As filed with the Securities and Exchange Commission on September 15, 1997
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO
SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
----------------------
SEVEN SEAS PETROLEUM INC.
(Exact name of registrant as specified in its charter)
YUKON TERRITORY 73-1468669
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation)
SUITE 960, THREE POST OAK CENTRAL
1990 POST OAK BOULEVARD
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 622-8218
Securities to be registered pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class to be so registered each class is to be registered
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NONE NOT APPLICABLE
Securities to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES, NO PAR VALUE PER SHARE
(Title of class)
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<PAGE>
ITEM 1. BUSINESS.
GENERAL
Seven Seas Petroleum Inc. ("Seven Seas") is engaged in the exploration and
development of oil and gas properties outside of North America. Seven Seas,
through its subsidiaries, owns interests in prospective areas located in
Colombia, Australia and Papua New Guinea, all of which are in the initial stages
of exploration and development. The Company's primary business strategy is to
explore and develop its existing interests in Colombia. The Company also may
seek to acquire additional oil and gas exploration opportunities in Colombia
which management believes have large reserve potential. As a result of its focus
on its Colombian properties, the Company intends to divest or farmout its other
oil and gas interests in Australia and Papua New Guinea. Seven Seas and its
subsidiaries are collectively referred to herein as the "Company." Certain oil
industry terms used herein are defined in the Glossary of Technical Terms
attached hereto as Appendix A.
The Company's principal asset is a 57.7% interest in the Dindal Association
Contract and Rio Seco Association Contract (collectively, the "Association
Contracts") that relate to oil and gas prospects located in the Magdalena Basin
in Colombia, approximately 90 kilometers northwest of Bogota. In 1996, two
exploratory wells were drilled on the Dindal block. The Association Contracts
were issued by Empresa Colombiana de Petroleos ("ECOPETROL"), the stateowned
Colombian oil company, in March 1993 and August 1995, respectively, and provide
generally for a six-year exploration phase followed by a 22-year production
period, with partial relinquishments of acreage, excluding commercial fields,
required commencing at the end of the sixth year of each contract. See "Item 3.
Properties -Colombia -- Dindal and Rio Seco Association Contracts; Magdalena
Basin -- Terms of Association Contracts and Related Matters." For a description
of the Company's interests in these properties, see "Item 3. Properties."
The Association Contracts entitle the Company to engage in exploration,
development and production activities in approximately 106,000 acres located in
the Magdalena Basin. Recent discoveries in the Magdalena Basin include Amoco's
Opon Field, located approximately 170 kilometers north of the prospect area, and
Lasmo's Venganza/Revancha complex, located approximately 150 kilometers to the
south.
Three wells have been drilled, to date, on the Dindal block under the Dindal
Association Contract. The El Segundo #1 well commenced drilling in December
1995, reached total depth in mid-January 1996 and was placed on a long-term
production test in July 1996. The El Segundo #2 well was completed for testing
in November 1996 and a long-term production test commenced in February 1997. The
Escuela #1 well, which was drilled in 1994 prior to the acquisition of an
interest in the block by the Company, was plugged and abandoned as a dry hole. A
fourth well, El Segundo #3, has been drilled to a total depth of 6,920 feet.
Production testing on this well has commenced with results expected in late
September 1997. The following table provides a summary of the El Segundo #1 well
and the El Segundo #2 wells:
TOTAL DRILLING MAXIMUM TESTED
DEPTH PRODUCTION
WELL DATE COMPLETED (FEET) BOPD RATE (1)
- ---- -------------- ------ -------------
El Segundo #1.......... February 1996 5,718 3,415
El Segundo #2.......... November 1996 6,820 8,948
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(1) References are from production testing only and are not necessarily
indicative of flow rates that may be utilized during production. Production
tests are conducted to obtain an indication of the flow capacity of
individual wells and to give an indication of reservoir quality. Actual
producing rates from individual wells will depend on the results of an
integrated reservoir study and an engineering production plan which will
incorporate data from all wells in the field in a development plan to
maximize economic recovery of oil from the reservoir.
The first well for the Rio Seco Association Contract, the Tres Pasos #1
well, commenced drilling on September 10, 1997. The Tres Pasos #1 well is an
appraisal well for the oil accumulation discovered in the Dindal block and is
located some 2.5 kilometers northwest of the surface location of the El Segundo
#1 and #2 wells.
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The Company plans to commence drilling at least two additional wells on the
Dindal block in 1997 and to acquire permits for a seismic survey, in each case,
to determine the potential size of the oil accumulation by further delineating
the areal extent and reservoir geology of the structure. The Company has
budgeted up to $14.0 million on the exploration of the Dindal and Rio Seco
blocks in the second half of 1997, including the cost of four wells.
RISKS ASSOCIATED WITH THE COMPANY'S BUSINESS
EXPLORATION AND DEVELOPMENT RISKS. Oil and gas exploration and development
is a speculative business and involves a high degree of risk. The Company has
expended, and plans to continue to expend, significant amounts of capital on the
acquisition and exploration of its oil and gas interests. Even if the results of
such activities are favorable, subsequent drilling at significant costs must be
conducted on a property to determine if commercial development of the property
is feasible. Oil and gas drilling may involve unprofitable efforts, not only
from dry holes but from wells that are productive but do not produce sufficient
net revenues to return a profit after drilling, operating and other costs. It is
difficult to project the costs of implementing an exploratory drilling program
due to the inherent uncertainties of drilling in unknown formations, the costs
associated with encountering various drilling conditions such as overpressured
zones and tools lost in the hole, and changes in drilling plans and locations as
a result of prior exploratory wells or additional seismic data and
interpretations thereof. Exploration of offshore oil and gas properties also
involves an increased degree of risk relative to onshore or close-to-shore
exploration primarily due to greater technical obstacles. The marketability of
oil and gas which may be acquired or discovered by the Company will be affected
by the quality and viscosity of the production and by numerous factors beyond
its control, including market fluctuations, the proximity and capacity of oil
and gas pipelines and processing equipment, government regulations, including
regulations relating to prices, taxes, royalties, land tenure, importing and
exporting of oil and gas and environmental protection. There can be no assurance
the Company will be able to discover, develop and produce sufficient reserves in
Colombia or elsewhere to recover the costs and expenses incurred in connection
with the acquisition, exploration and development thereof and achieve
profitability.
NEED FOR ADDITIONAL FINANCING. The Company has no significant income
producing properties and its principal asset, its interest in the Dindal and Rio
Seco blocks, is in the early stage of exploration and development. Since
inception through June 30, 1997, the Company incurred cumulative losses of
$7,173,485 and, because of its continued exploration activities, expects that it
will continue to incur losses and that its accumulated deficit will increase
until commencement of production from the Dindal and Rio Seco blocks in
quantities sufficient to cover operating expenses related thereto. The
exploration and development of the Company's current properties and any
properties acquired in the future is expected to require substantial amounts of
additional capital which the Company may be required to raise through debt or
equity financings, encumbering properties or entering into arrangements whereby
certain costs of exploration will be paid by others to earn an interest in the
property. There can be no assurance that the additional debt or equity financing
expected to be necessary to fund the Company's operations and obligations will
be available to the Company on economically acceptable terms. If sufficient
funds cannot be raised to meet the Company's obligations with respect to a
property, the Company may elect to forfeit its interest in such property. The
Company does not anticipate that it will lose any of its Colombian property to
forfeiture in the next 18 months. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RISKS INHERENT IN FOREIGN OPERATIONS. There are risks inherent in the fact
that the Company has acquired and intends to continue to acquire interests in
oil and gas properties located outside of North America in some cases in
countries which may be considered politically and economically unstable.
Foreign properties, operations or investments may be adversely affected by
local political and economic developments, exchange controls, currency
fluctuations, royalty and tax increases, retroactive tax claims, renegotiation
of contracts with governmental entities, expropriation, import and export
regulations and other foreign laws or policies governing operations of
foreign-based companies, as well as by laws and policies of the United States
affecting foreign trade, taxation and investment. In addition, as the Company's
operations are governed by foreign laws, in the event of a dispute, the Company
may be subject to the exclusive jurisdiction of foreign courts or may not be
successful in subjecting foreign persons to the jurisdiction of courts in the
United States. The Company may also be hindered or prevented from enforcing its
rights with respect to a governmental instrumentality because of the doctrine of
sovereign immunity.
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<PAGE>
The Company's business is subject to political risks inherent in all foreign
operations. While Colombia has no history of nationalizing its business nor
expropriation of foreign assets, the Company's oil and gas operations are
subject to certain risks, including: (i) loss of revenue, property, and
equipment as a result of unforeseen events such as expropriation,
nationalization, war and insurrection, (ii) risks of increases in taxes and
governmental royalties, (iii) renegotiation of contracts with governmental
entities, and (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects in certain areas in Colombia but
has not affected the Dindal and Rio Seco Association Contracts. The government
continues its efforts through negotiation and legislation to reduce the problems
and effects of insurgent groups, including regulations containing sanctions such
as impairment or loss of contract rights on companies and contractors if found
to be giving aid to such groups. The associate parties will continue to
cooperate with the government, and do not expect that future guerrilla activity
will have a material impact on the exploration and development of the
Association Contracts. However, there can be no assurance that such activity
will not occur or have such an impact and no opinion can be given on what steps
the government may take in response to any such activity. Colombia is among
several nations whose progress in stemming the production and transit of illegal
drugs is subject to annual certification by the President of the United States.
In March 1996, the President of the United States announced that Colombia would
neither be certified nor granted a national interest waiver. The consequences of
the failure to receive certification generally include the following: all
bilateral aid, except anti-narcotics and humanitarian aid, has been or will be
suspended; the Export-Import Bank of the United States and the Overseas Private
Investment Corporation will not approve financing for new projects in Colombia;
United States representatives at multilateral lending institutions will be
required to vote against all loan requests from Colombia, although such votes
will not constitute vetoes; and the President of the United States and Congress
retain the right to apply future trade sanctions. Each of these consequences of
the failure to receive such certification could result in adverse economic
consequences in Colombia and could further heighten the political and economic
risks associated with the Company's operations in Colombia.
DEPENDENCE ON ACTIVITIES IN COLOMBIA. The Company's success currently
depends to a high degree on its activities in Colombia. This dependence is
likely to be reflected in both the short-term performance and the Company's
long-term financial results. The Company currently is drilling one well and
intends to drill up to three additional wells on the Dindal and Rio Seco blocks
in 1997. The market price of the Common Shares may significantly fluctuate based
on the outcome of individual wells.
RISKS OF JOINT VENTURES. The Company has and expects to continue to acquire
only partial interests in oil and gas properties through joint venture
agreements with other oil and gas corporations that may, by the terms of such
joint venture agreements, be the operators of such programs. Although the
Company can take certain steps to determine if the risk of the program to be
conducted by the operator is appropriately spread over a number of prospects,
there can be no assurance that the risk will be so allocated, that the program
will be carried out by the operator in a manner deemed appropriate by the
Company or that the prospects will be successful. In addition, the Company's
ability to continue its exploration and development programs may be dependent
upon the decision of its joint venture partners to continue exploration and
development programs and to finance their portion of the costs and expenses of
the joint venture. If the Company's partners do not elect to continue and to
finance their obligations to the joint ventures, the Company may be required to
accept an assignment of the partners' interests therein and assume their
financing obligations or relinquish its interest in the joint venture.
OPERATING HAZARDS AND UNINSURED RISKS. The Company is also subject to all
the risks normally incident to drilling for and producing oil and gas, including
hazards such as over-pressured formations, blowouts, cratering, fires, spills,
or other hazards or conditions, any of which could result in damage to or loss
of life or property. In accordance with industry practice, the Company is not
fully insured against these risks nor are all such risks insurable. Payment of
such potential liabilities would reduce the funds available for exploration,
drilling and production and could have a material adverse effect on the Company.
LIMITED OPERATING HISTORY; DEPENDENCE ON KEY PERSONNEL. The Company has a
limited operating history and the success of the Company depends to a large
degree upon the efforts of its executive officers, the loss of whose services
could have a material adverse effect on the business and prospects of the
Company. The Company has entered into employment agreements with three of its
executive officers, the terms of which are more particularly described under
"Executive Compensation" below. The Company does not maintain key man insurance.
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<PAGE>
POTENTIAL CONFLICTS. Certain of the directors of Seven Seas also serve as
officers, directors or consultants of other companies involved in natural
resource development which activities may be in competition with the Company and
may result in conflicts of interest. In the event a director has an interest in
an investment or proposed investment of the Company or other conflict of
interest, it is the Company's policy that such director not participate in the
Company's decision-making with respect thereto and that any transactions with
such officers or directors be on terms consistent with industry standards and
sound business practices.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES. Estimates of the
Company's proved oil and gas reserves and projected future net revenues
appearing elsewhere herein are based on reserve reports prepared by independent
petroleum engineers. The estimation of reserves requires substantial judgment on
the part of the petroleum engineers, resulting in imprecise determinations,
particularly with respect to new discoveries. Different reserve engineers may
make different estimates of reserve quantities and revenues attributable thereto
based on the same data. Estimates of proved undeveloped reserves, which comprise
a substantial portion of the Company's reserves, are by their nature less
certain. The accuracy of any reserve estimate depends on the quality of the
available data as well as engineering and geological interpretation and
judgment. Results of drilling, testing and production and changes in the
assumptions regarding decline and production rates, crude oil prices, revenues,
taxes, capital expenditures, operating expenses, geologic success and quantities
of recoverable crude oil may vary substantially from those assumed in the
estimates, may result in revisions to such estimates and could materially affect
the estimated quantities and related value of reserves set forth herein. The
estimates of future net revenues reflect oil and gas prices as of the date of
estimation, without escalation. There can be no assurance, however, that such
prices will be realized or that the estimated production volumes will be
produced during the periods indicated. Future performance that deviates
significantly from the reserve reports could have a material adverse effect on
the Company.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS. The Company is continued under the
laws of the Yukon Territory in Canada. One of the directors of the Company, and
certain experts utilized by the Company, are residents of Canada and all or
substantially all of such persons' assets are located outside of the United
States. As a result, it may be difficult for holders of the Common Shares to
effect service within the United States upon the director and experts who are
not residents of the United States or to realize in the United States upon
judgments of courts of the United States against such persons and the Company
predicated upon civil liability under the United States federal securities laws.
The Company has been advised by its counsel that there is no assurance that
judgments of U.S. courts for liabilities predicated solely upon U.S. federal
securities laws will be enforceable in Canada against the Company or against any
of its directors or experts who are not residents of the United States.
MARKETS. There is substantial uncertainty as to the prices which the Company
may receive for production from its existing oil reserves or from additional oil
and gas reserves, if any, which the Company may discover. The availability of a
ready market and the prices received for oil and gas produced depend upon
numerous factors beyond the control of the Company including, but not limited
to, adequate transportation facilities (such as pipelines), the marketing of
competitive fuels, fluctuating market demand, governmental regulation and world
political and economic developments. Prices for crude oil are subject to wide
fluctuation in response to relatively minor changes in supply and demand, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. It is possible that, under market conditions prevailing in the
future, the production and sale of oil, if any, from certain of the Company's
properties may not be commercially feasible and the production of gas from the
Company's oil and gas interests in Colombia is not currently commercially
feasible. The sale of oil from the production tests on the Company's properties
in Colombia has been sold to Ecopetrol.
COMPETITION. Oil and gas exploration is extremely competitive in all of its
phases and particularly in exploration for and development of new sources of
crude oil and natural gas. The Company must compete with other companies that
are larger and financially stronger in acquiring properties suitable for
exploration, in contracting for drilling equipment and in securing trained
personnel.
REGULATION. The Company's operations are subject to regulations imposed by
the local regulatory authorities including, without limitation, currency
regulation, import and export regulation, taxation and environmental controls.
The regulations also generally specify, among other things, the extent to which
properties may be acquired or relinquished, permits necessary for drilling of
wells, spacing of wells, measures required for preventing waste of oil and gas
resources and, in some cases, rates of production and sales prices to be charged
to purchasers. Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines
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<PAGE>
and Energy, and the Ministry of the Environment. It is possible that the
administration and enforcement of current environmental laws and regulations or
the passage of new environmental laws or regulations in Colombia could result in
substantial costs and liabilities in the future or in delays in obtaining the
necessary permits to conduct and expand the Company's operations in such
country. The Company has experienced and may continue to experience delays in
obtaining the necessary environmental permits to expand its operations in
Colombia.
FORWARD-LOOKING INFORMATION
All statements other than statements of historical fact contained herein,
including statements in "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and "Properties," are
forward-looking statements. Forward-looking statements in this Prospectus
generally are accompanied by words such as "anticipate," "believe," "estimate,"
"project," "potential" or "expect" or similar statements. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, no assurance can be given that such expectations will prove correct.
Factors that could cause the Company's results to differ materially from the
results discussed in such forward-looking statements include the aforementioned
risks, such as the uncertainty of costs associated with exploratory drilling,
drilling results and reserve estimates, operating hazards, need for additional
capital, competition from other exploration, development and production
companies, the fluctuations of the prices received or demand for the Company's
oil and gas, and the effects of governmental and environmental regulation. All
forward-looking statements included herein are expressly qualified in their
entirety by the cautionary statements in this paragraph.
HISTORY AND ORGANIZATIONAL STRUCTURE
Seven Seas became subject to the laws of the Yukon Territory in August 1996.
Seven Seas was formed effective June 29, 1995 as a result of an amalgamation
(the "Amalgamation") under the laws of the province of British Columbia of Rusty
Lake Resources Ltd. ("Rusty Lake") and Seven Seas Petroleum Inc. (the
"Predecessor"), which was incorporated under the laws of British Columbia on
February 3, 1995. Under the terms of the Amalgamation, the shares of Rusty Lake
were exchanged for shares of Seven Seas on a 35-to-1 basis, while the shares of
the Predecessor were exchanged for shares of Seven Seas on a 1-to-1 basis. Rusty
Lake was formed by an amalgamation of the Lithium Corporation of Canada, Limited
and Stockgold Resources Inc. under the laws of Ontario effective January 31,
1993. Prior to the Amalgamation, Rusty Lake was a mineral exploration and
development corporation whose common shares were quoted for trading on The
Canadian Dealing Network.
The Company's principal executive office is located at Suite 960, Three Post
Oak Central, 1990 Post Oak Boulevard, Houston, Texas 77056, and its telephone
number is (713) 622-8218. The Company's operations are managed from its Houston,
Texas headquarters which consists of a staff of seven employees, using
professional consulting services as needed. The Company also maintains an
exploration office in Denver, Colorado with a staff of two employees.
The Company, through a wholly owned subsidiary, owns a 62.963% membership
interest in Cimarrona Limited Liability Company ("Cimarrona"). The remaining
37.037% membership interest is owned by MTV Investments, Limited Partnership, a
party at arms' length to the Company. Cimarrona owns a 25.38% interest in the
Dindal and Rio Seco Association Contracts. All of the Company's other
subsidiaries are wholly owned.
Financial information about foreign operations may be found in Notes 8 and
11 of the Notes to Consolidated Financial Statements contained in Item 13 below.
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ITEM 2. SELECTED FINANCIAL DATA.
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included herein.
<TABLE>
<CAPTION>
PERIOD FROM INCEPTION
SIX MONTHS SIX MONTHS YEAR ENDED (FEBRUARY 3, 1995)
ENDED ENDED DECEMBER 31, THROUGH
JUNE 30, 1997 JUNE 30, 1996 1996 DECEMBER-31,-1995
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<S> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenues......................... $ 670,901 $ 132,182 $ 575,281 $ 152,383
Net loss......................... (2,858,863) (797,930) (2,194,637) (2,119,985)
Net loss per common share........ (.10) (.06) (0.17) (0.23)
Weighted average shares outstanding 30,033,434 12,817,020 12,971,871 9,247,101
</TABLE>
DECEMBER 31, DECEMBER 31,
JUNE 30, 1997 1996 1995
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BALANCE SHEET DATA
Cash and cash equivalents... $ 8,948,909 $ 10,620,477 $3,365,603
Total assets................ 261,014,164 235,500,982 4,170,437
Current liabilities......... 1,339,486 2,805,665 120,305
Minority interest........... 2,124,170 1,060,433 --
Stockholder's equity........ 187,091,996 167,667,109 4,050,132
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities have been funded primarily by proceeds from private
placements of the Company's securities from inception through August 1997,
resulting in aggregate gross cash proceeds of $47,500,000. In 1996, the Company
acquired an additional 36.7% interest in the Association Contracts in Colombia
in exchange for the issuance of the Company's securities valued at $153,091,430
in the aggregate. From inception through June 30, 1997, the Company expended
$10,830,394 for the acquisition, exploration and development of its oil and gas
properties including $9,074,937 with respect to its interests in Colombia and
approximately $1,755,457 with respect to its interests in Australia, Papua New
Guinea, Argentina, Turkey and other countries, of which $1,144,668 has been
expensed through June 30, 1997. This amount included $500,800 for the cost of an
option to acquire a 5% participating interest in three exploration blocks in
North Africa. The Company declined to exercise the option and expensed the cost.
Additionally, the Company expensed $622,006 associated with a dry hole in the
San Jorge Basin, Argentina. The Company's activities in North Africa, Argentina
and Turkey have been discontinued.
COLOMBIA. The Company is required to drill a well on each of the Rio Seco
and Dindal blocks by August and September 1997, respectively, at an estimated
total cost to the Company of approximately $5,900,000, to fulfill its work
commitments for the current contract year. The Tres Pasos #1 and El Segundo #3
wells are intended to fulfill these obligations. In 1997, the Company also plans
to drill at least two additional wells on the Dindal block and to conduct
seismic operations at an aggregate estimated cost to the Company of
approximately $7,700,000. The Company may also spend up to an additional
$400,000 in operating costs. An exploration well is also required to be drilled
on the Tapir block at an estimated proportionate cost to the Company of
$250,000.
For the first six months of 1997 and the last six months of 1996, the
Company had oil and gas sales of $436,333 and $233,682, respectively, which
pertained solely to production testing of the Company's two wells in Colombia.
These sales represented the Company's only sales of production since its
inception. Although the Company intends to continue to sell oil resulting from
production tests, significant production from the El Segundo #1 well and the El
Segundo #2 well is not expected to commence until further work is done to
evaluate the field through the drilling of additional wells, and producing
facilities and pipelines have been constructed. Although the Company has
solicited proposals for various pipeline options, the substance and timing of
any decision regarding appropriate pipeline and production facilities will
depend on the results of the evaluation and appraisal of the Company's
discovery.
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AUSTRALIA AND PAPUA NEW GUINEA. The Company has entered into an agreement to
sell its Southern Perth Basin permits. (EP381 and EP408) "See Item 3.
Properties--Australia--Southern Perth Basin Permits." The Company intends to
divest or farmout its interests in other properties in Australia and its
property in Papua New Guinea.
The operator of the Bass Basin permit in Australia plans to drill an
exploratory well on a prospect located 10 kilometers north of the Yolla Field,
which was discovered by Amoco in the mid-1980's, and has applied for a permit
extension until a suitable rig can be contracted. "See
Properties--Australia--Bass Basin, Block T27P." As the operator is also seeking
additional participants in the block to share the cost of the well, which is
estimated to be $5,000,000, the estimated cost of the well to the Company cannot
now be determined. The Company is obligated to participate in this well with a
20% interest, unless it first divests or farms out its interest.
The cost of the first year work program for PPL-182 in Papua New Guinea was
completed at a total cost of approximately $116,000. Based on the results of the
first year program, the Company has decided to proceed with the second year work
program, subject to divestiture or farmout. The second year program is expected
to cost the Company approximately $500,000.
WORKING CAPITAL. The Company had working capital of $7,771,887 as of June
30, 1997 and realized an additional $23,400,000 in cash proceeds in August 1997
from a private placement of convertible debentures described below. See
"--Convertible Debentures." Current funds on hand will not be sufficient to meet
all planned exploration and development costs. Therefore, additional financing
will be necessary to complete these projects prior to the start-up of production
and generation of cash flows from the Company's oil discovery in Colombia in
quantities sufficient to cover operating expenses related thereto. In addition,
it is anticipated that the Company's future exploration activities with respect
to its current properties and any additional properties which may be acquired
will require substantial amounts of additional capital which the Company may be
required to raise through debt or equity financing, encumbering properties or
entering into arrangements whereby certain costs of exploration will be paid by
others to earn an interest in the property. There can be no assurance that the
additional debt or equity financing expected to be necessary to fund the
Company's operations and obligations will be available to the Company on
economically acceptable terms. If sufficient funds are not available to meet the
Company's obligations with respect to a property, the Company may elect to
forfeit its interest in such property. The Company does not anticipate that it
will forfeit its interests in such property within the next 18 months and
intends to use the proceeds of the recently completed $25 million debt offering
to meet its current drilling obligations and for general corporate purposes.
CONVERTIBLE DEBENTURES
In August 1997, the Company issued $25 million of Special Notes in a private
transaction to institutional and accredited investors. Interest on the Special
Notes is due and payable in arrears at a rate of 6% per annum on December 31 and
June 30 in each year until maturity, commencing on December 31, 1997.
The Special Notes are exchangeable for a like principal amount of
convertible redeemable debentures (the "Debentures") on or before August 7,
1998. The Special Notes will be deemed to be exchanged upon the earlier to occur
of (i) the effectiveness of a registration statement under the Securities Act of
1933, as amended (the "Securities Act"), covering the resale of the Debentures
and compliance by the Company with certain Canadian securities requirements and
(ii) August 7, 1998. The Debentures are convertible into units (the "Units") on
the basis of one Unit for each $11.50 principal amount of Debentures outstanding
(initially 2,173,913 Common Shares), subject to adjustment. Each Unit consists
of one common share and one-half of a common share purchase warrant (the
"Warrants"). The Debentures mature on August 7, 2003. Each whole Warrant is
exercisable for one common share at an exercise price of $15.00 per share. The
Warrants expire August 7, 1998.
At the option of the Company, the Debentures are convertible into common
shares if a registration statement for resale of the common shares has been
declared effective under the Securities Act and has been effective during the
seven-day notice period required by the Company to the holders of Debentures of
its intent to exercise its conversion rights, provided that the Company's common
shares have traded at or above U.S. $14.00 per share for 20 consecutive trading
days on the Toronto Stock Exchange.
The Special Notes and Debentures are secured by a pledge of the shares of
the Company's subsidiaries and a guarantee by Seven Seas Petroleum Holdings Inc.
-7-
<PAGE>
RESULTS OF OPERATIONS
The Company reported net losses of $2,858,863 ($.10 per share) for the six
months ended June 30, 1997, $797,930 ($.06 per share) for the six months ended
June 30, 1996, $2,194,637 ($.17 per share) for the year ended December 31, 1996
and $2,119,985 ($.23 per share) for the period from inception through December
31, 1995. Oil revenues for the first six months of 1997 and the 1996 calendar
year were $436,333 and $233,682, respectively. Production costs for the same
periods were $231,155 and $252,504, respectively. Oil revenues and production
costs in 1996 occurred in the second half of the year. Oil revenues and the
associated production costs pertained solely to production testing of two wells
in Colombia.
General and administrative costs increased from $1,070,765 for the period
from inception through December 31, 1995 to $2,452,546 for the year ended
December 31, 1996 primarily as a result of a full year of expenses incurred by
the Company in 1996 as compared to 1995, and the increase in activities
associated primarily with the acquisition of GHK Company Colombia, Esmeralda LLC
and Cimarrona. Additionally, general and administrative costs increased
significantly for the first six months of 1997 to $3,281,260 as compared to only
$892,391 for the first six months of 1996. These increases occurred principally
as a result of the expansion of the Company's activities, the acquisition of
additional interests in the Association Contracts in Colombia, costs associated
with listing the Company's securities on the Toronto Stock Exchange, additions
to the professional staff as well as severance payments and related compensation
costs associated with former executives of the Company. Depreciation and
amortization increased also from $37,671 for the period from inception through
December 31, 1995 to $111,334 for the year ended December 31, 1996 primarily as
a result of the acquisitions mentioned above and the inclusion of a full year of
depreciation expense for the Company in 1996.
Colombian oil production (net to the Company, including minority interest)
of 30,748 barrels in the first six months of 1997 and 14,188 barrels in 1996
pertained solely to the Company's share of oil produced from production testing
of the Company's two wells and was sold to Ecopetrol at an average price of
$14.19 per barrel in 1997 and $16.47 per barrel in 1996.
Interest income increased from $152,383 for the period from inception
through December 31, 1995 to $341,599 for the year ended December 31, 1996, and
from $132,182 for the first six months of 1996 to $234,568 for the first six
months of 1997, as a consequence of higher cash balances resulting from the
private placements of the Company's securities.
ITEM 3. PROPERTIES.
COLOMBIA
DINDAL AND RIO SECO ASSOCIATION CONTRACTS; MAGDALENA BASIN
INTRODUCTION AND REGIONAL OVERVIEW. Colombia is the fourth largest country
in South America, with a total land area of more than 440,000 square miles and a
population of more than 35 million. Colombia has a strong, stable and
diversified economy. According to publicly available information, Colombia's
Gross Domestic Product ("GDP") has grown by an average of 4% annually in the
last ten years, approximately twice the average for Latin America. Colombia is
the only country in South America that did not have a single year of negative
GDP or declining per capita income growth in the 1980s and the 1990s. Colombia
recently introduced legislation to attract foreign investment in energy
projects. The measures include the exemption of new oil operations from the $1/b
tax which was levied in 1992 to finance protection of oil operations.
According to publicly available information, the U.S. is Colombia's largest
trading partner, accounting for more than 43% of that country's total imports
and 38% of its total exports. The U.S. is also the top provider of eight of
Colombia's 15 largest imports. U.S. Oil companies now account for 11 of the 18
largest foreign oil concerns operating in the country. Colombia is Latin
America's third leading crude exporter to the U.S., after Venezuela and Mexico.
Colombia is the only country in South America that has seaports on both the
Pacific and Atlantic Oceans, which provide access to major oil markets. The
country has two main crude oil export pipelines leading to the port of Covenas
in Colombia. The pipeline from Cano Limon has a maximum capacity of 200,000
BOPD, and the second pipeline from
-8-
<PAGE>
Vasconia has recently been expanded to 300,000 BOPD. A 500,000 BOPD pipeline
connecting Vasconia to Covenas is scheduled for operation in late 1997.
The geology of Colombia has been studied since the mid-1800s and has
continued to the present, amassing some detail of the tectonic framework and
related stratigraphy. During the evolution of the geological knowledge of
Colombia, oil and natural gas exploration has been pursued in the Llanos,
Putumayo and Magdalena basins. Exploration in the Magdalena Valley Basin began
in 1918 with the drilling of the Guataqui wells in the Girardot subbasin,
followed in 1951 by the Ortega discovery. As of December 1993, 210 exploratory
wells had been drilled, resulting in the discovery of 30 fields.
Two major physiographic features dominate the geography of Colombia. To the
west lie the Andes mountains, which, north of the Ecuador border, bifurcate into
three ranges, the Western, Central and Eastern Cordillera, extending toward the
Caribbean coast. These ranges are separated by the Cauca and Magdalena valleys,
respectively. To the east lies the Llanos, a savanna within the bounds of the
Orinoco Basin, which extends over the remainder of the country.
Association Contracts acquired from Ecopetrol, after being approved by all
proper Colombian governmental authorities as well as the board of Ecopetrol, are
mutually executed by the parties and subsequently recorded as a public deed in
Colombia. Therefore, ownership of an Association Contract is of public record
and protected by Colombian law.
-9-
<PAGE>
This page consists of a map outlining the Republic of Colombia, South
America and portions of the bordering countries of Venezuela, Brazil, Peru and
Ecuador. The Company's Dindal and Rio Seco Blocks and the Tapir Block are shown
in yellow; producing oil fields are indicated by green ovals and the Cusiana,
Cano Limon-Guafita and Shushufindi oil fields are also identified by name; oil
pipelines are indicated by green lines, including outlets to the Pacific Ocean
and Caribbean Sea. The map references distance measurements in kilometers and
miles.
-10-
<PAGE>
This page consists of a map entitled: "Emerald Mountain Cimarrona
Structure." The map references distance measurements in miles, and shows the
depth in feet of certain areas. The map shows the location of the El Segundo #1
and El Segundo #2 oil wells, the appraisal locations of El Segundo #3 and Tres
Pasos #1 wells and additional proposed appraisal locations. The map also shows
the location of additional wells drilled in the area, the potential oil field
area and location of the Guaduas Fault.
-11-
<PAGE>
The Company's principal asset is a 57.7% interest in the Association
Contracts with Empresa Colombiana de Petroleos, the Colombian national oil
company ("Ecopetrol"), which entitle the Company to engage in exploration,
development and production activities in approximately 106,000 acres located in
the oil producing Magdalena Basin, about 90 kilometers northwest of Bogota. The
area is accessible via the main road between Bogota and Honda. The village of
Guaduas lies within the block and provides infrastructure for the local economy
which is primarily agrarian in nature. The remaining interests are owned by MTV
Investments Limited Partnership (9.4%) and Sociedad Internacional Petrolera,
S.A. ("Sipetrol") (32.9%). Sipetrol is the international exploration and
production subsidiary of the Chilean national oil company.
Recent discoveries in the Magdalena Basin include Amoco's Opon Field,
located approximately 170 kilometers north of the prospect area, and Lasmo's
Venganza/Revancha complex, located approximately 150 kilometers to the south.
The main Rio Magdalena oil pipelines (12" to 20" diameters) lie approximately 20
kilometers west of the prospect area and provide an opportunity for oil
transportation from the Company's discovery. Early production from the discovery
well and subsequent wells in Dindal and Rio Seco blocks, subject to further
engineering and economic studies, will likely be truck transported by road to an
oil terminal on the Rio Magdalena pipeline system approximately 78 miles away,
prior to full field development and pipeline installation.
PROSPECT GEOLOGY. The Dindal structure is formed by a faulted anticlinal
closure in the foot wall of the Bituima thrust fault system on the eastern side
of the Rio Magdalena river valley. The primary oil reservoir is the Upper
Cretaceous Cimarrona formation which is comprised of both limestones and
sandstones in the vicinity of the Dindal structure. These reservoir sequences
are charged with oil generated from the immediately underlying Villeta (also
called LaLuna) shale which is considered the principal source rock for the oil
accumulations throughout Colombia and Venezuela.
The Cimarrona formation is seen in surface outcrop to the north and west of
the structure, as well as in the Lasmo Madrigal #1 well, the AIPC Quina #1 well
and the Company's El Segundo #1 and #2 wells. From this geologic control
information, the Cimarrona is shown to be depositionally complex, exhibiting
changes in both gross thickness and rock types in the region of the Dindal
structure. In the Madrigal #1 well, the Cimarrona is approximately 1,600 feet
thick with mixed rock types including sandstones, conglomerates, siltstones and
shales. Approximately nine kilometers east in the El Segundo #2 well, the
Cimarrona has thinned to approximately 450 feet in thickness and contains
limestones, calcareous sandstones, and siltstones. Additional data from
appraisal wells concerning these variations is required before oil reserves can
be reliably assessed for the structure and an appropriate field development plan
drafted.
Evidence for the structural trap is found in both seismic data over the
prospect and in surface geologic mapping. The trapping mechanism is believed to
be formed by structural closure in three directions (north, south and west), and
an imbricate fault within the Bituima Fault system to the east, which is
evidenced in the Escuela #1 well which was drilled in 1994, prior to the
acquisition of an interest in the block by the Company, and was plugged and
abandoned as a dry hole. The Escuela #1 well is located four kilometers
southeast of the El Segundo #1 well location and encountered Tertiary and
Cretaceous shales and siltstones from surface to total depth. This predominantly
shale section, emplaced by thrust faulting adjacent to the Cimarrona reservoir
section, is believed to form the eastern critical element of the trap for the
prospect.
EXPLORATION ACTIVITY. The El Segundo #1 discovery well commenced drilling in
December 1995 and reached total depth in mid-January 1996. The well reached the
objective Cimarrona formation at a depth of 5,630 feet, but stopped drilling
after penetrating only 88 feet of the Cimarrona due to circulation problems
encountered while drilling. The well was then completed for testing in February
1996 and drill stem tests recovered 19(degree) API oil at surface limited rates
of 300-500 barrels per day. Operations were then suspended pending receipt of a
permit to transport produced oil by truck from a long-term production test.
Permits for the long-term production test were received in late June 1996 and
production testing commenced in early July. Tests using electric submersible
pumps produced oil at rates of 3,400 barrels per day. No aquifer water was
produced during the tests, and analysis of reservoir pressure response during
testing and the shut-in period following testing showed no evidence of reservoir
boundaries, geologic complexities or oil-water contact. Analysis of oil
recovered during testing showed 19(degree) API gravity, low sulphur crude oil,
with reservoir temperature of 120(degree)F and pressure of 1,640 psi (at
collection datum). Following testing during July and August 1996, El Segundo #1
was shut-in to allow drilling of the El Segundo #2 well from the same surface
location.
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<PAGE>
The El Segundo #2 well commenced drilling in early September 1996 and
reached total drilling depth of 6,820 feet in late October. The well was
intentionally deviated from the surface location of the El Segundo #1 well to a
bottom hole location some 2,000 feet north of the surface location. The well
encountered approximately 450 feet of oil saturated and highly fractured Upper
Cretaceous Cimarrona formation at a drilling depth of 6,052 feet (vertical depth
of 5,588 feet). The well was completed for testing in November, and five drill
stem tests were conducted in late November through February. The first two tests
in the upper Villeta formation and the lower Cimarrona formation recovered no
oil and have been interpreted to be low permeability. The last three tests,
conducted in separate intervals of the upper Cimarrona between 6,052 and 6,280
feet, produced oil at rates from 3,866 to 6,154 barrels per day each. Following
these tests in February 1997, production tests were conducted of the combined
interval between 6,052 and 6,315 feet. These tests produced oil at rates as high
as 8,948 barrels per day. Analysis of reservoir pressure performance during and
following the production testing in El Segundo #2 well supported the conclusions
from the production testing of the El Segundo #1 well in July and August 1996.
The El Segundo #3 well has been drilled to a total depth of 6,920 feet.
Production testing on this well has commenced with results expected in late
September 1997.
The first well for the Rio Seco Association Contract, the Tres Pasos #1
well, commenced drilling on September 10, 1997. The Tres Pasos #1 well is an
appraisal well and is located some 2.5 kilometers northwest of the surface
location of the El Segundo #1 and #2 wells. The Company plans to drill up to two
additional wells on the Dindal block in 1997 and to acquire permits for a
seismic survey to further delineate the areal extent and reservoir geology of
the structure.
The Company and its partners have paid all costs of the exploration program
under the Association Contracts to date. Under the terms of the Dindal and Rio
Seco Association Contracts, the Company and its partners are required to drill
one well on each contract per year through 1999 and 2001, respectively, and will
continue to bear all exploration costs relating to a field until such field is
declared commercial. The Company plans to submit a commerciality application to
Ecopetrol in 1998 with respect to its discovery.
GHK Company Colombia, a wholly-owned subsidiary of the Company, serves as
the operator of the joint venture to develop the Dindal and Rio Seco blocks,
pursuant to the terms of operating agreements between the Company, its
respective subsidiaries and its joint venture partners. GHK Company Colombia has
exclusive charge of carrying out the program of operations within the budgets
approved by the operating committee and may demand payment in advance from each
party of its respective shares of estimated monthly expenditures.
TERMS OF ASSOCIATION CONTRACTS AND RELATED MATTERS. The Association
Contracts were issued by Ecopetrol in March 1993 and August 1995, respectively,
and provide generally for a six year exploration phase followed by a 22-year
production period, with partial relinquishments of acreage, excluding commercial
fields, required commencing at the end of the sixth year of each contract. Under
the terms of the Association Contracts, Ecopetrol will receive a royalty equal
to 20% of production (after pipeline tariffs are deducted) on behalf of the
Colombian government and, in the event a commercially feasible discovery is
made, Ecopetrol will acquire a 50% interest in the remaining production, bear
50% of the development costs, and reimburse the joint venture, from Ecopetrol's
share of future production, for 50% of the joint venture's costs of certain
exploration activities. Upon acceptance of a field as commercial, Ecopetrol will
acquire a 50% interest therein and the interests of the other parties to the
contract, including the Company, will be reduced by 50%; all decisions regarding
the development of a commercial field will be made by an Executive Committee
consisting of representatives of the parties to the contract who will vote in
proportion to their respective interests in such contract. Decisions of the
Executive Committee will be made by the affirmative vote of the holders of over
50% of the interests in the contract.
If any commercial field in the respective contract areas produces in excess
of 60 million barrels, Ecopetrol's interest in production and costs for such
contract area increases as follows: (i) under the terms of the Dindal
Association Contract, such increases occur in 5% increments from 50% to 70% as
accumulated production from any field increases in 30 million barrel increments
from 60 million barrels to 150 million barrels; and (ii) under the terms of the
Rio Seco Association Contract, Ecopetrol's interest increases from 50% to 75% as
the ratio of the accumulated income attributable to the parties to the contract
other than Ecopetrol to the accumulated development, exploration and operating
costs of such parties (less any expenses reimbursed by Ecopetrol) increases from
one to one to two to one.
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<PAGE>
Under the terms of the Association Contracts, in the event a discovery is
made and is not deemed to be commercially feasible by Ecopetrol, the joint
venture may expend up to $2 million over a one-year period to further develop
the field, 50% of which will be reimbursed if Ecopetrol subsequently accepts the
commercial feasibility thereof. If Ecopetrol does not declare the field
commercial, the joint venture may continue to develop the field at its own
expense. In such event, Ecopetrol will have the right to acquire a 50% interest
therein upon payment of 200% of the amounts expended by the joint venture, which
payment may be made out of Ecopetrol's share of future production.
Oil produced from the Dindal block to date under the long term production
tests has been sold to Ecopetrol. Upon Ecopetrol's declaration of the
commerciality of the Company's discovery, oil produced from the Dindal and Rio
Seco blocks may be sold to Ecopetrol or to third parties provided that 75% of
the purchase price is paid in U.S. dollars and the remainder in Colombian pesos.
In the event the production is required to satisfy internal demand for oil in
Colombia, the Company may be required to sell some or all of its production to
Ecopetrol at prevailing market prices.
The Company's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian corporate income tax at a rate of 35%. An
additional remittance tax is imposed upon remittance of profits abroad at a rate
of 7%.
ACQUISITION OF INTEREST. Pursuant to an agreement dated August 14, 1995, as
amended, the Company acquired from GHK Company Colombia, a 15% interest in the
Association Contracts in consideration of the payment of approximately $106,000
and its share of the cost of drilling, testing and completing the El Segundo #1
well and its proportionate share of the obligations for the first year of the
Rio Seco Association Contract. The Company acquired an additional 36.7% interest
in the Association Contracts indirectly through its acquisition of 100% of the
outstanding securities of GHK Company Colombia and Esmeralda Limited Liability
Company and its acquisition of 62.963% of the outstanding securities of
Cimarrona Limited Liability Company. For a more particular description of these
transactions, see "Certain Transactions."
The Company acquired a 6% interest in the Association Contracts indirectly
through its acquisition of 100% of the outstanding securities of Petrolinson
S.A. (Petrolinson"), the holder of such 6% interest, in consideration of the
issuance of 1,000,000 Common Shares to the shareholder of Petrolinson. As the
holders of the remaining 94% interest in the Association Contracts, including
the Company, had previously agreed to pay 100% of the exploration costs
attributable to such 6% interest through the exploration period, approximately
45% of the exploration costs for the Association Contracts attributable to the
6% interest acquired by the Company are paid by the other holders of interests
in the Association Contracts. The exploration period will terminate upon
Ecopetrol's declaration of the commerciality of a field.
Under the terms of a letter agreement dated September 11, 1992, as amended,
between GHK Company Colombia and Dr. Jay Namson, the holders of interests in the
Association Contracts, as a group, will be required to assign a 2% working
interest in the Dindal Association Contract and the Rio Seco Association
Contract to Dr. Namson after recovery from production of 100% of all costs
incurred in connection with the exploration and development of the Dindal and
Rio Seco blocks since the completion of the first year work obligations under
the Dindal Association Contract. Accordingly, when such costs have been
recovered, the Company will be required to assign to Dr. Namson 2% of its
interests prior to the acquisition of the 6% Petrolinson interest (or a 0.517%
interest in each Association Contract, after adjusting for the acquisition of a
50% interest by Ecopetrol which is expected to occur prior to the assignment to
Dr. Namson).
TAPIR ASSOCIATION CONTRACT, LLANOS BASIN
INTRODUCTION. The Company acquired an 11.875% interest in the Tapir
Association Contract (the "Tapir Association Contract") in April 1996. The Tapir
block consists of 250,000 acres located in the Llanos Basin of east central
Colombia and is crossed by two oil pipelines carrying production from nearby oil
fields. Other Tapir Association Contract interests are held by Ampolex (56.25%),
Mohave Oil & Gas Corp. ("Mohave") (10.205%), Doreal Energy (11.67%) and Heritage
Minerals Colombia ("Heritage Minerals") (10%), which serves as the operator.
EXPLORATION PROSPECTS. There are three exploration prospect types on the
Tapir block: several conventional Llanos Basin small structural closures, a deep
Paleozoic anomaly and two basal Cretaceous stratigraphic prospects. The small
structural closures are relatively low risk, but are expected to have low
reserves potential (10-30 MMBO each). The Paleozoic prospect is of geologic
interest, but relies on unproven source and reservoir rocks, and is therefore
high risk
-14-
<PAGE>
until further geologic work can be completed. The geologic risk for the two
Cretaceous stratigraphic prospects depends on the effectiveness of the lateral
seal between the Ubaque sandstone and the adjacent Paleozoic section.
The Mateguafa prospect, one of the small structural closures in the central
portion of the Tapir block, has been selected as the first exploration drill
site in the Tapir block and is expected to commence drilling in late 1997 or the
first quarter of 1998, following receipt of required permits from the Ministry
of Environment.
EXISTING WELL. In 1993, the Macarenas #1 well, a discovery well, was drilled
on the Tapir block and produced 320 BOPD in a short-term test, but was not
completed for production. Since the well was drilled and tested, additional oil
pipeline infrastructure has been built in the area. The operator plans to place
the well on long-term production test after the completion of the exploratory
well to determine sustainable production rates and the extent of the reservoir.
TERMS OF TAPIR CONTRACT. The Tapir Association Contract was effective on
February 6, 1995 on terms substantially similar to the Rio Seco Association
Contract. Heritage Minerals, the Tapir Association Contract operator, has
completed an 83 kilometer seismic program in the field, which satisfied the work
program for the first year of the Tapir Association Contract and part of the
second year. The commitment for the second year well has been extended and the
exploration well required in the second year work program is expected to
commence drilling in late 1997 or the first quarter of 1998.
The Company acquired its interest in the Tapir Association Contract in April
1996 in consideration of the payment for $104,000 which represents reimbursement
for past seismic costs and permit administration, and its agreement to pay its
proportionate share of the costs of a seismic program, the first exploratory
well, the production test on the Macarenas #1 well (assuming the parties elect
to proceed therewith) and certain additional costs to earn its interest in the
Tapir Contract. The Company estimates that its proportionate share of these
costs, which are required to be paid to retain its interest in the Tapir
Association Contract, is approximately $300,000.
AUSTRALIA
The following is a description of the Company's interests in Australia,
which the Company plans to divest or farmout.
SOUTHERN PERTH BASIN PERMITS
The Company holds an 11.77% working interest in Exploration Permit 381
("EP381") and Exploration Permit 408 ("EP408"), both of which relate to
properties that are located in the southern Perth Basin, Western Australia.
Other interests in these permit areas are held by: Pennzoil (44.115%), Amity Oil
(30.115%) and GeoPetro Company (14%).
The Company has entered into a letter of intent with respect to the sale of
its interests in EP 381 and EP 408 for $850,000. In addition, the Company would
reserve a small overriding royalty in each permit. Consummation of the
transaction contemplated by the letter of intent is subject to several
conditions, including obtaining approvals of third parties and governmental
authorities. No assurance can be given that the Company will complete this sale.
BASS BASIN, BLOCK T27P
The Company holds a 20% working interest in Block T27P, a 1.8 million acre
block in approximately 70 meters of water, in the Bass Basin, the central of
three basins offshore southern Australia. The easternmost basin is the Gippsland
Basin where BHP Petroleum and Esso have a series of large oil and gas fields.
The westernmost basin is the Otway Basin, the site of recent gas discoveries by
BHP Petroleum and others which will likely serve the South Australia and
Victoria gas market. The T27P block lies about halfway between the Victoria
coast to the north and the Tasmania coast to the south (about 90 kilometers each
way). The Bass Basin has been the site of a series of gas and oil shows and
discoveries, including the Yolla Field, which is adjacent to Block T27P. The
Yolla Field was discovered by Amoco in the mid-1980's and has not yet been
appraised or developed.
Globex Exploration, the operator of the permit with an 80% working interest,
was granted the Offshore Petroleum Exploration Permit effective August 10, 1994
(the "Bass Basin Permit"). Globex completed a 1,000 kilometer 2D seismic program
in the block. The remaining work commitment in the block consists of a 3D
seismic survey and two exploration wells. Globex has selected a drillable
prospect some 10 kilometers north of the Yolla Field and is seeking
-15-
<PAGE>
additional participants in the block to share the cost of an exploratory well
which is estimated to be approximately $5 million. As suitable drilling rigs are
not available in the near term, Globex has applied for a permit extension in the
block until a suitable rig can be contracted.
In March 1996, the Company acquired a six-month option to purchase its
interest in the block for $250,000 and exercised that option in September 1996.
Pursuant to the terms of the option agreement, the Company may elect to farmout
up to 50% of its interest in the Bass Basin Permit. In addition, if Globex
Exploration and the other interest holders seek to enter into a farmout, the
Company has agreed to participate proportionally with such parties in such
farmout provided that its interest may not be reduced below 10%.
PAPUA NEW GUINEA
The following is a description of the Company's permit in Papua New Guinea.
PERMIT PPL-182
The Company holds 100% of exploration permit PPL-182 in southern Papua New
Guinea effective June 11, 1996. The permit covers an area of 1,200,000 acres
located both onshore and offshore in the Fly River Delta and the Gulf of Papua.
The nearest discovery to the permit area is the Pandora Gas Discovery
located in PPL-82 approximately 150 kilometers to the east in the Gulf of Papua.
The International Petroleum Corporation and Chevron announced in March 1996 a
feasibility study for the delivery of gas from the Pandora Gas Field and from
other fields in Papua New Guinea to be transported south to northern Australia.
Past exploration activity within PPL-182 has resulted in the acquisition of
seismic data and the drilling of several exploration wells. The Company's first
year work program consisted of a geological and geophysical review of existing
data. Based on the results of this study, the Company has decided to proceed
with the second year's work commitment which provides for seismic reprocessing
and acquisition of a high resolution aeromagnetic survey and is expected to cost
approximately $500,000. The Company plans to divest or farmout its interest. If
such divestiture or farmout is unsuccessful, it is the Company's intention to
drop the block if it is unable to secure an industry partner. If the block is
relinquished, the Company's exposure would be forfeiture of its approximate
$40,000 bond.
OTHER PROPERTIES
As a result of the Amalgamation, Seven Seas acquired three mineral
properties owned by Rusty Lake, two of which have been sold. The remaining
property, consisting of a 60% interest in two patented mining parcels located in
Whitney Township in the Province of Ontario, is being offered for sale. The
Company has no plans to explore these mining properties.
Since its inception, the Company has been involved in exploration activities
in Colombia, Australia, Argentina, Turkey and Papua New Guinea. Exploration
activities in Argentina and Turkey have been discontinued and an option for the
right to participate in future exploration activities in North Africa was never
exercised.
SUPPLEMENTARY INFORMATION IN RESPECT OF OIL AND GAS PROPERTIES
RESERVES REPORTED TO OTHER AGENCIES. No estimates of the Company's total
proved net oil and gas reserves have been filed with or included in reports to
any federal authority or agency in the United States.
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<PAGE>
PRODUCTIVE WELLS AND ACREAGE. The following table sets forth the productive
oil and gas wells and developed acreage owned by the Company as of June 30,
1997:
WELLS(1)
------------------------------------------ DEVELOPED ACREAGE
OIL GAS -----------------
GROSS NET GROSS NET GROSS(2) NET
----- --- ----- --- ------ ---
Colombia..... 2 1.154 640 369
-- ----- --- --- --- ---
Total.... 2 1.154 640 369
== ===== === === === ===
- ---------------
1 One or more completions in the same well bore are counted as one well.
2 Assumes 320 acre well spacing.
UNDEVELOPED ACREAGE. The following table sets forth estimates of the
undeveloped acreage for which oil and gas leases or concessions were held by the
Company as of June 30, 1997.
GROSS ACRES NET ACRES
--------------- -------------
Colombia........................ 355,360 90,774
Papua New Guinea................ 1,200,000 1,200,000
Australia....................... 2,694,546 317,148
--------- ----------
Total....................... 4,249,906 1,601,286
========= =========
DRILLING ACTIVITIES. The following table sets forth the number of wells
drilled by the Company since its inception:
<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENT
---------------------------------- ------------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
---------------- ---------------- ------------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Six months ended June 30, 1997 -- -- -- -- -- -- -- --
Year ended December 31, 1996:
Colombia................ 2 1.154 -- -- -- -- -- --
Argentina............... -- -- 1 .25 -- -- -- --
----- ------ --------- ------ ----- --- ----- ---
2 1.154 1 .25
======= ======= ========= ===== ===== === ===== ===
Year ended December 31, 1995:
Australia............... -- -- 1 .1
====== ======== ======== ====== ===== === ===== ===
</TABLE>
PRESENT ACTIVITIES. As of August 15, 1997, one well was in progress in
Colombia.
ADDITIONAL INFORMATION. Reference is made to the Supplemental Oil and Gas
Information (Unaudited) included in the Notes to Consolidated Financial
Statements of the Company included herein for additional information regarding
the Company's oil and gas producing activities prepared in accordance with the
requirements of Statement of Financial Accounting Standards No. 69 "Disclosures
About Oil and Gas Producing Activities."
-17-
<PAGE>
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of August 15, 1997
with respect to the beneficial ownership of the Common Shares, by (i) each
person known by the Company to own beneficially more than 5% of the issued and
outstanding Common Shares, (ii) each director of the Company and each of the
Named Officers, and (iii) all executive officers and directors of the Company as
a group.
NUMBER OF PERCENT
BENEFICIAL OWNER COMMON SHARES(1) OF CLASS
- ---------------- ---------------- --------
Robert A. Hefner III ..................... 6,418,300(2) 18%
c/o Seven Seas Petroleum Inc.
Suite 960, Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas 77056
Breene M. Kerr ........................... 3,030,883(3) 9%
c/o Brookside Company
115 Bay Street
Easton, Maryland 21601
Brian Egolf .............................. 126,386(4) *
Sir Mark Thomson Bt. ..................... 452,566(5) 1%
Robert B. Panero.......................... 779(6) *
Gary F. Fuller............................ 27,000(7) *
James D. Scarlett......................... 25,000(7) *
Herbert C. Williamson, III ............... --(8) --
Timothy T. Stephens....................... 353,500(9) 1%
Albert E. Whitehead....................... 1,246,758(10) 4%
Larry A. Ray.............................. 262,167(11) *
David F. DeCort........................... 236,915(12) *
John P. Dorrier........................... 277,486(13) *
All executive officers and directors
as a group (10 persons)................. 10,857,482(14) 30%
- ---------------
* Less than 1%
(1) Unless otherwise indicated, each of the parties listed has sole voting and
investment power over the shares owned. The number of shares indicated
includes, in each case, the number of Common Shares issuable upon exercise
of stock options ("Options") subject to the Amended 1996 Stock Option
Plan, to the extent that such Options are currently exercisable. For
purposes of this table, Options are deemed to be "currently exercisable"
if they may be exercised within 60 days following August 15, 1997.
