SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
F O R M 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR (G) OF THE SECURITIES EXCHANGE ACT OF 1934
SEVEN SEAS PETROLEUM INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
YUKON TERRITORY 73-1468669
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
SUITE 960, THREE POST OAK CENTRAL, 1990 POST OAK BOULEVARD, HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 622-8218
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS TO BE SO REGISTERED
NONE
NAME OF EACH EXCHANGE ON WHICH REGISTERED
EACH CLASS IS TO BE REGISTERED
NOT APPLICABLE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON SHARES, NO PAR VALUE PER SHARE
(Title of Class)
ITEM 1. BUSINESS
GENERAL.
Seven Seas Petroleum Inc. ("Seven Seas") is engaged in the exploration
and development of oil and gas properties outside of North America. Seven Seas,
through its subsidiaries, owns interests in seven prospective areas located in
Colombia, Australia and Papua New Guinea, all of which are in the initial stages
of exploration and development. Seven Seas and its subsidiaries are collectively
referred to herein as the "Company." Certain oil industry terms used herein are
defined in the Glossary of Technical Terms attached hereto as Appendix A.
The Company's principal asset is a 57.7% interest in the Dindal
Association Contract and Rio Seco Association Contract (collectively, the
"Association Contracts") which are located in the Upper Magdalena Basin in
Colombia, approximately 90 kilometers northwest of Bogota. In 1996, two
exploratory wells were drilled on the Dindal block. The Company also holds the
following interests in exploratory oil and gas properties: an 11.875% interest
in the Tapir Association Contract in the Llanos Basin in Colombia; an 11.77%
interest in the EP381 Permit and in the Whicher Range Permit Application in
Perth Basin, Australia; a 20% interest in Block T27P in the Bass Basin, offshore
southern Australia; and a 100% interest in PPL-182 in southern Papua New Guinea.
For a description of the Company's interests in these properties, see
"Properties."
The Company's primary business strategy is to explore and develop the
Dindal and Rio Seco Association Contracts in Colombia. The Company also intends
to explore its other oil and gas interests in Colombia, Australia and Papua New
Guinea and may acquire additional oil and gas exploration opportunities which
management believes have large reserve potential. Although this type of
exploration and development generally involves higher risks, in the view of
management, it holds the potential to produce greater economic rewards.
SUMMARY OF PROPERTIES
The following summary of the Company's properties is qualified in its
entirety by the more detailed information included herein under the headings
"Properties" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
DINDAL AND RIO SECO ASSOCIATION CONTRACTS, UPPER MAGDALENA BASIN,
COLOMBIA. The Company's principal asset is a 57.7% interest in the Association
Contracts which entitle the Company to engage in exploration, development and
production activities in approximately 106,000 acres located in the oil
producing Upper Magdalena Basin, about 90 kilometers northwest of Bogota. Recent
discoveries in the Magdalena Basin include Amoco's Opon Field, located
approximately 170 kilometers north of the prospect area, and Lasmo's
Venganza/Revancha complex, located approximately 150 kilometers to the south.
Three wells have been drilled, to date, on the Dindal block under the
Dindal Association Contract. The El Segundo #1 well commenced drilling on
December 10, 1995, reached total depth in mid-January 1996 and was placed on a
long-term production test in July 1996. The El Segundo #2 well was completed for
testing in November 1996 and a long-term production test commenced in February
1997. The Escuela #1 well, which was drilled in 1994 prior to the acquisition of
an interest in the block by the Company, was plugged and abandoned as a dry
hole. The following table provides a summary of the El Segundo #1 well and the
El Segundo #2 wells:
TOTAL DRILLING MAXIMUM TESTED
DEPTH PRODUCTION
WELL DATE COMPLETED (FEET) BOPD RATE(1)
---- -------------- ------------- --------------
El Segundo #1 February 1996 5,718 3,415
El Segundo #2 November 1996 6,820 8,948
(1) References are from production testing only and are not necessarily
indicative of flow rates that may be utilized during long-term production.
Production tests are conducted to obtain an indication of the flow capacity of
individual wells and to give an indication of reservoir quality. Actual
producing rates from individual wells will depend on the results of an
integrated reservoir study and an engineering production plan which will
incorporate data from all wells in the field in a development plan to maximize
economic recovery of oil from the reservoir.
The first well for the Rio Seco Association Contract, the Tres Pasos #1
well, is expected to commence drilling operations in May 1997. The Tres Pasos #1
well is an appraisal well for the oil accumulation discovered in the Dindal
block and is located some 2.5 kilometers northwest of the surface location of
the El Segundo #1 and #2 wells. The Company plans to drill up to two additional
wells on the Dindal block in 1997 and to acquire permits for a seismic survey,
in each case, to determine the potential size of the oil accumulation by further
delineating the areal extent and reservoir geology of the structure. The Company
may expend up to $12 million on the exploration of the Dindal and Rio Seco
blocks in 1997, including the cost of two wells, estimated at approximately $4.4
million, which are required to be drilled under the terms of the Association
Contracts.
TAPIR ASSOCIATION CONTRACT, LLANOS BASIN, COLOMBIA. The Tapir Association
Contract is located in the Llanos Basin of east central Colombia and is crossed
by two oil pipelines carrying production from nearby oil fields. An exploratory
well is expected to commence on the Tapir block in late 1997 or in the first
quarter of 1998 following receipt of required permits from the Ministry of the
Environment. The estimated cost to the Company of this well is approximately
$250,000. An existing discovery well, the Macarenas #1, was drilled on the Tapir
block in 1993 and produced 320 BOPD in a short-term test, but was not completed
for production. Since the well was drilled and tested, additional oil pipeline
infrastructure has been built in the area. The operator plans to place the well
on long-term production test after the completion of the exploratory well to
determine sustainable production rates and the extent of the reservoir.
PERTH BASIN, EP381 AND WHICHER RANGE PERMITS, AUSTRALIA. The Company
currently holds an 11.765% working interest in EP 381, an exploration permit
covering 455,405 acres, and in the Whicher Range Permit Application, covering
439,141 acres, both of which are located in the Perth Basin, Western Australia.
The greater Perth Basin produces gas and oil from accumulations onshore in a
region north of the Company's permit areas and north of the city of Perth. The
Whicher Range Permit Application, which adjoins EP381 to the north and contains
the Whicher Range Gas Field discovered by Union Oil of California in 1968, was
reserved for the applicants pending resolution of native claims pursuant to the
Australian NATIVE CLAIMS ACT 1993.
The principal exploration interest in the EP 381 and the Whicher Range
Permit areas is for natural gas generated in Permian coal measures and
reservoired within adjacent Permian
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sandstones. The operator of the permit areas has conducted reservoir studies on
the Whicher Range Permit Application area, the results of which indicate that
the use of different drilling technologies and newer completion techniques could
make the Whicher Range Gas Field economic to develop. Based on this technical
assessment and the market for natural gas now believed to be available in the
area, the partners plan to re-enter and test the Whicher Range #1 well in 1997.
If this re-entry and test is successful, the parties may drill an additional
well in late 1997 and initiate additional seismic programs in the block. In
addition, a new seismic study was commenced in March 1997 to delineate further
prospects in the EP381 prospect area. In May 1995, the Scott River #1 well was
drilled in the southern portion of EP 381, encountered Permian sandstones which
had sub-commercial saturations of natural gas and was abandoned.
BASS BASIN, BLOCK T27P, AUSTRALIA. The Company holds a 20% working
interest in Block T27P, a 1.8 million acre block in about 70 meters of water, in
the Bass Basin, the central of three basins offshore southern Australia. The
easternmost basin is the Gippsland Basin where BHP Petroleum and Esso have a
series of large oil and gas fields. The westernmost basin is the Otway Basin,
the site of recent gas discoveries by BHP Petroleum and others which will likely
serve the South Australia and Victoria gas market. The Bass Basin has been the
site of a series of gas and oil shows and discoveries, including the Yolla
Field, which is adjacent to Block T27P. The Yolla Field was discovered by Amoco
in the mid-1980's but has not yet been appraised or developed for production.
Globex Exploration, the operator of the permit with a 80% working
interest, has completed a 1,000 kilometer 2D seismic program in the block. The
remaining work commitment in the block consists of a 3D seismic survey and two
exploration wells. Globex Exploration has selected a drillable prospect
approximately 10 kilometers north of the Yolla Field, and is seeking additional
participants in the block to share the cost of an exploratory well which is
estimated to be approximately $5 million. As suitable drilling rigs are not
available in the near term, Globex has applied for a permit extension in the
block until a suitable rig can be contracted.
PERMIT PPL-182, PAPUA NEW GUINEA. The Company was granted exploration
permit PPL-182 in southern Papua New Guinea effective June 11, 1996. The permit
covers an area of 1,200,000 acres located both onshore and offshore in the Fly
River Delta and the Gulf of Papua. The nearest discovery to the permit area is
the Pandora Gas Discovery located in PPL-82 approximately 150 kilometers to the
east in the Gulf of Papua.
Past exploration activity within PPL-182 has resulted in the acquisition
of seismic data and the drilling of several exploration wells. The Company's
first year work program consists of a geological and geophysical review of
existing data. Based on the results of this study, the Company will decide
whether to proceed with the second year's work commitment which provides for
seismic reprocessing and acquisition of a high resolution aeromagnetic survey
and is expected to cost approximately $500,000. The Company plans to secure an
industry partner or partners to underwrite a significant portion of future
exploration costs.
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RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS.
EXPLORATION AND DEVELOPMENTAL RISKS. Oil and gas exploration and
development is a speculative business and involves a high degree of risk. The
Company has expended, and plans to continue to expend, significant amounts of
capital on the acquisition and exploration of its properties. Even if the
results of such activities are favorable, as in Colombia where the Company has
made an oil discovery, subsequent drilling at significant costs must be
conducted on the property to determine if commercial development of the property
is feasible. Oil and gas drilling may involve unprofitable efforts, not only
from dry wells but from wells that are productive but do not produce sufficient
net revenues to return a profit after drilling, operating and other costs. It is
difficult to project the costs of implementing an exploratory drilling program
due to the inherent uncertainties of drilling in unknown formations, the costs
associated with encountering various drilling conditions such as overpressured
zones and tools lost in the hole, and changes in drilling plans and locations as
a result of prior exploratory wells or additional seismic data and
interpretations thereof. Exploration of offshore oil and gas properties also
involves an increased degree of risk relative to onshore or close-to-shore
exploration primarily due to greater technical obstacles. The marketability of
oil and gas which may be acquired or discovered by the Company will be affected
by the quality and viscosity of the production and by numerous factors beyond
its control, including market fluctuations, the proximity and capacity of oil
and gas pipelines and processing equipment, government regulations, including
regulations relating to prices, taxes, royalties, land tenure, importing and
exporting of oil and gas and environmental protection. There can be no assurance
the Company will be able to discover, develop and produce sufficient reserves in
Colombia, Australia, Papua New Guinea, or elsewhere to recover the costs and
expenses incurred in connection with the acquisition, exploration and
development thereof and achieve profitability.
NEED FOR ADDITIONAL FINANCING. The Company has no significant income
producing properties and its principal asset, the Dindal and Rio Seco blocks, is
in the early stage of exploration and development. Since inception through
December 31, 1996, the Company incurred cumulative losses of $4,314,622 and,
because of its continued exploration activities, expects that it will continue
to incur losses and that its accumulated deficit will increase until
commencement of production from the Dindal and Rio Seco blocks in quantities
sufficient to cover operating expenses related thereto. The exploration and
development of the Company's current properties and any properties acquired in
the future is expected to require substantial amounts of additional capital
which the Company may be required to raise through debt or equity financings,
encumbering properties or entering into arrangements where by certain costs of
exploration will be paid by others to earn an interest in the property. There
can be no assurance that the additional debt or equity financing expected to be
necessary to fund the Company's operations and obligations will be available to
the Company on economically acceptable terms. If sufficient funds cannot be
raised to meet the Company's obligations with respect to a property, the Company
may elect to forfeit its interest in such property. See"Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISKS INHERENT IN FOREIGN OPERATIONS. There are risks inherent in the
fact that the Company has acquired and intends to continue to acquire interests
in oil and gas properties located outside of North America in some cases in
countries which may be considered politically and economically unstable.
Accordingly, the Company is subject to risks inherent in the ownership and
development of foreign properties including, without limitation, cancellation or
renegotiation of contracts, royalty and tax increases, retroactive tax claims,
expropriation, adverse changes in currency values, foreign exchange controls,
import and export regulations,
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environmental controls, and other laws, regulations or international
developments which may adversely affect the Company's properties. The Company's
operations and agreements may be governed by foreign laws and, in the event of a
dispute, the Company may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the United States. Certain of the properties for which
the Company has an application pending in Australia are the subject of native
claims which remain unresolved. In addition, there can be significant logistical
problems, costs and risks in conducting oil and gas activities in remote, rugged
and primitive regions such as Papua New Guinea, or in Colombia where the
Company's operations may be exposed to potentially detrimental activities by the
leftist guerrillas that have operated in the region for many years.
DEPENDENCE ON ACTIVITIES IN COLOMBIA. The Company's success currently
depends to a high degree on its activities in Colombia. This dependence is
likely to be reflected in both the short-term performance and the Company's
long-term financial results. The Company currently intends to drill up to three
additional wells on the Dindal and Rio Seco blocks in 1997. The market price of
the Common Shares may significantly fluctuate based on the outcome of individual
wells.
RISKS OF JOINT VENTURES. The Company has and expects to continue to
acquire only partial interests in oil and gas properties through joint venture
agreements with other oil and gas corporations which may, by the terms of such
joint venture agreements, be the operators of such programs. Although the
Company can take certain steps to determine if the risk of the program to be
conducted by the operator is appropriately spread over a number of prospects,
there can be no assurance that the risk will be so allocated, that the program
will be carried out by the operator in a manner deemed appropriate by the
Company or that the prospects will be successful. In addition, the Company's
ability to continue its exploration and development programs may be dependent
upon the decision of its joint venture partners to continue exploration and
development programs and to finance their portion of the costs and expenses of
the joint venture. If the Company's partners do not elect to continue and to
finance their obligations to the joint ventures, the Company may be required to
accept an assignment of the partners' interests therein and assume their
financing obligations or relinquish its interest in the joint venture.
OPERATING HAZARDS AND UNINSURED RISKS. The Company is also subject to all
the risks normally incident to drilling for and producing oil and gas, including
hazards such as over-pressured formations, blowouts, cratering, fires, spills,
or other hazards or conditions, any of which could result in damage to or loss
of life or property. In accordance with industry practice, the Company is not
fully insured against these risks nor are all such risks insurable. Payment of
such potential liabilities would reduce the funds available for exploration,
drilling and production and could have a material adverse effect on the Company.
LIMITED OPERATING HISTORY; DEPENDENCE ON KEY PERSONNEL. The Company has a
limited operating history and the success of the Company depends to a large
degree upon the efforts of its executive officers, the loss of whose services
could have a material adverse effect on the business and prospects of the
Company. The Company has entered into employment agreements with three of its
executive officers, the terms of which are more particularly described under
"Executive Compensation" below. The Company does not maintain key man insurance.
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POTENTIAL CONFLICTS. Certain of the directors of Seven Seas also serve as
officers, directors or consultants of other companies involved in natural
resource development which activities may be in competition with the Company and
may result in conflicts of interest. In the event a director has an interest in
an investment or proposed investment of the Company or other conflict of
interest, it is the Company's policy that such director not participate in the
Company's decision-making with respect thereto and that any transactions with
such officers or directors be on terms consistent with industry standards and
sound business practices.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES. Estimates of
the Company's proved oil and gas reserves and projected future net revenues
appearing elsewhere herein are based on reserve reports prepared by independent
petroleum engineers. The estimation of reserves requires substantial judgment on
the part of the petroleum engineers, resulting in imprecise determinations,
particularly with respect to new discoveries. Different reserve engineers may
make different estimates of reserve quantities and revenues attributable thereto
based on the same data. Estimates of proved undeveloped reserves, which comprise
a substantial portion of the Company's reserves, are by their nature less
certain. The accuracy of any reserve estimate depends on the quality of the
available data as well as engineering and geological interpretation and
judgment. Results of drilling, testing and production and changes in the
assumptions regarding decline and production rates, crude oil prices, revenues,
taxes, capital expenditures, operating expenses, geologic success and quantities
of recoverable crude oil may vary substantially from those assumed in the
estimates, may result in revisions to such estimates and could materially affect
the estimated quantities and related value of reserves set forth herein. The
estimates of future net revenues reflect oil and gas prices as of the date of
estimation, without escalation. There can be no assurance, however, that such
prices will be realized or that the estimated production volumes will be
produced during the periods indicated. Future performance that deviates
significantly from the reserve reports could have a material adverse effect on
the Company.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS. The Company is continued under
the laws of the Yukon Territory in Canada. Certain of the directors of the
Company, and certain experts utilized by the Company, are residents of Canada
and all or substantially all of such persons' assets are located outside of the
United States. As a result, it may be difficult for holders of the Common Shares
to effect service within the United States upon the directors and experts who
are not residents of the United States or to realize in the United States upon
judgments of courts of the United States against such persons and the Company
predicated upon civil liability under the United States federal securities laws.
