-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A73veAm7V8iWLXAeui1Jim9MsPqKc1jWoingLgdwxMRCPrURUqNykT7A4dUnFs4+ C6ETW2Dr64mSs1KA4NAa5Q== 0001169232-02-001663.txt : 20020918 0001169232-02-001663.hdr.sgml : 20020918 20020918150144 ACCESSION NUMBER: 0001169232-02-001663 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020918 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BREK ENERGY CORP CENTRAL INDEX KEY: 0001095070 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 980206967 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 000-27753 FILM NUMBER: 02766837 BUSINESS ADDRESS: STREET 1: 19TH FLOOR STREET 2: 80 GLOUCESTER ROAD CITY: HONG KONG STATE: K3 ZIP: 00000 BUSINESS PHONE: 85228015181 MAIL ADDRESS: STREET 1: 902 HENLEY BLDG STREET 2: 5 QUEENS ROAD CENTRAL CITY: HONG KONG STATE: K3 ZIP: 00000 FORMER COMPANY: FORMER CONFORMED NAME: FIRST ECOM COM INC DATE OF NAME CHANGE: 19990915 10-K/A 1 d51970_10k-a.txt AMENDED ANNUAL REPORT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ANNUAL REPORT Form 10-K/A Amendment No. 2 ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 BREK ENERGY CORPORATION (Exact Name of Registrant as Specified in Charter) Nevada 0-27753 98-0206979 (State or Other Jurisdiction (Commission (IRS Employer of Incorporation) File Number) Identification No.) 19th Floor, 80 Gloucester Road, Wan Chai, Hong Kong SAR (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (852) 2801-5181 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001 per share Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. |X| Aggregate market value of the voting and non-voting common equity held by non- affiliates of the registrant as of March 28,2002 was $13,233,022. Number of shares of Common Stock outstanding as of March 28, 2002 was 22,055,037. Documents incorporated by reference: None ITEM 1. BUSINESS Brek Energy Corporation operates through its subsidiaries in the oil and gas exploration and the electronic payment processing businesses. Before the middle of 2001, its emphasis had been on the electronic payment processing business. Since it acquired an interest in Gasco Energy, Inc., an oil and gas exploration company, in July 2001, Brek's focus has been on that industry. Brek recently acquired an interest in another company engaged in oil and gas exploration - Vallenar Energy Corp. Brek remains in development stage. It has earned insignificant revenues from its electronic processing operations in its first three years through December 31,2001, and has not received any revenue from the oil and gas business. Brek's longer-term ability to emerge from development stage depends upon developing its oil and gas business and developing sufficient markets and demand for its electronic processing business. Brek has incurred operating losses of $11.46 million, $12.81 million and $6.35 million for the years ended December 31, 2001, 2000 and 1999. In addition, Brek had a recovery from discontinued operations of $1.49 million for the year ended December 31, 2001 versus a loss of $4.22 million for the year ended December 31, 2000. As at December 31, 2001 Brek's accumulated deficit was approximately $35.1 million. Brek expects its accumulated deficit to grow for the foreseeable future. Brek did not raise any equity funds during the year ended December 31, 2001 and Brek will either have to raise new equity funds, sell some assets or obtain debt financing sufficient to support Brek's requirements through the year ended December 31, 2002. Any sale of equity by Brek will likely result in substantial dilution to its shareholders. Oil and Gas Exploration By Gasco Energy, Inc. By agreement dated July 5, 2001, Brek acquired a series of preferred stock of Gasco Energy, Inc. which is convertible into approximately 26% of the equity of Gasco. Brek has elected to convert half of this preferred stock into common stock. In February 2002, Brek entered into agreements with certain shareholders of Gasco which provided for Brek to acquire additional 7,000,000 shares of common stock of Gasco in exchange for 19,250,000 shares of Brek common stock. The shareholders were Marc Bruner, Wet Coast Management Corp., Richard Jeffs, Ralph Ruoss, Claudia Handschin, Turf Holdings Ltd., Tradewinds Investment Ltd., Seloz Gestion SA, Nicolas Mathys, Carrera Investments Ltd., Erich Hofer, Bruno Sauter, Tom Fails and Equistar Capital LLC. Gasco is engaged in locating and developing hydrocarbon prospects, primarily located in the Rocky Mountain region. It applies new technologies to generate and develop high-potential prospects. All of Gasco's properties are located in the western United States. Riverbend Project. Gasco's Riverbend Project consists of approximately 117,000 gross acres in the Uinta Basin of northeastern Utah, some of which is leased by Gasco, some of which is subject to farmout and other agreements under which Gasco may earn leasehold interests, and some of which is held by third parties. A farmout agreement is one in which the owner of - 3 - a lease assigns it or a portion of it to another person who then has a right to drill one or more wells on the leased property and to receive a portion of the revenues, if any, from the wells. Gasco's geologic and engineering focus is concentrated on three tight-sand formations in the basin: the Wasatch, Mesaverde and Mancos formations. In December 2000, Gasco entered into an agreement with Phillips Petroleum, a major oil and gas company, that defined a 60,000-acre Area of Mutual Interest, referred to herein as an AMI, within the Riverbend project, not all of which is currently leased by either Gasco or Phillips. Under the terms of this agreement, Phillips paid $1,000,000 to Gasco upon execution of the agreement, and later expended $8,000,000 in connection with drilling and completing three producing wells. As a result of Phillips' drilling, Gasco earned additional acreage under certain farmout agreements during 2001. The agreement further afforded Phillips the right to acquire an 80% interest in all of Gasco's leases and farmout agreements within the AMI by assigning two leases within the AMI to Gasco. There has been some uncertainty as to whether Phillips timely exercised its right to acquire the 80% interest in all of Gasco's leases and contracts within the AMI. However, Gasco has indicated its willingness, subject to the satisfaction of certain conditions, to accept the assignment of the two leases, which have since been tendered by Phillips, and to proceed with the assignment of the 80% interest to Phillips, and Phillips has indicated that it will begin drilling a new earning well in the AMI on April 17, 2002. Gasco is currently considering whether or not to participate in this well. During January 2002, Gasco entered into an agreement with Halliburton Energy Services under which Halliburton has the option to earn a participation interest proportionate to its investment (not to exceed 50%) by funding the completions of Wasatch wells. Gasco, at its option, may elect to limit Halliburton's funding and the resulting participation interest to 25%. Gasco and Halliburton will also share technical information through the formation of a joint technical team. Gasco began drilling the first Wasatch well during February 2002. Gasco anticipates drilling three gross (1.5 net) wells in this area during 2002 and has set its capital budget for this purpose at $3,000,000. After the wells drilled under this agreement have reached payout status, as defined in the agreement, Halliburton will retain an interest equal to 5% of Gasco's total interest prior to payout. Payout occurs when the revenue from the production of a well equals the cost of drilling, completing and equipping the well. Greater Green River Basin Project. In Wyoming, Gasco established an AMI with Burlington Resources covering approximately 330,000 acres in Sublette County within the Greater Green River Basin. As of March 15, 2002, Gasco had leased approximately 67,000 acres in this area. The exploration agreement governing the AMI requires Burlington to drill two wells and to shoot 180 miles of high-resolution two-dimension seismic. During 2001, three shallow wells were drilled in this area for the purpose of holding acreage and earning expiring leasehold. Two of the wells tested only the Fort Union and Upper Lance formations and the third well tested all zones. All of these wells have been cased and are in various stages of completion. They did not evaluate the deeper, high-potential Middle and Lower Lance formations, which are prolific producers in the nearby Jonah Field and Pinedale - 4 - Anticline area. Gasco and Burlington are targeting these deeper formations with their ongoing seismic and exploration activities. In 2001, Burlington drilled two wells and shot 80 miles of seismic. As of March 15, 2002, one of the wells drilled was being completed. Burlington has advised Gasco that it plans to complete the second well, complete the seismic program and drill additional wells during 2002. Gasco anticipates participating in the drilling of one gross well in this area and has set its 2002 capital budget for this purpose at $750,000. During 2002, Gasco purchased additional real property in Sublette County, Wyoming: a 50% interest in 21,613 acres for approximately $1,411,000; a 20% interest in 4,098 acres for approximately $107,000; and leasehold interests covering approximately 16,606 acres for approximately $1,500,000. In connection with this last acquisition, Gasco received an exclusive option to purchase an additional 72,583 acres in this area. Monthly payments of $300,000 are required during 2002 in order to maintain this option. Gasco may elect to exercise its option to complete the transaction at any time. On February 26, 2002, Gasco began drilling a well in the Southwest Jonah field located in the Greater Green River Basin in Sublette County, Wyoming. This was the first well drilled within a newly created AMI with Cabot Oil and Gas, consisting of nine sections (5,760 gross acres, 1,440 net acres). The well was drilled to a total depth of 11,000 feet. The well encountered natural gas, but not in sufficient quantities to be deemed economic, making it a "dry hole." Gasco has an option to drill additional wells within the AMI if the new interpretation of the well's data in integration with the seismic data warrants such testing. The net dry hole cost of this well is estimated at $500,000. Southern California Project. Gasco currently leases approximately 3,900 net acres in the Kern and San Luis Obispo Counties of southern California. It has no drilling or development plans for this acreage during 2002, but plans to continue paying leasehold rentals and other minimum geological expenses to preserve this acreage. Gasco may consider selling this acreage in the future. Productive Gas Wells. The following table summarizes Gasco's productive and shut-in gas wells as of December 31, 2001. 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 Gasco has an interest. Net wells are the sum of Gasco's fractional interests owned in the gross wells. Gross Net Producing gas wells 4 1.5 Shut-in gas wells 4 3.2 - --- Total 8 4.7 = === Gasco does not operate any of these wells. Of the four producing wells, three are operated by Phillips Petroleum Company and one is operated by Wasatch Energy Corp. Oil and Gas Acreage. The following table sets forth the undeveloped leasehold acreage, by area, held by Gasco as of December 31, 2001. 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. Gross acres are the total number of acres in which Gasco has a working interest. Net acres are the sum of Gasco's fractional interests owned in the gross acres. In certain leases, Gasco's ownership is not the same for all depths; therefore, the net acres in these leases are calculated using the lowest ownership interest at any depth. Gross Net Utah 116,997 81,034 Wyoming 52,363 45,232 California 3,868 3,866 ------- ------- Total acres 173,228 130,132 ======= ======= In 2002, Gasco acquired approximately 42,317 gross (28,233 net) undeveloped acres in Sublette County Wyoming. On March 7, 2002, Gasco completed a strategic exchange of acreage within the Uinta Basin in northeastern Utah, whereby it received 3,359 gross acres (2,474 net) in exchange for 320 gross acres (160 net) and the contractual right to earn Wasatch rights on approximately 2,463 net Uinta Basin acres. Gasco has an option to acquire 72,583 acres in the Greater Green River Basin. Gasco can also earn a 37.5% interest in an additional 21,760 acres in Sublette County Wyoming if it participates in the drilling of one well prior to November 2002. Gasco also has the right to earn a 20% interest in 21,951 gross acres within the Uinta Basin by participating in the drilling of four wells prior to February 2004. Drilling Activity. The following table sets forth Gasco's drilling activity during the year ended December 31, 2001. Gasco had no drilling activity during the years ended December 31, 2000 and 1999. Gross Net Exploratory Wells: Productive 4 1.6 Dry 2 2 - --- Total wells 6 3.6 = === Oil and Gas Exploration Projects by Vallenar Energy Corp. 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 held by Brek, represents approximately 25% of Vallenar's equity. For as long as at least one-half of the preferred stock is outstanding, it is entitled as a class to at least 26% of the total voting power of Vallenar. 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 is playing an active role in the management of Vallenar. Vallenar holds leases covering approximately 8,540 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. Vallenar has advised Brek that it intends to complete a one-to-two well, controlled situation core test to determine the recovery factor of the oil. Assuming the core test results are favorable, Vallenar's management has recommended that a five-acre pilot program then be implemented to test recovery methods. Electronic Payment Processing Brek was formed on September 16, 1998 with the name of First Ecom.com, Inc., to facilitate electronic payment processing of e-commerce transactions for banks and their merchants through the medium of the Internet. It continues to do business in this area through its wholly owned subsidiary First Ecom Systems Limited, referred to herein as FESL. FESL has developed an electronic gateway to convert consumers' credit card information collected by merchants on the Internet into a format that can be processed by banks. FESL acts as a payment system service provider between banks, online merchants and consumers. The principal geographic area in which FESL provides its services is throughout Asia. FESL charges banks service fees for processing transactions through this gateway on their behalf. Brek's electronic payment processing business has not generated any significant revenues to date, and management is reviewing various options for this business. Payment Processing Over the Internet. To purchase goods or services over the Internet, a customer generally visits a merchant's web site to view and select these goods or services. Purchases are almost invariably paid for by credit card, and prior to furnishing the goods or services a merchant requires the customer to submit his credit card details and seek authorization to charge the card for the purchase. To accept payment by credit card, a merchant must establish a bank account with a financial institution and configure his web site for this purpose by credit cards for goods or services ordered from him online. Payment then occurs in three steps: authorization, settlement and funds transfer. After completing the order form and shipping details on a FESL-enabled merchant's web site, a customer is redirected to a secure FESL payment page on the site. The data is encrypted and sent to the FESL's gateway. The payment gateway then routes the authorization request into the appropriate card network (e.g. VISA, MasterCard, American Express), where it is forwarded to the bank that issued the customer's credit card. The issuing bank approves or declines the transaction. If it approves a transaction, it blocks the relevant amount of funds in the consumer's account, reducing the cardholder's available credit limit by the authorized amount. Its response is routed back through the appropriate card network to FESL's payment gateway and finally over the Internet to the merchant's web site and the consumer simultaneously. The entire process typically takes less than 10 seconds, so the consumer is advised almost immediately whether or not his purchase has been approved. The merchant may from time to time review the status of transactions by accessing the Merchant Accounting & Reporting System (referred to as MARS), FESL's proprietary software, using a web browser over the Internet. This software records the status of all purchases made by consumers on a FESL-enabled merchant's web site. A patent application for MARS was filed with the United States Patent and Trademark Office on August 29, 2000 by the inventor, Enzo Michelangeli, who assigned all his rights in the application to Brek on November 20, 2000. The cost of this application was $18,800. MARS has been licensed to Transworld Payment Solutions N.V. In the case of approved purchases the merchant must ship the goods or provide the services. Once this has been done, the merchant is permitted to request settlement of the transaction, and does so by initiating the settlement request in his MARS account, usually on a batch-by-batch basis. The settlement request from the merchant is routed to the merchant's acquiring bank. The acquiring bank will request payment from the bank that issued the consumer's credit card. The issuing bank then releases the funds to the merchant's bank, completing the payment process. FESL's Operations and Technology. FESL continues the program, started in 2000, of working directly with various banks who in turn offer electronic payment services to their merchant customers. FESL has enabled two banks, which currently have some 60 merchants whose e-commerce transactions are authorized and approved through FESL's payment gateway. From the time they were enabled in 2000 through January 31, 2002, these banks executed over 250,000 transactions using the FESL's payment gateway. In August 2001, FESL entered into an agreement with United Overseas Bank (Malaysia) Bhd to process its ecommerce transactions. To date one merchant customer of this bank has been activated. In 2002, FESL was certified by American Express to handle ecommerce transactions for its merchants in the Asia Pacific region. The first merchants are expected to be activated in the first half of 2002. FESL owns and operates its own payment gateway technology and its merchant accounting and reporting systems on redundant servers in Hong Kong. FESL maintains engineers at all times to monitor the gateway. The servers have been in constant operation since September 1999 without failure. The software FESL provides to merchants to connect their web sites to FESL's gateway encrypts the transaction information sent over the Internet to the gateway, which in turn encrypts the information that it sends to payment switch. This encryption is 128-bit key strength. A version of this software has been developed in conjunction with Microsoft Corporation as a "plug-in" to the Microsoft Site Server Commerce Edition suite of programs. Microsoft has no rights in this software, and neither Brek not FESL have any agreements with Microsoft. Sold or Discontinued Businesses Until March 31, 2001, Brek provided systems integration services through its wholly owned subsidiary, Asia Internet Limited, which was acquired on March 31, 2000. In February 2001 Brek decided, due to the downturn in Internet related business in Hong Kong and the surrounding area, to terminate this business. Asia Internet Limited ceased operations effective as of March 31, 2001. In June 2001 Brek acquired the remaining 50% of the equity of, and loans payable by, First Ecommerce Data Services Limited, referred to as FEDS, which was headquartered in Bermuda, from the Bank of Bermuda for cash of $4,289,542 plus the cancellation of options to purchase 500,000 shares of Brek common stock. On October 19, 2001, Brek sold its 100% interest in FEDS to Transworld Payment Solutions N.V. for cash of $1,663,986 plus a note payable for 40% of FEDS operating profits for the next three years with a minimum guaranteed amount of $2 million and a maximum of $3 million. In addition, Brek was paid back loans totaling $1,336,014. In September 2001, Brek terminated its relationship with the Bank of Bermuda pursuant to which it had acted as a master merchant for the bank. Employees Brek has significantly reduced its work force and as at February 15, 2002 employed 17 full-time personnel. Of these 9 work within the payment processing business and the remainder support Brek's corporate functions and oil and gas business. It is expected that additional personnel will be hired for the oil and gas business to accomplish Brek's business plans. None of Brek's employees is a member of a labor union. Sales and Marketing The principal markets for any oil and gas produced by Brek are transmission pipeline companies, utilities, refining companies and companies that actually use the gas in their operations. The principal market for FESL's ecommerce services are banks and their merchants. In order for merchants to sell goods and services over the internet, they and their banks must be able to accept and process ecommerce transactions on widely-held credit cards such as MasterCard and Visa. FESL will continue to focus its sales efforts in Hong Kong and other Asian markets. Its principal marketing office is located in Hong Kong with representatives located in Europe and Malaysia. Competition Oil and Gas Exploration. Brek's natural gas and petroleum exploration activities take place in a highly competitive and speculative business atmosphere. In seeking suitable natural gas and petroleum 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 petroleum and natural gas industry will be significant. Competition in the petroleum and natural gas 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 petroleum and natural gas exploration companies and may have difficulty acquiring additional acreage or projects, and may have difficulty arranging for the transportation of product, in the event Brek is successful in its exploration efforts. 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 will be required to obtain drilling permits for its wells, and there is no assurance that such permits will be available timely or at all. The prices of oil and gas are controlled by domestic and world markets. Electronic Payment Processing. The most dominant participant in credit card processing is First Data Corporation, which enjoys a near monopoly of the industry in North America. Outside of North America, however, First Data is not dominant. In Asia, FESL's principal market competition will come from three sources: o Large merchants having their own gateways; o Merchant banks maintaining their own gateways; and o Internet service providers and similar businesses that host merchant web sites maintaining their own gateways. Many of these competitors are substantially larger than Brek, have longer operating histories and have much greater resources at their disposal. FESL believes that competition will be on the basis of price and quality of service. Because FESL's gateway is shared by many merchants and banks, FESL believes that its prices will be competitive on the grounds of economies of scale. It should be cheaper for each bank and merchant to share the cost of the FESL's gateway rather than maintain its own. FESL also believes that it will have an advantage over merchants and banks in maintaining the highest quality of service possible. Competitors of FESL, however, will have greater resources to allocate to the development and maintenance of a gateway should they choose to do so. Governmental Regulations and Environmental Laws Brek, or a venture in which it participates, will be required to obtain local government and other permits for drilling oil or gas wells. These permits are issued by whichever of the State or the Bureau of Land Management is the lessor under the lease where the well is proposed to be drilled. The BLM is the lessor on most of Brek's leases. Each application for permit must be accompanied by an Environmental Assessment Report, which will be prepared by a licensed, qualified firm retained by Brek to evaluate the environmental impact of the well. The permit will only be granted if the report recommends it in light of the environmental assessment. The report usually takes one week to prepare and costs approximately $2000. Permits can take up to 18 months to obtain and generally cost less than $ 10,000. Gasco has applied for 14 permits, of which 10 have been granted and four are pending. No permit application by Gasco has ever been denied. Exploration and production activities relating to oil and gas leases are subject to numerous environmental laws, rules and regulations. The Federal Clean Water Act requires the construction of a fresh water containment barrier between the surface of each drilling site and the underlying water table. Various federal, state and local laws and regulations covering the discharge of materials into the environment, or otherwise relating to the protection of the environment, may affect Brek's operations and costs through their effect on oil and gas exploration, development and production operations. Environmental laws and regulations have changed substantially and rapidly over the last 30 years, and Brek anticipates that there will be continuing changes. Laws and regulations protecting the environment have generally become more stringent in recent years, and may in certain circumstances impose "strict liability," rendering a person liable for environmental damages without regard to negligence or fault on the part of such person. Such laws and regulations may expose Brek to liability for the conduct of operations or conditions caused by others, or for acts of Brek which were in compliance with all applicable laws at the time such acts were performed. Increasingly strict environmental restrictions and limitations have resulted in increased operating costs for Brek and other businesses throughout the United States, and it is possible that the costs of compliance with environmental laws and regulations will continue to increase. The modification of existing laws or regulations or the adoption of new laws or regulations relating to environmental matters could have a material adverse effect on Brek's operations. In addition, Brek's existing and proposed operations could result in liability for fires, blowouts, oil spills, discharge of hazardous materials into surface and subsurface aquifers and other environmental damage, any one of which could result in personal injury, loss of life, property damage or destruction or suspension of operations. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, requires payments for cleanup of certain abandoned waste disposal sites, even though such waste disposal activities were undertaken in compliance with regulations applicable at the time of disposal. Under the Superfund law, liability is joint and several, and one party may be required to bear more than its proportional share of cleanup costs at a site where it has responsibility pursuant to the legislation if payments cannot be obtained from other responsible parties. Other legislation mandates cleanup of certain wastes at facilities that are currently being operated. States also have regulatory programs that can mandate waste cleanup. CERCLA authorizes the Environmental Protection Agency ("EPA") and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs they incur. The scope of financial liability under these laws involves inherent uncertainties. It is not anticipated that Brek will be required in the near future to expend material amounts because of environmental laws and regulations, but inasmuch as such laws and regulations are frequently changed, Brek is unable to predict the ultimate future cost of compliance. Brek believes it is presently in compliance with all applicable federal, state or local environmental laws, rules or regulations; however, continued compliance (or failure to comply) and future legislation may have an adverse impact on Brek's present and contemplated business operations. No assurance can be given as to what effect these present and future laws, rules and regulations will have on Brek's current and future operations. The Company Brek was incorporated on February 12, 1999 in the state of Nevada in the United States. On February 12, 1999, before issuing any shares of capital stock, Brek consummated an agreement and plan of merger with JRL Resources Corp., a Florida corporation, whereby JRL's 12,040,000 outstanding shares of common stock were converted into 12,040,000 shares of Brek's common stock on a one-for-one basis. JRL was incorporated in Florida on November 13, 1996 and was inactive from the time of its formation until its merger with Brek. Before August 18, 1998, JRL was named Vantage Sales Corp. Shortly before this merger, JRL had acquired all the outstanding capital stock of First Ecommerce Asia Limited, which was then Brek's only direct subsidiary, and is located in Hong Kong. First Ecommerce Asia Limited was incorporated in Hong Kong on September 16, 1998. Before December 10, 1998, it was named Gold Pacific Management Limited. On January 28, 1999 all of First Ecommerce Asia Limited's outstanding shares of common stock were exchanged for 985,000 of JRL's 1,025,000 then-outstanding shares plus 3,015,000 newly issued shares, and it became a wholly owned subsidiary of JRL. For accounting purposes, this transaction was treated as an acquisition of JRL by First Ecommerce Asia Limited, and therefore the financial information contained herein is only presented from September 16, 1998, the date on which First Ecommerce Asia Limited was formed. JRL had no operations before this date. When JRL was merged into Brek, First Ecommerce Asia Limited became the subsidiary of Brek. Brek's shareholders approved changing the name of the corporation from First Ecom.com, Inc. to Brek Energy Corporation at the Annual Meeting on January 29, 2002. The amended articles of Brek were filed with the State of Nevada on January 31, 2002. Brek's headquarters are presently located at 19th Floor, 80 Gloucester Road, Wan Chai, Hong Kong SAR. Risk Factors Brek is in development stage and an investment in Brek's common stock involves a high degree of risk. Brek's business and results of operations could be seriously harmed and the trading price of Brek's common stock could decline should any of these risks come to fruition. General Risks Brek's Limited Operating History May Prevent it From Achieving Success Brek has a limited operating history, which may prevent it from achieving success. Its revenue and income potential are unproven. It will encounter challenges and difficulties frequently encountered by early-stage companies in new and rapidly evolving markets. Brek's date of inception was September 16, 1998. Chief among these challenges and difficulties are: Being able to adequately prove up its resources Locating and acquiring proper acquisition targets Locating and acquiring direct interests in oil and gas prospects Raising adequate additional equity and/or adequate financings Potential acquisitions being able to prove up their resources Persuading banks to outsource their Internet credit card processing Processing a sufficient volume of Internet credit card transactions which, particularly in Asia, may not be present in sufficient quantity to generate required revenues Persuading banks and others to purchase the e-Acquirer and other products It may fail to address any of these challenges and failure to do so would seriously harm Brek's business and operating results. In addition, because of Brek's limited operating history, it has limited insight into trends that may emerge and affect Brek's business. Brek has Incurred Losses and Expects Future Losses Brek has experienced operating losses in each period since inception and expects these operating losses to continue in the foreseeable future. Brek may not have sufficient resources to increase its revenues enough to achieve profitability. Brek's failure to increase its revenues significantly would seriously harm Brek's business and operating results. In fact, Brek may not have any revenue growth. On December 31, 2001, Brek had an accumulated deficit of approximately $35.1 million, a significant portion of this loss, $10,461,322, was incurred during the year ended December 31,2001, which included a non-recurring charge of $3.16 million, a further write down of the investment in uniView of $0.314 million and a recovery from discontinued operations of $1.49 million. Brek has recorded the non-recurring charge to reduce the carrying value of the stock of its subsidiary First Ecommerce Data Services Limited to net realizable value. This stock was subsequently sold for $3,451,235, which was its written-down value. On June 30, 2002, Brek's accumulated deficit had grown to approximately $40.4 million. Brek May Not Be Able to Obtain Future Financing Brek will be required to raise additional capital in 2002. It may not be able to raise capital when needed on terms favorable to it or at all. Brek has relied on the sale of its equity capital to fund working capital and the acquisition of its assets. Any future financing will likely result in substantial dilution to Brek's stockholders. Failure to generate operating cash flow or to obtain additional financing could delay or cause indefinite postponement of further exploration and