(2) Includes 150,000 Common Shares currently issuable upon exercise of
Options, 20,000 shares held by an entity in which Mr. Hefner has a
substantial interest and 3,360,607 Common Shares beneficially owned by Mr.
Hefner and held in escrow pursuant to the Escrow Agreement.
(3) Includes 25,000 Common Shares currently issuable upon exercise of an
Option, consists of [3,005,883] shares beneficially owned by a limited
partnership in which Mr. Kerr serves as a general partner and includes
1,915,216 Common Shares held in escrow pursuant to the Escrow Agreement.
(4) Includes 12,650 Common Shares owned by a member of Mr. Egolf's family,
2,000 Common Shares owned by a trust for the benefit of members of Mr.
Egolf's family, 75,000 Common Shares currently issuable upon exercise of
Options and 39,147 shares held in escrow pursuant to the Escrow Agreement.
(5) Includes 25,000 Common Shares currently issuable upon exercise of an
Option and 199,531 shares held in escrow pursuant to the Escrow Agreement.
(6) Includes 234 shares held by Mr. Panero's wife and 363 shares held in
escrow pursuant to the Escrow Agreement.
(7) Includes 25,000 Common Shares currently issuable upon exercise of an
Option.
(8) Subsequent to August 15, 1997, Mr. Williamson received options for 150,000
Common Shares that are currently exercisable.
(9) Includes 172,000 Common Shares currently issuable upon exercise of
Options. Mr. Stephens resigned as an officer and director of the Company
in May 1997.
(10) Includes 235,000 Common Shares currently issuable upon exercise of Options
and 166,667 Common Shares held in escrow pursuant to the Founder's Escrow
Agreement. Mr. Whitehead resigned as an officer and director of the
Company in May 1997.
(11) Includes 66,667 Common Shares currently issuable upon exercise of an
Option and an additional 194,000 owned by Mr. Ray's wife.
(12) Includes 801 shares owned by Mr. DeCort's wife and 184,000 Common Shares
currently issuable upon exercise of Options.
(13) Includes 266,000 Common Shares currently issuable upon exercise of
Options.
(14) Includes 816,667 Common Shares currently issuable upon exercise of Options
and an aggregate of 5,514,864 Common Shares and 166,667 Common Shares held
in escrow pursuant to the GHK Escrow Agreement and the Founder's Escrow
Agreement, respectively.
-18-
<PAGE>
VOTING SUPPORT AGREEMENT
Under the terms of a voting support agreement by and between the Company and
Hazel Ventures Ltd., the sole shareholder of Petrolinson ("Hazel Ventures"),
Hazel Ventures agreed that prior to July 19, 1998, it will vote all Common
Shares of the Company owned or controlled by it in favor of the slate of
directors proposed by the Company's chief executive officer and will require any
purchaser of its shares to agree to be bound by the terms of the agreement
unless the purchaser acquires the shares in the open market. Hazel acquired
1,000,000 Common Shares, or 2.9% of the Company's outstanding Common Shares, in
exchange for the transfer of its ownership of Petrolinson, the holder of a 6%
interest in the Association Contracts, to a subsidiary of the Company.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS
On May 20, 1997, seven of the Company's nine directors resigned and
confirmed they would not stand for re-election as directors at the Annual
General Meeting of shareholders of the Company on June 12, 1997. The seven
directors included Albert E. Whitehead, Malcolm Butler, William G. McIntosh,
Harvey S. Robinson, James A. Millard, John B. Zaozirny and Timothy T. Stephens.
At the June 12, 1997 meeting, the Company re-elected Robert A. Hefner III and
Brian Egolf to the Board, as well as the following new directors: Breene M.
Kerr, Sir Mark Thomson Bt., Robert B. Panero, Gary F. Fuller and James D.
Scarlett. Subsequent to the meeting, the Board of Directors appointed Larry A.
Ray as a director of the Company. In addition, in September 1997, Mr. Williamson
was appointed as a director of the Company. As indicated in the Supplemental
Management Proxy Circular dated as of May 26, 1997 that was furnished to the
shareholders of the Company in connection with the Annual General Meeting,
certain disagreements with respect to how the Company should be operated to
become self-sufficient to manage its Colombian properties was voiced by the two
largest shareholders, Messrs. Hefner and Kerr, and by Mr. Egolf to other members
of the Board of Directors. Thereafter, Mr. Whitehead indicated he would retire
and resign as a director of the Company. As a result, the Voting Support
Agreement, which contained an obligation of Messrs. Hefner and Kerr to vote in
favor of a slate proposed by the Chief Executive Officer, was subject to
termination. Due to these events, the senior officers, Messrs. Butler and
Stephens, together with all the directors other than Messrs. Hefner and Egolf,
resigned.
The information set forth below, furnished to the Company by the respective
individuals, shows as to each director and executive officer of the Company (i)
his name and age; (ii) his principal positions with the Company; (iii) his
principal occupation or employment during the last five years; (iv) other public
directorships, and (v) the month and year in which he began to serve as a
director. No family relationship exists among any of the executive officers and
directors of the Company.
<TABLE>
<CAPTION>
PRESENT POSITION PRINCIPAL OCCUPATION DURING THE DIRECTOR
NAME AGE WITH THE COMPANY LAST FIVE YEARS; OTHER DIRECTORS SINCE
- ----------------------------- ------ ---------------- -------------------------------- --------
<S> <C> <C> <C>
Robert A. Hefner III(1)..... 62 Chairman, Chief Chairman, Chief Executive Office 11/96
Executive Officer and and Managing Director of the
Managing Director Company since May 1997; Owner
and Managing Member, The GHK
Company L.L.C., a private
company engaged in oil and gas
exploration
Breene M. Kerr(1)(2)(3)..... 68 Vice Chairman General Partner, Talbot Fairfiel 6/97
L.P., an oil and gas exploration
undertaking; Chairman of Kerr
Consolidated, an equipment sales
and leasing undertaking from 1969
to 1995; Director of Chesapeake
Energy Corp.
</TABLE>
-19-
<PAGE>
<TABLE>
<CAPTION>
PRESENT POSITION PRINCIPAL OCCUPATION DURING THE DIRECTOR
NAME AGE WITH THE COMPANY LAST FIVE YEARS; OTHER DIRECTORS SINCE
- ----------------------------- ------ ---------------- -------------------------------- --------
<S> <C> <C> <C>
Larry A. Ray(1)................ 49 Executive Vice President Executive Vice President and Chief 6/97
and Chief Operating Operating Officer since September
Officer 1997 and director; Executive Vice
President - Operations from June
1997 to September 1997; Manager,
The GHK Company L.L.C.
Herbert C. Williamson, III..... 49 Executive Vice President Executive Vice President and Chief 9/97
and Chief Financial Financial Officer of the Company
Officer since September 1997 and director;
from 1995 through September 1997,
Director of the Investment Banking
Department of Credit Suisse First
Boston; from 1985 through 1995,
Vice Chairman and Executive Vice
President, Parker & Parsley
Petroleum Company
John P. Dorrier................ 45 Executive Vice President Executive Vice President of the N/A
Company since May 1995; from
1987 through March 1995, Mr.
Dorrier held various positions with
BHP Petroleum, including Vice
President Exploration, the Americas
David F. DeCort................ 41 Vice President - Finance Vice President - Finance and N/A
and Secretary Secretary of the Company since
June 1995; Treasurer/Controller of
Huffco Group Inc., a Houston
independent oil and gas company,
from August 1990 to June 1995
Brian Egolf(3)................. 49 Director President, Petroleum Management 11/96
Corporation, a private oil and gas
exploration company
Sir Mark Thomson Bt.(2)........ 57 Director Managing Director of B&N Invest 6/97
ments Limited, an investment
management company
Robert B. Panero............... 68 Director Founder and President of Robert 6/97
Panero Associates, international
strategic policy and project studies
advisors
Gary F. Fuller(3).............. 60 Director Shareholder/director of McAfee & 6/97
Taft, attorneys-at-law
James D. Scarlett(2)........... 44 Director Partner in McMillan, Binch,
attorneys-at-law 6/97
</TABLE>
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Stock Option and Compensation Committee.
-20-
<PAGE>
Executive officers of the Company serve at the pleasure of the Board of
Directors. The term of office of each director of the Company ends at the next
annual meeting of the Company's shareholders or when his or her successor is
elected and qualifies. Vacancies on the Board are filled by the remaining
directors and directors elected to fill such vacancies hold office until the
next annual meeting of the Company's shareholders.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company held three meetings during 1996 and
took action by unanimous written consent twenty times during 1996. All directors
attended 75% or more of the total number of meetings of the Board and of the
committees of which they were members.
The Executive Committee, the Audit Committee and the Stock Option and
Compensation Committee (the "Compensation Committee") are the only standing
committees of the Board. There is no formal nominating committee of the Company.
The Executive Committee, which is currently composed of Messrs. Hefner, Kerr
and Ray, is delegated, during the intervals between the meetings of the Board of
Directors, all the powers of the Board in respect of the management and
direction of the business and affairs of the Company (except only those
specified in Subsection 116(2) of the Yukon Business Corporation Act) in all
cases in which specified direction in writing shall not have been given by the
Board. During 1996 and until their resignation from the Board of Directors, the
Executive Committee was composed of Messrs. Whitehead, Stephens, Hefner and
Plewes. The Executive Committee met once during 1996.
The Audit Committee, which is currently composed of Messrs. Kerr, Scarlett
and Thomson, consults with the auditors of the Company and such other persons as
the members deem appropriate, reviews the preparations for and scope of the
audit of the Company's annual financial statements, makes recommendations
concerning the engagement and fees of the independent auditors, and performs
such other duties relating to the financial statements of the Company as the
Board of Directors may assign from time to time. During 1996, and until their
resignation from the Board of Directors, the Audit Committee was comprised of
William G. McIntosh and John B. Zaozirny. The Audit Committee met two times
during 1996 and took action by unanimous consent twice during 1996.
The Compensation Committee, which currently is composed of Messrs. Kerr,
Egolf and Fuller, has all of the powers of the Board of Directors, including the
authority to issue shares or other securities of the Company, in respect of any
matters relating to the administration of the Company's 1996 Stock Option Plan
and the compensation of officers, directors, employees and other persons
performing substantial services for the Company. During 1996 and until May 1997,
the Compensation Committee was comprised of James A. Millard, George Plewes and
Harvey S. Robinson. The Compensation Committee took action by unanimous written
consent twice during 1996.
DIRECTORS' FEES
Directors who are officers or employees of the Company receive no additional
compensation for their service as members of the Board of Directors or as
members of Board committees. Directors who are not officers or employees of the
Company are eligible to participate in the Company's Amended 1996 Stock Option
Plan and are reimbursed for their out-of-pocket expenses incurred in connection
with their service as directors, including travel expenses. In July 1996, each
non-employee director received a five year option to purchase 10,000 Common
Shares at an exercise price of $7.125 per share. In November 1996, upon their
election as directors, Messrs. Hefner and Egolf each received a five year option
to purchase 50,000 Common Shares at an exercise price of $18.75 per share. In
May 1997, each non-officer received an option for 15,000 shares of common stock
at $10.90. Messrs. Hefner and Egolf declined to accept such options. In June
1997, the Company granted Mr. Ray an option to purchase 200,000 Common Shares at
a price of $10.70 per share. Such options vest one-third immediately with the
remaining vesting 50% at the end of one year from the date of grant and the
remaining 50% at the end of the second year from the date of grant. On September
9, 1997, the Company granted Mr. Ray options to purchase an additional 200,000
Common Shares at a price of $13.23 per share. Such options vest one-third each
on the third, fourth and fifth anniversaries of the date of grant. The Company
granted options to the other directors as follows on July 17, 1997 at an
exercise price of $10.95 per share: Mr. Hefner -- 300,000; Mr. Egolf -- 75,000;
Mr. Kerr -- 75,000; Mr. Fuller -- 75,000; Mr. Panero -- 50,000; Mr. Scarlett --
75,000;
-21-
<PAGE>
and Mr. Thomson -- 75,000. One-third of the options are vested immediately, with
the remaining vesting 50% at the end of one year from the date of grant and the
remaining 50% at the end of the second year from the date of grant. Mr. Panero's
options will vest 50% at the end of one year from the date of grant and the
remaining 50% at the end of the second year from the date of grant. Mr. Panero
also received a payment of $37,500 in lieu of 25,000 options which would have
vested immediately. In each case, the Company granted these options at the
approximate prevailing market price on the date of grant.
-22-
<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
which was awarded or paid to, or earned by, the Company's Chief Executive
Officer and the Company's four most highly compensated officers (other than the
Chief Executive Officer) who were serving as officers at December 31, 1996, and
whose total salary and bonus during the fiscal year ended December 31, 1996
exceeded $100,000 (the "Named Officers").
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------------------- -------
OTHER RESTRICTED
ANNUAL SHARES LTIP ALL OTHER
NAME AND PRINCIPAL YEAR SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
POSITION ($) ($) ($)(1) ($) (#) ($) ($)(3)
- --------------------------- ---- -------- ----- ------------ ---------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Albert E. Whitehead(4) .... 1996 $150,000 -0- -0- -0- 185,000(5) -0- 14,634
Chairman of the Board .. 1995 125,000 -0- -0- -0- 200,000 -0- --
and Chief Executive
Officer
Timothy T. Stephens(4) .... 1996 $135,000 93,840 -0- -0- 172,000(5) -0- 13,170
President .............. 1995 106,875(2) -0- -0- -0- 250,000 -0- --
John P. Dorrier ........... 1996 $120,000 83,520 -0- 151,000 -0- 11,707
Executive Vice President 1995 80,000(2) -0- -0- -0- 125,000 -0- --
David F. DeCort ........... 1996 $ 90,000 62,640 -0- -0- 124,000 -0- 8,780
Vice President-Finance . 1995 52,500(2) -0- -0- -0- 100,000 -0- --
</TABLE>
- ---------------
(1) Except as otherwise indicated, the dollar value of perquisites and other
personal benefits for each of the Named Executive Officers was less than
established reporting thresholds.
(2) Represents salary received from commencement of employment through December
31, 1995 from the Company and the Predecessor, which amount does not reflect
an annual rate of compensation.
(3) Consists solely of amounts contributed by the Company to the Named Executive
Officer's account in the Company's 401(k) Plan.
(4) On May 20, 1997, Messrs. Whitehead and Stephens resigned as executive
officers and directors of the Company. As part of a settlement agreement
with Mr. Stephens, the Company agreed to pay Mr. Stephens $525,000. The
Company also entered into a consulting agreement with Mr. Whitehead for a
three-year term for $200,000 per annum. Mr. Malcolm Butler was named Chief
Executive Officer of the Company in May 1997 and received 200,000 options at
$10.90, but resigned on May 20, 1997 when Mr. Hefner was named Chief
Executive Officer. Mr. Butler received a lump sum payment of $250,000,
representing one year's salary, as part of the settlement agreement with
him.
(5) In May 1997, Messrs. Whitehead and Stephens were each granted options
exercisable for 50,000 shares of common stock at $10.90 per share. As part
of the arrangements surrounding the resignation of such persons, the
exercise period of the options for Messrs. Whitehead and Stephens was
extended from 90 days to 18 months.
As a result of the resignations and the appointment of Mr. Robert A. Hefner
III as Chief Executive Officer and Mr. Larry A. Ray as Executive Vice
President-Operations, the Company anticipates that Messrs. Ray, Dorrier and
DeCort will be the Company's most highly compensated executive officers for
1997. Mr. Hefner will not receive any salary from the Company for 1997.
-23-
<PAGE>
OPTION/SAR GRANTS DURING 1996
The following table sets forth information regarding individual grants of
Options by the Company during the fiscal year ended December 31, 1996 to each of
the Named Officers, and their potential realizable values.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------
POTENTIAL REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL RATES OF
SHARES % OF TOTAL SHARE PRICE APPRECIATION FOR
UNDERLYING OPTIONS/SARS OPTION TERM(1)
OPTIONS/SARS GRANTED TO EXERCISE OR --------------------
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION 5% 10%
(#) FISCAL YEAR ($/SH) DATE ($) ($)
------------- ------------ ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Albert E. Whitehead(2).. 85,000 13.1% $18.75 11/26/2001 440,324 973,000
100,000 15.4% $ 7.125 07/23/2001 196,851 434,988
Timothy T. Stephens(2).. 82,000 12.6% $18.75 11/26/2001 424,783 938,659
90,000 13.8% $ 7.125 07/23/2001 177,166 391,490
John P. Dorrier(2)...... 71,000 10.9% $18.75 11/26/2001 367,800 812,741
80,000 12.3% $ 7.125 07/23/2001 157,480 347,990
54,000 8.3% $18.75 11/26/2001 279,735 618,141
David F. DeCort(2)...... 70,000 10.7% $ 7.125 07/23/2001 137,795 304,492
</TABLE>
- ---------------
(1) The assumed rates of annual appreciation are calculated from the date of
grant through the assumed expiration date. Actual gains, if any, on stock
option exercises and Common Share holdings are dependent on the future
performance of the Common Shares and overall stock market conditions. There
can be no assurance that the value reflected in the table will be achieved.
(2) In addition to the grants of options indicated in the table above, in May
1997, Messrs. Whitehead, Stephens, Dorrier and DeCort received options
exercisable for 50,000, 50,000, 40,000 and 30,000 common shares,
respectively, at an exercise price of US $10.90.
OPTION EXERCISES DURING 1996 AND FISCAL YEAR END OPTION VALUES
The following table provides information related to Options exercised by the
Named Officers during 1996 and the number and value of unexercised Options held
by the Named Officers at year-end. The Company does not have any outstanding
stock appreciation rights.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN THE MONEY
OPTIONS, WARRANTS/SARS AT OPTIONS, WARRANTS/SARS
SHARES FISCAL YEAR-END (#)(1) AT FISCAL YEAR END ($)(3)
ACQUIRED VALUE REALIZED ------------------------------------------------------------------
NAME ON EXERCISE (#) ($)(2) EXERCISABLE - UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------ ----------------------------------- ------------------ -----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Albert E. Whitehead.......... 200,000 $2,312,500 185,000 -0- $1,100,000 -0-
Timothy T. Stephens.......... 228,333 $3,767,951 193,667 -0- $1,192,714 -0-
John P. Dorrier.............. 50,000 $328,750 226,000 -0- $2,183,125 -0-
David F. DeCort.............. 30,000 $502,500 194,000 -0- $1,986,250 -0-
</TABLE>
- ---------------
(1) The number of exercisable and unexercisable Options set forth in the above
table may differ from the number reflected in the table on page 27 because
the information in the above table is as of December 31, 1996.
(2) Represents the difference between the exercise price of the option and the
closing price on the date of exercise.
(3) Based on a closing price on December 31, 1996 of $18.125 per share.
EMPLOYMENT CONTRACTS AND CHANGE OF CONTROL ARRANGEMENTS
The Company and each of Messrs. Dorrier and DeCort have entered into three
year employment contracts which provide that they will receive annual base
salaries of $150,000 and $112,500, respectively, and, in the sole discretion of
the Compensation Committee of the Board, may receive annual merit increases,
annual bonuses and stock option awards. The contracts may be terminated for
"cause" which includes death or serious incapacity and the executive officers
may resign upon three months' prior written notice. The Company and each of
Messrs. Dorrier and DeCort have also entered into agreements which provide for
payments to the executive in the event there is a Change of Control of
-24-
<PAGE>
the Company and the executive's employment is terminated (i) by the Company
within twelve months thereafter, (ii) by the executive within six months
thereafter, or (iii) by the executive between six and twelve months after a
Change of Control if a Triggering Event has occurred. In any such event, the
executive shall be entitled to a payment equal to the aggregate salary payable
for the remaining term of his employment agreement and the Company shall pay the
executive's health insurance premium for a period of one year unless the
executive has secured comparable health insurance prior thereto. If bonuses are
paid by the Company for the year in which the executive's employment terminated,
the executive shall be entitled to a bonus equal to the most recent annual bonus
paid to him for each year or part of the year remaining on his employment
agreement, provided that such bonus payment shall only be paid with respect to a
year that the Company otherwise pays bonuses to some or all of its employees. In
addition, all stock options held by the executive shall be extended until the
earlier to occur of the expiration date of the option or eighteen months after
the date of the termination of his employment by the Company or the date of his
notice of intent to terminate his employment if he elected to resign. The
agreements also provide that in the event the exercise price of any option
granted simultaneously with the option issued to the executive is reduced, the
exercise price of the executive's option shall also be reduced. For purposes of
the agreement, the term "Change of Control" is defined to include the
acquisition by any person or combination of persons of a sufficient number of
securities of the Company to materially affect the control of the Company which,
for purposes of the agreement, shall be deemed to occur if 20% or more of the
votes which may be cast in the election of directors have been acquired by any
person or combination of persons; a merger, consolidation, or amalgamation with
or into any other person if all or part of the outstanding voting securities of
the Company shall be changed, reclassified, converted, exchanged or otherwise
acquired for shares or other securities of the Company or any other person or
for cash or any other property, unless such transaction has been approved by a
majority of the directors in office on April 28, 1997; a majority of the
directors in office on April 28, 1997 shall cease to serve as directors of the
Company for any reason including resignation; the sale or other transfer of
assets which constitute more than 50% of the consolidated assets of the Company
(measured by either book value or fair market value) or which generated more
than 50% of the consolidated operating income or cash flow of the Company. The
term "Triggering Event" shall include any adverse change in the duties, powers
or compensation of the executive in effect prior to the Change in Control or a
change in the person to whom the executive reports, other than as a result of a
promotion in the normal course of business. As a result of the resignation by
the directors of the Company in May 1997, a change of control occurred with
respect to such officers.
The Company has entered into a five year employment agreement with Mr. Larry
A. Ray that provides for an annual base salary of $262,500 and in the sole
discretion of the Compensation Committee of the Board, Mr. Ray may receive
annual merit increases, annual bonuses and stock option awards. As part of his
employment agreement, Mr. Ray was granted options to purchase 200,000 Common
Shares at an exercise price of $10.70 per share. One-third of the options vested
immediately and the remainder vest one-half each on the first and second
anniversaries of the date of grant. On September 9, 1997, the Company granted
Mr. Ray options to purchase an additional 200,000 Common Shares under the 1997
Stock Option Plan at a price of $13.23 per share, subject to shareholder
approval of the 1997 Stock Option Plan at the next annual or special meeting.
Such options vest one-third each on the third, fourth, and fifth anniversaries
of the date of grant. The employment agreement may be terminated for "cause"
which includes death or serious incapacity. Under the terms of the employment
agreement, Mr. Ray will receive payments equal to the amounts remaining to be
paid under the agreement in the event of a "change in control" and his
employment terminates for any reason, including resignation by Mr. Ray. For
purposes of this Agreement, the term "Change in Control" shall mean (1) any
merger, consolidation, or reorganization in which the Company is not the
surviving entity (or survives only as a subsidiary of an entity), (2) any sale,
lease, exchange, or other transfer of (or agreement to sell, lease, exchange, or
otherwise transfer) all or substantially all of the assets of the Company to any
other person or entity (in one transaction or a series of related transactions),
(3) dissolution or liquidation of the Company, (4) when any person or entity,
including a "group" as contemplated by Section 13(d) of the Securities Exchange
Act of 1934, as amended, acquires or gains ownership or control (including
without limitation, power to vote) of more than 50% of the outstanding shares of
the Company's voting stock (based upon voting power), or (5) as a result of or
in connection with a contested election of directors, the persons who were
directors of the Company before such election cease to constitute a majority of
the Board of Directors; provided, however, that the term "Change in Control"
shall not include any reorganization, merger, consolidation, sale, lease,
exchange, or similar transaction involving solely the Company and one or more
previously wholly-owned subsidiaries of the Company.
The Company will enter into a five year employment agreement with Mr.
Herbert C. Williamson, III that provides for an annual base salary of $100,000,
and in the sole discretion of the Compensation Committee of the Board, Mr.
Williamson may receive annual merit increases, annual bonuses and stock option
awards. As part of his employment
-25-
<PAGE>
agreement, Mr. Williamson was granted options to purchase 500,000 Common Shares
at an exercise price of $13.23 per share. Options to purchase 150,000 Common
Shares vest immediately, options to purchase 150,000 Common Shares vest on
September 9, 1998, and options to purchase 50,000 Common Shares each vest on
September 9, 1999, 2000, 2001 and 2002, respectively. All of the options granted
by the Board of Directors to Mr. Williamson are subject to approval of the 1997
Stock Option Plan by the stockholders at the next annual or special meeting. The
remaining terms and conditions of Mr. Williamson's employment agreement are
substantially similar to Mr. Ray's employment agreement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
THE GHK TRANSACTION
In April 1996, the Company and GHK Company Colombia, an Oklahoma corporation
controlled by Robert A. Hefner III, entered into a non-binding letter of intent
governing a proposed acquisition by the Company of an additional 35%
participating interest in the Association Contracts in consideration of the
issuance of up to 16,000,000 Common Shares by the Company to three entities
holding such interests or to their respective shareholders (collectively, the
"GHK Transaction"). Effective July 26, 1996, pursuant to the terms of three
separate share purchase agreements, the Company agreed to issue an aggregate of
16,777,143 Common Shares to nineteen unrelated parties, in consideration of the
Company's acquisition of (a) 100% of the issued and outstanding shares of GHK
Company Colombia which serves as the operator under the Association Contracts
and holds a 10.944% interest in such contracts, (b) 100% of the membership
interests of Esmeralda Limited Liability Company ("Esmeralda") which holds a
9.776% interest in the Association Contracts, and (c) 62.963% membership
interest in Cimarrona Limited Liability Company ("Cimarrona") which holds a
25.38% interest in the Association Contracts. As a result of the transaction,
the Company acquired an additional 36.7% indirect interest in the Association
Contracts. As a condition to the GHK Transaction, the Company also entered into
the Registration Rights Agreement, the Escrow Agreement, the Management
Agreement and the Voting Support Agreement, each of which is more particularly
described below.
Pursuant to the terms of the share purchase agreement between the Company
and Robert A. Hefner III, the Company purchased 100% of the issued and
outstanding shares of GHK Company Colombia from Mr. Hefner in consideration for
the issuance of 5,002,972 Class A Preferred Shares Series 1 of the Company to
him. Pursuant to the terms of the share purchase agreement between the Company
and the members of Esmeralda, the Company purchased 100% of the membership
interests of Esmeralda from such members in consideration for the issuance of an
aggregate of 4,469,028 B Special Warrants (the "B Warrants") to such members .
Pursuant to the terms of the share purchase agreement between the Company and
the members of Cimarrona, the Company purchased a 62.963% membership interest in
Cimarrona from such members in consideration for the issuance of an aggregate of
7,305,143 B Warrants to such members. The Preferred Shares and the B Warrants
were issued at a deemed price per share of $9.125 which was based upon the
closing price of the Company's Common Shares on the Canadian Dealer Network on
July 26, 1996. Under the terms of the share purchase agreement each of the
parties agree to indemnify the other for certain matters relating to the
business prior to the transaction.
Each B Warrant was exercisable into one Common Share without payment of
additional consideration and was automatically converted into a Common Share, in
accordance with the terms of the Company's Articles of Continuance, in February
1997. Each Preferred Share was entitled to one vote per share, was exercisable
into one Common Share without payment of additional consideration and was also
automatically converted into a Common Share, in accordance with the terms of the
Company's Articles of Continuance, in February 1997.
The shares of GHK Company Colombia and the 62.963% interest in Cimarrona
were transferred to Seven Seas Petroleum Colombia Inc.; 50% of the membership
interest in Esmeralda was transferred to Seven Seas Petroleum Colombia Inc.; and
50% of such membership interest was transferred to Seven Seas Petroleum
Holdings, Inc. as a limited liability company is required to have a minimum of
two members.
As a condition of completing the GHK Transaction, the Company also entered
into a Registration Rights Agreement with the holders of the B Warrants and the
Preferred Shares which currently entitles such holders to notice of proposed
public offerings or private placements by the Company under the Securities Act
(Ontario) and to include Common Shares held by such holders in such offerings
subject to limitations which may be imposed by the managing underwriter of any
such offering.
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As a condition of the Company obtaining the consent of the Ontario
Securities Commission to the GHK Transaction, the Company, the holders of
Preferred Shares and B Warrants and the Montreal Trust Company of Canada, as
trustee, entered into an escrow agreement dated July 26, 1996 (the "GHK Escrow
Agreement") pursuant to which 70% of the securities issued by the Company in the
GHK Transaction, or upon conversion or the securities issued therein, are held
in escrow. An aggregate of 11,744,000 Common Shares are currently held in escrow
and such Common Shares may not be sold, assigned, pledged, or transferred until
released from escrow in accordance with the terms of the GHK Escrow Agreement.
Shares held in escrow may be voted by the registered holders thereof. Pursuant
to the terms of the Escrow Agreement, the securities held in escrow shall be
released as follows: (i) one-third of the securities deposited in escrow shall
be released on each of July 26, 1997, 1998 and 1999 or (ii) the securities may
be released in full if the Company or the owner of such securities provides the
Ontario Securities Commission with technical reports acceptable to the director
thereof that establish a determinate value as of April 26, 1996 for the
interests in the Association Contracts transferred to the Company or its
subsidiaries, of $118,908,000 or more. If interim technical reports establish a
determinate value of less than $118,908,000 for such interests, proportionate
releases from escrow may be permitted.
Prior to the GHK Transaction, GHK Company L.L.C. ("GHK L.L.C."), an
Oklahoma limited liability company, the principal owner of which is Robert A.
Hefner III, provided administrative and management services to GHK Company
Colombia in connection with its obligations as operator of the Dindal and Rio
Seco blocks. As a condition of completing the GHK Transaction, the Company, GHK
Company Colombia and GHK L.L.C. entered into a Management Agreement pursuant to
which GHK L.L.C. was retained by GHK Company Colombia to perform the duties and
obligations of GHK Company Colombia under the Association Contracts and as
operator of the Dindal blocks under the joint operating agreement dated August
1, 1996 (the "JOA"). GHK Company Colombia agreed to pay GHK L.L.C. a monthly sum
equal to 100% of the overhead charges authorized under the JOA relating to such
blocks (which costs are estimated to be approximately $15,000 per month) plus an
additional $15,000 per month and to reimburse GHK L.L.C. for all expenses
incurred in the performance of its duties under the Management Agreement. The
costs and expenses under the JOA are paid by the interest holders under the
Association Contracts proportionately to their percentage interests therein.
From July 26, 1996 to June 30, 1997, GHK Company Colombia paid an aggregate of
$374,109 to GHK L.L.C. for services provided under this agreement. The
Management Agreement was terminated June 30, 1997.
Under the terms of a Voting Support Agreement executed in connection with
the GHK Transaction, Seven Seas, Robert A. Hefner III, Breene M. Kerr, Albert E.
Whitehead, George H. Plewes, and Timothy T. Stephens agreed to vote or cause to
be voted all shares owned or controlled by them in favor of the slate of
directors proposed by the Company's chief executive officer. The Voting Support
Agreement also provides that a sale by Messrs. Hefner and Kerr of a block of
10,000 Common Shares or more which were initially subject to the GHK Escrow
Agreement, must first be offered to be made through Yorkton Securities, Inc. or
such other investment dealer as may be designated by the Board of Directors or
the securities sold will remain subject to the Voting Support Agreement. In the
event any such dealer is unable or unwilling to sell such securities in a timely
manner at a price acceptable to the seller, the seller may sell to a third party
without being subject to the Voting Support Agreement provided that such sale is
not to a person or one or more of a group of persons acting in concert, who is
acquiring the securities of the seller in connection with a takeover bid, other
than where such takeover bid is an offer made generally to the shareholders of
the Company. The Voting Support Agreement terminated on May 20, 1997.
Prior to the GHK Transaction, neither Mr. Hefner, Mr. Egolf nor Mr. Kerr
were affiliated with the Company. As a result of the GHK Transaction, Messrs.
Hefner and Egolf were elected directors of the Company and Mr. Hefner and Mr.
Kerr became substantial shareholders of the Company. In addition, as a result of
an agreement between Mr. Hefner, in his capacity as the selling shareholder of
GHK Company Colombia, the members of Esmeralda and Cimarrona and Mr. Egolf
(collectively, the Sellers"), the Sellers paid Mr. Egolf an aggregate of 83,886
B Warrants, which were subsequently converted into 83,886 Common Shares of which
58,720 shares were held in escrow pursuant to the Escrow Agreement, as
consideration for his services to the Sellers in connection with the GHK
Transaction. As of August 15, 1997, 39,147 shares remain subject to the Escrow
Agreement.
TRANSACTIONS WITH FORMER DIRECTOR AND OFFICER. Mr. Albert E. Whitehead,
formerly Chairman and Chief Executive Officer of the Company and a director, may
be deemed a promotor of the Company. In connection with the formation of the
Predecessor of the Company in February 1995, Mr. Whitehead received 1,000,000
Common Shares for a total consideration of $1.00. As of condition of the Common
Shares being listed on the Toronto Stock Exchange ("TSE"), the TSE required Mr.
Whitehead to place 500,000 Common Shares held by him in escrow in accordance
with the TSE's
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founder stock policy. Under the terms of the escrow agreement (the "Founder's
Escrow Agreement") between Mr. Whitehead, the Company and Montreal Trust Company
of Canada as escrow agent dated January 21, 1997, one-third of the shares
subject thereto were to be released from escrow on each of June 29, 1996, 1997
and 1998 and, accordingly, 166,667 Common Shares are currently subject to the
Founder's Escrow Agreement. For a description of the Common Shares and options
held by Mr. Whitehead, see "Principal Stockholders" and "Executive
Compensation."
TRANSACTIONS WITH DIRECTOR AND OFFICER. The Company has agreed to loan Larry
A. Ray $200,000 at 6.06% interest. Interest on the loan is payable monthly with
a single principal payment due at the end of five years.
ITEM 8. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Company is a party or
to which any of its property is subject.
ITEM 9. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(A) MARKET INFORMATION.
The Company's Common Shares have been listed on the Toronto Stock Exchange
("TSE") in Toronto, Ontario, Canada, since February 10, 1997 and currently trade
under the symbol "SVS.U". From June 30, 1995 through February 7, 1997, the
Company's Common Shares traded on the Canadian Dealer Network under the symbol
"SVSE.U". The following table summarizes the high and low closing prices as
reported on the Canadian Dealer Network for each quarterly period since the
commencement of trading through February 7, 1997 and the high and low sales
prices as reported on the TSE from February 10, 1997 through August 15, 1997.
The prices listed below are stated in U.S. dollars, which is the currency in
which they were quoted:
HIGH LOW VOLUME
(US $)
1995
Third Quarter 2.15 0.90 2,101,602
Fourth Quarter 1.15 0.60 1,974,615
1996
First Quarter 6.75 0.55 8,402,885
Second Quarter 10.50 5.25 4,107,361
Third Quarter 20.00 7.00 6,655,958
Fourth Quarter 25.75 14.75 8,537,978
1997
First Quarter (through February 7, 1997) 19.00 15.00 3,018,441
First Quarter (since February 10, 1997) 17.40 9.00 3,718,929
Second Quarter 13.10 8.25 3,200,200
Third Quarter (through August 15, 1997) 12.00 9.60 1,018,400
(B) HOLDERS.
As of August 15, 1997, the Common Shares of Seven Seas were held of record
by approximately 6,635 holders, including several holders who are nominees for
an undetermined number of beneficial owners.
(C) DIVIDENDS
The Company has not declared or paid any cash dividends on its Common Shares
since its inception nor does the Company intend to do so in the immediate
future. It is currently the policy of the Company's Board of Directors to retain
earnings to finance the Company's exploration and development activities and
operations and the expansion of the Company's business.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Within the last three years, the Company issued the following securities
which were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
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On June 30, 1995, upon the Amalgamation, 11,999,999 Common Shares of the
Company were issued to the holders of the common shares of the Predecessor and
680,464 Common Shares of the Company were issued to the holders of shares of
Rusty Lake. The Amalgamation was conducted in Canada, was effected in accordance
with the laws of British Columbia and approved by the Supreme Court of British
Columbia.
In March 1996, 2,000,000 Special Warrants were issued at a purchase price of
$2.75 per Unit pursuant to a brokered private offering of units conducted in
Canada pursuant to the British Columbia securities laws. The Units were
convertible into one common share and one half of one Class A share purchase
warrant (the "Class A Warrants"). Each whole Class A Warrant entitled the holder
thereof to acquire one additional Common Share at a price of $3.50 per share at
any time on or before March 14, 1997. Yorkton Securities Inc., First Marathon
Securities Limited and Griffiths McBurney & Partners Inc. served as agents for
the private placement and received a 7% commission on the gross proceeds
thereof. To the extent U.S. residents were involved in this transaction, the
Company believes that the issuance of securities was exempt from registration
under the Securities Act by virtue of the provision of Section 4(2) thereof.
In July 1996, the Company issued the following securities in the GHK
Transaction: (i) an aggregate of 7,305,143 B Special Warrants to certain members
of Cimarrona Limited Liability Company as consideration for the transfer of a
62.963% membership interest in Cimarrona Limited Liability Company by such
members to a subsidiary of the Company,; (ii) 4,469,028 B Special Warrants to
the members of Esmeralda Limited Liability Company as consideration for the
transfer of a 100% membership interest in Esmeralda by such members to a
subsidiary of the Company, and (iii) 5,002,972 Class A Preferred Shares to
Robert A. Hefner III as consideration for the transfer of all of the issued and
outstanding shares of GHK Company Colombia to a subsidiary of the Company. The B
Special Warrants and the Class A Preferred Shares were each issued at a deemed
purchase price of $9.125 per Special Warrant and per Preferred Share. Each B
Special Warrant and each Class A Preferred Share was convertible in each case
into one Common Share of the Company. To the extent U.S. residents were involved
in this transaction, the Company believes that the issuance of securities was
exempt from registration under the Securities Act by virtue of the provision of
Section 4(2) thereof.
In October 1996, 500,000 C Special Warrants were issued at a purchase price
of $15.00 per Unit pursuant to a brokered private offering of Units conducted in
Canada pursuant to the British Columbia securities laws. The Units were
convertible into one common share and one half of one Class B share purchase
warrant (the "Class B Warrants"). Each whole Class B Warrant entitles the holder
thereof to acquire one additional Common Share at a price of $18.50 per share at
any time on or before October 15, 1997. Yorkton Securities and Tuscarora
Capital, Inc. jointly served as the agent for the private placement and jointly
received a 6% commission on the gross proceeds thereof. To the extent U.S.
residents were involved in this transaction, the Company believes that the
issuance of securities was exempt from registration under the Securities Act by
virtue of the provisions of Section 4(2) thereof.
In February 1997, 19,277,143 Common Shares were issued upon the automatic
conversion of (i) the Special Warrants issued in March 1996, (ii) the B Special
Warrants and the Class A Preferred Shares issued in July 1996, and (iii) the C
Special Warrants issued in October 1996. As the conversion of such securities
was automatic, to the extent U.S. residents were involved in such transaction,
the Company relied on the exemption from registration under the Securities Act
by virtue of the provisions of Section 3(a)(9) thereof, since the securities
issued were exchanged by the Company with existing security holders exclusively
and no commission or other remuneration was paid or given directly or indirectly
for soliciting such exchange.
In February 1997, 1,000,000 Common Shares were issued in a private
transaction to Hazel Ventures Ltd., a British Virgin Islands company, in
consideration of the transfer of 100% of the capital stock of Petrolinson S.A.
to a subsidiary of the Company in a transaction conducted outside of the United
States.
From February 1996 through August 1997, an aggregate of 912,000 Common
Shares were issued to former directors and former and current employees of the
Company upon the exercise of employee stock options at purchase prices of $0.75
to $7.125 per share. To the extent U.S. residents were involved in these
transactions, the Company believes that the issuance of securities was exempt
from registration under the Securities Act by virtue of the provisions of
Section 4(2) thereof.
In March 1997, 1,000,000 Common Shares were issued upon exercise of the
Class A Warrants at an exercise price of $3.50 per share. To the extent U.S.
residents were involved in this transaction, the Company believes that the
issuance of securities was exempt from registration under the Securities Act by
virtue of the provisions of Section 4(2) thereof.
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On August 7, 1997, the Company issued $25,000,000 principal amount of
Special Notes. See "Item 2. Manage ment's Discussion and Analysis of Financial
Condition and Results of Operations--Convertible Debentures." To the extent U.S.
residents were involved in this transaction, the Company believes that the
issuance of securities was exempt from registration under the Securities Act by
virtue of the provisions of Section 4(2) thereof and Rule 506 of Regulation D.
ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The following statements are subject to the detailed provisions of the
Company's Articles of Continuance and ByLaws, do not purport to be complete, and
are qualified in their entirety by reference thereto.
The Company's Articles of Continuance authorizes the issuance of an
unlimited number of Common Shares without par value and an unlimited number of
Class A Preferred Shares, without par value. As of August 15, 1997, 34,869,575
Common Shares were issued and outstanding. As of August 15, 1997, the Company
had 6,635 shareholders of record.
COMMON SHARES
No holder of Common Shares has any preemptive right to subscribe for any of
the Company's securities. All outstanding shares are fully paid and
nonassessable. Holders of Common Shares are not entitled to cumulative voting
and are entitled to one vote per share with respect to all matters that are
required by law to be submitted to shareholders, including the election of
directors.
Subject to the prior rights of the holders of any Preferred Shares that may
be outstanding, holders of Common Shares are entitled to share pro rata in such
dividends as may be declared by the Board of Directors out of funds legally
available for that purpose. In the event of liquidation of the Company, all
assets available for distribution (after satisfaction of the prior rights of the
holders of any outstanding Preferred Shares) are distributable among the holders
of the Common Shares according to their respective holdings.
Montreal Trust Company of Canada, Suite 600, 530-8th Avenue, S.W., Calgary,
Alberta T2P 3S8, is the transfer agent and the registrar for the Company's
Common Shares.
The authorized but unissued Common Shares and Preferred Shares could be
used to dilute the share ownership of persons seeking to obtain control of the
Company, and thereby defeat a possible takeover attempt which, if shareholders
were offered a premium over the market value of their shares, might be viewed as
being beneficial to the Company's shareholders. In addition, the Preferred
Shares could be issued with voting, conversion rights and preferences which
would adversely affect the voting power and other rights of holders of Common
Shares.
PREFERRED SHARES
The Company's Articles of Continuance provide that the Board of Directors,
without shareholder approval, has the authority to issue Preferred Shares from
time to time in series and to fix the designation, powers (including voting
powers, if any), preferences and relative, participating, optional, conversion
and other special rights, and the qualifications, limitations, and restrictions
of each series, except that with respect to the payment of dividends and the
distribution of assets upon liquidation, each series shall rank equally with any
other series of Preferred Shares outstanding.
In the event of issuance, the Preferred Shares could be utilized, under
certain circumstances, as a method of discouraging, delaying or preventing a
change in control of the Company. Such actions could have the effect of
discouraging bids for the Company, thereby preventing shareholders from
receiving the maximum value for their shares. Although the Company has no
present intention to issue any additional Preferred Shares, there can be no
assurance that the Company will not do so in the future.
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CANADIAN FEDERAL INCOME TAX CONSIDERATIONS.
The following is a summary of the principal Canadian income tax
considerations generally applicable to nonresidents of Canada who hold the
Common Shares as capital property, deal at arm's length with the Company and do
not use or hold and are deemed not to use or hold their Common Shares in the
course of carrying on a business in Canada and do not carry on insurance
business in Canada. This summary has been prepared by reference to the existing
provisions of the Income Tax Act (Canada) (the "Act"), the Income Tax
Regulations (the "Regulations"), all published proposals for the amendment of
the Act and the Regulations to the date hereof and the published administrative
practices of Revenue Canada, the agency that administers the Act. Although this
summary does not specifically address the provincial income tax consequences of
an investment in Common Shares, generally speaking, provincial taxation does not
apply to persons who are not resident in Canada and who do not own or hold
property in the course of carrying on a business in Canada. Apart from changes
to the Act and the Regulations which have been publicly announced to the date
hereof, this summary does not consider the potential for any future alterations
to Canadian income tax legislation.
DISPOSITIONS OF COMMON SHARES. A nonresident of Canada will only be subject
to taxation in Canada under the Act in respect of a disposition of Common Shares
if such shares constitute "taxable Canadian property" to such nonresident.
Provided that the Common Shares are listed on a recognized stock exchange in
Canada at the time of a disposition, they will only constitute "taxable Canadian
property" to a holder if the holder, either alone or together with persons with
whom the holder does not deal at arm's length, owns or at any time in the five
years prior to the date of disposition, has owned in excess of 25% of the issued
and outstanding shares of a class or series of the capital of the Company.
Persons who are related by blood or marriage, or are subject to common control
are deemed to deal otherwise than at arm's length; other persons may also be
considered to be dealing otherwise than at arm's length in certain
circumstances. For the purposes of determining the 25% threshold, rights or
options to acquire Common Shares will be treated as ownership thereof. Subject
to the comments set out below in respect of the application of the U.S. --
Canada Income Tax Convention to U.S. resident holders, nonresidents whose shares
constitute "taxable Canadian property" will be subject to taxation thereon on
the same basis as Canadian residents. Generally speaking, three-quarters of the
excess of the holder's proceeds of disposition, over the adjusted cost base of
the Common Shares, must be included in income as a taxable capital gain, to be
taxed at prevailing federal Canadian rates, which range from approximately 26%
to 39%.
Nonresidents whose shares are repurchased by the Company, except in respect
of certain purchases made by the Company in the open market, will give rise to
the deemed payment of a dividend by the Company to the former holder of Common
Shares in an amount equal to the excess paid over the paid-up capital of the
Common Shares so repurchased. Such deemed dividend will be excluded from the
former holders' proceeds of disposition of his Common Shares for the purposes of
computing any capital gain but will be subject to Canadian nonresident
withholding tax in the manner described below under "Dividends." In certain
limited circumstances, a sale by a holder of the Common Shares to a corporation
resident in Canada with which the holder does not deal at arm's length may give
rise to the deemed payment of a dividend, to the extent the amount received in
consideration therefor exceeds the paid-up capital of the Common Shares disposed
of.
Pursuant to the U.S.-Canada Income Tax Convention (the "Convention"),
shareholders of the Company who are resident in the U.S. for the purposes of the
Convention and whose shares might otherwise be "taxable Canadian property" may
be exempt from Canadian taxation in respect of any gains on the Common Shares
provided the principal value of the Company is not derived from real property
located in Canada at the time of the disposition.
The Company owns no Canadian real property and the Company has no present
intention to acquire Canadian real property.
DIVIDENDS. Under the Act, withholding tax is imposed at the rate of 25% on
the amount of any dividends paid or credited on the Common Shares to a person
not resident in Canada. Pursuant to the U.S. -- Canada Income Tax Convention,
the rate of tax on such dividends is reduced to 6% for dividends received in
1996 and 5% thereafter by any U.S. resident corporation who owns in excess of
10% of the voting shares of the corporation, and to 15% in all other instances.
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INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the acquisition of control
of a Canadian business by non-Canadians without review and approval of the
Investment Review Division of Industry Canada, the agency that administers the
ICA, unless such acquisition is exempt from review under the provisions of the
ICA. Investment Review Division of Industry Canada must be notified of such
exempt acquisitions. The ICA covers acquisitions of control of corporate
enterprises, whether by purchase of assets, shares of "voting interests" of an
entity that controls, directly or indirectly, another entity carrying on a
Canadian business.
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Certificate of Continuance of the Company. There are no other decrees or
regulations in Canada which restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends, interest
or other payments to nonresident holders of the Company's Common Shares except
as discussed above.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Yukon BUSINESS CORPORATIONS ACT and the Company's Bylaws provide the
following authority to indemnify directors or officers or former directors or
officers of the Company or of a company of which the Company is or was a
shareholder:
(1) Except in respect of an action by or on behalf of the corporation or a
body corporate to procure a judgment in its favor, a corporation may
indemnify a director or officer of the corporation, a former director
or officer of the corporation or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of
which the corporation is or was a shareholder or creditor, and his
heirs and legal representatives, against all costs, charges and
expenses, including an amount paid to settle an action or satisfy a
judgment, reasonably incurred by him in respect of any civil, criminal
or administrative action or proceeding to which he is made a party by
reason of being or having been a director or officer of that
corporation or body corporate, if (a) he acted honestly and in good
faith with a view to the best interests of the corporation, and (b) in
the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
(2) A corporation may, with the approval of the Supreme Court, indemnify a
person referred to in subsection (1) in respect of an action by or on
behalf of the corporation or body corporate to procure a judgment in
its favor, to which he is made a party by reason by being or having
been a director or an officer of the corporation or body corporate,
against all costs, charges and expenses reasonably incurred by him in
connection with the action if he fulfills the conditions set out in
paragraphs (1)(a) and (b).
The Yukon BUSINESS CORPORATIONS ACT also provides that:
(3) Notwithstanding anything in subsections (1) through (6), a person
referred to in subsection (1) is entitled to indemnity from the
corporation in respect of all costs, charges and expenses reasonably
incurred by him in connection with the defense of any civil, criminal
or administrative action or proceeding to which he is made a party by
reason of being or having been a director or officer of the
corporation or body corporate, if the person seeking indemnity (A) was
substantially successful on the merits of his defense of the action or
proceeding, (B) fulfills the conditions set out in paragraphs (1)(a)
and (b), and (C) is fairly and reasonably entitled to indemnity.
(4) A corporation may purchase and maintain insurance for the benefit of
any person referred to in subsection (1) against any liability
incurred by him (a) in his capacity as a director or officer of the
corporation, except when the liability relates to his failure to act
honestly and in good faith with a view to the best interests of the
corporation, or (b) in his capacity as a director or officer of
another body corporate if he acts or acted in that capacity at the
corporation's request, except when the liability relates to his
failure to act honestly and in good faith with a view to the best
interests of the body corporate.
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(5) A corporation or a person referred to in subsection (1) may apply to
the Supreme Court for an order approving an indemnity under this
section and the Supreme Court may so order and make any further order
it thinks fit.
(6) On an application under subsection (5), the Supreme Court may order
notice to be given to any interested person and that person is
entitled to appear and be heard in person or by counsel.
The Bylaws of the Company also provide that the provisions for
indemnification contained in the Bylaws (outlined in subsections (1) and (2)
above) shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under any Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise both as to an action in his
official capacity and as to an action in any other capacity while holding such
office and shall continue as to a person who has ceased to be a director of
officer and shall enure to the benefit of the heirs and legal representatives of
such person. The Company maintains director's and officer's insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is therefore unenforceable.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Financial Statement and Financial Statement Schedules included
separately herein.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. See the
accompanying Index to Financial Statements.
(b) EXHIBITS. See the accompanying Index of Exhibits.
-33-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registrant statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
SEVEN SEAS PETROLEUM INC.
By /S/ LARRY A. RAY
Larry A. Ray
Executive Vice President
and Chief Operating Officer
Date: September 15, 1997
-34-
<PAGE>
APPENDIX A
GLOSSARY OF TECHNICAL TERMS
ANTICLINAL TRAP means a subsurface, geological structure in the form of a sine
curve (i.e., the information rises to a rounded peak) as a result of which any
oil in the deposit will normally rise to the highest point in the structure.
APPRAISAL WELL means a well drilled subsequent to a discovery well in order to
confirm potential recoverable reserve quantities prior to development drilling
of the field.
AQUIFER means water bearing rock structure.
BOPD means barrels of oil per day.
COMMISSION means the U.S. Securities and Exchange Commission.
COMPLETION means the installation of permanent equipment for the production of
crude oil or gas, or in the case of a dry hole, the reporting of abandonment to
the appropriate agency.
DEVELOPMENT WELL means a well drilled within the proved area of a oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
DRILL STEM TEST means a method of determining the presence of oil and gas in a
formation. When the depth to be tested has been reached in a well being drilled,
a special tool is lowered into the hole. The drilling mud is removed and the
contents of the formation allowed to flow into the tool while an instrument
measures the pressure.
ECOPETROL means Empresa Colombiana de Petroleos, the Colombian national oil
company.
EXPLORATORY WELL means a well drilled to find and purchase oil and gas reserves
not classified as proved, to find a new reservoir in a field previously found to
be productive of oil and gas in another reservoir or to extend a known
reservoir.
FARMOUT means an agreement whereby the owner of a lease agrees to assign or
transfer the lease (or some portion of it), retaining some interest (such as an
overriding royalty or right to share in production), subject to the drilling of
one or more wells as a prerequisite to completion of the transfer by him.
MMBO means one million barrels of crude oil.
OPERATOR means any person, partnership, corporation or other entity engaged in
the business of exercising direct supervision over the drilling or completion of
or production from a well.
PRODUCTIVE WELL means a well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
PROVEN DEVELOPED PRODUCING RESERVES means those proved reserves that are
actually on production or, if not producing, that could be recovered from
existing wells or facilities and where the reasons for the current non-producing
status is the choice of the owner rather than the lack of markets or some other
reasons. An illustration of such a situation is where a well or zone is capable
but is shut-in because its deliverability is not required to meet contract
commitments.
PROVEN RESERVES means those reserves estimated as recoverable under current
technology and existing economic conditions, from that portion of a reservoir
which can be reasonably evaluated as economically productive on the basis of
analysis of drilling, geological, geophysical and engineering data, including
the reserves to be obtained by enhanced recovery processes demonstrated to be
economic and technically successful in the subject reservoir.
PROVEN UNDEVELOPED RESERVES means those proved reserves that are not currently
producing either due to lack of facilities and/or markets.
RESERVOIR means a porous permeable sedimentary rock containing commercial
quantities of oil or gas.
- 35 -
<PAGE>
INDEX OF EXHIBITS
NO. EXHIBIT DOCUMENT
(1) Not Applicable
(2) Not Applicable
(3) Articles of Incorporation and By-laws
*(A) The Amalgamation Agreement effective June 29, 1995 by and
between Seven Seas Petroleum Inc., a British Columbia
corporation; and Rusty Lake Resources Ltd.