The Company has been advised by its counsel that there is no assurance that
judgments of U.S. courts for liabilities predicated solely upon U.S. federal
securities laws will be enforceable in Canada against the Company or against any
of its directors or experts who are not residents of the United States.
MARKETS. There is substantial uncertainty as to the prices which the
Company may receive for production from its existing oil reserves or from oil
and gas reserves, if any, which the Company may discover. The availability of a
ready market and the prices received for oil and gas produced depend upon
numerous factors beyond the control of the Company including, but not limited
to, adequate transportation facilities (such as pipelines), the marketing of
competitive fuels, fluctuating market demand, governmental regulation and world
political and economic developments. Prices for crude oil are subject to wide
fluctuation in response to relatively minor changes in supply and demand, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. It is possible that, under market conditions prevailing in the
future, the production and sale of oil, if any, from certain of the Company's
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properties may not be commercially feasible and the production of gas from the
Company's properties in Colombia, the Bass Basin and Papua New Guinea, is not
currently expected to be commercially feasible. The sale of oil from the
long-term production tests on the Company's properties in Colombia is currently
being sold to Ecopetrol.
COMPETITION. Oil and gas exploration is extremely competitive in all of
its phases and particularly in exploration for and development of new sources of
crude oil and natural gas. The Company must compete with other companies that
are larger and financially stronger in acquiring properties suitable for
exploration, in contracting for drilling equipment and in securing trained
personnel. The Company is not a significant participant in the oil and gas
industry and it may not always be possible to acquire properties suitable for
drilling at economic prices.
REGULATION. The Company's operations are subject to regulations imposed
by the local regulatory authorities including, without limitation, currency
regulation, import and export regulation, taxation and environmental controls.
The regulations also generally specify, among other things, the extent to which
properties may be acquired or relinquished, permits necessary for drilling of
wells, spacing of wells, measures required for preventing waste of oil and gas
resources and, in some cases, rates of production and sales prices to be charged
to purchasers. Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,
and the Ministry of the Environment. It is possible that the administration and
enforcement of current environmental laws and regulations or the passage of new
environmental laws or regulations in Colombia could result in substantial costs
and liabilities in the future or in delays in obtaining the necessary permits to
conduct and expand the Company's operations in such country. The Company has
experienced and may continue to experience delays in obtaining the necessary
environmental permits to expand its operations in Colombia. Operations in
Australia are governed by the State of Western Australia and by the State of
Tasmania. Operations in Papua New Guinea are currently governed by the
Department of Mining and Petroleum.
FORWARD-LOOKING INFORMATION. All statements other than statements of
historical fact contained herein, including statements in "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and "Properties," are forward-looking statements. Forward-looking
statements in this Prospectus generally are accompanied by words such as
"anticipate," "believe," "estimate," "project," "potential" or "expect" or
similar statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, no assurance can be
given that such expectations will prove correct. Factors that could cause the
Company's results to differ materially from the results discussed in such
forward-looking statements include the aforementioned risks, such as the
uncertainty of costs associated with exploratory drilling, drilling results and
reserve estimates, operating hazards, need for additional capital, competition
from other exploration, development and production companies, the fluctuations
of the prices received or demand for the Company's oil and gas, and the effects
of governmental and environmental regulation. All forward-looking statements
included herein are expressly qualified in their entirety by the cautionary
statements in this paragraph.
HISTORY AND ORGANIZATIONAL STRUCTURE.
Seven Seas became subject to the laws of the Yukon Territory in August
1996. Seven Seas was formed effective June 29, 1995 as a result of an
amalgamation (the "Amalgamation")
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under the laws of the province of British Columbia of Rusty Lake Resources Ltd.
("Rusty Lake") and Seven Seas Petroleum Inc. (the "Predecessor"), which was
incorporated under the laws of British Columbia on February 3, 1995. Under the
terms of the Amalgamation, the shares of Rusty Lake were exchanged for shares of
Seven Seas on a 35-to-1 basis, while the shares of the Predecessor were
exchanged for shares of Seven Seas on a 1-to-1 basis. Rusty Lake was formed by
an amalgamation of the Lithium Corporation of Canada, Limited and Stockgold
Resources Inc. under the laws of Ontario effective January 31, 1993. Prior to
the Amalgamation, Rusty Lake was a dormant mineral exploration and development
corporation whose common shares were quoted for trading on the Canadian Dealer
Network.
The Company's principal executive office is located at Suite 960, Three
Post Oak Central, 1990 Post Oak Boulevard, Houston, Texas 77056 and its
telephone number is (713) 622-8218. The Company's operations are managed from
its Houston, Texas headquarters which consists of a staff of five employees,
using professional consulting services as needed. The Company also maintains an
office in Tulsa, Oklahoma with a staff of two employees.
The following chart details the structure of Seven Seas and its
subsidiaries as of March 31, 1997. Except as noted, all of the subsidiaries are
directly or indirectly wholly owned by Seven Seas:
--------------------------------------------
| |
| |
----------------| Seven Seas Petroleum Inc. |---------------------------------
| | (Yukon) | | |
| | | | |
| | | | |
| | | | |
| -------------------------------------------- | |
| | | |
---------------- --------------------------------- ---------------------- ---------------
Seven Seas Seven Seas Petroleum Seven Seas Seven Seas
Resources Holdings Inc. Petroleum Petroleum
Australia Inc. (Cayman Islands) Turkey USA, Inc.
(B.C.) Holding Company Inc. (B.C.) (U.S.A.)
(Dormant) (Dormant)
---------------- --------------------------------- ---------------------- ---------------
| |
| |
--------------------------------------- |
| |
| |
-----------------------------------------------------------------------------------------------------------------
| | | | | | |
| | | | | | |
- -------------------- | ---------------------- ---------------------- ---------------- ---------------- ----------------
Seven Seas | Seven Seas Seven Seas Seven Seas Seven Seas Seven Seas
Petroleum Argentina | Petroleum Australia Petroleum Colombia Petroleum Petroleum Petroleum PNG Inc.
Inc. | Inc. Inc. Mediterranean Turkey (Cayman Islands)
(Cayman Islands) | (Cayman Islands) (Cayman Islands) Inc. (Cayman Islands) Oil and Gas
(Dormant) | Oil and Gas Oil and Gas (Cayman Islands) (Dormant) Exploration
| Exploration Exploration (Dormant)
- -------------------- | ---------------------- ---------------------- ---------------- ---------------- ----------------
| |
| |
| ---------------------------------------------------------------------------------------------
| | | | |
| | | | |
---------------------------- ---------------------- ---------------------- ----------------------
Esmeralda Limited Liability GHK Company Colombia Cimarrona Limited Liability Petrolinson, S.A.
Company (Oklahoma) (Oklahoma) Company (Panama)
Oil and Gas Exploration Oil and Gas Exploration (Oklahoma) Oil and Gas Exploration
Oil and Gas Exploration
---------------------------- ---------------------- ---------------------- ----------------------
The Company, through Seven Seas Petroleum Colombia Inc., owns a 62.963%
membership interest in Cimarrona Limited Liability Company. The remaining
37.037%
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membership interest is owned by MTV Investments, Limited Partnership, a party at
arms' length to the Company. Seven Seas Petroleum Holdings Inc. and Seven Seas
Petroleum Colombia Inc. each own 50% of the membership interests of Esmeralda
Limited Liability Company, as a limited liability company is required to have a
minimum of two members. The Company intends to dissolve its dormant British
Columbia subsidiaries.
Financial information about foreign operations may be found in Note 5 of
the Notes to Consolidated Financial Statements contained in Item 13 below.
ITEM 2. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with
the Consolidated Financial Statements and Notes thereto included herein.
Period from Inception
Year Ended (February 3, 1995)
December 31, through December 31,
INCOME STATEMENT DATA 1996 1995
------------ ---------------------
Revenues 575,281 152,383
Net loss (2,194,637) (2,119,985)
Net loss per common share (0.17) (0.23)
Weighted average shares outstanding 12,971,871 9,247,101
Period from Inception
Year Ended (February 3, 1995)
December 31, through December 31,
BALANCE SHEET DATA 1996 1995
------------ ---------------------
Cash and cash equivalents 10,620,477 3,365,603
Total assets 171,533,207 4,170,437
Current liabilities 2,805,665 120,305
Minority interest 1,060,433 --
Stockholder's equity 167,667,109 4,050,132
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES.
Since inception, the Company's activities have been funded primarily by
proceeds from private placements of the Company's securities resulting in
aggregate net cash proceeds of $19,000,000. In 1996, the Company acquired an
additional 36.7% interest in the Association Contracts in Colombia in exchange
for the issuance of the Company's securities valued at $153,091,430 in the
aggregate. Since inception the Company has expended approximately $7,533,200 for
the acquisition, exploration and development of its oil and gas properties
including approximately $5,934,600 with respect to its interests in Colombia,
approximately $454,600 with respect to its interests in Australia, approximately
$16,300 with respect to its
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interest in Papua New Guinea, and approximately $1,127,700 for exploration
activities in Argentina, Turkey and other countries, which have been expensed.
COLOMBIA. The Company is required to drill an additional well on each of
the Dindal and Rio Seco blocks by August and September 1997, respectively, at an
estimated total cost to the Company of $4,400,000, to fulfill its work
commitments for the current contract year. In 1997, the Company also plans to
drill one additional well on the Dindal block and to perform a seismic survey at
an aggregate estimated cost to the Company of approximately $5,200,000. The
Company may also spend up to an additional $2,400,000 in operating costs. An
exploration well is also required to be drilled on the Tapir block at an
estimated proportionate cost to the Company of $250,000.
In the third and fourth quarters of 1996, the Company had oil and gas
sales of $233,682 which pertained solely to production testing of the Company's
two wells in Colombia. Although the Company intends to continue to sell oil
resulting from long-term production tests, significant production from the El
Segundo #1 well and the El Segundo #2 well is not expected to commence until
further work is done to evaluate the field through the drilling of additional
wells, and producing facilities and pipelines have been constructed. Although
the Company has solicited proposals for various pipeline options, the substance
and timing of any decision regarding appropriate pipeline and production
facilities will depend on the results of the evaluation and appraisal of the
Company's discovery.
AUSTRALIA. Upon issuance of the Whicher Range Permit Application, the
parties to the permit plan to re-enter the Whicher Range #1 well and perform an
acid-fracture stimulation of the productive intervals in the well at an
estimated cost to the Company of $380,000.
The operator of the Bass Basin permit plans to drill an exploratory well
on a prospect located 10 kilometers north of the Yolla Field and has applied for
a permit extension until a suitable rig can be contracted. As the operator is
also seeking additional participants in the block to share the cost of the well,
which is estimated to be $5,000,000, the estimated cost of the well to the
Company cannot now be determined.
PAPUA NEW GUINEA. The cost of the first year work program planned for PPL
182 in Papua New Guinea is estimated to be approximately $100,000. Based on the
results of the first year program, the Company will decide whether to proceed
with the second year work program which is expected to cost approximately
$500,000.
The Company had working capital of approximately $9,100,000 as of
December 31, 1996 and realized an additional $3,500,000 in cash proceeds in
March 1997 as a result of the exercise of outstanding Common Share purchase
warrants. As the current funds on hand will not be sufficient to meet all
planned exploration costs, additional financing will be necessary to complete
these projects prior to the start-up of production and generation of cash flows
from the Company's oil discovery in Colombia in quantities sufficient to cover
operating expenses related thereto. In addition, it is anticipated that the
Company's future exploration activities with respect to its current properties
and any additional properties which may be acquired will require substantial
amounts of additional capital which the Company may be required to raise through
debt or equity financing, encumbering properties or entering into arrangements
whereby certain costs of exploration will be paid by others to earn an interest
in the property. There can
- 10 -
be no assurance that the additional debt or equity financing expected to be
necessary to fund the Company's operations and obligations will be available to
the Company on economically acceptable terms. If sufficient funds are not
available to meet the Company's obligations with respect to a property, the
Company may elect to forfeit its interest in such property. The Company has no
significant lines of credit.
RESULTS OF OPERATIONS.
The Company reported a net loss of $2,194,637 ($.17 per share) for the
year ended December 31, 1996 which compares with a net loss of $2,119,985 ($.23
per share) for the period from inception through December 31, 1995. Oil and gas
revenues and production costs for 1996 were $233,700 and $252,500, respectively.
There were no oil and gas revenues or production costs for the year ended
December 31, 1995. Depreciation and amortization increased from $37,700 for the
period from inception through December 31, 1995 to $111,300 for the year ended
December 31, 1996 primarily as a result of the acquisition of GHK Company
Colombia, Esmeralda Limited Liability Company and Cimarrona Limited Liability
Company and the inclusion of a full year of depreciation expense for the
Company.
Colombian oil production (net to the Company) of 14,188 barrels in 1996
pertained solely to the Company's share of oil produced from production testing
of the Company's two wells and was sold to Ecopetrol at an average price of
$16.47 per barrel.
Interest income increased from $152,400 for the period from inception
through December 31, 1995 to $341,600 for the year ended December 31, 1996 as a
consequence of higher cash balances resulting from the private placements of the
Company's securities. General and administrative expenses increased from
$1,070,800 for the period from inception through December 31, 1995 to $2,452,500
for the year ended December 31, 1996 principally as a result of the expansion of
the Company's activities, the acquisition of an additional interest in the
Dindal and Rio Seco blocks in Colombia and costs associated with listing the
Company's securities on The Toronto Stock Exchange.
ITEM 3. PROPERTIES.
COLOMBIA.
DINDAL AND RIO SECO ASSOCIATION CONTRACTS; UPPER MAGDALENA BASIN.
INTRODUCTION AND REGIONAL OVERVIEW. Two major physiographic features
dominate the geography of Colombia. To the west lie the Andes mountains, which,
north of the Ecuador border, bifurcate into three ranges, the Western, Central
and Eastern Cordillera, extending toward the Caribbean coast. These ranges are
separated by the Cauca and Magdalena valleys, respectively. To the east lies the
Llanos, a savanna within the bounds of the Orinoco Basin, which extends over the
remainder of the country.
The geology of Colombia has been studied since the mid 1800's and has
continued to the present, amassing some detail of the tectonic framework and
related stratigraphy. During the evolution of the geological knowledge of
Colombia, oil and natural gas exploration has been pursued in the Llanos,
Putumayo and Magdalena basins. Exploration in the Upper Magdalena
- 11 -
Valley Basin began in 1918 with the drilling of the Guataqui wells in the
Girardot subbasin, followed in 1951 by the Ortega discovery. As of December
1993, 210 exploratory wells had been drilled, resulting in the discovery of 30
fields.
This page consists of a map outlining the state of Colombia, South
America and portions of the bordering states of Venezuela, Brazil, Peru and
Ecuador. The Company's Dindal and Rio Seco Blocks and the Tapir Block are shown
in yellow; producing oil fields are indicated by green ovals and the Cusiana,
Cano Limon-Guafita and Shushufindi oil fields are also identified by name; oil
pipelines are indicated by green lines, including outlets to the Pacific Ocean
and Caribbean Sea. The map references distance measurements in kilometers and
miles.
- 12 -
This page consists of a color map entitled: "Cimarrona Depth Structure
Map" and shows the Dindal and Rio Seco Blocks with a small insert in the upper
left hand corner showing the location of the blocks and Bogota on a small map of
Colombia. The map references distance measurements in kilometers and miles, and
shows the depth in feet of certain areas. The map shows the location of the El
Segundo No. 1 and El Segundo No. 2 oil wells, the proposed appraisal location of
the Tres Pasos No. 1 well and additional proposed appraisal locations. The map
also shows the location of the following wells: Escuela No. 1, Madrigal No. 1,
Ocobo No. 1, Quina No. 1, Las Palmas No. 1, and Tomate No. 1, and additional
wells drilled in the area and, in each case, indicates by symbol whether such
well was a dry well with gas and oil shows, a dry well with gas shows, or a dry
well with oil shows. The map also indicates the existence of oil seeps,
Cimarrona outcrop, the potential oil field area and the location of the Guaduas
Fault.
- 13 -
The Company's principal asset is a 57.7% interest in the Association
Contracts with Empresa Colombiana de Petroleos, the Colombian national oil
company ("Ecopetrol") which entitle the Company to engage in exploration,
development and production activities in approximately 106,000 acres located in
the oil producing Upper Magdalena Basin, about 90 kilometers northwest of
Bogota. The area is accessible via the main road between Bogota and Honda. The
village of Guaduas lies within the block and provides infrastructure for the
local economy which is primarily agrarian in nature.
