<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A-2
-------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended: December 31, 1997 Commission file number: 019020
OPTIMA PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
CANADA 98-0115468
(State of Incorporation) (I.R.S. Employee identification No.)
#600, 595 HOWE STREET, VANCOUVER, BRITISH COLUMBIA V6C 2T5
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (604) 684-6886
Securities registered pursuant to Section 12(b) of the Act:
-------------------------------
(Title of Each Class) (Name of Each Exchange on which Registered)
COMMON STOCK, NO PAR VALUE NASDAQ (NMS) STOCK MARKET
TORONTO STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: None
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definite proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing price of the Common Stock on March 17 ,
1998 as reported on NASDAQ National Market System was approximately
U.S.$8,409,524 Shares of Common Stock held by each senior officer and director
and by each person who owns 5% or more of outstanding Common Stock have been
excluded in that such person may be deemed to be affiliated. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As at March 17, 1998, Registrant had outstanding 11,002,346 shares of Common
Stock.
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OPTIMA PETROLEUM CORPORATION
INDEX TO FORM 10-K/A-2
PART I
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 1. BUSINESS......................................................3
ITEM 2. PROPERTIES...................................................13
ITEM 3. LEGAL PROCEEDINGS............................................14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS...........15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..........................................16
ITEM 6. SELECTED FINANCIAL DATA......................................17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE..........................24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...........25
ITEM 11. EXECUTIVE COMPENSATION.......................................27
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT...................................................28
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.....................................................31
ITEM 15. SIGNATURES...................................................32
</TABLE>
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PART I
ITEM 1. BUSINESS
GENERAL
Optima Petroleum Corporation (hereinafter referred to as "Optima" or
the "Company"), along with its wholly owned United States subsidiary, Optima
Energy (U.S.) Corporation, ("Optima US"), is engaged in the business of oil and
gas exploration and development in Canada and the United States.
The Company was incorporated under the name "Lathwell Resources
Ltd.", by registration of Articles and Memorandum pursuant to the laws of the
province of British Columbia on April 11, 1983. On February 5, 1988,
consolidating its share capital on a 1 for 5 basis, the Company changed its name
to "Optima Energy Corporation". On July 9, 1992, the Company changed its name to
"Optima Petroleum Corporation" concurrently with a 1 for 2.5 consolidation of
its share capital. It was continued under the Canada Business Corporation Act
("CBCA") on May 23, 1995.
Effective December 1, 1992, the Company acquired through Optima US,
from a director of the Company, a 100 percent interest in the common shares of
Arenosa Resource Corporation ("Arenosa"), a company engaged in oil and gas
exploration and production. Arenosa was acquired at fair value as determined by
a December 1, 1992 reserve evaluation prepared by independent engineers and was
approved by the shareholders. Arenosa was subsequently amalgamated into Optima
US.
On September 8, 1995 the Company acquired 100% of the shares of
Roxbury Capital Corp. pursuant to a plan of arrangement under the CBCA. The
purchase of Roxbury Capital Corp. was accounted for as an acquisition at a
consideration of $6,186,272 in exchange for 1,374,727 common shares ($4.50 per
share).
Optima participates primarily as a working interest holder, in
numerous oil and gas prospects which are operated either by itself or by third
parties. By funding its proportionate share of drilling costs of a successfully
completed well, Optima earns an interest in the well and in the related acreage,
based on the terms of the applicable participation agreement.
The Company's oil and gas interests as at December 31, 1997 are
described under Item 2 on page(s)12-13. Canadian property interests are held by
the Company and U.S. property interest by Optima U.S. Unless otherwise indicated
all acquisitions or dispositions referred to in this section and elsewhere in
this document have been negotiated on an arm's length basis.
The Company's financial statements are stated in Canadian dollars
(CDN$) and are prepared in accordance with Canadian generally accepted
accounting principals ("GAAP"); reconciliations to U.S. GAAP are contained in
footnotes to the financial statements. The value of the U.S. Dollar in relation
to the Canadian Dollar was $1.00 U.S. equal to $1.4165 CDN as at March 17, 1998.
BUSINESS STRATEGY
During fiscal 1997, the Company closed the sale of a substantial
portion of its Canadian petroleum and natural gas interests for cash proceeds of
$16,750,000 which was utilized to eliminate bank debt and focus solely on U.S.
exploration.
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EXPLORATION STRATEGY
The Company's exploration strategy is based on the identification and
development of exploratory prospects to achieve reserve growth and to establish
long term increased cash flow. Prospect selection criteria require that each
prospect has the minimum potential for the discovery of 5,000,000 barrels of oil
or 50 billion cubic feet of natural gas to the 100% working interest. The
Company looks to acquire a significant ownership interest of between 25% and
50%.
Prospects are identified and developed in conjunction with industry
partners. The primary area of focus is the onshore Gulf Coast of Louisiana, USA.
The Company believes that substantial oil and natural gas reserves can be
established through the utilization of 3-D seismic and CAEX technology with
specific applications in the Gulf Coast of Louisiana. The application of the
sophisticated tools by experienced industry specialists can identify prospects
with multiple productive zones, maximize the probability of success and mitigate
the risk of dry holes.
The Company's philosophy is to participate in the generation of the
exploration prospects with its industry partners. The actual operation of the
drilling and development programs in respect of the Gulf Coast is vested with
local partners. The Company operates its major Canadian properties.
OIL AND NATURAL GAS RESERVES
Substantially all of the Company's oil and natural gas reserves are
located in the state of Louisiana, USA. The Meridian Resources Joint Venture was
evaluated by Ryder Scott Company whereas the remaining U.S. properties were
evaluated by Laroche Petroleum Consultants Ltd. Both independent evaluations
("Evaluation Reports") were effective December 31, 1997. Commencing in 1995, the
Company retained Ryder Scott Company to evaluate the TMR Joint Venture and had
retained the Scotia Group, Inc. to evaluate solely the Elm Grove property. AMH
Group Ltd. in 1995 and 1996 provided independent reserve appraisals for the
Canadian properties. The crude oil and natural gas reserve estimates on which
these evaluations are based were determined in accordance with generally
accepted evaluation practices.
The independent evaluation incorporates the reporting standard as set
out in Regulation S-X as they pertain to Proven Oil and Gas Reserves, Proved
Developed Oil and Gas Reserves and Proved Undeveloped Reserves. Proven Oil and
Gas Reserves means the estimated quantities of crude oil, natural gas, and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, (i.e., prices and costs as of
the date the estimate is made). Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The area of
a reservoir considered proved includes; (A) that portion delineated by drilling
and defined by gas-oil and/or oil-water contacts, if any, and (B) the
immediately adjoining portions not yet drilled, but which can be reasonable
judged as economically productive on the basis of available geological and
engineering data. In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower proved limit of
the reservoir.
(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for the
engineering analysis on which the project or program was based.
(iii) Estimates or proved reserves do not include the following: (A)
oil that may become available from known reservoirs but is classified separately
as "indicated additional reserves"; (B) crude oil, natural gas, and natural gas
liquids, the recovery of which is subject to reasonable doubt because of
uncertainty as to geology, reservoir characteristics, or economic factors; (C)
crude oil, natural gas, and natural gas liquids, that may occur in undrilled
prospects; and (D) crude oil, natural gas, and natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
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<PAGE> 5
Proved Developed Oil and Gas Reserves means reserves that can be
expected to be recovered through existing wells with existing equipment and
operating methods. Additional oil and gas expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery should be
included as "proved developed reserves" only after testing by a pilot project or
after the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
Proved Undeveloped Reserves means reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonable certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
The following table summarizes the Company's reserves. ALL
EVALUATIONS OF FUTURE NET PRODUCTION REVENUE SET FORTH IN THE TABLES ARE STATED
PRIOR TO PROVISIONS FOR INCOME TAXES AND INDIRECT COSTS. IT SHOULD NOT BE
ASSUMED THAT THE DISCOUNTED FUTURE NET REVENUES SHOWN BELOW ARE REPRESENTATIVE
OF THE FAIR MARKET VALUE OF OPTIMA'S RESERVES. Other assumptions and
qualifications relating to costs, prices for future production and other matters
are included in the Evaluation Reports Table No. 1 sets forth estimates of the
Company's proved developed and undeveloped oil/gas reserves as of December 31,
1997. The Company's estimated total proved developed and undeveloped reserves of
oil and natural gas as of December 31, 1997, 1996 and 1995 based upon the
Evaluation Reports were as follows:
<TABLE>
<CAPTION>
===================================================================================
RESERVE QUANTITY INFORMATION
WORKING INTEREST SHARE
YEAR ENDED DECEMBER 31
- -----------------------------------------------------------------------------------
TOTAL UNITED STATES CANADA
- -----------------------------------------------------------------------------------
GAS LIQUIDS GAS LIQUIDS GAS LIQUIDS
MMCF MBBLS MMCF MBBLS MMCF MBBLS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Proved
Reserves
1997 3,288 876 3,288 876 -- --
1996 20,397 1,450 5,143 1,139 15,254 311
1995 32,954 748 11,328 331 21,626 417
===================================================================================
Proved
Developed
Reserves
1997 2,333 554 2,331 554 -- --
1996 19,258 996 4,004 828 15,254 168
1995 23,823 643 9,494 308 14,329 335
===================================================================================
Proved
Undeveloped
Reserves
1997 955 322 955 322 -- --
1996 1,139 454 1,139 311 -- 143
1995 9,131 105 1,834 23 7,297 82
===================================================================================
</TABLE>
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<PAGE> 6
The Company reports its reserves at the working interest level as
compared to the net revenue interest level due to the large component of
Canadian oil and gas reserves prior to January 1, 1997. In Canada, oil and gas
rights are owned by the various provincial governments and the calculation of
production royalties, referred to as crown royalties is more complex than the
practice in the United States. Whereas crown royalty calculations incorporate
commodity price, productivity, royalty credit and royalty holidays, net revenue
interest is difficult to compare on a year to year basis. The Company's net
revenue interest reserves as at December 31, 1997 (being the first year without
Canadian assets) were;
<TABLE>
<CAPTION>
Gas Liquids
mmcf mbbls
<S> <C> <C>
Proved reserves 2,465 660
===== ===
Proved developed reserves 1,750 433
===== ===
Proven undeveloped reserves 715 227
===== ===
</TABLE>
In addition to the discussion below reference is made to the
Consolidated Financial Statements and the Supplemental Oil and Gas Information
(unaudited) included elsewhere within. Such discussion also contains information
with respect to the Company's reserves at December 31, 1997, 1996 and 1995.
For the fiscal years ended December 31, 1997, 1996 and 1995 the
Company had the following working interest production:
<TABLE>
<CAPTION>
================================================================================
PRODUCTION
WORKING INTEREST SHARE
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Oil Wells (bbls)
Canada -- 29,939 13,880
USA 141,210 123,760 57,242
Gas Wells (mcf)
Canada -- 1,608,454 763,999
USA 1,003,147 1,700,984 1,600,490
================================================================================
</TABLE>
The following table sets forth the net proved reserves of the Company
as at December 31, 1997, 1996 and 1995 and the discounted cash flow value
thereof. The reserve information was derived from the evaluation reports
provided by the Company's petroleum engineers:
<TABLE>
<CAPTION>
===============================================================================================
FUTURE CASH FLOWS
UNESCALATED PRICES AND COSTS, CANADIAN DOLLARS, WORKING INTEREST SHARES AS AT
DECEMBER 31
($000)
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Future net cash flow before taxes $17,961 $63,086 $50,801
Future net cash flow discounted at 10% before taxes 12,541 43,015 29,473
Future net cash flow discounted at 10% after taxes (1) 12,541 41,536 29,473
===============================================================================================
</TABLE>
Note: (1) Estimated income taxes have been reduced to give effect to tax
benefits related to the use of the Company's available net operating
loss carry forwards.
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In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenues therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
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 such reserves
are only attempts to define the degree of speculation involved. For these
reasons, estimates of the economically recoverable oil and natural gas reserves
attributed to any particular group of properties, classifications of such
reserves based on risk of recovery and estimates of the future net revenues
expected therefrom, prepared by different engineers or by the same engineers at
different times, may vary substantially. Therefore, the actual production,
revenues, royalties, severance and excise taxes, development and operating
expenditures with respect to the Company's reserves will likely vary from such
estimates, and such variances could be material.
In accordance with applicable requirements of the Securities and
Exchange Commission, the estimated discounted future net revenues 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
revenues 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.
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OIL AND NATURAL GAS DRILLING ACTIVITIES
The following table sets forth the gross and net numbers of
productive, or dry exploratory and development wells that the Company drilled in
each of 1997, 1996 and 1995.
<TABLE>
<CAPTION>
=====================================================================================
GROSS NET
- -------------------------------------------------------------------------------------
PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CANADA
Exploratory Wells
1997(1) n/a n/a n/a n/a n/a n/a
1996 -- 1 1 -- .25 .25
1995 4 -- 4 1.95 -- 1.95
Development Wells
1997(1) n/a n/a n/a n/a n/a n/a
1996 1 -- 1 .15 -- .15
1995 1 -- 1 .33 -- .33
- -------------------------------------------------------------------------------------
USA
Exploratory Wells
1997 4 2 6 .72 0.33 1.05
1996 5 5 10 .60 1.03 1.63
1995 1 4 5 .19 .33 .52
Development Wells
1997 2 -- 2 .33 -- .33
1996 1 -- 1 .08 -- .08
1995 1 -- 1 .04 -- .04
- -------------------------------------------------------------------------------------
TOTAL
Exploratory Wells
1997 4 2 6 .72 .33 1.05
1996 5 6 11 .60 1.28 1.88
1995 5 4 9 2.14 .33 2.00
Development Wells
1997 2 -- 2 .33 -- .33
1996 2 -- 2 .23 -- .23
1995 2 -- 2 .37 -- .37
====================================================================================
</TABLE>
(1) SOLD CANADIAN OPERATIONS EFFECTIVE JANUARY 1, 1997
PRODUCTION
The Company as at December 31, 1997 has an ownership interest in 31
producing oil and gas wells:
<TABLE>
<CAPTION>
Net Working Net Revenue
Gross Interest Interest
<S> <C> <C> <C>
Oil wells 8 0.86 0.60
Gas wells 23 4.52 3.17
-- ---- ----
31 wells 5.38 wells 3.77 wells
== ==== ====
</TABLE>
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The following table summarizes the net volumes of oil, liquids and
natural gas produced and sold, before royalty, as well as the average price
received in respect to such sales. This table segments production between Canada
and USA and represents all properties in which the Company holds interests:
<TABLE>
<CAPTION>
============================================================================================================================
NATURAL GAS (CDN$)
- ----------------------------------------------------------------------------------------------------------------------------
CANADA USA TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net Production Average Sales Net Production Average Sales Company
(mcf) (price/mcf) (mcf) (price/mcf) Production (mcf)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 -- n/a 1,003,147 $3.72 1,003,147
1996 1,608,454 $1.38 1,700,984 $3.58 3,309,438
1995 763,999 $1.59 1,600,491 $2.39 2,364,489
- ----------------------------------------------------------------------------------------------------------------------------
OIL AND LIQUIDS (CDN$)
- ----------------------------------------------------------------------------------------------------------------------------
CANADA USA TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
Net Production Average Sales Net Production Average Sales Company
(bbl) (price/bbl) (bbl) (price/bbl) Production (bbl)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997 - n/a 141,210 $27.75 141,210
1996 29,939 $28.52 123,760 $29.86 153,699
1995 13,880 $22.82 57,243 $24.50 71,122
============================================================================================================================
</TABLE>
The following table summarizes the average production costs per unit
of production, with natural gas converted to its energy equivalent at a ratio of
six thousand cubic feet of natural gas to one barrel of oil:
<TABLE>
<CAPTION>
================================================================================
CANADA USA
- --------------------------------------------------------------------------------
<S> <C> <C>
1997 n/a $3.29
1996 $2.51 $2.22
1995 $3.49 $1.34
================================================================================
</TABLE>
ACREAGE
The following table sets forth the development and undeveloped oil
and natural gas acreage in which the Company held an interest as of December 31,
1997. Undeveloped acreage is considered to be those lease acres on which wells
have not been drilled or completed to a point that would permit the production
of commercial quantities of oil and natural gas, regardless of whether or not
such acreage contains proved reserves.