*(B) Certificate of Continuance and Articles of Continuance into
the Yukon Territory
*(C) By-Laws
(4) Instruments defining the rights of security holders, including
indentures
*(A) Excerpts from the Articles of Continuance
*(B) Excerpts from the By-laws
*(C) Specimen stock certificate
*(D) Form of Class B Warrant
*(E) Class B Warrant Indenture dated as of October 15, 1996 by and
between the Company of Canada and Montreal Trust Company
(9) Not Applicable
(10) Material Contracts
*(A) Agreement dated August 14, 1995 by and between the Company and
GHK Company Colombia, as amended by letter agreement dated
November 30, 1995
*(B) The Association Contract by and between Ecopetrol, GHK Company
Colombia and Petrolinson, S.A. relating to the Dindal block,
as amended
*(C) The Association Contract by and between Ecopetrol and GHK
Company Colombia relating to the Rio Seco block
*(D) Joint Operating Agreement dated as of August 1, 1994 by and
between GHK Company Colombia and the holders of interests in
the Dindal block
*(E) The GHK Company Colombia Share Purchase Agreement dated as of
July 26, 1996 by and between Robert A. Hefner III, Seven Seas
Petroleum Colombia Inc. and the Company
<PAGE>
NO. EXHIBIT DOCUMENT
*(F) The Cimarrona Purchase Agreement dated as of July 26, 1996 by
and between the members of Cimarrona Limited Liability
Company, the Company, Seven Seas Petroleum Colombia Inc., and
Robert A. Hefner III
*(G) The Esmeralda Purchase Agreement dated as of July 26, 1996 by
and between the members of Esmeralda Limited Liability
Company, Robert A. Hefner III, the Company, Seven Seas
Petroleum Holdings, Inc. and Seven Seas Petroleum Colombia
Inc.
*(H) The Registration Rights Agreement dated as of July 26, 1996 by
and between the Company and certain individuals
*(I) Shareholders' Voting Support Agreement dated as of July 26,
1996 by and between Seven Seas Petroleum Inc. and Messrs.
Hefner, Kerr, Whitehead, Plewes and Stephens
*(J) Management Services Agreement by and among GHK Company
Colombia, the Company and The GHK Company LLC
*(K) The Escrow Agreement for a Natural Resources Company by and
among Montreal Trust Company as trustee, the Company and
certain individuals and entities
*(L) The Escrow Agreement for a Natural Resources Company by and
among Montreal Trust Company, as trustee, the Company and
Albert E. Whitehead
*(M) Amended 1996 Stock Option Plan
*(N) Form of Incentive Stock Option Agreement
*(O)Form of Directors' Stock Option Agreement
*(P) Form of Employment Agreement between the Company and each of
Messrs. Stephens, Dorrier and DeCort
*(Q) Form of Agreement between the Company and each of Messrs.
Stephens, Dorrier and DeCort relating to a change of control
**(R) Form of Employment Agreement between the Company and Larry A.
Ray
**(S) Settlement Agreement between the Company and Mr. Whitehead
dated May 20, 1997
**(T) Petrolinson S.A. Share Purchase Agreement dated February 14,
1997, between Hazel Ventures LTD., Seven Seas Petroleum
Colombia Inc. and Seven Seas Petroleum Inc.
<PAGE>
NO. EXHIBIT DOCUMENT
**(U) Pledge Agreement dated March 5, 1997 among Hazel Ventures
LTD., Seven Seas Petroleum Inc., Seven Seas Petroleum Colombia
Inc., and Integro Trust (BVI Limited)
**(V) Shareholder Voting Support Agreement made as of March 5, 1997
between Seven Seas Petroleum Inc. and Hazel Ventures LTD.
**(W) Purchase Warrant Indenture made as of August 7, 1997 between
Seven Seas Petroleum Inc. and Montreal Trust Company of Canada
**(X) Indenture made as of August 7, 1997 between Seven Seas
Petroleum Inc. and Montreal Trust Company of Canada
**(Y) Limited Recourse Guarantee, Security and Pledge Agreement made
as of August 7, 1997 between Seven Seas Petroleum Holdings
Inc. and Montreal Trust Company of Canada
**(Z) Limited Recourse Guarantee, Security and Pledge Agreement made
as of August 7, 1997 between Seven Seas Petroleum Colombia
Inc. and Montreal Trust Company of Canada
**(AA)Private Placement Subscription Agreement made as of August 7,
1997 between Seven Seas Petroleum Inc. and Jasopt Pty Limited
**(BB)1997 Stock Option Plan
(11.1) Not Applicable
(12) Not Applicable
(13) Not Applicable
(16) Not Applicable
(18) Not Applicable
(21) Not Applicable
*(22) Subsidiaries of the Registrant
(23) Consent of experts and counsel
**(A) Consent of Jerry L. Williams, Independent Public Accountants
**(B) Consent of Arthur Andersen LLP
(24) Not Applicable
*(27) Financial Data Schedule
(28) Not Applicable
<PAGE>
(99) Not Applicable
- ------------
* Previously filed.
**Filed herewith.
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Historical Financial Statements of Acquired Companies
Introduction to the Acquisition.................................................... F-1
GHK Company Colombia
Report of Independent Public Accountant........................................ F-2
Balance Sheets as of July 26, 1996 and December 31, 1995, 1994 and 1993........ F-3
Statements of Operations for the Period from January 1, 1996 to July 26, 1996
and the Years Ended December 31, 1995, 1994 and 1993....................... F-4
Statements of Stockholder's Equity for the Period from January 1, 1996 to
July 26, 1996 and the Years Ended December 31, 1995, 1994 and 1993......... F-5
Statements of Cash Flows for the Period from January 1, 1996 to July 26, 1996
and the Years Ended December 31, 1995, 1994 and 1993....................... F-6
Notes to Financial Statements.................................................. F-7
Esmeralda Limited Liability Company
Report of Independent Public Accountant........................................ F-8
Balance Sheets as of July 26, 1996 and December 31, 1995, 1994 and 1993........ F-9
Statements of Operations for the Period from January 1, 1996 to July 26, 1996
and the Years Ended December 31, 1995, 1994 and 1993....................... F-10
Statements of Members' Equity for the Period from January 1, 1996 to July 26,
1996 and the Years Ended December 31, 1995, 1994 and 1993.................. F-11
Statements of Cash Flows for the Period from January 1, 1996 to July 26, 1996
and the Years Ended December 31, 1995, 1994 and 1993....................... F-12
Notes to Financial Statements.................................................. F-13
Cimarrona Limited Liability Company
Report of Independent Public Accountant........................................ F-14
Balance Sheets as of July 26, 1996 and December 31, 1995 and 1994.............. F-15
Statements of Operations for the Period from January 1, 1996 to July 26, 1996
and the Years Ended December 31, 1995 and 1994............................. F-16
Statements of Members' Equity for the Period from January 1, 1996 to July 26,
1996 and the Years Ended December 31, 1995 and 1994........................ F-17
Statements of Cash Flows for the Period from January 1, 1996 to July 26, 1996
and the Years Ended December 31, 1995 and 1994............................. F-18
Notes to Financial Statements.................................................. F-19
Pro Forma Financial Statement
Introduction to the Pro Forma Statement and Pro Forma Statement of
Operations (Unaudited)......................................................... F-20
Consolidated Financial Statements
Report of Independent Public Accountants........................................... F-21
Consolidated Balance Sheets as of June 30, 1997, December 31, 1996 and 1995........ F-22
Statements of Consolidated Operations and Accumulated Deficit for the Six
Months Ended June 30, 1997 and 1996, the Year Ended December 31, 1996,
From Inception (February 3, 1995) to December 31, 1995, and Cumulative
Total from Inception to June 30, 1997.......................................... F-23
Statement of Consolidated Stockholders' Equity for the Period from Inception
(February 3, 1995) through June 30, 1997....................................... F-24
Statements of Consolidated Cash Flows for the Six Months Ended June 30,
1997 and 1996, the Year Ended December 31, 1996, Period from Inception
(February 3, 1995) to December 31, 1995, and Cumulative Total from
Inception to June 30, 1997..................................................... F-25
Notes to Consolidated Financial Statements......................................... F-26
</TABLE>
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
Introduction to the Acquisition
On July 26, 1996, Seven Seas acquired 100 percent of the outstanding stock,
which represented 100 percent of the voting shares held in GHK Company Colombia
and Esmeralda LLC. Additionally, on the same date, the Company acquired 62.963
percent of the outstanding shares and voting stock of Cimarrona LLC.
Collectively, the acquisition of these three companies resulted in the purchase
of an additional 36.7 percent participating interest in the Dindal and Rio Seco
Association Contracts ("the Association Contracts") in which the Company
previously held a 15 percent participating interest. All three entities were oil
and gas exploration companies whose only material asset was the participating
interest they held in the Association Contracts in Colombia. As consideration
for the increased interest, Seven Seas issued to the stockholders in GHK Company
Colombia, Esmeralda LLC and Cimarrona LLC a combination of preferred shares and
special warrants which are exchangeable into a total of 16,777,143 common shares
upon the earlier of the approval of a prospectus qualifying the exchange, or one
year from the closing of the transaction. This transaction has been reflected as
an acquisition using the purchase method of accounting, whereby the assets
acquired and the liabilities assumed were fair valued and the three respective
entities have been prospectively reflected in the Company's financial statements
since July 26, 1996. The historical financial statements of the acquired
companies are presented on the succeeding pages.
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of
GHK Colombia Company
I have audited the accompanying balance sheets of GHK Company Colombia (an
Oklahoma Corporation) as of July 26, 1996 (prior to the sale of stock discussed
in Note 5) and December 31, 1995, 1994, and 1993 and the related statements of
operations, stockholder's equity, and cash flows for the periods then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
These standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of GHK Company Colombia as of July 26,
1996 and December 31, 1995, 1994 and 1993, and the results of its operations and
its cash flows for the periods then ended in conformity with generally accepted
accounting principles.
Jerry L. Williams, CPA
Oklahoma City, Oklahoma
August 5, 1997
F-2
<PAGE>
GHK Company Colombia
Balance Sheets
<TABLE>
<CAPTION>
December 31,
July 26, -------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 3) ....... $ 546,943 $ 561,039 $ 28,667 $ 18,928
Accounts receivable:
Joint venture operations (Note 2) ..... -- 48,600 1,001 324,328
Affiliates (Notes 2 and 7) ............ -- 667,723 162,143 146,629
Oil and gas sales ..................... 5,766 -- -- --
---------- ---------- ---------- ----------
Total current assets ....................... 552,709 1,277,362 191,811 489,885
Properties and equipment,
at cost, (Notes 2 and 9):
Oil and gas properties (full cost method)
Proved ............................... -- -- -- --
Unproved (excluded from amortization) 757,331 410,630 253,260 28,851
---------- ---------- ---------- ----------
757,331 410,630 253,260 28,851
Less accumulated depreciation,
depletion, and amortization .......... -- -- -- --
---------- ---------- ---------- ----------
Net properties and equipment ............... 757,331 410,630 253,260 28,851
---------- ---------- ---------- ----------
$1,310,040 $1,687,992 $ 445,071 $ 518,736
========== ========== ========== ==========
Liabilities and stockholder's equity
Current liabilities:
Accounts payable ......................... $ 489,077 $ 958,408 $ 4,314 $ 190,047
Payable to former stockholder (Note 6) .. 21,215 -- -- --
Advance payments from joint venture
participants (Note 2 ) ................. 45,573 44,535 -- --
Advances from affiliates (Note 7) ........ 73,998 -- -- --
Note payable to affiliate
due within one year (Note 4) ........... -- 360,889 -- --
---------- ---------- ---------- ----------
Total current liabilities .................. 629,863 1,363,832 4,314 190,047
Note payable to affiliate due after
one year (Note 4) ........................ -- -- 360,889 355,889
Commitments and contingencies
(Notes 2,3, and 8) ...................... -- -- -- --
Stockholder's equity (Notes 2, 5, 6, and 9):
Common stock, $.50 par value, 100,000
shares authorized and 1,000 shares
outstanding ............................ 500 500 500 500
Additional paid in capital ............... 369,038 -- -- --
Retained earnings ........................ 310,639 323,660 79,368 (27,700)
---------- ---------- ---------- ----------
680,177 324,160 79,868 (27,200)
---------- ---------- ---------- ----------
$1,310,040 $1,687,992 $ 445,071 $ 518,736
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
GHK Company Colombia
Statements of Operations
<TABLE>
<CAPTION>
Period from
January 1 to Year ended December 31,
July 26, ------------------------------
1996 1995 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales ................. $ 5,766 $ -- $ -- $ --
Joint operations income (Note 2) . -- -- 84,783 --
Promotion fees (Note 7) .......... -- 246,383 25,000 --
-------- -------- -------- --------
Total revenues ...................... 5,766 246,383 109,783 --
Cost and expenses:
Lease operating expenses .......... 13,411 -- -- --
General and administrative ........ 5,376 2,091 2,715 27,700
-------- -------- -------- --------
Total costs and expenses ............ 18,787 2,091 2,715 27,700
-------- -------- -------- --------
Net income (loss) before income taxes (13,021) 244,292 107,068 (27,700)
-------- -------- -------- --------
Provision for income taxes .......... -- -- -- --
-------- -------- -------- --------
Net income (loss) ................... $(13,021) $244,292 $107,068 $(27,700)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
GHK Company Colombia
Statements of Stockholder's Equity
For the period from January 1, 1996 to July 26, 1996,
and the years ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Additional
Common Paid In Retained
Stock Capital Earnings
---------- ---------- ----------
<S> <C> <C> <C>
Balance at December 31, 1992 ................................ $ -- $ -- $ --
Issuance of 1,000 shares of common stock .................... 500 -- --
Net loss .................................................... -- -- (27,700)
---------- ---------- ----------
Balance at December 31, 1993 ................................ 500 -- (27,700)
Net income .................................................. -- -- 107,068
---------- ---------- ----------
Balance at December 31, 1994 ................................ 500 -- 79,368
Net income .................................................. -- -- 244,292
---------- ---------- ----------
Balance at December 31, 1995 ................................ 500 -- 323,660
Conversion of note payable obligation into additional
paid in capital (Note 4) .................................. -- 390,253 --
Net loss for the period from January 1, 1996 to July 26, 1996 -- -- (13,021)
Excess advance by former shareholder (Note 6) .............. -- (21,215) --
---------- ---------- ----------
Balance at end of period .................................... $ 500 $ 369,038 $ 310,639
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
GHK Company Colombia
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 1 to Year ended December 31,
July 26, --------------------------------------------
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ........................ $ (13,021) $ 244,292 $ 107,068 $ (27,700)
Adjustments to reconcile net loss to net
cash provided by operating activities:
(Increase) decrease in:
Accounts receivable ................. 710,557 (553,179) 307,813 (470,957)
Increase (decrease) in:
Accounts payable .................... (469,331) 954,094 (185,733) 190,047
Advance payments from joint venture
participants ...................... 1,038 44,535 -- --
Advances from affiliates ............ 73,998 -- -- --
------------ ------------ ------------ ------------
Total adjustments ........................ 316,262 445,450 122,080 (280,910)
Net cash provided by (used for)
operating activities ................... 303,241 689,742 229,148 (308,610)
Cash flows from investing activities:
Additions to oil and gas properties ...... (346,701) (157,370) (224,409) (28,851)
------------ ------------ ------------ ------------
Net cash used for investing activities ... (346,701) (157,370) (224,409) (28,851)
Cash flows from financing activities:
Proceeds from borrowings ................. 1,119,081 155,000 1,490,000 335,889
Payments on notes payable ................ (1,089,717) (155,000) (1,485,000) --
------------ ------------ ------------ ------------
Net cash provided by financing activities 29,364 -- 5,000 335,889
Net increase (decrease) in cash and
cash equivalents ....................... (14,096) 532,372 9,739 (1,572)
Cash and cash equivalents
at beginning of year ................... 561,039 28,667 18,928 20,000
------------ ------------ ------------ ------------
Cash and cash equivalents
at end of period ....................... $ 546,943 $ 561,039 $ 28,667 $ 18,428
============ ============ ============ ============
Noncash financing activities:
Conversion of note payable obligation into
additional paid in capital ............. $ 390,253 -- -- --
Excess advance by former
shareholder (Note 6) .................. $ 21,215
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRESENTATION
GHK Company Colombia (the "Company") was incorporated on November 24, 1992,
under the laws of the State of Oklahoma. The Company's original stockholder was
The GHK Company, an Oklahoma general partnership, whose managing partner is
Robert A. Hefner III ("Hefner"). In December 1993, The GHK Company assigned all
of the outstanding stock of the Company to Hefner.
As discussed in Note 5, on July 26, 1996, Hefner sold all of the outstanding
shares of the Company. The financial statements have been prepared and are
presented prior to the sale by Hefner and before any write up of oil and gas
properties.
OPERATIONS
The Company is engaged in the exploration, development and production of oil and
gas properties located in Colombia, South America. The principal asset of the
Company is a participating interest in certain association contracts allowing
for the exploration and development of the Dindal and Rio Seco blocks located in
the Upper Magdalena Basin of Colombia.
All of the Company's exploration and development are conducted jointly with
others, and the financial statements reflect only the Company's proportionate
interest in such activities.
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 on
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs,
are capitalized.
F-7
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OIL AND GAS PROPERTIES (CONTINUED)
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Investments in unproved properties and major
development projects are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the present value of estimated
future net revenues, based on current economic and operating conditions, plus
the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
INCOME TAXES
The Company, with the consent of its stockholder, elected to be an S Corporation
under the provision of the Internal Revenue Code. Instead of paying corporate
income taxes, the stockholders of an "S" Corporation are taxed individually on
their proportionate share of the Company's taxable income.
As a result of the sale of the Company's stock on July 26, 1996, (see Note 5),
the Company's S Corporation election was terminated. Therefore no provision or
liability for federal or state income taxes has been included in the financial
statements for 1993, 1994, 1995 and for the period from January 1, 1996 to July
26, 1996.
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The Company's reporting and functional currency is U. S. dollars. No material
translation gains or losses were recorded during the periods reported.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash and
cash equivalents, accounts receivable, and accounts payable approximates fair
value as of July 26, 1996 and December 31, 1995.
The Company does not hold or issue financial instruments for trading purposes.
REVENUE RECOGNITION
Generally, oil and gas revenues from producing wells are recognized when the oil
or gas is produced and sold.
2. COLOMBIAN OPERATIONS
In January 1993, effective in March 1993, the Company and Petrolinson S. A.
("Petrolinson"), a Panamanian Corporation, entered into a risk sharing
Association Contract (the "Dindal Contract") with Empresa Colombiana de
Petroleos, the Colombian national oil company ("Ecopetrol"). The Dindal Contract
entitled the Company to explore for oil and gas on approximately 198,000 net
acres located in the Cundinamarca Region of Colombia (the "Dindal Block") and
provides for a six-year exploration period expiring in 1999, subject to a
requirement for additional partial relinquishments in 1999, and for a production
period expiring in 2021. Under the terms of the Dindal Contract, as modified in
1994, the Company is obligated to drill one exploratory well a year for six
years ending in 1999, and provide certain geological and geophysical information
and training. In 1994, under the terms of the Dindal Contract, the Company
returned 54,000 acres in the Northern Part of the Dindal Block, in exchange for
certain drilling concessions.
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
2. COLOMBIAN OPERATIONS (CONTINUED)
In June 1995, effective August 1995, the Company entered into a risk sharing
Association Contract (the "Rio Seco Contract") with Ecopetrol. The Rio Seco
contract covers an area of approximately 43,000 acres contiguous to the western
boundary of the Dindal Block (the "Rio Seco Block"). The six year exploration
period will expire in 2001 and is subject to a requirement for additional
partial relinquishments of acreage in 2001. The Rio Seco Contract also provides
for a 22-year production period with the contract expiring in 2023. Under the
terms of the Rio Seco Contract, the Company is obligated to perform certain
geological and geophysical studies and drill one exploratory well a year for
five years ending in 2001.
In February 1993 and June 1995, the Company and Petrolinson, wholly owned by
Norman R. Rowlinson, a geologist, entered agreements, whereby, the Company
assigned to Petrolinson, a 6% interest in the Dindal and Rio Seco Contracts (the
"Contracts") in exchange for services provided in obtaining the Contracts. The
Company agreed to pay Petrolinson's share of costs through the exploration
period of the Contracts. As discussed in Note 9, Seven Seas Petroleum Inc.
purchased this 6% interest from Petrolinson in March 1997.
During 1994 and 1995, the Company assigned various participation interests in
the Contracts, subject to the same commitments and obligations as the Company,
totaling 83.056%, while retaining a 10.944% participation interest. Under the
terms of the assignments, the participants are obligated to pay certain
exploration and developments costs in excess of their participation interest
assigned, and to reimburse the Company certain costs and expenses incurred in
securing the Contracts.
The Company serves as the operator of the Colombian properties under the
Contracts. The Contracts provide for the Company to be reimbursed for overhead
expenses based upon a stated percentage of expenditures under the Contracts. In
1994 the Company received income of $84,783 under this provision. In 1995, the
Company and The GHK Company entered into an agreement, whereby, the Company
assigned its rights to the overhead reimbursement to The GHK Company in exchange
for The GHK Company providing the personnel and technical expertise required
under the Contract.
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
2. COLOMBIAN OPERATIONS (CONTINUED)
The Dindal and Rio Seco Contracts provides that Ecopetrol will receive a royalty
equal to 20% of production on behalf of the Colombian government and, is
entitled to an additional 50% of the remaining production. In the event a
discovery field is deemed commercially feasible, initiating the "Exploitation"
period under the Contracts, Ecopetrol will bear 50% of the future costs in that
field, and reimburse the joint venture, from Ecopetrol's share of future
production from the field, for 50% of the joint venture's costs of successful
exploratory wells in the field. If a commercial field on the Dindal Block
produces in excess of 60 million barrels, Ecopetrol's interest in production and
costs will increase in 5% increments from 50% to 70% as accumulated production
from the field increases in 30 million barrel increments from 60 million barrels
to 150 million barrels. If a commercial field on the Rio Seco Block produces in
excess of 60 million barrels, Ecopetrol's interest in production and costs
ranges from 50% to 75% based on annual measurements of profitability as defined
in the Rio Seco Contract. The joint venture bears all costs and risks of
exploration activities on the Dindal Block and Rio Seco Block, subject to
Ecopetrol's right to acquire a 50% interest in commercial discoveries.
If a discovery is made and is not deemed by Ecopetrol to be commercially
feasible, the joint venture may continue to develop the field at its own expense
and will recover 200% of the costs from Ecopetrol, at which time Ecopetrol will
then acquire a 50% interest.
The joint venture has completed its drilling and other obligations for the first
three years of the Dindal Contract. Management of the Company believes
additional development activities are necessary before a commerciality
application will be submitted to Ecopetrol. The joint venture has the right to
continue the exploration program through 1999 with an obligation to conduct
exploration programs to be approved by Ecopetrol in 1997, 1998, and 1999. By
letter dated November 7, 1996, Ecopetrol granted the first annual extension of
the exploration program for the year 1997. The joint venture has also completed
its geological and geophysical obligations for the first year of the Rio Seco
Contract, but no wells have yet been drilled on the Rio Seco Block.
3. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances with high credit quality financial
institutions, one located in the United States and one located in Colombia. The
balances in these accounts, at times, have exceeded insured limits.
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
3. CONCENTRATION OF CREDIT RISK (CONTINUED)
As noted previously, the Company's oil and gas operations are in the country of
Colombia. Because of this, the Company is subject not only to the ordinary
economic risks of the country such as changes in taxes, rate of inflation, etc.,
but also to changes in the political environment which may take place within
Colombia.
4. NOTE PAYABLE TO AFFILIATE
In 1993, the Company entered into a loan agreement with The GHK Company for cash
advances previously made to the Company. Under the terms of the loan agreement,
the outstanding balance accrued interest at 9% per annum and was payable
monthly. The outstanding principal balance was due on December 31st of each
year. The note was secured by all of the assets of the Company and was
guaranteed by Hefner. Each year the loan agreement was renewed for a one year
period. During the life of the loan the Company did not pay any interest, and in
1996, The GHK Company relieved the Company of any obligation to pay interest
accrued under the loan agreement.
Below is a schedule of note activity:
<TABLE>
<CAPTION>
Period from Year ended December 31,
January 1 to --------------------------------------------
July 26, 1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Beginning balance .......... $ 360,889 $ 360,889 $ 355,889 $ 20,000
Advances ................... 1,119,081 155,000 1,490,000 335,889
Payments:
Cash ..................... (1,089,717) (155,000) (1,485,000) --
Conversion of note payable
obligation to additional
paid in capital ........ (390,253) -- -- --
------------ ------------ ------------ ------------
Ending balance ............. $ -- $ 360,889 $ 360,889 $ 355,889
============ ============ ============ ============
Current portion ............ $ -- $ 360,889 $ -- $ --
Long term portion .......... -- -- 360,889 355,889
$ -- $ 360,889 $ 360,889 $ 355,889
------------ ------------ ------------ ------------
</TABLE>
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
4. NOTE PAYABLE TO AFFILIATE (CONTINUED)
During the period from January 1, 1996 to July 26, 1996, advances of $1,119,081
and cash payments of $1,089,717 were made on the note. On July 26, 1996, the
remaining balance on the loan of $390,253 was retired by converting the
obligation to additional paid in capital of the Company.
5. SALE OF THE COMPANY'S STOCK
On July 26, 1996, Robert A. Hefner III, the sole shareholder of the Company,
sold all of the issued and outstanding stock of the Company in exchange for
5,002,972 Class A Preferred Shares Series 1 (the "Preferred Shares") issued by
Seven Seas Petroleum Inc. ("SSPI"). SSPI is incorporated under the laws of
British Colombia and had previously acquired a 15% participation interest in the
Dindal and Rio Seco Contracts. In accordance with the terms of the sales
agreement, 70% or 3,502,080 of the Preferred Shares were placed in escrow. Under
the terms of the escrow agreement, the escrowed Preferred Shares are to be
released on the earlier of (a) on July 26, 1997, 1998, and 1999, one third of
the warrants shall be released or (b) a value of $118,908,000 for the properties
under the Dindal and Rio Seco Contracts is approved by the Director of the
Ontario Securities Commission.
The shares of the Company were transferred to Seven Seas Petroleum Colombia
Inc., a wholly owned subsidiary ofSSPI. Pursuant to the special rights and
restrictions attaching to the Preferred Shares, each Preferred Share may be
converted, without payment of additional consideration, to common shares on the
earlier of: (a) five business days following the issuance of a receipt for
SSPI's final prospectus by the last of the British Columbia, Alberta and Ontario
Securities Commissions or (b) July 25, 1997. The required receipt was received
in February 1997.
As part of the Seven Seas sale, the Company, on July 26, 1996, The GHK Company
and Seven Seas entered into a Management Services Agreement, whereby The GHK
Company, as Manager under the agreement, will provide the necessary services and
administrative support as may be required for the Company to perform its duties
and obligations under the terms of the Dindal and Rio Seco Contracts. The GHK
Company is entitled to $15,000 a month plus all of the overhead charges
authorized under the joint operating agreements for the Contracts.
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
5. SALE OF THE COMPANY'S STOCK (CONTINUED)
Members of two affiliates, Cimarrona Limited Liability Company ("Cimarrona") and
Esmeralda Limited Liability Company ("Cimarrona"), sold their interest in the
affiliates, to SPPI in exchange for certain special warrants ofSSPI. These sales
represented a 25.756% participation interest in the Contracts. After the
purchase of the various participation interests, SSPI owned a 51.7% interest in
the Dindal and Rio Seco Contracts.
In connection with the sale of his stock, Hefner, entered into an agreement with
an individual agreeing to pay him a fee equal to 0.5% of the Preferred Shares,
otherwise issuable to him, in exchange for his services in structuring,
negotiating and closing the sale transaction. The individual elected to receive
B Special Warrants issued by SSPI in lieu of the Preferred Shares.
6. EQUITY ADJUSTMENT
Under the terms of the sales agreement covering the sale of the Company's stock,
discussed in Note 5, post closing adjustments are to be completed within 120
days of the closing date. It was determined that Hefner had advanced $21,215 in
excess of his share of cost and expenses as of July 26, 1996. An adjustment to
additional paid in capital has been made for this amount.
7. RELATED PARTY TRANSACTIONS
Substantially all the Company's activity represents costs and expenses relating
to the Dindal and Rio Seco Contracts. Below is a schedule of payments received
by the Company from Esmeralda and Cimarrona.
ESMERALDA CIMARRONA
------------ ------------
January 1 to July 26, 1996 ... $ 635,622 1,255,663
Year ended December 31, 1995 . 5,000 --
Year ended December 31, 1994 . 703,611 1,045,686
Year ended December 31, 1993 . -- --
------------ ------------
$ 1,344,233 $ 2,301,349
============ ============
At December 31, 1995, 1994 and 1993, Esmeralda owed the Company $295,283,
$158,771, and $146,129, respectively, for their share of costs and expenses
under the Contracts. At December 31, 1995 and 1994, Cimarrona owed the Company
$371,840, and $2,872, respectively for their share of costs and expenses under
the Contracts. At July 26, 1996, Esmeralda and Cimarrona had advanced $13,759
and $36,231, respectively, in excess of their share of accrued expenses.
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
7. RELATED PARTY TRANSACTIONS (CONTINUED)
At July 26, 1996, SSPI had advanced to the Company $24,008 in excess of their
share of accrued expenses.
In 1995, the Company received promotion fees of $246,383, including $106,383
from SSPI and $140,000 from new members in Cimarrona, for the right to
participate in the Dindal and Rio Seco Contracts.
In March 1993, the Company was required under the terms of the Dindal Contract
to provide a $500,000 letter of credit in favor of Ecopetrol in order to
guarantee payment of the first year costs under the Contract. The letter of
credit expired in March 1994. An affiliate, The GHK Company, guaranteed the
letter of credit by pledging a $500,000 certificate of deposit during the term
of the letter of credit.
In February 1993, the Company entered into a consulting services agreement with
Minandina Ltda. ("Minandina"), wholly owned by Norman R. Rowlinson. Under the
agreement Minandina provided managerial, administrative and technical assistance
to the Company, and act as a Company liaison to various Colombian government
agencies. The agreement was amended effective August 1, 1995. For the period
from January 1 to July 26, 1996 and for the years ended December 31, 1995, 1994,
and 1993 the Company paid Minandina $48,522, $23,216, $87,317, and $61,180,
respectively.
In 1994, the Company, Esmeralda, and Cimarrona entered into an agreement with
two individuals to serve as principal legal representatives of the Company in
Colombia in exchange for a monthly payment of $5,000. These individuals or their
controlled corporations indirectly own membership interests in Esmeralda. For
the period from January 1 to July 26, 1996 and for the years ended December 31,
1995 and 1994, payments of $37,500, $37,000 and $29,308, respectively, were made
under the agreement.
8. COMMITMENTS AND CONTINGENCIES
For the period from July 27, 1996 to June 30, 1997, Seven Seas Petroleum
Colombia, Inc. had advanced to the Company approximately $1,673,000 representing
the Company's share of exploration costs under the Rio Seco and Dindal Contracts
for that period. In addition, the Company has elected to participate in two
wells with an estimated total cost of $8,500,000. These wells are required to be
drilled by September 1997 and will fulfill the Company's 1997 work commitment
under these Contracts. The Company will be required to pay their proportionate
share of the total cost of these two wells or approximately $990,000.
<PAGE>
GHK Company Colombia
Notes to Financial Statements
July 26, 1996 and December 31, 1995, 1994, and 1993
9. SUBSEQUENT EVENTS
As discussed in Note 5, on July 26, 1996, the shares of the Company were
exchanged for 5,002,972 shares of Class A Preferred Shares Series 1 of Seven
Seas Petroleum Inc. As of the date of the acquisition, the shares had a market
value of $9.125 per share. In accordance with the purchase agreement, the shares
were transferred into the name of Seven Seas Petroleum Colombia, Inc., a wholly
owned subsidiary of Seven Sea Petroleum Inc.
In March 1997, Seven Seas Petroleum Inc. entered into an agreement with
Petrolinson to acquire its 6% interest in the Dindal and Rio Seco Contracts, in
exchange for 1,000,000 shares of its common stock. After this transaction, SSPI
owned a 57.7% interest in the Dindal and Rio Seco Contracts.
In May 1997, Robert A. Hefner III was named Chairman, Managing Director and
Chief Executive Officer of Seven Seas Petroleum, Inc.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members of
Esmeralda Limited Liability Company
I have audited the accompanying balance sheets of Esmeralda Limited Liability
Company (an Oklahoma Limited Liability Company) as of July 26, 1996 (prior to
the sale of members' interests discussed in Note 6) and December 31, 1995, 1994,
and 1993 and the related statements of operations, members' equity, and cash
flows for the periods then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express an
opinion on these financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
These standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Esmeralda Limited Liability Company
as of July 26, 1996 and December 31, 1995, 1994, and 1993, and the results of
its operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
Jerry L. Williams, CPA
Oklahoma City, Oklahoma
August 5, 1997
F-8
<PAGE>
Esmeralda Limited Liability Company
Balance Sheets
<TABLE>
<CAPTION>
December 31,
July 26, ------------------------------------------
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 3) ......... $ 43,266 $ 158,421 $ 19,908 $ 591,647
Accounts receivable from members (Note 4) .. 127,019 -- -- --
Advance payment to affiliate (Note 4) ..... 13,759 -- -- --
Accounts receivable - oil and gas sales .... 5,151 -- -- --
------------ ------------ ------------ ------------
Total current assets ......................... 189,195 158,421 19,908 591,647
Properties and equipment, at cost,
(Notes 2 and 5):
Oil and gas properties (full cost method)
Proved ................................. -- -- -- --
Unproved (excluded from amortization) .. 1,321,027 1,011,330 864,483 113,481
------------ ------------ ------------ ------------
1,321,027 1,011,330 864,483 113,481
Less accumulated depreciation,
depletion, and amortization ............ -- -- -- --
------------ ------------ ------------ ------------
Net properties and equipment ................. 1,321,027 1,011,330 864,483 113,481
------------ ------------ ------------ ------------
Organizational costs ......................... 28,271 28,271 28,271 28,271
Less accumulated amortization ................ 17,434 14,135 8,481 2,827
------------ ------------ ------------ ------------
10,837 14,136 19,790 25,444
------------ ------------ ------------ ------------
$ 1,521,059 $ 1,183,887 $ 904,181 $ 730,572
============ ============ ============ ============
Liabilities and members' equity
Current liabilities:
Accounts payable to affiliate (Note 4) ..... $ 132,522 $ 295,377 $ 158,765 $ 146,129
Accounts payable to members (Note 4) ....... 18,951 -- -- --
------------ ------------ ------------ ------------
Total current liabilities .................... 151,473 295,377 158,765 146,129
Commitments and contingencies
(Notes 2, 3, and 5) ....................... -- -- -- --
Members' equity (Notes 2, 4, and 5) .......... 1,369,586 888,510 745,416 584,443
------------ ------------ ------------ ------------
$ 1,521,059 $ 1,183,887 $ 904,181 $ 730,572
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
Esmeralda Limited Liability Company
Statements of Operations
<TABLE>
<CAPTION>
For the period
from January 1 Year ended December 31,
to July 26, --------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales .................. $ 5,151 $ -- $ -- $ --
Cost and expenses:
Amortization of organizational costs 3,298 5,654 5,654 2,827
Lease operating expenses ........... 11,980 -- -- --
General and administrative ......... 8,288 2,452 9,373 12,730
---------- ---------- ---------- ----------
Total costs and expenses ............. 23,566 8,106 15,027 15,557
---------- ---------- ---------- ----------
Net loss ............................. $ (18,415) $ (8,106) $ (15,027) $ (15,557)
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
Esmeralda Limited Liability Company
Statements of Members' Equity
<TABLE>
<CAPTION>
For the period
from January 1 Year ended December 31,
to July 26, --------------------------------------------
1996 1995 1994 1993
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at the beginning of year ........... $ 888,510 $ 745,416 $ 584,443 $ --
Member contributions ....................... 518,442 188,000 218,000 600,000
Member distributions ....................... -- (36,800) (42,000) --
Net loss for the year ...................... -- (8,106) (15,027) (15,557)
Excess advance by members (Note 4) ........ (18,951)
Net loss for the period from January 1, 1996
through July 26, 1996 .................... (18,415) -- -- --
------------ ------------ ------------ ------------
Balance at the end of period ............... $ 1,369,586 $ 888,510 $ 745,416 $ 584,443
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE>
Esmeralda Limited Liability Company
Statements of Cash Flows
<TABLE>
<CAPTION>
For the period
from January 1 Year ended December 31,
to July 26, --------------------------------------
1996 1995 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .................................... $ (18,415) $ (8,106) $ (15,027) $ (15,557)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Additions to organizational costs ....... -- -- -- (28,271)
Amortization of organizational costs .... 3,298 5,654 5,654 2,827
(Increase) decrease in:
Accounts receivable from members ...... (127,019) -- -- --
Advance payment to affiliate .......... (13,759) -- -- --
Accounts receivable - oil and gas sales (5,151) -- -- --
Increase (decrease) in:
Accounts payable to affiliate ......... (162,854) 136,612 12,636 146,129
---------- ---------- ---------- ----------
Total adjustments ........................... (305,485) 142,266 18,290 120,685
---------- ---------- ---------- ----------
Net cash provided by (used for)
operating activities ...................... (323,900) 134,160 3,263 105,128
Cash flows from investing activities:
Additions to oil and gas properties ......... (309,697) (146,847) (751,002) (113,481)
---------- ---------- ---------- ----------
Net cash used for investing activities ...... (309,697) (146,847) (751,002) (113,481)
Cash flows from financing activities:
Contributions by members .................... 518,442 188,000 218,000 600,000
Distributions to members .................... -- (36,800) (42,000) --
---------- ---------- ---------- ----------
Net cash provided by financing activities .. 518,442 151,200 176,000 600,000
Net increase (decrease) in cash and
cash equivalents .......................... (115,155) 138,513 (571,739) 591,647
Cash and cash equivalents
at beginning of year ...................... 158,421 19,908 591,647 --
---------- ---------- ---------- ----------
Cash and cash equivalents
at end of period .......................... $ 43,266 $ 158,421 $ 19,908 $ 591,647
========== ========== ========== ==========
Noncash financing activities:
Excess advance by members (Note 4) .......... $ 18,951
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
Esmeralda Limited Liability Company
Notes to Financial Statements
July 26, 1996 and December 1995, 1994, and 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Esmeralda Limited Liability Company (the "Company") was formed as a limited
liability company under the laws of the State of Oklahoma on December 20, 1993.
Operations of the Company began in September 1993. The GHK Company, who is owned
primarily by Robert A. Hefner III ("Hefner"), serves as Manager of the Company
and owned a 50% interest in the Company until July 26, 1996 (See Note 6).
As discussed in Note 6, on July 26, 1996, the members of the Company sold their
interests in the Company. These financial statements have been prepared and are
presented prior to the sale by the members and before any write-up of oil and
gas properties.
OPERATIONS
The Company is engaged in the exploration, development and production of oil and
gas properties located in Colombia, South America. The principal asset of the
Company is a participating interest in certain association contracts allowing
for the exploration and development of the Dindal and Rio Seco blocks located in
the Upper Magdalena Basin of Colombia.
All of the Company's exploration and development are conducted jointly with
others, and the financial statements reflect only the Company's proportionate
interest in such activities.
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 on
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs,
are capitalized.
F-13
<PAGE>
Esmeralda Limited Liability Company
Notes to Financial Statements
July 26, 1996 and December 1995, 1994, and 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OIL AND GAS PROPERTIES (CONTINUED)
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Investments in unproved properties and major
development projects are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the present value of estimated
future net revenues, based on current economic and operating conditions, plus
the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
INCOME TAXES
The financial statements do not include a provision for income taxes, because
the Company does not incur federal or state income taxes. Instead, its earnings
and losses are included in the members' personal income tax returns and are
taxed based on their personal tax rates.
FOREIGN CURRENCY TRANSLATION
The Company's reporting and functional currency is U. S. dollars. No material
translation gains or losses were recorded during the periods reported.
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash and
cash equivalents, accounts receivable, and accounts payable approximates fair
value as of July 26, 1996 and December 31, 1995. The Company does not hold or
issue financial instruments for trading purposes.
<PAGE>
Esmeralda Limited Liability Company
Notes to Financial Statements
July 26, 1996 and December 1995, 1994, and 1993
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Generally, oil and gas revenues from producing wells are recognized when the oil
or gas is produced and sold.
ORGANIZATIONAL COSTS
Costs associated with the organization and formation of the Company are being
amortized over a sixty-month period.
2. COLOMBIAN OPERATIONS
In January 1993, effective in March 1993, GHK Company Colombia ("GHK Colombia"),
wholly owned by Hefner until July 26, 1996, (See Note 6), and Petrolinson S. A.
("Petrolinson"), a Panamanian Corporation, entered into a risk sharing
Association Contract (the "Dindal Contract") with Empresa Colombiana de
Petroleos, the Colombian national oil company ("Ecopetrol"). The Dindal Contract
entitled GHK Colombia to explore for oil and gas on approximately 198,000 net
acres located in the Cundinamarca Region of Colombia (the "Dindal Block") and
provides for a six-year exploration period expiring in 1999, subject to a
requirement for additional partial relinquishments in 1999, and for a production
period expiring in 2021. Under the terms of the Dindal Contract, as modified in
1994, GHK Colombia is obligated to drill one exploratory well a year for six
years ending in 1999, and provide certain geological and geophysical information
and training. In 1994, under the terms of the Dindal Contract, GHK Colombia
returned 54,000 acres in the Northern Part of the Dindal Block, in exchange for
certain drilling concessions.
In 1993, the Company entered into an agreement with GHK Colombia and Petrolinson
S.A., whereby GHK Colombia assigned an undivided 21.12% interest in the Dindal
Contract. In November 1995, as a result of certain members of the Company not
wanting to make additional capital contributions, GHK Colombia assigned the
Company an undivided 9.776% interest in the Dindal Contract. Under the terms of
both agreements, the Company was obligated to pay certain exploration and
development costs in excess of their Contract interest assigned, and to
reimburse GHK Colombia certain costs and expenses incurred in securing the
Contract.
<PAGE>
Esmeralda Limited Liability Company
Notes to Financial Statements
July 26, 1996 and December 1995, 1994, and 1993
2. COLOMBIAN OPERATIONS (CONTINUED)
In June 1995, effective August 1995, GHK Colombia entered into a risk sharing
Association Contract (the "Rio Seco Contract") with Ecopetrol. The Rio Seco
contract covers an area of approximately 43,000 acres contiguous to the western
boundary of the Dindal Block (the "Rio Seco Block"). The six year exploration
period will expire in 2001 and is subject to a requirement for additional
partial relinquishments of acreage in 2001. The Rio Seco Contract also provides
for a 22-year production period with the contract expiring in 2023. Under the
terms of the Rio Seco Contract, GHK Colombia is obligated to perform certain
geological and geophysical studies and drill one exploratory well a year for
five years ending in 2001.
In February 1993 and June 1995, GHK Colombia and Petrolinson, wholly owned by
Norman R. Rowlinson, a geologist, entered into an agreement, whereby, GHK
Colombia assigned to Petrolinson, a 6% interest in the Dindal and Rio Seco
Contracts (the "Contracts") in exchange for services provided in obtaining the
Contracts. GHK Colombia agreed to pay Petrolinson's share of costs through the
exploration period of the Contracts. As discussed in Note 6, Seven Seas
Petroleum Inc. purchased this 6% interest from Petrolinson in March 1997.
In 1995, the Company entered into an agreement with GHK Colombia, whereby GHK
Colombia assigned an undivided 9.776% participation interest in the Rio Seco
Contract. Under the terms of the agreement, the Company is obligated to pay
certain exploration and development costs in excess of their participation
interest assigned, and to reimburse GHK Colombia certain costs and expenses
incurred in securing the Contract. The Company's interest is subject to the same
royalty and working interest after payout described above in the Dindal
Contract.
In addition to the participation interests assigned to the Company, during 1994
and 1995, GHK Colombia assigned other various participation interests in the
Dindal and Rio Seco Contracts, while retaining a 10.944% participation interest.
The terms of the other various participation interests assigned were similar to
the Company's.
GHK Colombia serves as the operator of the Colombian properties under the
Contracts. The Contracts provide for GHK Colombia to be reimbursed for overhead
expenses based upon a stated percentage of expenditures under the Contracts. In
1994, GHK Colombia received income of $84,783 under this provision. In 1995, GHK
Colombia and The GHK Company entered into an agreement, whereby, GHK Colombia
assigned its rights to the overhead reimbursement to The GHK Company in exchange
for The GHK Company providing the personnel and technical expertise required
under the Contract.
<PAGE>
Esmeralda Limited Liability Company
Notes to Financial Statements
July 26, 1996 and December 1995, 1994, and 1993
2. COLOMBIAN OPERATIONS (CONTINUED)
The Contracts provide that Ecopetrol will receive a royalty equal to 20% of
production on behalf of the Colombian government and, is entitled to an
additional 50% of the remaining production. In the event a discovery is deemed
commercially feasible, Ecopetrol will bear 50% of the future costs in that
field, and reimburse the joint venture, from Ecopetrol's share of future
production from the field, for 50% of the joint venture's costs of successful
exploratory wells in the field. If a commercial field on the Dindal Block
produces in excess of 60 million barrels, Ecopetrol's interest in production and
costs will increase in 5% increments from 50% to 70% as accumulated production
from the field increases in 30 million barrel increments from 60 million barrels
to 150 barrels. If a commercial field on the Rio Seco Block produces in excess
of 60 million barrels, Ecopetrol's interest in production and costs ranges from
50% to 75% based on annual measurements of profitability as defined in the Rio
Seco Contract. The joint venture bears all costs and risks of exploration
activities on the Dindal Block and Rio Seco Block, subject to Ecopetrol's right
to acquire a 50% interest in commercial discoveries.
If a discovery is made and is not deemed by Ecopetrol to be commercially
feasible, the joint venture may continue to develop the field at its own expense
and will recover 200% of the costs from Ecopetrol, at which time Ecopetrol will
acquire a 50% interest.
The joint venture has completed its drilling and other obligations for the first
three years of the Dindal Contract. Management of GHK Colombia believes
additional development activities are necessary before a commerciality
application will be submitted to Ecopetrol. The joint venture has the right to
continue the exploration program through 1999 with an obligation to conduct
exploration programs to be approved by Ecopetrol in 1997, 1998, and 1999. By
letter dated November 7, 1996, Ecopetrol granted the first annual extension of
the exploration program for the year 1997. The joint venture has also completed
its geological and geophysical obligations for the first year of the Rio Seco
Contract, but no wells have yet been drilled on the Rio Seco Block.
3. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances with high credit quality financial
institutions, one located in the United States and one located in Colombia. The
balances in these accounts, at times, have exceeded insured limits.
<PAGE>
Esmeralda Limited Liability Company
Notes to Financial Statements
July 26, 1996 and December 1995, 1994, and 1993
3. CONCENTRATION OF CREDIT RISK (CONTINUED)
As noted previously, the Company's oil and gas operations are in the country of
Colombia. Because of this, the Company is subject not only to the ordinary
economic risks of the country such as changes in taxes, rates of inflation,
etc., but also to changes in the political environment which may take place
within Colombia.
4. RELATED PARTY TRANSACTIONS
Substantially all the Company's activity represents costs and expenses paid to
GHK Colombia as a result of their participation interests in the Dindal and Rio
Seco Contracts. Below is a schedule of payments made by the Company to GHK
Colombia.
January 1 to July 26, 1996 ..... $ 635,622
Year ended December 31, 1995 ... 5,000
Year ended December 31, 1994 ... 703,611
Year ended December 31, 1993 ... --
------------
$ 1,344,233
============
At December 31, 1995, 1994, and 1993, the Company owed GHK Colombia $295,283,
$158,771, and $146,129, respectively, for the Company's share of costs and
expenses under the Contracts. At July 26, 1996, the Company had advanced GHK
Colombia $13,759 in excess of their share of accrued expenses.
In 1994, the Company, GHK Colombia, and Cimarrona, entered into an agreement
with two individuals to serve as principal legal representatives of the Company
in Colombia in exchange for a monthly payment of $5,000. These individuals or
their controlled corporations indirectly own membership interests in the
Company. For the period from January 1, 1996 to July 26, 1996 and for the years
ended December 31, 1995 and 1994, payments of $37,500, $37,000, and $29,308,
respectively, were made by GHK Colombia under the agreement.
At July 26, 1996, certain members of the Company who sold their interests, as
discussed in Note 6, owed the Company $127,019, representing their share of
costs and expenses associated with the sale.
At July 26, 1996, the Company owed The GHK Company $132,522 for the Company's
share of costs and expenses associated with the sale discussed in Note 6.
<PAGE>
Esmeralda Limited Liability Company
Notes to Financial Statements
July 26, 1996 and December 1995, 1994, and 1993
4. RELATED PARTY TRANSACTIONS (CONTINUED)
Under the terms of the sale agreement covering the sale of the members
interests, discussed in Note 6, post closing adjustments are to be completed
within 120 days of the closing date. It was determined that the members who sold
their interests had advanced $18,951 in excess of their share of costs and
expenses as of July 26, 1996. An adjustment to members' equity has been made for
this amount.
5. COMMITMENTS AND CONTINGENCIES
For the period from July 27, 1996 to June 30, 1997, the Company had been
advanced approximately $1,494,000 from Seven Seas Petroleum Holdings Inc. and
Seven Seas Petroleum Colombia Inc. representing the Company's share of
exploration and administrative costs incurred under the Rio Seco and Dindal
Contracts. In addition, the Company has elected to participate in two wells with
an estimated total cost of $8,500,000. These wells are required to be drilled by
September 1997 and will fulfill the Company's 1997 work commitment under these
Contracts. The Company will be required to pay their proportionate share of the
total cost of these two wells or approximately $884,000.
6. SUBSEQUENT EVENTS
On July 26, 1996, the members of the Company sold their interests in the Company
in exchange for 4,469,028 B Special Warrants issued by Seven Seas Petroleum Inc.
("SSPI"). SSPI is incorporated under the laws of the Yukon Territories and had
previously acquired a 15% participation interest in the Dindal and Rio Seco
contracts. The membership interests in the Company were transferred 50% into the
name of Seven Seas Petroleum Colombia Inc. and 50% into the name of Seven Seas
Petroleum Holdings Inc., both wholly owned subsidiaries of SSPI.
Other parties who owned participation interest in the Dindal and Rio Seco
Contracts totaling 26.924%, including Hefner who sold all of his GHK Colombia
stock, also sold their interest to SSPI in exchange for certain preferred shares
or special warrants ofSSPI. After the purchase of these various participation
interests, SSPI owned a 51.7% interest in the Contracts.
In March 1997, SSPI entered into an agreement with Petrolinson to acquire its 6%
interest in the Dindal and Rio Seco Contracts, in exchange for 1,000,000 shares
of its common stock. After this transaction, SSPI owned a 57.7% interest in the
Dindal and Rio Seco Contracts.
In May 1997, Robert A. Hefner III was named Chairman, Managing Director and
Chief Executive Officer of Seven Seas Petroleum Inc.
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members of
Cimarrona Limited Liability Company
I have audited the accompanying balance sheets of Cimarrona Limited Liability
Company (an Oklahoma Limited Liability Company) as of July 26, 1996 (prior to
the sale of members' interests discussed in Note 7) and December 31, 1995 and
1994 and the related statements of operations, members' equity, and cash flows
for the periods then ended. These financial statements are the responsibility of
the Company's management. My responsibility is to express an opinion on these
financial statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
These standards require that I plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Cimarrona Limited Liability Company
as of July 26, 1996 and December 31, 1995 and 1994, and the results of its
operations and its cash flows for the periods then ended in conformity with
generally accepted accounting principles.
Jerry L. Williams, CPA
Oklahoma City, Oklahoma
August 5, 1997
F-14
<PAGE>
Cimarrona Limited Liability Company
Balance Sheets
<TABLE>
<CAPTION>
December 31,
July 26, -----------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents (Note 3) ........... $ 39,263 $ 424,775 $ 2,080
Accounts receivable from members (Note 5 ) .. 178,228 -- --
Advance payment to affiliate (Note 5) ........ 36,231 -- --
Accounts receivable - oil and gas sales ...... 13,373 -- --
---------- ---------- ----------
Total current assets ........................... 267,095 424,775 2,080
Properties and equipment, at cost (Note 2)
Oil and gas properties (full cost method)
Proved ................................... -- -- --
Unproved (excluded from amortization) .... 2,231,479 1,427,455 1,061,734
---------- ---------- ----------
2,231,479 1,427,455 1,061,734
Less accumulated depreciation,
depletion, and amortization .............. -- -- --
---------- ---------- ----------
Net properties and equipment ................... 2,231,479 1,427,455 1,061,734
---------- ---------- ----------
Organizational costs ........................... 8,256 8,256 8,256
Less accumulated amortization .................. 4,266 3,302 1,651
---------- ---------- ----------
3,990 4,954 6,605
---------- ---------- ----------
$2,502,564 $1,857,184 $1,070,419
========== ========== ==========
Liabilities and members' equity
Current liabilities:
Accounts payable to affiliate (Note 5) ....... $ 216,455 $ 371,840 $ 2,872
Accounts payable to members (Note 5) ......... 30,977 -- --
---------- ---------- ----------
Total current liabilities ...................... 247,432 371,840 2,872
Commitments and contingencies (Notes 2, 3 and 6) -- -- --
Members' equity (Notes 2, 4, 5 and 6) .......... 2,255,132 1,485,344 1,067,547
---------- ---------- ----------
$2,502,564 $1,857,184 $1,070,419
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE>
Cimarrona Limited Liability Company
Statements of Operations
Period from
January 1 to Year ended December 31,
July 26, ------------------------
1996 1995 1994
---------- ---------- ----------
Revenues:
Oil and gas sales .................. $ 13,373 $ -- $ --
Interest income .................... 837 1,550 2,246
---------- ---------- ----------
Total revenues ....................... 14,210 1,550 2,246
Cost and expenses:
Amortization of organizational costs 964 1,651 1,651
Lease operating expenses ........... 31,100 -- --
General and administrative ......... 13,294 5,852 15,635
---------- ---------- ----------
Total costs and expenses ............. 45,358 7,503 17,286
---------- ---------- ----------
Net loss ............................. $ (31,148) $ (5,953) $ (15,040)
========== ========== ==========
The accompanying notes are an integral part of these financial statements.
F-16
<PAGE>
Cimarrona Limited Liability Company
Statements of Members' Equity
Period from
January 1 to Year ended December 31,
July 26, --------------------------
1996 1995 1994
----------- ----------- -----------
Balance at the beginning of year .. $ 1,485,344 $ 1,067,547 $ --
Member contributions .............. 831,913 423,750 1,082,587
Excess advance by members (Note 5) (30,977) -- --
Net loss .......................... (31,148) (5,953) (15,040)
----------- ----------- -----------
Balance at the end of period ...... $ 2,255,132 $ 1,485,344 $ 1,067,547
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
F-17
<PAGE>
Cimarrona Limited Liability Company
Statements of Cash Flows
<TABLE>
<CAPTION>
Period from
January 1 to Year ended December 31,
July 26, ----------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................. $ (31,148) $ (5,953) $ (15,040)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Additions to organizational costs ......... -- -- (8,256)
Amortization of organizational costs ...... 964 1,651 1,651
(Increase) decrease in:
Accounts receivable from members ........ (178,228) -- --
Advance payment to affiliate ............ (36,231) -- --
Accounts receivable - oil and gas sales . (13,373) -- --
Increase (decrease) in:
Accounts payable to affiliate ........... (155,385) 368,968 2,872
------------ ------------ ------------
Total adjustments ............................. (382,253) 370,619 (3,733)
------------ ------------ ------------
Net cash provided by (used for)
operating activities ........................ (413,401) 364,666 (18,773)
Cash flows from investing activities:
Additions to oil and gas properties ........... (804,024) (365,721) (1,061,734)
------------ ------------ ------------
Net cash used for investing activities ........ (804,024) (365,721) (1,061,734)
Cash flows from financing activities:
Contributions by members ...................... 831,913 423,750 1,082,587
Net cash provided by
financing activities ........................ 831,913 423,750 1,082,587
Net increase (decrease) in cash and
cash equivalents ............................ (385,512) 422,695 2,080
Cash and cash equivalents
at beginning of year ........................ 424,775 2,080 --
------------ ------------ ------------
Cash and cash equivalents
at end of period ............................ $ 39,263 $ 424,775 $ 2,080
============ ============ ============
Noncash financing activities:
Excess advance by members (Note 5) ............ $ 30,977
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Cimarrona Limited Liability Company (the "Company") was formed as a limited
liability company under the laws of the State of Oklahoma on December 8, 1993.
