Document/ExhibitDescriptionPagesSize 1: 10KSB Annual Report -- Small Business -- ksb HTML 1.55M
4: EX-10.4 Material Contract HTML 401K
5: EX-10.5 Material Contract HTML 112K
6: EX-21 Subsidiaries of the Registrant HTML 6K
2: EX-31 Certification per Sarbanes-Oxley Act (Section 302) HTML 17K
3: EX-32 Certification per Sarbanes-Oxley Act (Section 906) HTML 10K
(State
or other jurisdiction of incorporation or organization)
98-0206979
(I.R.S.
Employer Identification No.)
Third
Floor, 346 Kensington High Street, London, UK
(Address
of principal executive offices)
W14
8NS
(Zip
Code)
Issuer’s
telephone number: 011-44-20-7371-6668
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
Name
of each exchange on which registered
None
N/A
Securities
registered pursuant to Section 12(g) of the Act:
shares
of common stock-
$0.001 par value
(Title
of Class)
Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by
Section 13 or 15(d) of the Exchange Act during the last 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2)
has been subject to such filing requirements for the past 90 days. [
] Yes [ X ] No
Indicate
by check mark if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [
]
Page
- 1
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
[
] Yes [ X ] No
State
issuer’s revenues for its most recent fiscal year. $
nil
State
the
aggregate market value of the voting and non-voting common equity held by
non-affiliates
computed
by reference to the price at which the common equity was sold, or the average
bid and asked price of such common equity, as of a specified date within the
past 60 days: $5,298,019
as of December 31, 2002 ($0.25 close)
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date.
Documents
incorporated by reference: Exhibit 3.1 (Amended and Restated Articles of
Incorporation) filed on May 14, 2002 as an Exhibit to Brek’s Form 10-K/A (Annual
Report); Exhibit 3.2 (By-laws) filed on October 21, 1999 as an Exhibit to Brek’s
Form 10 (Registration Statement); Exhibit 4.1 (1999 Employee Stock Option /
Warrant Plan) filed on September 11, 2000 as an Exhibit to Brek’s Form S-8
(Registration Statement); Exhibit 4.2 (Rights Agreement) filed on March 6,2002
as an Exhibit to Brek’s Form 8-K (Current Report); Exhibit 4.3 (2001 Employee
Stock Option / Warrant Plan) filed on July 10, 2002 as an Exhibit to Brek’s Form
S-8 (Registration Statement); Exhibit 10.1 (Stock Purchase Agreement) filed
on
March 29, 2000 as an Exhibit to Brek’s Form 10-KSB (Annual Report); Exhibit 10.2
(Stock Purchase Agreement) filed on September 18, 2002 as an attached Exhibit
to
Brek’s Form 10-K/A (Annual Report); Exhibit 10.3 (Purchase Agreement) filed on
July 31, 2002 as an Exhibit to Brek’s Form 8-K (Current Report); Exhibit 10.4
(Share Purchase Agreement); and Exhibit 10.5 (License Agreements).
Transitional
Small Business Disclosure Format (Check one):
Yes [ ] No [ x ]
Page
- 2
PART
I
Item
1.Description
of Business.
(a)
Business
Development
Brek
Energy Corporation is a Nevada corporation in the oil and gas business.
Brek was in the business of developing electronic payment processing
systems from its inception until July 2001 when it acquired shares
in
Gasco Energy, Inc., an oil and gas exploration company. In July 2002,
Brek exchanged its shares in Gasco for a leasehold interest in 25% of
Gasco’s
undeveloped properties in Utah, Wyoming and California, which it owns
and
operates through subsidiaries, and sold its electronic payment processing
subsidiary. Since then, Brek has focused on the development of its
natural gas and oil properties. On March 12, 2002, Brek acquired shares
in
Vallenar Energy Corp., an oil and gas exploration company. On June28,2002, Brek increased its shareholding in Vallenar to 51.53%. See “Business
of Brek” and “Management’s Discussion and Analysis or Plan of Operations”
below for more information.
Brek
has
an authorized capital of 300,000,000 shares of common stock with a par
value
of $0.001 of which 59,498,090 shares are issued and outstanding.
Neither
Brek nor any of its subsidiaries have been involved in any bankruptcy,
receivership or similar proceedings. There have been no material
reclassifications, mergers, consolidations or purchases or sales of a
significant amount of assets not in the ordinary course of Brek’s
business.
(b)
Business
of Brek
Brek
is a
natural gas and petroleum exploitation, development, and production company
engaged in the acquisition, operation and development of unconventional
hydrocarbon prospects, primarily in the Rocky Mountain region. Brek, through
its
subsidiaries, conducts its principal business, which is (1) the acquisition
of
leasehold interests in petroleum and natural gas rights, either directly or
indirectly, and (2) the exploitation and development of properties subject
to
these leases. Brek is currently focusing on drilling efforts in the Riverbend
Project located in the Unita Basin of northeastern Utah, targeting the Wasatch,
Mesaverde and Blackhawk formations. See “Item 2. Description of Property” below
for more information.
Brek
is
also the majority owner of Vallenar Energy Corp., an oil and gas company with
a
strategy of structuring and developing an economically viable enhanced oil
recovery operation focusing on oil and gas projects located in Texas. See “Item
2. Description of Property” below for more information.
Brek
is
in the early stages of development and has insufficient operating history on
which to base an evaluation of its business and prospects. Any such evaluation
must be made in light of the risks frequently encountered by companies in their
early states of development, particularly for companies in high risk sectors
such as natural gas and oil. Brek’s longer term ability to emerge from the
development stage depends upon its natural gas and oil properties proving
sufficient reserves and if sufficient reserves are proved, bringing these
properties into production.
Page
- 3
Products
and Services
The
discovery of natural gas or oil and the ability to produce either one in
commercial quantities is very speculative. Even assuming that Brek obtains
the
necessary financing for drilling, if Brek or its operator does not discover
and
produce commercial quantities of natural gas or oil, it will not have any
products or services to offer and its business could fail. The principal uses
for natural gas and oil are heating, manufacturing, power, and
transportation.
Natural
gas will be gathered through connections between Brek’s natural gas wells and
the pipeline transmission system. Natural gas sales are by contract, and Brek,
through its operator, will enter into a contract with the natural gas company
that will purchase most of the natural gas produced in the area. Natural gas
purchasers pay well operators 100% of the sale proceeds of natural gas on or
about the 25th of each month for the previous month’s sales. The operator is
responsible for all distributions to the working interest and royalty owners.
There is no standard price for natural gas and prices will fluctuate with the
seasons and the general market conditions.
Brek
primarily produces natural gas, and also produces condensate (oil). During
the
fiscal year ended December 31, 2002, Brek did not produce any product. When
Brek
begins producing natural gas and condensate from its properties, it intends
to
sell its product to purchasers in the geographic area of the properties. Natural
gas, after processing, will be distributed through pipelines. Brek will
recognize revenue from the sale of natural gas when it reaches the customer’s
point of purchase in the gas transmission system. The amount Brek recognizes
for
each well will be based on the percentage of Brek’s net revenue interest in the
well, and the remainder will be allocated to other persons holding a net revenue
interest.
Market
Brek
will
derive its revenue principally from the sale of natural gas. As a result, Brek’s
revenues will be determined, to a large degree, by prevailing natural gas
prices. Brek intends to sell the majority of its natural gas on the open market
at prevailing market prices. The market price for natural gas is dictated by
supply and demand, and Brek cannot accurately predict or control the price
it
receives for its natural gas.
The
market for natural gas and oil production is regulated by both the state and
federal governments. The overall market is mature and, with the exception of
natural gas, all producers in a producing region will receive the same price.
The
availability of a ready market for any natural gas or oil produced by Brek
depends on numerous factors beyond the control of management, including but
not
limited to, the extent of domestic production and imports of oil, the proximity
and capacity of natural gas pipelines, the availability of skilled labor,
materials and equipment, the effect of state and federal regulation of natural
gas and oil production, and federal regulation of natural gas sold in interstate
commerce. Natural gas and oil produced by Brek or its operator in Utah will
be
sold to various purchasers who service the areas where Brek’s wells are located.
During the fiscal year ended December 31, 2002, Brek’s wells were not subject to
any agreements that prevented Brek from either selling its production on the
spot market or committing such gas to a long-term contract; however, there
can
be no assurance that Brek will have ready access to suitable markets for its
future natural gas and oil production.
The
marketability of Brek’s natural gas is not expected to pose a problem for Brek.
Natural gas can be easily sold wherever it may be produced in the States that
Brek operates subject to the transportation cost. However, if or when Brek
starts producing natural gas it could be difficult to sell since transportation
requires a pipeline. In the areas that Brek is presently pursuing new drilling
activity for natural gas, other companies have been delayed up to a year because
of the unavailability of a pipeline. No assurance can be given that natural
gas
wells drilled by Brek or its operator will be placed on line within a year
after
the well is drilled and completed.
Distribution
Methods of Products and Services
Natural
gas will be delivered to the purchaser via gathering lines into the main gas
transmission line. Management anticipates that Brek’s products will be sold to
any number of purchasers in the area of its properties, however, no assurance
can be given that Brek will be able to make such sales or that if it does,
it
will be able to receive a price that is sufficient to make its operations
profitable.
Competition
Brek’s
natural gas and oil exploration activities take place in a highly competitive
and speculative business atmosphere. In seeking suitable natural gas and oil
properties for acquisition, Brek competes with a number of other companies
operating in its areas of interest, including large oil and gas companies and
other independent operators with greater financial resources. Management does
not believe that Brek’s competitive position in the natural gas and oil industry
will be significant.
Page
- 4
Competition
in the natural gas and oil exploration industry also exists in the form of
competition to acquire the most promising acreage blocks and obtaining the
most
favorable prices for transporting the product. Brek is relatively small compared
to other natural gas and oil exploration companies and may have difficulty
acquiring additional acreage or projects, and may have difficulty arranging
for
the transportation of product, if Brek is successful in its exploration
efforts.
The
natural gas industry is very competitive, particularly with respect to the
acquisition of drilling rigs and natural gas exploration services from
independent contractors. Brek
anticipates a tight market for obtaining drilling rigs and services, and the
manpower to run them. The current high level of drilling activity in Brek’s
areas of exploration may have a significant adverse impact on the timing and
profitability of Brek’s operations. In addition, Gasco Energy, Inc., the
operator on the properties, will be required to obtain drilling permits for
its
wells, and there is no assurance that such permits will be available in a timely
manner or at all.
The
price
of natural gas is affected by continuous shifts in supply and demand and is
controlled by domestic and world markets. Natural gas is becoming the preferred
source of energy over other fossil fuels because it is an environmentally
friendlier source of energy. The demand for natural gas is increasing and
whether or not their will be an adequate supply is very uncertain. Numerous
well-established companies are focusing significant resources on exploration.
These companies may be able to compete more effectively than Brek. Due to these
factors, Brek expects competition to intensify in the natural gas industry
in
general and for the acquisition of drilling rigs and natural gas exploration
services from independent contractors
Government
Controls and Regulations
Brek,
or
a venture in which it participates, will be required to obtain local government
and other permits for drilling oil or gas wells.
Brek
and
its operators are subject to stringent federal, state, and local laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations
may
require the acquisition of permits before drilling commences, limit or prohibit
operations on environmentally sensitive lands such as wetlands or wilderness
areas, result in capital expenditures to limit or prevent emissions or
discharges, and place restrictions on the management of wastes. Failure to
comply with these laws and regulations may result in the assessment of
administrative, civil and criminal penalties, the imposition of remedial
obligations, and the issuance of injunctive relief. Any changes in environmental
laws and regulations that result in more stringent and costly waste handling,
disposal or cleanup requirements could have a material adverse effect on our
operations. While management believes that Brek and its operators are in
substantial compliance with current environmental laws and regulations and
that
continued compliance with existing requirements would not materially affect
Brek, there is no assurance that this trend will continue in the
future.
The
Comprehensive Environmental Response, Compensation and Liability Act, as
amended, also known as “CERCLA”
or
“Superfund”,
and
comparable state laws impose liability without regard to fault or the legality
of the original conduct, on certain classes of persons who are considered to
be
responsible for the release of a hazardous substance into the environment.
Under
CERCLA, these “responsible
persons”
may
be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment, for damages
to natural resources, and for the costs of certain health studies, and it is
not
uncommon for neighboring landowners and other third parties to file claims
for
personal injury and property damage allegedly caused by the release of hazardous
substances into the environment.
Brek
also
may incur liability under the Resource Conservation and Recovery Act, also
known
as “RCRA”,
which
imposes requirements relating to the management and disposal of solid and
hazardous wastes. While there exists an exclusion from the definition of
hazardous wastes for “drilling fluids, produced waters, and other wastes
associated with the exploration, development, or production of crude oil,
natural gas or geothermal energy”, in the course of Brek’s operations, Brek may
generate ordinary industrial wastes, including paint wastes, waste solvents,
and
waste compressor oils that may be regulated as hazardous waste.
Brek
currently owns or leases, through its operators, properties that for a number
of
years have been used for the exploration and production of natural gas and
oil.
Although Brek and its operators have utilized operating and disposal practices
that were standard in the industry at the time, hydrocarbons or other wastes
may
have been disposed of or released on or under the properties owned or leased
by
Brek or on or under other locations where such wastes have been taken for
disposal. In addition, some of these properties may have been operated by third
parties whose disposal or release of hydrocarbons or other wastes was not under
Brek’s control. These properties and the wastes disposed thereon may be subject
to CERCLA, RCRA, and analogous State laws. Under such laws, Brek could be
required to remove or remediate previously disposed wastes or property
contamination or to perform remedial operations to prevent future
contamination.
Page
- 5
The
Federal Water Pollution Control Act of 1972, as amended, also known as the
“Clean
Water Act”
and
analogous State laws impose restrictions and strict controls regarding the
discharge of pollutants, including produced waters and other oil and natural
gas
wastes, into state or federal waters. The discharge of pollutants into regulated
waters is prohibited, except in accord with the terms of a permit issued by
EPA
or the state. The Clean Water Act provides civil and criminal penalties for
any
discharge of oil in harmful quantities and imposes liabilities for the costs
of
removing an oil spill.
The
Clean
Air Act, as amended (the “CAA”),
restricts the emission of air pollutants from many sources, including natural
gas and oil operations. New facilities may be required to obtain permits before
work can begin, and existing facilities may be required to incur capital costs
in order to remain in compliance. In addition, more stringent regulations
governing emissions of toxic air pollutants are being developed by the EPA,
and
may increase the costs of compliance for some facilities.
Under
the
National Environmental Policy Act (the “NEPA”),
a
federal agency, in conjunction with a permit holder, may be required to prepare
an environmental assessment or a detailed environmental impact statement, also
known as an “EIS”
before
issuing a permit that may significantly affect the quality of the environment.
Brek or its operators are currently in negotiations with the U.S. Bureau of
Land
Management or “BLM”
regarding the preparation of an EIS in connection with certain proposed
exploration and production operations in the Uinta Basin of Utah. Brek expects
that the EIS will take approximately 18 to 24 months to complete. Until the
EIS
is completed and issued by the BLM, Brek will be limited in the number of
natural gas and oil wells that it or its operator can drill in the areas
undergoing EIS review. While Brek does not expect that the EIS process will
result in a significant curtailment in future natural gas and oil production
from this particular area, Brek can provide no assurance regarding the outcome
of the EIS process.
Brek
and
its subsidiaries are in compliance with the foregoing legislation and will
continue to comply with the legislation in the future. Management believes
that
compliance with the foregoing legislation will not adversely affect Brek’s
business operations in the future or its competitive position.
Effect
of Existing or Probable Governmental Regulations on Brek’s
Business
Brek’s
business is subject to various levels of government controls and regulations,
which are supplemented and revised from time to time, including various laws
and
regulations of the United States, the State of Utah, the State of Wyoming,
the
State of California, the State of Texas, and the municipalities in which it
operates that govern the exploration, development and production of natural
gas
and oil. Brek will have to abide and follow the procedures established by the
entities in those jurisdictions. For instance, the Texas Railroad Commission
determines all procedures and regulations that concern oil and natural gas
exploration and production activities in the State of Texas. Brek is unable
to
predict what additional legislation or revisions may be proposed that might
affect its business or when any such proposals, if enacted, might become
effective. Such changes, however, could require increased capital and operating
expenditures and could prevent or delay certain operations by Brek or one of
its
subsidiaries.
Dependence
on One or a Few Major Customers
During
the fiscal year ended December 31, 2002, Brek did not have any natural gas
sales. When Brek has sales Brek will not have any customers as any sales will
be
handled by the operator of the properties. The natural gas to be sold by Brek
is
a commodity desired by many companies and Brek or its operator are frequently
contacted regarding the sale of its products. At anytime Brek may be selling
10%
or more of its natural gas to one purchaser, such a purchaser is not material
to
Brek since if that purchaser fails to purchase Brek’s natural gas for any reason
Brek can readily sell the natural gas to another party at a price close to
what
was paid by the former purchaser.
Patents/Trade
Marks/Licences/Franchises/Concessions/Royalty Agreements or Labour
Contracts
Neither
Brek nor its subsidiaries currently own any patents or trade marks. Also, they
are not party to any license or franchise agreements, concessions, royalty
agreements or labor contracts arising from any patents or trade
marks.
Brek’s
web site is copyrighted upon loading. www.brekenergy.com
is a
registered domain name of Brek. Brek and its subsidiaries will seek further
trademark protection for any associated domain names.
Estimate
of Research and Development Costs
Brek
did
not perform any research activities in the past two fiscal years ended 2002
and
2001. Brek spent $529,906 and $nil on exploration and development activities
during the two fiscal years ended 2002 and 2001 respectively. Also, Brek did
not
spend any funds on geological and economical evaluations of its properties
during the same time period.
Page
- 6
Number
of Total Employees and Number of Full Time Employees
As
of
December 31, 2002, Brek had one full time employee and no part time
employees.
RISK
FACTORS
Brek
is
in the development stage and an investment in Brek’s business involves a high
degree of risk. You should consider each of the following risk factors and
the
other information in this Annual Report, including Brek’s financial statements
and the related notes, in evaluating Brek’s business and prospects. The risks
and uncertainties described below are not the only ones that impact on Brek’s
business. Additional risks and uncertainties not presently known to Brek or
that
Brek currently considers immaterial may also impair its business operations.
If
any of the following risks actually occur, Brek’s business and financial results
could be harmed. In that case, the trading price of Brek’s shares of common
stock could decline.
Risks
associated with Brek’s business and properties:
1.
Brek
is
a
development stage company and may not be able to continue as a going concern
and
may not be able to raise additional financing.
A
note
provided by Brek’s independent auditors in Brek’s financial statements for the
period from inception, September 16, 1998, through December 31, 2002 contains
an
explanatory note that indicates that Brek is a development stage company and
its
ability to continue as a going concern and to emerge from the development stage
is dependent on continued financial support from its shareholders, raising
additional capital to fund future operations, and ultimately to attain
profitable business operations.
Brek
has
a working capital deficiency and has accumulated losses since inception. These
factors raise substantial doubt about Brek’s ability to continue as a going
concern. To date there has been no significant revenue. In a development stage
company, management devotes most of its activities to developing a market for
its products and services. These consolidated financial statements have been
prepared on a going concern basis, which implies that Brek will continue to
realize its assets and discharge its liabilities in the normal course of
business. Brek has not generated significant revenue and has never paid any
dividends. Brek is unlikely to pay dividends or generate significant earnings
in
the immediate or foreseeable future. There is no guarantee that Brek will be
able to raise any equity financing or generate profitable operations. As of
December 31, 2002, Brek had a working capital deficit of $1,376,726 and had
accumulated losses of $61,080,323 since its inception. These factors raise
substantial doubt regarding Brek’s ability to continue as a going
concern.
This
note
may make it more difficult for Brek to raise additional equity or debt financing
needed to run its business and is not viewed favorably by analysts or investors.
Brek urges potential investors to review this report before making a decision
to
invest in Brek.
2.Brek
has
a limited operating history and has losses that it expects will continue into
the future, which may prevent Brek achieving success. If the losses continue,
Brek will have to suspend operations or cease
operations.
Brek
has
a limited operating history upon which an evaluation of its future success
or
failure can be made. You should be aware of the difficulties normally
encountered by new natural gas exploration companies similarly situated to
Brek
and the high rate of failure of such enterprises. Many of these risks and
uncertainties are described in more detail elsewhere in this “Risk Factors”
section. Brek’s likelihood of success must be considered in light of the
problems, expenses, difficulties, complications and delays encountered in
connection with the exploration of the properties that Brek plans to undertake.
These potential problems include, but are not limited to, unanticipated problems
relating to exploration, and additional costs and expenses that may exceed
current estimates. You should consider the likelihood of Brek’s future success
to be highly speculative in view of its limited operating history, as well
as
the complications frequently encountered by other companies in the early stages
of development. If Brek realizes problems, additional costs, difficulties,
complications or delays in connection with its exploration activities, it will
have a material adverse effect on its business operations, results of operations
and financial condition, and as a result, its business could suspended or
fail.
Brek
has
incurred significant operating losses since inception and has limited financial
resources to support it until such time that it is able to generate positive
cash flow from its business operations. As of December 31, 2002, Brek’s net loss
since inception on September 16, 1998 was $61,080,323. During the 12 months
ended December 31, 2002, operating expenses increased by $21,983,937. Based
upon
its plan of operations for 2003, Brek expected to incur $17,500 per month in
operating losses for those next 18 months. This will happen because there are
expenses associated with the proposed natural gas and oil exploration programs
on its properties. See “Management Discussion and Analysis” on page 21 for more
details.
Page
- 7
Brek
cannot guaranty that it will be successful in generating revenues in the future
or that it will be able to raise any working capital for operating funds.
Failure to generate revenues or raise any financing may cause Brek to suspend
or
cease operations.
Brek’s
ability to achieve and maintain profitability and positive cash flow is
dependent upon its ability to generate revenues from its planned business
operations and to reduce development costs. Without the generation of any
revenues or any capital being raised in an equity or debt financing, Brek will
run out of operating funds in one month.
3.Brek
has limited control over activities on properties that Brek does not operate
and
depends on Gasco Energy, Inc. to manage, drill and operate the wells, which
could negatively impact on the exploration and development of Brek’s properties
and on Brek’s business operations.
Substantially
all of Brek’s business operations are conducted through joint operating
agreements under which Brek owns partial interests in natural gas and oil
properties. If Brek does not operate the properties in which it owns an
interest, Brek does not have control over normal operating procedures,
expenditures or future development of underlying properties. The failure of
an
operator of Brek’s wells to adequately perform operations, or an operator’s
breach of the applicable agreements, could reduce Brek’s production and revenues
and have a negative impact on Brek’s business operations. The success and timing
of Brek’s drilling and development activities on properties operated by others
therefore depends upon a number of factors outside of Brek’s control, including
the operator’s timing and amount of capital expenditures, expertise and
financial resources, inclusion of other participants in drilling wells, and
use
of technology. Because Brek does not have a majority interest in most wells
that
Brek does not operate, Brek may not be in a position to remove the operator
in
the event of poor performance.
4.Brek’s
partners and third party operators could suffer financial hardship, which could
negatively impact on the exploration and development of Brek’s
properties.
Liquidity
and cash flow problems encountered by Brek’s partners or the co-owners of Brek’s
properties may prevent or delay the drilling of a well or the development of
a
project. Brek’s partners and working interest co-owners may be unwilling or
unable to pay their share of the costs of projects as they become due. In the
case of a farm-out partner, Brek would have to find a new farm-out partner
or
obtain alternative funding in order to complete the exploration and development
of the prospects subject to the farm-out agreement. In the case of a working
interest owner, Brek could be required to pay the working interest owner’s share
of the project costs. Brek cannot assure you that it would be able to obtain
the
capital necessary to fund either of these contingencies or that Brek would
be
able to find a new farm-out partner.
5.The
exploration and development of Brek’s oil & gas properties require
substantial capital, which Brek may not be able to obtain, which in turn could
lead to a loss of Brek’s interest in certain oil & gas properties and a
decline in Brek’s natural gas and oil
reserves.
Brek’s
current operating funds are less than necessary to complete Brek’s proposed oil
& gas exploration programs, and therefore Brek will need to obtain
additional financing in order to complete each of the proposed oil & gas
exploration programs. As of December 31, 2002, Brek had cash in the amount
of
$3,801. In 2002, Brek had limited operations and had no income. Brek’s natural
gas and oil exploration programs call for significant expenses in connection
with the exploration of the respective natural gas and oil properties. As of
December 31, 2002, Brek did not have sufficient funds to maintain its interest
in its natural gas and oil properties and for ongoing administrative expenses
and needs to raise additional funds to participate in all of its current
exploration programs on the natural gas and oil properties.
Brek
has
relied in the past primarily on the sale of equity capital to fund working
capital and the acquisition of its prospects and related leases. Failure to
generate operating cash flow or to obtain additional financing could result
in
substantial dilution of its property interests, or delay or cause indefinite
postponement of further exploration and development of its prospects with the
possible loss of its oil & gas properties.
Brek
will
require significant additional capital to fund its future activities and to
service current and any future indebtedness. In particular, Brek faces
uncertainties relating to its ability to generate sufficient cash flows from
operations to fund the level of capital expenditures required for its natural
gas and oil exploration and production activities and its obligations under
various agreements with third parties relating to exploration and development
of
certain prospects. Brek’s failure to find the financial resources necessary to
fund its planned activities and service its debt and other obligations could
adversely affect Brek’s ability to continue as a going concern.
Page
- 8
Brek
can
provide no assurance that it will be able to find the required capital.
Obtaining additional and acceptable financing would be subject to a number
of
factors, including the market prices for natural gas and oil, investor
acceptance of Brek’s natural gas and oil properties, and investor sentiment.
These factors may make the timing, amount, terms or conditions of the financing
unavailable and unacceptable to Brek. The most likely source of future capital
presently available to Brek is through the sale of equity capital. However,
any
sale of share capital will result in dilution to existing shareholders. The
only
other anticipated alternatives for the financing of Brek’s proposed natural gas
and oil exploration programs exploration would be private loans or the offering
by Brek of an interest in its natural gas and oil properties to be earned by
another party or parties carrying out further exploration thereof, which is
not
presently contemplated.
6.Brek’s
and its operator’s ability to market and transport the natural gas and oil that
is discovered on Brek’s properties is essential to Brek’s business operations,
but is subject to certain requirements.
Several
factors beyond Brek’s control may adversely affect its ability to market the
natural gas and oil that it discovers. These factors include the proximity,
capacity and availability of natural gas and oil pipelines and processing
equipment, market fluctuations of prices, taxes, royalties, land tenure,
allowable production, and environmental protection. The extent of these factors
cannot be accurately predicted, but any one or a combination of these factors
may result in Brek’s inability to sell its natural gas and oil at prices that
would result in an adequate return on Brek’s invested capital.
7.As
a result of substantially all of Brek’s producing properties are located in the
Rocky Mountains, Brek is vulnerable to certain risks associated with primarily
operating in one geographical area.
All
of
Brek’s future production is anticipated to be located in, the Rocky Mountain
Region of the United States. The natural gas prices other companies in the
Rocky
Mountain region have received and are currently receiving are at a discount
to
natural gas prices in other parts of the United States. The natural gas prices
other companies in the Rocky Mountain region will receive in the future may
also
be at a discount to natural gas prices in other parts of the United States.
Factors that can cause price volatility for natural gas and crude oil within
this region are:
•
the
availability of gathering systems with sufficient capacity to handle local
production;
•
seasonal fluctuations in local demand for production;
•
local
and national gas storage capacity;
•
interstate pipeline capacity; and
•
the
availability and cost of gas transportation facilities from the Rocky Mountain
region.
8.Brek’s
business operations could negatively be impacted if there is a shortage of
supplies, equipment and personnel for the exploration and development on Brek’s
properties.
Brek’s
ability to conduct operations in a timely and cost effective manner depends
on
the availability of supplies, equipment and personnel. The natural gas and
oil
industry is cyclical and experiences periodic shortages of drilling rigs,
supplies and experienced personnel. Shortages can delay operations and
materially increase operating and capital costs, which could negatively impact
on Brek’s business operations and financial position.
9.Seasonal
weather conditions and lease stipulations adversely affect Brek’s ability to
conduct drilling activities in some of the areas where its properties are
located.
Natural
gas and oil operations in the Rocky Mountains are adversely affected by seasonal
weather conditions and lease stipulations designed to protect various wildlife.
In certain areas, including the Uinta Basin, drilling and other natural gas
and
oil activities can only be conducted during the spring and summer months. This
limits Brek’s or its operator’s ability to operate in those areas and can
intensify competition during those months for drilling rigs, oil field
equipment, services, supplies and qualified personnel, which may lead to
periodic shortages. These constraints and the resulting shortages or high costs
could delay Brek’s or its operator’s operations and materially increase Brek’s
operating and capital costs.
10.Brek
may suffer losses or incur liability for events that Brek or the operator of
a
property have chosen not to insure against.
Although
management believes the operator of any property in which Brek may acquire
interests will acquire and maintain appropriate insurance coverage in accordance
with standard industry practice, Brek may suffer losses from uninsurable hazards
or from hazards, which Brek or the operator have chosen not to insure against
because of high premium costs or other reasons. Brek may become subject to
liability for pollution, fire, explosion, blowouts, cratering and oil spills
against which Brek cannot insure or against which Brek may elect not to insure.
Such events could result in substantial damage to natural gas and oil wells,
producing facilities and other property and personal injury. The payment of
any
such liabilities may have a material adverse effect on Brek’s financial position
and business operations.
Page
- 9
11.Brek
may not be able manage growth of its business operations effectively, which
could result in a negative impact on Brek’s business operations and financial
condition.
If
Brek is unable to manage growth effectively, its business, financial condition,
and results of operations condition will be negatively affected. Because of
Brek’s small size, growth in accordance with its plan of operations, if
achieved, will place a significant strain on its financial, technical,
operational and management resources. As Brek expands its activities and
increases the number of projects it is evaluating or in which it participates,
there will be additional demands on Brek’s financial, technical and management
resources. Brek’s systems, procedures or controls may not be adequate to support
its business operations and Brek’s management may not be able to achieve the
execution necessary to successfully implement Brek’s plan of operations. The
failure to continue to upgrade its technical, administrative, operating and
financial control systems or the occurrence of unexpected expansion
difficulties, including the recruitment and retention of experienced managers,
geoscientists and engineers, could have a negative impact on Brek’s business,
financial condition, and results of operations and its ability to timely execute
its plan of operations.
Risks
associated with Brek’s industry:
12.Due
to the speculative nature of natural gas exploration, there is substantial
risk
that Brek will be unable to locate commercial quantities of natural gas, which
in turn will negatively impact Brek’s business operations.
The
search for commercial quantities of natural gas as a business is extremely
risky. The properties may not contain commercially exploitable quantities of
natural gas. The exploration expenditures to be made by Brek may not result
in
the discovery of commercial quantities of natural gas. Problems such as unusual
or unexpected formations and other conditions are involved in natural gas
exploration and often result in unsuccessful exploration efforts. Brek may
not
be able to discover and produce commercial quantities of natural gas from its
properties. If Brek does not discover and produce commercial quantities of
natural gas, it will not have any products or services to offer and its business
could fail.
13.The
natural gas and oil markets are volatile markets that have a direct impact
on
Brek’s revenues and profits and the market conditions will effect whether Brek
will be able to continue its operations.
Brek’s
revenues, operating results, cash flow and future rate of growth are very
dependent upon prevailing prices for natural gas and oil. Historically, natural
gas and oil prices and markets have been volatile and not predictable, and
they
are likely to continue to be volatile in the future. Prices for natural gas
and
oil are subject to wide fluctuations in response to relatively minor changes
in
the supply of and demand for natural gas and oil, market uncertainty and a
variety of additional factors that are beyond our control,
including:
•
political conditions in both natural gas and oil producing and exporting
countries
•
the
supply and price of both domestic and foreign natural gas and oil
•
the
worldwide and regional demand for energy
•
the
effect of domestic and foreign government regulation of production and
transportation
•
the
price and availability of alternative energy sources
•
weather
conditions
•
acts
of
war, terrorism and vandalism
•
market
manipulation
Lower
natural gas and oil prices may not only decrease Brek’s revenues on a per unit
basis but also may reduce the amount of natural gas and oil that Brek can
produce economically. A substantial or extended decline in natural gas and
oil
prices may materially and adversely affect Brek’s business operations, financial
condition, and ability to finance planned capital expenditures.
14.Competition
in the natural
gas and oil industry is intense and Brek may not be able to compete effectively
with its competitors.
Brek’s
ability to acquire additional natural gas and oil properties and develop new
and
existing properties in the future will depend on its ability to conduct
operations, to evaluate and select suitable properties, to attract qualified
personnel, and to consummate transactions in this intensely competitive
environment. Brek
competes with other natural gas and oil companies and other independent
operators possessing greater financial resources and technical facilities than
Brek in connection with the acquisition of natural gas and oil properties and
in
connection with the recruitment and retention of qualified personnel. There
is
significant competition for the limited number of natural gas and oil
opportunities and, as a result, Brek may be unable to acquire an interest in
attractive natural gas and oil exploration properties on terms it considers
acceptable on a continuing basis. Brek
also
competes for the equipment and labor required to operate and to develop natural
gas and oil properties. Management believes that Brek’s competitive position in
the natural gas and oil industry is significant at this time.
Page
- 10
Also,
larger competitors may be able to absorb the burden of any changes in federal,
state and local laws and regulations more easily than Brek can, which would
adversely affect Brek’s competitive position. Also, these competitors may be
able to pay more for natural gas and oil properties and may be able to define,
evaluate, bid for and acquire a greater number of properties than Brek can.
In
addition, some of Brek’s competitors have been operating in the natural gas and
oil industry for a much longer time than Brek and have demonstrated the ability
to operate through industry cycles.
15.Brek
is subject to complex laws and regulations, including environmental regulations,
which could negatively impact the business operations and financial condition
of
Brek.
Development,
production and sale of natural gas and oil in the United States are subject
to
extensive laws and regulations, including environmental laws and regulations.
Brek may be required to make large expenditures to comply with environmental
and
other governmental regulations. Matters subject to regulation
include:
•
location and density of wells
•
the
handling of drilling fluids and obtaining discharge permits for drilling
operations
•
emissions into the environment
•
accounting for and payment of royalties on production from state, federal and
Indian lands
•
bonds
for ownership, development and production of natural gas and oil
properties
•
transportation of natural gas and oil
•
storage
and disposition of hazardous waste
•
operation of wells and reports concerning operations
•
taxation
Under
the
various complex laws and regulations, Brek could be liable for personal
injuries, property damage, oil spills, discharge of hazardous materials,
remediation and clean-up costs and other environmental damages. Failure to
comply with these laws and regulations also may result in the suspension or
termination of Brek’s operations and subject Brek to administrative, civil and
criminal penalties. Moreover, these laws and regulations could change in ways
that substantially increase Brek’s costs. Accordingly, any of these liabilities,
penalties, suspensions, terminations or regulatory changes could negatively
impact Brek’s business operations and financial condition.
16.The
natural gas and oil industry involves numerous uncertainties and operating
risks
that could negatively impact Brek’s business operations and financial
condition.
Brek’s
development, exploitation and exploration activities may be unsuccessful for
many reasons, including weather, cost overruns, equipment shortages and
mechanical difficulties. Moreover, the successful drilling of a natural gas
well
or an oil well does not ensure a profit on investment. A variety of factors,
both geological and market-related, can cause a well to become uneconomical
or
only marginally economical. In addition to their cost, unsuccessful wells can
impede Brek’s efforts to replace reserves.
The
natural gas and oil business involves a variety of operating risks,
including:
•
fires
•
explosions
•
blow-outs and surface cratering
•
uncontrollable flows of oil, natural gas, and formation water
•
natural
disasters, such as adverse weather conditions
•
pipe,
cement, or pipeline failures
•
casing
collapses
•
embedded oil field drilling and service tools
•
abnormally pressured formations
•
environmental hazards, such as natural gas leaks, oil spills, pipeline ruptures,
and discharge of toxic gases
Page
- 11
If
Brek
or its operators experience any of these problems, it could affect well bores,
gathering systems and processing facilities, which could adversely affect Brek’s
or the operator’s ability to conduct operations. Brek could also incur
substantial losses as a result of:
•
injury
or loss of life
•
severe
damage to and destruction of property, natural resources, and
equipment
•
pollution and other environmental damage
•
clean-up responsibilities
•
regulatory investigation and penalties
•
suspension of business operations
•
repairs
to resume business operations
Brek
does
not carry business interruption insurance at levels that would provide enough
funds for it to continue operating without access to other funds. For some
risks, Brek may not obtain insurance if management believes the cost of
available insurance is excessive relative to the risks presented. In addition,
pollution and environmental risks generally are not fully insurable. If a
significant accident or other event occurs and is not fully covered by
insurance, it could negatively impact Brek’s business operations enough to force
Brek to cease business operations.
17.Brek’s
stock price is volatile and may fluctuate, which will have a direct impact
on
your investment in Brek.
The
stock
markets in general, and the stock prices of natural gas and oil companies in
particular, have experienced extreme volatility that often has been unrelated
to
the operating performance of any specific public company. Brek’s stock price may
be impacted by factors that are unrelated or disproportionate to its operating
performance and the
trading price of Brek’s shares of common stock may not be an accurate reflection
of their value.
The
market price of Brek’s common stock may fluctuate significantly in response to a
number of factors, some of which are beyond Brek’s control, such as interest
rates, increased competition, general economic, political and market conditions,
recessions,
or changes in government regulations, including environmental
regulations,
and
some of which are within Brek’s control, such as actual
or
anticipated variations in Brek’s operating
results, announcements of new projects and properties, new customers,
acquisition of potential natural gas and oil entities and prospects,
Brek’s
ability or inability to generate new revenues,
and
results of exploration and development. These
market fluctuations may adversely affect the market price of Brek’s shares of
common stock.
18.A
small number of Brek’s stockholders own a substantial amount of Brek’s shares of
common stock, and if such stockholders were to sell those shares in the public
market within a short period of time, the price of Brek’s shares of common stock
could drop significantly.
Because
a
small
number of Brek’s stockholders own a substantial amount of Brek’s shares of
common stock, those shareholders will be able to significantly decide who will
be directors and any other stockholders may not be able to elect any directors.
Also, sales of a large number of shares of Brek’s shares of common stock or even
the availability of a substantial number of shares of common stock for sale
could have the effect of reducing the price per share of Brek’s common stock,
especially if the shares of common stock continue to be thinly
traded.
As
of
December 31, 2002, there were 26,560,037 shares of common stock issued and
outstanding, with
13,892,076 shares of common stock of Brek that were freely tradeable and
5,367,961 shares that were subject to Rule 144. The remaining 7,300,000 shares
of common stock were restricted from trading. As of December 31, 2002, there
were 1,843,682 share purchase warrants exercisable into one share of common
stock each. Also, as of December 31, 2002, there were 1,630,000 stock options
outstanding, exercisable into one share of common stock each, and there were
an
additional 3,320,000 stock options that could be granted under Brek’s 2001 Stock
Option Plan. If all the share purchase warrants and all the granted options
were
exercised, the number of issued and outstanding shares of common stock would
increase by 3,473,682 shares to 30,033,719 shares of common stock.
19.A
change of control of Brek can be delayed, impeded or effected by the directors
and management, who collectively own 10.7% of the outstanding shares or by
the
implementation of Brek’s rights agreement by the board of directors.
As
of
December 31, 2002, Brek’s
directors and management owned an aggregate of 2,832,961 shares of common
stock
and as a result have the ability to influence the vote for a change of voting
control of Brek or the vote to approve or reject any offer for the purchase
and
sale of Brek’s assets.
Also,
upon the happening of certain events, the board of directors could vote
to
implement Brek’s rights agreement, which would delay, impede or effect a change
in control of Brek or could impede a merger, consolidation, takeover or
other
business combination involving Brek or discourage a potential acquirer
from
making a tender offer or otherwise attempting to obtain control of
Brek.
See
“Dividends” on page 18 and Exhibit 4.2 - Rights Agreement for more
details.
Page
- 12
20.Brek
may not be able to attract and retain qualified personnel necessary for the
implementation of its plan of operations and exploration
programs.
Brek’s
current management is inexperienced in operating a natural gas and oil business.
Brek may need to hire or retain qualified management, employees or consultants
with expertise in natural gas and oil exploration and development. Brek’s
success depends on its ability to attract, retain and motivate qualified
personnel. Key personnel represent a significant asset, and the competition
for
these personnel is intense in the natural gas and oil industry. Brek does not
maintain key person life insurance on any of its personnel. The loss of one
or
more of its key employees or its inability to attract, retain and motivate
qualified personnel could negatively impact Brek’s ability to implement its plan
of operations and to complete its natural gas and oil programs.
21.Brek’s
officers and directors have conflicts of interest in that they are officers
and
directors of other companies that will prevent them from devoting full-time
to
Brek’s business operations, which may negatively impact on Brek’s business
operations.
Brek’s
officers and directors have conflicts of interest in that they are officers
and
directors of other companies. Management’s other activities will prevent them
from devoting full-time to Brek’s business operations. This will impede Brek’s
growth and business operations and may reduce its financial results because
of
the slow down in operations.
22.Brek
has not and does not expect to pay dividends in the foreseeable
future.
Brek
has
never paid cash dividends on its shares of common stock and has no plans to
do
so in the foreseeable future. Brek intends to retain earnings, if any, to
develop and expand its business operations.
23.“Penny
Stock” rules may make buying or selling Brek’s shares of common stock difficult,
and severely limit their market and liquidity.
Trading
in Brek’s shares of common stock is subject to certain regulations adopted by
the SEC commonly known as the “penny stock” rules. Currently, Brek’s shares of
common stock qualify as penny stocks and are covered by Section 15(g) of the
Securities Exchange Act of 1934, which imposes additional sales practice
requirements on broker/dealers who sell the shares of common stock in the
aftermarket. The “penny stock” rules govern how broker-dealers can deal with
their clients and “penny stocks”. For sales of Brek’s shares of common stock,
the broker/dealer must make a special suitability determination and receive
from
you a written agreement prior to making a sale to you.
These
additional burdens imposed upon broker-dealers by the “penny stock” rules may
discourage broker-dealers from effecting transactions in Brek’s shares of common
stock, which could severely limit their market price and liquidity of its shares
of common stock. This could prevent you from reselling your shares and may
cause
the price of the shares to decline. See “Penny Stock rules” on page 20 for more
details.
Item
2.Description
of Property.
Corporate
Headquarters
As
of
December 31, 2002, Brek operated from its principal executive office at
19th
Floor,
80 Gloucester Road, Wanchai, Hong Kong. Brek’s telephone number was
011-852-2801-5181. Since March 1, 2002, Brek has leased the office space under
a
one year term lease at a rental rate of HK$36,458 a month (approximately
US$4,704/month).
Page
- 13
Property
A.
Petroleum
and Natural Gas Properties
Riverbend
Project, Utah
As
of
December 31, 2002, the Riverbend Project comprised approximately 103,227 gross
acres in the Uinta Basin of northeastern Utah, of which Brek held interests
in
approximately 11,141 net acres as of December 31, 2002. Brek’s engineering and
geologic focus was concentrated on three tight-sand formations in the Uinta
basin: the Wasatch, Mesaverde and Blackhawk formations.
Greater
Green River Basin Project, Wyoming
As
of
December 31, 2002, Brek had a leasehold interest in approximately 123,700 gross
acres and 24,369 net acres in this area. Brek held a non-operated interest
in
one non-producing well in this area and a non-operated interest in one producing
well in this area. Brek was considering additional options for this area such
as
the farm-out of some of its acreage and other similar type
transactions.
Crocker
Canyon Prospect, California
As
of
December 31, 2002, Brek had a leasehold interest in approximately 4,068 gross
acres and 932 net acres in Kern and San Luis Obispo Counties of Southern
California. Brek had no drilling or development plans for this acreage during
2003 and planned to continue paying leasehold rentals and other minimum
geological expenses to preserve Brek’s acreage positions on these
prospects.
Rocksprings
Prospect, Edwards County, Texas
In
March
2002, Brek acquired 2,512,500 shares of common stock of Vallenar Energy Corp.
which, together with the 733,333 shares of common stock issuable upon conversion
of preferred stock of Vallenar Energy Corp. held by Brek, represents
approximately 25% of Vallenar Energy Corp.’s equity. On June 28, 2002, Brek
acquired an additional 2 million shares of common stock of Vallenar Energy
Corp.
from third parties for $10,000 and subscribed for an additional 800,000 shares
of common stock of Vallenar Energy Corp. at $0.50 per share ($400,000). At
December 31, 2002, Brek held a 51.53% equity interest in Vallenar Energy Corp.
For as long as at least one-half of the preferred stock is outstanding, it
is
entitled as a class to at least 29.69% of the total voting power of Vallenar
Energy Corp. Brek is entitled to designate one director who must sit on the
executive committee of the board or additional voting rights accrue to the
preferred stock. All decisions of this executive committee must be unanimous.
Brek has been playing an active role in the management of Vallenar Energy Corp.
since 2002.
Vallenar
Energy Corp. holds leases covering approximately 51,194 gross and 8,865 net
acres in the Rocksprings Prospect, which is located in central Edwards County,
Texas, and is a part of the Geronimo Creek Prospect. The Geronimo Creek Prospect
is a shallow, heavy oil play within the Cretaceous aged Glen Rose limestone
and
Travis Peak sandstone. It is a north-south oriented, faulted anticline having
approximately 75 feet of closure covering approximately 29,500 acres. During
2002, Vallenar drilled one well, the results were inconclusive, and no further
work has been performed.
B.
Oil
and Gas Operations
During
2002, two wells were drilled on the Wyoming property and one well was drilled
on
the Texas property. None of these wells were considered to be prospective.
At
the end of 2002, no further exploration or development work was planned for
the
Texas, California or Wyoming properties. During 2002 one well was drilled on
the
Utah property. During 2004, Brek commenced exploration and development of their
Utah properties and plans to continue with exploration and development of these
properties as its financial resources permit.
C.
Volumes,
Prices and Operating
Expenses
Brek
had
no production or sales of natural gas prior to its fiscal year ended December31, 2002.
D.
Development,
Exploration and Acquisition Capital
Expenditures
During
the year ended December 31, 2002, Brek spent $2,032,860in
development and exploration activities, including property acquisition costs
net
of impairment charges of $16,634,187. During the years ended December 31, 2001
and 2000, Brek spent $nil in development and exploration activities. As of
December 31, 2002, Brek held a 25% working interest in 230,995 gross acres
and
36,442 net acres located in Utah, Wyoming and California. Brek also owns a
51.53% interest in 51,194 gross acres and 8,865 net acres located in Edwards
County, Texas. As of December 31, 2002, Brek had no producing gas wells or
shut-in gas wells on these properties.
Page
- 14
The
following table presents information regarding Brek’s net costs incurred in the
purchase of proved and unproved properties and in exploration and development
activities:
For
the Years Ended December 31
2002
2001
2000
Property
Acquisition Costs:
Unproved
$
18,137,141
nil
nil
Proved
nil
nil
nil
Exploration
and Development Costs:
$
529,906
nil
nil
Impairment
Charges:
($16,634,187
)
nil
nil
Total
$
2,032,860
nil
nil
E.
Productive
Wells and Acreage
As
of
December 31, 2002, Brek had no producing gas wells or shut-in gas wells on
its
properties. Productive
wells are producing wells and wells capable of production. Shut-in wells are
wells that are capable of production but are currently not producing. Gross
wells are the total number of wells in which the Company has an interest. Net
wells are the sum of Brek’s fractional interests owned in the gross
wells.
F.
Undeveloped
Acreage
The
following table sets forth the undeveloped and developed leasehold acreage,
by
area, held by Brek as of December 31, 2002. Undeveloped acres are acres on
which
wells have not been drilled or completed to a point that would permit the
production of commercial quantities of oil and gas, regardless of whether or
not
such acreage contains proved reserves. Developed acres are acres, which are
spaced or assignable to productive wells. Gross acres are the total number
of
acres in which Brek has a working interest. Net acres are the sum of Brek’s
fractional interests owned in the gross acres. The table does not include
acreage that Brek has a contractual right to acquire or to earn through drilling
projects, or any other acreage for which Brek has not yet received leasehold
assignments. In certain leases, Brek’s ownership is not the same for all depths;
therefore, the net acres in these leases are calculated using the greatest
ownership interest at any depth. Generally this greater interest represents
Brek’s ownership in the primary objective formation.
Undeveloped
Acres
Developed
Acres
Gross
Net
Gross
Net
Utah
103,277
11,141
nil
nil
Wyoming
123,700
24,369
nil
nil
California
4,068
932
nil
nil
Texas
51,194
8,865
nil
nil
Total
Acres
282,239
45,307
nil
nil
G.
Drilling
Activity
The
following table sets forth Brek’s drilling activity during the year ended
December 31, 2002. Brek had no drilling activity during the fiscal years ended
December 31, 2001 and 2000.
In
the
table, “gross” refers to the total wells in which Brek has a working interest,
and “net” refers to gross wells multiplied by Brek’s working interest. A
productive well is an exploratory or a development well that is not a dry
well.
2002
Gross
Net
Exploratory
Wells
Productive
3.0
0.3
Dry
0.0
0.0
Total
Wells
3.0
0.3
Development
Wells
Productive
0.0
0.0
Dry
0.0
0.0
Total
Wells
0.0
0.0
Page
- 15
H.
Present
Activity
During
the year ended December 31, 2002 , Brek participated in three exploratory wells,
two of which were located in the Greater Green River Basin acreage in Wyoming
and one within the Riverbend Project in Utah . Overall, Brek had an 8.6%
net revenueinterest,
or net 0.26 wells. All three of these wells were completed and produced natural
gas in the first quarter of 2003. One of the Wyoming wells was eventually
shut-in.
I.
Delivery
Commitments
Brek
Energy is not obligated to provide a fixed and determinable quantity of oil
or
gas in the near future under existing contracts or agreements.
Item
3.Legal
Proceedings.
As
of
December 31, 2002, Brek was not a party to any pending legal proceedings and,
to
the best of Brek’s knowledge, none of Brek’s property or assets were the subject
of any pending legal proceedings, with the exception of the
following:
Temporary
Order - British Columbia Securities Commission
On
November 14, 2002, Brek became aware that itself, Vallenar Energy Corp., Richard
Jeffs, and Vallenar Energy Corp’s president and CEO, Jeff Paquin, had been named
in a Temporary Order and Notice of Hearing regarding certain alleged violations
of the British Columbia Securities Act (the “BCSA”). This Temporary Order and
Notice of Hearing (the “Temporary Order”) alleged that Messrs. Jeffs and Paquin,
together with others, engaged in acts in furtherance of trades of shares of
Brek
(and other issuers) and advised persons to purchase shares of Brek (and other
issuers) without being registered under the British Columbia Securities Act.
The
Temporary Order required Messrs. Jeffs and Paquin to resign from their positions
as officers of Brek and Vallenar Energy Corp., and prohibited them and Brek
and
Vallenar Energy Corp. from trading in any securities and from engaging in
investor relations activities in British Columbia. Management believed that
neither it nor Vallenar Energy Corp. violated the BCSA or engaged in any
activity that would require them to be registered under the BCSA.