development of its oil and gas prospects or result in the loss or sale of such properties. Brek May Not Be Able to Attract and Retain Personnel Brek may not be successful in attracting, assimilating, or retaining qualified personnel with knowledge and expertise in the various facets of oil and gas exploration and development industry. Like other companies in Hong Kong, Brek faces intense competition for qualified personnel there. Brek does not consider any of its employees to be of key importance. Until August 31, 2002, it had an employment agreement with its chief executive officer, but he resigned on that date. It currently has an employment agreement with its chief financial officer. Brek does not carry life insurance on any of its employees. Brek Must Replace Its Chief Executive Officer Gregory M. Pek informed Brek that he did not wish to extend his employment agreement with Brek, which expired on August 31, 2002. Brek will have to engage a new Chief Executive Officer in a timely enough fashion so that Brek is not adversely affected. Brek's Stock Price May Fluctuate The market price of Brek's common stock may fluctuate significantly in response to a number of factors, some of which (such as interest rates, general economic conditions and trading multiples of comparable companies) are beyond Brek's control, and some of which (such as operating results, announcements of new products, new customers, acquisition of potential oil and gas entities and prospects, results of exploration and development) are within Brek's control. In addition, Brek's common stock is sometimes very thinly traded and this characteristic may exaggerate any fluctuations. Brek's trading price may not be an accurate reflection of its value. Future Sales of Shares Could Depress Brek's Stock Price If Brek's stockholders sell substantial amounts of Brek's common stock in the public market, the market price of Brek's common stock could fall. All of Brek's outstanding common stock is eligible for sale in the public market immediately. Shareholders Will Receive No Dividends Brek has never paid dividends and has no current plans to do so. Given Brek's financial position, it is unlikely that it will pay any dividends in the foreseeable future. Brek plans instead to retain earnings, if any, to fund internal growth. Difficulty of Enforcing Legal Process It may be difficult or impossible to effect service of process within the United States upon the directors of Brek (other than Andrew Leitch), to bring suit in the United States or to enforce, in the U.S. courts, any judgment obtained there against such persons predicated upon any civil liability provisions of the U.S. federal securities laws. All of Brek's directors, except Andrew Leitch, reside outside the United States. A substantial portion of the assets of such persons are located outside the United States. Foreign courts may not entertain original actions against Brek's directors or officers predicated solely upon U.S. federal securities laws. Furthermore, judgments predicated upon any civil liability provisions of the U.S. federal securities laws may not be directly enforceable in foreign countries. Oil and Gas Exploration Risks Oil or Gas Wells may be Unproductive or Uneconomic The business of exploring for and producing oil and gas involves a substantial risk of investment loss that even a combination of experience, knowledge and careful evaluation may not be able to overcome. Drilling oil and gas wells involves the risk that the wells will be unproductive or that, although productive, the wells do not produce oil and/or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered, which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. Some of the Risks of Drilling and Operating Oil or Gas Wells are Uninsurable Brek may suffer losses from uninsurable hazards or from hazards which the operator or Brek has 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 oil and gas 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. No Assurance of Titles If an examination of the title history of petroleum and natural gas lease that Brek has purchased reveals that it has been purchased in error from a person who was not the owner of the mineral interest purportedly covered by the lease, Brek's interest would be worthless. In that event, the lease would be lost. Brek plans not to undergo the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease. Rather, Brek will rely upon the judgment of petroleum and natural gas lease brokers or land men who perform the fieldwork in examining records in the appropriate governmental office before attempting to place under lease a specific mineral interest. If such an examination is ever done, it may reveal that curative work must be done to correct deficiencies in the marketability of the title, and such curative work entails expense. The work might include obtaining affidavits of heirship or causing an estate to be administered. Environmental Regulations May Prevent or Delay Drilling Oil or Gas Wells The petroleum exploration and production activities of Brek are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Specifically, Brek is subject to legislation regarding emissions into the environment, water discharges, and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. Such laws and regulations have been changed from time to time in the past and may be changed again in the future to impose an even greater burden on Brek. Governmental Regulations May Increase Expenses and Delay or Prevent Drilling Oil or Gas Wells Any increases in the regulatory burden on the petroleum and natural gas industry created by new legislation would increase Brek's cost of doing business. A major risk affecting drilling is the need to obtain drilling permits. Delays in obtaining drilling permits, the failure to obtrain a drilling permit for a well, or a permit with unreasonable conditions or costs attached to it, could have a material adverse effect on Brek's ability to develop its properties fully. Petroleum and natural gas exploration, development and production are subject to various types of regulation by local, state and federal agencies. Legislation affecting the petroleum and natural gas industry is under constant review for amendment and expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue and have issued rules and regulations binding on the petroleum and natural gas industry and its individual members, some of which carry substantial penalties for failure to comply Natural Gas and Oil Prices May Fall A decline in the price of natural gas and oil prices would result in a commensurate reduction in Brek's income for the production of oil and gas. In the event prices fall substantially, Brek may not be able to realize a profit from its production and would continue to operate at a loss. In recent decades, there have been periods of both worldwide overproduction and underproduction of hydrocarbons and periods of both increased and relaxed energy conservation efforts. Such conditions have resulted in periods of excess supply of, and reduced demand for, crude oil on a worldwide basis and for natural gas on a domestic basis. These periods have been followed by periods of short supply of, and increased demand for, crude oil and natural gas. The excess or short supply of crude oil has placed pressures on prices and has resulted in dramatic price fluctuations even during relatively short periods of seasonal market demand. Brek May Not Be Able to Compete in This Industry Brek's competitors may be able to pay more for petroleum and natural gas properties than Brek and may be able to better evaluate prospects than Brek. In addition, Brek's competitors may have a greater ability to continue exploration activities during periods of low hydrocarbon market prices. Brek's ability to acquire additional properties and to discover reserves in the future will depend upon its ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment. The petroleum and natural gas industry is intensely competitive and Brek competes with other companies, which have greater resources. Many of its competitors not only explore for and produce crude petroleum and natural gas but also carry on refining operations and market petroleum and other products on a regional, national or worldwide basis. There is also competition between the petroleum and natural gas industry and other industries with respect to the supply of energy and fuel to industrial, commercial and individual customers. There is no assurance that Brek will be able to effectively compete against such companies. Electronic Payment Processing Risks Brek May Fail to Expand Its Customer Base Brek's success in the payment processing business is substantially dependent on the growth of its customer base of banks that use its e-Acquirer system. If it fails to increase its customer base, its business and operating prospects would be seriously harmed. Brek's ability to attract customers will depend on a variety of factors, including the price and quality of Brek's products and services as well as Brek's ability to market its products and services effectively. Brek May Not Be Able to Compete in The Processing Market Brek's competitors have extensive customer bases and strong customer relationships that they could leverage, including relationships with Brek's current and potential customers. This competition will impede Brek's ability to expand its customer base. Brek's payment processing markets are new, rapidly evolving and highly competitive, and it expects this competition to persist and intensify in the future. Brek's failure to maintain and enhance its competitive position could seriously harm its business and operating prospects. It will encounter competition from a number of sources. These competitors also have significantly more established customer service organizations than Brek does. Brek May Not Be Able to Develop Adequate Sales and Marketing Capabilities Brek needs to expand its marketing and sales operations in order to increase market awareness of Brek's services and generate increased revenues. Brek may lack the resources to enable this expansion, however. Brek has only been marketing its payment processing services since early 1999. Brek's services require sophisticated sales effort targeted at senior management of Brek's prospective customers, which are principally banks and large international conglomerates. Competition for qualified sales personnel is intense, however, and Brek may not be able to hire enough qualified individuals in the future. Use of the Internet and Growth of E-commerce May Not Continue Demand for Brek's payment processing business depends on consumers' using the internet for e-commerce. Any reduction in such use will reduce the demand for Brek's payment processing services. Rapid growth in the use of the Internet has occurred only recently. As a result, its acceptance and use may not continue to develop at historical rates, and a sufficiently broad base of consumers may not adopt, or continue to use, the Internet and other online services as a medium of commerce. Demand and market acceptance for recently introduced services and products over the Internet are subject to a high level of uncertainty, and there exist few proven services and products. The Internet may not be accepted as a long-term commercial marketplace for a number of reasons, including potentially inadequate development of the necessary network infrastructure or delayed development of enabling technologies and performance improvements. Brek's success will depend, in large part, upon third parties maintaining the Internet infrastructure to provide a reliable network backbone with the necessary speed, data capacity, security and hardware for reliable Internet access and services. Cautionary Statement Regarding Forward-Looking Statements In the interest of providing the shareholders with certain information regarding Brek's future plans and operations, certain statements set forth or incorporated by reference in this registration statement relate to management's future plans and objectives. Such statements are forward-looking statements within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this report, including, without limitation, statements regarding Brek's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "project," "estimate," "anticipate," "believe," or "continue" or the negative thereof or similar terminology. Although any forward-looking statements contained or incorporated by reference in this registration statement or otherwise expressed by or on behalf of Brek are, to the knowledge and in the judgment of the officers and directors of Brek, believed to be reasonable, there can be no assurances that any of these expectations will prove correct or that any of the actions that are planned will be taken. Forward-looking statements involve known and unknown risks and uncertainties, which may cause Brek's actual performance and financial results in future periods to differ materially from any projection, estimate or forecasted result. Important factors that could cause actual results to differ materially from Brek expectations include those discussed under the caption "Risk Factors" above. All subsequent written and oral forward-looking statements attributable to Brek, or persons acting on its behalf, are expressly qualified in their entirety by these important factors. Brek assumes no duty to update or revise its forward-looking statements based on changes in internal estimates or expectations or otherwise. ITEM 2. PROPERTIES Brek currently leases an office of approximately 2,500 square feet at the address of its headquarters in Hong Kong for $6,870 per month plus government rates. This lease expires on February 28, 2003. Gasco and Vallenar hold oil and gas leases as described above, and each leases office space. ITEM 3. LEGAL PROCEEDINGS Neither Brek, Gasco nor Vallenar is a party to any legal proceedings, which, in Brek's opinion, after consultation with legal counsel, could have a material adverse effect on Brek. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At Brek's 2000 Annual Meeting held on January 19, 2001, the shareholders elected the six Board Members for terms which expire at the 2001 Annual Meeting. The shareholders also ratified the appointment of Deloitte Touche Tohmatsu as Brek's Independent Accountants. At Brek's 2001 Annual Meeting held on January 29, 2002 the shareholders elected the seven Board Members for terms which expire at the 2002 Annual Meeting, ratified the appointment of Deloitte Touche Tohmatsu as Brek's Independent Accountants, approved the creation of the 2001 Stock Option/Warrant Plan and approved amending the articles of Brek to change its name to Brek Energy Corporation and to increase the number of authorized common shares from 200 million share with a par value of $0.001 to 300 million shares with a par value of $0.001. Although a proposal to amend Brek's articles to create 50 million preferred shares received more affirmative votes than negative ones, it did not receive the approval of a majority of all the outstanding stock, as required by Nevada law. ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Brek's common stock has 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 it traded on the OTC under the symbol "FECC" since March 8, 1999. 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. In addition, Brek's Units (each of which consists of one share of common stock and a warrant to purchase one third of a share of common stock) were listed on the Bermuda Stock Exchange from December 23, 1999 until March 12, 2001 when the units were "unbundled" after which the units only consist of a warrant to purchase one third of a share of common stock of Brek. The following table sets forth the high and low closing prices for the common stock for the periods indicated. Year/Quarter High Low - ------------ ---- --- 2001 Fourth Quarter 0.62 0.30 Third Quarter 0.90 0.32 Second Quarter 1.35 0.81 First Quarter 1.88 0.75 2000 Fourth Quarter $4.00 $0.75 Third Quarter 10.03 4.34 Second Quarter 23.00 7.88 First Quarter 32.50 7.94 As of February 28, 2002 there were approximately 107 holders of record of the common stock. On March 28, 2002, the closing sales price of Brek's common stock was $0.60 per share. Brek has not paid any cash dividends on its Common Stock and does not presently intend to do so. Future dividend policy will be determined by its Board of Directors on the basis of its earnings, capital requirements, financial condition and other factors deemed relevant. The transfer agent and registrar of Brek's Common stock is Nevada Agency and Trust Company, 50 West Liberty, Suite 880, Reno, Nevada 895O1. The transfer agent and registrar of Brek's Units is The Bank of Bermuda Limited, 6 Front Street, Hamilton, Bermuda. Recent Sales of Unregistered Securities On March 28, 2002 the Company issued 2,845,000 shares of common stock at $0.50 per share producing aggregate proceeds of $1,397,500, which is net of related share issue cost of $25,000, received by the Company. 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. These investors were Gregory Pek, Kenneth Telford, Ian Robinson, Liechtenstein Global Trust, Bonia Ng, Greg Gudbranson, Happy Profit International Limited, Ultratech Capital Management, Warwick Ventures Limited Roger Glenn, and Colin Low. Of these investors, Messrs. Pek and Robinson are directors of the Company, and Messrs. Pek and Telford are executive officers of the Company. Brek has been advised that the persons indicated below have the power to vote and dispose of Brek's shares held by the following investors: Liechtenstein Global Trust - Furst Hans-Adam von Liechtenstein, c/o LGT Group Foundation, Herrengase 12, FL-9490 Vaduz; Happy Profit International Limited - Brian Langdon-Pratt, 1219 Bank of America Tower, 12 Harcourt Road, Central, Hong Kong; Ultratech Capital Management - Patrick Thomson, Tradewinds Building, Suite 401, Bay Street, Nassau, Bahamas; and Warwick Ventures Limited - Stuart Smith, c/o LOM Securities Bermuda Ltd., 27 Reid Street, Hamilton HN11, Bermuda. This information was obtained from the shareholders of record or their agents. In the case of Liectenstein Global Trust, the information was obtained from a bank in Switzerland. Brek has no way of independently verifying the accuracy of this information and does not know whether this information is correct. The issuances and sales were exempt under Section 4(2) under the Securities Act of 1933, as amended, and Regulations S and D thereunder. All expenditures of proceeds so far have been for normal overhead and other general corporate purposes. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." ITEM 6. SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with Brek's audited consolidated financial statements appearing elsewhere herein. For the period from September 16, 1998 (date of inception) to December 31, 1998, the consolidated financial statements are not presented as all amounts are $Nil.
Year ended Year ended Year ended December 31, 2001 December 31, 2000 December 31, 1999 ----------------- ----------------- ----------------- Revenue Payment processing 301,978 38,223 2,634 Operating expenses Sales and marketing 611,628 2,113,149 1,563,246 General and administrative 7,153,141 8,297,692 4,241,389 Systems and technology 836,134 1,489,056 552,221 Charges for impairment of certain long-lived and prepaid assets 3,159,505 949,418 -- ----------- ----------- ---------- Total expenses 11,760,408 12,849,315 6,356,856 Loss from operations (11,458,430) (12,811,092) (6,354,222) ----------- ----------- ---------- Other income/(expenses) Interest income 704,725 1,527,959 36,761 Interest expense -- (2,121) (471,424) Loss on write down of marketable securities (314,339) (1,632,353) -- ----------- ----------- ---------- 390,386 (106,515) (434,663) ----------- ----------- ---------- Equity in loss of affiliates (882,146) (292,118) -- ----------- ----------- ---------- Loss from continuing operations (11,950,190) (13,209,725) (6,788,885) ----------- ----------- ---------- Income (loss) from discontinued operations Net income (loss) (236,683) (4,219,736) -- Gain on discontinuance (net of $Nil tax effects) 1,725,551 -- -- ----------- ----------- ---------- 1,488,868 (4,219,736) -- ----------- ----------- ---------- Loss before cumulative effect of accounting change (10,461,322) (17,429,461) (6,788,885) Cumulative effect of accounting change -- (380,000) -- ----------- ----------- ---------- Net loss (10,461,322) (17,809,461) (6,788,885) =========== =========== ========== Basic and diluted loss per share applicable to common stockholders Continuing operations (0.62) (0.73) (0.56) Discontinued operations 0.08 (0.23) -- Cumulative effect of accounting change -- (0.02) -- ----------- ----------- ---------- (0.54) (0.98) (0.56) Weighted average shares used in computing per share amounts 19,210,037 18,064,980 12,043,662 ========== ========== ========== Balance Sheet Data: 2001 2000 1999 US $US $US$ Current Assets 2,596,852 32,282,424 12,159,946 Note Receivable 1,865,244 -- -- Loan Receivable 270,055 -- -- Property and Equipment 257,321 578,866 1,046,237 Total Assets 23,497,378 35,969,172 13,206,183 Deferred Rent -- -- 62,017 Obligation under capital lease -- -- 3,788 (including current installments) Total Liabilities 271,379 509,373 1,263,936 Stockholders Equity 23,225,999 35,459,799 11,942,247
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General During 2001 Brek rationalized its operations, changed its primary focus to oil and gas exploration, combined its payment gateway and related products into a new e-Acquirer product, and limited its marketing objectives to enabling banks in Asia. Brek discontinued the systems integration business of Asia Internet Limited as part of the rationalization of operations. On June 19, 2002, Brek acquired the remaining 50% of First Ecommerce Data Services Limited ("FEDS") from the Bank of Bermuda for $4,289,542, of which $3,581,993 was for equity of FEDS, $668,007 was to acquire the bank's interest in a shareholder loan owed by FEDS to the bank and $39,542 was for costs of the transaction. Warrants to purchase 500,000 shares of Brek common stock held by the bank were cancelled in connection with this transaction, but their exercise price far exceeded the then-market price of Brek's common stock so they were deemed to be of no value. Their exercise price was $12 per share, and the last trade in Brek's stock on June 19, 2002, was at $0.86 per share. On October 19, 2002, Brek sold 100% of FEDS to Transworld Payment Solutions N.V. for $1,663,007 plus a Note for a minimum of $2,000,000 (having a present value of $1,885,896). Under the terms of the note, Transworld is required to pay by March 1 in each of 2003, 2004 and 2005, 40% of the net operating profits realized by FEDS in the preceding year, but not less than $350,000, $650,000 and $1,000,000, respectively, nor more than $500,000, $1,000,000 and $1,500,000, respectively, on each date. Brek expects to receive the minimum payments set forth above and no more. At the time of the sale of FEDS, Brek also received $1,336,014 as the repayment of shareholder loans owed by FEDS to Brek, half of which were acquired from the Bank of Bermuda on June 19, 2002. Brek and Transworld have never been affiliated with each other in any way. During 2001, Brek acquired a 26% non-dilutable voting interest in Gasco Energy, Inc. for $19 million and advanced $270,055 to Vallenar Energy Corp., which subsequent to the year end formed part of the $350,000 acquisition of preferred shares of Vallenar, which have a 26% non-dilutable voting interest. The majority of Brek's revenues during 2001 came from the operations carried on through First Ecommerce Data Services Limited during the period of time that it was a wholly-owned subsidiary however, Brek is still a development stage enterprise 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 the rapidly evolving sector related to the Internet. See "Item 1. Business - Risk Factors". There is no assurance that Brek will be successful in addressing these risks and if it fails to do so, its financial condition and results of operations would be materially adversely affected. Crititical Accounting Policies Brek prepares its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of Brek's financial statements requires it to make estimates and assumptions that affect the amounts of assets and liabilities reported and the disclosure of contingent assets and liabilities at the date of the financial statements and the amount of revenues and expenses reported during the period covered by the financial statements. On an on-going basis, Brek evaluates its estimates and judgments, including those related to its investments. Actual results may differ from those used in making any such estimates and judgments. The following critical accounting policies affect the more significant assumptions and estimates used in the preparation of Brek's consolidated financial statements. Investment in Affiliate Brek has accounted for its interest in Gasco using the equity method. Gasco has incurred operating losses since Brek's investment in July 2001. Sustained operating losses of this affiliate or other adverse events could result in Brek's inability to recover the carrying value of the investment, which may require Brek to record an impairment charge in the future. Through December 31, 2001, Brek has not recorded an impairment charge for this investment. Income Taxes Brek records a valuation allowance to reduce its deferred tax assets to the amount that it believes is more likely than not to be realized. If in the future Brek determines that it will be able to realize its deferred tax assets in excess of their recorded amount, it will adjust the deferred tax asset accordingly, which will increase income in the period the determination is made. Likewise, if Brek determines that it will not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period the determination is made. Impairment of Assets Brek reviews all assets on a regular basis to ensure that there is no impairment in the carrying value. If it determines that there has been a permanent decline in, or Brek has become unable to recover, the carrying value of the asset, an impairment charge will be recorded, which will have an adverse effect upon Brek's future operating results. Results of Operations Revenues Total revenues for 2001 were $301,978 as compared to $38,223 in 2000 and $2,634 in 1999. The systems integration revenue of $816,648 in 2000 which related directly to Asia Internet Limited which was acquired on March 31,2000 was reclassified to discontinued operations. Of the total revenue, $250,567 was due to consolidation of FEDS revenue for the period from June 19, 2001 to October 19, 2001. Operating Expenses Total operating expenses incurred for 2001, 2000 and 1999 were $11,760,408, $12,849,315 and $6,356,856, respectively. 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 the 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 the 2000 year and no charge in 1999. Of the total operating expenses, $936,586 was due to consolidation of FEDS expenses for the period June 19,2001 to October 19,2001. A reclassification of the expenses in 2000 of Asia Internet Limited to discontinued operations was made. Significant components of operating expenses for 2001 and 2000 consisted of the following Expenses Amount ------ 2001 2000 1999 ---- ---- ---- Operating expenses Sales and marketing 611,628 2,113,149 1,563,246 General and administrative 7,153,141 8,297,692 4,241,389 Systems and technology 836,134 1,489,056 552,221 Charges for impairment of certain long-lived and prepaid assets 3,159,505 949,418 -- ---------- ---------- --------- Total expenses 11,760,408 12,849,315 6,356,856 ========== ========== ========= The decrease in expenses during the 2001 year is attributable to Brek decreasing the number of employees to a low of 14, decreased sales and marketing efforts, decreased systems development and the discontinuance of the operations of Asia Internet Limited. Other Income and Expenses Interest income decreased to $704,725 in 2001 as compared to $1,527,959 in 2000 and $36,761 in 1999. This decrease was due to Brek's decreased cash position during the year and a significant reduction in interest rates. The most significant aspect related to the decrease in cash was due to the acquisition of the preferred stock in Gasco Energy, Inc. Interest expense reduced to $nil in 2001 as compared to $2,121 in 2000 and $471,424 in 1999 as Brek did not have any borrowings during 2001. The equity in loss of affiliates for 2001 of $882,146 consisted of Brek's share of the losses before the acquisition of the remaining 50% interest of First Ecommerce Data Services Limited on June 18, 2001, of $390,052 and Brek's share of the losses of Gasco Energy, Inc. after the acquisition of its preferred stock on July 19, 2001. Of $492,094 versus $292,118 in 2000 attributable wholly to First Ecommerce Data Services Limited and $nil in 1999. During 2001, Brek recorded a loss of $314,339 on the write down its investment in shares of uniView Technologies Corporation, a NASDAQ listed company. Brek purchased 735,295 shares, since reduced to 91,912 due to a share consolidation in September 2001, of uniView in a August 2000 private placement for $2 million. The closing market price on December 31, 2001 was $0.58. Brek recorded a loss of $1,632,353 during the year ended December 31, 2000. During 2001, Brek discontinued the operations of its systems integration business carried on through its subsidiary Asia Internet Limited. The discontinuation of these operations resulted in a recovery of $1,488,868 due to the reversal of unvested stock compensation costs of $1,852,570. These operations had an operating loss of $236,683 during 2001 versus a loss of $4,219,736 for 2000. There were no systems integration operations during 1999. There is no cumulative effect of accounting change this year as compared to last year. Liquidity and Capital Resources Brek did not have any fund raising activities during 2001. On March 28, 2002, Brek had $2.5 million of cash, cash equivalents and marketable securities available to fund operations. Brek significantly lowered its ongoing expenditures and overhead during the 2001 year by reducing the number of employees, closing offices and leasing more affordable office space. Although Brek believes that its current cash balances, cash equivalents, investments and equity holdings could meet its working capital and capital expenditure needs for 2002, Brek does expect that it will need to raise funds in order to achieve its desired business objectives on a more timely basis. Because Brek is not currently generating sufficient cash to fund its operations, Brek may need to rely on external financing to meet future capital and operating requirements. Any projections of future cash needs and cash flows are subject to substantial uncertainty. Brek's capital requirements depend upon several factors, including the rate of market acceptance, its ability to expand its customer base and increase revenues, its level of expenditures for marketing and sales, purchases of equipment, acquisitions of oil and gas entities and prospects and other factors. If Brek's capital requirements vary materially from those currently planned, Brek may require additional financing sooner than anticipated. Brek can make no assurance that financing will be available in amounts or on terms acceptable to Brek, if at all. Further, if Brek issues 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, and debt financing, if available, may involve restrictive covenants which could restrict Brek's operations or finances. If Brek cannot raise funds, if needed, on acceptable terms, Brek may not be able to continue its operations, grow market share, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements which could negatively impact Brek's business, operating results and financial condition. Brek leases office and other premises under non-cancellable operating leases that call for payments of $216,419 during 2002 and $76,032 during 2003. Brek does not anticipate receiving any income from its investments in Gasco or Vallenar for the foreseeable future. The Note Receivable is due, without interest, as follows: March 1, 2003 - $350,000 March 1, 2004 - $650,000 March 1, 2005 - $1,000,000 Brek has entered into employment agreements with all of its employees. These agreements require severance payments ranging from four to 16 weeks' salary upon termination without cause. If the employees were all terminated without cause, Brek would have a liability for minimum severance pay of approximately $330,000. The proceeds of $1,422,500 that Brek received upon the issuance of 2,845,000 shares of its common stock on March 28, 2002 is being used to pay operating expenses of Brek. SELECTED UNAUDITED QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS The following table sets forth unaudited quarterly statements of operations data for the four quarters ended December 31, 2001 and 2000. We believe this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements appearing elsewhere in this report. We believe this data includes all necessary adjustments, consisting only of normal recurring adjustments, necessary for fair presentation. You should read the quarterly data together with the consolidated financial statements and the notes to those statements appearing elsewhere in this report. The consolidated results of operations for any quarter are not necessarily indicative of the operating results for any future period. We expect that or revenues may fluctuate significantly and in fact may be significantly less due to the closure of the systems integration business.