Operations of the Company did not start until January 1994. The GHK Company,
although not a member of the Company, serves as Manager of the Company.
As discussed in Note 7, on July 26, 1996, certain members of the Company, whose
membership interest totaled 62.963%, sold their interests in the Company. These
financial statements have been prepared and are presented prior to the sale
discussed in Note 7.
OPERATIONS
The Company is engaged in the exploration, development and production of oil and
gas properties located in Colombia, South America. The principal asset of the
Company is a participating interest in certain association contracts allowing
for the exploration and development of the Dindal and Rio Seco blocks located in
the Upper Magdalena Basin of Colombia.
All of the Company's exploration and development are conducted jointly with
others, and the financial statements reflect only the Company's proportionate
interest in such activities.
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 on
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
OIL AND GAS PROPERTIES
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration, and
development of oil and gas reserves, including directly related overhead costs,
are capitalized.
F-19
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OIL AND GAS PROPERTIES (CONTINUED)
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Investments in unproved properties and major
development projects are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized.
In addition, the capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the present value of estimated
future net revenues, based on current economic and operating conditions, plus
the lower of cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized.
INCOME TAXES
The financial statements do not include a provision for income taxes, because
the Company does not incur federal or state income taxes. Instead, its earnings
and losses are included in the members' personal income tax returns and are
taxed based on their personal tax rates.
FOREIGN CURRENCY TRANSLATION
The Company's reporting and functional currency is U. S. dollars. No material
translation gains or losses were recorded during the periods reported.
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments including cash and
cash equivalents, accounts receivable, and accounts payable approximates fair
value as of July 26, 1996 and December 31, 1995. The Company does not hold or
issue financial instruments for trading purposes.
REVENUE RECOGNITION
Generally oil and gas revenues from producing wells are recognized when the oil
or gas is produced and sold.
ORGANIZATIONAL COSTS
Costs associated with the organization and formation of the Company are being
amortized over a sixty-month period.
2. COLOMBIAN OPERATIONS
In January 1993, effective in March 1993, GHK Company Colombia ("GHK Colombia"),
wholly owned by Robert A. Hefner III ("Hefner") until July 26, 1996, (See Note
7), and Petrolinson S. A. ("Petrolinson"), a Panamanian Corporation, entered
into a risk sharing Association Contract (the "Dindal Contract") with Empresa
Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The
Dindal Contract entitled GHK Colombia to explore for oil and gas on
approximately 198,000 net acres located in the Cundinamarca Region of Colombia
(the "Dindal Block") and provides for a six-year exploration period expiring in
1999, subject to a requirement for additional partial relinquishments in 1999,
and for a production period expiring in 2021. Under the terms of the Dindal
Contract, as modified in 1994, GHK Colombia is obligated to drill one
exploratory well a year for six years ending in 1999, and provide certain
geological and geophysical information and training. In 1994, under the terms of
the Dindal Contract, GHK Colombia returned 54,000 acres in the Northern Part of
the Dindal Block, in exchange for certain drilling concessions.
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
2. COLOMBIAN OPERATIONS (CONTINUED)
In 1994, the Company entered into an agreement with GHK Colombia and Petrolinson
S.A., whereby GHK Colombia assigned an undivided 20.9% interest in the Dindal
Contract. In November 1995, as a result of member withdrawals and new member
additions discussed in Note 4, GHK Colombia assigned the Company an undivided
25.38% interest in the Dindal Contract. Under the terms of both agreements, the
Company was obligated to pay certain exploration and development costs in excess
of their Contract interest assigned, and to reimburse GHK Colombia certain costs
and expenses incurred in securing the Contract.
In June 1995, effective August 1995, GHK Colombia entered into a risk sharing
Association Contract (the "Rio Seco Contract") with Ecopetrol. The Rio Seco
contract covers an area of approximately 43,000 acres contiguous to the western
boundary of the Dindal Block (the "Rio Seco Block"). The six year exploration
period will expire in 2001 and is subject to a requirement for additional
partial relinquishments of acreage in 2001. The Rio Seco Contract also provides
for a 22-year production period with the contract expiring in 2023. Under the
terms of the Rio Seco Contract, GHK Colombia is obligated to perform certain
geological and geophysical studies and drill one exploratory well a year for
five years ending in 2001.
In February 1993 and June 1995, GHK Colombia and Petrolinson, wholly owned by
Norman R. Rowlinson, a geologist, entered into agreements, whereby, GHK Colombia
assigned to Petrolinson, a 6% interest in the Dindal and Rio Seco Contracts (the
"Contracts") in exchange for services provided in obtaining the Contracts. GHK
Colombia agreed to pay Petrolinson's share of costs through the exploration
period of the Contracts. As discussed in Note 7, Seven Seas Petroleum Inc.
purchased this 6% interest from Petrolinson in March 1997.
In 1995, the Company entered into an agreement with GHK Colombia, whereby GHK
Colombia assigned an undivided 25.38% participation interest in the Rio Seco
Contract. Under the terms of the agreement, the Company is obligated to pay
certain exploration and development costs in excess of their participation
interest assigned, and to reimburse GHK Colombia certain costs and expenses
incurred in securing the Contract. The Company's interest is subject to the same
royalty and working interest after payout described above in the Dindal
Contract.
In addition to the participation interests assigned to the Company, during 1994
and 1995, GHK Colombia assigned other various participation interests in the
Dindal and Rio Seco Contracts, while retaining a 10.944% participation interest.
The terms of the other various participation interests assigned were similar to
the Company's.
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
2. COLOMBIAN OPERATIONS (CONTINUED)
GHK Colombia serves as the operator of the Colombian properties under the
Contracts. The Contracts provide for GHK Colombia to be reimbursed for overhead
expenses based upon a stated percentage of expenditures under the Contracts. In
1994, GHK Colombia received income of $84,783 under this provision. In 1995, GHK
Colombia and The GHK Company entered into an agreement, whereby, GHK Colombia
assigned its rights to the overhead reimbursement to The GHK Company in exchange
for The GHK Company providing the personnel and technical expertise required
under the Contract.
The Contracts provide that Ecopetrol will receive a royalty equal to 20% of
production on behalf of the Colombian government and, is entitled to an
additional 50% of the remaining production. In the event a discovery is deemed
commercially feasible, initiating the "Exploitation" period under the Contracts,
Ecopetrol will bear 50% of the future costs in that field, and reimburse the
joint venture, from Ecopetrol's share of future production from the field, for
50% of the joint venture's costs of successful exploratory wells in the field.
If a commercial field on the Dindal Block produces in excess of 60 million
barrels, Ecopetrol's interest in production and costs will increase in 5%
increments from 50% to 70% as accumulated production from the field increases in
30 million barrel increments from 60 million barrels to 150 barrels. If a
commercial field on the Rio Seco Block produces in excess of 60 million barrels,
Ecopetrol's interest in production and costs ranges from 50% to 75% based on
annual measurements of profitability as defined in the Rio Seco Contract. The
joint venture bears all costs and risks of exploration activities on the Dindal
Block and Rio Seco Block, subject to Ecopetrol's right to acquire a 50% interest
in commercial discoveries.
If a discovery is made and is not deemed by Ecopetrol to be commercially
feasible, the joint venture may continue to develop the field at its own expense
and will recover 200% of the costs from Ecopetrol, at which time Ecopetrol will
then acquire a 50% interest.
The joint venture has completed its drilling and other obligations for the first
three years of the Dindal Contract. Management of GHK Colombia believes
additional development activities are necessary before a commerciality
application will be submitted to Ecopetrol. The joint venture has the right to
continue the exploration program through 1999 with an obligation to conduct
exploration programs to be approved by Ecopetrol in 1997, 1998, and 1999. By
letter dated November 7, 1996, Ecopetrol granted the first annual extension of
the exploration program for the year 1997. The joint venture has also completed
its geological and geophysical obligations for the first year of the Rio Seco
Contract, but no wells have yet been drilled on the Rio Seco Block.
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
3. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances with high credit quality financial
institutions, one located in the United States and one located in Colombia. The
balances in these accounts, at times, have exceeded insured limits.
As noted previously, the Company's oil and gas operations are in the country of
Colombia. Because of this, the Company is subject not only to the ordinary
economic risks of the country such as changes in taxes, rate of inflation, etc.,
but also to changes in the political environment which may take place within
Colombia.
4. WITHDRAWALS OF MEMBERS
During 1994 and 1995 three members, whose ownership totaled 65.27% of the
Company, withdrew from the partnership, and the Company added five new partners.
The Limited Liability Agreement of the Company was amended in July 1995 to
reflect these changes. Promotion fees totaling $140,000 were paid by the new
members to GHK Colombia.
5. RELATED PARTY TRANSACTIONS
Substantially all the Company's activity represents costs and expenses paid to
GHK Colombia as a result of their participation interests in the Dindal and Rio
Seco Contracts. For the year ended December 31, 1994 the Company paid GHK
Colombia $1,045,686. No payments were made in 1995. For the period from January
1, 1996 to July 26, 1996, payments totaling $1,255,663 were made by the Company
to GHK Colombia.
At December 31, 1995 and 1994, the Company owed GHK Colombia $371,840 and
$2,872, respectively, for their share of costs and expenses under the Contracts.
At July 26, 1996, the Company had advanced GHK Colombia $36,231 in excess of
their share of accrued expenses.
In 1995, GHK Colombia received promotion fees of $246,383, including $106,383
from SSPI and $140,000 from new members in the Company, for the right to
participate in the Dindal and Rio Seco Contracts.
In 1994, the Company, GHK Colombia, and Esmeralda, entered into an agreement
with two individuals to serve as principal legal representatives of the Company
in Colombia in exchange for a monthly payment of $5,000. These individuals or
their controlled corporations indirectly own membership interests in Esmeralda.
For the period from January 1, 1996 to July 26, 1996 and for the years ended
December 31, 1995 and 1994, payments of $37,500, $37,000 and $29,308,
respectively, were made by GHK Colombia under the agreement.
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
5. RELATED PARTY TRANSACTIONS (CONTINUED)
At July 26, 1996, certain members of the Company who sold their interests, as
discussed in Note 7, owed the Company $178,228, representing their share of
costs and expenses associated with the sale.
At July 26, 1996, the Company owed The GHK Company $216,455 for the Company's
share of costs and expenses associated with the sale discussed in Note 7.
Under the terms of the sale agreement covering the sale of the members
interests, discussed in Note 7, post closing adjustments are to be completed
within 120 days of the closing date. It was determined that the members who sold
their interests had advanced $30,977 in excess of their share of costs and
expenses as of July 26, 1996. An adjustment to members' equity has been made for
this amount.
6. COMMITMENTS AND CONTINGENCIES
For the period from July 27, 1996 to June 30, 1997, the Company received
contributions from the members of approximately $3,867,000 representing the
Company's share of exploration and administrative costs under the Rio Seco and
Dindal Contracts. In addition, the Company has elected to participate in two
wells with an estimated total cost of $8,500,000. These wells are required to be
drilled by September 1997 and will fulfill the Company's 1997 work commitment
under these Contracts. The Company will be required to pay their proportionate
share of the total cost of these two wells or approximately $2,295,000.
7. SUBSEQUENT EVENTS
On July 26, 1996, certain members of the Company, whose membership interests
totaled 62.963%, sold their interests in the Company in exchange for 7,305,143 B
Special Warrants issued by Seven Seas Petroleum Inc. ("SSPI"). SSPI is
incorporated under the laws of Yukon Territories and had previously acquired a
15% participation interest in the Dindal and Rio Seco Contracts. The membership
interests sold were transferred into the name of Seven Seas Petroleum Colombia
Inc., a wholly owned subsidiary of SSPI.
Other parties who owned participation interest in the Dindal and Rio Seco
Contracts totaling 20.72%, including Hefner who sold all of his GHK Colombia
stock, also sold their interest to SSPI in exchange for certain preferred shares
or special warrants of SSPI. After the purchase of these various participation
interests, SSPI owned a 51.7% interest in the Contracts.
<PAGE>
Cimarrona Limited Liability Company
Notes to Financial Statements
July 26, 1996, and December 31, 1995, and 1994
7. SUBSEQUENT EVENTS (CONTINUED)
In March 1997, SSPI entered into an agreement with Petrolinson to acquire its 6%
interest in the Dindal and Rio Seco Contracts, in exchange for 1,000,000 shares
of its common stock. After this transaction, SSPI owned a 57.7% interest in the
Dindal and Rio Seco Contracts.
In May 1997, Robert A. Hefner III was named Chairman, Managing Director and
Chief Executive Officer of Seven Seas Petroleum Inc.
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
PRO FORMA FINANCIAL STATEMENT
INTRODUCTION
On July 26, 1996, Seven Seas acquired 100 percent of the outstanding stock,
which represented 100 percent of the voting shares held in GHK Company Colombia
and Esmeralda LLC. Additionally, on the same date, the Company acquired 62.963
percent of the outstanding shares and voting stock of Cimarrona LLC.
Collectively, the acquisition of these three companies resulted in the purchase
of an additional 36.7 percent participating interest in the Dindal and Rio Seco
Association Contracts ("the Association Contracts") in which the Company
previously held a 15 percent participating interest. All three entities were oil
and gas exploration companies whose only material asset was the participating
interest they held in the Association Contracts in Colombia. As consideration
for the increased interest, Seven Seas issued to the stockholders in GHK Company
Colombia, Esmeralda LLC and Cimarrona LLC a combination of preferred shares and
special warrants which are exchangeable into a total of 16,777,143 common shares
upon the earlier of the approval of a prospectus qualifying the exchange, or one
year from the closing of the transaction. This transaction has been reflected as
an acquisition using the purchase method of accounting, whereby the assets
acquired and the liabilities assumed were fair valued and the three respective
entities have been prospectively reflected in the Company's financial statements
since July 26, 1996. The Pro Forma Statement of Operations below shows the
results of operations, combining this purchase-method acquisition as though the
three companies were acquired at the beginning of the year 1996:
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
PRO FORMA STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
GHK Companies(A)
January 1, July 26, Pro forma
1996 1996 adjustment Combined
------------ -------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues:
Crude oil sales ............................... $ 233,682 $ 24,290 $ -- $ 257,972
Interest income ............................... 341,599 837 -- 342,436
------------ -------- ----------- ------------
575,281 25,127 -- 600,408
Expenses:
General & administrative ...................... 2,452,546 26,958 -- 2,479,504
Lease operating ............................... 252,504 56,491 -- 308,995
Other ......................................... 129,103 4,262 -- 133,365
Minority interest ............................. (64,235) -- (11,536)(B) (75,771)
------------ -------- ----------- ------------
2,769,918 87,711 (11,536) 2,846,093
------------ -------- ----------- ------------
Net Loss .......................................... $ (2,194,637) $(62,584) $ 11,536 $ (2,245,685)
------------ -------- ----------- ------------
Net loss per Common Share ......................... $ (0.17) $ (0.17)(C)
Weighted Average Number of Common
Shares Outstanding ................................ 12,971,871 12,971,871
============ ============
</TABLE>
NOTES TO PRO FORMA STATEMENT OF OPERATIONS:
(A) GHK Companies includes the three entities acquired on July 26, 1996: GHK
Company Colombia, Esmeralda LLC, and Cimarrona LLC.
(B) The pro forma adjustment is required to record the 37. 037 percent
minority interest in the historical net loss of Cimarrona LLC totalling
($31,148) for the period January 1, 1996 to July 26, 1996.
(C) Net loss per share is computed using the weighted average number of
shares outstanding. No effect was given to common stock equivalents as
the effect would be antidilutive. All shares issued in connection with
the conversion of preferred shares and special warrants were not
considered outstanding until registration with the Canadian Securities
Commissions occurred on February 7, 1997.
F-20
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Seven Seas Petroleum Inc.:
We have audited the accompanying consolidated balance sheets of Seven Seas
Petroleum Inc. (a Yukon Territory, Canada corporation in the development stage)
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statement of operations and accumulated deficit, stockholders' equity and cash
flows for the year ended December 31, 1996 and for the period from inception
(February 3, 1995) through December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Seven Seas Petroleum
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for the year ended December 31, 1996, and for
the period from inception (February 3, 1995) through December 31, 1995, in
conformity with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
February 22, 1997
F-21
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------------
June 30, 1997 1996 1995
------------- ------------- -----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents ..................................................... $ 8,948,909 $ 10,620,477 $ 3,365,603
Marketable securities ......................................................... 43,795 43,795 43,795
Accounts receivable ........................................................... 109,117 1,241,430 43,642
Prepaids and other ............................................................ 9,552 -- 482
------------- ------------- -----------
9,111,373 11,905,702 3,453,522
EVALUATED OIL AND GAS INTERESTS, full-cost method ................................. 1,831,713 1,611,665 --
UNEVALUATED OIL AND GAS INTERESTS, full-cost method, net .......................... 249,980,012 221,884,126 574,137
FIXED ASSETS, net of accumulated depreciation of $84,332 at June 30, 1997, ........ 88,060 74,219 63,707
$68,733 at December 31, 1996 and $9,965 at December 31, 1995
ORGANIZATION COSTS, net of accumulated depreciation of $102,536 at June 30, 1997,
$80,272 at December 31, 1996 and $27,706 at December 31, 1995 ................ 3,006 25,270 79,071
------------- ------------- -----------
TOTAL ASSETS ...................................................................... $ 261,014,164 $ 235,500,982 $ 4,170,437
------------- ------------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable ............................................................. $ 830,486 $ 2,560,665 $ 120,305
Accrued compensation ......................................................... 509,000 245,000 --
------------- ------------- -----------
1,339,486 2,805,665 120,305
DEFERRED INCOME TAXES ............................................................. 70,458,512 63,967,775 --
MINORITY INTEREST ................................................................. 2,124,170 1,060,433 --
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY
Share capital -
Authorized unlimited common shares without par value and
unlimited Class A preferred shares without par value;
34,819,606 issued and outstanding common shares at June 30, 1997,
13,315,796 at December 31, 1996 and 12,680,463 at December 31, 1995 ............ 194,265,713 6,781,616 6,170,117
Preferred share subscriptions - 5,002,972 shares at December 31, 1996 ............. -- 45,652,120 --
Special warrant subscriptions - 14,274,171 warrants at December 31, 1996 .......... -- 119,548,227 --
Deficit accumulated during development stage ...................................... (7,173,485) (4,314,622) (2,119,985)
Treasury stock, 29 shares held at June 30, 1997 and December 31, 1996 ............. (232) (232) --
------------- ------------- -----------
Total Stockholders' Equity ........................................................ 187,091,996 167,667,109 4,050,132
------------- ------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ........................................ $ 261,014,164 $ 235,500,982 $ 4,170,437
============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
STATEMENTS OF CONSOLIDATED OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
From Inception Cumulative Total
(February 3, from Inception
Six Months Ended June 30, Year Ended 1995) to (February 3, 1995)
---------------------------- December 31, December 31, to
1997 1996 1996 1995 June 30, 1997
------------ ------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE
Crude oil sales ........................... $ 436,333 $ -- $ 233,682 $ -- $ 670,015
Interest income ........................... 234,568 132,182 341,599 152,383 728,550
------------ ------------ ------------ ------------ ------------
670,901 132,182 575,281 152,383 1,398,565
EXPENSES
Lease operating expenses .................. 231,155 -- 252,504 -- 483,659
General and administrative ................ 3,281,260 892,391 2,452,546 1,070,765 6,804,571
Depreciation and amortization ............. 37,863 35,212 111,334 37,671 186,868
Dry hole and abandonment costs ............ 16,952 -- 4,910 1,122,806 1,144,668
Geological and geophysical ................ 27,372 1,759 10,521 9,769 47,662
Loss on sale of resource properties ....... -- -- -- 31,357 31,357
------------ ------------ ------------ ------------ ------------
3,594,602 929,362 2,831,815 2,272,368 8,698,785
LOSS BEFORE INCOME TAXES .................... (2,923,701) (797,180) (2,256,534) (2,119,985) (7,300,220)
INCOME TAX EXPENSE .......................... 7,733 750 2,338 -- 10,071
------------ ------------ ------------ ------------ ------------
NET LOSS BEFORE MINORITY INTEREST ........... (2,931,434) (797,930) (2,258,872) (2,119,985) (7,310,291)
MINORITY INTEREST ........................... 72,571 -- 64,235 -- 136,806
------------ ------------ ------------ ------------ ------------
NET LOSS .................................... $ (2,858,863) $ (797,930) $ (2,194,637) $ (2,119,985) $ (7,173,485)
============ ============ ============ ============ ============
DEFICIT ACCUMULATED DURING THE DEVELOPMENT
STAGE, beginning of period ................ (4,314,622) ($ 2,119,985) (2,119,985) -- --
DEFICIT ACCUMULATED DURING THE DEVELOPMENT
STAGE, end of period ...................... $ (7,173,485) $ (2,917,915) $ (4,314,622) $ (2,119,985) $ (7,173,485)
============ ============ ============ ============ ============
NET LOSS PER COMMON SHARE ................... $ (0.10) $ (0.06) $ (0.17) $ (0.23) $ (0.48)
============ ============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING ................. 30,033,434 12,817,020 12,971,871 9,247,101 15,078,264
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
For the Period from Inception (February 3, 1995) through June 30, 1997
<TABLE>
<CAPTION>
Common Stock
---------------------------
Date Number Amount
--------------------- ----------- -------------
<S> <C> <C> <C>
Issuance of common share to founder ................................. February 3, 1995 .... 1 $ --
Issuance of common shares to founder for cash ....................... February 27, 1995 ... 999,999 1
Issuance of common shares in a private placement for cash
($0.25 per share) ................................................. March 22, 1995 ...... 4,000,000 1,000,000
Issuance of common shares in private placements for cash
($0.75 per share): ................................................ May 31, 1995 ........ 5,687,666 4,265,750
.......................................................... June 9, 1995 ........ 979,000 734,250
Issuance of common shares in settlement of agents' fees
($0.75 per share): ................................................ May 31, 1995 ........ 284,383 213,287
............................................................ June 9, 1995 ........ 48,950 36,713
Less: Common share issuance cost .................................... May 31 - June 9, 1995 -- (250,000)
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake Resources
($0.25 per share) ................................................. June 29-30, 1995 .... 680,464 170,116
Net loss ............................................................ -- --
----------- -------------
Balance at December 31, 1995 ........................................ 12,680,463 6,170,117
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant) ............................ March 15, 1996 ...... -- --
Issuance of common shares to the Company's 401(k) plan
($7.875 per share) ................................................ April 29,1996 ....... 10,000 78,750
Purchase Treasury Stock ($8.00 per share) ........................... June 26, 1996 ....... -- --
Exercise of stock options for cash ($.75 per share) ................. Jan. - June 1996 .... 305,000 228,750
Exercise of stock options for cash ($7.125 per share) ............... April 29, 1996 ...... 10,000 71,250
Issuance of exchangeable preferred stock in connection with
business combination ( $9.125 per share) .......................... July 26, 1996 ....... -- --
Issuance of special warrants in connection with business
combination ($9.125 per warrant) .................................. July 26, 1996 ....... -- --
Issuance of convertible special warrants in a brokered private
placement for cash ($15.00 per warrant) ........................... October 16, 1996 .... -- --
Exercise of stock options for cash ($.75 per share) ................. July - December 1996 310,333 232,749
Net loss ............................................................ -- --
----------- -------------
Balance at December 31, 1996 ........................................ 13,315,796 6,781,616
Unaudited:
Conversion of special warrants issued in connection with the business
combination dated July 26, 1996 ($9.125 per share) ................ February 7, 1997 .... 11,774,171 107,439,309
Conversion of the preferred shares in connection with the business
combination dated July 26, 1996 ($9.125 per share) ................ February 7, 1997 .... 5,002,972 45,652,120
Conversion of privately placed special warrants ($15.00 per warrant) February 7, 1997 .... 500,000 7,013,370
Conversion of privately placed special warrants ($2.75 per warrant) February 7, 1997 .... 2,000,000 5,095,548
Issuance of common shares in connection with the business
combination ($18.55 per share) .................................... March 5, 1997 ....... 1,000,000 18,550,000
Conversion of privately placed special warrants ($3.50
per warrant) ...................................................... March 14, 1997 ...... 1,000,000 3,500,000
Exercise of stock options for cash ($7.125 per share) ............... April 15, 1997 ...... 10,000 71,250
Exercise of stock options for cash ($.75 per share) ................. Jan. -June 1997 ..... 216,667 162,500
Net loss ............................................................ -- --
----------- -------------
Balance at June 30, 1997 (Unaudited) ................................ $34,819,606 $ 194,265,713
=========== =============
</TABLE>
<TABLE>
<CAPTION>
Preferred Stock Special Warrants
--------------------------- -----------------------------
Number Amount Number Amount
----------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Issuance of common share to founder ......................... -- -- -- $ --
Issuance of common shares to founder for cash ............... -- $ -- -- --
Issuance of common shares in a private placement for
cash ($0.25 per share) .................................... -- -- -- --
Issuance of common shares in private placements for
cash ($0.75 per share): ................................... -- -- -- --
............................................................. -- -- -- --
Issuance of common shares in settlement of agents' fees
($0.75 per share): ........................................ -- -- -- --
............................................................. -- -- -- --
Less: Common share issuance cost ............................ -- -- -- --
Issuance of common shares in connection with the
May 5, 1995 amalgamation agreement with Rusty Lake
Resources ($0.25 per share) ............................... -- -- -- --
Net loss .................................................... -- -- -- --
----------- ------------ ------------ -------------
Balance at December 31, 1995 ................................ -- -- -- --
Issuance of special warrants in a brokered private placement
for cash ($2.75 per warrant) .............................. -- -- 2,000,000 5,095,548
Issuance of common shares to the Company's 401(k) plan
($7.875 per share) ........................................ -- -- -- --
Purchase Treasury Stock ($8.00 per share) ................... -- -- -- --
Exercise of stock options for cash ($.75 per share) ......... -- -- -- --
Exercise of stock options for cash ($7.125 per share) ....... -- -- -- --
Issuance of exchangeable preferred stock in connection with
business combination ( $9.125 per share) .................. -- -- -- --
Issuance of special warrants in connection with business
combination ($9.125 per warrant) .......................... 5,002,972 45,652,120 11,774,171 107,439,309
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant) ........... -- -- 500,000 7,013,370
Exercise of stock options for cash ($.75 per share) ......... -- -- -- --
Net loss .................................................... -- -- -- --
----------- ------------ ------------ -------------
Balance at December 31, 1996 ................................ -- -- 14,274,171 119,548,227
Unaudited: .................................................. 5,002,972 45,652,120
Conversion of special warrants issued in connection with the
business combination dated July 26, 1996 ($9.125 per share) -- -- (11,774,171) (107,439,309)
Conversion of the preferred shares in connection with the
business combination dated July 26, 1996 ($9.125 per share) (5,002,972) (45,652,120) -- --
Conversion of privately placed special warrants ($15.00 per
warrant) .................................................. -- -- (500,000) (7,013,370)
Conversion of privately placed special warrants ($2.75 per
warrant) .................................................. -- -- (2,000,000) (5,095,548)
Issuance of common shares in connection with the business
combination ($18.55 per share) ............................ -- -- -- --
Conversion of privately placed special warrants ($3.50 per
warrant) .................................................. -- -- -- --
Exercise of stock options for cash ($7.125 per share) ....... -- -- -- --
Exercise of stock options for cash ($.75 per share) ......... -- -- -- --
Net loss .................................................... -- -- -- --
----------- ------------ ------------ -------------
Balance at June 30, 1997 (Unaudited) ........................ $ -- $ -- $ -- $ --
=========== ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
Deficit
Accumulated
Treasury Stock during
----------------------- Development
Number Amount Phase Total
---------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Issuance of common share to founder ................... -- $-- $ -- $ --
Issuance of common shares to founder for cash ......... -- -- -- 1
Issuance of common shares in a private placement for
cash ($0.25 per share) .............................. -- -- -- 1,000,000
Issuance of common shares in private placements for
cash ($0.75 per share): ............................. -- -- -- 4,265,750
.......................................... -- -- -- 734,250
Issuance of common shares in settlement of agents'
fees ($0.75 per share): ............................. -- -- -- 213,287
............................................ -- -- -- 36,713
Less: Common share issuance cost ...................... -- -- -- (250,000)
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake
Resources ($0.25 per share) ......................... -- -- -- 170,116
Net loss .............................................. -- -- (2,119,985) (2,119,985)
---------- ---------- ----------- -------------
Balance at December 31, 1995 .......................... -- -- (2,119,985) 4,050,132
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant) .............. -- -- -- 5,095,548
Issuance of common shares to the Company's 401(k)
plan ($7.875 per share) ............................. -- -- -- 78,750
Purchase Treasury Stock ($8.00 per share) ............. 29 (232) -- (232)
Exercise of stock options for cash ($.75 per share) ... -- -- -- 228,750
Exercise of stock options for cash ($7.125 per share) . -- -- -- 71,250
Issuance of exchangeable preferred stock in connection
with business combination ( $9.125 per share) ....... -- -- -- 45,652,120
Issuance of special warrants in connection with
business combination ($9.125 per warrant) ........... -- -- -- 107,439,309
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant) ..... -- -- -- 7,013,370
Exercise of stock options for cash ($.75 per share) ... -- -- -- 232,749
Net loss .............................................. -- -- (2,194,637) (2,194,637)
---------- ---------- ----------- -------------
Balance at December 31, 1996 .......................... 29 (232) (4,314,622) 167,667,109
Unaudited:
Conversion of special warrants issued in connection
with the business combination dated July 26, 1996
($9.125 per share) .................................. -- -- -- --
Conversion of the preferred shares in connection
with the business combination dated July 26, 1996
($9.125 per share) .................................. -- -- -- --
Conversion of privately placed special warrants
($15.00 per warrant) ................................ -- -- -- --
Conversion of privately placed special warrants
($2.75 per warrant) ................................. -- -- -- --
Issuance of common shares in connection with the
business combination ($18.55 per share) ............. -- -- -- 18,550,000
Conversion of privately placed special warrants
($3.50 per warrant) ................................. -- -- -- 3,500,000
Exercise of stock options for cash ($7.125 per share) . -- -- -- 71,250
Exercise of stock options for cash ($.75 per share) ... -- -- -- 162,500
Net loss .............................................. -- -- (2,858,863) (2,858,863)
---------- ---------- ----------- -------------
Balance at June 30, 1997 (Unaudited) .................. $ 29 $ (232) $(7,173,485) $ 187,091,996
========== ========== =========== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
From Inception
(February 3, Cumulative Total
Year Ended 1995) to from Inception
Six Months Six Months December 31, December 31, (February 3, 1995)
Ended 1997 Ended 1996 1996 1995 to June 30, 1997
------------ ----------- ------------- ----------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss ................................... $ (2,858,863) $ (797,930) $ (2,194,637) $(2,119,985) $ (7,173,485)
Add (subtract) items not requiring
(providing) cash:
Minority interest .......................... (72,571) -- (64,235) -- (136,806)
Common stock contribution to 401(k)
retirement plan ........................... -- 78,750 78,750 -- 78,750
Dry hole and abandonment costs ............. 16,952 -- -- 1,122,806 1,139,758
Loss on sale of resource properties ........ -- -- -- 31,357 31,357
Depreciation and amortization .............. 37,863 35,212 111,334 37,671 186,868
Changes in working capital excluding changes
to cash and cash equivalents:
Accounts receivable ..................... 1,138,757 163 (316,431) (43,642) 778,684
Prepaids and other, net ................. (9,552) (7,177) 482 (482) (9,552)
Accounts payable ........................ (1,731,781) (117,691) 1,509,348 120,305 (102,128)
Accrued liabilities ..................... 264,000 -- 245,000 -- 509,000
------------ ----------- ------------- ----------- -------------
Cash Flow Used in Operating Activities ....... (3,215,195) (808,673) (630,389) (851,970) (4,697,554)
------------ ----------- ------------- ----------- -------------
INVESTING ACTIVITIES
Exploration of oil and gas properties ...... (3,297,185) (943,468) (5,836,266) (1,696,943) (10,830,394)
Proceeds from acquisition .................. 194 -- 630,226 -- 630,420
Proceeds from sale of property ............. -- -- -- 84,336 84,336
Other asset additions ...................... (29,440) (152) (64,135) (169,821) (263,396)
------------ ----------- ------------- ----------- -------------
Cash Flow Used in Investing Activities ....... (3,326,431) (943,620) (5,270,175) (1,782,428) (10,379,034)
------------ ----------- ------------- ----------- -------------
FINANCING ACTIVITIES
Proceeds from special warrants issued ...... -- 5,095,548 12,108,917 -- 12,108,917
Proceeds from share capital issued ......... 3,733,751 228,750 532,750 6,000,001 10,266,502
Proceeds from additional paid-in
capital contributed ....................... -- -- 999 -- 999
Contributions by minority interest ......... 1,136,307 -- 513,004 -- 1,649,311
Purchase of treasury stock ................. -- (232) (232) -- (232)
------------ ----------- ------------- ----------- -------------
Cash Flow Provided by Financing Activities ... 4,870,058 5,324,066 13,155,438 6,000,001 24,025,497
------------ ----------- ------------- ----------- -------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ........................... (1,671,568) 3,571,773 7,254,874 3,365,603 8,948,909
Cash and cash equivalents, beginning of period 10,620,477 3,365,603 3,365,603 -- --
------------ ----------- ------------- ----------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ..... $ 8,948,909 $ 6,937,376 $ 10,620,477 $ 3,365,603 $ 8,948,909
============ =========== ============= =========== =============
SUPPLEMENTAL DISCLOSURES
Common stock granted pursuant to an agency
agreement for a private placement ........ $ -- $ -- $ -- $ 250,000 $ 250,000
Common stock issued pursuant to amalgamation -- -- -- 170,116 170,116
Common stock issued pursuant to acquisitions 18,550,000 -- 153,091,430 -- 171,641,430
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DEVELOPMENT STAGE OPERATIONS:
Seven Seas Petroleum Inc. (a Yukon Territory, Canada corporation) was
formed on February 3, 1995. Seven Seas Petroleum Inc. and its subsidiaries
(collectively referred to as "Seven Seas" or the "Company") are
collectively a development stage enterprise engaging in acquisition,
exploration, and development of interests in oil and gas projects
worldwide. The Company's primary business operations to date have been the
exploration and development of its interests in Colombia, South America.
The Company has yet to generate any significant revenue from oil and gas
sales and has no assurance of future revenues. The Company's principal
asset is its 57.7 percent participating interest in the Dindal Association
Contract and Rio Seco Association Contract (collectively, the "Association
Contracts"). The Association Contracts were issued by Empresa Colombiana
de Petroleos ("Ecopetrol"), the National Oil Company of Colombia, in March
1993 and August 1995, repectively, and entitle the Company to engage in
exploration, development, and production activities in Colombia. As of
June 30, 1997, three wells have been drilled and completed on the Dindal
Association Contract. Two of the wells have been production tested by the
Company and one was plugged and abandoned as a dry hole prior to the
Company acquiring an interest in the Association Contracts. The Company is
currently drilling a fourth well in the Dindal Block with results expected
in September 1997 and plans to drill a fifth well located in the Rio Seco
Block in September 1997.
Seven Seas is subject to several categories of risk associated with its
development stage activities. Oil and gas exploration and development is a
speculative business and involves a high degree of risk. The Company has
expended, and plans to expend, significant amounts of capital on the
acquisition and exploration of its properties, and most of such properties
have not been fully evaluated for hydrocarbon potential. The exploration
and development of current properties and any properties acquired in the
future are expected to require substantial amounts of additional capital
which the Company may be required to raise through debt or equity
financings, which might involve encumbering properties or entering into
arrangements where certain costs of exploration will be paid by others to
earn an interest in the property. There are risks that result because the
Company has acquired, and intends to continue to acquire, interests in
properties outside of North America, in some cases in countries that may
be considered politically and economically unstable. Seven Seas' success
currently depends to a high degree on its activities in Colombia.
F-26
<PAGE>
2. BUSINESS COMBINATION:
On June 29, 1995 the Supreme Court of British Columbia approved the May 5,
1995 amalgamation of Seven Seas and Rusty Lake Resources Ltd. Stockholders
of Rusty Lake Resources Ltd. were issued one common share in Seven Seas,
the new company after the amalgamation, for each 35 common shares held in
Rusty Lake Resources Ltd. Additional shares of Seven Seas were issued in
settlement of certain indebtedness of Rusty Lake Resources Ltd. This
transaction has been reflected as an acquisition by Seven Seas using the
purchase method of accounting, whereby the assets acquired and liabilities
assumed were fair valued and Rusty Lake Resources Ltd. has been
prospectively reflected in the Company's financial statements since June
29, 1995. The net assets of Rusty Lake Resources Ltd. were recorded on the
books of Seven Seas as follows:
Marketable securities $ 3,370
Goods and services tax receivable 3,099
Resource properties 115,693
Other assets (organization costs) 87,481
Accounts payable (39,527)
Share capital (680,464 shares) (170,116)
On July 26, 1996 the Company acquired 100 percent of the outstanding stock
which represented 100 percent of the voting shares held in GHK Company
Colombia and Esmeralda LLC. Additionally, on the same date, the Company
acquired 62.963 percent of the outstanding shares and voting stock in
Cimarrona LLC. This transaction has been reflected as an acquisition by
Seven Seas using the purchase method of accounting, whereby the assets
acquired and liabilities assumed were fair valued and the operations of
the acquired entities have been reflected in the Company's financial
statements since July 26, 1996. As consideration for the increased
interest from these acquisitions, Seven Seas issued to the stockholders in
GHK Company Colombia, Esmeralda LLC and Cimarrona LLC a combination of
preferred shares and special warrants which are exchangeable into a total
of 16,777,143 common shares upon the earlier of the approval of a
prospectus qualifying the exchange, or one year from the closing of the
transaction. Of the 16,777,143 preferred shares and special warrants,
5,002,972 preferred shares were issued for all of the common shares in GHK
Company Colombia, 4,469,028 special warrants were issued for all of the
common shares in Esmeralda LLC, and 7,305,143 special warrants were issued
for 62.963 percent of the common shares in Cimarrona LLC. The remaining
37.037 percent interest in Cimarrona LLC represents a minority interest
which is reflected as such on the balance sheet. The 16,777,143 preferred
shares and special warrants were recorded based on the closing stock price
of Seven Seas on July 26, 1996 at $9.125 totaling $153,091,430. Net assets
acquired include $217,090,298 assigned to oil and gas properties (which
are subject to future evaluation based on further appraisal drilling) and
other nominal net working capital, less amounts attributable to the
minority interest in Cimarrona LLC. Because of the differences
<PAGE>
in tax basis and the financial statement valuation of such acquired oil
and gas properties, $63,967,775 of deferred Colombian and U.S. income
taxes was also recorded in this acquisition (see Note 3 and 5) and is
included in the amount assigned to oil and gas properties. Any income and
expenditures incurred by these three entities after July 26, 1996, are
included in the December 31, 1996 and June 30, 1997 statement of
operations and accumulated deficit.
Of the 16,777,143 preferred shares and special warrants issued, 11,744,000
are held subject to an escrow agreement, whereby one third of the
securities are released each year for three years. The securities may be
released earlier based upon a valuation of the Seven Seas interests in the
Contract Areas. Collectively, the acquisition of these three companies
resulted in the purchase of an additional 36.7 percent participating
interest in the Association Contracts in which the Company previously held
a 15 percent participating interest. All three entities were oil and gas
exploration companies whose only material asset was the participating
interest they held in the Association Contracts in Colombia.
On February 7, 1997 approvals were granted by the Ontario Securities
Commission, British Columbia Securities Commission and the Alberta
Securities Commission for the prospectus filed to qualify 11,774,171
special warrants and 5,002,972 preferred shares which were automatically
converted to common stock. These shares were issued in connection with the
acquisition of a 36.7 percent participating interest in the Association
Contracts in Colombia by the Company on July 26, 1996.
On March 5, 1997 the Company acquired 100 percent of the outstanding
voting stock held in Petrolinson, S.A. The terms of the transaction were
agreed to in a letter of intent dated November 22, 1996. The principal
asset owned by Petrolinson, S.A. is a six percent participating interest
in the Association Contracts. As consideration for the six percent
participating interest in the Association Contracts, Seven Seas issued to
the sole shareholder in Petrolinson, S.A. 1,000,000 common shares of Seven
Seas Petroleum Inc. common stock. The common shares issued to the sole
shareholder of Petrolinson, S.A. are subject to an escrow agreement, the
terms of which provide for a 120 day escrow of shares commencing from
March 5, 1997 with an option by the Company to extend the escrow period
for an additional 30 days. This six percent interest will be carried
through exploration by the other 94 percent participating interest
parties. This transaction has been reflected in 1997 as an acquisition by
Seven Seas using the purchase method of accounting, whereby the assets
acquired and liabilities assumed were fair valued and the acquired
operations have been reflected in the Company=s financial statements since
March 5, 1997. The 1,000,000 shares were recorded based on the weighted
average closing stock price of Seven Seas for the period beginning 30 days
prior to and 30 days subsequent to November 22, 1996, or $18.55. This
represents a transaction cost of $18,550,000. Net assets acquired include
$25,035,701 assigned to oil and gas properties (which are subject to
future evaluation based on further appraisal drilling) and other nominal
net working capital. Because of the differences in tax basis and the
financial statement valuation of such acquired oil and gas properties,
$6,490,737 of deferred Colombian income tax was also recorded in this
acquisition (see Note 3 and 5) and is included in the amount assigned to
oil and gas properties.
<PAGE>
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company follows U.S. generally accepted accounting principles. A
summary of the Company's significant policies is set out below:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues, and expenses. Actual results could differ from the estimates and
assumptions used.
RECLASSIFICATION OF PRIOR PERIOD STATEMENTS
Consistent with the asset/liability method of accounting for income taxes,
the Company recorded deferred income tax liabilities relating to the
acquisitions of GHK Company Colombia, Esmeralda LLC, and 62.963% of
Cimarrona LLC in 1996 and Petrolinson, S.A. on March 5, 1997. The credit
to deferred income tax liabilities and the corresponding increase in
unevaluated oil and gas interests amounted to $70,458,512 and $63,967,775
as of June 30, 1997 and December 31, 1996, respectively. The nature of the
amounts recorded is described in Note 5, Income Taxes. Additionally,
certain other minor reclassifications have been made to conform to current
reporting practices.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries, after eliminating
all material intercompany accounts and transactions.
INTERIM FINANCIAL INFORMATION
All interim financial information for 1997 and 1996 included herein is
unaudited but includes all adjustments, consisting only of normal
recurring adjustments, which the Company considers necessary for a fair
presentation of the financial position at June 30, 1997 and the operating
results and cash flows for the interim periods. Results of the six months
ended June 30, 1997 are not necessarily indicative of results for the
entire year.
STATEMENT OF CASH FLOWS
Cash and cash equivalents include bank deposits and short-term
investments, which upon acquisition have a maturity of three months or
less. Cash payments for income taxes amounted to $7,733, $750, and $2,338
for the six months ended June 30, 1997, the six months ended June 30,
1996, and for the year ended December 31, 1996, respectively.
<PAGE>
ACCOUNTS RECEIVABLE
Accounts receivable included the following at June 30, 1997 and December
31, 1996 and 1995:
June 30, 1997 1996 1995
------------- ---------- -------
(Unaudited)
Crude oil sales ............... $ 94,193 $ 58,845 $ --
Joint venture partners ....... -- 1,117,635 --
Other ......................... 14,924 64,950 43,642
-------- ---------- -------
Total accounts receivable ..... $109,117 $1,241,430 $43,642
======== ========== =======
MARKETABLE SECURITIES
The Company has adopted the Statement of Financial Accounting Standards
No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and
Equity Securities." SFAS 115 requires that all investments in debt
securities and certain investments in equity securities be reported at
fair value except for those investments which management has the intent
and the ability to hold to maturity. Investments which are held-for-sale
are classified based on the stated maturity and management's intent to
sell the securities. Changes in fair value are reported as a separate
component of stockholders' equity, but were immaterial for all periods
presented herein.
OIL AND GAS INTERESTS
The Company follows the full-cost method of accounting for oil and natural
gas properties. Under this method, all costs incurred in the acquisition,
exploration and development, including unproductive wells are capitalized
in separate cost centers for each country. Such capitalized costs include
contract and concession acquisition, geological, geophysical and other
exploration work, drilling, completing and equipping oil and gas wells,
constructing production facilities and pipelines, and other related costs.
As of December 31, 1996 and 1995, unevaluated oil and gas interests
include capitalized general and administrative costs of $140,628 and
$130,866, respectively. No additional general and administrative costs
were capitalized during the six months ended June 30, 1997.
The capitalized costs of oil and gas properties in each cost center are
amortized on a composite units of production method based on future gross
revenues from proved reserves. Sales or other dispositions of oil and gas
properties are normally accounted for as adjustments of capitalized costs.
Gain or loss is not recognized in income unless a significant portion of a
cost center's reserves is involved. Capitalized costs associated with the
acquisition and evaluation of unproved properties are excluded from
amortization until it is determined whether proved reserves can be
assigned to such properties or until the value of the properties is
impaired. If the net capitalized costs of oil and gas properties in a cost
center exceed an amount equal to the sum of the present value of estimated
future net revenues from proved oil and gas reserves in the cost center
and the lower of cost or fair value of properties not being amortized,
both adjusted for income tax effects, such excess is charged to expense.
<PAGE>
Since the Company has not completed its evaluation of its oil and gas
reserves in Colombia and has only produced test quantities of oil, a
provision for depletion has not been made.
Substantially all the Company's exploration and production activities are
conducted jointly with others and the accounts reflect only the Company's
proportionate interest in such activities.
FOREIGN CURRENCY TRANSLATION
The Company's foreign operations are a direct and integral extension of
the parent company's operations and the majority of all costs associated
with foreign operations are paid in U.S. dollars and not the local
currency of the operations; therefore, the reporting and functional
currency is the U.S. dollar. Gains and losses from foreign currency
transactions are recognized in current net income. Monetary items are
translated using the exchange rate in effect at the balance sheet date;
non-monetary items are translated at historical exchange rates. Revenues
and expenses are translated at the average rates in effect on the dates
they occur. No material translation gains or losses were incurred during
the periods presented.
INCOME TAXES
The Company follows the asset/liability method of accounting for income
taxes under which deferred tax assets and liabilities are recognized for
the future tax consequences of (i) temporary differences between the tax
bases of assets and liabilities and their reported amounts in the
financial statements and (ii) operating loss and tax credit carryforwards
for tax purposes. Deferred tax assets are reduced by a valuation allowance
when, based upon management's estimates, it is more likely than not that a
portion of the deferred tax assets will not be realized in a future
period. For the six months ended June 30, 1997, June 30, 1996, and the
year ended December 31, 1996, the Company has recorded income tax expense
of $7,733; $750; and $2,338, respectively.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided on a
straight-line basis over three to five years.
ORGANIZATION COSTS
Organization costs represent the normal cost of incorporating the Company.
In association with the amalgamation agreement with Rusty Lake Resources
Ltd., organization costs of $87,481 were recorded to reflect the excess
purchase price of Seven Seas common shares provided to Rusty Lake
Resources Ltd. stockholders over and above the net asset value of Rusty
Lake Resources Ltd. as of June 29, 1995. Organization costs are being
amortized on a straight-line basis over two years.
EARNINGS PER SHARE
Net loss per share is computed using the weighted average number of shares
outstanding. No effect was given to common stock equivalents as the effect
would be antidilutive. All shares issued in connection with the conversion
of preferred shares and special warrants during 1996 were not considered
outstanding until registration with the Canadian Securities Commissions
<PAGE>
occurred on February 7, 1997, including the shares held in escrow for the
former shareholders of GHK Company Colombia, Esmeralda LLC and Cimarrona
LLC. The common shares held in escrow were considered in the weighted
average shares outstanding since they are considered outstanding by the
transfer agent and have voting rights.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings
per Share." SFAS 128 establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held
common stock or potential common stock. This statement simplifies the
standards for computing and presenting EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share," and makes them
comparable to international EPS standards. This statement is effective for
financial statements issued for periods ending after December 15, 1997,
including interim periods; earlier application is not permitted. The
statement requires restatement of all prior-period EPS data presented.
Considering the guidelines as prescibed by SFAS 128, the Company's
management believes that the adoption of this statement will not have a
material effect on EPS and thus pro forma EPS, as suggested for all
interim and annual periods prior to required adoption, have been omitted.
4. CASH AND CASH EQUIVALENTS:
June 30, December 31, December 31,
1997 1996 1995
----------- ----------- ----------
(Unaudited)
Cash ............................ $2,525,077 $ 170,684 $ 53,103
Short-term investments .......... 6,423,832 10,449,793 3,312,500
---------- ----------- ----------
Total cash and cash equivalents . $8,948,909 $10,620,477 $3,365,603
========== =========== ==========
The carrying value of short-term investments approximates fair value
5. INCOME TAXES:
The geographical sources of income (loss) before income taxes and minority
interest were as follows:
December 31, December 31,
1996 1995
----------- -----------
United States ............... $ (277,456) $ --
Foreign ..................... (1,979,078) (2,119,985)
----------- -----------
Income (loss) before taxes -. $(2,256,534) $(2,119,985)
=========== ===========
<PAGE>
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
Six Months ended Six Months ended December 31, December 31,
June 30, 1997 June 30, 1996 1996 1995
---------------- ---------------- ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Current:
United States ....... $ -- $-- $ -- $--
Foreign ............. 7,733 750 2,338 --
------ ---- ------ ---
Income tax expense .. $7,733 $750 $2,338 $--
====== ==== ====== ===
</TABLE>
No deferred taxes were recorded during the periods presented, as there
were no significant changes in the temporary differences between the book
and tax bases of assets and liabilities. Deferred U.S. and Colombian
income taxes have been provided for the book-tax basis differences related
to the Colombian acquisitions discussed further in Note 2. These foreign
subsidiaries' cumulative undistributed earnings are considered to be
indefinitely reinvested outside of Canada and, accordingly, no Canadian
deferred income taxes have been provided thereon.
The Company's net deferred income tax liabilities consist of the
following:
December 31, 1996 December 31, 1995
----------------- -----------------
Deferred tax liability .. $ 63,967,775 $ --
Deferred tax asset ...... (1,531,782) (741,995)
Valuation allowance ..... 1,531,782 741,995
------------ ---------
Total ................... $ 63,967,775 $ --
============ =========
Temporary differences included in the deferred tax liabilities relate
primarily to excess of book over tax basis on acquired oil and gas
properties. During the six months ended June 30, 1997, deferred Colombian
income tax in the amount of $6,490,737 was recorded in the acquisition of
Petrolinson, S.A., as described in Note 2. Deferred tax assets principally
consist of net operating loss carryforwards.
As of December 31, 1996 the Company's subsidiaries had net operating loss
carryforwards in various foreign jurisdictions (primarily Colombia) of
approximately $4,100,000. These loss carryforwards will expire beginning
in 2000 if not utilized to reduce Colombian income taxes. In addition, the
Company had approximately $277,000 of U.S. tax net operating loss
carryforwards expiring in varying amounts between 2003 and 2004. A
valuation allowance has been provided for the deferred tax assets
resulting from these loss carryforwards because their future realization
is not currently deemed probable by management. This valuation allowance
is the primary reason the total income tax provisions in 1995 and 1996
differ from the amounts computed at the statutory rates, which are 35% in
Colombia and in the United States.
<PAGE>
6. SHARE CAPITAL:
On March 15, 1996, a brokered private placement was carried out in Canada.
The Company issued 2,000,000 special warrants at $2.75 per warrant for a
net offering after commissions and expenses of $5,095,548 to a third party
financial brokerage institution. Each special warrant was convertible into
one unit. Each unit consisted of one share of common stock and a one-half
common share purchase warrant at $3.50 per full share. The warrants were
convertible at the earlier of (a) one year from date of issuance or (b)
the date an approval is issued for a prospectus qualifying the conversion
in the appropriate jurisdictions. On March 14, 1997, the 1,000,000 common
share purchase warrants were exercised and converted to common shares for
net proceeds of $3,500,000.
On October 16, 1996, another brokered private placement was carried out in
Canada. Seven Seas issued to a third party financial brokerage institution
500,000 special warrants at $15.00 per warrant for a net offering after
commissions and expenses of $7,013,370. Each special warrant was
convertible into one unit. Each unit consisted of one share of common
stock and a one-half common share purchase warrant at $18.50 per full
share. The warrants were convertible at the earlier of (a) one year from
date of issuance or (b) the date an approval is issued for a prospectus
qualifying the conversion in the appropriate jurisdictions. As of June 30,
1997 the 250,000 common share purchase warrants have not been exercised at
$18.50 per share.
An approval for qualification of the conversion of the 2,000,000 and
500,000 special warrants issued in the brokered private placements on
March 15 and October 16, 1996, respectively, was received on February 7,
1997 by the Ontario, Alberta, and British Columbia Securites Commissions.
All special warrants were exercised and have been converted to common
shares.
The proceeds of the brokered private placements on March 15 and October
16, 1996 will be used for additional drilling, seismic and production
facilities related to the Company's 57.7 percent participating interest in
the Association Contracts and for further exploration activities.
7. STOCK OPTIONS
Officers, directors and employees have been granted stock options under
the Company's 1995 Stock Option Plan and the Amended 1996 Stock Option
Plan. Pursuant to the Amended 1996 Stock Option Plan ("the Plan"),
3,000,000 shares were authorized for issuance of which 1,164,667 were
outstanding as of December 31, 1996, the effective date of the Toronto
Stock Exchange's approval. Under rules of the Toronto Stock Exchange, the
net options outstanding at the effective date are considered as being
granted under the Plan. As of December 31, 1996, 1,835,333 stock options
were available for issuance. The stock options granted during 1995, 1996
and through May 1997 were not subject to vesting requirements. The term of
the stock options is five years from the date of grant. The Company grants
options at the approximate prevailing market price on the date of grant.
Effective June 1997, stock options
<PAGE>
granted under the Plan became subject to a vesting requirement; one-third
of the stock options granted vest immediately, and the remainder vests
one-half each on the first and second anniversaries of the date of grant.
The Board of Directors is responsible for administering the Amended 1996
Stock Option Plan, determining the terms upon which options may be
granted, prescribing, amending and rescinding such interpretations and
determinations and granting options to employees, directors, and officers.
