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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F
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(MARK ONE)
/X/ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
/ / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER ___________
TRANSATLANTIC PETROLEUM CORP.
(Exact name of Registrant as specified in its charter)
ALBERTA, CANADA
(Jurisdiction of incorporation or organization)
340 - 12TH AVENUE S.W.
SUITE 1550
CALGARY, ALBERTA T2R 1L5
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of
the Act: NONE
Securities registered or to be registered pursuant to Section 12(g) of
the Act.
COMMON SHARES, WITHOUT PAR VALUE
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(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act: NONE
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report: 79,384,092 Common Shares as of August 31,
2000.
Indicate by check mark which financial statement item the registrant
has elected to follow. Item 17 /X/ Item 18 / /
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TABLE OF CONTENTS
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PAGE
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PART I.......................................................... 4
Item 1. Description of Business 4
Item 2. Description of Property 11
Item 3. Legal Proceedings 20
Item 4. Control of Registrant 20
Item 5. Nature of Trading Market 21
Item 6. Exchange Controls and Other Limitations Affecting Security
Holders 21
Item 7. Taxation 22
Item 8. Selected Consolidated Financial Data 25
Item 9. Management's Discussion and Analysis of Financial Condition
and Results of Operations 27
Item 9a. Quantitative and Qualitative Disclosures About Market
Risk 35
Item 10. Directors and Officers of Registrant 36
Item 11. Compensation of Directors and Officers 37
Item 12. Options to Purchase Securities from Registrant or
Subsidiaries 40
Item 13. Interest of Management in Certain Transactions 41
PART II......................................................... 41
Item 14. Description of Securities to Be Registered 41
PART III........................................................ 41
Item 15. Defaults Upon Senior Securities 41
Item 16. Changes in Securities and Changes in Security for Registered
Securities 41
PART IV......................................................... 42
Item 17. Financial Statements 42
Item 18. Financial Statements 42
Item 19. Financial Statements and Exhibits 43
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GLOSSARY
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"Bbl"................... means one barrel.
"Bcf"................... means one billion cubic feet.
"Bcfe".................. means billion cubic feet of gas equivalent calculated
on the basis that one Bbl of crude oil or natural gas
liquids is equivalent to six Mcf of natural gas.
"BOE"................... means barrels of oil equivalent calculated on the
basis that six Mcf of natural gas is equivalent to
one barrel of crude oil or natural gas liquids
equivalent.
"BOE/d"................. means barrels of oil equivalent per day.
"Bopd".................. means barrels of oil per day.
"Company"............... means TransAtlantic Petroleum Corp. and its wholly
owned subsidiaries.
"Development well"...... means a well drilled within or in close proximity to
a discovered pool of oil or gas.
"Exploratory well"...... means a well drilled either in search of a new and as
yet undiscovered pool of oil or gas, or with the
expectation of significantly extending the limit of a
pool which is partly discovered.
"Gross acres"........... means the total number of acres in which the Company
or its subsidiaries own a working interest.
"Gross wells"........... means the total number of wells in which the Company
or its subsidiaries own a working interest.
"MBbl".................. means one thousand barrels.
"MBOE/d"................ means one thousand barrels of oil equivalent per day.
"Mcf"................... means one thousand cubic feet.
"Mcf/d"................. means one thousand cubic feet per day.
"MMBbl"................. means one million barrels.
"MMBOE"................. means one million barrels of oil equivalent.
"MMcf".................. means one million cubic feet.
"MMcf/d"................ means one million cubic feet per day.
"Net acres"............. refers to Gross acres multiplied by the Company's or
its subsidiaries' working interest percentage
therein.
"Net wells"............. refers to Gross wells multiplied by the Company's or
its subsidiaries' working interest percentage
therein.
"NGLs".................. means natural gas liquids.
"PV-10 Value"........... means the present value of proved reserves and is an
estimate of the discounted pre-tax cash flows
attributable to estimated net proved reserves.
Pre-tax cash flow is defined as net revenues less
production and ad valorem taxes, future capital costs
and operating expenses, but before deducting federal
income taxes. Estimated pre-tax cash flows have been
discounted at an annual rate of 10% to determine
their "present value." The present value is shown to
indicate the effect of the value of the revenue and
should not be construed as being the fair market
value of the properties. Estimates of reserve
quantities and future net cash flows have been made
using oil and gas prices and operating costs held
constant at prices in effect on the date of the
report.
"TransAtlantic"......... has the same meaning as Company.
"Undeveloped land"...... refers to oil and gas properties to which no reserves
are assigned.
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CURRENCY REFERENCES
Unless otherwise indicated, all sums of money set out in this Form 20-F are
expressed in United States dollars. The consolidated financial statements of the
Company were historically expressed in Canadian dollars. The U.S. dollar became
the principal currency of the Company's business, beginning in January 1998.
FORWARD-LOOKING STATEMENTS
This Registration Statement on Form 20-F contains certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the actual results, financial condition,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: the volatility of oil and gas prices, product
supply and demand, market competition, risks inherent in the Company's oil and
gas operations, imprecision of reserve estimates, the Company's ability to
replace and expand oil and gas reserves, the Company's ability to generate
sufficient cash flow from operations to meet its current and future obligations,
the Company's ability to access external sources of debt and equity capital, and
other factors referenced in this Registration Statement on Form 20-F. Certain of
these factors are discussed in more detail elsewhere in this Registration
Statement on Form 20-F, including without limitation "Item 1. Description of
Business" and "Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations." Given these uncertainties, readers are
cautioned not to place
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undue reliance on such forward-looking statements. The Company disclaims any
obligation to update any such forward-looking statements to reflect future
events or developments.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
TransAtlantic Petroleum Corp. is an oil and gas exploration and production
company with its primary assets located in Egypt, Nigeria and the United
States. In December 1998, the Company's predecessor company, Profco Resources
Ltd. ("Profco") amalgamated with GHP Exploration Corporation ("GHP"), a
publicly-traded exploration and production company. The Company issued
19,003,828 shares of common stock having a fair market value of $9.1 million
to the shareholders of GHP in the amalgamation in exchange for a working
capital infusion of $1.9 million and exploration prospects in Egypt, Tunisia
and the United States. Profco was incorporated under the laws of the Province
of British Columbia in October 1985 and continued under the laws of the
Province of Alberta in June 1997. In connection with the amalgamation, Profco
changed its name to TransAtlantic Petroleum Corp. and the Company generally
began operating under new management. The year ended December 31, 1999 was
the Company's first full year of operations following the amalgamation.
As of December 31, 1999, the Company's estimated proved reserves totaled 4.77
MMBbls with a PV-10 Value of $12.25 million. Approximately 93% of the
Company's reserves are proved producing reserves.
The corporate office of the Company is Suite 1550, 340 - 12th Avenue S.W.,
Calgary, Alberta, T2R lL5. The Company's international operations are
conducted out of the office of its wholly owned subsidiary, TransAtlantic
Petroleum (USA) Corp., located at Suite 900, 1900 West Loop South, Houston,
Texas, 77027.
RECENT DEVELOPMENTS
In July 1999, the Company successfully completed an exploration well, the
Hana-1, on its West Gharib concession, onshore Gulf of Suez, Egypt. The
Company owns a 30% working interest in the concession. An appraisal well, the
Hana-2, was successfully completed in September 1999. During the first half of
2000, four additional appraisal wells were successfully drilled and completed.
Production from the wells is being trucked to a pipeline approximately ten
kilometers away while permanent production facilities are being installed,
which will be capable of handling up to 15,000 Bopd. These facilities are
expected to be completed in the third quarter of 2000. For the six months
ending June 30, 2000, average daily production net to the Company from its
West Gharib concession was 241 Bopd. The wells are currently producing at an
average of 2,473 Bopd (278 Bopd net to the Company). In June 2000, the Company
and its partners acquired a 60 square kilometer 3-D survey over several
prospects adjacent to the Hana field and recently completed the acquisition of
a 400 square kilometer 3-D survey to delineate additional prospects in the
West Gharib concession.
Since December 1999, the Company has drilled five wells on the Central Sinai
concession, onshore Gulf of Suez, Egypt, two of which were successful. The
Company owns a 25% interest in the concession. The Company is currently
evaluating options for commercializing the field, and further drilling is
dependent upon determinations of commerciality and further study of the well
results. The first exploration period expired on September 22, 2000. The
Company and its partner extended the first exploration period by six months by
conducting further operations on the concession, subject to regulatory
approval. Should regulatory approval be denied, the Company and its partner
will seek approval for a development lease surrounding the Lagia-6, Lagia-7
and South Lagia wells.
During 1999, the Ejulebe field in Nigeria produced approximately 2.65 MMBbls
at a gross daily average of approximately 7,230 Bopd. Over the final six
months of 1999, the field averaged 6,100 Bopd and for the first six months of
2000, the field averaged 5,740 Bopd. The Company's arrangement with the
service contractor of the field provides that the Company receives a minimum
payment until the capital component of the service contract has been paid to
the service contractor. At current production levels, the Company will
continue to only receive its share of the minimum payment, but may realize
increased cash flow in the early 2001 if oil prices remain at their current
level. See "Item 2. Description of Property--Nigeria--Development and
Exploration of OML-109."
As of December 1999, the Company has withdrawn from further activities in
Tunisia and has relinquished its acreage position there.
STRATEGY
TransAtlantic's strategy is to build a substantial reserve base and
sustainable production revenue by:
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- cost efficiently acquiring projects containing, or adjacent
to, known hydrocarbon accumulations with significant
exploration potential in proven basins.
- mitigating exploration risk through participation in a
balanced portfolio of exploration activity where the net risk
and exposure to the Company are acceptable.
- exploring in countries which have attractive fiscal regimes
and governments eager to develop their petroleum industries.
- taking advantage of areas where the Company has considerable
knowledge and can use that knowledge swiftly to create its
competitive advantage.
The Company's primary mission is to participate in a portfolio of high
quality, low to medium risk oil and gas exploration ventures in high graded
international areas. These are areas that management believes have
significant remaining reserve potential and where commercial production can
be rapidly established. The medium to long term plan includes participation
both as operator and non-operator in acreage within specific focal areas in
Africa and other international opportunities that will be evaluated based on
merit and risks. In addition, the Company plans to evaluate existing field
discoveries where additional exploration potential remains.
RISK FACTORS
THE COMPANY HAS A HISTORY OF LOSSES.
The Company incurred net losses from operations of $1,731,000, $713,000,
$12,368,000, $12,686,000 and $2,888,000 for each of the years ended December
31, 1995, 1996, 1997, 1998 and 1999, respectively. In addition, for the six
months ended June 30, 2000, the Company incurred a net loss from operations
of $825,000. No assurance can be made that the Company will operate at a
profit in the future. The likelihood of the Company's future profitability
must be considered in light of the financial, business and operating risks,
expenses, difficulties and delays frequently encountered in connection with
the oil and gas acquisition, exploration, development and production business
in which the Company is engaged.The financial statements included herein do
not include any adjustments that may result from these uncertainties.
BECAUSE THE COMPANY HAS HAD A LIMITED OPERATING HISTORY, OPERATING RESULTS TO
DATE SHOULD NOT BE UNDULY RELIED UPON.
On December 1, 1998, the Company acquired GHP Exploration Corporation in an
amalgamation transaction. The resulting enterprise (formerly Profco Resources
Ltd.) was renamed TransAtlantic Petroleum Corp. In addition, in September
1998, production from the Company's Nigerian operations commenced. Prior to
this time, the Company was engaged in exploration and development activities
in Nigeria and also owned interests in a few producing oil and gas properties
in Alberta, Canada that were sold in mid-1997. TransAtlantic commenced
production from the Hana Field, Egypt in late December 1999. The operating
results to date provide insufficient information to make any assumptions with
respect to future cash flow from operations. Accordingly, no assurance can be
given that TransAtlantic will successfully operate at a profit or generate
sufficient cash flow to satisfy its working capital and debt service
requirements in the future.
THE COMPANY MAY NOT BE ABLE TO REPLACE RESERVES OR GENERATE CASH FLOWS IF IT
IS UNABLE TO RAISE CAPITAL.
The Company will be required to make substantial capital expenditures to
develop reserves and to discover new oil and gas reserves. If TransAtlantic's
cashflow from operating activities is insufficient to fund such additional
expenditures, it will be required to sell equity, issue debt or offer
interests in the properties to be earned by another party or parties carrying
out further exploration or development thereof. See "Item 9. Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Capital Expenditures" for a
discussion of the Company's capital budget. There can be no assurance that
capital will be available to TransAtlantic from any source or that, if
available, it will be at prices or on terms acceptable to TransAtlantic. If
TransAtlantic is unable to meet its share of costs incurred under agreements
to which it is a party, its interest in the properties subject to such
agreements may be reduced.
OIL AND NATURAL GAS PRICES ARE VOLATILE.
TransAtlantic's revenues and profitability will be substantially dependent
upon prevailing prices for crude oil, natural gas and natural gas liquids.
For much of the past decade, the markets for crude oil and natural gas have
been extremely volatile. Such markets are expected to continue to be volatile
in the foreseeable future. In general, future prices of crude oil, natural
gas and natural gas liquids are
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dependent upon numerous external factors such as various economic, political
and regulatory developments and competition from other sources of energy. The
unsettled nature of the energy market and the unpredictability of worldwide
political developments, including, for example, actions of the Organization
of Petroleum Exporting Countries ("OPEC") members, make it particularly
difficult to estimate future prices of oil, gas and natural gas liquids. Any
significant decline in the price of oil, gas or natural gas liquids for an
extended period would have a material adverse effect on TransAtlantic's
financial condition and results of operations, and would, under certain
circumstances, impair access to sources of capital. Currently, TransAtlantic
has not entered into any derivative or long-term contracts to fix the prices
received for its share of production.
THE COMPANY MAY BE UNABLE TO REPLACE RESERVES IF ITS DRILLING OPERATIONS ARE
UNSUCCESSFUL OR IF IT IS UNABLE TO ACQUIRE PROVED RESERVES.
Producing oil and natural gas reservoirs generally are characterized by
declining production rates that vary depending upon reservoir characteristics
and other factors. TransAtlantic's future success depends upon its ability to
find, develop and/or acquire oil and gas reserves at prices that permit
profitable operations. Except to the extent that TransAtlantic conducts
successful development, exploitation or exploration activities or acquires
properties containing proved reserves, the proved reserves of TransAtlantic
will decline. This rate of decline depends upon reservoir characteristics
encountered in TransAtlantic's Egyptian and offshore Nigeria reservoirs,
where the majority of its proved reserves are located. The market for
acquiring proved reserves is extremely competitive, and TransAtlantic may not
be able to buy reserves for development and exploitation at prices it
considers to be reasonable or within its budgets. The cost of drilling,
completing and operating wells may vary significantly from initial estimates.
TransAtlantic's drilling operations may be unsuccessful or may be curtailed,
delayed or canceled as a result of numerous factors not within
TransAtlantic's control. These factors include, but are not limited to, title
problems, weather conditions, compliance with governmental requirements,
shortage of capital, mechanical difficulties and shortages or delays in the
delivery of drilling rigs or other equipment. Accordingly, there can be no
assurance that TransAtlantic's acquisition, development, or exploration
activities will result in reserves added at acceptable costs.
THE COMPANY'S FOCUS ON EXPLORATORY PROJECTS INCREASES THE RISKS INHERENT IN
OIL AND GAS ACTIVITIES.
TransAtlantic will be spending a large portion of its capital budget on
exploration, primarily on international projects. Exploration activities
involve substantially more risk than development or exploitation activities.
Exploratory drilling is a speculative activity. Although the use of 3-D
seismic data and other advanced technologies could increase the probability
of success of its exploratory wells, and reduce the average finding costs
through the elimination of prospects that might otherwise be drilled solely
on the basis of 2-D seismic data and other traditional methods, TransAtlantic
may not always be able to acquire 3-D seismic data over properties in which
it owns an interest. Even when fully utilized and properly interpreted, 3-D
seismic data and visualization techniques only assist geoscientists in
identifying subsurface structures and hydrocarbon indicators and do not
conclusively allow the interpreter to know if hydrocarbons will in fact be
present, or present in economic quantities, in such structures. In addition,
the use of 3-D seismic data and such technologies require greater predrilling
expenditures than traditional drilling strategies and TransAtlantic could
incur losses as a result of such expenditures. Failure of TransAtlantic's
exploration activities would have a material adverse effect on
TransAtlantic's future results of operations and financial condition.
Should sufficient capital not be available, the development and exploration
of TransAtlantic's properties could be delayed and, accordingly, the
implementation of TransAtlantic's business strategy would be adversely
affected.
THE COMPANY'S FOCUS ON INTERNATIONAL OPERATIONS INCREASES THE RISKS INHERENT
IN OIL AND GAS ACTIVITIES.
TransAtlantic currently conducts operations and has proved reserves in
Nigeria and Egypt and owns some minor properties in the United States. In the
future, TransAtlantic may commence operations in other countries.
International crude oil and natural gas exploration, development and
production activities are subject to political, economic and other
uncertainties including but not limited to changes, sometimes frequent or
material, in governmental energy policies or the personnel administering
them, expropriation of property, cancellation or modification of contract
rights, foreign exchange restrictions, currency fluctuations, royalty and tax
increases, retroactive tax claims, limits on allowable levels of production,
labor disputes and other risks arising out of foreign governmental
sovereignty over the areas in which TransAtlantic's operations will be
conducted, as well as risks of loss due to civil strife, acts of war and
insurrection. See "--Government Regulation." These risks may be higher in
developing countries in which TransAtlantic may conduct such activities.
TransAtlantic's international operations may also be adversely affected by
laws and policies of Canada or the United States affecting foreign trade,
taxation and investment. Consequently, TransAtlantic's international
exploration, development and production activities may be substantially
affected by factors beyond TransAtlantic's control, any of which could
materially adversely affect TransAtlantic's financial position or results of
operations. Furthermore, in the event of a dispute arising from international
operations, TransAtlantic may be subject to the exclusive jurisdiction of
courts outside the U.S. or Canada or may not be successful in subjecting
persons to the jurisdictions of the courts in the U.S. or Canada, which could
adversely affect the outcome of such dispute.
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The Company's private ownership of oil and gas reserves under oil and gas
leases in the United States differs distinctly from its ownership of foreign
oil and gas properties. In the foreign countries in which the Company does
business, the state generally retains ownership of the minerals and
consequently retains control of (and in many cases, participates in) the
exploration and production of hydrocarbon reserves. Accordingly, operations
outside the United States may be materially affected by host governments
through royalty payments, export taxes and regulations, surcharges, petroleum
profits taxes, value added taxes, production bonuses, participation options
and other charges. In addition, the Company may operate in such countries
with a joint venture partner, and the Company's ability to conduct
exploration, development and production activities may be materially
adversely affected by decisions and actions of its joint venture partners.
Certain of the Company's producing properties are located in Nigeria. Nigeria
is a developing third world nation that has experienced periods of civil
unrest and political and economic instability. In 1998, Nigeria made a
peaceful transition from military rule to a democratically elected
government. The establishment of a democratically elected government has
brought with it the potential financial support of the international
community. The amount of such financial support from the international
community will be a factor in how well Nigeria thrives in the next several
years. There can be no assurance of the extent of financial support by the
international community if any. In addition, Nigeria and other African
countries have occasionally asserted rights to land, including oil and gas
properties, through border disputes. If a country claims superior rights to
oil and gas leases or concessions granted to the Company by another country,
the Company's interests could be lost or decreased in value. In addition,
political and economic instability in Africa could result in new governments
or the adoption of new policies that might assume a substantially more
hostile attitude toward foreign investment. Actions taken by the
international community, future political unrest or actions by companies
doing business in Nigeria may have a materially adverse effect on Nigeria and
in turn, on TransAtlantic's financial condition or results of operations.
TransAtlantic has no ability to control the factors that may lead to such
events.
Nigerian laws require that foreign companies involved in the petroleum
industry hire and train indigenous personnel in petroleum operations.
Nigerian oil workers are organized into a number of labor unions. In the fall
of 1994, these labor unions called a general strike to protest against a
number of the political changes that had occurred within Nigeria. There is no
assurance that there will not be strikes in the future. Any future labor
interruptions could adversely affect the Company's ongoing operations and its
ability to explore for, produce, market and sell its reserves.
FACTORS BEYOND THE COMPANY'S CONTROL AFFECT ITS ABILITY TO MARKET PRODUCTION.
The marketability of TransAtlantic's production will depend upon numerous
factors beyond the Company's control. These factors include the availability
and capacity of gathering systems, pipelines and other production
transportation systems, the effect of federal, state and other governmental
regulation of such production and transportation, general economic conditions
and the supply of and demand for crude oil and natural gas, the availability
of alternate fuel sources and the effects of inclement weather, all of which
could adversely affect TransAtlantic's ability to market its production. In
addition, the Company may be unable to obtain favorable prices for the oil
and gas it produces.
THE CONCENTRATION OF THE COMPANY'S PROPERTIES INCREASES THE RISKS INHERENT IN
OIL AND GAS ACTIVITIES.
TransAtlantic's production and prospects are concentrated in a small number
of properties and prospects. See "Item 2. Description of Properties."
TransAtlantic will remain vulnerable to the disproportionate impact of delays
or interruptions of production from its discoveries and exploratory prospects
until it develops a more diversified production base.
THE RESERVE INFORMATION IN THIS REGISTRATION STATEMENT ARE ESTIMATES WHICH
SHOULD NOT BE UNDULY RELIED UPON.
Numerous uncertainties are inherent in estimating quantities of proved and
other reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
producer. The reserve data set forth herein represents only estimates based
on available geological, geophysical, production and engineering data, the
extent, quality and reliability of which vary. Oil and gas reserve
engineering is a subjective process of estimating accumulations of oil and
gas that cannot be measured in an exact manner, and estimates of other
engineers might differ materially from those shown. The accuracy of any
reserve estimate is a function of the quality and quantity of available data,
engineering and geological interpretation and judgment. In addition, the
estimates of future net cash flows from proved reserves and the present value
thereof are based upon certain assumptions about future production levels,
prices, costs and participation, if any, by third parties in the development
of the Company's reserves that may not prove correct over time, for reasons
which may or may not be under the control of or known to the Company. Any
significant variance from these assumptions could materially affect the
quantity and value of the Company's reserves as compared to the estimates
contained herein. Information about reserves constitutes forward looking
information.
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PROCEEDINGS MAY BE INITIATED AGAINST THE COMPANY IF IT FAILS TO COMPLY WITH
THE TERMS OF A SETTLEMENT AGREEMENT.
In August 2000, the Company entered into a settlement agreement with Global
Marine Integrated Services--International Inc. ("GMISI"), a wholly-owned
subsidiary of Global Marine, Inc., relating to the payment of outstanding
indebtedness on a promissory note from Tarpon-Benin S.A. to GMISI in the
original amount of $3,071,060. See "Item 9. Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources." The Company, as the indirect majority owner of Tarpon,
guaranteed the note. Although some payments had been made against the note,
Tarpon failed to pay the note in accordance with its terms and as of January
31, 2000 the note was in default.
GMISI has agreed that so long as the Company complies with the terms of the
settlement agreement, GMISI will not seek to enforce the note against the
Company or initiate any proceedings against the Company with regard to the
note or the guarantee. If the Company fails to or is unable to comply with
the terms of the settlement agreement, GMISI may pursue legal and equitable
remedies against TransAtlantic.
A RECENT ARBITRATION DECISION RULED AGAINST THE COMPANY; IF THE COMPANY IS
REQUIRED TO PAY THE DAMAGES AWARDED, IT COULD HAVE A MATERIAL ADVERSE EFFECT
ON THE COMPANY.
Several of the Company's wholly owned subsidiaries (the "Subsidiaries") are
parties to a Shareholder Agreement, pertaining to the Company's interest in
Tarpon-Benin S.A. ("Tarpon") of which the Company is the indirect majority
owner. Tarpon owned a concession in the Republic of Benin. At a meeting of
the shareholders in 1998, Tarpon elected to withdraw from the concession and
allow the concession agreement to expire; however, a group of minority
shareholders (the "Shareholders") objected. The Shareholders, along with the
parent company of the Shareholders, initiated arbitration in October, 1998
under the American Arbitration Association. On September 18, 2000, the
Company was advised that the arbitrator ruled that the Subsidiaries had
breached the Shareholder Agreement and assessed damages of $1,848,359.32.
While the Company was not a party to the Shareholder Agreement, the
arbitrator ruled that the Company guaranteed all obligations of the
Subsidiaries. The Company does not believe that the Subsidiaries have a basis
to appeal the decision. However, the Company intends to contest the
arbitrator's ruling against the Company. If the Company is required to pay
the damages awarded, it could have a material adverse effect on the Company.
THE COMPANY'S QUARTERLY RESULTS FLUCTUATE SIGNIFICANTLY AND SHOULD NOT BE
UNDULY RELIED UPON.
TransAtlantic's quarterly results of operations may fluctuate significantly
as a result of variations in oil and gas production and prices and variations
in TransAtlantic's drilling activities. Drilling activities can be affected
by a number of factors including the availability of equipment for drilling
or recompletions, weather, governmental regulations and available cash flow.
WEATHER, UNEXPECTED SUBSURFACE CONDITIONS AND OTHER UNFORESEEN OPERATING
HAZARDS MAY ADVERSELY IMPACT THE COMPANY'S ABILITY TO CONDUCT BUSINESS.
The oil and gas business involves a variety of operating risks, including the
risk of fire, explosion, blowout, pipe failure, casing collapse, stuck tools,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, pipeline ruptures and discharges of toxic gases, the occurrence of
any of which could result in substantial losses to TransAtlantic due to
injury and loss of life, loss of or damage to well bores and/or drilling or
production equipment, costs of overcoming downhole problems, severe damage to
and destruction of property, natural resources and equipment, pollution and
other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. Gathering systems
and processing facilities are subject to many of the same hazards and any
significant problems related to those facilities could adversely affect
TransAtlantic's ability to market its production. Moreover, offshore
operations are subject to a variety of operating risks peculiar to the marine
environment, such as hurricanes or other adverse weather conditions.
TransAtlantic will maintain insurance against some, but not all, potential
risks; however, there can be no assurance that such insurance will be
adequate to cover any losses or exposure for liability. Insurance may not
cover downhole-operating risks, such as the costs of retrieving stuck
equipment. Furthermore, TransAtlantic cannot predict whether insurance will
continue to be available at premium levels that justify its purchase or
whether insurance will be available at all to cover the risks faced by
TransAtlantic. The occurrence of a significant event not fully insured or
indemnified against could materially and adversely affect the Company's
financial condition and results of operations.