As
a
result of the Temporary Order, Richard N. Jeffs resigned as both the CEO and
president of Brek on November 20, 2002. On December 5, 2002, the British
Columbia Securities Commission released a decision not to extend the Temporary
Order against Brek, Mr. Jeffs, Vallenar Energy Corp. and Mr. Paquin, among
others, as a result of there being insufficient evidence of any
wrongdoing.
As
of
December 31, 2002, Brek and Vallenar Energy Corp., to the best of management’s
knowledge, were still under investigation by the British Columbia Securities
Commission. On April 1, 2003, the British Columbia Securities Commission
withdrew the notice of hearing and had not, to the best of management’s
knowledge, issued any further notices or orders against Brek or its officers
or
directors.
Bermuda
lawsuit - Transworld Payment Solutions N.V. et al. vs. Brek Energy Corporation
et al.
On
February 25, 2003, Transworld Payment Solutions N.V. and First Curacao
International Bank N.V., the debtor and the guarantor respectively of a note
receivable, commenced legal action against Brek and others in the Supreme Court
of Bermuda claiming that Brek and its former subsidiary, First Ecom Systems
Limited, had promised to develop and supply them with certain software pursuant
to three license agreements dated October 19, 2001. The plaintiffs were seeking
rescission of all agreements between the parties or, alternatively, damages
for
misrepresentation and breach of agreements. The plaintiffs commenced the lawsuit
approximately one week before they had to make their first instalment payment
pursuant to a share purchase agreement dated October 19, 2001. At that time,
the
plaintiffs were obligated to make an instalment payment in the amount of
$1,901,107. The plaintiffs have not made any instalment payments as required
pursuant to the terms and conditions of the share purchase agreement. See
Exhibit 10.4 - Share Purchase Agreement and Exhibit 10.5 - License Agreements
for more details.
Page
- 16
Brek
and
the other defendants filed a defence and counterclaim on May 8, 2003 with the
Supreme Court of Bermuda. In their counterclaim, the defendants were seeking
specific performance of the share purchase agreement or, alternatively, damages
for breach of contract. Although the directors believed that the plaintiffs’
claims were without merit as there was no condition to develop software for
the
plaintiffs, due to lack of financial resources Brek did not pursue its
counterclaim. No further action has transpired by any party since Brek filed
its
defence and counterclaim.
Item
4.Submission
of Matters to a Vote of Security Holders.
No
matter
was submitted to a vote of security holders, through the solicitation of proxies
or otherwise, during the fourth quarter of the fiscal year covered by this
report.
PART
II
Item
5.Market
for Common Equity and Related Stockholder Matters.
(a)Market
Information
Brek’s
common stock traded on the Nasdaq National Market System under the symbol “FECC”
from June 6, 2000 until February 19, 2002 when the symbol was changed to “BREK”.
Prior to that, BREK traded on the NASD OTC Bulletin Board under the symbol
“FECC” since March 8, 1999. On December 3, 2002, Brek was removed from the
Nasdaq National Market System for failing to maintain minimum listing
requirements.
The
table
below gives the high and low closing prices for each fiscal quarter for the
2002
fiscal year and the 2001 fiscal year.
Period
ended
High
Low
31
December 2002
$0.68
$0.22
30
September 2002
$0.81
$0.55
30
June 2002
$1.13
$0.61
31
March 2002
$0.70
$0.39
31
December 2001
$0.62
$0.30
30
September 2001
$0.90
$0.32
30
June 2001
$1.35
$0.81
31
March 2001
$1.88
$0.75
Brek’s
common stock has also traded on the Berlin over-the-counter stock exchange
since
January 27, 2000 and has been listed on the Bermuda Stock Exchange since
December 23, 1999.
Subsequent
to December 3, 2002, Brek’s shares of common stock were quoted on the NASD OTC
Bulletin Board under the symbol “BREK”. On May 23, 2003, Brek’s shares of common
stock ceased to be quoted on the NASD OTC Bulletin Board and Brek’s shares of
common stock were quoted on the gray market under the same symbol,
“BREK”.
The
table
below gives the high and low bid information for the one fiscal quarter during
the 2002 fiscal year for when Brek was quoted on the NASD OTC Bulletin Board.
The bid information was obtained from Pink Sheets LLC and reflects inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
High
& Low Bids
Period
ended
High
Low
Source
31
December 2002
$0.32
$0.20
Pink
Sheets LLC
30
September 2002
n/a
n/a
n/a
30
June 2002
n/a
n/a
n/a
31
March 2002
n/a
n/a
n/a
31
December 2001
n/a
n/a
n/a
30
September 2001
n/a
n/a
n/a
30
June 2001
n/a
n/a
n/a
31
March 2001
n/a
n/a
n/a
Page
- 17
(b)Holders
of Record
As
of
December 31, 2002, there were approximately 139 holders of record of Brek’s
shares of common stock.
(c)Dividends
Brek
has
never declared or paid dividends on its shares of common stock. Brek intends
to
follow a policy of retaining earnings, if any, to finance the growth of the
business and does not anticipate paying any cash dividends in the foreseeable
future. The declaration and payment of future dividends on the shares of common
stock will be the sole discretion of the board of directors and will depend
on
Brek’s profitability and financial condition, capital requirements, statutory
and contractual restrictions, future prospects and other factors deemed relevant
by the board of directors.
On
December 5, 2001, the Board of Directors of Brek adopted a shareholder rights
plan (the “Rights Plan”). The purpose of the Rights Plan is to deter, and
protect Brek’s shareholders from, certain coercive and otherwise unfair takeover
tactics and enable the Board of Directors to represent effectively the interests
of shareholders in the event of a takeover attempt. The Rights Plan does not
deter negotiated mergers or business combinations that the Board of Directors
determines to be in the best interests of Brek and its shareholders. In
connection with the adoption of the Rights Plan, Brek entered into a rights
agreement with U.S. Bank, N.A. dated as of March 1, 2002.
On
March20, 2002, the Board of Directors declared a dividend of one common share
purchase right (a “Right”) for each outstanding share of common stock, par value
$0.001 per share, of Brek. The dividend was payable on March 20, 2002 to the
stockholders of record on that date. Upon the happening of certain events,
the
board of directors could vote to implement Brek’s rights agreement, which would
delay, impede or effect a change in control of Brek or could impede a merger,
consolidation, takeover or other business combination involving Brek or
discourage a potential acquirer from making a tender offer or otherwise
attempting to obtain control of Brek.
Once the
Rights become exercisable, each Right entitles the registered holder to purchase
from Brek five shares of common stock at a price of $0.01 per share, subject
to
adjustment. The description and terms of the Rights are set forth in the rights
agreement. See Exhibit 4.2 - Rights Agreement for more details.
(d)Recent
Sales of Unregistered Securities
There
have been no sales of unregistered securities within the last three years that
would be required to be disclosed pursuant to Item 701 of Regulation S-B, except
for the following:
During
2000, Brek issued 50,000 warrants to a former employee. These warrants were
exercisable until June 30, 2002 at a price of $8.55 per share.
On
March6, 2000, Brek issued 3,228,500 units, each of which consisted of one share
of
common stock and a five-year warrant to purchase one third of a share of common
stock for $11.40 per whole share, to 15 non-US investors outside the United
States for $9.50 per unit. This issuance was exempt from registration pursuant
to Regulation S.
In
connection with the private placement on March 6, 2000, Brek granted warrants
to
an investment bank to purchase 26,923 shares of common stock at an exercise
price of $7.80 and 223,925 shares of common stock at an exercise price of $11.40
per warrant. All of the warrants expired on March 9, 2005.
March
2000 - Acquisition of Asia Internet Limited
On
March16, 2000, Brek signed an agreement with the owners of Asia Internet Limited
to
purchase the entire issued share capital of Asia Internet Limited for a
consideration of $1.2 million in cash and 24,870 shares of common stock of
Brek.
On March 31, 2000, Brek issued 4,974 shares of common stock to Balaji Exports
Ltd., 12,435 shares of common stock to Rajan Chellarm Mahboobani, and 7,461
shares of common stock to Ravi Kishinchand Daswani, the share holders of Asia
Internet Limited, in exchange for all of the issued and outstanding shares
of
Asia Internet Limited. Brek relied upon Section 4(2) of the Securities Act
of
1933 and Rule 903 of Regulation S promulgated pursuant to that Act by the
Securities and Exchange Commission. Management is satisfied that the
requirements of the exemption from the registration and prospectus delivery
requirements of the Securities Act of 1933 have been fully complied with. The
offering was not a public offering and was not accompanied by any general
advertisement or any general solicitation. No offer was made or accepted in
the
United States and the share certificates representing the shares were legended
with the applicable trading restrictions. See Exhibit 10.1 - Stock Purchase
Agreement for more details.
Page
- 18
July
2000 - Exercise of Warrants
On
July26, 2000, Brek issued 1,000,000 shares of common stock for the exercise of
warrants at an exercise price of $7.80 per warrant. These warrants were issued
as part of the December 23, 1999 offering and expired on December 22,2004.
2000
-
Stock Options Granted
Under
the
1999 Stock Option Plan, Brek granted the following share purchase options during
the fiscal year ended December 31, 2000:
On
August29, 2000, Brek approved the granting of new options, with a new exercise price
of $5.05 per share, providing the holders first rescinded their existing grants.
Holders of 1,145,740 stock options elected to rescind their grants and these
were replaced with a like number of new stock options repriced to $5.05 per
stock option.
2001
-
Stock Options Granted
Under
the
2001 Stock Option/Warrant Plan, Brek granted the following share purchase
options to employees, directors and consultants of Brek during the fiscal year
ended December 31, 2001:
Brek’s
2001 stock option/warrant plan provides for the granting of stock options or
warrants for the purchase of a specific number of common shares at a specific
price for a specific time period to officers, consultants, directors and key
employees. All share options/warrants granted under the 2001 option/warrant
plan
either vest immediately, at 25% per quarter over a period of one year, or on
a
performance basis. All options, if remaining unexercised, expire five years
after the date of issue.
On
October 31, 2001, Brek approved the granting of new options to employees and
directors with a new exercise price of $0.40 per share providing the holders
first rescinded their existing grants of options and warrants (if any). Holders
of 825,000 options granted under the 1999 Stock Option Plan and 235,000 warrants
granted on March 29, 2001 elected to rescind their existing grants and these
were replaced with new grants totalling 765,000 options.
On
October 31, 2001, Brek also granted new options to employees, directors and
consultants to purchase up to 495,000 shares of Brek’s common stock at a price
of $0.40 per share. The options vested immediately and expire on October 31,2006. 285,000 of these options were granted to consultants of Brek.
March
2002 - $0.50 Offering
On
or
about April 9, 2002, Brek issued 2,845,000 shares of common stock at $0.50
per
share producing aggregate proceeds of $1,397,500, which was net of related
share
issue cost of $25,000, received by Brek. The sales were to 14 investors, of
which 12 were non-US persons outside the United States and two were accredited
investors in the United States. Of these investors, one was a director and
executive officer of Brek, one was a director of Brek, and one was an executive
officer of Brek. The issuances and sales were exempt under Section 4(2) under
the Securities Act of 1933, and Regulations S and D thereunder. All expenditures
of proceeds were for normal overhead and other general corporate
purposes.
Page
- 19
July31, 2002 - Purchase Agreement with Gasco Energy, Inc.
On
July31, 2002, Brek issued an aggregate 4,125,000 common shares in exchange for
an
undivided interest in oil and gas properties at a deemed value of $2,862,750.
Brek issued 1,237,500 shares of common stock to Richard N. Jeffs, 1,237,500
shares of common stock to Wet Coast Management Corp., a company controlled
by
Mr. Jeffs, 825,000 shares of common stock to Nicolas Mathys, and 825,000 shares
of common stock to Ralph Fuoss in exchange for an undivided interest in Gasco
Energy, Inc’s undeveloped mineral leases. Brek relied upon Section 4(2) of the
Securities Act of 1933 and Rule 903 of Regulation S promulgated pursuant to
that
Act by the Securities and Exchange Commission. Management is satisfied that
the
requirements of the exemption from the registration and prospectus delivery
requirements of the Securities Act of 1933 have been fully complied with. The
offering was not a public offering and was not accompanied by any general
advertisement or any general solicitation. No offer was made or accepted in
the
United States and the share certificates representing the shares were legended
with the applicable trading restrictions. See Exhibit 10.3 - Purchase Agreement
for more details.
On
August23, 2002, Brek issued 80,000 common shares, at a deemed value of $56,800, to
certain subscribers of the March 28, 2002 private placement as a 10% penalty
for
failing to make its S-3 Registration Statement effective within 120 days, as
required under the terms of their private placement agreements. Brek issued
68,000 shares of common stock to Warwick Ventures Ltd. and 12,000 shares of
common stock to Ultratech Capital Management.
On
September 10, 2002, Brek issued 100,000 common shares at a price of $0.70 to
Gregory Pek, Brek’s former Chief Executive Officer, as part of his severance
package. See Item 10 - “Executive Compensation” below for more
information.
On
September 24, 2002, Brek issued 50,000 shares of common stock at $0.68 per
share
to each of two directors and an officer of Brek in settlement of $102,000 in
accrued bonuses payable. Brek issued 50,000 shares of common stock to Ian
Robinson, 50,000 shares of common stock to Ravi Daswani, and 50,000 shares
of
common stock to Kenneth Telford. See Item 10 - “Executive Compensation” below
for more information.
On
September 19, 2002, 50,000 employee stock options, issued under the 2001 stock
option warrant plan, were exercised at $0.40 per share for cash proceeds of
$20,000. Upon receipt of the exercise price in full, Brek issued 50,000 shares
of common stock to Steve Corbin on October 3, 2002.
2002
-
Stock Options Granted
Under
the
2001 Stock Option/Warrant Plan, Brek granted the following share purchase
options to employees, directors and consultants of Brek during the fiscal year
ended December 31, 2002:
On
July15, 2002, Brek granted options to employees and directors to purchase up to
370,000 shares of Brek’s common stock at a price of $0.55 per share. The options
vested immediately and expire on July 15, 2007.
On
July15, 2002, Brek also granted options to officers to purchase up to 50,000 shares
of Brek’s common stock at a price of $0.55 per share. The options vest 25% every
6 months, and expire 3 months after termination of employment.
(e)
Penny
Stock Rules
Trading
in Brek’s shares of common stock is subject to the “penny stock” rules. The SEC
has adopted regulations that generally define a penny stock to be any equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions. These rules require that any broker-dealer who recommends
Brek’s shares of common stock to persons other than prior customers and
accredited investors, must, prior to the sale, make a special written
suitability determination for the purchaser and receive the purchaser’s written
agreement to execute the transaction. Unless an exception is available, the
regulations require the delivery, prior to any transaction involving a penny
stock, of a disclosure schedule explaining the penny stock market and the risks
associated with trading in the penny stock market. In addition, broker-dealers
must disclose commissions payable to both the broker-dealer and the registered
representative and current quotations for the securities they offer. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in Brek’s shares of common
stock, which could severely limit their market price and liquidity of Brek’s
shares of common stock.
Page
- 20
The
“penny stock” rules also imposes additional sales practice requirements on
broker/dealers who sell penny stock. These rules require a one page summary
of
certain essential items. The items include the risk of investing in penny stocks
in both public offerings and secondary marketing; terms important to in
understanding of the function of the penny stock market, such as “bid” and
“offer” quotes, a dealers “spread” and broker/dealer compensation; the
broker/dealer compensation, the broker/dealers duties to its customers,
including the disclosures required by any other penny stock disclosure rules;
the customers rights and remedies in causes of fraud in penny stock
transactions; and, the NASD’s toll free telephone number and the central number
of the North American Administrators Association, for information on the
disciplinary history of broker/dealers and their associated
persons.
Item
6.Management’s
Discussion and Analysis or Plan of Operation.
The
following is a discussion and analysis of the consolidated financial condition
and results of operations of Brek Energy Corporation for the fiscal years ended
December 31, 2002 and 2001. You should read the following in conjunction with
the consolidated financial statements and related notes appearing elsewhere
herein.
OVERVIEW
Until
2002, we focused our operations on the electronic payment processing
business.
During 2001 and 2002, we disposed of our electronic payment processing
businesses. In July, 2002, we acquired a 25% working interest in
the
undeveloped oil and gas leases owned by Gasco Energy, Inc. in Utah, Wyoming
and California, and we acquired a 51.53% non-dilutable voting interest
in Vallenar Energy Corp., a company engaged in oil and gas exploration
in Texas.
Since
we
acquired our oil and gas interests, we have focused our attention on
our
oil and gas operations, primarily in Utah and Wyoming. We are not the
operator on any of the properties. The main focus of our oil and gas
exploration
business is in the Untied States.
As
of the
date of this filing, we have participated in the drilling or re-completion
of
eleven wells and have ten producing wells in which we have net revenue interests
of between 8% and 20%. One well, an earning well drilled by Burlington in 2002,
is shut in. We are still paying for work on one well that was completed during
the summer of 2005. We believe that this work will increase the production
in
the well, with a corresponding increase in revenue.
We
have
farmed out the drilling of six wells. Under the farmout agreements, we agreed
to
forfeit 100% of our interest in five wells and wellbores and 75% of our interest
in one well and wellbore, and to relinquish 70% of our leasehold interest in
the
acreage surrounding four wells and 75% in the acreage surrounding two wells
in
exchange for the right to back in to a 7.5% working interest in four wells
and
wellbores when the farmee has recovered 100% of its drilling and operating
costs, an over-riding royalty interest in the revenue from one well convertible
to a wellbore interest when the farmee has recovered 100% of its drilling and
operating costs, and 7.5% of the revenue that we would have earned from one
well
had we not relinquished our well and wellbore interests in the
well.
We
transferred one-half of our interest in two wells and wellbores and all of
our
interest in one well and wellbore, all in Utah, to a small drilling fund for
which the fund paid us its share of the drilling and completion costs. We used
the recovered funds to invest in drilling other wells. The well in which we
transferred all of our interest was an earning well.
We
did
not consent to the drilling of twenty wells proposed by Gasco. As a result
of
our non-consent, Gasco has drilled or will drill the wells bearing 100% of
the
costs and is entitled to all of the revenue generated from the sale of oil
and
gas until they have recovered 300% of their drilling costs, 150% of the costs
of
newly acquired equipment in the well, and 100% of the operating costs and
the
costs of any newly acquired surface equipment beyond the wellhead connections,
at which time we are entitled to our percentage of the revenue. The average
cost
of these non-consent wells is approximately $3.5 million, so we do not expect
to
see any revenue from them for some time, if ever. We have not, however,
forfeited any leasehold interests and can participate in future drilling
that is
proposed for other locations on the same lease
Page
- 21
We
are in
the early stages of development and have insufficient operating history on
which
to base an evaluation of our business and prospects. Any such evaluation must
be
made in light of the risks frequently encountered by companies in their early
states of development, particularly for companies in high risk sectors such
as
oil and gas. Our longer-term ability to emerge from the development stage
depends upon our oil and gas properties proving up sufficient reserves and
if
sufficient reserves are proved, bringing these properties into
production.
Since
inception we have had recurring operating losses and continuing negative cash
flows from operations. Due to these factors the consolidated financial
statements have been prepared on a going concern basis. We believe that our
cash
and cash equivalents, as of December 31, 2002, and the date of this filing,
are
not sufficient to satisfy our working capital needs and that we must raise
funds
by borrowing, raising additional equity or liquidating assets to satisfy our
operational and working capital requirements in the foreseeable future.
RESULTS
OF OPERATIONS
Revenues
We
are in
the development stage and had no revenue during the year ended December 31,2002. Due to the disposal of our subsidiary, First Ecom Systems Limited, on
September 30, 2002, all revenue from this electronic systems payment processing
business was reclassified to discontinued operations for the years ended
December 31, 2002, 2001 and 2000. We expect to generate revenue from our oil
and
gas properties, but it will be nominal until we have drilled enough wells to
generate meaningful revenue.
Before
these reclassifications, total revenues for year ended December 31, 2001, were
$301,978 as compared to $38,223 for the year ended December 31, 2000. At
December 31, 2002, systems integration revenue of $816,648 related to Asia
Internet Limited, which we acquired on March 31, 2000, was reclassified to
discontinued operations. During 2001, $250,567 of the total revenue was due
to
consolidation of FEDS revenue for the period from June 19, 2001 to October19,2001.
Operating
Expenses
Total
operating expenses increased by $21,983,937 or 9456% from $232,475 for the
year
ended December 31, 2001, to $22,216,412 for the year ended December 31, 2002.
This increase was due to $611,628 in sales and marketing expenses, $6,920,666
in
administrative expenses, $836,134 in systems and technology expenses and
$3,159,505 in charges for impairment of certain long-lived and prepaid assets
being reclassified to discontinued operations at December 31, 2001, due to
the
disposal of First Ecom Systems Limited on September 30, 2002. The increase
was
also due to an increase in charges for impairment of certain long-lived assets
during 2002 of $16,634,187 which was due to the recording of an impairment
charge on our oil and gas properties, $1,901,106 due to impairment of our note
receivable and $8,015 due to impairment on our fixed assets. Due to the sale
of
First Ecom Systems Limited on September 30, 2002, at December 31, 2002, we
reclassified First Ecom System Limited’s December 31, 2000, operating expenses
in the amount of $12,849,315 to discontinued operations. Our operating expenses
have decreased significantly since 2002 due to our having discontinued all
electronic payments processing operations.
Before
these reclassifications, total operating expenses for the years ended December31, 2001 and 2000 were $11,760,408 and $12,849,315. The year 2001 included
a
non-recurring charge of $3,159,505 for impairment of long-lived assets,
resulting from the write-down of the carrying value of First Ecommerce Data
Services Limited as at September 30, 2001, based on sale proceeds in October
2001, versus a similar charge of $949,418, which resulted from a review of
the
carrying value of Brek’s electronic payment processing assets in 2000. Of the
total operating expenses, $936,586 was due to consolidation of FEDS expenses
for
the period June 19, 2001 to October 19, 2001. We reclassified the expenses
in
2000 of Asia Internet Limited to discontinued operations. The decrease in
expenses during 2001 is attributable to a decrease in the number of employees,
a
decrease in sales and marketing efforts, decreased systems development and
the
discontinuance of the operations of Asia Internet Limited.
Other
Items
Interest
income decreased to $40,593 during the year ended December 31, 2002, as compared
to $704, 725 during the year ended December 31, 2001. This decrease was due
to a
decrease in our cash, which we used primarily to cover operating costs in our
payments processing subsidiaries until they were discontinued, and to buy oil
and gas properties and pay for our oil and gas participation costs.
Page
- 22
Interest
income decreased to $704,725 during the year ended December 31, 2001 as compared
to $1,527,959 during the year ended December 31, 2000. This decrease was due
to
our decreased cash position during the year and a significant reduction in
interest rates. The most significant aspect relating to the decrease in cash
was
our acquisition of the preferred stock in Gasco Energy Inc.
Interest
expense for the years ended December 31, 2002 and 2001 was $nil, because we
did
not borrow any money during these periods.
Interest
expense decreased to $nil during the year ended December 31, 2001 as compared
to
$2,121 during the year ended December 31, 2000, because we did not borrow any
money during 2001.
The
losses in equity investments for the year ended December 31, 2002, consisted
of
$796,370, which was our equity in the losses of Gasco before we exchanged our
Gasco preferred shares for a 25% interest in Gasco’s unproved oil and gas
properties on July 16, 2002, and $17,011, which was our equity in the losses
of
Vallenar before we increased our equity interest to 51.53% on June 28, 2002.
The
losses of $882,146 in equity investments for the year ended December 31, 2001,
consisted of our share of the losses before acquisition of the remaining 50%
interest in First Ecommerce Data Services limited on June 18, 2001 ($390,052),
and our share of the losses of Gasco Energy, Inc. after we acquired Gasco’s
preferred stock on July 19, 2001 ($492,094). During the year ended December31,2000, we recorded an equity loss of $292,118 in an affiliate which was wholly
attributable to our share of the losses before we acquired the remaining 50%
interest in First Ecommerce Data Services Limited.
During
the year ended December 31, 2002, we recorded a write down of our investment
in
an equity investment of $3,309,536. This loss adjusted the carrying value of
our
equity in Gasco to the fair value amount of $14,402,000, which is based on
the
average closing market price of Gasco’s shares for two days before and two days
after July 16, 2002, the date on which we exchanged our Gasco shares for
leasehold interests.
During
the year ended December 31, 2002, we recorded a loss on the sale of our
investment in shares of uniView Technologies Corporation of $12,611. During
the
years ended December 31, 2002, 2001 and 2000, we recorded losses of $34,927,
$314,339 and $1,632,353 on the write down of our investment in this investment.
During
the year ended December 31, 2002, we discontinued the operations of First Ecom
Systems Limited, our payment processing business. The discontinuation of these
operations resulted in the net operating losses of First Ecom System Limited,
for the years ended December 31, 2002, 2001 and 2000, of $1,199,755, $11,225,955
and $12,811,092, being reclassified to discontinued operations.
During
the year ended December 31, 2001, we discontinued the operations of our systems
integration business which was carried on through our subsidiary Asia Internet
Limited. The discontinuation of these operations resulted in a recovery of
$1,725,551 which was primarily due to the reversal of unvested stock
compensation costs of $1,852,570. During the years ended December 31, 2001
and
2000, we recorded net-operating losses of $236,683 and $4,219,736.
On
June28, 2002, we acquired a further 2 million common shares of Vallenar, which
increased our equity interest to 51.53%. At December 31, 2002, we recorded
$302,142, which is the minority shareholders’ 48.47% interest in Vallenar’s
losses.
Deferred
Tax Assets
We
recorded a valuation allowance to reduce our deferred tax assets to the amount
that we believe is more likely than not to be realized. If in the future we
determine that we will be able to realize deferred tax assets in excess of
their
recorded amount, we will adjust the deferred tax assets accordingly, which
will
increase income in the period the determination is made. Likewise if we
determine that we will not be able to realize all or part of our net deferred
tax assets in the future, an adjustment to the deferred tax asset would be
charged to income in the period the determination is made.
Liquidity
and Capital Resources
We
had
cash and cash equivalents of $3,801 and a working capital deficit of $1,376,726
at December 31, 2002. During the year ended December 31, 2002, we used
$2,098,755 in cash for operating activities primarily for an operating loss
of
$27,243,917 and $35,863 in imputed interest on notes receivable. These
expenditures were offset by an $813,381 equity loss in affiliates, $302,142
attributed to the minority interest, $228,800 in issuance of shares in
settlement of expenses, $106,975 in stock compensation costs, $102,611 in
depreciation, $48,976 in losses on disposal of equipment, a $132 loss from
discontinued operations, a $113, 420 write-down on equipment, a $12,611 loss
on
sale of marketable securities, a $34,927 loss recognized on the write-down
of
marketable securities, $18,543,307 in charges for certain long lived and prepaid
assets, $3,309,536 in impairment losses of equity in affiliates, a decrease
of
$31,307 in accounts receivable and accrued interest receivable, a decrease
of
$390,428 in other prepaid expenses and deposits, an increase of $776,755 in
accounts payable and accrued liabilities, and an increase of $365,717 in amounts
due to related parties.
Page
- 23
During
the year ended December 31, 2002, $1,417,500 in cash was provided by financing
activities. These financing activities consisted of receipt of $1,422,500 from
the issuance of common shares and receipt of $20,000 from the exercise of stock
options, offset by a payment $25,000 in respect of share issue costs.
During
the year ended December 31, 2002, $1,403,428 in cash was used in investing
activities, These investing activities included cash of $17,537 spent on the
purchase of property and equipment, $529,906 spent on our oil and gas
properties, $772,563 spent on increasing our equity interest in Vallenar and
$361,085 was the effect of the minority interest on the acquisition of the
subsidiary, these expenditures were offset by the receipt of loan proceeds
of
$270,055, receipt of proceeds from the disposal of equipment of $1,837 and
receipt of proceeds from the sale of marketable securities of $5,771.
A
decrease in working capital of $3,702,199 was due to a decrease in current
assets of $2,559,727 plus an increase in current liabilities of $1,142,472.
We
have accumulated a deficit of $61,080,323 since inception and have stockholders’
equity of $598,107. We have no contingencies or long term commitments except
for
the Transworld litigation which is disclosed in the contingencies and
commitments footnote to the financial statements and the Burlington litigation
which is disclosed in the subsequent event footnote to the financial statement,
appearing elsewhere herein.
We
did
not have any fund raising activities during 2001.
At
December 31, 2001, we had approximately $2.1 million in cash, cash equivalents
and marketable securities available to fund operations. We significantly lowered
our on going expenditures and overhead during 2001 buy reducing the number
of
employees, closing offices and leasing more affordable office
space.
Plan
of Operation for the Next Twelve Months
This
is a
discussion of the plan of operation for the twelve months following the date
of
this filing. As of December 31, 2002, we had either disposed of or discontinued
our operations in all of our payments processing subsidiaries and since then
we
have focused only on our oil and gas operations, primarily in Utah and Wyoming.
We own a minority (25%) working interest in our Utah and Wyoming properties
and
are not the operator. Subsidiaries of Gasco Energy, Inc. own the majority (75%)
working interest in these and the California properties, and Gasco Production
Company is the operator. As a result of this arrangement, we are, to a large
extent, subject to Gasco’s operating plans. In some cases, we and Gasco together
own less than 100% of the working interest and the parties with the remaining
interests are the operators: for example, our and Gasco’s working interests are
less than 100% on properties in which Burlington has working interests and
is
the operator.
We
expect
that Gasco or the other operators will propose drilling a number of wells during
the remainder of 2005 and in 2006 and we hope to participate in them. Our
participation will depend entirely upon our being able to raise the capital
required. How much capital we will require depends upon, among other things,
how
many wells Gasco proposes and the costs of the wells. We anticipate that a
well
will cost between $3.5 million and $4.5 million to complete; in most cases,
our
portion of the total cost will be 25%. Drilling costs are difficult to
anticipate at this time, as costs have been rising steadily during the past
two
years, in part because of an increase in demand for materials and expertise
in
Asia and an increase in drilling activity in the United States and elsewhere
in
the world.
We
have
nominal revenue-generating operations and do not have the cash, cash equivalents
or investments required to finance our participation in drilling programs or
to
cover our working capital requirements. We are solely dependent upon external
financing and are considering several options for raising funds to meet our
future capital and operating requirements. Any projections of future cash needs
and cash flows are subject to substantial uncertainty. Our capital requirements
depend on several factors including participation in drilling programs,
acquisitions of oil and gas interests, the rate of market acceptance, our
ability to increase revenues, our purchases of equipment, and other factors.
If
our capital requirements vary materially from those planned, we may require
additional financing sooner than anticipated. We cannot assure that financing
will be available in amounts or on terms acceptable to us, if at all. If we
issue equity securities, stockholders may experience additional dilution or
the
new equity securities may have rights, preferences or privileges senior to
those
of existing holders of common stock. Debt financing, if available, may involve
restrictive covenants, which could restrict our operations or finances. If
we
cannot raise funds or sell assets, if needed, on acceptable terms, we may not
be
able to continue our operations, take advantage of future opportunities, or
respond to competitive pressures or unanticipated requirements which could
negatively impact our business, operating results and financial condition.
We
are a party to certain agreements pursuant to which others may drill oil or
gas
wells on property in which we own an interest. We cannot control the timing
or
the cost of this drilling. If a well is drilled and we cannot or choose not
to
pay our share of the cost of the well, then we will have no rights to any
production from that well until the operator has recovered its costs under
the
applicable agreement.
Page
- 24
CRITICAL
ACCOUNTING POLICIES
Development
Stage Activities
We
do not
have significant operations and in accordance with SFAS No. 7, we are considered
a development stage company.
Principles
of Consolidation
The
consolidated financial statements include our financial statements and our
subsidiaries. All significant inter-company balances and transactions have
been
eliminated. Affiliated companies (20% to 50% owned companies) in which we do
not
have significant influence are accounted for, using the equity method. Our
share
of earnings (losses) from these companies are included in the accompanying
consolidated statements of operations.
The
financial statements for the period prior to our merger with JRL Resources
reflect the consolidated financial position and results of operations of FEAL.
Subsequent to the merger, the financial statements reflect the consolidated
financial position and results of operations of BREK (as successor to JRL
Resources subsequent to BREK’s formation and JRL Resources prior to BREK’s
formation) and its subsidiaries.
Fair
Value of Financial Instruments
The
carrying values reflected in the consolidated balance sheets for cash and cash
equivalents, trade accounts receivable, accrued interest receivable, short
term
loan, accounts payable and accruals and amounts due to related parties
approximate their fair values because of the short term nature of these
instruments. The fair value of the note receivable of $1 is an estimate based
on
the value the Company expects to realize within the next twelve months.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation
is
provided using the straight-line method over the estimated useful lives of
the
assets less salvage value as follows:
Leasehold
improvements
Over
the
term of the leases
Computer
equipment and processing system 3
years
Furniture,
fixtures and office
equipment
5
years
During
the year all of the fixed assets were disposed of when the Company changed
business direction and disposed of their Hong Kong office.
Goodwill
We
adopted the provisions of Statement of Financial Accounting Standards (“SFAS”)
No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets” on January 1, 2002.
SFAS 142 requires, among other things, the discontinuance of amortization for
goodwill and indefinite life intangible assets. In addition, the standard
includes provisions for the reclassification of certain existing recognized
intangibles such as goodwill, reassessment of the useful lives of existing
recognized intangibles with finite lives, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. SFAS 142 also requires that we complete a transitional goodwill
impairment test six months from the date of adoption. The effects of adopting
the non-amortization provisions of SFAS 142, assuming these provisions were
adopted for the periods presented, are summarized below.
2002
2001
2000
Reported
net loss
$
(27,243,917
)
$
(10,461,322
)
$
(17,809,461
)
Add:
Goodwill amortization
-
325,671
291,282
Adjusted
net loss
$
(27,243,917
)
$
(10,135,651
)
$
(17,518,179
)
Reported
basic and diluted loss per share
$
(1.16
)
$
(0.54
)
$
(0.98
)
Add:
Goodwill amortization, per basic and diluted share
-
.02
.02
Adjusted
basic and diluted loss per share
$
(1.16
)
$
(0.52
)
$
(0.96
)
Page
- 25
During
the year ended December 31, 2002, goodwill was written off as part of the loss
from discontinued operations.
Long-Lived
Assets
SFAS
No.
144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived
Assets” requires the recognition of an impairment loss on long-lived assets if
the carrying amount exceeds its fair value, as determined using undiscounted
cash flows expected to result from the use and eventual disposition of the
asset. We adopted SFAS 144, on January 1, 2002. During the year ended December31, 2002, we recorded $18,543,307 in charges for impairment of certain
long-lived assets.
Software
Development Costs
Internal
and external costs incurred to develop internal-use computer software are
expensed during the preliminary project stage and capitalized during the
application development stage and amortized over three years. During the years
ended December 31, 2002, 2001, and 2000, and the cumulative period from
inception to December 31, 2002, $nil, $nil, $130,816 and $225,406 of
internal-use computer software development costs were expensed. As of December31, 2002 and 2001, capitalized software net of accumulated amortization and
impairment charges were $nil and $68,411.
Income
Taxes
Income
tax expense is based on pre-tax financial accounting income. We recognize
deferred tax assets and liabilities based on differences between the financial
reporting and tax bases of assets and liabilities using the enacted tax rates
and laws that are expected to be in effect when the differences are expected
to
be recovered. We have recorded a valuation allowance to reduce our deferred
tax
assets to the amount that we believe is more likely than not to be
realized.
Oil
and Gas Properties
We
follow
the full-cost method of accounting whereby we capitalize all costs related
to
the acquisition of oil and gas leases and acquisition and development of oil
and
gas properties into a single cost center (“full-cost pool”). Such costs include
lease acquisition costs, geological and geophysical expenses, overhead directly
related to exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from property sales are generally
credited to the full cost pool without gain or loss recognition unless such
a
sale would significantly alter the relationship between capitalized costs and
the proved reserves attributable to these costs. A significant alteration would
typically involve a sale of 25% or more of the proved reserves related to a
single full-cost pool.
We
compute the depletion of exploration and development costs and depreciation
of
production equipment using the units-of-production method based upon estimated
proven oil and gas reserves. We withhold the costs of unproved properties from
the depletion base until they are either developed or abandoned. We review
the
properties periodically for impairment. We transfer total well costs to the
depletable pool even when multiple targeted zones have not been fully evaluated.
For depletion and depreciation purposes, we convert relative volumes of oil
and
gas production and reserves at the energy equivalent rate of six thousand cubic
feet of natural gas to one barrel of crude oil. Our oil and gas wells began
producing after December 31, 2002; accordingly we have not recorded any
depletion expenses before or during the year endedDecember31, 2002.
Under
the
full-cost method of accounting, capitalized oil and gas property costs less
accumulated depletion and net of deferred income taxes may not exceed an amount
equal to the present value, discounted at 10%, of estimated future net revenues
from proved oil and gas reserves plus the cost or estimated fair value, if
lower, of unproven properties. Should capitalized costs exceed this ceiling,
impairment is recognized. The present value of estimated future net revenues
is
computed by applying current prices of oil and gas to estimated future
production of proved oil and gas reserves as of period-end, less estimated
future expenditures to be incurred in developing and producing the proved
reserves assuming the continuation of existing economic conditions.
Stock-based
Compensation
We
account for stock-based compensation arrangements with employees in accordance
with the provisions of APB 25 and comply with the disclosure provisions of
SFAS
123. Under APB 25, compensation expense is based on the difference, if any,
between the fair value of our stock and the exercise price of options issued
on
the date of grant. We amortize the unearned compensation over the vesting period
of the individual options.
Page
- 26
For
stock
options granted to employees and directors, with exercise prices at or above
the
market value of the stock on the grant date, we adopted the disclosure-only
provisions of SFAS 123. Had compensation cost been recognized based on the
fair
value at the date of grant consistent with the method prescribed by SFAS No.
123, our net losses and loss per share would have been reduced to the following
pro forma amounts at December 31, 2002. Also disclosed below are the pro-forma
amounts previously disclosed and pro forma amounts that have been restated
due
to a prior period adjustment which was caused by an error in the calculation
of
stock based compensation related to stock options issued, reissued and re-priced
during December 2001, 2000 and 1999:
The
fair
value of the common stock options granted during the years ended December 31,2002, 2001, 2000 and 1999, for disclosure purposes was estimated on the grant
dates using the Black Scholes Pricing Model and the following
assumptions:
2002
Expected
dividend yield
-
Expected
price volatility
131%
to 151%
Risk-free
interest rate
3%
to 5.5%
Expected
life of options
5
years
2001
As
Restated
2001
As
Previously
Disclosed
Expected
dividend yield
-
-
Expected
price volatility
151%
93.15%
to 150.69%
Risk-free
interest rate
5.5%
5.5%
Expected
life of options
5
years
3
and 5 years
Page
- 27
2000
As
Restated
2000
As
Previously Disclosed
Expected
dividend yield
-
-
Expected
price volatility
110%
93.15%
to 129.54%
Risk-free
interest rate
5.5%
5.5%
Expected
life of options
5
years
3
years
1999
As
Restated
1999
As
Previously
Disclosed
Expected
dividend yield
-
-
Expected
price volatility
51.45%
to 91.20%
54.45%
to 91.2%
Risk-free
interest rate
5.5%
5.5%
Expected
life of options
5
years
3
years
We
account for equity instruments issued to non-employees in accordance with the
provisions of SFAS 123, and Emerging Issues Task Force No. 96-18 (“EITF 96-18”).
We account for all transactions in which we receive goods or services as
consideration for the issuance of equity instruments based on the fair value
of
the consideration received or the fair value of the equity instrument, whichever
is more reliably measurable.
We
account for the re-pricing and re-issuing of stock options under the variable
accounting provisions of FIN 44.
Recent
Accounting Pronouncements
SFAS
No.
141 (“SFAS 141”), “Business Combinations” and SFAS No. 142 (“SFAS 142”),
“Goodwill and Intangible Assets”, were issued by the FASB in June 2001 and
became effective for us on July 1, 2001 and January 1, 2002, respectively.
The
FASB, the Securities and Exchange Commission (“SEC”) and others are engaged in
deliberations on the issue of whether SFAS 141 and 142 require interests held
under oil, gas and mineral leases or other contractual arrangements be
classified as intangible assets. If these interests were deemed to be intangible
assets, mineral interest use rights for both undeveloped and developed
leaseholds would be classified separately from oil and gas properties and
intangible assets on our balance sheets only, but these costs would continue
to
be aggregated with other costs of oil and gas properties in the notes to the
financial statements in accordance with SFAS No. 69 (“SFAS 69”), “Disclosures
about Oil and Gas Producing Activities”. Additional disclosures required by SFAS
141 and 142 would also be included in the notes to financial statements.
Historically, and to our knowledge, we and all other oil and gas companies
have
continued to include these oil and gas leasehold interests as part of oil and
gas properties after SFAS 141 and 142 became effective. We believe that few
oil
and natural gas companies have adopted this interpretation or changed their
balance sheet presentation for oil and gas leaseholds since the implementation
of SFAS 141 and 142.
As
applied to companies like Brek that have adopted full-cost accounting for oil
and gas activities, we understand that this interpretation of SFAS 141 and
142
would only affect our balance sheet classification of proved oil and gas
leaseholds acquired after June 30, 2001 and our unproved oil and gas leaseholds.
Our results of operations would not be affected, since these leasehold costs
would continue to be amortized in accordance with full cost accounting rules.
At
December 31, 2002, we had undeveloped leaseholds of approximately $2.03 million,
that would be classified on the balance sheets as “intangible undeveloped
leaseholds” if we applied the interpretation currently being deliberated. This
classification would require that we make the disclosures set forth under SFAS
142 related to these interests. Our current disclosures are those required
by
SFAS 69.
We
will
continue to classify our oil and gas leaseholds as tangible oil and gas
properties until further guidance is provided. Although most of our oil and
gas
property interests are held under oil and gas leases, we do not expect that
this
interpretation, if adopted, would have a material impact on our financial
condition or results of operations.
Contractual
Obligations
We
did
not have any contractual obligations at December 31, 2002, or as of the date
of
this filing, except for lease commitments totaling $88,050 for the first quarter
of 2003.
Page
- 28
Internal
and External Sources of Liquidity
We
have
funded our operations principally through the private placement of shares and
the exercise of stock purchase warrants.
Inflation
We
do not
believe that inflation will have a material impact on our future
operations.
Uncertainties
Relating to Forward Looking Statements
This
Form
10-KSB Annual Report contains “forward-looking statements” within the meaning of
the Private Securities Litigation Reform Act of 1995. You can identify these
statements by our use of words such as “plan”, “expect”, “aim”, “believe”,
“project”, “anticipate”, “intend”, “estimate”, “will”, “should”, “could” and
other expressions that indicate future events and trends. All statements that
address expectations or projections about the future, including statements
about
our strategy for participating in drilling programs, increasing revenues, and
raising capital from external sources are forward-looking
statements.
All
forward-looking statements are made as of the date of filing of this Form 10-KSB
and we disclaim any duty to update these statements.
Certain
parts of this Form 10-KSB may contain “forward-looking statements” within the
meaning of the Securities Exchange Act of 1934 based on current managements
expectations. Our actual results could differ materially from those in our
forward looking statements due to a number of uncertainties including, but
not
limited to, those discussed in this section. Factors that could cause our future
results to differ from these expectations include general economic conditions,
particularly as they affect our ability to raise sufficient working capital,
the
costs of bringing our oil and gas properties into production, and the market
for
our production. As a result, the identification and interpretation of data
and
other information and their use in developing and selecting assumptions from
and
among reasonable alternatives requires the exercise of judgment. To the extent
that the assumed events do not occur, our outcome may vary substantially from
our anticipated or projected results, and accordingly, we express no opinion
on
the achievability of those forward-looking statements and give no assurance
that
any of the assumptions relating to the forward-looking statements are
accurate.
We
may,
from time to time, make oral forward-looking statements. We strongly advise
you
to read the foregoing paragraphs and the risk factors described in this annual
report and in our other documents filed with the United States Securities and
Exchange Commission for a description of certain factors that could cause our
actual results to differ materially from those in the oral forward-looking
statements. We disclaim any intention or obligation to update or revise any
oral
or written forward-looking statements whether as a result of new information,
future events or otherwise.
Item
7.Financial
Statements
See
audited financial statements for the period ended December 31, 2002 and 2001
attached as Exhibit A to this Form 10-KSB.
Item
8.Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure.
There
are
no changes in or disagreements with Brek’s accountants on accounting and
financial disclosure. Brek’s principal
independent accountant since November 24, 2004 to the current date is
Hall
& Company, Certified Public Accountants Inc.,
16140
Sand Canyon Avenue, Suite 100, Irvine California, 92618
Effective
November 24, 2004, Brek’s board of directors approved a change in Brek’s
independent auditors. None of the reports of Deloitte Touche Tohmatsu, Chartered
Accountants on the financial statements of Brek’s for the fiscal years ended
December 31, 2000 and 2001 contained any adverse opinion or disclaimer of
opinion, or was qualified or modified as to uncertainty, audit scope or
accounting principles. Although audited statements prepared by Deloitte Touche
Tohmatsu, Chartered Accountants contained a going concern qualification, such
financial statements did not contain any adjustments for uncertainties stated
therein, nor have there been at any time, disagreements between Brek and
Deloitte Touche Tohmatsu, Chartered Accountants on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
Brek
retained the accounting firm of Hall & Company, Certified Public Accountants
Inc.,
to
serve
as its independent accountants to audit its financial statements beginning
with
the year ended December 31, 2002. This engagement became effective November24,2004. Prior to its engagement as Brek’s independent auditors, Hall &
Company, Certified Public Accountants Inc.,
had
not
been consulted by Brek either with respect to the application of accounting
principles to a specific transaction or the type of audit opinion that might
be
rendered on Brek’s financial statements or on any other matter that was the
subject of any prior disagreement between Brek and its previous certifying
accountants.
Page
- 29
Item
8A. Controls
and Procedures.
Brek
maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in Brek’s Securities Exchange Act of 1934
reports is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms, and that such information is accumulated
and communicated to Brek’s management, including its chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure. Based on their most recent evaluation, which was completed
within 90 days of the filing of this Form 10-KSB, Brek’s Chief Executive Officer
and Chief Financial Officer believe Brek’s disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14 and 15d-14) are effective to ensure
that information required to be disclosed by Brek in this report is accumulated
and communicated to Brek’s management, including its principal executive officer
and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure. Based upon the foregoing, Brek’s chief executive
officer and chief financial officer concluded that Brek’s disclosure controls
and procedures are effective in connection with the filing of this Annual Report
on Form 10-KSB for the year ended December 31, 2002.
There
were no significant changes in Brek’s internal controls or other factors that
could significantly affect these controls subsequent to the date of their
evaluation, including any significant deficiencies or material weaknesses of
internal controls that would require corrective action.
Item
8B. Other Information
During
the fourth quarter of the fiscal year covered by this Form 10-KSB, Brek reported
all information that was required to be disclosed in a report on Form 8-K,
except for the following.
Item
2.06 - Material Impairments
In
February 2003, it was determined that a note receivable from Transworld Payment
Solutions N.V. in the amount of $1,901,107 was impaired due to Transworld
commencing a legal action against a subsidiary of Brek in which Transworld
claimed that First Ecom Systems Limited had promised to develop and supply
them
with certain software. See “Item 3. Legal Proceedings” above for more
details.
Item
2.06 - Material Impairments
Based
on
a reserve study completed during the first quarter of 2005, it was determined
that a $16,634,187 impairment charge needed to be taken against the oil and
gas
properties at December 31, 2002.
Item
3.01 - Notice of Delisting or Failure to Satisfy a Continued Listing Rule or
Standard; Transfer of Listing
On
October 31, 2002, Brek received a Nasdaq Staff Determination that Brek’s shares
of common stock during the 90-day period ending on October 30, 2002, had not
maintained a closing bid price of $1.00 per share for the ten consecutive
trading days necessary to qualify for continued listing on the National Market
System, and that Brek’s shares of common stock were therefore subject to
de-listing from the Nasdaq National Market on November 8, 2002, for failure
to
comply with Marketplace Rule 4450.
Brek
applied to list its shares of common stock on the Nasdaq SmallCap Market, where
it would be eligible for re-listing on the National Market System if it
maintained a closing bid price of $1.00 for 30 consecutive trading days before
January 28, 2003. However, Brek was unable to maintain the minimum closing
bid
price for the required time period and on December 3, 2002, Brek was removed
from the Nasdaq National Market System for failing to maintain minimum listing
requirements.
Subsequently,
on May 23, 2003, Brek’s shares of common stock ceased to be quoted on the NASD
OTC Bulletin Board for failing to make timely filings with the Securities &
Exchange Commission, a listing requirement of the NASD OTC Bulletin Board,
following which Brek’s shares of common stock were moved to and quoted on the
gray market under the same symbol, “BREK”.
Item
5.02 - Departure of Directors or Principal Officers; Election of Directors;
Appointments of Principal Officers
In
September 2002, both Douglas Moore and Andrew Leitch resigned as directors
of
Brek.
Page
- 30
On
October 8, 2002, Greg Pek resigned as both CEO and president of Brek and Richard
N. Jeffs was appointed the new CEO and president of Brek to replace Mr. Pek.
At
that time, Mr. Jeffs was and had been a self-employed businessman since 1990
and
a director of a private venture capital company since 1999. See “Item 12.
Certain Relationships and Related Transactions” below for more
details.
On
November 14, 2002, Brek became aware that itself, Vallenar Energy Corp., Richard
Jeffs, and Vallenar Energy Corp’s president and CEO, Jeff Paquin, had been named
in a Temporary Order and Notice of Hearing regarding certain alleged violations
of the British Columbia Securities Act (the “BCSA”). This Temporary Order and
Notice of Hearing (the “Temporary Order”) alleged that Messrs. Jeffs and Paquin,
together with others, engaged in acts in furtherance of trades of shares of
Brek
(and other issuers) and advised persons to purchase shares of Brek (and other
issuers) without being registered under the British Columbia Securities Act.
The
Temporary Order required Messrs. Jeffs and Paquin to resign from their positions
as officers of Brek and Vallenar Energy Corp., and prohibited them and Brek
and
Vallenar Energy Corp. from trading in any securities and from engaging in
investor relations activities in British Columbia. Management believed that
neither it nor Vallenar Energy Corp. violated the BCSA or engaged in any
activity that would require them to be registered under the BCSA. The British
Columbia Securities Commission rescinded the temporary orders against Brek,
Mr.
Jeffs and others on December 5, 2002, and withdrew the notice of hearing on
April 1, 2003. To the best of management’s knowledge, the British Columbia
Securities Commission has issued no further orders or notices in connection
with
this matter.