================================================================================
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
- --------------------------------------------------------------------------------
GROSS NET GROSS NET
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Louisiana 5,929 829 (1) 52,592 7,292
New Mexico -- -- 2,664 661
Total 5,929 829 55,256 7,953
================================================================================
</TABLE>
(1) includes 18,742 gross acres held under option
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<PAGE> 10
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company
makes only a cursory review of title to undeveloped petroleum and natural gas
leases at the time they are acquired by the Company. However, before drilling
commences, the Company causes a thorough title search to be conducted, and any
material defects in title are remedied prior to the time actual drilling of a
well on the lease begins. To the extent title opinions or other investigations
reflect title defects, the Company, rather than the seller or lessor of the
undeveloped property, is typically obligated to cure any such title defects at
its expense. If the Company were unable to remedy or cure any title defect of a
nature such that it would not be prudent to commence drilling operations on the
property, the Company could suffer a loss of its entire investment in drilling
operations on the property. The Company believes that it has good title to its
oil and natural gas properties, some of which are subject to immaterial
encumbrances, easements and restrictions.
The oil and natural gas properties owned by the Company are also
typically subject to royalty and other similar non-cost bearing interests
customary in the industry, including the overriding royalty and participation
rights granted with the Company's acquisition of prospects and to the Company's
key employees and outside geologists. The Company does not believe that any of
these encumbrances or burdens will materially affect the Company's ownership or
use of its properties.
In respect of its Canadian operations, the majority of its leases are
in respect of petroleum and natural gas rights which are owned by the provincial
government, referred to as Crown leases and drilling licenses, specifically the
Government of Alberta. Accordingly, title opinions are normally not acquired in
Canada in respect of mineral title prior to drilling a well on Crown leases
granted by the Government of Alberta.
MARKETING OF PRODUCTION
The Company's production is marketed to third parties in conjunction
with industry partners. Typically oil is sold at the wellhead at field posted
prices and natural gas is sold under contract at a negotiated price based upon
factors normally considered in the industry, such as price regulations,
distances from the well to the pipeline, well pressure, estimated reserves,
quality of natural gas and prevailing supply / demand conditions.
MARKET CONDITIONS
Production sold during 1997 was derived solely from oil and gas
prospects in Louisiana, USA in which the Company holds interests ranging from 4
to 35 percent. The operators of these projects are responsible for the marketing
and distribution of the natural gas and oil. Natural gas and oil is sold on a
contractual basis in the spot market whereas buyers are subject to change
periodically. Approximately 99 percent of revenue during fiscal 1997 was derived
from petroleum and natural gas sales, net of royalties and production taxes.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, and to a lesser
extent, oil. Oil and natural gas prices have been extremely volatile in recent
years and affected by many factors outside the control of the Company. The
monthly average Gulf Coast spot price for natural gas at Henry Hub for 1997 has
ranged between U.S.$2.85 per mcf and U.S.$4.49 per mcf.
Because the majority of the Company's production and targeted
prospects are natural gas, the Company is affected more by changes in natural
gas prices than crude oil prices. However, the Company's recent discoveries in
Louisiana produce more revenues from oil production than from natural gas.
Accordingly, any substantial or extended decline in the price of oil and natural
gas could have a material adverse effect on the Company's financial condition
and results of operations, including reduced cash flow and borrowing capacity.
In addition, sales of oil and natural gas have historically been seasonal in
nature, which may lead to substantial differences in cash flow at various times
throughout the year. The marketability of the Company's production depends in
part upon the availability, proximity and capacity of natural gas gathering
systems, pipelines and processing facilities. Federal and state regulation of
oil and natural gas adversely affect the Company's ability to produce and market
its oil and natural gas. If market factors were to change dramatically, the
financial impact on the Company could be substantial. The availability of
markets and the volatility of product prices are beyond control of the Company
and thus represent significant risks.
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<PAGE> 11
COMPETITION
The Company operates a growing business in a competitive market.
There are a number of risks inherent to the Company's business. There is
competition from other oil and gas exploration and development companies with
operations similar to those of the Company. Nevertheless, the market for the
Company's existing and / or possible future production of petroleum and natural
gas tends to be commodity oriented, rather than company oriented. Accordingly,
the Company expects to compete by keeping its production costs low through
judicious selection of which property to develop, the practice of joint
venturing its interests, and keeping overhead charges under control.
INDUSTRY RISKS
The business of exploration for and production of oil and gas
involves a substantial risk of investment loss. Drilling oil and gas wells
involves the risk that the wells will be unproductive or that, although
productive, the wells do not produce oil or gas in economic quantities. Other
hazards, such as unusual or unexpected geological formations, pressures, fires,
blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well. Adverse weather
conditions can also hinder drilling operations. A productive well may become
uneconomic if water or other deleterious substances are encountered, which
impair or prevent the production of oil or gas from the well. In addition,
production from any well may be unmarketable if it is impregnated with water or
other deleterious substances. The marketability of crude oil and natural gas is
affected by numerous factors beyond the control of the Company. These factors
include market fluctuations, the world price of crude oil, the proximity and
capacity of crude oil and natural gas pipelines and processing equipment and
government regulations, including regulations relating to prices, taxes,
royalties, land tenures, allowable production, the import and export of crude
oil and natural gas and environmental protection. The effect of these factors
cannot be predicted.
As with any oil or gas property, there can be no assurance that oil
or gas will continue to be produced from the Company's properties. Although the
operators of the Company's properties maintain insurance in amounts customary in
the industry for liability and property damage on behalf of the working interest
participants, the Company may suffer losses from uninsurable hazards or from
hazards which the Company may choose not to insure against because of high
premium costs or other reasons.
REGULATIONS
In the United States, natural gas and oil production operations are
subject to various types of regulation by state and federal agencies.
Legislation affecting the natural gas and oil industry is under constant review
for amendment or expansion. Also, numerous departments and agencies, both
federal and state, are authorized by statute to issue rules and regulations
binding on the natural gas and oil industry and its individual members, some of
which carry substantial penalties for failure to comply.
Sale of natural gas in the United States is subject to regulation of
production, transportation and pricing by governmental regulatory agencies.
Generally, the regulatory agency in the state where a producing natural gas well
is located supervises production activities and, in addition, the transportation
of natural gas sold interstate. Prior to January, 1993, certain natural gas was
subject to regulation by the Federal Energy Regulatory Commission ("FERC") under
the Natural Gas Policy Act ("NGPA"). The NGPA prescribed maximum lawful prices
for natural gas sales effective December 1, 1978. Effective January 1, 1993,
natural gas prices were completely deregulated; consequently sales of Optima's
natural gas after that date may be made at market prices.
Although the transportation and sale of gas in interstate commerce
remains heavily regulated, the FERC has recently sought to promote greater
competition in natural gas markets by encouraging open access transportation by
interstate pipelines, with the goal of expanding opportunities for producers to
contract directly with local distribution companies and end-users.
Sales in the Unites States of crude oil, condensate and gas liquids
are not regulated and are made at market prices. States in which Optima U.S.
conducts business regulate the production and sale of natural gas and oil,
including requirements for obtaining drilling permits, the method of developing
new fields, the spacing and operations of wells and the prevention of waste of
natural gas and resources. In addition, most states regulate the rate of
production and may establish maximum daily production allowable for wells on a
market demand of conservation basis.
-11-
<PAGE> 12
To the best of it's knowledge, the Company believes that the
operators of drilling programs in which the Company is a joint venture partner,
have complied with all regulations in their respective locations involving non-
Canadian projects.
ENVIRONMENTAL
The oil and gas industry is subject to environmental regulation
pursuant to various federal, state and local laws in the U.S. These laws
regulate storage and transportation of liquid hydrocarbons, use of facilities
for treating, processing, recovering or otherwise handling hydrocarbons and
wastes therefrom and abandonment and reclamation of well and facility sites. A
breach of these laws may result in the imposition of fines and penalties.
The Company must rely on its third party operators to conduct
operations on these properties in accordance with applicable environmental and
conservation laws. The Company believes that it is currently in substantial
compliance with U.S. environmental laws and regulations. The Company has
experienced no material financial effects to date from compliance with Canadian
and U.S. environmental laws or regulations. The Company does not currently plan
any material capital expenditures for Canadian or U.S. environmental control
efforts.
The Company does not act as operator in the U.S. in respect of any of
the properties in which it holds interest nor does it intend to do so in the
future. On January 9, 1995, the Environmental Protection Agency ("EPA") issued
regulations prohibiting the discharge of produced water and produced sand
derived from oil and gas operations in certain coastal areas (primarily state
waters) of Louisiana and Texas, effective February 8, 1995. In connection with
these new regulations, however, the EPA also issued an administrative order
requiring affected permittees who must meet the no discharge requirement for
produced water to do so by January 1, 1997, unless an earlier compliance date is
required by Louisiana or Texas. The incremental cost to implement any required
re-injection program is not significant.
The Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered responsible for the release of a "hazardous
substance" into the environment. These persons include the owner or operator of
the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of hazardous substances found at the site.
Persons who are or were responsible for releases of hazardous substances under
CERCLA may be subject to joint and several liabilities for the costs of cleaning
up the hazardous substances that have been released into the environment. The
Company has not received any notification that it may be potentially responsible
for cleanup costs under CERCLA.
Stricter standards in environmental legislation may be imposed on the
oil and gas industry in the future. For instance, certain oil and gas
exploration and production wastes are currently excluded from regulations as
"hazardous waste" under the federal Resource Conservation and Recovery Act
("RCRA"). From time to time, legislation has been proposed in Congress that
would reclassify those exploration and production wastes as RCRA "hazardous
wastes" and make the reclassified wastes subject to more stringent handling,
disposal and clean-up requirements. If such legislation were to be enacted, it
could increase the operating costs of the Company as well as the oil and gas
industry in general. Furthermore, although petroleum, including crude oil and
natural gas, is exempt from CERCLA, future amendments to CERCLA may remove this
exemption. State initiatives to further regulate the disposal of oil and natural
gas waste are under consideration in certain states, and these various
initiatives could have a similar impact on the Company.
GEOGRAPHIC SEGMENTS AND FOREIGN SALES
The Company reported net revenue from operations for the fiscal year
ended December 31, 1997 of CDN $5,068,219. The net revenue is calculated as
gross sales of $7,649,415 less royalties and production taxes of $2,581,196.
-12-
<PAGE> 13
The following table sets forth results of operations for producing
activities by geographic location, as of the fiscal year ended December 31,
1997.
<TABLE>
<CAPTION>
===========================================================================================
FINANCIAL INFORMATION RELATING TO FOREIGN AND
DOMESTIC OPERATIONS AND EXPORT SALES
(CDN$)
- -------------------------------------------------------------------------------------------
1997 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Petroleum and natural gas sales, net of royalties
and petroleum taxes:
Canada $ -- $2,620,886 $1,311,114
USA 5,068,219 7,354,719 3,566,185
Operating Profit or (loss):
Canada 484,513 110,215 159,597
USA (3,730,223) 2,554,535 584,425
Petroleum and natural gas interests, net of
accumulated depletion and depreciation:
Canada 1,211,921 16,848,304 16,553,994
USA 16,484,047 17,916,046 16,945,686
===========================================================================================
</TABLE>
EMPLOYEES AND INDEPENDENT CONSULTANTS
As at December 31, 1997, the Company directly employed no part-time
or full-time individuals. However, nine individuals devote either all or a
significant portion of their time to the affairs of the Company, through
management agreements.
Said agreements consist of those which provide for the services of
the Company chairman; president and chief executive officer; secretary and chief
financial officer; financial controller; production engineer; one individual who
provides corporate communications; one individual who provides accounting
services; and two individuals who provide clerical services.
Refer to Item 10. Directors and Executive Officers of the
Registrant, Item 11. Executive Compensation, and Item 13. Certain Relationships
and Related Transactions for additional disclosure.
As of December 31, 1997, Optima US directly or indirectly employed no
full or part-time individuals. Management is administered by the same
individuals who manage the affairs of the Company.
ITEM 2. PROPERTIES
DESCRIPTION
The Company's corporate finance office is located in leased office
space at #600 -- 595 Howe Street, Vancouver, British Columbia, Canada, V6C 2T5.
The registered office of the Company is Suite 2170, Bow Valley Square Four, 250
- -- 6th Avenue, S.W., Calgary, Alberta, T2P 3R7. Properties in which the Company
holds interests are located in the states of Louisiana and New Mexico, in the
USA.
No material weather or environmental problems are anticipated. Oil
and gas exploration, development and exploitation should not be inconsistent
with the various areas' current mining, recreational and residential uses, which
are minimal. Normal practices to reduce noise, changes to air quality and water
quality are expected to be sufficient. The project operators have obtained all
necessary permits for exploration work performed to date in each of their
respective locations, and anticipate no material problems obtaining the
necessary permits to proceed with development.
The following discussion outlines the acquisition, the location, and
summary of operations, for each of the properties in which the Company holds
interests.
-13-
<PAGE> 14
ALBERTA PROPERTIES
On May 30, 1997, the Company closed the sale of a substantial
portion of its Canadian petroleum and natural gas interests for cash proceeds of
$16,750,000. The sole remaining Canadian asset is a shut-in well located at
Wildhay 05-10-58-23 W5M. This well is the subject of litigation between Optima
and the drilling contractor. Optima's legal counsel has submitted a certificate
of readiness to the Court of Queen's Bench, Judicial District of Calgary. It is
anticipated that the trial will be scheduled for either the fourth quarter of
1998 or the first quarter of 1999.