COMPLIANCE WITH ENVIRONMENTAL AND OTHER GOVERNMENTAL REGULATIONS COULD BE
COSTLY AND COULD NEGATIVELY IMPACT PRODUCTION.
The drilling for and production, handling, transportation and disposal of oil
and gas and byproducts are subject to extensive regulation under federal,
provincial, state, local and foreign country environmental laws that may be
changed from time to time in response to economic or political conditions.
See "--Government Regulation." Matters subject to regulation include, but are
not limited to, permits for drilling operations, drilling, plugging and
reclamation bonds, operational practices and reporting, the spacing of wells,
unitization
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and pooling of properties, taxation and environmental protection. In most
instances, the applicable regulatory requirements relate to water and air
pollution control and solid waste management measures, permitting
requirements, or restrictions on operations in environmentally sensitive
areas, such as coastal zones, wetlands, and wildlife habitat. Under these
laws and regulations, the Company could be liable for personal injury and
clean-up costs and other environmental and property damages, as well as
administrative, civil and criminal penalties. The Company maintains limited
insurance coverage for sudden and accidental environmental damages. The
Company does not believe that insurance coverage for environmental damages
that occur over time is available at a reasonable cost. Moreover, the Company
does not believe that insurance coverage for the full potential liability
that could be caused by sudden and accidental environmental damages is
available at a reasonable cost. Offshore operations are subject to more
extensive governmental regulation, including regulation that may, in certain
circumstances, impose absolute liability for environmental damage and allow
interruption or termination of business activities by government authorities
based on environmental or other considerations.
COMPETITIVE INDUSTRY CONDITIONS MAY NEGATIVELY AFFECT THE COMPANY'S ABILITY
TO CONDUCT OPERATIONS.
Competition in the oil and gas industry is intense, particularly with respect
to the acquisition of producing properties and proved undeveloped acreage.
Major and independent oil and gas companies, as well as individuals and
drilling programs, actively bid for desirable oil and gas properties, as well
as for the equipment and labor required to operate and develop such
properties. Many of TransAtlantic's competitors have financial resources and
exploration and development budgets that are substantially greater than those
of TransAtlantic, which may adversely affect TransAtlantic's ability to
compete successfully. In addition, many of TransAtlantic's larger competitors
may be better able to respond to factors that affect the demand for oil and
natural gas production such as changes in worldwide oil and natural gas
prices and levels of production, the cost and availability of alternative
fuels, and the application of government regulations. Other factors which
affect the Company's ability to successfully compete are: the Company's
access to seismic, geological and other information, and the Company's
ability to retain the personnel necessary to properly evaluate such
information; the location of, and the Company's ability to access, platforms,
pipelines and other facilities used to produce and transport oil and gas
production; and the standards the Company establishes for the minimum
projected return on an investment of its capital.
INFORMATION IN THIS REGISTRATION STATEMENT REGARDING THE COMPANY'S PROSPECTS
REFLECTS THE COMPANY'S CURRENT INTENT AND IS SUBJECT TO CHANGE.
The Company's current prospects and plans to explore these prospects are
described in this registration statement. A prospect is a property on which
the Company has identified what its geoscientists believe, based on available
seismic and geological information, to be indications of hydrocarbons. The
Company's prospects are in various stages of evaluation, ranging from a
prospect which is ready to drill to a prospect which will require substantial
additional seismic data processing and interpretation. Whether the Company
ultimately drills a prospect may depend on the following factors: receipt of
additional seismic data or the reprocessing of existing data; material
changes in oil or gas prices; the costs and availability of drilling rigs;
success or failure of wells drilled in similar formations or which would use
the same production facilities; availability and cost of capital; changes in
the estimates of the costs to drill or complete wells; the Company's ability
to attract other industry partners to acquire a portion of the working
interest to reduce exposure to costs and drilling risks; and decisions of the
Company's joint working interest owners. The Company will continue to gather
data about its prospects, and it is possible that additional information may
cause the Company to alter its drilling schedule or determine that a prospect
should not be pursued at all.
THE LOSS OF KEY PERSONNEL COULD NEGATIVELY AFFECT THE COMPANY'S OPERATIONS.
TransAtlantic will depend to a large extent on the services of its senior
management personnel. The loss of the services of any such personnel could
have a potential adverse effect on TransAtlantic's operations.
CERTAIN OFFICERS AND DIRECTORS MAY HAVE INTERESTS ADVERSE TO THE COMPANY.
There may be potential conflicts of interest for certain of the officers and
directors of TransAtlantic who are or may become engaged from time to time in
the crude oil and natural gas business on their own behalf or on behalf of
other companies with which they may serve in the capacity as directors or
officers. Certain of the outside directors of TransAtlantic are officers
and/or directors of other publicly traded crude oil and natural gas
exploration and production companies. To the extent any such conflicts arise
from time to time, they will be governed by and resolved in accordance with
the applicable provisions of TransAtlantic's governing corporate legislation.
GOVERNMENT REGULATION
NIGERIA
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All phases of oil exploration, development and production in Nigeria are
regulated by the Nigerian government either directly, through the Nigerian
Ministry of Petroleum Resources ("NMPR") or the Nigerian Department of
Petroleum Resources ("NDPR") pursuant to the PETROLEUM DECREE, 1969, and
under periodic policy statements issued by the Nigerian government and
administrative practices of the NDPR. Areas of government regulation include
restrictions on petroleum production, price controls, export controls, taxes
and royalties, expropriation of property, environmental protection and rig
safety. In addition, all petroleum drilling and production in Nigeria must be
approved in advance by the Nigerian government through the NMPR or the NDPR.
TransAtlantic's partner, Atlas Petroleum International Limited, as operator,
and TransAtlantic's wholly owned subsidiary, Summit Oil & Gas Worldwide Ltd.,
as technical adivsor, must submit annual work programs and budgets to the
NDPR for review and approval. Likewise, the NDPR must approve, in advance,
all seismic and drilling activities as well as the installation of production
facilities through the issuance of permits for such activities. Although the
Company has no reason to believe that the applicable approval will not be
received in the normal course, there is no assurance that the NDPR will grant
the requisite approvals. Failure to obtain NDPR approval could have a
materially adverse effect on the future results of operations of the Company.
Producers are subject to a tax on adjusted petroleum profits. Adjusted
petroleum profits consist generally of revenues from petroleum sales less
operational expenses and certain capital costs (including drilling costs).
The PETROLEUM PROFITS TAX ACT, 1969, prescribes a petroleum profits tax rate
of 65.75% for the first five years and 85% thereafter. The Company
understands that a reduced petroleum profits tax rate or other regulatory
relief may be applicable to concession blocks awarded under the Indigenous
Program. Any changes to the current royalty regime or the PETROLEUM PROFITS
TAX ACT, 1969 or their applicability to the Indigenous Program will affect
the Company.
Under Nigerian legislation, a petroleum concession owner is required to
engage in petroleum exploration and development. Concessions may be obtained
directly from the NMPR or from an existing concession owner, provided that
prior NMPR approval to an assignment is obtained. Petroleum concessions
granted by the NMPR consist of either an oil exploration license, an oil
prospecting license ("OPL") or an oil mining lease ("OML"). The PETROLEUM
DECREE, 1969 provides that an OPL is issued for a maximum term of five years.
An OPL gives the holder the exclusive right to conduct both seismic and
exploratory drilling operations within a concession block and the right to
carry away and dispose of petroleum produced during the term of the OPL. If,
during the term of the OPL, testing or actual production demonstrates that
the OPL is capable of producing 10,000 Bopd ("Commercial Quantities") and
conditions imposed by the NMPR and NDPR are satisfied, including payment of
applicable fees and the provision of specified documentation, the holder of
an OPL becomes entitled to apply to the NMPR for an OML. An OML provides the
holder with an exclusive right to conduct exploration and development
drilling operations and the exploitation of petroleum discovered on the
concession block for a term of up to twenty years. An OML may be renewed upon
application to the NMPR. The PETROLEUM DECREE, 1969 contains provisions that
require the holder of an OML to relinquish 50% of the geographic area
encompassed by the OML after ten years upon the request of the NMPR. The
acreage to be relinquished is identified by the holder of the OML. The lessee
of an OML shall be entitled to apply in writing to the Minister, not less
than twelve months before the expiration of the lease, for a renewal of the
lease either in respect of the whole of the leased area or any particular
part thereof, and the renewal shall be granted if the lessee has paid all
rent and royalties due and has otherwise performed all his obligations under
the lease.
Under the PETROLEUM DECREE, 1969, the Nigerian government may elect, during
the currency of an OML or OPL, to directly participate in the concession,
which could result in a reduction of the participating interest of the
Company. The PETROLEUM DECREE, 1969 does not specify the maximum level of
government participation. Neither the PETROLEUM DECREE, 1969 nor any
subsequent correspondence between the NMPR and the Company's Nigerian partner
addresses either the payment to the Company or its Nigerian partner of a
proportionate share of future costs or the reimbursement of past costs by the
Nigerian government.
EGYPT
All phases of oil exploration, development and production in Egypt are
regulated by the Egyptian government through Egyptian General Petroleum
Corporation ("EGPC"). Areas of government regulation include exploration and
production approvals, taxes and royalties, expropriation of property,
environmental protection and safety. Concession holders are subject to an
Egyptian corporate income tax of 42.5% that is paid by EGPC on behalf of the
concession holder out of EGPC's share of revenues. Concessions are generally
held under profit sharing agreements which are negotiated individually with
EGPC.
Under Egyptian legislation, a petroleum concession owner is required to
engage in petroleum exploration and development. Concessions may be obtained
directly from EGPC or from an existing concession owner, provided that prior
EGPC approval to an assignment is obtained. The holders of the concession
have the exclusive right to conduct both geophysical and exploratory drilling
operations within the concession block and the right to carry away and
dispose of production produced during the term of the concession. If, during
the term of the concession, testing or production of commercial quantities of
hydrocarbons is achieved and conditions imposed by EGPC are satisfied,
including the provision of specified documentation, the holder of the
concession has the right to apply to EGPC for a
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conversion to a development lease and the formation of a joint operating
company specifically set up to administer the development, exploration and
administration of the development lease. The joint operating company is
directed by a board of directors including, in equal numbers, members of EGPC
and the concession holders. Management of the joint operating company is run
by a chairman delegated by EGPC. Other senior management positions are
negotiated between EGPC and the concession holders.
The concession holder has the right to explore and produce oil from the
development lease for a period of twenty years. A development lease can be
extended upon proof of commercial reserves. Areas outside the development
lease, but within the concession limits, are generally held for three
exploration phases (generally consisting of three-year periods). Each
exploration phase consists of a minimum work obligation, including minimum
financial commitments. Following completion of the minimum work program and
written acceptance by EGPC that the work program obligations have been
fulfilled, the concession holder has the option to relinquish the concession
or relinquish 25% of the concession and commit to a further exploration
phase. The acreage to be relinquished is identified by the concession holder.
The renewal of the lease shall be granted to the concession holder if all
obligations have been performed under the lease.
Egypt retains the right of requisition of production from Egyptian
concessions and cancellation of the concession agreements upon the occurrence
of specific events, including a national emergency due to war, imminent
expectation of war or internal causes, unauthorized assignment of interests
in the concession, the concession holder being adjudicated bankrupt by a
court of competent jurisdiction and intentional extraction of any mineral not
authorized by the concession agreement. Requisition or cancellation of the
Company's concession agreements as a result of the foregoing or for any other
reasons would have a material adverse effect on the Company.
MANAGEMENT AND EMPLOYEES
As of December 31, 1999, TransAtlantic and its subsidiaries had 10 employees
of which three were executive officers. See "Item 10. Directors and Officers
of Registrant." The Company utilizes consultants when necessary and engages
field personnel on a contract basis to manage the Company's operated
producing properties.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company is engaged in the exploration, development and acquisition of oil
and gas properties. The Company's activities are currently focused in
evaluating and exploiting the petroleum potential of specific concessions in
North and West Africa. These areas possess prolific source rocks that have
charged some of the world's largest oil fields. Management believes that both
areas offer good opportunity for the Company to explore for oil and in North
Africa, for natural gas where existing infrastructure includes a network of
oil and gas pipelines linking fields with ports and urban centers, as well as
major gas transmission lines to European markets. The infrastructure for gas
has not yet developed in West Africa.
NIGERIA
Nigeria began producing oil in 1957 and is currently Africa's largest oil
producer and exporter. Given the critical role oil plays in the Nigerian
economy, the Company believes that any potential civil or political unrest
will not adversely affect the country's oil industry. The country offers
numerous opportunities for continued oil exploration offshore at relatively
shallow drilling depths and low exploration risk.
THE INDIGENOUS PROGRAM
TransAtlantic's participation in Nigeria is through a joint venture between
the Company's wholly owned subsidiary, Summit Oil and Gas Worldwide Ltd.
("SOGW"), as technical advisor, and Atlas Petroleum International Limited
("Atlas"), a Nigerian company that serves as operator of the concession. The
joint venture with Atlas is under a program (the "Indigenous Program")
introduced in 1990 by the NMPR in an effort to increase production and
domestic participation in the country's oil industry. The Indigenous Program
provides qualified, privately-owned Nigerian companies with both preferential
treatment in the allocation of available petroleum concession blocks and
favorable economic terms for the development of such blocks. Participating
Nigerian companies are permitted to establish revenue and cost sharing
arrangements with foreign companies that provide the technical expertise,
operational support and financial resources required for exploration and
development operations. As part of the Indigenous Program, the Nigerian
government receives production royalties and taxes and is not required to
fund any exploration or development costs. The financial terms that are
available to SOGW under the Indigenous Program differ from those generally
available to most multinational companies that operate in Nigeria. Outside of
the Indigenous Program, multinational companies are joint working interest
owners with the Nigerian National Petroleum Company ("NNPC") under one of
several different forms of joint ventures. The joint ventures generally
provide that the participating company and the NNPC collectively fund
operating and capital expenditures and recover their costs and profits from
the
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proceeds of production based on their relative participating interest. In
addition, under the joint ventures, the NNPC has the right to approve
proposed exploration and development projects. TransAtlantic believes that
SOGW's ability under the Indigenous Program to proceed with exploration and
development projects that it considers attractive without NNPC participation
gives it increased flexibility to pursue other opportunities within Nigeria.
Recent announcements by the Nigerian government and the NDPR have indicated
that companies participating in the Indigenous Program should qualify for
certain tax and royalty relief. However, no such royalty or tax relief has
yet been instituted.
In March 2000, SOGW initiated an arbitration to resolve certain differences
of opinion between SOGW and Atlas relating to the interpretation of certain
provisions of its joint operating agreement with Atlas. It also involves
disagreements regarding reporting of royalties and lifting procedures. The
dispute relates primarily to the undeveloped acreage on the concession, and
does not affect the operation of the Ejulebe field. SOGW has filed an
arbitration proceeding in Geneva. See "Item 3. Legal Proceedings."
In addition, in 1996, SOGW loaned $5.0 million to the Chairman of Atlas by
way of a three year promissory note, which was guaranteed by Atlas. Atlas
pledged 50% of its 40% interest in OML-109 to SOGW as security. The note is
in default and SOGW has initiated proceedings for its collection. The
collection proceeding was filed in the High Court of England and Wales in
London, England and is set for trial in early 2001. See "Item 3. Legal
Proceedings."
OIL MINING LICENSE ("OML") -- 109
SOGW owns a 30% interest in a 215,000 acre concession offshore Nigeria. Prior
to the recovery of its accumulated costs incurred ("payout"), SOGW is
responsible for the payment of 100% of capital costs and receives 60% of the
net revenue accruing to SOGW and Atlas. With respect to 200,000 of the acres,
SOGW has a 30% interest after payout (60,000 net acres) and a 22.5% working
interest after payout in the remaining 15,000 acres (3,375 net acres)
surrounding and including the Ejulebe field. Until a loan made by SOGW during
1996 to the Chairman of Atlas is repaid, SOGW is also entitled to receive 50%
of Atlas' share of cash flow from the concession (20% net to SOGW) pursuant
to Atlas's guarantee. See "--The Indigenous Program," above.
The concession, located in the northwestern part of the Niger Delta, is 12 to
15 kilometers offshore in 50 to 250 feet of water. Originally granted as an
oil prospecting license, OPL-75, the concession was converted to OML-109 in
1996. The oil mining license was granted for an initial term of 20 years and
may be extended upon proof of additional commercial economic reserves. There
are no governmental prescribed work program requirements for the concession;
however, Atlas and SOGW must submit annual work programs and demonstrate
continued activity to explore and develop the block.
DEVELOPMENT AND EXPLORATION OF OML-109
The local geology offshore Nigeria is very similar in geophysical response,
structural style and formation age to that of the Mississippi Delta in the
Gulf of Mexico. Seismic interpretation techniques, such as "bright spot"
identification, that have been proven to reduce exploration risk in the Gulf
of Mexico and other areas are applicable to this area. Additionally, the
Company believes that specialized seismic processing techniques will assist
in delineating hydrocarbon type and extent of accumulations.
In 1994, SOGW originally acquired and processed a 32 square mile 3-D seismic
survey over a portion of the northern half of the concession, including the
Ejulebe field. Subsequently, in 1996 SOGW and Atlas, through a service
contractor, acquired and processed the "Ekura" survey consisting of
approximately 127 square miles of 3-D seismic data. SOGW also acquired 2-D
seismic in 1995 that covers the entire 215,000 acres, and in 1995 acquired
additional 3-D coverage that had been previously acquired by Chevron. SOGW
now has 3-D seismic surveys covering approximately 40% of the concession.
EJULEBE FIELD
Production under OML-109 first commenced in September 1998 with the
development of the Ejulebe field. The field is located in the northern
portion of the concession area, four miles northwest of the Mefa oilfield,
which is located on the offsetting concession to OML-109 and operated by
Chevron.
The field was originally discovered by SOGW in 1994. Following the discovery,
an appraisal well was drilled in 1995. Subsequently, SOGW and Atlas entered
into a service contract dated January 14, 1996 whereby CXY Nigeria Oil Field
Services Ltd., a subsidiary of Canadian Occidental Petroleum Ltd. ("CXY"),
provides certain financial, technical and operational services in the 15,000
acres surrounding and including the Ejulebe field. Pursuant to the service
contract, two additional exploratory wells and three development wells were
drilled on or near the Ejulebe Field in 1996 and 1997. A production platform
was built and pipeline laid for first production which commenced in September
1998. As compensation for providing the above services, CXY recovers its
costs, which include actual
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operating and capital costs and a financing fee, and receives 25% of the net
operational revenues from Ejulebe and other hydrocarbon accumulations CXY
discovers on the 15,000 acres. The 25% declines to 20% as certain cumulative
production levels are attained. CXY pays the Company and Atlas a minimum
payment of $510,000 ($306,000 net to the Company) per year if profits are not
generated under the terms of the service contract.
As part of their commitment, CXY drilled two successful development oil wells
in the field, a pressure maintenance well on the flank of the structure and
two unsuccessful exploratory wells. Currently, there are three wells producing
oil in the field. Delivery of Ejulebe production is via a 14 mile, 6 inch
pipeline from the central production facilities to a floating storage and
off-loading facility operated by Conoco. TransAtlantic's capital expenditures
to date total just over $14 million. CXY's capital expenditures to date exceed
$105 million on the field.
During 1999, the Ejulebe field produced approximately 2.65 MMBbls at a gross
daily average of approximately 7,230 Bopd. Over the final six months of 1999,
the field averaged 6,100 Bopd and for the first six months of 2000, the field
averaged 5,740 Bopd. This rate is significantly lower than pre-production
estimates. The Company's arrangement with CXY provides that the Company
receives a minimum payment until CXY reaches payout. At current production
levels, SOGW is realizing only the minimum payment of approximately $306,000
per year. If the production rate remains stable and oil prices remain above
$25 per barrel, the Company estimates that the Ejulebe field should become
profitable in year 2001. Otherwise, TransAtlantic will continue to receive
only its share of the minimum payment under the services contract with CXY.
Management continues to explore ways to increase daily rates and accelerate
production of the remaining reserves; no assurances can be made, however, that
management will be successful. At present production rates, it is not
anticipated that the production quotas set by the Nigerian Government as a
member of the Organization of Petroleum Exporting Countries will have an
impact on the Ejulebe field.
Estimated net proved reserves attributable to this field at December 31, 1999
were 4.25 MMBbls with a PV-10 Value of $ 4.57 million.
ADDITIONAL PROSPECTS ON OML-109
The balance of the 200,000 acres on the OML-109 are to be explored and
developed by SOGW and Atlas. SOGW continually reevlauates its interpretation
of the seismic data covering this area and has identified eight prospects on
or extending onto OML-109, including the Kahuna Prospect and the Tuna
Prospect, described below. No exploration activities can be undertaken,
however, until settlement of the dispute with the Company's indigenous
partner. The Company anticipates that a drilling program will be undertaken
with respect to the Kahuna and Tuna prospects approximately six to eight
months after settlement or resolution of the arbitration. The Company
continually reviews its drilling plans in light of changing circumstances. See
"Item 1. Description of Business--Risk Factors--Prospects." The Company's
drilling schedule with respect to its other prospects will depend on the
results of the Company's program on the Kahuna and Tuna prospects and other
factors described under "Item 1. Description of Business--Risk
Factors--Prospects."
Kahuna Prospect. A down to the basin fault closure to the east of the
Sonam structural crest is the basis for the Kahuna prospect. It covers
approximately 1,000 acres in area, with a water depth of approximately
125 feet. This area consists of major growth faults together with
several small fault blocks. Several amplitude anomalies are associated
with the fault closures, giving credence to the prospect. Estimated net
dry hole costs to drill this well are $3.5 million.
Tuna Prospect. This prospect is located upthrown and adjacent to the
down-to-the-basin fault that forms the Kahuna prospect. The structure
covers an area of approximately 800 acres and exhibits anomalous
seismic amplitudes. Water depth at the prospect is approximately 125
feet. A well drilled to approximately 8,000 feet would test the primary
section of interest. Estimated net dry hole costs to drill this well
are $3.5 million.
EGYPT
Egypt is a major focal area for the Company. Management believes that the
country offers excellent opportunities to build a large reserve base in areas
with proven petroleum systems, excellent economics and shallow, inexpensive
drilling. In addition, there are existing facilities for the gathering,
treating, storage and transportation of crude oil located in and around the
existing fields within each of the Company's concessions.
CENTRAL SINAI CONCESSION
The Central Sinai Concession consists of 4.5 million acres and is located
onshore in the central portion of the Sinai Peninsula within the Gulf of Suez
basin. The western portion of the block borders the Gulf of Suez shore for
more than 100 kilometers. With the exception of the coastal lands and the
interior basin, the terrain is primarily mountainous topography. There are
three oil fields confined
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within the boundaries of the concession but specifically excluded from the
concession rights. The Egyptian government oil company holds these fields,
which were discovered by Shell between 1946 and 1947 using gravity techniques
before the emergence and use of seismic techniques. The producing horizons are
shallow Miocene and Eocene formations at depths ranging from 2,000 feet to
4,000 feet.
Refinery and tanker terminals exist at Suez, which is located adjacent to the
northern boundary of the Central Sinai concession, and at Wadi Feiran, 20
kilometers south of the concession. Storage and loading facilities exist at
Ras Budran on the southern boundary of the block. An excellent metaled road,
capable of accommodating the heaviest of oilfield traffic, runs from north of
Suez along the west coast of the Sinai Peninsula to Sharm el-Sheikh, though
other roads are few.
ACQUISITION OF INTEREST IN CONCESSION
The Company's wholly-owned subsidiary, GHP Exploration (Egypt) Ltd.
("GHP-Egypt"), acquired its 25% interest in the concession pursuant to a
Participation Agreement dated March 27, 1998 with Alliance Egyptian National
Exploration Company ("Alliance"). In consideration of the 25% interest,
GHP-Egypt repaid Alliance $1.0 million of their prior costs incurred. In
addition, GHP-Egypt agreed to pay 40% of the $6.0 million minimum financial
commitment ($2.4 million net to GHP-Egypt) associated with the initial work
program required to be carried out on the concession of which all has been
paid as of July 31, 2000. Alliance is the operator under the concession, and
GHP-Egypt serves as the technical advisor.
CONCESSION TERMS
The concession agreement requires that GHP-Egypt and Alliance pay all of the
operating and capital costs for developing the concession, while the
production will be split between GHP-Egypt, Alliance and EGPC, the government
partner. Up to 35% of the crude oil and natural gas produced from the
concession is available to GHP-Egypt and Alliance to recover operating and
capital costs ("Cost-Recovery Oil"). To the extent eligible costs exceed 35%
of the crude oil and natural gas produced and sold from the concession in any
given quarter, such excess costs may be carried into future quarters without
limit. The remaining 65% of all crude oil and natural gas produced from the
concession ("Profit Oil") is divided between EGPC and GHP-Egypt and Alliance,
with the percentage received by GHP-Egypt and Alliance reducing from 26% to
15% as the gross daily average crude oil and natural gas equivalent produced
on a quarterly basis increases from less than 5,000 Bbls/d to in excess of
50,000 Bbls/d. To the extent that eligible operating and capital costs do not
exceed 35% of the crude oil and natural gas produced and sold from the
concession in any given quarter, such excess Cost-Recovery Oil is split
between EGPC and GHP-Egypt and Alliance in the same percentages as the Profit
Oil outlined above.
WORK PROGRAM OBLIGATION
GHP-Egypt and Alliance are in the first exploration phase under the
concession. The work program required under the terms of the concession
agreement mandates the drilling of four wells and the acquisition of 200
square kilometers of 3-D seismic data and additional 500 line kilometers of
2-D seismic data in the initial three-year exploration period that expired
September 22, 2000. The exploration period has been extended an additional six
(6) months through operations, subject to regulatory approval. This program
requires a net minimum financial commitment of $2.4 million. A 25% acreage
relinquishment is required after the initial exploration period. As of June
30, 2000, the Company had incurred all of this amount and the government had
waived any unmet work program obligations. Since then, the Company has
expended a small amount of money employing the services of a workover rig on
the Lagia-6, Lagia-7 and South Lagia wells.
EXPLORATION PROGRAM
In February 1999, TransAtlantic and its industry partner acquired
approximately 310 kilometers of 2-D seismic data over several leads that had
been identified from previous data. Seismic processing and interpretation of
this data set was completed in October 1999. From this interpretation seven
prospects and leads were identified. Four exploratory test sites were chosen
from these prospects. Although called for in the concession agreement, no
additional 2-D or 3-D seismic was shot on the concession. The government
accepted the work program of GHP-Egypt and its partner which included drilling
more than the minimum number of wells and which met the financial commitment
called for under the concession agreement.