Three months ended Three months ended Three months ended Three months ended December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001 ----------------- ------------------ ------------- -------------- Revenue Payment processing 59,142 205,928 24,152 12,756 ---------- ---------- ---------- ---------- Operating expenses Sales and marketing 217,317 206,049 15,506 172,756 General and administrative 1,970,356 1,725,000 1,581,343 1,876,442 Systems and technology 171,599 483,860 62,187 118,488 Charges for impairment of certain long-lived and prepaid assets -- 3,159,505 -- -- ---------- ---------- ---------- ---------- Total expenses 2,359,272 5,574,414 1,659,036 2,167,686 ---------- ---------- ---------- ---------- Loss from operations (2,300,130) (5,368,486) (1,634,884) (2,154,930) ---------- ---------- ---------- ---------- Other income/(expenses) Interest income 13,921 56,504 246,698 387,602 Interest expense -- -- -- -- Loss on write down of marketable securities (6,434) (307,905) -- -- ---------- ---------- ---------- ---------- 7,487 (251,401) 246,698 387,602 ---------- ---------- ---------- ---------- Equity in loss of affiliates (336,393) (155,701) (194,653) (195,399) ---------- ---------- ---------- ---------- Loss from continuing operations (2,629,036) (5,775,588) (1,582,839) (1,962,727) ---------- ---------- ---------- ---------- Income (loss) from discontinued operations Net income (loss) (7,627) -- 2,271 (231,327) Gain on discontinuance -- -- -- 1,725,551 ---------- ---------- ---------- ---------- (7,627) -- 2,271 1,494,224 ---------- ---------- ---------- ---------- Loss before cumulative effect of accounting change (2,636,663) (5,775,588) (1,580,568) (468,503) Cumulative effect of accounting change -- -- -- -- ---------- ---------- ---------- ---------- Net loss (2,636,663) (5,775,588) (1,580,568) (468,503) ========== ========== ========== ========== Basic and diluted loss per share applicable to common stockholders Continuing operations (0.14) (0.30) (0.08) (0.10) Discontinued operations -- -- -- 0.08 ---------- ---------- ---------- ---------- (0.14) (0.30) (0.08) (0.02) Weighted average shares used in computing per share amounts 19,210,037 19,210,037 19,210,037 19,210,037 ========== ========== ========== ==========
Three months ended Three months ended Three months ended Three months ended December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001 ----------------- ------------------ ------------- -------------- Revenue Payment processing 10,336 17,355 5,730 4,802 System integration revenue 178,814 233,133 404,701 -- ---------- ---------- ---------- ---------- Total revenue 189,150 250,488 410,431 4,802 Direct costs 226,765 269,279 340,244 -- ---------- ---------- ---------- ---------- Gross profit (37,615) (18,791) 70,187 4,802 ---------- ---------- ---------- ---------- Operating expenses Sales and marketing (250,338) 491,206 698,203 519,983 General and administrative 2,697,181 2,223,961 2,742,270 1,872,501 Systems and technology 729,081 1,251,266 1,424,850 244,369 Non-recurring charges for impairment of certain long-lived and prepaid assets 2,405,829 -- -- -- ---------- ---------- ---------- ---------- Total expenses 5,581,753 3,966,433 4,865,323 2,636,853 Operating loss (5,619,368) (3,985,224) (4,795,136) (2,632,051) Other income/(expenses) Interest income 398,944 476,273 474,090 179,603 Interest expense (387) (85) (1,385) (264) Loss on write down of marketable securities (1,448,553) (183,800) -- -- ---------- ---------- ---------- ---------- Total other income (expenses) (1,049,996) 292,388 472,705 179,339 ---------- ---------- ---------- ---------- Equity in loss of affiliates (177,695) (114,423) -- -- Loss before cumulative effect of accounting change (6,847,060) (3,807,259) (4,322,431) (2,452,712) ---------- ---------- ---------- ---------- Cumulative effect of accounting change (380,000) -- -- -- Net loss (7,227,060) (3,807,259) (4,322,431) (2,452,712) ========== ========== ========== ========== Basic and diluted loss per share applicable to common stockholders Before cumulative effect of accounting change (0.36) (0.20) (0.24) (0.15) Cumulative effect of accounting change (0.02) -- -- -- ---------- ---------- ---------- ---------- (0.38) (0.20) (0.24) (0.15) ========== ========== ========== ========== Weighted average shares used in computing per share amounts 19,210,037 18,935,312 18,210,037 15,879,359 ========== ========== ========== ==========
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Foreign Exchange Risk Brek intends to continue marketing its payment processing services throughout Hong Kong and the Asia-Pacific region as well as North America and Europe. As a result, its financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions in its existing and potential markets, however, the fact that the Hong Kong dollar, Brek's functional currency, is pegged to the U.S. dollar reduces Brek's risk. Brek expects that its initial oil and gas acquisitions will be in the United States. If Brek makes acquisitions outside of the United States its financial results could be affected by factors such as changes in foreign currency exchange rates or weak economic conditions. Financial Instruments Brek primarily invests in fixed rate investments with short maturities, which do not present a material interest rate risk, however, Brek's interest income is sensitive to changes in the general level of Hong Kong and U.S. interest rates. There have been no significant changes in Brek's exposure to changes in either interest rates or foreign currency exchange rates for the year ended December 31, 2001. Its exposure to interest rates is limited as it does not have variable rate and long-term borrowings. Brek is subject to variable interest rates on its bank deposits that are cash and short-term investments. These investments are held at cost because there are no significant market price movements. As of December 31, 2001, a hypothetical 10% immediate increase or decrease in interest rates would increase or decrease Brek's annual interest expense and income by approximately $nil and $1,617,000, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and reports of Brek's independent public accountants are filed as part of this report on pages F-1 through F-35. The consolidated financial statements and reports of the independent public accountants of Gasco Energy, Inc. are filed as part of this report on pages F-36 through F-55. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Brek has had no disagreements with its Independent Accountants on accounting and financial disclosure. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, and terms of office of directors and executive officers of Brek are set forth below: Name (1) Age Position With Company Gregory M. Pek 47 Director, President, and Chief Executive Officer Ravi K. Daswani 35 Director Douglas Moore 43 Director Ian G. Robinson 63 Director, Chairman of the Board James Pratt 53 Director Andrew Leitch (2) 58 Director Kenneth G.C. Telford 53 Secretary, and Chief Financial Officer (1) None of Brek's officers or directors, other than Andrew Leitch, is a resident or citizen of the United States (2) Mr. Leitch was appointed a Member of Brek's Board of Directors in April 2002. Gregory M. Pek has been a Director of Brek since March 3, 1999 and has been a Director of First Ecommerce Asia Limited since its inception. Mr. Pek was President and Chief Executive Officer since March 3, 1999 until June 27, 2000. Mr. Pek assumed the position of President and co-Chief Executive Officer on October 16, 2000 until August 31, 2001 when he became Chief Executive Officer upon the resignation of Mr. Daswani. He was from March 1994 to February 1999 an executive officer of David Resources Company Limited, a petroleum and wine trading company, Kong Tai International Holdings Company Limited, a real property investment company and from September 1998 to February 1999 a director of Singapore Hong Kong Properties Investment Limited, a real property investment company. Before 1994, Mr. Pek was a director and officer of a number of public companies in Canada. Mr. Pek is a director of Gasco Energy, Inc. and Vallenar Energy Corp., which are subsidiaries of Brek. Ravi K. Daswani has been a Director of Brek since March 3, 1999 and was a Director of First Ecommerce Asia Limited since its inception until July 2001. 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, he was the managing director of a wholesale and retail apparel business called Daswani S.A., a Panamanian company. He has established international operations trading in dry goods, consumer electronics, apparel and Internet services in Africa, Latin America and Asia. Ian Robinson has been a Director of Brek since February 24, 2000, was appointed Vice-Chairman on November 29, 2000 and Chairman on January 19, 2001. For more than the last five years Mr. Robinson has been the managing director of Robinson Management Limited, which provides financial planning and business advice, forensic accounting services and insolvency services. Mr. Robinson has 45 years of experience as a Chartered Accountant and was a former senior partner of the Hong Kong office of the international accountancy firm Ernst & Young, an accountancy and auditing services firm. He has been based in Hong Kong since 1980 servicing the Asia region and has had experience in major countries around the world. Mr. Robinson specializes in corporate rescue, restructuring, insolvency, investigation, business valuation and trouble shooting generally. Mr. Robinson also is a member of the Supervisory Board and the Executive Committee of the Hong Kong Housing Society, a non-governmental provider of low and middle income housing. Douglas Moore has been a Director of Brek since October 27, 1999. Mr. Moore is the Chief Executive Officer of Henderson Cyber Limited, the high technology ecommerce subsidiary of the Henderson Group, which consists of Henderson Land Development Company Limited, a property development company, and its subsidiaries. Mr. Moore is also the Head of Strategic Planning of Henderson Land. From 1994 until early 2000, Mr. Moore was the Head of the Hong Kong Market of Credit Suisse, a bank, and a director of Credit Suisse Investment Advisory (Hong Kong) Limited, the bank's investment advisory subsidiary. Prior to 1994, Mr. Moore practiced international and Canadian tax law with the Hong Kong office of McMillan Binch, a Canadian law firm. He is a Canadian and a Hong Kong lawyer. James Pratt was appointed to Brek's Board of Directors in June 2000. Mr. Pratt is Deputy Chairman of the GSM Association, which is a wireless telecommunications industry representative body consisting of more than 636 wireless network operators and key manufacturers and suppliers to the wireless industry. Mr. Pratt was previously Managing Director of Asia Wireless, a division of Telstra International, Telstra Corporation of Australia where he oversaw all of Telstra Group's wireless operations and investments throughout the Asia Pacific Region. Mr. Pratt was formerly Chief Executive Officer of Peoples Phone, a wireless telecom provider in Hong Kong, since 1996. Prior to this he was general manager of the telecommunications division of Mitsubishi Electric Australia. Mr. Pratt has more than thirty years international management experience in the Asia Pacific telecommunications industry. Mr. Andrew Leitch was appointed to Brek Energy's board of directors in April 2002. Mr. Leitch is both a Chartered Accountant (Canada) and a Certified Public Accountant (USA). He has an international and diversified career spanning some 25 years with Deloitte & Touche, an accountancy and auditing services firm, and has held senior executive positions in certain varied commercial enterprises. Mr. Leitch has 20 plus years of experience in international business. He worked as the Chief Operating Officer for Vapotronics Inc., a biotech company in San Diego from 2000-2001. While Mr. Leitch was with Deloitte & Touche, Hong Kong from 1994-2000, he was the Vice Chairman of the Management Committee (1997-2000) and Executive Director of Corporate Finance (1994-1997). Mr. Leitch currently holds a board position with Citicorp Everbright China Fund Limited, an investment fund. Kenneth G.C. Telford has been Brek's Chief Financial Officer and Secretary since July 1, 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 called Tropical Rent a Car Systems, Inc. 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. Mr. Telford is a director of Vallenar Energy Corp., which is a subsidiary of Brek. ITEM 11. EXECUTIVE COMPENSATION
Annual compensation Long term compensation Awards Payouts Shares of Restricted common stock Other annual stock underlying LTIP All Other (2) Name and Principal Position Year Salary Bonus compensation award(s) options Payouts Compensation Gregory Pek, CEO 2001 $218,710 $107,097 $15,484 75,000 2000 238,172 -- -- -- 200,000 -- -- 1999 167,742 -- -- -- 100,000 -- -- Ravi Daswani, Co-CEO [1] 2001 154,839 109,677 4,473 75,000 2000 238,172 -- -- -- 200,000 -- -- 1999 167,742 -- -- -- 100,000 -- -- Kenneth Telford, CFO 2001 259,994 117,419 13,005 200,000 Does not 2000 exceed 100,000 100,000 Steve Corbin, President, First Ecom Systems Limited 2001 202,581 45,800 1,548 -- 50,000 -- -- 2000 Does not -- -- -- 30,000 -- -- exceed 100,000 1999 Does not -- -- -- 20,000 -- -- exceed 100,000 Barry Conn, Senior Vice President, First Ecom Systems Limited 2001 157,419 -- 1,548 -- 25,000 -- -- 2000 Does not -- -- -- 20,000 -- -- exceed 100,000
(1) resigned as co-ceo on August 31, 2001 (2) Other annual compensation consisted of housing expense, directors fees and employer contributions to the mandatory provident fund in Hong Kong (which is a program similar to Social Security in the United States) Directors and executive officers were granted options to purchase Brek's common stock during the year as follows: Option grants in Fiscal year ended Dec. 31, 2001
Individual grants Potential realizable value at assumed annual rates of Stock price appreciation for option term Number of Percent of securities Total options underlying granted to Exercise Value at options granted employees in of base Market Expiration grant date Name (1) fiscal year price ($/Sh) price Date 0% 5% 10% Gregory Pek, CEO 75,000 5.9% $0.40 $0.41 31-Oct-06 750 9,246 19,523 Ravi Daswani (2) 75,000 5.9% 0.40 0.41 31-Oct-06 750 9,246 19,523 Ian Robinson 75,000 5.9% 0.40 0.41 31-Oct-06 750 9,246 19,523 Douglas Moore 125,000 9.8% 0.40 0.41 31-Oct-06 1,250 15,409 32,539 James Pratt 75,000 5.9% 0.40 0.41 31-Oct-06 750 9,246 19,523 Marc Bruner (3) 75,000 5.9% 0.40 0.41 31-Oct-06 750 9,246 19,523 Ken Telford 200,000 15.6% 0.40 0.41 31-Oct-06 2,000 24,655 52,062 Steve Corbin 50,000 3.9% 0.40 0.41 31-Oct-06 500 6,164 13,015 Barry Conn 25,000 2.0% 0.40 0.41 31-Oct-06 250 3,082 6,508
(1) All of the options granted are fully vested and exercisable until October 31, 2006 (2) Resigned as Co-CEO August 2001. (3) Resigned May 4, 2002. Total effective options as at Dec. 31, 2001 1,280,000 No share options were exercised during the year; share options outstanding in the hands of directors and senior management as of December 31, 2001 were as follows:
Number of securities underlying Value of Unexercised In-The- unexercised options at fiscal Money options at fiscal year Shares year end(#) end (1) ($) acquired on value --------------------------------- ------------------------------ Name exercise (#) realized ($) Exercisable Unexercisable Exercisable Unexercisable Gregory Pek, CEO 0 0 75,000 0 $0 0 Ravi Daswani (2) 0 0 75,000 0 0 0 Ian Robinson 0 0 75,000 0 0 0 Douglas Moore 0 0 125,000 0 0 0 James Pratt 0 0 75,000 0 0 0 Marc Bruner (3) 0 0 75,000 0 0 0 Ken Telford 0 0 200,000 0 0 0 Steve Corbin 0 0 50,000 0 0 0 Barry Conn 0 0 25,000 0 0 0
(1) Based on a December 31, 2001 closing price of US$0.40 per share. (2) Resigned as Co-CEO August 2001. (3) Resigned May 4, 2002. Directors' Compensation Directors, who are not officers of Brek, are paid fees of $10,280 per year in connection with their serving on the Board. The Chairman of the Board receives $54,000 per year. Directors are reimbursed for out-of-pocket expenses incurred with attending Board meetings. Employment Agreements Gregory Pek. Brek entered into an employment agreement with Gregory Pek, its President and Chief Executive Officer, the term of which commenced in January 1999. This agreement provided that Brek would pay Mr. Pek a monthly salary of HK $100,000 (approximately USD 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 USD 19,230); however, in December 2000 Mr. Pek agreed to have his monthly salary temporarily reduced to HK $100,000 (approximately USD 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 USD 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 USD 21,150) plus an additional month's salary per calendar year of service as a year-end payment. These agreements will terminate on August 31, 2002. At the request of Mr. Pek, his agreements are not being extended past August 31, 2002. Because the agreements are not being extended, Brek must pay a termination payment to Mr. Pek in August 2002 equal to three months' salary. Brek believes that it will be able to engage another Chief Executive Officer in a timely fashion, and that no harm will come to Brek due to Mr. Pek's decision not to continue as its Chief Executive Officer. Ravi Daswani. Brek entered into an employment agreement with Ravi Daswani, who served as the Senior Vice President and Chief Operating Officer until his resignation in August 2001, the term of which commenced in January 1999. This agreement provided that Brek would pay Mr. Daswani a monthly salary of HK $100,000 (approximately USD 12,820) plus an additional month's salary per calendar year of service as a year-end payment. In January 2000 Mr. Daswani's monthly salary was increased to HK $150,000 (approximately USD 19,230); however, in December 2000 Mr. Daswani agreed to have his monthly salary temporarily reduced to HK $100,000 (approximately USD 12,820). Brek entered into a new six-month employment agreement with Mr. Daswani covering the period from March 1, 2001 to August 31, 2001. Under this agreement, Mr. Daswani was paid (i) a monthly salary of HK $150,000 (approximately USD 19,230), (ii) an additional lump-sum payment equal to four months' salary on August 31, 2001 and (iii) a prorated portion of one month's salary, equal to HK $100,000 (approximately USD 12,820), on August 31, 2001. At the request of Mr. Daswani, his agreements were not renewed. Kenneth Telford. Brek entered into employment agreements with Kenneth Telford, its Chief Financial Officer, the terms of which commenced in March 2001. Pursuant to these agreements, Brek paid Mr. Telford an aggregate monthly salary of HK $165,000 (approximately USD 21,250), for the period from March 1, 2001 through September 30, 2001, issued Mr. Telford warrants to purchase 50,000 shares of Brek's common stock at an exercise price of USD 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 USD 21,250) plus an additional month's salary per calendar year of service as a year-end payment. This agreement will terminate on August 31, 2002 unless Brek chooses to extend the term of the agreement. If Brek does not choose to extend the term of the agreement, the agreement provides that Brek must pay a termination payment to Mr. Telford in August 2002 equal to three months' salary. Brek and Mr. Telford have 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 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). Report of Compensation Committee of the Board of Directors Notwithstanding anything to the contrary set forth in any of Brek's previous or future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 (the "Exchange Act') that might incorporate this Form 10-K Annual Report or future filings with the Securities and Exchange Commission, in whole or in part, the following report shall not be deemed to be incorporated by reference into any such filing. Membership and Role of the Compensation Committee The Compensation Committee consists of the following non-employee members of Brek's Board of Directors: Douglas Moore, Ian Robinson and James Pratt. The Compensation Committee reviews and determines Brek's executive compensation objectives and policies, administers Brek's stock plans and grants stock options. In Hong Kong, competition for executive talent is intense in our industry. With this perspective, the Compensation Committee reviews and sets the compensation of Brek's executive officers. Executive Compensation Program Objectives The objectives of Brek's executive compensation program are to: o Attract and retain highly talented and productive executives o Provide incentives for superior performance o Align the interests of executive officers with the interests of Brek's stockholders by basing a significant portion of compensation upon Brek's performance Components Brek's executive compensation program combines the following two components, in addition to the benefit plans offered to all employees: base salary and long-term incentive compensation consisting of stock option grants. It is Brek's policy to set base salary levels and long-term incentive compensation on a comparable level with an average of those of select corporations to which Brek compares itself for purposes of executive compensation. Brek selects such corporations on the basis of a number of factors, such as their size and complexity, the nature of their businesses, the regions in which they operate, the structure of their compensation programs and the availability of compensation information. The corporations selected for such comparison may vary from year to year based upon market conditions and changes in both Brek's and the corporations' businesses over time. Brek believes that competitive compensation levels are necessary to attract and retain the high-caliber executives necessary for the successful conduct of Brek's business. Each component of Brek's executive compensation program serves a specific purpose in meeting Brek's objectives. The components of Brek's executive compensation program are described below, except for any variations arising from individual provisions of employment agreements that Brek enters into upon hiring an executive. Base Salary The Compensation Committee annually reviews the salaries of Brek's executives. When setting base salary levels in a manner consistent with the objectives outlined above, the Committee considers competitive market conditions for executive compensation, Company performance and individual performance. The measures of individual performance considered in setting 2001 salaries included, to the extent applicable to an individual executive officer, a number of quantitative and qualitative factors such as Brek's historical and recent financial performance in the principal area of responsibility of the officer (including such measures as gross margin, net income, sales, customer count and market share), the individual's progress toward non-financial goals within his area of responsibility, individual performance, experience and level of responsibility and other contributions to Brek's success. The Compensation Committee has not found it practicable, nor has it attempted, to assign relative weights to the specific factors used in determining base salary levels, and the specific factors used may vary among individual officers. As is typical for most corporations, payment of base salary is not conditioned upon the achievement of any specific, pre-determined performance targets. Long-term incentive compensation. Brek believes that option grants align executive interests with stockholder interests by creating a direct link between compensation and stockholder return, give executives a significant, long-term interest in Brek's success, and help retain key executives in a competitive market for executive talent. Brek's Stock Option Plan authorizes the Committee to grant stock options to executives. Option grants are made from time to time to executives whose contributions have or will have a significant impact on Brek's long-term performance. Brek's determination of whether option grants are appropriate each year is based upon individual performance measures established for each individual. Options are not necessarily granted to each executive during each year. Generally, options granted to executive officers vest in equal annual installments over a period of two years and expire five years from the date of grant. Replacement Option Grants (On October 31, 2001, the named executives set forth below rescinded options and warrants to purchase Brek's common stock, and Brek reissued a new number of new options having five-year terms and exercise prices equal to the then-fair value of the stock (which were lower than the exercise prices of the options and warrants rescinded). See "Report of Compensation Committee of the Board of Directors."