LOUISIANA PROPERTIES
TURTLE BAYOU/KENT BAYOU PROSPECT
As at December 31, 1997 there were 2 producing wells and another 4
wells being recompleted in new producing horizons. Gross daily field production
for the month of February, 1998 average 3,440 MCF of natural gas and 124 barrels
of condensate per day. The Company's working interest varies between 13.475% and
24.25% with a weighted average of barrels on proven reserves of 13.9%.
A 3-D regional seismic survey is currently being shot which
incorporates the Turtle Bayou field. The operator, American Explorer, Inc. has
negotiated access to the data set which should be available later in 1998. Any
further exploration will be contingent on the interpretation of this data set
identifying new deep drilling targets.
VALENTINE
The Company owns a 35% working interest in 24 wells at an average
82.5% net revenue interest. Currently four wells are on production at an average
daily rate of 698 MCF of natural gas and 149 barrels of oil. In mid 1997 an
agreement was entered into with a major oil and gas company who has agreed to
expend approximately US $ 10.0 million to earn a 50% interest in the Valentine
field. The funds are being expended on the permitting, shooting and processing
of a 3-D seismic survey to evaluate the deeper horizons. The gross acreage
position at Valentine as at December 31, 1997 was 29,317 gross acres including
18,742 gross acres held under option.
TMR JOINT VENTURE
Pursuant to the master participation agreement with Meridian
Resources Corporation ("TMR") dated October 1, 1993, the Company has evaluated
ten prospect areas of which five have been drilled, four rejected pursuant to
the geological and geophysical review, and one prospect at Stella is to be
drilled during 1998. Seven features have been evaluated by drilling resulting in
five gas wells, four oil wells and five dry holes. Optima US holds between 4%
and 8% working interests in the wells operated by TMR pursuant to the joint
venture.
OTHER PROPERTIES
Optima US acquired a 25% working interest in the Chrysler prospect in
Lea County, New Mexico. The target is the Devonian formation and is supported by
interpreted 3-D seismic. The first well, Savage #34-1 was spudded in December,
1996, drilled to 13,000 feet and abandoned on February 17, 1997. A second well
is scheduled to be drilled in 1998. During 1996 two more wells were drilled to
the Smackover "C" sands at East Haynesville. Both wells the Garrett #1 and
Delaney #1 are producing in the Smackover "C". Further development will occur in
this field once the Commissioner of Conservation, State of Louisiana assigns 320
acre production units in both the Smackover Lime and "C" formations. A hearing
is schedule in mid-April, 1998. The Company holds a 28% working interest at East
Haynesville.
ITEM 3. LEGAL PROCEEDINGS
There are no legal proceedings to which the Company or its subsidiary
is a party or by which any of its property is subject, other than ordinary and
routine litigation to the business of producing and exploring for oil and
natural gas, except as follows:
S.W. HOLMWOOD
The Company is a party to litigation in the United States District
Court, Western District of Louisiana (Amoco Production Company vs. Texas
Meridian Resource Exploration, Inc.) by virtue of its master participation
agreement with Meridian Resource Corporation (formally known as Texas Meridian
Resource Corporation).
-14-
<PAGE> 15
The litigation enures from a joint exploration agreement between the
plaintiff and defendant whereby adjoining petroleum and natural gas leases were
pooled on a 50% / 50% joint ownership basis. Two producing oil wells have been
drilled and placed on production. The plaintiff is claiming a breach of trust
and demands surrender of 100% of the wells ownership on a retroactive basis and
has received a favourable summary judgement. The operator pending the court's
granting of damages intends to appeal the judgement.
The Company holds a beneficial 4% working interest. Since the outcome
of this litigation is not determinable, the Company has recorded 100% of the
cumulative net operating income to date aggregating to $1,023,000 as Revenue in
Dispute in its consolidated financial statements.
WILDHAY
The Company is party to a statement of claim and counterclaim with a
drilling contractor in the Judicial District of Calgary, Court of Queen's Bench,
Alberta. The nature of this litigation is based on a contract wherein the
drilling contractor drilled a well on behalf of the Company and a joint venture
partner. The working interest participants are demanding $2,738,568 in throw
away costs and expenses plus $1,001,755 for loss of the original well as well as
$5,932,000 of reservoir damage from the drilling contractor. The well in
question is reflected in the Company's consolidated financial statements in
property and equipment at $1.1 million and an additional $1.2 million is
included as a receivable from the Company's joint venture partner.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Shareholders of the Company held on May 29,
1997, the Company's shareholders ratified the appointment of KPMG as the
Company's independent auditors for 1997. The number of shares voted for and
withheld with respect to the election of the directors and the number of shares
voted for and against and the abstention for the ratification of the appointment
of the Company's auditors were as follows:
<TABLE>
<CAPTION>
================================================================================
WITHHOLD/
NOMINEE FOR AGAINST ABSTAIN
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Robert L. Hodgkinson 7,127,717 11,371 93,450
William C. Leuschner 7,117,703 21,385 93,450
Ronald P. Bourgeois 7,108,339 30,749 93,450
Emile D. Stehelin 6,925,326 213,762 93,450
Martin G. Abbott 6,925,324 215,714 93,450
Appointment of Auditors 7,220,810 11,728 N/A
================================================================================
</TABLE>
Additionally, the following proposals were approved at the Company's annual
meeting:
<TABLE>
<CAPTION>
================================================================================
AFIRMATIVE WITHHOLD/
NOMINEE VOTES AGAINST ABSTAIN
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Approval of an 6,933,825 298,713 N/A
amendment to the
Articles of Incorporation
the permitting directors to
appoint additional
directors.
================================================================================
</TABLE>
-15-
<PAGE> 16
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK AND EQUITY
The Registrant's Common Shares and Warrants trade on the Toronto
Stock Exchange in Ontario, Canada under the symbol "OPP" and "OPPwt"
respectively. The Registrant's common shares trade on the NASDAQ in Washington,
D.C., U.S.A. under the symbol "OPPCF".
The following table lists trading volume and high and low trading
prices for the last fiscal quarters. The current market price as of March 17,
1998 was Cdn.$1.40 on the Toronto Stock Exchange, U.S.$1.16 on NASDAQ.
<TABLE>
<CAPTION>
================================================================================
STOCK TRADING DATA
COMMON SHARES (OPP)
- --------------------------------------------------------------------------------
NASDAQ TORONTO STOCK EXCHANGE
- --------------------------------------------------------------------------------
Period Ending Volume High Low Volume High Low
(U.S.$) (U.S.$) (Cdn.$) (Cdn.$) (Cdn.$)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
4th Quarter 3,501,452 $2.31 $1.50 1,278,905 $3.85 $1.50
3rd Quarter 2,252,291 $2.13 $1.38 465,172 $3.25 $2.00
2nd Quarter 1,713,721 $2.56 $2.00 488,271 $3.50 $2.75
1st Quarter 1,826,990 $3.06 $2.13 427,752 $4.10 $2.95
- --------------------------------------------------------------------------------
1996
4th Quarter 2,282,517 $3.13 $2.31 591,581 $4.50 $3.30
3rd Quarter 2,000,092 $3.37 $2.96 350,498 $5.10 $3.80
2nd Quarter 2,217,462 $3.63 $2.63 777,051 $4.90 $3.60
1st Quarter 1,679,407 $3.13 $2.50 344,848 $4.25 $3.50
- --------------------------------------------------------------------------------
1995
4th Quarter 2,112,338 $3.25 $2.13 286,456 $4.20 $3.40
3rd Quarter 2,047,898 $3.25 $2.00 427,692 $4.35 $2.90
2nd Quarter 945,104 $3.63 $2.25 98,763 $4.75 $3.25
1st Quarter 1,057,423 $4.00 $2.13 261,102 $5.25 $2.95
- --------------------------------------------------------------------------------
1994
4th Quarter 2,316,857 $4.75 $3.38 802,150 $6.38 $4.80
3rd Quarter 1,444,251 $5.50 $3.88 251,291 $7.50 $5.50
2nd Quarter 2,322,254 $5.00 $3.00 636,031 $6.88 $4.25
1st Quarter 2,534,871 $5.25 $3.50 540,257 $7.00 $4.75
- --------------------------------------------------------------------------------
</TABLE>
As at March 17, 1998 the Company has 918 shareholders of record.
The Company has not paid cash dividends on the Common Shares and does
not intend to pay cash dividends on the Common Shares in the foreseeable future.
The Company currently intends to retain its cash for the continued development
of its business including exploratory and developmental drilling activities.
Holders of common stock are entitled to one vote for each share held
of record on all matters to be acted upon by the shareholders. Holders of common
stock are entitled to receive such dividends as may be declared from time to
time by the Board of Directors, in its discretion, out of funds legally
available therefore.
-16-
<PAGE> 17
Upon liquidation, dissolution or winding up of the Registrant,
holders of common stock are entitled to receive pro rata the assets of the
Registrant, if any, remaining after payments of all debts and liabilities. No
shares have been issued subject to call or assessment. There are no preemptive
or conversion rights and no provisions for redemption or purchase for
cancellation, surrender or sinking or purchase funds.
Provisions as to the modification, amendment or variation of such
shareholder rights or provisions are contained in the Canada Business Corporate
Act ("CBCA"). Under the CBCA, the Articles of Incorporation documents otherwise
provide, that any action to be taken by a resolution of the members may be taken
by an ordinary resolution by a vote of a majority or more of the shares
represented at the shareholder's meeting.
The Registrant is a publicly-owned corporation, the shares of which
are owned by Canadian residents, U.S. residents and residents of other
countries. The Registrant is not owned or controlled directly or indirectly by
another corporation or foreign government.
ITEM 6. SELECTED FINANCIAL DATA
All financial data should be read in conjunction with the
Consolidated Financial Statements of Optima and related notes thereto included
elsewhere in this report.
The value of the U.S. Dollar in relation to the Canadian Dollar was
CDN $1.4165 as at March 17 , 1998. The following table sets forth a history of
the exchange rates for the U.S./Canadian Dollar during the past five fiscal
years:
<TABLE>
<CAPTION>
================================================================================
CANADIAN DOLLAR / U.S. DOLLAR
- --------------------------------------------------------------------------------
YEAR AVERAGE HIGH LOW CLOSE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 $1.43 $1.44 $1.41 $1.44
1996 $1.36 $1.39 $1.33 $1.37
1995 $1.37 $1.38 $1.35 $1.36
1994 $1.37 $1.41 $1.31 $1.40
1993 $1.28 $1.30 $1.28 $1.29
================================================================================
</TABLE>
The Company's financial statements are stated in Canadian Dollars
(Cdn$) and are prepared in accordance with Canadian Generally Accepted
Accounting Principles ("Canadian GAAP"); reconciliations to United States
Generally Accepted Accounting Principles ("U.S. GAAP") are contained in note 12
to the consolidated financial statements.
-17-
<PAGE> 18
The following table presents selected financial information:
<TABLE>
<CAPTION>
==================================================================================================
SELECTED FINANCIAL DATA
CANADIAN GAAP
(CDN$ IN 000)
- --------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
(NOTE 1 a) (NOTE 1 b) (NOTE 1 c)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue $7,649 $12,863 $6,762 $4,152 $3,984
Net income (loss) (4,835) 229 (1,155) (4,305) (261)
Earnings (loss) per share
(Note 2) (0.43) 0.02 (0.13) (0.56) (0.05)
Working capital (Note 3) 7,857 1,289 747 17 2,833
Resource properties 17,696 34,764 33,500 22,260 16,780
Total assets 28,143 41,215 39,178 24,794 21,171
Long-term debt 143 6,120 7,390 1,849 1,349
Shareholders equity 25,738 31,472 28,478 20,838 19,167
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
==================================================================================================
SELECTED FINANCIAL DATA
U.S. GAAP
(CDN$ IN 000)
- --------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
(NOTE 1 a) (NOTE 1 b) (NOTE 1 c)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating revenue $7,649 $12,863 $6,762 $4,152 $3,984
Net income (loss) (4,035) 229 (1,955) (4,305) (201)
Earnings (loss) per share
(Note 2) (0.36) 0.02 (0.22) (0.56) (0.03)
Working capital (Note 3) 7,857 1,289 747 17 2,833
Resource properties 17,696 33,964 32,700 22,260 16,780
Total assets 28,143 40,415 38,378 24,794 21,171
Long-term debt 143 6,120 7,390 1,849 1,349
Shareholders equity 25,738 30,672 27,678 20,838 19,167
=================================================================================================
</TABLE>
-18-
<PAGE> 19
NOTES TO SELECTED FINANCIAL DATA
1. COMPARABILITY OF SELECTED FINANCIAL DATA
(a) Effective January 1, 1997, the Company sold a substantial portion of
its Canadian petroleum and natural gas interests. The effects on 1997
results compared to prior years are discussed on page 18 under Results
of Operations.
(b) Effective September 8, 1995, the Company acquired Roxbury Capital
Corp. ("Roxbury"). As a result of this acquisition, 1996 production
and sales volumes increased significantly compared to 1995 as
discussed on page 19 under Results of Operations.
(c) 1995's results were also affected by the Roxbury acquisition and an
increase in drilling activity as discussed on page 21 under Results of
Operations.
2. NET INCOME (LOSS) PER SHARE
Net income (loss) per share for Canadian and U.S. GAAP has been calculated
based on the following weighted average numbers of shares outstanding:
<TABLE>
<CAPTION>
===========================================================================================
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Weighted average number of shares 11,159,663 10,945,927 9,031,583 7,625,417 5,380,125
- -------------------------------------------------------------------------------------------
</TABLE>
3. WORKING CAPITAL
Working capital is defined as total current assets less total current
liabilities.
4. CANADIAN AND U.S. GAAP DIFFERENCES
There are no material differences between Canadian and U.S. GAAP related to
the above selected financial data except as follows:
a) 1995's loss is $800,000 higher for U.S. GAAP as explained on page 21
under "Investment Carrying Value Adjustment". As a result of this
adjustment, resource properties, total assets and shareholder's equity
are all $800,000 lower under U.S. GAAP for 1995 and 1996.
b) 1997's loss is $800,000 lower for U.S. GAAP as a result of the
realization of the $800,000 writedown for Canadian GAAP purposes as
part of the $2,250,000 write-down as explained on page 19 under
"Investment Carrying Value".