West Asl-1, the first well in this drilling program, is located approximately
three kilometers from the prolific Asl field. West Asl-1 was designed to
target the same Miocene and Eocene section found to be productive at Asl
field. Total depth of this exploration well was expected to be approximately
5,500 feet. The West Asl-1 test well began drilling on December 3, 1999 and
reached the primary objective on December 14, 1999. When entering the primary
Eocene target interval, the well experienced total loss of mud filtrate into
the formation resulting in the loss of the hole. The well was officially
plugged and abandoned on December 18, 1999. The Company next began drilling
the South Lagia well in January 2000. This well, although showing promising
indications of hydrocarbons, was determined to be non-commercial following
testing. In March 2000, the Company drilled the Lagia-6 well. The Lagia-6
discovery well
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was drilled to a total depth of 2,500 feet and production casing was set at
1,250 feet in order to evaluate the Miocene Nukhul formation. Electric logs
and hydrocarbon shows while drilling indicated a gross sand section of 170
feet with over 60 feet of net oil pay. In April 2000, the Lagia-7 well was
drilled approximately 380 meters downdip of Lagia-6 and encountered a gross
hydrocarbon column of 177 feet with over 75 feet of net oil pay. A fifth well,
drilled in May 2000, was a dry hole. The Company is evaluating options for
commercializing the field, and further drilling is dependent upon
determinations of commerciality and further study of the well results. The
Company and its partner plan to extend the first exploration period by six
months by conducting further operations on the concession, subject to
regulatory approval. Should regulatory approval be denied, the Company and its
partner will seek approval for a development lease surrounding the Lagia-6,
Lagia-7 and South Lagia wells.
WEST GHARIB CONCESSION
The West Gharib concession consists of 630,000 acres and is located on the
onshore portion of the Gulf of Suez Basin. Most of the concession's 120
kilometer length is located within the prolific Gulf of Suez petroleum system.
The topography throughout the concession consists of coastal plain geology
with minor surface faulting. There is one oil field located within the
boundaries of the concession but specifically excluded from the concession
rights.
On the West Gharib concession, both oil and gas pipelines run the length of
the concession with storage and loading facilities located adjacent to the
concession at Ras Shukeir.
ACQUISITION OF INTEREST IN CONCESSION
The Company's wholly owned subsidiary, GHP Exploration (West Gharib) Ltd.
("GHP-West Gharib"), acquired its 30% interest in the concession pursuant to a
Participation Agreement dated April 27, 1998 with Dublin International
Petroleum (Egypt) Limited ("Dublin"), a wholly owned subsidiary of Tanganyika
Oil Company Ltd. In consideration of the 30% interest, GHP-West Gharib repaid
Dublin and Tanganyika $303,000 of their sunk costs. In addition, GHP-West
Gharib agreed to pay 60% of the first two exploration wells to a maximum of
$750,000 net to GHP-West Gharib. Thereafter, GHP-West Gharib will pay 30% of
all exploration and development costs. Dublin is the operator of the
concession.
CONCESSION TERMS
The concession agreement requires that GHP-West Gharib and its partners in the
concession pay all of the operating and capital costs for developing the
concession, while the production will be split between GHP-West Gharib, its
joint venture partners, and EGPC. Up to 30% of the crude oil and natural gas
produced from the concession is available to GHP-West Gharib and its partners
to recover operating and capital costs ("Cost-Recovery Oil"). To the extent
eligible costs exceed 30% of the crude oil and natural gas produced and sold
from the concession in any given quarter, such excess costs may be carried
into future quarters without limit. The remaining 70% of all crude oil and
natural gas produced from the concession ("Profit Oil") is divided between
EGPC and GHP-West Gharib and its partners, with the percentage received by
GHP-West Gharib and its partners reducing from 30% to 15% as the gross daily
average crude oil and natural gas equivalent produced on a quarterly basis
increases from less than 5,000 Bopd to in excess of 100,000 Bopd. To the
extent that eligible operating and capital costs do not exceed 30% of the
crude oil and natural gas produced and sold from the concession in any given
quarter, such excess Cost-Recovery Oil is split 70% to EGPC and 30% to
GHP-West Gharib and its partners.
WORK PROGRAM OBLIGATION
The required work program for the initial three-year exploration period, which
commenced on June 1, 1998, is to drill three wells, acquire 50 square
kilometers of 3-D seismic data and 300 line kilometers of 2-D seismic data.
All of the work program obligations have been met. Net financial exposure to
GHP-West Gharib for this initial exploration period is approximately $1.86
million, of which all had been incurred as of December 31, 1999. In addition
to meeting its work program obligations for the initial exploration period,
through July 31, 2000, the Company has spent an additional $1.5 million on the
West Gharib concession.
EXPLORATION PROGRAM
The joint venture has acquired 43 square kilometers of 3-D seismic data, 248
line kilometers of 2-D seismic data and reprocessed existing 2-D seismic data.
Based on this seismic data, two exploration wells and one appraisal well were
drilled during 1999 resulting in the discovery and subsequent commercial
declaration of the Hana oil field and one dry hole (Farha 1). In June 2000,
the Company and its partners acquired a 60 square kilometer 3-D survey over
several prospects adjacent to the Hana field and commenced the acquisition of
a 400 square kilometer 3-D survey to delineate additional prospects in the
Hana field.
HANA FIELD
-15-
<PAGE>
On June 23, 1999, TransAtlantic and its partners spudded the Hana-1
exploration well. The Hana-1 well, drilled on the basis of 3-D seismic,
resulted in a significant oil discovery. The well encountered over 60 feet of
net pay in the Miocene-aged Kareem formation and tested oil at a stabilized
rate of 568 Bopd.
The Hana-2 appraisal well, drilled in September 1999, encountered the top of
the Kareem Sand 47 feet updip from the discovery well. The well was perforated
across the entire 76 feet of net pay interval and production tested at a
stabilized rate of 2,180 Bopd with zero water cut. The test rate was
restricted to the capacity of the bottom hole pump. The higher structural
position and thicker contiguous pay interval in the Hana-2 well considerably
enhanced the interpretive scope and size of the reservoir. One exploratory
well drilled to the south of the Hana field was a dry hole.
During the first half of 2000, four additional appraisal wells were
successfully drilled and completed. Production from the wells is being trucked
to a pipeline approximately ten kilometers away while permanent production
facilities are being installed, which will be capable of handling up to 15,000
Bopd. These facilities are expected to be completed in the third quarter of
2000. For the six months ended June 30, 2000, average daily production net to
the Company from its West Gharib concession was 1,578 Bopd (241 Bopd net to
the Company). The wells are currently producing at an average of 2,473 Bopd
(278 Bopd net to the Company).
Estimated net proved reserves attributable to this field at December 31, 1999
were 525.9 MMBbls with a PV-10 Value of $7.68 million.
TUNISIA
During December 1999 and prior to incurring any expenditures, the Company
elected to withdraw from its concession in Tunisia in order to focus its
available resources on its Egyptian and Nigerian exploration and development
opportunities.
UNITED STATES
The Company owns properties in the United States which are not material to its
business. The Company does not have any proved reserved attributable to its
U.S. properties. The Company does not have any current exploration plans with
respect to its prospects in the United States.
DRILLING ACTIVITY
TransAtlantic participated in the drilling of six (1.92 net wells) from
January 1, 1998 to December 31, 1999:
<TABLE>
<CAPTION>
1999 1998
--------------------------------- -------------------------------
Gross Net Gross Net
Wells Wells Wells Wells(1)
----- ----- ----- --------
<S> <C> <C> <C> <C>
Exploratory
Egypt.................................. 4.00 1.15 -- --
Nigeria................................ -- -- -- --
United States.......................... 1.00 .67 1.00 0.10
---- ---- ---- ----
Development................................. -- -- -- --
---- ---- ---- ----
Total....................................... 5.00 1.82 1.00 0.10
==== ==== ==== ====
</TABLE>
(1) For purposes of this table, "net wells" reflects gross wells multiplied
by the Company's or its subsidiaries' working interest before payout.
Three of the exploratory wells drilled in 1999 were productive, while the one
well drilled in 1998 was productive. Since December 31, 1999, the Company has
drilled four exploratory wells and four development wells in Egypt, of which
six were successful. The Company did not drill any additional wells in Nigeria
or the United States.
UNDEVELOPED LAND
The following table sets forth TransAtlantic's and its subsidiaries' interests
in properties on which no producing wells have been drilled as of December 31,
1999:
-16-
<PAGE>
<TABLE>
<CAPTION>
Gross Acres Net Acres(1)
-------------- ---------------
<S> <C> <C>
Nigeria......................................................................... 212,000 62,700
Egypt........................................................................... 5,102,174 1,306,652
United States................................................................... 17,425 5,635
====== =====
Total.................................................................. 5,331,599 1,374,987
</TABLE>
(1) Calculated based on the Company's after-payout working interest.
OIL AND GAS WELLS
As of December 31, 1999, TransAtlantic owned interests in six producing oil
wells, one producing gas well and one pressure maintenance well. The following
table sets forth the producing wells and wells capable of producing in which
TransAtlantic and its subsidiaries owned a working interest at December 31,
1999:
<TABLE>
<CAPTION>
OIL WELLS GAS WELLS
----------------------------------------------- --------------------------------------------
PRODUCING SHUT-IN PRODUCING SHUT-IN
----------------------- ----------------------- ----------------------- --------------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Nigeria............................ 3 1.80 - - - - - -
Egypt.............................. 2 0.60 - - - - - -
United States...................... 1 1.00 1 1.0 1 0.67 - -
Total..................... 6 3.40 1 1.0 1 0.67 - -
</TABLE>
-17-
<PAGE>
RESERVES AND FUTURE NET CASH FLOWS
The Company's proved reserves and the PV-10 Values attributable to such
reserves for the years ended December 31, 1998 and 1999 were estimated by
Ryder Scott Company Petroleum Engineers ("Ryder Scott") of Calgary, Alberta,
independent petroleum consultants. For the year ended December 31, 1997, the
Company's proved reserves and the PV-10 Value attributable to such reserves
were estimated by O'Neill Petroleum Consultants.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997(2)(3)
------------ ------------ ------------
<S> <C> <C> <C>
NIGERIA(1)
PROVED DEVELOPED:
Oil (Bbls) ........... 4,246,377 5,670,267 --
Gas (Mcf) ............ -- -- --
PROVED UNDEVELOPED:
Oil (Bbls) ........... -- -- 10,866,000
Gas (Mcf) ............ -- -- --
TOTAL PROVED:
Oil (Bbls) ........... 4,246,377 5,670,267 10,866,000
Gas (Mcf) ............ -- -- --
PV-10 Value ............. $ 4,568,046 $ 2,189,751 $24,785,000
EGYPT(4)
PROVED DEVELOPED:
Oil (Bbls) ........... 201,629 -- --
Gas (Mcf) ............ -- -- --
PROVED UNDEVELOPED:
Oil (Bbls) ........... 324,319 -- --
Gas (Mcf) ............ -- -- --
TOTAL PROVED:
Oil (Bbls) ........... 525,948 -- --
Gas (Mcf) ............ -- -- --
PV-10 Value ............. $ 7,682,324 $ -- $ --
TOTAL(5)
PROVED DEVELOPED:
Oil (Bbls) ........... 4,448,006 5,670,267 --
Gas (Mcf) ............ -- -- --
PROVED UNDEVELOPED:
Oil (Bbls) ........... 324,319 -- 10,866,000
Gas (Mcf) ............ -- -- --
TOTAL PROVED:
Oil (Bbls) ........... 4,772,325 5,670,267 10,866,000
Gas (Mcf) ............ -- -- --
PV-10 Value ............. $12,250,370 $ 2,189,751 $24,785,000
</TABLE>
---------------
(1) SOGW's indigenous partner has pledged 50% of its 40% interest in
OML-109 to SOGW as security for amounts advanced by SOGW during 1996.
See "Item 2. Description of Property--Nigeria--The Indigenous Program."
This additional 20% interest is included in the reserve volumes and
future net cash flows.
(2) Effective July 1, 1997, the Company disposed of all of its Canadian oil
and gas interests. Accordingly, no reserves are shown attributable to
these interests.
(3) The reserve report prepared by O'Neill Petroleum Consultants was
prepared prior to the commencement of actual production from the
Ejulebe field. The reserve report included proved undeveloped gas
reserves at December 31, 1997 of 23,012,000 Mcf with no PV-10 Value.
Based upon actual production results, the reservoir calculations were
revised and the proved oil reserves for the Ejulebe field significantly
reduced. The proved gas reserves in the O'Neill Report were written off
in 1998 because no infrastructure exists to produce gas offshore
Nigeria; accordingly, there is presently no market for gas from OML
109.
-18-
<PAGE>
(4) The Company had an updated reserve report prepared by Ryder Scott as of
May 31, 2000 for the Hana field to reflect the results of the wells
drilled in the first part of 2000. Proved developed reserves and total
proved reserves attributable to the Hana field were 404,342 Mbbls and
764,094 Mbbls, respectively, with an aggregate PV-10 Value of
$13,058,596.
(5) Does not include minimal proved reserves attributable to the Company's
U.S. interests.
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net cash flows therefrom are based upon a number
of variable factors and assumptions, such as historical production from the
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and natural gas prices and future operating
costs, all of which may vary considerably from actual results. All such
estimates are to some degree speculative, and classifications of reserves are
only attempts to define the degree of speculation involved. For those
reasons, estimates of the economically recoverable oil and natural gas
reserves attributable to any particular group of properties, classifications
of such reserves based on risk of recovery and estimates of future net
revenues expected therefrom, prepared by different engineers or by the same
engineers at different times, may vary substantially. The Company's actual
production, revenues, severance and excise taxes, and development and
operating expenditures, with respect to its reserves will vary from such
estimates, and such variances could be material. See "Item 1. Description of
Business--Risk Factors."
Estimates with respect to proved reserves that may be developed and produced
in the future are often based upon volumetric calculations and upon analogy
to similar types of reserves rather than actual production history. Estimates
based on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in
the estimated reserves.
In accordance with applicable requirements of the SEC, the estimated
discounted future net cash flows from estimated proved reserves are based on
prices and costs as of the date of the estimate unless such prices or costs
are contractually determined at such date. Actual future prices and costs may
be materially higher or lower. Actual future net cash flows also will be
affected by factors such as actual production, supply and demand for oil and
natural gas, curtailments or increases in consumption by natural gas
purchasers, changes in governmental regulations or taxation and the impact of
inflation on costs.
Set forth below are net quantities of oil (including condensate and natural
gas liquids) and gas produced by the Company for each of the last three
fiscal years. The Company is not a party to any long-term supply on similar
agreements with foreign governments or authorities where it is a producer.
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1999 1998 1997
------------- -------------- ---------
<S> <C> <C> <C>
NIGERIA(1)
Oil (MBbls) ................. 1,571 417 --
Gas (MMcf) .................. -- -- --
MBOE ........................ 1,571 417 --
EGYPT
Oil (MBbls) ................. -- -- --
Gas (MMcf) .................. -- -- --
MBOE ........................ -- -- --
CANADA(2)
Oil (MBbls) ................. -- -- 19
Gas (MMcf) .................. -- -- 418
MBOE ........................ -- -- 89
TOTAL(3)
Oil (MBbls) ................. 1,571 417 19
Gas (MMcf) .................. -- -- 418
MBOE ........................ 1,571 417 89
</TABLE>
-----------------------------
(1) SOGW's indigenous partner has pledged 50% of the revenues attributable
to its 40% interest in OML-109 to SOGW as security for amounts advanced
by SOGW during 1996. See "Item 2--Description of Property--Nigeria--The
Indigenous Program." This additional interest is included in the
December 31, 1999 reserve report. The above table reflects only SOGW's
60% interest
-19-
<PAGE>
and does not include the quantities attributable to the pledged
interest.
(2) Effective July 1, 1997, the Company disposed of all of its Canadian oil
and gas interests.
(3) Does not include minimal production attributable to the Company's U.S.
interests.
MARKETING AND PRICING
The Company's Nigerian production is marketed by CXY to crude purchasers or
refiners at market prices, adjusted for transportation and crude quality. The
Company's Egyptian production is marketed by EGPC or, at TransAtlantic's
option, by the Company, to crude purchasers or refiners at market prices,
adjusted for handling charges, transportation and crude quality. The
Company's United States natural gas and crude oil production is marketed to
aggregators or marketers of crude oil and natural gas, generally under 30 day
contracts that renew automatically at market prices. The price received for
the Company's production is subject to fluctuation and volatility. See "Item
1. Description of Business--Risk Factors."
ITEM 3. LEGAL PROCEEDINGS.
Several of the Company's wholly owned subsidiaries (the "Subsidiaries") are
parties to a Shareholder Agreement effective February 28, 1997, pertaining to
the Company's interest in Tarpon-Benin S.A. ("Tarpon") of which the Company
is the indirect majority owner. Tarpon owned a concession in the Republic of
Benin. At a meeting of the shareholders in 1998, Tarpon elected to withdraw
from the concession and allow the concession agreement to expire; however, a
group of minority shareholders (the "Shareholders") objected. The
Shareholders, along with the parent company of the Shareholders, initiated
arbitration in October, 1998 under the American Arbitration Association. The
claimants in the arbitration seek damages in an amount sufficient to perform
certain alleged obligations which the claimants contend are required to be
performed pursuant to the terms of the Shareholder Agreement, including the
acquisition and processing of 500 kilometers of new seismic lines on the
concession, an annual training program and a bank guarantee for seismic work.
On September 18, 2000, the Company was advised that the arbitrator ruled that
the Subsidiaries had breached the Shareholder Agreement and assessed damages
of $1,848,359.32. While the Company was not a party to the Shareholder
Agreement, the arbitrator ruled that the Company guaranteed all obligations
of the Subsidiaries. The Company does not believe that the Subsidiaries have
a basis to appeal the decision. However, the Company intends to contest the
arbitrator's ruling against the Company. No assurances can be made that the
Company will be successful.
On the Company's South Fort Stockton Prospect in Pecos County, Texas, the
Winfield Ranch #17-1E well was drilled to a total depth of 25,740 feet and
was cased and logged. Log analysis indicated a potential for more than 1,100
feet of gross pay in the Ellenburger formation, a highly prolific gas zone in
the region and the primary objective of the well. In early December 1998,
during operations to clean out the production casing, a string of drill pipe
supplied by Weatherford International, Inc. and manufactured by a Weatherford
subsidiary parted and became stuck in the bottom section of the hole. Efforts
to retrieve the stuck string of drill pipe were not successful. When
settlement discussions with Weatherford and its insurer failed to yield an
acceptable settlement, the working interest owners together with the
operator, Baytech, Inc., filed a lawsuit against Weatherford in state court
in Pecos County, Texas on March 3, 1999. Substantial discovery has taken
place, and the trial is currently set for December 2000. The lawsuit against
Weatherford seeks to require Weatherford to either redrill or pay to redrill
another well to the Ellenburger formation. The lawsuit also seeks
consequential and exemplary damages.
Under its joint operating agreement (the "JOA") with Atlas, the Company,
through its wholly owned subsidiary SOGW, owns a 30% interest (60% revenue
interest prior to payout) in the remaining 200,000 acres of OML 109 outside
the Ejulebe field. In March 2000, SOGW initiated an arbitration in Geneva,
Switzerland with the International Chamber of Commerce to resolve certain
differences of opinion relating to the interpretation of the JOA. In
particular, the Company seeks a declaratory judgment as to how taxes are to
be paid, how the bank account is to operate and how the assignment of
proceeds to pay the outstanding loans should work. The arbitration proceeding
is scheduled to commence in September 2000. Once resolved, the Company
anticipates proceeding with further exploration of the remainder of OML 109.
In addition, in 1996, SOGW loaned $5.0 million to the Chairman of Atlas, by
way of a promissory note, which was guaranteed by Atlas. The note bears
interest at LIBOR plus 3% per annum. At July 31, 2000, approximately $6.65
million of principal and interest was outstanding under the note. The note is
currently in default. Under the terms of the guarantee, SOGW is entitled to
receive 50% of Atlas' share of cash flow from the concession. Since the note
is in default, SOGW has additional rights under the loan documents regarding
the Atlas share of production. SOGW has initiated proceedings in the High
Court of England and Wales in London, England for its collection, and trial
is set for early 2001.
ITEM 4. CONTROL OF REGISTRANT.
The Company records its common shares on its transfer agent's books in
registered form. Some of the Company's common shares are registered in the
name of intermediaries, such as brokerage houses and clearing houses, on
behalf of their clients and, as a result, the
-20-
<PAGE>
Company does not know the identity of the beneficial owners. To the best of
the Company's knowledge, it is not directly or indirectly owned or controlled
by another corporation or by any foreign government nor is there any
arrangement, the operation of which may, in the future, result in a change of
control.
As of August 31, 2000, the Company is not aware of any person, firm or
corporation which beneficially owns, directly or indirectly, or exercises
control or direction over, voting securities carrying more than ten percent
of the voting rights attached to any class of the securities of the Company.
The following table is furnished as of August 31, 2000, to indicate
beneficial ownership of the Company's common shares by all executive officers
and directors of the Company as a group:
<TABLE>
<CAPTION>
Title of Class Identity of Person or Group Amount Beneficially Owned(1) Percent of Class
-------------- --------------------------- ---------------------------- ----------------
<S> <C> <C> <C>
Common shares Directors and executive officers 8,701,282(2) 10.96%
as a group (9 persons)
</TABLE>
-------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Unissued common shares
subject to options, warrants or other convertible securities currently
exercisable or convertible, or exercisable or convertible within 60
days, are deemed outstanding for the purpose of computing the
beneficial ownership of common shares of the person holding such
convertible security but are not deemed outstanding for computing the
beneficial ownership of common shares of any other person.
(2) Includes 4,714,000 common shares issuable upon the exercise of
outstanding stock options held by directors and officers as a group.
ITEM 5. NATURE OF TRADING MARKET.
The common shares of the Company are listed and posted for trading on The
Toronto Stock Exchange and trade under the symbol "TNP.U". The following
table sets forth the volume of trading, and the high and low sales price per
common share for the periods indicated:
<TABLE>
<CAPTION>
Volume High Low
---------- ----- -----
<S> <C> <C> <C>
Quarter ended March 31, 1998............................. 2,735,950 $1.45 $0.65
Quarter ended June 30, 1998 ............................. 1,691,400 $0.93 $0.63
Quarter ended September 30, 1998......................... 3,420,641 $1.00 $0.63
Quarter ended December 31, 1998.......................... 4,272,689 $0.78 $0.30
Quarter ended March 31, 1999............................. 2,855,021 $0.50 $0.16
Quarter ended June 30, 1999.............................. 5,969,924 $0.28 $0.15
Quarter ended September 30, 1999......................... 11,602,283 $0.34 $0.12
Quarter ended December 31, 1999.......................... 4,940,968 $0.24 $0.15
Quarter ended March 31, 2000............................. 19,138,305 $0.42 $0.15
Quarter ended June 30, 2000.............................. 7,505,203 $0.25 $0.14
</TABLE>
The price of the common shares, as reported by the Toronto Stock Exchange at the
close of business on August 31, 2000 was $0.15.
The Company's common shares are not traded on an exchange in the United States,
and there is no established market in the United States for the Company's common
shares. As at August 31, 2000, a total of 79,384,092 of our common shares were
issued and outstanding and held by 330 holders of record, of which 47 holders of
record, holding 9,128,192 of our common shares, were residents of the United
States. The computation of the number of common shares held of record by
residents of the United States is based upon the number of common shares held of
record by holders with United States addresses. Residents of the United States
may beneficially own common shares which are held of record by non-residents of
the United States.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
There are no governmental laws, decrees, or regulations in Canada relating to
restrictions on the export or import of capital, or affecting the remittance
of interest, dividends, or other payments to non-resident holders on the
Company's common stock. Any remittances of
-21-
<PAGE>
dividends to United States residents are, however, subject to a 15%
withholding tax (5% if the shareholder is a corporation owning at least 10%
of the outstanding common stock of the Company) pursuant to Article X of the
reciprocal tax treaty between Canada and the United States. See "Item 7 -
Taxation."
There are presently no applicable limitations specific to the rights of
non-Canadians to hold or vote the common stock of the Company under the laws
of Canada or the Province of Alberta or in the charter documents of the
Company.
Although certain such limitations exist in the provisions of the Investment
Canada Act, management of the Company considers that they are inapplicable to
the Company. The Investment Canada Act requires that a non-Canadian making an
investment which would result in the acquisition of control of a Canadian
business, the gross value of the assets of which exceed certain threshold
levels or the business activity of which is related to Canada's cultural
heritage or national identity, to either notify, or file an application for
review with, Investment Canada, the federal agency created by the Investment
Canada Act. At present, the Company does not have any assets in Canada and
therefore does not constitute a Canadian business as that term is defined
under the Act and such restrictions are therefore inapplicable.
ITEM 7. TAXATION.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSEQUENCES
Management of the Company considers that the following general summary fairly
describes the principal Canadian federal income tax consequences applicable
to a holder of common stock of the Company who is a resident of the United
States and who is not a resident of Canada and who does not use or hold, and
is not deemed to use or hold, his shares of common stock of the Company in
connection with carrying on a business in Canada (a "non-resident
shareholder").
This summary is based upon the current provisions of the Income Tax Act
(Canada) (the "ITA"), the regulations thereunder (the "Regulations"), the
current publicly announced administrative and assessing policies of the
Canada Customs & Revenue Agency and all specific proposals (the "Tax
Proposals") to amend the ITA and Regulations announced by the Minister of
Finance (Canada) prior to the date hereof. This description is not exhaustive
of all possible Canadian federal income tax consequences and does not take
into account or anticipate any changes in law, whether by legislative,
governmental or judicial action.
DIVIDENDS
Dividends paid, or credited, or deemed to be paid or credited, on the common
stock of the Company to a non-resident will be subject to withholding tax.
The Canada-U.S. Income Tax Convention (1980) (the "Treaty") provides that the
normal 25% withholding tax rate is reduced to 15% on dividends paid on shares
of a corporation resident in Canada (such as the Company) to residents of the
United States, and also provides for a further reduction of this rate to 5%
where the beneficial owner of the dividends is a corporation which is a
resident of the United States which owns at least 10% of the voting shares of
the corporation paying the dividend.
Where the dividends are received by a resident of the United States carrying
on business in Canada through a permanent establishment in Canada or by a
person who performs independent personal services in Canada from a fixed base
situated in Canada, and holding of the shares in respect of which the
dividends are paid is effectively connected with that permanent
establishment, the dividends are generally subject to Canadian tax as
business profits or income from rendering such services and the Treaty does
not limit the tax payable on such income under the Act.