As
a
result of the Temporary Order, Richard N. Jeffs resigned as both the CEO and
president of Brek on November 20, 2002. At that time, the Nominating Committee
was searching for a qualified candidate who was willing to accept the position,
but no replacement was appointed. Even without a CEO, the board of directors
believed, until such a candidate was found, Brek would not adversely affected
by
the lack of a CEO. See “Item 3. Legal Proceedings” above for more
details.
PART
III
Item
9.Directors,
Executive Officers, Promoters and Control Persons; Compliance with Section
16(a)
of the Exchange Act.
(a)Identify
Directors and Executive Officers
Each
director of Brek or its subsidiaries holds office until (i) the next annual
meeting of the stockholders, (ii) his successor has been elected and qualified,
or (iii) the director resigns.
(1)
Richard
Jeffs was briefly the CEO of Brek from September 2002 until his resignation
in
November 2002. As of December 31, 2002, no one had been appointed to fill the
office of CEO.
Gregory
Pek
- Mr.
Pek (48 years old) has been a director of Brek since March 1999. Mr. Pek was
a
co-founder of Brek and was the president and chief executive officer of Brek
from March 1999 until June 2000. Mr. Pek was the chairman of the board of Brek
from June 2000 until November 2000. Mr. Pek was the president and co-chief
executive officer of Brek from October 2000 until August 2001. From August
2001
until October 2002, Mr. Pek was the chief executive officer of Brek. Finally,
from November 2003 until January 2005, Mr. Pek was the chief financial officer
of Brek. Since December 2002, Mr. Pek has been a director and officer of Global
Financial Network Limited, a private Hong Kong company. From 1994 to 1999,
Mr.
Pek was an executive officer of both David Resources Company Limited, a
petroleum and wine trading company, and Kong Tai International Holdings Company
Limited, a real property investment company. From September 1998 to February
1999, Mr. Pek was a director of Singapore Hong Kong Properties Investment
Limited, another real property investment company. Mr. Pek obtained a Bachelor
of Commerce from the University of British Columbia in 1978. In 1981, Mr. Pek
received his chartered accountant designation after articling with Clarkson
Gordon.
Page
- 31
Ian
Robinson
- Mr.
Robinson (64) has been a director of Brek since April 2001. Since 1995, Mr.
Robinson has been the owner and managing director of Robinson Management
Limited, a business consulting firm. In 1962, Mr. Robinson received his CPA
designation from the Institute of Chartered Accountants of Australia.
Jim
Pratt
- Mr.
Pratt (54) has been a director of Brek since June 2000. In the past five years,
Mr. Pratt served as the CEO of Peoples Phone in Hong Kong and is currently
the
Managing Director of Asia Wireless, a Division of Telstra On Air, Telstra
Corporation of Australia. Mr. Pratt oversees all of Telstra Group’s wireless
operations and is responsible for their various investments throughout the
Asia
Pacific Region. Mr. Pratt has more than thirty years international management
experience in the Asia-Pacific telecommunications industry. Also, Mr. Pratt
currently represents Singtel Optus Limited as the chairman of the GSM
Association. Mr. Pratt is also an executive director of GlobeTrac Inc., a
NASDAQ-quoted company.
Ravi
Daswani
- Mr.
Daswani (36) has been a director of Brek since March 1999. Mr. Daswani was
Chief
Operating Officer of Brek from March 3, 1999 until August 31, 2001 and co-Chief
Executive Officer from October 16, 2000 to August 31, 2001 when he retired
to
pursue other business interests. From December 1997 to February 1999 Mr. Daswani
was the managing director and co-owner of Asia Internet Limited, a Hong Kong
Internet service provider. For more than three years before December 1997,
Mr.
Daswani was the managing director of a wholesale and retail apparel business
called Daswani S.A., a Panamanian company.
Kenneth.
Telford
- Mr.
Telford (54) was appointed Brek’s Chief Financial Officer and Secretary in July
2000. Mr. Telford is both a Chartered Accountant (Canada) and Certified Public
Accountant (USA). Mr. Telford has been a partner in Sadovnick Telford + Skov,
Chartered Accountants in Canada and Telford Sadovnick, PLLC, Certified Public
Accountants in the United States since 1994. Mr. Telford was also previously
a
partner in the international accounting firm Touche Ross & Co. (now Deloitte
& Touche) as well as Chief Operating Officer and Chief Financial Officer of
an automotive rental company. Mr. Telford has advised numerous companies,
operating in both North America and Asia Pacific, on a broad range of financial
and business matters including the financial management requirements of U.S.
publicly listed companies.
(b)Identify
Significant Employees
Brek
has
no significant employees.
(c)Family
Relationships
There
are
no family relationships among the directors, executive officers or persons
nominated or chosen by Brek to become directors or executive
officers.
(d)Involvement
in Certain Legal Proceedings
(1)
No
bankruptcy petition has been filed by or against any business of
which any
director was a general partner or an executive officer either at
the time
of the bankruptcy or within two years prior to that
time.
(2)
No
director has been convicted in a criminal proceeding and is not subject
to
a pending criminal proceeding (excluding traffic violations and other
minor offences).
(3)
No
director has been subject to any order, judgement, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring, suspending
or
otherwise limiting his involvement in any type of business, securities
or
banking activities.
(4)
No
director has been found by a court of competent jurisdiction (in
a civil
action), the Securities Exchange Commission or the Commodity Futures
Trading Commission to have violated a federal or state securities
or
commodities law, that has not been reversed, suspended, or
vacated.
(e)Compliance
with Section 16(a) of the Exchange Act.
All
reports were filed with the SEC on a timely basis and Brek is not aware of
any
failures to file a required report during the period covered by this annual
report, with the exception of the following. Gregory M. Pek, Ian Robinson,
James
Pratt, Ravi Daswani, Kenneth Telford, and Richard N. Jeffs, all failed to file
a
Form 5 or to provide Brek with a written representation that a Form 5 was not
required.
Page
- 32
(f)Audit
Committee Financial Expert
Brek
has
no financial expert. Management believes the cost related to retaining a
financial expert at this time is prohibitive. Further, because of Brek’s limited
operations, management believes the services of a financial expert are not
warranted.
(g)Identification
of Audit Committee
During
the fiscal year ended December 31, 2002, the Audit Committee consisted of Ian
Robinson and James Pratt. The Audit Committee was responsible for (i) reviewing
the scope of and the fees for the annual audit, (ii) reviewing with the
independent auditors the corporate accounting practices and policies, (iii)
reviewing with the independent auditors their final report, and (iv) being
available to the independent auditors during the year for consultation purposes.
Each of the members of the Audit Committee was independent within the meaning
of
Rule 4200(a)(15) of the NASD listing standards.
As
of
December 31, 2002, Brek did not have a written audit committee charter or
similar document.
(h)Code
of Ethics
As
of
December 31, 2002, Brek had not adopted a code of ethics. The board of directors
decided not adopt a code of ethics at that time as Brek had minimal operations,
had no employees or management, and the board of directors was managing Brek’s
minimal operations.
Item
10. Executive Compensation.
Brek
has
paid $744,672 in compensation to its named executive officers during its 2002
fiscal year.
SUMMARY
COMPENSATION TABLE
Long-term
compensation
Annual
compensation
Awards
Payouts
Name
and principal position
(a)
Year
(b)
Salary
($)
(c)
Bonus
($)
(d)
Other
annual compen-sation
($)
(e)
Restricted
stock awards
($)
(f)
Securities
underlying options/
SARs
(#)
(g)
LTIP
Payouts
($)
(h)
All
other compen-sation
($)
(i)
Gregory
Pek
CEO
/ President
Mar
1999 - Oct 2000
Aug
2001 - Oct 2002
Co-CEO
/ President
Oct
2000 - Aug 2001
2000
2001
2002
238,172
218,710
189,286
[1]
nil
107,097
nil
nil
15,484
[2]
27,871
[2]
nil
nil
nil
200,000
[3]
75,000
[4]
25,000
nil
nil
nil
nil
nil
70,000
[5]
Kenneth
Telford
CFO
July
2000 - Oct 2003
2000
2001
2002
n/a
[6]
259,994
297,806
[7]
n/a
[6]
117,419
34,000 [8]
n/a
13,005
[2]
17,209
[2]
n/a
nil
nil
n/a
200,000
[9]
50,000
n/a
nil
nil
n/a
nil
nil
Ravi
Daswani
COO
Mar
1999 - Aug 2001
Co-CEO
Oct
2000 - Aug 2001
2000
2001
2002
238,172
154,839
n/a
[10]
nil
109,677
34,000
[10]
nil
4,473
[2]
n/a
nil
nil
n/a
200,000
[3]
75,000
[4]
n/a
nil
nil
n/a
nil
nil
nil
[11]
Ian
Robinson
Chairman
Jan
2001 - present
2000
2001
2002
n/a
15,500
40,500
[12]
n/a
64,516
34,000
[13]
n/a
nil
nil
n/a
nil
nil
n/a
75,000
[14]
25,000
n/a
nil
nil
n/a
nil
nil
Richard
N. Jeffs
CEO
/ President
Oct
2002- Nov 2002
2000
2001
2002
n/a
n/a
nil
n/a
n/a
nil
n/a
n/a
nil
n/a
n/a
nil
n/a
n/a
nil
n/a
n/a
nil
n/a
n/a
nil
[15]
Page
- 33
[1]
Gregory
Pek accrued $159,038 in additional salary in the fiscal year ended December31,2002.
[2]
Other
annual compensation consisted of housing expense, director’s fees, and employer
contributions to the mandatory provident fund in Hong Kong, which is a similar
program to Social Security in the United States.
[3]
On
August29, 2000, 150,000 of these stock options were rescinded and replaced with
150,000 new stock options, of which 100,000 of the stock options were repriced
from $9.90 to $5.05 per stock option and 50,000 of the stock options were
repriced from $7.65 to $5.05 per stock option. The fair market value of Brek’s
shares of common stock at the time of the grant of the new options was $5.91
per
share.
[4]
On
October 31, 2001, these 75,000 stock options, exercisable at $0.40 per stock
option, were issued in consideration of the return and cancellation of 150,000
stock options exercisable at $5.05 per stock option and 50,000 stock options
exercisable at $7.65 per stock option. The fair market value of Brek’s shares of
common stock at the time of the grant of the new options was $0.41 per
share.
[5]
Gregory
Pek received 100,000 shares of common stock as severance valued at
$70,000.
[6]
Kenneth
Telford’s salary did not exceed $100,000 in the fiscal year ended December 31,2000.
[7]
Kenneth
Telford accrued $54,000 in additional salary in the fiscal year ended December31, 2002.
[8]
Kenneth
Telford received 50,000 shares of common stock in payment of a bonus accrued
during 2001 in the amount of $34,000. The fair market value of Brek’s shares of
common stock at the time of the issuance of these shares was $0.68 per
share.
[9]
On
October 31, 2001, these 200,000 stock options, exercisable at $0.40 per stock
option, were issued in consideration of the return and cancellation of 100,000
stock options exercisable at $5.05 per stock option and 50,000 warrants
exercisable at $1.25 per warrant. The fair market value of Brek’s shares of
common stock at the time of the grant of the new options was $0.41 per
share.
[10]
Ravi
Daswani was not an executive office during the fiscal year ended December 31,2002. However, Mr. Daswani received 50,000 shares of common stock as a bonus
payment in lieu of an accrued bonus from 2001 in the amount of $34,000. The
fair
market value of Brek’s shares of common stock at the time of the issuance of
these shares was $0.68 per share.
[11]
Ravi
Daswani accrued $10,320 in directors’ fees for the fiscal year ended December31, 2002.
[12]
Ian
Robinson accrued $13,500 in additional salary for the fiscal year ended December31, 2002.
[13]
Ian
Robinson received 50,000 shares of common stock in payment of salary accrued
during 2001 in the amount of $34,000. The fair market value of Brek’s shares of
common stock at the time of the issuance of these shares was $0.68 per
share.
[14]
On
October 31, 2001, these 75,000 stock options, exercisable at $0.40 per stock
option, were issued in consideration of the return and cancellation of 50,000
stock options exercisable at $5.05 per stock option and 50,000 warrants
exercisable at $1.25 per warrant. The fair market value of Brek’s shares of
common stock at the time of the grant of the new options was $0.41 per
share.
[15]
Richard
N. Jeffs was owed $24,000 for consulting fees at December 31, 2002.
Grant
of Stock Options
During
the fiscal year ended December 31, 2002, Brek granted an aggregate 420,000
stock
options, with the following stock options being granted to the named executive
officers.
Name
Number
of
securities
underlying
options
/ SARs granted
(#)
Percent
of total options / SARs granted to employees in fiscal
year
No
stock
options or stock appreciation rights were exercised by any named executive
officers during the fiscal year ended December 31, 2002.
Existing
stock options in the hands of named executive officers and senior management
as
of December 31, 2002, were as follows:
Page
- 34
Name
Shares
acquired on exercise
(#)
Value
realized
($)
Number
of securities underlying unexercised options/SARs at
FY-end
(#)
Value
of unexercised
in-the-money
options/SARs
at FY-end
($)
Exercisable
Unexercisable
Exercisable
Unexercisable
Gregory
Pek
0
nil
81,250
18,750
0
0
Ian
Robinson
0
nil
81,250
18,750
0
0
Kenneth
Telford
0
nil
212,500
37,500
0
0
Richard
N. Jeffs
0
nil
150,000(1)
0
0
0
(1)
Stock
options granted to Wet Coast Management Corp. which Richard N. Jeffs
is
the sole beneficial owner.
Long
Term Incentive Plan Awards
Brek
did
not award any long term incentive plans during the fiscal year ended December31, 2002.
Director
Compensation
During
the fiscal year ended December 31, 2002, directors, who are not officers of
Brek, were paid fees of $10,320 per year in connection with their serving on
the
Board. The Chairman of the Board received $54,000 per year. Directors were
also
reimbursed for out-of-pocket expenses incurred for attending Board
meetings.
Termination
of Employment
As
of
December 31, 2002, there were no employment agreements between Brek or the
subsidiaries and any named executive officer, and there were no employment
agreements or other compensating plans or arrangements with regard to any named
executive officer that provided for specific compensation in the event of
resignation, retirement, other termination of employment, a change of control
of
Brek, or from a change in a named executive officer’s responsibilities following
a change in control, with the exception of following:
Gregory
Pek
In
January 1999, Brek entered into an employment agreement with Gregory Pek. The
agreement provided that Brek would pay Mr. Pek a monthly salary of HK$100,000
(approximately US$12,820) plus an additional month's salary per calendar year
of
service as a year-end payment. In January 2000, Mr. Pek's monthly salary was
increased to HK$150,000 (approximately US$19,230); however, in December 2000
Mr.
Pek agreed to have his monthly salary temporarily reduced to HK$100,000
(approximately US$12,820). Brek entered into new six-month employment agreements
with Mr. Pek covering the period from March 1, 2001 to August 31, 2001. During
this period, Mr. Pek’s aggregate monthly salary was HK$165,000 (approximately
US$21,150) plus an additional lump-sum payment equal to four months’ salary was
paid to Mr. Pek in August 2001. In August 2001, Brek entered into new one-year
employment agreements with Mr. Pek that provide for an aggregate monthly salary
of HK$165,000 (approximately US$21,150) plus an additional month’s salary per
calendar year of service as a year-end payment. These agreements terminated
on
August 31, 2002, and as a result, Brek paid a termination payment to Mr. Pek
in
August 2002 equal to three months’ salary.
Kenneth
Telford
In
March
2001, Brek entered into employment agreements with Kenneth Telford, its Chief
Financial Officer. Pursuant to these agreements, Brek paid Mr. Telford an
aggregate monthly salary of HK$165,000 (approximately US$21,250) for the period
from March 1, 2001 through September 30, 2001, and issued Mr. Telford warrants
to purchase 50,000 shares of Brek’s common stock at an exercise price of US$1.25
per share, and paid Mr. Telford an additional lump-sum payment in August 2001
equal to four months’ salary. The agreements also provided for an additional
month’s salary per calendar year of service as a year-end payment. In August
2001 Brek entered into new one-year employment agreements with Mr. Telford
that
provide for an aggregate monthly salary of HK$165,000 (approximately US$21,250)
plus an additional month's salary per calendar year of service as a year-end
payment. This agreement would have terminated on August 31, 2002 unless Brek
chose to extend the term of the agreement. If Brek did not choose to extend
the
term of the agreement, the agreement provided that Brek must pay a termination
payment to Mr. Telford in August 2002 equal to three months’
salary.
Brek
and
Mr. Telford agreed to extend his employment for one year beginning in August
2002. Under the new arrangement with Mr. Telford, he will be paid $27,000 per
month. In addition, he will have the option of working less than full time
if he
chooses, and if he receives payment from another employer other than Brek for
time devoted to a job other than being an executive of Brek, Brek may reduce
its
payments to Mr. Telford by an amount equal to 80% of the amount of such other
payments in excess of $3,000 (which reduction may not exceed
$10,000).
Page
- 35
Compensation
Committee
During
the fiscal year ended December 31, 2002, Brek’s Compensation Committee consisted
of the following non-employee members of Brek's board of directors: Ian Robinson
and James Pratt. The Compensation Committee was responsible for reviewing and
determining Brek's executive compensation objectives and policies, administers
Brek's stock plans and grants stock options.
Item
11. Security Ownership of Certain Beneficial Holders and
Management.
(a)Security
Ownership of Certain Beneficial Owners (more than 5%)
(1)
Title
of Class
(2)
Name
and Address of Beneficial Owner
(3)
Amount
and Nature of
Beneficial
Owner
(4)
Percent
of
Class [1]
shares
of
common
stock
Richard
N. Jeffs
Third
Floor
346
Kensington High Street
London,
UK, W14 8NS
2,685,000
[2]
[3]
10.05%
[4]
shares
of
common
stock
Gregory
Pek
902
Henley Building 5
Queens
Road Central, Hong Kong
1,607,500
[5]
6.03%
[6]
[1]
Based
on
26,560,037 shares of common stock issued and outstanding as of December 31,2002
unless indicated otherwise.
[2]
This
number includes 1,286,500 shares of common stock that are beneficially owned
indirectly.
[3]
This
number includes 150,000 stock options that can be exercised into one share
of
common stock per stock option.
[4]
Based
on
26,710,037 shares of common stock on the assumption that all the stock options
in footnote #3 above are exercised.
[5]
This
number includes 100,000 stock options that can be exercised into one share
of
common stock per stock option.
[6]
Based
on
26,660,037 shares of common stock on the assumption that all the stock options
in footnote #5 above are exercised.
(b)Security
Ownership of Management
(1)
Title
of Class
(2)
Name
and Address of Beneficial Owner
(3)
Amount
and Nature of Beneficial Owner
(4)
Percent
of
Class [1]
shares
of
common
stock
Gregory
Pek
902
Henley Building 5
Queens
Road Central, Hong Kong
1,607,500
[2]
6.03%
[3]
shares
of
common
stock
Ian
Robinson
902
Henley Boulevard
5
Queen Road
Central,
Hong Kong
795,000
[4]
[5]
2.98%
[6]
shares
of
common
stock
James
Pratt
32
Greenwich Road, Greenwich
Sydney,
NSW 2065 Australia
120,000
[7]
0.45%
[8]
shares
of
common
stock
Ravi
Daswani
902
Henley Building 5
Queens
Road Central, Hong Kong
560,461[9]
2.10%
[10]
shares
of
common
stock
Kenneth
Telford
902
Henley Building 5
Queen’s
Road
Central,
Hong Kong
400,000
[11]
1.49%
[12]
shares
of
common
stock
Directors
and Executive Officers (as a group)
3,482,961[13]
12.80%
[14]
[1]
Based
on
26,560,037 shares of common stock issued and outstanding as of December 31,2002
unless indicated otherwise.
[2]
This
number includes 100,000 stock options that can be exercised into one share
of
common stock per stock option.
[3]
Based
on
26,660,037 shares of common stock on the assumption that all the stock options
in footnote #2 above are exercised.
[4]
This
number includes 125,000 shares of common stock that are beneficially owned
indirectly.
[5]
This
number includes 100,000 stock options that can be exercised into one share
of
common stock per stock option.
[6]
Based
on
26,660,037 shares of common stock on the assumption that all the stock options
in footnote #5 above are exercised.
[7]
This
number includes 100,000 stock options that can be exercised into one share
of
common stock per stock option.
[8]
Based
on
26,660,037 shares of common stock on the assumption that all the stock options
in footnote #7 above are exercised.
[9]
This
number includes 100,000 stock options that can be exercised into one share
of
common stock per stock option.
[10]
Based
on
26,660,037 shares of common stock on the assumption that all stock options
in
footnote #9 above are exercised.
[11]
This
number includes 250,000 stock options that can be exercised into one share
of
common stock per stock option.
[12]
Based
on
26,810,037 shares of common stock on the assumption that all the stock options
in footnote #11 above are exercised.
[13]
This
number includes 650,000 stock options that that can be exercised into one share
of common stock per stock option.
[14]
Based
on
27,210,037 shares of common stock on the assumption that all the stock options
in footnote #13 above are exercised.
Page
- 36
(c)Changes
in Control
Brek
is
not aware of any arrangement that may result in a change in control of
Brek.
Item
12. Certain Relationships and Related Transactions.
(a)Transactions
with Related Parties
During
the last two fiscal years, no director, executive officer or security holder
has
had any direct or indirect interest in any transaction or a series of similar
transactions that exceeded $60,000 to which Brek or any of its subsidiaries
was
a party with the exception of the following:
Investor
Relations Fees - Pacific Capital Markets Inc.
In
2001
and 2002, Brek paid investor relations fees to Pacific Capital Markets Inc.,
a
company that was one third owned by Richard Jeffs, in the amount of $241,700
and
$187,328 respectively.
Stock
Purchase Agreement with Vallenar Energy Corp.
On
March12, 2002, Brek paid $12,563 to acquire 2,512,500 common shares of Vallenar
Energy Corp’s stock and paid $350,000 to acquire 733,333 preferred shares of
Vallenar Energy Corp. Brek’s interest in Vallenar Energy Corp. is the largest
outstanding voting block stock. The interest in the preferred shares entitles
Brek to a minimum 26% of the voting power of Vallenar that will not be diluted
by further issuances of common stock. The preferred shares are convertible
into
733,333 common shares at the discretion of Brek. Also, as a shareholder of
preferred shares, Brek is entitled to vote as a class on certain extraordinary
matters such as a merger or other acquisition. See Exhibit 10.2 - Stock Purchase
Agreement for more details.
During
2001, Brek advanced $270,055 to Vallenar Energy Corp. Gregory Pek and Ken
Telford are also directors of Vallenar Energy Corp., and Richard N. Jeffs is
also a shareholder of Vallenar Energy Corp.
Purchase
Agreement with Gasco Energy, Inc.
On
July16, 2002, Gasco Energy, Inc. entered into a purchase agreement with Brek and
other stockholders of Gasco Energy, Inc., including Richard Jeffs and Wet Coast
Management Corp., which is owned and controlled by Richard Jeffs, pursuant
to
which Brek and the others purchased from Gasco Energy, Inc. an undivided 25%
of
Gasco Energy, Inc.’s working interests in all undeveloped acreage owned by Gasco
Energy, Inc., representing 35,169 net undeveloped acres, in exchange for
6,250,000 shares of common stock of Gasco Energy, Inc. and 500 shares of
preferred stock of Gasco Energy, Inc. held by Brek and the other stockholders.
The other stockholders assigned their right to receive their share of such
working interests to Brek, so that Brek acquired title to all of the working
interests conveyed by Gasco Energy, Inc. in the transaction. For the assignment
of their right to Brek, Mr. Jeffs and Wet Coast Management Corp. each received
1,237,500 shares of common stock in the capital of Brek. Brek also has the
option to acquire an additional 5% undivided interest in Gasco Energy, Inc.’s
undeveloped acreage by paying a total of $10.5 million in two equal installments
on or before January 1, 2004 and January 1, 2005, respectively. A 2.5% interest
will be conveyed to Brek upon receipt of each installment. Brek must make timely
payment of the first installment in order to maintain the option to acquire
the
additional 2.5% interest with the second installment. See Exhibit 10.3 -
Purchase Agreement for more details.
Page
- 37
(b)Transactions
with Promoters
During
the fiscal year ended December 31, 2002, Richard Jeffs, Gregory Pek and Kenneth
Telford were the only promoters of Brek. None of the promoters received anything
of value from Brek or its subsidiaries nor is any promoter entitled to receive
anything of value from Brek or its subsidiaries for services provided as a
promoter of Brek or its subsidiaries, except for Mr. Jeffs, as disclosed above
under “Transactions with Related Parties”.
1999
Stock Option Plan, filed as an Exhibit to Brek’s Form S-8 (Registration
Statement) filed on September 11, 2000, and incorporated herein by
reference.
2001
Employee Stock Option / Warrant Plan, filed as an Exhibit to Brek’s Form
S-8 (Registration Statement) filed on July 10, 2002, and incorporated
herein by reference.
Filed
10.1
Stock
Purchase Agreement dated March 16, 2000 among Brek Energy Corporation,
Balaji Exports Ltd., Rajan Chellarm Mahboobani, Ravi Kishinchand
Daswani,
and Asia Internet Limited, filed as an attached exhibit to Brek’s Form
10-KSB (Annual Report) filed on March 29, 2000, and incorporated
herein by
reference.
Filed
10.2
Stock
Purchase Agreement dated March 12, 2002 between Vallenar Energy Corp.
and
Brek Energy Corporation, filed as an attached exhibit to Brek’s Form
10-K/A (Annual Report) filed on September 18, 2002, and incorporated
herein by reference.
Filed
10.3
Purchase
Agreement dated July 16, 2002 among Gasco Energy, Inc., Pannonian
Energy
Inc., San Joaquin Oil & Gas Ltd., Brek Energy Corporation, Brek
Petroleum Inc., Brek Petroleum (California), Inc. and certain
stockholders, filed as an attached exhibit to Brek’s Form 8-K (Current
Report) filed on July 31, 2002, and incorporated herein by
reference.
Filed
10.4
Share
purchase agreement dated October 19, 2001 among First Ecom.com, Inc.,
First Commerce Asia Limited, FEDS Acquisition Corporation, First
Ecom
Systems Limited, Transworld Payment Solutions NV, and First Curacao
International Bank NV.
Included
10.5
License
agreements dated October 19, 2001 among First Ecom.com, Inc., First
Ecom
Systems Limited, and Transworld Payment Solutions NV.
Included
21
List
of Subsidiaries, filed as an attached exhibit to Brek’s Form 10-KSB (2002
- Annual Report) filed on November, 2005, and incorporated herein
by
reference.
Included
31
Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Included
32
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of
the Sarbanes-Oxley Act of 2002.
Included
Page
- 38
Item
14. Principal Accounting Fees and Services
(1)
Audit Fees
The
aggregate fees billed for each of the last two fiscal years for professional
services rendered by the principal accountant for Brek’s audit of annual
financial statements and for review of financial statements included in Brek’s
Form 10-QSB’s or services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements for those fiscal
years were:
2002
-
$31,552- Hall & Company, Certified Public Accountants Inc.
2001
- $0
- Hall & Company, Certified Public Accountants Inc.
The
aggregate fees billed in each of the last two fiscal years for assurance and
related services by the principal accountants that are reasonably related to
the
performance of the audit or review of Brek’s financial statements and are not
reported in the preceding paragraph were:
2002
-
$0- Hall & Company, Certified Public Accountants Inc.
2001
- $0
- Hall & Company, Certified Public Accountants Inc.
The
aggregate fees billed in each of the last two fiscal years for professional
services rendered by the principal accountant for tax compliance, tax advice,
and tax planning were:
2002
-
$0- Hall & Company, Certified Public Accountants Inc.
2001
- $0
- Hall & Company, Certified Public Accountants Inc.
The
aggregate fees billed in each of the last two fiscal years for the products
and
services provided by the principal accountant, other than the services reported
in paragraphs (1), (2), and (3) above were:
2002
-
$0- Hall & Company, Certified Public Accountants Inc.
2001
- $0
- Hall & Company, Certified Public Accountants Inc.
(5)
Brek’s audit committee’s pre-approval policies and procedures described in
paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the audit committee
pre-approve all accounting related activities prior to the performance of any
services by any accountant or auditor.
(6)
The
percentage of hours expended on the principal accountant’s engagement to audit
Brek’s financial statements for the most recent fiscal year that were attributed
to work performed by persons other than the principal accountant’s full time,
permanent employees was nil %.
Page
- 39
SIGNATURES
In
accordance with Section 13 or 15(d) of the Securities and Exchange Act of 1934,
Brek has caused this report to be signed on its behalf by the undersigned duly
authorized person.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the following
persons on behalf of Brek and in the capacities and on the dates indicated
have
signed this report below.
1.
I have reviewed this quarterly report on Form 10-KSB of Brek Energy Corporation;
2.
Based
on my knowledge, this quarterly report does not contain any untrue statement
of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were
made, not misleading with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The
small business issuer’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
small business issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the small business issuer’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the small business issuer’s internal
control over financial reporting that occurred during the small business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer’s internal
control over financial reporting; and
5.
The
small business issuer’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to
the small business issuer’s auditors and the audit committee of the small
business issuer’s board of directors (or persons performing the equivalent
functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer’s ability to record, process,
summarize and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuer’s internal control over
financial reporting.
1.
I have reviewed this quarterly report on Form 10-KSB of Brek Energy Corporation;
2.
Based
on my knowledge, this quarterly report does not contain any untrue statement
of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were
made, not misleading with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the small business issuer
as
of, and for, the periods presented in this report;
4.
The
small business issuer’s other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
small business issuer and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the small business issuer, including its
consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the small business issuer’s disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
(d)
Disclosed in this report any change in the small business issuer’s internal
control over financial reporting that occurred during the small business
issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the small business issuer’s internal
control over financial reporting; and
5.
The
small business issuer’s other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial reporting,
to
the small business issuer’s auditors and the audit committee of the small
business issuer’s board of directors (or persons performing the equivalent
functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the small business issuer’s ability to record, process,
summarize and report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the small business issuer’s internal control over
financial reporting.
In
connection with the Annual Report of Brek Energy Corporation (“Brek”) on Form
10-KSB for the period ending December 31, 2002 as filed with the Securities
and
Exchange Commission on the date hereof (the “Report”), I, Richard N. Jeffs,
President and Chief Executive Officer of Brek and a member of the Board of
Directors, certify, pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly represents, the financial
condition and result of operations of the Company.
In
connection with the Annual Report of Brek Energy Corporation (“Brek”) on Form
10-KSB for the period ending December 31, 2002 as filed with the Securities
and
Exchange Commission on the date hereof (the “Report”), I, Richard n. Jeffs,
Chief Financial Officer of Brek and a member of the Board of Directors, certify,
pursuant to s.906 of the Sarbanes-Oxley Act of 2002, that:
(1)
The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
(2)
The information contained in the Report fairly represents, the financial
condition and result of operations of the Company.
Brek
Energy Corporation (Formerly First Ecom.com, Inc.)
London,
United Kingdom
We
have
audited the accompanying consolidated balance sheet of Brek Energy Corporation
as of December31, 2002, and the related consolidated statements of operations, stockholders’
equity, and
cash
flows for the year then ended. These financial statements are the responsibility
of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based
on
our audit. The consolidated financial statements of Brek Energy Corporation
as
of December31, 2000 and 2001 were audited by other auditors whose report dated March20,2002, expressed
an unqualified opinion.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight
Board (United States). Those standards require that we plan and perform
the
audit to obtain
reasonable assurance about whether the financial statements are free of
material
misstatement.
The Company is not required to have, nor were we engaged to perform, an
audit of
its
internal control over financial reporting. Our audit included consideration
of
internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstance,
but not for the purpose of expressing an opinion on the effectiveness of
the
Company’s
internal control over financial reporting. Accordingly, we express no such
opinion. An
audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In
our
opinion, the financial statements referred to above present fairly, in
all
material respects, the consolidated
financial position of Brek Energy Corporation as of December 31, 2002,
and the
results
of its operations and its cash flows for the year then ended in conformity
with
accounting principles
generally accepted in the United States of America.
First
Ecommerce Asia Limited (“FEAL”) was incorporated in Hong Kong on September 16,1998. On January 28, 1999, FEAL, entered into an agreement and plan of
merger
with JRL Resources Corp., (“JRL Resources”) a company incorporated in the State
of Florida on November 13, 1996. Pursuant to the terms of the agreement,
plan of
merger and related agreements, 3,015,000 newly issued shares of JRL Resources
and 985,000 shares held by existing shareholders of JRL Resources were
exchanged
for two shares of FEAL. As a result of this business combination FEAL became
a
wholly-owned subsidiary of JRL Resources.
The
merger between JRL Resources and FEAL was a merger of a private operating
company, (FEAL) into a public shell corporation, with nominal net assets,
that
resulted in the owners and management of the private company (FEAL) obtaining
operating control of the combined company after the transaction. For accounting
purposes, the transaction has been treated as a reverse merger, of JRL
Resources
by FEAL with FEAL deemed to be the accounting acquirer.
Pursuant
to an agreement and plan of merger dated February 12, 1999, JRL Resources
was
merged with and into Brek Energy Corporation (formerly First Ecom.com,
Inc.)
(“BREK” or the Company”), a company incorporated in the State of Nevada on
February 12, 1999, with no shares issued and outstanding. Pursuant to the
agreement and plan of merger, all of the 12,040,000 outstanding common
shares of
JRL Resources were exchanged on a one-for-one basis for newly issued shares
of
BREK, with BREK being the surviving corporation. For accounting purposes,
this
merger is treated as a re-incorporation of JRL Resources as BREK.
Details
of the issuance of common stock are set out in Note 13.
The
Company was originally established to facilitate electronic payment processing
of e-commerce transactions for merchants and banks across the Internet.
The
Company developed an electronic gateway to convert consumers’ credit card
information, collected by merchants on the Internet, into a format that
could be
processed by banks. The Company disposed of its payment processing business
on
September 30, 2002. (Note 11)
During
2001, the Company changed its primary business to that of oil and gas
exploration and on July 19, 2001, acquired a 26% non-dilutable voting interest
in Gasco Energy, Inc., (“Gasco”). On July 16, 2002, the Company exchanged all of
its shareholdings in Gasco for an undivided interest in all of Gasco’s
undeveloped mineral leases in Utah, Wyoming, and California. At the same
time,
the Company acquired an additional undivided interest in Gasco’s undeveloped
mineral leases from certain third parties in exchange for the issuance
of
4,125,000 shares of the Company. The main focus of the Company’s oil and gas
exploration business has been centered in the United States. (Notes 8,
10, 13
and 20)
In
March
2002, the Company acquired a 26% non-dilutable voting interest in Vallenar
Energy Corp. (“Vallenar”) another company engaged in oil and gas exploration. On
June 28, 2002, the Company increased its ownership of Vallenar to 51.53%.
(Note
9)
Development
Stage Activities
The
Company has not commenced significant operations and in accordance with
SFAS No.
7, the Company is considered a development stage company.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. Affiliated companies (20% to 50% owned
companies) in which the Company does not have significant influence are
accounted for, using the equity method. The Company’s share of earnings (losses)
from these companies are included in the accompanying consolidated statements
of
operations.
The
financial statements for the period prior to the merger with JRL Resources
reflect the consolidated financial position and results of operations of
FEAL.
Subsequent to the merger, the financial statements reflect the consolidated
financial position and results of operations of BREK (as successor to JRL
Resources subsequent to BREK’s formation and JRL Resources prior to BREK’s
formation) and its subsidiaries.
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management
to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash
and Cash Equivalents
For
purposes of the balance sheets and statements of cash flows, the Company
considers all highly liquid debt instruments purchased with maturity of
three
months or less to be cash equivalents.
Marketable
Securities
The
Company considers all marketable securities as available-for-sale. All
securities are recorded at fair value. Unrealized gains and losses, which
are
temporary, on marketable securities are reported as a component of other
comprehensive income and classified as accumulated other comprehensive
income
(loss) in stockholders’ equity (deficit). Realized gains and losses and
unrealized losses, which are other than temporary on marketable securities
are
included in earnings and are derived using the specific identification
method.
The Company sold all of their marketable securities during the year ended
December 31, 2002.
Investments
The
Company accounts for its investments in entities where it does not have
majority
voting or management control, using the equity basis. The gains (losses)
from
equity investments are reported as a component of income (loss).
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to a concentration of
credit
risk consist primarily of cash and cash equivalents. The Company places
its cash
with various major financial institutions and, by policy, limits the amount
of
credit exposure with any one financial institution.
Fair
Value of Financial Instruments
The
carrying values reflected in the consolidated balance sheets for cash and
cash
equivalents, trade accounts receivable, accrued interest receivable, short
term
loan, accounts payable and accruals and amounts due to related parties
approximate their fair values because of the short term nature of these
instruments. The fair value of the note receivable of $1 is an estimate
based on
the value the Company expects to realize within the next twelve months.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Revenue
Recognition
Oil
and
gas revenue will be recognized as income when the oil or gas is produced
and
sold.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Depreciation
is
provided using the straight-line method over the estimated useful lives
of the
assets less salvage value as follows:
Leasehold
improvements
Over
the
term of the leases
Computer
equipment and processing
system
3
years
Furniture,
fixtures and office
equipment
5
years
During
the year all of the fixed assets were disposed of when the Company changed
business direction and disposed of their Hong Kong office. (Note 7)
Goodwill
The
Company adopted the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 142 (“SFAS 142”) “Goodwill and Other Intangible Assets” on January1, 2002. SFAS 142 requires, among other things, the discontinuance of
amortization for goodwill and indefinite life intangible assets. In addition,
the standard includes provisions for the reclassification of certain existing
recognized intangibles such as goodwill, reassessment of the useful lives
of
existing recognized intangibles with finite lives, reclassification of
certain
intangibles out of previously reported goodwill and the identification
of
reporting units for purposes of assessing potential future impairments
of
goodwill. SFAS 142 also requires the Company to complete a transitional
goodwill
impairment test six months from the date of adoption. The effects of adopting
the non-amortization provisions of SFAS 142, assuming these provisions
were
adopted for the periods presented, are summarized below.
2002
2001
2000
Reported
net loss
$
(27,243,917
)
$
(10,461,322
)
$
(17,809,461
)
Add:
Goodwill amortization
-
325,671
291,282
Adjusted
net loss
$
(27,243,917
)
$
(10,135,651
)
$
(17,518,179
)
Reported
basic and diluted loss per share
$
(1.16
)
$
(0.54
)
$
(0.98
)
Add:
Goodwill amortization, per basic and diluted share
-
.02
.02
Adjusted
basic and diluted loss per share
$
(1.16
)
$
0.52
)
$
(0.96
)
During
the year ended December 31, 2002, goodwill was written off as part of the
loss
from discontinued operations. (Note 11)
Long-Lived
Assets
SFAS
No.
144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived
Assets” requires the recognition of an impairment loss on long-lived assets if
the carrying amount exceeds its fair value, as determined using undiscounted
cash flows expected to result from the use and eventual disposition of
the
asset. SFAS 144, was adopted by the Company on January 1, 2002. During
the year
ended December 31, 2002, the Company recorded $18,543,307 in charges for
impairment of certain long-lived assets. (Notes 5, 7 and 8)
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Software
Development Costs
Internal
and external costs incurred to develop internal-use computer software are
expensed during the preliminary project stage and capitalized during the
application development stage and amortized over three years. During the
years
ended December 31, 2002, 2001, and 2000, and the cumulative period from
inception to December 31, 2002, $Nil, $Nil, $130,816 and $225,406 of
internal-use computer software development costs were expensed. As of December31, 2002 and 2001, capitalized software net of accumulated amortization
and
impairment charges were $Nil and $68,411. (Notes 7 and 11)
Debt
Issued with Stock Purchase Warrants
Debt
issued with detachable stock purchase warrants is accounted for in accordance
with the provisions of Accounting Principles Board Opinion No. 14 (“APB 14”),
“Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants”.
Under APB No. 14, the portion of the proceeds of debt securities issued
with
detachable stock purchase warrants which is allocable to the warrants is
accounted for as additional paid-in capital. The allocation is based on
the
relative fair values of the two securities at the time of issue. Any resulting
discount or premium on the debt securities is accounted for as such and
amortized over the term of the debt securities.
Foreign
Currency
The
functional currency of the Company is the Hong Kong dollar. The reporting
currency of the Company is the United States dollar. Balance sheet accounts
of
the Company are translated into United States dollars at exchange rates
as of
the balance sheet date. Revenues and expenses are translated at average
rates
for the year. The resulting cumulative translation adjustments have been
recorded as a separate component of stockholders’ equity. Foreign currency
transaction gains and losses are included in consolidated net loss.
Income
Taxes
Income
tax expense is based on pre-tax financial accounting income. The Company
recognizes deferred tax assets and liabilities based on differences between
the
financial reporting and tax bases of assets and liabilities using the enacted
tax rates and laws that are expected to be in effect when the differences
are
expected to be recovered. The Company provides a valuation allowance for
deferred tax assets for which it does not consider realization of such
assets to
be more likely than not.
Research
and Development and Advertising
Research
and development and advertising costs are expensed as incurred. Research
and
development costs amounted to $Nil in each of the years ended December31, 2002,
2001, 2000 and the cumulative period from inception to December 31, 2002.
Advertising costs amounted to $129,810, $87,607, $241,485, and $711,081
for the
years ended December 31, 2002, 2001, 2000 and the cumulative period from
inception to December 31, 2002.
Start-up
and Pre-operating Costs
Start-up
and pre-operating costs are expensed as incurred.
Comprehensive
Income
Comprehensive
income reflects changes in equity that results from transactions and economic
events from non-owner sources. The Company had no comprehensive income
for the
years ended December 31, 2002, 2001 and 2000.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-based
Compensation
The
Company accounts for stock-based compensation arrangements with employees
in
accordance with the provisions of APB 25 and complies with the disclosure
provisions of SFAS 123. Under APB 25, compensation expense is based on
the
difference, if any, between the fair value of the Company’s stock and the
exercise price of options issued on the date of grant. The unearned compensation
is being amortized over the vesting period of the individual options.
For
stock
options granted to employees and directors of the Company, with exercise
prices
at or above the market value of the stock on the grant date, the Company
adopted
the disclosure-only provisions of SFAS 123. Had compensation cost been
recognized based on the fair value at the date of grant consistent with
the
method prescribed by SFAS No. 123, the Company’s net losses and loss per share
would have been increased to the following pro forma amounts at December31,2002. Also disclosed below are the pro-forma amounts previously disclosed
and
pro forma amounts that have been restated due to a prior period adjustment
which
was caused by an error in the calculation of stock based compensation related
to
stock options issued, reissued and re-priced during December 2001, 2000
and
1999:
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Stock-based
Compensation, continued
The
fair
value of the common stock options granted during the years ended December31,2002, 2001, 2000 and 1999, for disclosure purposes was estimated on the
grant
dates using the Black Scholes Pricing Model and the following
assumptions:
2002
Expected
dividend yield
-
Expected
price volatility
131%
to 151%
Risk-free
interest rate
3%
to 5.5%
Expected
life of options
5
years
2001
As
Restated
2001
As
Previously
Disclosed
Expected
dividend yield
-
-
Expected
price volatility
151%
93.15%
to 150.69%
Risk-free
interest rate
5.5%
5.5%
Expected
life of options
5
years
3
and 5 years
2000
As
Restated
2000
As
Previously Disclosed
Expected
dividend yield
-
-
Expected
price volatility
110%
93.15%
to 129.54%
Risk-free
interest rate
5.5%
5.5%
Expected
life of options
5
years
3
years
1999
As
Restated
1999
As
Previously
Disclosed
Expected
dividend yield
-
-
Expected
price volatility
51.45%
to 91.20%
54.45%
to 91.2%
Risk-free
interest rate
5.5%
5.5%
Expected
life of options
5
years
3
years
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS 123, and Emerging Issues Task Force No. 96-18
(“EITF
96-18”). All transactions in which goods or services are consideration received
for the issuance of equity instruments are accounted for based on the fair
value
of the consideration received or the fair value of the equity instrument,
whichever is more reliably measurable.
The
Company accounts for the re-pricing and re-issuing of stock options under
the
variable accounting provisions of FIN 44.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Oil
and Gas Properties
The
Company follows the full cost method of accounting whereby all costs related
to
the acquisition of oil and gas leases and acquisition and development of
oil and
gas properties are capitalized into a single cost center (“full cost pool”).
Such costs include lease acquisition costs, geological and geophysical
expenses,
overhead directly related to exploration and development activities and
costs of
drilling both productive and non-productive wells. Proceeds from property
sales
are generally credited to the full cost pool without gain or loss recognition
unless such a sale would significantly alter the relationship between
capitalized costs and the proved reserves attributable to these costs.
A
significant alteration would typically involve a sale of 25% or more of
the
proved reserves related to a single full cost pool.
Depletion
of exploration and development costs and depreciation of production equipment
is
computed using the units of production method based upon estimated proven
oil
and gas reserves. The costs of unproved properties are withheld from the
depletion base until such time as they are either developed or abandoned.
The
properties are reviewed periodically for impairment. Total well costs are
transferred to the depletable pool even when multiple targeted zones have
not
been fully evaluated. For depletion and depreciation purposes, relative
volumes
of oil and gas production and reserves are converted at the energy equivalent
rate of six thousand cubic feet of natural gas to one barrel of crude oil.
The
Company’s oil and gas wells began producing subsequent to December 31, 2002;
accordingly the Company has not recorded any depletion expenses prior to
or
during the year endedDecember31, 2002.
Under
the
full cost method of accounting, capitalized oil and gas property costs
less
accumulated depletion and net of deferred income taxes may not exceed an
amount
equal to the present value, discounted at 10%, of estimated future net
revenues
from proved oil and gas reserves plus the cost or estimated fair value,
if
lower, of unproven properties. Should capitalized costs exceed this ceiling,
impairment is recognized. The present value of estimated future net revenues
is
computed by applying current prices of oil and gas to estimated future
production of proved oil and gas reserves as of period-end, less estimated
future expenditures to be incurred in developing and producing the proved
reserves assuming the continuation of existing economic conditions. (Notes
8 and
20)
Basic
and Diluted Net Income (Loss) Per Common Share (“EPS”)
Basic
loss per share excludes dilution and is computed by dividing net income
(loss)
available to common stockholders by the weighted average number of common
shares
outstanding during the period. Diluted loss per share reflects the potential
dilution of securities that could occur if securities or other contracts
to
issue common stock (such as, convertible preferred stock, warrants to purchase
common stock and common stock options) were exercised or converted into
common
stock.
Potential
common shares are excluded from the diluted loss per share computation
in net
loss periods as their effect would be anti-dilutive.
For
the
years ended December 31, 2002, 2001 and 2000, options to purchase1,680,000,3,069,500and
4,272,250 shares of common stock and warrants to purchase1,893,682,2,158,682
and 2,893,682 shares of common stock were outstanding at various times
throughout the reported years.Also,
for
the year ended December 31, 1999, one convertible security to purchase
125,000
shares of common stock at $8.00 per share was outstanding for approximately
five
months during 1999.At
December 31, 2002, 2001 and 2000, options to purchase1,630,000,1,280,000
and 1,809,500 shares of common stock and warrants to purchase
1,843,682,1,893,682
and 1,893,682 shares of common stock were outstanding.The
effects of all of these securities were not included in the computation
of
diluted loss per share, because the Company has been in a net loss position
for
all periods since the beginning of operations and the effect would be
anti-dilutive.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Accounting
Change
In
November 2000, the EITF reached a partial consensus on Issue No. 00-27,
“Application of Issue No. 98-5 to Certain Convertible Instruments” (“EITF
00-27”). Since consensus was reached on Issue No. 98-5 in May 1999, there has
been diversity in practice as to the measurement of certain beneficial
features
of convertible instruments. The consensus reached in EITF 00-27 clarifies
the
measurement of such beneficial features. To the extent that this represents
a
change in the manner in which an entity previously measured beneficial
features
of instruments issued subsequent to May 1999, Issue 00-27 requires an entity
to
re-perform the measurement and report any additional charge as a cumulative
effect of change in accounting principle.
In
connection with convertible debt issued in 1999, the Company recorded a
beneficial conversion feature of approximately $50,000 at December 31,1999.
However, in accordance with guidance set forth in EITF 00-27, at December31,2000, the Company recognized an additional beneficial conversion charge
of
approximately $380,000. (Note 16) The charge is measured by the difference
between the effective conversion price of the debt and the fair value of
shares
of common stock into which the debt is convertible, as measured at the
date of
issuance. This charge is recognized in the accompanying consolidated statements
of operations, as a cumulative effect of accounting change for the year
ended
December 31, 2000 and as an increase in additional paid in capital in the
accompanying consolidated statements of changes in stockholders’ equity and
comprehensive income.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent
Accounting Pronouncements
SFAS
No.
141 (“SFAS 141”), “Business Combinations” and SFAS No. 142 (“SFAS 142”),
“Goodwill and Intangible Assets”, were issued by the FASB in June 2001 and
became effective for the Company on July 1, 2001 and January 1, 2002,
respectively. The FASB, the Securities and Exchange Commission (“SEC”) and
others are engaged in deliberations on the issue of whether SFAS 141 and
142
require interests held under oil, gas and mineral leases or other contractual
arrangements be classified as intangible assets. If such interests were
deemed
to be intangible assets, mineral interest use rights for both undeveloped
and
developed leaseholds would be classified separately from oil and gas properties
and intangible assets on the Company’s balance sheets only, but these costs
would continue to be aggregated with other costs of oil and gas properties
in
the notes to the financial statements in accordance with SFAS No. 69 (“SFAS
69”), “Disclosures about Oil and Gas Producing Activities”. Additional
disclosures required by SFAS 141 and 142 would also be included in the
notes to
financial statements. Historically, and to the Company’s knowledge, we and all
other oil and gas companies have continued to include these oil and gas
leasehold interests as part of oil and gas properties after SFAS 141 and
142
became effective. The Company believes that few oil and natural gas companies
have adopted this interpretation or changed their balance sheet presentation
for
oil and gas leaseholds since the implementation of SFAS 141 and
142.
As
applied to companies like BREK that have adopted full cost accounting for
oil
and gas activities, the Company understands that this interpretation of
SFAS 141
and 142 would only affect its balance sheet classification of proved oil
and gas
leaseholds acquired after June 30, 2001 and its unproved oil and gas leaseholds.
The Company’s results of operations would not be affected, since these leasehold
costs would continue to be amortized in accordance with full cost accounting
rules. At December 31, 2002, the Company had undeveloped leaseholds of
approximately $2.03 million, that would be classified on the balance sheets
as
“intangible undeveloped leaseholds” if the Company applied the interpretation
currently being deliberated. This classification would require the Company
to
make the disclosures set forth under SFAS 142 related to these interests.
The
Company’s current disclosures are those required by SFAS 69.
The
Company will continue to classify its oil and gas leaseholds as tangible
oil and
gas properties until further guidance is provided. Although most of the
Company’s oil and gas property interests are held under oil and gas leases, it
is not expected that this interpretation, if adopted, would have a material
impact on the Company’s financial condition or results of operations.