Recent discoveries in the Magdalena Basin include Amoco's Opon Field,
located approximately 170 kilometers north of the prospect area, and Lasmo's
Venganza/Revancha complex, located approximately 150 kilometers to the south.
The main Rio Magdalena oil pipelines (12" to 20" diameters) lie approximately 20
kilometers west of the prospect area and provide an opportunity for oil
transportation from the Company's discovery. Early production from the discovery
well and subsequent wells in Dindal and Rio Seco blocks will likely be truck
transported by road to an oil terminal on the Rio Magdalena pipeline system
approximately 78 miles away, prior to full field development and pipeline
installation.
PROSPECT GEOLOGY. The Dindal structure is formed by a faulted anticlinal
closure in the foot wall of the Bituima thrust fault system on the eastern side
of the Rio Magdalena river valley. The primary oil reservoir is the Upper
Cretaceous Cimarrona formation which is comprised of both limestones and
sandstones in the vicinity of the Dindal structure. These reservoir sequences
are charged with oil generated from the immediately underlying Villeta shale
which is considered the principal source rock for the oil accumulations
throughout Colombia and Venezuela. The Villeta shale is present in area wells
both in and adjacent to the Dindal block.
The Cimarrona formation is seen in surface outcrop to the north and west
of the structure, as well as in the Lasmo Madrigal #1 well, the AIPC Quina #1
well and the GHK El Segundo #1 and #2 wells. From this geologic control
information, the Cimarrona is shown to be depositionally complex, exhibiting
rapid changes in both gross thickness and rock types in the region of the Dindal
structure. In the Madrigal #1 well, the Cimarrona is approximately 1,600 feet
thick with mixed rock types including sandstones, conglomerates, siltstones and
shales. Only 9 kilometers east in the El Segundo #2 well, the Cimarrona has
thinned to approximately 450 feet in thickness and contains limestones,
calcareous sandstones, and siltstones. Additional data from appraisal wells
concerning these variations is required before oil reserves can be reliably
assessed for the structure and an appropriate field development plan drafted.
Evidence for the anticlinal trap at the structure is found in both
seismic data over the prospect and in surface geologic mapping. The trapping
mechanism is believed to be formed by structural closure in three directions
(north, south and west), and an imbricate fault within the Bituima Fault system
to the east, which is evidenced in the Escuela #1 well which was drilled in
1994, prior to the acquisition of an interest in the block by the Company, and
was plugged and abandoned as a dry hole. The Escuela #1 well is located four
kilometers southeast of the El Segundo #1 well location and encountered Tertiary
and Cretaceous shales and siltstones from surface to total depth. This
predominantly shale section, emplaced by thrust faulting adjacent to the
Cimarrona reservoir section, is believed to form the critical element of the
trap for the prospect.
- 14 -
EXPLORATION ACTIVITY. The El Segundo #1 discovery well commenced drilling
in December 1995 and reached total depth in mid-January, 1996. The well reached
the objective Cimarrona formation at a depth of 5,630 feet, but stopped drilling
after penetrating only 88 feet of the Cimarrona due to circulation problems
encountered while drilling. The well was then completed for testing in February
1996 and drill stem tests recovered 19(degree) API oil at surface limited rates
of 300-500 barrels per day. Operations were then suspended pending receipt of a
permit to transport produced oil by truck from a long-term production test.
Permits for the long-term production test were received in late June 1996 and
production testing commenced in early July. Tests using electric submersible
pumps produced oil at rates of 3,400 barrels per day. No aquifer water was
produced during the tests, and analysis of reservoir pressure response during
testing and the shut-in period following testing showed no evidence of reservoir
boundaries, geologic complexities or oil-water contact. Analysis of oil
recovered during testing showed 19(degree) API gravity, low sulphur crude oil,
with reservoir temperature of 120(degree)F, pressure of 1,640 psi and bubble
point of 1,570 psi (at collection datum). Following testing during August, El
Segundo #1 was shut-in to allow drilling of the El Segundo #2 well from the same
surface location.
The El Segundo #2 well commenced drilling in early September 1996 and
reached total drilling depth of 6,820 feet in late October. The well was
intentionally deviated from the surface location of the EL SEGUNDO #1 well to a
bottom hole location some 2,000 feet north of the surface location. The well
encountered approximately 450 feet of oil saturated and highly fractured Upper
Cretaceous Cimarrona formation at a drilling depth of 6,052 feet (vertical depth
of 5,588 feet). The well was completed for testing in November, and five drill
stem tests were conducted in late November through February. The first two tests
in the upper Villeta formation and the lower Cimarrona formation recovered no
oil and have been interpreted to be low permeability. The last three tests,
conducted in separate intervals of the upper Cimarrona between 6,052 and 6,280
feet, produced oil at rates from 3,866 to 6,154 barrels per day each. Following
these tests in February 1997, production tests were conducted of the combined
interval between 6,052 and 6,315 feet. These tests produced oil at rates as high
as 8,948 barrels per day. Analysis of reservoir pressure performance during and
following the production testing in El Segundo #2 well supported the conclusions
from the production testing of the El Segundo #1 well in July and August 1996.
In March, 1997 the El Segundo #2 well was placed on long-term production test to
gather further reservoir information.
The first well for the Rio Seco Association Contract, the Tres Pasos #1
well, is expected to commence drilling operations in May 1997. The Tres Pasos #1
well is an appraisal well for the oil accumulation discovered in the Dindal
block and is located some 2.5 kilometers northwest of the surface location of
the El Segundo #1 and #2 wells. The Company plans to drill up to two additional
wells on the Dindal block in 1997 and to acquire permits for a seismic survey to
further delineate the areal extent and reservoir geology of the structure.
The Company and its partners have paid all costs of the exploration
program under the Association Contracts to date. Under the terms of the
Association Contract, the Company and its partners are required to drill one
well on each contract per year and will continue to bear all exploration costs
relating to a field until such field is declared commercial. The Company plans
to submit a commerciality application to Ecopetrol during the fourth quarter of
1997 or the first quarter of 1998 with respect to its first discovery.
- 15 -
GHK Company Colombia, an indirect wholly-owned subsidiary of the Company,
serves as the operator of the joint venture to develop the Dindal and Rio Seco
blocks, pursuant to the terms of operating agreements between the Company, its
respective subsidiaries and its joint venture partners. GHK Company Colombia has
exclusive charge of carrying out the program of operations within the budgets
approved by the operating committee and may demand payment in advance from each
party of its respective shares of estimated monthly expenditures. GHK Company
Colombia has retained GHK Company L.L.C., the principal owner of which is Robert
A. Hefner, III, a director of the Company, to perform the duties and obligations
of GHK Company Colombia under the Association Contracts and as operator of the
Dindal and Rio Seco blocks pursuant to the terms of a Management Agreement more
particularly described under "Certain Relationships and Related Transactions -
The GHK Transaction."
TERMS OF ASSOCIATION CONTRACTS AND RELATED MATTERS. The Association
Contracts were issued by Ecopetrol in March 1993 and August 1995, respectively,
and provide generally for a six year exploration phase followed by a twenty-two
year production period, with partial relinquishments of acreage, excluding
commercial fields, required commencing at the end of the sixth year of each
contract. Under the terms of the Association Contracts, Ecopetrol will receive a
royalty equal to 20% of production (after pipeline tariffs are deducted) on
behalf of the Colombian government and, in the event a commercially feasible
discovery is made, Ecopetrol will acquire a 50% interest in the remaining
production, bear 50% of the development costs, and reimburse the joint venture,
from Ecopetrol's share of future production, for 50% of the joint venture's
costs of certain exploration activities. Upon acceptance of a field as
commercial, Ecopetrol will acquire a 50% interest therein and the interests of
the other parties to the contract, including the Company, will be reduced by
50%; all decisions regarding the development of a commercial field will be made
by an Executive Committee consisting of representatives of the parties to the
contract who will vote in proportion to their respective interests in such
contract. Decisions of the Executive Committee will be made by the affirmative
vote of the holders of over 50% of the interests in the contract.
If any commercial field in the respective contract areas produces in
excess of 60 million barrels, Ecopetrol's interest in production and costs for
such contract area increases as follows: (i) under the terms of the Dindal
Association Contract, such increases occur in 5% increments from 50% to 70% as
accumulated production from any field increases in 30 million barrel increments
from 60 million barrels to 150 million barrels; and (ii) under the terms of the
Rio Seco Association Contract, Ecopetrol's interest increases from 50% to 75% as
the ratio of the accumulated income attributable to the parties to the contract
other than Ecopetrol to the accumulated development, exploration and operating
costs of such parties (less any expenses reimbursed by Ecopetrol) increases from
one to one to two to one.
Under the terms of the Association Contracts, in the event a discovery is
made and is not deemed to be commercially feasible, the joint venture may expend
up to $2 million over a one year period to further develop the field, 50% of
which will be reimbursed if Ecopetrol subsequently accepts the commercial
feasibility thereof. If Ecopetrol does not declare the field commercial, the
joint venture may continue to develop the field at its own expense. In such
event, Ecopetrol will have the right to acquire a 50% interest therein upon
payment of 200% of the amounts expended by the joint venture, which payment may
be made out of Ecopetrol's share of future production.
- 16 -
Oil produced from the Dindal block to date under the long term production
tests has been sold to Ecopetrol. Upon Ecopetrol's declaration of the
commerciality of the Company's discovery, oil produced from the Dindal and Rio
Seco blocks may be sold to Ecopetrol or to third parties provided that 75% of
the purchase price is paid in U.S. dollars and the remainder in Colombian pesos.
In the event the production is required to satisfy internal demand for oil in
Colombia, the Company may be required to sell some or all of its production to
Ecopetrol at prevailing market prices.
The Company's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian corporate income tax at a rate of 35%. An
additional remittance tax is imposed upon the remittance of profits abroad at a
rate of 7%.
ACQUISITION OF INTEREST. Pursuant to an agreement dated August 14, 1995,
as amended, the Company acquired from GHK Company Colombia, a 15% interest in
the Association Contracts in consideration of the payment of $100,000 and its
share of the cost of drilling, testing and completing the El Segundo #1 well and
its proportionate share of the obligations for the first year of the Rio Seco
Association Contract. The Company acquired an additional 36.7% interest in the
Association Contracts indirectly through its acquisition of 100% of the
outstanding securities of GHK Company Colombia and Esmeralda Limited Liability
Company and its acquisition of 62.963% of the outstanding securities of
Cimarrona Limited Liability Company. For a more particular description of these
transactions, see "Certain Transactions."
The Company acquired a 6% interest in the Association Contracts
indirectly through its acquisition of 100% of the outstanding securities of
Petrolinson S.A. (Petrolinson"), the holder of such 6% interest, in
consideration of the issuance of 1,000,000 Common Shares to the shareholder of
Petrolinson, of which 995,000 shares are held in escrow until July 1997. As the
holders of the remaining 94% interest in the Association Contracts, including
the Company, had previously agreed to pay 100% of the exploration costs
attributable to such 6% interest through the exploration period, approximately
45% of the exploration costs for the Association Contracts attributable to the
6% interest acquired by the Company are paid by the other holders of interests
in the Association Contracts. The exploration period will terminate upon
Ecopetrol's declaration of the commerciality of a field.
Under the terms of a letter agreement dated September 11, 1992, as
amended, between GHK Company Colombia and Dr. Jay Namson, the holders of
interests in the Association Contracts, as a group, will be required to assign a
2% working interest in the Dindal Association Contract and the Rio Seco
Association Contract to Dr. Namson after recovery from production of 100% of all
costs incurred in connection with the exploration and development of the Dindal
and Rio Seco blocks since the completion of the first year work obligations
under the Dindal Association Contract. Accordingly, when such costs have been
recovered, the Company will be required to assign to Dr. Namson 2% of its
interests (or a 0.577% interest in each Association Contract, after adjusting
for the acquisition of a 50% interest by Ecopetrol which is expected to occur
prior to the assignment to Dr. Namson).
- 17 -
TAPIR ASSOCIATION CONTRACT, LLANOS BASIN
INTRODUCTION. The Company acquired an 11.875% interest in the Tapir
Association Contract (the "Tapir Association Contract") in April 1996. The Tapir
block consists of 250,000 acres located in the Llanos Basin of east central
Colombia and is crossed by two oil pipelines carrying production from nearby oil
fields. Other Tapir Association Contract interests are held by Ampolex (56.25%),
Mohave Oil & Gas Corp. ("Mohave") (10.205%), Doreal Energy (11.67%) and Heritage
Minerals Colombia ("Heritage Minerals") (10%), which serves as the operator.
EXPLORATION PROSPECTS. There are three exploration prospect types on the
Tapir block: several conventional Llanos Basin small structural closures, a deep
Paleozoic anomaly and two basal Cretaceous stratigraphic prospects. The small
structural closures are relatively low risk, but are expected to have low
reserves potential (10-30 MMBO each). The Paleozoic prospect is of geologic
interest, but relies on unproven source and reservoir rocks, and is therefore
high risk until further geologic work can be completed. The geologic risk for
the two Cretaceous stratigraphic prospects depends on the effectiveness of the
lateral seal between the Ubaque sandstone and the adjacent Paleozoic section.
The Mateguafa prospect, one of the small structural closures in the
central portion of the Tapir block, has been selected as the first exploration
drill site in the Tapir block and is expected to commence drilling in late 1997
or the first quarter of 1998, following receipt of required permits from the
Ministry of Environment.
EXISTING WELL. In 1993, the Macarenas #1 well, a discovery well, was
drilled on the Tapir block and produced 320 BOPD in a short-term test, but was
not completed for production. Since the well was drilled and tested, additional
oil pipeline infrastructure has been built in the area. The operator plans to
place the well on long-term production test after the completion of the
exploratory well to determine sustainable production rates and the extent of the
reservoir.
TERMS OF TAPIR CONTRACT. The Tapir Association Contract was effective on
February 6, 1995 on terms substantially similar to the Rio Seco Association
Contract. Heritage Minerals, the Tapir Association Contract operator, has
completed an 83 kilometer seismic program in the field, which satisfied the work
program for the first year of the Tapir Association Contract and part of the
second year. The commitment for the second year well has been extended and the
exploration well required in the second year work program is expected to
commence drilling in late 1997 or the first quarter of 1998.
The Company acquired its interest in the Tapir Association Contract in
April 1996 in consideration of the payment for $104,000 which represents
reimbursement for past seismic costs and permit administration, and its
agreement to pay its proportionate share of the costs of a seismic program, the
first exploratory well, the long-term production test on the Macarenas #1 well
(assuming the parties elect to proceed therewith) and certain additional costs
to earn its interest in the Tapir Contract. The Company estimates that its
proportionate share of these costs, which are required to be paid to retain its
interest in the Tapir Association Contract, is approximately $300,000.
- 18 -
AUSTRALIA
PERTH BASIN, EP381 AND WHICHER RANGE PERMITS.
The Company holds an 11.77% working interest in Exploration Permit 381
and the Whicher Range Permit Application (which has been conditionally granted
but not yet issued), both of which are located in the southern Perth Basin,
Western Australia. Other interests in these permit areas are held by: Pennzoil
(44.115%), Amity Oil (30.115%) and GeoPetro Company (14%).
The EP 381 Permit covers an area of 455,405 acres; the Whicher Range
Permit Application covers 439,141 acres and adjoins the EP 381 Permit to the
north for a total area of 894,546 acres. The Whicher Range Permit Application
has been reserved for the applicants pending resolution of native claims
pursuant to the Australian NATIVE CLAIMS ACT 1993.
The greater Perth Basin produces gas and oil from accumulations onshore
in a region north of the Company's permit areas and north of the city of Perth.
The area in and around the Company's permit areas is the site of farming and
mining activities which has created an apparent strong local demand for energy
which would be the intended market for any natural gas produced from the EP 381
or the Whicher Range Permits.
The principal exploration interest in the EP 381 and the Whicher Range
Permit areas is for natural gas generated in Permian coal measures and
reservoired within adjacent Permian sandstones. The operator of the permit areas
has conducted reservoir studies on the Whicher Range Permit Application area,
which contains the Whicher Range Gas Field discovered by Union Oil of California
in 1968. The results of these studies indicate that the use of different
drilling technologies and newer completion techniques could make the Whicher
Range Gas Field economic to develop. Based on this technical assessment and the
market for natural gas now believed to be available in the area, the partners
plan to re-enter and test the Whicher Range #1 well in 1997. If this re-entry
and test is successful, the parties may drill an additional well in late 1997
and initiate additional seismic programs in the block. In addition, a new
seismic study was commenced in March 1997 to delineate further prospects in the
EP 381 prospect area. In May 1995, the Scott River #1 well was drilled in the
southern portion of EP 381, encountered Permian sandstones which had
sub-commercial saturations of natural gas and was abandoned.