A summary of the status of the Company's Stock Option Plan as of December
31, 1995 and 1996 and changes during the periods ended on those dates is
presented below:
<TABLE>
<CAPTION>
1995 1996
--------------------- ------------------------
Weighted Weighted
Average Average
Excercise Excercise
Shares Price Shares Price
------- ----- ---------- ------
<S> <C> <C> <C> <C>
Outstanding options at inception
(February 3, 1995) and beginning
of the year .................................. -- -- 985,000 $ 0.75
Options granted .............................. 985,000 $0.75 805,000 $12.86
Options excercised ........................... -- -- (625,333) $ 0.85
Options outstanding at year end .............. 985,000 $0.75 1,164,667 $ 9.07
Options excercisable at year end ............. 985,000 $0.75 764,667 $ 4.00
Weighted-average fair value of options
granted during the year ...................... -- $0.19 -- $ 4.65
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number Weighted- Weighted- Number Weighted-
Outstanding at Average Average Exercisable At Average
Range of Exercise December 31, Contractual Life Exercise December 31, Exercise
Price 1996 (Years) Price 1996 Price
----------------- ------------------- ---------------- ---------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
$0.75 374,667 3.3 $ 0.75 374,667 $ 0.75
$7.13 390,000 4.5 $ 7.13 390,000 $ 7.13
$18.75 400,000 4.9 $ 18.75 -- --
------------- ----------
1,164,667 764,667
============= ==========
</TABLE>
On May 20, 1997, the Chairman of the Board, the Chief Executive Officer,
and the President of the Company resigned and received settlements from
the Company. Seven Seas entered into a consulting agreement with the
former Chairman of the Board for a three-year term for $200,000 per year.
The Company agreed to pay compensation of $525,000 to the former President
and $250,000 to the former Chief Executive Officer. The former President
is also
<PAGE>
entitled to receive a payment equal to the bonus paid to him during 1996,
or $98,840, for each year, or part of a year remaining on the employment
contract, provided that such payment shall only be made in respect of any
year that the Company otherwise declares and pays bonuses to some or all
of its employees. The term of the President's employment contract is the
three-year period from April 28, 1997. As part of the arrangements
surrounding the resignations, the exercise period of the options granted
to the former officers during their employment was extended from ninety
days to eighteen months. Due to the change in the measurement date, the
Company was required to record compensation expense of $508,250 for the
six-month period ended June 30, 1997, representing the market value of the
common shares on the new measurement date less the exercise price of the
options granted. Only the exercisable options granted to the former
Chairman and the former President were considered in the computation. As
of May 20, 1997, 190,000 options were outstanding with an exercise price
of $7.125 and a market value of $9.80 per share.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123"),
the Company applies APB Opinion 25 in accounting for its stock option
plan, and accordingly does not recognize compensation cost as it relates
to SFAS 123.
If the Company had elected to recognize compensation cost based on the
fair value of the options granted at the grant date as prescribed by SFAS
123, net loss and net loss per share would have increased to the proforma
amounts shown below:
DECEMBER 31, 1996 DECEMBER 31, 1995
----------------- -----------------
Pro Forma Net Loss ....... $(5,938,372) $(2,309,940)
Pro Forma
Net Loss per Share ....... $ (.46) $ (.25)
The effects of applying SFAS 123 in this proforma are not indicative of
future amounts.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
assumptions used for grants during the year ended December 31, 1996:
weighted average risk free interest rate of 6.29%; no dividend yield;
volatility of .2686; and expected life of five years. The Company granted
options prior to public trading on the Canadian Dealer Network on June 30,
1995. Consequently, the underlying common stock had no historic volatility
prior to June 30, 1995. The fair value of the options granted prior to
June 30, 1995 was based on the difference between the present value of the
exercise price of the option and the estimated fair value price of the
stock.
<PAGE>
8. OPERATIONS BY GEOGRAPHIC AREA:
The Company operates in one industry segment. Information about the
Company=s operations for the year ended December 31, 1996 and the period
from inception to December 31, 1995 by different geographic areas is shown
below:
<TABLE>
<CAPTION>
Other Foreign
Canada United States Colombia Areas Total
----------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Revenues......................... $ 333,598 $ -- $ 239,345 $ 2,338 $ 575,281
Operating Loss................... (1,399,866) (277,456) (438,948) (140,264) (2,256,534)
Capital Expenditures............. -- -- 5,564,861 271,405 5,836,266
Identifiable Assets............. 10,497,084 46,939 224,436,899 520,060 235,500,982
Depreciation and Amortization.... -- -- -- -- --
<CAPTION>
Canada Colombia Argentina
----------- ------------ -----------
<S> <C> <C> <C>
Year ended December 31, 1995
Revenues......................... $ 147,372 $ -- $ --
Operating Loss................... (863,787) (3,147) (625,771)
Capital Expenditures............. -- 369,723 622,006
Identifiable Assets............. 3,565,647 385,999 --
Depreciation and Amortization.... -- -- --
<CAPTION>
Other Foreign
North Africa Areas Total
------------ ------------ -----------
Year ended December 31, 1995
Revenues......................... $ -- $ 5,011 $ 152,383
Operating Loss................... (509,878) (117,402) (2,119,985)
Capital Expenditures............. 500,800 204,414 1,696,943
Identifiable Assets............. -- 218,791 4,170,437
Depreciation and Amortization.... -- -- --
</TABLE>
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 131 ("SFAS 131") "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 establishes standards for
the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in
interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas, and major
customers. This statement is effective for financial statements issued for
periods ending after December 15, 1997. The Company's management believes
that the adoption of this statement will not have a material effect on its
consolidated results of operations, financial position, or cash flows.
9. COMMITMENTS AND CONTINGENCIES:
The Company leases property and equipment under various operating leases.
Aggregate minimum lease payments under existing contracts as of December
31, 1996, are as follows: $63,799 for 1997; $54,902 for 1998; $25,138 for
1999; $0 for 2000 and thereafter. Rental expense amounted to $82,928 in
1996; $58,536 in 1995; $39,859 for the six months ended June 30, 1997; and
$40,420 for the six months ended June 30, 1996.
Two wells estimated at a total cost of $10,600,000 are required to be
drilled on the Company's Association Contracts during 1997 to fulfill the
Company's 1997 work commitments. The drilling of a well on the Dindal
Association Contract commenced on June 23, 1997, but is not expected to be
completed until September 1997. The Company
<PAGE>
plans to commence drilling a well on the Rio Seco Association Contract in
September 1997. Seven Seas will be required to pay their proportionate
share of the total cost of these two wells, or approximately $5,900,000.
10. SUBSEQUENT EVENTS (UNAUDITED):
On August 7, 1997, a brokered private placement with two third parties was
carried out in Canada involving the issuance of $25,000,000 of Special
Notes. The net proceeds after commissions and expenses were approximately
$23,400,000. The Special Notes will be exchangeable by the holders into
Convertible Debentures at any time and will be automatically converted
upon approval of a prospectus qualifying the issuance of the Convertible
Debentures. The Convertible Debentures will be issued in denominations of
$100, have a maturity date of August 7, 2003 and will bear interest at a
rate of 6 percent per annum. The Convertible Debentures are convertible
into units of the Company, at a rate of $11.50 per unit. Each unit
consists of one share of common stock and a one-half common share purchase
warrant with each whole warrant exercisable for a period of one year from
August 7, 1997 at $15.00 per share. These Convertible Debentures are
common stock equivalents (potentially 3,260,870 common shares) and are
potentially dilutive to future earnings, if the Company has net earnings
in the future. The Convertible Debentures are secured by a pledge of
shares of the subsidiaries of the Company.
On July 26, 1997, one-third of the 11,744,000 common shares or 3,914,667,
issued in the business combination with GHK Company Colombia, Esmeralda
LLC, and Cimarrona LLC were released from escrow pursuant to the escrow
agreement as descibed in Note 2.
The 1,000,000 common shares issued to the sole shareholder of Petrolinson,
S.A. on March 5, 1997 in a business combination were released from escrow
on July 3, 1997, in accordance with the escrow agreement as described in
Note 2.
The Company has signed a letter of intent to sell its 11.77 percent
interest in the Southern Perth Basin Permits (EP381 and EP408) located in
Southwestern Australia. The Company will receive cash of $850,000 and a
small overriding royalty interest in each permit. Completion of the
transaction contemplated by the letter of intent is subject to several
conditions, including obtaining approvals of third parties and
governmental authorities. No assurance can be given that the Company will
complete this sale.
<PAGE>
11. SUPPLEMENTAL OIL AND GAS INFORMATION:
Capitalized costs at December 31, 1996 and December 31, 1995 relating to the
Company's oil and gas activities are shown below:
<TABLE>
<CAPTION>
Colombia Argentina North Africa Others Total
------------ ---------- --------- --------- -------------
<S> <C> <C> <C> <C> <C>
As of December 31, 1996
Proved properties ........................ $ 1,611,665 $ -- $ -- $ -- $ 1,611,665
============ ========== ========= ========= =============
Unproved properties ...................... $221,413,217 $ -- $ -- $ 475,819 $ 221,889,036
Less: Dry Hole and Abandonment ........... -- -- -- (4,910) (4,910)
------------ ---------- --------- --------- -------------
Unproved properties, net ................. $221,413,217 $ -- $ -- $ 470,909 $ 221,884,126
As of December 31, 1995
Proved properties ........................ $ -- $ -- $ -- $ -- $ --
============ ========== ========= ========= =============
Unproved properties ...................... $ 369,723 $ 622,006 $ 500,800 $ 204,414 $ 1,696,943
Less: Dry Hole and Abandonment ........... -- (622,006) (500,800) -- (1,122,806)
------------ ---------- --------- --------- -------------
Unproved properties, net ................. $ 369,723 $ -- $ -- $ 204,414 $ 574,137
============ ========== ========= ========= =============
</TABLE>
Cost incurred during the years ended December 31, 1996 and 1995, respectively,
were as follows:
<TABLE>
<CAPTION>
Colombia Argentina North Africa Others Total
------------ -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Property acquisition cost:
Proved ............................. $ 1,554,041 $ -- $ -- $ -- $ 1,554,041
Unproved ........................... 215,536,257 -- -- 250,000 215,786,257
Exploration cost ........................... 5,564,861 -- -- 21,405 5,586,266
------------ -------- -------- -------- ------------
Total cost incurred ................ $222,655,159 $ -- $ -- $271,405 $222,926,564
============ ======== ======== ======== ============
Year ended December 31, 1995
Property acquisition cost:
Proved ............................. $ -- $ -- $ -- $ -- $ --
Unproved ........................... 106,383 75,000 500,800 6,073 688,256
Exploration cost ........................... 263,340 547,006 -- 198,341 1,008,687
------------ -------- -------- -------- ------------
Total cost incurred ................ $ 369,723 $622,006 $500,800 $204,414 $ 1,696,943
============ ======== ======== ======== ============
</TABLE>
As of December 31, 1996, the Company has not made a provision for
depletion. The Company has yet to fully evaluate its prospect related to
the Association Contracts in Colombia and to date produced only
insignificant amounts of oil under its production-testing plan. At such
time that the Company completes its evaluation of the Association
Contracts and if a significant level of production of proved reserves
occurs, the currently excluded oil and gas properties will be included in
the amortization base. The Company anticipates completion of its
evaluation of the Association Contracts mid-year 1998 and will commence
development immediately if the evaluation proves successful.
<PAGE>
EXPLORATION COSTS
The Company has been involved in exploration activities in Colombia,
Australia, Argentina, Turkey and Papua New Guinea. Also, the Company
purchased an option for the right to participate in future exploration
activities in North Africa, but the option was never exercised.
Additionally, the Company acquired oil and gas properties in Colombia
totaling $217,090,298 in 1996 and $25,035,701 in 1997. Capitalized
acquisition costs incurred during 1996 and 1997 include $63,967,775 and
$6,490,737, respectively, of deferred income tax as disclosed in Note 2,
Business Combination. Also, $57,624 of exploration costs incurred in 1996
was reclassified as proved oil and gas interests.
The Company had oil and gas sales of $233,682 and $436,333 for 1996 and
1997 respectively which pertained solely to production testing of two
wells located in Colombia.
On May 16, 1995, the Company entered into an agreement whereby Seven Seas
purchased an option for $500,000 to acquire a 5 percent participating
interest in three exploration blocks in North Africa upon completion of
the first exploration well drilled. The first exploration well was
completed as a dry hole in July of 1995. After careful review, Seven Seas
decided not to exercise its option. The cost of the option, $500,000, plus
additional costs of $800 incurred toward purchasing this option was
originally recorded as unproved oil and gas interests and were
subsequently expensed.
The El Catamarqueno X-1 test well on the Sur Rio Deseado Block in the San
Jorge Basin, Argentina, was determined to be unsuccessful during the first
week of January 1996, prior to release of the 1995 financial statements.
Consequently, the Company determined that further drilling on the block
was not justified and exploration costs of $622,006 incurred in Argentina
during 1995 were expensed in 1995.
Ecopetrol has the right to back into Seven Seas' participating interest in
the Association Contracts upon declaration of commerciality at an initial
50 percent participating interest. Ecopetrol's interest can increase based
upon accumulated production levels. Ecopetrol will at the time of
commerciality bear 50 percent of the future costs in the field and
reimburse the other parties in these two blocks for 50 percent of
previously incurred costs associated with successful wells.
PROVED RESERVES (UNAUDITED)
Proved reserves represent estimated quantities of crude oil which
geological and engineering data demonstrate to be reasonably recoverable
in the future from known reservoirs under existing economic and operating
conditions. Estimates of proved developed oil reserves are subject to
numerous uncertainties inherent in the process of developing the estimates
including the estimation of the reserve quantities and estimated future
rates of production and timing of development expenditures. The accuracy
of any reserve estimate is a function of the quantity and quality of
available data and of engineering and geological interpretation and
judgement. Results of drilling, testing and production subsequent to the
date of the estimate may justify revision of such estimate. Additionally,
the estimated volumes to be commercially recoverable may fluctuate with
<PAGE>
changes in the price of oil. The proved reserves at December 31, 1996 are
based solely on the results of the drilling of the El Segundo No. 1 well
on the Dindal Association Contract.
Estimates of future recoverable oil reserves and projected future net
revenues were provided by Sproule International Limited. The Company's
proved reserves were comprised entirely of crude oil in Colombia.
Proved developed and undeveloped reserves (barrels):
TOTAL
-------
December 31, 1995............... --
Discoveries..................... 818,000
-------
December 31,1996................ 818,000
=======
Proved Developed................ 408,000
=======
The following table presents the standardized measure of discounted future
net cash flows relating to proved oil reserves. Future cash inflows and
costs were computed using prices and costs in effect at the end of the
year without escalation less a $3.00 gravity adjustment. Future income
taxes were computed by applying the appropriate statutory income tax rate
to the pretax future net cash flows reduced by future tax deductions and
net operating loss carryforwards.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AT DECEMBER 31,
1996
Future cash inflows......................................... $15,006,000
Future costs
Production............................................ 2,112,000
Development........................................... 1,939,000
-----------
Future net cash flows before income taxes................... 10,955,000
Future income taxes......................................... 5,122,000
Future net cash flows....................................... 5,833,000
10% discount factor......................................... 822,000
-----------
Standardized measure of discounted future net cash flows.... $ 5,011,000
===========
The standardized measure of discounted future net cash flows shown above
relates to the Company's discovery of oil from the El Segundo No. 1 well
on the Dindal Association Contract in 1996. There were no other changes in
the components of the standardized measure of discounted future net cash
flows during 1996.
The standardized measure of discounted future net cash flows does not
purport to present the fair market value of the Company's proved reserves.
An estimate of fair value would also take into account, among other
things, the recovery of reserves in excess of proved reserves, anticipated
future changes in prices and costs and a discount factor more
representative of the time value of money and the risks inherent in
reserve estimates.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made by and between SEVEN
SEAS PETROLEUM INC. ("Company") and LARRY A. RAY ("Executive").
W I T N E S S E T H:
WHEREAS, Company is desirous of employing Executive in an executive
capacity on the terms and conditions, and for the consideration, hereinafter set
forth and Executive is desirous of being employed by Company on such terms and
conditions and for such consideration;
NOW, THEREFORE, for and in consideration of the mutual promises, covenants
and obligations contained herein, Company and Executive agree as follows:
ARTICLE 1: EMPLOYMENT AND DUTIES
1.1 EMPLOYMENT; EFFECTIVE DATE. Company agrees to employ Executive and
Executive agrees to be employed by Company, beginning as of the Effective Date
(as hereinafter defined) and continuing for the period of time set forth in
Article 2 of this Agreement, subject to the terms and conditions of this
Agreement. For purposes of this Agreement, the "Effective Date" shall be June
12, 1997.
1.2 POSITIONS. From and after the Effective Date, Company shall employ
Executive in the position of Executive Vice President, Operations of Company, or
in such other positions as the parties mutually may agree. Executive shall also
serve as President of GHK Company Columbia. Executive currently serves on the
Board of Directors of Company (the "Board of Directors") as a full member
thereof. During the term of this Agreement, Company shall continue to cause
Executive to be nominated to serve on the Board of Directors and will use
reasonable efforts to secure Executive's election to the Board of Directors. It
is the intention of the parties that Executive will be elected to and will serve
on the Board of Directors while serving hereunder as Executive Vice President,
Operations of Company.
1.3 DUTIES AND SERVICES. Executive agrees to serve in the positions
referred to in paragraph 1.2 and to perform diligently and to the best of his
abilities the duties and services appertaining to such offices, as well as such
additional duties and services appropriate to such offices which the parties
mutually may agree upon from time to time. Executive's employment shall also be
subject to the policies maintained and established by Company, as the same may
be amended from time to time.
1.4 OTHER INTERESTS. Executive agrees, during the period of his employment
by Company, to devote his primary business time, energy and best efforts to the
business and affairs of Company and its affiliates and not to engage, directly
or indirectly, in any other business or businesses, whether or not similar to
that of Company, except with the consent of the Board of Directors. The
foregoing notwithstanding, the parties recognize and agree that Executive may
<PAGE>
engage in passive personal investments and other business activities that do not
conflict with the business and affairs of Company or interfere with Executive's
performance of his duties hereunder.
1.5 DUTY OF LOYALTY. Executive acknowledges and agrees that Executive owes
a fiduciary duty of loyalty, fidelity and allegiance to act at all times in the
best interests of Company and to do no act which would injure the business,
interests, or reputation of Company or any of its subsidiaries or affiliates. In
keeping with these duties, Executive shall make full disclosure to Company of
all business opportunities pertaining to Company's business and shall not
appropriate for Executive's own benefit business opportunities concerning the
subject matter of the fiduciary relationship.
ARTICLE 2: TERM AND TERMINATION OF EMPLOYMENT
2.1 TERM. Unless sooner terminated pursuant to other provisions hereof,
Company agrees to employ Executive for the period ( the "Term") beginning on the
Effective Date and ending on June 12, 2000. If the employment relationship is
not terminated prior to the end of the Term, either Company or Executive may
elect, for any reason whatever, with or without cause, to cause the employment
relationship to cease as of the expiration of the Term. This shall occur by
either party giving a written notice to the other party at least 30 days prior
to the end of the Term that the employment relationship shall cease as of the
expiration of the Term. Should Executive serve the full Term and remain employed
by Company beyond the expiration of the Term, such employment shall convert to a
month-to-month, at-will relationship. Such at-will relationship may be
terminated at any time by either Executive or Company for any reason whatsoever,
with or without cause, upon 30 days' prior written notice to the other party.
2.2 COMPANY'S RIGHT TO TERMINATE. Notwithstanding the provisions of
paragraph 2.1, Company shall have the right to terminate Executive's employment
under this Agreement at any time for any of the following reasons:
(i) upon Executive's death;
(ii) upon Executive's becoming incapacitated by accident, sickness
or other circumstance which renders him mentally or physically incapable
of performing the duties and services required of him hereunder on a
full-time basis for a period of at least 180 consecutive days;
(iii) for cause, which for purposes of this Agreement shall mean
Executive (A) has engaged in gross negligence or willful misconduct in the
performance of the duties required of him hereunder, (B) has been
convicted of a misdemeanor involving moral turpitude or convicted of a
felony, (C) has willfully refused without proper legal reason to perform
the duties and responsibilities required of him hereunder, (D) has
materially breached any corporate policy or code of conduct established by
Company, or (E) has willfully engaged in conduct that he knows or should
know is materially injurious to Company or any of its affiliates;
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<PAGE>
(iv) for Executive's material breach of any material provision of
this Agreement which, if correctable, remains uncorrected for 30 days
following written notice to Executive by Company of such breach; or
(v) for any other reason whatsoever, in the sole discretion of the
Board of Directors.
2.3 EXECUTIVE'S RIGHT TO TERMINATE. Notwithstanding the provisions of
paragraph 2.1, Executive shall have the right to terminate his employment under
this Agreement for any of the following reasons:
(i) within 60 days of and in connection with or based upon (A) a
material breach by Company of any material provision of this Agreement,
(B) an overall substantial and material reduction in the nature or scope
of Executive's duties and responsibilities, or (C) the assignment to
Executive of duties and responsibilities that are materially inconsistent
with the positions referred to in paragraph 1.2; provided, however, that,
prior to Executive's termination of employment under this paragraph
2.3(i), Executive must give written notice to Company of any such breach,
reduction or assignment and such breach, reduction or assignment must
remain uncorrected for 30 days following such written notice; or
(ii) at any time for any reason whatsoever, in the sole discretion
of Executive.
2.4 NOTICE OF TERMINATION. If Company or Executive desires to terminate
Executive's employment hereunder at any time prior to expiration of the Term
provided in paragraph 2.1, it or he shall do so by giving written notice to the
other party that it or he has elected to terminate Executive's employment
hereunder and stating the effective date and reason for such termination,
provided that no such action shall alter or amend any other provisions hereof or
rights arising hereunder, including, without limitation, the provisions of
Articles 4 and 5 hereof.
ARTICLE 3: COMPENSATION AND BENEFITS
3.1 BASE SALARY. During the term of this Agreement, Executive shall
receive a minimum annual base salary equal to the greater of (i) $250,000 or
(ii) such amount as the parties mutually may agree upon from time to time. The
minimum annual base salary shall not be reduced after any increase thereof.
Executive's annual base salary shall be paid in equal installments in accordance
with the Company's standard policy regarding payment of compensation to
executives but no less frequently than monthly.
3.2 BONUSES. Executive shall receive such bonuses, if any, as the
Compensation Committee of the Board of Directors shall determine in its sole
discretion.
3.3 INITIAL STOCK OPTION. On the date of execution of this Agreement (the
"Date of Grant"), Company shall grant to Executive an option (the "Initial
Option") to purchase 200,000 shares of Company's common stock ("Stock") pursuant
to the 1997 Stock Option Plan, as amended (the "Stock Option Plan"). The
purchase price for each share of
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<PAGE>
Stock subject to the Initial Option shall be equal to the Fair Market Value (as
such term is defined in the Stock Option Plan) of a share of Stock as of the
Date of Grant. Subject to the terms of the Stock Option Plan and the agreement
to be executed by Company and Executive evidencing the Initial Option, the
Initial Option shall (i) have a term of 5 years (which term shall begin on the
[Effective Date] [Date of Grant]), (ii) vest and become exercisable with respect
to (A) 33 1/3 % of the shares covered thereby as of the [Effective Date] [Date
of Grant], (B) an additional 33 1/3 % of the shares covered thereby on the first
anniversary of the [Effective Date] [Date of Grant], and (C) an additional 33
1/3 % of the shares covered thereby on the second anniversary of the [Effective
Date] [Date of Grant], (iii) become vested and fully exercisable by Executive
upon the occurrence of a "Change in Control" (as such term is defined in Section
3.6 hereof) while Executive is employed by Company, and (iv) constitute an
incentive stock option (within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended) to the maximum extent permitted by law.
3.4 RELOCATION AND MOVING EXPENSES. Company shall reimburse Executive for
all reasonable expenses associated with the sale of Executive's residence in
Oklahoma City, Oklahoma and all reasonable moving costs or other expenses
associated with the relocation of Executive's residence to the Houston, Texas
metropolitan area. For the period (the "Commuting Period") beginning with the
Effective Date and ending on the earlier of (i) the date Executive sells his
principal residence in Oklahoma City, Oklahoma or (ii) the first anniversary of
the Effective Date, Company shall, at its sole cost and expense, provide
Executive with a furnished apartment in the Houston, Texas metropolitan area,
which apartment shall be mutually agreeable to Company and Executive and shall
have electricity, local phone service, basic cable television service, and
weekly maid service. Further, during the Commuting Period, Company shall (A)
reimburse Executive for the reasonable costs of his transportation between
Oklahoma City and Houston and (B) reimburse Executive for his transportation
expenses incurred within Houston or, at the request of Executive, provide him
with an automobile for his use within Houston.
3.5 OTHER PERQUISITES. During his employment hereunder, Executive shall be
afforded the following benefits as incidences of his employment:
(i) BUSINESS AND ENTERTAINMENT EXPENSES - Subject to Company's
standard policies and procedures with respect to expense reimbursement as
applied to its executive employees generally, Company shall reimburse
Executive for, or pay on behalf of Executive, reasonable and appropriate
expenses incurred by Executive for business related purposes, including
dues and fees to industry and professional organizations and costs of
entertainment and business development.
(ii) CLUB MEMBERSHIP - Executive shall be allowed to obtain
membership at a mutually acceptable country club in the Houston, Texas
metropolitan area in Executive's name and Company shall reimburse
Executive for, or pay on behalf of Executive, initiation fees,
assessments, monthly dues, and reasonable business use associated with
such membership.
(iii) OTHER COMPANY BENEFITS - Executive and, to the extent
applicable, Executive's spouse, dependents and beneficiaries, shall be
allowed to participate in all benefits, plans and programs, including
improvements or modifications of the same, which
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<PAGE>
are now, or may hereafter be, available to other executive employees of
Company. Such benefits, plans and programs may include, without
limitation, profit sharing plan, thrift plan, health insurance or health
care plan, life insurance, disability insurance, pension plan,
supplemental retirement plans, vacation and sick leave benefits, and the
like. Company shall not, however, by reason of this paragraph be obligated
to institute, maintain, or refrain from changing, amending, or
discontinuing, any such benefit plan or program, so long as such changes
are similarly applicable to executive employees generally.
3.6 CHANGE IN CONTROL BENEFITS. Upon the occurrence of a Change in Control
(as such term is hereinafter defined) prior to expiration of the Term provided
in paragraph 2.1, the Company shall (i) promptly pay Executive a single lump sum
cash bonus payment in an amount equal to the aggregate base salary that would be
payable by Company to Executive for the unexpired portion of the Term based upon
Executive's base salary in effect pursuant to paragraph 3.1 immediately prior to
such Change in Control and (ii) cause all outstanding stock options granted by
Company to Executive (including, without limitation, the Initial Option) to
become vested and immediately exercisable in full. In addition, if Executive's
employment is terminated for any reason whatsoever on or after the occurrence of
a Change in Control and prior to expiration of the Term provided in paragraph
2.1, then during the period, if any (but in no event for more than 12 months
after the date of Executive's termination of employment), that Executive elects
to continue coverage for himself and any of his eligible dependents under
Company's group health plans pursuant to the continuation of coverage provisions
contained in Sections 601 through 608 of the Employee Retirement Income Security
Act of 1974, as amended, Executive's premiums for such coverage shall be no
greater than that charged by Company generally to its active executive employees
for coverage under such plans. For purposes of this Agreement, the term "Change
in Control" shall mean (1) any merger, consolidation, or reorganization in which
Company is not the surviving entity (or survives only as a subsidiary of an
entity), (2) any sale, lease, exchange, or other transfer of (or agreement to
sell, lease, exchange, or otherwise transfer) all or substantially all of the
assets of Company to any other person or entity (in one transaction or a series
of related transactions), (3) dissolution or liquidation of Company, (4) when
any person or entity, including a "group" as contemplated by Section 13(d) of
the Securities Exchange Act of 1934, as amended, acquires or gains ownership or
control (including, without limitation, power to vote) of more than 50% of the
outstanding shares of Company's voting stock (based upon voting power), or (5)
as a result of or in connection with a contested election of directors, the
persons who were directors of Company before such election cease to constitute a
majority of the Board of Directors; provided, however, that the term "Change in
Control" shall not include any reorganization, merger, consolidation, sale,
lease, exchange, or similar transaction involving solely Company and one or more
previously wholly-owned subsidiaries of Company.
ARTICLE 4: PROTECTION OF INFORMATION
4.1 DISCLOSURE TO EXECUTIVE. Company shall disclose to Executive, or place
Executive in a position to have access to or develop, trade secrets or
confidential information of Company or its affiliates; and/or shall entrust
Executive with business opportunities of Company or its affiliates; and/or shall
place Executive in a position to develop business good will on behalf of Company
or its affiliates.
-5-
<PAGE>
4.2 DISCLOSURE TO AND PROPERTY OF COMPANY. All information, ideas,
concepts, improvements, discoveries, and inventions, whether patentable or not,
which are conceived, made, developed, or acquired by Executive, individually or
in conjunction with others, during Executive's employment by Company (whether
during business hours or otherwise and whether on Company's premises or
otherwise) which relate to Company's business, products, or services (including,
without limitation, all such information relating to corporate opportunities,
research, financial and sales data, pricing terms, evaluations, opinions,
interpretations, acquisitions prospects, the identity of customers or their
requirements, the identity of key contacts within the customer's organizations
or within the organization of acquisition prospects, or marketing and
merchandising techniques, prospective names, and marks) shall be disclosed to
Company and are and shall be the sole and exclusive property of Company.
Moreover, all documents, drawings, memoranda, notes, records, files,
correspondence, manuals, models, specifications, computer programs, E-mail,
voice mail, electronic databases, maps, and all other writings or materials of
any type embodying any of such information, ideas, concepts, improvements,
discoveries, and inventions are and shall be the sole and exclusive property of
Company. Upon termination of Executive's employment by Company, for any reason,
Executive promptly shall deliver the same, and all copies thereof, to Company.
4.3 NO UNAUTHORIZED USE OR DISCLOSURE. Executive will not, at any time
during or after Executive's employment by Company, make any unauthorized
disclosure of any confidential business information or trade secrets of Company
or its affiliates, or make any use thereof, except in the carrying out of
Executive's employment responsibilities hereunder. Affiliates of the Company
shall be third party beneficiaries of Executive's obligations under this
paragraph. As a result of Executive's employment by Company, Executive may also
from time to time have access to, or knowledge of, confidential business
information or trade secrets of third parties, such as customers, suppliers,
partners, joint venturers, and the like, of Company and its affiliates.
Executive also agrees to preserve and protect the confidentiality of such third
party confidential information and trade secrets to the same extent, and on the
same basis, as Company's confidential business information and trade secrets.
4.4 OWNERSHIP BY COMPANY. If, during Executive's employment by company,
Executive creates any work of authorship fixed in any tangible medium of
expression which is the subject matter of copyright (such as videotapes, written
presentations, or acquisitions, computer programs, E-mail, voice mail,
electronic databases, drawings, maps, architectural renditions, models, manuals,
brochures, or the like) relating to Company's business, products, or services,
whether such work is created solely by Executive or jointly with others (whether
during business hours or otherwise and whether on Company's premises or
otherwise), Company shall be deemed the author of such work if the work is
prepared by Executive in the scope of Executive's employment; or, if the work is
not prepared by Executive within the scope of Executive's employment but is
specially ordered by Company as a contribution to a collective work, as a part
of a motion picture or other audiovisual work, as a translation, as a
supplementary work, as a compilation, or as an instructional text, then the work
shall be considered to be work made for hire and Company shall be the author of
the work. If such work is neither prepared by Executive within the scope of
Executive's employment nor a work specially ordered that is deemed to be a work
made for hire, then Executive hereby agrees to
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<PAGE>
assign, and by these presents does assign, to Company all of Executive's
worldwide right, title, and interest in and to such work and all rights of
copyright therein.
4.5 ASSISTANCE BY EXECUTIVE. Both during the period of Executive's
employment by Company and thereafter, Executive shall assist Company and its
nominee, at any time, in the protection of Company's worldwide right, title, and
interest in and to information, ideas, concepts, improvements, discoveries, and
inventions, and its copyrighted works, including without limitation, the
execution of all formal assignment documents requested by Company or its nominee
and the execution of all lawful oaths and applications for patents and
registration of copyright in the United States and foreign countries.
4.6 REMEDIES. Executive acknowledges that money damages would not be
sufficient remedy for any breach of this Article by Executive, and Company shall
be entitled to enforce the provisions of this Article by terminating payments
then owing to Executive under this Agreement and/or to specific performance and
injunctive relief as remedies for such breach or any threatened breach. Such
remedies shall not be deemed the exclusive remedies for a breach of this
Article, but shall be in addition to all remedies available at law or in equity
to Company, including the recovery of damages from Executive and his agents
involved in such breach and remedies available to Company pursuant to other
agreements with Executive.
ARTICLE 5: STATEMENTS CONCERNING COMPANY
5.1 IN GENERAL. Executive shall refrain, both during the employment
relationship and after the employment relationship terminates, from publishing
any oral or written statements about Company, any of its affiliates, or any of
such entities' officers, employees, agents or representatives that are
slanderous, libelous, or defamatory; or that disclose private or confidential
information about Company, any of its affiliates, or any of such entities'
business affairs, officers, employees, agents, or representatives; or that
constitute an intrusion into the seclusion or private lives of Company, any of
its affiliates, or any of such entities' officers, employees, agents, or
representatives; or that give rise to unreasonable publicity about the private
lives of Company, any of its affiliates, or any of such entities' officers,
employees, agents, or representatives; or that place Company, any of its
affiliates, or any of such entities' officers, employees, agents, or
representatives in a false light before the public; or that constitute a
misappropriation of the name or likeness of Company, any of its affiliates, or
any of such entities' officers, employees, agents, or representatives. A
violation or threatened violation of this prohibition may be enjoined by the
courts. The rights afforded Company and its affiliates under this provision are
in addition to any and all rights and remedies otherwise afforded by law.
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<PAGE>
ARTICLE 6: EFFECT OF TERMINATION ON COMPENSATION
6.1 BY EXPIRATION. If Executive's employment hereunder shall terminate
upon expiration of the Term provided in paragraph 2.1 hereof, then all
compensation and all benefits to Executive hereunder shall terminate
contemporaneously with termination of his employment. Upon any termination of
the employment relationship by either Executive or Company after the expiration
of the Term provided in paragraph 2.1, Executive shall be entitled to pro-rata
salary through the date of such termination and any and all other compensation
to which Executive is entitled under this Agreement and all future benefits for
which Executive is eligible under this Agreement shall cease and terminate.
6.2 BY COMPANY. If Executive's employment hereunder shall be terminated by
Company prior to expiration of the Term provided in paragraph 2.1, then, upon
such termination, regardless of the reason therefor, all compensation and
benefits to Executive hereunder shall terminate contemporaneously with the
termination of such employment; provided, however, that if such termination
shall occur prior to the occurrence of a Change in Control for any reason other
than those encompassed by paragraphs 2.2(i), (ii), (iii), or (iv), then,
provided Executive executes a release of all of his claims and causes of action
against Company and its affiliates (which release shall be in a form that is
satisfactory to Company; (the "Release")), Company shall provide Executive with
Termination Benefits. For purposes of this Agreement, the term "Termination
Benefits" shall mean the following: (i) Company shall continue to pay to
Executive his base salary in effect pursuant to paragraph 3.1 at the time of
Executive's termination of employment for the unexpired portion of the Term set
forth in paragraph 2.1; (ii) the Initial Option shall become vested and
immediately exercisable in full upon Executive's termination of employment and
for a period of six months thereafter (but in no event shall the Initial Option
be exercisable after the expiration of its initial term); (iii) all other
outstanding stock options granted by Company to Executive shall become vested
and immediately exercisable in full upon Executive's termination of employment
and for a period of three months thereafter or for such greater period as may be
provided in the plan or plans pursuant to which such stock options were granted
(but in no event shall any such stock option be exercisable after the expiration
of the original term of such stock option); and (iv) during the period, if any
(but in no event for more than 12 months after the date of Executive's
termination of employment), that Executive elects to continue coverage for
himself and any of his eligible dependents under Company's group health plans
pursuant to the continuation of coverage provisions contained in Sections 601
through 608 of the Employee Retirement Income Security Act of 1974, as amended,
Executive's premiums for such coverage shall be no greater than that charged by
Company generally to its active executive employees for coverage under such
plans.
6.3 BY EXECUTIVE. If Executive's employment hereunder shall be terminated
by Executive prior to expiration of the Term provided in paragraph 2.1, then,
upon such termination, regardless of the reason therefor, all compensation and
benefits to Executive hereunder shall terminate contemporaneously with the
termination of such employment; provided, however, that if such termination
shall occur prior to the occurrence of a Change in Control for a reason
encompassed by paragraph 2.3(i), then, provided Executive executes the Release,
Company shall provide Executive with Termination Benefits.
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<PAGE>
6.4 NO DUTY TO MITIGATE LOSSES. Executive shall have no duty to find new
employment following the termination of his employment under circumstances which
require Company to pay any amount to Executive pursuant to this Article 6. Any
salary or remuneration received by Executive from a third party for the
providing of personal services (whether by employment or by functioning as an
independent contractor) following the termination of his employment under
circumstances pursuant to which this Article 6 apply shall not reduce Company's
obligation to make a payment to Executive (or the amount of such payment)
pursuant to the terms of this Article 6.
6.5 LIQUIDATED DAMAGES. In light of the difficulties in estimating the
damages for an early termination of this Agreement, Company and Executive hereby
agree that the payments, if any, to be received by Executive pursuant to this
Article 6 shall be received by Executive as liquidated damages.
6.6 INCENTIVE AND DEFERRED COMPENSATION. This Agreement governs the rights
and obligations of Executive and Company with respect to Executive's base salary
and certain perquisites of employment. Executive's rights and obligations both
during the term of his employment and thereafter with respect to stock options,
restricted stock, incentive and deferred compensation, life insurance policies
insuring the life of Executive, and other benefits under the plans and programs
maintained by Company shall be governed by the separate agreements, plans and
other documents and instruments governing such matters except to the extent
expressly set forth herein.
ARTICLE 7: MISCELLANEOUS
7.1 NOTICES. For purposes of this Agreement, notices and all other
communications provided for herein shall be in writing and shall be deemed to
have been duly given when personally delivered or when mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
IF TO COMPANY TO: Seven Seas Petroleum Inc.
Suite 960, Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas 77056
Attention: Robert A. Hefner, III, Chairman
IF TO EXECUTIVE TO: Mr. Larry A. Ray
___________________________________________
___________________________________________
or to such other address as either party may furnish to the other in writing in
accordance herewith, except that notices of changes of address shall be
effective only upon receipt.
7.2 APPLICABLE LAW. This Agreement is entered into under, and shall be
governed for all purposes by, the laws of the State of Texas.
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<PAGE>
7.3 NO WAIVER. No failure by either party hereto at any time to give
notice of any breach by the other party of, or to require compliance with, any
condition or provision of this Agreement shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time.
7.4 SEVERABILITY. If a court of competent jurisdiction determines that any
provision of this Agreement is invalid or unenforceable, then the invalidity or
unenforceability of that provision shall not affect the validity or
enforceability of any other provision of this Agreement, and all other
provisions shall remain in full force and effect.
7.5 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.
7.6 WITHHOLDING OF TAXES AND OTHER EMPLOYEE DEDUCTIONS. Company may
withhold from any benefits and payments made pursuant to this Agreement all
federal, state, city and other taxes as may be required pursuant to any law or
governmental regulation or ruling and all other normal employee deductions made
with respect to Company's employees generally.
7.7 HEADINGS. The paragraph headings have been inserted for purposes of
convenience and shall not be used for interpretive purposes.
7.8 GENDER AND PLURALS. Wherever the context so requires, the masculine
gender includes the feminine or neuter, and the singular number includes the
plural and conversely.
7.9 AFFILIATE. As used in this Agreement, the term "affiliate" shall mean
any entity which owns or controls, is owned or controlled by, or is under common
ownership or control with, Company.
7.10 ASSIGNMENT. This Agreement shall be binding upon and inure to the
benefit of Company and any successor of Company, by merger or otherwise. Except
as provided in the preceding sentence, this Agreement, and the rights and
obligations of the parties hereunder, are personal and neither this Agreement,
nor any right, benefit, or obligation of either party hereto, shall be subject
to voluntary or involuntary assignment, alienation or transfer, whether by
operation of law or otherwise, without the prior written consent of the other
party.
7.11 TERM. This Agreement has a term co-extensive with the term of
employment provided in paragraph 2.1. Termination shall not affect any right or
obligation of any party which is accrued or vested prior to such termination.
Without limiting the scope of the preceding sentence, the provisions of Articles
4 and 5 shall survive any termination of the employment relationship and/or of
this Agreement.
7.12 ENTIRE AGREEMENT. Except as provided in (i) the written benefit plans
and programs referenced in paragraph 3.5(iii), and (ii) any signed written
agreement contemporaneously or hereafter executed by Company and Executive, this
Agreement constitutes the entire agreement of
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<PAGE>
the parties with regard to the subject matter hereof, and contains all the
covenants, promises, representations, warranties and agreements between the
parties with respect to employment of Executive by Company. Without limiting the
scope of the preceding sentence, all prior understandings and agreements among
the parties hereto relating to the subject matter hereof are hereby null and
void and of no further force and effect. Any modification of this Agreement will
be effective only if it is in writing and signed by the party to be charged.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the
_____ day of ____________, 1997, to be effective as of the Effective Date.
SEVEN SEAS PETROLEUM INC.
BY: ____________________________________
NAME: _____________________________
TITLE: ___________________________
"COMPANY"
__________________________________________
LARRY A. RAY
"EXECUTIVE"
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May 20, 1997
Mr. Albert E. Whitehead
Suite 305, Reunion Center Building
9 East 4th Street
Tulsa, Oklahoma 74103-5109
Dear Al:
This letter sets forth our mutual understanding concerning the arrangements,
terms and conditions pursuant to which you will be retained to serve as a
consultant to Seven Seas Petroleum Inc. (the "Company") for a period of three
(3) years commencing the date hereof.
1. (a) You agree to serve as a consultant to the Company for a period
commencing on the date hereof and ending on the third anniversary of the date
hereof and to perform such consulting services as the management and directors
of the Company may from time to time reasonably request. If the Company requests
that you perform services hereunder and you have performed at least 10 hours of
service for each month since the date of this Agreement, you shall be deemed to
be in compliance with your obligations under this Agreement and need not comply
with that request. The services described in this section shall be rendered by
you at your office in Tulsa, Oklahoma or at the Company's office in Houston,
Texas. The Company acknowledges and agrees that you shall be providing services
to the Company on a non-exclusive basis and that during the period in which you
serve as a consultant to the Company, you may serve as an officer, director,
consultant or shareholder of other companies engaged in oil and gas exploration
and development, some of which may be in competition with the Company.
(b) The Company shall pay to you an amount equal to $200,000 per annum,
in twenty-four equal installments on the first and fifteenth day of each month
commencing June 1, 1997. The Company shall also reimburse you for all properly
documented reasonable out-of-pocket expenses incurred in the performance of your
duties as a consultant.
(c) Until the first anniversary of the date hereof, the Company shall
maintain in full force and effect, for your continued benefit, the benefits
under any life insurance, medical or long term disability insurance policy
currently in effect and thereafter, with respect to medical insurance benefits,
you may elect to continue your coverage, at your expense, under COBRA.
(d) The Company hereby agrees to take any and all actions required to
extend the exercise period of all stock options currently held by you on the
date hereof until October 20, 1998, including, without limitation, all actions
required to pre-clear the extension of the exercise period of such options with
the Toronto Stock Exchange or, if such pre-clearance is not obtained, to amend
the stock option plan or to implement such other provisions as may be necessary
to provide the economic benefit of such stock options to you for such extended
exercise period.
<PAGE>
(e) You agree not to disclose to anyone any confidential or non-public
information which relates to the Company or its subsidiaries.
2. Your relationship to the Company shall be that of independent contractor
and you shall not be an employee or agent of the Company and you shall not have
the power to bind or purport to bind the Company in any way nor shall you hold
yourself out as an employee or agent of the Company.
3. This Agreement shall inure to the benefit of and shall be binding upon
you and your executor, administrator, heirs, and personal representatives, and
the Company and its successors and assigns. In the event of a merger or
consolidation of the Company, or a sale of all or substantially all of the
assets of the Company, all amounts which would have been due under Section 1(b)
above for the remaining term of this Agreement shall be paid in a lump sum in
cash prior to the consummation of any such transaction and this Agreement shall
be terminated upon such payment. In the event of your death or permanent
disability, all amounts which would have been due under Section 1(b) above for
the remaining term of this Agreement shall be paid in a lump sum in cash to your
spouse, in the case of disability, or to your executor in the case of death.
4. This Agreement constitutes the entire agreement between the parties
relating to the subject matter hereof. It cannot be altered or amended except by
a writing duly executed by the party against whom such alteration or amendment
is sought to be enforced. This Agreement is for personal services and may not be
assigned by you.
5. This Agreement shall in all respects be governed by and construed in
accordance with the laws of the State of Texas applicable to contracts made and
to be performed entirely within such state.
6. If any one or more of the provisions contained in this Agreement shall be
held illegal or unenforceable, no other provision shall be affected.
If this letter correctly sets forth your understanding of the terms of your
consulting arrangement with the Company please sign below in the place indicated
and return it to us.
SEVEN SEAS PETROLEUM INC.
By: /s/ ROBERT A. HEFNER III
Robert A. Hefner III
Accepted and Agreed:
By: /s/ ALBERT E. WHITEHEAD
Albert E. Whitehead
PETROLINSON S.A. SHARE PURCHASE AGREEMENT
THIS AGREEMENT dated for reference the 14th day of February, 1997
BETWEEN:
HAZEL VENTURES LTD., a company incorporated under the laws of the British
Virgin Islands with registered offices at Tropic Isle Building, Wickhams
Cay, Road Town, Tortola, British Virgin Islands
(hereinafter called the "Vendor")
AND:
SEVEN SEAS PETROLEUM COLOMBIA, INC., a company incorporated under the laws
of the Cayman Islands and having a business address at 1900 Post Oak
Boulevard, Suite 960, Houston, Texas, 77056, in the United States of
America
(hereinafter called "SSPC")
AND:
SEVEN SEAS PETROLEUM INC., a company continued under the laws of the Yukon
Territory with registered offices at 3081 Third Avenue, Whitehorse, Yukon
Territory, Canada V1A 4Z7
(hereinafter called "SSPI")
WITNESSES THAT WHEREAS:
A. The Vendor is the holder and beneficial owner of all of the issued and
outstanding shares of Petrolinson S.A. (the "Company");
B. The Vendor has agreed to sell and SSPI has agreed to purchase the Vendor's
Shares on the terms and conditions detailed herein.
THEREFORE in consideration of the premises and the mutual covenants and
agreements herein set forth, the parties hereto covenant and agree each with the
other as follows:
1. INTERPRETATION
1.1 In this Agreement, including the schedules hereto, except as otherwise
expressly provided:
<PAGE>
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(a) "Agreement" means this agreement, including the preamble and the
Schedules hereto, as it may from time to time be supplemented or
amended;
(b) "Association Contracts" means the association contracts between GHK
Company Colombia and Empressa Colombiana de Petroles S.A. respecting
the Properties;
(c) "Closing" means the completion of the transactions contemplated in
this Agreement in accordance with its terms;
(d) "Closing Certificate" means a closing certificate executed by or on
behalf of, inter alia, the parties to this Agreement;
(e) "Closing Date" means the date of the Closing as determined pursuant
to Section 10.1;
(f) "Company" has the meaning assigned thereto in the preamble to this
Agreement;
(g) "Environmental Law, Regulation or Order" means all applicable
domestic and foreign federal, state, municipal or local laws,
statutes or ordinances pertaining to the environment, all applicable
rules, regulations or the like promulgated under or pursuant to such
laws, statutes or ordinances and all applicable governmental
authorizations or orders or the like issued or rendered by any
governmental body under or pursuant to any such laws, statutes,
ordinances, rules or regulations;
(h) "Escrow Agreement" shall have the meaning assigned thereto in
paragraph 5.2(c) of this Agreement;
(i) "Financial Statements" means the financial statements of the Company
attached as Schedule "A" hereto;
(j) "Hazardous Substance" includes any contaminants, pollutants,
dangerous substances including asbestos, urea formaldehyde, liquid
wastes, petrochemicals, industrial wastes, toxic substances,
hazardous or toxic chemicals, hazardous wastes, hazardous materials
or hazardous substances either in fact or as defined in or pursuant
to or regulated by any Environmental Law, Regulation or Order;
(k) "Liens" means all liens, mortgages, debentures, charges,
hypothecations, pledges or other security interests or encumbrances
of whatever kind;
(1) "Material Adverse Effect" means an adverse effect that is, or would
be, singly or in the aggregate material;
<PAGE>
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(m) "1933 Act" means the SECURITIES ACT of 1933 (United States) as
amended;
(n) "Pledge Agreement" means that agreement providing for the pledging
of the SSPI Shares by the Vendor in the form attached as Schedule
"E" hereto;
(o) "Properties" means the Dindal and Rio Seco areas located in the
Upper Magdalena Basin of Colombia as described in the Association
Contracts;
(p) "SSPI Shares" has the meaning assigned thereto in Section 2.3;
(q) "Statement Date" means the date to which the Financial Statements of
the Company were prepared;
(r) "The Exchange" means the Toronto Stock Exchange;
(s) "U.S. Person" has the meaning set out in Regulation S under the 1933
Act;
(t) "Vendor's Shares" means the shares of the Vendor in the Company;
(u) "Voting Support Agreement" means the shareholders voting support
agreement in the form attached as Schedule "F" hereto;
(v) all references in this Agreement to a designated "Section" or other
subdivision or to a Schedule are to the designated Section or other
subdivision of, or Schedule to, this Agreement;
(w) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Section or other subdivision or Schedule;
(x) the headings are for convenience only and do not form a part of this
Agreement and are not intended to interpret, define, or limit the
scope, extent or intent of this Agreement or any provision hereof;
(y) the singular of any term includes the plural, and vice versa; the
use of any term is equally applicable to any gender and, where
applicable, a body corporate; the word "or "is not exclusive and the
word "including" is not limiting (whether or not non-limiting
language, such as "without limitation" or "but not limited to" or
words of similar import, is used with reference thereto);
(z) in respect of the Company, any accounting term not otherwise defined
has the meaning assigned to it in accordance with accounting
principles generally accepted in the Republic of Panama;
<PAGE>
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(aa) in respect of SSPI and SSPC, any accounting term not otherwise
defined has the meaning assigned to it in accordance with Canadian
generally accepted accounting principles;
(ab) where any representation or warranty is made "to the knowledge of"
any party, such party will not be liable for a misrepresentation or
breach of warranty by reason of the fact, state of facts, or
circumstance in respect of which the representation or warranty is
given being untrue if such party proves it did not have actual
knowledge thereof;
(ac) in respect of SSPI and SSPC, where any representation or warranty is
made to the knowledge of one, it is deemed to be to the knowledge of
both; and
(ad) where any representation or warranty of the Vendor references
disclosure to either SSPI or SSPC, disclosure to one is deemed to be
disclosure to both.
1.2 The following are the Schedules to this Agreement:
SCHEDULE DESCRIPTION
-------- -----------
A Financial Statements
B Directors and Officers of the Company
C Outstanding Indebtedness
D Surviving Contracts
E Pledge Agreement
F Voting Support Agreement
G Outstanding Options and Warrants
2. PURCHASE AND SALE
2.1 Subject to the terms and conditions of this Agreement, the Vendor hereby
sells and assigns to SSPI, and SSPI hereby purchases from the Vendor the
Vendor's Shares free and clear of any liens.
2.2 SSPI hereby directs the Vendor to transfer the Vendor's Shares to and into
the name of SSPC in accordance with the terms and conditions of this Agreement,
and SSPC hereby acknowledges its entitlement to receive the Vendor's Shares.
2.3 The Purchase Price payable by SSPI for the Vendor's Shares shall be paid by
the issuance to the Vendor of one million (1,000,000) fully paid and
non-assessable common shares in the capital of SSPI (the "SSPI Shares"), subject
to:
(a) the approval and policies of The Exchange, and
<PAGE>
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(b) the terms and conditions of this Agreement.