In
August
2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement
Obligations”. This statement addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets,
and
the associated asset retirement costs. This statement establishes a uniform
methodology for accounting for estimated reclamation and abandonment costs
whereby reclamation and closure costs including site rehabilitation will
be
recorded at the estimated present value of reclamation liabilities and
will
increase the carrying amount of the related asset. These reclamation costs
will
be allocated to expense over the life of the related assets and will be
adjusted
for changes resulting from the passage of time and revisions to either
the
timing or the amount of the original present value estimate. The Company
will be
required to adopt this standard on January 1, 2003. The Company does not
anticipate that the adoption of this statement will have a significant
impact on
its financial position and results of operations.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent
Accounting Pronouncements, continued
In
May
2002, FASB issued SFAS No. 145 (“SFAS 145”), “Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections”.
Such standard requires any gain or loss on extinguishments of debt to be
presented as a component of continuing operations (unless specified criteria
are
met) whereas SFAS 4 required that such gains and losses be classified as
an
extraordinary item in determining net income. Upon adoption of SFAS 145,
the
Company will reclassify any extraordinary gains and losses on the
extinguishments of debt recorded in prior periods to continuing operations.
The
adoption of SFAS 145 did not have a material effect on the Company’s financial
position or results of operations.
In
June
2002, the FASB issued SFAS No. 146 (“SFAS 146”), "Accounting for Costs
Associated with Exit or Disposal Activities" which addresses financial
accounting and reporting for costs associated with exit or disposal activities.
It nullified Emerging Issues Task Force ("EITF") Issue No. 94-3 "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146
requires that a liability for costs associated with an exit or disposal
activity
be recognized when the liability is incurred rather than at the date of
an
entity's commitment to an exit plan, as was required under EITF No. 94-3.
Such
costs covered by the standard include lease termination costs and certain
employee severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS 146 also
establishes that fair value is the objective for initial measurement of
the
liability. SFAS 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. The Company does not anticipate
that this statement will have a material impact on the Company’s financial
statements or results of operations.
In
October 2002, the FASB issued SFAS No. 147 (“SFAS 147”), “Acquisitions of
Certain Financial Institutions”. SFAS 147 provides guidance on the accounting
for the acquisition of a financial institution. SFAS 147 applies to all
financial institution acquisitions except those between two or more mutual
enterprises.
In
November 2002, the FASB issued Interpretation No. 45 (“FIN 45”), “Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others”. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under specific guarantees that it has
issued.
It also clarifies that a guarantor is required to recognize, at inception
of a
guarantee, a liability for the fair value of the obligation undertaken
in
issuing the guarantee. The disclosure requirements in this interpretation
were
effective for financial statements of interim and annual periods ending
after
December 15, 2002. Additionally, the recognition of a guarantor’s obligation
should be applied on a prospective basis on guarantees issued after December31,2002. The adoption of FIN 45 is not expected to have a material effect
on the
Company’s financial position or results of operations.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent
Accounting Pronouncements, continued
In
December 2002, the FASB issued SFAS No. 148 (“SFAS 148”), “Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
FASB
Statement No. 123”. SFAS 148 amends SFAS 123, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirement of SFAS 123 to require more prominent disclosure
in both
annual and interim consolidated financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method
used on reported results. SFAS No. 148 is effective for financial statements
for
fiscal years ending after December 15, 2002. The adoption of this Statement
did
not have a significant impact on the Company’s financial position or results of
operations. The Company will continue to account for its stock-based
compensation using the methods detailed in its stock-based compensation
accounting policy.
In
January 2003, the FASB issued FIN No. 46 (“FIN 46”), “Consolidation of Variable
Interest Entities”. This interpretation explains how to identify variable
interest entities and how an enterprise assesses its interest in a variable
interest entity to decide whether to consolidate that entity. This
interpretation requires existing unconsolidated variable interest entities
to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. FIN 46 requires that the primary
beneficiary in a variable interest entity consolidate the entity even if
the
primary beneficiary does not have a majority voting interest. Variable
interest
entities that effectively disperse risks will not be consolidated unless
a
single party holds an interest or combination of interest that effectively
recombines risks that were previously dispersed. This interpretation applies
immediately to variable interest entities created after January 31, 2003,
and to
variable interest entities in which an enterprise obtains an interest after
that
date. It applies in the first fiscal year or interim period beginning after
June15, 2003, to variable interest entities in which an enterprise holds a
variable
interest that it acquired before February 1, 2003. In addition, FIN 45
requires
disclosure of information regarding guarantees or exposures to loss relating
to
any variable interest entity existing prior to January 31, 2003, in financial
statements issued after January 31, 2003. Management believes that the
adoption
of FIN 46 will not have a material effect on the Company’s financial position or
results of operations.
In
April
2003, the FASB issued SFAS No. 149 (”SFAS 149”), “Amendment of Statement 133 on
Derivative Instruments and Hedging Activities,” which clarifies financial
accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”.
SFAS 149 is effective for contracts entered into or modified after June30, 2003
and for hedging relationships designated after June 30, 2003. The adoption
of
SFAS 149 is not expected to have a material effect on the Company’s financial
condition or results of operations.
In
May
2003, the FASB issued SFAS No. 150 (“SFAS 150”), “Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.” This
statement establishes standards for how an issuer classifies and measures
in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the
standard,
financial instruments that embody obligations for the issuer are required
to be
classified as liabilities. SFAS 150 is effective for all financial instruments
created or modified after May 31, 2003, and otherwise shall be effective
at the
beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 is not expected to have a material effect on the Company’s
financial condition or results of operations.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, continued
Recent
Accounting Pronouncements, continued
In
December 2003, the Financial Accounting Standards Board (“FASB”) issued a
revised FIN No. 46 (“FIN 46R”), “Consolidation of Variable Interest Entities”.
Fin 46R addresses consolidation by business enterprises of variable interest
entities and significantly changes the consolidation application of
consolidation polices to variable interest entities and, thus improves
comparability between enterprises engaged in similar activities when those
activities are conduced through variable interest entities. The Company
does not
expect that adoption of FIN 46R will have a material effect on its financial
position or results of operations.
Reclassifications
Certain
prior year amounts in the accompanying consolidated financial statements
have
been reclassified to conform to the current year’s presentation. These
reclassifications had no effect on the results of operations of financial
position for any year/period presented.
NOTE
3 - MARKETABLE SECURITIES
Marketable
securities for the year ended December 31, 2001 was comprised of 91,912
shares
(representing a 2.7% equity interest), after an 8 for 1 reverse stock split
on
September 7, 2001 of uniView Technologies Corporation, a public company
traded
on NASDAQ. The Company has written down the carrying value of the shares
by
$34,927, $314,339, $1,632,353, and $1,981,619 for the years ended December31,2002, 2001 2000, and the cumulative period from inception to December 31,2002.
The carrying value of the marketable securities was written down to its
market
value as the declines in value were deemed to be other than temporary.
As of
December 31, 2002, all shares of uniView Technologies Corporation were
disposed
of for consideration of $5,771, resulting in a loss on disposal of $12,611.
NOTE
4 - PREPAID FINANCIAL ADVISORY FEE
In
1999, the Company paid a fee of $1,500,000 to a consultant to introduce
the
Company to financial institutions and other investors, assist in negotiation
of
debt or equity financing, design and implement public relations and investor
relations programs, and develop an advertising strategy for the
Company.
These
services were rendered to the Company over the period from March 5, 1999
to
August 31, 2000 and the amount paid was deferred and amortized over the
life of
the service agreement on a straight-line basis. For the years ended December31,2002, 2001 and 2000, and the cumulative period from inception to December31,2002, the Company recognized approximately $Nil, $Nil, $672,000 and $1,500,000
in operating expenses in respect of the consultant’s fee.
NOTE
5 - NOTE RECEIVABLE
On
October 19, 2001, the Company completed the sale of its 100% interest in
its
subsidiary, First Ecommerce Data Services Limited (“FEDS”), to Transworld
Payment Solutions N.V. (“Transworld”). The guaranteed amount of FEDS operating
profits is receivable in installments of $350,000, $650,000 and $1,000,000,
due
March 1, 2003, 2004 and 2005. The guaranteed installments have been recorded
at
their present value with imputed interest of 2% to 3.5%. Imputed interest
of
$35,863 and $9,348 were recorded as interest income in the years ended
December31, 2002, and 2001.
During
the year, as a result of a dispute with Transworld, the Company undertook
an
assessment on its notes receivable and recorded an impairment charge of
$1,901,106 for the year ended December 31, 2002, to reduce the carrying
value of
the asset to the estimated fair value that the Company expects to receive
within
the next twelve months. This impairment charge is recorded as an operating
expense in the consolidated statements of operations, in the charges for
impairment of certain long-lived and prepaid assets section. (Notes 10
and 20)
2002
2001
Present
value of guarantee notes receivable
$
1,901,107
$
1,865,244
Less:
Impairment charge
1,901,106
-
Less:
Present value of amount due within one Year
1
-
$
-
$
1,865,244
NOTE
6 - LOAN RECEIVABLE
At
December 31, 2002 and 2001, the Company had a loan receivable in the amount
of
$Nil and $270,055. The note was receivable on demand, secured by 800,000
common
shares of the payee and bore interest at 6%. The interest was paid on repayment
of the note. (Notes 9 and 12)
NOTE
7 - PROPERTY AND EQUIPMENT
2002
2001
Computer
equipment and processing system
-
$
513,591
Furniture,
fixtures and office equipment
-
67,294
-
$
580,885
Less:
Accumulated depreciation
-
(323,564
)
$
-
$
257,321
During
2002, the Company disposed of all of its property and equipment when they
closed
their Hong Kong offices and disposed of their payment processing business.
Closure of the Hong Kong office resulted in an impairment loss on certain
long
lived assets of $8,014, which has been recorded in operating expenses under
charges for impairment of certain long-lived assets on the consolidated
statements of operations for the year ended December 31, 2002.
Depreciation
expense charged to results of operations for the years ended December 31,2002,
2001, 2000 and the cumulative period from inception to December 31, 2002,
was
$102,611, $446,366, $207,125, $575,587, and $1,374,946. At December 31,2002 all
of the depreciation expenses were reclassified on the consolidated statements
of
operations to loss from discontinued operations, net loss - payment
processing.
The
Company has a 25% interest in 103,227 gross acres (11,141 net acres) in
the
Uinta Basin region in Utah, 123,700 gross acres (24,369 net acres) in the
Greater Green River Basin of Wyoming and 4,068 gross acres (932 net acres)
in
Kern County and San Luis Obispo County in California and a 50% interest
in
51,194 gross acres (8,865 net acres) in Edwards County in Texas.
The
following table presents the Company’s oil and gas property acquisitions,
exploration and development expenditures and an adjustment for impairment
charges:
At
December 31, 2002, the Company’s proved and unproved oil and gas properties
consisted of leasehold interests and exploration and development costs
related
to their interests in Texas, Utah, Wyoming and California. The Company’s proven
and unproven properties are evaluated periodically for the possibility
of
potential impairment. During 2002, the Company recorded impairment charges
on
its proved and unproved acreage as follows:
Costs
Impairment
Cost
Net of
Charges
Impairment
Charges
Proved
Properties
Wyoming
Exploration
& development costs
$
416,178
$
(416,178)
$
Unproved
Properties
Property
acquisition costs:
Utah
8,459,726
(6,427,166)
2,032,560
Wyoming
8,459,727
(8,459,627)
100
California
345,294
(345,194)
100
Texas
872,391
(872,291)
100
Exploration
& development costs:
Wyoming
7,661
(7,661)
-
Utah
7,662
(7,662)
-
California
2,998
(2,998)
-
Texas
95,410
(95,410)
-
$
18,667,047
$
(16,634,187)
$
2,032,860
During
2002, two wells that were drilled on the Wyoming property were not considered
prospective by the Company and as a result of this assessment an impairment
charge was recorded against the property.
At
the
end of 2002 the Company recorded impairment charges against its unproven
properties in Texas, California and Wyoming because no exploration or
development work is expected to be performed on these properties. The Company
recorded an impairment of their Utah property based on a reserves study
completed subsequent to December 31, 2002. (Note 20)
NOTE
9 - MINORITY INTEREST
On
March12, 2002, the Company acquired an equity interest of 29.69% in Vallenar,
a
company with interests in various oil and gas leases in Texas, by converting
a
loan receivable from Vallenar of $270,055 together with a further payment
of
$79,945, into 733,333 Series “A” Preferred Shares of Vallenar. The Company also
acquired 2,512,500 common shares of Vallenar from third parties for $12,563.
The
preferred shares, which are convertible into 733,333 common shares of Vallenar,
provide the Company with a non-dilutable 26% voting interest provided that
at
least 50% of Vallenar’s shares remain outstanding.
On
June 28, 2002, the Company acquired a further 2 million common shares of
Vallenar, from third parties, for $10,000 and subscribed for an additional
800,000 common shares of Vallenar at $0.50 per share ($400,000). At December31,2002, the Company held a 51.53% equity interest in Vallenar.
Prior
to
June 28, 2002, the Company accounted for its interest in Vallenar using
equity
accounting. The equity in loss of Vallenar for the period from March 12,2002 to
June 28, 2002 was $17,011. This loss has been recorded in the Company’s December31, 2002, consolidated statements of operations as equity in losses of
affiliates, in the losses associated with affiliates section of the financial
statements.
Subsequent
to June 28, 2002, the acquisition is being accounted for using purchase
accounting and accordingly, the results of Vallenar’s operations have been
included in the Company’s consolidated financial statements from June 28, 2002
onwards. The total cost of the Vallenar acquisition has been allocated
to the
tangible and intangible assets acquired and liabilities assumed based on
their
respective fair market values at the effective date of the acquisition.
Such
allocations ultimately will be based on further management studies and
due
diligence and consequently are preliminary and subject to revision.
The
excess of the Company’s costs over fair value of the identifiable net assets
attributable to the Company of $372,643 has been recorded as an increase
in
value of the oil and gas properties. (Note 8)
Assets
acquired and liabilities assumed in the acquisition were as
follows:
Banks
and
fixed
deposits................................................................................................................23,993
Notes
receivable from the
Company............................................................................................370,000
Oil
and
gas
properties.....................................................................................................................499,748
Short
term loan…………………………………………………………………………………… (29,000)
During
2000, the Company acquired a 50% interest in FEDS, a joint venture operation
with the Bank of Bermuda, a principal shareholder of the Company, from
the Bank
of Bermuda for $3 million. The excess of the purchase price over the Company’s
share of the net assets of FEDS at the date of investment based on their
estimated fair market value at the date of acquisition was allocated to
goodwill. Goodwill amounted to approximately $1.2 million and was being
amortized over seven years. In addition, the Company had advanced FEDS
an
unsecured, non-interest bearing loan of $400,000.
2000
Cost
of
investment..........................................................................................$3,000,000
Share
in
losses of
affiliate.................................................................................(292,118)
On
June18, 2001, the Company acquired the remaining 50% of the issued shares of
FEDS
such that FEDS became a wholly-owned subsidiary of the Company. The purchase
consideration was $3,581,993 cash for the shares. In addition, the Company
acquired a shareholder’s loan from the Bank of Bermuda to FEDS in the amount of
$668,007. Total consideration paid to the Bank of Bermuda was $4,250,000.
Direct
costs of $39,542 were incurred in respect of this transaction.
Prior
to
June 18, 2001, the Company recorded its share of the losses in FEDS under
the
equity method. The Company’s share of such losses were $390,052 for the period
from January 1 to June 18, 2001, and $292,118 for the year ended December31,2000. (Note 11)
Subsequent
to June 18, 2001, the acquisition was accounted for using purchase accounting
and accordingly, theresults
of operations from FEDS have been included in the Company’s consolidated
financialstatements
from June 19, 2001, onwards. The excess of the Company’s costs over the fair
value of the identifiable net assets of $2,480,877 was recorded as additional
goodwilland
was
being amortized on a straight-line basis over seven years.
Bank
and
fixed deposits
acquired..................................................................................(2,057,483)
Direct
costs..............................................................................................................................39,542
$2,232,059
======
On
October 19, 2001, the Company sold its 100% interest in FEDS for cash of
$1,663,986 plus 40% of FEDS operating profits for the next three years
with a
minimum guaranteed amount of $2 million and a maximum of $3 million.
The
sale
of FEDS resulted in no gain or loss being recorded at December 31, 2001,
because
the Company had recognized an impairment loss of $3,159,505 at September30,2001. Revenues and loss from operations, for the period (including impairment
loss of $3,159,505) from FEDS included in the consolidated statements of
operations were $250,567 and $664,278, respectively from June 19, 2001
to
October 19, 2001. (Note 11)
On
July19, 2001, the Company acquired an equity interest in Gasco Energy, Inc.
(“Gasco”), a Nevada Corporation, involved in the exploration of and potential
development of natural gas reserves on some 103,227 gross acres in the
Uinta
Basin region in Utah, 123,700 gross acres in the Greater Green River Basin
of
Wyoming and 4,068 gross acres in Kern County and San Luis Obispo County
in
California. The Company paid $19 million for 1,000 preferred shares of
Gasco,
which were convertible into 9.5 million common shares of Gasco, at the
Company’s
option. These preferred shares entitled the Company to a non-dilutable
26%
voting interest in Gasco, provided that at least 50% of the preferred shares
remained outstanding. This equity interest was accounted for as
follows:
$796,370
and the accumulated losses from July 19, 2001 (date of first acquisition)
to
December 31, 2002 were $1,288,464. These losses have been recorded in the
Company’s consolidated statements of operations, as equity in losses of
affiliates, in the losses associated with affiliates section.
In
March
2002, the Company converted 50% of its preferred shares of Gasco (500 shares)
into 4,750,000 Gasco common shares and on July 16, 2002, the Company exchanged
its 4,750,000 common shares of Gasco and 500 preferred shares of Gasco,
for an
undivided interest in all of Gasco’s undeveloped mineral leases in Wyoming, Utah
and California. On July 16, 2002, the Company acquired an additional undivided
interest in Gasco’s undeveloped mineral leases from certain other Gasco
shareholders, in exchange for 4,125,000 common shares of the Company. (Notes
8,
12 and 13) These transactions gave the Company a combined 25% undivided
interest
in all of Gasco’s undeveloped mineral leases.
At
July16, 2002, the Company had recorded an impairment loss of equity in affiliate
of
$3,309,536, in the losses associated with affiliates section of the consolidated
statements of operations. This loss adjusted the carrying value of its
equity in
Gasco to the fair value amount of $14,402,000, which is based on the average
closing market price of Gasco’s shares for two days before and two days after
the date the Company exchanged its Gasco shares. At July 16, 2002, the
Company
recorded the additional undivided interest in Gasco’s undeveloped mineral leases
from certain other Gasco shareholders, in exchange for 4,125,000 common
shares
of the Company at $2,862,750. This was based on the average closing market
price
of the common shares of the Company for two days before the date of exchange
and
two days after the date of exchange. The fair value of the Gasco shares
exchanged by the Company and shares of the Company issued for the additional
undivided interests in the mineral leases, of $14,402,000 and $2,862,750,
have
been recorded under oil and gas properties. (Note 8)
The
Company has an option to acquire an additional 2.5% interest in these
undeveloped mineral leases by paying $5,250,000 on or before January 1,2004. If
they exercise this option, the Company has the option of acquiring an additional
undivided 2.5% interest by paying $5,250,000 on or before January 1, 2005.
(Note
20)
NOTE
11 - DISCONTINUED OPERATIONS
First
Ecom System Limited
On
September 30, 2002, the Company disposed of its subsidiary, First Ecom
Systems
Limited (“FESL”), which was engaged in the electronic payment processing
operations, for consideration of $12,786. At December 31, 2002, the Company
recorded a loss on discontinuance in the consolidated statements of operations
of $132, which is the difference between FESL’s net assets of $12,918 and the
disposal price.
As
at
December 31, 2002, no assets or liabilities of the payment processing business
were included in the consolidated balance sheet. All FESL’s revenues and
expenses for the years ended December 31, 2002, 2001, 2000 and the cumulative
period from inception to December 31, 2002 have been reclassified from
operations to the income (loss) from discontinued operations section of
the
consolidated statements of operations. These net losses were$1,199,785,
$11,225,955, $12,811,092, and $31,590,922 for the years ended December31, 2002,
2001, 2000 and the cumulative period from inception to December 31, 2002.
FESL’s
revenues from the payment processing business were $67,918, $301,978, $38,223
and $408,119 for the years ended December 31, 2002, 2001, 2000 and the
cumulative period from inception to December 31, 2002. FESL’s losses from
operations for the years ended December 31, 2002, 2001, 2000 and for the
period
from inception to December 31, 2002 were $847,906, $851,883, $823 and
$1,700,612.
First
Ecommerce Data Services Limited
At
December 31, 2002,the
Company reclassified its share of equity in losses of affiliate of $390,052
for
the period from January 1 to June 18, 2001, and $292,118 for the year ended
December 31, 2000 to the income (loss) from discontinued operations section
of
thestatements
of operations. (Note 10)
Asia
Internet Limited
During
the first quarter of 2001 the Company decided to discontinue its systems
integration business, which was carried on through its wholly-owned subsidiary,
Asia Internet Limited (“AIL”). The discontinued operations resulted in a gain on
discontinuance of $1,725,551 due to reversal of $1,852,570 of unvested
stock
compensation costs previously recorded to AIL employees, net of severance
pay of
$127,019. The assets and liabilities of the discontinued operations included
in
the accompanying consolidated balance sheet at December 31, 2001 were $7,736
and
$148,818. Revenues for the system integration business were $92,237, $816,648,
and $908,885, for the years ended December 31, 2001 and 2000 and the period
from
September 16, 1998 (inception) to December 31, 2001. Net losses-system
integration, for the years ended December 31, 2001 and 2000 and the period
from
September 16, 1998 (inception) to December 31, 2001 were $236,683, $4,219,736
and $4,456,419, have been recorded as in the income (loss) from discontinued
operations section of the consolidated statements of operations.
The
Company was indebted to its former President and CEO in the amount of $28,000.
This debt is unsecured, non-interest bearing and has no set terms of repayment.
Subsequent to December 31, 2002, this loan was settled by issuance of common
shares of the Company. (Note 20)
During
the years ended December 31, 2002, 2001 and 2000, the Company paid investor
relations fees to a company controlled by the former President and CEO
of the
Company in the amount of $187,328, $241,700 and $Nil.
During
the years ended December 31, 2002, 2001 and 2000the Company paid legal
fees to
a law firm controlled by the wife of the Company’s former President and CEO in
the amount of $2,503, $Nil and $647. During the period from March 12, 2002,
the
date the Company first acquired an equity interest in Vallenar, until June28,2002, the date of the Company commenced consolidating the financial results
of
Vallenar, Vallenar accrued legal fees to a law firm controlled by the wife
of
the Company’s former President and CEO in the amount of $33,769, of which, at
December 31, 2002, there is a balance of unpaid legal fees included in
accounts
payable of $30,941. Subsequent to December 31, 2002, this liability was
settled
by the issuance of common shares of the Company. (Note 20)
On
July16, 2002, the Company issued 1,237,500 shares of its common stock to the
Company’s former President and CEO and 1,237,500 shares of its common stock to
a
company controlled by the Company’s former President and CEO in exchange for an
undivided interest in Gasco’s undeveloped mineral leases. (Notes 8, 10 and
13)
The
Company had accrued consulting fees payable to the former President and
CEO in
the amount of $24,000. Subsequent to December 31, 2002, this liability
was
settled by the issuance of common shares of the Company. (Note 20)
The
Company had accrued consulting fees payable to the wife of the former President
and CEO in the amount of $10,000. Subsequent to December 31, 2002, this
liability was settled by the issuance of common shares of the Company.
(Note
20)
The
Company had accrued consulting fees payable to a relative of the former
President and CEO in the amount of $6,000. Subsequent to December 31, 2002,
this
liability was settled by the issuance of common shares of the Company.
(Note
20)
The
Company paid $12,000 in consulting fees to a company controlled by a former
director of Vallenar and $39,000 in consulting fees to a former director
of
Vallenar.
The
Company paid $15,000 in consulting fees to a company controlled by a former
director of Vallenar.
The
Company paid $351,806 in fees and a housing allowance of $17,209 to an
officer.
At December 31, 2002, $54,000 of these fees were unpaid and included in
accrued
liabilities. Subsequent to December 31, 2002, $50,000 of this liability
was
settled by the issuance of common shares of the Company. (Note
20)
The
Company paid $418,324 in directors’ fees and paid a housing allowance of $27,871
to a former CEO. During the year $70,000 of these directors’ fees were paid
through the issuance of 100,000 common shares of the Company. (Note 13)
At
December 31, 2002, $159,038 of the above directors’ fees were unpaid and
included in accrued liabilities. Subsequent to December 31, 2002, $50,000
of
this liability was settled by the issuance of common shares of the Company.
(Note 20)
The
Company paid $54,000 in directors’ fees to its Chairman. At December 31, 2002,
$13,500 of these directors’ fees were unpaid and included in accrued
liabilities. Subsequent to December 31, 2002, this liability was settled
by the
issuance of common shares of the Company. (Note 20)
The
Company paid $10,320 in directors’ fees to a director. At December 31, 2002,
$5,160 of these directors’ fees were unpaid and included in accrued liabilities.
Subsequent to December 31, 2002, this liability was settled by the issuance
of
common shares of the Company. (Note 20)
The
Company paid $10,320 in directors’ fees to a director. At December 31, 2002, the
Company was indebted to this director in the amount of $14,103. Subsequent
to
December 31, 2002, $5,160 of this liability was settled by the issuance
of
common shares of the Company. (Note 20)
The
Company paid $7,457 in directors’ fees to a former director. At December 31,2002, $5,160 of these directors’ fees were unpaid and included in accrued
liabilities. Subsequent to December 31, 2002, $2,580 of this liability
was
settled by the issuance of common shares of the Company. (Note 20)
The
Company paid $7,743 in directors’ fees to a former director. At December 31,2002, $5,160 of these directors’ fees were unpaid and included in accrued
liabilities. Subsequent to December 31, 2002, $2,580 of this liability
was
settled by the issuance of common shares of the Company. (Note 20)
The
Company paid consulting fees to former directors of $28,628.
The
Company advanced $270,055 to Vallenar. A director and an officer of the
Company
are also directors of Vallenar, and certain shareholders of the Company’s
affiliate, Gasco are also shareholders of Vallenar. The loan was subsequently
converted to equity interest. (Note 6)
On
March31, 2000, the Company acquired AIL in exchange for cash and shares with
a total
fair market value of $1.8 million; prior to March 31, 2000, AIL was considered
a
related party to the Company as a 30% shareholder of AIL is also a director
and
stockholder of the Company. AIL provided technical support, system maintenance
and other professional services to the Company and purchased computer and
office
equipment on behalf of the Company. During the year ended December 31,2000, and
prior to the acquisition of AIL by the Company, the Company paid $91,871
to AIL
for the above services. During the year ended December 31, 2000, the amounts
charged by AIL to the Company for technical support, system maintenance
and
other professional services, and purchase of computer and office equipment
on
the Company’s behalf were $283,157 for services and $15,290 for
purchases.
A
former director and shareholder of the Company was a partner in a law firm
(the
“Firm”) to which the Company paid legal fees in the ordinary course of its
business. The amount paid by the Company and charged by the firm during
the year
ended December 31, 2000, was $373,497. Effective June 15, 2000, the director
resigned from the firm and entered into a consultancy agreement directly
with
the Company for a monthly fee of $16,129. For the year ended December 31,2000,
$106,153 was paid to this former director.
A
director of the Company received consulting fees of $25,000, which was
paid in
the ordinary course of business.
The
Company issued 2,845,000 common shares, under a Reg. S private placement,
at
$0.50 per share for cash of $1,422,500 less related share issue costs of
$25,000, during April 2002.
On
July31, 2002, the Company issued 4,125,000 common shares in exchange for an
undivided interest in oil and gas properties at a deemed value of $2,862,750.
The former President and Chief Executive Officer has a direct and indirect
interest in 2,475,000 of these shares. (Notes 8, 10 and 12)
On
August23, 2002, the Company issued 80,000 common shares, at a deemed value of
$56,800,
to certain subscribers of the March 28, 2002 private placement as a 10%
penalty
for failing to make its S-3 Registration Statement effective within 120
days, as
required under the terms of their private placement agreements.
On
September 10, 2002, the Company issued 100,000 common shares at a price
of $0.70
to the Company’s former Chief Executive Officer, as part of his severance
package. (Note 12)
On
September 19, 2002, 50,000 employee stock options, issued under the 2001
stock
option warrant plan, were exercised at $0.40 per share for cash proceeds
of
$20,000.
On
September 24, 2002, the Company issued 50,000 common shares at $0.68 to
each of
two directors and an officer (150,000 common shares in total) of the Company
in
settlement of $102,000 in accrued bonuses payable.
During
the year ended December 31, 2001, there were no common stock
transactions.
On
July26, 2000, 1,000,000 common shares were issued, due to the exercise of warrants
issued on November 26, 1999, for total proceeds of $7,800,000. (Note
16)
Pursuant
to an agreement to acquire all of the outstanding shares of AIL in March
2000,
the Company issued 24,870 shares at a deemed total value of
$623,988.
On
March 6, 2000, the Company sold 3,228,500 units at $9.50 per unit for cash
proceeds of $30,670,750, pursuant to a private placement. Each unit consists
of
one share of the Company’s common stock and one stock purchase warrant to
purchase one third of a share of the Company’s common stock at $11.40 per share.
The Company recorded share issue costs of $2,095,562 in respect of this
private
placement. (Note 16)
On
January 28, 1999, the Company issued 8,000,000 common shares to financial
advisors for services, at a deemed fair value of the services provided
of
$300,000, rendered in connection with organizational activities of the
Company
plus a nominal amount of cash of $8,000 for total consideration of $308,000
or
$0.0385 per share.
On
March3, 1999, the Company issued 500,000 common shares at $4 per share for total
net
proceeds of $2,000,000.
On
September 8, 1999, the Company issued 166,667 common shares at $9 per share
for
total net proceeds of $1,500,000.
On
November 26, 1999, the Company issued 1,000,000 common shares at $6.50
per share
for total net proceeds of $6,230,000, net of share issue costs of $270,000.
Each
of these shares had attached a five-year warrant to purchase one new common
share for $7.80 per share. These warrants, which were exercisable at any
time up
to November 25, 2004, were exercised in July 26, 2000. (Note 16)
On
December 23, 1999, the Company issued 1,250,000 common shares at a price
of
$6.50 per share for total proceeds of $7,637,500, net of share issue costs
of
$487,500. Each of these shares had attached a five-year warrant to purchase
one-third of one new common share for $7.80 per whole share and is exercisable
at any time up to December 22, 2004. (Note 16)
NOTE
14 - STOCKHOLDER RIGHTS PLAN
On
March 1, 2002, the Company declared a dividend of one right for each share
of
the Company’s common stock issued and outstanding on March 20, 2002. Each right
entitles the holder to purchase five shares of the Companies common stock
at an
exercise price of $0.01 per right, if certain events occurred relating
to a
person or group acquiring or attempting to acquire 10% or more of the
outstanding of common shares of the Company without the approval of the
Company’s board of Directors. The rights are exercisable until December 31,2020. Additional shares issued by the Company subsequent to March 20, 2002
are
automatically included in the share rights plan.
As
of
December 31, 2002, the Company had reserved 132,800,185 shares for the
exercise
of these rights for the outstanding issued shares and 17,368,410 for the
potential exercise of outstanding options and warrants.
The
Company has two stock option plans, the 1999 Stock Option Plan and the
2001
Stock Option/Warrant Plan. The 1999 Stock Option Plan allows the Company
to
grant up to 3,000,000 stock purchase options and the 2001 Stock Option/Warrant
Plan allows the Company to grant up to 5,000,000 stock purchase options
or
warrants.
1999
Stock Option Plan
The
Company’s 1999 stock option plan generally provides for the granting of
non-qualified and incentive stock options for the purchase of common stock
to
officers, consultants, directors and key employees. Non-qualified options
can be
granted at a price not less than 85% of the market price of the common
stock at
the date of grant. Incentive stock options can be granted at the market
price at
the date of grant, if granted to a director or consultant who is also an
officer
or key employee of the Company or at 110% of market price if granted to
a
shareholder holding ten percent or more of the Company’s common shares.
All
share
options granted under the 1999 Option Plan are exercisable at 50% one year
after
the date of issue and the remaining 50% two years after the date of issue.
All
options, if remaining unexercised, expire five years after the date of
issue.
All vested options lapse within three months of termination of
employment.
Under
the
1999 Stock Option Plan, the Company granted the following share purchase
options:
On
August29, 2000, the Company approved the granting of new options, with a new
exercise
price of $5.05 per share, providing the holders first rescinded their existing
grants. Holders of 1,145,740 stock options elected to rescind their grants
and
these were replaced with a like number of new grants. The modified grants
were
accounted for using variable accounting according to FASB Interpretation
No.
44.
During
the year ended December 31, 2002, 20,000 vested options were
forfeited.
The
weighted average fair value of the options granted in 2002, 2001 and 2000
were
$nil, $12.03 and $7.13.
2001
Stock Option/Warrant Plan
The
Company’s 2001 stock option/warrant plan generally provides for the granting of
stock options or warrants for the purchase of a specific number of common
shares
at a specific price for a specific time period to officers, consultants,
directors and key employees.
All
share
options/warrants granted under the 2001 option/warrant plan either vest
immediately, at 25% per quarter over a period of one year or on a performance
basis. All options, if remaining unexercised, expire five years after the
date
of issue.
The
Company granted the following share options to employees, directors and
consultants:
On
October 31, 2001, the Company approved the granting of new options to employees
and directors with a new exercise price of $0.40 per share providing the
holders
first rescinded their existing grants of options and warrants (if any).
Holders
of 825,000 options granted under the 1999 Stock Option Plan and 235,000
warrants
granted on March 29, 2001 elected to rescind their existing grants and
these
were replaced with new grants totaling 765,000 options. (Note 16) The modified
grants were accounted for using variable accounting according to FASB
Interpretation No. 44.
On
October 31, 2001, the Company granted new options to employees, directors
and
consultants to purchase up to 495,000 shares of the Company’s common stock at a
price of $0.40 per share. The options vest immediately, expire on October31,2006 and had a fair value on the grant date of $0.41 per share. 150,000
of these
options were granted to consultants. During 2002, 50,000 of these options
were
exercised.
On
July 15, 2002, the Company granted options to employees and directors to
purchase up to 370,000 shares of the Company’s common stock at a price of $0.55
per share. The options vest immediately, expire on July 15, 2007 and have
a fair
value of $0.73 per share.
On
July15, 2002, the Company granted options to directors to purchase up to 50,000
shares of the Company’s common stock at a price of $0.55 per share. The options
vest 25% immediately and 25% every 6 months and expire 3 months after
termination of employment and have a fair value of $0.73 per share.
A
summary
of the activity of the Company’s 2001 stock option/warrant plan:
The
weighted average fair value of the options granted in 2002 and 2001 was
$0.65
and $0.38.At December 31, 2002 and 2001 the weighted-average remaining
contractual life of the outstanding options was 3.48 and 4.07
years.
Compensation
Expense - Prior Period Adjustment
At
December 31, 2002, it was discovered there was an error in the calculation
of
stock based compensation related to stock options issued in prior years.
The
Company corrected this error at December 31, 2002. The cumulative effect
of this
correction is a decrease in additional paid in capital of $1,223,262 and
a
decrease in the accumulated deficit of $1,223,262 as of December 31, 2002.
Had
this error been corrected in prior years, it would have decreased (increased)
the net losses, as reported in the following table:
On
March29, 2001, the Company issued 265,000 warrants to certain directors and
employees
to purchase a total of 265,000 shares of the Company’s common stock at $1.25 per
share. The market value of the Company’s shares at the date of issue was $0.84
per share. These warrants were exercisable through March 31, 2004. During
the
year ended December 31, 2001, 30,000 of these warrants were returned and
forfeited and 235,000 of these warrants were rescinded in exchange for
replacement grants of stock options. (Note 15)
On
June30, 2000, the Company issued 50,000 warrants to a former employee to purchase
50,000 shares of the Company’s common stock at $8.55 per share. The market value
of the Company’s shares at the date of issue was $9.84. These warrants were
exercisable for a period of two years from the date of issue. The fair
value of
the warrants was accounted for in operating expenses and estimated on the
date
of issue using the Black-Scholes Option-pricing model with the following
assumptions used: risk-free interest rate of 5.5%; expected life of five
years;
87% expected volatility; and no dividends. These warrants were not exercised
and
expired on June 30, 2002.
On
March6, 2000, the Company sold a total of 3,228,500 units at $9.50 per unit
pursuant
to a private placement for cash proceeds of $30,670,750. Each unit consists
of
one share of the Company’s common stock and one warrant to purchase one third of
a share of the Company’s common stock. The warrants, are exercisable through
March 5, 2005, entitle the holder to purchase one-third of a share of common
stock at $11.40 per share. (Note 13)
The
portion of stock proceeds allocated to the warrants was $7,656,124, which
has
been recorded as a separate component of additional paid-in capital. In
consideration for arranging the private placement, the Company granted
warrants
to purchase 26,923 shares at $7.80 per share, and 223,925 shares at $11.40
per
share, of the Company’s common stock to an investment bank. These warrants
expire on March 9, 2005. Included in the fair value of warrants issued
with
common stock of $7,656,124 is $1,374,446 allocated to the fair value of
the
warrants issued to the investment bank in connection with the private placement.
The
allocations were based on the relative fair value of the warrants and the
fair
value was estimated on the date of issue using the Black-Scholes option-pricing
model using the following assumptions: risk-free interest rate of 5.5%;
expected
life of five years; 116% expected volatility; no dividends.
On
December 23, 1999, the Company issued 1,250,000 common shares at a price
of
$6.50 per share. Attached to each share was a five-year warrant to purchase
one-third of a share of the Company’s common stock for $7.80 until December 22,2004. (Note 13)
On
August10, 1999, the Company entered into an agreement with a company (the “Lender”)
for the advance of $1,000,000 for three months. Pursuant to the terms of
the
loan agreement, the loan bore interest at 12% per annum and was convertible
into
common shares of the Company at $8.00 per share at the lender’s option. The
repayment date of the loan was extended to January 10, 2000 and on December30,1999, the loan was repaid in full. As discussed in Note 2, the intrinsic
value
of the conversion feature at the date of issuance of the loan was $50,000
which
was accounted for as additional paid-in capital. The Company recognized
an
additional $380,000 deemed financing cost for the beneficial conversion
feature
of the convertible short-term note during the fourth quarter of 2000, as
a
cumulative effect of a change in accounting principle.
Pursuant
to this agreement the lender was granted warrants to purchase 100,000 common
shares of the Company at $8.50 per share, exercisable for five years, commencing
on August 10, 1999. The relative fair value of these warrants was deemed
to be
$360,000 and was recorded as a separate component of additional paid-in
capital.
The fair value of warrants issued was estimated on the date of issue using
the
Black-Scholes option-pricing model with the following assumptions used:
risk-free interest rate of 5.5%; expected life of five years; 76.7% volatility;
no dividends.
Income
tax expense has not been recognized for the years ended December 31, 2002,
2001
or 2000 and no taxes were payable at December 31, 2002 or 2001, because
the
Company is in the development stage and has incurred losses since its inception.
The
components of the Company’s net tax losses are as follows:
2002
2001
2000
United
States of America
$
(13,270,288
)
$
(6,353,148
)
$
(9,160,736
)
Hong
Kong
(1,200,964
)
(3,748,476
)
(6,977,789
)
Other
countries (British Virgin Islands, Bermuda and Canada)
As
of December 31, 2002 and 2001, the Company had the following deferred tax
assets
that primarily relate to net operating losses. A 100% valuation allowance
has
been established, as management believe it is more likely than not that the
deferred tax assets will not be realized.
2002
2001
Federal
loss carryforwards
$
7,783,936
$
4,066,883
State
loss carryforwards, Nevada
-
-
Foreign
loss carryforwards
2,923,633
2,731,479
Less:
Valuation allowance
(10,707,569
)
(6,798,362
)
$
-
$
-
The
Company’s valuation allowance increased during 2002 and 2001 by $3,909,207 and
$3,357,159.
The
federal NOL’s expire through December 31, 2022 and the Hong Kong NOL’s can be
carried forward indefinitely.
NOTE
18 - SEGMENTED INFORMATION
During
the year ended December 31, 2002, the Company disposed of its payment processing
business, the Company now has only one business, an oil and gas business
in the
United States of America.
NOTE
19 - COMMITMENTS AND CONTINGENCIES
Lease
Commitments
The
Company leases office and other premises under non-cancelable operating leases.
The lease commitments for the next five years are:
2003
$88,050
Total:
$88,050
Rent
expense for the years ended December 31, 2002, 2001, 2000 and the cumulative
period from inception were $96,481, $372,178, $611,509, and $1,356,599
respectively.
NOTE
19 - COMMITMENTS AND CONTINGENCIES, continued
Going
Concern
During
the year the Company changed business direction and has been focusing on
its oil
and gas business. As such, the Company has accumulated a deficit in excess
of
$61 million to date and additional financing will be required by the Company
to
support development of its oil and gas properties until such time as the
Company
achieves positive cash flow from operations. These factors raise substantial
doubt about the Company’s ability to continue as a going concern. The Company’s
ability to achieve and maintain profitability and positive cash flow is
dependent upon its ability to locate profitable oil and gas properties, generate
revenues from its oil and gas production and control production costs. Based
upon current plans, the Company expects to incur operating losses in future
periods. There is no assurance that the Company will be able to generate
revenues in the future. The accompanying financial statements do not include
any
adjustments that might be necessary if the Company is unable to continue
as a
going concern.
NOTE
20 - SUBSEQUENT EVENTS
Contingent
liabilities
In
February 2003 the debtor and guarantor of the note receivable commenced
legal
action against the Company, in Bermuda, claiming that the Company and its
former
subsidiary, First Ecom Systems Limited, had promised to develop and supply
them
with certain software. As a result of this litigation the debtor ceased
making
the required installment payments on March 1, 2003. Although the directors
believed that this lawsuit was without merit as there was no condition
to
develop software for the debtor, due to lack of financial resources the
Company
did not defend its position and no further actions by either party have
transpired since February 2003. (Notes 5 and 9)
On
June9, 2003, a petition was filed against the Company by Burlington Resources
Oil
& Gas Company , LP (“Burlington”) claiming that Brek failed to pay for costs
incurred by Burlington in drilling oil and gas wells in Texas. Burlington
claimed damages of $658,831. On July 16, 2003, Brek Petroleum Inc. filed
its
original answer to the petition. On March 1, 2004, the Company and Burlington
entered into a settlement agreement whereby the Company agreed to pay Burlington
a total of $691,874, in twelve equal monthly payments, commencing August14,2004, plus legal and court imposed interest.
Oil
and Gas Properties
Based
on
a December 31, 2004 reserves study, the Company recorded an impairment charge
on
their Utah oil and gas properties. Based on this study the Company valued
the
Utah oil and gas properties at an amount equal to the present value, discounted
at 10%, of the estimated future net revenues from proved oil and gas reserves
of
approximately $5.7 million (calculated, based on estimated net revenues of
$18.5
million) plus the cost, or estimated fair value, if lower of unproved
properties, less estimated future expenditures to be incurred in developing
and
producing the proved reserves of approximately $3.7 million. The present
value
of estimated future net revenues was computed by applying current prices
of oil
and gas to estimated future production of proved oil and gas reserves as
of
December 31, 2004, assuming the continuation of existing economic conditions.
(Note 8)
The
Company has an option to acquire an additional 2.5% interest in these
undeveloped mineral leases by paying $5,250,000 on or before January 1, 2004
and
if they exercise this option, the Company has the option of acquiring an
additional undivided 2.5% interest by paying $5,250,000 on or before January1,2005. The Company did not exercise either of these options. (Note
10)
On
April14, 2003, the Company issued 277,776 common shares at $0.18 per share by
way of
a private placement for total proceeds of $50,000.
On
April14, 2003, the Company converted $308,947 in accounts payable and $28,700
in
loans payable into 1,875,817 common shares at $0.18 per share. (Note
12)
During
the year ended December 31, 2004, the Company issued 23,438,623 units for
cash
of $3,141,893 and 1,804,167 units, to an officer, as a finder’s fee of $226,250
for arranging placement of 18,041,670 of the 23,438,623 units. These units
were
issued at prices between $0.05 and $0.20 per unit. Each unit is comprised
of one
common share and one share purchase warrant, each warrant entitles the holder
to
purchase one share of the Company’s common stock, is exercisable at prices
between $0.25 to $0.35 per share and expires within one to three years. The
fair
value of the warrants was estimated to be $842,036 (25% of the $3,368,143
in
debt or proceeds received from the sale of the units).
During
the year ended December 31, 2004, the Company issued 1,375,000 units for
debt of
$68,750, the units were issued at $0.05 per unit. Each unit is comprised
of one
common share and one share purchase warrant, each warrant entitles the holder
to
purchase one common share of the Company’s stock, is exercisable at $0.35 per
share and expires in one year. The fair value of the warrants was estimated
to
be $17,188 (25% of the $68,750 in debt).
During
the seven month period ended July 31, 2005, the Company issued 3,333,335
units
for cash of $1,000,000 and 333,334 units, to an officer, as a finder’s fee of
$100,000, for arranging placement of these units. The units were issued at
$0.30
per unit. Each unit is comprised of one common share and one share purchase
warrant, each warrant entitles the holder to purchase one share of the Company’s
common stock, is exercisable at $0.50 per share and expires within two years
of
the date of issuance. The fair value of the warrants was estimated to be
$275,000 (25% of the $1,100,000 in debt or proceeds received from the sale
of
the units).
THE
INSTALLMENT PAYMENTS REPRESENTED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED
UNDER THE UNITED STATES SECURITIES ACT OF 1933. THEY MAY NOT BE SOLD, OFFERED
FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE
OF A
REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH INSTALLMENT PAYMENTS
UNDER
SUCH ACT OR AN OPINION OF COUNSEL OR OTHER EVIDENCE SATISFACTORY TO FIRST
CURACAO INTERNATIONAL BANK, N.V. AND ITS COUNSEL THAT SUCH REGISTRATION
IS NOT
REQUIRED.
Page
- 88
SHARE
PURCHASE AGREEMENT
THIS
SHARE PURCHASE AGREEMENT
(together with all schedules, exhibits or other instruments attached hereto,
this “Agreement”) is entered into effective as of the 19th
day of
October, 2001 (the “Effective Date) by and among First Ecom.com, Inc., a Nevada
corporation (“First Ecom”), FEDS Acquisition Corporation, a Nevada corporation
(“FEDS Acquisition”), First Ecom Data Services Asia Limited, a Hong Kong
corporation (“FEDS Asia”), First Ecommerce Asia Limited, a Hong Kong corporation
(“First Asia”) (First Ecom, FEDS Acquisition, FEDS Asia and First Asia being
sometimes referred to herein individually as a Seller and collectively,
whether
two or more, as “Sellers”), and First Curacao International Bank, N.V., a
Netherlands Antilles company (“Purchaser”).
WHEREAS
FEDS
Acquisition is the registered and beneficial owner of all of the issued
and
outstanding share capital of First Ecommerce Data Services Limited, a Bermuda
company (the “Company”); and
WHEREAS,
FEDS
Asia is the owner and holder of all rights, titles and interest in and
to
certain computer software technologies of interest to Purchases;
and
WHEREAS,
First
Ecom is the registered and beneficial owner of all of the issued and outstanding
share capital of FEDS Acquisition, First Asia and FEDS Asia; and
WHEREAS,
First
Asia is a party to a certain license and distribution agreement with Oasis
Technology Ltd. of interest to Purchaser; and
WHEREAS,
upon
the terms and subject to the conditions set forth in this Agreement, Purchaser
wishes to purchase, and Sellers wish to transfer or cause to be transferred
to
Purchaser, the Company Shares, and to effect such other transfers and grants
of
rights and licenses to purchaser as are contemplated herein for the
consideration set forth below;
NOW,
THEREFORE, in
consideration of the premises and of the mutual agreements, provisions
and
covenants herein contained, and for other good and valuable consideration,
the
receipt and sufficiency of which are hereby acknowledged, Purchaser and
Sellers
hereby agree as follows:
ARTICLE
I
- DEFINITIONS
1.1 Definitions.
As used in this Agreement, the following capitalized terms shall have the
meanings ascribed to them below. Other capitalized terms used herein shall
have
the meanings given them where they first appear.
“Affiliate”
of a person or entity shall mean any other person or entity controlled
by,
controlling, or under common control with said person or entity, and “control”
for this purpose is understood to include the ownership or voting control
of
more than 50% of the outstanding securities of any such person carrying
the
power to vote with respect to the direction or management of the person
or
entity.
“Business
Day” shall mean any on which businesses in Bermuda are normally open for
business, excluding governmental, banking and other generally recognized
holidays.
Page
- 89
“Closing”
shall mean the closing of the transactions contemplated by this Agreement
to
take place upon the execution and delivery of this Agreement as specified
in
Article II.
“Closing
Date” shall mean the date on which Closing takes place.
“Companies
Act” shall mean the Companies Act 1981 of Bermuda, as amended from time to
time.
“Company
Shares” shall have the meaning given it in Section 4.5(a).
“Contracts”
shall mean any and all contracts, commitments, covenants, promises, notes,
mortgages, indentures, leases of tangible personal property, licenses,
franchises, options, warranties, commitments, and other agreements,
understandings and arrangements (other than those constituting real property
or
bank deposit agreements).
“Environmental
Requirements” shall mean all applicable Legal Requirements, together with any
other requirements of permits, licenses, certificates, authorizations,
concessions, franchises or other approvals of any Governmental Authority
relating to pollution, the protection of human health or safety or the
environment, including, without limitation all requirements pertaining
to
reporting, licensing, permitting, investigation and remediation of emissions,
discharges, releases, or threatened releases of Hazardous Substances into
the
air, surface water, groundwater, or land, ore relating to the manufacture,
processing distribution, use, treatment, storage, disposal, transport,
or
handling of Hazardous Substances; and all requirements pertaining to the
protection of the health and safety of the Company’s employees, contractors or
the public.
“Governmental
Authority” shall mean any court, governmental department, commission, council,
board, agency, or other judicial, administrative, regulatory, legislative
or
other governmental agency or instrumentality of Bermuda or any foreign
country,
or any state, county, municipality or local governmental body located in
Bermuda
or any such other foreign country.
“Hazardous
Substances” shall mean any pollutant, contaminant, material, substance, waste,
chemical or compound that is regulated, restricted or prohibited by any
Environmental Requirement or designated by any Governmental Authority to
be
hazardous, toxic, radioactive, biohazardous or otherwise a danger to health
or
the environment.
“Intellectual
Property” shall mean any and all discoveries, inventions (patentable or
otherwise), methods, trade secrets, know-how and other proprietary information,
utility models, sketches, drawings, designs, charts, lists, reports, forms,
memoranda, writings, computer software, computer software documentation,
trademarks and trade names, service marks, and service names, domain names,
copyrights, patents (including without limitation utility patents, design
patents, utility models and petty patents), moral rights, in all cases
whether
or not registered or registrable, and all rights to renewal and extension
of
copyrights, patents or designs to the full term or terms for which such
copyrights, patents or designs may be issued, renewed or extended, all
copyright, patent and design registrations and applications therefor, all
rights
under judicial orders or injunctions, and the right to recover for past
and
future infringements, and also including in the case of patent application
the
right to claim priority for such patent applications.