The Company acquired its interest in EP381 and the Whicher Range Permit
Application by virtue of a farm-in agreement dated March 6, 1995 and an
additional assignment of an interest in 1996. The parties to EP 381 have
complied with the work commitments required under EP 381 through the end of the
current contract year; the parties to the Whicher Range Permit Application
believe that the planned re-entry in the Whicher Range #1 well will satisfy the
work commitment at least through the first year of such permit.
BASS BASIN, BLOCK T27P.
The Company holds a 20% working interest in Block T27P, a 1.8 million
acre block in approximately 70 meters of water, in the Bass Basin, the central
of three basins offshore southern Australia. The easternmost basin is the
Gippsland Basin where BHP Petroleum and Esso have a series of large oil and gas
fields. The westernmost basin is the Otway Basin, the
- 19 -
site of recent gas discoveries by BHP Petroleum and others which will likely
serve the South Australia and Victoria gas market. The T27P block lies about
halfway between the Victoria coast to the north and the Tasmania coast to the
south (about 90 kilometers each way). The Bass Basin has been the site of a
series of gas and oil shows and discoveries, including the Yolla Field, which is
adjacent to Block T27P. The Yolla Field was discovered by Amoco in the
mid-1980's and has not yet been appraised or developed.
Globex Exploration, the operator of the permit with an 80% working
interest, was granted the Offshore Petroleum Exploration Permit effective August
10, 1994 (the "Bass Basin Permit"). Globex completed a 1,000 kilometer 2D
seismic program in the block. The remaining work commitment in the block
consists of a 3D seismic survey and two exploration wells. Globex has selected a
drillable prospect some 10 kilometers north of the Yolla Field and is seeking
additional participants in the block to share the cost of an exploratory well
which is estimated to be approximately $5 million. As suitable drilling rigs are
not available in the near term, Globex has applied for a permit extension in the
block until a suitable rig can be contracted.
In March 1996, the Company acquired a six-month option to purchase its
interest in the block for $250,000 and exercised that option in September 1996.
Pursuant to the terms of the option agreement, the Company may elect to farmout
up to 50% of its interest in the Bass Basin Permit. In addition, if Globex
Exploration and the other interest holders seek to enter into a farmout, the
Company has agreed to participate proportionally with such parties in such
farmout provided that its interest may not be reduced below 10%.
PAPUA NEW GUINEA
PERMIT PPL-182
The Company holds 100% of exploration permit PPL-182 in southern Papua
New Guinea effective June 11, 1996. The permit covers an area of 1,200,000 acres
located both onshore and offshore in the Fly River Delta and the Gulf of Papua.
The nearest discovery to the permit area is the Pandora Gas Discovery
located in PPL-82 approximately 150 kilometers to the east in the Gulf of Papua.
The International Petroleum Corporation and Chevron announced in March 1996 a
feasibility study for the delivery of gas from the Pandora Gas Field and from
other fields in Papua New Guinea to be transported south to northern Australia.
Past exploration activity within PPL-182 has resulted in the acquisition
of seismic data and the drilling of several exploration wells. The Company's
first year work program consists of a geological and geophysical review of
existing data. Based on the results of this study, the Company will decide
whether to proceed with the second year's work commitment which provides for
seismic reprocessing and acquisition of a high resolution aeromagnetic survey
and is expected to cost approximately $500,000. At the end of the second year
work program, the Company will decide whether to continue its exploration
program or relinquish the permit. The Company plans to secure an industry
partner or partners to underwrite a significant portion of future exploration
costs.
- 20 -
OTHER PROPERTIES
As a result of the Amalgamation, Seven Seas acquired three mineral
properties owned by Rusty Lake, two of which have been sold. The remaining
property, consisting of a 60% interest in two patented mining parcels located in
Whitney Township in the Province of Ontario, is being offered for sale. The
Company has no plans to explore these mining properties.
Since its inception, the Company has been involved in exploration
activities in Colombia, Australia, Argentina, Turkey and Papua New Guinea.
Exploration activities in Argentina and Turkey have been discontinued and an
option for the right to participate in future exploration activities in North
Africa was never exercised.
SUPPLEMENTARY INFORMATION IN RESPECT OF OIL AND GAS PROPERTIES
RESERVES REPORTED TO OTHER AGENCIES. No estimates of the Company's total
proved net oil and gas reserves have been filed with or included in reports to
any federal authority or agency in the United States other than the Commission.
PRODUCTIVE WELLS AND ACREAGE. The following table sets forth the
productive oil and gas wells and developed acreage owned by the Company as of
December 31, 1996:
Wells 1
--------------------------------------
Developed
Oil Gas Acreage
------------------ ----------------- ------------------
GROSS NET GROSS NET GROSS 2 NET
Colombia........... 2 1.034 640 331
- ----- -- -- --- ---
TOTAL....... 2 1.034 640 331
== ===== == == === ===
1One or more completions in the same well bore are counted as one well.
2Assumes 320 acre well spacing.
UNDEVELOPED ACREAGE. The following table sets forth estimates of the
undeveloped acreage for which oil and gas leases or concessions were held by the
Company as of December 31, 1996.
- 21 -
Gross Acres Net Acres
--------------- ------------
Colombia.................. 355,360 84,138
Papua New Guinea.......... 1,200,000 1,200,000
Australia................. 2,694,546 317,148
--------- ---------
TOTAL.............. 4,249,906 1,601,286
========= =========
DRILLING ACTIVITIES. The following table sets forth the number of wells
drilled by the Company since its inception:
EXPLORATORY DEVELOPMENT
----------------------------- --------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
---------- --- ---------- ---
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
Year ended
December 31, 1996:
Colombia 2 1.034 - - - - - -
Argentina - - 1 .25 - - - -
-- ----- -- --- -- -- -- --
2 1.034 1 .25
== ===== == === == == == ==
Year ended
December 31, 1995:
Australia - - 1 .1 - - - -
== ===== == === == == == ==
PRESENT ACTIVITIES. As of December 31, 1996, one well was in progress.
ADDITIONAL INFORMATION. Reference is made to the Supplemental Oil and Gas
Information (Unaudited) included in the Notes to Consolidated Financial
Statements of the Company included herein for additional information regarding
the Company's oil and gas producing activities prepared in accordance with the
requirements of Statement of Financial Accounting Standards No. 69 "Disclosures
About Oil and Gas Producing Activities."
- 22 -
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information as of April 29, 1997
with respect to the beneficial ownership of the Common Shares, by (i) each
person known by the Company to own beneficially more than 5% of the issued and
outstanding Common Shares, (ii) each director of the Company and each of the
Named Officers, and (iii) all executive officers and directors of the Company as
a group.
NUMBER OF SHARES PERCENT
BENEFICIAL OWNER OF COMMON SHARES (1) CLASS
- ---------------- --------------------- --------
Robert A. Hefner III
c/o The GHK Company
Suite 470
6305 Waterford Boulevard
Oklahoma City, Oklahoma 731118 6,750,300(2) 19.5%
Breene M. Kerr 3,885,885(3) 11.2%
c/o Brookside Company
115 Bay Street
Easton, Maryland 21601
Brian Egolf 126,386(4) *
William G. McIntosh 55,000 *
James A. Millard 65,000(5) *
Harvey S. Robinson 46,700(6) *
Timothy T. Stephens 355,172(7) 1.0%
Albert E. Whitehead 1,291,858(8) 3.7%
John B. Zaozirny 65,000(9) *
David F. DeCort 206,915(10) *
John P. Dorrier 237,486(11) *
ALL EXECUTIVE OFFICERS AND DIRECTORS
AS A GROUP (10 PERSONS) 9,199,817(12) 25.8%
- ---------------
* Less than 1%
(1) Based on 34,699,575 Common Shares issued and outstanding on April 24, 1997.
Unless otherwise indicated, each of the parties listed has sole voting and
investment power over the shares owned. The number of shares indicated
includes, in each case, the number of Common Shares issuable upon exercise
of stock options ("Options") subject to the Amended 1996 Stock Option Plan,
to the extent that such Options are currently exercisable. For purposes of
this table, Options are deemed to be "currently exercisable" if they may be
exercised within 60 days following April 24, 1997. In addition, certain of
the shares listed above are currently held in escrow pursuant to the terms
of the GHK Escrow Agreement, which is more particularly described under
"Certain Relationships and Related Transactions - GHK Transaction" and under
the Founder's Escrow Agreement, which is more particularly described under
"Certain Relationships and Related Transactions - Transactions with
Promoter". Both the GHK Escrow
- 23 -
Agreement and the Founder's Escrow Agreement restrict the ability of the
holders of securities subject thereto to transfer such securities but do not
restrict such holders from exercising voting rights with respect to such
securities.
(2) Includes 50,000 Common Shares currently issuable upon exercise of an Option,
20,000 shares held by an entity in which Mr. Hefner has a substantial
interest and 5,040,910 Common Shares beneficially owned by Mr. Hefner and
held in escrow pursuant to the Escrow Agreement.
(3) Consists solely of shares beneficially owned by a limited partnership in
which Mr. Kerr serves as a general partner and includes 2,872,826 Common
Shares held in escrow pursuant to the Escrow Agreement.
(4) Includes 12,650 Common Shares owned by a member of Mr. Egolf's family, 2,000
Common Shares owned by a trust for the benefit of members of Mr. Egolf's
family and 50,000 Common Shares currently issuable upon exercise of an
Option.
(5) Includes 30,000 Common Shares currently issuable upon exercise of Options.
(6) Includes 8,000 shares owned by Mr. Robinson's wife and 1,700 shares owned by
members of his immediate family over which he has a power of attorney but no
pecuniary interest and in which he disclaims beneficial ownership.
(7) Includes 172,000 Common Shares currently issuable upon exercise of Options.
(8) Includes 185,000 Common Shares currently issuable upon exercise of Options
and 333,333 Common Shares held in escrow pursuant to the Founder's Escrow
Agreement.
(9) Includes 60,000 Common Shares currently issuable upon exercise of Options.
(10)Includes 801 shares owned by Mr. DeCort's wife and 154,000 Common Shares
currently issuable upon exercise of Options.
(11)Includes 75,000 Common Shares currently issuable upon exercise of Options
and an additional 151,000 Common Shares which may be issuable upon exercise
of Options granted by the Company.
(12)Includes 927,000 Common Shares currently issuable upon exercise of Options
and an aggregate of 7,913,736 Common Shares and 333,333 Common Shares held
in escrow pursuant to the GHK Escrow Agreement and the Founder's Escrow
Agreement, respectively.
VOTING SUPPORT AGREEMENTS
Under the terms of a Voting Support Agreement executed in connection with
the GHK Transaction described below under "Certain Relationships and Related
Transactions," Seven Seas, Robert A. Hefner III, Breene M. Kerr, Albert E.
Whitehead, George H. Plewes, and Timothy T. Stephens agreed to vote or cause to
be voted all shares owned or controlled by them in favor of the slate of
directors proposed by the Company's chief executive officer. The Voting Support
Agreement also provides that a sale by Messrs. Hefner and Kerr of a block of
10,000 Common Shares or more which were initially subject to the GHK Escrow
Agreement, must first be offered to be made through Yorkton Securities Inc. or
such other investment dealer as may be designated by the Board of Directors or
the securities sold will remain subject to the Voting Support Agreement. In the
event any such dealer is unable or unwilling to sell such securities in a timely
manner at a price acceptable to the seller, the seller may sell to a third party
without being subject to the Voting Support Agreement provided that such sale is
not to a person or one or more of a group of persons acting in concert, who is
acquiring the securities of the seller in connection with a takeover bid, other
than where such takeover bid is an offer made generally to the shareholders of
the Company. The Voting Support Agreement will terminate on the earlier to occur
of July 19, 1998, the date either Messrs. Egolf and Hefner are not elected as
directors; the date two of Messrs. Albert E. Whitehead, George H. Plewes and
Timothy T. Stephens are not elected as directors or cease to be officers of the
Company; if, during any six month period, the Company issues in excess
- 24 -
of 25% of the then issued and outstanding shares of the Company at the beginning
of such period, without obtaining shareholder approval; or the failure of the
Company to maintain directors' and officers' insurance.
Under the terms of a voting support agreement by and between the Company and
Hazel Ventures Ltd., the sole shareholder of Petrolinson ("Hazel Ventures"),
Hazel Ventures agreed that prior to July 19, 1998, it will vote all Common
Shares of the Company owned or controlled by it in favor of the slate of
directors proposed by the Company's chief executive officer and will require any
purchaser of its shares to agree to be bound by the terms of the agreement
unless the purchaser acquires the shares in the open market. Hazel acquired
1,000,000 Common Shares, or 2.9% of the Company's outstanding Common Shares, in
exchange for the transfer of its ownership of Petrolinson, the holder of a 6%
interest in the Association Contracts, to a subsidiary of the Company.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
The information set forth below, furnished to the Company by the
respective individuals, shows as to each director and executive officer of the
Company (i) his name and age; (ii) his principal positions with the Company;
(iii) his principal occupation or employment during the last five years; (iv)
other directorships, and (v) the month and year in which he began to serve as a
director. No family relationship exists among any of the executive officers and
directors of the Company.
PRINCIPAL OCCUPATION
DURING THE LAST FIVE
NAME AND AGE PRESENT POSITION YEARS; OTHER
SINCE WITH THE COMPANY DIRECTORSHIPS DIRECTOR
- ------------ ---------------- -------------------- --------
Albert E. Whitehead Chairman, Chief Chairman and Chief February 1995
(67)(1) Executive Officer Executive Officer of
and a Director the Company since
February 1995; Chairman
and Chief Executive
Officer of Garnet
Resources Corporation,
a publicly held oil and
gas exploration
company, from 1987
through February 1995;
Director, Americomm
Resources Corporation
- 25 -
Timothy T. Stephens President and a President of the March 1995
(44)(1) Director Company since March
1995; Vice President of
Enron Capital and Trade
Resources, the merchant
bank and trading
subsidiary of Enron
Corporation, from 1991
to 1995.
John P. Dorrier (44) Executive Vice Executive Vice N/A
President President of the
Company since March
1995; from 1987 through
March 1995, Mr. Dorrier
held various positions
with BHP Petroleum,
including Vice
President Exploration,
the Americas
David F. DeCort (41) Vice President Vice President - N/A
- Finance; Finance of the Company
Secretary and since June 1995;
Chief Financial Treasurer/Controller of
Officer Huffco Group Inc., a
Houston independent oil
and gas company, from
August 1990 to June
1995
Brian Egolf (48) Director President, Petroleum November, 1996
Management Corporation,
a private oil and gas
exploration company
Robert A. Hefner III Director President, The GHK November, 1996
(62)(1) Corporation, a private
company engaged in oil
and gas exploration
William G. McIntosh Director Retired Banker February 1995
(67)(2)
James A. Millard Director Solicitor with February 1995
(65)(3) MacKimmie Matthews,
Barristers and
Solicitors
Harvey S. Robinson Director Retired oilman; from February 1995
(70)(3) 1991 to 1993, Mr.
Robinson served as
president and the
geologist of Robinson
Resources Ltd., a
- 26 -
private company engaged
in petroleum
exploration and
development.
John B. Zaozirny Director Counsel to McCarthy February 1995
(49)(2) Tetrault, Barristers
and Solicitors
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Stock Option and Compensation Committee.
Executive officers of the Company serve at the pleasure of the Board of
Directors. The term of office of each director of the Company ends at the next
annual meeting of the Company's shareholders or when his or her successor is
elected and qualifies. Vacancies on the Board are filled by the remaining
directors and directors elected to fill such vacancies hold office until the
next annual meeting of the Company's shareholders.
As a condition of completing the GHK transaction, Messrs. Robert A Hefner,
III and Brian Egolf were appointed as members of the Board of Directors. Under
the terms of the Voting Support Agreement executed in connection with the GHK
Transaction, Seven Seas, Robert A. Hefner III, Breene M. Kerr, Albert E.
Whitehead, George H. Plewes, and Timothy T. Stephens agreed to vote or cause to
be voted all shares owned or controlled by them in favor of the slate of
directors proposed by the Company's chief executive officer. Under the terms of
the voting support agreement executed in connection with the acquisition of
Petrolinson, Hazel Ventures has agreed to vote or cause to be voted all shares
owned or controlled by it in favor of the slate of directors proposed by the
Company's chief executive officer. For additional information on the Voting
Support Agreements, including their term, see "Principal Stockholders - Voting
Support Agreements." For additional information on the GHK Transaction, see
"Certain Relationships and Related Transactions - GHK Transaction."
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company held three meetings during 1996 and
took action by unanimous written consent twenty times during 1996. All directors
attended 75% or more of the total number of meetings of the Board and of the
committees of which they were members.
The Executive Committee, the Audit Committee and the Stock Option and
Compensation Committee (the "Compensation Committee") are the only standing
committees of the Board. There is no formal nominating committee; the Board of
Directors or the Executive Committee performs this function.
The Executive Committee, which is currently composed of Messrs. Whitehead,
Stephens, and Hefner, has all the powers of the Board of Directors in the
management of the business and affairs of the Company, except as such powers are
limited by the Yukon Business Corporations Act. During 1996, the Executive
Committee met one time.