3. VENDOR'S WARRANTIES AND REPRESENTIONS
3.1 The Vendor warrants and represents to SSPI, with the intent that SSPI will
rely thereon in entering into this Agreement and in concluding the purchase and
sale contemplated herein, that on the date hereof:
(a) the Vendor is the registered holder and beneficial owner of the
Vendor's Shares free and clear of all Liens, and the Vendor has no
interest, legal or beneficial, direct or indirect, in any shares of,
or the assets or business of, the Company other than the Vendor's
Shares;
(b) the Vendor's Shares represent all of the issued and outstanding
shares of the Company;
(c) with the exception of this Agreement, no party has any agreement,
right or option, consensual or arising by law, present or future,
contingent or absolute, or capable of becoming an agreement, right
or option:
(i) to require the Company to issue or allot any further or other
shares in its capital or any other security convertible or
exchangeable into shares in its capital or to convert or
exchange any securities into or for shares in the capital of
the Company;
(ii) to require the Company to purchase, redeem or otherwise
acquire any of the issued and outstanding shares in its
capital; or
(iii) to purchase or otherwise acquire any shares in the capital of
the Company;
(d) the Vendor has good and sufficient right and authority to enter into
this Agreement on the terms and conditions herein set forth and to
transfer the legal and beneficial title and ownership of the
Vendor's Shares to SSPC;
(e) the Company is duly incorporated, validly existing and in good
standing under the laws of the Republic of Panama;
(f) the directors and officers of the Company are as described in
Schedule "B";
(g) all alterations to the constating documents of the Company since its
incorporation have been duly approved by the shareholders of the
Company and registered with the appropriate authorities;
<PAGE>
- 6 -
(h) the Company is duly registered to carry on business in all
jurisdictions in which the Company carries on business except where
the failure to so register would not have a Material Adverse Effect
on the Company;
(i) the Company has the power, authority and capacity to carry on its
business as presently conducted by it;
(j) the Company holds a six percent (6%) participating interest under
the Association Contracts, free and clear of all Liens and the
Company has no other material assets;
(k) the Company carries on no other business other than the holding of
the six percent (6%) participating interest under the Association
Contracts;
(1) to the Vendor's knowledge the Association Contracts are in good
standing and remain in full force and effect;
(m) to the Vendor's knowledge, the Company holds all licences and
permits required for the conduct in the ordinary course of its
business as presently conducted by it, and all such licences and
permits are in good standing and the conduct and uses of the same by
the Company are in compliance with all laws and other restrictions,
rules, regulations and ordinances applicable to the Company and its
business, save and except for breaches which do not have a Material
Adverse Effect on the Company or its business as presently
conducted;
(n) the making of this Agreement and the completion of the transactions
contemplated hereby and the performance of and compliance with the
terms hereof will not:
(i) conflict with or result in a breach of or violate any of the
terms, conditions, or provisions of the constating documents
of the Company or the Vendor;
(ii) to the Vendor's knowledge, conflict with or result in a breach
of or violate any of the terms, conditions or provisions of
any law, judgment, order, injunction, decree, regulation or
ruling of any court or governmental authority, domestic or
foreign, to which the Company or the Vendor is subject, or
constitute or result in a default by the Company under any
agreement, contract or commitment to which the Company or the
Vendor is a party;
(iii) to the Vendor's knowledge, give to any person any remedy,
cause of action, right of termination, cancellation or
acceleration in or with respect to any understanding,
agreement, contract, or
<PAGE>
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commitment, written, oral or implied, to which the Company is
a party;
(iv) to the Vendor's knowledge, give to any government or
governmental authority, including any governmental department,
commission, bureau, board, or administrative agency, any right
of termination, cancellation, or suspension of, or constitute
a breach of or result in a default under any permit, license,
control, or authority issued to the Company and which is
necessary or desirable in connection with the conduct and
operation of the business currently conducted by the Company;
(v) to the Vendor's knowledge, constitute a default by the Company
or an event which, with the giving of notice or lapse of time
or both, might constitute an event of default or
non-observance under any agreement, contract, indenture or
other instrument relating to any indebtedness of the Company
which would give any party the right to accelerate the
maturity for the payment of any amount payable under that
agreement, contract, indenture, or other instrument;
so as to have a Material Adverse Effect on the Company;
(o) the Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States and
applied on a basis consistent with prior years, are true and correct
in every material respect, and present fairly all the assets,
liabilities (whether accrued, absolute, contingent or otherwise) and
the financial condition of the Company as at the Statement Date;
(p) there is no indebtedness of the Company, including to the Vendor,
which is not disclosed or reflected in the Financial Statements
other than as detailed in Schedule "C";
(q) income tax returns with respect to the Company have been filed and
income taxes paid, insofar as required, for all years to and
including the most recent taxation year end of the Company, and the
Company has withheld and remitted to all applicable tax collecting
authorities all amounts required to be remitted to all tax
collecting authorities respecting payments to employees or to
non-residents, or otherwise and has paid all installments of
corporate taxes due and payable as of the date hereof;
(r) to the Vendor's knowledge, all tax returns and reports of the
Company required by law to be filed prior to the date hereof
including all income tax returns and all other corporate tax returns
required to be filed with any governmental taxing authority or board
have been filed and are true,
<PAGE>
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complete and correct, and all taxes and other government charges
including all income, excise, sales, business and property taxes and
other rates, charges, assessment, levies, duties, taxes,
contributions, fees and licenses required to be paid have been paid,
and if not required to be paid as at the date hereof, have been
accrued in the Financial Statements;
(s) adequate provision has been made for taxes payable by the Company
which are not yet due and payable and there are no agreements,
waivers or other arrangements providing for an extension of time
with respect to the assessment or reassessment of any tax return by
any taxing authority or for the filing of any tax return by or
payment of any tax, governmental charge or deficiency by the
Company, and to the knowledge of the Vendor, there are no contingent
tax liabilities or any grounds which would prompt a reassessment by
any taxing authority;
(t) to the Vendor's knowledge, no authorization, approval, order,
license, permit or consent of, any governmental authority,
regulatory body or court, and no registration, declaration or filing
by the Vendor or the Company with any such governmental authority,
regulatory body or court remains outstanding in order for the Vendor
to complete the within purchase and sale, to duly perform and
observe the terms and provisions of this Agreement, and to render
this Agreement legal, valid, binding and enforceable in accordance
with its terms;
(u) the Vendor does not have any specific information relating to the
Company which is not generally known and which, to the knowledge of
the Vendor, has not been disclosed to SSPC or SSPI and which if
known could reasonably be expected to have a Material Adverse Effect
on the value of the Vendor's Shares;
(v) to the Vendor's knowledge:
(i) the business of the Company as currently carried on by it
complies with all applicable laws, judgments, decrees, orders,
injunctions, rules, statutes and regulations of all courts,
arbitrators or governmental authorities, including all health
and safety statutes and regulations, and all Environmental
Laws, Regulations and Orders, except where the failure to
comply would not have a Material Adverse Effect on the
Company;
(ii) the Company's business, assets or properties are not subject
to any judicial or administrative proceeding alleging the
violation of any applicable health or safety law,
Environmental Laws, Regulations and Orders, judgment, decree,
order, injunction, rule, statute or regulation except where
such proceeding would not have a Material Adverse Effect on
the Company;
<PAGE>
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(iii) without limiting the generality of the foregoing, there does
not exist a state of facts or event which could give rise to a
notice of non-compliance with any Environmental Laws,
Regulations or Orders, and the Company:
(1) has never used any of its premises or permitted them to be
used, to generate, manufacture, refine, treat, transport,
store, handle, dispose, transfer or process Hazardous
Substances except in compliance with all Environmental Laws,
Regulations and Orders;
(2) has not caused or permitted the release of any Hazardous
Substances on or off-site of its premises; and
(3) has not received any notice, citation, directive, order,
claim, letter or other communication from any governmental
body that it is potentially responsible for a domestic or
foreign federal, state, municipal or local clean-up site or
corrective action under any Environmental Law, Regulation or
Order, and neither the Company nor the Vendor has any
knowledge of any facts or event which could give rise thereto;
(w) since the date of the Financial Statements there has not been any
occurrence or event which has had, or to the Vendor's knowledge
might reasonably be expected to have, a Material Adverse Effect on
the business of the Company as currently carried on or the results
of its operations;
(x) other than this Agreement and the Association Contracts, and except
as disclosed in Schedule "D" hereto, the Company does not have:
(i) any material contract, agreement, undertaking or arrangement,
whether oral, written or implied, which cannot be terminated
on not more than one month's notice, or
(ii) any outstanding material agreements, contracts or commitments
(whether written or oral) whatsoever relating to or affecting
the conduct of its business as currently carried on, or any of
its assets, or for the purchase, sale or lease of its assets;
(y) there are no actions, suits, judgments, investigations or
proceedings outstanding or pending, or, to the knowledge of the
Vendor, threatened against or affecting the Company, at law or in
equity, before or by any domestic or foreign:
(i) court,
<PAGE>
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(ii) federal, state, municipal or other governmental authority, or
(iii) department, commission, board, tribunal, bureau or agency,
and the Company is not a party to or threatened with any litigation
which in either case would have a Material Adverse Effect on the
Company;
(z) to the Vendor's knowledge, the Company is not:
(i) in breach of any of the terms, covenants, conditions, or
provisions of, or in default under, and has not done or
omitted to do anything which, with the giving of notice or
lapse of time or both, would constitute a breach of or a
default under any contract to which it is a party provided
that no representation or warranty is given with respect to
any breach or default under the Association Contracts which
may arise as a result of the entering into of this Agreement
and the completion of the transactions contemplated hereby;
(ii) in violation of, nor are any present uses by the Company of
any of its assets in violation of or contravention of, any
applicable law, statute, order, rule or regulation;
(iii) in breach or default under any judgment, injunction or other
order or aware of any judicial, administration, governmental,
or other authority or arbitrator by which the Company is bound
or to which the Company or any of its assets are subject;
except where such breach or violation would not have a Material
Adverse Effect;
and the Company has not received notice that any such default,
breach or violation is being alleged;
(aa) the Company has not guaranteed, or agreed to guarantee, any
indebtedness or other obligation of any party, except as described
in the Financial Statements;
(ab) the Company has no employees;
(ac) since the date of the Financial Statements:
(i) no dividends of any kind or other distribution on any shares
of the Company have been declared or paid by the Company;
(ii) except as required under the Association Contracts, no capital
expenditure or commitment therefor has been made by the
<PAGE>
- 11 -
Company other than as previously disclosed in writing to SSPC;
and
(iii) the Company has not increased the pay of or paid or agreed to
pay any pension, bonus, share of profits or other similar
benefit to or for the benefit of any agent, director or
officer of the Company, except increases in the normal course
of business;
(ad) the Vendor is not a U.S. Person and is not acquiring the securities
offered hereby for the account or benefit of a U.S. Person;
(ae) the Vendor is aware that the SSPI Shares have not been registered
under the 1933 Act and may not be offered or sold in the United
States unless registered under the 1933 Act and the securities laws
of all applicable states of the United States unless an exemption
from such registration requirement is available or registration is
not required pursuant to Regulation S under the 1933 Act or
registration is otherwise not required under the 1933 Act and that
SSPI has no obligation or present intention of filing a registration
statement under the 1933 Act in respect of the SSPI Shares;
(af) the Vendor is further aware that:
(i) no offers in respect of the SSPI Shares were made by any
person to the Vendor while the Vendor was in the United
States;
(ii) the Vendor was outside the United States at the time of
execution and delivery of this Agreement; and
(iii) the certificates representing the SSPI Shares will bear a
legend stating that such securities have not been registered
under the 1933 Act or the securities laws of any state of the
United States and the SSPI Shares may not be exercised in the
United States or by or on behalf of a U.S. Person unless
registered under the 1933 Act and the securities laws of all
applicable states of the United States or an exemption from
such registration requirements is available;
(ag) the Vendor is a resident of the British Virgin Islands;
(ah) the Vendor is not acquiring the SSPI Shares as a result of any form
of general solicitation or general advertising including
advertisements, articles, notices or other communications published
in any newspaper, magazine or similar media or broadcast over radio,
or television, or any seminar or meeting whose attendees have been
invited by general solicitation or general advertising; and
<PAGE>
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(ai) there are no brokerage, finder's or similar fees paid or payable by
or on behalf of the Company or the Vendor in connection with the
transactions contemplated herein.
4. SSPC'S AND SSPI'S WARRANTIES AND REPRESENTIONS
4.1 SSPC and SSPI jointly and severally warrant and represent to the Vendor,
with the intent that the Vendor will rely thereon in entering into this
Agreement and in concluding the purchase and sale contemplated herein, that on
the date hereof:
(a) SSPC has been duly and validly incorporated and is a validly
existing corporation in good standing under the laws of the Cayman
Islands, with all necessary power, authority and capacity to own its
property and assets and carry on its business as presently carried
on by it and to complete the transactions provided for herein;
(b) SSPI has been duly and validly incorporated and is a validly
existing corporation in good standing under the laws of the Yukon
Territory, with all necessary power, authority and capacity to own
its property and assets and carry on its business as presently
carried on by it and to complete the transactions provided for
herein;
(c) SSPI is a reporting issuer in good standing under the securities
laws of Ontario, Alberta and British Columbia;
(d) SSPI is not a reporting issuer under the securities laws of any
other province, state, country or other jurisdiction;
(e) SSPI has full corporate power and authority to issue the SSPI
Shares, and the SSPI Shares will be issued as fully paid and
non-assessable shares;
(f) the authorized capital of SSPI consists of an unlimited number of
common shares without par value and an unlimited number of Class "A"
preferred shares without par value of which 32,612,910 common shares
and nil Class "A" preferred shares are issued and outstanding as at
the date hereof;
(g) with the exception of this Agreement or as set out in Schedule G
hereto, no party has any agreement, right or option, consensual or
arising by law, present or future, contingent or absolute, or
capable of becoming an agreement, right or option:
(i) to require SSPI to issue or allot any further or other shares
in its capital or any other security convertible or
exchangeable into shares in its capital or to convert or
exchange any securities into or for shares in the capital of
the Company;
<PAGE>
- 13 -
(ii) to require SSPI to purchase, redeem or otherwise acquire any
of the issued and outstanding shares in its capital; or
(iii) to purchase or otherwise acquire any shares in the capital of
SSPI;
(h) each of SSPI and SSPC is duly registered to carry on business in all
jurisdictions in which it carries on business except where the
failure to register would not have a Material Adverse Effect on the
condition (financial or otherwise) business, properties, prospects
or net worth of SSPI or SSPC as the case may be;
(i) each of SSPI and SSPC has full corporate power and authority to
enter into this Agreement and to perform its obligations set out
herein, and the Agreement has been duly authorized, executed and
delivered by each of SSPI and SSPC and constitutes a legal, valid
and binding obligation of each of SSPI and SSPC enforceable in
accordance with its terms;
(j) neither SSPC nor SSPI is in default or breach of, and the execution
and delivery of this Agreement by SSPC and SSPI and the performance
of the transactions contemplated thereby will not result in a breach
of, and do not create a state of facts which, after notice or lapse
of time or both, will result in a breach of, and do not and will not
conflict with, any of the terms, conditions or provisions of the
constating documents, resolutions or bylaws of SSPC or SSPI;
(k) SSPC and SSPI hold all licenses and permits required for the conduct
in the ordinary course of their respective businesses as presently
conducted by them;
(1) SSPI has the right, power and authority to direct the transfer of
the Vendor's Shares to SSPC and SSPC has the right, power and
authority to receive same, and neither such direction nor reception
of the Vendor's Shares gives rise to any liability under taxation or
other laws; and
(m) SSPI is not a nonresident of Canada for the purposes of the INCOME
TAX ACT (Canada).
5. COVENANTS AND ACKNOWLEDGEMENTS OF THE VENDOR
5.1 The Vendor hereby covenants and agrees that:
(a) the representations and warranties of the Vendor contained herein
shall be true in all material respects at and as of the Closing as
if such representations and warranties were made as of such time;
(b) the Vendor shall duly and punctually perform all the obligations to
be performed by it under this Agreement;
<PAGE>
- 14 -
(c) the Vendor shall execute all such documents and do all such things
as shall be reasonably necessary to give full effect to this
Agreement;
(d) without limiting the generality of paragraph 5.1(a), from the date
hereof to and including the time of Closing:
(i) the Vendor shall use its reasonable efforts to cause the
Company to comply with all applicable laws, judgments,
decrees, orders, injunctions, rules, statutes and regulations
of all courts, arbitrators or governmental authorities in the
Republic of Panama, the Republic of Colombia and the United
States of America; and
(ii) the Vendor shall not permit the Company to sell, assign or
otherwise transfer, or subject to any Lien whatsoever, any of
the Company's assets or properties (including, without
limitation, the Company's interests in the Association
Contracts and the Properties);
(e) the Vendor shall, and the Vendor shall cause the Company to, provide
SSPI with reasonable access to all relevant materials requested by
SSPI to undertake reasonable due diligence.
5.2 The Vendor hereby acknowledges and agrees that:
(a) in order to ensure compliance with applicable securities laws, the
SSPI Shares may not be sold for a period of 120 days after the
Closing Date;
(b) SSPI shall be entitled to take all such steps as it shall deem
necessary to give effect to this Section 5.2, including, but not
necessarily limited to, causing a legend to be placed on the share
certificates representing the SSPI Shares detailing the restriction
set out in Section 5.2(a) above in such manner as SSPI may direct;
and
(c) if required by the Ontario Securities Commission or The Exchange, he
will enter into an escrow agreement respecting all or a portion of
the SSPI Shares (the "Escrow Agreement"), which Escrow Agreement
shall be in a form acceptable to the Ontario Securities Commission.
<PAGE>
- 15 -
6. COVENANTS OF SSPI
6.1 SSPI hereby covenants and agrees that:
(a) the representations and warranties of SSPI contained herein shall be
true in all material respects at and as of the Closing as if such
representations and warranties were made as of such time;
(b) SSPI shall duly and punctually perform all the obligations to be
performed by it under this Agreement, and cause SSPC to duly and
punctually perform all the obligations to be performed by it under
this Agreement;
(c) SSPI shall execute, and will cause SSPC to execute, all such
documents and shall do, and will cause SSPC to do, all such things
as shall be reasonably necessary to give full effect to this
Agreement;
(d) it will cause the SSPI Shares and the certificates representing the
same to be duly issued and delivered in accordance with this
Agreement and the Articles of SSPI;
(e) all SSPI Shares which shall be issued hereunder shall be fully paid
and non-assessable;
(f) it will use its best efforts to maintain its corporate existence;
(g) it will use its best efforts to ensure that all common shares of
SSPI outstanding or issuable from time to time continue to be traded
on The Exchange, the Canadian Dealing Network or such other exchange
or electronic trading facility satisfactory to the directors of
SSPI;
(h) it will duly and punctually take all such steps as shall be
necessary to cause the removal of any order which may be issued
ceasing or suspending trading in the securities of SSPI or
prohibiting the sale of such securities;
(i) it will make all requisite filings under applicable securities
legislation including those necessary to remain a reporting issuer
not in default in the provinces of Ontario, Alberta and British
Columbia and it will use its reasonable best efforts to maintain
that status for a period of one year from the date hereof;
(j) it will provide the Vendor with reasonable access to all relevant
materials requested by the Vendor to undertake reasonable due
diligence; and
(k) following the Closing Date, it will use its best efforts to obtain
all necessary regulatory approvals and consents to the transfer of
the 6%
<PAGE>
- 16 -
interest in the Association Contracts held by the Company to SSPC or
another subsidiary of SSPI.
7. COVENANTS OF SSPC
7.1 SSPC hereby covenants and agrees that:
(a) the representations and warranties of SSPC contained herein shall be
true in all material respects at and as of the Closing as if such
representations and warranties were made as of such time;
(b) SSPC shall duly and punctually perform all the obligations to be
performed by it under this Agreement; and
(c) SSPC shall execute all such documents and shall do all such things
as shall be reasonably necessary to give full effect to this
Agreement.
8. NON-MERGER
8.1 The representations, warranties, covenants and agreements of the Vendor
contained herein and those contained in the documents and instruments delivered
pursuant hereto will survive the Closing Date for a period of one year from the
date hereof, and notwithstanding the completion of the transactions herein
contemplated, the waiver of any condition contained herein (unless such waiver
expressly releases the Vendor of such representation, warranty, covenant or
agreement), or any investigation by SSPI and/or SSPC, the same will remain in
full force and effect during that period.
8.2 The representations, warranties, covenants and agreements of SSPC and SSPI
contained herein and those contained in the documents and instruments delivered
pursuant hereto will survive the Closing Date for a period of one year, and
notwithstanding the completion of the transactions herein contemplated, the
waiver of any condition contained herein (unless such waiver expressly releases
SSPC and SSPI of such representation, warranty, covenant or agreement), or any
investigation by the Vendor, the same will remain in full force and effect
during that period.
9. CONDITIONS PRECEDENT
9.1 The obligations of SSPC and SSPI to consummate the transactions herein
contemplated are subject to the fulfillment of each of the following conditions
at the times stipulated:
(a) this Agreement and the transactions contemplated hereby shall have
been approved by The Exchange and by every other stock exchange and
regulatory authority having jurisdiction whose approval is required;
<PAGE>
- 17 -
(b) the representations and warranties of the Vendor contained herein
shall be true and correct in all material respects at and as of the
Closing as if such representations and warranties were made as of
such time;
(c) all covenants, agreements and obligations hereunder on the part of
the Vendor to be performed or complied with at or prior to the
Closing, including the Vendor's obligation to deliver the documents
and instruments herein provided for, shall have been performed and
complied with at and as of the Closing;
(d) all contracts, other than as detailed in Schedule "D", shall have
been terminated without further obligation to the Company;
(e) the shareholders loan of $316,911 as set out in the Financial
Statements will be either forgiven or repaid prior to Closing, in
either case with no further obligation to the Company;
(f) the Vendor shall have entered into the Pledge Agreement and the
Voting Support Agreement;
(g) the Vendor shall have executed all such documents as may be required
by the Ontario Securities Commission and The Exchange providing for
restrictions on the resale of the SSPI Shares (including, without
limitation, an Escrow Agreement, if required); and
(h) SSPI shall have completed a due diligence review of the Company with
results satisfactory to it and its counsel on or before February 15,
1997.
9.2 The conditions set forth in Section 9.1 are for the exclusive benefit of
SSPI and may be waived by SSPI in writing in whole or in part at any time.
9.3 The obligations of the Vendor to consummate the transactions herein
contemplated are subject to the fulfillment of each of the following conditions:
(a) the representations and warranties of SSPC and SSPI contained herein
are true and correct in all material respects at and as of Closing
as if such representations and warranties were made as of such time;
(b) all covenants, agreements and obligations hereunder on the part of
SSPC and SSPI to be performed or complied with at or prior to the
Closing, including SSPC's and SSPI's obligations to deliver the
documents and instruments herein provided for, shall have been
performed and complied with as at the Closing;
<PAGE>
- 18 -
(c) the terms of any escrow restrictions imposed by the Ontario
Securities Commission with respect to the resale of the SSPI Shares
shall be acceptable to the Vendor; and
(d) the Vendor shall have completed a due diligence review of SSPI
satisfactory to the Vendor and his counsel.
9.4 The conditions set forth in Section 9.3 are for the exclusive benefit of the
Vendor and may be waived by the Vendor in whole or in part at any time.
9.5 The obligations of the Vendor, SSPI and SSPC to complete and give effect to
the transactions herein contemplated are further subject to the due execution of
the Closing Certificate by or on behalf of all parties whose execution is
provided for therein.
10. CLOSING
10.1 The Closing shall take place at 10:00 a.m. local time at the offices of
Integro Trust (BVI Limited), located at Tropic Isle Building, Wickhams Cay in
the City of Road Town, Tortola, British Virgin Islands, within five (5) business
days of obtaining by SSPI of all necessary regulatory approvals for the issuance
of the SSPI Shares, which in any event shall be no later than March 31, 1997, or
such other later date as may be mutually agree upon by the parties hereto.
11. TRANSACTIONS OF THE VENDOR AT THE CLOSING
11.1 At the Closing, the Vendor will execute and deliver or cause to be executed
and delivered all documents, instruments, resolutions and share certificates as
are necessary to effectively transfer the Vendor's Shares to SSPC, free and
clear of all Liens, including:
(a) certified copies of resolutions of the directors of the Company and
the Vendor authorizing the transfer of the Vendor's Shares and
certified copies of resolutions of the directors of the Company
authorizing the transfer of the Vendor's Shares in bearer form;
(b) a certificate executed by the directors of the Company certifying
that the Vendor's Shares represent all of the issued and outstanding
shares of the Company and that there are no agreements, rights or
options outstanding to purchase or otherwise acquire any shares in
the Company;
(c) share certificates representing the Vendor's Shares in bearer form;
(d) resignations in writing of all the directors and officers and
signing officers of the Company;
<PAGE>
- 19 -
(e) all corporate records and books of account of the Company including,
without limiting the generality of the foregoing, minute books,
share register books, share certificate books and annual reports;
(f) a Closing Warranty and Certificate from the Vendor confirming that
the representations and warranties of the Vendor contained herein
are true and correct in all material respects at and as of the
Closing, that the Vendor has complied with the covenants contained
in Section 5.1 and that the conditions to be satisfied by the
Vendor, unless waived, set out in Section 9.1 have been satisfied at
the Closing;
(g) the Voting Support Agreement duly executed by the Vendor;
(h) the Pledge Agreement duly executed by the Vendor together with an
executed stock power of attorney, with the execution by the Vendor
properly guaranteed, and such other documents as are required to be
delivered by the Vendor under the terms of the Pledge Agreement;
(i) if required, the Escrow Agreement duly executed by the Vendor,
together with duly executed copies of such other documents as may be
required under Section 9.1(g) of this Agreement;
(j) a legal opinion from counsel to the Company addressed to SSPI in
form satisfactory to SSPI; and
(k) all such other documents and instruments as SSPI may reasonably
require including but not limited to computer data including
information as to the Properties, administrative information, and
all accounting information, vouchers, receipts, accounting entries
and diaries of the Company.
12. TRANSACTIONS OF SSPI AT THE CLOSING
12.1 At the Closing, SSPC and SSPI will deliver or cause to be executed and
delivered all documents, instruments, resolutions and share certificates as are
necessary to effectively transfer the SSPI Shares to the Vendor, free and clear
of all Liens, including:
(a) certified copies of resolutions of the directors of SSPC and SSPI
authorizing the entering into of this Agreement and the carrying out
of the transactions contemplated herein and certified copies of
resolutions of the directors of SSPI authorizing the issuance of
SSPI Shares;
(b) duly issued share certificates representing the SSPI Shares in the
name of the Vendor as provided in Section 2.3 hereof;
(c) a Closing Warranty and Certificate from SSPC and SSPI confirming
that the representations and warranties of SSPC and SSPI contained
herein are
<PAGE>
- 20 -
true and correct in all material respects at and as of the Closing,
that SSPC and SSPI have complied with the covenants contained in
Section 6.1 and 7.1 and that the conditions to be satisfied by SSPC
and SSPI, unless waived, set out in Section 9.3 have been satisfied
at the Closing;
(d) a legal opinion from counsel to SSPC and SSPI addressed to the
Vendor and in form satisfactory to the Vendor;
(e) all such other documents and instruments as the Vendor may
reasonably require with respect to SSPC and SSPI; and
(f) a certificate of Montreal Trust, as the registrar and transfer agent
of SSPI, confirming the information set out in subsection 4.1(f).
13. INDEMNITY
13.1 The Vendor hereby agrees to indemnify and hold harmless SSPI and SSPC from
and against:
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfillment of any
covenant on the part of the Vendor under this Agreement or from any
misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to SSPI or SSPC hereunder;
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing; and
(c) any and all liability to which SSPI or SSPC is subject as a result
of the failure of the Vendor to pay such tax obligations of the
Vendor as are determined to exist arising from the transactions
contemplated herein;
and if any action or claim shall be asserted against SSPI, SSPC or the Company
in respect of which indemnity may be sought hereunder, SSPI, SSPC or the
Company, as the case may be, shall promptly notify the Vendor in writing and the
Vendor shall assume the defense thereof at his expense through legal counsel
acceptable to SSPI. No party shall effect a settlement of such action or claim
without the written consent of the other party, such consent not to be
unreasonably withheld or delayed.
13.2 The liability of the Vendor under Section 13.1 herein shall be secured by a
pledge of the SSPI Shares in favour of SSPI in accordance with the terms of the
Pledge Agreement, said pledge to remain in effect until the earlier of the date
that the 6% participating interest in the Association Contracts is validly
transferred to SSPC or such other subsidiary of SSPI as SSPI shall elect, and
120 days from the Closing Date, provided that in circumstances where the
transfer has not occurred 120 days from the Closing Date as a result of
circumstances outside of the control of SSPI, then the 120 days referred to
herein shall be extended by a further
<PAGE>
- 21 -
30 days in circumstances where an action or claim is asserted to which Section
13.1 applies during the period in which the pledge is otherwise to remain in
effect hereunder, the pledge shall remain in effect until such time as the
action or claim is quantified by agreement between SSPI and the Vendor, in which
case the pledge shall remain in effect only as to those number of SSPI Shares as
have a market price equal to the quantified amount, said SSPI Shares to remain
subject to the pledge until such time as such action or claim is either settled
or becomes a liability certain of the Vendor under Section 13.1 herein, in which
case SSPI shall be entifled to realize on the pledge to the extent of such
liability in accordance with the terms of the Pledge Agreement.
13.3 The total and aggregate liability of the Vendor under Section 13.1 herein
shall be limited to the market price, as at the date of a claim for indemnity,
of the SSPI Shares and such liability can be satisfied either by paying the
amount thereof to SSPI or by surrendering such of the SSPI Shares as have a
market price equal to the amount of the liability.
13.4 For the purpose of Section 13.3 herein, the "market price" of the SSPI
Shares shall be deemed to be equal to the average of the closing price of SSPI's
common shares on The Toronto Stock Exchange during the ten most recent trading
days ending immediately prior to the date of a claim for indemnity.
13.5 SSPI and SSPC will indemnify and hold harmless the Vendor from and against:
(a) any and all losses, damages or deficiencies resulting from any
misrepresentation, breach of warranty or non-fulfillment of any
covenant on the part of SSPI or SSPC under this Agreement or from
any misrepresentation in or omission from any certificate or other
instrument furnished or to be furnished to the Vendor hereunder; and
(b) any and all actions, suits, proceedings, demands, assessments,
judgments, costs and legal and other expenses incidental to any of
the foregoing;
and if any action or claim shall be asserted against the Vendor in respect of
which indemnity may be sought hereunder, the Vendor shall notify SSPI in writing
and SSPI shall assume the defence thereof at its expense through legal counsel
acceptable to the Vendor. No party shall effect a settlement of such action or
claim without the written consent of the other party, such consent not to be
unreasonably withheld or delayed.
14. CONFIDENTIALITY
14.1 The existence of this Agreement and the terms and conditions hereof are
intended to be confidential and are not to be discussed with or disclosed to any
third party, except:
(a) with the express prior written consent of the other parties hereto;
<PAGE>
- 22 -
(b) as may be required or appropriate in response to any summons,
subpoena or discovery order or to comply with any applicable law,
order, regulation or ruling;
(c) as SSPI and the Vendor, or their designees, reasonably deems
appropriate in order to conduct due diligence, title or other
investigation relating to the transactions contemplated herein; or
(d) as may be required by SSPI to be disclosed in a press release
pursuant to applicable securities laws, or the policies, rules or
regulations of The Exchange or any other stock exchange on which
SSPI's shares are listed.
15. COUNTERPARTS
15.1 This Agreement may be executed in any number of facsimile counterparts,
each of which shall be deemed to be an original and all of which together shall
be deemed to be one and the same document.
16. TIME OF THE ESSENCE
16.1 Time is of the essence of this Agreement.
17. ENTIRE AGREEMENT
17.1 This Agreement, together with the agreements and documents provided for
herein, contains the entire agreement between the parties hereto in respect of
the purchase and sale of the Vendor's Shares and there are no warranties,
representations, terms, conditions or collateral agreements, express or implied,
other than expressly set forth or provided for in this Agreement.
18. FURTHER ASSURANCES
18.1 The parties will execute and deliver such further documents and instruments
and do all such acts and things as may be reasonably necessary or requisite to
carry out the full intent and meaning of this Agreement and to effect the
transactions contemplated by this Agreement, and the parties will cooperate in
respect of any requirement to file an application with Investment Canada.
19. SUCCESSORS AND ASSIGNS
19.1 This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
<PAGE>
- 23 -
20. NOTICE
20.1 Any notice required or permitted to be given under this Agreement will be
validly given if in writing and delivered or sent by pre-paid registered mail,
to the following addresses:
(a) If to the Vendor:
HAZEL VENTURES LTD.
Tropic Isle Building
Wickhams Cay, Road Town
Tortola, British Virgin Islands
Attention: Selena Gibson
(b) If to SSPI:
SEVEN SEAS PETROLEUM INC.
Suite 960 - 1900 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Timothy Stephens
or to such other address as any Party may specify by notice in writing to the
other.
20.2 Any notice delivered on a business day will be deemed conclusively to have
been effectively given on the date notice was delivered.
20.3 Any notice sent by prepaid registered mail will be deemed conclusively to
have been effectively given on the third business day after posting; but if at
the time of posting or between the time of posting and the third business day
thereafter there is a strike, lockout or other labour disturbance affecting
postal service, then the notice will not be effectively given until actually
delivered.
21. PROPER LAW
21.1 This Agreement will be governed by and construed in accordance with the
laws of the State of Texas and the laws of the United States of America
applicable therein and the parties will attorn to the Courts thereof.
IN WITNESS WHEREOF the parties have caused this Agreement to be executed and
delivered as of the date first above written.
HAZEL VENTURES LTD.
Per: /s/ S. GIBSON
Authorized Signatory
SEVEN SEAS PETROLEUM COLOMBIA INC.
Per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
SEVEN SEAS PETROLEUM INC.
Per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
This is page 24 of an Agreement dated for reference the 14th day of February,
1997 between Hazel Ventures Ltd., Seven Seas Petroleum Colombia Inc. and Seven
Seas Petroleum Inc.
<PAGE>
SCHEDULE "A"
PETROLINSON, S.A.
CONSOLIDATION
12/31/95
SEE ACCOUNTANTS COMPILATION REPORT
<TABLE>
<CAPTION>
ACCOUNT PANAMA COLOMBIA COMBINED ADJUSTMENTS CONSOLIDATION
@ 12/31/95 @ 12/31/95 BALANCE DR(CR) @ 12/31/95
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH ..................... 12,566 35 12,601 -- 12,601
ACCOUNTS RECEIV .......... -- 85 85 -- 85
DUE FR COLOMB BRANCH ..... 885,944 -- 885,944 (885,944) 0
INVESTMENTS .............. 1,360,776 -- 1,360,776 (1,360,774) 0
SUB-SURFACE RIGHTS ....... -- 41,791 41,791 (38,808) 2,983
ORGANIZATION COST ........ -- 11,249 11,249 (11,249) 0
DEFERRED CHARGES ......... 34,863 5,876,254 5,911,117 (5,600,890) 310,227
TOTAL ASSETS ............. 2,294,149 5,929,414 8,223,583 (7,897,667) 325,896
DUE TO SHAREHOLDER ....... 308,550 8,361 316,911 -- 316,911
PARTICIPANTS ACCOUNT ..... 114,190 -- 114,190 114,190 0
DUE TO HOME OFFICE ....... -- 5,525,955 5,525,955 5,525,955 0
TOTAL LIABILITIES ........ 422,740 5,534,316 5,967,056 5,640,145 316,911
CAPITAL .................. 2,200 2,200 4,400 2,055 2,345
OTHER PAID IN CAPITAL .... (2,055) -- (2,055) (2,055) 0
LEGAL RESERVE ............ -- 254 254 -- 254
RETAINED EARNINGS ........ 1,872,715 391,810 2,264,525 2,257,522 7,003
PROFIT (LOSS) ............ (1,451) 0 (1,451) -- (1,451)
CONVERSION GAIN (LOSS) ... 0 834 834 -- 834
TOTAL CAPITAL ............ 1,871,409 395,098 2,266,507 2,257,522 8,985
TOTAL LIABILITES & CAPITAL 2,294,149 5,929,414 8,223,563 7,897,667 325,696
</TABLE>
<PAGE>
SCHEDULE "B"
DIRECTORS AND OFFICERS OF PETROLINSON S.A.
Janio Luis Lescure Sanchez -- President and Director
Ivan Diaz Gutierrez -- Treasurer and Director
Maribel Caliendo Melendez -- Secretary and Director
<PAGE>
SCHEDULE "C"
OUTSTANDING INDEBTEDNESS OF PETROLINSON S.A.
None
<PAGE>
SCHEDULE "D"
SURVIVING CONTRACTS OF PETROLSINSON S.A.
None
<PAGE>
SCHEDULE "E"
PLEDGE AGREEMENT
THIS AGREEMENT dated for reference the ___ day of February, 1997.
AMONG:
HAZEL VENTURES LTD., a company incorporated under the laws of the
British Virgin Islands with registered offices at Tropic Isle
Building, Wickliams Cay, Road Town, Tortola, British Virgin Islands
(Hereinafter called the "Hazel Ventures")
OF THE FIRST PART
AND:
SEVEN SEAS PETROLEUM INC., a company continued under the laws of
the Yukon Territory with registered offices at 3081 Third Avenue,
Whitehorse, Yukon Territory, Canada V1A 4Z7
(hereinafter called "SSPI")
OF THE SECOND PART
AND:
SEVEN SEAS PETROLEUM COLOMBIA INC., a company incorporated under
the laws of the Cayman Islands with a business address at 1900 Post Oak
Boulevard, Suite 960, Houston, Texas, 77056, in the United States of America
(hereinafter called "SSPC")
OF THE THIRD PART
AND:
INTEGRO TRUST (BVI LIMITED), a company incorporated under the laws
of the British Virgin Islands with a business address at Tropic Isle Building,
Wickhams Cay, Road Town, Tortola, British Virgin Islands
(hereinafter called the "Agent")
OF THE FOURTH PART
<PAGE>
- 2 -
WHEREAS:
A. SSPI, SSPC and Hazel Ventures have entered into a share purchase agreement
dated for reference December 23, 1996 (the "Share Purchase Agreement"), whereby
SSPI has agreed to acquire all the issued and outstanding shares of Petrolinson
S.A. ("Petrolinson") in consideration of the issuance to Hazel Ventures, as
vendor, of one million common shares in the capital of SSPI (the "SSPI Shares");
B. Under the terms of the Share Purchase Agreement, Hazel Ventures has agreed to
provide certain indemnities (the "Indenmities") to SSPI and SSPC and as security
therefor has agreed to pledge the SSPI Shares; and
C. The Agent has agreed to undertake and perform its duties according to the
terms and conditions hereof.
NOW THEREFORE THIS AGREEMENT that in consideration of the premises and
mutual covenants and agreements herein contained, and for good and other
valuable consideration, the parties hereby agree as follows:
1. In this Agreement, including the schedules hereto, except as otherwise
expressly provided:
(a) "Agreement" means this agreement, including the preamble hereto, as
it may from time to time be supplemented or amended;
(b) "Association Contracts" shall have the meaning assigned thereto in
the Share Purchase Agreement;
(c) "Certificates" means the share certificate or certificates
representing the SSPI Shares;
(d) "Closing Date" shall have the meaning assigned thereto in the Share
Purchase Agreement;
(e) "Pledged Assets" means: (i) the SSPI Shares delivered to the Agent
hereunder and the accompanying Powers, (li) the balance of funds, if
any, in the Escrow Account and all interest earned thereon, and
(iil) any other property which may be substituted therefor;
(f) "Account" shall have the meaning assigned thereto in Section 3;
(g) "Release Date" shall have the meaning assigned thereto in Section 4;
<PAGE>
- 3 -
(h) "Market Price" means the average closing price of SSPI's listed
common shares on The Toronto Stock Exchange on the ten trading days
immediately preceding the time for determination of such Market
Price;
(i) "Petrolinson" shall have the meaning assigned thereto in the
preamble to this Agreement;
(j) "Powers" shall have the meaning assigned thereto in Section 2;
(k) "SSPI Shares" shall have the meaning assigned thereto in the
preamble to this Agreement;
(1) all references in this Agreement to a designated "Section" or other
subdivision or to a Schedule are to the designated Section
subdivision of, or Schedule to, this Agreement;
(m) the words "herein", "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Section or other subdivision; and
(n) the singular of any term includes the plural, and vice versa; the
use of any term is equally applicable to any gender and, where
applicable, a body corporate; the word "or" is not exclusive and the
word "including" is not limiting (whether or not non-limiting
language, such as "without limitation" or "but not limited to" or
words of similar import, is used with reference thereto).
2. On the Closing Date, as security for the Indemnities, Hazel Ventures shall
cause to be delivered to the Agent Certificates representing the SSPI Shares,
together with undated irrevocable stock transfer powers (the "Powers") duly
executed in blank by Hazel Ventures.
3. All dividends declared and distributed in respect of the SSPI Shares shall be
deposited with the Agent and held pursuant to the terms hereof. The Agent agrees
to hold and dispose of the Certificates and the Powers and any funds which may
be delivered to the Agent as contemplated in this Agreement and to establish and
maintain a separate, interest-bearing trust account with a reputable bank for
any such funds (the "Account"). The Agent's possession of the Pledged Assets
shall be considered possession as agent for SSPI and SSPC for purposes of
continuing the perfection of SSPI and SSPC's security interest therein (although
the Agent's responsibilities and liability for acting in such capacity shall be
limited as provided herein).
4. The Agent shall hold the Pledged Assets until the earlier of the date that
Petrolinson's 6% participating interest in the Association Contracts is validly
transferred to SSPC or such other subsidiary of SSPI as SSPI shall elect, and
120 days after the Closing Date (such earlier date, the "Release Date");
provided, however, that in the event that the said transfer of Petrolinson's 6%
participating interest in the Association Contracts is delayed beyond 120 days
<PAGE>
- 4 -
for reasons beyond SSPI's control, the 120-day period referred to herein shall
be extended to 150 days after the Closing Date and further provided that, in
circumstances where an action or claim is asserted which could give rise to a
liability of Hazel Ventures under the Share Purchase Agreement during the period
in which the Agent is otherwise obligated to hold the Pledged Assets hereunder,
the Agent shall continue to hold the Pledged Assets until such time as the
action or claim is quantified by agreement between SSPI and Hazel Ventures, in
which case the Agent shall continue to hold only that number of the SSPI Shares
as have a Market Price equal to the quantified amount, said SSPI Shares to be
held until such time as such action or claim is settled or becomes a liability
certain of the Vendor under the Share Purchase Agreement, in which case the
provisions of Section 5 herein shall apply in respect of such liability. Upon
delivery to the Agent of notice in writing signed by an authorized
representative of SSPI and an authorized representative of Hazel Ventures that
the Release Date has occurred, the Agent shall deliver the Pledged Assets to
Hazel Ventures, and in this regard SSPI covenants and agrees that it will act
promptly in furnishing such notice to the Agent upon occurrence of the Release
Date.
5. In the event Hazel Ventures shall become liable or obligated to SSPI and/or
SSPC under the Share Purchase Agreement, Hazel Ventures may, at its option, pay
the amount of such liability to SSPI and/or SSPC, as the case may be. In the
event Hazel Ventures does not pay the said amount with ten (10) days after the
liability has become fixed under the procedures set forth in Section 7 and
receipt by Hazel Ventures of written notice from SSPI and/or SSPC specifying the
amount due and the facts giving rise to such liability of Hazel Ventures, SSPI
and/or SSPC, as the case may be, may look to the Pledged Assets for discharge of
such liability of Hazel Ventures without, however, in any way releasing or
satisfying any liability of Hazel Ventures under the Share Purchase Agreement
except to the extent that such liability shall have been satisfied by the
Pledged Assets.
6. Subject to the limitations set forth in Section 5, SSPI and/or SSPC, as the
case may be, shall be entitled to receive Pledged Assets to the extent necessary
to satisfy any and all liabilities of Hazel Ventures under the Share Purchase
Agreement. Without limiting the generality of the foregoing, SSPI and/or SSPC,
as the case may be, shall be entitled to claim SSPI Shares having an aggregate
Market Price sufficient to satisfy the liabilities of Hazel Ventures under the
Share Purchase Agreement.
7. Each claim by SSPI and/or SSPC for indemnification under the Share Purchase
Agreement shall be made by notice to the Agent with a copy of such notice to
Hazel Ventures, stating the nature and amount of the claim. Any claim based upon
a final judgment, decree or award of a court of competent jurisdiction requiring
the payment of money by SSPI, SSPC or any of their respective officers or
directors, shall be conclusive as to the amount of such claim, provided a
certified copy of such judgment, decree or award. Any claim shall be settled in
all respects thirty (30) days after receipt by the Agent of notice thereof,
unless within such period the Agent and SSPI and/or SSPC, as the case may be,
shall have received from Hazel Ventures written notice questioning the propriety
of the claim, in which case such claim, unless settled by mutual agreement
between SSPI and Hazel Ventures, shall be promptly referred by the Agent to a
single arbitrator to be mutually agreed to between SSPI and Hazel Ventures,
whose decision shall be conclusive and binding upon the parties hereto.
<PAGE>
- 5 -
8. The Agent shall not be liable for any loss arising out of any act or omission
to act, or for any error in judgement, in the execution of the agency created by
this Agreement, except in the case of gross negligence or wilful misconduct of
the Agent or its employees.
9. The Agent shall not be required to give any bond or other security for the
faithful or due performance of its duties under the agency created by this
Agreement.
10. The Agent shall be entitled to charge and be paid all usual or proper
professional and other charges for any business or act done in the execution of
the agency created by this Agreement.
11. SSPI and Hazel Ventures agree, severally and jointly, to hold the Agent
harmless and to indemnify the Agent against any loss, liability, expense
(including reasonable legal fees and expenses), claim or demand arising out of
or in connection with the performance of its obligations in accordance with the
provisions of this Agreement, except for gross negligence or wilful misconduct
of the Agent or its employees. The foregoing indemnities in this Section shall
survive the resignation or removal of the Agent or the termination of this
Agreement.
12. The Agent is not a party to, and is not bound by, any provisions which may
be evidenced by, or arise out of, any agreement other than as therein set forth
under the express provisions of this Agreement.
13. The Agent acts hereunder as a trustee only and is not responsible or liable
in any manner whatsoever for the sufficiency, correctness, genuineness or
validity of the documents deposited with it, or for the form or execution of any
documents, or for the identity or authority or right of any person or party
executing them.
14. The Agent shall be protected in acting upon any written notice, request,
waiver, consent, receipt or other paper or document apparently signed by the
proper person or party.
15. In the event of any disagreement between any of the parties to this
Agreement, or between them or any of them and any other person, resulting in
demands or adverse claims being made in connection with or for any asset
involved herein or affected hereby, the Agent shall be entitled, at its
discretion, to refuse to comply with any demands or claims on it, as long as
such disagreement shall continue, and in so refusing the Agent may make no
delivery or other disposition of any asset involved herein or affected hereby,
and in so doing, the Agent shall not be or become liable in any way or to any
person or party for its failure or refusal to comply with such conflicting
demands or adverse claims, and it shall be entitled to continue so to refrain
from acting and so to refuse to act until the rights of such persons or parties
shall have been finalLy adjudicated in a court assuming and having jurisdiction
on the asset involved herein or affected hereby, or all differences shall have
been adjusted by agreement and the Agent shall have been notified thereof in
writing signed by all persons and parties interested.
16. The existence of this Agreement and the terms and conditions hereof are
intended to be confidential and are not to be discussed with or disclosed to any
third party, except:
<PAGE>
- 6 -
(a) with the express prior written consent of the other parties hereto;
(b) as may be required or appropriate in response to any summons,
subpoena or discovery order or to comply with any applicable law,
order, regulation or ruling;
(c) as SSPI and Hazel Ventures, or their designees, reasonably deems
appropriate in order to conduct due diligence, title or other
investigation relating to the transactions contemplated in the Share
Purchase Agreement; or
(d) as may be required by SSPI to be disclosed in a press release
pursuant to applicable securities laws, or the policies, rules or
regulations of The Toronto Stock Exchange or any other stock
exchange on which SSPI's shares are listed.
17. This Agreement maybe executed in any number of facsimile counterparts, each
of which shall be deemed to be an original and all of which together shall be
deemed to be one and the same document.
18. Time is of the essence of this Agreement.
19. The parties will execute and deliver such further documents and instruments
and do all such acts and things as may be reasonably necessary or requisite to
carry out the full intent and meaning of this Agreement and to effect the
transactions contemplated by this Agreement.
20. This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
21. Any notice required or permitted to be given under this Agreement will be
validly given if in writing and delivered or sent by pre-paid registered mail,
to the following addresses:
(a) If to Hazel Ventures:
HAZEL VENTURES LTD.
Tropic Isle Building
Williams Cay
Road Town, Tortola
British Virgin Islands
Attention: Selena Gibson
Facsimile Number: ____________
<PAGE>
- 7 -
(b) If to SSPI:
SEVEN SEAS PETROLEUM INC.
Suite 960 - 1900 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Timothy Stephens
Facsimile Number: 713-621-9770
(c) If to the Agent:
INTEGRO TRUST (BVI LIMITED)
Tropic Isle Building
Williams Cay
Road Town, Tortola
British Virgin Islands
Attention: Selena Gibson
Facsimile Number: ____________
or to such other address as any party may specify by notice in writing to the
other parties.
22. Any notice delivered on a business day pursuant to Section 21 will be deemed
conclusively to have been effectively given on the date notice was delivered.
23. Any notice sent by prepaid registered mail pursuant to Section 21 will be
deemed conclusively to have been effectively given on the third business day
after posting; but if at the time of posting or between the time of posting and
the third business day thereafter there is a strike, lockout or other labour
disturbance affecting postal service, then the notice will not be effectively
given until actually delivered.
24. This Agreement will be governed by and construed in accordance with the laws
of the Province of British Columbia and the laws of Canada applicable therein
and the parties will attorn to the Courts thereof.
IN WITNESS WHEREOF the parties hereto have executed these presents the day
and year first above written.
HAZEL VENTURES LTD.
Per: /s/ S. GIBSON
Authorized Signatory
<PAGE>
SCHEDULE "F"
SHAREHOLDERS VOTING SUPPORT AGREEMENT
This Agreement is made as of _________________, 1997
BETWEEN:
SEVEN SEAS PETROLEUM INC.
(herein called the "Company")
OF THE FIRST PART
AND
HAZEL VENTURES LTD.,
(herein called the "Shareholder")
OF THE SECOND PART
WHEREAS:
A. The Shareholder has agreed to enter into this Agreement to evidence certain
respective rights and obligations in respect of certain matters pertaining to
the voting and disposition of voting shares of the Company;
FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1- DEFINITIONS
(a) "Board" means the board of directors of the Company;
(b) "Meeting" means a meeting of the shareholders of the Company duly
called in accordance with the terms of the Business Corporations Act
(Yukon);
<PAGE>
- 2 -
(c) "Slate" means the slate of directors proposed by the Chief Executive
Officer of the Company for election to the Board.
SECTION 2- INTERPRETATION
2.1 GENDER/NUMBERS. Words importing the singular number only shall include the
plural and vice versa, and words importing the use of any gender shall include
both genders.
2.2 HEADINGS. The article and section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
2.3 PROPER LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the Province of British Columbia and the federal
laws of Canada applicable therein.
SECTION 3 - EXERCISE OF VOTING POWER
3.1 EXERCISE OF VOTING POWER. Until termination of this Agreement under section
5.1, at any Meeting called for the purpose of electing directors of the Company,
the Shareholder shall vote or cause to be voted all voting shares of the Company
owned or controlled by it on the date of such meeting in favour of the election
of the Slate.
3.2 NOMINATIONS. If, in connection with any Meeting called for the purpose of
electing directors of the Company, management of the Company fails to nominate a
Slate, the Shareholder shall be entitled to nominate and vote for individuals as
it so chooses.
SECTION 4 - SALES OF SHARES
4.1 RESTRICTED SALES. The Shareholder will, as a condition of a sale of any
shares of the Company held by it, require the purchaser to agree to be bound by
the terms of this
<PAGE>
- 3 -
Agreement provided that this condition will not apply to sales in the open
market made through the facilities of The Toronto Stock Exchange or any other
stock exchange or electronic trading facility on which the Company's shares are
listed or quoted for trading.
4.2 TAKE-OVER BIDS. If a take-over bid or other offer is made generally to
shareholders of the Company by an arm's length third party for all or a portion
of the common shares of the Company, the Shareholder will be free to tender to
such bid or offer any common shares owned by it and shall not be required. to
comply with the selling restrictions contained in section 4.1.
SECTION 5 - TERMINATION
5.1 TERMINATION. This Agreement shall terminate on July 19, 1998.
SECTION 6- MISCELLANEOUS
6.1 AMENDMENT. The provisions of this Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated except by a written
instrument signed by all the parties hereto or their respective successors and
assigns.
6.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, all
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
6.3 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to be for the
benefit of and shall not be enforceable by any person not a party hereto,
including, without limitation, any shareholders of the Company not parties
hereto.
6.4 SEVERABILITY. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision
<PAGE>
- 4 -
of this Agreement is held to be prohibited by or invalid under applicable law,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
6.5 COUNTERPARTS. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall constitute an original, but all of which taken
together shall constitute one and the same Agreement.
The parties have executed this Agreement as of the day and year first above
written.
SEVEN SEAS PETROLEUM INC.
per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
HAZEL VENTURES INC.
per: /s/ S. GIBSON
Authorized Signatory
<PAGE>
SCHEDULE "G"
SEVEN SEAS PETROLEUM INC.
OUTSTANDING OPTIONS AND WARRANTS
1. 3,000,000 common shares have been authorized for issuance pursuant to the
SSPI Amended 1996 Stock Option Plan. To date 1,164,667 options have been
granted under the plan of which 1,099,667 remain outstanding with terms as
follows:
Number of Options Exercise Price (U.S.) EXPIRY DATE
----------------- --------------------- -----------
400,000 $ 18.75 November 26, 2001
390,000 $ 7.125 July 23, 2001
33,000 $ 0.75 June 1, 2000
75,000 $ 0.75 May 1, 2000
151,667 $ 0.75 March 22, 2000
2. 250,000 common shares have been authorized for issuance upon exercise of
250,000 Class B share purchase warrants having an exercise price of
U.S.$18.50, said warrants expiring October 15, 1997.
3. 1,000,000 common shares have been authorized for issuance upon exercise of
1,000,000 Class A share purchase warrants having an exercise price of
U.S.$3.50, said warrants expiring March 14, 1997.
PLEDGE AGREEMENT
THIS AGREEMENT dated for reference the 5th day of March, 1997.
AMONG:
HAZEL VENTURES LTD., a company incorporated under the laws of the
British Virgin Islands with registered offices at Tropic Isle
Building, Wickhams Cay, Road Town, Tortola, British Virgin Islands
(hereinafter called the "Hazel Ventures")
OF THE FIRST PART
AND:
SEVEN SEAS PETROLEUM INC., a company continued under the laws of the
Yukon Territory with registered offices at 3081 Third Avenue,
Whitehorse, Yukon Territory, Canada V1A 4Z7
(hereinafter called "SSPI")
OF THE SECOND PART
AND:
SEVEN SEAS PETROLEUM COLOMBIA INC., a company incorporated under the
laws of the Cayman Islands with a business address at 1900 Post Oak
Boulevard, Suite 960, Houston, Texas, 77056, in the United States of
America
(hereinafter called "SSPC")
OF THE THIRD PART
AND:
INTEGRO TRUST (BVI LIMITED), a company incorporated under the laws
of the British Virgin Islands with a business address at Tropic Isle
Building, Wickhams Cay, Road Town, Tortola, British Virgin Islands
(hereinafter called the "Agent")
OF THE FOURTH PART
<PAGE>
- 2 -
WHEREAS:
A. SSPI, SSPC and Hazel Ventures have entered into a share purchase agreement
dated for reference February 14, 1997 (the "Share Purchase Agreement"), whereby
SSPI has agreed to acquire all the issued and outstanding shares of Petrolinson
S.A. ("Petrolinson") in consideration of the issuance to Hazel Ventures, as
vendor, of one million common shares in the capital of SSPI (the "SSPI Shares");
B. Under the terms of the Share Purchase Agreement, Hazel Ventures has agreed to
provide certain indemnities (the "Indemnities") to SSPI and SSPC and as security
therefor has agreed to pledge the SSPI Shares; and
C. The Agent has agreed to undertake and perform its duties according to the
terms and conditions hereof.
NOW THEREFORE THIS AGREEMSNT WITNESSES that in consideration of the
premises and mutual covenants and agreements herein contained, and for good and
other valuable consideration, the parties hereby agree as follows:
1. In this Agreement, including the schedules hereto, except as otherwise
expressly provided:
(a) "Agreement" means this agreement, including the preamble hereto, as
it may from time to time be supplemented or amended;
(b) "Association Contracts" shall have the meaning assigned thereto in
the Share Purchase Agreement;
(c) "Certificates" means the share certificate or certificates
representing the SSPI Shares;
(d) "Closing Date" shall have the meaning assigned thereto in the Share
Purchase Agreement;
(e) "Pledged Assets" means: (i) the SSPI Shares delivered to the Agent
hereunder and the accompanying Powers, (ii) the balance of funds, if
any, in the Escrow Account and all interest earned thereon, and
(iii) any other property which may be substituted therefor;
(f) "Account" shall have the meaning assigned thereto in Section 3;
(g) "Release Date" shall have the meaning assigned thereto in Section 4;
<PAGE>
- 3 -
(h) "Market Price" means the average closing price of SSPI's listed
common shares on The Toronto Stock Exchange on the ten trading days
immediately preceding the time for determination of such Market
Price;
(i) "Petrolinson" shall have the meaning assigned thereto in the
preamble to this Agreement;
(j) "Powers" shall have the meaning assigned thereto in Section 2;
(k) "SSPI Shares" shall have the meaning assigned thereto in the
preamble to this Agreement;
(1) all references in this Agreement to a designated "Section" or other
subdivision or to a Schedule are to the designated Section or other
subdivision of, or Schedule to, this Agreement;
(m) the words "herein", "thereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any
particular Section or other subdivision; and
(n) the singular of any term includes the plural, and vice versa; the
use of any term is equally applicable to any gender and, where
applicable, a body corporate; the word "or" is not exclusive and the
word "including" is not limiting (whether or not non-limiting
language, such as "without limitation" or "but not limited to" or
words of similar import, is used with reference thereto).