Page
- 90
“Legal
Requirements” means laws, statutes, orders, rules, ordinances, regulations,
codes, judgments, orders, writs or decrees of any governmental Authority
having
jurisdiction over the person or subject matter in question, and any and
all
legal duties arising under applicable common law.
ARTICLE
II - PURCHASE AND SALE
2.1 Purchase
and Sale of the Company Shares. Subject to the terms and conditions of
this
Agreement, Sellers hereby agree to sell and deliver, or cause to be sold
and
delivered, to Purchaser or its assignee or nominee, and Purchaser or its
assignee or nominee hereby agrees to purchase and accept form Sellers,
all legal
and beneficial interest in all of the Company Shares, consisting of 3,000,000
ordinary shares of par value BD$1.00, represented by Certificate No. 8
(the
“Certificate”, whether one or more), free from all liens, charges, encumbrances,
equities and claims of third parties of any description, together with
all
rights now or hereafter attaching thereto.
2.2 Grant
of
Software Licenses; Assignment of Distribution License; Support and Maintenance,
Subject to the terms and conditions of, this Agreement, Sellers hereby
agree to
execute and deliver to Purchaser (i) a Software License Agreement for Merchant
Accounting and Reporting System, (ii) a Software License Agreement for
Payment
Gateway, and (iii) a Software Development License Agreement, each in the
form of
Exhibits A, B and C attached hereto and made a part hereof for all purposes,
respectively, (iv) subject to any necessary consents that remain to be
obtained
from Oasis Technology Ltd., a Subdistributor and Assignment Agreement in
the
form of Exhibit D attached hereto and made a part hereof for all purposes,
and
(v) an End User Support Agreement in the form of Exhibit E attached hereto
and
made a part hereof for all purposes.
2.3 Purchase
Price. The aggregate purchase price (the “Consideration”) to be paid by
Purchaser for the Company Shares, the grants of the software licenses and
the
assignment described in Section 2.2 above, the entry into the End User
Support
Agreement described in Section 2.2 above, and the other covenants and agreements
on the part of Sellers provided for hereunder, shall be US$1,663,986 payable
at
Closing in cash, by cashier’s check or by wire transfer of immediately available
funds to an account designated in writing by Sellers to Purchaser no less
than
three Business Days prior to the Closing for this purpose, plus the payments
required to be paid to Sellers by or on behalf of Purchaser in the amounts
and
at the times set forth in Section 7.1 below (the “Installment Payments”). In
this connection the parties acknowledge and agree that, of the US$1,663,986
payable at Closing, US$10.00 represents the entire fee for each of the
license
agreements described in clauses (i), (ii) ad (iii), respectively, of Section
2.3, an additional US$10.00 represents the entire fee for the Subdistributor
and
Assignment Agreement described in clause (iv) of Section 2.3 , and US$10.00
represents the entire fee for the end User Support Agreement described
in clause
(v) of Section 2.3, and the remaining US$1,663,936, plus the Installment
Payments, represents the entire purchase price being paid for the Company
Shares. As provided in Section 10.12 hereof, Purchaser shall be deemed
to have
discharged its obligations to make payments hereunder by making such payments
to
First Ecom, which shall hold such payments in trust for the other Sellers
as
their interest may appear.
Page
- 91
2.4 Closing.
The Closing shall take place at the offices of Appleby Spurling & Kempe,
Cedar House, 41 Cedar Avenue, Hamilton, Bermuda upon the latest to occur
of (i)
immediately upon complete execution and delivery of this Agreement and
(ii) as
soon as practicable following complete execution and delivery of this Agreement
and satisfaction or waiver of all of the conditions to the obligations
of the
parties to consummate the transactions contemplated hereby in accordance
with
this Agreement, and (iii) at such other time, place and date as is mutually
agreed to by the parties hereto. The parties acknowledge that the execution
of
documents and instruments required hereunder may take place prior to the
actual
finding of the Consideration payable at Closing or the satisfaction of
certain
conditions to Closing, in which case such documents and instruments shall
be
placed into escrow with the firm of Appleby Spurling & Kempe for release
upon funding and satisfaction of all such conditions, and the Closing Date
shall
be the date of such release. Notwithstanding any requirement herein that
documents or instruments be dated the Closing Date, such documents and
instruments shall be deemed satisfactory if dated on the date of signing,
but
considered effective on the Closing Date, and conditions required to be
satisfied prior to Closing, and representations and warranties given at
signing,
shall be deemed satisfied if satisfied after signing but prior to or on
the
Closing Date.
2.5
Sellers’
Actions at the Closing. At or prior to the
Closing:
(a)
Sellers
shall deliver to Purchaser:
(i) (A) the
Certificates of Incorporation or other equivalent organizational document
of
each of First Ecom, FEDS Acquisition, FEDS Asia and First Asia, respectively,
certified in each case as of a date no earlier than five (5) Business Days
prior
to the Closing Date by the Secretary of State of the State of Nevada or
equivalent official or office of the jurisdiction of incorporation, and
(B) a
certificate of said Secretary of State or other official or office dated
as of
no earlier than three (3) Business Days prior to the Closing Date as to
the due
incorporation and good standing of each of First Ecom, FEDS Acquisition,
FEDS
Asia and First Asia, respectively; and
(ii) certificates
of the Secretary or an Assistant Secretary of each of First Ecom, FEDS
Acquisition, FEDS Asia and First Asia, respectively, dated the Closing
Date and
certifying (A) that the Certificate of Incorporation or equivalent
organizational document of such company has not been amended since the
date of
the last amendment referred to in the certificate delivered pursuant to
clause
(i) (A) above, (B) that attached thereto is a true and correct copy of
all
resolutions adopted by the Board of Directors and, if required under the
company’s organizational documents or applicable Legal Requirements,
shareholders of such company authorizing the execution, delivery and performance
of this Agreement and the ancillary agreements and transactions contemplated
hereby and that such resolutions have not been amended or modified and
are in
full force and effect in the form adopted, and (C) to the incumbency and
specimen signature of each officer of such company executing this Agreement
and
each ancillary agreement to be executed by such company pursuant to this
Agreement and any certificate or instrument furnished pursuant hereto;
and
Page
- 92
(iii) (A)
the
Memorandum of Association of the Company, certified as of a date no earlier
than
three (3) Business Days prior to the Closing Date by the Registrar of Companies
of Bermuda, and (B) a Certificate of Compliance from said Registrar of
companies
dated as of no earlier than three (3) Business Days prior to the Closing
Date as
to the due incorporation and good standing of the Company; and
(iv) certificate
of the Secretary of the Company dated the Closing Date and certifying (A)
that
the Memorandum of Association of the Company has not been amended since
the date
of the last amendment referred to in the Certificate delivered pursuant
to
clause (iii) (A) above, and (B) that attached thereto is a true and correct
copy
of all resolutions adopted by the Board of Directors and shareholders of
the
Company pursuant to the provisions of Section 2.5(c) below and that such
resolutions have not been amended or modified and are in full force and
effect
in the form adopted, and (C) that the other requirements of Section 2.5(c)
have
been fulfilled in accordance with the provisions thereof; and
(v) an
opinion of counsel from legal counsel to First Ecom and FEDS Acquisition
substantially in the form of Exhibit J attached hereto and made a part
hereof
for all purposes;
(b) Sellers
shall deliver or procure delivery to the Purchaser of the Certificate evidencing
the Company Shares, accompanied by duly executed share transfer instruments
in
the form attached hereto as Exhibit F effecting transfer from FEDS Acquisition
of all the Company Shares in favor of Purchaser (or its nominee(s)), and,
in
connection therewith, Sellers hereby irrevocably appoint, as of the time
of
Closing, any corporate officer of Purchaser and any Director of the Company
as
Sellers’ attorneys-in-fact and irrevocably instruct any such attorney-in-fact to
execute all or any form(s) of transfer, surrender and/or other documents(s)
at
such attorney-in-fact’s direction in relation to the Company Shares in favor of
Purchaser or such other person or persons as Purchaser may direct and to
do all
such acts and things as may in the opinion of such attorney-in-fact be
reasonably necessary or reasonably expedient for the purposes of, or in
connection with, the acceptance of the purchase described in Section 2.1
and to
surrender or vest in Purchaser or its nominee(s) the Company Shares;
(c) To
the
extent they have not previously done so, Sellers shall, and shall cause
the
Company to, procure that a board meeting of the Company shall be held at
which
(i) there shall be submitted and accepted the resignations or otherwise
arranged
the removals of directors and officers referred to in Section 4.4(b); (ii)
there
shall be appointed as directors and officers of the company the nominees
of
Purchaser specified in Section 4.4(b); (iii) the transfers of the Company
Shares
contemplated by this Agreement shall be approved and Purchaser and/or its
nominee(s) shall be registered as the holders of the Company Shares and
new
share certificates shall be executed and issued accordingly; (iv) all existing
instructions of the Company to its banks shall be cancelled and new instructions
given in such form as Purchaser may require; and (v) the registered office
of
the company will be changed to Cedar House, 41 Cedar Avenue, Hamilton HM
EX,
Bermuda, all in form and substance reasonably satisfactory to
Purchaser;
(d) To
the
extent they have not previously done so, Sellers shall, or shall cause
the
Company to, procure that the auditors of the Company shall deliver their
written
resignation to Purchaser;
Page
- 93
(e) To
the
extent they have not previously done so, Sellers shall cause Company to
repay to
First Ecom out of Company’s accounts the US$1,336,014 debt and the US$9,401.27
interest obligation currently owed by Company to First Ecom, and Sellers
will
furnish to Company a release in the form attached hereto as Exhibit G of
said
debt and obligation and any and all liens or encumbrances or related
undertakings securing its or their repayment, together with the originals(s)
of
the promissory note or notes evidencing said indebtedness;
(f) Sellers
shall, or shall cause the Company to, deliver to Purchaser the statutory
books
of the Company complete and accurate up to Closing and any company seal(s),
memorandum of association, bye-laws and amendments thereto, name change
certificates and other company filings, and all unused share certificates
of the
Company;
(g) To
the
extent they have not previously done so, Sellers shall, or shall cause
the
Company to, deliver to Purchaser the unaudited financial statements of
the
Company comprising the balance sheet as at, and the year-to-date income
and cash
flow statement for the period ending, September 30, 2001;
(h) To
the
extent they have not previously done so, Sellers shall, or shall cause
their
appropriate Affiliates to, procure that their names and the names of their
Affiliates that are the same as or confusingly similar to the Company’s name be
changed so that they are not, it being understood that “FirstEcom.Com” shall not
be considered as such for this purpose, and Seller shall deliver to Purchaser
(i) a copy of the instruments or documentation necessary to do so as certified
by the appropriate Governmental Authority no earlier than five (5) business
Days
prior to the Closing Date or in the event that such certifications cannot
with
reasonable diligence be obtained prior to the Closing Date, (ii) evidence
reasonably satisfactory to Purchaser that applications to accomplish same
have
been duly filed and are being diligently pursued;
(i) To
the
extent they have not previously done so, Sellers shall, and shall cause
the
Company to, execute and deliver an agreement in the form of Exhibit H attached
hereto and made a part hereof for the purpose of assigning, conveying and
transferring to First Ecom or its designee all of the Company’s right, title and
interest, if any, in and to the logo attached to said Exhibit H, which
logo is
and shall remain First Ecom’s or its designee’s property;
(j) To
the
extent they have not previously done so, Sellers shall, or shall cause
the
Company to, obtain and deliver to Purchase an accurate and complete copy
of the
permission in writing granted form the Bermuda Monetary Authority for the
transfer of all the Company Shares from FEDS Acquisition to Purchaser
contemplated by this agreement, all in form and substance reasonably
satisfactory to Purchaser;
(k) Sellers
shall provide confirmation reasonably satisfactory to Purchaser in connection
with the license currently held by the Company under Section 114 of the
Companies Act to the effect that (i) said license shall continue in full
force
and effect following the transfer of control of the Company from FEDS
Acquisition to Purchaser contemplated hereunder, and (ii) that the condition
in
said license previously limiting to “financial institutions” the range of
customers to whom the Company would be permitted to render services has
been or
will be removed;
Page
- 94
(l) To
the
extent they have not previously done so, Sellers shall, and shall cause
the
Company to, procure that the Bye-laws of the Company be amended in the
following
respects; (i) amend Bye-law 61, which still requires beneficial ownership
by
Bermudians in the Company to be at least 60% and a non-Bermudian holding
more
than 40% of the shares of the Company to dispose of the excess, so that
the
Bye-laws reflect and permit the ownership by FEDS Acquisition (a non-Bermudian)
of all the Company Shares and so that they further permit the transfer
of those
Company Shares from FEDS Acquisition to Purchaser, and (ii) amend Bye-law
64,
which currently provides that the Board of Directors has absolute discretion
without assigning any reason not to register any share transfer, so that
such
discretionary power is removed, all in form and substance reasonably
satisfactory to Purchaser;
(m) To
the
extent they have not previously done so, Sellers shall cause the Company
to
execute and deliver to FEDS Asia an assignment in the form of Exhibit I
attached
hereto and made a part hereof for all purposes of all the Company’s right, title
and interest in and to that certain E-commerce Transaction Processing Agreement
dated June 22, 2000 entered into between the Company and Wing Hang Bank
and that
certain Services Agreement for E-commerce Transaction Processing dated
November30, 2000 between the Company and International Bank of Asia Limited, all
in form
and substance reasonably satisfactory to Purchaser;
(n) To
the
extent they have not previously done so, Sellers shall cause the Company
to
furnish to the “Customer” under that certain Transaction Processing Agreement
made effective 20 April 2001 and entered into by and between the Company
and
Planet Group, Inc. a letter in form and substance reasonably satisfactory
to
Purchaser regarding the provisions of Section 14 of that Agreement;
and
(o) To
the
extent they have not previously done so, Sellers shall, and shall cause
the
Company to, pay to the appropriate governmental Authority any and all applicable
Bermuda stamp duties incurred with respect to the execution and delivery
of all
of the contracts, agreements and other instruments listed in Schedules
1 or 2,
the employment-related agreements specified in Section 4.17(b) and the
Lease
specified in Section 4.12 (a) below, including without limitation any fines
or
penalties for delinquent or insufficient filing or payment with respect
thereto.
2.6
Purchaser’s
Actions at the Closing. At the
Closing:
(a)
Purchaser
shall deliver to Sellers:
(i) (A) the
Articles of Association of Purchaser, certified as of no earlier than five
(5)
Business Days prior to the Closing Date by Mr. G.C.A. Smeets, a civil law
notary
residing in Curacao, Netherlands Antilles, and (B) a certificate of the
said Mr.
G.C.A. Smeets dated as of no earlier than five (5) Business Days prior
to the
Closing Date as to the due incorporation and good standing of
Purchaser;
(ii) certificate
of a Managing Director of Purchaser dated the Closing Date and certifying
(A)
that the Articles of Association of Purchaser has not been amended since
the
date of the last amendment referred to in the Certificate delivered pursuant
to
clause (i) (A) above, (B) that attached thereto is a true and correct copy
of
all resolutions adopted by the Board of Managing Directors of Purchaser
authorizing the execution, delivery and performance of this Agreement and
the
ancillary agreements and transactions contemplated hereby and that such
resolutions have not been amended or modified and are in full force and
effect
in the form adopted, and (C) to the incumbency and specimen signature of
each
officer of Purchaser executing this Agreement and each ancillary agreement
to be
executed by purchaser pursuant to this Agreement and any certificate of
instrument furnished pursuant hereto; and
Page
- 95
(b) Purchaser
shall deliver to Seller the portion of the Consideration to be paid at
Closing
in the form and manner described in Section 2.3 above.
ARTICLE
III - REPRESENTATIONS AND WARRANTIES
REGARDING
SELLERS
Sellers,
acting jointly and severally, hereby represent and warrant to Purchaser
as
follows:
3.1 Organization.
Each of First Ecom and FEDS Acquisition is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Nevada
and
has all requisite corporate power and authority to own, lease and operate
its
properties and to carry on its business as now being conducted. Each of
FEDS
Asia and First Asia is a corporation duly incorporated, validly existing
and in
good standing under the laws of Hong Kong and has all requisite corporate
power
and authority to own, lease and operate its properties and to carry on
its
business as now being conducted. First Ecom is the registered and beneficial
owner of all of the issued and outstanding share capital of FEDS Acquisition,
First Asia and FEDS Asia.
3.2 Authority.
Each Seller has all requisite corporate power and authority to enter into
this
Agreement and to perform its obligations hereunder and consummate the
transactions contemplated hereby. Each Seller’s execution and delivery of this
Agreement, the performance by such Seller of its obligations hereunder
and the
consummation of the transactions contemplated hereby have been duly and
validly
authorized by all necessary corporate action on the part of such
Seller.
FEDS
Acquisition has the full power to assign, transfer and deliver the Company
Shares hereunder, free and clear of all covenants, conditions, voting trust
arrangements, liens, encumbrances, equities, security interests, restrictions,
claims, charges, and other claims or rights of third parties (“Encumbrances”).
This Agreement, and each agreement, document or other instrument required
to be
executed and delivered hereunder, when executed and delivered by all Sellers
named as a party thereto, will constitute the valid and legally binding
obligation of each such named Seller, legally enforceable against such
Seller in
accordance with its terms, subject to the effects of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the
rights of creditors generally, limitations imposed by applicable law or
equitable principles upon the specific enforceability of any of the remedies,
covenants or other provisions of this Agreement, and upon the availability
of
injunctive relief or other equitable remedies. FEDS Acquisition acquired
the
Company Shares from First Ecom in a bona fide transaction for fair
consideration, such transfer was duly and validly authorized by all necessary
corporate action on the part of First Ecom and FEDS Acquisition, and such
transfer is property stamped and not subject to any executory agreement,
condition subsequent or other covenant or condition that would reserve
to First
Ecom or any other party the right to rescind or otherwise avoid such
transfer.
Page
- 96
3.3 No
conflict with Other Instruments. Each Seller’s execution and delivery of, and
performance of its obligations under, this Agreement, each agreement, document
or other instrument required to be executed and delivered hereunder, and
the
transactions contemplated hereby and thereby (i) will not result in any
violation of, conflict with, constitute a breach, violation or default
(with or
without notice of lapse of time, or both), give rise to a right of termination,
cancellation, forfeiture or acceleration of any obligation or loss of any
benefit under, or result in the creation or encumbrance on any of the properties
or assets of any Seller or the Company or any of its or their subsidiaries,
under (x) any provision of the certificate of incorporation, bylaws, or
other
charter or government document of any Seller or (y) any agreement, arrangement,
contract, understanding, note, mortgage, indenture, lease, franchise, license,
permit or other instrument to which any Seller is a party or by which any
Seller
or any of its properties or assets is bound, (ii) will not conflict with,
or
result in any breach or violation of, any Legal Requirement applicable
to Seller
or its properties or assets, or (iii) will not result in the imposition
of any
Encumbrance upon the Company Shares, except, in the case of clauses (i)
(y) and
(ii), for any of the foregoing that would not, individually or in the aggregate,
have a material adverse effect on Sellers and their subsidiaries, taken
as a
whole, or that could not result in the creation of any material lien, charge
or
encumbrance upon any assets of any Seller or any of its subsidiaries, or
that
could not prevent, materially delay or materially burden the transactions
contemplated by this Agreement.
3.4 Ownership
of Securities, FEDS Acquisition will sell the Company Shares pursuant to
this
Agreement with full title guarantee (as construed under Bermuda law) and,
upon
consummation of the purchase contemplated by this Agreement, Purchaser
will
acquire such Company Shares free and clear of all liens, charges, encumbrances,
equities and claims of third parties of any description with full title
guarantee and with the benefit of all other rights and advantages belonging
to
or accruing on such Company Shares. No Seller is a party to or otherwise
subject
to, any trust, voting trust or agreement, proxy or other agreement, arrangement
or understanding, between or among any persons that affects or relates
to the
voting or giving of written consent with respect to the Company Shares
or any
other outstanding security of the Company, the election of directors, the
appointment of officers or other actions of the board of directors of the
Company (the “Board of Directors”) or the management of the
Company.
3.5 Sale
Entirely for Own Account. This Agreement is made with each Seller in reliance
upon Sellers’ representation to Purchaser, which by the execution of this
Agreement Seller hereby confirm, that the Installment Payments to be received
by
FEDS Acquisition will be acquired for investment for FEDS Acquisition’s own
account, not as a nominee or agent, and not with a view to the resale or
distribution of any part thereof, and that no Seller has any present intention
of selling, granting any participation in, or otherwise distributing the
same
other than in each case pursuant to an appropriate exemption from registration
under applicable law. By executing this Agreement, Sellers further represent
that no Seller has any contract, undertaking, agreement or arrangement
with any
person to sell, transfer or grant participations to such person or to any
third
person, with respect to any of the Installment Payments.
Page
- 97
3.6 Reliance
Upon Seller’s Representations. Each Seller understands that the Installment
Payments are not registered under the United States Securities Act of 1933
(the
“Securities Act”) on the ground that the sale provided for in this agreement and
the issuance of securities hereunder is exempt from registration under
the
Securities Act pursuant to Section 4(2) thereof and/or Regulation S promulgated
thereunder, and that Purchaser’s reliance on such exemption is based on every
Seller’s representations set forth herein. Each Seller realizes that the basis
for the exemption may not be present if, notwithstanding such representations,
any Seller has in mind merely acquiring the Installment Payments for a
fixed or
determinable period in the future, or for a market rise, or for sale if
the
market does not rise. No Seller has any such intention.
3.7 Restricted
Securities. Each Seller understands that the Installment Payments may not
be
sold, transferred or otherwise disposed of or in the United States without
registration under the Securities Act or an exemption therefrom, and that
in the
absence of an effective registration statement covering the Installment
Payments
or an available exemption from registration under the Securities Act, the
Installment Payments must be held indefinitely. In particular, each Seller
is
aware that the Installment Payment may not be sold pursuant to Rule 144
promulgated under the Securities Act unless all of the conditions of that
Rule
are met. In this connection, each Seller represents that such Seller understands
that under Rule 144, the Installment Payments must be held for at least
one year
after purchase thereof from Purchaser prior to resale (and possibly longer
under
applicable regulations) and that, under certain circumstances, the conditions
for use of Rule 144 include the availability of public current information
about
Purchaser, that sales be effected through a “broker’s transaction” or in
transactions with a “market maker,” and that the number of securities in respect
of the Installment Payments being sold not exceed specified limitations.
Such
public current information about Purchaser for purposes of Rule 144 is
not now
publicly available and may not be in the future.
3.8 Governmental
Consents and Notices. No consent, approval, order or authorization of,
or
registration, declaration of, notice to or qualification or filing with,
any
Governmental Authority or regulated public securities exchange or other
organized public market on which the shares of any such Seller are traded
(including but not limited to Nasdaq), whether domestic or foreign, is
required
to be obtained or submitted by or on behalf of or with respect to any Seller
in
connection with the execution and delivery of this Agreement by any Seller
or
the consummation by any Seller of the transactions contemplated hereby
that has
not been, or will not prior to Closing have been, duly obtained and/or
submitted, as applicable. No consent, approval, order or authorization
of, or
registration, declaration of, notice to or qualification or filing with,
any
Governmental Authority or regulated public securities exchange or other
organized public market on which the shares of any such Seller are traded
(including but not limited to Nasdaq), whether domestic or foreign, was
required
to be obtained or submitted by or on behalf of or with respect to any Seller
in
connection with First Ecom’s transfer of Company Shares to FEDS Acquisition that
has not been duly obtained and/or submitted, as applicable.
3.9 Litigation.
There is no (a) claim, action, suit or proceeding pending or, to the knowledge
of Sellers and the Company, threatened against or relating to any Seller
or any
of its or their subsidiaries before any Governmental Authority or arbitration
tribunal, or (b) outstanding judgment, order, writ, injunction or decree,
or
application, request or motion therefor, of any court, governmental agency
or
arbitration tribunal in a proceeding to which any Seller or any of its
or their
subsidiaries was or is a party that would individually or in the aggregate,
either impair any Seller’s ability to consummate the transactions contemplated
by this Agreement or have a material adverse effect on Sellers and their
subsidiaries taken as a whole.
Page
- 98
3.10 Insolvency.
Each of the Sellers is unable to pay its liabilities as they come due,
and none
is otherwise “insolvent” under bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting the rights of
creditors generally that are applicable to such Seller or its assets. No
order
has been made, petition presented, resolution passed or meeting convened
for the
winding up of any Seller or for an administration order in respect of any
Seller; no receiver, receiver and manager, administrative receiver or liquidator
has been appointed of the business or the whole or any part of the assets
or
undertaking of any Seller; there are no circumstances that now or with
the
passage of time may give rise to the appointment of any such receiver,
receiver
and manager, administrative receiver or liquidator, and, to the knowledge
of
Sellers and the Company, no such order, petition, resolution, meeting or
appointment is pending or threatened.
3.11 No
Misleading Statements. No representation or warranty made herein by any
Seller
contains any statement of a material fact that is either untrue or, in
the light
of the circumstances under which they are made, misleading.
3.12 Brokers
or Finders. Neither any Seller nor any of their officers, directors, employees
or shareholders has employed any broker or finder in connection with the
transactions contemplated by this Agreement, nor have they incurred, and
they
shall not incur, directly or indirectly, any liability for any brokerage
or
finders’ fees or agents’ commissions or any similar charges in connection with
this Agreement or any transaction contemplated hereby.
Sellers,
acting jointly and severally, hereby represent and warrant to Purchaser
as
follows:
4.1
Organization.
(a) The
Company is a local company incorporated under a private act known as “The
Rosebank Investment Company Act, 1957” (the “EDS Act”) by a memorandum of
association deposited 10 September 1957 (the “Memorandum of Association”) under
the laws of Bermuda, both of which remain in full force and effect, as
amended
to the date hereof, under the Companies Act. True, complete and accurate
copies
of the Company’s Memorandum of Association and Bye-laws, as amended to the date
hereof, and of the minutes of all of directors’ and shareholders’ meetings, and
the shareholders’ registry, complete and accurate as of the date hereof, have
been delivered to Purchaser or its counsel. Such documents contain full
details
of the rights and restrictions attached to the share capital of the Company,
and
all directors’ and shareholders’ resolutions reflected in the said minutes have
been duly adopted as resolutions of the Company, and have not, except as
disclosed therein, been rescinded or modified.
Page
- 99
(b) The
Company holds a validly issued and currently in effect license from the
Registrar of Companies under Section 114 of the Companies Act permitting
ownership of up to 100% of the Company Shares by FEDS Acquisition, which
license
(i) contains no conditions, and is subject to no express or implied limitations
by reason of the representations made or other information provided in
the
course of making application for such license, that would render the license
invalid or otherwise jeopardize its scope or continued validity by reason
of the
transfer of the Company Shares to Purchaser contemplated hereby, and (ii)
is
current in all payments of fees required for maintenance of the license,
including without limitation the required 2001 annual fee of
BD$1000.00.
4.2 Qualification;
Location of Asset and Operations. The Company has all requisite power and
authority to own, lease and operate its respective properties and to carry
on
its business as and where now being conducted. The Company is qualified
to
conduct business in its jurisdiction of incorporation and in each such
other
jurisdiction where the nature of its assets or the conduct of its business
requires it to be so qualified. The Company has no assets having a situs
outside
of Bermuda and does not have a branch, agency or place of business or any
permanent establishment (as that expression is defined in the relevant
double
taxation relief orders current at the date of this agreement) outside Bermuda
and is not required to be qualified to do business outside Bermuda.
4.3 Register
of shareholders and meetings. The register of shareholders an statutory
books of
the company contain complete, true and accurate records of the shares and
shareholders of the Company and all the other information which they are
required to contain under the Companies Act up to the date of this Agreement,
and comply with all the requirements of the Companies Act and all returns,
particulars, resolutions and other documents required to be delivered by
the
Company to the Registrar of Companies have been duly delivered with the
required
time limits and no fines or penalties are outstanding or known to be due.
The
Company has not received notice of any application or intended application
for
the modification of its register of shareholders that is not already reflected
in the entries recorded therein. The Company has held all regular and special
meetings of shareholders required of it under the Companies Act or, to
the
extent of any delinquency in the convening or completion of such meetings,
such
delinquencies have been cured by application to and sanction by the Registrar
of
Companies, the convening and completion of such meetings, and the payment
in
full of any resulting fines, penalties or assessments. No application has
been
made by a shareholder or creditor of the Company or any other person to
wind-up
the affairs of the Company on account of any such delinquency. All transfers
of
shares of the Company taking place prior to the date hereof have been properly
stamped and have, received all necessary or appropriate approvals of the
Bermuda
Monetary Authority.
4.4
Board
of Directors and Officers.
(a) As
of
August 31, 2001, (i) the number of directors comprising the Company’s Board of
Directors was six (6), (ii) three of the directors positions were vacant,
(iii)
the directors serving in the remaining three positions were Gregory Pek,
J.
David Lema and Ian G. Robinson and (iv) the President and Vice President
positions were held by J. David Lema and Gregory Pek, respectively. Each
of the
aforenamed directors and officers was duly appointed in accordance with
the
Company’s Memorandum of Association and Bye-laws, and in accordance with the
Companies Act, and none of them has since their respective appointments
resigned
or offered his or her resignation as such. Any other person who previously
served as a director of the Company has duly and validly resigned or been
removed from that position, or has vacated the position upon the due expiration
of his or her term, and no basis for any claim against the Company, its
Affiliates or its or their directors, officers or shareholders exists,
and none
has been asserted, by or on behalf of any previous directors arising out
of such
previous service or holding of office or the termination thereof, however
occasioned.
Page
- 100
(b) Further,
effective as of the Closing, Sellers and the Company’s Board of Directors have
taken or caused to be taken all necessary and appropriate actions to (i)
reduce
the number of positions in the Company’s Board of Directors from six to two,
(ii) remove or secure the resignations of Gregory Pek and Ian G. Robinson
from
their positions as directors of the Company without any claim for compensation
or otherwise and replace them with Purchaser’s nominee Michael Sanchez, and
(iii) remove or secure the resignation of Gregory Pek from his position
as Vice
President of the Company without any claim for compensation or otherwise
and
replace him with Purchaser’s nominee Michael Sanchez, with the result that the
Company’s Board of Directors will consist of two directors, namely J. David Lema
and Michael Sanchez.
4.5
Capital
Structure.
(a) The
authorized share capital of the Company consists of 5,000,000 ordinary
shares
having a par value of BD1.00 per share, of which 3,000,000 of such shares
are
issued and outstanding as of the date hereof, which issued and outstanding
shares are recorded and duly registered in the Company’s register of
shareholders in the name of FEDS Acquisition (the “Company Shares”). All issued
Company Shares are validly issued and fully paid, have been issued in compliance
with applicable Legal Requirements, and, without limiting the provisions
of
Section 4.5(b) below, are not subject to any rights of pre-emption, redemption,
repurchase, right of first refusal, co-sale right, right of participation,
right
of first offer, option or other restriction on transfer, including without
limitation any such rights that may arise or have existed under the Memorandum
of Association or Bye-laws of the Company, the Shareholders’ Agreement relating
to the Company dated May 26, 2000 by and among The Bank of Bermuda Limited,
First Ecom and the Company (the “Shareholders’ Agreement”), or the Share
Purchase and Sale Agreement between The Bank of Bermuda Limited and First
Ecom
dated June 18, 2001 (the “Share Purchase and Sale Agreement”), or otherwise in
relation to the sale and purchase of the same hereunder. The rights, preferences
and privileges of the Company Shares are as set forth in the Company’s
Memorandum of Association and Bye-laws. The Company has not purchased any
of its
own shares. As of the date hereof, without limiting the provisions of Section
4.5(b) below, there are no other shares or other equity securities of the
Company and no other options, warrants, calls, conversion rights, commitments
or
agreements of any character to which the Company is a party or by which
the
Company may be bound that do or may obligate the Company to issue, deliver
or
sell, or cause to be issued, delivered or sold, additional shares in the
Company’s share capital or securities convertible into or exchangeable for the
Company’s share capital or that do or may obligate the Company to grant, extend
or enter into any such option, warrant, call, conversion right, commitment
or
agreement.
(b) With
respect to that certain Transaction Processing Agreement dated 20 April
2001 and
entered into by and between the Company and Planet Group, Inc., Company
has
issued a letter to the “Customer” thereunder in form and substance reasonably
satisfactory to purchaser providing notice of the transfer of shares
contemplated hereby and certain other matters in connection with the provisions
of Section 14 of said agreement.
Page
- 101
(c) Nothing
in this Agreement shall oblige Purchaser to buy any issued and outstanding
shares of the Company or otherwise complete this Agreement unless the sale
and
purchase of all such issued and outstanding shares in the Company is completed
and transferred to Purchaser simultaneously.
(d) FEDS
Acquisition owns or holds the entire beneficial interest in the Company
Shares
of which it is the holder of record, and such shares are not subject to,
and the
Company is not a party to or otherwise subject to, any trust, voting trust
or
agreement, proxy or other agreement, arrangement or understanding, between
or
among any persons that affects or relates to the voting or giving of written
consent with respect to the Company Shares or any other outstanding security
of
the Company, the election of directors, the appointment of officers or
other
actions of the Board of Directors of the Company or the management of the
Company.
4.6Subsidiaries;
Equity Investments. The Company does not now have and, except to the extent
of
any such subsidiaries or other controlled companies as the Company may
have had
prior to its change of name from “Rosebank Investment Company Limited” to “First
Ecommerce Data Services Limited” on 12 November 1999, has never had any other
subsidiaries or companies controlled by the Company and does not own and,
except
to the extent of any such equity or other controlling interests as the
Company
may have had prior to its change of name from “Rosebank Investment Company
Limited” to “First Ecommerce Data Services Limited” on 12 November 1999, has
never owned any equity interest in, or controlled, directly or indirectly,
any
other corporation, partnership, joint venture, trust, firm or other
entity.
4.7 No
conflict with Other Instruments.
(a)
Except
as
otherwise specifically stated in Section 4.7(b), 4.7(c) or 4.7(d) below,
the
execution, delivery and performance of this Agreement and the transactions
contemplated hereby (I) will not result in any violation of, conflict with,
constitute a breach, violation or default (with or without notice or lapse
of
time, or both) under, give rise to a right of termination, cancellation,
forfeiture or acceleration of any obligation or loss of any benefit under,
or
result in the creation of encumbrance on any of the properties or other
assets
of any Seller or the Company pursuant to, (i) any provision of the Company’s
Memorandum of Association and/or Bye-laws or other organizational documents,
or
(ii) any agreement, contract, understanding, note, mortgage, indenture,
lease,
franchise, license, permit or other instrument to which the Company is
a party
or by which the properties or assets of the Company is bound, including
without
limitation those contracts listed in Schedules 1 or 2 attached hereto or
specified in Section 4.17(b) below, or (2) conflict with or result in any
breach
or violation of any Legal Requirement applicable to the Company or its
properties or assets.
(b) Each
of
(i) that certain E-commerce Transaction Processing Agreement dated 12 June
2001
and entered into by and between the Company and Provident Bank and Trust
of
Belize Limited and (ii) that certain Transaction Processing Services Agreement
dated 7 August 2001 and entered into by and between the Company and DPI
Merchant
Services, Inc. (signed for an on behalf of Data Processors International
Inc.),
contain provisions entitling either party to terminate the agreement upon
a
change in control of the other party. Neither of those two agreements has
ever
generated, nor do they currently generate, a material portion of the Company’s
net income or revenues.
Page
- 102
(c) Further,
the Company’s policy of Professional Liability insurance maintained through
certain Lloyd’s of London syndicates and underwriters and dated 30 March 2000
entitles Lloyd’s to notice of any merger or acquisition by or of the Company,
and the Company has given all notice and taken such further action as is
required of it under said policy in connection with this Agreement and
the
transactions contemplated hereby.
(d) The
Mastercard Member Service Provider TPP Agreement dated 4 November 1999
and
entered into by and between The Bank of Bermuda Limited (as “Processor”) and
MasterCard International Incorporated, under which the Company has now
succeeded
to all the rights and obligations of The Bank of Bermuda Limited as Processor,
contains a provision obligating the Processor to notify MasterCard International
Limited of any “material changed circumstances in organizational structure”
experienced by the Processor.
4.8 Governmental
Consents and Notices. No consent, approval, order or authorization of,
or
registration, declaration of, notice to or qualification or filing with
any
Governmental Authority or any regulated public securities exchange or other
organized public market on which the shares of any Seller are traded (including
but not limited to Nasdaq), whether domestic or foreign, is required to
be
obtained or submitted by or on behalf of or with respect to the Company
in
connection with the execution, delivery and performance of this Agreement
or the
consummation of the transactions contemplated hereby that has not been,
or will
not prior to Closing have been, duly obtained and/or submitted, as
applicable.
4.9 Financial
Statements. A complete and accurate copy of the Company’s income statement,
balance sheet and statement of cash flow for the period from January 1,2000 to
December 31, 2000, together with the associated auditors’ and directors’ reports
and notes thereto (“Audited Financial Statements”), together with the Company’s
internal monthly income statements, balance sheets and statements of cash
flow
statement for the periods from January 1, 2001 through August 31, 2001
(the
“Unaudited Financial Statements”) have been furnished to Purchaser (the Audited
Financial Statements and the Unaudited Financial Statements being herein
referred to collectively as the “Financial Statements”). The Financial
Statements were prepared in accordance with applicable Companies Act
requirements and United States generally accepted accounting principles
consistently applied, and present fairly in all material respects the financial
condition as at the dates of such statements and results of operations
of the
Company for the periods covered thereby, except that the Unaudited Financial
Statements may be subject to normal and recurring year-end adjustments.
4.10
Accounting
and Other Records
(a) All
the
accounts, books, ledgers and financial and other records of whatsoever
kind of
the Company (including all invoices) have been kept in accordance with
applicable Companies Act requirements and are in the possession of the
Company
or under its control. Except as stated in Section 4.10(b) below, none of
the
Company’s records, systems, controls, data or information are recorded, stored,
maintained, operated or otherwise wholly or partly dependent on or held
by any
means (including any electronic, mechanical or photographic process whether
computerized or not) which (including all means of access thereto and therefrom
are not under the exclusive ownership and direct control of the
Company.
Page
- 103
(b) Two
Sun
E250 servers and related equipment and software owned and operated by FEDS
Asia
have been used in connection with the Company’s fulfillment of its obligations
under the agreements referred to in Section 2.5(m). Upon completion of
the
assignment referred to in Section 2.5(m). Upon completion of the assignment
referred to in Section 2.5(m), such use will no longer be necessary in
order for
the Company to continue to render to FEDS Asia in support of those agreements
the services it has to date been obligated to render to Wing Hang Bank
and
International Bank of Asia under those agreements, and will no longer be
available to the Company.
4.11 Absence
of Changes. Except as otherwise expressly contemplated by this Agreement,
since
August 31, 2001, the Company’s business has been conducted only in the ordinary
and usual course without any interruption in the nature, scope or manner,
and
without limiting the generality of the foregoing:
(i)
Except as disclosed in this Article IV, there have been no changes in the
Company’s properties, employees, obligations or liabilities of the Company or in
its relations with customers, vendors, lessors, licensors or other business
relationships that, in the aggregate, have had or may be reasonably expected
to
have a material adverse effect on the Company;
(ii)
The
Company has not issued, or authorized for issuance, or entered into any
commitment to issue, any equity security, bond, note or other
security;
(iii)
Except as disclosed in this Article IV, the Company has not incurred additional
debt for borrowed money, or incurred any obligation or liability, except
in the
ordinary course of business consistent with past practice and, in any event,
not
in excess of US$10,000 individually or US$30,000 in the aggregate or the
equivalent in any other currency;
(iv)
The
Company has not discharged any obligation or liability, or discharged,
settled
or satisfied any claim, lien or encumbrance, except for current liabilities
in
the ordinary course of business consistent with past practice and, in any
event,
not in excess of US$10,000 for any single occurrence or US$30,000 in the
aggregate or the equivalent in any other currency;
(v)
Except for the payment to Seller of US$1,336,014 in satisfaction of the
Company’s intercompany debt and US$9,401.27 intercompany interest obligation to
Seller as contemplated by Section 2.5(e) above, the Company has not declared
or
made any dividend, payment or other distribution to its shareholders or
any
Affiliate of its shareholders or otherwise on account of any outstanding
equity
interest in the Company;
(vi)
The
Company has not purchased, redeemed or otherwise acquired or committed
itself to
acquire, directly or indirectly, any of its shares;
(vii)
The
Company has not conveyed or disposed of, or agreed to conveyor dispose
of, by
sale, assignment, lease, license or otherwise, or mortgaged, pledged or
otherwise encumbered, any of its intangible assets or properties;
Page
- 104
(viii)
The Company has not mortgaged, pledged, or otherwise encumbered any of
its
tangible assets or properties;
(ix)
The
Company has not disposed of, or agreed to dispose of, by sale, lease, license
or
otherwise, any tangible asset or property, except in the ordinary course
of
business consistent with past practice; -
(x)
The
Company has not written off any debts, no debt has been released by the
Company
on terms under which the debtor pays less than the book value of its debt,
and
no debt owing to the Company has proved to any extent to be
unrecoverable;
(xi)
The
Company has not purchased or agreed to purchase or otherwise acquire any
securities of any corporation, partnership, joint venture, firm or other
entity;
(xii)
Except as disclosed in this Article IV or in Schedule 5 attached hereto,
the
Company has not made any expenditure or commitment for the purchase,
acquisition, construction or improvement of a capital asset, except in
the
ordinary course of business consistent with past practice and, in any event,
not
in excess of US$5,000 for any single item or US$15,000 in the aggregate
or the
equivalent in any other currency;
(xiii)
The Company has not entered into any contract or commitment (whether in
respect
of capital expenditure or otherwise) on terms which will allow for less
than
full recovery by the Company of costs and overheads or which is of a 10ng-tenn
nature, or which involves or could involve an ob1igation in excess of US$10,000
or the equivalent in any other currency; and for this purpose a long-term
contract or commitment is one which will not be performed in accordance
with
itsterms
within three months after the date it was entered into or undertaken or
which is
incapable of termination by the Company on three months’ notice or
less;
(xiv)
The
Company has not adopted or amended any bonus, incentive, profit-sharing,
stock
option, stock purchase, pension, retirement, deferred-compensation, severance,
life insurance, medical or other benefit plan, agreement, trust, fund or
arrangement for the benefit of employees of any kind whatsoever, nor entered
into or amended any agreement relating to employment, services as an independent
contractor or consultant, or severance or termination pay, nor agreed to
do any
of the foregoing;
(xv)
Except as disclosed in this Article IV, neither any Seller nor the Company
has
effected or agreed to effect any change in the Company’s directors, officers or
employees;
(xvi)
Except as contemplated in Section 2.5, neither any Seller nor the Company
has
effected or committed itself to effect any amendment or modification to
the
Company’s Memorandum of Association or Bye-laws;
(xvii)
The Company has not lost any source of supply that is material to the business
of the Company;
Page
- 105
(xviii)
The Company has not disposed of or agreed to dispose of any asset for a
consideration payable by installments where any installment remains
unpaid;
(xix)
All
cash and payments of any kind received by the Company have been credited
to the
Company’s accounts with its bankers;
(xx)
The
Company has paid its creditors in accordance with the same policy as that
maintained during prior periods.
(xxi)
None of the assets of the Company has been diminished by the wrongful act
of any
person;
(xxii)
There has been no material change in the working capital requirements of
the
Company;
(xxiii)
Except for changing market conditions prevailing in the industry generally
to
which the Company and its competitors are subject, there has otherwise
been no
material adverse change in the Company or its business, assets, operations
or
financial condition; provided, however, that transaction volumes from The
Bank
of Bermuda Limited have declined significantly since August 31,2001.
4.12 Real
Property.
(a) Lease.
The Company is a party to that certain Lease (herein, the “Lease”) dated 18th
June 2001 between J.H.R. Properties Limited (“Landlord”) and the Company
(“Tenant”) and Carecorp Limited (“Agent”) covering part of the fourth floor of
the premises known as “The Emporium” located at 69 Front Street, Hamilton,
Bermuda (the “Premises”), which provides for a- two year fixed term tenancy
ending the 31st
of May
2003, with an option to renew for a further two years which must be (but
has not
yet been) exercised on or before February 28, 2002, a complete and accurate
copy
of which has previously been furnished to Purchaser by Seller and/or the
Company. Under the Lease, the Company is obliged to pay rent fixed at
BD$71,610.00 per annum payable monthly in the sum of BD$5,967.50,
with
a
service charge payable monthly at the rate of BD$17.35 per square foot,
but with
provision for an accounting by the Landlord at the end of each year of
the
tenancy. The Lease is in full force and effect, valid, enforceable in accordance
with its terms subject to the effects. of applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the rights of
creditors and the effect or availability of rules of law governing specific
performance, injunctive relief or other equitable remedies. The Lease comprises
the only real property in which the Company has an interest and which is
used in
connection with its business. The Premises are occupied or used by Company
under
the Lease, and the terms of that lease permit occupation or use for the
purposes
for which the Company currently uses the Premises and contemplates future
use of
the Premises. Neither the Premises nor the Company’s occupancy of the Premises
is in violation of any applicable Legal Requirements, and the Company has
not
received any notice restricting the use and enjoyment of the Premises that
is
inconsistent with the Company’s current and contemplated future use of the
Premises. .
(b) Encumbrances.
(i)
The
Lease is held by Company free from any mortgage, debenture, charge, or
other
encumbrance securing the repayment of monies or other obligation or liability
of
the Company or any other person, and neither the Lease nor the Premises
covered
thereby is
subject
to any option, right of pre-emption or right of first refusal.
Page
- 106
(ii)
The
Company has not assigned its interest in the Lease to any other party,
whether
an Affiliate of the Company or otherwise, and the Company has not created
any
further subtenancy or license of its interest in the Lease and there are
no
persons other than the Company in occupation of the Premises.
(iii)
Without limiting any other representation or warranty contained in this
Agreement, the Lease is not subject to any restrictive covenants, stipulations,
easements, profits, rights-of-way, licenses, grants, restrictions, overriding
interests or other rights vested in third parties, and the Company has
not
entered into any agreement or commitment to give or create any of the
foregoing.
(iv)
There are no outstanding actions, disputes, claims or demands between the
Company and any third party affecting the Premises, or any boundaries thereof,
or with respect to any of the rights appurtenant to the Premises as set
out in
the Lease.
(c) Regulatory
Matters. The Premises are not being or intended or required by the Company
to be
used other than for the uses thereof permitted under applicable Legal
Requirements, and all necessary permissions have been obtained or deemed
to have
been granted by applicable Governmental Authorities for the use, alternations,
improvements of the Premises by Company. The Company has satisfied any
charges,
monetary claims and liabilities imposed by reason of the occupancy or use
of the
Premises by the Company under applicable Legal Requirements. The Company
has
received no notice of any outstanding and unobserved or unperformed obligation
with respect to the Premises necessary to comply with any applicable Legal
Requirements.
(d) Compliance
with Lease. The obligations and liabilities imposed and arising under the
Lease
on the Company have been fully observed and performed, and any payments
in
respect of them due and payable by the Company have been duly paid as and
when
due, and no other event has occurred that constitutes, or that with the
giving
of notice or the passage of time would constitute, a default or violation
by the
Company thereunder or, to the knowledge of Sellers and the Company, by
any other
party thereto. The Company has received no notice from the Landlord of
any
breaches of the covenants on its part and the conditions contained in the
Lease
and the last demand (or receipt for rent if issued) was unqualified and
the
Company has not received notice that the Landlord has any intention of
terminating the Lease. All requisite licenses, consents and approvals required
of the Company from the Landlord have been obtained, and the covenants
on the
part of the Company contained in such licenses, consents and approvals
have been
duly performed and observed. The Company has not served any notice on the
Landlord claiming any breach by the Landlord of its obligations under the
Lease,
nor is there any current or, to the knowledge of Sellers and the Company,
threatened dispute with the Landlord regarding the observance of obligations
under the Lease (whether by the Landlord or the Company).
Page
- 107
4.13 Taxation.
(a) The
Company has filed all Tax Returns (as defined below) that it was required
to
file within the requisite time limits, and all such Tax. Returns were correct
and complete in all material respects and were properly made. The Company
has
paid all Taxes (as defined below) that are shown to be due on any such
Tax
Returns within the time limits set out by law and the provisions and reserves
for Taxes set forth in the Financial Statements are sufficient to pay all
unpaid
Taxes of the Company attributable to all periods ended on or before August31,2001, and all Taxes attributable to the period from and after August 31,2001
and continuing through the Closing Date are attributable to the operation
of the
Company in the ordinary course of business. All Taxes that the Company
is or was
required by law to withhold or collect have been duly withheld or collected
and,
to the extent required, have been paid to the proper Taxation Authority.
(b) For
purposes of this Agreement, “Taxes” means all taxes, charges, fees, levies,
duties, imposts or other similar assessments or liabilities, including
without
limitation income, corporation, capital gains, value added taxes, stamp
duties,
and customs duties and excise duties. imposed by Bermuda or any jurisdiction
elsewhere in the world, and any interest, fines or penalties resulting
from,
attributable to or incurred in connection with any tax or any contest or
dispute
thereof and “Taxation” shall be construed accordingly. For purposes of this
Agreement, “Tax Returns” means all returns, declarations, notices, statements,
applications, reports, clearances, or other information required to be
supplied
to a Taxation Authority in connection with Taxes, and ‘‘Taxation Authority”
means any governmental or other fiscal, revenue customs or excise authority,
department, agency, body or office whether in Bermuda or elsewhere in the
world
having authority or jurisdiction to impose or assess in relation to the
Company
for any Taxes. .
(c) No
investigation or other inquiry of any Tax Returns of the Company by any
Taxation
Authority is currently in progress or, to the knowledge of Sellers and
the
Company, threatened or contemplated. There are no matters likely to affect
the
liability of the Company (whether accrued, contingent or future) to taxation
of
any nature whatsoever or to other sums imposed, charged, assessed, levied
or
‘payable or withdrawal of any relief are disputed with the relevant tax
authorities.
(d) The
amount of tax chargeable to the Company during any accounting period ending
before August 31, 2001 was not dependent on any concession, agreement or
other
formal arrangement with any Taxation Authority when such concessions,
agreements, or arrangements are in writing.
(e) All
pension contributions (both employer’s and employee’s) in respect of employees,
officers of the Company and any person(s) who, should have been treated
as such
for these purposes have been duly paid.
(f) The
Company has not at any time:
(i)
reduced its share capital or repurchased, repaid or redeemed shares of
any class
of its share capital or capitalized any profits or reserves or share premium
account in the form of, or in paying up any amounts unpaid on, any shares,
debentures or other securities or agreed or resolved to do any of the foregoing;
or
(ii)
provided capital to any company on terms whereby the company so capitalized
has
in consideration thereof issued shares, loan stock or other securities
where the
terms of any such capitalization were otherwise than by way of a bargain
made at
arms’ length or where the shares, loan stock or other securities acquired are
shown in the Financial Statements at a value in excess of their market
value at
the time of acquisition.