- 27 -
The Audit Committee, which is currently composed of Messrs. McIntosh and
Zaozirny, consults with the auditors of the Company and such other persons as
the members deem appropriate, reviews the preparations for and scope of the
audit of the Company's annual financial statements, makes recommendations
concerning the engagement and fees of the independent auditors, and performs
such other duties relating to the financial statements of the Company as the
Board of Directors may assign from time to time. The Audit Committee met two
times during 1996 and took action by unanimous consent twice during 1996.
The Compensation Committee, which currently is composed of Messrs. Millard
and Robinson, has all of the powers of the Board of Directors, including the
authority to issue shares or other securities of the Company, in respect of any
matters relating to the administration of the Company's 1996 Stock Option Plan
and the compensation of officers, directors, employees and other persons
performing substantial services for the Company. The Compensation Committee took
action by unanimous written consent twice during 1996.
DIRECTORS' FEES
Directors who are officers or employees of the Company receive no
additional compensation for their service as members of the Board of Directors
or as members of Board committees. Directors who are not officers or employees
of the Company are eligible to participate in the Company's Amended 1996 Stock
Option Plan and are reimbursed for their out-of-pocket expenses incurred in
connection with their service as directors, including travel expenses. In July
1996, each non-employee director received a five year option to purchase 10,000
Common Shares at an exercise price of $7.125 per share. In November 1996, upon
their election as directors, Messrs. Hefner and Egolf each received a five year
option to purchase 50,000 Common Shares at an exercise price of $18.75 per
share. In each case, the exercise price of the options was equal to the market
value for a Common Share on the date of grant.
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
which was awarded or paid to, or earned by, the Company's Chief Executive
Officer and the Company's four most highly compensated officers (other than the
Chief Executive Officer) who were serving as officers at December 31, 1996, and
whose total salary and bonus during the fiscal year ended December 31, 1996
exceeded $100,000 (the "Named Officers").
- 28 -
LONG TERM COMPENSATION
-------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ -------------------- --------
OTHER
ANNUAL RESTRICTED ALL OTHER
COMPEN- SHARES LTIP COMPEN-
NAME AND PRINCIPAL BONUS SATION AWARD(S) OPTIONS/ PAYOUTS SATION
POSITION YEAR SALARY ($) ($) ($)(1) ($) SARS(#) ($) ($)(3)
- ------------------ ---- ---------- ---- ------ ----------- -------- -------- ---------
Albert E. Whitehead 1996 $150,000 -0- -0- -0- 185,000 -0- 14,634
Chief Executive 1995 125,000 -0- -0- -0- 200,000 -0- --
Officer
Timothy T. Stephens 1996 $135,000 93,840 -0- -0- 172,000 -0- 13,170
President 1995 106,875(2) -0- -0- -0- 250,000 -0- --
John P. Dorrier 1996 $120,000 83,520 -0- 151,000 -0- 11,707
Executive Vice 1995 80,000(2) -0- -0- -0- 125,000 -0- --
President
David F. DeCort 1996 $ 90,000 62,640 -0- -0- 124,000 -0- 8,780
Vice President - 1995 52,500(2) -0- -0- -0- 100,000 -0- --
Finance
- --------------------------------------------------------------------------------------------------------------
(1) Except as otherwise indicated, the dollar value of perquisites and other
personal benefits for each of the Named Executive Officers was less than
established reporting thresholds.
(2) Represents salary received from commencement of employment through December
31, 1995 from the Company and the Predecessor, which amount does not reflect
an annual rate of compensation.
(3) Consists solely of amounts contributed by the Company to the Named Executive
Officer's account in the Company's 401(k) Plan.
- 29 -
OPTION/SAR GRANTS DURING 1996
The following table sets forth information regarding individual grants of
Options by the Company during the fiscal year ended December 31, 1996 to each of
the Named Officers, and their potential realizable values.
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF
SHARE PRICE APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM (1)
- -------------------------------------------------------------------------- -----------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS/SAR'S
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS/SAR'S EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED # FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------- -------------- ----------- ---------- ------- -------
Albert E. Whitehead 85,000 13.1% $18.75 11/26/2001 440,324 973,000
100,000 15.4% $7.125 07/23/2001 196,851 434,988
Timothy T. Stephens 82,000 12.6% $18.75 11/26/2001 424,783 938,659
90,000 13.8% $7.125 07/23/2001 177,166 391,490
John P. Dorrier 71,000 10.9% $18.75 11/26/2001 367,800 812,741
80,000 12.3% $7.125 07/23/2001 157,480 347,990
David F. DeCort 54,000 8.3% $18.75 11/26/2001 279,735 618,141
70,000 10.7% $7.125 07/23/2001 137,795 304,492
- ----------------
(1) The assumed rates of annual appreciation are calculated from the date of
grant through the assumed expiration date. Actual gains, if any, on stock
option exercises and Common Share holdings are dependent on the future
performance of the Common Shares and overall stock market conditions.
There can be no assurance that the value reflected in the table will be
achieved.
- 30 -
OPTION EXERCISES DURING 1996 AND FISCAL YEAR END OPTION VALUES
The following table provides information related to Options exercised by
the Named Officers during 1996 and the number and value of unexercised Options
held by the Named Officers at year-end. The Company does not have any
outstanding stock appreciation rights.
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS, WARRANTS/SARS AT OPTIONS, WARRANTS/SARS
FISCAL YEAR-END (#)(1) AT FISCAL YEAR-END ($)(3)
SHARES ACQUIRED VALUE REALIZED ------------------------- --------------------------
NAME ON EXERCISE (#) ($)(2) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- --------------- -------------- ----------- ------------- ----------- -------------
Albert E. Whitehead 200,000 $2,312,500 185,000 -0- $1,100,000 -0-
Timothy T. Stephens 228,333 $3,767,951 193,667 -0- $1,192,714 -0-
John P. Dorrier 50,000 $328,750 226,000 -0- $2,183,125 -0-
David F. DeCort 30,000 $502,500 194,000 -0- $1,986,250 -0-
- ------------------------------------------------------------------------------------------------------------
(1) The number of exercisable and unexercisable Options set forth in the
above table may differ from the number reflected in the table on page 27
because the information in the above table is as of December 31, 1996.
(2) Represents the difference between the exercise price of the option and
the closing price on the date of exercise.
(3) Based on a closing price on December 31, 1996 of $18.125 per share.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company and each of Messrs. Stephens, Dorrier and DeCort have entered
into three year employment contracts which provide that they will receive annual
base salaries of $175,000, $150,000 and $112,500, respectively, and, in the sole
discretion of the Compensation Committee of the Board, may receive annual merit
increases, annual bonuses and stock option awards. The contracts may be
terminated for "cause" which includes death or serious incapacity and the
executive officers may resign upon three months' prior written notice.
The Company and each of Messrs. Stephens, Dorrier and DeCort have also
entered into agreements which provide for payments to the executive in the event
there is a Change of Control of the Company and the executive's employment is
terminated (i) by the Company within twelve months thereafter, (ii) by the
executive within six months thereafter, or (iii) by the executive between six
and twelve months after a Change of Control if a Triggering Event has occurred.
In any such event, the executive shall be entitled to a payment equal to the
aggregate salary payable for the remaining term of his employment agreement and
the Company shall pay the executive's health insurance premium for a period of
one year unless the executive has secured comparable health insurance prior
thereto. If bonuses are paid by the Company for the year in which the
executive's employment terminated, the executive shall be entitled to a bonus
equal to the most recent annual bonus paid to him. In addition, all stock
options held by the executive shall be extended until the earlier to occur of
the expiration date of the option or eighteen months after the date of the
termination of his employment by the Company or the date of his notice of intent
to
- 31 -
terminate his employment if he elected to resign. The agreements also provide
that in the event the exercise price of any option granted simultaneously with
the option issued to the executive is reduced, the exercise price of the
executive's option shall also be reduced. For purposes of the agreement, the
term "Change of Control" is defined to include the acquisition by any person or
combination of persons of a sufficient number of securities of the Company to
materially affect the control of the Company which, for purposes of the
agreement, shall be deemed to occur if 20% or more of the votes which may be
cast in the election of directors have been acquired by any person or
combination of persons; a merger, consolidation, or amalgamation with or into
any other person if all or part of the outstanding voting securities of the
Company shall be changed, reclassified, converted, exchanged or otherwise
acquired for shares or other securities of the Company or any other person or
for cash or any other property, unless such transaction has been approved by a
majority of the directors in office on April 28, 1997; a majority of the
directors in office on April 28, 1997 shall cease to serve as directors of the
Company for any reason including resignation; the sale or other transfer of
assets which constitute more than 50% of the consolidated assets of the Company
(measured by either book value or fair market value) or which generated more
than 50% of the consolidated operating income or cash flow of the Company. The
term "Triggering Event" shall include any adverse change in the duties, powers
or compensation of the executive in effect prior to the Change in Control or a
change in the person to whom the executive reports, other than as a result of a
promotion in the normal course of business.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE GHK TRANSACTION
In April 1996, the Company and GHK Company Colombia, an Oklahoma
corporation controlled by Robert A. Hefner III, entered into a non-binding
letter of intent governing a proposed acquisition by the Company of an
additional 35% participating interest in the Association Contracts in
consideration of the issuance of up to 16,000,000 Common Shares by the Company
to three entities holding such interests or to their respective shareholders
(collectively, the "GHK Transaction"). Effective July 26, 1996, pursuant to the
terms of three separate share purchase agreements, the Company agreed to issue
an aggregate of 16,777,143 Common Shares to nineteen unrelated parties, in
consideration of the Company's acquisition of (a) 100% of the issued and
outstanding shares of GHK Company Colombia which serves as the operator under
the Association Contracts and holds a 10.944% interest in such contracts, (b)
100% of the membership interests of Esmeralda Limited Liability Company
("Esmeralda") which holds a 9.776% interest in the Association Contracts, and
(c) 62.963% membership interest in Cimarrona Limited Liability Company
("Cimarrona") which holds a 25.38% interest in the Association Contracts. As a
result of the transaction, the Company acquired an additional 36.7% indirect
interest in the Association Contracts. As a condition to the GHK Transaction,
the Company also entered into the Registration Rights Agreement, the Escrow
Agreement and the Management Agreement, each of which is more particularly
described below, and the Voting Support Agreement which is more particularly
described above under "Principal Stockholders."
Pursuant to the terms of the share purchase agreement between the Company
and Robert A. Hefner III, the Company purchased 100% of the issued and
outstanding shares of GHK Company Colombia from Mr. Hefner in consideration for
the issuance of 5,002,972 Class A Preferred Shares Series 1 of the Company to
him. Pursuant to the terms of the share purchase agreement between the Company
and the members of Esmeralda, the Company purchased 100% of the membership
interests of Esmeralda from such members in consideration for the issuance of
- 32 -
an aggregate of 4,469,028 B Special Warrants (the "B Warrants") to such members.
Pursuant to the terms of the share purchase agreement between the Company and
the members of Cimarrona, the Company purchased a 62.963% membership interest in
Cimarrona from such members in consideration for the issuance of an aggregate of
7,305,143 B Warrants to such members. The Preferred Shares and the B Warrants
were issued at a deemed price per share of $9.125 which was based upon the
closing price of the Company's Common Shares on the Canadian Dealer Network on
July 26, 1996. As a condition to each purchase agreement, the Company agreed
that two representatives of the sellers under such agreements would be appointed
to the Board of Directors of the Company and Messrs. Robert A. Hefner, III and
Brian Egolf are serving on the Board of Directors as their representatives. In
addition, Mr. Hefner and Breene M. Kerr entered into the Voting Support
Agreement, more particularly described above under "Principal Stockholders."
Each B Warrant was exercisable into one Common Share without payment of
additional consideration and was automatically converted into a Common Share, in
accordance with the terms of the Company's Articles of Continuance, in February
1997. Each Preferred Share was entitled to one vote per share, was exercisable
into one Common Share without payment of additional consideration and was also
automatically converted into a Common Share, in accordance with the terms of the
Company's Articles of Continuance, in February 1997. As the Preferred Shares
were issued to Mr. Hefner in lieu of B Warrants to enable him to effect the sale
of the shares of GHK Company Colombia on a tax-free basis, Mr. Hefner agreed to
indemnify the Company from any tax liability to which the Company became subject
as a result of the transaction.
The shares of GHK Company Colombia and the 62.963% interest in Cimarrona
were transferred to Seven Seas Petroleum Colombia Inc.; 50% of the membership
interest in Esmeralda was transferred to Seven Seas Petroleum Colombia Inc.; and
50% of such membership interest was transferred to Seven Seas Petroleum
Holdings, Inc. as a limited liability company is required to have a minimum of
two members.
As a condition of completing the GHK Transaction, the Company also entered
into a Registration Rights Agreement with the holders of the B Warrants and the
Preferred Shares which currently entitles such holders to notice of proposed
public offerings or private placements by the Company under the Securities Act
(Ontario) and to include Common Shares held by such holders in such offerings
subject to limitations which may be imposed by the managing underwriter of any
such offering. The Registration Rights Agreement will terminate on the earlier
to occur of July 26, 1998 or the termination of the Voting Support Agreement.
As a condition of the Company obtaining the consent of the Ontario
Securities Commission to the GHK Transaction, the Company, the holders of
Preferred Shares and B Warrants and the Montreal Trust Company of Canada, as
trustee, entered into an escrow agreement dated July 26, 1996 (the "GHK Escrow
Agreement") pursuant to which 70% of the securities issued by the Company in the
GHK Transaction, or upon conversion or the securities issued therein, are held
in escrow. An aggregate of 11,744,000 Common Shares are currently held in escrow
and such Common Shares may not be sold, assigned, pledged, or transferred until
released from escrow in accordance with the terms of the GHK Escrow Agreement.
Shares held in escrow may be voted by the registered holders thereof. Pursuant
to the terms of the Escrow Agreement, the securities held in escrow shall be
released as follows: (i) one-third of the securities deposited in escrow shall
be released on each of July 26, 1997, 1998 and 1999 or (ii) the securities may
be released in full if the Company or the owner of such securities provides the
Ontario Securities Commission with technical reports acceptable to the director
thereof that establish a determinate value as of April 26, 1996 for the
interests in the Association Contracts transferred to the Company or its
- 33 -
subsidiaries, of $118,908,000 or more. If interim technical reports establish a
determinate value of less than $118,908,000 for such interests, proportionate
releases from escrow may be permitted.
Prior to the GHK Transaction, GHK Company L.L.C. ("GHK L.L.C."), an
Oklahoma limited liability company, the principal owner of which is Robert A.
Hefner, III, provided administrative and management services to GHK Company
Colombia in connection with its obligations as operator of the Dindal and Rio
Seco blocks. As a condition of completing the GHK Transaction, the Company, GHK
Company Colombia and GHK L.L.C. entered into a Management Agreement pursuant to
which GHK L.L.C. was retained by GHK Company Colombia to perform the duties and
obligations of GHK Company Colombia under the Association Contracts and as
operator of the Dindal blocks under the joint operating agreement dated August
1, 1996 (the "JOA"). GHK Company Colombia agreed to pay GHK L.L.C. a monthly sum
equal to 100% of the overhead charges authorized under the JOA relating to such
blocks (which costs are estimated to be approximately $15,000 per month) plus an
additional $15,000 per month and to reimburse GHK L.L.C. for all expenses
incurred in the performance of its duties under the Management Agreement. The
costs and expenses under the JOA are paid by the interest holders under the
Association Contracts proportionately to their percentage interests therein.
From July 26, 1996 to December 31, 1996, GHK Company Colombia paid an aggregate
of $144,305 to GHK L.L.C. for services provided under this agreement. The
Management Agreement may be terminated by either party upon 180 days prior
written notice and will terminate upon the earlier to occur of (i) the drilling
and completion of both the second year well under the Rio Seco Association
Contract and the fourth year well under the Dindal Association Contract, or (b)
the declaration of a commercial field under either of the Association Contracts,
by Ecopetrol.
Prior to the GHK Transaction, neither Mr. Hefner, Mr. Egolf nor Mr. Kerr
were affiliated with the Company. As a result of the GHK Transaction, Messrs.
Hefner and Egolf were elected directors of the Company and Mr. Hefner and Mr.
Kerr became substantial shareholders of the Company. In addition, as a result of
an agreement between Mr. Hefner, in his capacity as the selling shareholder of
GHK Company Colombia, the members of Esmeralda and Cimarrona and Mr. Egolf
(collectively, the Sellers"), the Sellers paid Mr. Egolf an aggregate of 83,886
B Warrants, which were subsequently converted into 83,886 Common Shares, as
consideration for his services to the Sellers in connection with the GHK
Transaction.