2. On the Closing Date, as security for the Indemnities, Hazel Ventures shall
cause to be delivered to the Agent Certificates representing the SSPI Shares,
together with undated irrevocable stock transfer powers (the "Powers") duly
executed in blank by Hazel Ventures.
3. All dividends declared and distributed in respect of the SSPI Shares shall be
deposited with the Agent and held pursuant to the terms hereof. The Agent agrees
to hold and dispose of the Certificates and the Powers and any funds which may
be delivered to the Agent as contemplated in this Agreement and to establish and
maintain a separate, interest-bearing trust account with a reputable bank for
any such funds (the "Account"). The Agent's possession of the Pledged Assets
shall be considered possession as agent for SSPI and SSPC for purposes of
continuing the perfection of SSPI and SSPC's security interest therein (although
the Agent's responsibilities and liability for acting in such capacity shall be
limited as provided herein).
4. The Agent shall hold the Pledged Assets until the earlier of the date that
Petrolinson's 6% participating interest in the Association Contracts is validly
transferred to SSPC or such other subsidiary of SSPI as SSPI shall elect, and
120 days after the Closing Date (such earlier date, the "Release Date");
provided, however, that in the event that the said transfer of Petrolinson's 6%
participating interest in the Association Contracts is delayed beyond 120 days
<PAGE>
- 4 -
for reasons beyond SSPI's control, the 120-day period referred to herein shall
be extended to 150 days after the Closing Date and further provided that, in
circumstances where an action or claim is asserted which could give rise to a
liability of Hazel Ventures under the Share Purchase Agreement during the period
in which the Agent is otherwise obligated to hold the Pledged Assets hereunder,
the Agent shall continue to hold the Pledged Assets until such time as the
action or claim is quantified by agreement between SSPI and Hazel Ventures, in
which case the Agent shall continue to hold only that number of the SSPI Shares
as have a Market Price equal to the quantified amount, said SSPI Shares to be
held until such time as such action or claim is settled or becomes a liability
certain of the Vendor under the Share Purchase Agreement, in which case the
provisions of Section 5 herein shall apply in respect of such liability. Upon
delivery to the Agent of notice in writing signed by an authorized
representative of SSPI and an authorized representative of Hazel Ventures that
the Release Date has occurred, the Agent shall deliver the Pledged Assets to
Hazel Ventures, and in this regard SSPI covenants and agrees that it will act
promptly in furnishing such notice to the Agent upon occurrence of the Release
Date.
5. In the event Hazel Ventures shall become liable or obligated to SSPI and/or
SSPC under the Share Purchase Agreement, Hazel Ventures may, at its option, pay
the amount of such liability to SSPI and/or SSPC, as the case may be. In the
event Hazel Ventures does not pay the said amount with ten (10) days after the
liability has become fixed under the procedures set forth in Section 7 and
receipt by Hazel Ventures of written notice from SSPI and/or SSPC specifying the
amount due and the facts giving rise to such liability of Hazel Ventures, SSPI
and/or SSPC, as the case may be, may look to the Pledged Assets for discharge of
such liability of Hazel Ventures without, however, in any way releasing or
satisfying any liability of Hazel Ventures under the Share Purchase Agreement
except to the extent that such liability shall have been satisfied by the
Pledged Assets.
6. Subject to the limitations set forth in Section 5, SSPI and/or SSPC, as the
case may be, shall be entitled to receive Pledged Assets to the extent necessary
to satisfy any and all liabilities of Hazel Ventures under the Share Purchase
Agreement. Without limiting the generality of the foregoing, SSPI and/or SSPC,
as the case may be, shall be entitled to claim SSPI Shares having an aggregate
Market Price sufficient to satisfy the liabilities of Hazel Ventures under the
Share Purchase Agreement.
7. Each claim by SSPI and/or SSPC for indemnification under the Share Purchase
Agreement shall be made by notice to the Agent with a copy of such notice to
Hazel Ventures, stating the nature and amount of the claim. Any claim based upon
a final judgment, decree or award of a court of competent jurisdiction requiring
the payment of money by SSPI, SSPC or any of their respective officers or
directors, shall be conclusive as to the amount of such claim, provided a
certified copy of such judgment, decree or award. Any claim shall be settled in
all respects thirty (30) days after receipt by the Agent of notice thereof,
unless within such period the Agent and SSPI and/or SSPC, as the case may be,
shall have received from Hazel Ventures written notice questioning the propriety
of the claim, in which case such claim, unless settled by mutual agreement
between SSPI and Hazel Ventures, shall be promptly referred by the Agent to a
single arbitrator to be mutually agreed to between SSPI and Hazel Ventures,
whose decision shall be conclusive and binding upon the parties hereto.
<PAGE>
- 5 -
8. The Agent shall not be liable for any loss arising out of any act or omission
to act, or for any error in judgement, in the execution of the agency created by
this Agreement, except in the case of gross negligence or wilful misconduct of
the Agent or its employees.
9. The Agent shall not be required to give any bond or other security for the
faithful or due performance of its duties under the agency created by this
Agreement.
10. The Agent shall be entitled to charge and be paid all usual or proper
professional and other charges for any business or act done in the execution of
the agency created by this Agreement.
11. SSPI and Hazel Ventures agree, severally and jointly, to hold the Agent
harmless and to indemnify the Agent against any loss, liability, expense
(including reasonable legal fees and expenses), claim or demand arising out of
or in connection with the performance of its obligations in accordance with the
provisions of this Agreement, except for gross negligence or wilful misconduct
of the Agent or its employees. The foregoing indemnities in this Section shall
survive the resignation or removal of the Agent or the termination of this
Agreement.
12. The Agent is not a party to, and is not bound by, any provisions which may
be evidenced by, or arise out of, any agreement other than as therein set forth
under the express provisions of this Agreement.
13. The Agent acts hereunder as a trustee only and is not responsible or liable
in any manner whatsoever for the sufficiency, correctness, genuineness or
validity of the documents deposited with it, or for the form or execution of any
documents, or for the identity or authority or right of any person or party
executing them.
14. The Agent shall be protected in acting upon any written notice, request,
waiver, consent, receipt or other paper or document apparently signed by the
proper person or party.
15. In the event of any disagreement between any of the parties to this
Agreement, or between them or any of them and any other person, resulting in
demands or adverse claims being made in connection with or for any asset
involved herein or affected hereby, the Agent shall be entitled, at its
discretion, to refuse to comply with any demands or claims on it, as long as
such disagreement shall continue, and in so refusing the Agent may make no
delivery or other disposition of any asset involved herein or affected hereby,
and in so doing, the Agent shall not be or become liable in any way or to any
person or party for its failure or refusal to comply with such conflicting
demands or adverse claims, and it shall be entitled to continue so to refrain
from acting and so to refuse to act until the rights of such persons or parties
shall have been finalLy adjudicated in a court assuming and having jurisdiction
on the asset involved herein or affected hereby, or all differences shall have
been adjusted by agreement and the Agent shall have been notified thereof in
writing signed by all persons and parties interested.
16. The existence of this Agreement and the terms and conditions hereof are
intended to be confidential and are not to be discussed with or disclosed to any
third party, except:
<PAGE>
- 6 -
(a) with the express prior written consent of the other parties hereto;
(b) as may be required or appropriate in response to any summons,
subpoena or discovery order or to comply with any applicable law,
order, regulation or ruling;
(c) as SSPI and Hazel Ventures, or their designees, reasonably deems
appropriate in order to conduct due diligence, title or other
investigation relating to the transactions contemplated in the Share
Purchase Agreement; or
(d) as may be required by SSPI to be disclosed in a press release
pursuant to applicable securities laws, or the policies, rules or
regulations of The Toronto Stock Exchange or any other stock
exchange on which SSPI's shares are listed.
17. This Agreement may be executed in any number of facsimile counterparts, each
of which shall be deemed to be an original and all of which together shall be
deemed to be one and the same document.
18. Time is of the essence of this Agreement.
19. The parties will execute and deliver such further documents and instruments
and do all such acts and things as may be reasonably necessary or requisite to
carry out the full intent and meaning of this Agreement and to effect the
transactions contemplated by this Agreement.
20. This Agreement will enure to the benefit of and be binding upon the parties
hereto and their respective heirs, executors, administrators, successors and
permitted assigns.
21. Any notice required or permitted to be given under this Agreement will be
validly given if in writing and delivered or sent by pre-paid registered mail,
to the following addresses:
(a) If to Hazel Ventures:
HAZEL VENTURES LTD.
Tropic Isle Building
Williams Cay
Road Town, Tortola
British Virgin Islands
Attention: Selena Gibson
Facsimile Number: 809 492 2704
<PAGE>
- 7 -
(b) If to SSPI:
SEVEN SEAS PETROLEUM INC.
Suite 960 - 1900 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Timothy Stephens
Facsimile Number: 713-621-9770
(c) If to the Agent:
INTEGRO TRUST (BVI LIMITED)
Tropic Isle Building
Williams Cay
Road Town, Tortola
British Virgin, Islands
Attention: Selena Gibson
Facsimile Number: 809 492 2704
or to such other address as any party may specify by notice in writing to the
other parties.
22. Any notice delivered on a business day pursuant to Section 21 will be deemed
conclusively to have been effectively given on the date notice was delivered.
23. Any notice sent by prepaid registered mail pursuant to Section 21 will be
deemed conclusively to have been effectively given on the third business day
after posting; but if at the time of posting or between the time of posting and
the third business day thereafter there is a strike, lockout or other labour
disturbance affecting postal service, then the notice will not be effectively
given until actually delivered.
24. This Agreement will be governed by and construed in accordance with the laws
of the Province of British Columbia and the laws of Canada applicable therein
and the parties will attorn to the Courts thereof.
IN WITNESS WHEREOF the parties hereto have executed these presents
the day and year first above written.
HAZEL VENTURES LTD.
Per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
<PAGE>
- 8 -
SEVEN SEAS PETROLEUM COLOMBIA INC.
Per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
SEVEN SEAS PETROLEUM INC.
Per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
INTEGRO TRUST (BVI LIMITED)
Per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
SHAREHOLDERS VOTING SUPPORT AGREEMENT
This Agreement is made as of March 5,1997
BETWEEN:
SEVEN SEAS PETROLEUM INC.
(herein called the "Company")
OF THE FIRST PART
AND:
HAZEL VENTURES LTD.,
(herein called the "Shareholder")
OF THE SECOND PART
WHEREAS:
A. The Shareholder has agreed to enter into this Agreement to evidence certain
respective rights and obligations in respect of certain matters pertaining to
the voting and disposition of voting shares of the Company;
FOR VALUE RECEIVED, the parties agree as follows:
SECIION 1 - DEFINITONS
(a) "Board" means the board of directors of the Company;
(b) "Meeting" means a meeting of the shareholders of the Company duly
called in accordance with the terms of the BUSINESS CORPORATIONS ACT
(Yukon);
<PAGE>
- 2 -
(c) "Slate" means the slate of directors proposed by the Chief Executive
Officer of the Company for election to the Board.
SECTION 2 - INTERPRETATION
2.1 GENDER/NUMBERS. Words importing the singular number only shall include the
plural and vice versa, and words importing the use of any gender shall include
both genders.
2.2 HEADINGS. The article and section headings in this Agreement are included
herein for convenience of reference only and shall not constitute a part of this
Agreement for any other purpose.
2.3 PROPER LAW. This Agreement shall be governed by and interpreted in
accordance with the laws of the Province of British Columbia and the federal
laws of Canada applicable therein.
SECTION 3 - EXERCISE OF VOTING POWER
3.1 EXERCISE OF VOTING POWER. Until termination of this Agreement under section
5.1, at any Meeting called for the purpose of electing directors of the Company,
the Shareholder shall vote or cause to be voted all voting shares of the Company
owned or controlled by it on the date of such meeting in favour of the election
of the Slate.
3.2 NOMINATIONS. If, in connection with any Meeting called for the purpose of
electing directors of the Company, management of the Company fails to nominate a
Slate, the Shareholder shall be entitled to nominate and vote for individuals as
it so chooses.
SECTION 4 - SALES OF SHARES
4.1 RESTRICTED SALES. The Shareholder will, as a condition of a sale of any
shares of the Company held by it, require the purchaser to agree to be bound by
the terms of this
<PAGE>
- 3 -
Agreement provided that this condition will not apply to sales in the open
market made through the facilities of The Toronto Stock Exchange or any other
stock exchange or electronic trading facility on which the Company's shares are
listed or quoted for trading.
4.2 TAKE-OVER BIDS. If a take-over bid or other offer is made generally to
shareholders of the Company by an arm's length third party for all or a portion
of the common shares of the Company, the Shareholder will be free to tender to
such bid or offer any common shares owned by it and shall not be required. to
comply with the selling restrictions contained in section 4.1.
SECTION 5 - TERMINATION
5.1 TERMINATION. This Agreement shall terminate on July 19, 1998.
SECTION 6- MISCELLANEOUS
6.1 AMENDMENT. The provisions of this Agreement may not be amended, changed,
supplemented, waived or otherwise modified or terminated except by a written
instrument signed by all the parties hereto or their respective successors and
assigns.
6.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided herein, all
covenants and agreements contained in this Agreement by or on behalf of any of
the parties hereto will bind and inure to the benefit of the respective
successors and assigns of the parties hereto whether so expressed or not.
6.3 NO THIRD PARTY BENEFICIARIES. This Agreement is not intended to be for the
benefit of and shall not be enforceable by any person not a party hereto,
including, without limitation, any shareholders of the Company not parties
hereto.
6.4 SEVERABILITY. Whenever possible, each provision of this Agreement will be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision
<PAGE>
- 4 -
of this Agreement is held to be prohibited by or invalid under applicable law,
such provision will be ineffective only to the extent of such prohibition or
invalidity, without invalidating the remainder of this Agreement.
6.5 COUNTERPARTS. This Agreement may be executed simultaneously in two or more
counterparts, each of which shall constitute an original, but all of which taken
together shall constitute one and the same Agreement.
The parties have executed this Agreement as of the day and year first above
written.
SEVEN SEAS PETROLEUM INC.
per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
HAZEL VENTURES INC.
per: /s/ SIGNATURE ILLEGIBLE
Authorized Signatory
------------------------------------------------------------
PURCHASE WARRANT INDENTURE
Made as of August 7, 1997
Between
SEVEN SEAS PETROLEUM INC.
as Company
and
MONTREAL TRUST COMPANY OF CANADA
as Trustee
------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
RECITALS...............................................................1
SECTION 1 -- INTERPRETATION
1.1 Definitions......................................................2
(1) Agent......................................................2
(2) Applicable Legislation.....................................2
(3) Business Day...............................................2
(4) Certificate of the Company.................................2
(5) Closing Date...............................................2
(6) Common Shares..............................................2
(7) Company....................................................2
(8) Counsel....................................................2
(9) Current Market Price.......................................2
(10) Debentures.................................................3
(11) Exercise Date..............................................3
(12) Exercise Price.............................................3
(13) Expiry Date................................................3
(14) GAAP.......................................................3
(15) Indenture..................................................3
(16) Instrument Indenture.......................................3
(17) Issue Date.................................................3
(18) Office of the Trustee......................................3
(19) Person.....................................................3
(20) Preliminary Prospectus.....................................3
(21) Prospectus.................................................3
(22) Purchase Warrant Certificate...............................4
(23) Purchase Warrants..........................................4
(24) Qualifying Jurisdictions...................................4
(25) this Indenture.............................................4
(26) Time of Expiry ............................................4
(27) Trading Day................................................4
(28) Trustee....................................................4
(29) Unit.......................................................4
(30) Warrantholders.............................................4
(31) Warrantholders' Resolution.................................4
(32) Warrant Register...........................................4
1.2 Outstanding Purchase Warrants....................................4
1.3 Currency.........................................................5
1.4 Complete Agreement...............................................5
1.5 Number and Gender................................................5
1.6 Sections; Headings...............................................5
1.7 Governing Law....................................................5
(i)
<PAGE>
1.8 Time of Essence..................................................5
SECTION 2 -- ISSUE OF PURCHASE WARRANTS
2.1 Terms of Purchase Warrants.......................................5
2.2 Warrantholder not a Shareholder..................................5
2.3 Signature of Purchase Warrant Certificates.......................6
2.4 Certification....................................................6
2.5 Issue of Purchase Warrant Certificates...........................6
2.6 Lost Purchase Warrant Certificate................................6
2.7 Registration of Purchase Warrants................................7
2.8 Exchange of Purchase Warrant Certificates........................7
2.9 Charges for Exchange.............................................7
2.10 Transfer and Ownership of Purchase Warrants......................7
SECTION 3 -- RIGHTS AND COVENANTS OF THE COMPANY
3.1 Optional Purchases by the Company................................8
3.2 General..........................................................8
3.3 Trustee's Remuneration and Expenses..............................9
SECTION 4 -- EXERCISE OF PURCHASE WARRANTS
4.1 Method of Exercise of Purchase Warrants..........................9
4.2 Effect of Exercise of Purchase Warrants.........................10
4.3 Partial Exercise of Purchase Warrants. ........................11
4.4 Destruction of Purchase Warrant Certificates....................11
4.5 Accounting and Recording........................................11
4.6 Postponement of Delivery of Common Share Certificates...........11
4.7 Securities Restrictions.........................................12
4.8 No Fractional Shares............................................12
4.9 Exercise Price..................................................12
4.10 Adjustment of Exercise Price/Number of Common Shares............12
4.11 No Adjustment for Stock Options.................................16
4.12 Proceedings Prior to any Action Requiring Adjustment............16
4.13 Certificate as to Adjustment....................................17
4.14 Notice of Special Matters.......................................17
4.15 No Action after Notice..........................................17
4.16 Protection of Trustee...........................................17
4.17 Reservation of Shares...........................................18
SECTION 5 -- ENFORCEMENT
5.1 Suits by Warrantholders.........................................18
5.2 Immunity of Shareholders, etc...................................18
5.3 Limitation of Liability.........................................18
5.4 Waiver of Default...............................................18
(ii)
<PAGE>
SECTION 6 -- CONCERNING THE WARRANTHOLDERS
6.1 Meetings........................................................19
6.2 Convening Meetings..............................................19
6.3 Place of Meeting................................................19
6.4 Notice..........................................................19
6.5 Persons Entitled to Attend......................................19
6.6 Quorum..........................................................19
6.7 Chairman........................................................19
6.8 Adjourned Meeting...............................................19
6.9 Votes...........................................................20
6.10 Powers of Warrantholders........................................20
6.11 Minutes of Meetings.............................................20
6.12 Written Resolutions.............................................21
6.13 Binding Effect..................................................21
SECTION 7 -- SUPPLEMENTAL INDENTURES
7.1 General.........................................................21
SECTION 8 -- SUCCESSOR COMPANIES
8.1 Amalgamation, Etc...............................................22
8.2 Trustee to Consent..............................................22
8.3 Substitutions of Successor Company..............................22
SECTION 9 -- CONCERNING THE TRUSTEE
9.1 Indemnity.......................................................22
9.2 Duties of Trustee...............................................22
9.3 Action by Trustee...............................................23
9.4 Certificate of the Company......................................23
9.5 Trustee May Employ Experts or Agents............................23
9.6 Resignation of Trustee..........................................23
9.7 Indenture Legislation...........................................23
9.8 Money Held and Deposited........................................23
9.9 Notice..........................................................24
9.10 Use of Proceeds.................................................24
9.11 No Inquiries....................................................24
9.12 Trustee Not Required To Give Security...........................24
9.13 No Conflict Of Interest.........................................24
9.14 Trustee Not Ordinarily Bound....................................24
9.15 Trustee May Deal In Purchase Warrants...........................25
SECTION 10 -- SATISFACTION AND DISCHARGE
10.1 General.........................................................25
(iii)
<PAGE>
SECTION 11 -- NOTICES
11.1 Notice to Company...............................................25
11.2 Notice to the Warrantholders. ..................................26
11.3 Notice to Trustee...............................................27
SECTION 12 -- ACCEPTANCE OF TRUST BY TRUSTEE
12.1 General.........................................................27
SECTION 13 -- FURTHER ASSURANCE
13.1 Further Assurances..............................................27
(iv)
<PAGE>
- 1 -
PURCHASE WARRANT INDENTURE
This Indenture is made as of August 7, 1997, between
SEVEN SEAS PETROLEUM INC., a company continued under
the laws of the Yukon Territory, having a head office
in the City of Houston, Texas as the "Company"
and
MONTREAL TRUST COMPANY OF CANADA, a trust company
incorporated under the laws of Canada and authorized to
carry on trust business in the Provinces of Alberta and
Ontario, having a head office in the City of Toronto,
Ontario as the "Trustee"
RECITALS
A. The Company is duly continued under the laws of the Yukon Territory.
B. The Company has entered into the Instrument Indenture (as defined below)
between the Company and the Trustee.
C. The Instrument Indenture provides for the issuance of notes which are
exchangeable for convertible debentures, which are convertible, subject to
certain terms and conditions and at the option of the holders thereof or the
Company, for Units, each consisting of one Common Share of the Company and
one-half (1/2) of one (1) Purchase Warrant.
D. The Company is duly authorized to create and issue the Purchase Warrants to
be constituted in the manner hereinafter provided.
E. One Purchase Warrant shall, subject to adjustment, entitle the holder thereof
to acquire one Common Share upon payment of the Exercise Price, upon the terms
and conditions hereinafter provided.
F. All things necessary have been done and performed so as to make the Purchase
Warrants, when certified by the Trustee and issued as provided herein, legal and
valid obligations of the Company with the benefits and subject to the terms of
this Indenture.
<PAGE>
- 2 -
G. The foregoing recitals are made as representations and statements of fact by
the Company and not by the Trustee.
FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1 -- INTERPRETATION
1.1 DEFINITIONS. In this Indenture, unless the context otherwise requires:
(1) AGENT means Yorkton Securities Inc. and its successors.
(2) APPLICABLE LEGISLATION means the provisions, if any, for the time being, of
any statute of any Qualifying Jurisdiction, and of the regulations under any
such statute, relating to trust indentures and to the rights, duties and
obligations of trustees under trust indentures and of corporations issuing their
obligations under trust indentures, to the extent that any such provisions are
in force and applicable to this Indenture.
(3) BUSINESS DAY means a day, other than a Saturday or a Sunday, on which the
Office of the Trustee is open for business.
(4) CERTIFICATE OF THE COMPANY means a written certificate signed in the name of
the Company by any duly authorized officer of the Company.
(5) CLOSING DATE means August 7, 1997.
(6) COMMON SHARES mean the Common Shares of the Company as constituted at the
date hereof.
(7) COMPANY means Seven Seas Petroleum Inc. and every successor corporation
thereto which shall have complied with the provisions of Section 8.
(8) COUNSEL means any barrister or solicitor or firm of barristers and
solicitors retained by the Trustee, or retained by the Company and approved by
the Trustee.
(9) CURRENT MARKET PRICE means at any date the weighted average trading price at
which the Common Shares have traded on The Toronto Stock Exchange or, if the
Company's Common Shares are not then traded on The Toronto Stock Exchange, such
other North American stock exchange or market (including NASDAQ) on which the
Common Shares are traded, during the twenty (20) consecutive Trading Days ending
three (3) Trading Days before such date. In the event the foregoing cannot be
determined, then the Current Market Price shall be established by the Company's
auditors.
<PAGE>
- 3 -
(10) DEBENTURES means the debentures to be issued in exchange for notes in
accordance with the Instrument Indenture.
(11) EXERCISE DATE means, with respect to any Purchase Warrant, the date on
which the Purchase Warrant Certificate representing such Purchase Warrant is
surrendered for exercise together with full payment of the Exercise Price, in
accordance with Section 4.
(12) EXERCISE PRICE means at any time the applicable price at which one Common
Share may be acquired on the exercise of a Purchase Warrant under Section 4.9.
(13) EXPIRY DATE means August 7, 1998 or, if such day is not a Business Day, the
Expiry Date shall be the next following Business Day.
(14) GAAP means generally accepted accounting principles in Canada consistently
applied as of the Closing Date.
(15) INDENTURE means this purchase warrant indenture as amended, restated,
supplemented or replaced from time to time.
(16) INSTRUMENT INDENTURE means the indenture made as of August 7, 1997 between
the Company and the Trustee, under which the Company issued notes exchangeable
for the Debentures.
(17) ISSUE DATE means the date upon which the Purchase Warrants are issued.
(18) OFFICE OF THE TRUSTEE means the principal office of the Trustee at Calgary,
Alberta, Canada.
(19) PERSON means an individual or corporation, a partnership or joint venture,
a trustee or trust, a government or agency thereof, an unincorporated
organization or entity; and pronouns have a similarly extended meaning.
(20) PRELIMINARY PROSPECTUS means a preliminary prospectus filed with the
securities commissions in the Qualifying Jurisdictions qualifying the
distribution of the Debentures upon exercise of the notes issued under the
Instrument Indenture.
(21) PROSPECTUS means a (final) prospectus filed with the securities commissions
in the Qualifying Jurisdictions qualifying the distribution of the Debentures
upon exercise of the notes issued under the Instrument Indenture.
(22) PURCHASE WARRANT CERTIFICATE means a certificate issued on or after the
Issue Date to evidence Purchase Warrants.
<PAGE>
- 4 -
(23) PURCHASE WARRANTS means the purchase warrants referred to in Section 2
created and authorized by and issuable under this Indenture, each entitling the
holder thereof, upon payment of the Exercise Price and upon tendering one (1)
whole Purchase Warrant, to purchase on or before the Time of Expiry (before any
adjustment under Section 4.10) one (1) Common Share.
(24) QUALIFYING JURISDICTIONS means the provinces of Ontario, British Columbia,
Alberta, Manitoba and Quebec and such other jurisdictions as the Agent may
notify the Company on not less than three (3) Business Days prior to the date of
filing the Preliminary Prospectus.
(25) THIS INDENTURE, HEREIN, HEREOF, HERETO, HEREUNDER or similar expressions as
used in this Indenture shall mean this Indenture (including the schedules
hereto) and any and every deed supplemental hereto and not any particular
Section or Subsection of this Indenture.
(26) TIME OF EXPIRY means 5:00 p.m. (Calgary time) on the Expiry Date.
(27) TRADING DAY means any day on which The Toronto Stock Exchange is open for
trading.
(28) TRUSTEE means Montreal Trust Company of Canada and its successors as
trustee hereunder for the time being of the trusts hereby created.
(29) UNIT means one (1) Common Share and one-half (1/2) of one (1) Purchase
Warrant.
(30) WARRANTHOLDERS means the several persons who are entered from time to time
as the holders of Purchase Warrants in the warrant register.
(31) WARRANTHOLDERS' RESOLUTION shall have the meaning attributed thereto in
Section 6.10.
(32) WARRANT REGISTER means the register maintained at the Office of the Trustee
by the Trustee for Purchase Warrants.
1.2 OUTSTANDING PURCHASE WARRANTS. Every Purchase Warrant issued by the Company
and certified and delivered by the Trustee hereunder shall be deemed to be
outstanding until it shall be exercised for the purchase of Common Shares or
until the passing of the Time of Expiry, whereupon such Purchase Warrant shall
automatically expire and shall have no further effect and where a new Purchase
Warrant Certificate has been issued in lieu of or in substitution for a Purchase
Warrant Certificate which has been lost, stolen, mutilated, destroyed or
defaced, only one of such Purchase Warrant Certificates shall be counted for the
purpose of determining the aggregate number of Purchase Warrants outstanding.
1.3 CURRENCY. All amounts of money are expressed in lawful money of the United
States of America.
<PAGE>
- 5 -
1.4 COMPLETE AGREEMENT. This Agreement constitutes the complete agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, commitments, understandings or inducements, whether oral or
written, expressed or implied.
1.5 NUMBER AND GENDER. Words importing the singular number only shall include
the plural and vice versa and words importing the masculine gender shall include
the feminine and neuter genders.
1.6 SECTIONS; HEADINGS. The division of this Indenture into Sections, paragraphs
and subparagraphs, the provision of a table of contents and the insertion of
headings is for convenience of reference only and shall not affect its
interpretation.
1.7 GOVERNING LAW. This Indenture, the Purchase Warrants and the Purchase
Warrant Certificates shall be governed by, interpreted in accordance with the
laws of the Province of Ontario and the laws of Canada applicable therein.
1.8 TIME OF ESSENCE. Time is of the essence of this Indenture.
SECTION 2 -- ISSUE OF PURCHASE WARRANTS
2.1 TERMS OF PURCHASE WARRANTS. The Purchase Warrant Certificates shall be
designated as "Common Share Purchase Warrants" of the Company, and shall be
issued in the form set forth in Schedule 2.1, with such additions, deletions and
alterations as the Trustee shall approve. The Purchase Warrants shall be issued
from time to time upon the holders of Debentures duly converting the Debentures
pursuant to the Instrument Indenture. All Purchase Warrants and Purchase Warrant
Certificates shall be registered and certified by the Trustee and dated as of
the day on which they are issued and may be typewritten, mimeographed, printed
or lithographed and shall be numbered consecutively. Each Purchase Warrant
authorized to be issued hereunder shall entitle the holder thereof, upon
exercise, together with payment of the Exercise Price, to acquire one (1) Common
Share, subject to adjustment in accordance with Section 4.10, at any time after
the Issue Date and until the Time of Expiry. The Exercise Price and the number
of Common Shares which may be acquired pursuant to the exercise of the Purchase
Warrants shall be adjusted in the events and in the manner specified in Section
4.10.
2.2 WARRANTHOLDER NOT A SHAREHOLDER. Nothing in this Indenture or in the holding
of a Purchase Warrant or Purchase Warrant Certificate or otherwise, shall, in
itself, confer or be construed as conferring upon a Warrantholder any right,
title or interest whatsoever as a shareholder of the Company, including, but not
limited to, the right to vote at, to receive notice of, or to attend, meetings
of shareholders or any other proceedings of the Company, or the right to receive
dividends and other distributions.
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2.3 SIGNATURE OF PURCHASE WARRANT CERTIFICATES. The Purchase Warrant
Certificates shall be executed by any one of the Chairman of the Board, the
President, a Vice-President or the Secretary of the Company and the signature of
any of such officers may be manually applied to the Purchase Warrant
Certificates or may be engraved, lithographed or otherwise mechanically
reproduced in facsimile on the Purchase Warrant Certificates, and in either case
shall bind the Company notwithstanding that the person whose signature is so
applied may not hold such office at the time the Purchase Warrant Certificates
are certified by the Trustee. The Purchase Warrant Certificates shall have the
corporate seal of the Company (or a facsimile reproduction thereof) affixed
thereto.
2.4 CERTIFICATION. No Purchase Warrant Certificate shall be issued or, if
issued, shall be valid until certified by the Trustee by the manual signature of
a duly authorized representative of the Trustee. Certification by the Trustee
does not however constitute any warranty as to the validity or security of the
Purchase Warrant Certificates but only as to their due issuance by the Trustee
pursuant to the Indenture.
2.5 ISSUE OF PURCHASE WARRANT CERTIFICATES.
(1) All Purchase Warrant Certificates issued and outstanding under this
Indenture shall rank PARI PASSU in all respects without priority or
preference of any one Purchase Warrant Certificate over any other
issued and outstanding under this Indenture, whatever may be the
actual date of issue thereof.
(2) Notwithstanding paragraph (1) above, the Warrantholder of each
Purchase Warrant, by acquiring the Purchase Warrant Certificate,
represents to the Company that it:
(a) has full power and capacity under the laws applicable to such
Warrantholder to acquire the Purchase Warrant and such acquisition
of the Purchase Warrant will not violate any provisions of any laws
applicable to such Warrantholder; and
(b) is acquiring the Purchase Warrant as principal, for investment and
not for distribution, redistribution, assignment or resale to
others.
2.6 LOST PURCHASE WARRANT CERTIFICATE. If any outstanding Purchase Warrant
Certificate is lost, stolen, mutilated, destroyed or defaced, the Company shall
execute and deliver and the Trustee shall certify a replacement Purchase Warrant
Certificate representing the same number of Purchase Warrants, upon
indemnification in an amount and subject to terms and conditions satisfactory to
the Company and the Trustee, and upon payment of a reasonable fee. Any such
replacement Purchase Warrant Certificate shall be entitled to the full benefit
hereof and shall rank equally in accordance with its terms with all then
outstanding Purchase Warrant Certificates, whatever the actual date of issue may
be.
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2.7 REGISTRATION OF PURCHASE WARRANTS. The Trustee shall maintain at the Office
of the Trustee a register (the "WARRANT REGISTER") of Warrantholders in which
shall be entered the name and address of the holder of each of the Purchase
Warrant Certificates. Such name shall also be recorded on the Purchase Warrant
Certificate concerned. The Trustee shall also maintain at such location a
register of transfers in which shall be recorded the particulars of all
transfers of Purchase Warrants. The person in whose name any Purchase Warrant
Certificates shall be registered shall be deemed and regarded as the owner and
holder thereof for all purposes of this Indenture.
2.8 EXCHANGE OF PURCHASE WARRANT CERTIFICATES.
(1) One or more Purchase Warrant Certificates representing any number of
Purchase Warrants may, upon compliance with the reasonable
requirements of the Trustee, be exchanged for another Purchase
Warrant Certificate of Purchase Warrant Certificates representing
the same aggregate number of Purchase Warrants as represented under
the Purchase Warrant Certificate or Purchase Warrant Certificates so
exchanged.
(2) Purchase Warrant Certificates may be exchanged only at the Office of
the Trustee or at any other place that is designated by the Company
with the approval of the Trustee. Any Purchase Warrant Certificate
tendered for exchange shall be surrendered and cancelled by the
Trustee.
2.9 CHARGES FOR EXCHANGE. Except as otherwise provided herein, the Trustee may
charge to the holder requesting an exchange a reasonable sum for each new
Purchase Warrant Certificate issued in exchange for a Purchase Warrant
Certificate or Purchase Warrant Certificates, and payment of such charges and
reimbursement of the Trustee or the Company for any and all stamp taxes or
governmental or other charges required to be paid shall be made by such
Warrantholder as a condition precedent to such exchange.
2.10 TRANSFER AND OWNERSHIP OF PURCHASE WARRANTS. The Purchase Warrants may only
be transferred on the Warrant Register by the Warrantholder or its legal
representatives or its attorney duly appointed by an instrument in writing in
form and execution satisfactory to the Trustee upon surrendering to the Trustee
at the Office of the Trustee, the Purchase Warrant Certificate or Purchase
Warrant Certificates representing the Purchase Warrants to be transferred, with
the transfer form thereon in the form set forth in Schedule 2.10 duly completed
and executed, signed by the Warrantholder or by the duly appointed legal
representative thereof or a duly authorized attorney, together with evidence of
authority of any such legal representative or attorney and, if required by the
transfer form, with such signature properly guaranteed, and upon compliance
with:
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(1) the conditions herein;
(2) such reasonable requirements as the Trustee may prescribe; and
(3) all applicable securities legislation and requirements of regulatory
authorities relating to the transferability of the Purchase Warrants
or restrictions thereon;
and such transfer shall be duly noted in the Warrant Register by the Trustee.
Upon compliance with such requirements, the Trustee shall issue to the
transferee a Purchase Warrant Certificate representing the Purchase Warrants
transferred. Such new Purchase Warrant Certificate shall be sent by first class
mail or held for pick up by the transferee in accordance with the instructions
given on the transfer form and, if no such instructions are given, shall be sent
by first class mail to the address of the transferee appearing on the form of
transfer. If less than all the Purchase Warrants represented by a Purchase
Warrant Certificate are transferred, the Trustee shall issue a new Purchase
Warrant Certificate representing those Purchase Warrants not transferred in the
same name as the name appearing on the Warrant Certificate surrendered for
transfer. Such new Purchase Warrant Certificate shall be sent by first class
mail or held for pick up in accordance with instructions given on the transfer
form and, if no instructions are given, shall be sent by first class mail to the
address of the holder of the Purchase Warrants surrendered for transfer
appearing on the Warrant Register.
Neither the Company nor the Trustee shall be bound to take notice of, or to see
to the execution of, any trust whether express, implied or constructive, in
respect of any Purchase Warrant, and may transfer any Purchase Warrant on the
direction of the person registered as the holder thereof whether such person is
named as a trustee or otherwise, as though that person were the beneficial owner
of the Purchase Warrant.
SECTION 3 -- RIGHTS AND COVENANTS OF THE COMPANY
3.1 OPTIONAL PURCHASES BY THE COMPANY. The Company may from time to time
purchase, by private contract or otherwise, any of the Purchase Warrants. Any
such purchase shall be made at the lowest price or prices at which, in the
opinion of the directors, such Purchase Warrants are then obtainable, plus
reasonable costs of purchase, and may be made in such manner, from such persons
and on such other terms as the Company, in its sole discretion, may determine.
Any Purchase Warrant Certificates representing the Purchase Warrants purchased
pursuant to this section shall forthwith be delivered to and cancelled by the
Trustee. No Purchase Warrants shall be issued in replacement thereof.
3.2 GENERAL. The Company covenants with the Trustee as follows:
(1) It will carry on business in accordance with good business practice;
(2) It will keep proper books of account and will record all dealings
and transactions in relation to its business;
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(3) It will observe and perform all of its conditions and covenants
contained in this Indenture or in the Purchase Warrant Certificates;
and
(4) It will at all times, in relation to this Indenture and any action
to be taken hereunder, observe and comply with and be entitled to
the benefits of all Applicable Legislation.
3.3 TRUSTEE'S REMUNERATION AND EXPENSES. The Company covenants that it will pay
to the Trustee from time to time reasonable remuneration for its services
hereunder and will pay or reimburse the Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Trustee
in the administration or execution of the trusts hereby created (including the
reasonable compensation and the disbursements of its Counsel and all other
advisers and assistants not regularly in its employ) both before any default
hereunder and thereafter until all duties of the Trustee hereunder shall be
finally and fully performed, except any such expense, disbursement or advance as
may arise out of or result from the Trustee's negligence, wilful misconduct or
bad faith. The Trustee shall not have any recourse against proceeds of the
offering of Notes or securities or other property held by it pursuant to this
Indenture for the payment of its fees.
SECTION 4 -- EXERCISE OF PURCHASE WARRANTS
4.1 METHOD OF EXERCISE OF PURCHASE WARRANTS.
(1) The holder of any Purchase Warrant may exercise the right conferred on
such holder to acquire Common Shares by surrendering, after the Issue Date
and prior to the Time of Expiry, to the Trustee, the Purchase Warrant
Certificate with a duly completed and executed exercise form, together
with a certified cheque, money order, cash or bank draft, in lawful money
of the United States of America payable to or to the order of the Trustee
at par in Calgary, Alberta, Canada, for the Exercise Price for the Common
Shares subscribed for.
A Purchase Warrant Certificate with the duly completed and executed
exercise form referred to in this subsection shall be deemed to be
surrendered only upon personal delivery thereof or, if sent by mail or
other means of transmission, upon actual receipt thereof at, in each case,
the Office of the Trustee.
(2) Any exercise form referred to in Section 4.1(1) shall be signed by the
Warrantholder or by the duly appointed legal representative thereof or a
duly authorized attorney, with evidence of authority of any such legal
representative or attorney attached thereto, and, if required by the
exercise form, with such signature properly guaranteed, and shall specify:
<PAGE>
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(a) the number of Common Shares which the Warrantholder wishes to
acquire (being not more than those which the holder is entitled to
acquire pursuant to the Purchase Warrant Certificate(s)
surrendered);
(b) the person or persons in whose name or names such Common Shares are
to be registered;
(c) the address or addresses of such person(s); and
(d) the number of Common Shares to be issued to each such person if more
than one is so specified.
If any of the Common Shares subscribed for are to be issued to a person or
persons other than the Warrantholder, each such person shall also complete
and deliver an exercise form in the form attached to the Purchase Warrant
Certificate and the Warrantholder shall pay to the Company or the Trustee
on behalf of the Company, all applicable transfer or similar taxes and the
Company shall not be required to issue or deliver certificates evidencing
Common Shares unless or until such Warrantholder shall have paid to the
Company, or the Trustee on behalf of the Company, the amount of such tax
or shall have established to the satisfaction of the Company that such tax
has been paid or that no tax is due.
4.2 EFFECT OF EXERCISE OF PURCHASE WARRANTS.
(1) Upon compliance by the holder of any Purchase Warrant Certificate with the
provisions of Section 4.1, the Common Shares subscribed for shall be
deemed to have been issued and the person or persons to whom such Common
Shares are to be issued shall be deemed to have become the holder or
holders of record of such Common Shares on the Exercise Date unless the
transfer registers of the Company shall be closed on such date, in which
case the Common Shares subscribed for shall be deemed to have been issued,
and such person or persons deemed to have become the holder or holders of
record of such Common Shares, on the date on which such transfer registers
are reopened.
(2) Within three (3) Business Days after the Exercise Date with respect to a
Purchase Warrant, the Company shall cause to be mailed to the person or
persons in whose name or names the Common Shares so subscribed for have
been issued, as specified in the subscription, at the address specified in
such subscription or, if so specified in such subscription, cause to be
delivered to such person or persons at the Office of the Trustee where the
Purchase Warrant Certificate was surrendered, a certificate or
certificates for the appropriate number of Common Shares subscribed for.
In the absence of instructions to the contrary, such certificates shall be
issued in the name of the registered holder of the surrendered Purchase
Warrant Certificate and shall be mailed by first class mail to the address
of such Warrantholder appearing on the Warrant Register.
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4.3 PARTIAL EXERCISE OF PURCHASE WARRANTS. The holder of any Purchase Warrants
may acquire a number of Common Shares less than the number which the holder is
entitled to acquire pursuant to the surrendered Purchase Warrant Certificate(s).
In the event of any exercise of a number of Purchase Warrants less than the
number which the holder is entitled to exercise, the holder of the Purchase
Warrants upon such exercise shall also be entitled to receive, without charge
therefor, a new Purchase Warrant Certificate(s) in respect of the balance of the
Purchase Warrants represented by the surrendered Purchase Warrant Certificate(s)
not then exercised. In the absence of instructions to the contrary, such
certificate shall be issued in the name of the registered holder of the
surrendered Purchase Warrant Certificate and shall be mailed by first class mail
to the address of such Warrantholder appearing on the Warrant Register.
4.4 DESTRUCTION OF PURCHASE WARRANT CERTIFICATES. All Purchase Warrant
Certificates surrendered to the Trustee shall be, after the expiry of any period
of retention prescribed by law, destroyed by the Trustee. Upon request by the
Company, the Trustee shall furnish to the Company a destruction certificate
identifying the Purchase Warrant Certificates so destroyed and the number of
Purchase Warrants evidenced thereby.
4.5 ACCOUNTING AND RECORDING.
(1) The Trustee shall promptly notify the Company when Purchase Warrants are
exercised and forward to the Company at the times hereinafter set forth
(or into an account or accounts of the Company with the bank or trust
corporation designated by the Company for that purpose) all money received
on the exercise of Purchase Warrants. The Trustee shall hold money
received on the exercise of Purchase Warrants and shall forward such money
to the Company (or into an account or accounts of the Company with the
bank or trust corporation designed by the Company for that purpose) within
three (3) Business Days from the date of receipt thereof. All such money
and any securities or other instruments received by the Trustee shall be
received in trust for and shall be segregated and kept apart by the
Trustee in trust for the Company.
(2) The Trustee shall record the particulars of the Purchase Warrants
exercised which shall include the names and addresses of the persons who
have exercised Purchase Warrants, the number of Common Shares issued upon
such exercise, the Exercise Date and the Exercise Price. Upon request of
the Company, the Trustee shall provide within five (5) Business Days such
particulars in writing to the Company.
4.6 POSTPONEMENT OF DELIVERY OF COMMON SHARE CERTIFICATES. The Company shall not
be required to deliver certificates for Common Shares during the period when the
stock transfer books of the Company are closed due to an impending meeting of
shareholders or a proposed payment of dividends or for any other purpose and in
the event of a surrender of a Purchase Warrant Certificate for the acquisition
of Common Shares during such period, the delivery of Common Share certificates
may be postponed for a period not exceeding ten (10) days after the date of the
re-opening of the stock transfer books.
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4.7 SECURITIES RESTRICTIONS. Notwithstanding anything herein contained, Common
Shares will only be issued pursuant to any Purchase Warrant in compliance with
the securities laws of any Qualifying Jurisdiction and, without limiting the
generality of the foregoing, in the event that Purchase Warrants are exercised
pursuant to Section 4.1 prior to the issuance of a receipt for the Prospectus,
the certificates representing the Common Shares issued thereby will bear such
legend as may, in the opinion of counsel of the Company, be necessary in order
to avoid a violation of any securities laws of any Qualifying Jurisdiction or to
comply with the requirements of any stock exchange on which the Common Shares
are listed; provided that, if at any time, in the opinion of counsel to the
Company, such legends are no longer necessary in order to avoid a violation of
say any such laws, or the holder of any such legended certificate, at the
holder's expense, provides the Company with evidence satisfactory in form and
substance to the Company (which may include an opinion of counsel satisfactory
to the Company) to the effect that such holder is entitled to sell or otherwise
transfer such Common Shares in a transaction in which such legends are not
required, such legended certificate may thereafter be surrendered to the Company
in exchange for a certificate which does not bear such legend.
4.8 NO FRACTIONAL SHARES. No fractional Common Share or scrip certificate
representing a fractional Common Share shall be issued upon the exercise of any
Purchase Warrants. If the exercise of any Purchase Warrants would otherwise
result in a fractional Common Share, the Company shall, in lieu of issuing such
fractional Common Share, pay to the Warrantholder concerned, an amount in lawful
money of the United States of America equal to the value of the fractional
Common Share based on the Current Market Price on the Exercise Date.
4.9 EXERCISE PRICE. The exercise price per acquisition of Common Share (the
"EXERCISE PRICE") for purposes of this Section 4 shall be $15.00 per Common
Share, subject to adjustment in accordance with Section 4.10.
4.10 ADJUSTMENT OF EXERCISE PRICE/NUMBER OF COMMON SHARES. The acquisition
rights in effect at any date attached to the Purchase Warrants shall be subject,
under certain circumstances, to adjustment from time to time as follows:
(1) If and whenever at any time from the date hereof and prior to the
Time of Expiry, the Company shall:
(a) subdivide, redivide or reclassify its outstanding Common Shares into
a greater number of shares; or
(b) reduce, combine or consolidate its outstanding Common Shares into a
smaller number of shares;
the Exercise Price in effect on the effective date of such subdivision or
consolidation shall be adjusted to equal the price determined by multiplying the
Exercise Price in effect immediately prior to such effective date or record date
by a fraction of which the numerator shall be the total number of Common Shares
outstanding immediately prior to such date and the denominator shall
<PAGE>
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be the total number of Common Shares immediately after such date. Such
adjustment shall be made successively whenever any event referred to in this
subsection 4.10(1) shall occur. For greater certainty, the issuance of
additional Common Shares by the Company shall not result in any adjustment being
made pursuant to this Section 4.10. Upon any adjustment of the Exercise Price
pursuant to this subsection 4.10(1), the number of Common Shares subject to the
right of purchase under each Purchase Warrant not previously exercised shall be
contemporaneously adjusted by multiplying the number of Common Shares which
theretofore may have been purchased under such Purchase Warrant by a fraction of
which the numerator shall be the respective Exercise Price in effect immediately
prior to such adjustment and the denominator shall be the respective Exercise
Price resulting from such adjustments.
(2) If and whenever at any time from the date hereof and prior to the
Time of Expiry, there is a reclassification of the Common Shares or
a capital reorganization of the Company other than as described in
Section 4.10(1) or a consolidation, amalgamation or merger of the
Company with or into any other body corporate, trust, partnership or
other entity, or a sale or conveyance of the property and assets of
the Company as an entirety or substantially as an entirety to any
other body corporate, trust, partnership or other entity, any
Warrantholder who has not exercised its right of acquisition prior
to the record date or effective date, as the case may be, of such
reclassification, reorganization, consolidation, amalgamation,
merger, sale or conveyance, upon the exercise of such right
thereafter, shall be entitled to receive and shall accept, in lieu
of the number of Common Shares then sought to be acquired by it, the
number of shares or other securities or property of the Company or
any body corporate, trust, partnership or other entity resulting
from such merger, amalgamation or consolidation, or to which such
sale or conveyance has been made, as the case may be, that such
Warrantholder would have been entitled to receive on such
reclassification, reorganization, consolidation, amalgamation,
merger, sale or conveyance, if, on the record date or the effective
date thereof, as the case may be, the Warrantholder had been the
registered holder of the number of Common Shares sought to be
acquired by it. If determined appropriate by the Trustee to give
effect to or to evidence the provisions of this Section 4.10(2), the
Company, any successor to the Company, or such body corporate,
partnership, trust or other entity, as the case may be, shall, prior
to or contemporaneously with any such reclassification,
reorganization, consolidation, amalgamation, merger, sale or
conveyance, enter into an indenture which shall provide, to the
extent possible, for the application of the provisions set forth in
this Indenture with respect to the rights and interests thereafter
of the Warrantholders to the end that the provisions set forth in
this Indenture shall thereafter correspondingly be made applicable,
as nearly as may reasonably be, with respect to any shares, other
securities or property to which a Warrantholder is entitled on the
exercise of its acquisition rights thereafter. Any indenture entered
into between the Company and the Trustee pursuant to the provisions
of this Section 4.10(2) shall be a supplemental indenture entered
into pursuant to the provisions of Section 7 hereof. Any indenture
entered into
<PAGE>
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between the Company, any successor to the Company or such body
corporate, partnership, trust or other entity and the Trustee shall
provide for adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided in this Section 4.10 and
which shall apply to successive reclassifications, reorganizations,
amalgamations, consolidations, mergers, sales or conveyances.
(3) If and whenever at any time from the date hereof and prior to the
Time of Expiry, the Company fixes a record date for the making of a
distribution to all or substantially all the holders of its
outstanding Common Shares of dividends or any other distribution of,
or in the form of, property or securities, including without
limitation: (i) shares of any class; (ii) rights, options or
warrants, (iii) evidences of its indebtedness, or (iv) assets,
including shares of other corporations, any Warrantholder who has
not exercised its right of acquisition prior to such record date,
upon the exercise of such right thereafter, shall be entitled to
receive, without further payment to the Company, and shall accept in
addition to the number of Common Shares to which it was theretofore
entitled upon such exercise, the kind and amount of shares and other
securities or property which such holder would have been entitled to
receive as a result of such distribution, if, on the record date it
had been the registered holder of the number of Common Shares to
which it was theretofore entitled upon exercise.
(4) In any case in which this Section 4.10 shall require that an
adjustment shall become effective immediately after a record date,
for an event referred to herein, the Company may defer, until the
occurrence of such event, issuing to the Warrantholder exercising
his rights after such record date and before the occurrence of such
event, the Common Shares or other securities issuable upon such
exercise by reason of the adjustment required by such event;
provided, however, that the Company shall deliver to such
Warrantholder an appropriate instrument evidencing such
Warrantholder's right to receive such Common Shares or other
securities upon the occurrence of the event requiring such
adjustment and the right to receive any distributions made on such
Common Shares declared in favour of holders of record of Common
Shares on and after the date of exercise or such later date as such
Warrantholder would but for the provisions of this Section 4.10(4),
have become the holder of record of such additional Common Shares.
(5) The adjustments provided for in this Section 4.10 are cumulative.
After any adjustment pursuant to this Section 4.10, the term "Common
Shares" where used in this Indenture shall be interpreted to mean
securities of any class or classes which, as a result of such
adjustment and all prior adjustments pursuant to this Section 4.10,
the Warrantholder is entitled to receive upon the exercise of his
right, and the number of Common Shares indicated in any instrument
of conversion shall be interpreted to mean, the number of Common
Shares or other property or securities a Warrantholder is entitled
to receive as a result of such adjustment and all prior adjustments
pursuant to this Section 4.10, upon the full exercise of the
Purchase Warrant.
<PAGE>
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(6) All shares or warrants of any class or other securities which a
Warrantholder is at the time in question entitled to receive on the
exercise of his conversion right, whether or not as a result of
adjustments made pursuant to this Section 4.10 shall, for the
purposes of the interpretation of this Indenture, be deemed to be
shares and warrants which such Warrantholder is entitled to acquire
pursuant to such conversion right.
(7) In the event of any question arising with respect to the adjustments
provided for in this Section 4.10 such question shall be
conclusively determined by the Company's auditors, or if they are
unable or unwilling to act, by such other firm of independent
chartered accountants as may be selected by the directors and which
is acceptable to the Trustee, who shall have access to all necessary
records of the Company, and such determination shall be binding upon
the Company, the Trustee, all Warrantholders and all other persons
interested therein.
(8) The adjustments provided for in this Section 4.10 shall, in the case
of adjustments to the Exercise Price, be computed to the nearest
one-tenth of one cent and no adjustment in the Exercise Price shall
be required unless such adjustment would result in a change of at
least one percent (1%) in the prevailing Exercise Price provided,
however, that any adjustments which, except for the provisions of
this Section 4.10(8) would otherwise have been required to be made,
shall be carried forward and taken into account in the event of any
circumstances requiring any subsequent adjustment.
(9) If the purchase price provided for in any right, warrant or option
issued as described in Section 4.10(3) is decreased, the Exercise
Price shall, subject to Section 4.10(4), forthwith be changed so as
to decrease the Exercise Price to such Exercise Price as would have
been obtained had the adjustment made in connection with the
issuance of all such rights, options or securities been made upon
the basis of such purchase price as so decreased or such rate as so
increased.
(10) No adjustment in the Exercise Price shall be made in respect of any
event described in Section 4.10(2):
(a) if the Warrantholders are entitled to participate in such event on
the same terms MUTATIS MUTANDIS as if they had exercised their
purchase rights prior to the effective date or record date or such
event, subject to the prior approval of The Toronto Stock Exchange
to such participation if the Common Shares or the Purchase Warrants
are then listed on such exchange; or
(b) in respect of any rights to acquire shares which are presently
outstanding.
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(11) In determining at any time and from time to time the number of
Common Shares outstanding at any particular time for purposes of
this Section 4.10 there shall be included that number of Common
Shares which would be outstanding upon conversion of all convertible
securities then outstanding, and upon exercise of all rights,
options or warrants then outstanding to purchase Common Shares, and
there shall be excluded any Common Shares (and Common Shares which
would be outstanding upon conversion of convertible securities) held
by or for the account of the Company.
(12) Upon the expiry of the period for conversion of convertible
securities and the exercise period for rights, options, warrants
(other than rights, options or warrants in respect of which the
Warrantholders are entitled to participate, as contemplated in
Section 4.10(10) to purchase Common Shares or convertible
securities), the Exercise Price shall be adjusted to what it would
have been if such unconverted convertible securities and unexercised
rights, options or warrants had not been issued.
(13) In case the Company after the date of this Indenture shall take any
action affecting the Common Shares, other than an action described
in this Section 4.10 which in the opinion of the board of directors
of the Company would materially adversely affect the rights of the
Warrantholders, the Exercise Price may be reduced in such manner, if
any, and at such time, by action of the directors, in their sole
discretion as they may determine to be equitable in the
circumstances, but subject in all cases to any necessary regulatory
approval. Failure by the directors to take any action so as to
provide for an adjustment on or prior to the effective date or
record date of any action by the Company affecting the Common Shares
shall be conclusive evidence that the board of directors of the
Company has determined that it is equitable to make no adjustment in
the circumstances.