CAPITAL GAINS
In general, a non-resident person is subject to tax in Canada at the rates
generally applicable to residents of Canada on any "taxable capital gain"
arising on the disposition of "taxable Canadian property." Shares of a
corporation which are listed on a prescribed stock exchange will only be
taxable Canadian property to a non-resident person if, at any time during the
five year period immediately preceding the disposition, the non-resident
shareholder, either alone or together with persons with whom such
non-resident did not deal at arm's length, owned 25 percent or more of the
issued shares of any class of series of the capital stock of the corporation,
or the non-resident's shares were acquired in a tax deferred exchange in
consideration for property that was itself taxable Canadian property. In
situations where shares constitute taxable capital property, the taxable
portion of a capital gain for dispositions occurring after February 27, 2000,
is equal to two-thirds of the amount by which the proceeds of disposition of
such shares, net of any reasonable costs associated with the disposition,
exceeds the adjusted cost base to the holder of the shares.
-22-
<PAGE>
Article XIII of the Treaty provides that gains realized by a United States
resident on the disposition of shares of a corporation that is a resident of
Canada, including shares which constitute taxable Canadian property, may not
be taxed in Canada unless the value of those shares is derived principally
from real property situated in Canada or the shares form part of the business
property of a permanent establishment which the resident of the United States
has or had in Canada within the 12 month period preceding the date of
disposition or if the shares pertain to a fixed base in Canada which is or
was available within the 12 month period preceding the date of disposition of
the purpose of performing independent personal services.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material United States federal income
tax consequences, under current law, generally applicable to a U.S. Holder
(as defined below) of the Company's common stock. This discussion does not
address consequences peculiar to persons subject to special provisions of
federal income tax law, such as tax-exempt organizations, qualified
retirement plans, financial institutions, insurance companies, real estate
investment trusts, regulated investment companies, broker-dealers,
nonresident alien individuals, foreign corporations, or shareholders owning
common stock representing 10% of the vote and value of the Company. In
addition, this discussion does not cover any state, local or foreign tax
consequences.
The following discussion is based upon the sections of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury Regulations, published
Internal Revenue Service ("IRS") rulings, published administrative positions
of the IRS and court decisions that are currently applicable, any or all of
which could be materially and adversely changed, possibly on a retroactive
basis, at any time. In addition, this discussion does not consider the
potential effects, both adverse and beneficial of recently proposed
legislation which, if enacted, could be applied, possibly on a retroactive
basis, at any time. The following discussion is for general information only
and is not intended to be, nor should it be construed to be, legal or tax
advice to any holder or prospective holder of the Company's common stock and
no opinion or representation with respect to the United States federal income
tax consequences, to any such holder or prospective holder is made.
Accordingly, holders and prospective holders of the Company's common stock
should consult their own tax advisors about the federal, state, local and
foreign tax consequences of purchasing, owning and disposing of shares of
common stock of the Company.
U.S. HOLDERS
As used herein, a "U.S. Holder" is defined as (i) a citizen or resident of
the U.S., or any state thereof, (ii) a corporation or other entity created or
organized under the laws of the U.S., or any political subdivision thereof,
(iii) an estate the income of which is subject to U.S. federal income tax
regardless of source, or (iv) a trust whose administration is subject to the
primary supervision of a U.S. court and which has one or more U.S.
fiduciaries who have the authority to control all substantial decisions of
the trust.
DISTRIBUTIONS ON SHARES OF COMMON STOCK
U.S. Holders receiving dividend distributions (including constructive
dividends) with respect to the Company's common stock are required to include
in gross income for United States federal income tax purposes the gross
amount of such distributions to the extent that the Company has current or
accumulated earnings and profits, without reduction for any Canadian income
tax withheld from such distributions. Such Canadian tax withheld may be
credited, subject to certain limitations, against the U.S. Holder's United
States federal income tax liability or, alternatively, may be deducted in
computing the U S. Holder's United States federal taxable income by those who
itemize deductions. (See more detailed discussion at "Foreign Tax Credit"
below.) To the extent that distributions exceed current or accumulated
earnings and profits of the Company, they will be treated first as a return
of capital up to the U.S. Holder's adjusted basis in the common stock and
thereafter as gain from the sale or exchange of such shares. Preferential tax
rates for long-term capital gains are applicable to a U.S. Holder which is an
individual, estate or trust. There are currently no preferential tax rates
for long-term capital gains for a U.S. Holder which is a corporation.
Dividends paid on the Company's common stock will not generally be eligible
for the dividends received deduction provided to corporations receiving
dividends from certain United States corporations.
FOREIGN TAX CREDIT
A U.S. Holder who pays (or has withheld from distributions) Canadian income
tax with respect to the ownership of the Company's common stock may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces
the taxpayer's income subject to tax. This election is made on a year-by-year
basis and applies to all foreign taxes paid by (or withheld from) the U.S.
Holder during that year. Subject to certain limitations, Canadian taxes
withheld will be eligible for credit against the U.S. Holder's United States
federal income taxes. Under the Code, the limitation on foreign taxes
-23-
<PAGE>
eligible for credit is calculated separately with respect to specific classes
of income. Dividends paid by the Company generally will be either "passive"
income or "financial services" income, depending on the particular U.S.
Holder's circumstances. Foreign tax credits allowable with respect to each
class of income cannot exceed the U.S. federal income tax otherwise payable
with respect to such class of income. The consequences of the separate
limitations will depend on the nature and sources of each U.S. Holder's
income and the deductions appropriately allocated or apportioned thereto. The
availability of the foreign tax credit and the application of the limitations
on the credit are fact specific and holders and prospective holders of common
stock should consult their own tax advisors regarding their individuals
circumstances.
DISPOSITION OF SHARES OF COMMON STOCK
A U.S. Holder will recognize gain or loss upon the sale of shares of common
stock equal to the difference, if any, between (i) the amount of cash plus
the fair market value of any property received; and (ii) the shareholder's
tax basis in the common stock. This gain or loss will be capital gain or loss
if the shares are a capital asset in the hands of the U.S. Holder, and such
gain or loss will be long-term capital gain or loss if the U.S. Holder has
held the common stock for more than one year. Gains and losses are netted and
combined according to special rules in arriving at the overall capital gain
or loss for a particular tax year. Deductions for net capital losses are
subject to significant limitations. For U.S. Holders who are individuals, any
unused portion of such net capital loss may be carried over to be used in
later tax years until such net capital loss is thereby exhausted. For U.S.
Holders which are corporations (other than corporations subject to Subchapter
S of the Code), an unused net capital loss may be carried back three years
from the loss year and carried forward five years from the loss year to be
offset against capital gains until such net capital loss is thereby exhausted.
OTHER CONSIDERATIONS
The Company has not determined whether it meets the definition of a "passive
foreign investment company" (a "PFIC"). It is unlikely that the company meets
the definition of a "foreign personal holding company" (a "FPHC") or a
"controlled foreign corporation (a "CFC") under current U.S. law.
If more than 50% of the voting power or value of the Company were owned
(actually or constructively) by one or more U.S. Holders who each owned
(actually or constructively) 10% or more of the voting power of the Company's
common shares ("10% Shareholders"), then the Company would become a CFC and
each 10% Shareholder would be required to include in its taxable income as a
constructive dividend an amount equal to its share of certain undistributed
income of the Company. If (1) more than 50% of the voting power or value of
the Company's common shares were owned (actually or constructively) by five
or fewer individuals who are citizens or residents of the United States and
(2) 60% or more of the Company's gross income consisted of certain interest,
dividend or other enumerated types of income, then the Company would be a
FPHC. If the Company were a FPHC, then each U.S. Holder (regardless of the
amount of the Company's common shares owned by such U.S. Holder) would be
required to include in its taxable income as a constructive dividend its
share of the Company's undistributed income of specific types.
If 75% or more of the Company's annual gross income has ever consisted of, or
ever consists of, "passive" income or if 50% or more of the average value of
the Company's assets in any year has ever consisted of, or ever consists of,
assets that produce, or are held for the production of, such "passive"
income, then the Company would be or would become a PFIC. If the Company were
to be a PFIC, then a U.S. Holder would be required to pay an interest charge
together with tax calculated at maximum tax rates on certain "excess
distributions" (defined to include gain on the sale of stock) unless such
U.S. Holder made an election either to (1) include in his or her taxable
income certain undistributed amounts of the Company's income or (2) mark to
market his or her Company common shares at the end of each taxable year as
set forth in Section 1296 of the Code.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. information reporting requirements may apply with respect to the payment
of dividends to U.S. Holders of the Company shares. Under Treasury
regulations currently in effect, non-corporate holders may be subject to
backup withholding at a 31% rate with respect to dividends when such holder
(1) fails to furnish or certify a correct taxpayer identification number to
the payor in the required manner, (2) is notified by the IRS that it has
failed to report payments of interest or dividends properly or (3) fails,
under certain circumstances, to certify that it has not been notified by the
IRS that it is subject to backup withholding for failure to report interest
and dividend payments properly.
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<PAGE>
ITEM 8. SELECTED FINANCIAL DATA.
The selected financia1data presented in the table below for the quarterly
periods ended June 30, 2000 and 1999, and the five fiscal years ended
December 31, 1999, are derived from the Company's consolidated financial
statements. This data includes the accounts of the Company and its
wholly-owned subsidiaries for periods owned by the Company.
The following selected financial data is qualified by reference to, and should
be read in conjunction with, the consolidated financial statements and related
notes included elsewhere in this Form 20-F. Reference is also made to "Item 9
- Management's Discussion and Analysis of Financial Condition and Results of
Operations." The selected consolidated financial data as at December 31, 1997,
1996 and 1995 and for the two years ended December 31, 1996 are derived from
audited consolidated financial statements that are not included herein.
The selected financial data as at June 30, 2000 and 1999 and for the six
months ended June 30, 2000 and 1999 are unaudited. However, these interim
financial statements have been prepared on the same basis as the audited
annual financial data and in the opinion of management, contain all
adjustments necessary for a fair presentation of the financial position and
results of operations for such periods. The results of operations for the six
months ended June 30, 2000 are not necessarily indicative of results to be
expected for a full fiscal year.
TransAtlantic follows the full cost method of accounting for oil and gas
operations.
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year ended December 31
---------------------- ----------- ----------- --------- ---------- ----------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(in thousands of U.S. dollars,
except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and gas revenues.................. $18,584 $10,198 $21,999 $3,391 $636 $1,485 $1,290
Cash from (used in) operating 210 (1,104) (595) (1,352) 763 (354) 228
activities ...........................
Per share........................... - (0.02) (0.01) (0.04) (0.02) (0.01) 0.01
Net loss.............................. 825 1,392 2,888 12,686 12,368 713 1,731
Per share........................... 0.01 0.02 0.05 0.35 0.37 0.03 0.07
Dividends per share................... - - - - - - -
Total assets.......................... 16,547 15,701 15,645 21,488 28,543 26,579 19,233
Long term debt........................ - - - - 5,906 - 1,960
Shareholders' equity.................. 12,480 11,655 11,059 10,798 15,347 26,294 16,440
Capital expenditures.................. 1,952 1,708 3,920 2,838 13,659 6,124 7,962
Acquisition of GHP.................... - - - 9,105 - - -
Proceeds on disposition of oil and gas
properties............................ - - 109 3,877 4,131 394 -
</TABLE>
DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES:
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP"). These principles, as they pertain to the Company's consolidated
financial statements, are not materially different from United States'
generally accepted accounting principles ("US GAAP"), except as follows:
(a) There are certain diferences between the full cost method of
oil and gas accounting as applied in Canada and as applied in
the United States. The Company has reviewed such differences
and determined that, except as discussed below, no material
variances in financial statement balances would have resulted
from the applicaiton of full cost accounting in accordance
with US GAAP.
The Company has completed ceiling test calculations in
accordance with US GAAP at December 31, 1999, 1998 and 1997.
The ceiling tests computed under US GAAP did not result in any
differnces as at Decebmer 31, 1999 and 1997. However, at
December 31, 1998 the US GAAP ceiling test results in an
additional impairment of $488. This difference would increase
the Company's net loss for the year ended December 31, 1998
and would reduce the Company's total assets and shareholders'
equity at December 31, 1998 and subsequent periods.
-25-
<PAGE>
(b) In accordance with US GAAP, the liability method of accounting
for income taxes is used instead of the deferral method. Under
the liability method, current and deferred income taxes are
recognized at currently enacted rates to reflect the expected
future tax consequences arising from the difference between
transactions recorded in the financial statements and those in
income tax returns. In addition, purchase price adjustments
arising from business combinations are grossed up for the
related income tax impact under US GAAP.
No adjustments to the financial statements are required with
respect to the accounting for income taxes.
(c) The Company applies the intrinsic value-based method of
accounting prescribed by Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees",
and related interpretations, in accounting for its stock
options issued to employees, directors and officers of the
Company for purposes of reconciliation to US GAAP. As such,
compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, "Accounting for
Stock-based Compensation", established accounting and
disclosure requirements using a fair value-based method of
accounting for stock-based employee compensations plans. As
allowed by SFAS No. 123, the Company has elected to continue
to apply the intrinsic value-based method of accounting
described above and has adopted the disclosure requirements of
SFAS No. 123. Stock options issued to third parties are
accounted at their fair values in accordance with SFAS No.
123.
No adjustments to the financial statements are required with
respect to the accounting for stock options, except for the
inclusion of additional disclosures below.
During the periods ended June 30, 2000, and December 31, 1999
and 1998, the Company granted options to employees, directors
and officers which, for purposes of reconciling to US GAAP,
have been accounted for in compliance with APB Opinion No. 25.
All were granted with exercise prices at the market price of
the Company's stock on the date of grant. Accordingly, no
compensation expense is recorded in the Company's statement of
operations and deficit.
The Company has calculated the fair value of stock options
granted to employees using the Black-Scholes option pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
June 30 December 31,
------- --------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Risk free interest rate.................. 5.75% 5.55% 5.15%
Volatility............................... 5.27% 6.13% 5.27%
Expected option life (in years).......... 4.5 4.5 4.5
Dividend Yield........................... 0% 0% 0%
</TABLE>
Had the Company determined compensation cost based upon the
fair value at the grant date for its stock options under SFAS
No. 123, the Company's net income and loss per share amounts
would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
June 30 December 31,
------- --------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Net loss under US GAAP:
As reported........................ $825 $2,888 $12,686
Pro forma.......................... $834 $3,040 $12,999
Net loss per common share:
As reported........................ 0.01 0.05 0.35
Pro forma.......................... 0.01 0.05 0.36
</TABLE>
(d) The reduction in stated capital recorded during 1998 under
Canadian GAAP would have to be reversed under US GAAP. As a
result, the Company's shareholders' equity under US GAAP at
December 31, 1998 and subsequent periods would be restated as
follows:
-26-
<PAGE>
<TABLE>
<CAPTION>
June 30 December 31,
------- ---------------------
2000 1999 1998
------- ------- -------
<S> <C> <C> <C>
Share capital............................ $43,757 $41,511 $38,362
Deficit.................................. (31,277) (30,452) (27,564)
------ ------ ------
$12,480 $11,059 $10,798
====== ====== ======
</TABLE>
(e) Supplementary disclosures required under US GAAP are as
follows:
<TABLE>
<CAPTION>
Six Months Ended
JUNE 30 DECEMBER 31,
2000 1999 1998
------------------- ---------- ------------
<S> <C> <C> <C>
Cash interest paid.................................... - - -
Cash taxes paid....................................... - - -
Components of change in non-cash working capital:
Restricted cash............................ $355 $1,187 -
Accounts receivable........................ 47 167 49
Accounts payable and accrued liabilities... 31 (583) 79
Other...................................... (24) 82 (475)
$410 $853 (347)
=== === ===
</TABLE>
(f) Additional Disclosures Required Under US GAAP:
The components of accounts payable and accrued liabilities are
as follows:
<TABLE>
<CAPTION>
June 30 December 31,
------------ -----------------------
2000 1999 1998
------------ ---------- -----------
<S> <C> <C> <C>
Accounts payable........................... $501 $494 $647
Accrued liabilities........................ 446 1,210 874
$947 $1,704 $1,521
=== ===== =====
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW
On December 1, 1998, the Company's predecessor, Profco Resources Ltd.,
acquired GHP Exploration Corporation in an amalgamation transaction. The
resulting enterprise was renamed TransAtlantic Petroleum Corp. The GHP
acquisition provided a working capital infusion of $1.9 million and brought
international exploration prospects in Egypt, Tunisia and the United States.
The year ended December 31, 1999 was the first full year of operations of
TransAtlantic Petroleum Corp. following the acquisition of GHP. In December
1999, the Company relinquished its interest in Tunisia.
In September 1998, production from the Company's Nigerian operations
commenced. The Hana oil discovery in Egypt in July 1999 represented a
significant milestone in TransAtlantic's history. First oil sales occurred in
late December 1999. The field has been developed in the first half of 2000,
and it is expected to provide cash flow to offset a portion of the Company's
ongoing exploration and development projects for the foreseeable future.
Inflation has not had a material impact on our results of operations and is
not expected to have a material impact on our results of operations in the
future.
-27-
<PAGE>
The following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto included as an exhibit to
this registration statement.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND SIX MONTHS ENDED JUNE 30, 1999
Total revenues for the first six months of 1999 and 2000 were $10.5 million
and $18.7 million, respectively. The increase in revenues reflects the higher
price per barrel received in the first six months of 2000 and the commencement
of production from the Company's Hana field in the West Gharib concession,
Egypt. Production from two Hana wells commenced at the end of 1999 with first
sales being booked in 2000. An additional four wells were placed on production
in the second quarter. For the six months ended June 30, 2000, the Hana field
production averaged 241 Bopd net to the Company. This production helped the
Company achieve improved operating income and operating cash flow for the
period ended June 30, 2000, compared to the same period in 1999. Cash flow
provided to the Company from the Hana field was used to partially pay for the
developmental drilling on the Hana field.
Although production and costs at the Ejulebe field offshore Nigeria remain
relatively constant, the revenues from the Ejulebe field continue to be
dedicated to payment of the service fee to the service contractor. This will
continue until the capital component of the service fee has been reduced, at
which point the Company will begin to share in a portion of the profits from
the field. A minimum payment of $34,000 per month is paid by CXY Oilfield
Services Nigeria, Ltd., the service contractor. This minimum payment revenue
effectively pays the overhead costs of the Company's operations in Nigeria.
OIL AND GAS SALES
The Company commenced receiving revenues from production from the Hana field
in the West Gharib Concession in Egypt in 2000. Production averaged 1,578 Bopd
(to the 100% interest) in the first six months of 2000 from the Hana wells.
Revenues net to the Company from the Hana field were $1.93 million in the
period ending June 30, 2000; after payment of production taxes and operating
expenses, the Company received $880,297.
In the first six months of 2000, oil and gas sales from both the Ejulebe field
and Hana field totaled $18.5 million, significantly more than the $10.2
million in the first half of 1999. This is attributable to the Hana field
coming on stream and the higher price per barrel being realized on the sale of
the Ejulebe crude. A portion of the revenues represents SOGW's 60% share of
revenue from the Ejulebe field, less the royalty payable to the Nigerian
government as well as an additional 20% share of revenue from the Ejulebe
field the Company receives to apply against a promissory note owed by the
Chairman of SOGW's Nigerian partner. During the period ended June 30, 2000 and
1999, the Company sold 745,412 and 952,706 barrels (net) produced from the
Ejulebe field at average prices of $26.86 and $12.76, respectively. During the
period ended June 30, 2000, the Company sold 43,948 barrels (net) produced
from the Hana field at an average price of $21.18. The increased average sales
price for production in 2000 reflects the increase in world oil prices in 2000
from prices in 1999.
Due to the method by which the Nigerian government calculates royalty
payments, SOGW also receives, in addition to the minimum revenue payment due
from CXY discussed above, its 60% share of the difference between the royalty
paid to the government and 18.5% of the actual sales price received for the
crude oil sold. SOGW's share of this differential totaled approximately $0.08
million for the six months ended June 30, 2000 and $0.14 million for the six
months ended June 30, 1999.
PRODUCTION EXPENSES
Production costs for the first six months of 2000 were $18.098 million as
compared to $10.396 million for the first six months of 1999. Production costs
for the Ejulebe field for the six months ended June 30, 2000 and June 30, 1999
consist of the service fee payable to CXY ($16.3 million in 2000 and $9.9
million in 1999) and other production related costs ($0.35 million in 2000 and
$0.36 million in 1999). Both the service fee and other production costs for
the first quarter of 1999 and 2000 relate primarily to the Ejulebe field
operations in Nigeria. The large increase in production expense during 2000
reflects the start-up of production from the Hana field. Operating costs at
the Hana field averaged $2.36 per barrel which includes transportation and
terminalling costs.
DEPRECIATION, DEPLETION AND AMORTIZATION
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<PAGE>
The provision for depreciation, depletion and amortization ("DD&A") is a
function of the total costs of exploring, developing and placing on stream
crude oil and natural gas properties, production from the properties and the
proven reserves assigned to the properties throughout the year and also
depreciation and amortization of non-oil and gas assets.
During the six months ended June 30, 1999 and 2000, the Company recorded DD&A
expense of $0.55 million and $0.6 million, respectively. DD&A expense for the
first half of 2000 consisted of $0.29 million attributable to Nigerian
operations, $0.28 million attributable to Egyptian operations with the
remainder attributable to amortization of other Company assets. DD&A expense
for the first half of 1999 consisted of $0.43 million attributable to Nigerian
operations, $0.10 million attributable to amortization of the premium paid on
the 7% Convertible Debentures due September 3, 1999 prior to redemption in
1999, with the remainder attributable to depreciation of other assets.
LOSS ON DISPOSITION OF PROPERTY AND EQUIPMENT
No significant dispositions were recorded in the first half of 2000 or the
first half of 1999.
GENERAL AND ADMINISTRATIVE EXPENSES
As of June 30, 1999, the Company had cost centers for general and
administrative expenses in Nigeria, the United States and Canada. As of
December 31, 1999, the Company added the Egyptian cost center. All of the
general and administrative charges in Nigeria for personnel and facilities
were either capitalized or recorded as part of production expenses as they
either related to exploration activities or were incurred in connection with
producing activities from the Ejulebe field. In Canada and the United States,
certain costs that related to the Company's international operations have been
allocated to the applicable subsidiary and capitalized or charged to the
operations of that country. Those costs which cannot be allocated to a
specific country or which relate to revenue producing operations have been
charged to general or administrative expenses.
Total general and administrative expense and that portion allocated to oil and
gas property is recapped in the following table:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
--------- ---------
(in thousands)
<S> <C> <C>
Expenses prior to capitalization:
Canada............................. $ 224 $ 284
Nigeria............................ 387 434
Egypt.............................. 196 124
United States...................... 406 491
------ ------
Total......................... $1,213 $1,333
====== ======
Capitalized costs directly related to geological and
geophysical activites:
Canada............................. -- --
Nigeria............................ (288) (434)
Egypt.............................. (185) (124)
United States...................... (27) (87)
-- --
Total......................... (500) (645)
------ ------
General and administrative expense: $ 713 $ 688
====== ======
</TABLE>
INTEREST AND OTHER EXPENSE
The Company recorded interest and other expense of $0.16 million for the six
months ended June 30, 2000 and $0.13 million for the six months ended June 30,
1999. Interest and other expense in these periods in 1999 and 2000 consisted
primarily of accrued interest related to the note payable to GMISI.
YEAR ENDED DECEMBER 31, 1999 AND YEAR ENDED DECEMBER 31, 1998
-29-
<PAGE>
Comparison of the Company's results of operations for the years ending
December 31, 1998 and December 31, 1999 is difficult because of the change in
asset structure between the two years. Revenues and expenses for the year
ended December 31, 1998 reflected 11 months of operations as Profco; during
this period the principal asset of the Company was the Nigerian property which
was not in commercial operation until September 1998. As of December 1, 1998,
the Company acquired GHP and therefore oil and gas revenues from the GHP oil
and gas assets for the month of December 1998 are included in the revenues and
expenses for the year ending December 31, 1998. In December 1998, a
substantial portion of GHP's United States assets were sold for $3.8 million
and that property sale is reflected in the year ending December 1998.
Total revenues for the years ended December 31, 1998 and 1999 were $3.7
million and $22.6 million, respectively. Revenues increased during 1999 as a
result of production from the Ejulebe Field. Included in 1999 revenues is $3.8
million reimbursed to the Company from CXY for prior costs in connection with
development of the Ejulebe field offshore Nigeria. See "Other" below.
OIL AND GAS SALES
The Company's oil and gas revenues and related production costs in 1999 and
1998 were primarily comprised of the Company's share of revenue and production
expenses from the Ejulebe field offshore Nigeria. This field came on stream in
September 1998 and the first crude lifting occurred in December 1998. In 1999,
crude liftings occurred every month or in some cases, every other month.
Although crude production commenced from the Hana field in Egypt in December
1999, no revenues for Hana crude oil sales were recorded in 1999.
Oil and gas sales for 1999 and 1998 totaled $22.0 million and $3.4 million,
respectively, and represent SOGW's 60% share of revenue from the Ejulebe
field, less the royalty payable to the Nigerian government, as well as an
additional 20% share of revenue from the Ejulebe field the Company receives to
apply against a promissory note owed by the chairman of SOGW's Nigerian
partner. During the years ended December 31, 1999 and 1998, the Company sold
1,571,200 and 416,500 barrels (net to SOGW's 60% interest) at average prices
of $16.75 and $9.75, respectively. The increased production in 1999 reflects a
full year of production. The increased average sales price for production in
1999 reflects the increase in world oil prices in 1999 from prices in 1998.
Due to the method by which the Nigerian government calculates royalty
payments, SOGW also receives, in addition to the minimum revenue payment due
from CXY discussed above, its 60% share of the difference between the royalty
paid to the government and 18.5% of the actual sales price received for the
crude oil sold. SOGW's share of this differential totaled approximately $0.22
million for 1999 and $0.07 million for 1998.
PRODUCTION EXPENSES
Production costs for the years ended December 31, 1999 and December 31, 1998
consist of the service fee payable to CXY for operation of the Ejulebe field
($21.5 million in 1999 and $3.1 million in 1998) and other production related
costs ($0.97 million in 1999 and $0.2 million in 1998). Both the service fee
and other production costs for 1999 and 1998 relate primarily to the Ejulebe
field operations in Nigeria. The large increase in production expense during
1999 reflects increased production from the Ejulebe field.