TRANSACTIONS WITH PROMOTER. Mr. Albert E. Whitehead, Chairman and Chief
Executive Officer of the Company and a director, may be deemed a promotor of the
Company. In connection with the formation of the Predecessor of the Company in
February 1995, Mr. Whitehead received 1,000,000 Common Shares for a total
consideration of $1.00. As of condition of the Common Shares being listed on the
Toronto Stock Exchange ("TSE"), the TSE required Mr. Whitehead to place 500,000
Common Shares held by him in escrow in accordance with the TSE's founder stock
policy. Under the terms of the escrow agreement (the "Founder's Escrow
Agreement") between Mr. Whitehead, the Company and Montreal Trust Company of
Canada as escrow agent dated January 21, 1997, one-third of the shares subject
thereto were to be released from escrow on each of June 29, 1996, 1997 and 1998
and, accordingly, 333,333 Common Shares are currently subject to the Founder's
Escrow Agreement. For a description of the Common Shares and options held by Mr.
Whitehead, see "Principal Stockholders" and "Executive Compensation."
ITEM 8. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
- 34 -
ITEM 9. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION.
The Company's Common Shares have been listed on the Toronto Stock Exchange
("TSE") in Toronto, Ontario, Canada, since February 10, 1997 and currently trade
under the symbol "SVS.U". From June 30, 1995 through February 7, 1997 the
Company's Common Shares traded on the Canadian Dealer Network under the symbol
"SVSE.U". The following table summarizes the high and low closing prices as
reported on the Canadian Dealer Network for each quarterly period since the
commencement of trading through February 7, 1997 and the high and low sales
prices as reported on the TSE from February 10, 1997 through March 31, 1997. The
prices listed below are stated in U.S. dollars, which is the currency in which
they were quoted:
HIGH LOW
----- -----
(US $)
1995
- ----
Third Quarter 2.15 0.90
Fourth Quarter 1.15 0.60
1996
- ----
First Quarter 6.75 0.55
Second Quarter 10.50 5.25
Third Quarter 20.00 7.00
Fourth Quarter 25.75 14.75
1997
- ----
First Quarter (through February 7, 19.00 15.00
1997)
First Quarter (since February 10, 17.40 9.00
1997)
(B) HOLDERS.
As of April 29, 1997, the Common Shares of Seven Seas were held of record
by approximately 6,727 holders, including several holders who are nominees for
an undetermined number of beneficial owners.
(C) DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Shares since its inception nor does the Company intend to do so in the immediate
future. It is currently the policy of the Company's Board of Directors to retain
earnings to finance the Company's exploration and development activities and
operations and the expansion of the Company's business.
- 35 -
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Within the last three years, the Company issued the following securities
which were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
On June 30, 1995, upon the Amalgamation, 11,999,999 Common Shares of the
Company were issued to the holders of the common shares of the Predecessor and
680,464 Common Shares of the Company were issued to the holders of shares of
Rusty Lake. The Amalgamation was conducted in Canada, was effected in accordance
with the laws of British Columbia and approved by the Supreme Court of British
Columbia.
In March 1996, 2,000,000 Special Warrants were issued at a purchase price
of $2.75 per Unit pursuant to a brokered private offering of units conducted in
Canada pursuant to the British Columbia securities laws. The Units were
convertible into one common share and one half of one Class A share purchase
warrant (the "Class A Warrants"). Each whole Class A Warrant entitled the holder
thereof to acquire one additional Common Share at a price of $3.50 per share at
any time on or before March 14, 1997. Yorkton Securities Inc., First Marathon
Securities Limited and Griffiths McBurney & Partners Inc. served as agents for
the private placement and received a 7% commission on the gross proceeds
thereof. To the extent U.S. residents were involved in this transaction, the
Company believes that the issuance of securities was exempt from registration
under the Securities Act by virtue of the provision of Section 4(2) thereof.
In July 1996, the Company issued the following securities in the GHK
Transaction: (i) an aggregate of 7,305,143 B Special Warrants to certain members
of Cimarrona Limited Liability Company as consideration for the transfer of a
62.963% membership interest in Cimarrona Limited Liability Company by such
members to a subsidiary of the Company,; (ii) 4,469,028 B Special Warrants to
the members of Esmeralda Limited Liability Company as consideration for the
transfer of a 100% membership interest in Esmeralda by such members to a
subsidiary of the Company, and (iii) 5,002,972 Class A Preferred Shares to
Robert A. Hefner III as consideration for the transfer of all of the issued and
outstanding shares of GHK Company Colombia to a subsidiary of the Company. The B
Special Warrants and the Class A Preferred Shares were each issued at a deemed
purchase price of $9.125 per Special Warrant and per Preferred Share. Each B
Special Warrant and each Class A Preferred Share was convertible in each case
into one Common Share of the Company. To the extent U.S. residents were involved
in this transaction, the Company believes that the issuance of securities was
exempt from registration under the Securities Act by virtue of the provision of
Section 4(2) thereof.
In October 1996, 500,000 C Special Warrants were issued at a purchase
price of $15.00 per Unit pursuant to a brokered private offering of Units
conducted in Canada pursuant to the British Columbia securities laws. The Units
were convertible into one common share and one half of one Class B share
purchase warrant (the "Class B Warrants"). Each whole Class B Warrant entitles
the holder thereof to acquire one additional Common Share at a price of $18.50
per share at any time on or before October 15, 1997. Yorkton Securities and
Tuscarora Capital, Inc. jointly served as the agent for the private placement
and jointly received a 6% commission on the gross proceeds thereof. To the
extent U.S. residents were involved in this transaction, the Company believes
that the issuance of securities was exempt from registration under the
Securities Act by virtue of the provisions of Section 4(2) thereof.
- 36 -
In February 1997, 19,277,143 Common Shares were issued upon the automatic
conversion of (i) the Special Warrants issued in March 1996, (ii) the B Special
Warrants and the Class A Preferred Shares issued in July 1996, and (iii) the C
Special Warrants issued in October 1996. As the conversion of such securities
was automatic, to the extent U.S. residents were involved in such transaction,
the Company relied on the exemption from registration under the Securities Act
by virtue of the provisions of Section 3(a)(9) thereof, since the securities
issued were exchanged by the Company with existing security holders exclusively
and no commission or other remuneration was paid or given directly or indirectly
for soliciting such exchange.
In February 1997, 1,000,000 Common Shares were issued in a private
transaction to Hazel Ventures Ltd., a British Virgin Islands company, in
consideration of the transfer of 100% of the capital stock of Petrolinson S.A.
to a subsidiary of the Company in a transaction conducted outside of the United
States.
From February 1996 through March 1997, an aggregate of 690,333 Common
Shares were issued to directors and employees of the Company upon the exercise
of employee stock options at purchase prices of $0.75 to $7.125 per share. To
the extent U.S. residents were involved in these transactions, the Company
believes that the issuance of securities was exempt from registration under the
Securities Act by virtue of the provisions of Section 4(2) thereof.
In March 1997, 1,000,000 Common Shares were issued upon exercise of the
Class A Warrants at an exercise price of $3.50 per share. To the extent U.S.
residents were involved in this transaction, the Company believes that the
issuance of securities was exempt from registration under the Securities Act by
virtue of the provisions of Section 4(2) thereof.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The following statements are subject to the detailed provisions of the
Company's Articles of Continuance and By-Laws, do not purport to be complete,
and are qualified in their entirety by reference thereto.
The Company's Articles of Continuance authorizes the issuance of an
unlimited number of Common Shares without par value and an unlimited number of
Class A Preferred Shares, without par value. As of April 24, 1997, 34,699,575
Common Shares, are issued and outstanding. As of April 29, 1997, the Company had
6,727 shareholders of record.
COMMON SHARES
No holder of Common Shares has any preemptive right to subscribe for any of
the Company's securities. All outstanding shares are fully paid and
nonassessable. Holders of Common Shares are not entitled to cumulative voting
and are entitled to one vote per share with respect to all matters that are
required by law to be submitted to shareholders, including the election of
directors.
Subject to the prior rights of the holders of any Preferred Shares that may
be outstanding, holders of Common Shares are entitled to share pro rata in such
dividends as may be declared by the Board of Directors out of funds legally
available for that purpose. In the event of liquidation of the Company, all
assets available for distribution (after satisfaction of the prior rights of the
holders of any outstanding Preferred Shares) are distributable among the holders
of the Common Shares according to their respective holdings.
- 37 -
Montreal Trust Company of Canada, Suite 600, 530-8th Avenue, S.W., Calgary,
Alberta T2P 3S8, is the transfer agent and the registrar for the Company's
Common Shares.
The authorized but unissued Common Shares and Preferred Shares could be used
to dilute the share ownership of persons seeking to obtain control of the
Company, and thereby defeat a possible takeover attempt which, if shareholders
were offered a premium over the market value of their shares, might be viewed as
being beneficial to the Company's shareholders. In addition, the Preferred
Shares could be issued with voting, conversion rights and preferences which
would adversely affect the voting power and other rights of holders of Common
Shares.
PREFERRED SHARES
The Company's Articles of Continuance provide that the Board of Directors,
without shareholder approval, has the authority to issue Preferred Shares from
time to time in series and to fix the designation, powers (including voting
powers, if any), preferences and relative, participating, optional, conversion
and other special rights, and the qualifications, limitations, and restrictions
of each series, except that with respect to the payment of dividends and the
distribution of assets upon liquidation, each series shall rank equally with any
other series of Preferred Shares outstanding.
In the event of issuance, the Preferred Shares could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Such actions could have the effect of
discouraging bids for the Company, thereby preventing shareholders from
receiving the maximum value for their shares. Although the Company has no
present intention to issue any additional Preferred Shares, there can be no
assurance that the Company will not do so in the future.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS.
The following is a summary of the principal Canadian income tax
considerations generally applicable to nonresidents of Canada who hold the
Common Shares as capital property, deal at arm's length with the Company and do
not use or hold and are deemed not to use or hold their Common Shares in the
course of carrying on a business in Canada and do not carry on insurance
business in Canada. This summary has been prepared by reference to the existing
provisions of the Income Tax Act (Canada) (the "Act"), the Income Tax
Regulations (the "Regulations"), all published proposals for the amendment of
the Act and the Regulations to the date hereof and the published administrative
practices of Revenue Canada, the agency that administers the Act. Although this
summary does not specifically address the provincial income tax consequences of
an investment in Common Shares, generally speaking, provincial taxation does not
apply to persons who are not resident in Canada and who do not own or hold
property in the course of carrying on a business in Canada. Apart from changes
to the Act and the Regulations which have been publicly announced to the date
hereof, this summary does not consider the potential for any future alterations
to Canadian income tax legislation.
DISPOSITIONS OF COMMON SHARES A nonresident of Canada will only be subject
to taxation in Canada under the Act in respect of a disposition of Common Shares
if such shares constitute "taxable Canadian property" to such nonresident.
Provided that the Common Shares are listed on a recognized stock exchange in
Canada at the time of a disposition, they will only constitute "taxable Canadian
property" to a holder if the holder, either alone or together with persons with
whom the holder does not deal at arm's length, owns or at any time in the five
years prior to the date of
- 38 -
dispositions, has owned in excess of 25% of the issued and outstanding shares of
a class or series of the capital of the Company. Persons who are related by
blood or marriage, or are subject to common control are deemed to deal otherwise
than at arm's length; other persons may also be considered to be dealing
otherwise than at arm's length in certain circumstances. For the purposes of
determining the 25% threshold, rights or options to acquire Common Shares will
be treated as ownership thereof. Subject to the comments set out below in
respect of the application of the U.S. -- Canada Income Tax Convention to U.S.
resident holders, nonresidents whose shares constitute "taxable Canadian
property" will be subject to taxation thereon on the same basis as Canadian
residents. Generally speaking, three-quarters of the excess of the holder's
proceeds of disposition, over the adjusted cost base of the Common Shares, must
be included in income as a taxable capital gain, to be taxed at prevailing
federal Canadian rates, which range from approximately 26% to 39%.
Nonresidents whose shares are repurchased by the Company, except in respect
of certain purchases made by the Company in the open market, will give rise to
the deemed payment of a dividend by the Company to the former holder of Common
Shares in an amount equal to the excess paid over the paid-up capital of the
Common Shares so repurchased. Such deemed dividend will be excluded from the
former holders' proceeds of disposition of his Common Shares for the purposes of
computing any capital gain but will be subject to Canadian nonresident
withholding tax in the manner described below under "Dividends." In certain
limited circumstances, a sale by a holder of the Common Shares to a corporation
resident in Canada with which the holder does not deal at arm's length may give
rise to the deemed payment of a dividend, to the extent the amount received in
consideration therefor exceeds the paid-up capital of the Common Shares disposed
of.
Pursuant to the U.S. -- Canada Income Tax Convention (the "Convention"),
shareholders of the Company who are resident in the U.S. for the purposes of the
Convention and whose shares might otherwise be "taxable Canadian property" may
be exempt from Canadian taxation in respect of any gains on the Common Shares
provided the principal value of the Company is not derived from real property
located in Canada at the time of the disposition.
The Company owns no Canadian real property and the Company has no present
intention to acquire Canadian real property.
DIVIDENDS Under the Act, withholding tax is imposed at the rate of 25% on
the amount of any dividends paid or credited on the Common Shares to a person
not resident in Canada. Pursuant to the Canada U.S. -- Canada Income Tax
Convention, the rate of tax on such dividends is reduced to 6% for dividends
received in 1996 and 5% thereafter by any U.S. resident corporation who owns in
excess of 10% of the voting shares of the corporation, and to 15% in all other
instances.
INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the acquisition of control
of a Canadian business by non-Canadians without review and approval of the
Investment Review Division of Industry Canada, the agency that administers the
ICA, unless such acquisition is exempt from review under the provisions of the
ICA. Investment Review Division of Industry Canada must be notified of such
exempt acquisitions. The ICA covers acquisitions of control of corporate
enterprises, whether by purchase of assets, shares of "voting interests" of an
entity that controls, directly or indirectly, another entity carrying on a
Canadian business. The ICA will have no effect on the acquisition of shares
covered by this Prospectus.
- 39 -
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Certificate of Continuance of the Company. There are no other decrees or
regulations in Canada which restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends, interest
or other payments to nonresident holders of the Company's Common Shares except
as discussed above.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Yukon BUSINESS CORPORATIONS ACT and the Company's Bylaws provide the
following authority to indemnify directors or officers or former directors or
officers of the Company or of a company of which the Company is or was a
shareholder:
(1) Except in respect of an action by or on behalf of the corporation or a body
corporate to procure a judgment in its favor, a corporation may indemnify a
director or officer of the corporation, a former director or officer of the
corporation or a person who acts or acted at the corporation's request as a
director or officer of a body corporate of which the corporation is or was a
shareholder or creditor, and his heirs and legal representatives, against
all costs, charges and expenses, including an amount paid to settle an
action or satisfy a judgment, reasonably incurred by him in respect of any
civil, criminal or administrative action or proceeding to which he is made a
party by reason of being or having been a director or officer of that
corporation or body corporate, if (a) he acted honestly and in good faith
with a view to the best interests of the corporation, and (b) in the case of
a criminal or administrative action or proceeding that is enforced by a
monetary penalty, he had reasonable grounds for believing that his conduct
was lawful.
(2) A corporation may, with the approval of the Supreme Court, indemnify a
person referred to in subsection (1) in respect of an action by or on behalf
of the corporation or body corporate to procure a judgment in its favor, to
which he is made a party by reason by being or having been a director or an
officer of the corporation or body corporate, against all costs, charges and
expenses reasonably incurred by him in connection with the action if he
fulfills the conditions set out in paragraphs (1)(a) and (b).
The Yukon BUSINESS CORPORATIONS ACT also provides that:
(3) Notwithstanding anything in subsections (1) through (6), a person referred
to in subsection (1) is entitled to indemnity from the corporation in
respect of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any civil, criminal or administrative action
or proceeding to which he is made a party by reason of being or having been
a director or officer of the corporation or body corporate, if the person
seeking indemnity (A) was substantially successful on the merits of his
defense of the action or proceeding, (B) fulfills the conditions set out in
paragraphs (1)(a) and (b), and (C) is fairly and reasonably entitled to
indemnity.
(4) A corporation may purchase and maintain insurance for the benefit of any
person referred to in subsection (1) against any liability incurred by him
(a) in his capacity as a director or officer of the corporation, except when
the liability relates to his failure to act honestly and in good faith with
a view to the best interests of the corporation, or (b) in his capacity as a
director or officer of another body corporate if he acts or acted in that
capacity at the corporation's
- 40 -
request, except when the liability relates to his failure to act honestly
and in good faith with a view to the best interests of the body corporate.
(5) A corporation or a person referred to in subsection (1) may apply to the
Supreme Court for an order approving an indemnity under this section and the
Supreme Court may so order and make any further order it thinks fit.
(6) On an application under subsection (5), the Supreme Court may order notice
to be given to any interested person and that person is entitled to appear
and be heard in person or by counsel.