-19-
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
=====================================================================================================
1997
1997 PERCENTAGE
WORKING INTEREST YEAR ENDED DECEMBER 31, INCREASE INCREASE
CDN$ 1997 1996 1995 (DECREASE) (DECREASE)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Volume:
Natural Gas (mcf) 1,003,147 3,309,438 2,364,489 (2,306,291) (70%)
Oil (bbl) 141,210 153,699 71,122 (12,489) (8%)
Average Price Per Unit:
Natural Gas (/mcf) $3.72 $2.51 $2.13 $1.21 48%
Oil (/bbl) $27.75 $29.60 $24.17 $ (1.85) (6%)
Gross Revenues:
Natural Gas $3,731,246 $8,313,466 $5,043,221 $(4,582,220) (55%)
Oil 3,918,169 4,549,235 1,719,186 (631,066) (14%)
--------- --------- --------- -------- ---
Total Revenue $7,649,415 $12,862,701 $6,762,407 $(5,213,286)
========== =========== ========== ===========
</TABLE>
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1997 TO TWELVE MONTHS ENDED DECEMBER 31, 1996
The Company reported a loss for the year of $4,835,220 being $0.43
per share as compared to earnings of $228,573 in 1996 or $0.02 per share. The
decline of $5,063,793 is due to a combination of production volume declines, a
$2,520,000 ceiling test writedown of U.S. resources properties and a $1,023,998
provision for revenue dispute. The 70% reduction in natural gas volume from
3,309,000 mcf in 1996 to 1,003,147 mcf is primarily due to the sale of Canadian
petroleum and natural gas assets effective January 1, 1997. Canadian operations
represented between 55% to 60% total entity production over the previous 12 to
18 months. Although oil production was also impacted by the Canadian asset sale,
new production at Back Ridge, Louisiana resulted in only an 8% decline in oil
production volume. Oil prices decline slightly by 6% whereas natural gas prices
were 48% higher than 1996.
The weighted average number of shares used in the calculation of
earnings for the year was 11,159,633 shares whereas the 1996 calculations are
based on 10,945,927 shares. The number of issued and outstanding shares was
11,318,894 as at January 1, 1997 but due to a share repurchase program was
reduced to 11,002,346 shares at December 31, 1997.
OPERATING EXPENSE
Oil and natural gas operating expenses decreased from $1,649,650 in
1996 to $1,018,211 in 1997. On a boe basis, operating expenses increased to
$3.29 as compared to $2.34 in 1996. The increase is due to workovers at
Valentine and declining gas productivity at Lake Boeuf.
INTEREST AND OTHER INCOME
Interest revenue of $250,916 in 1997 as compared to $26,095 a year
earlier reflects the significant improvement in the Company's cash position
resulting from the sale of Canadian assets.
INTEREST EXPENSE
Proceeds from the sale of Canadian assets were utilized to pay off the
Canadian bank loan. Additionally the Company reduced its U.S. bank loan to U.S.
$100,000. As a result the interest and bank charges fell to $188,468 in 1997 as
compared to $685,942 a year earlier.
-20-
<PAGE> 21
DEPLETION, DEPRECIATION AND AMORTIZATION
Depletion and depreciation decreased to $4,269,785 in 1997 from
$5,661,205 in 1996 or 25%. On a boe basis in 1997, the expense was $13.62 per
boe versus $8.03 per boe in 1996 (this comparison is based on an energy
equivalent of 6 mcf per boe). The calculation of depletion and depreciation is
based on the Evaluation Reports as at December 31, 1997 prepared by the
independent engineering consultants. These reports assume unescalated pricing
and do not recognize the results of subsequent drilling and completion activity
between December 31, 1997 and the filing date of this Annual Report.
The amortization expense of $68,494 did not change from 1996 as
deferred charges are being amortized over 60 months.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense of $1,691,779 in 1997 is an
increase of $28,368 over 1996, a change of 2%. On a boe basis, general and
administrative expenses were $5.40 per boe up 129% from $2.36 per boe in 1996.
INVESTMENT CARRYING VALUE
Pursuant to both Canadian and United States full cost method of
accounting the Company is required to meet certain ceiling tests in respect of
the carrying value of petroleum and natural gas interests on the balance sheet
as at December 31, 1997. A ceiling test writedown of $2,520,000 of petroleum and
natural gas interest was reflected in the Consolidated Statements of Operation
and Deficit.
BALANCE SHEET
The Company's total assets as at December 31, 1997 were $28,143,343
as compared to $41,214,668 a year earlier. The decline of 32% over the past year
is due to the combination of the sale of Canadian assets and paydown of Canadian
and U.S. bank loans.
Petroleum and natural gas interests were reduced to $17,695,968
(being $34,691,297 less $16,995,329) from $34,764,350 a year earlier. Canadian
petroleum and natural gas interests are $1,211,921 as at December 31, 1997 as
compared to $16,848,304 last year whereas U.S. petroleum and natural gas
interests declined by $1,431,999 from $17,916,046 as at December 31, 1996 to
$16,484,047 at the end of the current year.
In respect of liabilities and shareholders' equity, long term debt
declined to $143,050 from $6,119,670 being 98%. Shareholders' equity at December
31, 1997 decreased to $25,738,200 from $31,472,428 at the end of 1996. The
decline of $5,734,226 being 18% is a result of the net loss of $4,835,220 along
with the repurchase of common shares.
TWELVE MONTHS ENDED DECEMBER 31, 1996 TO TWELVE MONTHS ENDED DECEMBER 31, 1995
The Company realized earnings for the year of $228,573 being $0.02
per share as compared to a loss in 1995 of $1,155,062 or $0.13 per share. This
improvement of $1,384,235 is a result of increased oil and gas production and
improved commodity prices. Gross natural gas volumes increased 40% from
2,364,489 MCF to 3,309,438 MCF. The increase in oil production was 116% from
71,122 barrels to 153,699 barrels. Combined with strong oil prices, this
improvement resulted in gross oil revenue increasing by 165% from $1,719,186 in
1995 to $4,549,235 in 1996. The combined oil and gas revenue for 1996 was
$12,862,701 as compared to $6,762,407 in 1995.
The weighted average number of shares used in the calculation of
earnings for the year was 10,945,927 shares whereas the 1995 calculations are
based on 9,031,583 shares. The primary reason for this difference is the
1,374,227 shares from the Roxbury plan of arrangement which were issued in
September, 1995 and shares issued from treasury in 1996.
OPERATING EXPENSE
Oil and natural gas operating expenses increased from $926,159 in
1995 to $1,649,650 in 1996. On a boe basis, operating expenses fell to $2.34 in
1996 from $3.03 in 1995 an improvement of 23%. Canadian operating costs fell
from $3.49 per boe in 1995 to $2.51 in 1996. Although operating expenses in the
U.S. varied slightly, $2.22 per boe in 1996 versus $2.34 per boe in 1995, the
110% increase in Canadian gas production accounts for the differential.
-21-
<PAGE> 22
INTEREST AND OTHER INCOME
Interest revenue of $26,095 in 1996 did not vary significantly from
$25,784 a year earlier. Short term Canadian interest rate averaged between 3%
and 4.5% over the year.
INTEREST EXPENSE
Interest expense and bank charges were $685,942 in 1996, as compared
to $461,531 in 1995. The primary reason for this increase was that the combined
bank loan and debenture principal balance for 1996 averaged $7.5 million
Canadian, whereas in 1995 the average principal balance was below $5.0 million.
DEPLETION, DEPRECIATION AND AMORTIZATION
Depletion and depreciation increased to $5,661,205 in 1996 from
$3,207,118 in 1995, an increase of 77% on a boe basis in 1996 expense was $8.03
per boe versus $6.84 in 1995 (this comparison is based on an energy equivalent
of 6 mcf per boe). The calculation of depletion and depreciation is based on the
Evaluation Reports as at December 31, 1996, prepared by the independent
engineering consultants. These reports assume unescalated pricing and do not
recognize the results of subsequent drilling and completion between December 31,
1996 and the filing date of this Annual Report.
The amortization expense of $68,494 is derived from the costs of the
1995 Roxbury plan of arrangement in 1996. These deferred charges are being
amortized on a straight line basis over 60 months from the date of acquisition.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense of $1,663,411 in 1996 is an
increase of $193,328 over 1995, a change of 13%. On a boe basis, general and
administrative expenses were $2.36 down 25% from $3.16 per boe in 1995.
INVESTMENT CARRYING VALUE
Pursuant to both Canadian and United States full cost method of
accounting the Company is required to meet certain ceiling tests in respect of
the carrying value of petroleum and natural gas interests on the balance as at
December 31, 1996. The Company met these ceiling tests, and accordingly, no
write-down of petroleum and natural gas interests was required.
BALANCE SHEET
The Company's total assets as at December 31, 1996 were $41,214,688
as compared to $39,178,076 a year earlier. This increase of 5% over the past
year is due primarily to an improvement in working interest capital of $541,651.
Whereas the increase in petroleum and natural gas interests to
$34,764,350 (being $50,376,801 of capital costs less $15,612,451 in accumulated
depreciation, depletion and write-offs) was only $1,264,670, a reduction in the
level of year end activity reduced the advances to operators by $881,352. The
note receivable at year end of $497,692 is in respect of the sale at Elm Grove
which closed in 1996.
In respect of liabilities and shareholders' equity, long term debt
(including current portion) declined slightly to $6,850,617 from $7,390,400 a
year earlier. This change is a combination of higher bank debt and the
redemption of $829,000 of convertible debentures. Shareholders' equity at
December 31, 1996 increased to $31,472,428 from $28,477,535. This change is a
combination of $228,573 in income for the year end and the net issuance of
759,452 common shares for $2,766,320.
TWELVE MONTHS ENDED DECEMBER 31, 1995 TO DECEMBER 31, 1994
The Company realized a substantial increase in production as compared
to 1994 which contributed to the increase in gross revenue and earnings before
interest, depletion, depreciation and taxes. Gross natural gas volumes increased
80% from 1,311,852 mcf to 2,364,489 mcf whereas oil production almost doubled to
71,122 barrels from 36,337. Based on a barrel of oil equivalent basis ("boe") of
10 to 1 (1 barrel equals 10 mcf) which in our opinion reflects the comparative
financial value of oil and gas, production increased from 167,455 boe in 1994 to
307,571 in 1995, an increase of 82%. Gross revenue increased by 63% from
$4,137,141 in 1994 to $6,762,407 in 1995. Whereas 75% of the Company's
production is in the form of natural gas, the 17% decline in the average gas
price resulted in the rate of increase in revenue to lag behind in the increase
in production.
-22-
<PAGE> 23
Loss per share in 1995 fell to $0.13 per share being $1,155,062 from
$0.56 in 1994, an improvement of 77%. The weighted average number of shares used
in the calculation was 9,031,583 shares in 1995 as compared to 7,625,417 shares
in 1994 and reflects the issuance of 1,374,727 shares from the Roxbury plan of
arrangement.
OPERATING EXPENSES
Oil and natural gas operating expenses increased to $926,159 in 1995
from $615,477 in 1994. On a boe basis operating expense fell by 14% to $3.03 per
boe in 1995 from $3.68 per boe in 1994. This improvement results from the
benefit of economics of scale at Wildhay River and Lake Boeuf, where the Company
is realizing higher production levels.
INTEREST AND OTHER INCOME
Interest revenue fell from $45,628 in 1994 to $25,784 reflecting
lower short-term interest rates in Canada and a lower average cash balance
throughout 1995. Other income of $47,748 is a result of the conversion of
debentures received on the sale of marginal properties to SLN Ventures
Corporation.
INTEREST EXPENSE
Interest expense and bank charges increased to $461,351 in 1995 from
$126,399 in 1994 as a direct result of an increase of $5,561,400 in bank debt.
DEPLETION, DEPRECIATION AND AMORTIZATION
Depletion and depreciation increased substantially from $1,719,897 in
1994 to $3,207,118 in 1995, an increase of 86%. On a boe basis, the 1995 expense
was $6.84 per boe versus $6.74 in 1994 (this comparison is based on 6 mcf equal
to 1 barrel which is the energy equivalent). The calculation of depreciation and
depletion is based on the Evaluation Reports as at December 31, 1995 which
assumes unescalated commodity pricing and does not recognize the results of
subsequent drilling and completion between December 31, 1995 and the filing date
of this Annual Report.
The amortization expense of $22,587 is derived from the costs of the
plan of arrangement with Roxbury Capital Corporation. These deferred charges are
being amortized on a straight line basis over 60 months from the date of
acquisition.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense of $1,470,083 in 1995 is an
increase of $362,736 over 1994, a change of 33%. The increase is due to a
combination of consultants expense and office rent absorbed in a plan of
arrangement with Roxbury as well as on an increase in the level of remuneration.
General and administrative expenses were $3.16 per boe in 1995 as compared to
$4.34 per boe in 1994.
INVESTMENT CARRYING VALUE ADJUSTMENT
There was no write down of Petroleum and natural gas interests in
1995 as compared to $4,000,000 in 1994. The Company met the ceiling tests under
Canadian generally accepted accounting principles. Under the United States full
cost method of accounting for petroleum and natural gas interests, the Company
using oil and gas prices at the balance sheet date, would have been required to
write down its Canadian petroleum and natural gas interests by approximately
$800,000.
BALANCE SHEET
Total assets as at December 31, 1995 were $39,178,076 as compared to
$24,794,082 a year earlier. The major source of the change is in petroleum and
natural gas interest of $33,499,680 (being $43,597,549 in capital costs less
$10,097,869 in accumulated depreciation, depletion and write-offs) which
increased $11,240,175 in 1995.
During 1995 the Company participated in the drilling of 11 gross
wells (2.84 net wells). Additionally, the increase in petroleum and natural gas
interests reflects the acquisition of Roxbury and additional interests in Turtle
Bayou, Louisiana.
In respect of the liabilities and shareholders' equity, long term
debt increased from $1,849,000 as at December 31, 1994 to $7,390,400 as at
December 31, 1995. Shareholders' equity as at December 31, 1995 increased to
$28,477,535 from $20,837,561. The major change is due to the issuance of
2,137,340 shares for $8,795,036 in cash
-23-
<PAGE> 24
and assets combined with the loss for the year of $1,155,062.
LIQUIDITY AND CAPITAL RESOURCES
TWELVE MONTHS ENDED DECEMBER 31, 1997 TO TWELVE MONTHS ENDED DECEMBER 31, 1996.
Working capital as at December 31, 1997 was $7,856,820 as compared to
$1,288,511 a year earlier. Cash and cash equivalents increased to $5,660,354 at
year end from $2,055,062 at December 31, 1996. In addition, a further $703,996
of cash was held in trust to fund future abandonment and site restoration work
in the Valentine field. An additional $715,250 of cash in trust in respect of a
pending joint venture was release to the Company in early 1998 when a due
diligence review resulted in cessation of negotiations.
The increase in working capital of $6,568,309 over the fiscal year is
primarily due to the sale of the Canadian operations. Cash flow from operations
was $2,528,992 in 1997 as compared to $5,958,272 in 1996, a decline of
$3,429,280 . After utilizing $1,807,809 of cash flow to reduce accounts payable,
and a further $440,586 consumed in the sale of the Canadian petroleum and
natural interests, the Company had $577,024 to finance its capital expenditures.
A year earlier discretionary cash flow was $5,348,360, which represents a
reduction of $4,771,336.
Net receipts from investing activities for 1997 were $10,532,087 as
compared to cash requirements of $6,045,068 in 1996. Proceeds from the sale of
petroleum and natural interests, was $16,750,000 in 1997 as compared to
$1,176,849 a year earlier.
In respect of financial activities, the Company redeemed common
shares in the amount of $899,006 and reduced its bank debt by $6,707,567.
The Company as of the date of this annual report is not in a position
to forecast 1998 capital requirements. The pending merger with American
Explorer, Inc. (Refer to note 15 in the attached financial statements in respect
of subsequent events) if consummated will allow for a more precise determination
of capital requirements.