DEPRECIATION, DEPLETION AND AMORTIZATION
During the years ended December 31, 1999 and December 31, 1998, the Company
recorded DD&A expense of $0.8 million and $1.1 million, respectively. DD&A
expense for 1999 consisted of $0.65 million attributable to Nigerian
operations, $0.1 million attributable to amortization of the Company's 7%
Convertible Debentures due September 3, 1999 prior to redemption in 1999 and
$0.05 million attributable to depreciation of corporate office equipment. DD&A
expense for 1998 consisted of $0.8 million attributable to Nigerian
operations, $0.15 million attributable to amortization of the premium paid on
the 7% Convertible Debentures due September 3, 1999 and $0.14 million
attributable to depreciation of office equipment.
LOSS ON DISPOSITION OF PROPERTY AND EQUIPMENT
No significant dispositions were recorded in 1999. The 1998 loss on
disposition of property and equipment consists of a $0.14 million loss on the
sale of marketable securities and a $0.6 million loss on the sale of
miscellaneous office equipment.
ADJUSTMENT OF OIL AND GAS PROPERTIES
Companies in the oil and gas industry utilizing the full cost method of
accounting are required to undergo a ceiling test quarterly,
-30-
<PAGE>
on a country by country basis. The ceiling test calculation estimates future
net revenues from proven reserves, based on current prices, together with the
cost of unproven properties, with a reduction for future site restoration
costs (where applicable), general and administrative expenses, financing costs
and income taxes. The result is then compared to the current net book value of
their crude oil and natural gas properties. If the calculation results in a
deficiency, companies are required to reduce current year's earnings by a
corresponding amount.
During the years ended December 31, 1999 and December 31, 1998, the Company
recorded writedowns of $0.89 million and $10.4 million, respectively. In 1998,
the Company abandoned the Sud Nefta concession in Tunisia and the concession
in Benin and wrote off $2 million of costs. The $0.16 million writedown
recorded in 1999 relates to additional costs incurred in abandoning the Sud
Nefta concession. In addition, during 1998 the Company recorded a writedown of
$8.4 million in the value of its Nigerian oil and gas assets. This writedown
was due to the decrease in reserve value as a result of historically low crude
prices for the Ejulebe field at December 31, 1998.
At current production rates, the Ejulebe field is not operating at a breakeven
rate and SOGW is receiving only the guaranteed minimum revenue payment and
royalty differential. With no assurance that the production rate can be
increased or sustained, the Company was unable to record any increase to its
reserve value attributable to these variables. However, it is possible if
production rates remain steady and the crude price for the Ejulebe crude
remains above $25 per barrel, that SOGW could begin receiving revenues in year
2001.
GENERAL AND ADMINISTRATIVE EXPENSES
As of December 31, 1999 and 1998, the Company had cost centers for general and
administrative expenses in Nigeria, the United States and Canada. As of
December 31, 1999, the Company added the Egyptian cost center. All of the
general and administrative charges in Nigeria for personnel and facilities
were either capitalized or recorded as part of production expenses as they
either related to exploration activities or were incurred in connection with
producing activities from the Ejulebe field. In Canada and the United States,
certain costs that related to the Company's international operations have been
allocated to the applicable subsidiary and capitalized or charged to the
operations of that country. Those costs which cannot be allocated to a
specific country or which relate to revenue producing operations have been
charged to general or administrative expenses.
Total general and administrative expense and that portion allocated to oil and
gas property is recapped in the following table:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1999 1998
------- --------
(in thousands)
<S> <C> <C>
Expenses prior to capitalization:
Canada.................................................................. $ 393 $ 767
Nigeria................................................................. 820 1,286
Egypt................................................................... 262 --
United States........................................................... 730 104
------- -------
Total...................................................... 2,205 2,157
======= =======
Capitalized costs directly related to geological and geophysical
activities:
Canada.................................................................. (92) (274)
Nigeria................................................................. (727) (1,286)
Egypt................................................................... (262) --
------- -------
Total...................................................... (1,179) (1,560)
======= =======
General and administrative expenses.......................................... $ 1,026 $ 597
======= =======
</TABLE>
The increase in general and administrative expenses between 1998 and 1999 is
attributable to the acquisition of GHP and the consequent increase in foreign
operations. The 1998 total consists only of the Profco operations whereas 1999
includes Egypt and the United States as well as corporate expenses.
INTEREST AND OTHER EXPENSE
The Company recorded interest and other expense of $0.3 million for the year
ended December 31, 1999 and $0.8 million for the
-31-
<PAGE>
year ended December 31, 1998. Interest and other expense in 1999 consisted
primarily of accrued interest related to the note payable to GMISI.
Interest and other expense for the year ended December 31, 1998 included $0.24
million in accrued interest relating to the note payable to GMISI, but also
included $0.4 million of interest relating to the 7% Convertible Debentures
due September 3, 1999 which were issued in September 1997 and redeemed in
April 1999. The balance of interest and other expense for 1998 related
primarily to impairment of marketable securities.
OTHER
The Company received cash of $3.8 million in the first quarter of 1999 from
CXY as reimbursement of prior costs incurred in the Ejulebe field in Nigeria.
The terms of the service contract with CXY required CXY to fund the drilling,
completion and equipment costs of the Ejulebe field, incur certain other
expenditures and reimburse SOGW for $10 million of prior costs incurred upon
the Ejulebe field reaching one million barrels of cumulative oil production.
During 1996, CXY advanced $5 million to SOGW as a loan bearing interest at
LIBOR plus 3% per annum in respect of the service contract. The net payment of
$3.8 million received in 1999 represents the $10 million payment less the
principal and accrued interest due on the advance made during 1996.
YEAR ENDED DECEMBER 31, 1998 AND YEAR ENDED DECEMBER 31, 1997
Revenues and production expenses for the year ended December 31, 1997
reflected the six month results from the Company's Canadian oil and gas assets
which were sold effective June 30, 1997, resulting in the 1997 loss on
disposition of property and equipment of $2.3 million. The Company's
corresponding amounts for 1998 primarily represented SOGW's share of revenue
and production costs from the Ejulebe field offshore Nigeria that came on
stream during September 1998.
Total revenues for the years ended December 31, 1998 and 1997 were $3.39
million and $0.64 million, respectively. Revenues increased during 1998 as a
result of the commencement of production from the Ejulebe field.
OIL AND GAS SALES
The Company's oil and gas revenues and related production costs in 1998 were
primarily comprised of revenues from the sale of production from the Ejulebe
field, as well as an additional 20% share of revenue from the Ejulebe field
the Company receives to apply against a promissory note owed by the Chairman
of SOGW's Nigerian partner. The Company's oil and gas revenues and related
production costs in 1997 were comprised of revenues from the Company's
Canadian oil and gas assets which were sold effective June 30, 1997. Oil and
gas sales for 1998 and 1997 totaled $3.39 million and $0.64 million,
respectively. During the year ended December 31, 1998, the Company sold
416,500 Bbls (net to SOGW's 60% interest) at average price of $9.75 per
barrel. The increased production in 1998 reflects the start-up of the Ejulebe
field.
PRODUCTION EXPENSES
Production costs for the years ended December 31, 1998 ($3.3 million) and
December 31, 1997 ($0.2 million) consist of production expenses for the
Ejulebe field in 1998 and for the Canadian oil and gas properties in 1997. The
increase in production expense during 1998 reflects the payment of the service
fee to the service contractor for the Ejulebe field.
DEPRECIATION, DEPLETION AND AMORTIZATION
During the years ended December 31, 1998 and December 31, 1997, the Company
recorded DD&A expense of $1.1 million and $0.55, respectively. DD&A expense
for 1998 consisted of $0.8 million attributable to Nigerian operations, $0.15
million attributable to amortization of the premium paid on the 7% Convertible
Debentures due September 3, 1999 and $0.15 million attributable to
depreciation of office equipment. DD&A expense for 1997 consisted of the
expense associated with the Company's Canadian properties and to depreciation
of office equipment.
LOSS ON DISPOSITION OF PROPERTY AND EQUIPMENT
The 1998 loss on disposition of property and equipment consists of a $0.14
million loss on the sale of marketable securities and a $0.6 million loss on
the sale of miscellaneous office equipment. The 1997 loss on disposition of
property and equipment consists of a $2.3 million loss on the sale of the
Company's Canadian oil and gas assets.
ADJUSTMENT OF OIL AND GAS PROPERTIES
-32-
<PAGE>
Companies in the oil and gas industry are required to undergo a ceiling test
quarterly, on a country by country basis. The ceiling test calculation
estimates future net revenues from proven reserves, based on current prices,
together with the cost of unproven properties, with a reduction for future
site restoration costs (where applicable), general and administrative
expenses, financing costs and income taxes. The result is then compared to
the current net book value of their crude oil and natural gas properties. If
the calculation results in a deficiency, companies are required to reduce
current year's earnings by a corresponding amount.
During the years ended December 31, 1998 and December 31, 1997, the Company
recorded writedowns of $10.4 million and $9.6 million, respectively. In 1998,
the Company abandoned the Sud Nefta concession in Tunisia and the concession
in Benin and wrote off $2 million of costs. In addition, during 1998 the
Company recorded a writedown of $8.4 million in the value of its Nigerian oil
and gas assets. This writedown was due to the decrease in reserve value as a
result of historically low crude prices for the Ejulebe field at December 31,
1998. The $9.6 million writedown recorded in 1997 relates to the Company's
Sud Nefta concession in Tunisia and the Benin concession as a result of
drilling a non-commercial well on each of the prospects.
GENERAL AND ADMINISTRATIVE EXPENSES
As of December 31, 1998 and 1997, the Company had cost centers for general
and administrative expenses in Nigeria, the United States and Canada. All of
the general and administrative charges in Nigeria for personnel and
facilities were either capitalized or recorded as part of production expenses
as they either related to exploration activities or were incurred in
connection with producing activities from the Ejulebe field. In Canada and
the United States, certain costs that related to the Company's international
operations have been allocated to the applicable subsidiary and capitalized
or charged to the operations of that country. Those costs which cannot be
allocated to a specific country or which relate to revenue producing
operations have been charged to general or administrative expenses.
Total general and administrative expense and that portion allocated to oil
and gas property is recapped in the following table:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1998 1997
------------- ------------
(in thousands)
<S> <C> <C>
Expenses prior to capitalization:
Canada.............................................................. $ 767 $ 491
Nigeria............................................................. 1,286 1,143
Egypt............................................................... - -
United States....................................................... 104 -
------------- ------------
Total...................................................... 2,157 1,634
============= ============
Capitalized costs directly related to geological and geophysical
activities:
Canada.............................................................. (274) (45)
Nigeria............................................................. (1,286) (1,143)
Egypt............................................................... - -
United States....................................................... - -
Total...................................................... (1,560) (1,188)
General and administrative expenses.......................................... $ 597 $ 446
============= ============
</TABLE>
The increase in general and administrative expenses between 1998 and 1997 is
primarily attributable to overhead increases associated with the amalgamation
of Profco with GHP Exploration. The 1997 general and administrative expenses
consist only of Profco operations which were localized in Canada and Nigeria.
INTEREST AND OTHER EXPENSE
The Company recorded interest and other expense of $0.8 million for the year
ended December 31, 1998 and $0.15 for the year ended December 31, 1997.
Interest and other expense for the year ended December 31, 1998 included
$0.24 million in accrued interest relating to the note payable to Global
Marine Integrated Services - International Inc., but also included $0.4
million of interest relating to the 7% Convertible Debentures due September 3,
1999 which were issued in September 1997 and redeemed in April 1999. The
balance of interest and other expense for 1998 related primarily to
impairment of marketable securities. Interest and other expense in 1997
consisted primarily of interest relating to the 7% Convertible Debentures due
September 3, 1999 which
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<PAGE>
were issued in September 1997.
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL SOURCES
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities,
issuance of debt and equity securities and sales of non-strategic assets and
oil and gas properties.
On May 31, 2000, the Company completed a brokered private placement totaling
1.6 million units with gross proceeds of approximately $304,000. Each unit
cost $0.19 and consisted of one common share and 0.6 common share purchase
warrant. A whole warrant is exercisable at $0.25 until May 31, 2001. In
connection with the placement, the Company paid costs of $8,156. The funds
from this placement were used for general corporate purposes.
On January 28, 2000, the Company completed a brokered private placement
totaling 10 million units with gross proceeds of approximately $2 million.
Each unit cost $0.20 and consisted of one common share and one-half common
share purchase warrant. A whole warrant is exercisable at $0.25 until January
31, 2001. In connection with the placement, the Company paid costs of $0.163
million and issued one million warrants to the broker exercisable at $0.25
per share on or before January 31, 2001. The funds from this placement were
used primarily to fund the four well drilling program on the Central Sinai
concession and the development drilling on the West Gharib concession and for
general corporate purposes.
As a result of payments to GMISI and the redemption of outstanding
debentures, the Company reduced its total principal and related accrued
interest due on outstanding debt from $9.2 million at December 31, 1998, to
$2.9 million at December 31, 1999. Because of interest payable on the GMISI
debt, the outstanding debt at June 30, 2000 was $3.12 million.
At December 31, 1999, the Company had a working capital deficiency of $3.5
million consisting primarily of approximately $2.85 million of principal and
accrued interest attributable to the note payable to GMISI. At June 30, 2000,
the Company had a working capital deficiency of $3.34 million; although there
was additional interest on the note payable to GMISI, cash flow from the Hana
field was used to pay for the expenditures on the Company's drilling programs
in Egypt.
Throughout 1999 and the first half of 2000, the Company had ongoing
discussions with GMISI with respect to amounts due under the outstanding note
payable that has been guaranteed by the Company. On August 24, 2000, the
Company and GMISI entered into a settlement agreement that provides that the
entire obligation can be satisfied if the Company pays GMISI $1.5 million
before November 22, 2000, subject to certain regulatory approvals. If not
paid, the entire note amount ($3.12 million at June 30, 2000) plus accrued
interest is converted to long term debt bearing interest at 12% per annum and
payable in monthly installments of $75,000 per month.
On July 21, 1999, the Company completed a private placement of 4.65 million
special warrants at $ 0.20 per unit for gross proceeds of $0.93 million. Each
special warrant consisted of one common share and one-half of a common share
purchase warrant. A whole purchase warrant entitles the purchaser to purchase
one common share at $0.25 on or before December 31, 2000. The net proceeds
were used to fund the ongoing exploration activities in Egypt and for general
corporate purposes.
On May 17, 1999, the Company redeemed its outstanding Cdn. $9 million of 7%
Convertible Debentures due September 3, 1999 in exchange for the payment of
$3.65 million in cash and the issuance of approximately 9.15 million common
shares of TransAtlantic at a deemed price of $0.25 per share.
CAPITAL EXPENDITURES AND COMMITMENTS
In the first half of 2000, the Company incurred $2.0 million in capital
expenses as compared to $1.7 in the first half of 1999. This increase is due
to the increased activities on the Egyptian concessions.
The Company incurred $3.9 million and $11.9 million in capital expenditures
during 1999 and 1998, respectively. Of the 1999 amount, $2.7 million was
incurred on the Egyptian concessions, $0.63 million was incurred in Nigeria
and the U.S. and the balance represents capitalized costs. Of the 1998
amount, $9.1 million was incurred in the acquisition of GHP through the
issuance of 19.0 million common shares. The remaining $2.8 million was
incurred primarily on the Company's Nigerian concession and its abandoned
Benin and Sud Nefta concessions. These costs were financed through existing
working capital.
-34-
<PAGE>
The Company has total remaining commitments on its Central Sinai concession
and on its West Gharib concession, both located in Egypt, of approximately
$0.1 million and expects to incur an additional $0.5 million over the next 6
months, excluding general and administrative expenses. In addition, the
Company expects to incur additional expenses in the West Gharib concession to
drill additional development wells and install production facilities. To meet
its debt obligations and outstanding capital commitments for calendar year
2000, the Company will be required to use existing cash on hand and cash flow
from operations, negotiate outstanding amounts due and obtain additional debt
or equity financing. There can be no assurance that the Company will be able
to continue to meet its obligations on the above commitments. See "Item 1.
Description of Business-Risk Factors."
FUTURE FINANCIAL CONDITION
The Company's future financial condition and ability to provide value to its
shareholders is contingent on the extent of the recoverable reserves from the
Hana and Ejulebe fields, the discovery of other economically recoverable
reserves, its ability to restructure or refinance its existing debt
obligations and its ability to raise additional exploration and development
capital. Success is also dependent on oil and gas product prices, the cost of
acquiring, finding, developing, and producing crude oil and natural gas
reserves and the ability to achieve profitable production rates on its
existing reserve base and future discoveries, if any. To a large extent, the
production rates on the Company's existing discoveries and potential future
discoveries are, or may be, beyond the control of the Company. The production
rate maintained by field operators or service contractors may significantly
impact the Company's production limits with little influence by the Company.
The prices received by the Company from the sale of its production are
subject to fluctuation in response to changes in supply, market uncertainty
and a variety of other factors beyond the Company's control.
ITEM 9A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
The following table provides the names of all of our directors and executive
officers, their positions, terms of office and their principal occupations
during the past five years. Each director is elected for a one year term or
until his successor has been duly elected or appointed. Officers serve at the
pleasure of the Board of Directors.
<TABLE>
<CAPTION>
Name, Residence, Position with the Company
and Term of Office Principal Occupations During the Past Five Years
--------------------------------------------- ---------------------------------------------------------------------
<S> <C>
JOHN ANDRIUK(1).............................. President, Andriuk Enterprises, Ltd.
Calgary, Alberta
Director since August, 1995
JOHN J. FLEMING (2).......................... Chairman, Roseland Resources, Ltd.
Calgary, Alberta
Vice Chairman of the Board since
December 1998
Director since November, 1992
DON V. INGRAM................................ President and Chief Executive Officer, Imco Recycling Inc.
Dallas, Texas
Director since March, 1995
STEPHEN S. KURTZ(2).......................... President and Chief Executive Officer of Shenkin Kurtz Baker & Co.
Denver, Colorado LLC (an accounting firm) and SKB Business Services (a Century
Director since December, 1998 Business Services firm).
BARRY D. LASKER.............................. President, Chief Executive Officer and Chief Operating Officer of
Houston, Texas TransAtlantic Petroleum Corp.
President, Chief Executive Officer, Chief
Operating Officer since December 1998
Director since December, 1998
GEORGE H. PLEWES(1)(2)....................... Chairman of Southwestern Gold Corporation (an international mining
Pembroke, Bermuda exploration company).
Chairman of the Board since December
1998
Director since December, 1998
TREVOR W. WILSON(1).......................... Senior Vice President of Lions Gate Entertainment Corp. from
West Vancouver, British Columbia September, 1997 to May, 1998; prior thereto, Vice Chairman of
Director since December, 1998 Yorkton Securities Inc. (a securities dealer).
SCOTT C. LARSEN.............................. President of various subsidiaries of TransAtlantic Petroleum Corp.
Dallas, Texas
Acting Chief Financial Officer
and Corporate Secretary since September
1999
MICHAEL J. GARTLAND.......................... Occupied various exploration positions with TransAtlantic Petroleum
Houston, Texas Corp. and GHP.
Vice President Exploration since
September 1999
</TABLE>
-36-
<PAGE>
--------------------------------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee. The Company does not have an executive
committee.
Each of our directors were elected at our last annual general meeting of
shareholders. The term of office of each director concludes at our next annual
general meeting of shareholders, unless the director's office is earlier
vacated in accordance with our by-laws. There are no family relationships
among any of our directors, officers or key employees.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
During the fiscal year ended December 31, 1999, we paid our executive officers
$440,000 in aggregate cash compensation. Bonuses of $85,000 were paid in the
first quarter of 2000.
We are required, under applicable securities legislation in Canada, to
disclose to our shareholders details of compensation paid to our directors and
officers. The following fairly reflects all material information regarding
compensation paid by the Company to its directors and officers, which
information has been disclosed to our shareholders in accordance with
applicable Canadian law.
The following table sets forth all annual and long term compensation for
services in all capacities to the Company and its subsidiaries for the three
most recently completed financial years in respect of the Company's CEO and,
if they earned more than Cdn. $100,000 or its equivalent in U.S. dollars, each
of the individuals who was, as of December 31, 1999, an executive officer of
the Company (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------------------------------------------- --------------------------------------
Securities
Under
Other Annual Options/ Restricted
Compen- SARs Shares or LTIP All Other
Salary Bonus sation Granted Restricted Payouts Compen-
Year ($) ($)(1) ($)(2) (#)(3) Share Units ($) ($) sation
---- ------------ ------- ------------ ---------- --------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barry D. Lasker 1999 $150,000 $50,000 - 825,000 - - -
President & Chief 1998 $12,500 - - 606,350(5) - - -
Executive Officer(4) 1997 - - - - - - -
Michael J. Gartland 1999 $140,000 $15,000 - 300,000 - - -
Vice President 1998 $11,666 - - 121,800 - - -
Exploration 1997 - - - - - - -
Scott C. Larsen 1999 $150,000 $20,000 - 300,000 - - -
Acting CFO & 1998 - - - 110,000 - - -
Corporate Secretary 1997 - - - 40,000 - - -
John J. Fleming 1999 - - - 200,000 - - $20,000
Former Chief 1998 Cdn.$140,000 - - 153,300 - - $60,000
Executive Officer(6) 1997 Cdn.$140,000 - - 140,000 - - -
</TABLE>
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<PAGE>
--------------------------------
(1) 1999 bonuses were paid in February 2000.
(2) Perquisites and other personal benefits do not exceed the lesser of
Cdn. $50,000 and 10% of the total of the annual salary and bonus of any
of the named executive officers.
(3) The Company has not granted any SARs.
(4) Mr. Lasker was appointed Chief Executive Officer on December 1, 1998
upon completion of the amalgamation with GHP. Mr. Lasker was formerly
Chief Executive Officer of GHP.
(5) Includes 526,350 options to acquire common shares of the Company
originally issued by GHP.
(6) Mr. Fleming was Chief Executive Officer of the Company until December
1, 1998 at which time he ceased to be employed by the Company. In
consideration thereof, Mr. Fleming was awarded 100,000 common shares of
the Company with a deemed value of Cdn. $60,000 and US $100,000 in
severance pay, US $25,000 of which was paid in 1999. Mr. Fleming
remains Vice Chairman and a director of the Company.
EMPLOYMENT CONTRACTS AND TERMINATION AGREEMENTS
All of the Company's employment contracts with its executive officers are
verbal. The agreements provide for the remuneration described above under the
Summary Compensation Table. The agreements may be terminated at the election
of the executive officer or the Company on reasonable notice. Bonuses and
stock options may be paid or granted in the discretion of the Board of
Directors upon recommendation of the Compensation Committee.
PENSION PLANS
The Company does not have any pension plans. The Company's U.S. subsidiary,
TransAtlantic Petroleum (USA) Corp. has established a 401(k) Retirement Plan
(the "Plan") under applicable U.S. income tax legislation. The Plan provides
for voluntary contributions by both the employees and the Company, at their
discretion. Directors are not eligible to participate in this plan.
DIRECTORS' COMPENSATION
The Company does not have any arrangements pursuant to which directors are
remunerated by the Company or its subsidiaries for their services in their
capacities as directors, consultants or experts other than stock options to
purchase common shares of the Company which are granted to the Company's
directors from time to time.
OTHER REMUNERATION
During the financial year ended December 31, 1999, there was no remuneration
paid or payable, directly or indirectly, by the Company and its subsidiaries
pursuant to any existing plan or arrangement to its directors or Named
Executive Officers.
OPTION GRANTS DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
The following table discloses the particulars of options to purchase common
shares granted by the Company during the 1999 fiscal year to the Named
Executive Officers (the Company has not granted stock appreciation rights):
-38-
<PAGE>
<TABLE>
<CAPTION>
Percentage Of Market Value
Securities Total Of Securities
Under Options Underlying
Options Granted To Exercise or Options
(1) Employees Base On the
Granted In Financial Price Date Of Grant
Optionee (#)0 Year ($/Share) ($/Security) Expiration Date
------------------------------- ---------- ------------- ----------- -------------- ---------------
<S> <C> <C> <C> <C>
John J. Fleming................ 50,000 5.3 $0.20 $0.20 May 27, 2004
150,000 7.9 $0.20 $0.20 Dec. 4, 2004
Barry D. Lasker................ 250,000 26.5 $0.20 $0.20 May 27, 2004
575,000 30.3 $0.20 $0.20 Dec. 4, 2004
George H. Plewes............... 50,000 5.3 $0.20 $0.20 May 27, 2004
400,000 21.1 $0.20 $0.20 Dec. 4, 2004
Scott C. Larsen................ 150,000 15.9 $0.20 $0.20 May 27, 2004
150,000 7.9 $0.20 $0.20 Dec. 4, 2004
Michael J. Gartland............ 150,000 15.9 $0.20 $0.20 May 27, 2004
150,000 7.9 $0.20 $0.20 Dec. 4, 2004
</TABLE>
AGGREGATE OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FINANCIAL YEAR
AND FINANCIAL YEAR END OPTION VALUES
The following table discloses the particulars of stock options exercised
during 1999 by the Named Executive Officers (the Company has not granted
stock appreciation rights):
<TABLE>
<CAPTION>
Unexercised Value of Unexercised
Securities Aggregate Options at FY-End In-The-Money
Acquired Value (#)(2) Options at FY-End(1)
On Exercise Realized(1) ------------------------------- -----------------------------
(#) ($) Exercisable Unexercisable Exercisable Unexercisable
----------- ----------- -------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barry D. Lasker..... - - 1,431,350 - - -
George H. Plewes.... - - 887,550 - - -
John J. Fleming..... - - 493,300 46,667 - -
Scott C. Larsen..... - - 550,000 13,333 - -
Michael J. Gartland. - - 421,800 - - -
</TABLE>
------------------
(1) Value is the product of the number of shares multiplied by the
difference between the closing market price on the relevant date and
the exercise price. The closing market price on December 31, 1999 was
US $0.19 per share.
(2) As of December 31, 1999.
-39-
<PAGE>
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
The Company may grant, pursuant to its stock option plan, which was
established in 1995, stock options to its directors, officers, employees and
consultants or to employees or consultants of a subsidiary or of a company
providing management services to the Company or to a subsidiary in
consideration of them providing their services. The Company's Board of
Directors determines the number of shares subject to each option within the
guidelines established by the plan. The options enable such persons to
purchase shares of the Company at a price fixed pursuant to the rules of the
plan. The option agreements must provide that the option can only be
exercised by the optionee and only for so long as the optionee shall continue
in the capacity outlined above or within a specified period after ceasing to
continue in the capacity outlined above. The options are exercisable by the
optionee giving the Company notice and payment of the exercise price for the
number of shares to be acquired. Under the plan approved by the Company's
shareholders, the Board of Directors is empowered to grant stock options to
insiders; shareholder approval is not required.