The Bylaws of the Company also provide that the provisions for
indemnification contained in the Bylaws (outlined in subsections (1) and (2)
above) shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under any Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise both as to an action in his
official capacity and as to an action in any other capacity while holding such
office and shall continue as to a person who has ceased to be a director of
officer and shall enure to the benefit of the heirs and legal representatives of
such person. The Company maintains director's and officer's insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Financial Statement and Financial Statement Schedules included
separately herein.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial statements and financial statement schedules - see the
accompanying Index to Financial Statements
(b) Exhibits - see the accompanying Index of Exhibits
- 41 -
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registrant statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
SEVEN SEAS PETROLEUM INC.
By /s/ ALBERT E. WHITEHEAD
Albert E. Whitehead
Chairman and Chief
Executive Officer
Date: April 30, 1997
- 42 -
APPENDIX A
GLOSSARY OF TECHNICAL TERMS
ANTICLINAL TRAP means a subsurface, geological structure in the form of a sine
curve (i.e., the information rises to a rounded peak) as a result of which any
oil in the deposit will normally rise to the highest point in the structure.
APPRAISAL WELL means a well drilled subsequent to a discovery well in order to
confirm potential recoverable reserve quantities prior to development drilling
of the field.
AQUIFER means water bearing rock structure.
BOPD means barrels of oil per day.
COMMISSION means the U.S. Securities and Exchange Commission.
COMPLETION means the installation of permanent equipment for the production of
crude oil or gas, or in the case of a dry hole, the reporting of abandonment to
the appropriate agency.
DEVELOPMENT WELL means a well drilled within the proved area of a oil or gas
reservoir to the depth of a strategraphic horizon known to be productive.
DRILL STEM TEST means a method of determining the presence of oil and gas in a
formation. When the depth to be tested has been reached in a well being drilled,
a special tool is lowered into the hole. The drilling mud is removed and the
contents of the formation allowed to flow into the tool while an instrument
measures the pressure.
ECOPETROL means Empresa Colombiana de Petroleos, the Colombian national oil
company.
EXPLORATORY WELL means a well drilled to find and purchase oil and gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil and gas in another reservoir or to extend a known
reservoir.
FARMOUT means an agreement whereby the owner of a lease agrees to assign or
transfer the lease (or some portion of it), retaining some interest (such as an
overriding royalty or right to share in production), subject to the drilling of
one or more wells as a prerequisite to completion of the transfer by him.
MMBO means one million barrels of crude oil.
OPERATOR means any person, partnership, corporation or other entity engaged in
the business of exercising direct supervision over the drilling or completion of
or production from a well.
PRODUCTIVE WELL means a well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
PROVEN DEVELOPED PRODUCING RESERVES means those proved reserves that are
actually on production or, if not producing, that could be recovered from
existing wells or facilities and where the reasons for the current non-producing
status is the choice of the owner rather than the lack of markets or some other
reasons. An illustration of such a situation is where a well or zone is capable
but is shut-in because its deliverability is not required to meet contract
commitments.
PROVEN RESERVES means those reserves estimated as recoverable under current
technology and existing economic conditions, from that portion of a reservoir
which can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data, including
the reserves to be obtained by enhanced recovery processes demonstrated to be
economic and technically successful in the subject reservoir.
PROVEN UNDEVELOPED RESERVES means those proved reserves that are not currently
producing either due to lack of facilities and/or markets.
RESERVOIR means a porous permeable sedimentary rock containing commercial
quantities of oil or gas.
INDEX OF EXHIBITS
NO. EXHIBIT DOCUMENT EXHIBIT NO.
(2) Not Applicable
(3) Articles of Incorporation and By-laws
(A) The Amalgamation Agreement effective June
29, 1995 by and between Seven Seas
Petroleum Inc., a British Colombia
corporation; and Rusty Lake Resources Ltd.
(B) Certificate of Continuance and Articles
of Continuance into the Yukon Territory
(C) By-Laws
(4) Instruments defining the rights of
security holders, including indentures
(A) Excerpts from the Articles of Continuance
(B) Excerpts from the By-laws
(C) Specimen stock certificate
(D) Form of Class B Warrant
(E) Class B Warrant Indenture dated as of
October 15, 1996 by and between the
Company of Canada and Montreal Trust
Company
(9) Not Applicable
(10) Material Contracts
(a) Agreement dated August 14, 1995 by and
between the Company and GHK Company
Colombia, as amended by letter agreement
dated November 30, 1995
(b) The Association Contract by and
between Ecopetrol, GHK Company
Colombia and Petrolinson, S.A. relating
to the Dindal block, as amended
NO. EXHIBIT DOCUMENT EXHIBIT NO.
(c) The Association Contract by and
between Ecopetrol and GHK Company
Colombia relating to the Rio Seco block
(d) Joint Operating Agreement dated as of
August 1, 1994 by and between GHK Company
Colombia and the holders of interests in
the Dindal block
(e) The GHK Company Colombia Share
Purchase Agreement dated as of July 26,
1996 by and between Robert A. Hefner,
III, Seven Seas Petroleum Colombia Inc.
and the Company
(f) The Cimarrona Purchase Agreement
dated as of July 26, 1996 by and
between the members of Cimarrona
Limited Liability Company, the
Company, Seven Seas Petroleum
Colombia Inc., and Robert A. Hefner, III
(g) The Esmeralda Purchase Agreement
dated as of July 26, 1996 by and
between the members of Esmeralda
Limited Liability Company, Robert A
Hefner, III, the Company, Seven Seas
Petroleum Holdings, Inc. and Seven Seas
Petroleum Colombia Inc.
(h) The Registration Rights Agreement dated
as of July 26, 1996 by and between the
Company and certain individuals
(i) Shareholders' Voting Support Agreement
dated as of July 26, 1996 by and
between Seven Seas Petroleum Inc. and
Messrs. Hefner, Kerr, Whitehead, Plewes
and Stephens
(j) Management Services Agreement by and
among GHK Company Colombia, the
Company and The GHK Company LLC
NO. EXHIBIT DOCUMENT EXHIBIT NO.
(k) The Escrow Agreement for a Natural
Resources Company by and among
Montreal Trust Company as trustee, the
Company and certain individuals and
entities
(l) The Escrow Agreement for a Natural
Resources Company by and among
Montreal Trust Company, as trustee, the
Company and Albert E. Whitehead
(m) Amended 1996 Stock Option Plan
(n) Form of Incentive Stock Option Agreement
(o) Form of Directors' Stock Option Agreement
(p) Form of Employment Agreement
between the Company and each of
Messrs. Stephens, Dorrier and DeCort
(q) Form of Agreement between the
Company and each of Messrs. Stephens,
Dorrier and DeCort relating to a change
of control
(11.1) Not Applicable
(12) Not Applicable
(13) Not Applicable
(16) Not Applicable
(18) Not Applicable
(21) Not Applicable
(22) Subsidiaries of the Registrant 22
(23) Not Applicable
(24) Not Applicable
(27) Financial Data Schedule 27
(28) Not Applicable
(99) Not Applicable
INDEX TO FINANCIAL STATEMENTS
Page
Seven Seas Petroleum Inc. and Subsidiaries
Consolidated Financial Statements
Report of Independent Public Accountants F-1
Consolidated Balance Sheets, December 31, 1996 and 1995 F-2
Consolidated Statements of Operations and Accumulated F-3
Deficit for the year ended December 31, 1996, and for
the period from inception (February 3, 1995) through
December 31, 1995
Consolidated Statements of Stockholders' Equity for the F-4
year ended December 31, 1996, and for the period from
inception (February 3, 1995) through December 31, 1995
Consolidated Statements of Cash Flows for the year F-5
ended December 31, 1996, and for the period from
inception (February 3, 1995) through December 31, 1995
Notes to Consolidated Financial Statements F-6
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Seven Seas Petroleum Inc.:
We have audited the accompanying consolidated balance sheets of Seven Seas
Petroleum Inc. (a Yukon Territory, Canada, corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related consolidated statements of
operations and accumulated deficit, stockholders' equity and cash flows for the
year ended December 31, 1996, and for the period from inception (February 3,
1995) through December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Seven Seas Petroleum
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the year ended December 31, 1996, and for
the period from inception (February 3, 1995) through December 31, 1995, in
conformity with generally accepted accounting principles (Note 3).
Houston, Texas
February 22, 1997
F-1
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
(In U.S. Dollars)
1996 1995
------------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 4) .......... $ 10,620,477 $ 3,365,603
Marketable securities ....................... 43,795 43,795
Accounts receivable ......................... 1,241,430 43,642
Prepaids and other .......................... -- 482
------------- -----------
11,905,702 3,453,522
OIL AND GAS INTERESTS, full-cost method:
Evaluated, net .............................. 1,611,665 --
Unevaluated, net ............................ 157,916,351 574,137
FIXED ASSETS, net of accumulated depreciation .. 74,219 63,707
ORGANIZATION COSTS, net ........................ 25,270 79,071
------------- -----------
Total assets ............. $ 171,533,207 $ 4,170,437
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .... $ 2,805,665 $ 120,305
MINORITY INTEREST .............................. 1,060,433 --
STOCKHOLDERS' EQUITY:
Share capital (Note 7)-
Authorized unlimited common shares without
par value and unlimited Class A
preferred shares without par value;
13,315,796 issued and outstanding
common shares at December 31, 1996,
12,680,463 issued and outstanding
common shares at December 31, 1995 ...... 6,781,616 6,170,117
Preferred stock subscriptions, 5,002,972
shares at December 31, 1996 ............. 45,652,120 --
Special warrant subscriptions, 14,274,171
warrants at December 31, 1996 ........... 119,548,227 --
Accumulated deficit ......................... (4,314,622) (2,119,985)
Treasury stock, 29 shares held .......... (232) --
------------- -----------
Total stockholders' equity ........... 167,667,109 4,050,132
------------- -----------
Total liabilities and
stockholders' equity ............ $ 171,533,207 $ 4,170,437
============= ===========
Approved by the Board
- ------------------------------- ---------------------------------
Director Director
Albert E. Whitehead Timothy T. Stephens
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996, AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1995
(In U.S. Dollars)
1996 1995
----------- -----------
REVENUES:
Crude oil sales ........................... $ 233,682 $ --
Interest income ........................... 341,599 152,383
----------- -----------
575,281 152,383
----------- -----------
EXPENSES:
Lease operating expenses .................. 252,504 --
General and administrative ................ 2,452,546 1,070,765
Depreciation and amortization ............. 111,334 37,671
Exploration expense (Note 5) .............. 4,910 1,122,806
Geological and geophysical ................ 10,521 9,769
Loss on sale of resource properties ....... -- 31,357
----------- -----------
2,831,815 2,272,368
----------- -----------
LOSS BEFORE INCOME TAXES ..................... (2,256,534) (2,119,985)
INCOME TAX EXPENSE (Note 6) .................. 2,338 --
----------- -----------
NET LOSS BEFORE MINORITY INTEREST ............ (2,258,872) (2,119,985)
MINORITY INTEREST ............................ 64,235 --
NET LOSS ..................................... (2,194,637) (2,119,985)
ACCUMULATED DEFICIT, beginning of period ..... (2,119,985) --
ACCUMULATED DEFICIT, end of period ........... $(4,314,622) $(2,119,985)
=========== ===========
NET LOSS PER COMMON SHARE .................... $ (0.17) $ (0.23)
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996, AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1995
(In U.S. Dollars)
Common Preferred Special Accumulated Treasury
Stock Stock Warrants Deficit Stock Total
---------- ----------- ------------ ----------- ----- -------------
BALANCE AT FEBRUARY 3, 1995 ..................... $ -- $ -- $ -- $ -- $-- $ --
ISSUANCE OF COMMON STOCK ...................... 6,170,117 -- -- -- -- 6,170,117
NET LOSS ...................................... -- -- -- (2,119,985) -- (2,119,985)
---------- ----------- ------------ ----------- ----- -------------
BALANCE AT DECEMBER 31, 1995 .................. 6,170,117 -- -- (2,119,985) -- 4,050,132
ISSUANCE OF COMMON STOCK ...................... 611,499 -- -- -- -- 611,499
SECURITIES ISSUED IN ACQUISITION (Note 2) ..... -- 45,652,120 107,439,309 -- -- 153,091,429
ISSUANCE OF SPECIAL WARRANTS (Note 7) ......... -- -- 12,108,918 -- -- 12,108,918
PURCHASE OF TREASURY STOCK .................... -- -- -- -- (232) (232)
NET LOSS ...................................... -- -- -- (2,194,637) -- (2,194,637)
---------- ----------- ------------ ----------- ----- -------------
BALANCE AT DECEMBER 31, 1996 .................. $6,781,616 $45,652,120 $119,548,227 $(4,314,622) $(232) $ 167,667,109
========== =========== ============ =========== ===== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996, AND FOR THE PERIOD
FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1995
(In U.S. Dollars)
1996 1995
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................... $ (2,194,637) $(2,119,985)
Minority interest ........................... 64,235 --
Common stock contribution to 401(k)
retirement plan ........................... 78,750 --
Exploration expense ......................... -- 1,122,806
Loss on sale of resource properties ......... -- 31,357
Depreciation and amortization ............... 111,334 37,671
Changes in assets and liabilities-
(Increase) in accounts receivable ......... (316,431) (43,642)
Decrease (increase) in prepaids and other . 482 (482)
Increase in accounts payable .............. 1,754,348 120,305
------------- -----------
(501,919) (851,970)
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration of oil and gas properties ....... (5,836,266) (1,696,943)
Proceeds from acquisition ................... 630,226 --
Proceeds from sale of property .............. -- 84,336
Other asset additions ....................... (64,135) (169,821)
(5,270,175) (1,782,428)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from special warrants issued ....... 12,108,917 --
Proceeds from share capital issued .......... 532,750 6,000,001
Proceeds from additional paid-in capital
contributed ............................... 999 --
Contributions by minority interest .......... 384,534 --
Purchase of treasury stock .................. (232) --
------------- -----------
13,026,968 6,000,001
------------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...... 7,254,874 3,365,603
CASH AND CASH EQUIVALENTS, beginning of period . 3,365,603 --
------------- -----------
CASH AND CASH EQUIVALENTS, end of period ....... $ 10,620,477 $ 3,365,603
============= ===========
SUPPLEMENTAL DISCLOSURES:
Common stock issued pursuant to an agency
agreement for a private placement ......... $ -- $ 250,000
Common stock issued pursuant to the
amalgamation .............................. -- 170,116
Common stock issued pursuant to the
acquisition ............................... 153,091,430 --
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
1. NATURE OF OPERATIONS:
Seven Seas Petroleum Inc. (a Yukon Territory, Canada, corporation) was formed on
February 3, 1995. Seven Seas Petroleum Inc. and its subsidiaries, Seven Seas
Petroleum Holdings Inc., Seven Seas Petroleum Argentina Inc., Seven Seas
Petroleum Australia Inc., Seven Seas Petroleum Colombia Inc., Seven Seas
Petroleum Mediterranean Inc., Seven Seas Petroleum Turkey Inc., Seven Seas
Petroleum PNG Inc., Seven Seas Petroleum U.S.A. Inc., GHK Company Colombia,
Esmeralda LLC and Cimarrona LLC, are collectively referred to herein as "Seven
Seas" or "the Company." The Company's business is to acquire, explore and
develop interests in oil and gas projects worldwide.
At December 31, 1996, the Company's unevaluated oil and gas interests were
recently acquired and are in the initial stages of evaluation and development.
Accordingly, the recoverability of such amounts is dependent upon the completion
of exploration work, the discovery of oil and gas reserves in commercial
quantities and the subsequent development, production and sales of these
reserves. Recoverability is also dependent on the Company's ability to finance
the exploration and development activities through operations or outside
financing.
2. BUSINESS COMBINATION:
On June 29, 1995, the Supreme Court of British Columbia approved an amalgamation
of Seven Seas and Rusty Lake Resources Ltd. Stockholders of Rusty Lake Resources
Ltd. were issued one common share in Seven Seas, the new company after the
amalgamation, for each 35 common shares held in Rusty Lake Resources Ltd.
Additional shares of Seven Seas were issued in settlement of certain
indebtedness of Rusty Lake Resources Ltd. This transaction has been reflected as
an acquisition by Seven Seas using the purchase method of accounting. The net
assets of Rusty Lake Resources Ltd. were recorded on the books of Seven Seas as
follows:
Marketable securities $ 3,370
Goods and services tax receivable 3,099
Resource properties 115,693
Other assets (organization costs) 87,481
Accounts payable (39,527)
Share capital (680,464 shares) (170,116)
On July 26, 1996, the Company acquired 100 percent of the outstanding stock
which represented 100 percent of the voting shares held in GHK Company Colombia
and Esmeralda LLC. Additionally, on the same date, the Company acquired 62.963
percent of the outstanding shares and voting stock in Cimarrona LLC. This
transaction has been reflected as an acquisition by Seven Seas using the
purchase method of accounting. Seven Seas issued to the stockholders in GHK
Company Colombia, Esmeralda LLC and Cimarrona LLC a combination of preferred
shares and special warrants which are exchangeable into a total of 16,777,143
common shares upon the earlier of the receipting of a prospectus qualifying the
exchange, or one year from the closing of the transaction. Of the 16,777,143
preferred shares and special warrants, 5,002,972 preferred shares were issued
for all of the common shares in GHK Company Colombia, 4,469,028 special warrants
were issued for all of the common shares in Esmeralda LLC and 7,305,143 special
warrants were issued for 62.963 percent of the common shares in Cimarrona LLC.