Page
- 108
(g) All
documents in the possession of the Company to which the Company is a party
which
are necessary to prove the title of the Company to its assets or by virtue
of
which the Company has any right have been properly stamped, and for the
avoidance of doubt this includes adjudication if appropriate, and no such
documents which are outside Bermuda would attract stamp duty if they were
brought into Bermuda. All transactions to which the Company is or was a
party
and relating to chargeable securities of the Company have been completed
by duly
stamped documents of transfer.
(h) The
Company is not under any actual or contingent liability to taxation in
respect
of any other person, including but not limited to any other company which
at any
time has been a member of the same group or consortium as the Company or
any
associated company of the Company for taxation purposes.
(i) Since
November, 1999, the Company has at all times been resident for taxation
purposes
in Bermuda is not chargeable to tax or similar duties or imposts in any
jurisdiction other than Bermuda and has never had any permanent establishment
in
any other country.
4.14 Guaranties.
There are no actual or contingent liabilities on the part of the Company
arising
directly or indirectly out of any agreement, contract, lease, sublease,
tenancy,
sub-tenancy, conveyance, transfer, license, deed or any other instrument,
arrangement or understanding in the nature of a guaranty, indemnity or
surety
for the performance or payment by any third party under the terms of that
or any
other instrument, arrangement or understanding;
(a) Except
for Contracts that do not obligate, any party thereto to make payments
or
furnish goods or services valued in excess of US$500 individually or US$5000
in
the aggregate or the equivalent in any other currency,
(i)
Schedules 1 and 2 attached hereto, together with Section 4.17(b), list
all of
the Contracts to which the Company is a party or by which the Company or
itsproperty
or assets are bound, and complete and accurate copies of all of such Contracts
have been furnished to Purchaser,
(ii)
all
of such Contracts are valid, properly and adequately stamped or adjudicated,
and
enforceable in accordance with their respective terms subject to the effects
of
applicable bankruptcy, insolvency~ reorganization, moratorium or other
similar
lawsaffecting
the rights of creditors and the effect or availability of rules of law
governing
specific performance, injunctive relief or other equitable remedies, such
Contracts are in full force and effect, free and clear of any liens or
encumbrances, and no event has occurred that constitutes, or that with
the
giving of notice or the passage of time would constitute, a default or
violation
by the Company thereunder or, to the knowledge of Sellers and the Company,
by
any other party thereto,
Page
- 109
(iii)
the
Company is a party to each of such Contracts and, except as otherwise provided
in Section 2.5(m) above, has not assigned or otherwise transferred any
interest
therein or any of the rights and benefits accruing therefrom,
(iv)
no
third party has notified the Company of any claim, dispute or controversy
with
respect to any of such Contracts, nor has the Company received notice or
warning
of alleged nonperformance, delay in delivery or other noncompliance by
the
Company with respect to its obligations under any of such Contracts, nor,
to the
knowledge of Sellers and the Company as of the date hereof (but except
with
respect to the change in control issue under the contract’ with DPI Merchant
Services, Inc. and Provident Bank and Trust of Belize Limited described
in
Section 4.7(b) above), are there any facts which exist indicating that
any of
such Contracts may be totally or partially terminated or suspended by the
other
parties thereto, and
(v)
except for those Contracts listed in Schedules 1 and 2, there are no other
agreements, understandings or arrangements, whether written or oral, affecting
or relating to the ownership, use or operation by the Company of its assets,
or
the conduct of its business, or the rights or obligations of any party
to such
Contracts.
(b) The
Company has not nor, to the knowledge of Sellers and the Company, has any
of the
employees of the Company, entered into any Contract containing covenants
limiting the right of the Company or such employee to compete in any business
or
with any person, other than the Contracts listed in Section 4.
17(b).
(c) Any
information contained in any materials previously furnished to Purchaser
to the
contrary notwithstanding, the Company has in fact succeeded to all of The
Bank
of Bermuda Limited’s rights and obligations as “Processor” under that certain
Mastercard Member Service Provider Third Party Processor Agreement dated
4
November, 1999 between The Bank of Bermuda Limited and MasterCard International
Incorporated (the “TPP Agreement”), and all MasterCard transactions processed by
the Company have been processed under appropriate authorization from
MasterCard;
4.16 Environmental
Matters.
(a) The
Company is and at all times has been, in compliance with all applicable
Environmental Requirements, including, without limitation, Environmental
Requirements relating to exposures, emissions, discharges, releases or
threatened releases of Hazardous Substances into or on land, ambient air,
surface water, groundwater, personal property or structures (including
the
protection, cleanup, removal, remediation or damage thereof), or otherwise
related to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, discharge or handling of Hazardous Substances or related
to
health and safety of employees and other persons. The Company has not received
any notice of any investigation, claim or proceeding against the Company
relating to any violation or alleged violation on the part of the Company
under
any Environmental Requirements, and the Company is not aware of any fact
or
circumstance that could involve the Company as a party in any litigation,
proceeding, investigation or claim under any Environmental
Requirement.
Page
- 110
(b) The
Company has not disposed of any Hazardous Substances on or about any properties
at any time owned, leased or occupied by the Company in a manner that would
give
rise to liability of the Company under any Environmental Requirements.
The
Company has not itself disposed of any materials at any site being investigated
or remediated for contamination or possible contamination of the
environment.
(c) The
Company has all permits, licenses and approvals required by Environmental
Requirements for their use and occupancy of, and for all their operations
and
activities conducted on, the Premises and. to the knowledge of Sellers
and the
Company, the Company is in full compliance with all such permits, licenses
and
approvals, except where such non-compliance would not have an adverse effect
on
the Company or its business, assets, operations- or financial
condition.
4.17 Employees.
(a) A
complete and accurate list setting forth all employees, contractors and
consultants of the Company as of the date hereof, together with their titles
or
positions, dates of hire, regular work location and current compensation,
current salary and benefits, notice period, confidentiality obligations
and all
other terms and conditions of employment or engagement, including any additional
terms and conditions of employment or engagement, whether contained in
a Company
or staff handbook or otherwise, has previously been furnished to Purchaser
by or
on behalf of Sellers and/or Company.
(b) The
employment contracts or other agreements between the Company and any officer,
director, employee, contractor, consultant or other individual person relating
to the performance of services consist of those with Mr. David Lema as
“Chief
Executive Officer” dated June 18, 2001, Mrs. Leslie Pooley-Maughan as “Chief
Business Officer” dated June 18, 2001, Mr. Kieth Flaherty as “Chief Technology
Officer” dated June. 18, 2001, Ms. Marcy Judd as “Financial Controller” dated
June 19, 2001, Mr. Horst Finkbeiner as “Head of Business Analysts/Project
Management” dated August 2, 2000, Ms. Barbara Gaudette as “Senior Business
Analyst” dated June 19, 2001, Mr. Arrigo Merlo as “Client Relationship Manager”
effective as of June 29, 2000, Mr. Jason Taylor as “Senior Analyst Programmer”
effective as of June 19, 2001, Mr. David Petty as “Business Analyst” effective
as of July 9, 2001, Ms. Deborah L.A. King as “Executive Administrative
Assistant” effective as of August 23, 2001, and Mr. Alexander Fox as “Junior
Bankcard Switch Technician effective as of October 1, 2001, and complete
and
accurate copies of all such agreements have previously been furnished to
Purchaser by or on behalf of Sellers and/or Company.
(c) Except
for Robert St. John, who is to report to work October 29, 2001 as “Senior
Bankcard Switch Technician” at a salary of US$75,000 annually, there are no
outstanding offers of employment or engagement made to any person by the
Company
and there is no one who has accepted an offer of employment or engagement
made
by the Company who has not yet taken up that employment or
engagement.
(d) Except
as
expressly contemplated by the terms of this Agreement, no officer, director,
employee, contractor or consultant of the Company identified in the materials
furnished to Purchaser under subsections (a) or (b) above:
(i)
has
given or received notice terminating his or her employment or engagement
or
altering its terms, and no such person will be entitled as a result of
the
entering into of this Agreement and the sale of the Company Shares to Purchaser
to give notice of termination or to claim for any payment or benefit or
to treat
himself or .herself as being released from any obligation and, to the knowledge
of Sellers and the Company, no such person is planning to terminate his
or her
employment as of or shortly after the Closing; or
Page
- 111
(ii)is
currently on sick leave which (as of the date of this Agreement) has been
for
more than 14 consecutive days; or
(iii)is
currently on maternity leave.
(e) Asof
August31, 2001, there were no outstanding arrears of salary, wages, holiday pay
or
other remuneration due to any officer, director, consultant, employee or
contractor of the Company other than as set forth in the Financial Statements
except as incurred in the ordinary course of business and not used.
(f) Except
or
Mr. David Petty, whose annual salary was increased from US$68,OOO to US$71,400,
since August 31, 2001, (i) no change has been made in the rate or basis
of
remuneration, fee or other benefits provided for or paid to .any officer,
director, consultant, employee or contractor of the Company and (ii) no
change
has been made in any other terms of employment or engagement of any such
officer, director, consultant, employee or contractor.
(g) The
Company has not entered into any agreement or legally binding commitment
regarding any future variation in any contract of employment or other agreement
in respect of any of their officers, directors, employees, consultants
or
contractors or any agreement imposing an obligation on the Company to increase
the basis and/or rates of remuneration or payment and/or the provision
of other
benefits to or on behalf of its officers, directors, employees, consultants
or
contractors at any future date.
(h) Allemployees
of the Company who require a work permit will have a valid work permit
in force
at the Closing, except that Kieth Flaherty, Barbara Gaudette Jason Taylor
and
Robert St. John are currently in the process of having their work permits
renewed under the auspices of the Company.
(i) The
Company is not liable to pay any industrial levy nor do they have any
outstanding undischarged liability to pay any Governmental Authority in
any
jurisdiction, other than as provided in the Financial Statements, nor any
taxation, contribution or other impost arising in connection with the employment
or engagement by the Company of employees, directors, officers, consultants
or
contractors.
(j) The
Company is not aware of any facts or matters affecting any employee of
the
Company which might reasonably be considered grounds for dismissing such
employee or warning such employee that the continuation of any conduct
or
behavior may lead to dismissal.
(k) No
grievance or complaint of sex, race or disability discrimination, whether
formal
or informal, is pending in an administrative or litigation proceeding nor,
to
the knowledge of Sellers and the Company, has been raised by any employee,
director, officer or consultant or former employee, director, officer or
consultant of the Company in the twelve months prior to Closing.
Page
- 112
(l) The
Company has not made any loans to or entered into any credit transaction
with
any of its directors or to any employee.
(m) Except
as
expressly listed otherwise in Schedule 3 attached hereto and made a part
hereof
for all purposes, the Company has not any deferred compensation, pension,
health, profit sharing, bonus, stock purchase, stock option, hospitalization,
insurance., severance, redundancy, workers’ compensation, supplemental
unemployment benefits, vacation benefits, disability benefits, or any other
employee benefit or otherwise or welfare benefit plan or obligation covering
any
of its officers or employees or any informal understanding with -respect
to the
foregoing. -
(n) The
Company’s pension plan described in Schedule 3 has been maintained in material
compliance with its governing rules or terms, and all applicable requirements
as
to the filing of reports, documents and notices with Governmental Authorities
and the furnishing of documents to participants or beneficiaries have been
satisfied. No employee, former employee or relative or dependent of such
employee or other participants in said pension plan has made any claim
against
the Company in respect thereof.
(o) The
Company has not entered into any union membership, security of employment,
redundancy, recognition or other collective agreement (whether legally
binding
or not) with a trade union, works council, staff association, employee
representatives or other organization or body of employees, nor has the
Company
done any act which might be construed as recognition.
(p) There
are
no controversies or labor or trade disputes or union organization activities
pending or, to the knowledge of Sellers and the Company, threatened between
the
Company and any of its employees nor are there facts known to the Company
which
might ,indicate that there may be any such dispute or activities.
(q) To
the
knowledge of Sellers and the Company, none of the employees of the Company
belongs to any union or collective bargaining unit or is represented by
any,
works council, staff association or other body representing employees relating
to their activities as employees of the Company.
(r) The
Company has complied with its obligations under all applicable domestic
and
foreign equal employment opportunity and other laws and regulations related
to
employment or working conditions.
(s) To
the
knowledge of Sellers and the Company, no employee of the Company is in
violation
of any agreement of employment, non-competition or confidentiality with
any
former employer.
4.18 Intellectual
Property.
(a) The
operations of the Company do not conflict with or infringe, and no one
has
asserted to any Seller or to the Company that such operations conflict
with or
infringe, any Intellectual Property owned, possessed or used by any third
party.
There are no claims, disputes, actions, proceedings, suits or appeals pending
against Seller or the Company with respect to any such Intellectual Property,
and, to the knowledge of Sellers and the Company, none has been threatened
against the Company. Without limitation of the foregoing, the Company has
complied in all material respects with all express and/or implied obligations
of
confidentiality to which it is subject in relation to Intellectual Property
owned by third parties.
Page
- 113
(b) Except
as
expressly stated in the relevant Contracts listed in Schedule 1
hereto,
(i)
there
are no facts or, to the knowledge of Sellers and the Company, alleged facts
that
would reasonably serve as a basis for any claim that the Company does not
have
the right to use and to transfer the right to use, free of any rights or
claims
of others, all Intellectual Property used or held for use by it in the
development, manufacture, use, sale or other disposition of any or all
products
or services presently being used; furnished or sold in the conduct of the
business of the Company as it has been and is now being conducted (the
‘.’Company Intellectual Property”),
(ii)
the
Company Intellectual Property referred to in clause (i) immediately above
are
free of any unresolved ownership disputes with respect to any third party
and,
to the knowledge of Sellers and the Company, there is no unauthorized use,
infringement or misappropriation of any of the Company Intellectual Property
by
any third party, including any employee, or former employee of the Company,
nor,
to the knowledge of Sellers and the Company, is there any breach of any
license,
sublicense or other agreement authorizing another party to use such Company
Intellectual Property.
(c) The
Company has not entered into any agreement granting any third party the
right to
bring infringement actions with respect to, or otherwise to enforce rights
with
respect to, any of such Company Intellectual Property.
(d) The
Company has taken all measures it deems reasonable and appropriate to maintain
the confidentiality of such of the Company Intellectual Property the value
of
which to the Company is contingent upon maintenance of the confidentiality
thereof.
(e) The
Company has secured valid written assignments from all consultants and
employees
who contributed to the creation or development of the Company Intellectual
Property of the rights to such contributions that the Company does not
already
own by operation of law, and no employee or consultant retains any interest
or
right in relation to such Company Intellectual Property.
4.19 Compliance
with Law; Permits.
(a) All
licenses, franchises, permits, approvals, clearances, consents, certificates
and
other evidences of authority normally issued by a Governmental Authority
that
are necessary for the carrying on of the Company’s business (“Permits”) are in
full force and effect and, to the knowledge of Sellers and the Company,
the
Company is not in violation of any Permit in any material respect. The
Permits
are not subject to any unusual or onerous conditions. The business of the
Company has been conducted in accordance with its Memorandum of Association
and
Bye-laws and, except where such non-compliance would not have a material
adverse
effect on the Company or its business, assets, operations or financial
condition, all applicable Legal Requirements.
Page
- 114
(b) To
the
knowledge of Sellers and the Company, there are no investigations, proceedings,
inquiries, communications or other circumstances that indicate that any
Permits
may be revoked, cancelled, superseded; modified or not renewed.
(c) No
outstanding notices in relation to any statutory obligation have been served
on
the Company in respect of any of its assets or in respect of any contravention
or non-compliance with or alleged contravention or non-compliance with
any
obligation or otherwise.
(d) To
the
knowledge of Sellers and the Company, there have not been and are not pending,
or in existence, any investigations or inquiries by, or on behalf of, any
governmental or administrative or other body in respect of any of the affairs
of
the Company.
4.20 Litigation.
There is no “claim, dispute, action, proceeding, notice, order, suit, appeal or
investigation, at law or in equity, pending or, to the knowledge of Sellers
and
the Company, threatened, against the Company or any pension scheme of the
Company or any of its directors, officers, employees, former employees
or
agents, or involving any of its assets or properties, before any Governmental
Authority. The Company is not aware that there are any facts which, if
known to
shareholders, customers, suppliers, Governmental Authorities or other persons,
wouldresult
in
any such claim, dispute, action, proceeding, suit or appeal or investigation
that would have or would reasonably be likely to have a material adverse
effect
on the Company or its business, assets, operations or financial condition.
The
Company is not subject to any order, writ, injunction or decree of any
Governmental Authority, arbitration panel or other tribunal, nor is the
Company
in default with respect to any notice, order, writ, injunction or
decree.
4.21 Tangible
Personal Property. The items of tangible personal property reflected in
the
Company’s Financial Statements or otherwise listed in the “fixed asset
schedules” furnished to Purchaser by or on behalf of Sellers or the Company in
connection with the Financial Statements (“Tangible Personal Property”) comprise
the only material tangible personal property owned by the Company in whole
or in
part, are used or held for use in connection with the business of the Company,
and are owned by the Company free and clear of any and all liens, encumbrances,
equities, security interests, mortgages, debentures, claims, charges, and
other
claims or rights of third parties, and, except as and to the extent provided
for
in Section 14 of that certain Transaction Processing Agreement dated 20
April
2001 and entered into by and between the Company and Planet Group, Inc.,
none of
such Tangible Personal Property is subject to any option, right of pre-emption
or right of first refusal. All requisite licenses, consents and approvals
required of the Company for the ownership and/or operation of the Tangible
Personal Property have been duly obtained or given.
4.22 Computer
System and Software.
(a) Subject
to the terms of any relevant Contracts listed in Schedule 1 attached hereto,
the
Company is the legal and beneficial owner free of any and all liens and
encumbrances or is the lessee of all the items of equipment, hardware.
firmware
and accessories relating to the “Computer System”) and no other person (other
than the lessor, as applicable) has any claims or rights in respect thereof.
For
the purposes of this Agreement, “Computer System” means the computer systems,
including all its equipment, hardware, firmware, software and accessories
used
or held for use by the Company in the processing of financial transactions
for
its customers.
Page
- 115
(b) Except
to
the extent that the Software incorporates code obtained under license from
Oasis
Technology Ltd. under the license specified in Schedule I attached hereto,
and
except for the Merchant Accounting and Reporting System and Payment Gateway
software that is the subject of Seller’s obligation to grant licenses under
Section 2.2 hereof, the Company is the legal and beneficial owner free
of any
and all liens and encumbrances of all Software, and such Software was either
developed by the Company’s employees in the course of their employment or by
third parties pursuant to agreements under which all rights in the Software
are
vested in the Company. For the purposes of this Agreement, “Software” means all
computer programs and all related object code and source-code and databases
used
or held for use by the Company in the processing of financial transactions
for
its customers.
(c) There
are
in existence maintenance and support agreements in respect of all equipment,
hardware, furniture, software and accessories used in the Computer System,
and
the Company has not done, or omitted to do, any act which might entitle
the
provider of the maintenance and support services to terminate such agreements
or
to withhold or refuse to supply any services thereunder, and the Company
is not
in dispute with such provider regarding its maintenance and support
obligations.
(d) The
Computer System comprises equipment, hardware, firmware, software including
source code and object code, supporting materials and accessories which
are
necessary to enable the Company to carry on its business in the same manner
and
to the same extent as ‘it has been carried on prior to Closing, and the rights
to use the Computer System or any part thereof will not be adversely affected
by
the transactions effected by this Agreement.
4.23 Insurance.
The Company and its assets are insured against such risks and in such sums
as
are described in the policies listed in Schedule 2, a complete and accurate
copy
of which policies have previously been furnished to Purchaser. All premiums
due
in respect of such insurances have been fully paid or have been paid in
accordance with the obligations stated in the insurance policies; and the
next
renewal date for each of such insurances is a date at least 30 days after
the
Closing Date. Nothing has been done or omitted to be done which could make
any
policy of insurance void or voidable, or which is likely to result in an
increase in premium; and none of such insurances is subject to any special
or
unusual terms or restrictions or to the payment of any premium in excess
of the
normal rate. Each such insurance policy is enforceable and in full force
and
effect in accordance with its terms and will continue to be enforceable
and in
full force and effect immediately following the Closing in accordance with
the
terms thereof as in effect prior to the Closing. The Company is not in
breach or
default (including with respect to the payment of premiums or the giving
of
notices) under any such policies, no event has occurred which, with notice
or
the lapse of time, would constitute such a breach or default or permit
termination, modification or acceleration, under such policy; and the Company
has not received any notice from the insurer disclaiming coverage or reserving
rights with respect to a particular claim or such policy in general. There
are
no claims arising against the Company by an employee, a worker or any other
third party, in respect of any accident or injury and, to the knowledge
of
Sellers and the Company, there are no unreported accidents or incidents
that
would give rise to such a claim, which are not fully covered by
insurance.
Page
- 116
4.24 Brokers
or Finders. Neither the Company nor any of its officers, directors, employees
or
shareholders has employed any broker or finder in connection with the
transactions contemplated by this Agreement, nor have they incurred, and
they
shall not incur, directly or indirectly, any liability for any brokerage
or
finders’ fees or agents’ commissions or any similar charges in connection with
this Agreement or any transaction contemplated hereby.
4.25 Related
Parties. No officer or director of the Company has, either directly or
indirectly, (a) an interest in any corporation, partnership, firm or other
person or entity which furnishes or sells services or products which are
similar
to those furnished or sold by the Company, (b) a beneficial interest in
any
contract or agreement to which the Company is a party or by which the Company
may be bound, or (c) an interest in any of the assets used by the
Company.
4.26 Certain
Advances. There are no loans by the Company to any directors, officers,
employees, consultants or shareholders of the Company, or owing by any
Affiliate
of any director or officer of the Company, other than advances in the ordinary
course of business consistent with past practice to officers and employees
for
reimbursable business expenses which are not in excess of US$l,000 or the
equivalent in any other currency for anyone individual.
4.27 Underlying
Documents. Copies of any underlying documents listed in this Agreement
(including without limitation in any Schedule, Exhibit or other attachment
hereto), or described in this Agreement as having been disclosed or furnished
to
Purchaser have been furnished to Purchaser. All such documents furnished
or made
available to Purchaser are true and correct copies, and there are no amendments
or modifications thereto, that have not been included in the documents
furnished
to Purchaser.
4.28 Banking
Facilities. The Company maintains the following banking accounts:
(i)
an
investment account at The Bank of Bermuda Limited under account number
0022319,
the reported balance of which as of August 31, 2001 was valued at BD$31,715.30,
(ii)
a
corporate account at The Bank of Bermuda Limited under account number 804391,
the reported ba1ances of which as of August 31, 200 1 were valued at
US$1,443,576.69 and BD$12,020.71,
and
the
authorized signatories on these accounts were, immediately prior to taking
the
actions required under Section 2.5(c)(iv) above, any two of Gregory Pek,
David
Lema, Leslie Pooley-Maughan and Marcy Judd. The Company maintains no other
deposit accounts or other depositary or financing relationships at any
other
financial institution or credit company, and the signatories on the aforesaid
accounts may be replaced upon notice in writing to The Bank of Bermuda
Limited.
Page
- 117
4.29 Relations
with Affiliates. Except for (i) First Ecom’s ownership and operation at no cost
to the Company of the two Sun E250 servers and related equipment and software
in
support of the Merchant Accounting and Reporting System portion of the
Company’s
business, and (ii) the working capital loan facility extended from First
Ecom to
the Company as described in Section 2.5(e) above, the Company has no Contract
with any of its Affiliates for, and neither the management, operation or
conduct
of the Company’s business, nor the goodwill of its vendors, customers or other
business relations, nor its rights in, maintenance of or access to its
assets
and facilities, draws upon, the provision of any services or support from
First
Ecom or any other Affiliate of First Ecom.
4.30 Insolvency.
The Company is ab1e to pay its liabilities as they come due, and is not
otherwise “insolvent” under bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting the rights ofcreditors
generally that are applicable to the Company or its assets. No order has
been
made, petition presented, resolution passed or meeting convened for the
winding
up of the Company or for an administration order in respect of the Company;
no
receiver, receiver and manager, administrative receiver or liquidator has
been
appointed of the business or the whole or any part of the assets or undertaking
of the Company; there are no circumstances that now or with the passage
of time
may give rise to the appointment of any such receiver, receiver and manager,
administrative receiver or liquidator, and, to the knowledge of Sellers
and the
Company, no such order, petition, resolution, meeting or appointment is
pending
or threatened.
4.31 No
Misleading Statements. No representation or warranty made herein, and nothing
contained in the materials furnished to Purchaser by or on behalf of Sellers
and/or the Company in connection with Purchaser’s review and analysis of the
Company and its business, operations, assets or financial condition (other
than
statements of a forward-looking nature, such as those contained in multi-year
forecasts and projections), contains any statement of a material fact that
is
either untrue or, in the light of the circumstances under which they are
made,
misleading.
ARTICLE
V
- REPRESENTATIONS AND WARRANTIES OF PURCHASER
Purchaser
represents and warrants to Sellers as follows:
5.1 Organization.
Purchaser is a corporation duly incorporated, validly existing arid in
good
standing under the laws of the Netherlands Antilles and has all requisite
corporate power and authority to own, lease and operate its properties
and to
carryon its business as now being conducted.
5.2 Authority.
Purchaser has all requisite corporate power and authority to enter into
this
Agreement and to perform its obligations hereunder and consummate the
transactions contemplated hereby. The execution and delivery of this Agreement,
the performance by Purchaser of its obligations hereunder and the consummation
of the transactions contemplated hereby have been duly and validly authorized
by
all necessary corporate action on the part of Purchaser. This Agreement,
when
executed and delivered by Purchaser, will constitute a valid and legally
binding
obligation of Purchaser, legally enforceable against Purchaser in accordance
with its terms, subject to the effects of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the
rights of creditors generally, limitations imposed by applicable law or
equitable principles upon the specific enforceability of any of the remedies,
covenants or other provisions of this Agreement, and upon the availability
of
injunctive relief or other equitable remedies.
Page
- 118
5.3 No
Conflict with Other Instruments. Purchaser’s execution and delivery of, and
performance of its obligations under. this Agreement (including the Exhibits
hereto), the related agreements required to be entered into as conditions
of
Closing under Article VI hereof, and the transactions contemplated hereby
(i)
will not result in any violation of, conflict with, constitute a breach,
violation or default (with or without notice or lapse of time, or both)
under,
give rise to a right of termination, cancellation, forfeiture or acceleration
of
any obligation or loss of any benefit under, or result in the creation
or
encumbrance on any of the properties or assets of Purchaser or any of its
subsidiaries, pursuant to (x) any provision of the certificate of incorporation,
bylaws, or other charter or governing document of Purchaser, or (y) any
agreement, arrangement, contract, understanding, note, mortgage, indenture,
lease, franchise, license, permit or other instrument to which Purchaser
is a
party or by which Purchaser or any of its properties or assets is bound,
(b)
wi11 not conflict with, or result in any breach or violation of, any Legal
Requirement applicable to Purchaser or its properties or assets, except.
in the
case of clauses (i)(y) and (ii) for any of the foregoing that would not,
individually or in the aggregate, have a material adverse effect on Purchaser
and its subsidiaries, taken as a whole, or that could not result in the
creation
of any material lien, charge or encumbrance upon any assets of Purchaser
or any
of its subsidiaries or that could not prevent, materially delay or materially
burden the transactions. contemplated by this Agreement.
5.4 Governmental
Consents and Notices. Except for the approval of the Bermuda Monetary Authority
required for the transfer of Company Shares to Purchaser contemplated by
Article
II, no consent, approval, order or authorization of, or registration,
declaration of, notice to or qualification or filing with, any Governmental
Authority, whether domestic or foreign, is required to be obtained or submitted
by or on behalf of or with respect to Purchaser in connection with the
execution
and delivery of this Agreement by Purchaser or the consummation by Purchaser
of
the transactions contemplated hereby that has not been, or will not prior
to
Closing have been, duly obtained and/or submitted, as applicable.
5.5 Litigation.
There is no (a) claim, action, suit or proceeding pending or, to the knowledge
of Purchaser, threatened against or relating to Purchaser or its subsidiaries
before any Governmental Authority or arbitration tribunal, or (b) outstanding
judgment, order, writ. injunction or decree, or application, request or
motion
therefor, of any court, governmental agency or arbitration tribunal in
a
proceeding to which Purchaser or any subsidiary of Purchaser was or is
a party
that would individually or in the aggregate, either impair Purchaser’s ability
to consummate the transactions contemplated by this Agreement or have a
material
adverse effect on Seller and its subsidiaries taken as a whole.
5.6 No
Misleading Statements. No representation or warranty made herein by Purchaser
contains any statement of a material fact that is untrue or, in the light
of the
circumstances under which they are made, misleading.
5.7 Brokers
or Finders. Neither Purchaser nor any of its officers, directors, employees
or
shareholders has employed any broker or finder in connection with the
transactions contemplated by this Agreement, nor have they incurred, and
they
shall not incur, directly or indirectly, any liability for any brokerage
or
finders’ fees or agents’ commissions or any similar charges in connection with
this Agreement or any transaction contemplated hereby.
Page
- 119
5.8 Acquisition
for Investment. Purchaser is acquiring the Company Shares for its own account
and not with the present view to sell the Company Shares in connection
with the
distribution thereof.
ARTICLE
VI - CONDITIONS TO CLOSING
6.1 Conditions
to Obligations of Each Party to Effect the Closing. The respective obligations
of each party to this Agreement to consummate the Closing and the transactions
contemplated by this Agreement shall be subject to the satisfaction at
or prior
to the Closing of the following conditions:
(a) Illegality.
There shall not have been any Legal Requirement enacted, promulgated or
deemed
applicable to the transactions contemplated by this Agreement by any
Governmental Authority that prevents the consummation of the Closing or
the
transactions contemplated by this Agreement or has the effect of making
the
purchase of Company Shares illegal.
(b) Absence
of Litigation. No action, suit or proceeding concerning Purchaser, the
Company,
or any Seller shall be pending by or before any court of competent jurisdiction
or Governmental Authority wherein an unfavorable judgment, order, decree,
stipulation or injunction would (i) prevent consummation of any of the
transactions contemplated by this Agreement or (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation.
6.2 Additional
Conditions to the Obligations of Sel1ers. The obligations of Sellers to
consummate the Closing and the transactions contemplated by this Agreement
shall
be subject to the satisfaction at or prior to the Closing of each of the
following conditions, any of which may be waived, in writing, exclusively
by
Sellers:
(a) Representations
and Warranties. The representations and warranties of Purchaser contained
in
this Agreement or in the certificates required to be delivered at the Closing
pursuant to Section 2.6(a) shall be true and correct on the date hereof
and on
and as of the Closing Date, as though made on and as of the Closing Date
(except
for representations and warranties made as of a specified date, which need
be
true and correct only as of the specified date).
(b) Agreements
and Covenants. Purchaser shall have performed or complied in all material
respects with al1 agreements and covenants required by this Agreement.
to be
performed or, complied with by it on or prior to the Closing.
6.3 Additional
Conditions to the Obligations of Purchaser. The obligations of Purchaser
to
consummate the Closing and the transactions contemplated by this Agreement
shall
be subject to the satisfaction at or prior to the Closing of each of the
following conditions, any of which may be waived, in writing, exclusively
by
Purchaser:
Page
- 120
(a) Representations
and Warranties. The representations and warranties of Sellers contained
in this
Agreement or in the certificates required to be delivered at the Closing
pursuant to Section 2.5(a) shall be true and correct on the date hereof
and on
and as of the Closing Date, as though made on and as of the Closing Date
(except
for representations and warranties made as of a specified date, which need
be
true and correct only as of the specified date).
(b) Agreements
and Covenants. Sellers and the Company shall have performed or complied
in all
material respects with all agreements and covenants, and otherwise shall
have
taken all actions, required by this Agreement to be performed or complied
with
or taken by them on or prior to the Closing.
(c) Absence
of Litigation, Prohibitions or Restrictions. No action, suit or proceeding
concerning the Company or any Seller shall be pending or threatened in
writing
by or before any Governmental Authority out of which may issue a Legal
Requirement, and no Legal Requirement shall have been issued or determined
by a
Governmental Authority to be applicable to the transactions contemplated
hereby,
that would: (i) prohibit Purchaser’s ownership of the Company Shares or the
Company’s ownership or operation of any portion of the business or assets of the
Company or (ii) compel Purchaser or the Company to dispose of or hold separate,
as a result of the transactions contemplated hereby, any portion of the
business
or assets of the Company or Purchaser; in either case, the unavailability
of
which assets or business would have a material adverse effect on Purchaser
or
would reasonably be expected to have a material adverse effect on Purchaser’s
ability to realize the benefits expected from thetransactions
contemplated hereby.
(d) Sellers
shall have in good faith supported and cooperated with Purchaser in its
efforts
to obtain the consent of Oasis Technology Ltd. to the assignment contemplated
in
clause (iv) of Section 2.2.
ARTICLE
VII - POST-CLOSING AGREEMENTS
7.1 Installment
Payments.
(a) Within.
sixty (60) days following the end of each of the three calendar years ending
December 31, 2002, 2003 and 2004, respectively. Purchaser will pay to FEDS
Acquisition an amount in U.S. dollars equal to the lesser of:
(i)
the
greater of (x) forty percent (40%) of the net operating profits, if any,
realized by Company during the calendar year in question or (y) the amounts
set
forth below under the column headed “Minimum”, or
(ii)
the
amounts set forth below under the column headed “Maximum”,
for
each
of the years in question, respectively (all dollar amounts are in United
Stares
dollars):
Page
- 121
YEAR
MAXIMUM
MINIMUM
2002
$500,000
$350,000
2003
$1
million
$650,000
2004
$1.5
million
$1
million
(b)“Net
operating profits” for this purpose will be calculated after deduction of taxes,
interest, depreciation and amortization in accordance with United States
generally accepted accounting principles applied consistently with the
accounting policies and practices of the Company from period to period,
excluding (i) any management or other administrative fees or expenses of
a
general nature charged to Company by Purchaser or any Affiliate of Purchaser,
(ii) interest and other charges for facilities granted to Company by Purchaser
or ,any Affiliate of Purchaser to the extent such charges exceed rates
generally
available elsewhere in the, commercial lending market for comparable facilities
to similarly situated borrowers, and (iii) any reductions of revenue caused
by
the transfer of all or a substantial part of Company’s revenue-generating
operations from Company to Purchaser or any Affiliate of Purchaser.
(c) Purchaser
hereby acknowledges its intent to cause Company to be operated following
Closing
in a manner consistent with the assumptions and projections identified
in the
“Business Plan” attached hereto as Schedule 4 and made a part hereof for all
purposes, including but not limited to providing Company with sufficient
working
capital (not exceeding US$4 million) to conduct its business in the manner
heretofore conducted. In this regard, it is anticipated that Purchaser
will, as
soon as practicable following Closing, extend to Company a working capital
loan
facility in a principal amount equal to that described in Section 2.5(e)
on such
terms and conditions as Purchaser and the Company shall mutually agree.
Notwithstanding the foregoing, however, Seller and Purchaser agree and
acknowledge that Company, and Purchaser’s intentions with respect to the
Company, are subject to changing market conditions in the environment in
which
Company operates, and that Purchaser shall have no obligations to cause
Company
to be operated in any particular way or furnished with any particular level
of
funding. Seller’s sole assurances regarding its participation in future
operating profits of Company lie in the “Minimum” payment obligations set out in
the table in Section 7.1 (a) above.
(d) Following
the end of each of the said three calendar years, Purchaser shall, or shall
cause the Company to deliver to Seller annual financial statements of the
Company that have been audited by an independent auditing firm of international
stature and reputation, together with the auditors’ statement and notes thereto.
Such statements shall be delivered to Seller no later than one hundred
twenty
(120) days following the end of each such calendar year period, accompanied
by a
reconciliation statement prepared by such auditing firm setting forth the
calculation of “net operating profits” in accordance with the standards set
forth in subparagraph (b) above and specifying the amount underpaid or
overpaid
by Purchaser as compared to said statement. Sellers shall then have up
the
thirty (30) days to review such materials and, if no objection is raised
in
writing by Sellers within that time, said reconciliation statement shall
be
final and binding on the parties. If on the other hand Sellers object to
said
materials in any respect by written notice to Purchaser, then the parties
shall
work in good faith to resolve their disagreement(s) within the succeeding
thirty
(30) day period. During that time, either Sellers or Purchaser may give
notice
to the other of its election to refer the disagreement to a second independent
auditing firm of international stature and reputation, which firm shall
be
selected (i) by the firm that audited Purchaser’s financial statements in the
first place, or (i) if such firm fails or refuses to select a second such
firm,
by mutual agreement of Sellers and Purchaser. The decision of the second
such
firm shall be final and binding on the parties and may be enforced by a
court of
competent jurisdiction. If the second such firm’s decision results in a “net
operating profit” calculation difference of less than five percent from the
first such firm’s decision, the costs of the second such firm’s review shall be
borne by Sellers. If the difference is from five to ten percent., the cost
shall
be borne equally between Sellers, on the one hand, and Purchaser, on the
other.
If the difference is greater than ten Percent, the cost shall be borne
by
Purchaser. Any overpayment by Purchaser shall be refunded by Sellers, and
any
underpayment by Purchaser shall be paid to Sellers, promptly upon the parties’
receipt of the final determination.
Page
- 122
7.2 Assignment
of Oasis Distribution License. To the extent that such consent has not
yet -been
obtained, and to the extent that Purchaser so requests, Sellers shall continue
in good- faith to support and cooperate with Purchaser in its efforts to
obtain
the consent of Oasis Technology Ltd. to the assignment contemplated by
clause
(iv) of Section 2.2.
7.3 Following
the Closing. Sellers shall, and shall cause their Affiliates to, discontinue
and
thereafter refrain from the use of the “FEDS” name and any other such
trademarks, tradenames, service marks, service names, or logos that are
the same
as or confusingly similar to Company’s name, it being understood that
“FirstEcom.Com” shall not be considered as such for this purpose. In addition,
to the extent that they have not completely done so prior to Closing, Sellers
shall, and shall cause their appropriate Affiliates to, procure that their
names
and the names of their Affiliates that are the same as or confusingly similar
to
the Company’s name be changed so that they are not, it being understood that
“FirstEcom.Com” shall not be considered as such for this purpose.
7.4 Post-Closing
Intercompany Support. For a period of twelve (12) months following the
Closing,
and only to the extent that any Seller has within the twelve (12) months
preceding Closing provided or caused to be provided intercompany operational
support for Company using the assets, resources or facilities of such Seller
or
its Affiliates, Sellers shall continue to provide or cause to be provided
such
support as Purchaser shall request in order to maintain Company’s operations at
the level of functionality and efficiency enjoyed by Company prior to Closing,
including without limitation the provision of such remote hardware support,
application hosting, and/or other computer processing functions asare
currently being performed for or on behalf of Company by any Sellers and/or
its
Affiliates. Without limiting the foregoing, this includes the servers and
related hardware, software and data described in Section 4.10 above. It
is
understood and agreed that such support shall be at no additional cost
to
Purchaser or the Company. This Section 7.4 does not apply to the support
services covered by that certain End User Support Agreement in the form
attached
hereto as Exhibit E and entered into by the parties thereto.
7.5 Processing
Transactions. From time to time following the Closing, Sellers may contact
Company to propose the entry by a Seller and/or its designee into agreements
or
understandings for the processing by the Company of financial transactions
referred by such Seller, and Company will be entitled to accept or decline
or
propose modifications to such proposals in its sole discretion.
7.6 Post-closing
Audit. During the course of First Ecom’s annual audit of its financial condition
and results of operations with respect to the fiscal. year ending December31,2001, Purchaser agrees that it shall, and shall cause the Company to, permit
the
auditors of First Ecom access during reasonable business hours and upon
reasonable advance notice to the books and records of the Company for the
purpose of completing their audit of First Ecom’s consolidated financial
statements for the portion of said fiscal year ending on the Closing Date.
In
this connection, Purchaser shall instruct its auditors to provide reasonable
cooperation with respect to such access. Sellers agree that they shall
pay and
be responsible for any out-of-pocket costs and expenses reasonably incurred
by
Purchaser in the course of such audit, and that they shall limit such access
so
as to minimize the time and disruption necessary to complete the work.
To the
extent reasonably practicable, Sellers shall permit Purchaser to make available
copies of such information as shall the auditors shall require without
the need
for actual onsite visits. In any case, such auditing firm and Sellers shall
be
required to sign such confidentiality and non-disclosure agreements as
Purchaser
shall reasonably require with respect to such information as may be disclosed
to
Sellers or their auditor during the course of such review.
Page
- 123
7.7 Additional
Documents and Further Assurances. Each party hereto, at the reasonable
request
of the other party hereto, shall execute and deliver such other instruments
and
do and perform such other acts and things as may be reasonably necessary
or
desirable for effecting completely the consummation of this Agreement and
the
transactions contemplated hereby.
ARTICLE
VIII - INDEMNIFICATION
8.1 Survival
of Representations and Warranties
(a) All
of
Sellers’ and Purchaser’s representations and warranties in this Agreement or in
any instrument delivered pursuant to this Agreement shall survive the Closing
and continue until 5:00 p.m., Bermuda time, on the third anniversary of
the
Closing Date (the “Expiration Date”), except that nothing in this Section 8.1
shall be deemed to limit any right or remedy for fraud with respect to
the
representations and warranties set forth in Articles III, IV or V.
The
waiver of any condition based on the accuracy of any representation or
warranty,
or the performance or compliance of any covenant or obligation, or any
limitations on the survival of such representations and warranties, will
not
affect the right to indemnification set forth in Section 8.2.
(b) The
representations, warranties, covenants and obligations of Sellers, and
the
rights and remedies that may be exercised by Purchaser, shall not be limited
or
otherwise affected by or as a result of any information furnished to, or
any
investigation conducted for or on behalf of, or any knowledge acquired
by,
Purchaser or its officers, directors, employees, shareholders, agents advisors,
or representatives as to the accuracy or inaccuracy of any such representation
or warranty, except as, otherwise expressly provided in this
Agreement.
8.2 Indemnification.
(a) Indemnification.
Subject to the limitations set forth herein, Sellers agree to indemnify
Purchaser, the Company, their Affiliates, and their respective. shareholders,
directors, officers, employees, agents and representatives (collectively,
the
“Indemnified Parties”) for claims, losses, liabilities, damages, deficiencies,
costs and expenses, including reasonable attorneys’ fees and expenses, and
expenses of investigation and defense (calculated after deduction for insurance
proceeds recovered or recoverable) incurred by such Indemnified Party directly
or indirectly (including, after the Closing. by the Company) as a result
of (i)
any inaccuracy or breach of a representation or warranty of Sellers contained
herein or in any certificate required to be delivered at Closing by Seller
under
Section 2.5(a), or (ii) any failure by Sellers or the Company to perform
or
comply with any covenant or agreement contained herein, or (iii) any
transactions, business, or other activities, actions or omissions by or
on
behalf of the Company at any time prior to January 1, 2000, or (iv) any
claim or
cause or action arising out of the Shareholders’ Agreement or the Share Purchase
and Sale Agreement (hereinafter individually a “Loss” and collectively
“Losses”), or (v) without limiting any of the foregoing, the failure of the
Company to have, or any claim or al1egation on the part of any person that
the
Company has not, succeeded to all of The Bank of Bermuda Limited’s rights and
obligations as “Processor” under the TPP Agreement referenced in Section 4.15(
c) above effective from the first date on which the Company engaged in
transaction processing for MasterCard transactions, or (vi) the provisions
of
Section 14 of that certain Transaction Processing Agreement dated 20 April
2000
and entered into by and between the Company and Planet Group, Inc. Sellers
acknowledge that such Losses, if any, would relate to unresolved contingencies
existing at the Closing, which if resolved at the Closing would have led
to a
reduction in the aggregate purchase price paid by Purchaser. For the avoidance
of doubt, the Company shall not be liable in respect of any inaccuracy
or breach
in any representation, warranty or covenant contained in this Agreement,
howsoever caused, or in any instrument delivered pursuant to this Agreement
or
in connection with the transactions contemplated hereby.
Page
- 124
(b) Third-Party
Claims. In the event Purchaser becomes aware of a third-party claim which
Purchaser believes may result in a demand against Sellers hereunder, Purchaser
shall promptly notify First Ecom of such claim, and First Ecom shall be
entitled, at its expense, to participate in any defense of such claim.
If First
Ecom acknowledges in writing to Purchaser that if the allegations in such
claim
are in fact true then any liability arising from the adjudication or other
settlement of such claim would be for the account of Sellers, then First
Ecom
shall be entitled to assume the defense of such claim and shall have the
power
to settle such claim. If First Ecom is not entitled to or chooses not to
assume
the defense of any such claim, Purchaser shall consult with and attempt
to
solicit the consent of First Ecom prior to and in connection with any settlement
of any such claim, but Purchaser shall have the right in its sole discretion
to
settle any such claim. If First Ecom had the right but chosenot
to
assume the defense of any such claim, First Ecom shall be estopped from
objecting to Purchaser’s claim under this Article VIII for the amount of any
settlement entered into by Purchaser with respect to such claim.
(c) Basket;
Limitations Period. Purchaser shall not be entitled to bring any claim
against
Sellers under this Section 8.2 unless and until the aggregate of all such
c1aims
equals or exceeds the sum of US$50000. In addition, Purchaser shall not
be
entitled to bring any claim against Sellers under this Section 8.2 unless
Purchaser notifies Sellers in writing of such c1aim on or before the third
anniversary of the Effective Date of this Agreement.
ARTICLE
IX-TERMINATION AND WAIVER
9.1 Termination.
This Agreement may be terminated and the transactions contemplated hereby
abandoned at any time prior to the Closing:
Page
- 125
(a) By
mutual
written consent of Sellers and Purchaser;
(b) By
Purchaser if the Closing has not occurred by October 31, 2001 on account
of the
failure or non-fulfillment of any of Purchaser’s conditions to Closing set forth
in Section 6.3 above;
(c) By
Sel1ers if the Closing has not occurred by October 31, 2001 on account
of the
failure or non-fulfillment of any of Sellers’ conditions to Closing set forth in
Section 6.2 above; or
(d) By
Purchaser or Seller if in any case Closing has not occurred by November30, 2001
(provided that the right to terminate this Agreement under this paragraph
(d)
shall not be available to any party whose willful failure to fulfill any
obligation hereunder has been the cause of, or resulted in, the failure
of the
Closing to occur on or before such date).
9.2 Extension
.of Time, Waiver. At any time prior to the Closing, Purchaser, on the one
hand,
and Sellers, on the other hand, may, to the extent legally allowed:
(a) Extend
the time for the performance of any of the obligations or other acts of
the
other party hereto,
(b) Waive
any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto,
(c) Waive
compliance with any of the agreements or conditions for the benefit of
such
party contained herein; provided, that no failure or delay by any party
hereto
in exercising any right hereunder shall operate as a waiver thereof nor
shall
any single or partial exercise thereof preclude any other or, further exercise
thereof or the -exercise of any other right hereunder;
provided,
that any agreement on the part of any party hereto to any such extension
or
waiver shall be valid only if set forth in an instrument in writing signed
on
behalf of such party that expressly refers to this Section and the particular
obligation, inaccuracy, agreement or condition that is the subject of the
waiver.
ARTICLE
X
- GENERAL
10.1 Expenses.
All fees and expenses incurred in connection with the transactions contemplated
hereby, including, without limitation, all legal, accounting, financial
advisory, consulting and all other fees and expenses of third parties incurred
by a party in connection with the negotiation and effectuation of the terms
and
conditions of this . Agreement and the transactions contemplated hereby,
shall
be the obligation of the respective party incurring such fees and expenses;
provided, however, that if the purchase and sale of the Company Shares
is
consummated, the Company shall not incur financial advisory, brokers’, finders’,
legal and accounting fees and expenses in excess of US$5000.00 in connection
with the transactions contemplated hereby, and provided, further, that
Sellers,
on the one hand, and Purchaser, on the other, shall each bear one-half
of the
applicable Bermuda stamp duties incurred with respect to the transfer of
the
certificates representing the Company Shares.
Page
- 126
10.2 Public
Disclosure. Unless otherwise required by applicable Legal Requirements
(including, without limitation, applicable securities laws) or by the rules
and
regulations of a regulated public securities exchange or other organized
public
market on which the shares of any Seller are traded (including but not
limited
to Nasdaq), prior to the Closing, no disclosure (whether or not in response
to
an inquiry) of the discussions or subject matter of this Agreement or the
transactions contemplated hereby shall be made by any party hereto unless
approved by Purchaser and Sellers prior to release, provided that such
approval
shal1 not be unreasonably withheld.
10.3 Notices.
Any notice, request, instruction or other document to be given hereunder
by any
party to the other shall be in writing and shall be deemed to have been
given or
made if in writing and (a) delivered personally, as of the date of such
delivery, (b) by telecopy as of the date of receipt of confirmation of
transmission (provided that such telecopy was promptly confirmed by personal
delivery, first class mail, or courier), or (c) by internationally recognized
delivery service guaranteeing delivery in two business days or less, with
the
price of delivery paid by the sender, as of the date of such delivery,
to the
parties at the following addresses and numbers:
or
to
such other address as may be designated in writing by the parties, by a
notice
given as aforesaid.
10.4 Headings
and Interpretation. The headings of the several sections of this Agreement
are
inserted for-convenience of reference only and are not intended to affect
the
meaning or interpretation of this Agreement. As used in this Agreement,
the use
of pronouns in the masculine, feminine or neutral gender shall be interpreted
as
a use of any of the other genders, and the use of plural or singular shall
be
interpreted as the use of the other, as the context shall require. Further,
as
used in this Agreement, the phrase “to the knowledge of Sellers and the Company”
means to the collective knowledge of any and/or all of them, whether such
knowledge is held by one, more than one or all of them.
10.5 Counterparts.
This Agreement may be executed in counterparts, and when so executed each
counterpart shall be deemed to be an original, and said counterparts together
shall constitute one and the same instrument.
10.6 Amendment
or Supplement. This Agreement may not be amended or supplemented except
by an
instrument in writing signed by or on behalf of Purchaser and
Sellers.
10.7 Entire
Agreement; Assignment. This Agreement, the Schedules and Exhibits hereto,
and
the documents and instruments and other agreements among the parties hereto
referenced herein (a) constitute the entire agreement among the parties
with
respect to the subject matter hereof and supersede all prior agreements
and
understandings, both written and oral, among the parties with respect to
the
subject matter hereof and (b) shall not be assigned by operation of law
or
otherwise except as mutually agreed in writing between the parties, except
that:
(i)
Purchaser may transfer or assign its rights, interests or obligations hereunder
in whole or in part to any third party upon notice to Sellers, provided
that no
such transfer or assignment shall relieve Purchaser of any of its obligations
hereunder, and .