The maximum number of common shares issuable under the plan is 7,750,000. As
of August, 31, 2000, there are outstanding stock options to purchase up to
5,302,550 shares of the Company's common stock. The following table discloses
outstanding options held by directors and officers at such date:
<TABLE>
<CAPTION>
No. of Company
Common Shares
Underlying Exercise
Name/Group Options Price Date of Grant Expiration Date
-------------------------------- -------------- --------- ----------------- -----------------
<S> <C> <C> <C> <C>
Executive Officers as a Group... 60,000 $1.00 (Cdn) March 13, 1996 March 13, 2001
40,000 $1.00 (Cdn) July 30, 1997 July 30, 2002
348,000 $0.57 December 1, 1998 December 1, 2001
130,500 $0.57 December 1, 1998 December 17, 2002
87,000 $0.57 December 1, 1998 April 1, 2003
82,650 $0.57 December 1, 1998 September 8, 2003
190,000 $0.57 December 23, 1998 December 23, 2003
550,000 $0.20 May 27, 1999 May 27, 2004
875,000 $0.20 December 3, 1999 December 3, 2004
Directors who are not Executive 200,000 $2.70 (Cdn) March 13, 1996 March 13, 2001
Officers........................ 75,000 $3.15 (Cdn) October 15, 1996 October 15, 2001
155,000 $2.30 (Cdn) May 23, 1997 May 23, 2002
215,000 $2.20 (Cdn) July 30, 1997 July 30, 2002
304,500 $0.57 December 1, 1998 December 1, 2001
43,500 $0.57 December 1, 1998 December 17, 2002
152,250 $0.57 December 1, 1998 April 1, 2003
52,200 $0.57 December 1, 1998 September 8, 2003
438,400 $0.57 December 23, 1998 December 23, 2003
300,000 $0.20 May 27, 1999 May 27, 2004
950,000 $0.20 December 3, 1999 December 3, 2004
--------------------------------------------------------------------------------------------------------------------
-40-
<PAGE>
Directors and Officers as a
Group........................... 2,675,000 $0.20
628,400 $0.38
1,200,600 $0.57
100,000 $1.00 (Cdn)
200,000 $2.70 (Cdn.)
215,000 $2.20 (Cdn.)
155,000 $2.30 (Cdn.)
75,000 $3.15 (Cdn.)
</TABLE>
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
There have been no material transactions during the last three fiscal years,
and there are no presently proposed transactions, to which the Company or any
of its subsidiaries was or is to be a party, in which any director, officer
or ten-percent shareholder, or any relative of the foregoing persons, had or
is to have a direct or indirect material interest.
During the last three fiscal years, none of the Company's directors or
officers, or any associate of any director or officer was indebted to the
Company.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
AUTHORIZED AND ISSUED SHARES
The authorized share capital of the Company consists of unlimited common
shares without par value. As of August 31, 2000, the Company had a total of
79,384,092 common shares issued and outstanding. All of the common shares are
fully paid and not subject to any future call or assessment. All of the
common shares of the Company rank equally as to voting rights, participation
in a distribution of the assets of the Company on a liquidation, dissolution
or winding-up of the Company and the entitlement to dividends. Dividends are
payable if, as and when declared by our board of directors subject to the
prior rights of holders of shares ranking senior to the common shares with
respect to dividends, if any. The holders of the common shares are entitled
to receive notice of all shareholder meetings and to attend and to cast one
vote per common share at such meetings. The common shares do not have
preemptive or conversion rights. In addition, there are no sinking fund or
redemption provisions applicable to the common shares. The Alberta
Corporations Act provides that the rights and provisions attached to any
class of shares may not be modified, amended or varied unless consented to by
special resolution passed by a majority of not less than 2/3 of the votes
cast in person or by proxy by holders of shares of that class.
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 16. CHANGES IN SECURITIES AND CHANGES IN SECURITY FOR REGISTERED
SECURITIES.
Not Applicable.
-41-
<PAGE>
PART IV
ITEM 17. FINANCIAL STATEMENTS.
The financial statements filed as part of this registration statement are
listed in Item 19 - Financial Statements and Exhibits. All financial
statements in this registration statement, unless otherwise stated, are
presented in accordance with Canadian GAAP.
ITEM 18. FINANCIAL STATEMENTS.
Not applicable.
-42-
<PAGE>
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
DESCRIPTION PAGE
----------- ----
<S> <C> <C>
1. TransAtlantic Petroleum Corp.
Auditors' Report...................................................................
Consolidated Balance Sheets as at June 30, 2000, December 31,
1999 and December 31, 1998 ........................................................
Consolidated Statements of Operations and Deficit for the six
months ended June 30, 2000 and for the three years ended
December 31, 1999, 1998 and 1997 ..................................................
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and for the three years ended December 31, 1999,
1998 and 1997
Notes to the Consolidated Financial Statements.....................................
2. GHP Exploration Corporation
Consolidated Balance Sheet as at September 30, 1998................................
Consolidated Statement of Operations and Deficit for the nine
months ended September 30, 1998....................................................
Consolidated Statement of Cash Flows for the nine months ended
September 30, 1998.................................................................
Consolidated Balance Sheets as at December 31, 1997
and December 31, 1996..............................................................
Consolidated Statements of Operations and Deficit for the two
years ended December 31, 1997 and 1996.............................................
Consolidated Statements of Cash Flows for the two years ended
December 31, 1997 and 1996.........................................................
</TABLE>
EXHIBITS
-43-
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
1.1 Certificate of Continuance of Profco Resources Ltd.
dated June 10, 1997.
1.2 Articles of Continuance of Profco Resources Ltd.
dated June 4, 1997.
1.3 Certificate of Amendment of Profco Resources Ltd.
dated July 21, 1997.
1.4 Certificate of Registration of Profco Resources Ltd.
dated July 31, 1997.
1.5 By-Law No. 1 of Profco Resources Ltd. dated May 23,
1997.
1.6 Certificate of Amendment of Profco Resources Ltd.
dated December 2, 1998.
1.7 Articles of Amendment of Profco Resources Ltd. dated
December 2, 1998.
2.1 Profco Resources Ltd. Stock Option Plan (1995) dated
April 7, 1995.
2.2 Amendment to Profco Resources Ltd. Stock Option Plan
(1995), dated June 2, 1997.
2.3 Amendment to TransAtlantic Petroleum Corp. Stock
Option Plan (formerly Profco Resources Ltd. Stock
Option Plan) (1995), dated June 14, 1999.
2.4 Amendment to TransAtlantic Petroleum Corp. Stock
Option Plan (1995), dated June 6, 2000.
3.1 Oil Mining Lease No. 109 granted by Federal Republic
of Nigeria to Atlas Petroleum International Limited
dated May 27, 1996.
3.2 Joint Operating Agreement of 1st of August, 1995
Relating to Oil Prospecting License 75 between Atlas
Petroleum International Limited and Summit Oil & Gas
Worldwide Ltd.
3.3 First Amendment to Joint Operating Agreement of 1st
of August, 1995 Relating to Oil Prospecting License
75.
3.4 Petroleum Services Subcontract dated January 14, 1996
between CXY Nigeria Oilfield Services Ltd., Atlas
Petroleum International Limited and Summit Oil & Gas
Worldwide Ltd.
3.5 Amendment to Petroleum Services Subcontract dated
July 2, 1997.
3.6 Amendment to Petroleum Services Subcontract dated
October 26, 1998.
-44-
<PAGE>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
3.7 Deed of Assignment dated April 9, 1998 between the
Alliance Egyptian National Exploration Company, as
Assignor, and GHP Exploration (Egypt) Ltd., as
Assignee.
3.8 Participation Agreement dated March 27, 1998 between
Alliance Egyptian National Exploration Company and
GHP Exploration (Egypt) Ltd. and GHP Exploration
Corporation.
3.9 First Amendment to Participation Agreement dated
February 4, 2000 between Alliance Egyptian National
Exploration Company and GHP Exploration (Egypt) Ltd.
and TransAtlantic Petroleum Corp (formerly GHP
Exploration Corporation).
3.10 Concession Agreement for Petroleum Exploration and
Exploitation between the Arab Republic of Egypt and
The Egyptian General Petroleum Corporation and
National Exploration Company, in Central Sinai Area,
A.R.E., dated September 22, 1997.
3.11 Oil Prospecting License No. 75 granted by the Federal
Republic of Nigeria to Atlas Petroleum International
Nigeria Limited dated February 8, 1991.
3.12 Consent of the Federal Republic of Nigeria to the
Assignment of 30% Interest by Atlas Petroleum
International Limited dated Jul 22, 1992
3.13 Agreement dated July 17, 1992 between Atlas Petroleum
International Limited and Summit Partners Management
Co. relating to Oil Prospecting License 75.
3.14 Operating Agreement dated January 1, 1999 between
Alliance Egyptian National Exploration Company and
GHP Exploration (Egypt) Ltd.
3.15 Deed of Assignment dated March 17, 1999 between
Dublin International Petroleum (Egypt) Limited and
Tanganyika Oil Company, Ltd., as Assignors, and GHP
Exploration (West Gharib) Ltd., as Assignee.
3.16 Farmout Agreement dated April 27, 1998 between
Tanganyika Oil Company, Ltd., Dublin International
Petroleum (Egypt) Limited and GHP Exploration (Egypt)
Ltd.
3.17 Resolution No. 1 amending the Farmout Agreement
approved by Dublin International Petroleum (Egypt)
Limited and GHP Exploration (West Gharib) Ltd.
3.18 Concession Agreement for Petroleum Exploration and
Exploitation between the Arab Republic of Egypt, the
Egyptian General Petroleum Corporation, Tanganyika
Oil Company Ltd. and Dublin International Petroleum
(Egypt) Limited, in West Gharib Area, Eastern,
A.R.E., dated June 1, 1998.
-45-
<PAGE>
EXHIBIT DESCRIPTION PAGE
------- ----------- ----
<S> <C> <C>
3.19 International Joint Operating Agreement dated April
27, 1998 between Dublin International Petroleum
(Egypt) Limited and GHP Exploration (West Gharib)
Ltd. and Drucker Petroleum Inc.
3.20 Petroleum Handling and Sale Agreement dated December
30, 1999 by and between General Petroleum Company and
Dara Petroleum Company.
3.21 Settlement Agreement dated August 24, 2000 between
Global Marine, Inc., Global Marine Integrated
Services--International Inc. and TransAtlantic
Petroleum Corp.
</TABLE>
-46-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the Registrant certifies that it has reasonable grounds
to believe that it meets all of the requirements for filing on Form 20-F and
has duly caused this annual report to be signed on its behalf by the
undersigned, thereunto duly authorized.
TRANSATLANTIC PETROLEUM CORP.
By:
-------------------------------------------
Barry D. Lasker, President, Chief Executive
Officer and Chief Operating Officer
Date:___________, 2000
-47-
<PAGE>
KPMG
Consolidated Financial Statements of
TRANSATLANTIC PETROLEUM CORP.
Unaudited as at June 30, 2000 and the six months
ended June 30, 2000 and 1999
Audited as at December 31, 1999 and 1998 and for each of
the years in the three year period ended December 31, 1999
AUDITORS' REPORT TO THE DIRECTORS
We have audited the consolidated balance sheets of TransAtlantic Petroleum
Corp. as at December 31, 1999 and 1998 and the consolidated statements of
operations and deficit and cash flows for each of the years in the three year
period ended December 31, 1999. 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 Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit
to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
1999 and 1998 and the results of its operations and its cash flows for each of
the years in the three year period ended December 31, 1999 in accordance with
Canadian generally accepted accounting principles.
Accounting principles generally accepted in Canada vary in certain significant
respects from accounting principles generally accepted in the United States.
Application of accounting principles generally accepted in the United States
would have affected results of operations for each of the years in the three
year period ended December 31, 1999 and shareholders' equity as at December
31, 1999 and 1998, to the extent summarized in note 11 to the consolidated
financial statements.
Chartered Accountants
Calgary, Canada
March 27, 2000
(except for notes 4(a), 9(c) and 11 which are as of September 22, 2000)
COMMENTS FOR U.S. READERS
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the financial
statements are affected by conditions and events that cast substantial doubt
on the company's ability to continue as a going concern, such as those
described in note 1(a) to the consolidated financial statements. Our report to
the directors, dated March 27, 2000 (except for notes 4(a), 9(c) and 11 which
are as of September 22, 2000) is expressed in accordance with Canadian
reporting standards which do not permit a reference to such events and
conditions in the auditors' report when these are adequately disclosed in the
financial statements.
Chartered Accountants
Calgary, Canada
March 27, 2000
Page 1
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Consolidated Balance Sheets
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
December 31,
June 30, ----------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term investments $ 208 $ 161 $ 2,955
Restricted cash (note 9) 208 563 1,750
Accounts receivable 191 275 4,228
Other current assets 120 92 170
---------------------------------------------------------------------------------------------------------------
727 1,091 9,103
Property and equipment (note 3) 15,820 14,554 12,135
Other - - 250
---------------------------------------------------------------------------------------------------------------
$ 16,547 $ 15,645 $ 21,488
===============================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities (note 2) $ 947 $ 1,704 $ 1,521
Indebtedness (note 4) 3,120 2,882 9,169
---------------------------------------------------------------------------------------------------------------
4,067 4,586 10,690
Shareholders' equity:
Share capital (note 5) 28,879 26,633 23,484
Deficit (note 7) (16,399) (15,574) (12,686)
---------------------------------------------------------------------------------------------------------------
12,480 11,059 10,798
Basis of presentation (note 1)
Commitments and contingencies (note 9)
Subsequent events (notes 4(a) and 9(c) )
---------------------------------------------------------------------------------------------------------------
$ 16,547 $ 15,645 $ 21,488
===============================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 2
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Consolidated Statements of Operations and Deficit
(Thousands of U.S. Dollars)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, Years Ended December 31,
------------------------------- ---------------------------------------------
2000 1999 1999 1998 1997
---------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil and gas sales,
net of royalties $ 18,584 $ 10,198 $ 21,999 $ 3,391 $ 636
Interest income 158 333 564 328 177
---------------------------------------------------------------------------------------------------------------
18,742 10,531 22,563 3,719 813
Expenses:
Production:
Service fees 16,318 9,908 21,453 3,113 -
Taxes 947 - - - -
Other 833 488 970 199 196
Depreciation, depletion
and amortization 598 554 800 1,120 551
Loss on disposition
of property and
equipment - - - 196 2,260
Write-down of oil
and gas properties - 152 889 10,365 9,576
General and
administrative 713 688 1,026 597 446
Interest and other 158 133 313 815 152
---------------------------------------------------------------------------------------------------------------
19,567 11,923 25,451 16,405 13,181
---------------------------------------------------------------------------------------------------------------
Net loss for the period 825 1,392 2,888 12,686 12,368
Deficit, beginning of period 15,574 12,686 12,686 14,878 2,510
Reduction in stated capital
(note 7) - - - (14,878) -
---------------------------------------------------------------------------------------------------------------
Deficit, end of period $ 16,399 $ 14,078 $ 15,574 $ 12,686 $ 14,878
===============================================================================================================
Net loss per share (note 8)
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
<CAPTION>
TRANSATLANTIC PETROLEUM CORP.
Consolidated Statements of Cash Flows
(Thousands of U.S. Dollars)
-----------------------------------------------------------------------------------------------------------------------
Six Months Ended
June 30, Years Ended December 31,
---------------------------- ---------------------------------------------
2000 1999 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash provided by (used in):
Operating activities:
Net loss for the
period $ (825) $ (1,392) $ (2,888) $(12,686) $(12,368)
Items not involving cash:
Depreciation, depletion
and amortization 598 554 800 1,120 551
Write-down of oil and gas
properties - 152 889 10,365 9,576
Other items not involving
cash 27 (240) (249) 196 2,260
----------------------------------------------------------------------------------------------------------------------
(200) (926) (1,448) (1,005) 19
Changes in non-cash
working capital 410 (178) 853 (347) 744
----------------------------------------------------------------------------------------------------------------------
210 (1,104) (595) (1,352) 763
Investing activities:
Exploration and
acquisition of oil
and gas properties (1,952) (1,708) (3,920) (2,838) (13,659)
Past cost reimbursement
(note 3) - - 3,828 - -
Proceeds from sale
of property and
equipment - - 109 3,877 4,131
Changes in non-cash
working capital (601) 4,502 1,159 (511) 7,085
----------------------------------------------------------------------------------------------------------------------
(2,553) 2,794 1,176 528 (2,433)
Financing activities:
Issuance of common
shares, net 2,152 - 889 - 1,421
Borrowings of long-term
debt - - - - 5,906
Repayments of long-term
debt - (4,354) (4,354) (3,588) -
Changes in non-cash
working capital 238 (242) 90 857 -
----------------------------------------------------------------------------------------------------------------------
2,390 (4,596) (3,375) (2,731) 7,327
----------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and
short-term investments 47 (2,906) (2,794) (3,555) 5,674
Cash and short-term investments,
beginning of period 161 2,955 2,955 6,510 863
----------------------------------------------------------------------------------------------------------------------
Cash and short-term
investments, end of
period $ 208 $ 49 $ 161 $ 2,955 $ 6,510
======================================================================================================================
</TABLE>
Cash and short-term investments is comprised of cash and investments with
maturities of thirty days or less.
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000 and
1999 is unaudited) (U.S. Dollars)
-------------------------------------------------------------------------------
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and include
the accounts of the Company and its wholly-owned subsidiaries. The application
of accounting principles generally accepted in the United States would have
affected these consolidated financial statements to the extent summarized in
note 11.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues, expenses and
related disclosures. Actual results could differ from those estimates and
assumptions; however, management believes that such differences would not be
material.
1. BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES:
(a) Basis of presentation:
The consolidated financial statements have been presented on a
going-concern basis which contemplates that TransAtlantic Petroleum
Corp. (the "Company") will continue to meet its obligations as they
come due in the foreseeable future. As at June 30, 2000, the Company
had a working capital deficiency of $3.3 million (December 31, 1999 -
$3.5 million).
To meet its obligations as they come due, the Company will be required
to use existing cash on hand, cash flow from operations, if any,
re-negotiations of debt obligations and the issuance of additional
debt or equity.
If the going concern assumption were inappropriate, then adjustments
would be necessary in the carrying value and classification of assets
and the reported results of operations in the financial statements.
(b) Nature of operations:
The Company is an independent oil and gas company amalgamated under
the laws of Alberta for the purpose of exploring for, developing and
producing crude oil, natural gas and natural gas liquids. The
Company's current activities are focused in Egypt and Nigeria and are
conducted through various wholly-owned subsidiaries.
The Company's viability, including the recoverability of the Company's
oil and gas investments, and the results of its operations, is
dependent upon the discovery of economically recoverable reserves, its
ability to obtain the necessary financing to complete development of
the reserves and the future profitable production from its developed
reserves. Inherent in these requirements is the importance of product
prices and the costs of acquiring, finding, developing and producing
crude oil and natural gas reserves. The prices
Page 5
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000 and
1999 is unaudited) (U.S. Dollars)
-------------------------------------------------------------------------------
1. BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
received by the Company or its subsidiaries from the sale of their
crude oil and natural gas production are subject to fluctuation in
response to changes in supply, market uncertainty and a variety of
factors beyond the Company's control.
(c) Oil and gas properties:
Under the full cost method of accounting, the Company capitalizes all
acquisition, exploration and development costs incurred for the
purpose of finding oil and gas reserves in cost centers on a
country-by-country basis. Costs associated with production and general
corporate activities are expensed in the period incurred. Proceeds
from the sale of oil and gas properties are accounted for as
reductions to capitalized costs, and gains or losses are not
recognized unless the sale would alter the depletion rate by more than
20%.
The Company computes the provision for depreciation, depletion and
amortization of oil and gas properties using the unit-of-production
method based upon production and estimates of proved reserve
quantities as determined by independent reservoir engineers.
Unevaluated property costs are excluded from the amortization base
until the properties associated with these costs are evaluated and
determined to be productive or become impaired. Depreciation of
furniture, fixtures and computer equipment and software is provided
for on the straight-line basis at rates between three and seven years
designed to amortize the cost of the assets over their estimated
useful lives.
The net carrying value of the Company's oil and gas properties is
limited to an estimated recoverable amount. This amount is determined
by estimating the amount of future net revenues from proved properties
based on period-end prices less future production, general and
administrative, financing and site restoration costs and production
and income taxes, together with the value of unproved properties at
the lower of cost and realizable value on a country-by-country basis.
When it is determined that the net realizable value is less than the
carrying value of the oil and gas properties, the impairment is
charged to income.
Where appropriate, provisions are made in the accounts for estimated
future net costs of well abandonment and site restoration, including
removal of production facilities at the end of their useful life.
Costs are based on estimates valued at year-end prices and in
accordance with the current legislation and industry practices. The
annual provision is computed on a unit-of-production basis and is
recorded as an expense for the year.
A substantial portion of the Company's activities are conducted
jointly with industry partners and the accompanying consolidated
financial statements reflect only the Company's proportionate interest
in such activities.
Page 6
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000 and
1999 is unaudited) (U.S. Dollars)
-------------------------------------------------------------------------------
1. BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
(d) Foreign currency translation:
Assets and liabilities denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at the
balance sheet date for monetary items and at exchange rates in effect
at the transaction dates for non-monetary items. Income and expenses
are translated at the average exchange rates in effect during the
applicable period. Exchange gains or losses are included in operations
in the period incurred, except for unrealized gains and losses on
long-term monetary items which are deferred and amortized to earnings
over their remaining term.
(e) Financial instruments:
The fair value of cash and short-term investments, receivables and
accounts payable and accrued liabilities approximates their carrying
value. The Company has no derivative financial instruments.
(f) Stock option policy:
The Company has one stock-based compensation plan that is detailed in
note 5(c). No compensation expense is recognized for this plan when
stock options are granted. Consideration paid upon exercise of stock
options is credited to share capital.
(g) Income taxes:
Effective January 1, 2000, the Canadian Institute of Chartered
Accountants ("CICA") changed the accounting standard relating to the
accounting for income taxes. The CICA's new standard on accounting for
income taxes adopts the liability method of accounting for future
income taxes. Under the liability method, future income tax assets and
liabilities are determined based on "temporary differences"
(differences between the accounting basis and the tax basis of the
assets and liabilities), and are measured using the currently enacted,
or substantively enacted, tax rates and laws expected to apply when
these differences reverse. A valuation allowance is recorded against
any future income tax assets if it is more likely than not that the
asset will not be realized. Income tax expense or benefit is the sum
of the Company's provision for current income taxes and difference
between the opening and ending balances of the future income tax
assets and liabilities.
Prior to adoption of this new standard, income tax expense was
determined using the deferral method. Under this method, deferred
income tax expense was determined based on "timing differences"
(differences between the accounting and tax treatment of items of
expense or income), and were measured using the tax rates in effect in
the year the differences originated. Certain deferred tax assets, such
as the benefit of tax losses
Page 7
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000 and
1999 is unaudited) (U.S. Dollars)
-------------------------------------------------------------------------------
1. BASIS OF PRESENTATION, NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
carried forward, were not recognized unless there was virtual
certainty that they would be realized.
(g) Income taxes (continued):
The Company has adopted the new income tax accounting standard
retroactively without restatement of prior periods. There has not been
any change in the Company's deficit or future income taxes as a result
of adopting the new income tax accounting standard.
2. BUSINESS COMBINATION:
On October 19, 1998, the Company entered into an Arrangement Agreement with
GHP Exploration Company ("GHP"), a Yukon Territory corporation, and on
November 24, 1998 the shareholders of GHP approved the Arrangement. On
December 1, 1998, the Company and GHP completed the Arrangement and the
Company acquired all of the issued and outstanding common shares of GHP.
The Company was then re-named TransAtlantic Petroleum Corp.
The acquisition was accounted for using the purchase method and,
accordingly, the results of operations of GHP were included in the
consolidated financial statements from the date of acquisition of December
1, 1998. Pursuant to the terms of the Arrangement Agreement, each common
share of GHP was exchanged for 0.87 common shares of the Company. The
Company issued a total of 19,003,828 common shares having a fair market
value of $9.1 million.
As of June 30, 2000, and December 31, 1999 and 1998, the Company had $0.16
million, $0.24 million and $0.51 million, respectively, of severance costs
included in accounts payable and accrued liabilities related to the
amalgamation. The purchase price was allocated to the assets and
liabilities based on their estimated fair market value as follows:
<TABLE>
---------------------------------------------------------------------------
<S> <C>
Cash $ 758
Other current assets 1,887
Property and equipment 7,083
Other assets 150
Current liabilities (773)
---------------------------------------------------------------------------
Net assets acquired $ 9,105
===========================================================================
</TABLE>
Page 8
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
Accumulated
depletion,
depreciation Net book
December 31, 1999 Cost and amortization value
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Crude oil and natural gas properties
Nigeria $ 18,181 $ (9,841) $ 8,340
Egypt 5,071 -- 5,071
United States 1,730 (728) 1,002
Furniture, fixtures and other assets 376 (235) 141
------------------------------------------------------------------------------------------------------------
$ 25,358 $ (10,804) $ 14,554
============================================================================================================
December 31, 1998
------------------------------------------------------------------------------------------------------------
Crude oil and natural gas properties
Nigeria $ 17,743 $ (9,191) $ 8,552
Egypt 2,047 -- 2,047
United States 1,357 -- 1,357
Furniture, fixtures and other assets 365 (186) 179
------------------------------------------------------------------------------------------------------------
$ 21,512 $ (9,377) $ 12,135
============================================================================================================
June 30, 2000
------------------------------------------------------------------------------------------------------------
Crude oil and natural gas properties
Nigeria $ 18,181 $ (10,117) $ 8,064
Egypt 6,746 (282) 6,464
United States 1,920 (728) 1,192
Furniture, fixtures and other assets 377 (277) 100
------------------------------------------------------------------------------------------------------------
$ 27,224 $ (11,404) $ 15,820
============================================================================================================
</TABLE>
(a) The carrying value of capital assets is subject to uncertainty
associated with the quantity of oil and gas reserves, future production
rates, commodity prices and other factors. Future events could
materially change the carrying values recognized in the accompanying
consolidated financial statements. At December 31, 1998, the Company's
capitalized costs of its Nigerian oil and gas properties exceeded the
ceiling limitation and the Company recorded in the 1998 financial
statements an $8.4 million non-cash impairment of these assets. At June
30, 2000, included within the Company's recorded balance for Nigerian
crude oil and natural gas properties was $6.5 million (December 31,
Page 9
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT (CONTINUED):
1999 - $6.5 million; December 31, 1998 - $6.4 million) of costs
related to unproved properties not being amortized.