Length (months) of Exercise price of option/warrant term Number of options/warrants options/warrants remaining at Date of New rescinded rescinded Replacement Number of exercise -------------------------- ---------------------- --------------------- Name new options(1) price Options Warrants Options Warrants Options Warrants Gregory Pek, CEO 75,000 0.40 150,000 -- 5.05 -- 46 -- 50,000 -- 7.65 -- 32 -- Ravi Daswani(2) 75,000 0.40 150,000 -- 5.05 -- 46 -- 50,000 -- 7.65 -- 32 -- Ian Robinson 75,000 0.40 50,000 50,000 5.05 1.25 46 53 Douglas Moore 125,000 0.40 100,000 30,000 5.05 1.25 46 53 James Pratt 75,000 0.40 50,000 30,000 5.05 1.25 46 53 Ken Telford 200,000 0.40 100,000 50,000 5.05 1.25 46 53 Steve Corbin 50,000 0.40 20,000 50,000 5.05 1.25 46 53 10,000 -- 7.65 -- 32 -- Barry Conn 25,000 0.40 20,000 25,000 5.05 1.25 46 53
- ---------- (1) All new options expire on October 31, 2006 (2) Resigned as Co-CEO August 2001. Benefits. Brek believes that it must offer a competitive benefit program to attract and retain key executives. During 2001, Brek provided medical and other benefits to its executive officers that are generally available to Brek's other employees. Compensation of the Chief Executive Officer. The chief Executive Officer's compensation plan for 2001 included the same elements and performance measures as the plans of Brek's other executive officers. Submitted by: Douglas Moore Ian Robinson James Pratt ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth the current beneficial ownership of Brek's common stock by (i) each person known by Brek to beneficially own five percent or more of Brek's outstanding common stock, (ii) Brek's Chief Executive Officer and Directors and (iii) all of Brek's Executive officers and Directors as a group. Except as otherwise indicated, all shares of Common Stock are beneficially owned, and investment and voting power is held, by the person named as owner. Name and Address of Number of Shares Percentage Beneficial Owner Beneficially Owned Ownership ------------------ --------- Gregory M. Pek 1,782,500(1)(2) 8.05% Ravi K. Daswani 485,461(1)(2) 2.19% Power Technology Investment Corporation(10) 1,333,333(3)(4) 5.96% Douglas Moore 391,667(2)(4)(5) 1.76% Ian Robinson 595,000(1)(2) 2.69% James Pratt 95,000(1)(2) 0.43% Andrew Leitch 0 0.00% Kenneth Telford 300,000(2)(6) 1.35% Steve Corbin 65,415(2)(7) 0.30% Barry Conn 25,000(2)(8) 0.11% Executive Officers and Directors as a group 3,740,043(9) 16.39% - ---------- (1) Includes options to purchase 75,000 shares of common stock. (2) All options expire on October 31, 2006 and are exercisable for $0.40 per share. (3) Includes warrants to purchase 333,333 shares of common stock. (4) All warrants expire on March 5, 2005 and are exercisable for $11.40 per share. (5) Includes options to purchase 125,000 shares and warrants to purchase 66,667 shares of common stock. (6) Includes options to purchase 200,000 shares (7) Includes options to purchase 50,000 shares. (8) Includes options to purchase 25,000 shares. (9) Includes options to purchase 700,000 shares and warrants to purchase 66,667 shares of common stock. (10) Power Technology Investment Corporation is a wholly owned subsidiary of Power Corporation of Canada, a Canadian corporation the shares of which are listed on the Toronto Stock Exchange and traded under the symbol "POW". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS During the year ended December 31, 2001, Brek paid consulting fees of $28,629 to former directors Ermanno Pascutto ($16,129) and Eric Pinkney ($12,500). During 2001, Brek advanced $270,055 to Vallenar. Gregory Pek and Ken Telford are also directors of Vallenar, and certain shareholders of Brek's affiliate, Gasco, are also shareholders of Vallenar. Effective as of March 31, 2000 Brek acquired 100% of the issued and outstanding shares of Asia Internet Limited for cash of $1.2 million and 24,870 shares of the Common Stock of Brek then valued at $623,988. AIL was considered a related party to Brek as Ravi Daswani, a 30% shareholder of AIL, was also a director and stockholder of Brek. This purchase price was approved by all the directors of Brek except for Mr. Daswani, who abstained. None of the other directors had any affiliation with AIL. AIL provided technical support, system maintenance and other professional services to Brek and purchased computer and office equipment on behalf of Brek. During the year ended December 31, 2000 and prior to the acquisition of AIL by Brek, Brek paid $91,871 (1999: $465,442) to AIL for the above services. During the year ended December 31, 2000, the amounts charged by AIL to Brek for technical support, system maintenance and other professional services, and purchase of computer and office equipment on Brek's behalf were $283,157 for services and $15,290 for purchases, respectively (1999: $401,054 for services and $148,526 for purchases, respectively). On March 31, 2000, Brek completed the acquisition of AIL and AIL's assets and liabilities have been consolidated into Brek's financial statements as of that date. Ermanno Pascutto, a director and shareholder of Brek was a partner in a law firm (the "firm") to which Brek paid legal fees in the ordinary course of its business. The amount paid by Brek and charged by the firm during the year ended December 31, 2000 was $373,497 (1999: $315,056 advanced to the firm by Brek and $395,364 the amount charged by the firm). Effective from June 15, 2000, the director resigned from the firm and entered into a consultancy agreement directly with Brek for a monthly fee of $16,129. For the year ended December 31, 2000, $106,153 has been paid to this former director. During the year ended December 31, 2000, Eric Pinkney, then a director of Brek, received consulting fees of $25,000 of which Brek paid in the ordinary course of its business. During 1999, Cody Cain, then a director of Brek, was a partner in a professional firm to which Brek had paid consultancy fees in the ordinary course of its business. The amount charged by the firm to Brek during the year ended December 31, 1999 was $234,319. As at December 31, 1999, Brek owed the firm $109,227. Mssers. Pek, Robinson and Telford agreed in February 2002 to subscribe for 200,000 , 500,000 and 100,000 shares of Brek common stock, respectively, at $0.50 per share, the prevailing market price of the stock at the time of the agreement. These transactions were completed in March 2002. Brek believes that the above transactions are on terms at least as favorable to it as could have been obtained in an arm's length transaction. ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS Previously filed EXHIBITS 3.1 Amended and Restated Articles of Incorporation*** 3.2 By-laws* 4.1 Specimen Stock Certificate* 10.1 Vallenar Stock Purchase Agreement 10.2 Employment Agreements of Gregory Pek: 10.2.1 Hong Kong Service Agreement 10.2.2 Offshore Service Agreement 10.2.3 Supplemental Service Agreement 10.3 Employment Agreements of Kenneth Telford: 10.3.1 Hong Kong Service Agreement 10.3.2 Offshore Service Agreement 10.3.3 Supplemental Service Agreement 11.1 Computation of Earnings (Loss) Per Share*** 21.1 List of Subsidiaries*** 23.1 Consent of Deloitte Touche Tohmatsu*** 23.2 Consent of KPMG*** 23.3 Consent of Deloitte & Touche, LLP*** 23.4 Consent of Wheeler Wasoff, P.C.*** 23.5 Consent of HJ & Associates, LLC*** * Incorporated by reference to Brek's Registration Statement on Form 10 filed October 21, 1999 *** Previously filed. REPORTS ON FORM 8-K Form 8-K Filed on November 2, 2001 in Regard to Disposal of FEDS Shares Form 8-KA Filed on November 7, 2001 in Regard to Acquisition of Shares of Gasco Energy, Inc. Form 8-KA Filed on December 3, 2001 in Regard to Disposal of FEDS Shares SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized on the 17th day of September, 2002. BREK ENERGY CORPORATION. /S/ Kenneth G.C. Telford ---------------------------------- Kenneth G.C. Telford Secretary and Chief Financial Officer Signature Title - --------- ----- /S/ Gregory M. Pek Director, President, and Chief - ------------------------------ Executive Officer (principal Gregory M. Pek executive officer) /S/ Ravi K. Daswani Director - ------------------------------ Ravi K. Daswani /S/ Douglas Moore Director - ------------------------------ Douglas Moore /S/ Ian G. Robinson Director & Chairman of the Board - ------------------------------ Ian G. Robinson /S/ James Pratt Director - ------------------------------ James Pratt /S/ Andrew Leitch Director - ------------------------------ Andrew Leitch /S/ Kenneth G.C. Telford Secretary & Chief Financial Officer - ------------------------------ (principal accounting officer) Kenneth G.C. Telford EX-10.1 4 d51970_ex10-1.txt VALLENAR STOCK PURCHASE AGREEMENT Exhibit 10.1 STOCK PURCHASE AGREEMENT between VALLENAR ENERGY CORP. and BREK ENERGY CORPORATION STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT is made as of the 12th day of March 2002, between Vallenar Energy Corp., a Nevada corporation ("Vallenar"), and Brek Energy Corporation, a Nevada corporation ("Brek") THE PARTIES HEREBY AGREE AS FOLLOWS: 1. Purchase and Sale of Stock. 1.1 Sale and Issuance of Series A Preferred Stock. (a) Vallenar shall adopt and file with the Secretary of State of Nevada on or before the Closing (as defined below) the Certificate of Designation in the form attached hereto as Exhibit A (the "Certificate of Designation"). (b) Subject to the terms and conditions of this Agreement, Brek shall purchase at the Closing and Vallenar shall sell and issue to Brek at the Closing 733,333 shares of Vallenar's Series A Preferred Stock (the "Shares") for the aggregate purchase price of $350,000 (the "Purchase Price"). 1.2 Closing. The purchase and sale of the Shares shall take place at the offices of Vallenar's counsel, at 10:00 A.M., on a date agreed to by the parties which shall not be more than five days after all the conditions set forth in Section 6 shall have been satisfied (which time and place are designated as the "Closing"). At the Closing, Vallenar shall deliver to Brek a certificate representing the Shares against payment of the Purchase Price therefor by wire transfer, to an account designated at least three days before the Closing by Vallenar in writing, or at the option of Brek by the forgiveness of indebtedness of $350,000 in principal amount owed by Vallenar to Brek, or by a combination of cash and forgiveness of indebtedness. 2. Representations and Warranties of Vallenar. Vallenar hereby represents and warrants to Brek that: 2.1 Valid Issuance of Preferred and Conversion Stock. The Shares have been duly and validly authorized and, when issued, sold and delivered in accordance with the terms of this Agreement, will be validly issued, fully paid and nonassessable, and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. The Common Stock issuable upon conversion of the Shares has been duly and validly reserved for issuance and, when issued upon conversion of the Shares in accordance with the terms of the Certificate of Designations, will be duly and validly issued, fully paid, and nonassessable and will be free of restrictions on transfer other than restrictions on transfer under this Agreement and under applicable state and federal securities laws. The Founder Shares have been validly issued and fully paid and are nonassessable. 2.2 Organization. Each of Vallenar and its Subsidiaries (collectively, the "Vallenar Subsidiaries") is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and has the requisite power and authority to carry on its business as now being conducted. Vallenar and each of the Vallenar Subsidiaries is duly qualified or licensed to do business and is in good standing in each jurisdiction in which the nature of its business or the ownership or leasing of its properties makes such qualification or licensing necessary, except in such jurisdictions where the failure to be so duly qualified or licensed and in good standing could not reasonably be expected to have a Material Adverse Effect on Vallenar or prevent or materially delay the consummation of the Reorganization. Vallenar has delivered to Brek complete and correct copies of its Articles of Incorporation and By-laws and the organizational documents of each of the Vallenar Subsidiaries. 2.3 Subsidiaries. Vallenar's only Subsidiaries are Nathan Oil Partners LP, a Texas limited partnership, and Nathan Oil Operating Co. LLC, a Texas limited liability company, both of which were organized on October 31, 2001. All of the outstanding equity of each Vallenar Subsidiary has been validly issued. All of the outstanding equity of each Vallenar Subsidiary is owned by Vallenar or by another Vallenar Subsidiary free and clear of any and all Liens. Except for equity in the Vallenar Subsidiaries, neither Vallenar nor any of the Vallenar Subsidiaries owns, directly or indirectly, any capital stock or other ownership interest in any corporation, partnership, joint venture, limited liability company or other entity. 2.4 Capital Structure. The authorized capital stock of Vallenar consists of 250,000,000 shares of capital stock, of which 200,000,000 shares are authorized to be issued as common stock (the "Common Stock"), and 50,000,000 shares are authorized to be issued as preferred stock. On the date hereof, Vallenar has (i) 10,050,000 shares of common stock issued and outstanding and no shares of preferred stock outstanding; (ii) no shares of stock held in its treasury; (iii) no shares of capital stock reserved for issuance upon exercise of - 45 - outstanding stock options (the "Vallenar Stock Options") and (iv) no shares of capital stock that it may be required to issue under agreements (other than this Agreement). Except as set forth above and as contemplated by this Agreement there are no shares of capital stock of Vallenar or equity of any Vallenar Subsidiary issued, reserved for issuance or outstanding, and there are no stock appreciation rights, phantom stock rights or other contractual rights the value of which is determined in whole or in part by the value of any capital stock of Vallenar or any equity of a Vallenar Subsidiary. The Vallenar Stock Options and any other security convertible into or exercisable or exchangeable for Common Stock (each of which shall be determined on an as if converted, exercised or exchanged basis) are herein referred to as "Vallenar Stock Equivalents." Each outstanding share of Common Stock is, and each share of common stock which may be issued pursuant to the Vallenar Stock Options will be, when issued, duly authorized, validly issued, fully paid and nonassessable and not subject to preemptive rights. There are no outstanding bonds, debentures, notes or other indebtedness of Vallenar or any Vallenar Subsidiary having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matter on which Vallenar's stockholders may vote. Except as set forth above, there are no securities, options, warrants, calls, rights, commitments, agreements, arrangements or undertakings of any kind obligating Vallenar or any of the Vallenar Subsidiaries to issue, deliver or sell or create, or cause to be issued, delivered or sold or created, additional shares of capital stock or other voting securities or Vallenar Stock Equivalents or equity equivalents of any of the Vallenar Subsidiaries or obligating Vallenar or any of the Vallenar Subsidiaries to issue, grant, extend or enter into any such security, option, warrant, call, right, commitment, agreement, arrangement or undertaking. There are no outstanding contractual obligations of Vallenar or any of the Vallenar Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital stock or other equity of Vallenar or any of the Vallenar Subsidiaries. 2.5 Authority. The Board of Directors of Vallenar, at a meeting duly called and held, duly adopted resolutions approving this Agreement. The execution, delivery and performance of this Agreement by Vallenar and the consummation by Vallenar of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Vallenar. This Agreement has been duly executed and delivered by Vallenar and (assuming the valid authorization, execution and delivery of this Agreement by Brek) constitutes the valid and binding obligation of Vallenar enforceable against Vallenar in accordance with its terms, except that such enforceability (i) may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to the enforcement of creditors' rights and remedies generally, and (ii) is subject to general principles of equity (regardless of whether considered in a proceeding in equity or at law). 2.6 Consents and Approvals; No Violations. Except for filings, permits, authorizations, consents and approvals as may be required under, and other applicable requirements of, the Securities Act, state securities or "Blue Sky" laws, the Exchange Act, the NRS, or the rules and regulations of Nasdaq (collectively, the "Vallenar Required Approvals"), neither the execution, delivery or performance of this Agreement by Vallenar nor the consummation by Vallenar of the transactions contemplated hereby will (i) violate or conflict with the Articles of Incorporation or By-laws of Vallenar or the organizational documents of any of the Vallenar Subsidiaries, (ii) require any filing with, or permit, authorization, consent or approval of, any Governmental Entity (except where the failure to obtain such permits, authorizations, consents or approvals or to make such filings could not reasonably be expected to have a Material Adverse Effect on Vallenar, (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, amendment, cancellation or acceleration) under, any of the terms, conditions or provisions of any note, bond, mortgage, indenture, lease, license, contract, agreement or other instrument or obligation to which Vallenar or any of the Vallenar Subsidiaries is a party or by which any of their respective properties are bound, (iv) violate any law, court order, judgment, decree, or regulation applicable to Vallenar or any of the Vallenar Subsidiaries or by which any of their respective properties are bound, or (v) result in the creation or imposition of any Lien on any asset of Vallenar or the Vallenar Subsidiaries, except in the case of clauses (iii), (iv) or (v) for violations, breaches or defaults that could not reasonably be expected to have a Material Adverse Effect on Vallenar. 2.7 Reserved. 2.8 Absence of Material Adverse Change. Since December 31, 2000, Vallenar and the Vallenar Subsidiaries have conducted their respective businesses in all material respects only in the ordinary course, consistent with past practices, and there has not been (i) any Material Adverse Change with respect to Vallenar, (ii) any declaration, setting aside or payment of any dividend or other distribution with respect to its capital stock or any redemption, purchase or other acquisition of any of its capital stock, (iii) any split, combination or - 46 - reclassification of any of its capital stock or any issuance or the authorization of any issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock, or (iv) any material change in accounting methods, principles or practices by Vallenar affecting its assets, liabilities or business, except insofar as may have been required by a change in generally accepted accounting principles. 2.9 Permits; Compliance with Laws. (a) Each of Vallenar and the Vallenar Subsidiaries is in possession of all franchises, grants, authorizations, licenses, permits, charters, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for Vallenar or any of the Vallenar Subsidiaries to own, lease and operate its properties or to carry on its business as it is now being conducted or as it is planned to be conducted in connection with the acquisition and exploitation of oil and gas leases in Edwards County, Texas (the "Vallenar Permits"), except where the failure to have any of the Vallenar Permits could not, individually or in the aggregate, have a Material Adverse Effect on Vallenar, and, as of the date of this Agreement, no suspension or cancellation of any of the Vallenar Permits is pending or, to the knowledge of Vallenar, threatened, except where the suspension or cancellation of any of the Vallenar Permits could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Vallenar. The business of Vallenar and the Vallenar Subsidiaries is not being conducted in violation of any law, ordinance or regulation of any Governmental Entity, except for possible violations that could not reasonably be expected to have a Material Adverse Effect on Vallenar. 2.10 Tax Matters. Except as would not have a Material Adverse Effect on Vallenar: (i) Vallenar and each of the Vallenar Subsidiaries have timely filed (after taking into account any extensions to file) all Tax Returns required to be filed by them either on a separate or combined or consolidated basis; (ii) all such Tax Returns are correct in all respects and accurately disclose in all respects all Taxes required to be paid for the periods covered thereby; (iii) Vallenar and the Vallenar Subsidiaries have paid or caused to be paid all Taxes shown as due on such Tax Returns and all Taxes for which no Tax Return was required to be filed, and the Financial Statements reflect an adequate reserve as determined in accordance with generally accepted accounting principles for all material Taxes payable by Vallenar and the Vallenar Subsidiaries and not yet due (other than a reserve for deferred Taxes established to reflect timing differences between book and Tax treatment) for all taxable periods and portions thereof accrued through the date of such Financial Statements; (iv) none of Vallenar or any Vallenar Subsidiary has waived in writing any statute of limitations in respect of Taxes; (v) there is no action, suit, investigation, audit, claim or assessment that has been formally commenced or proposed to Vallenar in writing with respect to Taxes of Vallenar or any of the Vallenar Subsidiaries where an adverse determination is reasonably likely; (vi) there are no Liens for Taxes upon the assets of Vallenar or any Vallenar Subsidiary except for Liens relating to current Taxes not yet due; (vii) all Taxes which Vallenar or any Vallenar Subsidiary is required by law to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued on the books of Vallenar or such Vallenar Subsidiary; (viii) neither Vallenar nor any Vallenar Subsidiary has been a member of any group of tax payors filing Tax Returns on a consolidated, combined, unitary or similar basis other than each such group of which it is currently a member; (ix) no deduction of any amount that would otherwise be deductible by Vallenar or any of the Vallenar Subsidiaries could be disallowed under Section 162(m) of the Code; (x) neither Vallenar nor any of the Vallenar Subsidiaries is a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code; (xi) none of Vallenar, Brek or any of their Subsidiaries will be obligated to make a payment, in connection with the transactions contemplated hereunder or otherwise, to any employee or former employee of, or individual providing services to, Vallenar or any Vallenar Subsidiary that would be a "parachute payment" to a "disqualified individual" as those terms are defined in Section 280G of the Code without regard to whether such payment is reasonable compensation for personal services performed or to be performed in the future; and (xii) none of Vallenar, Brek or any of their Subsidiaries will be obligated to pay any excise taxes or similar taxes imposed on any employee or former employee of, or individual providing services to, Vallenar or any Vallenar Subsidiary under Section 4999 of the Code or any similar provisions as a result of the consummation of the transactions contemplated hereby, either alone or in connection with any other event. 2.11 Liabilities. Except for the $350,000 principal amount loan made by Brek to Vallenar, Vallenar and the Vallenar Subsidiaries, taken as a whole, do not have any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) required by generally accepted accounting principles to be set forth on a consolidated balance sheet of Vallenar and its Subsidiaries or in the notes thereto that were not set forth in the Financial Statements. 2.12 Benefit Plans; Employees and Employment Practices. Neither Vallenar nor any of the Vallenar Subsidiaries has adopted or agreed to create, adopt or contribute to any Vallenar Benefit Plan. There exist no material employment, consulting, severance, bonus, incentive or termination agreements between - 47 - Vallenar or any of the Vallenar Subsidiaries and any current or former employee, officer or director of Vallenar or any of the Vallenar Subsidiaries. 2.13 Litigation. As of the date of this Agreement there is no suit, action, proceeding or investigation pending or, to Vallenar's knowledge, threatened, against Vallenar or any of the Vallenar Subsidiaries before any Governmental Entity that, individually or in the aggregate, would reasonably be expected to have a Material Adverse Effect on Vallenar. Neither Vallenar nor any of the Vallenar Subsidiaries is subject to any outstanding judgment, order, writ, injunction or decree that could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on Vallenar. 2.14 Environmental Matters. Vallenar is conducting its businesses in material compliance with all applicable laws, including Environmental Laws, and has and is in compliance with all licenses and permits required under any such laws, unless failure to so comply would not reasonably be expected to have a Material Adverse Effect. None of Vallenar's operations or properties is the subject of federal, state or local investigation evaluating whether any material remedial action is needed to respond to a release of any Hazardous Materials into the environment or to the improper storage or disposal (including storage or disposal at offsite locations) of any Hazardous Materials, unless such remedial action would not reasonably be expected to have a Material Adverse Effect. Vallenar is not responsible (and to the best knowledge of Vallenar, no Person has filed any notice indicating that Vallenar is responsible) for the improper release into the environment, or the improper storage or disposal, of any material amount of any Hazardous Materials. To the best knowledge of Vallenar, no Hazardous Materials have been improperly released by any other Person or are improperly stored or disposed of, upon any property of Vallenar, unless such release, storage or disposal would not reasonably be expected to have a Material Adverse Effect. 2.15 Intellectual Property. The Intellectual Property Rights consist solely of items and rights which are: (i) owned by Vallenar or the Vallenar Subsidiaries; (ii) in the public domain; or (iii) rightfully used by Vallenar or the Vallenar Subsidiaries pursuant to a license, and, with respect to Intellectual Property Rights owned by Vallenar or the Vallenar Subsidiaries, Vallenar or the Vallenar Subsidiaries own the entire right, title and interest in and to such Intellectual Property Rights free and clear of any Liens. Vallenar and the Vallenar Subsidiaries have all rights in the Intellectual Property Rights necessary to carry out their businesses substantially as currently conducted except as could not reasonably be expected to have a Material Adverse Effect on Vallenar. The Intellectual Property Rights do not infringe on any proprietary right of any Person, except to the extent that any such infringement, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on Vallenar. As of the date of this Agreement, no claims against Vallenar or any Vallenar Subsidiary (or, to Vallenar's knowledge, against any other holder of Intellectual Property Rights) (x) challenging the validity, effectiveness, or ownership by Vallenar or the Vallenar Subsidiaries of any of the Intellectual Property Rights, or (y) to the effect that the Intellectual Property Rights infringe or will infringe on any intellectual property or other proprietary right of any Person have been asserted or, to Vallenar's knowledge, are threatened by any Person nor to Vallenar's knowledge are there any valid grounds for any bona fide claim of any such kind. To Vallenar's knowledge, there is no material unauthorized use, infringement or misappropriation of any of the Intellectual Property Rights by any third party, employee or former employee of Vallenar or the Vallenar Subsidiaries. 2.16 Brokers. No broker, investment banker, financial advisor or other person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Vallenar. 