The remaining 37.037 percent interest in Cimarrona represents a minority
interest which is reflected as such on the balance sheet. The 16,777,143
preferred shares and special warrants were recorded based on the closing stock
price of Seven Seas on July 26, 1996, at $9.125, totaling $153,091,430. Net
assets acquired include $153,122,523 assigned to oil and
F-6
-2-
gas properties (which are subject to future evaluation based on further
appraisal drilling) and other nominal net working capital, less amounts
attributable to the minority interest in Cimarrona LLC. Any income and
expenditures incurred by these three entities after July 26, 1996, are included
in the current year's statement of operations and accumulated deficit.
Of the 16,777,143 preferred shares and special warrants issued, 11,744,000 are
held subject to an escrow agreement, whereby one-third of the Securities are
released each year for three years. The Securities may be released earlier based
upon a valuation of the Seven Seas interests in the contract areas.
Collectively, the acquisition of these three companies resulted in the purchase
of an additional 36.7 percent participating interest in the Dindal and Rio Seco
Blocks in Colombia in which the Company previously held a 15 percent
participating interest. All three entities were oil and gas exploration
companies whose only material asset was the participating interest they held in
the Dindal and Rio Seco Association contracts in Colombia.
3. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
The Company follows accounting principles generally accepted in Canada. A
summary of the Company's significant policies is set out below.
CONSOLIDATION
These consolidated financial statements include the accounts of Seven Seas
Petroleum Inc. and its wholly owned subsidiaries named in Note 1.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include bank deposits and short-term investments
which, upon acquisition, have a maturity of three months or less.
MARKETABLE SECURITIES
Marketable securities are recorded at the lower of cost or market value.
Declines in market value below carrying value are written down through earnings.
Marketable securities include $14,700 which is restricted until June 4, 1997.
OIL AND GAS INTERESTS
The Company follows the full-cost method of accounting for oil and natural gas
operations, whereby all costs incurred for exploration and development of oil
and natural gas properties are capitalized in country-by-country cost centers.
Such costs include land acquisition costs, geological and geophysical costs,
costs of drilling both productive and nonproductive wells, related plant and
production equipment costs, carrying costs of nonproductive properties and that
portion of administration costs applicable to exploration and development
activities. Proceeds received from the disposal of properties are normally
credited against accumulated costs. No gains or losses are recognized upon the
disposition of oil and natural gas properties except under circumstances which
result in a major disposal of reserves.
The costs of acquiring and evaluating properties are initially excluded from
depletion calculations. These properties are assessed periodically to ascertain
whether impairment has occurred. When evaluated reserves are assigned or when
the property is considered impaired, the cost of the property is added to the
costs subject to depletion. Depletion is recorded on the unit-of-production
basis. If the net capitalized costs of oil and gas properties (net of recorded
deferred taxes and accumulated provision for site restoration and abandonment
costs) in a cost center exceed an amount equal to the sum of the undiscounted
estimated future
-3-
net revenues from evaluated oil and gas reserves in the cost center (net of site
restoration and abandonment costs, interest, production-related general and
administrative costs) and the costs of properties not being amortized, both
adjusted for income tax effects, such excess is charged to expense.
Substantially all the Company's exploration and production activities are
conducted jointly with others, and the accounts reflect only the Company's
proportionate interest in such activities.
FOREIGN CURRENCY TRANSLATION
The Company's reporting and functional currency is U.S. dollars. Foreign
operations which generally are financially and operationally interdependent with
the parent company are accounted for using the temporal method. Monetary items
are translated using the exchange rate in effect at the balance sheet date;
nonmonetary items are translated at historical exchange rates. Revenues and
expenses are translated at the average rates in effect on the dates they occur.
No material translation gains or losses were recorded during the period.
INCOME TAXES
The deferral method of tax allocation is followed under which the income tax
provision is based on the results of operations reported in the accounts. The
difference between the income tax provision and taxes currently payable would be
reflected as deferred income taxes. For the year ended December 31, 1996, the
Company has recorded tax expense of $2,338. No deferred tax benefits have been
recognized for 1996 or 1995 because the realization of these tax benefits cannot
be reasonably assured.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided on a straight-line
basis over three to five years.
ORGANIZATION COSTS
Organization costs represent the normal cost of incorporating the Company. In
association with the amalgamation agreement with Rusty Lake Resources Ltd.,
organization costs of $87,481 were recorded to reflect the excess purchase price
of Seven Seas common shares provided to Rusty Lake Resources Ltd. stockholders
over and above the net asset value of Rusty Lake Resources Ltd. as of June 29,
1995. Organization costs are being amortized on a straight-line basis over two
years.
EARNINGS PER SHARE
Basic earnings (loss) per common share are calculated using the weighted average
number of shares outstanding during the period. Fully diluted loss per share has
not been presented as it is antidilutive.
4. CASH AND CASH EQUIVALENTS:
DECEMBER 31
------------------------
1996 1995
----------- ----------
Cash $ 170,684 $ 53,103
Short-term investments 10,449,793 3,312,500
----------- ----------
Total cash and cash equivalents $10,620,477 $3,365,603
=========== ==========
The carrying value of short-term investments approximates fair value.
-4-
5. INVESTMENT IN OIL AND GAS INTERESTS:
Inception
Year Ended Through
December 31, December 31,
1996 1995
------------- -----------
Costs incurred-
Evaluated producing properties $ 802,737 $ --
Evaluated nonproducing properties 808,928 --
Unevaluated nonproducing properties 151,568,482 --
Exploration costs 5,778,642 1,696,943
------------- -----------
Total oil and gas costs incurred 158,958,789 1,696,943
Less- Exploration expense (4,910) (1,122,806)
------------- -----------
Capitalized costs $ 158,953,879 $ 574,137
============= ===========
EXPLORATION COSTS
The Company has been involved in exploration activities in Colombia, Australia,
Argentina, Turkey and Papua New Guinea and, also, the Company purchased an
option for the right to participate in future exploration activities in North
Africa, but the option was never exercised. Additionally, the Company acquired
oil and gas properties in Columbia during 1996 totaling $153,122,523 and $57,624
of exploration costs were incurred also in 1996 which were reclassified as
evaluated oil and gas interests. In the third and fourth quarters of 1996, the
Company had oil and gas sales of $233,682 which pertained solely to production
testing of two wells located in Colombia. During the period ending December 31,
1995, exploration costs incurred of $622,006 in Argentina and $500,800 for the
option in North Africa were expensed.
On May 16, 1995, the Company entered into an agreement whereby Seven Seas
purchased an option for $500,000 to acquire a 5 percent participating interest
in three exploration blocks in North Africa upon completion of the first
exploration well drilled. The first exploration well was completed as a dry hole
in July of 1995. After careful review, Seven Seas decided not to exercise its
option. The cost of the well and the option, $500,000, plus additional costs of
$800 incurred toward purchasing this option, were originally recorded as
unevaluated oil and gas interests and were subsequently expensed.
The El Catamarqueno X-1 test well on the Sur Rio Deseado Block in the San Jorge
Basin, Argentina, was determined to be unsuccessful during January of 1996. The
Company determined that further drilling on the block was not justified and,
therefore, expensed exploration interests in Argentina of $622,006.
Empresa Colombiana de Petroleos, the Colombian national oil company (Ecopetrol),
has the right to back into Seven Seas Dindal and Rio Seco Association contracts
in Colombia upon declaration of commerciality at an initial 50 percent
participating interest. Ecopetrol's interest can increase based upon accumulated
production levels. Ecopetrol will at the time of commerciality bear 50 percent
of the future costs in the field and reimburse the other parties in these two
blocks for 50 percent of previously incurred costs associated with successful
exploratory and appraisal wells.
-5-
The Company had capitalized exploration costs as follows, which included
capitalized general and administrative costs of $140,628 as of December 31,
1996, and $130,866 as of December 31, 1995:
1996 1995
---------- --------
Colombia $5,876,960 $369,723
Australia 454,565 193,280
Turkey -- 4,552
Papua New Guinea 16,344 6,582
---------- --------
Total exploration costs $6,347,869 $574,137
========== ========
6. INCOME TAXES:
The income tax benefit for the year ended December 31, 1996 and 1995, is
calculated by applying Canadian federal and provincial statutory tax rates to
pretax income with adjustments as set out in the following table:
Inception
Year Ended Through
December 31, December 31,
1996 1995
----------- ---------
Expected income tax benefit at 45% $(1,015,440) $(953,993)
Benefits of losses not recognized 1,015,440 953,993
Canadian income tax expense 2,338 --
----------- ---------
Income tax expense $ 2,338 $ --
=========== =========
7. SHARE CAPITAL:
Number of
Outstanding
Common
Shares Value
---------- -----------
Shares issued to founder for cash 1,000,000 $ 1
Private placement of common shares for cash 10,666,666 6,000,000
Shares issued in settlement of agents' fees 333,333 250,000
Shares issued on conversion of notes payable 403,350 100,838
Shares issued on conversion of common shares 277,114 69,278
Less- Share issue cost -- (250,000)
---------- -----------
Balance at December 31, 1995 12,680,463 6,170,117
Shares issued to Company's 401(k) plan 10,000 78,750
Shares issued on exercise of options 625,333 532,749
---------- -----------
Balance at December 31, 1996 13,315,796 $ 6,781,616
========== ===========
The Company periodically issues incentive stock options to officers, directors
and employees of the Company, exercisable at the approximate prevailing market
prices at the time of issue. As of December 31, 1995, there were 990,000 options
for common shares outstanding to directors, officers and employees of the
Company under the 1995 stock option plan and, as of December 31, 1996, there
were 1,164,667 options for common
-6-
shares outstanding. Of the outstanding options at December 31, 1996, a total of
374,667 options have an exercise price of $.75 and 390,000 options have an
exercise price of $7.125, while the remaining 400,000 options have an exercise
price of $18.75. All options vest immediately and expire between March 2000 and
November 2001.
A brokered private placement involving the issuance of 2,000,000 special
warrants at $2.75 per warrant for a net offering after commissions and expenses
of $5,095,548 was completed in Canada on March 15, 1996. Each special warrant is
convertible into one unit. Each unit consists of one share of common stock and a
one-half common share purchase warrant at $3.50 per full share. The warrants are
convertible at the earlier of (a) one year from date of issuance or (b) the date
a receipt is issued for a prospectus qualifying the conversion in the
appropriate jurisdictions (see Subsequent Events).
A brokered private placement involving the issuance of 500,000 special warrants
at $15.00 per warrant for a net offering after commissions and expenses of
$7,013,370 was completed in Canada on October 16, 1996. Each special warrant is
convertible into one unit. Each unit consists of one share of common stock and a
one-half common share purchase warrant at $18.50 per full share. The warrants
are convertible at the earlier of (a) one year from date of issuance or (b) the
date a receipt is issued for a prospectus qualifying the conversion in the
appropriate jurisdictions (see Subsequent Events).
The proceeds of the March 15 and October 16, 1996, private placements will be
used for additional drilling, seismic and production facilities on the Company's
51.7 percent participating interest in the Emerald Mountain, Colombia, oil
discovery and for further exploration activities.
See Note 2 for discussion of other securities issued.
8. COMMITMENTS AND CONTINGENCIES:
The Company is committed to make minimum payments under contracts for certain
office facilities and equipment. Amounts due under these contracts as of
December 31, 1996, are as follows: $63,799 for 1997, $54,902 for 1998, $25,138
for 1999 and none thereafter.
Two wells estimated at a total cost of $7,600,000 are required to be drilled on
the Company's Rio Seco and Dindal Blocks in Colombia by August and September
1997, respectively, to fulfill the Company's 1997 work commitment on these two
blocks. The Company will be required to pay its proportionate share of the total
cost of these two wells.
9. SUBSEQUENT EVENTS:
On March 5, 1997, the Company acquired 100 percent of the outstanding stock
which represented 100 percent of the voting shares held in Petrolinson, S.A. The
terms of the transaction were agreed to in a letter of intent dated November 22,
1996. The principal asset owned by Petrolinson, S.A., is a 6 percent
participating interest in the Dindal and Rio Seco Association contracts. As
consideration for the 6 percent interest in the Dindal and Rio Seco Association
contracts, Seven Seas issued to the sole stockholder in Petrolinson, S.A.,
1,000,000 common shares of Seven Seas Petroleum Inc. common stock. The common
shares issued to Petrolinson, S.A., will be subject to an escrow agreement, the
terms of which provide for a 120-day escrow of shares commencing from March 5,
1997. This 6 percent interest will be carried through exploration by the other
94 percent participating interest parties. This transaction will be reflected in
1997 as an acquisition by Seven Seas using the purchase method of accounting.
The 1,000,000 shares will be recorded based on the average
-7-
closing stock price of Seven Seas for the period beginning 30 days prior to and
30 days subsequent to November 22, 1996, or $18.55. This represents a
transaction cost of $18,550,000. Net assets acquired include $18,537,321
assigned to oil and gas properties (which are subject to future evaluation based
on further appraisal drilling) and other nominal net working capital.
On February 6, 1997, approvals were granted by the Ontario Securities
Commission, British Columbia Securities Commission and the Alberta Securities
Commission receipting a prospectus filed to qualify 2,500,000 special warrants
as common stock pertaining to the March and October 1996 financings.
Additionally, the prospectus qualified 11,774,171 special warrants and 5,002,972
preferred shares as common stock which was issued in connection with the
acquisition of a 36.7 percent participating interest in the Dindal and Rio Seco
Association contracts in Colombia by the Company on July 26, 1996.
10. DIFFERENCES IN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES BETWEEN
CANADA AND THE UNITED STATES:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in Canada. No material
modifications would be necessary to the financial statements to comply with
generally accepted accounting principles in the United States.
11. SUPPLEMENTAL OIL AND GAS
INFORMATION (UNAUDITED):
PRODUCING PROPERTIES
Proved reserves represent estimated quantities of crude oil which geological and
engineering data demonstrate to be reasonably recoverable in the future from
known reservoirs under existing economic and operating conditions. Estimates of
proved developed oil reserves are subject to numerous uncertainties inherent in
the process of developing the estimates including the estimation of the reserve
quantities and estimated future rates of production and timing of development
expenditures. The accuracy of any reserve estimate is a function of the quantity
and quality of available data and of engineering and geological interpretation
and judgment. Results of drilling, testing and production subsequent to the date
of the estimate may justify revision of such estimate. Additionally, the
estimated volumes to be commercially recoverable may fluctuate with changes in
prices of oil. The proved reserves at December 31, 1996, are based only upon the
results of the drilling of the El Segundo No. 1 well on the Dindal Block in
Colombia.
Estimates of future recoverable oil reserves and projected future net revenues
were provided by Sproule International Limited. The Company's proved reserves
were comprised entirely of crude oil in Colombia and are stated in barrels.
Proved developed and undeveloped reserves (number of barrels at December 31,
1996):
Beginning of year --
Additions 818,000
-------
End of year 818,000
=======
Proved developed reserves at end of year 408,000
=======
The following table presents the standardized measure of discounted future net
cash flows relating to proved oil reserves. Future cash inflows and costs were
computed using prices and costs in effect at the end of the applicable year
without escalation. Crude oil prices at December 31, 1996, were $25.93 per
barrel for West Texas Intermediate as compared to the average for the year of
$22.13. Therefore, a crude price of $22.13
-8-
unescalated, less a $3.00 gravity adjustment, was used in calculating the
standardized measure of discounted future net cash flows, as the December 1996
year-end price of $25.93 was not representative of current or future pricing.
Future income taxes were computed by applying the appropriate statutory income
tax rate to the pretax future net cash flows reduced by future tax deductions
and net operating loss carryforwards.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
Future cash inflows $12,520,000
Future costs-
Production 2,112,000
Development 1,939,000
-----------
Future net cash flows before income taxes 8,469,000
Future income taxes 4,027,000
-----------
Future net cash flows 4,442,000
10% discount factor 641,000
-----------
Standardized measure of discounted future net cash flows $ 3,801,000
===========
The standardized measure of discounted future net cash flows does not purport to
present the fair market value of the Company's proved reserves. An estimate of
fair value would also take into account, among other things, the recovery of
reserves in excess of evaluated reserves, anticipated future changes in prices
and costs and a discount factor more representative of the time value of money
and the risks inherent in reserve estimates.