Page
- 128
(ii)
Sellers may transfer or assign their rights and interests under Section
7.1 with
respect to the Installment Payments in whole or in part to any unrelated
third
party in a bona fide, cash-only, arms’ length transaction, provided that they
first give detailed notice to Purchaser of any such proposed transfer and
its
terms, whereupon Purchaser shall have the right and opportunity to elect
to
purchase such rights on the same terms, the exercise of which right
willrequire
either written or, if given either to First Ecom’s Chief Executive Officer or
Chief Financial Officer, oral notice received by. First Ecom from Purchaser
to
that effect within five (5) Business Days following Purchaser’s receipt of
Sellers’ notice of proposed transfer, provided that no such transfer or
assignment shall relieve Sellers of any of their obligations
hereunder.
This
Agreement will be binding upon and inure to the benefit of the parties
and their
respective successors and permitted assigns.
10.8 Severability.
In the event that any provision of this Agreement or the application thereof,
becomes or is declared by a court of competent jurisdiction to be illegal,
void
or unenforceable, the remainder of this Agreement will continue in full
force
and effect and the application of such provision to other persons or
circumstances will be interpreted so as reasonably to effect the intent
of the
parties hereto. The parties further agree to replace such void or unenforceable
provision of this Agreement with a valid and enforceable provision that
will
achieve, to the extent possible, the economic, business and other purposes
of
such void or unenforceable provision.
10.9 Other
Remedies. Except as otherwise provided herein, any and all remedies herein
expressly conferred upon a party will be deemed cumulative with and not
exclusive of any other remedy conferred hereby, or by law or equity upon
such
party, and the exercise by a party of anyone remedy wi1l not preclude the
exercise of any other remedy.
10.10 Governing
Law. This Agreement shall be governed by and construed in accordance
withthe
laws
of Bermuda, without regard to the applicable principles of conflicts of
laws
thereof.
10.11 Absence
of Third-Party Beneficiary Rights. No provision of this Agreement is intended,
or will be interpreted, to provide to or create for any third-party beneficiary
rights or any other rights of any kind in any client, customer, affiliate,
shareholder, employee, partner or any party hereto or any other person
or
entity, and all provisions hereof will be personal solely between the parties
to
this Agreement, except that the provisions of Article VIII shall be for
the
benefit of, and enforceable by, the indemnified parties referred to
therein.
10.12 Joint
and
Several Responsibility. Sellers acknowledge and agree that they are entering
into this Agreement, and that they make the representations, warranties,
covenants and agreements set forth herein, jointly and severally, with
full
recourse on the, part of Purchaser to any and all Sellers for the obligations
and undertakings of any Seller contained herein. In this respect, each
Seller
joins in this Agreement as primary obligor and not as surety, and Purchaser
shall not be required to proceed first against or exhaust its remedies
against
any one or more Sellers as a condition to proceeding hereunder against
any other
Seller with respect to any claim arising hereunder. Further, each Seller
hereby
irrevocably and exclusively appoints First Ecom as its agent and
attorney-in-fact for the giving or receipt of all notices or payments,
the
granting of all consents, approvals, or waivers, and the taking of all
such
other actions and making of all such other elections and/or decisions as
shall
be explicitly or implicitly provided or permitted herein to be given, received,
granted, taken or made by or on behalf of the Sellers or any of them (it
being
understood that omitting to take any action or make any election or decision
shall be deemed the taking of an action or the making of any election or
decision for this purpose), and to do all such acts and things as may in
the
opinion of such attorney-in-fact be reasonably necessary or reasonably
expedient
for the purposes thereof, or in connection therewith, and Purchaser shall
be
entitled to rely conclusively on any of the foregoing as the action, decision
or
election, as the case may be, of each and all of the Sellers. Each Seller
agrees
that the foregoing appointment constitutes a power coupled with an interest
and
shall be binding upon its successors and assigns. Any payments received
by First
Ecom hereunder that properly belong to any of other Seller shall be held
by
First Ecom in trust for the benefit of such other Seller, and Sellers hereby
release, discharge and agree to hold harmless Purchaser for any amounts
payable
to any Seller hereunder or pursuant to any transaction or instrument
contemplated hereby that Purchaser pays to First Ecom.
Page
- 129
IN
WITNESS WHEREOF,
Purchaser and Sellers have caused this Agreement to be executed and delivered
all as of the date first above written.
“Sellers”:
FIRST
ECOM.COM, INC.
By:
/s/
Kenneth G.C. Telford
Name:
Kenneth G.C. Telford
Title:
Secretary
FEDS
ACQUISITION CORPORATION
By:
/s/
Kenneth G.C. Telford
Name:
Kenneth G.C. Telford
Title:
Secretary
FIRST
ECOM DATA SERVICES
ASIA
LIMITED
By:
/s/
Kenneth G.C. Telford
Name:
Kenneth G.C. Telford
Title:
Secretary
FIRST
ECOMMERCE ASIA LIMITED
By:/s/
Kenneth G.C. Telford
Name:
Kenneth G.C. Telford
Title:
Secretary
“Purchaser”:
FIRST
CURACAO INTERNATIONAL BANK, N.V.
By:
/s/
John Chr. M.A.M. Deuss
Name:
John Chr. M.A.M. Deuss
Title:
President
Page
- 130
Exhibits
attached:
A - Form
of
Mars Software License Agreement
B - Form
of
Payment Gateway License Agreement
C - Form
of
Software Development License Agreement
D - Form
of
Oasis Subdistributor and Assignment Agreement
E - Form
of
End User Support Agreement
F - Form
of
Share Transfer Instruments
G
- Form
of
Release And Discharge of Intercompany
Debt And Related Liens
H - Assignment
and Transfer of Logo from the Company to Seller
I
- Assignment
and Transfer of Wing Hang Bank and International Bank of Asia Contracts
From The
Company to FEDS Asia
J
-
Form
of
Opinion of Legal Counsel to be delivered on behalf of First Ecom and FEDS
Acquisition
(END
OF
DOCUMENT - SEE ATTACHED EXHIBITS AND SCHEDULES)
Page
- 131
Schedule
A
SOFTWARE
LICENSE AGREEMENT
FOR
MERCHANT
ACCOUNTING AND REPORTING SYSTEM
SOFTWARE
LICENSE AGREEMENT
("Agreement") is entered into effective as of October 19, 2001 (the
“Effective
Date”)
by and
among First Ecom.com, a Nevada corporation having its principal place of
business at 80 Gloucester Road, 19th
Floor,
Wan Chai, Hong Kong ("First Ecom"), and First Ecom Data Services Asia Limited,
a
Hong Kong corporation having its principal place of business at 80 Gloucester
Road, 19th
F loor,
Wan
Chai, Hong Kong (“FEDS Asia”) (First Ecom and FEDS Asia being referred to herein
individually,
jointly and collectively as “Licensor”),
and
Transworld Payment Solutions N.V., a Netherlands Antilles company having
its
offices at c/o Julianaplein No. 5, Curacao, Netherlands Antilles (“Licensee”).
1.Definitions.
As used
in this Agreement, the capitalized terms defined in the introductory
paragraph
shall have the meanings assigned to them therein, and the following capitalized
terms shall
have the meanings assigned to them below:
“Affiliate”
of
a
person or entity means any other person or entity controlled by, controlling,
or
under common control with said person or entity, and “control” for this purpose
is understood to include the ownership or voting control of more than 50%
of the
outstanding securities of any such person carrying the power to vote with
respect to the direction or management of the person or entity.
“Documentation”
means
the related hard-copy or electronically reproducible technical documents
furnished in association with the Software;
“Media”
means
the original Licensor-supplied physical materials (if any) containing the
Software and/or Documentation;
“Product”
means
collectively the Media, Software, and Documentation, and all Software,
Media or
Documentation updates subsequently provided to Licensee by Licensor or
its
authorized distributor;
Page
- 132
“Software”
means
the original computer files (including all computer programs and data stored
in
such files) comprising Licensor's financial transaction management and
reporting
computer software product known as "Merchant Accounting and Reporting System” or
“MARS”, and all whole or partial copies thereof, including without limitation
all modified copies and portions merged into other programs, and further
including any and all updates, revisions, enhancements, modifications,
subsequent versions and other derivative works thereof
developed and furnished to Licensee by or on behalf of Licensor from time
to
time.
Other
capitalized terms used herein shall have the meanings
assigned to them where they first appear.
2.Grant
Of License Rights. For
good
and
valuable consideration in hand received, the receipt and sufficiency of
which
are hereby acknowledged, but subject to the terms and conditions set forth
herein, Licensor grants to Licensee and its Affiliates a paid-up royalty-free,
non-exclusive, non-transferable, perpetual license to deploy, install,
execute
and use solely for Licensee's and/or its Affiliates' internal use as many
copies
of the Product, and on such number(s) and type(s) of servers, workstations
or
other computer hardware, and in such locations, as Licensee shall deem
desirable
from time to time. Any programs, utilities, modules or other software or
documentation supplied by third parties and embedded in or bundled with
the
Product as furnished to Licensee by or on behalf of Licensor are hereby
expressly included in the scope of this grant. Licensor agrees to deliver,
promptly upon the execution and delivery of this Agreement (but not before
November 15, 2001), no less than two (2) master copies of the Software
in
executable (machine readable) code format to Licensee on such Media as
Licensee
shall reasonably request, together with two (2) copies of the
Documentation.
Page
- 133
3.Title
And Copyright.
Licensor represents and warrants to Licensee that Licensor is the owner
and
holder of all rights, titles and interests in and to the Product, free
and clear
of all liens, charges, encumbrances, equities and claims of third parties
of any
description. There are no facts or alleged facts known to Licensor which
would
reasonably serve as a basis for any claim that Licensor does not have the
right
to grant the rights and licenses provided for herein. As between Licensor
and
Licensee, Licensee acknowledges and agrees that, except as and to the extent
otherwise agreed in writing between the parties, all title and copyrights
in and
to the Product, are and will remain the property of Licensor and/or its
affiliates and suppliers, and are protected by applicable copyright laws
and
applicable international copyright treaties, and that Licensor neither
grants
hereby nor otherwise transfers hereby any rights of ownership therein to
Licensee or to any third party. Licensee will not claim or assert title
to or
ownership of the Product except pursuant to a written agreement expressly
entitling Licensee to claim or assert such title or ownership. This Agreement,
when executed and delivered by Licensor and Licensee, w ill constitute
the valid
and legally binding obligation of Licensor, legally enforceable against
Licensor
in accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the
rights of creditors generally, limitations imposed by applicable law or
equitable principles upon the specific enforceability of any of the remedies,
covenants or the provisions of this Agreement, and upon the availability
of
injunctive relief or other equitable remedies.
4.Restrictions.
Licensee
will not remove or alter any copyright or, proprietary notice from copies
of the
Product. Except in accordance with the terms of this Agreement or any other
express written agreement between the parties, Licensee agrees (a) not
to
decompile, disassemble, reverse engineer or otherwise attempt to derive
the
Software’s source code from object code except to the extent expressly permitted
by applicable law or treaty despite this limitation; (b) not to sell, rent,
lease, license, sub-license, display, modify, time share, outsource or
otherwise
transfer the Product to, or , permit the use of the Product by, any third
party
not an Affiliate of Licensee, provided,
without
limiting the scope of the license grant hereinabove stated, it is understood
and
agreed that this Agreement permits the use of the Product by Licensee and
its
Affiliates in support of services rendered to their customers in the normal
course of their trade or business; and (c) to use reasonable care and protection
to prevent the unauthorized use, copying, publication or dissemination
of the
Product. Licensor has the right to obtain injunctive relief against any
actual
or threatened violation of these restrictions, in addition to any other
available remedies.
Page
- 134
5.Taxes
And Addition Charges. All
license fees paid or payable by the Licensee for the license granted hereunder
(this "License") do not include, and Licensor will be responsible for,
any and
all taxes, duties, levies, tariffs, and other governmental charges now
or
hereafter imposed by any governmental authority on the purchase or sale
of this
License or the use or possession of the Product by Licensee and/or its
Affiliates; provided, that Licensee will be responsible for its own corporate
franchise taxes and taxes based upon its own net income.
6.Limited
Warranty. Licensor
warrants to Licensee that, for a period of ninety (90) days from the Effective
Date, (i) the Documentation and Media will be, under normal use, free from
physical defects, and (ii) the Software will perform in substantial accordance
with the operating specifications contained in the Documentation that is
most
current at the Effective Date. If Licensee notifies Licensor within said
ninety-day period of its belief that either of these warranties has been
breached, including a description of the nature or circumstances of such
breach,
Licensor will be obligated to use reasonable efforts to remedy the defect(s)
in
question within a reasonable period of time or, at Licensor’s option, to replace
the defective Product component at no additional charge. Licensor, it’s
authorized distributors and its suppliers do not warrant that the Product
will
satisfy Licensee’s requirements, that the operation of the Product will be
uninterrupted or error free, or that all software defects can be corrected.
This
warranty will be void if: (i) the Product is not used in accordance with
the
instructions set out in the Documentation, (ii) a Product defect has been
caused
by any of Licensee's or a third party's malfunctioning equipment, or (iii)
Licensee has made modifications to the Product not expressly authorized
in
writing by Licensor.
7.Indemnification
For Infringement. Licensor
will defend or settle, at its own expense any claim against Licensee by
a third
party asserting that Licensee's and/or its Affiliates’ use of the Product within
the scope of this Agreement violates such third party’s patent, copyright,
trademark, trade -secret or other proprietary rights, and will indemnify
Licensee against any damages finally awarded against Licensee arising out
of
such claim. Licensee will promptly notify Licensor in writing after first
receiving notice of any such claim, and Licensor will have sole control
of the
defense of any action and all negotiations for its settlement or compromise,
with Licensee's reasonable assistance; provided, that Licensee's approval
in
writing shall be required of any settlement or compromise involving any
admission of fault or wrongdoing on the part of Licensee, and provided,
further,
that Licensee may at Licensor's cost and expense take responsibility for
its own
defense if and to the extent that Licensee has any reasonable doubt as
to the
ability or willingness of Licensor to fund such defense or any award, settlement
or compromise arising therefrom. Licensor will not be liable for any costs
or
expenditures incurred by Licensee without Licensor's prior written consent
except insofar as Licensee reasonably determines that it is necessary or
appropriate to incur such costs and expenses in order to preserve its legal
or
equitable rights and remedies, protect it from further such claims, or
minimize
the losses associated with claims so made. If an order is obtained against
Licensee’s and/or its Affiliates’ use of the Product by reason of any claimed
infringement, or if in Licensor's opinion the Product is likely to become
the
subject of such a claim, Licensor will, at its option and expense, and
in
addition to any other rights and remedies available to Licensee hereunder,
either (i) procure for Licensee the right to continue using the Product,
or (ii)
modify or replace the Product with a compatible, functionally equivalent,
non-infringing Product.
Page
- 135
8.Support.
Contemporaneously
with the execution of this Agreement, Licensor and Licensee are entering
into an
End User Support Agreement under which Licensor will provide ongoing support
and
maintenance beyond the scope and time limits of the warranty period set
forth in
Section 6 above, which End User Support Agreement sets forth the terms
and
conditions under which Licensee will be entitled to receive such Product
updates
and other Product support as may be provided for therein. Notwithstanding
the
foregoing, however, it is understood and agreed that, for purposes of this
Agreement, the Software to which the license granted herein pertains includes
both the first and second versions of the "MARS" product as well as the
java-enabled version combined with Licensor's "payment gateway" product
currently in development. Accordingly, regardless of the terms of the particular
agreement entered into by the parties as described above, Licensor hereby
agrees
to furnish to Licensee at no additional charge the java-enabled version
of the
Software when available.
9.SuccessorsAnd
Assigns.
This
Agreement will be binding upon and inure to the benefit of each of the
parties
and their respective successors and assigns; provided, however, that Licensee
may not assign or sublicense this Agreement in whole or in part to any
person or
entity not an Affiliate of Licensee without the prior written consent of
Licensor, and any assignment or sublicense attempted without such consent
will
be void.
10.Governing
Law. This
agreement will be governed by and construed in accordance with the laws
of
Bermuda, without regard to conflicts of law principles.
11.Miscellaneous.
(a) Each
party is an independent contractor under this Agreement, and nothing herein
will
be construed to create any partnership, joint venture, or agency relationship
parties between the parties hereto. Any use of the term "partner" in any
communication by or between the parties or on their individual or joint
behalf
or in any trademark or service mark to describe their relationship is intended
solely in the colloquial sense of a valued business relationship, and does
not
indicate the existence of or an offer to enter into a legal partnership,
joint
agency or other relationship involving common ownership or joint and/or
several
liability with one another and/or any of their Affiliates. Neither party
will
incur any debt or make any express or implied agreement, guarantee, warranty
or
representation in the name or on behalf of the other without the other's
express
written authorization, and each party will be responsible for its own costs
and
expenses incurred in connection with this Agreement. No failure or delay
by
either party in exercising any right, power or privilege hereunder will
operate
as a waiver thereof, nor will any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any right, power
or
privilege hereunder. No remedy expressly provided in this Agreement for
a breach
will be the sole or exclusive remedy for such breach, and each party hereby
reserves to itself, in addition to the remedies expressly provided to it
in this
Agreement, all remedies available to it under law and at equity. This Agreement
may be amended, modified or waived only by a subsequent writing that
specifically refers to this Agreement and that is signed by both parties,
and no
other act, document, usage, or custom will be deemed to amend this Agreement.
Headings in this Agreement are for convenience of reference only and will
not
affect the construction or interpretation of this Agreement. If any provision
or
provisions of this Agreement will be held, for any reason to be illegal,
invalid
or unenforceable in any circumstance, the remaining provisions will nonetheless
be legal, valid and enforceable provisions, and the affected provision
will
remain legal, valid and enforceable in other circumstances. The terms of
this
Agreement that expressly or by implication are intended to continue beyond
its
termination will survive any such termination. Under local law and treaties,
the
restrictions and limitations of this Agreement may not apply to Licensee;
Licensee may have other rights and remedies, and be subject to other
restrictions and limitations.
Page
- 136
(b) IN
NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER UNDER THE LAW OF TORT,
CONTRACT
OR OTHERWISE, AND INCLUDING AS A RESULT OF NEGLIGENCE, FOR SPECIAL, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE
PERFORMANCE OR NON-PERFORMANCE HEREOF (EVEN IF THE RESPONSIBLE PARTY HAS
BEEN
ADVISED OF OR FORESEES A POSSIBILITY OF ANY SUCH DAMAGES OCCURRING), INCLUDING
BUT NOT LIMITED TO LOST BUSINESS REVENUE, FAILURE TO REALIZE EXPECTED PROFITS
OR
SAVINGS, OR LOSS OF DATA.
(c) Neither
party hereto shall be held liable hereunder for any default arising from
the
delay in the performance of its obligations hereunder to the extent that
such
default or delay:
(i)
is
caused directly by an event beyond the reasonable control of
the
defaulting or delaying party (the "Non-performing Party"), such
as, but
not restricted to, fire, flood, earthquake, elements of nature,
acts of
war, terrorism, riots, civil disorders, rebellions or revolutions,
strikes, lockouts or labor difficulties; and
Page
- 137
(ii)
could
not have been prevented by reasonable precautions and cannot
possibly be
circumvented by the Non-performing Party through the use of commercially
reasonable alternative sources, work-around plans or other means;
(a
“Force Majeure Event”). The Non-performing Party will be excused from any
further performance of the obligations affected by such Force
Majeure
Event for as long as the Force Majeure Event continues and the
Non-Performing Party continues to use its reasonable efforts
to recommence
performance. The Non-performing Party shall immediately notify
the other
party by telephone (to be confirmed in writing within five (5)
days of the
inception of the Force Majeure Event) and describe at a reasonable
level
of detail the circumstances causing such default or delay. During
the
continuance of a Force Majeure Event affecting Licensor, Licensee
shall
continue to pay Licensor’s charges for professional services actually
rendered and expenses incurred in the actual performance of such
services
in accordance with this Agreement. Notwithstanding any other
provision
hereof, this clause (c) will not excuse a breach of any purely
monetary
obligation.
12.Joint
and Several Responsibility. Each
of
First Ecom and FEDS Asia acknowledge and agree that they are entering into
this
Agreement, and that they make the representations, warranties, covenants,
agreements, indemnities and other undertakings and responsibilities of
Licensor
set forth herein, jointly and severally, with full recourse on the part
of
Licensee to either or both of them for the obligations and undertakings
of
Licensor contained herein. In this respect, each of First Ecom and FEDS
Asia
joins in this Agreement as primary obligor and not as surety, and Licensee
shall
not be required to proceed first against or exhaust its remedies against
either
of First Ecom or FEDS Asia as a condition to pr proceeding hereunder against
the
other with respect to any claim arising hereunder. Further, each of First
Ecom
and FEDS Asia hereby irrevocably and exclusively appoints First Ecom as
its
agent and attorney-in-fact for the giving or receipt of all notices or
payments,
the granting of all consents, approvals, or waivers, and the taking of
all such
other actions and making of all such other elections and/or decisions as
shall
be explicitly or implicitly provided or permitted herein to be given, received,
granted, taken or made by or on behalf of Licensor or either of them (it
being
understood that omitting to take any action or make any election or decision
shall be deemed the taking of an action or the making of any election or
decision for this purpose), and to do all such acts and things as may in
the
opinion of such attorney-in-fact be reasonably necessary or reasonably
expedient
for the purposes thereof, or in connection therewith, and Licensee shall
be
entitled to rely conclusively on any of the foregoing as the action, decision
or
election, as the case may be, of each and both of First Ecom and FEDS Asia.
Each
of First Ecom and FEDS Asia agrees that the foregoing appointment constitutes
a
power coupled with an interest and shall be binding upon its successors
and
assigns. Any payments received by First Ecom hereunder that properly belong
to
FEDS Asia shall be held by First Ecom in trust for the benefit of FEDS
Asia, and
FEDS Asia hereby releases, discharges and agrees to hold harmless Licensee
for
any amounts payable to FEDS Asia that Licensee pays to First Ecom.
THIS
SOFTWARE LICENSE AGREEMENT (“Agreement”)
is
entered into effective as of October 19, 2001 (the “Effective
Date”)
by and
among First Ecom.com, Inc., a Nevada corporation having its principal place
of
business at 80 Gloucester Road, 19th
Floor,
Wan Chai, Hong Kong ("First Ecom"), and First Ecom Data Services Asia Limited,
a
Hong Kong corporation having its principal place of business at 80 Gloucester
Road, 19th
Floor,
Wan Chai, Hong Kong ("FEDS Asia")(First Ecom and FEDS Asia being referred
to
herein individually, jointly and collectively as "Licensor"), and Transworld
Payment Solutions N.V., a Netherlands Antilles company having its offices
at c/o
Julianaplein No. 5, Curacao, Netherlands Antilles ("Licensee").
1.Definitions.
As used
in this Agreement, the capitalized terms defined in the introductory paragraph
shall have the meanings assigned to them therein, and the following capitalized
terms shall have the meanings assigned to them below:
“Affiliate”
of
a
person or entity means any other person or entity controlled by, controlling,
or
under common control with said person or entity, and “control” for this purpose
is understood to include the ownership or voting control of more than 50%
of the
outstanding securities of any such person carrying the power to vote with
respect to the direction or management of the person or entity.
“Documentation”means
the
related hard-copy or electronically reproducible technical documents furnished
in association with the Software;
“Media”
means
the original Licensor-supplied physical materials (if any) containing the
Software and/or Documentation;
Page
- 141
“Product”
means
collectively the Media, Software, and Documentation, and all Software,
Media or
Documentation updates subsequently provided to Licensee by Licenosr or
its
authorized distributor;
“Software”
means
the original computer files (including all computer programs and data stored
in
such files) comprising Licensor's "Payment Gateway" computer software product
and all whole or partial copies thereof, which product consists of an electronic
internet payment gateway that translates various types of financial transaction
data, including but not limited to transaction data originating from credit,
debit and check payment methods, into a format that can be read by the
processing system or systems proprietary to First Ecommerce Data Services
Limited, including without limitation modified copies and portions merged
into
other programs, and further including any and all updates, revisions,
enhancements, modifications, subsequent versions and other derivative works
thereof developed and furnished to Licensee by or on behalf of Licensor
from
time to time.
Other
capitalized terms used herein shall have the meanings assigned to them
where
they first appear.
2.Grant
Of License Rights. For
good
and valuable consideration in hand received, the receipt and sufficiency
of
which are hereby acknowledged, but subject to the terms and conditions
set forth
herein, Licensor grants to Licensee and its Affiliates a paid-up, royalty-free,
non-exclusive, transferable, perpetual license to deploy, install, execute
and
use solely for Licensee's and/or its Affiliates' internal use as many copies
of
the Product, and on such number (s) and type(s) of servers, workstations
or
other computer hardware, and in such locations, as Licensee shall deem
desirable
from time to time. Any programs, utilities, modules or other software or
documentation supplied by third parties and embedded in or bundled with
the
Product as furnished to Licensee by or on behalf of Licensor are hereby
expressly included in the scope of this grant. It is understood and agreed
that
this Agreement permits the transfer by Licensee of its rights hereunder
to third
parties. Licensor agrees to deliver, promptly upon the execution and delivery
of
this Agreement (but not before November 15, 2001), no less than two (2)
master
copies of the Software in executable (machine readable) code format to
Licensee
of such Media as Licensee shall reasonably request, together with two (2)
copies
of the Documentation.
Page
- 142
3.Title
And Copyright.
Licensor represents and warrants to Licensee that Licensor is the owner
and
holder of all rights, titles and interests in and to the Product, free
and clear
of all liens, charges, encumbrances, equities and claims of third parties
of any
description. There are no facts or alleged facts known to Licensor which
would
reasonably serve as a basis for any claim that Licensor does not have the
right
to grant the rights and licenses provided for herein. As between Licensor
and
Licensee, Licensee acknowledges and agrees that, except as and to the extent
otherwise agreed in writing between the parties, all title and copyrights
in and
to the Product, are and will remain, are and will remain the property of
the
Licensor and/or its affiliates and suppliers, and are protected by applicable
copyright laws, and applicable international copyright treaties, and that
Licensor neither grants hereby nor otherwise transfers hereby any rights
of
ownership therein to Licensee or to any third party. Licensee will not
claim or
assert title to or ownership of the Product except pursuant to a written
agreement expressly entitling Licensee to claim or assert such title or
ownership. This Agreement, when executed and delivered by Licensor and
Licensee,
will constitute the valid and legally binding obligation of Licensor, legally
enforceable against Licensor in accordance with its terms, subject to the
effect
of bankruptcy, insolvency, reorganization, moratorium and other similar
laws
relating to or affecting the rights of creditors generally, limitations
imposed
by applicable law or equitable principles upon the specific enforceability
of
any of the remedies, covenants or other provisions of this Agreement, and
upon
the availability of injunctive relief or other equitable remedies.
Page
- 143
4.Restrictions.
Licensee will not remove or alter any copyright or proprietary notice from
copies of the Product. Except in accordance with the terms of this Agreement
or
any other express written agreement between the parties, Licensee agrees
(a) not
to decompile, disassemble, reverse engineer or otherwise attempt to derive
the
Software’s source code from object code except to the extent expressly permitted
by applicable law or treaty despite this limitation; and (b) to use reasonable
care and protection to prevent the unauthorized use, copying, publication
or
dissemination of the Product. Licensor has the right to obtain injunctive
relief
against any actual or threatened violation of these restrictions, in addition
to
any other available remedies.
5.Taxes
And Additional Charges.
All
license fees paid or payable by the Licensee for the license granted hereunder
(this "License") do not include, and Licensor will be responsible for,
any and
all taxes, duties, levies, tariffs, and other governmental charges now
or
hereafter imposed by any governmental authority on the purchase or sale
of this
License or the use or possession of the Product by Licensee and/or its
Affiliates; provided, that Licensee will be responsible for its own corporate
franchise taxes and taxes based upon its own net income.
6.Limited
Warranty. Licensor
warrants to Licensee that, for a period of ninety (90) days from the Effective
Date, (i) the Documentation and Media will be, under normal use, free from
physical defects, and (ii) the Software will perform in substantial accordance
with the operating specifications contained in the Documentation that is
most
current at the Effective Date. If Licensee notifies Licensor within said
ninety-day period of its belief that that either of these warranties has
been
breached, including a description of nature or circumstances of such breach,
Licensor will be obligated to use reasonable efforts to remedy the defect(s)
in
question within a reasonable period of time or, at Licensor’s option, to replace
the defective Product component at no additional charge. Licensor, its
authorized distributors and its suppliers do not warrant that the Product
will
satisfy Licensee’s requirements, that the operation of the Product will be
uninterrupted or error free, or that all software defects can be corrected.
This
warranty will be void if: (i) the Product is not used in accordance with
the
instructions set out in the Documentation, (ii) a Product defect has been
caused
by any of Licensee's or a third party's malfunctioning equipment, or (iii)
Licensee has made modifications to the Product not expressly authorized
in
writing by Licensor.
Page
- 144
7.Indemnification
For Infringement.
Licensor will defend or settle, at its own expense, any claim against Licensee
by a third party asserting that Licensee's and/or its Affiliates’ use of the
Product within the scope of this Agreement violates such third party’s patent,
copyright, trademark, trade secret or other proprietary rights, and will
indemnify Licensee against any damages finally awarded against Licensee
arising
out of such claimi. Licensee will promptly notify Licensor in writing after
first receiving notice of any such claim, and Licensor will have sole control
of
the defense of any action and all negotiations for its settlement or compromise,
with Licensee's reasonable assistance; provided, that Licensee’s approval in
writing shall be required of any settlement or compromise involving any
admission of fault or wrongdoing on the part of Licensee, and provided,
further,
that Licensee may at Licensor's cost and expense take responsibility for
its own
defense if and to the extent that Licensee has any reasonable doubt as
to the
ability or willingness of Licensor to fund such defense or any award, settlement
or compromise arising therefrom. Licensor will not be liable for any costs
or
expenditures incurred by Licensee without Licensor's prior written consent
except insofar as Licensee reasonably determines that it is necessary or
appropriate to incur such costs and expenses in order to preserve its legal
or
equitable rights and remedies, protect it from further such claims, or
minimize
the losses associated with claims so made. If an order is obtained against
Licensee’s and/or its Affiliates' use of the Product by reason of any claimed
infringement, or if in Licensor's opinion the Product is likely to become
the
subject of such a claim, Licensor will, at its option and expense, and
in
addition to any other rights s available to Licensee hereunder, either
(i)
procure for Licensee the right to ing the Product, or (ii) modify or replace
the
Product with a compatible, equivalent, non-infringing Product.
8.Support.
Contemporaneously with the execution of this Agreement, Licensor and Licensee
are entering into an End User Support Agreement under which Licensor will
provide ongoing support and maintenance beyond the scope and time limits
of the
warranty period set forth in Section 6 above, which End User Support Agreement
sets forth the terms and conditions under which Licensee will be entitled
to
receive such Product updates and other Product support as may be provided
for
therein. Notwithstanding the foregoing, however, it is understood and agreed
that, for purposes of this Agreement, the Software to which the license
granted
herein pertains includes both the first and second versions of the “Payment
Gateway” product as well as the java-enable version combined with Licensor's
"MARS" product currently in development. Accordingly, regardless of the
terms of
the particular agreement entered into by the parties as described above,
Licensor hereby agrees to furnish to Licensee at no additional charge the
java-enabled version of the Software when available.
9.Successors
And Assigns.
This
Agreement will be binding upon and inure to the benefit of each of the
parties
and their respective successors and assigns; provided, however, that Licensee
may not assign or sublicense this Agreement in whole or in part to any
person or
entity not an Affiliate of Licensee without the prior, written consent
of
Licensor, and any assignment or sublicense attempted without such consent
will
be void.
10.Governing
Law.
This
agreement will be governed by and construed in accordance with the laws
of
Bermuda, without regard to conflicts of law principles.
11.Miscellaneous.
(a) Each
party is an independent contractor under this Agreement, and nothing herein
will
be construed to create any partnership, joint venture, or agency relationship
between the parties hereto. Any use of the term "partner" in any communication
by or between the parties or on their individual or joint behalf or in
any
trademark or service mark to describe their relationship is intended solely
in
the colloquial sense of a valued business relationship, and does not indicate
the existence of or an offer to enter into a legal partnership, joint agency
or
other relationship involving common ownership or joint and/or several liability
with one another and/or any of their Affiliates. Neither party will incur
any
debt or make any express or implied agreement, guarantee, warranty or
representation, in the name or on behalf of the other without the other’s
express written authorization, and each party will be responsible for its
own
costs and expenses incurred in connection with this Agreement. No failure
or
delay by either party in exercising any right, power or privilege hereunder
will
operate as a waiver thereof, nor will any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any right,
power or priviledge hereunder. No remedy expressly provided in this Agreement
for a breach will be the sole or exclusive remedy for such breach, and
each
party hereby reserves to itself, in addition to the remedies expressly
provided
to it in this Agreement, all remedies available to it under law and at
equity.
This Agreement may be amended, modified or waived only by a subsequent
writing
that specifically refers to this Agreement and that is signed by both parties,
and no other act, document, usage, or custom wil1 be deemed to amend this
Agreement. Headings in this Agreement are for convenience of reference
only and
will not affect the construction or interpretation of this Agreement. If
any
provision or provisions of this Agreement will be held, for any-reason,
to be
illegal, invalid or unenforceable in any circumstance, the remaining provisions
will nonetheless be legal, valid and enforceable provisions, and the affected
provision will remain legal, valid and enforceable in other circumstances.
The
terms of this Agreement that expressly or by implication are intended to
continue beyond its termination will survive any such termination. Under
local
law and treaties, the restrictions and limitations of this Agreement may
not
apply to Licensee; Licensee may have other rights and remedies, and by
subject
to other restrictions and limitations.
Page
- 145
(b) IN
NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER
UNDER THE LAW OF TORT, CONTRACT OR OTHERWISE, AND INCLUDING AS A RESULT
OF
NEGLIGENCE, FOR SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES
ARISING
OUT OF THIS AGREEMENT OR THE PERFORMANCE OR NON-PERFORMANCE HEREOF EVEN
IF THE
RESPONSIBLE PARTY HAS BEEN ADVISED OF OR FORESEES A POSSIBILITY OF ANY
SUCH
DAMAGES OCCURRING), INCLUDING BUT NOT LIMITED TO LOST BUSINESS REVENUE,
FAILURE
TO REALIZE EXPECTED PROFITS OR SAVINGS OR LOSS OF DATA.
(c) neither
party hereto shall be held liable hereunder for any default arising
from
the
delay in the performance of its obligations hereunder to the extent that
such
default or delay:
(i) is
caused
directly by an event beyond the reasonable control of the defaulting or
delaying
party (the "Non-performing Party"), such as, but not restricted to, fire,
flood,
earthquake, elements of nature, acts of war, terrorism, riots, civil disorders,
rebellions or revolutions, strikes, lockouts or labor difficulties; and
(ii) could
not
have been prevented by reasonable precautions and cannot possibly be
circumvented by the Non-performing Party through the use of commercially
reasonable alternative sources, work-around plans or other means; (“Force
Majeure Event”). The Non-performing Party will be excused from any further
performance of the obligations affected by such Force Majeure Event for
as long
as the Force Majeure Event continues and the Non-Performing Party continues
to
use its reasonable efforts to recommence
performance. The
Non-performing Party shall immediately notify the other party by telephone
(to
be confirmed in writing within five (5) days of the inception of the Force
Majeure Event) and describe at a reasonable level of detail the circumstances
causing such default or delay. During the continuance of a Force Majeure
Event
affecting Licensor, Licensee shall continue to pay Licensor's charges for
professional services actually rendered and expenses incurred in the actual
performance of such services in accordance with this Agreement. Notwithstanding
any other provision hereof, this clause (c) will not excuse a breach of
any
purely monetary obligation.
Page
- 146
12.Joint
and Several Responsibility.
Each of
First Ecom and PEDS Asia acknowledge and agree that they are entering into
this
Agreement, and that they make the representations, warranties, covenants,
agreements, indemnities and other undertakings and responsibilities of
Licensor
set forth herein, jointly and severally, with full recourse on the part
of
Licensee to either or both of them for the obligations and undertakings
of
Licensor contained herein. In this respect, each of First Ecom and FEDS
Asia
joins in this Agreement as primary obligor and not as surety, and Licensee
shall
not be required to proceed first against or exhaust its remedies against
either
of First Ecom or FEDS Asia as a condition to proceeding hereunder against
the
other with respect to any claim arising hereunder. Further, each of First
Ecom
and FEDS Asia hereby irrevocably and exclusively appoints First Ecom as
its
agent and attorney-in-fact for the giving or receipt of all notices or
payments,
the granting of all consents, approvals, or waivers, and the taking of
all such
other actions and making of all such other elections and/or decisions as
shall
be explicitly or implicitly provided or permitted herein to be given, received,
granted, taken or made by or on behalf of Licensor or either of them (it
being
understood that omitting to take any action or make any election or decision
shall be deemed the taking of an action or the making of any election or
decision for this purpose), and to do all such acts and things as may in
the
opinion of such attorney-in-fact be reasonably necessary or reasonably
expedient
for the purposes thereof, or in connection therewith, and Licensee shall
be
entitled to rely conclusively on any of the foregoing as the action, decision
or
election, as the case may be, of each and both of First Ecom and FEDS Asia.
Each
of First Ecom and FEDS Asia agrees that the foregoing appointment constitutes
a
power coupled with an interest and shall be binding upon its successors
and
assigns. Any payments received by First Ecom hereunder that properly belong
to
FEDS Asia shall be held by First Ecom in trust for the benefit of FEDS
Asia, and
FEDS Asia hereby releases, discharges and agrees to hold harmless Licensee
for
any amounts payable to FEDS Asia that Licensee pays to First Ecom.
This
SOFTWARE
DEVELOPMENT LICENSE AGREEMENT
(“Agreement”)
is
entered into effective as of October 19, 2001 (the “Effective
Date”)
by and
among First Ecom.com, Inc., a Nevada corporation having its principal place
of
business at 80 Gloucester Road, 19th Floor, Wan Chai, Hong Kong (“First Ecom”),
and First Ecom Data Services Asia Limited, a Hong Kong corporation having
its
principal place of business at 80 Gloucester Road, 19th Floor, Wan Chai,
Hong
Kong (“FEDS Asia”)( First Ecom and FEDS Asia being referred to herein
individually, jointly and collectively as “Licensor”),
and
Transworld Payment Solutions N.V., a Netherlands Antilles company having
its
offices at c/o Julianaplein No. 5, Curacao, Netherlands Antilles (“Licensee”)
.
1.Definitions.
As used
in this Agreement, the capitalized terms defined in the introductory paragraph
shall have the meanings assigned to them therein, and the following capitalized
terms shall have the meanings assigned to them below:
“Affiliate”
of
a
person or entity means any other person or entity controlled by, controlling,
or
under common control with said person or entity, and "control" for this
purpose
is understood to include the ownership or voting control of more than 50%
of the
outstanding securities of any such person carrying the power to vote with
respect to the direction or management of the person or entity;
“Documentation”
means
the related hard-copy or electronically reproducible technical documents
created
in the course of the development of the Software, including without limitation
all specifications, instructions, technical descriptions, manuals, flow,
charts,
pseudo-code, state diagrams, interim versions of programs or parts thereof,
comments to source code, or other tangible notes or records pertaining
to the
Software's development;
“Media”
means
the original Licensor-supplied physical materials (if any) containing the
Software and/or Documentation;
Page
- 148
“Product”
means
collectively the Media, Software and Documentation, and all Software, Media
or
Documentation updates subsequently provided to the Licensee by Licensor
or its
authorized distributor;
“Software”
means
the original computer files (including all computer programs and data stored
in
such files) comprising (i) Licensor’s financial transaction management and
reporting computer software product known as “Merchant Accounting and Reporting
system or “MARS”, and system or “MARS”, and (ii) Licensor's “Payment Gateway”
computer software product, which product consists of an electronic internet
payment gateway that translates various types of financial transaction
data,
including but not limited to transaction data originating from credit,
debit and
check payment methods, into a format that can be read by the processing
system
or systems proprietary to First Ecommerce Data Services Limited, and all
whole
or partial copies thereof, including without limitation modified copies
and
portions merged into other programs, and further including any and all
updates,
revisions, enhancements, modifications, subsequent versions and other derivative
works thereof developed and furnished to Licensee by or on behalf of Licensor
from time to time.
Other
capitalized terms used herein shall have the meanings assigned to them
where
they first appear.
.
2.Grant
Of License Rights. For
good
and valuable consideration in hand received, the receipt and sufficiency
of
which are hereby acknowledged, but subject to the terms and conditions
set forth
herein, Licensor grants to Licensee and its Affiliates a paid-up, royalty-free,
non-exclusive, non-transferable, perpetual license to revise, modify, enhance
and otherwise develop derivative works of the Product. Licensor agrees
to
deliver promptly upon the execution and delivery of this Agreement (but
not
before November 15, 200l), no less than two (2) master copies of the Software
in
source (human readable) code format to Licensee on such Media as Licensee
shall
reasonably request, together with two (2) copies of the Documentation,
including
without limitation all relevant third party development toolkits and
licenses.
Page
- 149
3.Title
And Copyright. Licensor
represents and warrants to Licensee that Licensor is the owner and holder
of all
rights, titles and interests in and to the Product, free and clear of all
liens,
charges, encumbrances, equities and claims of third parties of any description.
There are no facts or alleged facts known to Licensor which would reasonably
serve as a basis for any claim that Licensor does not have the right to
grant
the rights and licenses provided for herein. As between Licensor and Licensee,
Licensee acknowledges and agrees that, except as and to the extent otherwise
agreed in writing between the parties, all title and copyrights in and
to the
Product, including without limitation the original code or other copyrightable
material embedded in any derivative works thereof created by or on behalf
of
Licensee pursuant to this Agreement, are and will remain the property of
Licensor and/or its affiliates and suppliers, and are protected by applicable
copyright laws, and applicable international copyright treaties, and that
Licensor neither grants hereby nor otherwise transfers hereby any rights
of
ownership therein to Licensee or to any third party; provided, however,
that any
incremental additional code or other copyrightable material created by
or for
Licensee or its Affiliates shall be the property of Licensee or its Affiliates,
as applicable, and shall not be subject to the restrictions set forth herein
except to the extent such incremental material incorporates, is embedded
in or
bundled with the Product. Licensee will not claim or assert title to or
ownership of the Product except pursuant to a written agreement expressly
entitling Licensee to claim or assert such title or ownership. This Agreement,
when executed and delivered by Licensor and Licensee, will constitute the
valid
and legally binding obligation of Licensor, legally enforceable against
Licensor
in accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the
rights of creditors generally, limitations imposed by applicable law or
equitable principles upon the specific enforceability of any remedies,
covenants
or other provisions of this Agreement, and upon the availability of injunctive
relief or other equitable remedies.
4.Restrictions.
Licensee
will not remove or alter any copyright or proprietary notice from copies
of the
Product. Except in accordance with the terms of this Agreement or any other
express written agreement between the parties, Licensee agrees (a) not
to sell,
rent, lease, license, sublicense, display, modify, time share, outsource
or
otherwise transfer the Product or any derivative work of the Product to,
or
permit the use of the Product or any derivative work of the Product by,
any
third party not an affiliate of Licensee, provided,
without
limiting the scope of the license grant hereinabove stated, it is understood
and
agreed that this Agreement permits the use of any derivative work of the
Product
by Licensee and its Affiliates in support of services rendered to their
customers in the normal course of their trade or business; and (b) to use
reasonable care and protection to prevent the unauthorized use, copying,
publication or dissemination of the Product. Licensor has the right to
obtain
injunctive relief against any actual or threatened violation of these
restrictions, in addition to any other available remedies.
5.Taxes
And Additional Charges.
All
license fees paid or payable by the Licensee for the license granted hereunder
(this "License") do not include, and Licensor will be responsible for,
any and
all taxes, duties, levies, tariffs, and other governmental charges now
or
hereafter imposed by any governmental authority on the purchase or sale
of this
License or the use or possession of the Product by Licensee and/or its
Affiliates; provided that Licensee will be responsible for its own corporate
franchise taxes and taxes based upon its own net income.
6.Limited
Warranty.
Licensor
warrants to Licensee that, for a period of ninety (90) days from the Effective
Date, (i) the Documentation and Media will be, under normal use, free from
physical defects, and (ii) the Software will perform in substantial accordance
with the operating specifications contained in the Documentation that is
most
current at the Effective Date. If Licensee notifies Licensor within said
ninety-day period of its belief that either of these warranties has been
breached, including a description of the nature or circumstances of such
breach,
Licensor will be obligated to use reasonable efforts to remedy the defect(s)
in
question within a reasonable period of time or, at Licensor’s option, to replace
the defective Product component at no additional charge. Licensor, its
authorized distributors and its suppliers do not warrant that the Product
will
satisfy Licensee’s requirements, that the operation of the Product will be
uninterrupted or error free, or that all software defects can be corrected,
This
warranty will be void if: (i) the Product is not used in accordance with
the
instructions set out in the Documentation, (ii) a Product defect has been
caused
by any of Licensee's or a third party's malfunctioning equipment, or (iii)
Licensee has made modifications to the Product not expresslyauthorized
in writing by Licensor.
Page
- 150
7.Indemnification
For Infringement. Licensor
will defend or settle, at its own expense, any claim against Licensee by
a third
party asserting that Licensee's and/or its Affiliates’ use of the Product within
the scope of this Agreement violates such third party’s patent, copyright,
trademark, trade secret or other proprietary rights, and will indemnify
Licensee
against any damages finally awarded against Licensee arising out of such
claim.
Licensee will promptly notify Licensor in writing after first receiving
notice
of any such claim, and Licensor will have sole control of the defense of
any
action and all negotiations for its settlement or compromise, with Licensee's
reasonable assistance; provided, that Licensee's approval in writing shall
be
required of any settlement or compromise involving any admission of fault
or
wrongdoing on the part of Licensee, and provided, further, that Licensee
may at
Licensor's cost and expense take responsibility for its own defense if
and to
the extent that Licensee has any reasonable doubt as to the ability or
willingness of Licensor to fund such defense or any award, settlement or
compromise arising therefrom. Licensor will not be liable for any costs
or
expenditures incurred by Licensee without Licensor's prior written consent
except insofar as Licensee reasonably determines that it is necessary or
appropriate to incur such costs and expenses in order to preserve its legal
or
equitable rights and remedies, protect it from further such claims, or
minimize
the losses associated with claims so made. If an order is obtained against
the
Licensee's and/or its Affiliates' use of the Product by reason of any claimed
infringement, or if in Licensor's opinion the Product is likely to become
the
subject of such a claim, Licensor will, at its option and expense, and
in
addition to any other rights and remedies available to Licensee hereunder,
either (i) procure for Licensee the right to continue using the product,
or (ii)
modify or replace the Product with a compatible functionally equivalent,
non-infringing Product.
8.Support.
Contemporaneously with the execution of this Agreement, Licensor and Licensee
are entering into an End User Support Agreement under which Licensor will
provide ongoing support and maintenance beyond the scope and time limits
of the
warranty period set forth in Section 6 above, which End User Support Agreement
sets forth the terms and conditions under which Licensee will be entitled
to
receive such Product updates and other Product support as may be provided
for
therein.
9.Successors
And Assigns.
This
Agreement will be binding upon and inure to the benefit of each of the
parties
and their respective successors and assigns; provided, however, that Licensee
may not assign or sublicense this Agreement in whole or in part to any
person or
entity not an Affiliate of Licensee without the prior written consent of
Licensor, and any assignment or sublicense attempted without such consent
will
be void. Notwithstanding the foregoing, if for any reason both First Ecom
and
FEDS Asia cease doing business, or both discontinue maintenance and support
for
the Software or any portion thereof, then in either case, unless the Software
or
portion thereof so affected has been conveyed to a third party, the license
granted hereunder shall thereupon automatically and without need for further
action by either party become transferable, and the restrictions contained
herein on disclosure or dissemination to third parties of the Product or
derivative works thereof shall thenceforth be of no force or
effect.
10.Governing
Law. This
agreement will be governed by and construed in accordance with the laws
of
Bermuda, without regard to conf1icts of law principles.
11.
Miscellaneous.
(a) Each
party is an independent contractor under this Agreement, and nothing herein
will
be construed to create any partnership, joint venture, or agency relationship
between the parties hereto. Any use of the term "partner" in any communication
by or between the parties or on their individual or joint behalf or in
any
trademark or service to describe their relationship is intended solely
in the
colloquial sense of a valued business relationship, and does not indicate
the
existence of or an offer to enter into a legal partnership, joint agency
or
other relationship involving common ownership or joint and/or several liability
with one another and/or any of their Affiliates. Neither party will incur
any
debt or make any express or implied agreement, guarantee, warranty or
representation in the name or on behalf of the other without the others
express
written authorization, and each party will be responsible for its own costs
and
expenses incurred in connection with this Agreement. No failure or delay
by
either party in exercising any right, power or privilege hereunder will
operate
as a waiver thereof, nor will any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any right, power
or
privilege hereunder. No remedy expressly provided in this Agreement for
a breach
will be the sole or exclusive remedy for such breach, and each party hereby
reserves to itself, in addition to the remedies expressly provided to it
in this
Agreement, all remedies available to it under law and at equity. This Agreement
may be amended, modified or waived only by a subsequent writing that
specifically refers to this Agreement and that is signed by both parties,
and no
other act, document, usage, or custom will be deemed to amend this Agreement.
Headings in this Agreement are for the convenience of reference only and
will
not affect the construction or interpretation of this Agreement. If any
provision or provisions of this Agreement will be held, for any reason,
to be
illegal, invalid or unenforceable in any circumstance, the remaining provisions
will nonetheless be legal, valid and enforceable provisions, and the affected
provision will remain legal, valid and enforceable in other circumstances.
The
terms of this Agreement that expressly or by implication are intended to
continue beyond its termination will survive any such termination. Under
local
law and treaties, the restrictions and limitations of this Agreement may
not
apply to Licensee; Licensee may have other rights and remedies, and be
subject
to other restrictions and limitations.
Page
- 151
(b) IN
NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER, UNDER THE LAW OF TORT,
CONTRACT
OR OTHER WISE, AND INCLUDING AS A RESULT OF NEGLIGENCE, FOR SPECIAL, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE
PERFORMANCE OR NON-PERFORMANCE HEREOF EVEN IF THE RESPONSIBLE PARTY HAS
BEEN
ADVISED OF OR FORESEES A LIABILITY OF ANY SUCH DAMAGES OCCURRING), INCLUDING
BUT
NOT LIMITED. TO LOST BUSINESS REVENUE, FAILURE TO REALIZE EXPECTED PROFITS
OR
SAVINGS, OR LOSS OF DATA.