During 1996, Summit Oil and Gas Worldwide Ltd. ("SOGW") signed a
service contract with CXY Nigeria Oilfield Services Limited ("CXY"), a
wholly-owned subsidiary of Canadian Occidental Petroleum Ltd. with
respect to the Ejulebe field. The terms of the contract required CXY to
fund the drilling, completion and equipment costs of the Ejulebe field,
incur certain other expenditures and reimburse SOGW for prior costs
incurred ("Past Cost Reimbursement") upon the Ejulebe field reaching
one million barrels of cumulative oil production, which occurred in
1999. In February and March 1999, the Company was credited $10 million
from CXY in satisfaction of the Past Cost Reimbursement; $3.8 million
in cash and $6.2 million in satisfaction of the CXY loan.
During 1996, CXY advanced $5 million to SOGW bearing interest at LIBOR
plus 3% per annum in respect of the service contract. $6.2 million of
the Past Cost Reimbursement was used to repay the CXY loan. SOGW
advanced these funds, bearing interest at LIBOR plus 3% per annum and
in return received, as security for the loan, an assignment from its
indigenous partner of certain rights as to distributions from cash
flows from the OML-109 concession offshore Nigeria. The Company has
recorded this advance as a component of its unproved property as at
December 31, 1999 and 1998. This note is non-performing as of December
31, 1999 and the Company has initiated a collection proceeding.
Interest on the note has been recognized to the extent received, which
equalled $0.6 million in 1999 and nil to June 30, 2000.
Under the service contract with CXY, CXY paid all of the capital, which
totaled in excess of $100 million, to drill development wells and
install a production platform and pipeline for the Ejulebe field. CXY
is paid a service fee by SOGW and its Nigerian partner out of
production revenues. The service fee is comprised of several components
including a return of capital invested by the service contractor.
Currently, all production revenues, after payment of royalties, are
paid to CXY. The Ejulebe field only becomes profitable to the Company
after the combination of price and production rate pays down CXY's
invested capital.
(b) During 1998, the Company acquired, in its acquisition of GHP (see note
2), a 30% working interest in the West Gharib Concession, held by GHP
Exploration (West Gharib) Ltd., and a 25% working interest in the
Central Sinai Concession, held by GHP Exploration (Egypt) Ltd. Also
acquired were several other properties which were sold in December 1998
for total proceeds of $3.8 million, and varying interests in
exploration acreage all located in the United States. The recorded
balances for the Company's United States properties primarily relate to
unproved prospects and are not being
Page 10
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT (CONTINUED):
amortized. During 1999, the Company wrote down the net book value of
its U.S. cost center by $0.7 million.
(c) During 1997, several of the Company's subsidiaries entered into an
agreement to acquire a 52.8% interest in Tarpon Benin S.A. ("Tarpon")
for cash consideration of $1.4 million. Tarpon was the owner of an
exploration and production concession in the Republic of Benin in which
Tarpon had the exclusive right to explore for and produce oil and
natural gas within the concession. The agreement required the Company's
subsidiaries and other parties to fund the drilling of an exploratory
well, seismic program and training program. At December 31, 1997,
approximately $8.7 million of costs related to Tarpon were written off
as the exploration program proved uneconomic. During 1998, an
additional $1.6 million of costs were written off.
(d) During 1997, SOGW Tunisia Ltd. entered into an agreement to earn a 6.7%
working interest in a drilling permit located in Tunisia by paying 10%
of the drilling costs associated with the initial well. The well was
determined to be uneconomic and the costs incurred to December 31, 1997
were written off. Also, the Company participated in the El Hamra
prospect in 1998 and 1999 but has made the decision to likewise abandon
it. During 1999, $0.16 million was written off and in 1998, $0.4
million was written off on the Company's Tunisia prospects.
(e) A total of $0.5 million, $1.2 million and $1.6 million of overhead
costs incurred during the six months ending June 30, 2000 and the years
ended December 31, 1999 and 1998, respectively, related to exploration
and development activities was capitalized.
4. INDEBTEDNESS:
(a) Note payable to Global Marine Integrated Services International Inc.
("GMISI"):
A promissory note with a principal balance of $2.3 million plus accrued
interest of $0.5 million as of December 31, 1999 issued by Tarpon, is
related to the drilling of the exploratory well offshore Benin (see
note 9(c)) and is guaranteed by the Company. The note payable,
originally at prime plus 2% interest, became non-performing as of
August, 1999. The note provides for default interest at prime plus 5%.
Tarpon is insolvent and the Company notified GMISI in January, 1999
that it would be unable to meet its obligation under the guarantee at
that time. The Company proposed a debt restructure plan and pursuant
thereto, the Company made a principal payment of $0.5 million on
February 17, 1999 and additional principal payments of $50,000 each
month from March, 1999 through June, 1999. Since that time, there have
been ongoing discussions but no further payments. On August 24, 2000,
the Company and GMISI entered into a settlement agreement that provides
for the entire amount to be satisfied if the Company pays GMISI $1.5
million prior to November 22, 2000. If not paid, the gross principal
plus accrued
Page 11
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
4. INDEBTEDNESS (CONTINUED):
interest is converted to long-term debt, bearing interest at 12% per
annum and payable in monthly instalments of $75,000. During 1999 and
1998, the Company recorded interest expense of $0.32 and $0.24 million,
respectively, related to this note. The fair value of the note payable
at December 31, 1999 and 1998 approximates its carrying value.
(b) Convertible unsecured debenture:
During 1999 and 1998, the Company recorded interest expense of $0.1
million and $0.4 million, respectively, related to the debentures. In
April, 1999, the Company entered into an Amending Supplemental Trust
Indenture allowing for the early redemption of its Cdn. $9 million
(approximately $5.9 million U.S. dollars) 7% convertible debentures
whereby the debenture holders were paid $3.6 million in cash and
received 9.144 million common shares of the Company at an ascribed
price of $0.25 per share.
5. SHARE CAPITAL:
(a) Authorized:
Unlimited number of common shares, without par value
(b) Issued:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
Number of
(In thousands) Shares Amount
-------------------------------------------------------------------------------------
<S> <C> <C>
Balance, December 31, 1997 34,481 $ 30,225
Reduction in stated capital (note 7) - (14,878)
Issued on acquisition of GHP (note 2) 19,004 8,137
-------------------------------------------------------------------------------------
Balance, December 31, 1998 53,485 23,484
Issuances of stock 4,880 930
Conversion of debentures 9,144 2,286
Issue costs - (67)
-------------------------------------------------------------------------------------
Balance, December 31, 1999 67,509 26,633
Issuances of stock 11,875 2,400
Issue costs - (154)
-------------------------------------------------------------------------------------
Balance, June 30, 2000 79,384 $ 28,879
=====================================================================================
</TABLE>
Page 12
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
5. SHARE CAPITAL (CONTINUED):
(c) Stock option plan:
The Company has a directors and management Stock Option Plan under
which 7.75 million common shares were reserved for issuance as at June
30, 2000. These options are granted with a five year expiry, the
majority of which are fully vested. Details of the Company's plan as at
June 30, 2000 and December 31, 1999 and 1998, and changes during the
periods, are presented below.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
Years Ended December 31,
June 30, 2000 1999 1998
------------------ ----------------------------------------
Weighted Weighted Weighted
Number average Number average Number average
of exercise of exercise of exercise
options price options price options price
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of period 5,773 $ 0.44 4,764 $ 0.84 2,130 $ 1.23
Granted 140 0.26 3,120 0.20 2,634 0.52
Exercised - - - - - -
Cancelled and expired (475) 1.30 (2,111) 0.98 - -
-------------------------------------------------------------------------------------------------------
Outstanding at end of period 5,438 $ 0.36 5,773 $ 0.44 4,764 $ 0.84
=======================================================================================================
Exercisable at year period 5,244 $ 0.33 5,478 $ 0.40 4,174 $ 0.78
=======================================================================================================
</TABLE>
The following table summarizes information about stock options as at
June 30, 2000:
<TABLE>
<CAPTION>
=====================================================================================================
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------
Weighted-
Average
Range of Prices Remaining Weighted- Weighted -
--------------------- Number Contractual Average Number Average
Low High Outstanding Life Exercise Price Exercisable Exercise Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.20 $ 0.20 2,845 4.0 $ 0.20 2,845 $ 0.20
0.26 0.57 2,140 3.0 0.50 2,140 0.50
0.67 2.11 453 1.5 0.78 259 0.47
-----------------------------------------------------------------------------------------------------
$ 0.20 $ 2.11 5,438 3.4 $ 0.36 5,244 $ 0.33
=====================================================================================================
</TABLE>
Page 13
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
5. SHARE CAPITAL (CONTINUED):
The following table summaries information about stock options at
December 31, 1999:
<TABLE>
<CAPTION>
=====================================================================================================
Options Outstanding Options Exercisable
-----------------------------------------------------------------------------------------------------
Weighted-
Average
Range of Prices Remaining Weighted- Weighted -
--------------------- Number Contractual Average Number Average
Low High Outstanding Life Exercise Price Exercisable Exercise Price
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.20 $ 0.20 2,845 4.5 $ 0.20 2,845 $ 0.20
0.38 0.57 2,000 3.5 0.52 2,000 0.52
0.67 2.17 928 2.0 1.05 633 0.95
-----------------------------------------------------------------------------------------------------
$ 0.20 $ 2.17 5,773 4.0 $ 0.80 5,478 $ 0.78
=====================================================================================================
</TABLE>
(d) Warrants:
On July 21, 1999, the Company completed a private placement of 4.65
million units at $0.20 per unit for gross proceeds of $0.93 million.
Each unit consisted of one common share and one-half common share
purchase warrant. A whole warrant is exercisable at $0.25 per share
until December, 2000. As at June 30, 2000 2.32 million share purchase
warrants (December 31, 1999 - 2.32 million) were outstanding.
On January 28, 2000, the Company completed a brokered private placement
totaling 10 million units for gross proceeds of $2.0 million. Each unit
cost $0.20 and consisted of one common share and one-half common share
purchase warrant. A whole warrant is exercisable at $0.25 until January
31, 2001. In connection with the placement, the Company issued one
million warrants to the broker, exercisable at $0.25 per share on or
before January 31, 2001.
On May 31, 2000, the Company completed a private placement totaling 1.6
million units for gross proceeds of $0.3 million. Each unit cost $0.19
and consisted of one common share and 0.60 of one common share purchase
warrant. A whole warrant is exercisable at $0.25 until May 31, 2001.
In addition, in May 2000, the Company issued 100,000 common shares to
the Company's 40(K) retirement plan, and issued 175,000 common shares
to former employees under a previously accrued December 1998 severance
agreement.
6. INCOME TAXES:
The Company and its wholly-owned subsidiaries have accumulated losses or
resource related deductions available for income tax purposes, subject to
confirmation by the
Page 14
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
6. INCOME TAXES (CONTINUED):
applicable authorities in Canada, in the United States and in Nigeria. No
recognition has been given in these consolidated financial statements to
the future benefits that may result from the utilization of these losses
for income tax purposes.
7. REDUCTION IN STATED CAPITAL:
On June 9, 1998, the shareholders of the Company approved a special
resolution authorizing a reduction in statutory capital in respect of the
common shares by U.S. $14.9 million. This resulted in a corresponding
reduction in the accumulated deficit as shown in the consolidated balance
sheets and the consolidated statements of operations and deficit.
8. NET LOSS PER SHARE:
<TABLE>
<CAPTION>
=======================================================================================
June 30, December 31,
----------------------- ------------------------------------
2000 1999 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net loss per share $ 0.01 $ 0.02 $ 0.05 $ 0.35 $ 0.37
=======================================================================================
</TABLE>
Per common share amounts were calculated using a weighted average number of
shares outstanding at June 30, 2000 of 76,509,779 and 55,918,882 at June
30, 1999 (December 31, 1999 - 61,685,180; 1998 - 36,064,916; 1997 -
33,870,621). Common share equivalents relating to options and share
purchase warrants were not included in the weighted average number of
shares for June 30, 2000 and December 31,1999, 1998 and 1997 since their
inclusion would not have been dilutive.
9. COMMITMENTS AND CONTINGENCIES:
(a) In March 1998, GHP Exploration (Egypt) Ltd. entered into a
Participation Agreement to acquire a 25% working interest in the 18,150
square kilometer Central Sinai Concession located in Egypt's Sinai
Peninsula. The work program requires a minimum financial commitment of
$6.0 million to the 100% interest and expires September 22, 2000. The
Company's share of this commitment is $2.4 million, of which $2.4
million had been incurred as of June 30, 2000 (December 31, 1999 - $1.6
million).
(c) In April 1998, GHP Exploration (West Gharib) Ltd. entered into a
Farmout Agreement to acquire a 30% working interest in the West Gharib
Concession consisting of 2,530 square kilometers located on the Western
shore of the Gulf of Suez basin. The work program requires a minimum
financial commitment of $5.0 million to the 100% interest and expires
June 1, 2001. The Company's share of this commitment is approximately
$2 million, of which all had been incurred as of December 31, 1999. The
Company has $0.6
Page 15
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
-------------------------------------------------------------------------------
9. COMMITMENTS AND CONTINGENCIES (CONTINUED):
million in escrow, which is recorded as restricted cash, to secure its
interest in the concession.
(c) Several of the Company's wholly-owned subsidiaries (the "Companies")
are parties to an arbitration brought by a group of minority
shareholders (the "Claimants") of Tarpon (see note 3(c)) seeking, among
other things, damages in an amount sufficient to perform certain
alleged obligations which the Claimants contend are required to be
performed pursuant to the terms of a shareholder agreement. On
September 18, 2000, the Company was advised that the arbitrator ruled
that the Subsidiaries had breached the Shareholder Agreement and
assessed damages of $1.8 million. While the Company was not a party to
the Shareholder Agreement, the arbitrator ruled that the Company
guaranteed all obligations of the Subsidiaries. The Company does not
believe that the Subsidiaries have a basis to appeal the decision.
However, the Company intends to contest the arbitrator's ruling against
the Company. No provision for any possible loss with respect to this
contingency has been made in the consolidated financial statements. No
assurances can be made that the Company will be successful.
(d) As at December 31, 1999 future minimum annual lease payments under
operating lease agreements for office premises and equipment for the
next five years are approximately $0.6 million in years 2000, 2001 and
2002, and $0.5 million in years 2003 and 2004.
10. SEGMENT INFORMATION:
As at June 30, 2000, the Company and its subsidiaries operate in one
dominant industry, the exploration for, and the development and production
of crude oil and natural gas. Identifiable assets, revenues and net loss in
each of its geographic areas are as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
Identifiable Net Loss
June 30, 2000 Assets Revenues (Income)
-------------------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Nigeria $ 8,198 $ 16,727 $ 359
Egypt 6,576 1,934 (362)
United States 1,463 81 328
Canada 306 - 210
Others 4 - 290
-------------------------------------------------------------------------------------------------------------------
$ 16,547 $ 18,742 $ 825
===================================================================================================================
Page 16
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
10. SEGMENT INFORMATION (CONTINUED):
December 31, 1999
-------------------------------------------------------------------------------------------------------------------
Nigeria $ 8,475 $ 22,423 $ 574
Egypt 5,110 15 (15)
United States 1,772 125 1,304
Canada 274 - 533
Others 14 - 492
-------------------------------------------------------------------------------------------------------------------
$ 15,645 $ 22,563 $ 2,888
===================================================================================================================
December 31, 1998
-------------------------------------------------------------------------------------------------------------------
Nigeria $ 12,627 $ 3,649 $ 9,172
United States 6,241 28 80
Egypt 2,297 - 2
Benin - - 1,613
Canada 311 42 1,417
Tunisia 12 - 402
-------------------------------------------------------------------------------------------------------------------
$ 21,488 $ 3,719 $ 12,686
===================================================================================================================
</TABLE>
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES:
The Company's consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada
("Canadian GAAP"). These principles, as they pertain to the Company's
consolidated financial statements, are not materially different from United
States' generally accepted accounting principles ("U.S. GAAP") except as
follows:
(a) There are certain differences between the full cost method of oil and
gas accounting as applied in Canada and as applied in the United
States. The Company has reviewed such differences and determined
that, except as discussed below, no material variances in financial
statement balances would have resulted from the application of full
cost accounting in accordance with U.S. GAAP.
The Company has completed ceiling test calculations in accordance
with U.S. GAAP at December 31, 1999, 1998 and 1997. The ceiling tests
computed under U.S. GAAP did not result in any differences as at
December 31, 1999 and 1997. However, at December 31, 1998 the U.S.
GAAP ceiling test results in an additional impairment of $488. This
difference would increase the Company's net loss for the year ended
Page 17
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000
and 1999 is unaudited)
(U.S. Dollars)
--------------------------------------------------------------------------------
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
December 31, 1998 and would reduce the Company's total assets and
shareholders' equity at December 31, 1988 and subsequent periods.
(b) In accordance with U.S. GAAP (and Canadian GAAP effective January 1,
2000), the liability method of accounting for income taxes is used
instead of the deferral method. Under the liability method, current
and deferred income taxes are recognized, at currently enacted rates,
to reflect the expected future tax consequences arising from the
difference between transactions recorded in the financial statements
and those in income tax returns. In addition, purchase price
adjustments arising from business combinations are grossed up for the
related income tax impact under U.S. GAAP.
No adjustments to the financial statements are required with respect
to the accounting for income taxes.
(c) The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations, in accounting for its stock options issued to
employees, directors and officers of the Company for purposes of
reconciliation to U.S. GAAP. As such, compensation expense would be
recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price. SFAS No. 123,
"Accounting for Stock-based Compensation", established accounting and
disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above and has adopted the
disclosure requirements of SFAS No. 123. Stock options issued to
third parties are accounted at their fair values in accordance with
SFAS No. 123.
No adjustments to the financial statements are required with respect to
the accounting for stock options, except for the inclusion of
additional disclosures below.
During the periods ended June 30, 2000, December 31, 1999 and 1998, the
Company granted options to employees, directors and officers which, for
purposes of reconciling to U.S. GAAP, have been accounting for in
compliance with APB Opinion No. 25. All were granted with exercise
prices at market price of the Company's stock on the date of grant.
Accordingly, no compensation expense is recorded in the Company's
statement of operations and deficit.
The Company has calculated the fair value of stock options granted to
employees using the Black-Scholes option pricing model with the
following weighted-average assumptions:
Page 18
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000 and
1999 is unaudited)
(U.S. Dollars)
-------------------------------------------------------------------------------
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
December 31,
June 30, -----------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk free interest rate 5.75% 5.55% 5.15%
Volatility 5.27% 6.13% 5.27%
Expected option life (in years) 5.0 5.0 5.0
Dividend yield 0% 0% 0%
==========================================================================================================
Had the Company determined compensation cost based upon the fair value at the grant date for its stock
options under SFAS No. 123, the Company's pro forma net loss per share amounts would have been as follows:
----------------------------------------------------------------------------------------------------------
December 31,
June 30, -----------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------
Net loss under U.S. GAAP:
As reported $ 825 $ 2,888 $ 12,686
Pro forma 834 3,040 12,999
----------------------------------------------------------------------------------------------------------
Net loss per common share:
As reported $ 0.01 $ 0.05 $ 0.35
Pro forma 0.01 0.05 0.36
==========================================================================================================
(d) The reduction in stated capital recorded during 1998 under Canadian GAAP would have to be reversed under
U.S. GAAP. As a result, the Company's shareholders' equity under U.S. GAAP at December 31, 1998 and
subsequent periods would be restated as follows:
----------------------------------------------------------------------------------------------------------
December 31,
June 30, -----------------------------------
2000 1999 1998
----------------------------------------------------------------------------------------------------------
Share capital $ 43,757 $ 41,511 $ 38,362
Deficit (31,277) (30,452) (27,564)
----------------------------------------------------------------------------------------------------------
$ 12,480 $ 11,059 $ 10,798
==========================================================================================================
</TABLE>
Page 19
<PAGE>
TRANSATLANTIC PETROLEUM CORP.
Notes to Consolidated Financial Statements
Years ended December 31, 1999, 1998 and 1997
(Information as at June 30, 2000 and for the six months ended June 30, 2000 and
1999 is unaudited)
(U.S. Dollars)
-------------------------------------------------------------------------------
11. DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (CONTINUED):
(e) Supplementary disclosures required under U.S. GAAP are as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
Six months
ended December 31,
June 30, ---------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Components of change in non-cash working capital:
Restricted cash $ 355 $ 1,187 $ -
Accounts receivable 47 167 49
Accounts payable and accrued liabilities 32 (583) 79
Other (24) 82 (475)
-----------------------------------------------------------------------------------------------------------
$ 410 $ 853 $ (347)
===========================================================================================================
(f) Additional Disclosures Required Under U.S. GAAP
The components of accounts payable and accrued liabilities are as follows:
-----------------------------------------------------------------------------------------------------------
December 31,
June 30, ---------------------------------
2000 1999 1998
-----------------------------------------------------------------------------------------------------------
Accounts payable $ 501 $ 494 $ 647
Accrued Liabilities 446 1,210 874
-----------------------------------------------------------------------------------------------------------
$ 947 $ 1,704 $ 1,521
===========================================================================================================
</TABLE>
Page 20
<PAGE>
AUDITORS' REPORT
To the Directors of
GHP EXPLORATION CORPORATION
We have audited the consolidated balance sheet of GHP EXPLORATION CORPORATION as
at December 31,1997 and the consolidated statements of operations and deficit
and cash flows for each of the years in the two year period ended December 31,
1997. 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 an audit to obtain
reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1997
and the results of its operations and the changes in its financial position for
each of the years in the two year period ended December 31, 1997 in accordance
with generally accepted accounting principles.
Toronto, Canada, /s/ Ernst & Young
February 17,1998 (except for note 10 ------------------------
which is as at June 24, 1998). Chartered Accountants
1
<PAGE>
GHP EXPLORATION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 3,573,368
Receivables 1,029,898
Prepaid expenses and other 106,727
------------
4,709,993
PROPERTY AND EQUIPMENT (NOTE 3) 10,987,859
------------
$ 15,697,852
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 2,387,041
SHAREHOLDERS' EQUITY
Share capital (Note 5) 14,659,806
Deficit (1,348,995)
------------
13,310,811
------------
$ 15,697,852
============
</TABLE>
Approved by the Board of Directors:
/s/ GEORGE H. PLEWES /s/ BARRY D. LASKER
----------------------------- -----------------------------
George H. Plewes Barry D. Lasker
Director Director
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
GHP EXPLORATION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION AND DEFICIT
(In U.S. Dollars)
<TABLE>
<CAPTION>
For The Years Ended December 31,
1997 1996
---- ----
<S> <C> <C>
REVENUES
Interest income $ 497,420 $ 49,407
Oil and gas sales 6,388 -
----------- -----------
503,808 49,407
EXPENSES
General and administrative (Note 7) 1,192,258 29,851
Depreciation, depletion and Amortization 23,232 -
Impairment of oil and Gas properties - -
Oil and gas production - -
----------- -----------
1,215,490 29,851
----------- -----------
NET INCOME (LOSS) FOR THE PERIOD (711,682) 19,556
DEFICIT, AT BEGINNING OF PERIOD (637,313) (656,869)
----------- -----------
DEFICIT, AT END OF PERIOD $(1,348,995) $ (637,313)
----------- -----------
NET INCOME (LOSS) PER SHARE $ (0.04) $ 0.00
=========== ===========
</TABLE>
The accompanying notes are integral part of these financial statements.
3
<PAGE>
GHP EXPLORATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss)for the period $ (711,682) $ 19,566
Add Items not Involving cash:
Depreciation, depletion and amortization 23,232 -
----------- ----------
(688,450) 19,556
Changes in non-cash working capital balances:
Increase in receivables (1,029,898) -
Decrease in prepaid expenses and other (72,293) (30,130)
Increase in accounts payable and accrued liabilities
4,532 30,092
----------- ----------
Cash provided by (used in) operating activities (1,786,109) 19,518
----------- ----------
INVESTING ACTIVITIES
Exploration and acquisition of properties (Note 3)
Non-cash portion of oil and gas property expenditures (9,979,433) (201,696)
2,350,947 -
Issuance of common shares for properties (Note 5) (143,000) -
Acquisition of corporate assets (136,684) -
----------- ----------
Cash used in investing activities (7,908,170) (201,696)
----------- ----------
FINANCING ACTIVITIES
Issuance of common shares (Note 5) 11,250,000 3,000,000
Share issue expenses (Note 5) (937,316) (62,877)
Issuance of common shares for properties (Note 5)
143,000 -
Increase in note payable - 54,600
Decrease in note payable (Note 7) - (544,498)
Issuance of common shares in
satisfaction of note payable (Note 5) - 544,498
----------- ----------
CASH PROVIDED BY FINANCING ACTIVITIES 10,455,684 2,991,723
----------- ----------
NET INCREASE (DECREASE) IN CASH AND SHORT-TERM
INVESTMENTS 761,405 2,809,545
Cash and short-term investments, beginning of period 2,811,963 2,418
----------- ----------
Cash and short-term investments, end of period $ 3,573,368 $2,811,963
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in U.S. Dollars)
1. BASIS OF PRESENTATION
On February 16, 1997, GHP Corporation, a company incorporated in the United
States, was acquired by a newly-incorporated Canadian shell company, GHP
Exploration Corporation, in exchange for 12,385,496 common shares. Since both
entities were under common control, this transaction did not constitute a
business combination under accounting principals generally accepted in Canada,
and has been accounted for to recognize the continuity of interests of the
shareholders of GHP Corporation in the consolidated assets, liabilities and
operations of GHP Exploration Corporation.
On April 17, 1997, GHP Exploration Corporation amalgamated with Laverty
Industrial Development Inc., a company whose shares were quoted on the Canadian
Dealing Network ("Laverty"), to form a new British Columbia corporation named
"GHP Exploration Corporation". Under the terms of the amalgamation agreement,
each common share of the Company and each 15 common shares of Laverty were
exchanged into one common share of the amalgamated company. A total of 465,392
common shares were issued to the former Laverty shareholders. The amalgamated
entity was continued into the Yukon Territory on April 30, 1997.