IMPACT OF ACQUISITION ON RESULTS OF OPERATIONS
In conjunction with the Company's pending merger with American
Explorer, Inc., the Company intends to emigrate and continue in Delaware. As a
result, the Company will change from reporting under Canadian GAAP to U.S. GAAP.
The Company does not expect any material adverse tax consequences or material
one time charges as a result of this emigration.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are stated in Canadian Dollars
(CDN$) and are prepared in accordance with Canadian GAAP; reconciliations to
U.S. GAAP are contained in note 12 to the financial statements. The value of the
U.S. Dollar in relation to the Canadian Dollar was U.S. $0.7060 as at March 17,
1998.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditor.
Consolidated Balance Sheets as at December 31, 1997 and 1996.
Consolidated Statements of Operations and Deficit for the Years Ended December
31, 1997, 1996 and 1995.
Consolidated Statements of Change in Financial Position for the Years Ended
December 31, 1997, 1996 and 1995.
Schedules of Consolidated General and Administrative Expense.
Notes to Consolidated Financial Statements for the Years Ended December 31,
1997, 1996 and 1995. Consolidated Supplemental Oil and Gas Information.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
-24-
<PAGE> 25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists as of December 31, 1997, the names of all
the Directors of the Registrant, their municipalities of residence, their
current positions with the Company and their principal occupations during the
past five years. Each Director will serve until the next annual general meeting
or until his successor is duly elected, unless his office is vacated in
accordance with the Articles of the Registrant. On February 28, 1998 the Company
filed a Form 8-K announcing a merger agreement between American Explorer, LLC
and the Company. Whereas the agreement is subject to a number of conditions
which must be met to give effect to merger, the agreement provides for the
nomination for election to the Board of Directors of Robert L. Hodgkinson,
William C. Leuschner, both of whom currently serve as Directors; as well as
Charles T. Goodson, Alfred J. Thomas II, Ralph J. Daigle, Robert R. Brooksher
and Daniel G. Fournerat all of whom are residents of Lafayette, Louisiana.
<TABLE>
<CAPTION>
=======================================================================================================
DIRECTORS
- -------------------------------------------------------------------------------------------------------
NAME, AGE AND MUNICIPALITY POSITION WITH PRINCIPAL OCCUPATION FOR
OF RESIDENCE THE COMPANY PREVIOUS FIVE YEARS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
WILLIAM C. LEUSCHNER, (69)** Chairman of the Board See below
Calgary, Alberta Director
ROBERT L. HODGKINSON, (48)** President, Chief Executive Officer, See below
Vancouver, British Columbia Director
RONALD P. BOURGEOIS, (46)* Chief Financial Officer, Secretary, See below
Vancouver, British Columbia Director
EMILE D. STEHELIN, (54)**/* Director See below
Whitehorse, Yukon Territories
MARTIN G. ABBOTT, (45)* Director See below
Calgary, Alberta
=======================================================================================================
</TABLE>
* Member of the Company's Audit Committee.
** Member of the Company's Executive Committee
WILLIAM C. LEUSCHNER: Director and Chairman of the Company since 1989.
Mr. Leuschner is a professional geologist with a Bachelor of Geology from Texas
A&M in 1950. In 1982, he founded Leuschner International Resources Ltd., a
private hydrocarbon consulting and independent oil and gas producing firm, of
which he is President. From 1982 to 1992, he was president of Arenosa Resource
Corporation, a private oil and gas company, subsequently sold to the Company.
Between 1984 and 1995, he was a Director of Skyline Natural Resources, a
publicly-traded company on the Alberta Stock Exchange.
ROBERT L. HODGKINSON: Director, President and Chief Executive Officer of
the Company since 1989. From 1982 to November 1990, he was Vice President with
L.O.M. Western Securities Ltd., a securities firm in Vancouver, British
Columbia. From April 1993, to September 1995, Mr. Hodgkinson was a director of
Roxbury Capital Corp.
RONALD P. BOURGEOIS: Director and Chief Financial Officer since June 1993
and Secretary since August, 1993. Mr. Bourgeois is a chartered accountant with a
Bachelor of Commerce (Hons) from the University of Manitoba in 1973 and achieved
his chartered accountant designation in 1976 after articling with Coopers &
Lybrand. Prior to his employment with the Company, Mr. Bourgeois served as the
President of the General Partner of each limited partnership managed by Lakewood
Capital Group Inc. from June, 1989 to June, 1993. He was also President of
Q-Vest Petroleum
-25-
<PAGE> 26
Management Inc. a predecessor of Lakewood from February, 1987 to June, 1989.
Both Lakewood Capital Group Inc. and Q-Vest Petroleum Management Inc. are oil
and gas investment management companies. From September 1994 to September 1995,
Mr. Bourgeois was a director and officer of Roxbury Capital Corp.
EMILE STEHELIN: Director of the Company since 1989. Since 1972 he has been
President and Director of E.V.E.M. Limited, a private holding company with
interests in real estate, property management, construction and mining.
MARTIN ABBOTT: Director of the Company since December 1994. Mr. Abbott is a
lawyer with a Bachelor of Arts from the University of Alberta in 1973 and
Bachelor of Law (LLB) from the same university in 1981. Mr. Abbott then articled
with the law firm of Fenerty, Robertson, Fraser & Hatch and later became a
partner with that firm, practising oil and gas business law, before joining the
Calgary office of Blake, Cassels & Graydon in 1991. Mr. Abbott retired from the
partnership of Blake, Cassels & Graydon to form TOM Capital Associates, Inc., a
merchant banking firm, in 1995, where he is Managing Director. Mr. Abbott is a
founder and director of Real Resources Inc., an Alberta Stock Exchange listed
company.
The directors of the Company are elected by the shareholders at each annual
general meeting and typically hold office until the next annual general meeting
at which time they may be re-elected or replaced. Casual vacancies on the board
are filled by the remaining directors and the persons filling those vacancies
hold office until the next annual general meeting at which time they may be
re-elected or replaced. The senior officers are appointed by the board and hold
office indefinitely at the pleasure of the board.
COMMITTEES OF THE BOARD: Whereas the Company has no Compensation Committee
to make recommendations as to the salary, bonuses and other compensation to be
paid to the officers. The Executive Committee exercises all of the powers of the
Board of Directors whenever the Board is not in session, subject to any
restrictions, regulations, limitations or directions which may from time to time
be imposed by the Board and save and except such acts as must by law be
performed by the directors themselves. The Executive Committee held three
meetings in 1997 and is composed of William C. Leuschner, Robert L. Hodgkinson
and Emile D. Stehelin.
The AUDIT COMMITTEE recommends to the Board of Directors the selection of
independent auditors: reviews with the auditors the scope of the audit: reviews
with the auditors and management of the Company the accounting principles,
policies and practices; reviews the audited consolidated financial statements of
the Company with the auditors prior to submission thereof to the Board of
Directors for approval; and undertakes other duties that may be delegated to it.
The Committee held one meeting in 1997 and is composed of Ronald P. Bourgeois,
Emile D. Stehelin and Martin G. Abbott.
-26-
<PAGE> 27
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
An "executive officer" is defined to mean the Chairman and any
Vice-Chairman of the Board of Directors of the Company, when that person
performs the functions of such office on a full-time basis, the President, any
Vice President in charge of a principal business unit such as sales, finance or
production, any officer of the Company or a subsidiary of the Company, or any
person who performs a policy-making function in respect of the Company, whether
or not such officer is also a director of the Company or of a subsidiary. The
following is a discussion of the compensation being paid to the Company's
executive officers.
SUMMARY OF COMPENSATION
The following table is a summary of compensation paid to the named
executive officers and directors as a group for the three most recently
completed financial years. Specific aspects of this compensation are dealt with
in further detail in the following tables.
<TABLE>
<CAPTION>
==================================================================================================================
ANNUAL COMPENSATION LONG TERM COMPENSATION
- ------------------------------------------------------------------------------------------------------------------
AWARDS PAYOUTS
- ------------------------------------------------------------------------------------------------------------------
SECURITIES RESTRICTED
FISCAL UNDER SHARES OR ALL OTHER
NAME AND POSITION YEAR OTHER ANNUAL OPTIONS RESTRICTED LTIP COMPEN-
OF PRINCIPAL ENDED SALARY BONUS COMPENSATIONS(1) GRANTED(2) SHARE UNITS PAY-OUTS(3) SATION(3)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert L. 1997 Nil N/A 150,000 Nil Nil Nil Nil
Hodgkinson 1996 Nil N/A 150,000 200,000 Nil Nil Nil
CEO, President 1995 Nil N/A 166,500 150,000 Nil Nil Nil
& Director
William C. 1997 Nil N/A 150,000 Nil Nil Nil Nil
Leuschner 1996 Nil N/A 150,000 125,000 Nil Nil Nil
Chairman, Director 1995 Nil N/A 149,000 150,000 Nil Nil Nil
Ronald P. Bourgeois 1997 Nil N/A 118,000 Nil Nil Nil Nil
CFO, Secretary 1996 Nil N/A 118,000 75,000 Nil Nil Nil
& Director 1995 Nil N/A 96,000 125,000 Nil Nil Nil
Emile D. Stehelin 1997 Nil N/A 0 25,000 Nil Nil Nil
Director 1996 Nil N/A 0 50,000 Nil Nil Nil
1995 Nil N/A 0 50,000 Nil Nil Nil
Martin G. Abbott 1997 Nil N/A 0 25,000 Nil Nil Nil
Director 1996 Nil N/A 0 Nil Nil Nil Nil
1995 Nil N/A 0 50,000 Nil Nil Nil
==================================================================================================================
</TABLE>
(1) Directors fees are paid only to non-executive directors at the rate of $500
per meeting and are paid in the form of common shares of the Company.
(2) All securities under options granted prior to the grant of April 3, 1995
were canceled pursuant to the terms and conditions of the current stock
option plan.
(3) The Company does not have a long term incentive plan nor a pension plan.
-27-
<PAGE> 28
OPTIONS GRANTED DURING THE MOST RECENTLY COMPLETED FISCAL YEAR
During the Company's most recently completed fiscal year, there were no
stock options granted to the Named Executive Officers.
AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
No incentive stock options were exercised by the Named Executive Officers,
during a the fiscal year-end.
All of the executive officers of the Company are entitled to reimbursement
of all reasonable business expenses and to receive incentive stock options as
they are granted from time to time by the Company. Reference should be made to
"Stock Options" for particulars of stock options granted to Executive Officers.
CDN$150,000 (which excluded reimbursement of expenses, office costs and
GST tax) was paid during fiscal 1997 to Leuschner International Resources Ltd.
(Leuschner), a consulting and independent oil and gas producing firm controlled
by William C. Leuschner, Chairman and Director of the Company. A February 1,
1995 Agreement between the Company and Leuschner, provides for William C.
Leuschner's services as Chairman (and one individual who provides clerical
services). The renewable contract calls for consideration of CDN$150,000 per
year, a monthly payment of $12,500, to the consulting firm.
CDN $150,000 (which excluded reimbursement of expenses, office costs and
GST tax) was paid during fiscal 1997 to Hodgkinson Equities Corporation, a
private consulting firm in which Robert L. Hodgkinson, President/CEO and a
Director of the Company, holds a 100 percent interest. The renewable contract
calls for monthly payments of CDN$12,500 to Hodgkinson Equities Corporation.
CDN$118,000 (which excluded reimbursement of expenses, office costs and
GST tax) was paid during fiscal 1997 to Ronald Bourgeois. Effective January 1,
1998 Mr. Bourgeois' contract was renewed at CDN $120,000 per annum, at a monthly
payment of CDN $10,000.
STOCK OPTIONS
Robert Hodgkinson, Emile Stehelin, William Leuschner, Ronald Bourgeois and
Martin Abbott have been granted director incentive stock options in accordance
with the policy of the Toronto Stock Exchange. These options are priced based on
the average closing price of the Company's shares for the ten trading days
immediately prior to the grant of option.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The authorized capital of the Registrant consists of 100,000,000 shares of
common stock without par value of which 11,002,346 are outstanding as of
December 31, 1997. All of the authorized shares of the Registrant are of the
same class and, once issued, rank equally as to dividends, voting powers, and
participation in assets.
Holders of common stock are entitled to one vote for each share held of
record on all matters to be acted upon by the shareholders. Holders of common
stock are entitled to receive such dividends as may be declared from time to
time by the Board of Directors, in its discretion, out of funds legally
available therefore.
Upon liquidation, dissolution or winding up of the Registrant, holders of
common stock are entitled to receive pro rata the assets of the Registrant, if
any, remaining after payments of all debts and liabilities. No shares have been
issued subject to call or assessment. There are no preemptive or conversion
rights and no provisions for redemption or purchase for cancellation, surrender,
or sinking or purchase funds.
Provisions as to the modification, amendment or variation of such
shareholder rights or provisions are contained in the CBCA. Under the CBCA, the
Company's Articles of Incorporation otherwise provide, any action to be taken by
a resolution of the members may be taken by an ordinary resolution by a vote of
a majority or more of the shares represented at the shareholders' meeting.
-28-
<PAGE> 29
<TABLE>
<S> <C>
Debt Securities to be Registered. Not applicable.
American Depository Receipts. Not applicable.
Other Securities to be Registered. Not applicable.
</TABLE>
The Registrant is a publicly-owned corporation, the shares of which are owned by
Canadian residents, U.S. residents, and residents of other countries. The
Registrant is not owned or controlled directly or indirectly by another
corporation or any foreign government.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the beneficial ownership of the Company as
at December 31, 1997 to the extent that each beneficial owner owns more than
five percent of the common shares of the Company:
<TABLE>
<CAPTION>
==============================================================================================
Per
Number of Shares Cent
Name and Address of Beneficially of
Title of Class Beneficial Owner Owned Class
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Shares E. D. Stehelin, Whitehorse, Yukon, Canada 1,326,942 12.1
Common Shares Wellington Management, Boston, MA, USA 1,079,000 9.9
Common Shares State Street Research & Management, Boston, MA, USA 572,300 5.2
- ----------------------------------------------------------------------------------------------
Total 2,996,442 27.2
==============================================================================================
</TABLE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the beneficial ownership as at December 31,
1997 of the Company's common shares by each of the Company's directors, certain
of its executive officers and by all of its directors and executive officers as
a group:
================================================================================
<TABLE>
<CAPTION>
Name and Address of Amount and Nature of Per Cent
Beneficial Owner Beneficial Ownership of Class
- --------------------------------------------------------------------------------
<S> <C> <C>
R.L. Hodgkinson, Vancouver, B.C., Canada 118,000(1) 1.1
W.C. Leuschner, Calgary, Alberta, Canada 560,225(1) 5.1
R.P. Bourgeois, Vancouver, B.C., Canada 57,151(2) 0.5
E.D. Stehelin, Whitehorse, Yukon, Canada 1,326,942(3) 12.1
M.G. Abbott, Calgary, Alberta, Canada 15,626(3) 0.1
- --------------------------------------------------------------------------------
All directors and executive
officers as a group (5 persons) 2,077,944 18.9
================================================================================
</TABLE>
NOTES:
(1) Excludes 200,000 exercisable stock options;
(2) Excludes 153,000 exercisable stock options;
(3) Excludes 100,000 exercisable stock options.