(c) Neither
party hereto shall be held liable hereunder for any default arising from
the
delay in
the
performance of its obligations hereunder to the extent that such default
or
delay:
(i) is
caused
directly by an event beyond the reasonable control of the defaulting party
or
delaying party (the “Non-performing Party”), such as, but not restricted to,
fire, flood, earthquake, elements of nature, acts of war, terrorism, riots,
civil disorders, rebellions or revolutions, strikes, lockouts or labor
difficulties; and
(ii) could
not
have been prevented by reasonable precautions and cannot
possibly
be circumvented by the Non-performing Party through the use of commercially
reasonable alternative sources, work-around plans or other means; (a “Force
Majeure Event”). The Non-performing Party will be excused from any further
performance of the obligations affected by such Force Majeure Event for
as long
as the Force Majeure Event continues and the Non-Performing Party continues
to
use its reasonable efforts to recommence performance. The Non-performing
Party
shall immediately notify the other party by telephone (to be confirmed
in
writing within five (5) days of the inception of the Force Majeure Event)
and
describe at a reasonable level of detail the circumstances causing such
default
or delay. During the continuance of a Force Majeure Event affecting Licensor,
Licensee shaIl continue to pay Licensor's charges for professional services
actually rendered and expenses incurred in the actual performance of such
services in accordance with this Agreement. Notwithstanding any other provisions
hereof, this clause (c) will not excuse a breach of any purely monetary
obligation.
12.Joint
and Several Responsibility. Each
of
First Ecom and FEDS Asia acknowledge and agree that they are entering into
this
Agreement, and that they make the representations, warranties, covenants,
agreements, indemnities and other undertakings and responsibilities of
Licensor
set forth herein, jointly and severally, with fullrecourse
on the part of Licensee to either or both of them for the obligations and
undertakings of Licensor contained herein. In this respect, each of First
Ecom
and FEDS Asia joins in this Agreement as primary obligor and not as surety,
and
Licensee shall not be required to proceed first against or exhaust its
remedies
against either of First Ecom or FEDS Asia as a condition to proceeding
hereunder
against the other with respect to any claim arising hereunder. Further,
each of
First Ecom and FEDS Asia hereby irrevocably and exclusively appoints First
Ecom
as its agent and attorney-in-fact for the giving or receipt of all notices
or
payments, the granting of all consents, approvals, or waivers, and the
taking of
all such other actions and making of all such other elections and/or decisions
as shall be explicitly or implicitly provided or permitted herein to be
given,
received, granted, taken or made by or on behalf of Licensor or either
of them
(it being understood that omitting to take any action or make any election
or
decision shall be deemed the taking of an action or the making of any election
or decision for this purpose), and to do all such acts and things as may
in the
opinion of such attorney-in-fact be reasonably necessary or reasonably
expedient
for the purposes thereof, or in connection therewith, the Licensee shall
be
entitled to rely conclusively on any of the foregoing as the action, decision
or
election, as the case may be, of each and both of First Ecom and FEDS Asia.
Each
of First Ecom and FEDS Asia agrees that the foregoing appointment constitutes
a
power coupled with an interest and shall be binding upon its successors
and
assigns. Any payments received by First Ecom hereunder that properly belong
to
FEDS Asia shall be held by First Ecom in
trust
for the benefit of FEDS Asia, and FEDS Asia hereby releases, discharges
and
agrees to hold harmless Licensee for any amounts payable to FEDS Asia that
Licensee pays to
First
Ecom.
SOFTWARE
LICENSE AGREEMENT
("Agreement") is entered into effective as of October 19, 2001 (the
“Effective
Date”)
by and
among First Ecom.com, a Nevada corporation having its principal place of
business at 80 Gloucester Road, 19th
Floor,
Wan Chai, Hong Kong ("First Ecom"), and First Ecom Data Services Asia Limited,
a
Hong Kong corporation having its principal place of business at 80 Gloucester
Road, 19th
F loor,
Wan
Chai, Hong Kong (“FEDS Asia”) (First Ecom and FEDS Asia being referred to herein
individually,
jointly and collectively as “Licensor”),
and
Transworld Payment Solutions N.V., a Netherlands Antilles company having
its
offices at c/o Julianaplein No. 5, Curacao, Netherlands Antilles (“Licensee”).
1.Definitions.
As used
in this Agreement, the capitalized terms defined in the introductory
paragraph
shall have the meanings assigned to them therein, and the following capitalized
terms shall
have the meanings assigned to them below:
“Affiliate”
of
a
person or entity means any other person or entity controlled by, controlling,
or
under common control with said person or entity, and “control” for this purpose
is understood to include the ownership or voting control of more than 50%
of the
outstanding securities of any such person carrying the power to vote with
respect to the direction or management of the person or entity.
“Documentation”
means
the related hard-copy or electronically reproducible technical documents
furnished in association with the Software;
“Media”
means
the original Licensor-supplied physical materials (if any) containing the
Software and/or Documentation;
“Product”
means
collectively the Media, Software, and Documentation, and all Software,
Media or
Documentation updates subsequently provided to Licensee by Licensor or
its
authorized distributor;
“Software”
means
the original computer files (including all computer programs and data stored
in
such files) comprising Licensor's financial transaction management and
reporting
computer software product known as "Merchant Accounting and Reporting System” or
“MARS”, and all whole or partial copies thereof, including without limitation
all modified copies and portions merged into other programs, and further
including any and all updates, revisions, enhancements, modifications,
subsequent versions and other derivative works thereof
developed and furnished to Licensee by or on behalf of Licensor from time
to
time.
Other
capitalized terms used herein shall have the meanings
assigned to them where they first appear.
2.Grant
Of License Rights. For
good
and
valuable consideration in hand received, the receipt and sufficiency of
which
are hereby acknowledged, but subject to the terms and conditions set forth
herein, Licensor grants to Licensee and its Affiliates a paid-up royalty-free,
non-exclusive, non-transferable, perpetual license to deploy, install,
execute
and use solely for Licensee's and/or its Affiliates' internal use as many
copies
of the Product, and on such number(s) and type(s) of servers, workstations
or
other computer hardware, and in such locations, as Licensee shall deem
desirable
from time to time. Any programs, utilities, modules or other software or
documentation supplied by third parties and embedded in or bundled with
the
Product as furnished to Licensee by or on behalf of Licensor are hereby
expressly included in the scope of this grant. Licensor agrees to deliver,
promptly upon the execution and delivery of this Agreement (but not before
November 15, 2001), no less than two (2) master copies of the Software
in
executable (machine readable) code format to Licensee on such Media as
Licensee
shall reasonably request, together with two (2) copies of the
Documentation.
Page
- 155
3.Title
And Copyright.
Licensor represents and warrants to Licensee that Licensor is the owner
and
holder of all rights, titles and interests in and to the Product, free
and clear
of all liens, charges, encumbrances, equities and claims of third parties
of any
description. There are no facts or alleged facts known to Licensor which
would
reasonably serve as a basis for any claim that Licensor does not have the
right
to grant the rights and licenses provided for herein. As between Licensor
and
Licensee, Licensee acknowledges and agrees that, except as and to the extent
otherwise agreed in writing between the parties, all title and copyrights
in and
to the Product, are and will remain the property of Licensor and/or its
affiliates and suppliers, and are protected by applicable copyright laws
and
applicable international copyright treaties, and that Licensor neither
grants
hereby nor otherwise transfers hereby any rights of ownership therein to
Licensee or to any third party. Licensee will not claim or assert title
to or
ownership of the Product except pursuant to a written agreement expressly
entitling Licensee to claim or assert such title or ownership. This Agreement,
when executed and delivered by Licensor and Licensee, w ill constitute
the valid
and legally binding obligation of Licensor, legally enforceable against
Licensor
in accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the
rights of creditors generally, limitations imposed by applicable law or
equitable principles upon the specific enforceability of any of the remedies,
covenants or the provisions of this Agreement, and upon the availability
of
injunctive relief or other equitable remedies.
4.Restrictions.
Licensee
will not remove or alter any copyright or, proprietary notice from copies
of the
Product. Except in accordance with the terms of this Agreement or any other
express written agreement between the parties, Licensee agrees (a) not
to
decompile, disassemble, reverse engineer or otherwise attempt to derive
the
Software’s source code from object code except to the extent expressly permitted
by applicable law or treaty despite this limitation; (b) not to sell, rent,
lease, license, sub-license, display, modify, time share, outsource or
otherwise
transfer the Product to, or , permit the use of the Product by, any third
party
not an Affiliate of Licensee, provided,
without
limiting the scope of the license grant hereinabove stated, it is understood
and
agreed that this Agreement permits the use of the Product by Licensee and
its
Affiliates in support of services rendered to their customers in the normal
course of their trade or business; and (c) to use reasonable care and protection
to prevent the unauthorized use, copying, publication or dissemination
of the
Product. Licensor has the right to obtain injunctive relief against any
actual
or threatened violation of these restrictions, in addition to any other
available remedies.
5.Taxes
And Addition Charges. All
license fees paid or payable by the Licensee for the license granted hereunder
(this "License") do not include, and Licensor will be responsible for,
any and
all taxes, duties, levies, tariffs, and other governmental charges now
or
hereafter imposed by any governmental authority on the purchase or sale
of this
License or the use or possession of the Product by Licensee and/or its
Affiliates; provided, that Licensee will be responsible for its own corporate
franchise taxes and taxes based upon its own net income.
6.Limited
Warranty. Licensor
warrants to Licensee that, for a period of ninety (90) days from the Effective
Date, (i) the Documentation and Media will be, under normal use, free from
physical defects, and (ii) the Software will perform in substantial accordance
with the operating specifications contained in the Documentation that is
most
current at the Effective Date. If Licensee notifies Licensor within said
ninety-day period of its belief that either of these warranties has been
breached, including a description of the nature or circumstances of such
breach,
Licensor will be obligated to use reasonable efforts to remedy the defect(s)
in
question within a reasonable period of time or, at Licensor’s option, to replace
the defective Product component at no additional charge. Licensor, it’s
authorized distributors and its suppliers do not warrant that the Product
will
satisfy Licensee’s requirements, that the operation of the Product will be
uninterrupted or error free, or that all software defects can be corrected.
This
warranty will be void if: (i) the Product is not used in accordance with
the
instructions set out in the Documentation, (ii) a Product defect has been
caused
by any of Licensee's or a third party's malfunctioning equipment, or (iii)
Licensee has made modifications to the Product not expressly authorized
in
writing by Licensor.
7.Indemnification
For Infringement. Licensor
will defend or settle, at its own expense any claim against Licensee by
a third
party asserting that Licensee's and/or its Affiliates’ use of the Product within
the scope of this Agreement violates such third party’s patent, copyright,
trademark, trade -secret or other proprietary rights, and will indemnify
Licensee against any damages finally awarded against Licensee arising out
of
such claim. Licensee will promptly notify Licensor in writing after first
receiving notice of any such claim, and Licensor will have sole control
of the
defense of any action and all negotiations for its settlement or compromise,
with Licensee's reasonable assistance; provided, that Licensee's approval
in
writing shall be required of any settlement or compromise involving any
admission of fault or wrongdoing on the part of Licensee, and provided,
further,
that Licensee may at Licensor's cost and expense take responsibility for
its own
defense if and to the extent that Licensee has any reasonable doubt as
to the
ability or willingness of Licensor to fund such defense or any award, settlement
or compromise arising therefrom. Licensor will not be liable for any costs
or
expenditures incurred by Licensee without Licensor's prior written consent
except insofar as Licensee reasonably determines that it is necessary or
appropriate to incur such costs and expenses in order to preserve its legal
or
equitable rights and remedies, protect it from further such claims, or
minimize
the losses associated with claims so made. If an order is obtained against
Licensee’s and/or its Affiliates’ use of the Product by reason of any claimed
infringement, or if in Licensor's opinion the Product is likely to become
the
subject of such a claim, Licensor will, at its option and expense, and
in
addition to any other rights and remedies available to Licensee hereunder,
either (i) procure for Licensee the right to continue using the Product,
or (ii)
modify or replace the Product with a compatible, functionally equivalent,
non-infringing Product.
Page
- 156
8.Support.
Contemporaneously
with the execution of this Agreement, Licensor and Licensee are entering
into an
End User Support Agreement under which Licensor will provide ongoing support
and
maintenance beyond the scope and time limits of the warranty period set
forth in
Section 6 above, which End User Support Agreement sets forth the terms
and
conditions under which Licensee will be entitled to receive such Product
updates
and other Product support as may be provided for therein. Notwithstanding
the
foregoing, however, it is understood and agreed that, for purposes of this
Agreement, the Software to which the license granted herein pertains includes
both the first and second versions of the "MARS" product as well as the
java-enabled version combined with Licensor's "payment gateway" product
currently in development. Accordingly, regardless of the terms of the particular
agreement entered into by the parties as described above, Licensor hereby
agrees
to furnish to Licensee at no additional charge the java-enabled version
of the
Software when available.
9.SuccessorsAnd
Assigns.
This
Agreement will be binding upon and inure to the benefit of each of the
parties
and their respective successors and assigns; provided, however, that Licensee
may not assign or sublicense this Agreement in whole or in part to any
person or
entity not an Affiliate of Licensee without the prior written consent of
Licensor, and any assignment or sublicense attempted without such consent
will
be void.
10.Governing
Law. This
agreement will be governed by and construed in accordance with the laws
of
Bermuda, without regard to conflicts of law principles.
11.Miscellaneous.
(a) Each
party is an independent contractor under this Agreement, and nothing herein
will
be construed to create any partnership, joint venture, or agency relationship
parties between the parties hereto. Any use of the term "partner" in any
communication by or between the parties or on their individual or joint
behalf
or in any trademark or service mark to describe their relationship is intended
solely in the colloquial sense of a valued business relationship, and does
not
indicate the existence of or an offer to enter into a legal partnership,
joint
agency or other relationship involving common ownership or joint and/or
several
liability with one another and/or any of their Affiliates. Neither party
will
incur any debt or make any express or implied agreement, guarantee, warranty
or
representation in the name or on behalf of the other without the other's
express
written authorization, and each party will be responsible for its own costs
and
expenses incurred in connection with this Agreement. No failure or delay
by
either party in exercising any right, power or privilege hereunder will
operate
as a waiver thereof, nor will any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any right, power
or
privilege hereunder. No remedy expressly provided in this Agreement for
a breach
will be the sole or exclusive remedy for such breach, and each party hereby
reserves to itself, in addition to the remedies expressly provided to it
in this
Agreement, all remedies available to it under law and at equity. This Agreement
may be amended, modified or waived only by a subsequent writing that
specifically refers to this Agreement and that is signed by both parties,
and no
other act, document, usage, or custom will be deemed to amend this Agreement.
Headings in this Agreement are for convenience of reference only and will
not
affect the construction or interpretation of this Agreement. If any provision
or
provisions of this Agreement will be held, for any reason to be illegal,
invalid
or unenforceable in any circumstance, the remaining provisions will nonetheless
be legal, valid and enforceable provisions, and the affected provision
will
remain legal, valid and enforceable in other circumstances. The terms of
this
Agreement that expressly or by implication are intended to continue beyond
its
termination will survive any such termination. Under local law and treaties,
the
restrictions and limitations of this Agreement may not apply to Licensee;
Licensee may have other rights and remedies, and be subject to other
restrictions and limitations.
(b) IN
NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER UNDER THE LAW OF TORT,
CONTRACT
OR OTHERWISE, AND INCLUDING AS A RESULT OF NEGLIGENCE, FOR SPECIAL, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE
PERFORMANCE OR NON-PERFORMANCE HEREOF (EVEN IF THE RESPONSIBLE PARTY HAS
BEEN
ADVISED OF OR FORESEES A POSSIBILITY OF ANY SUCH DAMAGES OCCURRING), INCLUDING
BUT NOT LIMITED TO LOST BUSINESS REVENUE, FAILURE TO REALIZE EXPECTED PROFITS
OR
SAVINGS, OR LOSS OF DATA.
(c) Neither
party hereto shall be held liable hereunder for any default arising from
the
delay in the performance of its obligations hereunder to the extent that
such
default or delay:
(i)
is
caused directly by an event beyond the reasonable control of
the
defaulting or delaying party (the "Non-performing Party"), such
as, but
not restricted to, fire, flood, earthquake, elements of nature,
acts of
war, terrorism, riots, civil disorders, rebellions or revolutions,
strikes, lockouts or labor difficulties; and
(ii)
could
not have been prevented by reasonable precautions and cannot
possibly be
circumvented by the Non-performing Party through the use of commercially
reasonable alternative sources, work-around plans or other means;
(a
“Force Majeure Event”). The Non-performing Party will be excused from any
further performance of the obligations affected by such Force
Majeure
Event for as long as the Force Majeure Event continues and the
Non-Performing Party continues to use its reasonable efforts
to recommence
performance. The Non-performing Party shall immediately notify
the other
party by telephone (to be confirmed in writing within five (5)
days of the
inception of the Force Majeure Event) and describe at a reasonable
level
of detail the circumstances causing such default or delay. During
the
continuance of a Force Majeure Event affecting Licensor, Licensee
shall
continue to pay Licensor’s charges for professional services actually
rendered and expenses incurred in the actual performance of such
services
in accordance with this Agreement. Notwithstanding any other
provision
hereof, this clause (c) will not excuse a breach of any purely
monetary
obligation.
Page
- 157
12.Joint
and Several Responsibility. Each
of
First Ecom and FEDS Asia acknowledge and agree that they are entering into
this
Agreement, and that they make the representations, warranties, covenants,
agreements, indemnities and other undertakings and responsibilities of
Licensor
set forth herein, jointly and severally, with full recourse on the part
of
Licensee to either or both of them for the obligations and undertakings
of
Licensor contained herein. In this respect, each of First Ecom and FEDS
Asia
joins in this Agreement as primary obligor and not as surety, and Licensee
shall
not be required to proceed first against or exhaust its remedies against
either
of First Ecom or FEDS Asia as a condition to pr proceeding hereunder against
the
other with respect to any claim arising hereunder. Further, each of First
Ecom
and FEDS Asia hereby irrevocably and exclusively appoints First Ecom as
its
agent and attorney-in-fact for the giving or receipt of all notices or
payments,
the granting of all consents, approvals, or waivers, and the taking of
all such
other actions and making of all such other elections and/or decisions as
shall
be explicitly or implicitly provided or permitted herein to be given, received,
granted, taken or made by or on behalf of Licensor or either of them (it
being
understood that omitting to take any action or make any election or decision
shall be deemed the taking of an action or the making of any election or
decision for this purpose), and to do all such acts and things as may in
the
opinion of such attorney-in-fact be reasonably necessary or reasonably
expedient
for the purposes thereof, or in connection therewith, and Licensee shall
be
entitled to rely conclusively on any of the foregoing as the action, decision
or
election, as the case may be, of each and both of First Ecom and FEDS Asia.
Each
of First Ecom and FEDS Asia agrees that the foregoing appointment constitutes
a
power coupled with an interest and shall be binding upon its successors
and
assigns. Any payments received by First Ecom hereunder that properly belong
to
FEDS Asia shall be held by First Ecom in trust for the benefit of FEDS
Asia, and
FEDS Asia hereby releases, discharges and agrees to hold harmless Licensee
for
any amounts payable to FEDS Asia that Licensee pays to First Ecom.
THIS
SOFTWARE LICENSE AGREEMENT (“Agreement”)
is
entered into effective as of October 19, 2001 (the “Effective
Date”)
by and
among First Ecom.com, Inc., a Nevada corporation having its principal place
of
business at 80 Gloucester Road, 19th
Floor,
Wan Chai, Hong Kong ("First Ecom"), and First Ecom Data Services Asia Limited,
a
Hong Kong corporation having its principal place of business at 80 Gloucester
Road, 19th
Floor,
Wan Chai, Hong Kong ("FEDS Asia")(First Ecom and FEDS Asia being referred
to
herein individually, jointly and collectively as "Licensor"), and Transworld
Payment Solutions N.V., a Netherlands Antilles company having its offices
at c/o
Julianaplein No. 5, Curacao, Netherlands Antilles ("Licensee").
1.Definitions.
As used
in this Agreement, the capitalized terms defined in the introductory paragraph
shall have the meanings assigned to them therein, and the following capitalized
terms shall have the meanings assigned to them below:
“Affiliate”
of
a
person or entity means any other person or entity controlled by, controlling,
or
under common control with said person or entity, and “control” for this purpose
is understood to include the ownership or voting control of more than 50%
of the
outstanding securities of any such person carrying the power to vote with
respect to the direction or management of the person or entity.
“Documentation”means
the
related hard-copy or electronically reproducible technical documents furnished
in association with the Software;
“Media”
means
the original Licensor-supplied physical materials (if any) containing the
Software and/or Documentation;
“Product”
means
collectively the Media, Software, and Documentation, and all Software,
Media or
Documentation updates subsequently provided to Licensee by Licenosr or
its
authorized distributor;
Page
- 160
“Software”
means
the original computer files (including all computer programs and data stored
in
such files) comprising Licensor's "Payment Gateway" computer software product
and all whole or partial copies thereof, which product consists of an electronic
internet payment gateway that translates various types of financial transaction
data, including but not limited to transaction data originating from credit,
debit and check payment methods, into a format that can be read by the
processing system or systems proprietary to First Ecommerce Data Services
Limited, including without limitation modified copies and portions merged
into
other programs, and further including any and all updates, revisions,
enhancements, modifications, subsequent versions and other derivative works
thereof developed and furnished to Licensee by or on behalf of Licensor
from
time to time.
Other
capitalized terms used herein shall have the meanings assigned to them
where
they first appear.
2.Grant
Of License Rights. For
good
and valuable consideration in hand received, the receipt and sufficiency
of
which are hereby acknowledged, but subject to the terms and conditions
set forth
herein, Licensor grants to Licensee and its Affiliates a paid-up, royalty-free,
non-exclusive, transferable, perpetual license to deploy, install, execute
and
use solely for Licensee's and/or its Affiliates' internal use as many copies
of
the Product, and on such number (s) and type(s) of servers, workstations
or
other computer hardware, and in such locations, as Licensee shall deem
desirable
from time to time. Any programs, utilities, modules or other software or
documentation supplied by third parties and embedded in or bundled with
the
Product as furnished to Licensee by or on behalf of Licensor are hereby
expressly included in the scope of this grant. It is understood and agreed
that
this Agreement permits the transfer by Licensee of its rights hereunder
to third
parties. Licensor agrees to deliver, promptly upon the execution and delivery
of
this Agreement (but not before November 15, 2001), no less than two (2)
master
copies of the Software in executable (machine readable) code format to
Licensee
of such Media as Licensee shall reasonably request, together with two (2)
copies
of the Documentation.
3.Title
And Copyright.
Licensor represents and warrants to Licensee that Licensor is the owner
and
holder of all rights, titles and interests in and to the Product, free
and clear
of all liens, charges, encumbrances, equities and claims of third parties
of any
description. There are no facts or alleged facts known to Licensor which
would
reasonably serve as a basis for any claim that Licensor does not have the
right
to grant the rights and licenses provided for herein. As between Licensor
and
Licensee, Licensee acknowledges and agrees that, except as and to the extent
otherwise agreed in writing between the parties, all title and copyrights
in and
to the Product, are and will remain, are and will remain the property of
the
Licensor and/or its affiliates and suppliers, and are protected by applicable
copyright laws, and applicable international copyright treaties, and that
Licensor neither grants hereby nor otherwise transfers hereby any rights
of
ownership therein to Licensee or to any third party. Licensee will not
claim or
assert title to or ownership of the Product except pursuant to a written
agreement expressly entitling Licensee to claim or assert such title or
ownership. This Agreement, when executed and delivered by Licensor and
Licensee,
will constitute the valid and legally binding obligation of Licensor, legally
enforceable against Licensor in accordance with its terms, subject to the
effect
of bankruptcy, insolvency, reorganization, moratorium and other similar
laws
relating to or affecting the rights of creditors generally, limitations
imposed
by applicable law or equitable principles upon the specific enforceability
of
any of the remedies, covenants or other provisions of this Agreement, and
upon
the availability of injunctive relief or other equitable remedies.
4.Restrictions.
Licensee will not remove or alter any copyright or proprietary notice from
copies of the Product. Except in accordance with the terms of this Agreement
or
any other express written agreement between the parties, Licensee agrees
(a) not
to decompile, disassemble, reverse engineer or otherwise attempt to derive
the
Software’s source code from object code except to the extent expressly permitted
by applicable law or treaty despite this limitation; and (b) to use reasonable
care and protection to prevent the unauthorized use, copying, publication
or
dissemination of the Product. Licensor has the right to obtain injunctive
relief
against any actual or threatened violation of these restrictions, in addition
to
any other available remedies.
5.Taxes
And Additional Charges.
All
license fees paid or payable by the Licensee for the license granted hereunder
(this "License") do not include, and Licensor will be responsible for,
any and
all taxes, duties, levies, tariffs, and other governmental charges now
or
hereafter imposed by any governmental authority on the purchase or sale
of this
License or the use or possession of the Product by Licensee and/or its
Affiliates; provided, that Licensee will be responsible for its own corporate
franchise taxes and taxes based upon its own net income.
Page
- 161
6.Limited
Warranty. Licensor
warrants to Licensee that, for a period of ninety (90) days from the Effective
Date, (i) the Documentation and Media will be, under normal use, free from
physical defects, and (ii) the Software will perform in substantial accordance
with the operating specifications contained in the Documentation that is
most
current at the Effective Date. If Licensee notifies Licensor within said
ninety-day period of its belief that that either of these warranties has
been
breached, including a description of nature or circumstances of such breach,
Licensor will be obligated to use reasonable efforts to remedy the defect(s)
in
question within a reasonable period of time or, at Licensor’s option, to replace
the defective Product component at no additional charge. Licensor, its
authorized distributors and its suppliers do not warrant that the Product
will
satisfy Licensee’s requirements, that the operation of the Product will be
uninterrupted or error free, or that all software defects can be corrected.
This
warranty will be void if: (i) the Product is not used in accordance with
the
instructions set out in the Documentation, (ii) a Product defect has been
caused
by any of Licensee's or a third party's malfunctioning equipment, or (iii)
Licensee has made modifications to the Product not expressly authorized
in
writing by Licensor.
7.Indemnification
For Infringement.
Licensor will defend or settle, at its own expense, any claim against Licensee
by a third party asserting that Licensee's and/or its Affiliates’ use of the
Product within the scope of this Agreement violates such third party’s patent,
copyright, trademark, trade secret or other proprietary rights, and will
indemnify Licensee against any damages finally awarded against Licensee
arising
out of such claimi. Licensee will promptly notify Licensor in writing after
first receiving notice of any such claim, and Licensor will have sole control
of
the defense of any action and all negotiations for its settlement or compromise,
with Licensee's reasonable assistance; provided, that Licensee’s approval in
writing shall be required of any settlement or compromise involving any
admission of fault or wrongdoing on the part of Licensee, and provided,
further,
that Licensee may at Licensor's cost and expense take responsibility for
its own
defense if and to the extent that Licensee has any reasonable doubt as
to the
ability or willingness of Licensor to fund such defense or any award, settlement
or compromise arising therefrom. Licensor will not be liable for any costs
or
expenditures incurred by Licensee without Licensor's prior written consent
except insofar as Licensee reasonably determines that it is necessary or
appropriate to incur such costs and expenses in order to preserve its legal
or
equitable rights and remedies, protect it from further such claims, or
minimize
the losses associated with claims so made. If an order is obtained against
Licensee’s and/or its Affiliates' use of the Product by reason of any claimed
infringement, or if in Licensor's opinion the Product is likely to become
the
subject of such a claim, Licensor will, at its option and expense, and
in
addition to any other rights s available to Licensee hereunder, either
(i)
procure for Licensee the right to ing the Product, or (ii) modify or replace
the
Product with a compatible, equivalent, non-infringing Product.
8.Support.
Contemporaneously with the execution of this Agreement, Licensor and Licensee
are entering into an End User Support Agreement under which Licensor will
provide ongoing support and maintenance beyond the scope and time limits
of the
warranty period set forth in Section 6 above, which End User Support Agreement
sets forth the terms and conditions under which Licensee will be entitled
to
receive such Product updates and other Product support as may be provided
for
therein. Notwithstanding the foregoing, however, it is understood and agreed
that, for purposes of this Agreement, the Software to which the license
granted
herein pertains includes both the first and second versions of the “Payment
Gateway” product as well as the java-enable version combined with Licensor's
"MARS" product currently in development. Accordingly, regardless of the
terms of
the particular agreement entered into by the parties as described above,
Licensor hereby agrees to furnish to Licensee at no additional charge the
java-enabled version of the Software when available.
9.Successors
And Assigns.
This
Agreement will be binding upon and inure to the benefit of each of the
parties
and their respective successors and assigns; provided, however, that Licensee
may not assign or sublicense this Agreement in whole or in part to any
person or
entity not an Affiliate of Licensee without the prior, written consent
of
Licensor, and any assignment or sublicense attempted without such consent
will
be void.
10.Governing
Law.
This
agreement will be governed by and construed in accordance with the laws
of
Bermuda, without regard to conflicts of law principles.
11.Miscellaneous.
(a) Each
party is an independent contractor under this Agreement, and nothing herein
will
be construed to create any partnership, joint venture, or agency relationship
between the parties hereto. Any use of the term "partner" in any communication
by or between the parties or on their individual or joint behalf or in
any
trademark or service mark to describe their relationship is intended solely
in
the colloquial sense of a valued business relationship, and does not indicate
the existence of or an offer to enter into a legal partnership, joint agency
or
other relationship involving common ownership or joint and/or several liability
with one another and/or any of their Affiliates. Neither party will incur
any
debt or make any express or implied agreement, guarantee, warranty or
representation, in the name or on behalf of the other without the other’s
express written authorization, and each party will be responsible for its
own
costs and expenses incurred in connection with this Agreement. No failure
or
delay by either party in exercising any right, power or privilege hereunder
will
operate as a waiver thereof, nor will any single or partial exercise thereof
preclude any other or further exercise thereof or the exercise of any right,
power or priviledge hereunder. No remedy expressly provided in this Agreement
for a breach will be the sole or exclusive remedy for such breach, and
each
party hereby reserves to itself, in addition to the remedies expressly
provided
to it in this Agreement, all remedies available to it under law and at
equity.
This Agreement may be amended, modified or waived only by a subsequent
writing
that specifically refers to this Agreement and that is signed by both parties,
and no other act, document, usage, or custom wil1 be deemed to amend this
Agreement. Headings in this Agreement are for convenience of reference
only and
will not affect the construction or interpretation of this Agreement. If
any
provision or provisions of this Agreement will be held, for any-reason,
to be
illegal, invalid or unenforceable in any circumstance, the remaining provisions
will nonetheless be legal, valid and enforceable provisions, and the affected
provision will remain legal, valid and enforceable in other circumstances.
The
terms of this Agreement that expressly or by implication are intended to
continue beyond its termination will survive any such termination. Under
local
law and treaties, the restrictions and limitations of this Agreement may
not
apply to Licensee; Licensee may have other rights and remedies, and by
subject
to other restrictions and limitations.
Page
- 162
(b) IN
NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER
UNDER THE LAW OF TORT, CONTRACT OR OTHERWISE, AND INCLUDING AS A RESULT
OF
NEGLIGENCE, FOR SPECIAL, INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES
ARISING
OUT OF THIS AGREEMENT OR THE PERFORMANCE OR NON-PERFORMANCE HEREOF EVEN
IF THE
RESPONSIBLE PARTY HAS BEEN ADVISED OF OR FORESEES A POSSIBILITY OF ANY
SUCH
DAMAGES OCCURRING), INCLUDING BUT NOT LIMITED TO LOST BUSINESS REVENUE,
FAILURE
TO REALIZE EXPECTED PROFITS OR SAVINGS OR LOSS OF DATA.
(c) neither
party hereto shall be held liable hereunder for any default arising
from
the
delay in the performance of its obligations hereunder to the extent that
such
default or delay:
(i) is
caused
directly by an event beyond the reasonable control of the defaulting or
delaying
party (the "Non-performing Party"), such as, but not restricted to, fire,
flood,
earthquake, elements of nature, acts of war, terrorism, riots, civil disorders,
rebellions or revolutions, strikes, lockouts or labor difficulties; and
(ii) could
not
have been prevented by reasonable precautions and cannot possibly be
circumvented by the Non-performing Party through the use of commercially
reasonable alternative sources, work-around plans or other means; (“Force
Majeure Event”). The Non-performing Party will be excused from any further
performance of the obligations affected by such Force Majeure Event for
as long
as the Force Majeure Event continues and the Non-Performing Party continues
to
use its reasonable efforts to recommence
performance. The
Non-performing Party shall immediately notify the other party by telephone
(to
be confirmed in writing within five (5) days of the inception of the Force
Majeure Event) and describe at a reasonable level of detail the circumstances
causing such default or delay. During the continuance of a Force Majeure
Event
affecting Licensor, Licensee shall continue to pay Licensor's charges for
professional services actually rendered and expenses incurred in the actual
performance of such services in accordance with this Agreement. Notwithstanding
any other provision hereof, this clause (c) will not excuse a breach of
any
purely monetary obligation.
12.Joint
and Several Responsibility.
Each of
First Ecom and PEDS Asia acknowledge and agree that they are entering into
this
Agreement, and that they make the representations, warranties, covenants,
agreements, indemnities and other undertakings and responsibilities of
Licensor
set forth herein, jointly and severally, with full recourse on the part
of
Licensee to either or both of them for the obligations and undertakings
of
Licensor contained herein. In this respect, each of First Ecom and FEDS
Asia
joins in this Agreement as primary obligor and not as surety, and Licensee
shall
not be required to proceed first against or exhaust its remedies against
either
of First Ecom or FEDS Asia as a condition to proceeding hereunder against
the
other with respect to any claim arising hereunder. Further, each of First
Ecom
and FEDS Asia hereby irrevocably and exclusively appoints First Ecom as
its
agent and attorney-in-fact for the giving or receipt of all notices or
payments,
the granting of all consents, approvals, or waivers, and the taking of
all such
other actions and making of all such other elections and/or decisions as
shall
be explicitly or implicitly provided or permitted herein to be given, received,
granted, taken or made by or on behalf of Licensor or either of them (it
being
understood that omitting to take any action or make any election or decision
shall be deemed the taking of an action or the making of any election or
decision for this purpose), and to do all such acts and things as may in
the
opinion of such attorney-in-fact be reasonably necessary or reasonably
expedient
for the purposes thereof, or in connection therewith, and Licensee shall
be
entitled to rely conclusively on any of the foregoing as the action, decision
or
election, as the case may be, of each and both of First Ecom and FEDS Asia.
Each
of First Ecom and FEDS Asia agrees that the foregoing appointment constitutes
a
power coupled with an interest and shall be binding upon its successors
and
assigns. Any payments received by First Ecom hereunder that properly belong
to
FEDS Asia shall be held by First Ecom in trust for the benefit of FEDS
Asia, and
FEDS Asia hereby releases, discharges and agrees to hold harmless Licensee
for
any amounts payable to FEDS Asia that Licensee pays to First Ecom.
This
SOFTWARE
DEVELOPMENT LICENSE AGREEMENT
(“Agreement”)
is
entered into effective as of October 19, 2001 (the “Effective
Date”)
by and
among First Ecom.com, Inc., a Nevada corporation having its principal place
of
business at 80 Gloucester Road, 19th Floor, Wan Chai, Hong Kong (“First Ecom”),
and First Ecom Data Services Asia Limited, a Hong Kong corporation having
its
principal place of business at 80 Gloucester Road, 19th Floor, Wan Chai,
Hong
Kong (“FEDS Asia”)( First Ecom and FEDS Asia being referred to herein
individually, jointly and collectively as “Licensor”),
and
Transworld Payment Solutions N.V., a Netherlands Antilles company having
its
offices at c/o Julianaplein No. 5, Curacao, Netherlands Antilles (“Licensee”)
.
1.Definitions.
As used
in this Agreement, the capitalized terms defined in the introductory paragraph
shall have the meanings assigned to them therein, and the following capitalized
terms shall have the meanings assigned to them below:
“Affiliate”
of
a
person or entity means any other person or entity controlled by, controlling,
or
under common control with said person or entity, and "control" for this
purpose
is understood to include the ownership or voting control of more than 50%
of the
outstanding securities of any such person carrying the power to vote with
respect to the direction or management of the person or entity;
“Documentation”
means
the related hard-copy or electronically reproducible technical documents
created
in the course of the development of the Software, including without limitation
all specifications, instructions, technical descriptions, manuals, flow,
charts,
pseudo-code, state diagrams, interim versions of programs or parts thereof,
comments to source code, or other tangible notes or records pertaining
to the
Software's development;
“Media”
means
the original Licensor-supplied physical materials (if any) containing the
Software and/or Documentation;
“Product”
means
collectively the Media, Software and Documentation, and all Software, Media
or
Documentation updates subsequently provided to the Licensee by Licensor
or its
authorized distributor;
“Software”
means
the original computer files (including all computer programs and data stored
in
such files) comprising (i) Licensor’s financial transaction management and
reporting computer software product known as “Merchant Accounting and Reporting
system or “MARS”, and system or “MARS”, and (ii) Licensor's “Payment Gateway”
computer software product, which product consists of an electronic internet
payment gateway that translates various types of financial transaction
data,
including but not limited to transaction data originating from credit,
debit and
check payment methods, into a format that can be read by the processing
system
or systems proprietary to First Ecommerce Data Services Limited, and all
whole
or partial copies thereof, including without limitation modified copies
and
portions merged into other programs, and further including any and all
updates,
revisions, enhancements, modifications, subsequent versions and other derivative
works thereof developed and furnished to Licensee by or on behalf of Licensor
from time to time.
Other
capitalized terms used herein shall have the meanings assigned to them
where
they first appear.
2.Grant
Of License Rights. For
good
and valuable consideration in hand received, the receipt and sufficiency
of
which are hereby acknowledged, but subject to the terms and conditions
set forth
herein, Licensor grants to Licensee and its Affiliates a paid-up, royalty-free,
non-exclusive, non-transferable, perpetual license to revise, modify, enhance
and otherwise develop derivative works of the Product. Licensor agrees
to
deliver promptly upon the execution and delivery of this Agreement (but
not
before November 15, 200l), no less than two (2) master copies of the Software
in
source (human readable) code format to Licensee on such Media as Licensee
shall
reasonably request, together with two (2) copies of the Documentation,
including
without limitation all relevant third party development toolkits and
licenses.
3.Title
And Copyright. Licensor
represents and warrants to Licensee that Licensor is the owner and holder
of all
rights, titles and interests in and to the Product, free and clear of all
liens,
charges, encumbrances, equities and claims of third parties of any description.
There are no facts or alleged facts known to Licensor which would reasonably
serve as a basis for any claim that Licensor does not have the right to
grant
the rights and licenses provided for herein. As between Licensor and Licensee,
Licensee acknowledges and agrees that, except as and to the extent otherwise
agreed in writing between the parties, all title and copyrights in and
to the
Product, including without limitation the original code or other copyrightable
material embedded in any derivative works thereof created by or on behalf
of
Licensee pursuant to this Agreement, are and will remain the property of
Licensor and/or its affiliates and suppliers, and are protected by applicable
copyright laws, and applicable international copyright treaties, and that
Licensor neither grants hereby nor otherwise transfers hereby any rights
of
ownership therein to Licensee or to any third party; provided, however,
that any
incremental additional code or other copyrightable material created by
or for
Licensee or its Affiliates shall be the property of Licensee or its Affiliates,
as applicable, and shall not be subject to the restrictions set forth herein
except to the extent such incremental material incorporates, is embedded
in or
bundled with the Product. Licensee will not claim or assert title to or
ownership of the Product except pursuant to a written agreement expressly
entitling Licensee to claim or assert such title or ownership. This Agreement,
when executed and delivered by Licensor and Licensee, will constitute the
valid
and legally binding obligation of Licensor, legally enforceable against
Licensor
in accordance with its terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
the
rights of creditors generally, limitations imposed by applicable law or
equitable principles upon the specific enforceability of any remedies,
covenants
or other provisions of this Agreement, and upon the availability of injunctive
relief or other equitable remedies.
Page
- 164
4.Restrictions.
Licensee
will not remove or alter any copyright or proprietary notice from copies
of the
Product. Except in accordance with the terms of this Agreement or any other
express written agreement between the parties, Licensee agrees (a) not
to sell,
rent, lease, license, sublicense, display, modify, time share, outsource
or
otherwise transfer the Product or any derivative work of the Product to,
or
permit the use of the Product or any derivative work of the Product by,
any
third party not an affiliate of Licensee, provided,
without
limiting the scope of the license grant hereinabove stated, it is understood
and
agreed that this Agreement permits the use of any derivative work of the
Product
by Licensee and its Affiliates in support of services rendered to their
customers in the normal course of their trade or business; and (b) to use
reasonable care and protection to prevent the unauthorized use, copying,
publication or dissemination of the Product. Licensor has the right to
obtain
injunctive relief against any actual or threatened violation of these
restrictions, in addition to any other available remedies.
5.Taxes
And Additional Charges.
All
license fees paid or payable by the Licensee for the license granted hereunder
(this "License") do not include, and Licensor will be responsible for,
any and
all taxes, duties, levies, tariffs, and other governmental charges now
or
hereafter imposed by any governmental authority on the purchase or sale
of this
License or the use or possession of the Product by Licensee and/or its
Affiliates; provided that Licensee will be responsible for its own corporate
franchise taxes and taxes based upon its own net income.
6.Limited
Warranty.
Licensor
warrants to Licensee that, for a period of ninety (90) days from the Effective
Date, (i) the Documentation and Media will be, under normal use, free from
physical defects, and (ii) the Software will perform in substantial accordance
with the operating specifications contained in the Documentation that is
most
current at the Effective Date. If Licensee notifies Licensor within said
ninety-day period of its belief that either of these warranties has been
breached, including a description of the nature or circumstances of such
breach,
Licensor will be obligated to use reasonable efforts to remedy the defect(s)
in
question within a reasonable period of time or, at Licensor’s option, to replace
the defective Product component at no additional charge. Licensor, its
authorized distributors and its suppliers do not warrant that the Product
will
satisfy Licensee’s requirements, that the operation of the Product will be
uninterrupted or error free, or that all software defects can be corrected,
This
warranty will be void if: (i) the Product is not used in accordance with
the
instructions set out in the Documentation, (ii) a Product defect has been
caused
by any of Licensee's or a third party's malfunctioning equipment, or (iii)
Licensee has made modifications to the Product not expresslyauthorized
in writing by Licensor.
7.Indemnification
For Infringement. Licensor
will defend or settle, at its own expense, any claim against Licensee by
a third
party asserting that Licensee's and/or its Affiliates’ use of the Product within
the scope of this Agreement violates such third party’s patent, copyright,
trademark, trade secret or other proprietary rights, and will indemnify
Licensee
against any damages finally awarded against Licensee arising out of such
claim.
Licensee will promptly notify Licensor in writing after first receiving
notice
of any such claim, and Licensor will have sole control of the defense of
any
action and all negotiations for its settlement or compromise, with Licensee's
reasonable assistance; provided, that Licensee's approval in writing shall
be
required of any settlement or compromise involving any admission of fault
or
wrongdoing on the part of Licensee, and provided, further, that Licensee
may at
Licensor's cost and expense take responsibility for its own defense if
and to
the extent that Licensee has any reasonable doubt as to the ability or
willingness of Licensor to fund such defense or any award, settlement or
compromise arising therefrom. Licensor will not be liable for any costs
or
expenditures incurred by Licensee without Licensor's prior written consent
except insofar as Licensee reasonably determines that it is necessary or
appropriate to incur such costs and expenses in order to preserve its legal
or
equitable rights and remedies, protect it from further such claims, or
minimize
the losses associated with claims so made. If an order is obtained against
the
Licensee's and/or its Affiliates' use of the Product by reason of any claimed
infringement, or if in Licensor's opinion the Product is likely to become
the
subject of such a claim, Licensor will, at its option and expense, and
in
addition to any other rights and remedies available to Licensee hereunder,
either (i) procure for Licensee the right to continue using the product,
or (ii)
modify or replace the Product with a compatible functionally equivalent,
non-infringing Product.
Page
- 165
8.Support.
Contemporaneously with the execution of this Agreement, Licensor and Licensee
are entering into an End User Support Agreement under which Licensor will
provide ongoing support and maintenance beyond the scope and time limits
of the
warranty period set forth in Section 6 above, which End User Support Agreement
sets forth the terms and conditions under which Licensee will be entitled
to
receive such Product updates and other Product support as may be provided
for
therein.
9.Successors
And Assigns.
This
Agreement will be binding upon and inure to the benefit of each of the
parties
and their respective successors and assigns; provided, however, that Licensee
may not assign or sublicense this Agreement in whole or in part to any
person or
entity not an Affiliate of Licensee without the prior written consent of
Licensor, and any assignment or sublicense attempted without such consent
will
be void. Notwithstanding the foregoing, if for any reason both First Ecom
and
FEDS Asia cease doing business, or both discontinue maintenance and support
for
the Software or any portion thereof, then in either case, unless the Software
or
portion thereof so affected has been conveyed to a third party, the license
granted hereunder shall thereupon automatically and without need for further
action by either party become transferable, and the restrictions contained
herein on disclosure or dissemination to third parties of the Product or
derivative works thereof shall thenceforth be of no force or
effect.
10.Governing
Law. This
agreement will be governed by and construed in accordance with the laws
of
Bermuda, without regard to conf1icts of law principles.
11.
Miscellaneous.
(a) Each
party is an independent contractor under this Agreement, and nothing herein
will
be construed to create any partnership, joint venture, or agency relationship
between the parties hereto. Any use of the term "partner" in any communication
by or between the parties or on their individual or joint behalf or in
any
trademark or service to describe their relationship is intended solely
in the
colloquial sense of a valued business relationship, and does not indicate
the
existence of or an offer to enter into a legal partnership, joint agency
or
other relationship involving common ownership or joint and/or several liability
with one another and/or any of their Affiliates. Neither party will incur
any
debt or make any express or implied agreement, guarantee, warranty or
representation in the name or on behalf of the other without the others
express
written authorization, and each party will be responsible for its own costs
and
expenses incurred in connection with this Agreement. No failure or delay
by
either party in exercising any right, power or privilege hereunder will
operate
as a waiver thereof, nor will any single or partial exercise thereof preclude
any other or further exercise thereof or the exercise of any right, power
or
privilege hereunder. No remedy expressly provided in this Agreement for
a breach
will be the sole or exclusive remedy for such breach, and each party hereby
reserves to itself, in addition to the remedies expressly provided to it
in this
Agreement, all remedies available to it under law and at equity. This Agreement
may be amended, modified or waived only by a subsequent writing that
specifically refers to this Agreement and that is signed by both parties,
and no
other act, document, usage, or custom will be deemed to amend this Agreement.
Headings in this Agreement are for the convenience of reference only and
will
not affect the construction or interpretation of this Agreement. If any
provision or provisions of this Agreement will be held, for any reason,
to be
illegal, invalid or unenforceable in any circumstance, the remaining provisions
will nonetheless be legal, valid and enforceable provisions, and the affected
provision will remain legal, valid and enforceable in other circumstances.
The
terms of this Agreement that expressly or by implication are intended to
continue beyond its termination will survive any such termination. Under
local
law and treaties, the restrictions and limitations of this Agreement may
not
apply to Licensee; Licensee may have other rights and remedies, and be
subject
to other restrictions and limitations.
(b) IN
NO
EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER, UNDER THE LAW OF TORT,
CONTRACT
OR OTHER WISE, AND INCLUDING AS A RESULT OF NEGLIGENCE, FOR SPECIAL, INCIDENTAL,
INDIRECT OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT OR THE
PERFORMANCE OR NON-PERFORMANCE HEREOF EVEN IF THE RESPONSIBLE PARTY HAS
BEEN
ADVISED OF OR FORESEES A LIABILITY OF ANY SUCH DAMAGES OCCURRING), INCLUDING
BUT
NOT LIMITED. TO LOST BUSINESS REVENUE, FAILURE TO REALIZE EXPECTED PROFITS
OR
SAVINGS, OR LOSS OF DATA.
(c) Neither
party hereto shall be held liable hereunder for any default arising from
the
delay in
the
performance of its obligations hereunder to the extent that such default
or
delay:
(i) is
caused
directly by an event beyond the reasonable control of the defaulting party
or
delaying party (the “Non-performing Party”), such as, but not restricted to,
fire, flood, earthquake, elements of nature, acts of war, terrorism, riots,
civil disorders, rebellions or revolutions, strikes, lockouts or labor
difficulties; and
(ii) could
not
have been prevented by reasonable precautions and cannot
possibly
be circumvented by the Non-performing Party through the use of commercially
reasonable alternative sources, work-around plans or other means; (a “Force
Majeure Event”). The Non-performing Party will be excused from any further
performance of the obligations affected by such Force Majeure Event for
as long
as the Force Majeure Event continues and the Non-Performing Party continues
to
use its reasonable efforts to recommence performance. The Non-performing
Party
shall immediately notify the other party by telephone (to be confirmed
in
writing within five (5) days of the inception of the Force Majeure Event)
and
describe at a reasonable level of detail the circumstances causing such
default
or delay. During the continuance of a Force Majeure Event affecting Licensor,
Licensee shaIl continue to pay Licensor's charges for professional services
actually rendered and expenses incurred in the actual performance of such
services in accordance with this Agreement. Notwithstanding any other provisions
hereof, this clause (c) will not excuse a breach of any purely monetary
obligation.
Page
- 166
12.Joint
and Several Responsibility. Each
of
First Ecom and FEDS Asia acknowledge and agree that they are entering into
this
Agreement, and that they make the representations, warranties, covenants,
agreements, indemnities and other undertakings and responsibilities of
Licensor
set forth herein, jointly and severally, with fullrecourse
on the part of Licensee to either or both of them for the obligations and
undertakings of Licensor contained herein. In this respect, each of First
Ecom
and FEDS Asia joins in this Agreement as primary obligor and not as surety,
and
Licensee shall not be required to proceed first against or exhaust its
remedies
against either of First Ecom or FEDS Asia as a condition to proceeding
hereunder
against the other with respect to any claim arising hereunder. Further,
each of
First Ecom and FEDS Asia hereby irrevocably and exclusively appoints First
Ecom
as its agent and attorney-in-fact for the giving or receipt of all notices
or
payments, the granting of all consents, approvals, or waivers, and the
taking of
all such other actions and making of all such other elections and/or decisions
as shall be explicitly or implicitly provided or permitted herein to be
given,
received, granted, taken or made by or on behalf of Licensor or either
of them
(it being understood that omitting to take any action or make any election
or
decision shall be deemed the taking of an action or the making of any election
or decision for this purpose), and to do all such acts and things as may
in the
opinion of such attorney-in-fact be reasonably necessary or reasonably
expedient
for the purposes thereof, or in connection therewith, the Licensee shall
be
entitled to rely conclusively on any of the foregoing as the action, decision
or
election, as the case may be, of each and both of First Ecom and FEDS Asia.
Each
of First Ecom and FEDS Asia agrees that the foregoing appointment constitutes
a
power coupled with an interest and shall be binding upon its successors
and
assigns. Any payments received by First Ecom hereunder that properly belong
to
FEDS Asia shall be held by First Ecom in
trust
for the benefit of FEDS Asia, and FEDS Asia hereby releases, discharges
and
agrees to hold harmless Licensee for any amounts payable to FEDS Asia that
Licensee pays to
First
Ecom.