2.17 Contracts. Except for this Agreement and the agreements referenced hereby, neither Vallenar nor any of the Vallenar Subsidiaries is a party to or bound by: (i) any "material contract" (as such term is defined in Schedule 601(b)(10) of Regulation S-K of the SEC) or any agreement, contract or commitment the loss or termination of which could have a Material Adverse Effect on Vallenar; (ii) any non-competition agreement or any similar agreement or obligation which materially limits or could materially limit Vallenar or any of the Vallenar Subsidiaries from engaging in the business of oil and gas exploration; or (iii) any management agreement, technical services agreement or other agreement whereby Vallenar or any of the Vallenar Subsidiaries is providing or is required to provide management or technical services to any other Person. (Taken as a whole, the contracts and agreements required to be filed by Vallenar with the SEC are collectively referred to as the "Vallenar Contracts"). With such exceptions as, individually or in the aggregate, have not had, and could not be reasonably expected to have, a Material Adverse Effect on Vallenar, (x) each of the Vallenar Contracts is valid and in full force and effect (except to the extent they have previously expired in accordance with their terms), and (y) neither Vallenar nor any of the Vallenar Subsidiaries has violated any provision of, or committed or failed to perform any act which, with or without notice, lapse of time, or both, would constitute a default under the provisions of any Vallenar Contract. To the knowledge of Vallenar, no counterparty to any such contract, agreement or commitment has violated any provision of, or - 48 - committed or failed to perform any act which, with or without notice, lapse of time, or both would constitute a default or other breach under the provisions of, such Vallenar Contract, except for defaults or breaches which, individually or in the aggregate, have not had, or would not reasonably be expected to have, a Material Adverse Effect on Vallenar. Neither Vallenar nor any of the Vallenar Subsidiaries is a party to, or otherwise a guarantor of or liable with respect to, any interest rate, currency or other swap or derivative transaction, other than any such transactions which are not material to the business of Vallenar or the Vallenar Subsidiaries. Vallenar has provided or made available to Brek a copy of each agreement described in subparts (i), (ii) and (iii) above. The designation or definition of Vallenar Contracts for purposes of this Section 2.17 and the disclosures made pursuant hereto shall not be construed or utilized to expand, limit or define the terms "material" and "Material Adverse Effect" as otherwise referenced and used in this Agreement. 2.18 Transactions with Affiliates. No director or executive officer of Vallenar or any 5% or greater stockholder of Vallenar is at the date hereof a party to any transaction with Vallenar or any of the Vallenar Subsidiaries in which the amount involved exceeds $50,000, including any contract or arrangement providing for the furnishing of services to or by, providing for rental of real or personal property (including intellectual property) to or from, or otherwise requiring payments to or from Vallenar or any of the Vallenar Subsidiaries. 2.19 Financial Statements. Vallenar has provided Brek with its financial statements as of and for the nine-month period ended September 30, 2001 (the "Financial Statements"). The Financial Statements present fairly, in all material respects, the financial position of Vallenar as of September 30, 2001 and the results of their operations and their cash flows for the nine-month period then ended in conformity with generally accepted accounting principles.. 2.20 Leases. Vallenar holds good and defensible title to the leases set forth on Exhibit B in accordance with standards generally acceptable in the oil and gas industry, free and clear of any mortgage, lien, charge, encumbrance, easement or title imperfection, except liens for (i) taxes or assessments not due and payable, or which are being contested in good faith by appropriate proceedings, (ii) liens for current costs of development and operation under operating agreements, none or which is in default, (iii) development obligations under the leases, the breach of which will result in failure of title only as to portions of the property subject to the lease where producing units have not been established and (iv) title imperfections that do not in the aggregate materially detract from the value or materially interfere with the current use of the properties leased by Vallenar as a whole. Each lease set forth on Exhibit B is valid and subsisting and there is not any existing default under any such lease, with such exceptions as in the aggregate are not material to all of such leases taken as a whole. 3. Representations and Warranties of Brek. Brek hereby represents and warrants that: 3.1 Authorization. Brek has full corporate power and authority to enter into this Agreement, and this Agreement constitutes its legal valid and binding obligation, enforceable against Brek in accordance with its terms. 3.2 Purchase Entirely for Own Account. The Shares and the Common Stock issuable upon conversion thereof (the "Conversion Stock" and, collectively with the Shares, the "Securities") will be acquired for investment for Brek's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof except in compliance with applicable securities laws. 3.3 Investment Experience. Brek acknowledges that it can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of the investment in the shares. Brek represents that it has not been organized for the purpose of acquiring the Shares. 3.4 Accredited Investor. Brek is an "accredited investor" within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of Regulation D, as presently in effect. 3.5 Restricted Securities. Brek understands that the Securities are "restricted securities" under the federal securities laws inasmuch as they are being acquired from Vallenar in a transaction not involving a public offering and that under such laws and applicable regulations the Securities may be resold without registrations - 49 - under the Act only in certain limited circumstances. Brek represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. 4. Covenants of Vallenar and Brek. 4.1 Delivery of Financial Information; Auditors. Vallenar shall deliver to Brek financial information about Vallenar sufficiently ahead of the deadlines for filing reports with the SEC to permit Brek to prepare and file such reports on a timely basis. Vallenar acknowledges that its results of operations will be material to Brek's financial statements. Vallenar shall provide preliminary information regarding its results of operations to Brek when and as the same becomes available with the understanding that the information is subject to change. Final results of operations of Vallenar shall in any event be delivered to Brek at least ten business days before the same are required to be included in a report that Brek is required to file with the SEC. Vallenar shall use a firm of certified public accountants that is reasonably acceptable to Brek. 4.2 Inspection. Vallenar shall permit Brek, at Brek's expense, to visit and inspect Vallenar's properties, to examine its books of account and records and to discuss Vallenar's affairs, finances and accounts with its officers, all at such reasonable times as may be requested by Brek. 4.3 Use of Proceeds. Vallenar shall use the proceeds from the sale of the Shares solely to acquire oil and gas leases in Edwards County, Texas. 4.4 Anti-dilution Protection. If Vallenar issues and sells Common Stock at an average price per share of less than $0.50, then Brek shall have the right to demand in writing that Vallenar issue to it (at no additional cost to Brek) that number of shares of Common Stock so that after such issuance Brek owns the percentage of Vallenar's fully diluted Common Stock outstanding that it would have owned if the average price per share of such issuances and sales had been $0.50. Upon receipt of such a written demand from Brek pursuant to the foregoing paragraph, Vallenar may either issue the shares of Common Stock referred to above to Brek or offer to acquire all the capital stock of Vallenar owned by Brek at an all-cash price equal to 125% of the price paid by Brek for each share of such capital stock. If Vallenar makes such an offer to Brek, Brek must accept within ten (10) days or its demand shall be deemed withdrawn, and in the absence of such acceptance Vallenar's and Brek's obligations under this Section 4.4 shall be considered discharged. If Brek accepts such an offer by Vallenar, Vallenar shall acquire its capital stock from Brek within ten (10) days by paying the purchase price set forth above in full. 4.5 Reserved 4.6 Right of First Refusal. Except for issuance and sale of (i) the common stock outstanding on the date hereof as set forth in Section 2.4, (ii) the Shares and (iii) up to 2,200,000 shares of Common Stock first issued after the date hereof for an aggregate purchase price not to exceed $1,100,000, Vallenar shall not (and shall cause its Subsidiaries not to) issue or sell any debt or equity securities or any securities exercisable for or convertible into such securities (except upon conversion of the Shares) unless the requirements of this Section 4.6 shall have been satisfied. 4.6.1 Vallenar or the Subsidiary that is issuing the securities (the "Issuer") shall in writing offer to sell to Brek the securities it plans to issue or sell. Such offer shall set forth in reasonable detail the price, which must be stated as a dollar amount, and other terms of the offer. 4.6.2 Brek shall have seven (7) days after receiving the offer in which to accept the offer in writing and, if it so accepts, an additional thirty (30) days to acquire the securities by delivering the full purchase price therefor to the Issuer. 4.6.3 If Brek does not accept the offer as required by Section 4.6.2, then the Issuer shall be free to sell the securities so offered to another person on the same terms or on terms more favorable to the Issuer than those offered to Brek for a period of sixty (60) days commencing upon the expiration of the 7-day period referred to in Section 4.6.2 for such acceptance (or upon the delivery of a binding, irrevocable, written notice by Brek to the Issuer that Brek declines the offer). 4.7 Registration Rights. If Vallenar files a registration statement under the Securities Act of 1933 covering the registration of any securities, then Brek will have the right to include the Conversion Shares and any other Common Stock owned by Brek in the registration. - 50 - 5. Reserved. 6. Conditions of Brek's Obligations at Closing. The obligations of Brek under subsection 1.1(b) of this Agreement are subject to the fulfillment at or before the Closing of each of the following conditions: 6.1 Representations and Warranties. The representations and warranties of Vallenar contained in Section 2 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the date of such Closing. 6.2 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares shall be duly obtained and effective as of the Closing. 6.3 Proceedings and Documents. All corporate and other proceedings in connection with the transactions contemplated at the Closing and all documents incident thereto shall be reasonably satisfactory in form and substance to Brek's counsel, and they shall have received all such counterpart original and certified or other copies of such documents as they may reasonably request 6.4 Founder Shares. Brek shall have acquired 2,512,500 shares of Vallenar's already-outstanding Common Stock from the holders thereof at a price of no more than $0.005 per share (the "Founder Shares") 7. Conditions of Vallenar's Obligations at Closing. The obligations of Vallenar to Brek under this Agreement are subject to the fulfillment at or before the Closing of each of the following conditions by Brek: 7.1 Representations and Warranties. The representations and warranties of Brek contained in Section 3 shall be true on and as of the Closing with the same effect as though such representations and warranties had been made on and as of the Closing. 7.2 Payment of Purchase Price. Brek shall have delivered the Purchase Price. 7.3 Qualifications. All authorizations, approvals, or permits, if any, of any governmental authority or regulatory body of the United States or of any state that are required in connection with the lawful issuance and sale of the Shares pursuant to this Agreement shall be duly obtained and effective as of the Closing. 8. Miscellaneous. 8.1 Survival. The representations, warranties and covenants of Vallenar and Brek contained in or made pursuant to this Agreement shall survive the execution and delivery of this Agreement and the Closing and shall in no way be affected by any investigation of the subject matter thereof made by or on behalf of Brek or Vallenar. 8.2 Assignment; Successors and Assigns. This Agreement shall not be assignable by any party hereto without the prior written consent thereto, and any purported assignment in violation hereof shall be null and void. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective permitted successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 8.3 Governing Law; Jurisdiction. This Agreement shall be governed in all respects by the laws of the United States of America and by the laws of the State of Nevada, excluding its conflict of law provisions. The parties hereby irrevocably and unconditionally consent to submit to the exclusive jurisdiction of the courts of the State of Nevada and of the United States of America located in Nevada (the "Nevada Courts") for any litigation arising out of or relating to this Agreement and the transactions contemplated hereby, waive any objection to the laying of venue of any such litigation in the Nevada Courts and agree not to plead or claim in any Nevada Court that such litigation brought therein has been brought in an inconvenient forum; provided that any judgment obtained in any such litigation may be enforced in any court having jurisdiction over a party or its assets. 8.4 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. - 51 - 8.5 Titles. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 8.6 Notices. All notices and other communications hereunder shall be validly given or made if in writing, when delivered personally (by courier service or otherwise), when delivered by telecopy, or when actually received when mailed by first-class certified or registered United States mail, postage-prepaid and return receipt requested, in each case to the address of the party to receive such notice or other communication set forth below, or at such other address as any party hereto may from time to time advise the other parties pursuant to this subsection: If to Vallenar, to: Vallenar Energy Corp. 14 Inverness Drive East, Suite H-236 Denver, Colorado 80112 Attention: President Fax: 303 483 0011 with a copy to: Rene Daignault Jeffs & Company Law Corporation 1100 Melville Street, 6th Floor Vancouver, British Columbia V6E 4A6 Facsimile: 604-664-0671 if to Brek, to: Brek Energy Corporation 80 Gloucester Road 19th Floor Wan Chai Hong Kong SAR Attention: CFO Facsimile: 852.2804.6291 with a copy to: D. Roger Glenn, Esq. Edwards & Angell, LLP 750 Lexington Avenue New York, New York 10022 Telecopy: (212) 308-4844 8.7 Expenses. Vallenar and Brek each shall pay all costs and expenses that it incurs with respect to the negotiation, execution, delivery and performance of this Agreement. 8.8 Amendments and Waivers. Any term of this Agreement may be amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of Vallenar and Brek. 8.9 Severability. If one or more provisions of this Agreement are held to be unenforceable under applicable law, such provision shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms. Any provision of this Agreement held invalid or unenforceable only in part or degree will remain in full force and effect to the extent not held invalid or unenforceable. - 52 - 8.10 Entire Agreement. This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and negotiations, both written and oral, between the parties with respect to the subject matter hereof. No representation, inducement, promise, understanding, condition or warranty not set forth herein or therein has been made or relied upon by either party hereto. Neither this Agreement nor any provision hereof or thereof, is intended to confer upon any person other than the parties hereto rights or remedies hereunder or thereunder. 8.11 Definitions. As used in this Agreement, the following terms have the meanings given to them below: "Action" shall mean any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. "Affiliate" shall mean with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with such Person provided that, for purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Business Day" means a day other than a Saturday, Sunday or other day on which commercial banks in New York City, are authorized or required by law to close. "Closing" shall have the meaning set forth in Section 2. "Code" shall mean the United States Internal Revenue Code of 1986, as amended. "Environmental Laws" shall mean any applicable statute, law, ordinance, regulation, rule, judgment, decree or order of any Governmental Entity relating to or regulating or imposing liability or standards of conduct with respect to pollution, protection of the environment or environmental regulation or control or regarding Hazardous Substances or occupational health or safety. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, together with the rules and regulations promulgated thereunder. "ERISA Affiliate" shall mean (i) any corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Code) as Vallenar; (ii) any partnership, trade or business (whether or not incorporated) which on the day before the Closing Date was under common control (within the meaning of Section 414(c) of the Code) with Vallenar; and (iii) any entity which is a member of the same affiliated service group (within the meaning of Section 414(m) of the Code) as either Vallenar, any corporation described in clause (i) or any partnership, trade or business described in clause (ii). "ERISA Benefit Plan" shall mean a Vallenar Benefit Plan maintained as of the date of this Agreement which is also an "employee pension benefit plan" (as defined in Section 3(2) of ERISA) or which is also an "employee welfare benefit plan" (as defined in Section 3(1) of ERISA). "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder. "Final Order" shall mean action by the applicable Governmental Entity which is in full force and effect, with respect to which no petition or other request for such Governmental Entity or court stay, reconsideration or review of any kind is pending, and as to which all time periods have expired within which a Governmental Entity may be asked to stay, reconsider or review the action or may stay, reconsider or review the action sua sponte. "Financial Statements" shall have the meaning given to it in Section 2.19. "Founder Shares" shall have the meaning given to it in Section 6.6. - 53 - "Governmental Entity" shall mean any federal, state or local government or any court, tribunal, administrative agency or commission or other governmental or other regulatory authority or agency, domestic, foreign or supranational. "Hazardous Materials" means any substances regulated under any Environmental Law, whether as pollutants, contaminants, or chemicals, or as industrial, toxic or hazardous substances or wastes, or otherwise. "Indebtedness" of any Person at any date shall mean (a) all indebtedness of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (b) any other indebtedness of such Person which is evidenced by a note, bond, debenture or similar instrument, (c) all obligations of such Person under financing leases, (d) all obligations of such Person in respect of acceptances issued or created for the account of such Person and with respect to unpaid reimbursement obligations related to letters of credit issued for the account of such Person and (e) all liabilities secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof. "Intellectual Property Rights" shall mean any right to use, all patents, patent rights, trademarks, trade names, trade dress, logos, service marks, copyrights, know how and other proprietary intellectual property rights and computer programs held or used by Vallenar or any of the Vallenar Subsidiaries that are individually or in the aggregate material to the conduct of the business of Vallenar and the Vallenar Subsidiaries, taken as a whole. "Investment Entity" shall mean an entity in which Vallenar or any of the Vallenar Subsidiaries has an Investment Interest. "Investment Interest" shall mean a direct or indirect ownership of (i) capital stock, bonds, debentures, partnership, membership interests or other ownership interests or other securities of any Person; (ii) any deposit with or advance, loan or other extension of credit (including the purchase of property from another Person subject to an understanding or agreement, contingent or otherwise to resell such property to such other Person) to any other Person; (iii) any revenue or profit interests pursuant to any agreement or license, or (iv) any agreement, commitment, right, understanding or arrangement with respect to any of the items referred to in (i), (ii) or (iii) of this definition. "Knowledge" and "known to" shall mean the actual knowledge of the executive officers of Vallenar or the executive officers of Brek, as the case may be, who have exercised reasonable due diligence with respect to the representation and warranty to which such knowledge statement is made. Liens" shall mean any pledges, claims, liens, charges, encumbrances and security interests of any kind or nature whatsoever. Material Adverse Change" or "Material Adverse Effect" shall mean, when used in connection with a person, any change or effect (or any development that, insofar as can reasonably be foreseen, is likely to result in any change or effect) or fact or condition that is materially adverse to the business, properties, assets, financial condition or results of operations of that person and its Subsidiaries taken as a whole, provided, however, that (i) any adverse change, effect or development that is primarily caused by conditions affecting the United States economy generally or the economy of any nation or region in which that person, or its Subsidiaries conducts business that is material to the business of that person and its Subsidiaries, taken as a whole, shall not be taken into account in determining whether there has been (or whether there could reasonably be foreseen) a "Material Adverse Change" or "Material Adverse Effect" with respect to that person (ii) any adverse change, effect or development that is primarily caused by conditions generally affecting the industries in which a person, conducts its business shall not be taken into account in determining whether there has been (or whether there could reasonably be foreseen) a "Material Adverse Change" or "Material Adverse Effect" with respect to that person, and (iii) any adverse change, effect or - 54 - development that is primarily caused by the announcement or pendency of this Agreement, the Reorganization or the transactions contemplated hereby shall not be taken into account in determining whether there has been (or whether there could reasonably be foreseen) a "Material Adverse Change" or "Material Adverse Effect" with respect to a person; and a "Material Adverse Effect" with respect to a person, shall include any applicable event, fact or condition with respect to that party which would reasonably be expected to delay, interfere with, impair or prevent the transactions contemplated by this agreement in a manner which would have a material adverse effect on such transactions taken as a whole considering the intentions and expectations of the parties hereto. "NRS" shall mean the Nevada Revised Statutes, Chapter 78 and 92A. "Person" shall mean an individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, unincorporated syndicate, unincorporated organization, trust, trustee, executor, administrator or other legal representative, Governmental Entity, political subdivision, or any group of Persons acting in concert. "SEC" shall mean the Securities and Exchange Commission. "Securities Act" shall mean the Securities Act of 1933, as amended, together with the rules and regulations promulgated thereunder. "Subsidiary" or "subsidiary" of a Person shall mean any Person (including any corporation, partnership, joint venture, limited liability company or other entity) in which the Person in question owns, directly or indirectly, an amount of the voting securities, other voting ownership or voting partnership interests which is sufficient to elect at least a majority of such Person's Board of Directors or other governing body (or, if there are no such voting interests, 50% or more of the equity interests) of such Person. "Tax" and "Taxes" shall mean any federal, state, local or foreign net income, gross income, gross receipts, windfall profit, severance, property, production, sales, use, license, excise, franchise, employment, payroll, withholding, alternative or add-on minimum or any other tax, custom, duty, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or penalty, addition to tax or additional amount imposed by any Governmental Entity. "Tax Return" shall mean any return, report or similar statement required to be filed with respect to any Tax including any information return, claim for refund, amended return or declaration of estimated tax. "Vallenar Benefit Plan" shall mean any bonus, pension, profit sharing, deferred compensation, incentive compensation, stock ownership, stock purchase, stock option, phantom stock, retirement, vacation, severance, disability, death benefit, hospitalization, medical, life insurance, supplemental unemployment benefits, employee stock purchase, stock appreciation, restricted stock or other employee benefit plan, policy, arrangement or agreement providing benefits to any current or former employee, officer or director of Vallenar or any of the Vallenar Subsidiaries or with respect to which Vallenar or any of the Vallenar Subsidiaries (or, in the case of an ERISA Benefit Plan, any of the Vallenar's ERISA Affiliates) may have any liability. "Vallenar Contracts" shall have the meaning set forth in Section 2.17. "Vallenar Employee" shall mean any employee of Vallenar or any of the Vallenar Subsidiaries. "Vallenar Permits" shall have the meaning set forth in Section 2.9. "Vallenar Required Approvals" shall have the meaning set forth in Section 2.6. - 55 - "Vallenar Stock Equivalents" shall have the meaning set forth in Section 2.4. "Vallenar Stock Options" shall have the meaning set forth in Section 2.4. "Vallenar Subsidiaries" shall have the meaning set forth in Section 2.2. - 56 - IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. VALLENAR ENERGY CORP. By: _______________________________________ Kenneth G. C. Telford, Vice President BREK ENERGY CORPORATION By: _______________________________________ Gregory M. Pek, Chief Executive Officer EXHIBIT A Exhibit A to that certain Stock Purchase Agreement between Vallenar Energy Corp. and Brek Energy Corporation made as of the 12th day of March 12, 2002. (number of pages including this one: 6) - -------------------------------------------------------------------------------- VALLENAR EXPLORATION CORP. Form of Certificate of Designation CERTIFICATE OF DESIGNATION OF THE VOTING POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF THE SERIES A PREFERRED STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF Pursuant to Section 1955 of Chapter 78 of the Nevada Revised Statutes Vallenar Exploration Corp., a corporation organized and existing under the laws of the State of Nevada (the "Corporation"), certifies that, pursuant to authority conferred upon the Board of Directors of the Corporation by its Articles of Incorporation (the "Articles") and pursuant to the provisions of Section 1955 of Chapter 78 of the Nevada Revised Statutes, the following resolution was duly approved and adopted by the Board of Directors of the Corporation pursuant to the unanimous written consent of all of the members of the Board of Directors: RESOLVED that, pursuant to the authority vested in the Board of Directors of the Corporation and by the Articles, a series of shares be created and authorized out of the Preferred Shares of the authorized capital of the Corporation and 733,333 shares of the Preferred Shares be designated as Series "A" Preferred Shares (the "Series "A" Preferred Shares") having the voting powers, designations, preferences, relative, participating, optional and other special rights and the qualifications, limitations and restrictions as are set forth in this Resolution as follows: - 57 - Section I. Dividends; Other Distributions. A. The holders of Series "A" Preferred Shares will be entitled to receive cash dividends out of funds legally available for payment of dividends, when and as the same are declared by the Board of Directors of the Corporation. Dividends will be paid to the holders of record of the Series "A" Preferred Shares as their names appear on the share register of the Corporation on the record date for such dividend. B. So long as any Series "A" Preferred Shares remains outstanding, the Corporation will neither (1) declare, pay or set apart for payment any dividend on Common Stock or (2) make any distribution on any Common Stock, nor will the Corporation or any of its subsidiaries (3) purchase, redeem or otherwise acquire any Common Stock or (4) pay or make available any monies for a sinking fund for the purchase or redemption of any Common Stock, unless the same action is taken by the Corporation with respect to the Series "A" Preferred Shares on an as-converted basis. Section II. Liquidation Preference. In the event of a liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, after all liquidation preferences in respect of any class or series of Preferred Stock that by its terms is senior to the Series "A" Preferred Shares (collectively, "Senior Shares") have been paid to the holders thereof, the holders of Series "A" Preferred Shares will be entitled to receive out of the assets of the Corporation, whether such assets are stated capital or surplus of any nature, an amount equal to one dollar ($1.00) per share (subject to appropriate adjustments for stock splits, stock