-29-
<PAGE> 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into the following material transactions with
directors, senior officers or principal holders of its securities:
(a) 7804 Yukon Inc. is a private company owned indirectly as to 47.619048%
by Robert L. Hodgkinson, president of the Company and 52.380952% by
Emile D. Stehelin, Director of the Company. 7804 Yukon Inc. has
acquired interests in the following prospects in which the Company has
participated or is participating: Valentine and Vermilion, Louisiana.
Each of these transactions were on terms as favorable as the Company
obtained from unaffiliated parties.
(b) Colima Oil Company, a company wholly owned by William C. Leuschner,
Chairman and director of the Company, has acquired interests in the
following prospects in which the Company has participated or is
participating; Valentine and East Haynesville, Louisiana. Each of
these transactions were on terms as favourable as the Company obtained
from unaffiliated parties.
(c) During October, 1995, Robert L. Hodgkinson acquired 115,000 shares of
the Company at $3.35 per share pursuant to a private placement. This
transaction was approved by the Toronto Stock Exchange.
(d) During October, 1995, William C. Leuschner through Colima Oil Company
acquired 34,500 shares of the Company at $3.35 per share pursuant to a
private placement. This transaction was approved by the Toronto Stock
Exchange.
(e) Various loans to Optima were made in 1995 by companies controlled by
Robert L. Hodgkinson, Emile D. Stehelin and William C. Leuschner. In
May, 1995, Messieurs Hodgkinson, Leuschner and Stehelin advanced to
the Company $116,500 each for a total of $349,500. These loans were
unsecured and non-interest bearing. Mr. Hodgkinson was repaid in July,
1995 and Messieurs Leuschner and Stehelin were repaid the 19th of
October, 1995. There are no loans outstanding as at December 31, 1997.
The Company pursuant to the nature of the business from time to time is
offered the opportunity to participate in oil and gas prospects. Directors,
senior officers and their associates and affiliates are allowed to participate
in these prospects only if it is determined by the Board of Directors that their
interests are over and above the level of participation that is prudent for the
Company in respects of its financial resources. Additionally, the terms of the
transactions must be similar to the terms of the participation by the Company.
Other than the above referenced situations, no Directors or Executive Officers
and no associate or affiliate of the foregoing persons has or had any material
interest, direct or indirect, in any transaction, or in any proposed
transaction, which in either such case has materially affected or will
materially affect the Company.
-30-
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) INDEX TO FINANCIAL STATEMENTS:
ANNUAL FINANCIAL STATEMENTS INCLUDED IN ITEM 8.
(i) Independent Auditor's Report.
(ii) Consolidated Balance Sheets as at December 31, 1997 and 1996.
(iii) Consolidated Statements of Operations and Deficit for the Years
Ended December 31, 1997, 1996 and 1995.
(iv) Consolidated Statement of Change in Financial Position for the Years
Ended December 31, 1997, 1996 and 1995.
(v) Schedules of Consolidated General and Administrative Expense.
(vi) Notes to Consolidated Financial Statements for the Years Ended
December 31, 1997, 1996, and 1995.
(vii) Consolidated Supplemental Oil and Gas Information.
SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS:
No financial statement schedules have been presented as they are not
applicable, not required or the required information is included in the
Consolidated Financial Statements or Notes thereto.
(b) REPORTS ON FORM 8-K.
A Form 8-K was filed on May 30, 1997 with the Securities and Exchange
Commission. The Company reported the closing of the sale of a substantial
position of its Canadian oil and gas assets for $16.8 million. This Form 8-K was
attached to the Form 10-Q filed for the quarterly period ended June 30, 1997.
(c) INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
----------- -----------------------
<S> <C>
*3.1 Articles of Incorporation
*3.2 Articles of Continuance CBCA
*3.3 Approval and Special Committee Approval of Plan of
Arrangement between Optima Petroleum Corporation
and Roxbury Capital Corporation.
*3.4 Subscription Agreements for Private Placements
entered into during 1995
*3.5 Approval of Payment in shares
*3.6 Employment/Consulting Contracts for Officers and
Directors
*3.7 Registrant's April 3, 1995 Stock Option Plan, as
amended at August 9, 1995
*3.8 Registrant's April 10, 1996 Stock Option Plan
*3.9 Approval of Share Compensation to Outside Directors
*3.10 Approval of Share Compensation to Chief Financial
Officer
*3.11 Consent of Ryder Scott Company Petroleum Engineers
*3.12 Consent of Laroche Petroleum Consultants, Ltd.
</TABLE>
____________________
* Previously filed
-31-
<PAGE> 32
ITEM 15. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
OPTIMA PETROLEUM CORPORATION
BY: _________________________________
ROBERT L. HODGKINSON
President
Chief Executive Officer and Director
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------------------------------------------------------
<S> <C> <C>
BY: /s/_________________________ President March 26, 1998
Robert L. Hodgkinson Chief Executive Officer
Director
BY: /s/_________________________ Chairman of the Board March 26, 1998
William C. Leuschner Director
BY: /s/_________________________ Secretary March 26, 1998
Ronald P. Bourgeois Chief Financial Officer
Director
</TABLE>
-32-
<PAGE> 33
OPTIMA PETROLEUM CORPORATION
Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995
<PAGE> 34
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of Optima Petroleum Corporation
as at December 31, 1997 and 1996 and the consolidated statements of operations
and deficit and changes in financial position for each of the years in the three
year period ended December 31, 1997. These consolidated 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 1996 and the results of its operations and the changes in its financial
position for each of the years in the three year period ended December 31, 1997
in accordance with generally accepted accounting principles in Canada.
Chartered Accountants
Vancouver, Canada
March 13, 1998
<PAGE> 35
OPTIMA PETROLEUM CORPORATION
Consolidated Balance Sheets
December 31, 1997 and 1996
<TABLE>
<CAPTION>
____________________________________________________________________________
1997 1996
____________________________________________________________________________
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 5,660,354 $ 2,055,062
Cash in trust 715,250 -
Accounts receivable (Note 14(b)) 2,220,151 2,516,578
Note receivable - current portion (Note4) 129,861 124,423
____________________________________________________________________________
8,725,616 4,696,063
OTHER
Cash held in trust (Note 5) 703,996 638,142
Advances to operators (Note 6) 547,200 468,864
Note receivable - long term portion
(Note 4) 265,077 373,269
Petroleum and natural gas interests,
full cost method (Note 7) 17,695,968 34,764,350
Deferred charges 205,486 273,980
____________________________________________________________________________
$ 28,143,343 $ 41,214,668
____________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Accounts payable and accrued liabilities $ 868,796 $ 2,676,605
Current portion of long-term debt (Note 8) - 730,947
____________________________________________________________________________
868,796 3,407,552
REVENUE IN DISPUTE (Note 14(a)) 1,023,998 -
LONG-TERM DEBT (Note 8) 143,050 6,119,670
SITE RESTORATION AND ABANDONMENT 369,297 215,018
SHAREHOLDERS' EQUITY
Share capital (Note 9)
Authorized 100,000,000 common shares
Issued 11,002,346 (1996 - 11,318,894)
common shares 30,891,689 31,790,695
Contributed surplus 608,222 608,222
Deficit (Note 9 (e)) (5,761,709) (926,489)
____________________________________________________________________________
25,738,202 31,472,428
____________________________________________________________________________
$ 28,143,343 $ 41,214,668
____________________________________________________________________________
</TABLE>
See accompanying notes to consolidated financial statements.
ON BEHALF OF THE BOARD
, Director , Director
<PAGE> 36
OPTIMA PETROLEUM CORPORATION
Consolidated Statements of Operations and Deficit
Years ended December 31, 1997, 1996 and 1995
<TABLE>
__________________________________________________________________________________________________________
1997 1996 1995
__________________________________________________________________________________________________________
<S> <C> <C> <C>
OPERATING REVENUE
Petroleum and natural gas sales $ 7,649,415 $ 12,862,701 $ 6,762,407
COSTS AND EXPENSES
Royalties and production taxes 2,581,196 2,887,096 1,885,108
Operating costs 1,018,211 1,649,650 926,159
Depletion and depreciation 4,269,745 5,661,205 3,207,118
Write-down of petroleum and natural gas interests 2,520,000 - -
Provision for revenue dispute (Note 14) 1,023,998 - -
Gain on sale of Canadian petroleum
and natural gas interests (518,025) - -
General and administrative (Schedule) 1,691,779 1,663,411 1,470,083
Interest and other revenue (250,916) (26,095) (73,532)
Foreign exchange gain (259,315) (3,789) (7,437)
Interest and bank charges 188,468 685,942 461,531
Amortization of deferred financing costs 68,494 68,494 22,587
__________________________________________________________________________________________________________
INCOME (LOSS) BEFORE INCOME TAXES (4,684,220) 276,787 (1,129,210)
Income taxes (Note 11) 151,000 48,214 25,852
__________________________________________________________________________________________________________
NET INCOME (LOSS) FOR THE YEAR (4,835,220) 228,573 (1,155,062)
DEFICIT, beginning of year (926,489) (1,155,062) (10,602,526)
Reduction of common share stated capital (Note
9(e)) - - 10,602,526
__________________________________________________________________________________________________________
DEFICIT, end of year $ (5,761,709) $ (926,489) $ (1,155,062)
__________________________________________________________________________________________________________
NET INCOME (LOSS) PER SHARE $ (0.43) $ 0.02 $ (0.13)
__________________________________________________________________________________________________________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 37
OPTIMA PETROLEUM CORPORATION
Consolidated Statements of Changes In Financial Position
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________
1997 1996 1995
____________________________________________________________________________________________________________
CASH PROVIDED BY (USED IN)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) for the year $ (4,835,220) $ 228,573 $ (1,155,062)
Items not involving cash
Gain on sale of Canadian petroleum
and natural gas interests (518,025) - -
Depletion, depreciation and amortization 4,338,239 5,729,699 3,229,705
Provision for revenue dispute 1,023,998 - -
Write-down of petroleum and natural gas
interests 2,520,000 - -
____________________________________________________________________________________________________________
2,528,992 5,958,272 2,074,643
Changes in non-cash working capital:
Accounts receivable 296,427 (44,195) (606,674)
Accounts payable and accrued liabilities (1,807,809) (565,717) 362,006
Net working capital adjustments on sale
of Canadian petroleum and natural gas
interests (440,586) - -
____________________________________________________________________________________________________________
577,024 5,348,360 1,829,975
FINANCING ACTIVITIES
Issue (repurchase) of
common shares (net of issue expenses) (899,006) 2,766,320 2,608,764
Increase in (repayment of) bank debt (6,707,567) 289,217 5,561,400
Note receivable 102,754 (497,692) -
Repayment of convertible debentures - (829,000) -
Issue of securities on purchase of subsidiary - - 6,186,272
Conversion of convertible debentures - - (20,000)
Site restoration and abandonment - - 36,574
____________________________________________________________________________________________________________
(7,503,819) 1,728,845 14,373,010
INVESTING ACTIVITIES
Proceeds on sale of petroleum and natural gas
interests 16,750,000 1,176,849 925,863
Petroleum and natural gas interests (5,358,473) (7,955,920) (8,558,633)
Advances to operators (78,336) 881,352 (903,652)
Cash held in trust (781,104) (638,142) -
Debentures receivable - 493,874 (493,874)
Deferred charges - (3,081) (278,783)
Purchase of subsidiary (Note 3) - - (6,186,272)
____________________________________________________________________________________________________________
10,532,087 (6,045,068) (15,495,351)
____________________________________________________________________________________________________________
INCREASE IN CASH 3,605,292 1,032,137 707,634
CASH AND CASH EQUIVALENTS, beginning of year 2,055,062 1,022,925 315,291
____________________________________________________________________________________________________________
CASH AND CASH EQUIVALENTS, end of year $ 5,660,354 $ 2,055,062 $ 1,022,925
____________________________________________________________________________________________________________
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 38
OPTIMA PETROLEUM CORPORATION
Schedules of Consolidated General and Administrative Expense
Years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
____________________________________________________________________________________
1997 1996 1995
____________________________________________________________________________________
<S> <C> <C> <C>
Consultants $ 712,014 $ 681,248 $ 652,259
Office expense 368,348 232,418 248,918
Legal, audit and tax 207,786 207,237 173,193
Investor communication 157,667 247,666 146,800
Office rent 112,776 80,685 31,879
Travel 86,843 166,708 163,181
Public listing 33,970 39,942 50,503
Directors' fees 12,375 7,507 3,350
____________________________________________________________________________________
$ 1,691,779 $ 1,663,411 $ 1,470,083
____________________________________________________________________________________
</TABLE>
<PAGE> 39
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 1
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation
The consolidated financial statements are presented in accordance with
generally accepted accounting principles applicable in Canada and
expressed in Canadian dollars. Except as disclosed in Note 12, these
financial statements conform, in all material respects, with generally
accepted accounting principles in the United States. These
consolidated financial statements reflect certain changes to
previously issued consolidated financial statements, resulting from a
review by the Securities and Exchange Commission. In accordance with
Securities and Exchange Commission requirements, the presentation of
certain items in the Statement of Operations and Deficit have been
reclassified and additional items have been added to note 12 on U.S.
and Canadian GAAP differences.
(b) Basis of consolidation
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary, Optima Energy (U.S.)
Corporation. All intercompany transactions and balances have been
eliminated.
(c) Cash and cash equivalents
Cash and cash equivalents include short-term investments with a
maturity of ninety days or less at the time of issue.
(d) Petroleum and natural gas interests
The Company follows the full cost method of accounting for petroleum
and natural gas interests whereby all costs of exploring and
developing petroleum and natural gas reserves, net of government
grants, are capitalized by individual country cost centre. Such costs
include land acquisition costs, geological and geophysical expenses,
costs of drilling both productive and non-productive wells and
overhead charges directly related to acquisition, exploration and
development activities.
The total carrying value of the Company's petroleum and natural gas
interests, less accumulated depletion, is limited to the estimated
future net revenue from production of proved reserves, based on
unescalated prices and costs plus the lower of cost and net realizable
value of unproved properties, less estimated future development costs,
general and administrative expenses, financing costs and income taxes.
The carrying value of unproved properties is reviewed periodically to
ascertain whether impairment has occurred. Where impairment has
occurred, the costs have been written down to their net realizable
value.
For each cost centre, the costs associated with proved reserves are
depleted on the unit-of-production method based on an independent
engineering estimate of proved reserves, after royalties, with natural
gas converted to its energy equivalent at a ratio of six thousand
cubic feet of natural gas to one barrel of oil.
Site restoration and abandonment costs, net of expected recoveries for
production equipment and facilities, at the end of their useful life,
are provided for on a unit-of-production basis.