This amalgamation was accounted for as an acquisition of Laverty by GHP
Exploration Corporation using the purchase method of accounting; however, the
fair market value of the acquired net assets of Laverty was nominal.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
GHP Exploration Corporation ("GHP" or the "Company") is a junior oil and gas
company incorporated under the laws of the Yukon Territory for the purpose of
exploring for, developing and producing crude oil, natural gas and natural gas
liquids in the United States and internationally. The Company's U.S. exploration
and production activities are focused along the Texas and Louisiana gulf coast,
both onshore and offshore, and in the Delaware Basin of West Texas. The
Company's international activities are currently focused in Egypt and Tunisia.
The Company's future financial condition, including the recoverability of the
Company's oil and gas investments, and the results of its operations is
dependent upon the discovery of economically recoverable reserves, its ability
to obtain the necessary financing complete development of the reserves and the
future profitable production from its developed reserves.
5
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U. S. Dollars)
Inherent in these requirements is the importance of product prices and the costs
of acquiring, finding, developing and producing crude oil and natural gas
reserves. The prices received by the Company from the sale of its crude oil and
natural gas production are subject to fluctuation in response to changes in
supply, market uncertainty and a variety of factors beyond the Company's
control. These factors include worldwide political instability (especially in
the Middle East), the foreign supply of oil and natural gas, the level of
consumer demand, and the price and availability of alternative fuels.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and include
the accounts of the Company and its wholly-owned subsidiaries; GHP Corporation
(a Colorado corporation), GHP Exploration (Tunisia) Ltd. (a Bermuda
corporation), GHP Exploration (Egypt) Ltd. (a Bermuda corporation) and GHP
Exploration (West Gharib) Ltd. (a Bermuda corporation). A substantial portion of
the Company's activities are conducted jointly with industry partners and the
accompanying consolidated financial statements reflect only the Company's
proportionate interest in such activities.
OIL AND GAS PROPERTIES
In connection with the events described in Note 1, the Company changed its
method of accounting for oil and gas exploration and development activities from
the successful efforts method to the full cost method. Due to the limited
operating history of the Company, no adjustment to historical results was
required.
Under the full cost method of accounting, the Company capitalizes all
acquisition, exploration and development costs incurred for the purpose of
finding oil and gas reserves in cost centres on a country-by-country basis.
Costs associated with production and general corporate activities are expensed
in the period incurred. Proceeds from the sale of oil and gas properties are
accounted for as reductions to capitalized costs, and gains or losses are not
recognized unless the sale would alter the depletion rate by more than 20%.
The Company computes the provision for depreciation, depletion and amortization
(DD&A) of oil and gas properties using the unit-of-production method based upon
production and estimates of proved reserve quantities as determined by
independent reservoir engineers. Unevaluated costs are excluded from the
amortization base until the properties associated with these costs are evaluated
and determined to be productive or become impaired.
The net carrying value of the Company's oil and gas properties is limited to an
estimated recoverable amount. This amount is determined by estimating the amount
of future net revenues from proved properties based on period-end prices less
future production, general and administrative, financing and site-restoration
costs and production and income taxes, together with the value of unproved
properties at the lower of cost and realizable value. When it is determined that
the net realizable value is less than the carrying value of the oil and gas
properties the impairment is charged to income.
Provision is made in the accounts for estimated future net costs of well
abandonments and site restoration, including removal of production facilities at
the end of their useful life. Costs are based on estimates valued at year-end
prices and in accordance
6
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
with the current legislation and industry practices. The annual provision is
computed on a unit-of-production basis and is recorded as an expense for the
year.
CORPORATE ASSETS
Corporate assets consists primarily of furniture, fixtures and computer
equipment. Depreciation of these, assets is provided for on the straight-line
basis at rates between three and seven years designed to amortize the cost of
the assets over their estimated useful lives.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is determined based on the weighted average number
of common shares outstanding for the year. Common equivalent shares relating to
options and warrants to purchase common shares were not included in the weighted
average number of shares since their inclusion would not have been dilutive.
FINANCIAL INSTRUMENTS
The fair value of cash and short-term investments, receivables and accounts
payable and accrued liabilities approximates their carrying value. The Company
has no derivative financial instruments.
3. PROPERTY AND EQUIPMENT
AS AT DECEMBER 31, 1997:
<TABLE>
<CAPTION>
Accumulated Net Book
Summary Cost DD&A Value
-------- ------------ ------------ ------------
<S> <C> <C> <C>
Crude oil & natural gas properties
Proved properties (all located in the U.S.) $ 5,816,173 $ (3,446) $ 5,812,727
Unproved properties and
properties under development: (not being amortized)
United Stales 4,276,699 - 4,276,699
Egypt - - -
Tunisia 781,535 - 781,535
Corporate assets 136,684 (19, 786) 116,898
------------ ----------- ------------
$ 11,011,091 $ (23,232) $ 10,987,859
============ =========== ============
</TABLE>
The net recoverable amount calculated under the Company's ceiling test exceeded
the carrying value of the Company's proved crude oil and natural gas holdings
for the period ended and December 31, 1997, on both an undiscounted and a 10%
discounted value basis. The carrying value of capital assets are subject to
uncertainty associated with the quantity of oil and gas reserves, future
production rates, commodity prices and other factors. Future events could
materially change the carrying values recognized in the accompanying
consolidated financial statements.
4. INCOME TAXES
The Company has accumulated losses for income tax purposes in Canada and in the
United States that may be applied to reduce future years' income tax
liabilities. Such losses in Canada of $274,000 expire commencing in 2004 and
such losses in the United States of $2.8 million expire commencing in 2008.
7
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
No recognition has been given in these consolidated financial statements to the
future tax benefits that may result from the utilization of these losses for
income tax purposes. The benefit, if any, of the application of these losses
will be recognized when and to the extent they are realized.
5. SHAREHOLDERS' EQUITY SHARE CAPITAL AUTHORIZED:
GHP's authorized capital consists of an unlimited number of common shares
without par value.
The Company's share capital for the year ended December 31, 1997 is set forth
below:
<TABLE>
<CAPTION>
Common Net
Shares Consideration
------ -------------
(No. of shares)
<S> <C> <C>
Common shares outstanding at December 31,1996 12,385,496 $ 4,204,121
Shares issued for cash 4,500,000 10,312,684
Shares issued in Laverty amalgamation (Note 2) 465,392 1
Shares issued for oil and gas property 65,000 143,000
----------- -----------
Common shares outstanding at December 31, 1997 17,415,888 14,659,806
=========== ===========
</TABLE>
STOCK OPTIONS
The Company has a Director's and Management Stock Option Plan under which 1.930
million shares were reserved for issuance as at December 31, 1997. These options
are exercisable until varying dates ranging from 2001 until 2003 at prices
ranging from $.50 to $3.00 per share.
Details of options outstanding are as follows:
<TABLE>
<CAPTION>
Year Ended December 31.
-----------------------
<S> <C>
Balance, beginning of period 950,000
Granted during the period 980,000
Expired during the period -
---------
Balance, end of period 1,930,000
=========
</TABLE>
WARRANTS
As at December 31,1997, the Company had 2,144 million warrants outstanding at an
exercise price of $2.50 per share and which are exercisable until March 1, 1999.
8
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U. S. Dollars)
6. COMMITMENTS AND CONTINGENCIES
As at December 31, 1997, future minimum annual lease payments under operating
lease agreements for office premises and equipment for the next five years are
as follows: 1998-$105,000, 1999-$105,000, 2000- $102,000, 2001- $102,000, 2002-
$77,000.
7. RELATED PARTY TRANSACTIONS
FINANCIAL SERVICES
A financial services firm controlled by a director of the Company provided
services to the Company totaling $48,930 in 1997, $46,343 in 1996, $4,735 in
1995, $7,086 in 1994 and $3,164 in 1993.
NOTE PAYABLE
On October 31, 1996, the Chairman and Chief Executive Officer of the Company
converted his note receivable from the Company, totaling $544,498, into
1,088,996 common shares of the Company.
8. SEGMENT INFORMATION
As at December 31, 1997, the Company and its subsidiaries operated in the United
States, Tunisia and Canada within one dominant industry segment; the exploration
for, and the development and production of crude oil and natural gas.
Identifiable assets, revenues and net loss in each of these geographic areas are
as follows:
<TABLE>
<CAPTION>
IDENTIFIABLE
ASSETS REVENUES NET LOSS
------ -------- --------
<S> <C> <C> <C>
United States $14,916,318 $ 503,808 $ (425,728)
Tunisia 781,534 - (12,093)
Canada - - (273,861)
----------- ----------- -----------
$15,697,852 $ 503,808 $ (711,682)
=========== =========== ===========
</TABLE>
9. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"). In certain aspects,
Canadian GAAP differs from accounting principles generally accepted in the
United States ("U.S. GAAP") and from policies prescribed by the U.S. Securities
and Exchange Commission. If U.S. GAAP had been followed, net income (loss) for
each period and net income (loss) per share would have been the same as
determined under Canadian GAAP.
9
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
10. SUBSEQUENT EVENTS
PRIVATE PLACEMENT
In February 1998 the Company issued 3.888 million special warrants ("Special
Warrants") at a price of$2.00 per Special Warrant. Each Special Warrant was
exchangeable, without further payment, into one common share and one-half of one
common share purchase warrant. Each whole common share purchase warrant entitles
the holder to acquire an additional common share of the Company for a period of
one year at a price of $2.50 per share.
In addition, the Company granted to the agent of the Special Warrant placement
200,000 Agent's Special Warrants entitling the agent to acquire, without any
payment, 200,000 share purchase warrants.
In June 1998, the Company filed a final prospectus for the purpose of qualifying
3,888,000 common shares and 1,944,000 common share purchase warrants to be
issued upon the exercise or deemed exercise of the 3,888,000 Special Warrants
previously issued by the Company.
EGYPT
In March 1998, the Company entered into a Participation Agreement to acquire a
25% working interest in a 4.5 million acre block in Egypt's Sinai Peninsula
("Sinai Concession"). The minimum work requirement on the Sinai Concession
totals $6 million to the 100% interest. The Company is required under its
agreement to post a $2.4 million letter of guaranty for its share of the initial
work requirements. Pursuant to the terms of the Participation Agreement, the
Company was required to repay $1million of the concession holder's cost incurred
to date. In 1998, the Company paid the concession holder $500,000 in cash and
issued 214,592 common shares having a value of $500,000.
In Apri1 1998, the Company entered into a Farmout Agreement to acquire a 30%
working interest in the West Gharib Concession consisting of 2,530 square
kilometres located on the Western shore of the Gulf of Suez basin. The
application for the concession was accepted by the Egyptian government on
November 17, 1997, and was ratified by the Egyptian government on June 1, 1998.
The minimum work requirement on the concession totals $5 million to the 100%
interest. The Company is required under its agreement to post a $1.5 million
letter of guaranty for its share of the minimum work requirement. Pursuant to
the terms of the Farmout Agreement, the Company was also required to repay
$303,000 of the concession holder's cost incurred to date.
SHARES ISSUED TO GHP CORPORATION 401 (K) RETIREMENT PLAN
On March 30, 1998, the Company issued 25,000 Common Shares to the GHP
Corporation 401 (k) Retirement Plan.
10
<PAGE>
GHP EXPLORATION CORPORATION
CONSOLIDATED BALANCE SHEETS
(In U.S. Dollars)
<TABLE>
<CAPTION>
September 30,1998
-----------------
(Unaudited)
<S> <C>
ASSETS
CURRENT ASSETS
Cash and short-term investments $ 2,725,822
Receivables 112,812
Prepaid expenses and other 389,736
------------
3,228,370
------------
PROPERTY AND EQUIPMENT (NOTE 3) 13,248,439
------------
$ 16,476,809
============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 588,747
SHAREHOLDERS' EQUITY
Share capital (Note 5) 23,021,746
Deficit (7,133,684)
------------
15,888,062
------------
$ 16,476,809
============
</TABLE>
Approved by the Board of Directors:
/s/ GEORGE H. PLEWES /s/ BARRY D. LASKER
-------------------- -------------------
George H. Plewes Barry D. Lasker
Director Director
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
GHP EXPLORATION CORPORATION
CONSOLIDATED STATEMENTS OF OPERATION AND DEFICIT
(In U.S. Dollars)
<TABLE>
<CAPTION>
September 30,
1998
----
<S> <C>
REVENUES
Interest income $ 218,542
Oil and gas sales 304,786
-----------
523,328
EXPENSES
General and administrative 1,470,685
Depreciation, depletion and Amortization 242,924
Impairment of oil and Gas properties 4,434,572
Oil and gas production 159,836
-----------
6,308,017
-----------
NET LOSS FOR THE PERIOD (5,784,689)
DEFICIT, AT BEGINNING OF PERIOD (1,348,995)
-----------
DEFICIT, AT END OF PERIOD $(7,133,684)
-----------
NET LOSS PER SHARE $ (0.30)
===========
</TABLE>
The accompanying notes are integral part of these financial statements.
2
<PAGE>
GHP EXPLORATION CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In U.S. Dollars)
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
------------------
(Unaudited)
<S> <C>
OPERATING ACTIVITIES
Net loss for the period $(5,784,689)
Add Items not Involving cash:
Depreciation, depletion and amortization 242,924
Impairment of oil and gas properties 4,434,572
-----------
(1,107,193)
Changes in non-cash working capital balances:
Decrease in receivables 751,649
Decrease in prepaid expenses and other (283,009)
Increase in accounts payable and accrued liabilities 12,804
-----------
Cash used in operating activities (460,312)
-----------
INVESTING ACTIVITIES
Exploration and acquisition of properties (Note 3) (5,740,011)
Non-cash portion of oil and gas property expenditures (1,811,098)
Issuance of common shares for properties (Note 5) (1,145,000)
Acquisition of corporate assets (53,065)
-----------
Cash used in investing activities (8,749,174)
-----------
FINANCING ACTIVITIES
Issuance of common shares (Note 5) 7,833,500
Share issue expenses (Note 5) (616,560)
Issuance of common share for properties (Note 5) 1,145,000
-----------
Cash provided by financing activities 8,361,940
-----------
NET DECREASE IN CASH AND SHORT-TERM
INVESTMENTS (847,546)
Cash and short-term investments, beginning of period 3,573,368
-----------
Cash and short-term investments, end of period $ 2,725,822
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
(All amounts as at September 30, 1998 and for the nine months then ended are
unaudited)
1. BASIS OF PRESENTATION
On February 16, 1997, GHP Corporation, a company incorporated in the United
States, was acquired by a newly-incorporated Canadian shell company, GHP
Exploration Corporation, in exchange for 12,385,496 common shares. Since both
entities were under common control, this transaction did not constitute a
business combination under accounting principals generally accepted in Canada,
and has been accounted for to recognize the continuity of interests of the
shareholders of GHP Corporation in the consolidated assets, liabilities and
operations of GHP Exploration Corporation.
On April 17, 1997, GHP Exploration Corporation amalgamated with Laverty
Industrial Development Inc., a company whose shares were quoted on the Canadian
Dealing Network ("Laverty"), to form a new British Columbia corporation named
"GHP Exploration Corporation". Under the terms of the amalgamation agreement,
each common share of the Company and each 15 common shares of Laverty were
exchanged into one common share of the amalgamated company. A total of 465,392
common shares were issued to the former Laverty shareholders. The amalgamated
entity was continued into the Yukon Territory on April 30, 1997. This
amalgamation was accounted for as an acquisition of Laverty by GHP Exploration
Corporation using the purchase method of accounting; however, the fair market
value of the acquired net assets of Laverty was nominal.
On September 30,1998, the Company agreed to merge with Profco Resources Ltd.
("Profco") by way of a share exchange transaction, subject to the satisfaction
of certain conditions including regulatory and court approvals and approval by
the Company's shareholders. This merger was completed in the fourth quarter of
1998, with GHP shareholders receiving .87 of a common share of Profco for each
common share of GHP.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
GHP Exploration Corporation ("GHP" or the "Company") is a junior oil and gas
company incorporated under the laws of the Yukon Territory for the purpose of
exploring for, developing and producing crude oil, natural gas and natural gas
liquids in the United States and internationally. The Company's U.S. exploration
and production activities are focused along the Texas and Louisiana gulf coast,
both onshore and offshore, and in the Delaware Basin of West Texas. The
Company's international activities are currently focused in Egypt and Tunisia.
The Company's future financial condition, including the recoverability of the
Company's oil and gas investments, and the results of its operations is
dependent upon the discovery of economically recoverable reserves, its ability
to obtain the necessary financing complete development of the reserves and the
future profitable production from its developed reserves.
4
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
Inherent in these requirements is the importance of product prices and the costs
of acquiring, finding, developing and producing crude oil and natural gas
reserves. The prices received by the Company from the sale of its crude oil and
natural gas production are subject to fluctuation in response to changes in
supply, market uncertainty and a variety of factors beyond the Company's
control. These factors include worldwide political instability (especially in
the Middle East), the foreign supply of oil and natural gas, the level of
consumer demand, and the price and availability of alternative fuels.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in Canada and include
the accounts of the Company and its wholly-owned subsidiaries; GHP Corporation
(a Colorado corporation), GHP Exploration (Tunisia) Ltd. (a Bermuda
corporation), GHP Exploration (Egypt) Ltd. (a Bermuda corporation) and GHP
Exploration (West Gharib) Ltd. (a Bermuda corporation). A substantial portion of
the Company's activities are conducted jointly with industry partners and the
accompanying consolidated financial statements reflect only the Company's
proportionate interest in such activities.
OIL AND GAS PROPERTIES
In connection with the events described in Note 1, the Company changed its
method of accounting for oil and gas exploration and development activities from
the successful efforts method to the full cost method. Due to the limited
operating history of the Company, no adjustment to historical results was
required.
Under the full cost method of accounting, the Company capitalizes all
acquisition, exploration and development costs incurred for the purpose of
finding oil and gas reserves in cost centres on a country-by-country basis.
Costs associated with production and general corporate activities are expensed
in the period incurred. Proceeds from the sale of oil and gas properties are
accounted for as reductions to capitalized costs, and gains or losses are not
recognized unless the sale would alter the depletion rate by more than 20%.
The Company computes the provision for depreciation, depletion and amortization
(DD&A) of oil and gas properties using the unit-of-production method based upon
production and estimates of proved reserve quantities as determined by
independent reservoir engineers. Unevaluated costs are excluded from the
amortization base until the properties associated with these costs are evaluated
and determined to be productive or become impaired.
The net carrying value of the Company's oil and gas properties is limited to an
estimated recoverable amount. This amount is determined by estimating the amount
of future net revenues from proved properties based on period-end prices less
future production, general and administrative, financing and site-restoration
costs and production and income taxes, together with the value of unproved
properties at the lower of cost and realizable value. When it is determined that
the net realizable value is less than the carrying value of the oil and gas
properties the impairment is charged to income.
Provision is made in the accounts for estimated future net costs of well
abandonments and site restoration, including removal of production facilities at
the end of their useful life. Costs are based on estimates valued at year-end
prices and in accordance
5
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
with the current legislation and industry practices. The annual provision is
computed on a unit-of-production basis and is recorded as an expense for the
year.
CORPORATE ASSETS
Corporate assets consists primarily of furniture, fixtures and computer
equipment. Depreciation of these, assets is provided for on the straight-line
basis at rates between three and seven years designed to amortize the cost of
the assets over their estimated useful lives.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is determined based on the weighted average number
of common shares outstanding for the period. Common equivalent shares relating
to options and warrants to purchase common shares were not included in the
weighted average number of shares since their inclusion would not have been
dilutive.
FINANCIAL INSTRUMENTS
The fair value of cash and short-term investments, receivables and accounts
payable and accrued liabilities approximates their carrying value. The Company
has no derivative financial instruments.
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the unaudited interim consolidated financial
statements reflect all adjustments, which consist only of normal and reoccurring
adjustments, necessary to present fairly the financial position at September 30,
1998 and the results of operations and the changes in financial position for the
nine-month period ended September 30, 1998, in accordance with accounting
principles generally accepted in Canada.
3. PROPERTY AND EQUIPMENT
As at September 30, 1998:
<TABLE>
<CAPTION>
Accumulated Net Book
SUMMARY Cost DD&A Value
------- ------------ ------------- ------------
<S> <C> <C> <C>
Crude oil & natural gas properties
Proved properties (U.S. only) $ 12,144,429 $ (4,653,471) $ 7,490,958
Unproved properties and
properties under development:
(not being amortized)
United States 2,636,932 - 2,636,932
Egypt 1,780,442 - 1,780,442
Tunisia 1,197,615 - 1,197,615
Corporate assets 189,749 (47,257) 142,492
$ 17,949,167 $ (4,700,728) $ 13,248,439
============ ============ ============
</TABLE>
6
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
The net recoverable amount calculated under the Company's ceiling test
exceeded the carrying value of the Company's proved crude oil and natural gas
holdings for the periods ended September 30, 1998, on both an undiscounted and
a 10% discounted value basis. The carrying value of capital assets are subject
to uncertainty associated with the quantity of oil and gas reserves, future
production rates, commodity prices and other factors. Future events could
materially change the carrying values recognized in the accompanying
consolidated financial statements.
On August 31, 1998, the Company sold its interest in a non-producing oil and
gas property for cash, an overriding royalty interest and other consideration
equal to approximately $600,000. It is undeterminable whether the Company will
be required to record a loss on the sale of this asset until the results from
two wells the Company is currently drilling are known.
4. INCOME TAXES
The Company has accumulated losses for income tax purposes in Canada and in
the United States that may be applied to reduce future years' income tax
liabilities. Such losses in Canada of $274,000 expire commencing in 2004 and
such losses in the United States of$2.8 million expire commencing in 2008.
No recognition has been given in these consolidated financial statements to
the future tax benefits that may result from the utilization of these losses
for income tax purposes. The benefit, if any, of the application of these
losses will be recognized when and to the extent they are realized.
5. SHAREHOLDERS' EQUITY SHARE CAPITAL AUTHORIZED:
GHP's authorized capital consists of an unlimited number of common shares
without par value.
7
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
The Company's share capital for the nine months ended September 30, 1998 is
set forth below:
<TABLE>
<CAPTION>
Common Net
Shares Consideration
------ -------------
(No. of shares)
<S> <C> <C>
Common shares outstanding at December 31, 1997 17,415,888 14,659,806
----------- -----------
Shares issued for cash 3,888,000 7.159,440
Shares issued for oil and gas properties 514,592 1,145,000
Shares issued to the GHP Corporation 401 (k) Plan 25,000 57,500
----------- -----------
Common shares outstanding at September 30, 1998 21,843,480 $23,021,746
----------- -----------
</TABLE>
STOCK OPTIONS
The Company has a Director's and Management Stock Option Plan under which
2.277 million shares were reserved for issuance as at September 30, 1998.
These options are exercisable until varying dates ranging from 2001 until 2003
at prices ranging from $.50 to $3.00 per share.
Details of options outstanding are as follows:
<TABLE>
<CAPTION>
Nine Months
Ended
September 30,1998
-----------------
(Unaudited)
<S> <C>
Balance, beginning of period 1,930,000
Granted during the period 397,000
Expired during the period (50,000)
---------
Balance, end of period 2,277,000
=========
</TABLE>
WARRANTS
As at September 30,1998, the Company had 2,144 million warrants outstanding at
an exercise price of $2.50 per share and which are exercisable until March 1,
1999.
8
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
6. SEGMENT INFORMATION
As at December 31, 1997, the Company and its subsidiaries operated in the
United States, Egypt, Tunisia and Canada within one industry segment; the
exploration for, and the development and production of crude oil and natural
gas. Identifiable assets, revenues and net loss in each of these geographic
areas are as follows:
<TABLE>
<CAPTION>
IDENTIFIABLE
ASSETS REVENUES NET LOSS
------------ -------- --------
<S> <C> <C> <C>
United States $13,248,752 $523,328 $(5,483,097)
Egypt 2,030,442 - 10,638
Tunisia 1,197,615 - (17,093)
Canada - - (273,861)
------------ -------- -----------
$16,476,809 $523,328 $(5,784,689)
</TABLE>
7. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements have been prepared in accordance with accounting
principles generally accepted in Canada ("Canadian GAAP"). In certain aspects,
Canadian GAAP differs from accounting principles generally accepted in the
United States ("U.S. GAAP") and from policies prescribed by the U.S.
Securities and Exchange Commission.
If U.S. GAAP had been followed, net income (loss) for each period and net
income (loss) per share would have been the same as determined under Canadian
GAAP.
9
<PAGE>
GHP EXPLORATION CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In U.S. Dollars)
8. OTHER MATTERS
PRIVATE PLACEMENT
In February 1998 the Company issued 3.888 million special warrants ("Special
Warrants") at a price of$2.00 per Special Warrant. Each Special Warrant was
exchangeable, without further payment, into one common share and one-half of
one common share purchase warrant. Each whole common share purchase warrant
entitles the holder to acquire an additional common share of the Company for a
period of one year at a price of $2.50 per share.
In addition, the Company granted to the agent of the Special Warrant placement
200,000 Agent's Special Warrants entitling the agent to acquire, without any
payment, 200,000 share purchase warrants.
In June 1998, the Company filed a final prospectus for the purpose of
qualifying 3,888,000 common shares and 1,944,000 common share purchase
warrants to be issued upon the exercise or deemed exercise of the 3,888,000
Special Warrants previously issued by the Company.
EGYPT
In March 1998, the Company entered into a Participation Agreement to acquire a
25% working interest in a 4.5 million acre block in Egypt's Sinai Peninsula
("Sinai Concession"). The minimum work requirement on the Sinai Concession
totals $6 million to the 100% interest. The Company is required under its
agreement to post a $2.4 million letter of guaranty for its share of the
initial work requirements. Pursuant to the terms of the Participation
Agreement, the Company was required to repay $1million of the concession
holder's cost incurred to date. In 1998, the Company paid the concession
holder $500,000 in cash and issued 214,592 common shares having a value of
$500,000.
In Apri1 1998, the Company entered into a Farmout Agreement to acquire a 30%
working interest in the West Gharib Concession consisting of 2,530 square
kilometres located on the Western shore of the Gulf of Suez basin. The
application for the concession was accepted by the Egyptian government on
November 17, 1997, and was ratified by the Egyptian government on June 1,
1998. The minimum work requirement on the concession totals $5 million to the
100% interest. The Company is required under its agreement to post a $1.5
million letter of guaranty for its share of the minimum work requirement.
Pursuant to the terms of the Farmout Agreement, the Company was also required
to repay $303,000 of the concession holder's cost incurred to date.
SHARES ISSUED TO GHP CORPORATION 401 (k) RETIREMENT PLAN
On March 30, 1998, the Company issued 25,000 Common Shares to the GHP
Corporation 401 (k) Retirement Plan.
10