dividends, combinations or other recapitalizations) plus any dividends declared but unpaid pursuant to Section I (the "Preference Amount Per Share") and will receive such Preference Amount Per Share before any payment will be made or any assets distributed to the holders of Common Stock. Section III. Voting Rights. A. A holder of Series "A" Preferred Shares will be entitled to vote on all matters on which the holders of the Common Stock are entitled to vote, and to notice of any shareholders' meeting. Except as otherwise required by law or provided for in Section III (D) and (E), the holders of Series "A" Preferred Shares and the holders of Common Stock will vote together as a single class on all matters presented to shareholders and not as separate classes. B. For so long as at least one-half of the Series "A" Preferred Shares remain outstanding, the Series "A" Preferred Shares will be entitled to the greater of (i) 26% of the total voting power of all Common Stock and Series "A" Preferred Shares outstanding on the record date for the shareholders' vote treated as a single class less the voting power of all outstanding Common Stock owned by the holders of the Series "A" Preferred Shares on such record date and (ii) the voting power of the Common Stock issuable upon conversion of the Series "A" Preferred Shares (the greater of (i) and (ii) being herein referred to as the "Preferred Voting Power"). Each Series "A" Preferred Share will be entitled to that number of votes equal to the Preferred Voting Power divided by the number of Series "A" Preferred Shares outstanding. C. If less than one-half of the Series "A" Preferred Shares remain outstanding, a holder of Series "A" Preferred Shares will be entitled to one vote for each share of Common Capital Share into which it is convertible. D. An affirmative vote of the Series "A" Preferred Shares, voting as a separate class, will be required: 1. to approve any plan or merger or exchange entered into by the Corporation or the disposition by the Corporation of all or substantially all its assets; 2. to amend the Articles; 3. for the Corporation to issue any capital stock other than Common Stock; or 4. for the Corporation to increase the size of its board of directors to more than eight (8). - 58 - E. Unless (i) the Corporation's Board of Directors has designated an executive or other committee with powers the same as those of the Corporation's executive committee, which has been designated and is in existence on the date hereof as set forth in the Corporation's by-laws, (ii) a person designated by the affirmative vote of the Series "A" Preferred Shares is a member of such committee and (iii) the rules of such committee require that any action of the committee be affirmed by the unanimous vote of the members of the committee, then (except as otherwise required by law) any action by the Board of Directors or any committee thereof must be ratified by the affirmative vote of a majority of the Series "A" Preferred Shares in order to have any force or effect. Section IV. Conversion. A. Subject to Section IV.C., each Series "A" Preferred Share will be convertible, at the option of the holder thereof at any time, into one (1) whole share of fully paid and non-assessable Common Stock by giving notice of such conversion at the principal place of business of the Corporation to the attention of the Secretary (or at such other place or places, or to such other person's attention, as may be designated by the Corporation). Such notice will state that the holder elects to convert such Series "A" Preferred Share, or a stated number of shares thereof, in accordance with the provisions hereof, and will also state the name or names (with addresses) in which the certificate or certificates for Common Stock will be issued. B. As promptly as practicable after exercise by any holder of such holder's option to convert any Series "A" Preferred Shares, the Corporation will deliver or cause to be delivered to or upon the written order of such holder, 1. a certificate or certificates representing the number of Common Stock issuable by reason of such conversion in such name or names and such denomination or denominations as the converting holder has specified consistent with all governing documents and agreements; 2. payment in an amount equal to all dividends declared with respect to each Series "A" Preferred Shares converted that have not been paid prior thereto; and 3. a certificate representing any Series "A" Preferred Share that was represented by the certificate or certificates delivered to the Corporation in connection with such conversion but which were not converted. Each such conversion will be deemed to have been made immediately prior to the close of business on the day the option to convert is exercised, and all rights of the converting holder as a holder of the Series "A" Preferred Shares surrendered for conversion will cease at such time and the person or persons in whose name or names the certificate(s) for the Common Stock issuable upon conversion are to be issued will be treated for all purposes as having become the record holder or holders thereof at such time. C. The number of Common Stock issuable upon conversion of the Series "A" Preferred Shares (the "Conversion Shares") will be the amount set forth in Section IV.A. unless an adjustment of the Conversion Shares is required pursuant to subparts 1 or 2 hereof, in which case the number of Conversion Shares will be such adjusted amount. 1. In case any of the following occurs: a. any reclassification or change in the outstanding Common Stock (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination); or - 59 - b. any consolidation or merger to which the Corporation is a party (other than a merger in which the Corporation is the surviving corporation and that does not result in any reclassification of, or change in, the outstanding Common Stock); (each of the foregoing, an "Organic Change") then, in each such case, the holders of the Series "A" Preferred Shares then outstanding will have the right to convert such Series "A" Preferred Shares into the kind and amount of shares, other securities or property, including cash, which would have been receivable upon such Organic Change by a holder of the Common Stock that were issuable upon conversion of the Series "A" Preferred Shares had such Common Stock been issued and outstanding at the time of and on any record date for such Organic Change. In each such case, the Corporation will make appropriate provisions (in form and substance satisfactory to the holders of a majority of the Series "A" Preferred Shares then outstanding) to insure that the provisions of this Section IV will be applicable to the Series "A" Preferred Shares. The Corporation will not effect any such Organic Change, unless prior to the consummation thereof, the successor entity (if other than the Corporation) resulting from consolidation or merger assumes by written instrument (in form and substance satisfactory to the holders of a majority of the Series "A" Preferred Shares then outstanding), the obligation to deliver to each such holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to acquire. In connection with any provision made pursuant to the terms of the preceding sentence, provision will also be made for adjustments that will be as nearly equivalent as may be practicable to the adjustments provided for in this Section IV. The provisions of Section IV.C.1. will apply to successive Organic Changes. 2. If at any time the Corporation subdivides or combines the outstanding Common Stock issuable upon conversion of the Series "A" Preferred Shares, then, in each such case, the Conversion Shares will, effective as of the effective date of such subdivision or combination, be proportionately increased in the case of subdivision or proportionately decreased in the case of combination. D. The Corporation will at all times reserve and keep available out of its authorized but unissued Common Stock, solely for the purpose of issue upon conversion of the Series "A" Preferred Shares, as provided in this Section IV, such number of Common Stock that will be sufficient from time to time to permit the conversion of all outstanding Series "A" Preferred Shares. The Corporation will take all such actions as may be necessary to assure that all such Common Stock may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which Common Stock may be listed (except for official notice of issuance that will be immediately delivered by the Corporation upon each such issuance). The Corporation will not take any action that would cause the number of authorized but unissued Common Stock to be less than the number of such shares required to be reserved hereunder for issuance upon conversion of the Series "A" Preferred Shares. - 60 - E. The issuance of certificates for Common Stock will be made without charge for any tax in respect of such issuance or other cost incurred by the Corporation in connection with such conversion and the related issuance of Common Stock upon conversion of Series "A" Preferred Shares; provided, however, that if any such certificate is to be issued in a name other than that of the holder of the converted Series "A" Preferred Shares, the Corporation will not be required to issue or deliver any share certificate or certificates unless and until the holder has paid to the Corporation the amount of any tax which may be payable in respect of any transfer involved in such issuance or establishes to the satisfaction of the Corporation that such tax has been paid or is not due. Upon conversion of each share of Series "A" Preferred Shares, the Corporation will take all such actions as are necessary in order to insure that the Common Stock issuable with respect to such conversion will be validly issued, fully paid and non-assessable, free and clear of all taxes, liens, charges and encumbrances with respect to the issuance thereof. F. The Corporation will not close its books against the transfer of Series "A" Preferred Shares or of Common Stock issued or issuable upon conversion of Series "A" Preferred Shares in any manner that interferes with the timely conversion of the Series "A" Preferred Shares. The Corporation will assist and cooperate with any holder of Series "A" Preferred Shares required to make any governmental filings or to obtain any governmental approval prior to or in connection with any conversion of Series "A" Preferred Shares hereunder (including, without limitation, making any filings required to be made by the Corporation). G. If any event occurs of the type contemplated by the provisions of this Section IV that is not expressly provided for by such provisions then the Corporation's Board of Directors will make an appropriate adjustment in the number of Conversion Shares so as to protect the rights of the holders of Series "A" Preferred Shares. Section V. Redemption of the Series "A" Preferred Shares A. The Corporation, at its option, may (except to the extent that the same will have been converted into Common Stock) redeem, at any time on or after January 1, 2007 the whole (and not merely a part) of the Series "A" Preferred Shares then outstanding at the redemption price equal to $0.48 per share plus all dividends declared but unpaid thereon to the date of redemption (the "Redemption Price"); provided, however, that no such redemption may occur unless during the twenty-day period commencing thirty days before the date on which the notice referred to in Section V.B. is sent (i) the Common Stock was and continues to be listed and registered on a national securities exchange or is quoted on the automated quotation system of a national securities association and (ii) the last sale price of the Common Stock on each day during such twenty-day period was at least $0.48 per share (adjusted as appropriate for adjustments made pursuant to Section IV.C.). B. Not less than sixty days nor more than ninety days prior to the date fixed for any redemption of the Series "A" Preferred Shares, a notice specifying the time and place for such redemption and the redemption price will be given by mail to the holders of record of the shares to be redeemed at their respective addresses as shown on the records of the Corporation. Such notice will state that the holder's Series "A" Preferred Shares will be redeemed on the redemption date specified in the notice (the "Redemption Date") provided that written consent to such redemption is received by the Corporation from the holder no later than the second full Business Day prior to such Redemption Date, and that, if such notice is not received by such day, the holder's Series "A" Preferred Shares will be converted in accordance with the provisions of Section IV. C. On the Redemption Date, Redemption Price for such Series "A" Preferred Shares will be payable to the order of the person whose name appears on the certificate or certificates evidencing the Series "A" Preferred Shares as the owner thereof. If on the Redemption Date the applicable Redemption Price therefor is either paid or made available for payment, then all rights of the holders thereof as shareholders of the Corporation will terminate, except only the right to receive payment of the applicable Redemption Price D. Series "A" Preferred Shares redeemed pursuant to this Section V or converted pursuant to Section IV above will thereupon be deemed retired and will resume the status of authorized but unissued Preferred Shares (without serial designation) and may, subject to the provisions hereof, be reissued as Series "A" Preferred Shares or shares of any other series of Preferred Shares as determined by the Board of Directors of the Corporation. - 61 - IN WITNESS WHEREOF, the undersigned have signed this Certificate of Designation as of December 14, 2001. Vallenar Exploration Corp. By______________________________________ Gregory M. Pek President By______________________________________ Kenneth G.C. Telford Secretary - 62 - EXHIBIT B Exhibit B to that certain Stock Purchase Agreement between Vallenar Energy Corp. and Brek Energy Corporation made as of the 12th day of March 12, 2002. (number of pages including this one: 1) - -------------------------------------------------------------------------------- Leases
- ----------------------------------------------------------------------------------------------------------- Project Acres Terms of Lease Royalties (1) Payments - ----------------------------------------------------------------------------------------------------------- Tract 1 7,750 5 years for all depths - renewable 1/6 for 0 ft. - 1500 ft. $35/acre bonus (2) 1/5 for below 1500 ft. Tract 3 790 5 years all depths - 1/6 all depths $27,657 bonus (2) renewable - ----------------------------------------------------------------------------------------------------------- Total 8,540 - -----------------------------------------------------------------------------------------------------------
(1) Paid on the gross proceeds of the production from the property. (2) One time payment for the full term of the lease made to the owners of the properties. - 63 - EX-10.2.1 5 d51970_ex10-21.txt HONG KONG SERVICE AGREEMENT Exhibit 10.2.1 SERVICE AGREEMENT THIS AGREEMENT is dated as of the 8th day of August 2001. BETWEEN: (1) First Ecom.com, Inc., a company formed under the laws of the State of Nevada, United States of America, and having its registered office at Suite 880, 50 West Liberty Street, Reno, Nevada, USA 89501 (the "Company"); and (2) Gregory Michael Pek, whose address is 206 Seabee Lane, Discovery Bay, Lantau Island, Hong Kong (the "Executive"). AGREED as follows:- 1. Appointment 1.1 Subject to the terms of this agreement, the Company shall employ the Executive and the Executive shall serve the Company as its Co-Chief Executive Officer from 1 September 2001 to 31 August 2002. 1.2 The duration of this agreement may be extended by the Company giving not less than 60 days prior notice to the Executive and on terms mutually agreed between the Company and the Executive, but such terms shall not be less favourable to the Executive than those in this agreement. 1.3 As from 1 September 2001, this agreement shall supersede any previous agreement relating to the employment of the Executive by the Company or its Affiliates. For the sake of clarity, all the Executive's rights, benefits and other entitlements accrued prior to 1 September 2001 under such previous agreement shall not be affected by this agreement. If there is any conflict or inconsistency between this agreement and any such previous agreement, this agreement shall prevail. However, the Company shall recognize and provide full credit for all of the Executive's period of service with First Ecommerce Asia Limited or any Affiliate commencing 1 January 1999 in relation to all rights, entitlements or benefits which are calculated with reference to the Executive's period of service with the Company or its Affiliates. 2. Duties 2.1 During his employment the Executive shall:- (a) perform in Hong Kong, to the best of his ability and with all reasonable care, the duties and exercise the powers and functions which from time to time may reasonably be assigned to or vested in him by the Board in relation to the Company and any of its Affiliates; (b) during working hours devote the whole of his time and attention to his duties; - 64 - (c) comply with all reasonable requests, instructions and regulations made by the Board and provide such explanations, information and assistance as to his activities or the business of the Company as the Board may reasonably require; (d) faithfully and loyally serve the Company to the best of his ability and use his utmost endeavours to promote its interests and those of its Affiliates; and (e) not be engaged or interested directly or indirectly in any other employment, trade, business, profession or occupation unless such activities have been disclosed to the Board and do not breach any of the provisions in this agreement. 2.2 The Executive shall generally be in the office or undertaking Company business during normal office hours. The Executive shall also work such further hours (without any additional remuneration) as may be necessary for the proper performance of his duties. 3. Remuneration and Benefits 3.1 Basic Remuneration As remuneration for the Executive's services, the Company shall pay to the Executive a Basic Remuneration of HK$90,000 per month payable in arrears on or before the last day of each calendar month (or if that day is not a Business Day, on the next preceding Business Day). The Board shall have complete discretion whether to grant any increase and any increase so granted shall take effect from such date as the Board may specify. 3.2 Housing The Company may at the request of the Executive pay a portion of the Executive's Basic Remuneration by way of rental reimbursement. Any amounts paid by the Company for such rental reimbursement shall be credited against or deducted from the Basic Remuneration. 3.3 Year-End Payment The Company shall pay to the Executive one months' Basic Remuneration per calendar year of service as a year-end payment ("Year-End Payment"). If the Executive does not serve the Company for the whole of any particular year, the Executive shall be entitled to a rateable proportion of the Year-End Payment, unless this agreement is terminated by the Executive, or by the Company in accordance with Clause 9.1. 3.4 End of Contract Payment Provided that neither the Executive has terminated this agreement nor the Company has terminated this agreement pursuant to Clause 9.1, in either case on or before 31 August 2002, and this agreement is not extended, the Company shall pay to the Executive three months' Basic Remuneration on termination of this agreement as end of contract payment. 4. Expenses 4.1 The Company shall reimburse the Executive for all reasonable travel, hotel, entertainment and other expenses properly incurred by him in the performance of his duties and properly claimed. The Executive shall provide such evidence of expenditures as the Company may reasonably require. - 65 - 5. Holidays 5.1 In addition to the normal public holiday in Hong Kong, the Executive shall be entitled to 15 Business Days paid holiday during each calendar year (accruing pro rata during the year) to be taken at such time as will not adversely interfere with the Company's business and approved by the Board. 6. Other Benefits 6.1 The Executive shall be entitled to paid sick leave, medical and other benefits in accordance with the laws of Hong Kong or enjoyed by other employees of the Company of a similar level of seniority as the Executive, whichever is the more favourable to the Executive. 7. Directorships 7.1 The Executive shall not be entitled to any director's fees or other remuneration in respect of the Executive's appointment as a director or officer of the Company or any Affiliate. 8. Confidential Information 8.1 During his employment the Executive shall not (except in the proper course of carrying out his duties to the Company) or at any time after his termination for any reason whatsoever disclose to any Person or, for himself or any other Person, otherwise make use of any Confidential Information or trade secrets relating to the Company or any of its Affiliates or any of its or their suppliers, agents, clients or customers and shall use his best efforts to prevent the unauthorised use or disclosure of any such information. 8.2 Without restricting the general nature of Clause 8.1, the Executive acknowledges that the Company and its Affiliates have certain proprietary interests and undertakes not, at any time (whether during his employment or at any time after its termination), to use or disclose for any unauthorised purpose, any confidential or secret information concerning any such matter. 8.3 Nothing in this agreement shall prohibit the disclosure by the Executive of information which: (a) the Executive is required to disclose by applicable law. The Executive shall consult with the Company so far as may be reasonably possible before making any such disclosure; (b) was known to the Executive prior to it being disclosed; (c) is disclosed on a confidential basis to consultants or advisers of the Company or an Affiliate to assist that party in providing services for the Company or an Affiliate; or (d) is disclosed in proceedings taken by the Executive for the enforcement of any rights or remedies under this agreement. 9. Termination 9.1 Without prejudice to any remedy which it may have against the Executive for the breach of any of the provisions of this agreement, the Company may by notice to the Executive forthwith terminate this agreement if the Executive shall be guilty of any serious misconduct which entitles the Company or its Affiliate to terminate the Executive's employment summarily under the laws of Hong Kong. - 66 - 9.2 The Executive may terminate this agreement upon providing to the Company 3 months prior written notice or payment of 3 months Basic Remuneration in lieu thereof. 9.3 If this agreement is terminated on or before 31 August 2002 otherwise than under circumstances which entitle the Company to summarily terminate this agreement under Clause 9.1, the Executive shall be entitled to be paid all Basic Remuneration and all other benefits up to and including 31 August 2002 (upon the termination of this agreement), as agreed compensation and not penalty, as if this agreement had not been terminated on or before that date. 10. Obligations Upon Termination of Agreement 10.1 Upon the termination of his employment for whatever reason the Executive shall:- (a) deliver up to the Company all property belonging to the Company or any of its Affiliates which may be in his possession or under his control, and (unless prevented by the owner) any papers and other property belonging to others which may be in his possession or under his control and which relate in any way to the business or affairs of the Company or any of its Affiliates or any supplier, agent or customer of the Company or any of its Affiliates, and he shall not, without the written consent of the Board, retain any copies of any such papers; and (b) not at any time represent himself still to be connected with the Company or any of its Affiliates. 11. Effect of Termination of This Agreement 11.1 The expiry or termination of this agreement however arising shall not operate to affect any provisions which are expressed to operate or have effect after its termination or expiry and shall not prejudice the exercise of any right or remedy of either party accrued beforehand. 11.2 On the proper termination or expiry of this agreement, the Executive shall not have any claim against the Company for damages or compensation of any nature whatsoever, provided that the Company has complied with its obligations under this agreement. 12. Protection of Goodwill 12.1 During his employment the Executive is likely to acquire Confidential Information belonging to the Company and its Affiliates and establish personal knowledge and influence with Persons dealing with the Company and its Affiliates. In these circumstances, and in order to protect the proprietary information and goodwill of the Company and the Affiliates, the Executive undertakes that he will be bound by the following restrictions. 12.2 The Executive shall not, without the prior written consent of the Board, for a period of 6 months after the termination for whatever reason of his employment under this agreement: (a) be engaged or interested in any capacity (whether as a director, shareholder, principal, partner, consultant, employee, independent contractor or otherwise) in any business whose activities directly compete with the business activities of the Company or with any Affiliate in Hong Kong or in their other places of business at the time of such termination; - 67 - (b) either on his own behalf or on behalf of any other Person and whether directly or indirectly: (i) canvass, solicit or approach or cause to be canvassed or solicited or approached for orders for any services or goods supplied by the Company or any Affiliate, any Person who to the Executive's knowledge at the date of the termination of the Executive's employment was a client or customer of the Company or any Affiliate; (ii) solicit or entice or try to solicit or entice away or employ or try to employ any employee from the Company or any Affiliate with whom the Executive had contact at any time during the last year of his employment; or (iii) interfere or seek to interfere with the continued supply to the Company or any Affiliate (or the terms relating to such supplies) of any goods or services from or otherwise deal with any suppliers who to the Executive's knowledge supplied goods or services to the Company or any Affiliate at any time during the last year of his employment. 12.3 Whilst each of the restrictions in this Clause are considered by the parties to be reasonable in all the circumstances and are necessary to protect the legitimate interests of the Company and its Affiliates, it is agreed and declared that if any one or more of such restrictions shall be judged to be void as going beyond what is reasonable in all the circumstances for the protection of the legitimate interests of the Company or any Affiliate but would be valid if words were deleted from it or the period of it reduced in scope the restrictions shall be deemed to apply with such modifications as may be necessary to make them valid and effective and any such modification shall not affect the validity of any other restriction. 12.4 Nothing in this agreement shall prevent the Executive from being the holder for investment of securities which do not exceed 5% in nominal value of any class of securities quoted on an officially recognised stock exchange. 13. Entire Agreement and Severability 13.1 This agreement constitutes the entire agreement between the parties concerning the employment described in it and both the Company and the Executive acknowledge that they have not entered into this agreement in reliance wholly or partly on any statement or representation made to either of them by or on behalf of the other except as set out in this agreement. No variation or addition to this agreement and no waiver of any provision of it shall be valid unless in writing signed by or on behalf of both parties. The headings of these provisions are for convenience of reference only and have no effect on their interpretation. 13.2 The provisions of this agreement are severable and if any provision is held to be invalid or unenforceable by a court of competent jurisdiction then such invalidity or unenforceability shall not affect the remaining provisions of this agreement. - 68 - 14. Notices 14.1 Any notice to be given under this agreement shall be in writing. Notice to the Executive shall be sufficiently served by being delivered personally to him or sent by pre-paid post (or air courier if sent internationally), addressed to him at his usual or last known place of abode. Notice to the Company shall be sufficiently served by being delivered to or sent by such post (or air courier if sent internationally), to the Company's address set out on the first page of this agreement or such other address as the Company may have given to the Executive by notice. 