================================================================================
<PAGE> 40
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 2
================================================================================
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The resource expenditure deductions for income tax purposes related to
exploration and development activities funded by flow-through share
arrangements are renounced to investors in accordance with income tax
legislation. Petroleum and natural gas interests are reduced by the
estimated renounced income tax benefits when the expenditures are
incurred.
Equipment is depreciated on a straight-line basis over five years.
(e) Deferred charges
Debt financing costs are amortized on a straight line basis over the
terms of the related loans.
(f) Foreign currency translation
The operations of the Company's U.S. subsidiary are considered
integrated with the operations of the Company, and thus, are
translated under the temporal method. Under this method, transactions
of the Company and its subsidiaries that are denominated in foreign
currencies are recorded in Canadian dollars at exchange rates in
effect at the related transaction dates. Monetary assets and
liabilities denominated in foreign currencies are adjusted to reflect
exchange rates at the balance sheet date. Exchange gains and losses
arising on the translation of monetary assets and liabilities, except
as they relate to long-term debt, are included in the determination of
income for the year. Unrealized foreign exchange gains and losses
related to long-term debt are deferred and amortized over the
remaining term of the related debt.
(g) Use of estimates
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 and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant areas requiring
the use of management estimates relate to the determination of rates
for depreciation, depletion and amortization and the impairment of
petroleum and natural gas interests. Actual results could differ from
these estimates.
(h) Fair value of financial instruments
Financial instruments include cash and cash equivalents, cash in
trust, accounts receivable, note receivable, accounts payable and
accrued liabilities and the current and long term portions of long
term debt. Fair values approximate carrying values for these financial
instruments since they are short term in nature, receivable or payable
on demand, or bear interest at floating rates.
(i) Revenue recognition
Petroleum and natural gas sales are recognized upon delivery to the
metered gate at the common carrier pipeline.
================================================================================
<PAGE> 41
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 3
================================================================================
2. SALE OF CANADIAN PETROLEUM AND NATURAL GAS INTERESTS
On May 30, 1997 the Company closed the sale of a substantial portion
of its Canadian petroleum and natural gas interests for cash proceeds
of $16,750,000.
The following pro-forma summary presents comparative consolidated results
of operations as if the disposition had occurred at the beginning of 1995:
<TABLE>
<CAPTION>
================================================================================
1997 1996 1995
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Petroleum and natural gas sales $ 7,649,415 $9,786,259 $5,233,031
Net income (loss) for the period (5,319,733) (212,883) (981,643)
Income (loss) per share (0.47) (0.02) (0.11)
================================================================================
</TABLE>
These unaudited pro-forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the disposition been made as of these dates or of results
which may occur in the future
3. PURCHASE OF ROXBURY CAPITAL CORP.
On September 8, 1995 the Company acquired Roxbury Capital Corp. ("Roxbury")
under a plan of arrangement whereby Roxbury shareholders exchanged all of
the issued and outstanding common shares of Roxbury for newly issued common
shares of the Company, at a ratio of seven Roxbury shares to one Company
share.
Net assets acquired, using the purchase method of accounting:
<TABLE>
<S> <C>
Petroleum and natural gas properties $6,775,104
Working capital (48,585)
Due to the Company (631,586)
Advances to operators 5,692
Furniture and fixtures 2,845
Deferred charges 82,802
-------------------------------------------------------------------------------
$6,186,272
===============================================================================
Consideration given, based on an independent business valuation:
1,374,727 common shares of the Company $6,186,272
===============================================================================
</TABLE>
In addition, Roxbury shareholders received a warrant for every seven
Roxbury shares exchanged, exercisable until February 28, 1997, for a
Company common share at a price of $5.10 per share. The warrants were not
exercised and expired on February 28, 1997.
The purchase price of the Company's interest exceeded the net book value of
the assets acquired by $1,389,355 and this amount has been allocated to the
Company's depletable petroleum and natural gas interests.
================================================================================
<PAGE> 42
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 4
================================================================================
3. PURCHASE OF ROXBURY CAPITAL CORP. (CONTINUED)
The operating results of Roxbury are included in the Company's consolidated
results of operations from the date of acquisition. The following unaudited
proforma summary presents the consolidated results of operations as if the
acquisition had occurred at the beginning of 1994:
<TABLE>
<CAPTION>
================================================================================
1995 1994
--------------------------------------------------------------------------------
<S> <C> <C>
Petroleum and natural gas sales,
net of royalties and production taxes $ 5,240,994 $ 3,290,811
Loss (2,239,737) (5,658,586)
Loss per share (0.22) (0.54)
================================================================================
</TABLE>
These unaudited pro-forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have
occurred had the acquisition been made as of these dates or of results
which may occur in the future.
4. NOTE RECEIVABLE
The note is due on June 18, 2000, bears no interest, is repayable in four
equal installments of $90,780 U.S. which commenced June 18, 1997 and is
secured by a mortgage on certain U.S. oil and gas properties.
5. CASH HELD IN TRUST
As a condition of a U.S. oil and gas property acquisition, the Company is
obliged to keep cash on deposit to fund future abandonment costs.
6. ADVANCES TO OPERATORS
The Company maintains joint accounts with operators engaged by the Company
to perform exploration and development work on its petroleum and natural
gas interests.
7. PETROLEUM AND NATURAL GAS INTERESTS
<TABLE>
<CAPTION>
================================================================================
United
Canada States Total
--------------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Petroleum and natural gas interests $1,171,301 $ 33,306,560 $ 34,477,861
Other equipment 183,426 30,010 213,436
--------------------------------------------------------------------------------
1,354,727 33,336,570 34,691,297
Accumulated depreciation, depletion
and write-offs (142,806) (16,852,523) (16,995,329)
--------------------------------------------------------------------------------
$1,211,921 $ 16,484,047 $ 17,695,968
================================================================================
</TABLE>
================================================================================
<PAGE> 43
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 5
================================================================================
7. PETROLEUM AND NATURAL GAS INTERESTS (CONTINUED)
<TABLE>
<CAPTION>
================================================================================================================
United
Canada States Total
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1996
Petroleum and natural gas interests $ 19,523,978 $ 30,676,552 $ 50,200,530
Other equipment 151,695 24,576 176,271
- ----------------------------------------------------------------------------------------------------------------------
19,675,673 30,701,128 50,376,801
Accumulated depreciation, depletion and write-offs (2,827,369) (12,785,082) (15,612,451)
- ----------------------------------------------------------------------------------------------------------------------
$ 16,848,304 $ 17,916,046 $ 34,764,350
================================================================================================================
</TABLE>
As at December 31, 1997, unproved properties with capitalized costs of
$2,911,126 (1996 - $4,441,055) were not subject to depletion. It is
expected that these properties will be evaluated over the next one to
three years.
In calculating estimated future net revenue at December 31, 1995, the
Company used forward sale gas prices received in February 1996. Had the
Company used actual gas prices received at December 31, 1995, a write-down
of $3,400,000 would have been required in the Company's petroleum and
natural gas interests.
8. LONG TERM DEBT
<TABLE>
<CAPTION>
======================================================================================================================
1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving $10,000,000 bank credit line, with a borrowing base of $3,969,000,
bearing interest monthly at Canadian Prime Rate plus 1% for Canadian dollar
drawdowns and U.S. Base Rate plus 0.5% for United States dollar drawdowns,
secured by a fixed and floating charge debenture and a general assignment of
book debts and Canadian oil and gas properties. The sale of the Canadian
producing properties on May 30, 1997 terminated the credit line $ -- $ 3,447,000
Revolving $5,000,000 (U.S.) bank credit line, with a borrowing base of $3,250,000
(U.S.), drawn to $100,000 (U.S.) bearing interest monthly at U.S. Base Rate plus
1.5%, secured by a revolving note due May 15, 1999 and U.S. oil and gas
properties 143,050 3,403,617
- ----------------------------------------------------------------------------------------------------------------------------
143,050 6,850,617
Less current portion of $5,000,000(U.S.) bank credit line ($533,304 U.S.) -- (730,947)
- ----------------------------------------------------------------------------------------------------------------------------
$ 143,050 $ 6,119,670
============================================================================================================================
</TABLE>
================================================================================
<PAGE> 44
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 6
================================================================================
9. SHARE CAPITAL
(a) Authorized
The authorized share capital consists of 100,000,000 common shares
without par value.
(b) Issued
<TABLE>
<CAPTION>
======================================================================================================
Number of Share
Shares Capital
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at December 31, 1994 8,422,102 $ 30,831,865
Issued for cash
Private placements 400,000 1,340,000
Exercise of options 272,500 961,250
Purchase of subsidiary 1,374,727 6,186,272
In lieu of consulting fees 85,912 324,117
Conversion of debentures 4,201 20,000
Reduction of common share stated capital -- (10,602,526)
Common share issue expenses -- (36,603)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 10,559,442 29,024,375
Issued for cash
Exercise of options 514,500 1,825,250
Private placements 260,000 1,001,000
Exercise of warrants 714 3,641
In lieu of consulting fees 9,070 32,525
In lieu of directors fees 2,068 7,507
Shares repurchased and cancelled under Normal Course Issuer Bid (26,900) (99,530)
Common share issue expenses -- (4,073)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 11,318,894 31,790,695
In lieu of consulting fees 6,000 21,780
In lieu of directors fees 552 2,004
Shares repurchased and cancelled under Normal Course Issuer Bid (323,100) (922,790)
- ------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 11,002,346 $ 30,891,689
======================================================================================================
</TABLE>
================================================================================
<PAGE> 45
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 7
================================================================================
9. SHARE CAPITAL (CONTINUED)
(c) Reserved in respect of options
<TABLE>
<CAPTION>
==================================================================================
Exercise Exercisable
Holder Number Price On or Before
-----------------------------------------------------------------------
Options
<S> <C> <C> <C>
Company directors and employees 193,000 $3.50 April 3, 1998
50,000 $3.55 April 3, 1998
100,000 $4.05 July 25, 1998
525,000 $4.15 June 12, 1999
50,000 $3.50 June 2, 1999
Non-related persons 120,000 $3.50 April 3, 1998
125,000 $3.50 June 2, 1999
-----------------------------------------------------------------------
1,163,000
-----------------------------------------------------------------------
</TABLE>
(d) Net income (loss) per share
Net income (loss) per share has been calculated based on the
following weighted average numbers of shares outstanding:
<TABLE>
<CAPTION>
===========================================================================
1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of shares 11,159,663 10,945,927 9,031,583
===========================================================================
</TABLE>
(e) Reduction of share capital
On June 22, 1995, the shareholders of the Company passed a special
resolution to reduce the stated capital of the Company's common
shares by $10,602,526 which represents the Company's deficit at
December 31, 1994.
10. RELATED PARTY TRANSACTIONS
During 1996, the Company was charged consulting expenses of $417,780 (1996
- $395,463, 1995 - 404,017) by companies related by virtue of common
directors. Office expense includes $117,600 (1996 - $115,962, 1995 -
$115,416) paid to a related company.
================================================================================
<PAGE> 46
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 8
================================================================================
11. INCOME TAXES
The benefit of the Company's losses for United States income tax purposes
has not been recognized in the accounts. The amount of these losses and
their expiry dates are as follows:
<TABLE>
<CAPTION>
==========================================================================
United States
--------------------------------------------------------------------------
<S> <C>
2006 US $1,331,731
2007 2,299,528
2008 489,925
2009 1,211,359
2010 2,440,048
2011 845,280
2012 360,000
--------------------------------------------------------------------------
US $8,977,871
==========================================================================
</TABLE>
The Company's effective tax rate differs from the expected statutory rate
either because losses have not been tax effected or because previously
unrecognized tax losses have been applied.
12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THE UNITED STATES
(a) Accounting for income taxes
Under the asset and liability method of Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), deferred income tax assets
and liabilities, reduced by a valuation allowance to an amount more
likely than not to be recovered, are measured using enacted tax rates
for the future income tax consequences attributable to differences
between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. The approximate
effect of each component of deferred income tax assets and
liabilities at December 31, 1997 is as follows:
<TABLE>
<CAPTION>
<S> <C>
Net operating losses deferred tax assets $ 5,137,000
Petroleum and natural gas interests deferred tax liabilities (44,000)
-----------------------------------------------------------------------
Net deferred tax assets 5,093,000
Less valuation allowance (5,093,000)
-----------------------------------------------------------------------
Deferred tax assets, net of valuation allowance $ --
=======================================================================
</TABLE>
The valuation allowance equals the entire amount of the net deferred
tax assets as the recognition criteria for deferred tax assets has not
been met. Therefore, there is no effect of applying the provisions of
SFAS 109 on the Company's financial statements.
================================================================================
<PAGE> 47
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 9
================================================================================
12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THE UNITED STATES (CONTINUED)
(b) Consolidated statements of changes in financial position
Under United States accounting principles, the following items are not
considered to be cash items and would not appear in the consolidated
statements of changes in financial position:
(i) the conversion of debentures
(ii) the acquisition of subsidiary in exchange for the issuance of
shares; and
(iii) the issuance of shares on settlement of consulting fees and
directors fees payable.
As a result, cash flows from operating, financing and investing
activities would be presented as follows under United States
accounting principles:
<TABLE>
<CAPTION>
========================================================================
1997 1996 1995
- ------------------------------------------------------------------------
Cash flows from:
<S> <C> <C> <C>
Operating activities $ 600,808 $ 5,388,392 $ 2,154,092
Financing activities (7,527,603) 1,688,813 7,862,621
Investing activities 10,532,087 (6,045,068) (9,309,079)
- -------------------------------------------------------------------------
Increase in cash $ 3,605,292 $ 1,032,137 $ 707,634
========================================================================
</TABLE>
Under United States accounting principles, the following supplementary
cash flow information would be disclosed:
<TABLE>
<CAPTION>
================================================================================
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest paid $188,468 $685,942 $461,531
================================================================================
Income taxes paid $151,000 $ 48,214 $ 25,852
================================================================================
</TABLE>
(c) Consolidated statements of operations and deficit
<TABLE>
<CAPTION>
======================================================================================================================
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss) reported $ (4,835,220) $ 228,573 $ (1,155,062)
Write-down of petroleum and natural gas interests 800,000 -- (800,000)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) for U.S. GAAP $ (4,035,220) $ 228,573 $ (1,955,062)
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) per share for U.S. GAAP $ (0.36) $ 0.02 $ (0.22)
- ----------------------------------------------------------------------------------------------------------------------
Weighted average shares for U.S. GAAP 11,159,663 10,945,927 9,031,583
======================================================================================================================
</TABLE>
================================================================================
<PAGE> 48
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 10
================================================================================
12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THE UNITED STATES (CONTINUED)
Under the United States full cost method of accounting for petroleum
and natural gas interests, the Company, using sales prices at the
balance sheet date, would have been required to write-down the Canadian
petroleum and natural gas interests by approximately $800,000 in 1995.