15. Definitions 15.1 In this agreement: "Affiliate" means any holding company of the Company and any corporation which, from time to time, is a subsidiary (as defined by the Companies Ordinance of Hong Kong) or Associated Company of the Company or any holding company of the Company in any part of the world; "Associated Company" means any corporation in which the Company or any holding company of the Company holds, owns or controls (directly or through other Persons) 20% or more of its issued share capital; "Basic Remuneration" means the basic remuneration of HK$90,000 per month referred to in Clause 3.1, as the same may be increased by the Board from time to time; "Board" means the board of directors of the Company or any Person authorised by it; "Business Day" means a day on which banks are open for business in Hong Kong, excluding Saturdays and Sundays; "Confidential Information" of a Person means information of any nature concerning that Person or its business which is not publicly known, including any compilation which is not publicly available of items of public information and further includes (without limitation) such information concerning the business, finances, ownership, trade connections and know how of the Person, but excluding information which: (i) is publicly known at the time of disclosure; (ii) after disclosure becomes publicly known other than as a result of a breach of a confidentiality obligation; (iii) can be shown to have been developed independently by the recipient before disclosure of the information; (iv) can be shown was made available to the recipient by some other Person who had a right to do so and who has not imposed on the recipient any obligation of confidentiality or restricted use; - 69 - "Hong Kong" means the Hong Kong Special Administrative Region, People's Republic of China; "Person" includes any natural person, corporation (state, federal, municipal or otherwise), unincorporated association (including partnership) and any form of governmental body or authority or other entity or body of any nature whatsoever in each case in any part of the world; and "Year-End Payment" has the meaning defined in Clause 3.3. 16. Governing Law 16.1 This agreement shall be governed by and interpreted according to the laws of Hong Kong and the parties submit to the non exclusive jurisdiction of the Hong Kong Courts. AS WITNESS the Executive and the duly authorised representative of the Company have set their hands the day and year first above written SIGNED by Kenneth G. C. Telford ) for and on behalf of ) First Ecom.com, Inc. ) SIGNED in the presence of:- ) SIGNED by Gregory Michael Pek ) in the presence of:- ) SIGNED - 70 - EX-10.2.2 6 d51970_ex10-22.txt OFFSHORE SERVICE AGREEMENT Exhibit 10.2.2 SERVICE AGREEMENT THIS AGREEMENT is dated as of the 8th day of August 2001. BETWEEN: (1) First Ecom.com, Inc., a company formed under the laws of the State of Nevada, United States of America, and having its registered office at Suite 880, 50 West Liberty Street, Reno, Nevada, USA 89501 (the "Company"); and (2) Gregory Michael Pek, whose address is 206 Seabee Lane, Discovery Bay, Lantau Island, Hong Kong (the "Executive"). AGREED as follows:- 1. Appointment 1.1 Subject to the terms of this agreement, the Company shall employ the Executive and the Executive shall serve the Company as its Co-Chief Executive Officer from 1 September 2001 to 31 August 2002. 1.4 The duration of this agreement may be extended by the Company giving not less than 60 days prior notice to the Executive and on terms mutually agreed between the Company and the Executive, but such terms shall not be less favourable to the Executive than those in this agreement. 1.5 As from 1 September 2001, this agreement shall supersede any previous agreement relating to the employment of the Executive by the Company or its Affiliates. For the sake of clarity, all the Executive's rights, benefits and other entitlements accrued prior to 1 September 2001 under such previous agreement shall not be affected by this agreement. If there is any conflict or inconsistency between this agreement and any such previous agreement, this agreement shall prevail. However, the Company shall recognize and provide full credit for all of the Executive's period of service with First Ecommerce Asia Limited or any Affiliate commencing 1 January 1999 in relation to all rights, entitlements or benefits which are calculated with reference to the Executive's period of service with the Company or its Affiliates. 2. Duties 2.1 During his employment the Executive shall:- (a) perform in any place outside Hong Kong, to the best of his ability and with all reasonable care, the duties and exercise the powers and functions which from time to time may reasonably be assigned to or vested in him by the Board in relation to the Company and any of its Affiliates; (b) during working hours devote the whole of his time and attention to his duties; (c) comply with all reasonable requests, instructions and regulations made by the Board and provide such explanations, information and assistance as to his activities or the business of the Company as the Board may reasonably require; (d) faithfully and loyally serve the Company to the best of his ability and use his utmost endeavours to promote its interests and those of its Affiliates; and (e) not be engaged or interested directly or indirectly in any other employment, trade, business, profession or occupation unless such activities have been disclosed to the Board and do not breach any of the provisions in this agreement. 2.2 The Executive shall generally be in the office or undertaking Company business during normal office hours. The Executive shall also work such further hours (without any additional remuneration) as may be necessary for the proper performance of his duties. 3. Remuneration and Benefits 3.5 Basic Remuneration As remuneration for the Executive's services, the Company shall pay to the Executive a Basic Remuneration of HK$75,000 per month payable in arrears on or before the last day of each calendar month (or if that day is not a Business Day, on the next preceding Business Day). The Board shall have complete discretion whether to grant any increase and any increase so granted shall take effect from such date as the Board may specify. 3.6 Year-End Payment The Company shall pay to the Executive one months' Basic Remuneration per calendar year of service as a year-end payment ("Year-End Payment"). If the Executive does not serve the Company for the whole of any particular year, the Executive shall be entitled to a rateable proportion of the Year-End Payment, unless this agreement is terminated by the Executive, or by the Company in accordance with Clause 9.1. 3.7 End of Contract Payment Provided that neither the Executive has terminated this agreement nor the Company has terminated this agreement pursuant to Clause 9.1, in either case on or before 31 August 2002, and this agreement is not extended, the Company shall pay to the Executive three month's Basic Remuneration on termination of this agreement as end of contract payment. 4. Expenses 4.1 The Company shall reimburse the Executive for all reasonable travel, hotel, entertainment and other expenses properly incurred by him in the performance of his duties and properly claimed. The Executive shall provide such evidence of expenditures as the Company may reasonably require. 5. Holidays 5.1 In addition to the normal public holiday in Hong Kong, the Executive shall be entitled to 15 Business Days paid holiday during each calendar year (accruing pro rata during the year) to be taken at such time as will not adversely interfere with the Company's business and approved by the Board. 6. Other Benefits 6.1 The Executive shall be entitled to paid sick leave, medical and other benefits in accordance with the laws of Hong Kong or enjoyed by other employees of the Company of a similar level of seniority as the Executive, whichever is the more favourable to the Executive. - 72 - 7. Directorships 7.1 The Executive shall not be entitled to any director's fees or other remuneration in respect of the Executive's appointment as a director or officer of the Company or any Affiliate. 8. Confidential Information 8.1 During his employment the Executive shall not (except in the proper course of carrying out his duties to the Company) or at any time after his termination for any reason whatsoever disclose to any Person or, for himself or any other Person, otherwise make use of any Confidential Information or trade secrets relating to the Company or any of its Affiliates or any of its or their suppliers, agents, clients or customers and shall use his best efforts to prevent the unauthorised use or disclosure of any such information. 8.2 Without restricting the general nature of Clause 8.1, the Executive acknowledges that the Company and its Affiliates have certain proprietary interests and undertakes not, at any time (whether during his employment or at any time after its termination), to use or disclose for any unauthorised purpose, any confidential or secret information concerning any such matter. 8.3 Nothing in this agreement shall prohibit the disclosure by the Executive of information which: (e) the Executive is required to disclose by applicable law. The Executive shall consult with the Company so far as may be reasonably possible before making any such disclosure; (f) was known to the Executive prior to it being disclosed; (g) is disclosed on a confidential basis to consultants or advisers of the Company or an Affiliate to assist that party in providing services for the Company or an Affiliate; or (h) is disclosed in proceedings taken by the Executive for the enforcement of any rights or remedies under this agreement. 9. Termination 9.4 Without prejudice to any remedy which it may have against the Executive for the breach of any of the provisions of this agreement, the Company may by notice to the Executive forthwith terminate this agreement if the Executive shall be guilty of any serious misconduct which entitles the Company or its Affiliate to terminate the Executive's employment summarily under the laws of Hong Kong. 9.5 The Executive may terminate this agreement upon providing to the Company 3 months prior written notice or payment of 3 months Basic Remuneration in lieu thereof. 9.6 If this agreement is terminated on or before 31 August 2002 otherwise than under circumstances which entitle the Company to summarily terminate this agreement under Clause 9.1, the Executive shall be entitled to be paid all Basic Remuneration and all other benefits up to and including 31 August 2002 (upon the termination of this agreement), as agreed compensation and not penalty, as if this agreement had not been terminated on or before that date. - 73 - 10. Obligations Upon Termination of Agreement 10.1 Upon the termination of his employment for whatever reason the Executive shall:- (a) deliver up to the Company all property belonging to the Company or any of its Affiliates which may be in his possession or under his control, and (unless prevented by the owner) any papers and other property belonging to others which may be in his possession or under his control and which relate in any way to the business or affairs of the Company or any of its Affiliates or any supplier, agent or customer of the Company or any of its Affiliates, and he shall not, without the written consent of the Board, retain any copies of any such papers; and (b) not at any time represent himself still to be connected with the Company or any of its Affiliates. 11. Effect of Termination of This Agreement 11.1 The expiry or termination of this agreement however arising shall not operate to affect any provisions which are expressed to operate or have effect after its termination or expiry and shall not prejudice the exercise of any right or remedy of either party accrued beforehand. 11.2 On the proper termination or expiry of this agreement, the Executive shall not have any claim against the Company for damages or compensation of any nature whatsoever, provided that the Company has complied with its obligations under this agreement. 12. Protection of Goodwill 12.1 During his employment the Executive is likely to acquire Confidential Information belonging to the Company and its Affiliates and establish personal knowledge and influence with Persons dealing with the Company and its Affiliates. In these circumstances, and in order to protect the proprietary information and goodwill of the Company and the Affiliates, the Executive undertakes that he will be bound by the following restrictions. 12.2 The Executive shall not, without the prior written consent of the Board, for a period of 6 months after the termination for whatever reason of his employment under this agreement: (a) be engaged or interested in any capacity (whether as a director, shareholder, principal, partner, consultant, employee, independent contractor or otherwise) in any business whose activities directly compete with the business activities of the Company or with any Affiliate in Hong Kong or in their other places of business at the time of such termination; (b) either on his own behalf or on behalf of any other Person and whether directly or indirectly: (i) canvass, solicit or approach or cause to be canvassed or solicited or approached for orders for any services or goods supplied by the Company or any Affiliate, any Person who to the Executive's knowledge at the date of the termination of the Executive's employment was a client or customer of the Company or any Affiliate; (ii) solicit or entice or try to solicit or entice away or employ or try to employ any employee from the Company or any Affiliate with whom the Executive had contact at any time during the last year of his employment; or (iii) interfere or seek to interfere with the continued supply to the Company or any Affiliate (or the terms relating to such supplies) of any goods or services from or otherwise deal with any suppliers who to the Executive's knowledge supplied goods or services to the Company or any Affiliate at any time during the last year of his employment. - 74 - 12.3 Whilst each of the restrictions in this Clause are considered by the parties to be reasonable in all the circumstances and are necessary to protect the legitimate interests of the Company and its Affiliates, it is agreed and declared that if any one or more of such restrictions shall be judged to be void as going beyond what is reasonable in all the circumstances for the protection of the legitimate interests of the Company or any Affiliate but would be valid if words were deleted from it or the period of it reduced in scope the restrictions shall be deemed to apply with such modifications as may be necessary to make them valid and effective and any such modification shall not affect the validity of any other restriction. 12.4 Nothing in this agreement shall prevent the Executive from being the holder for investment of securities which do not exceed 5% in nominal value of any class of securities quoted on an officially recognised stock exchange. 13. Entire Agreement and Severability 13.1 This agreement constitutes the entire agreement between the parties concerning the employment described in it and both the Company and the Executive acknowledge that they have not entered into this agreement in reliance wholly or partly on any statement or representation made to either of them by or on behalf of the other except as set out in this agreement. No variation or addition to this agreement and no waiver of any provision of it shall be valid unless in writing signed by or on behalf of both parties. The headings of these provisions are for convenience of reference only and have no effect on their interpretation. 13.2 The provisions of this agreement are severable and if any provision is held to be invalid or unenforceable by a court of competent jurisdiction then such invalidity or unenforceability shall not affect the remaining provisions of this agreement. 14. Notices 14.1 Any notice to be given under this agreement shall be in writing. Notice to the Executive shall be sufficiently served by being delivered personally to him or sent by pre-paid post (or air courier if sent internationally), addressed to him at his usual or last known place of abode. Notice to the Company shall be sufficiently served by being delivered to or sent by such post (or air courier if sent internationally), to the Company's address set out on the first page of this agreement or such other address as the Company may have given to the Executive by notice. 15. Definitions 15.1 In this agreement: "Affiliate" means any holding company of the Company and any corporation which, from time to time, is a subsidiary (as defined by the Companies Ordinance of Hong Kong) or Associated Company of the Company or any holding company of the Company in any part of the world; "Associated Company" means any corporation in which the Company or any holding company of the Company holds, owns or controls (directly or through other Persons) 20% or more of its issued share capital; "Basic Remuneration" means the basic remuneration of HK$75,000 per month referred to in Clause 3.1, as the same may be increased by the Board from time to time; "Board" means the board of directors of the Company or any Person authorised by it; "Business Day" means a day on which banks are open for business in Hong Kong, excluding Saturdays and Sundays; - 75 - "Confidential Information" of a Person means information of any nature concerning that Person or its business which is not publicly known, including any compilation which is not publicly available of items of public information and further includes (without limitation) such information concerning the business, finances, ownership, trade connections and know how of the Person, but excluding information which: (i) is publicly known at the time of disclosure; (ii) after disclosure becomes publicly known other than as a result of a breach of a confidentiality obligation; (iii) can be shown to have been developed independently by the recipient before disclosure of the information; (v) can be shown was made available to the recipient by some other Person who had a right to do so and who has not imposed on the recipient any obligation of confidentiality or restricted use; "Hong Kong" means the Hong Kong Special Administrative Region, People's Republic of China; "Person" includes any natural person, corporation (state, federal, municipal or otherwise), unincorporated association (including partnership) and any form of governmental body or authority or other entity or body of any nature whatsoever in each case in any part of the world; and "Year-End Payment" has the meaning defined in Clause 3.2. 16. Governing Law 16.1 This agreement shall be governed by and interpreted according to the laws of Hong Kong and the parties submit to the non exclusive jurisdiction of the Hong Kong Courts. AS WITNESS the Executive and the duly authorised representative of the Company have set their hands the day and year first above written SIGNED by Kenneth G. C. Telford ) for and on behalf of ) First Ecom.com, Inc. ) SIGNED in the presence of:- ) SIGNED by Gregory Michael Pek ) SIGNED in the presence of:- ) - 76 - EX-10.2.3 7 d51970_ex10-23.txt SUPPLEMENTAL SERVICE AGREEMENT Exhibit 10.2.3 SUPPLEMENTAL AGREEMENT TO SERVICE AGREEMENTS THIS AGREEMENT is dated as of the 8th day of August 2001. BETWEEN: (1) First Ecom.com, Inc., a company formed under the laws of the state of Nevada, United States of America, and having its registered office at Suite 880, 50 West Liberty Street, Reno, NV, USA 89501 (the "Company"); and (2) Gregory Michael Pek, whose address is 206 Seabee Lane, Discovery Bay, Lantau Island, Hong Kong (the "Executive"). WHEREAS:- A. The Executive and the Company have agreed that it is in the best interests of the parties for the Executive to enter into two service agreements with the Company, one in respect of services rendered in Hong Kong (the "Hong Kong Service Agreement") and the other in respect of services rendered outside Hong Kong (the "Offshore Service Agreement"), both dated the same date as this supplemental agreement. B. Notwithstanding the terms and conditions in the Hong Kong Service Agreement and the Offshore Service Agreement (collectively the "Service Agreements"), the parties agree that the Service Agreements shall be construed in the following manner. THE PARTIES AGREE AS FOLLOWS: 1. Compensation and Benefits (a) Subject to Clause 1(b) below, the Executive and the Company agree that the compensation and benefits payable to the Executive in relation to the Hong Kong Service Agreement and the Offshore Service Agreement shall not be duplicated. For the purpose of illustration, the Executive shall be entitled to the number of days of holiday stipulated in Clause 5.1 of the Service Agreements and not the total number of days of holiday in the two Service Agreements added together. If the Executive takes a particular day as a holiday under one of the Service Agreements, he shall be deemed to have also taken the same day as a holiday under the other Service Agreement. (b) The Executive will be paid the Basic Remuneration (as defined in the Service Agreements) equal to the total sum of those amounts stipulated in Clause 3.1 of both of the Service Agreements. In respect of other compensation or benefits which are calculated with reference to the Executive's Basic Remuneration, such compensation and benefits shall be calculated using the aggregate of the Basic Remuneration stipulated in Clause 3.1 of each of the Service Agreements. 2. Termination In the event that either of the Service Agreements is terminated pursuant to its terms and conditions, then the other Service Agreement shall also automatically terminate on the same date and for the same reason or cause. - 77 - 3. Governing Law This supplemental agreement shall be governed by and interpreted according to the laws of Hong Kong and the parties submit to the non exclusive jurisdiction of the Hong Kong Courts. AS WITNESS the Executive and the duly authorised representative of the Company have set their hands as of the day and year first above written. SIGNED by Kenneth G. C. Telford ) for and on behalf of ) First Ecom.com, Inc. ) SIGNED ) SIGNED by Gregory Michael Pek ) SIGNED in the presence of:- ) - 78 - EX-10.3.1 8 d51970_ex10-31.txt HONG KONG SERVICE AGREEMENT Exhibit 10.3.1 SERVICE AGREEMENT THIS AGREEMENT is dated as of the 8th day of August 2001. BETWEEN: (1) First Ecom.com, Inc., a company formed under the laws of the State of Nevada, United States of America, and having its registered office at Suite 880, 50 West Liberty Street, Reno, Nevada, USA 89501 (the "Company"); and (2) Kenneth G.C. Telford, whose address is Suite 2715 Sutton Court, Harbour City, Tsimshatsui, Kowloon, Hong Kong (the "Executive"). AGREED as follows:- 1. Appointment 1.1 Subject to the terms of this agreement, the Company shall employ the Executive and the Executive shall serve the Company as its Chief Financial Officer from 1 September 2001 to 31 August 2002. 1.6 The duration of this agreement may be extended by the Company giving not less than 60 days prior notice to the Executive and on terms mutually agreed between the Company and the Executive, but such terms shall not be less favourable to the Executive than those in this agreement. 1.7 As from 1 September 2001, this agreement shall supersede any previous agreement relating to the employment of the Executive by the Company or its Affiliates. For the sake of clarity, all the Executive's rights, benefits and other entitlements accrued prior to 1 September 2001 under such previous agreement shall not be affected by this agreement. If there is any conflict or inconsistency between this agreement and any such previous agreement, this agreement shall prevail. However, the Company shall recognize and provide full credit for all of the Executive's period of service with the Company or its Affiliates commencing 1 July 2000 in relation to all rights, entitlements or benefits which are calculated with reference to the Executive's period of service with the Company or its Affiliates. 2. Duties 2.1 During his employment the Executive shall:- (a) perform in Hong Kong, to the best of his ability and with all reasonable care, the duties and exercise the powers and functions which from time to time may reasonably be assigned to or vested in him by the Board in relation to the Company and any of its Affiliates; (b) during working hours devote the whole of his time and attention to his duties; - 79 - (c) comply with all reasonable requests, instructions and regulations made by the Board and provide such explanations, information and assistance as to his activities or the business of the Company as the Board may reasonably require; (d) faithfully and loyally serve the Company to the best of his ability and use his utmost endeavours to promote its interests and those of its Affiliates; and (e) not be engaged or interested directly or indirectly in any other employment, trade, business, profession or occupation unless such activities have been disclosed to the Board and do not breach any of the provisions in this agreement. 2.2 The Executive shall generally be in the office or undertaking Company business during normal office hours. The Executive shall also work such further hours (without any additional remuneration) as may be necessary for the proper performance of his duties. 3. Remuneration and Benefits 3.8 Basic Remuneration As remuneration for the Executive's services, the Company shall pay to the Executive a Basic Remuneration of HK$75,000 per month payable in arrears on or before the last day of each calendar month (or if that day is not a Business Day, on the next preceding Business Day). The Board shall have complete discretion whether to grant any increase and any increase so granted shall take effect from such date as the Board may specify. 3.9 Housing The Company may at the request of the Executive pay a portion of the Executive's Basic Remuneration by way of rental reimbursement. Any amounts paid by the Company for such rental reimbursement shall be credited against or deducted from the Basic Remuneration. 3.10 Year-End Payment The Company shall pay to the Executive one months' Basic Remuneration per calendar year of service as a year-end payment ("Year-End Payment"). If the Executive does not serve the Company for the whole of any particular year, the Executive shall be entitled to a rateable proportion of the Year-End Payment, unless this agreement is terminated by the Executive, or by the Company in accordance with Clause 9.1. 3.11 End of Contract Payment Provided that neither the Executive has terminated this agreement nor the Company has terminated this agreement pursuant to Clause 9.1, in either case on or before 31 August 2002, and this agreement is not extended, the Company shall pay to the Executive three months' Basic Remuneration on termination of this agreement as end of contract payment. 3.12 Tickets Upon termination of this agreement, the Company shall forthwith provide the Executive with two (2) business class airline tickets for return travel from Hong Kong to any destination in North America chosen by the Executive or at the option of the Executive, the Company shall pay to the Executive cash in lieu of one or both of such tickets. For the sake of greater clarity, the Executive's entitlement under this Clause 3.5 shall be in addition to any similar entitlement under any previous service agreement entered with the Company. - 80 - 4. Expenses 4.1 The Company shall reimburse the Executive for all reasonable travel, hotel, entertainment and other expenses properly incurred by him in the performance of his duties and properly claimed. The Executive shall provide such evidence of expenditures as the Company may reasonably require. 5. Holidays 5.2 In addition to the normal public holiday in Hong Kong, the Executive shall be entitled to 15 Business Days paid holiday during each calendar year (accruing pro rata during the year) to be taken at such time as will not adversely interfere with the Company's business and approved by the Board. 6. Other Benefits 6.1 The Executive shall be entitled to paid sick leave, medical and other benefits in accordance with the laws of Hong Kong or enjoyed by other employees of the Company of a similar level of seniority as the Executive, whichever is the more favourable to the Executive. 7. Directorships 7.1 The Executive shall not be entitled to any director's fees or other remuneration in respect of the Executive's appointment as a director or officer of the Company or any Affiliate. 8. Confidential Information 8.1 During his employment the Executive shall not (except in the proper course of carrying out his duties to the Company) or at any time after his termination for any reason whatsoever disclose to any Person or, for himself or any other Person, otherwise make use of any Confidential Information or trade secrets relating to the Company or any of its Affiliates or any of its or their suppliers, agents, clients or customers and shall use his best efforts to prevent the unauthorised use or disclosure of any such information. 8.2 Without restricting the general nature of Clause 8.1, the Executive acknowledges that the Company and its Affiliates have certain proprietary interests and undertakes not, at any time (whether during his employment or at any time after its termination), to use or disclose for any unauthorised purpose, any confidential or secret information concerning any such matter. 