Accordingly, loss and loss per share for the year ended December 31,
1995 under United States accounting principles would be $1,955,062 and
$0.22, respectively. The sale of the Canadian petroleum and natural gas
interests in 1997 causes this $800,000 difference to reverse.
Accordingly, loss and loss per share for the year ended December 31,
1997 under United States accounting principles would be $4,035,220 and
$0.36, respectively.
There is no difference between the weighted average number of shares
for U.S. and Canadian GAAP
(d) Balance sheets
<TABLE>
<CAPTION>
==========================================================================================
1997 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Deficit reported $ (5,761,709) $ (926,489)
Write-down of petroleum and natural gas interests -- (800,000)
Reduction of common share stated capital (10,602,526) (10,602,526)
- ------------------------------------------------------------------------------------------
Deficit for U.S. GAAP $(16,364,235) $(12,329,015)
==========================================================================================
==========================================================================================
1997 1996
- ------------------------------------------------------------------------------------------
Share capital reported $ 30,891,689 $ 31,790,695
Reduction of common share stated capital 10,602,526 10,602,526
- ------------------------------------------------------------------------------------------
Share capital for U.S. GAAP $ 41,494,215 $ 42,393,221
==========================================================================================
==========================================================================================
1997 1996
- ------------------------------------------------------------------------------------------
Petroleum and natural gas interest reported $ 17,695,968 $ 34,764,350
Write-down of petroleum and natural gas interests -- (800,000)
- ------------------------------------------------------------------------------------------
Petroleum and natural gas interest under U.S. GAAP $ 17,695,968 $ 33,964,350
==========================================================================================
</TABLE>
The write-down of petroleum and natural gas interest is discussed above
under 12(c).
The reduction of common share stated capital by off-setting an
accumulated deficit against share captial is not allowed under U.S.
GAAP.
================================================================================
<PAGE> 49
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 11
================================================================================
12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA
AND THE UNITED STATES (CONTINUED)
(e) Shareholders' equity under U.S. GAAP
<TABLE>
<CAPTION>
===================================================================================
1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C>
Opening shareholders' equity under U.S. GAAP $ 30,672,428 $ 27,677,427
Net income (loss) for U.S. GAAP (4,035,220) 228,573
Net share capital issued (repurchased) (899,006) 2,766,320
- -----------------------------------------------------------------------------------
Closing shareholders' equity under U.S. GAAP $ 25,738,202 $ 30,672,428
===================================================================================
</TABLE>
(f) Concentrations of credit risk
The Company does not have any significant concentrations of credit
risk.
(g) Accounting standards
The Company is not aware of any new accounting standards which have
been established but not yet effective, including Financial Accounting
Standards 130, 131, and 132, which would have a significant or
material effect on the Company's consolidated financial statements.
13. SEGMENTED INFORMATION
All of the Company's activities are in one business segment, petroleum and
natural gas exploration, development and production.
Note 6 discloses the Company's petroleum and natural gas interests by
geographic segment, and these interests comprise the majority of
identifiable assets as at December 31, 1997 and 1996. The Company's
operations by geographic segment for the years ended December 31, 1997,
1996 and 1995 were as follows:
================================================================================
<PAGE> 50
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 12
================================================================================
13. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
=================================================================================================================================
Canada United States Total
- ---------------------------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C>
Petroleum and natural gas sales - $ 7,649,415 $ 7,649,415
Royalties and production taxes - 2,581,196 2,581,196
Operating costs - 1,018,211 1,018,211
Depreciation and depletion $ 33,512 4,236,233 4,269,745
Gain on sale of Canadian petroleum and natural gas interests (518,025) - (518,025)
Provision for revenue dispute - 1,023,998 1,023,998
Write-down of petroleum and natural gas interests - 2,520,000 2,520,000
484,513 (3,730,223) (3,245,710)
Unallocated costs:
General and administrative 1,691,779
Interest and bank charges 188,468
Interest revenue (250,916)
Foreign exchange (259,315)
Amortization of deferred financing costs 68,494
Income taxes 151,000
- ---------------------------------------------------------------------------------------------------------------------------------
Loss $(4,835,220)
=================================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------------
1996
Petroleum and natural gas sales $ 3,076,442 $ 9,786,259 $ 12,862,701
Royalties and production taxes 455,556 2,431,540 2,887,096
Operating costs 746,835 902,815 1,649,650
Depreciation and depletion 1,763,836 3,897,369 5,661,205
- ---------------------------------------------------------------------------------------------------------------------------------
110,215 2,554,535 2,664,750
Unallocated costs:
General and administrative 1,663,411
Interest and bank charges 685,942
Interest and other revenue (26,095)
Foreign exchange (3,789)
Amortization of deferred financing costs 68,494
Income taxes 48,214
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income $ 228,573
=================================================================================================================================
</TABLE>
================================================================================
<PAGE> 51
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 13
================================================================================
13. SEGMENTED INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
===================================================================================================
Canada United States Total
===================================================================================================
<S> <C> <C> <C>
1995
Petroleum and natural gas sales $ 1,529,376 $ 5,233,031 $ 6,762,407
Royalties and production taxes 218,262 1,666,846 1,885,108
Operating costs 491,795 434,364 926,159
Depreciation and depletion 659,722 2,547,396 3,207,118
- ---------------------------------------------------------------------------------------------------
159,597 584,425 744,022
Unallocated costs:
General and administrative 1,470,083
Interest and bank charges 461,531
Interest and other revenue (73,532)
Foreign exchange (7,437)
Amortization of deferred financing costs 22,587
Income taxes 25,852
- ---------------------------------------------------------------------------------------------------
Loss $(1,155,062)
===================================================================================================
</TABLE>
14. LITIGATION
(a) S.W. HOLMWOOD
The Company is a party to litigation in the United States District Court,
Western District of Louisiana (Amoco Production Company vs. Texas Meridian
Resource Exploration, Inc.) by virtue of its master participation
agreement with Meridian Resource Corporation (formally known as Texas
Meridian Resource Corporation).
The litigation enures from a joint exploration agreement between the
plaintiff and defendant whereby adjoining petroleum and natural gas leases
were pooled on a 50%/50% joint ownership basis. Two producing oil wells
have been drilled and placed on production. The plaintiff is claiming a
breach of trust and demands surrender of 100% of the wells ownership on a
retroactive basis and has received a favorable summary judgement. The
operator pending the court's granting of damages intends to appeal the
judgement.
The Company holds a beneficial 4% working interest. Since the outcome of
this litigation is not determinable, the Company has recorded 100% of the
cumulative net operating income to date aggregating to $1,023,000 as
Revenue in Dispute.
(b) WILDHAY
The Company is party to a statement of claim and counterclaim with a
drilling contractor in the Judicial District of Calgary, Court of Queen's
Bench, Alberta. The nature of this litigation is based on a contract
wherein the drilling contractor drilled a well on behalf of the Company
and a joint venture partner. The working interest participants
================================================================================
<PAGE> 52
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 14
================================================================================
14. LITIGATION (CONTINUED)
are demanding $2,738,568 in throw away costs and expenses plus $1,001,755
for loss of the original well as well as $5,932,000 of reservoir damage
from the drilling contractor. The well in question is reflected in
property and equipment at $1.1 million and an additional $1.2 million is
included as a receivable from the Company's joint venture partner.
15. SUBSEQUENT EVENT
On February 11, 1998, the Company entered into a Plan and Agreement of
Merger ("Agreement") whereby the Company's wholly owned U.S. subsidiary
Optima Energy (U.S.) Corporation would merge with American Explorer,
L.L.C., ("American") a Louisiana limited liability company, Goodson
Exploration Company ("Goodson"), a Louisiana corporation, NAB Financial,
L.L.C. ("NAB"), a Louisiana limited liability company, and Dexco Energy,
Inc. ("Dexco"), a Louisiana corporation (American, Goodson, NAB and Dexco
collectively, referred to as the acquired companies). Goodson, NAB and
Dexco are holding companies which own all the outstanding common shares of
American. American is engaged in the acquisition of and exploration for
oil and natural gas.
Under the terms of the Agreement, the acquired companies would be merged
with the Company's U.S. subsidiary in exchange for 7,335,001 common shares
of the Company to be issued to the former shareholders of the acquired
companies, which will represent approximately 40% of the post acquisition
outstanding common shares of the Company. In addition, the Company will
issue 1,667,001 in contingent stock issue rights which will be
exchangeable for common shares of the Company if the Company's share price
exceeds U.S. $5 per share for 20 consecutive trading days. The contingent
stock issue rights will terminate on the third anniversary after issuance
if the condition stated above is not met within the three year time limit.
In addition, the Company is required to provide American with a loan
agreement of U.S. $2.5 million prior to March 1, 1998, with an initial
draw of U.S. $500,000 available at that date and further draws based on
the consummation of this Agreement.
The Agreement is subject to a number of conditions which must be met to
give effect to the merger including but not limited to the following:
- the receipt of various regulatory approvals;
- the approval of the Agreement by the shareholders of the Company and
the shareholders of the acquired companies; and
- due diligence by both the Company and the acquired companies.
If the agreement is consummated, the Company will account for the
acquisition using the purchase method.
The estimated purchase price based on the recent trading history of the
Company's common shares is approximately $14 million.
================================================================================
<PAGE> 53
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 15
================================================================================
SUPPLEMENTAL INFORMATION
RESERVE QUANTITY INFORMATION
AS AT DECEMBER 31, 1997, 1996, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
Total United States Canada
---------------------------------------------------------------------------------------
Gas Liquids Gas Liquids Gas Liquids
mmcf mbbls mmcf mbbls mmcf mbbls
- ------------------------------------------------------------------------------------------------------------------------------------
PROVED
<S> <C> <C> <C> <C> <C> <C>
1995
- ----
Beginning of year 33,798 537 9,880 313 23,918 224
Revisions of previous estimates (6,911) 88 581 57 (7,492) 31
Purchase of reserves in place 8,459 179 2,495 30 5,964 149
discoveries 203 112 203 85 -- 27
Sale of reserves in place (231) (97) (231) (97) -- --
Production (2,364) (71) (1,600) (57) (764) (14)
- ------------------------------------------------------------------------------------------------------------------------------------
End of year 32,954 748 11,328 331 21,626 417
- ------------------------------------------------------------------------------------------------------------------------------------
1996
- ----
Beginning of year 32,954 748 11,328 331 21,626 417
Revisions of previous estimates (12,538) (77) (5,717) 28 (6,821) (105)
Purchase of reserves in place 1,178 200 1,178 200 -- --
Discoveries 4,088 745 2,031 716 2,057 29
Sale of reserves in place (1,976) (12) (1,976) (12) -- --
Production (3,309) (154) (1,701) (124) (1,608) (30)
- ------------------------------------------------------------------------------------------------------------------------------------
End of year 20,397 1,450 5,143 1,139 15,254 311
- ------------------------------------------------------------------------------------------------------------------------------------
1997
- ----
Beginning of year 20,397 1,450 5,143 1,139 15,254 311
Revisions of previous estimates (1,224) (124) (1,224) (124) -- --
Purchase of reserves in place -- -- -- -- -- --
Discoveries 371 -- 371 -- -- --
Sale of reserves in place (15,254) (311) -- -- (15,254) (311)
Production (1,002) (140) (1,002) (140) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
End of year 3,288 875 3,288 875 -- --
====================================================================================================================================
PROVED DEVELOPED
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 23,823 643 9,494 308 14,329 335
December 31, 1996 19,258 996 4,004 828 15,254 168
December 31, 1997 2,333 554 2,333 554 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
================================================================================
<PAGE> 54
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 16
================================================================================
SUPPLEMENTAL INFORMATION
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE CASH FLOWS
AS AT DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(000's)
-------
<S> <C> <C> <C>
PROVED
Beginning of year 41,536 29,473 24,236
Petroleum and natural gas sales, net of
royalties, production taxes and operating income (4,050) (8,326) (3,951)
Unearned petroleum and natural gas sales, net of
royalties, production taxes and operating expenses (1,024) -- --
Net changes in prices (6,992) 22,017 (3,572)
Revisions of quantity estimates (6,093) (22,936) (3,332)
Purchase of reserves in place -- 3,199 7,503
Discoveries 665 18,277 1,389
Sale of reserves in place (13,856) (1,634) (1,160)
Changes in estimated future development costs (5,083) (9,468) (5,463)
Development costs incurred 5,358 6,978 8,559
Net change in estimated future taxes 1,479 (1,479) --
Accretion of discount 2,916 2,947 2,424
Changes in production rates (timing) (2,315) 2,488 2,840
------- ------- -------
End of year 12,541 41,536 29,473
======= ======= =======
</TABLE>
================================================================================
<PAGE> 55
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 17
================================================================================
SUPPLEMENTAL INFORMATION
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES
<TABLE>
<CAPTION>
Total United Canada
States
('000's)
====================================
<S> <C> <C> <C>
1997
Future cash inflows 23,223 23,223 --
Future production costs (3,623) (3,623) --
Future development costs (1,639) (1,639) --
------------------------------------
Future net cash flows 17,961 17,961 --
10% annual discount for estimating timing of cash flows (5,420) (5,420) --
------------------------------------
12,541 12,541 --
Estimated future income taxes (discounted at 10%) -- -- --
------------------------------------
Standardized measure of discounted cash flows 12,541 12,541 --
====================================
1996
Future cash inflows 80,667 46,053 34,614
Future production costs (12,866) (4,462) (8,404)
Future development costs (4,715) (1,914) (2,801)
------------------------------------
Future net cash flows 63,086 39,677 23,409
10% annual discount for estimating timing of cash flows (20,071) (10,518) (9,553)
------------------------------------
43,015 29,159 13,856
Estimated future income taxes (discounted at 10%) (1,479) (1,479) --
------------------------------------
Standardized measure of discounted cash flows 41,536 27,680 13,856
====================================
1995
Future cash inflows 66,697 26,994 39,703
Future production costs (13,671) (2,834) (10,837)
Future development costs (2,225) (691) (1,534)
Future net cash flows 50,801 23,469 27,332
10% annual discount for estimating timing of cash flows (14,139) -- (14,139)
------------------------------------
36,662 23,469 13,193
Estimated future income taxes (discounted at 10%) -- -- --
------------------------------------
Standardized measure of discounted cash flows 36,662 23,469 13,193
====================================
</TABLE>
================================================================================
<PAGE> 56
OPTIMA PETROLEUM CORPORATION
Notes to Consolidated Financial Statements
Years ended December 31, 1997, 1996 and 1995 Page 18
================================================================================
SUPPLEMENTAL INFORMATION
CAPITALIZED COSTS RELATING TO OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
1997 1996 1995
(000's)
=====================================
<S> <C> <C> <C>
Unproved oil and gas properties
Evaluated 4,848 7,346 9,987
Unevaluated 3,943 4,441 1,997
Proved oil and gas properties 25,687 38,414 31,470
-------------------------------------
34,478 50,201 43,454
Accumulated depletion (16,834) (15,705) (10,312)
-------------------------------------
Net capitalized costs 17,644 34,496 33,142
=====================================
</TABLE>
================================================================================