8.3 Nothing in this agreement shall prohibit the disclosure by the Executive of information which: (i) the Executive is required to disclose by applicable law. The Executive shall consult with the Company so far as may be reasonably possible before making any such disclosure; (j) was known to the Executive prior to it being disclosed; (k) is disclosed on a confidential basis to consultants or advisers of the Company or an Affiliate to assist that party in providing services for the Company or an Affiliate; or (I) is disclosed in proceedings taken by the Executive for the enforcement of any rights or remedies under this agreement. - 81 - 9. Termination 9.7 Without prejudice to any remedy which it may have against the Executive for the breach of any of the provisions of this agreement, the Company may by notice to the Executive forthwith terminate this agreement if the Executive shall be guilty of any serious misconduct which entitles the Company or its Affiliate to terminate the Executive's employment summarily under the laws of Hong Kong. 9.8 The Executive may terminate this agreement upon providing to the Company 3 months prior written notice or payment of 3 months Basic Remuneration in lieu thereof. 9.9 If this agreement is terminated on or before 31 August 2002 otherwise than under circumstances which entitle the Company to summarily terminate this agreement under Clause 9.1, the Executive shall be entitled to be paid all Basic Remuneration and all other benefits calculated up to and including 31 August 2002 (upon the termination of this agreement), as agreed compensation and not penalty, as if this agreement had not been terminated on or before that date. 10. Obligations Upon Termination of Agreement 10.1 Upon the termination of his employment for whatever reason the Executive shall:- (a) deliver up to the Company all property belonging to the Company or any of its Affiliates which may be in his possession or under his control, and (unless prevented by the owner) any papers and other property belonging to others which may be in his possession or under his control and which relate in any way to the business or affairs of the Company or any of its Affiliates or any supplier, agent or customer of the Company or any of its Affiliates, and he shall not, without the written consent of the Board, retain any copies of any such papers; and (b) not at any time represent himself still to be connected with the Company or any of its Affiliates. 11. Effect of Termination of This Agreement 11.1 The expiry or termination of this agreement however arising shall not operate to affect any provisions which are expressed to operate or have effect after its termination or expiry and shall not prejudice the exercise of any right or remedy of either party accrued beforehand. 11.2 On the proper termination or expiry of this agreement, the Executive shall not have any claim against the Company for damages or compensation of any nature whatsoever, provided that the Company has complied with its obligations under this agreement. 12. Protection of Goodwill 12.1 During his employment the Executive is likely to acquire Confidential Information belonging to the Company and its Affiliates and establish personal knowledge and influence with Persons dealing with the Company and its Affiliates. In these circumstances, and in order to protect the proprietary information and goodwill of the Company and the Affiliates, the Executive undertakes that he will be bound by the following restrictions. 12.2 The Executive shall not, without the prior written consent of the Board, for a period of 6 months after the termination for whatever reason of his employment under this agreement: (a) be engaged or interested in any capacity (whether as a director, shareholder, principal, partner, consultant, employee, independent contractor or otherwise) in any business whose activities directly compete with the business activities of the Company or with any Affiliate in Hong Kong or in their other places of business at the time of such termination; - 82 - (b) either on his own behalf or on behalf of any other Person and whether directly or indirectly: (i) canvass, solicit or approach or cause to be canvassed or solicited or approached for orders for any services or goods supplied by the Company or any Affiliate, any Person who to the Executive's knowledge at the date of the termination of the Executive's employment was a client or customer of the Company or any Affiliate; (ii) solicit or entice or try to solicit or entice away or employ or try to employ any employee from the Company or any Affiliate with whom the Executive had contact at any time during the last year of his employment; or (iii) interfere or seek to interfere with the continued supply to the Company or any Affiliate (or the terms relating to such supplies) of any goods or services from or otherwise deal with any suppliers who to the Executive's knowledge supplied goods or services to the Company or any Affiliate at any time during the last year of his employment. 12.3 Whilst each of the restrictions in this Clause are considered by the parties to be reasonable in all the circumstances and are necessary to protect the legitimate interests of the Company and its Affiliates, it is agreed and declared that if any one or more of such restrictions shall be judged to be void as going beyond what is reasonable in all the circumstances for the protection of the legitimate interests of the Company or any Affiliate but would be valid if words were deleted from it or the period of it reduced in scope the restrictions shall be deemed to apply with such modifications as may be necessary to make them valid and effective and any such modification shall not affect the validity of any other restriction. 12.4 Nothing in this agreement shall prevent the Executive from being the holder for investment of securities which do not exceed 5% in nominal value of any class of securities quoted on an officially recognised stock exchange. 13. Entire Agreement and Severability 13.1 This agreement constitutes the entire agreement between the parties concerning the employment described in it and both the Company and the Executive acknowledge that they have not entered into this agreement in reliance wholly or partly on any statement or representation made to either of them by or on behalf of the other except as set out in this agreement. No variation or addition to this agreement and no waiver of any provision of it shall be valid unless in writing signed by or on behalf of both parties. The headings of these provisions are for convenience of reference only and have no effect on their interpretation. 13.2 The provisions of this agreement are severable and if any provision is held to be invalid or unenforceable by a court of competent jurisdiction then such invalidity or unenforceability shall not affect the remaining provisions of this agreement. 14. Notices 14.1 Any notice to be given under this agreement shall be in writing. Notice to the Executive shall be sufficiently served by being delivered personally to him or sent by pre-paid post (or air courier if sent internationally), addressed to him at his usual or last known place of abode. Notice to the Company shall be sufficiently served by being delivered to or sent by such post (or air courier if sent internationally), to the Company's address set out on the first page of this agreement or such other address as the Company may have given to the Executive by notice. 15. Definitions 15.1 In this agreement: "Affiliate" means any holding company of the Company and any corporation which, from time to time, is a subsidiary (as defined by the Companies Ordinance of Hong Kong) or - 83 - Associated Company of the Company or any holding company of the Company in any part of the world; "Associated Company" means any corporation in which the Company or any holding company of the Company holds, owns or controls (directly or through other Persons) 20% or more of its issued share capital; "Basic Remuneration" means the basic remuneration of HK$75,000 per month referred to in Clause 3.1, as the same may be increased by the Board from time to time; "Board" means the board of directors of the Company or any Person authorised by it; "Business Day" means a day on which banks are open for business in Hong Kong, excluding Saturdays and Sundays; "Confidential Information" of a Person means information of any nature concerning that Person or its business which is not publicly known, including any compilation which is not publicly available of items of public information and further includes (without limitation) such information concerning the business, finances, ownership, trade connections and know how of the Person, but excluding information which: (i) is publicly known at the time of disclosure; (ii) after disclosure becomes publicly known other than as a result of a breach of a confidentiality obligation; (iii) can be shown to have been developed independently by the recipient before disclosure of the information; (vi) can be shown was made available to the recipient by some other Person who had a right to do so and who has not imposed on the recipient any obligation of confidentiality or restricted use; "Hong Kong" means the Hong Kong Special Administrative Region, People's Republic of China; "Person" includes any natural person, corporation (state, federal, municipal or otherwise), unincorporated association (including partnership) and any form of governmental body or authority or other entity or body of any nature whatsoever in each case in any part of the world; and "Year-End Payment" has the meaning defined in Clause 3.3. 17. Governing Law 17.1 This agreement shall be governed by and interpreted according to the laws of Hong Kong and the parties submit to the non exclusive jurisdiction of the Hong Kong Courts. AS WITNESS the Executive and the duly authorised representative of the Company have set their hands the day and year first above written SIGNED by Gregory Michael Pek ) for and on behalf of ) - 84 - First Ecom.com, Inc. ) SIGNED in the presence of:- ) SIGNED by Kenneth G.C. Telford ) in the presence of:- ) SIGNED - 85 - EX-10.3.2 9 d51970_ex10-32.txt OFFSHORE SERVICE AGREEMENT Exhibit 10.3.2 SERVICE AGREEMENT THIS AGREEMENT is dated as of the 8th day of August 2001. BETWEEN: (1) First Ecom.com, Inc., a company formed under the laws of the State of Nevada, United States of America, and having its registered office at Suite 880, 50 West Liberty Street, Reno, Nevada, USA 89501 (the "Company"); and (2) Kenneth G.C. Telford, whose address is Suite 2715 Sutton Court, Harbour City, Tsimshatsui, Kowloon, Hong Kong (the "Executive"). AGREED as follows:- 1. Appointment 1.1 Subject to the terms of this agreement, the Company shall employ the Executive and the Executive shall serve the Company as its Chief Financial Officer from 1 September 2001 to 31 August 2002. 1.8 The duration of this agreement may be extended by the Company giving not less than 60 days prior notice to the Executive and on terms mutually agreed between the Company and the Executive, but such terms shall not be less favourable to the Executive than those in this agreement. 1.9 As from 1 September 2001, this agreement shall supersede any previous agreement relating to the employment of the Executive by the Company or its Affiliates. For the sake of clarity, all the Executive's rights, benefits and other entitlements accrued prior to 1 September 2001 under such previous agreement shall not be affected by this agreement. If there is any conflict or inconsistency between this agreement and any such previous agreement, this agreement shall prevail. However, the Company shall recognize and provide full credit for all of the Executive's period of service with the Company or its Affiliates commencing 1 July 2000 in relation to all rights, entitlements or benefits which are calculated with reference to the Executive's period of service with the Company or its Affiliates. 2. Duties 2.1 During his employment the Executive shall:- (a) perform in any place outside Hong Kong, to the best of his ability and with all reasonable care, the duties and exercise the powers and functions which from time to time may reasonably be assigned to or vested in him by the Board in relation to the Company and any of its Affiliates; (b) during working hours devote the whole of his time and attention to his duties; (c) comply with all reasonable requests, instructions and regulations made by the Board and provide such explanations, information and assistance as to his activities or the business of the Company as the Board may reasonably require; (d) faithfully and loyally serve the Company to the best of his ability and use his utmost endeavours to promote its interests and those of its Affiliates; and - 86 - (e) not be engaged or interested directly or indirectly in any other employment, trade, business, profession or occupation unless such activities have been disclosed to the Board and do not breach any of the provisions in this agreement. 2.2 The Executive shall generally be in the office or undertaking Company business during normal office hours. The Executive shall also work such further hours (without any additional remuneration) as may be necessary for the proper performance of his duties. 3. Remuneration and Benefits 3.13 Basic Remuneration As remuneration for the Executive's services, the Company shall pay to the Executive a Basic Remuneration of HK$90,000 per month payable in arrears on or before the last day of each calendar month (or if that day is not a Business Day, on the next preceding Business Day). The Board shall have complete discretion whether to grant any increase and any increase so granted shall take effect from such date as the Board may specify. 3.14 Year-End Payment The Company shall pay to the Executive one months' Basic Remuneration per calendar year of service as a year-end payment ("Year-End Payment"). If the Executive does not serve the Company for the whole of any particular year, the Executive shall be entitled to a rateable proportion of the Year-End Payment, unless this agreement is terminated by the Executive, or by the Company in accordance with Clause 9.1. 3.15 End of Contract Payment Provided that neither the Executive has terminated this agreement nor the Company has terminated this agreement pursuant to Clause 9.1, in either case before 31 August 2002 and this agreement is not extended, the Company shall pay to the Executive three month's Basic Remuneration on termination of this agreement as end of contract payment. 4. Expenses 4.1 The Company shall reimburse the Executive for all reasonable travel, hotel, entertainment and other expenses properly incurred by him in the performance of his duties and properly claimed. The Executive shall provide such evidence of expenditures as the Company may reasonably require. 5. Holidays 5.1 In addition to the normal public holiday in Hong Kong, the Executive shall be entitled to 15 Business Days paid holiday during each calendar year (accruing pro rata during the year) to be taken at such time as will not adversely interfere with the Company's business and approved by the Board. 6. Other Benefits 6.1 The Executive shall be entitled to paid sick leave, medical and other benefits in accordance with the laws of Hong Kong or enjoyed by other employees of the Company of a similar level of seniority as the Executive, whichever is the more favourable to the Executive. 7. Directorships 7.1 The Executive shall not be entitled to any director's fees or other remuneration in respect of the Executive's appointment as a director or officer of the Company or any Affiliate. - 87 - 8. Confidential Information 8.1 During his employment the Executive shall not (except in the proper course of carrying out his duties to the Company) or at any time after his termination for any reason whatsoever disclose to any Person or, for himself or any other Person, otherwise make use of any Confidential Information or trade secrets relating to the Company or any of its Affiliates or any of its or their suppliers, agents, clients or customers and shall use his best efforts to prevent the unauthorised use or disclosure of any such information. 8.2 Without restricting the general nature of Clause 8.1, the Executive acknowledges that the Company and its Affiliates have certain proprietary interests and undertakes not, at any time (whether during his employment or at any time after its termination), to use or disclose for any unauthorised purpose, any confidential or secret information concerning any such matter. 8.3 Nothing in this agreement shall prohibit the disclosure by the Executive of information which: (m) the Executive is required to disclose by applicable law. The Executive shall consult with the Company so far as may be reasonably possible before making any such disclosure; (n) was known to the Executive prior to it being disclosed; (o) is disclosed on a confidential basis to consultants or advisers of the Company or an Affiliate to assist that party in providing services for the Company or an Affiliate; or (p) is disclosed in proceedings taken by the Executive for the enforcement of any rights or remedies under this agreement. 9. Termination 9.10 Without prejudice to any remedy which it may have against the Executive for the breach of any of the provisions of this agreement, the Company may by notice to the Executive forthwith terminate this agreement if the Executive shall be guilty of any serious misconduct which entitles the Company or its Affiliate to terminate the Executive's employment summarily under the laws of Hong Kong. 9.11 The Executive may terminate this agreement upon providing to the Company 3 months prior written notice or payment of 3 months Basic Remuneration in lieu thereof. 9.12 If this agreement is terminated on or before 31 August 2002 otherwise than under circumstances which entitle the Company to summarily terminate this agreement under Clause 9.1, the Executive shall be entitled to be paid all Basic Remuneration and all other benefits up to and including 31 August 2002 (upon the termination of this agreement), as agreed compensation and not penalty, as if this agreement had not been terminated on or before that date. 10. Obligations Upon Termination of Agreement 10.1 Upon the termination of his employment for whatever reason the Executive shall:- (a) deliver up to the Company all property belonging to the Company or any of its Affiliates which may be in his possession or under his control, and (unless prevented by the owner) any papers and other property belonging to others which may be in his possession or under his control and which relate in any way to the business or affairs of the Company or any of its Affiliates or any supplier, agent or customer of the Company or any of its Affiliates, and he shall not, without the written consent of the Board, retain any copies of any such papers; and (b) not at any time represent himself still to be connected with the Company or any of its Affiliates. - 88 - 11. Effect of Termination of This Agreement 11.1 The expiry or termination of this agreement however arising shall not operate to affect any provisions which are expressed to operate or have effect after its termination or expiry and shall not prejudice the exercise of any right or remedy of either party accrued beforehand. 11.2 On the proper termination or expiry of this agreement, the Executive shall not have any claim against the Company for damages or compensation of any nature whatsoever, provided that the Company has complied with its obligations under this agreement. 12. Protection of Goodwill 12.1 During his employment the Executive is likely to acquire Confidential Information belonging to the Company and its Affiliates and establish personal knowledge and influence with Persons dealing with the Company and its Affiliates. In these circumstances, and in order to protect the proprietary information and goodwill of the Company and the Affiliates, the Executive undertakes that he will be bound by the following restrictions. 12.2 The Executive shall not, without the prior written consent of the Board, for a period of 6 months after the termination for whatever reason of his employment under this agreement: (a) be engaged or interested in any capacity (whether as a director, shareholder, principal, partner, consultant, employee, independent contractor or otherwise) in any business whose activities directly compete with the business activities of the Company or with any Affiliate in Hong Kong or in their other places of business at the time of such termination; (b) either on his own behalf or on behalf of any other Person and whether directly or indirectly: (i) canvass, solicit or approach or cause to be canvassed or solicited or approached for orders for any services or goods supplied by the Company or any Affiliate, any Person who to the Executive's knowledge at the date of the termination of the Executive's employment was a client or customer of the Company or any Affiliate; (ii) solicit or entice or try to solicit or entice away or employ or try to employ any employee from the Company or any Affiliate with whom the Executive had contact at any time during the last year of his employment; or (iii) interfere or seek to interfere with the continued supply to the Company or any Affiliate (or the terms relating to such supplies) of any goods or services from or otherwise deal with any suppliers who to the Executive's knowledge supplied goods or services to the Company or any Affiliate at any time during the last year of his employment. 12.3 Whilst each of the restrictions in this Clause are considered by the parties to be reasonable in all the circumstances and are necessary to protect the legitimate interests of the Company and its Affiliates, it is agreed and declared that if any one or more of such restrictions shall be judged to be void as going beyond what is reasonable in all the circumstances for the protection of the legitimate interests of the Company or any Affiliate but would be valid if words were deleted from it or the period of it reduced in scope the restrictions shall be deemed to apply with such modifications as may be necessary to make them valid and effective and any such modification shall not affect the validity of any other restriction. - 89 - 12.4 Nothing in this agreement shall prevent the Executive from being the holder for investment of securities which do not exceed 5% in nominal value of any class of securities quoted on an officially recognised stock exchange. 13. Entire Agreement and Severability 13.1 This agreement constitutes the entire agreement between the parties concerning the employment described in it and both the Company and the Executive acknowledge that they have not entered into this agreement in reliance wholly or partly on any statement or representation made to either of them by or on behalf of the other except as set out in this agreement. No variation or addition to this agreement and no waiver of any provision of it shall be valid unless in writing signed by or on behalf of both parties. The headings of these provisions are for convenience of reference only and have no effect on their interpretation. 13.2 The provisions of this agreement are severable and if any provision is held to be invalid or unenforceable by a court of competent jurisdiction then such invalidity or unenforceability shall not affect the remaining provisions of this agreement. 14. Notices 14.1 Any notice to be given under this agreement shall be in writing. Notice to the Executive shall be sufficiently served by being delivered personally to him or sent by pre-paid post (or air courier if sent internationally), addressed to him at his usual or last known place of abode. Notice to the Company shall be sufficiently served by being delivered to or sent by such post (or air courier if sent internationally), to the Company's address set out on the first page of this agreement or such other address as the Company may have given to the Executive by notice. 15. Definitions 15.1 In this agreement: "Affiliate" means any holding company of the Company and any corporation which, from time to time, is a subsidiary (as defined by the Companies Ordinance of Hong Kong) or Associated Company of the Company or any holding company of the Company in any part of the world; "Associated Company" means any corporation in which the Company or any holding company of the Company holds, owns or controls (directly or through other Persons) 20% or more of its issued share capital; "Basic Remuneration" means the basic remuneration of HK$90,000 per month referred to in Clause 3.1, as the same may be increased by the Board from time to time; "Board" means the board of directors of the Company or any Person authorised by it; "Business Day" means a day on which banks are open for business in Hong Kong, excluding Saturdays and Sundays; "Confidential Information" of a Person means information of any nature concerning that Person or its business which is not publicly known, including any compilation which is not publicly available of items of public information and further includes (without limitation) such information concerning the business, finances, ownership, trade connections and know how of the Person, but excluding information which: (i) is publicly known at the time of disclosure; (ii) after disclosure becomes publicly known other than as a result of a breach of a confidentiality obligation; - 90 - (iii) can be shown to have been developed independently by the recipient before disclosure of the information; (vii) can be shown was made available to the recipient by some other Person who had a right to do so and who has not imposed on the recipient any obligation of confidentiality or restricted use; "Hong Kong" means the Hong Kong Special Administrative Region, People's Republic of China; "Person" includes any natural person, corporation (state, federal, municipal or otherwise), unincorporated association (including partnership) and any form of governmental body or authority or other entity or body of any nature whatsoever in each case in any part of the world; and "Year-End Payment" has the meaning defined in Clause 3.3. 17. Governing Law 17.1 This agreement shall be governed by and interpreted according to the laws of Hong Kong and the parties submit to the non exclusive jurisdiction of the Hong Kong Courts. AS WITNESS the Executive and the duly authorised representative of the Company have set their hands the day and year first above written SIGNED by Gregory Michael Pek ) for and on behalf of ) First Ecom.com, Inc. ) SIGNED in the presence of:- ) SIGNED by Kenneth G.C. Telford ) in the presence of:- ) SIGNED - 91 - EX-10.3.3 10 d51970_ex10-33.txt SUPPLEMENTAL SERVICE AGREEMENT Exhibit 10.3.3 SUPPLEMENTAL AGREEMENT TO SERVICE AGREEMENTS THIS AGREEMENT is dated as of the 8th day of August 2001 BETWEEN: (1) First Ecom.com, Inc., a company formed under the laws of the state of Nevada, United States of America, and having its registered office at Suite 880, 50 West Liberty Street, Reno, NV, USA 89501 (the "Company"); and (2) Kenneth G.C. Telford, whose address is Suite 2715 Sutton Court, Harbour City, Tsimshatsui, Kowloon, Hong Kong (the "Executive"). WHEREAS:- A. The Executive and the Company have agreed that it is in the best interests of the parties for the Executive to enter into two service agreements with the Company, one in respect of services rendered in Hong Kong (the "Hong Kong Service Agreement") and the other in respect of services rendered outside Hong Kong (the "Offshore Service Agreement"), both dated the same date as this supplemental agreement. B. Notwithstanding the terms and conditions in the Hong Kong Service Agreement and the Offshore Service Agreement (collectively the "Service Agreements"), the parties agree that the Service Agreements shall be construed in the following manner. THE PARTIES AGREE AS FOLLOWS: 1. Compensation and Benefits (c) Subject to Clause 1(b) below, the Executive and the Company agree that the compensation and benefits payable to the Executive in relation to the Hong Kong Service Agreement and the Offshore Service Agreement shall not be duplicated. For the purpose of illustration, the Executive shall be entitled to the number of days of holiday stipulated in Clause 5.1 of the Service Agreements and not the total number of days of holiday in the two Service Agreements added together. If the Executive takes a particular day as a holiday under one of the Service Agreements, he shall be deemed to have also taken the same day as a holiday under the other Service Agreement. (d) The Executive will be paid the Basic Remuneration (as defined in the Service Agreements) equal to the total sum of those amounts stipulated in Clause 3.1 of both of the Service Agreements. In respect of other compensation or benefits which are calculated with reference to the Executive's Basic Remuneration, such compensation and benefits shall be calculated using the aggregate of the Basic Remuneration stipulated in Clause 3.1 of each of the Service Agreements. 2. Termination In the event that either of the Service Agreements is terminated pursuant to its terms and conditions, then the other Service Agreement shall also automatically terminate on the same date and for the same reason or cause. - 92 - 3. Governing Law This supplemental agreement shall be governed by and interpreted according to the laws of Hong Kong and the parties submit to the non exclusive jurisdiction of the Hong Kong Courts. AS WITNESS the Executive and the duly authorised representative of the Company have set their hands as of the day and year first above written. SIGNED by Gregory Pek ) for and on behalf of ) First Ecom.com, Inc. ) SIGNED ) SIGNED by Kenneth G.C. Telford ) in the presence of:- ) SIGNED - 93 - -----END PRIVACY-ENHANCED MESSAGE-----