4.11 NO ADJUSTMENT FOR STOCK OPTIONS. For greater certainty, in this Section 4,
no adjustment shall be made in the acquisition rights attached to the Purchase
Warrants if the issue of Common Shares is being made pursuant to this Indenture
or pursuant to any stock option or stock purchase plan for directors, officers,
employees or consultants of the Company in force from time to time.
4.12 PROCEEDINGS PRIOR TO ANY ACTION REQUIRING ADJUSTMENT. As a condition
precedent to the taking of any action which would require an adjustment in any
of the acquisition rights pursuant to any of the Purchase Warrants, including
the number of Common Shares which are to be received upon the exercise thereof,
the Company shall take any corporate action which may, in the opinion of
counsel, be necessary in order that the Company has unissued and reserved in its
authorized capital and may validly and legally issue as fully paid and
non-assessable all the shares which the holders of such Purchase Warrants are
entitled to receive on the full exercise thereof in accordance with the
provisions hereof.
<PAGE>
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4.13 CERTIFICATE AS TO ADJUSTMENT. If any of the events referred to in Section
4.10 occur, the Company shall promptly file with the Trustee a Certificate of
the Company setting forth a brief statement of the facts and the consequent
adjustment required to be made by the provisions of this Indenture. The Trustee
shall promptly mail a copy of each such certificate to each of the
Warrantholders.
4.14 NOTICE OF SPECIAL MATTERS. The Company covenants with the Trustee that, so
long as any Purchase Warrant remains outstanding, it will give notice to the
Trustee and to the Warrantholders of its intention to fix a record date that is
prior to the Expiry Date for any event referred to in Sections 4.10(1) or
4.10(3) (other than subdivision, consolidation or reclassification of its Common
Shares) which may give rise to an adjustment in the Exercise Price. Such notice
shall specify the particulars of such event and the record date for such event,
provided that the Company shall only be required to specify in the notice such
particulars of the event as shall have been fixed and determined on the date on
which the notice is given. The notice shall be given in each case not less than
fourteen (14) days prior to such applicable record date.
4.15 NO ACTION AFTER NOTICE. The Company covenants with the Trustee that it will
not close its transfer books or take any other corporate action which might
deprive the holder of a Purchase Warrant of the opportunity to exercise its
right of acquisition pursuant thereto during the period of fourteen (14) days
after the giving of the certificate or notices set forth in Sections 4.13 and
4.14.
4.16 PROTECTION OF TRUSTEE. Except as provided in Section 9.2, the Trustee:
(1) shall not at any time be under any duty or responsibility to any
Warrantholder to determine whether any facts exist which may require
any adjustment contemplated by Section 4.10 or with respect to the
nature or extent of any such adjustment when made, or with respect
to the method employed in making the same;
(2) shall not be accountable with respect to the validity or value (or
the kind or amount) of any Common Shares or of any shares or other
securities or property which may at any time be issued or delivered
upon the exercise of the rights attaching to any Purchase Warrant;
(3) shall not be responsible for any failure of the Company to issue,
transfer or deliver Common Shares or certificates for the same upon
the surrender of any Purchase Warrants for the purpose of the
exercise of such rights or to comply with any of the covenants
contained in this Section; and
(4) shall not incur any liability or responsibility whatsoever or be in
any way responsible for the consequences of any breach on the part
of the Company of any of the representations, warranties or
covenants herein contained or of any acts of the directors,
officers, employees, agents or servants of the Company.
<PAGE>
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4.17 RESERVATION OF SHARES. At any time during which the number of authorized
Common Shares in the capital of the Company is limited, the Company shall
reserve out of such authorized, but unissued, Common Shares a sufficient number
thereof to provide for the exercise of any Purchase Warrants issued pursuant
thereto, and shall cause such Common Shares to be issued as fully paid and
non-assessable upon the exercise of Purchase Warrants.
SECTION 5 -- ENFORCEMENT
5.1 SUITS BY WARRANTHOLDERS. All or any rights conferred upon any Warrantholder
by any of the terms of the Purchase Warrant Certificates or the Indenture or
both may be enforced by the Warrantholder by appropriate proceedings but without
prejudice to the right which is hereby conferred upon the Trustee to proceed in
its own name to enforce each and all of the provisions herein contained for the
benefit of the Warrantholders.
5.2 IMMUNITY OF SHAREHOLDERS, ETC. The Trustee and, by the acceptance of the
Purchase Warrant Certificates and as part of the consideration for the issue of
the Purchase Warrants, the Warrantholders hereby waive and release any right,
cause of action or remedy now or hereafter existing in any jurisdiction against
any incorporator or any past, present or future shareholder, director, officer,
employee or agent of the Company or any successor Company on any covenant,
agreement representation or warranty by the Company contained herein or in the
Purchase Warrant Certificates.
5.3 LIMITATION OF LIABILITY. The obligations hereunder are not personally
binding upon, nor shall resort hereunder be had to, the private property of any
of the past, present or future directors or shareholders of the Company or any
successor Company or any of the past, present or future officers, employees or
agents of the Company or any successor Company, but only the property of the
Company or any successor Company shall be bound in respect hereof.
5.4 WAIVER OF DEFAULT. Upon the happening of any default hereunder the Trustee
shall have power to waive any default hereunder upon such terms and conditions
as the Trustee may deem advisable, if, in the Trustee's opinion, the same shall
have been cured or adequate provision made therefor; provided that no delay or
omission of the Trustee to exercise any right or power accruing upon any default
shall impair any such right or power or shall be construed to be a waiver of any
such default or acquiescence therein and provided further that no act or
omission of the Trustee in the premises shall extend to or be taken in any
manner whatsoever to affect any subsequent default hereunder of the rights
resulting therefrom.
SECTION 6 -- CONCERNING THE WARRANTHOLDERS
6.1 MEETINGS. In this Section 6, "meeting" means a meeting of the Warrantholders
and "adjourned meeting" means a meeting adjourned in accordance with Section
6.8.
<PAGE>
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6.2 CONVENING MEETINGS. The Trustee may and, upon receipt of a written request
executed under corporate seal by the Company or signed by Warrantholders holding
not less than twenty-five percent (25%) of the aggregate principal amount of
Instruments then outstanding, the Trustee shall convene a meeting, provided
adequate provision has been made by the Company or the Warrantholders for the
costs of convening and holding such a meeting. Any such written request shall
state generally the reason for the meeting and the business to be transacted
thereat.
6.3 PLACE OF MEETING. Every meeting shall be held in Calgary, Alberta, Canada.
6.4 NOTICE. The Trustee shall mail written notice of each meeting to each Holder
in the manner specified in Section 11 at least twenty (20) days before the date
of the meeting. The notice shall state the time and place of the meeting and
shall specify the general nature of business to be conducted thereat. It shall
not be necessary to specify in the notice of an adjourned meeting the nature of
the business to be transacted at the adjourned meeting. The accidental omission
to give notice of a meeting to any Warrantholder shall not invalidate any
resolution passed at any such meeting.
6.5 PERSONS ENTITLED TO ATTEND. The Company may and the Trustee shall, each by
its authorized representatives, attend a meeting but shall have no vote as such.
The respective legal advisers of the Company, of the Trustee and of any
Warrantholders may also attend a meeting but shall have no vote as such.
6.6 QUORUM. A quorum of the Warrantholders shall consist of two or more persons
present in person and owning or representing by proxy the owners of not less
than twenty-five percent (25%) of the aggregate principal amount of the
Instruments then outstanding.
6.7 CHAIRMAN. A Holder or a proxy for a Holder shall be nominated by the Trustee
to be the chairman of the meeting. If the person so nominated is not present
within twenty-five (25) minutes from the time fixed for the holding of the
meeting, the Warrantholders present in person or by proxy shall choose one of
their number to be chairman.
6.8 ADJOURNED MEETING. If a quorum of the Warrantholders is not present within
thirty (30) minutes from the time fixed for holding a meeting, the meeting shall
stand adjourned to a date not less than ten (10) days nor more than thirty (30)
days later and at a place in Calgary, Alberta, Canada, and at a time to be
specified by the chairman of the meeting. The Trustee shall promptly send a
notice of the adjourned meeting to all Warrantholders. At the adjourned meeting
two or more persons present in person and owning or representing by proxy the
owners of outstanding Purchase Warrants shall, in any event, constitute a quorum
for the transaction of the business for which the original meeting was convened.
6.9 VOTES. Votes may be given at a meeting in person or by a proxy appointed in
writing. A proxy need not be a Warrantholder. A poll shall be taken on every
question submitted to a meeting and shall, except as otherwise required herein,
require the affirmative vote of not less than a majority of the votes given on
the poll. If the vote is tied the motion shall not be carried.
<PAGE>
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On a poll each Warrantholder shall be entitled to one vote for every Purchase
Warrant of which he is the registered holder. A declaration made by the chairman
of a meeting that a resolution has been carried or lost shall be conclusive
evidence thereof. In the case of joint registered holders of a Purchase Warrant,
any one of them present in person or by proxy at the meeting may vote in the
absence of the other or others; but in case more than one of them be present in
person or by proxy, they shall vote together in respect of the Purchase Warrants
of which they are joint registered holders.
6.10 POWERS OF WARRANTHOLDERS. By resolution passed pursuant to this Section 6
by not less than two-thirds (2/3) of the votes cast in respect thereof (a
"WARRANTHOLDERS' RESOLUTION"), the Warrantholders may:
(1) agree to any modification, abrogation, alteration, compromise or
arrangement of the rights of the Warrantholders whether arising
under this Indenture, the Purchase Warrant Certificates or otherwise
in law, including rights of the Trustee held in trust for the
Warrantholders, which shall be agreed to by the Company; or
(2) direct or authorize the Trustee to exercise any discretion, power,
right, remedy or authority given to it by or under this Indenture or
the Purchase Warrant Certificates in the manner specified in such
resolution or to refrain from exercising any such discretion, power,
right, remedy or authority; or
(3) direct the Trustee to enforce any covenant on the part of the
Company contained in this Indenture or in the Instruments or to
waive any default by the Company in compliance with any provision of
this Indenture or the Purchase Warrant Certificates either
unconditionally or upon any conditions specified in such resolution,
whether or not the security hereof has become enforceable by reason
of such default; or
(4) amend, alter or repeal any resolution passed pursuant to this
Section 6.10.
6.11 MINUTES OF MEETINGS. The Trustee shall make and maintain minutes and
records of all resolutions and proceedings at a meeting. Such minutes and
records shall be available at the Office of the Trustee for inspection by a
Warrantholder or his authorized representative at reasonable times. If signed by
the chairman of the meeting or by the chairman of the next succeeding meeting of
the Warrantholders, such minutes shall be prima facie evidence of the matters
therein stated.
6.12 WRITTEN RESOLUTIONS. Notwithstanding the foregoing, a written resolution or
instrument signed in one or more counterparts by the holders of not less than
two-thirds (2/3) of the aggregate outstanding Purchase Warrants shall be deemed
to be the same as and to have the same force and effect as a Warrantholder's
Resolution duly passed at a meeting of the Warrantholders.
<PAGE>
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6.13 BINDING EFFECT. A resolution of the Warrantholders passed pursuant to this
Section 6 shall be binding upon all Warrantholders. Upon the passing of a
Warrantholders' resolution at a meeting of the Warrantholders, or upon the
signing of a written resolution or instrument pursuant to Section 6.12 hereof
and delivery by the Company to the Trustee of an original, certified or notarial
copy, or copies, of such resolution as executed or passed by the Warrantholders
the Trustee shall be entitled to and shall give effect thereto, subject always
to Section 9.2 hereof.
SECTION 7 -- SUPPLEMENTAL INDENTURES
7.1 GENERAL. From time to time the Company, when authorized by the directors of
the Company, and the Trustee may, subject to the provisions of this Indenture,
and shall, when so required by this Indenture, execute and deliver indentures
supplemental hereto, which thereafter shall form part hereof, or may do and
perform any other acts and things for any one or more or all of the following
purposes:
(1) adding to the provisions hereof such additional covenants,
enforcement provisions and release provisions (if any) as in the
opinion of counsel are necessary or advisable, provided the same are
not in the opinion of the Trustee prejudicial to the interests of
the Warrantholders;
(2) adding to the covenants of the Company in this Indenture for the
protection of the Warrantholders;
(3) evidencing the succession (or successive successions) of other
companies to the Company and the covenants of, and obligations
assumed by, such successor (or successors) in accordance with the
provisions of this Indenture;
(4) making such provisions not inconsistent with this Indenture as may
be deemed necessary or desirable with respect to matters or
questions arising hereunder;
(5) giving effect to a Warrantholders' resolution;
(6) to rectify any ambiguity, defective provision, clerical omission or
mistake or manifest or other error contained herein or in any deed
or indenture supplemental or ancillary hereto; or
(7) for any other purpose not inconsistent with the provisions of this
Indenture.
SECTION 8 -- SUCCESSOR COMPANIES
8.1 AMALGAMATION, ETC. The Company shall not enter into any transaction whereby
all, or substantially all, of its undertaking and assets would become the
property of a successor company (whether by way of reconstruction,
reorganization, recapitalization, consolidation, amalgamation, merger, transfer,
sale or otherwise) unless prior to, or contemporaneously with, the
<PAGE>
- 22 -
consummation of such transaction the successor company covenants with the
Trustee by an indenture or indentures satisfactory to the Trustee to perform all
the obligations on the part of the Company under this Indenture and to execute
and do all other instruments and things that the Trustee may reasonably require;
provided, however, that such reconstruction, reorganization, recapitalization,
consolidation, amalgamation, merger, transfer, sale or other transaction shall
be upon such terms as substantially to preserve, and not to impair, the rights
and powers of the Trustee and of the Warrantholders hereunder.
8.2 TRUSTEE TO CONSENT. Upon obtaining an opinion of Counsel that the provisions
of this Section 8 have been complied with, including an opinion that the
transaction is on such terms as substantially to preserve and not to impair the
rights and powers of the Trustee and the Warrantholders hereunder, the Trustee
shall consent to such transaction and execute and deliver such documents and do
such acts and things as, in its discretion, it may deem advisable, for the
completion of the transaction, whereupon the Company may be released and
discharged from liability under this Indenture and the Trustee may execute and
deliver all instruments which are necessary or reasonably required to that end.
8.3 SUBSTITUTIONS OF SUCCESSOR COMPANY. Whenever the provisions of this Section
8 have been complied with, the successor company shall succeed to, and be
substituted for, the Company with the same effect as if it had been named herein
as the Company, and shall possess and may exercise each and every right of the
Company hereunder.
SECTION 9 -- CONCERNING THE TRUSTEE
9.1 INDEMNITY. Before doing any act or thing pursuant hereto, the Trustee shall
be entitled to be indemnified by the Company or by the Warrantholders in an
amount and subject to terms and conditions satisfactory to it.
9.2 DUTIES OF TRUSTEE. By way of supplement to the provisions of any statute for
the time being relating to trustees, and notwithstanding any other provision of
this Indenture, in the exercise of the right, duties and obligations prescribed
or conferred by the terms of this Indenture, the Trustee shall exercise that
degree of care, diligence and skill that a reasonably prudent trustee would
exercise in comparable circumstances. Provided that the Trustee shall have
exercised such standard of care, diligence and skill, and in the absence of
wilful neglect, misconduct or fraud, the Company shall indemnify and save
harmless the Trustee from all loss, costs or damages it may suffer in
administering the trusts of this Indenture.
9.3 ACTION BY TRUSTEE. The Trustee shall not be obligated to do any act or thing
except when required to do so by this Indenture and, in the case of a default,
only when it has actual notice thereof.
<PAGE>
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9.4 CERTIFICATE OF THE COMPANY. The Trustee may accept a Certificate of the
Company as conclusive evidence of the truth of any fact relating to the Company
or its assets therein stated, but the Trustee may in its discretion require
further evidence or information before acting or relying on any such
certificate.
9.5 TRUSTEE MAY EMPLOY EXPERTS OR AGENTS. The Trustee may, at the Company's
expense, employ or retain such lawyers, accountants, engineers, appraisers or
other experts, advisers or agents as it may reasonably require for the purpose
of discharging its duties hereunder and shall not be responsible for any
misconduct, mistake or error of judgment on the part of any of them. The Trustee
may rely upon and act upon the opinion or advice of, or information obtained
from, any such lawyer, accountant, engineer, appraiser or other expert, adviser
or agent in relation to any matter arising in the administration of the trusts
hereof. The Trustee shall not incur any liability for the acts or omissions of
such lawyers, accountants, engineers, appraisers or other experts, advisers or
agents employed by the Trustee in good faith.
9.6 RESIGNATION OF TRUSTEE. The Trustee may resign its trust and be discharged
from all further obligations hereunder by giving to the Company written notice
at least ninety (90) days before the effective date of the resignation. If the
Trustee resigns, or becomes incapable of acting hereunder, the Company shall
forthwith appoint a new Trustee. Failing such appointment by the Company, the
retiring Trustee or any Warrantholders may apply to a court of competent
jurisdiction on such notice as such court may direct, for the appointment of a
new Trustee. The Warrantholders may, by Warrantholders' resolution, remove the
Trustee (including a Trustee appointed by the Company or by a court of competent
jurisdiction) and appoint a new Trustee. If any material conflict of interest in
the role of the Trustee as a fiduciary hereunder exists or shall arise, the
Trustee shall within ninety (90) days after ascertaining that it has such a
material conflict of interest, either eliminate such material conflict of
interest, or resign in the manner and with the effect as aforesaid.
9.7 INDENTURE LEGISLATION. The Company and the Trustee agree that each will at
all times in relation to this Indenture and any action to be taken hereunder,
observe and comply with and be entitled to the benefits of all Applicable
Legislation. If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with any mandatory requirement of Applicable Legislation,
such mandatory requirement shall prevail.
9.8 MONEY HELD AND DEPOSITED. Any monies held by the Trustee in accordance with
the trusts hereunder may be deposited in the name of the Trustee in any of the
five largest, in terms of assets, Canadian chartered banks or, with the consent
of the Company, in the deposit department of the Trustee or any other loan or
trust company authorized to accept deposits under the laws of Canada or any
province thereof at the rate of interest then current on similar deposits.
Unless and until the Trustee shall have declared the principal of and interest
on the Instruments to be due and payable, the Trustee shall pay over to the
Company all interest received by the Trustee with respect to any investments or
deposits made pursuant to the provisions of this Section 9.8.
<PAGE>
- 24 -
The Trustee shall incur no liability in respect of monies deposited with
anyone, including solicitors, except the Trustee unless the Trustee shall on its
own make such deposit without instructions or directions of the Company.
9.9 NOTICE. The Trustee shall not be required to give notice to third parties,
including the Warrantholders, of the execution of this Indenture.
9.10 USE OF PROCEEDS. The Trustee shall in no way be responsible for the use by
the Company of the proceeds of the issue hereunder.
9.11 NO INQUIRIES. The Trustee, prior to the certification and delivery of any
Purchase Warrant Certificates under any provisions of this Indenture, shall not
be bound to make any inquiry or investigation as to the correctness of the
matters set out in any of the resolutions, opinions, certificates or other
documents required by the provisions of this Indenture, but shall be entitled to
accept and act upon the resolutions, opinions, certificates or other documents.
The Trustee may nevertheless, in its discretion, require further proof in cases
where it deems further proof desirable. The Trustee shall not be bound to make
any inquiry or investigation as to the performance by the Company of the
Company's covenants hereunder.
9.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY. The Trustee shall not be required to
give any bonds or security with respect to the execution of the Trust and powers
of this Indenture.
9.13 NO CONFLICT OF INTEREST. The Trustee represents to the Company that at the
date of execution and delivery by it of this Indenture there exists no material
conflict of interest in the role of the Trustee as a fiduciary hereunder but if,
notwithstanding the provisions of this Section 9.13, such a material conflict of
interest exists, the validity and enforceability of this Indenture and the
Instruments issued hereunder shall not be affected in any manner whatsoever by
reason only that such material conflict of interest exists but the Trustee
shall, within ninety (90) days after ascertaining that it has a material
conflict of interest, either eliminate such material conflict of interest or
resign in the manner and with the effect specified in Section 9.6 hereof.
9.14 TRUSTEE NOT ORDINARILY BOUND. Except as otherwise specifically provided
herein, the Trustee shall not be bound to do, observe or perform or see to the
observance or performance by the Company of any of the obligations herein
imposed upon the Company or of the covenants on the part of the Company herein
contained, nor in any way to supervise or interfere with the conduct of the
Company's business, and then only after it shall have been indemnified to its
satisfaction against all actions, proceedings, claims and demands to which it
may render itself liable and all costs, charges, damages and expenses which it
may incur by so doing. None of the provisions contained in this Indenture shall
require the Trustee to expend or risk its own funds or otherwise to incur
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers unless indemnified as aforesaid.
<PAGE>
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9.15 TRUSTEE MAY DEAL IN PURCHASE WARRANTS. The Trustee may, in its personal or
other capacity, buy, sell, lend upon and deal in the Purchase Warrants and
generally contract and enter into financial transactions with the Company or
otherwise, without being liable to account for any profits made thereby.
SECTION 10 -- SATISFACTION AND DISCHARGE
10.1 GENERAL. Upon the earlier of:
(1) the date by which there shall have been delivered to the Trustee for
exercise or destruction all Purchase Warrant Certificates
theretofore certified hereunder; or
(2) the Time of Expiry;
and if all certificates representing Common Shares required to be issued in
compliance with the provisions hereof have been issued and delivered hereunder
and if all payments required to be made pursuant to Section 4 have been made in
accordance therewith, this Indenture shall cease to be of further effect and the
Trustee, on demand of and at the cost and expense of the Company and upon
delivery to the Trustee of a certificate of the Company stating that all
conditions precedent to the satisfaction and discharge of this Indenture shave
been complied with, shall execute proper instruments acknowledging satisfaction
of and discharging this Indenture. Notwithstanding the foregoing, the
indemnities provided to the Trustee by the Company hereunder shall remain in
full force and effect and survive the termination of this Indenture.
SECTION 11 -- NOTICES
11.1 NOTICE TO COMPANY. Any notice to the Company under the provisions of this
Indenture shall be valid and effective if delivered, or sent by telecopier
addressed to the Company at:
Seven Seas Petroleum Inc.
Suite 960
Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Vice President - Finance
Telecopier No.: (713) 621-9770
<PAGE>
- 26 -
with a copy to:
McMillan Binch
Suite 3800, South Tower
Royal Bank Plaza
Toronto, Ontario
M5J 2J7
Attention: James D. Scarlett
Telecopier No.: (416) 865-7048
and shall be deemed to have been effectively given on the date of delivery if
delivered, or the date of sending if sent by telecopier.
11.2 NOTICE TO THE WARRANTHOLDERS. Any notice to the Holders under the
provisions of this Indenture shall be valid and effective if delivered or sent
by ordinary post or sent by telegram, telex or telecopier addressed to such
Holder at their address appearing on the applicable register and shall be deemed
to have been effectively given on the date of delivery if delivered, on the
fifth Business Day following the date of the postmark on such notice, if mailed,
or the date of sending by telegram, telex or telecopier, with a copy to:
Yorkton Securities Inc.
11th Floor
1055 Dunsmuir Street
Vancouver, BC
V7X 1L4
Attention: Verlee Webb
Telecopier No.: (604) 640-0320
Any such notice of communication given with respect to an instrument which is
registered in more than one name may be given to any of the people named on the
register and such notice of communication shall be sufficient to all such
holders. Accidental error or omission in giving notice to any one or more
holders shall not invalidate any action or proceeding founded thereon.
If, by reason of a strike, lockout or other work stoppage, actual or threatened,
involving postal employees, any notice to be given to the Holders hereunder
could reasonably be considered unlikely to reach its destination, such notice
shall be valid and effective only if it is delivered personally to such Holders
or if delivered to the address for such Holders contained in the register
maintained by the Trustee, by telecopy or other means of prepaid transmitted and
recorded communication.
<PAGE>
- 27 -
11.3 NOTICE TO TRUSTEE. Any notice to the Trustee under the provisions of this
Indenture shall be valid and effective if delivered, or sent by telecopier
addressed to the Trustee at:
Montreal Trust Company of Canada
710 - 530 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
Attention: Manager, Corporate Trust
Telecopier No.: (403) 267-6598
with a copy to:
Yorkton Securities Inc.
11th Floor
1055 Dunsmuir Street
Vancouver, BC
V7X 1L4
Attention: Verlee Webb
Telecopier No.: (604) 640-0320
and shall be deemed to have been effectively given on the date of delivery, or
the date of sending if sent by telecopier.
SECTION 12 -- ACCEPTANCE OF TRUST BY TRUSTEE
12.1 GENERAL. The Trustee hereby accepts the trusts declared and provided in
this Indenture and agrees to perform the same upon the terms and conditions
hereinbefore set forth.
SECTION 13 -- FURTHER ASSURANCE
13.1 FURTHER ASSURANCES. The parties agree from time to time, as may be
reasonably required by any party hereto, to execute and deliver such further and
other documents and do all matters and things which may be convenient or
necessary to carry out the intention of this Indenture more effectively and
completely.
<PAGE>
- 28 -
The parties have executed this Indenture.
SEVEN SEAS PETROLEUM INC.
By: __________________________
Name:
Title:
MONTREAL TRUST COMPANY OF
CANADA
By: __________________________
Name:
Title:
By: __________________________
Name:
Title:
<PAGE>
SCHEDULE 2.1 - FORM OF PURCHASE WARRANT
THE PURCHASE WARRANTS REPRESENTED BY THIS CERTIFICATE ("WARRANTS") AND THE
UNDERLYING COMMON SHARES ("WARRANT SHARES") HAVE NOT BEEN REGISTERED UNDER THE
UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR ANY STATE
SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO U.S.
PERSONS (AS DEFINED IN REGULATION S UNDER THE 1933 ACT) WITHOUT REGISTRATION
UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION
FROM REGISTRATION IS AVAILABLE.
[ADDITIONAL LANGUAGE TO BE INCLUDED ONLY FOR REG. S INVESTORS:]
IN ADDITION, THE WARRANTS MAY NOT BE EXERCISED BY OR ON BEHALF OF ANY U.S.
PERSON, THE WARRANTS MAY NOT BE EXERCISED IN THE UNITED STATES (EXCEPT AS
PERMITTED BY REGULATION S), AND THE WARRANT SHARES MAY NOT BE DELIVERED IN THE
UNITED STATES (EXCEPT AS PERMITTED BY REGULATION S), UNLESS, IN EACH CASE, THE
WARRANTS AND WARRANT SHARES HAVE BEEN REGISTERED UNDER THE 1933 ACT OR AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
THE PURCHASE WARRANTS REPRESENTED BY THIS CERTIFICATE WILL BE VOID
AND OF NO VALUE UNLESS EXERCISED ON OR BEFORE 5:00 P.M. (CALGARY
TIME), AUGUST 7, 1998.
PURCHASE WARRANT CERTIFICATE
SEVEN SEAS PETROLEUM INC.
(A COMPANY CONTINUED UNDER THE LAWS OF THE YUKON TERRITORY)
WARRANT
CERTIFICATE NO. PW ________ ________________________ PURCHASE
WARRANTS entitling the holder to
acquire, subject to adjustment, one
Common Share for each Purchase Warrant
represented hereby.
THIS IS TO CERTIFY THAT _________________ (hereinafter referred to as the
"HOLDER") is the registered holder of that number of Purchase Warrants to
acquire Common Shares (as hereinafter defined) of Seven Seas Petroleum Inc. (the
"COMPANY") as set forth in this Purchase Warrant certificate (the "PURCHASE
WARRANT CERTIFICATE"). Each Purchase Warrant represented hereby entitles the
holder thereof to acquire, in the manner and subject to the restrictions and
adjustments set forth herein, at any time and from time to time until 5:00 p.m.
(Calgary time) (the "TIME OF EXPIRY") on August 7, 1998 (the "EXPIRY DATE"), one
fully paid and non-assessable common share ("COMMON SHARE") of the Company,
without nominal or par value, as such shares were constituted on August 7, 1997,
at a price of $15.00 per share.
2.1 - 1
<PAGE>
The right to acquire Common Shares hereunder may only be exercised by the
holder within the time set forth above by:
a. duly completing and executing the exercise form attached hereto (the
"EXERCISE FORM");
b. surrendering this Purchase Warrant Certificate to Montreal Trust Company
of Canada (the "TRUSTEE") at the principal offices of the Trustee in
Calgary, Alberta, Canada; and
c. remitting cash, certified cheque, bank draft or money order in lawful
money of the United States of America, payable to or to the order of the
Trustee at par in Calgary, Alberta, Canada for the aggregate purchase
price of the Common Shares so subscribed for.
These Purchase Warrants may be surrendered only upon personal delivery
hereof or, if sent by mail or other means of transmission, upon actual receipt
thereof by the Trustee at the office referred to above.
Upon surrender of these Purchase Warrants, the person or persons in whose
name or names the Common Shares issuable upon the exercise of the Purchase
Warrants are to be issued shall be deemed for all purposes (except as provided
in the Indenture hereinafter referred to) to be the holder or holders of record
of such Common Shares and the Company has covenanted that it will (subject to
the provisions of the Indenture) cause a certificate or certificates
representing such Common Shares to be delivered or mailed to the person or
persons at the address or addresses specified in the Exercise Form within five
(5) Business Days.
The registered holder of this Purchase Warrant Certificate may acquire any
lesser number of Common Shares than the number of Common Shares which may be
acquired for the Purchase Warrants represented by this Purchase Warrant
Certificate. In such event, the holder shall be entitled to receive a new
certificate for the balance of the Common Shares which may be acquired. To the
extent that the Warrantholder is entitled to receive on the exercise or partial
exercise thereof a fraction of a Common Share, such right may only be exercised
in respect of such fraction in combination with another Purchase Warrant or
other Purchase Warrants which in the aggregate entitles the Warrantholder to
receive a whole number of Common Shares.
No fractional Common Share or scrip certificate representing a fractional
Common Share shall be issued upon the exercise of any Purchase Warrants. If the
exercise of any Purchase Warrants would otherwise result in a fractional Common
Share, the Company shall, in lieu of issuing such fractional Common Share, pay
to the Warrantholder concerned, an amount in lawful money of the United States
of America equal to the value of the fractional Common Share based on the
Current Market Price on the Exercise Date.
The Purchase Warrants represented by this certificate are issued under and
pursuant to a Purchase Warrant Indenture (herein referred to as the "INDENTURE")
made as of August 7, 1997 between the Company and the Trustee. Reference is made
to the Indenture and any instruments supplemental thereto for a full description
of the rights of the holders of the Purchase Warrants and the terms and
conditions upon which the Purchase Warrants are, or are to be, issued and held,
with the same effect as if the provisions of the Indenture and all instruments
supplemental thereto were
2.1 - 2
<PAGE>
set forth herein. By acceptance hereof, the holder assents to all provisions of
the Indenture. In the event of a conflict between the provisions of the Purchase
Warrant Certificate and the indenture, the provisions of the Indenture shall
govern. Capitalized terms used in the Indenture have the meaning herein as
therein, unless otherwise defined.
In the event of any alteration of the Common Shares, including any
subdivision, consolidation or reclassification, and in the event of any form of
reorganization of the Company including any amalgamation, merger or arrangement,
the holders of Purchase Warrants shall, upon exercise of the Purchase Warrants
following the occurrence of any of those events, be entitled to receive the same
number and kind of securities that they would have been entitled to receive had
they exercised their Purchase Warrants immediately prior to the occurrence of
those events.
The registered holder of this Purchase Warrant Certificate may, at any
time prior to the Expiry Date, upon surrender hereof to the Trustee at its
principal offices in Calgary, Alberta, Canada, exchange this Purchase Warrant
Certificate for other certificates entitling the holder to acquire, in the
aggregate, the same number of Common Shares as may be acquired under this
Purchase Warrant Certificate.
The holding of the Purchase Warrants evidenced by this Purchase Warrant
Certificate shall not constitute the holder hereof a shareholder of the Company
or entitle the holder to any right or interest in respect thereof except as
expressly provided in the Indenture or in this Purchase Warrant Certificate.
The Indenture provides that all holders of Purchase Warrants shall be
bound by any resolution passed at a meeting of the holders held in accordance
with the provisions of the Indenture and resolutions signed by the holders of
Purchase Warrants entitled to acquire a specified majority of the Common Shares
which may be acquired pursuant to all then outstanding Purchase Warrants.
The Purchase Warrants evidenced by this Purchase Warrant Certificate may
be transferred on the register kept at the Offices of the Trustee in Calgary,
Alberta, Canada, by the registered holder hereof or its legal representatives or
its attorney duly appointed by an instrument in writing in form and execution
satisfactory to the Trustee, only upon compliance with the conditions prescribed
in the Indenture and upon compliance with such reasonable requirements as the
Trustee may prescribe.
This Purchase Warrant Certificate shall not be valid for any purpose
whatever unless and until it has been certified by or on behalf of the Trustee.
Time shall be of the essence hereof. This Purchase Warrant Certificate
shall be governed by and construed in accordance with the laws of the Province
of Ontario and the federal law applicable therein and shall be treated in all
respects as an Ontario contract.
IN WITNESS WHEREOF the Company has caused this Purchase Warrant Certificate to
be signed by its duly authorized officers as of o, 1997.
Certified by:
MONTREAL TRUST COMPANY SEVEN SEAS PETROLEUM INC.
2.1 - 3
<PAGE>
OF CANADA
By: ________________________ By: ________________________
Name: Name:
Title: Title:
2.1 - 4
<PAGE>
EXERCISE FORM
TO: SEVEN SEAS PETROLEUM INC.
(a) The undersigned hereby exercises the right to acquire __________ Common
Shares of Seven Seas Petroleum Inc. as constituted on August 7, 1997 (or such
number of other securities or property to which such Purchase Warrants entitle
the undersigned in lieu thereof or in addition thereto under the provisions of
the Indenture referred to in the accompanying Purchase Warrant Certificate) in
accordance with and subject to the provisions of such Indenture.
The undersigned understands that it shall be a condition to the exercise
of the Purchase Warrants that all applicable securities legislation be
satisfied. In this regard, it shall be a condition to the exercise of the
Purchase Warrants that the undersigned initial one of the following
certifications:
____ REGISTRATION. The undersigned has been advised by the Company or its
counsel that the Purchase Warrants and the underlying Common Shares
("Warrant Shares") have been registered under the United States Securities
Act of 1933, as amended (the "1933 Act").
____ EXERCISE BY NON-U.S. PERSON. The undersigned certifies that it (a) is not
a "U.S. Person" as defined in Rule 902(o) of Regulation S under the 1933
Act, which definition includes, but is not limited to, a resident of the
United States of America, any states thereof, or its territories or
possessions (the "United States"), (b) is not exercising the Purchase
Warrants on behalf of a U.S. Person, and (c) is not executing this
Exercise Form in the United States unless the undersigned is excluded form
the definition of U.S. Person pursuant to Rule 902(o)(2) or (o)(7).
____ EXERCISE BY U.S. PERSON. The undersigned certifies that it (a) is a U.S.
Person, or has executed this Exercise Form in the United States; (b) is
purchasing the Warrant Shares solely for the undersigned's own account and
not with a view to or for sale in connection with any distribution of the
Warrant Shares; (c) is an accredited investor, as that term is defined in
Rule 502(a) of Regulation D under the 1933 Act; and (d) is either
experienced in or knowledgeable with regard to the business of the
Company, or either alone or with the undersigned's professional advisers
(named on this Exercise Form) is capable, by reason of knowledge and
experience in financial and business matters in general, and investments
in particular, of evaluating the merits and risks of an investment in the
Warrant Shares, is able to bear the economic risk of the investment and
has the capacity to protect the undersigned's own interests in connection
with the investment in the Warrant Shares.
2.1 - 5
<PAGE>
(b) The Common Shares (or other securities or property) are to be issued as
follows:
Name: __________________________________________________________________
(Print clearly)
Address in full: ______________________________________________________
________________________________________________________________________
Social Insurance Number: ______________________________________________
Number of Common Shares: ______________________________________________
NOTE: If further nominees intended, please attach (and initial) schedule
giving these particulars.
Such Securities (please check one):
(a) _______ should be sent by first class mail to the following address:
____________________________________________________________
____________________________________________________________
(b) _______ should be held for pick up at the office of the Trustee at
which this Purchase Warrant Certificate is deposited.
If the number of Purchase Warrants exercised are less than the
number of Purchase Warrants represented hereby, the undersigned requests that
the new Purchaser Warrant Certificate representing the balance of the Purchase
Warrants be registered in the name of ________________________________________
______________________________________________________________________________
whose address is _____________________________________________________________
______________________________________________________________________________
Such securities (please check one):
(a) ________ should be sent by first class mail to the following address:
____________________________________________________________
____________________________________________________________
OR
2.1 - 6
<PAGE>
(b) ________ should be held for pick up at the office of the Trustee at
which this Purchase Warrant Certificate is deposited.
In the absence of instructions to the contrary, the securities or
other property will be issued in the name of or to the holder hereof and will be
sent by first class mail to the last address of the holder appearing on the
register maintained for the Purchase Warrants.
DATED this _____ day of _________, 19___.
_____________________________ __________________________________
Signature Guaranteed (Signature of Warrantholder)
__________________________________
Print Full Name
__________________________________
__________________________________
__________________________________
Print full address
2.1 - 7
<PAGE>
SCHEDULE 2.10 - FORM OF TRANSFER FORM
TRANSFER OF PURCHASE WARRANTS
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to
_________ Purchase Warrants of Seven Seas Petroleum Inc. registered in the name
of the undersigned on the records of Montreal Trust Company of Canada
represented by the Purchase Warrant Certificate attached and irrevocably
appoints ________________ the attorney of the undersigned to transfer the said
securities on the books or register with full power of substitution.
If less than all the Purchase Warrants represented by this Purchase Warrant
Certificate are being transferred, the Purchase Warrant Certificate representing
those Purchase Warrants not transferred will be registered in the name appearing
on the face of this Purchase Warrant Certificate and such certificates (please
check one):
(a) _______ should be sent by first class mail to the following address:
____________________________________________________________
____________________________________________________________
(b) _______ should be held for pick up at the office of the Trustee at
which this Purchase Warrant Certificate is deposited.
DATED the ______ day of _____________, 19____.
_____________________________ __________________________________
Signature Guaranteed (Signature of Warrantholder)
INSTRUCTIONS:
1. Signature of the Warrantholder must be the signature of the person
appearing on the face of this Purchase Warrant Certificate.
2. If the Transfer Form is signed by a trustee, executor, administrator,
curator, guardian, attorney, officer of a corporation or any person acting
in a judiciary or representative capacity, the certificate must be
accompanied by evidence of authority to sign satisfactory to the Trustee
and the Company.
3. The signature on the Transfer Form must be guaranteed by an authorized
officer of a chartered bank, trust company or an Investment dealer who is
a member of a recognized stock exchange.
2.10 - 1
<PAGE>
4. Purchase Warrants shall only be transferable in accordance with applicable
laws. The transfer of Purchase Warrants to a purchase not resident in a
Qualifying Jurisdiction may result in the Common Shares obtained upon the
exercise of the Purchase Warrants (whether after or before obtaining
receipts for a final prospectus relating to the distribution of Common
Shares upon exercise of Purchase Warrants) not being freely tradeable in
the jurisdiction of residence of the purchaser.
2.10 - 2
------------------------------------------------------------
INDENTURE
Made as of August 7, 1997
Between
SEVEN SEAS PETROLEUM INC.
as Company
and
MONTREAL TRUST COMPANY OF CANADA
as Trustee
------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
RECITALS...............................................................1
SECTION 1 -- INTERPRETATION
1.1 Definitions......................................................2
(1) Agent......................................................2
(2) Applicable Legislation.....................................2
(4) Business Day...............................................2
(5) Capital Lease Obligations..................................2
(6) Certificate of the Company.................................2
(8) Closing Date...............................................2
(9) Collateral.................................................2
(10) Common Shares..............................................2
(11) Company....................................................3
(12) Conversion Price...........................................3
(13) Conversion Time............................................3
(14) Counsel....................................................3
(15) Debenture Maturity Date....................................3
(16) Debentureholders...........................................3
(17) Debentures.................................................3
(18) Event of Default...........................................3
(19) Exchange Date..............................................3
(21) GAAP.......................................................3
(22) Holders....................................................3
(23) Holders' Resolution........................................3
(24) Indebtedness for Borrowed Money............................3
(25) Indenture..................................................4
(26) Instruments................................................4
(27) Lien.......................................................4
(28) Limited Liability Companies................................4
(29) Limited Recourse Guarantee, Security and Pledge Agreement..4
(30) Note Maturity Date.........................................4
(31) Noteholders................................................4
(32) Notes......................................................4
(33) Office of the Trustee......................................4
(34) Person.....................................................4
(35) Pledged Subsidiary.........................................5
(36) Pledgor Subsidiaries.......................................5
(37) Preliminary Prospectus.....................................5
(38) Prospectus.................................................5
(39) Purchase Money Obligation..................................5
(40) Purchase Warrants..........................................5
(41) Qualifying Jurisdictions...................................5
(43) Security Documents.........................................5
(i)
<PAGE>
(44) Senior Debt................................................5
(45) Subsidiary.................................................5
(46) this Indenture.............................................6
(47) Time of Expiry ............................................6
(48) Trading Day................................................6
(49) Trustee....................................................6
(50) Unit.......................................................6
(51) 1933 Registration Statement................................6
1.2 Outstanding Notes................................................6
1.3 Outstanding Debentures...........................................6
1.4 Same Debt........................................................6
1.5 Currency.........................................................7
1.6 Complete Agreement...............................................7
1.7 Number and Gender................................................7
1.8 Sections; Headings...............................................7
1.9 Governing Law....................................................7
1.10 Time of Essence..................................................7
SECTION 2 -- ISSUE AND EXCHANGE OF NOTES
2.1 Terms of Notes...................................................7
2.2 Denominations....................................................8
2.3 Signature of Notes...............................................8
2.4 Certification....................................................8
2.5 Issue of Notes...................................................8
2.6 Terms of Debentures..............................................8
2.7 Denominations....................................................9
2.8 Signature of Debentures..........................................9
2.9 Certification....................................................9
2.10 Issue of Debentures in Exchange for Notes........................9
2.11 Payment of Interest.............................................12
2.12 Lost Instrument.................................................12
2.13 Registration of Notes...........................................12
2.14 Registration of Debentures......................................13
2.15 Transfer........................................................13
2.16 Restrictions on Exchanges and Transfers.........................13
SECTION 3 -- SECURITY
3.1 Security........................................................14
3.2 Prior Charges...................................................14
3.3 Discharge of Security...........................................15
SECTION 4 -- SUBORDINATION
4.1 Subordination...................................................15
4.2 Further Assurances of Subordination.............................17
(ii)
<PAGE>
SECTION 5 -- COVENANTS OF THE COMPANY
5.1 General.........................................................17
5.2 Trustee's Remuneration and Expenses.............................18
5.3 Governmental Requirements.......................................18
SECTION 6 -- CONVERSION OF DEBENTURES
6.1 Exercise of Conversion Rights...................................19
6.2 Conversion of Debentures by the Company.........................19
6.3 Issue of Units..................................................20
6.4 Adjustments.....................................................20
6.5 No Fractional Shares............................................20
6.6 Time of Conversion..............................................20
6.7 Conversion Price................................................21
6.8 Adjustment of Number of Units...................................21
6.9 No Adjustment for Stock Options.................................25
6.10 Certificate as to Adjustment....................................25
6.11 Reservation of Shares...........................................25
6.12 Cancellation of Debentures......................................25
SECTION 7 -- DEFAULT AND ENFORCEMENT
7.1 Trustee May Remedy Default......................................26
7.2 Events of Default...............................................26
7.3 Acceleration....................................................27
7.4 Directions of Holders...........................................27
7.5 Notice..........................................................27
7.6 Enforcement.....................................................28
7.7 Application of Moneys...........................................28
7.8 Payments on Instruments.........................................28
7.9 Protection of Persons Dealing with Trustee......................29
7.10 Remedies Cumulative.............................................29
7.11 Judgment Against the Company....................................29
7.12 Trustee Appointed Attorney......................................29
SECTION 8 -- CONCERNING THE HOLDERS
8.1 Meetings........................................................29
8.2 Convening Meetings..............................................29
8.3 Place of Meeting................................................30
8.4 Notice..........................................................30
8.5 Persons Entitled to Attend......................................30
8.6 Quorum..........................................................30
8.7 Chairman........................................................30
8.8 Adjourned Meeting...............................................30
8.9 Votes...........................................................30
8.10 Powers of Holders...............................................31
8.11 Minutes of Meetings.............................................31
(iii)
<PAGE>
8.12 Written Resolutions.............................................31
8.13 Binding Effect..................................................31
SECTION 9 -- SUPPLEMENTAL INDENTURES
9.1 General.........................................................32
SECTION 10 -- SUCCESSOR COMPANIES
10.1 Amalgamation, Etc...............................................32
10.2 No Event of Default.............................................33
10.3 Trustee to Consent..............................................33
10.4 Substitutions of Successor Company..............................33
SECTION 11 -- CONCERNING THE TRUSTEE
11.1 Indemnity.......................................................33
11.2 Duties of Trustee...............................................33
11.3 Action by Trustee...............................................33
11.4 Certificate of the Company......................................33
11.5 Trustee May Employ Experts or Agents............................34
11.6 Resignation of Trustee..........................................34
11.7 Indenture Legislation...........................................34
11.8 Money Held and Deposited........................................34
11.9 Notice..........................................................35
11.10 Use of Proceeds...........................................35
11.11 No Inquiries..............................................35
11.12 Trustee Not Required To Give Security.....................35
11.13 No Conflict Of Interest...................................35
11.14 Trustee Not Ordinarily Bound..............................35
11.15 Trustee May Deal In Instruments...........................35
SECTION 12 -- SATISFACTION AND RELEASE
12.1 General.........................................................36
12.2 Non-Presentation of Instruments.................................36
12.3 Repayment of Unclaimed Moneys to Company........................36
SECTION 13 -- NOTICES
13.1 Notice to Company...............................................37
13.2 Notice to the Holders. .........................................37
13.3 Notice to Trustee...............................................38
SECTION 14 -- ACCEPTANCE OF TRUST BY TRUSTEE
14.1 General.........................................................38
SECTION 15 -- FURTHER ASSURANCE
15.1 Further Assurances..............................................38
(iv)
<PAGE>
- 1 -
INDENTURE
This Agreement is made as of August 7, 1997, between
SEVEN SEAS PETROLEUM INC., a company continued
under the laws of the Yukon Territory, having a
head office in the City of Houston, Texas as
Company
and
MONTREAL TRUST COMPANY OF CANADA, a trust company
incorporated under the laws of Canada and
authorized to carry on trust business in the
Provinces of Alberta and Ontario, having a head
office in the City of Toronto, Ontario as Trustee
RECITALS
A. The Company is duly continued under the laws of the Yukon Territory.
B. The Company is desirous of creating and issuing its notes to be constituted
in the manner hereinafter provided.
C. The notes to be issued hereunder shall be exchanged pursuant to the terms
hereof for debentures of the Company to be constituted in the manner hereinafter
provided.
D. All things necessary have been done and performed so as to make the said
notes and debentures, when certified by the Trustee and issued as provided
herein, legal and valid obligations of the Company with the benefits and subject
to the terms of this Indenture.
E. The foregoing recitals are made as representations and statements of fact by
the Company and not by the Trustee.
<PAGE>
- 2 -
FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1 -- INTERPRETATION
1.1 DEFINITIONS. In this Indenture, unless the context otherwise requires:
(1) AGENT means Yorkton Securities Inc. and its successors.
(2) APPLICABLE LEGISLATION means the provisions, if any, for the time being, of
any statute of any Qualifying Jurisdiction, and of the regulations under any
such statute, relating to trust indentures and to the rights, duties and
obligations of trustees under trust indentures and of corporations issuing their
obligations under trust indentures, to the extent that any such provisions are
in force and applicable to this Indenture.
(3) BLUE SKY FILINGS has the meaning attributed thereto in Section 2.10.
(4) BUSINESS DAY means a day, other than a Saturday or a Sunday, on which the
Office of the Trustee is open for business.
(5) CAPITAL LEASE OBLIGATIONS means, as to any Person, the obligations of such
Person to pay rent or other amounts under a lease, licence or other agreement
conveying the right to use property, whether real or personal, which obligations
are required to be classified and accounted for as a capital lease on a balance
sheet of such Person under GAAP (including the Canadian Institute of Chartered
Accountants Handbook Section 3065 as such section may be amended from time to
time) and, for purposes of this Indenture, the amount of such obligations shall
be the capitalized amount thereof, determined in accordance with GAAP (including
such Handbook Section 3065 as the same may be amended from time to time).
(6) CERTIFICATE OF THE COMPANY means a written certificate signed in the name of
the Company by any duly authorized officer of the Company.
(7) CLEARANCE DATE has the meaning attributed thereto in Section 2.10.
(8) CLOSING DATE means August 7, 1997.
(9) COLLATERAL means all of the Company's and the Pledgor Subsidiaries' right,
title and interest in and to the issued and outstanding shares and membership
interests of the Pledged Subsidiaries and the Limited Liability Companies.
(10) COMMON SHARES mean the Common Shares of the Company as constituted at the
date hereof.
<PAGE>
- 3 -
(11) COMPANY means Seven Seas Petroleum Inc. and every successor corporation
thereto which shall have complied with the provisions of Section 10.
(12) CONVERSION PRICE means at any time the applicable price at which Debentures
may be converted into Units under Section 6.
(13) CONVERSION TIME has the meaning attributed thereto in Section 6.6.
(14) COUNSEL means any barrister or solicitor or firm of barristers and
solicitors retained by the Trustee, or retained by the Company and approved by
the Trustee.
(15) DEBENTURE MATURITY DATE means the earlier of (a) August 7, 2003 and (b)
such other date as the principal amount of the Debentures shall become payable
in accordance with this Indenture.
(16) DEBENTUREHOLDERS means the several persons who are entered from time to
time as the holders of Debentures in the register of Debentureholders herein
provided for.
(17) DEBENTURES means the Debentures to be issued in exchange for Notes in
accordance with this Indenture.
(18) EVENT OF DEFAULT has the meaning attributed thereto in Section 7.2.
(19) EXCHANGE DATE has the meaning attributed thereto in Section 2.10(1).
(20) FINAL RECEIPT DATE has the meaning attributed thereto in Section 2.10.
(21) GAAP means generally accepted accounting principles in Canada consistently
applied as of the Closing Date.
(22) HOLDERS means Noteholders and Debentureholders.
(23) HOLDERS' RESOLUTION has the meaning attributed thereto in Section 8.10.
(24) INDEBTEDNESS FOR BORROWED MONEY means, with respect to any Person, without
duplication, (a) money borrowed and indebtedness represented by notes payable
and drafts accepted representing extensions of credit, (b) all obligations
(whether or not with respect to the borrowing of money) evidenced by bonds,
debentures, notes or other similar instruments, (c) all indebtedness upon which
interest charges are customarily paid by such Person, (d) all indebtedness
issued or assumed as full or partial payment for property or services including,
without limitation, Capital Lease Obligations and Purchase Money Obligations,
(e) the redemption obligations in respect of shares in the capital of any body
corporate that are redeemable at the option of the holder, whether on the
happening of any event or contingency or otherwise and (f) any guarantee (other
than by endorsement of negotiable instruments for
<PAGE>
- 4 -
collection in the ordinary course of business), direct or indirect, in any
manner of any part or all of an obligation included in clauses (a) to (e) above
or any agreement, direct or indirect, contingent or otherwise, the practical
effect of which is to assure in any way the payment or performance (or payment
of damages in the event of non-performance) of any part or all of an obligation
included in clauses (a) to (e) above of any Person.
(25) INDENTURE means this indenture as amended, restated, supplemented or
replaced from time to time.
(26) INSTRUMENTS means the Notes and the Debentures.
(27) LIEN means any mortgage, lien, pledge, assignment, charge, security
interest, title retention agreement, hypothec, levy, execution, seizure,
attachment, garnishment, right of distress or other claim in respect of property
of any nature or kind whatsoever and howsoever arising (whether consensual,
statutory or arising by operation of law or otherwise) and any arrangements
known as sale and lease-back, sale and buy-back and sale with option to
buy-back.
(28) LIMITED LIABILITY COMPANIES means Esmerelda Limited Liability Company and
Cimarrona Limited Liability Company.
(29) LIMITED RECOURSE GUARANTEE, SECURITY AND PLEDGE AGREEMENT means, with
respect to each Pledgor Subsidiary, the limited recourse guarantee, security and
pledge agreement made as of August 7, 1997 executed by such Pledgor Subsidiary
in favour of the Trustee on behalf of the Holders, as amended, restated,
supplemented or replaced from time to time.
(30) NOTE MATURITY DATE means the earlier of (a) August 7, 2003 and (b) such
other date as the principal amount of the Notes shall become payable in
accordance with this Indenture.
(31) NOTEHOLDERS means the several persons who are entered from time to time as
the holders of Notes in the register of Noteholders herein provided for.
(32) NOTES means the Notes issued and outstanding under and in accordance with
this Indenture.
(33) OFFICE OF THE TRUSTEE means the principal office of the Trustee in Calgary,
Alberta, Canada.
(34) PERSON means an individual or corporation, a partnership or joint venture,
a trustee or trust, a government or agency thereof, an unincorporated
organization or entity; and pronouns have a similarly extended meaning.
<PAGE>
- 5 -
(35) PLEDGED SUBSIDIARY means each of GHK Company Colombia, Petrolinson, S.A.
and Seven Seas Petroleum Colombia Inc.
(36) PLEDGOR SUBSIDIARIES means Seven Seas Petroleum Colombia Inc. and Seven
Seas Petroleum Holdings Inc.
(37) PRELIMINARY PROSPECTUS has the meaning attributed thereto in Section 2.10.
(38) PROSPECTUS has the meaning attributed thereto in Section 2.10.
(39) PURCHASE MONEY OBLIGATION means a Lien securing Indebtedness for Borrowed
Money of the Company or its Subsidiaries assumed or incurred to provide all or
part of the purchase price of property, which Lien is limited to the property
acquired in the transaction in which such a Lien was assumed or incurred, or any
extension, renewal or refinancing of the balance thereof from time to time
provided that there is no increase in the amount of such balance at the time of
any such extension, renewal or refinancing.
(40) PURCHASE WARRANTS means the warrants created and authorized by and issuable
under the purchase warrant indenture dated as of August 7, 1997 between the
Company and Montreal Trust Company of Canada each entitling the holder thereof,
subject to the terms and conditions therein provided, to acquire one Common
Share at a price of $15.00 per Common Share until the Time of Expiry.
(41) QUALIFYING JURISDICTIONS means the provinces of Ontario, British Columbia,
Alberta, Manitoba and Quebec and such other jurisdictions as the Agent may
notify the Company on not less than three (3) Business Days prior to the date of
filing the Preliminary Prospectus.
(42) SECURITIES COMMISSIONS has the meaning attributed thereto in Section 2.10.
(43) SECURITY DOCUMENTS means the Limited Recourse Guarantee, Security and
Pledge Agreements.
(44) SENIOR DEBT means all Indebtedness for Borrowed Money owing by the Company
to a financial institution (as defined in the BANK ACT (Canada)) unless such
Indebtedness for Borrowed Money expressly ranks PARI PASSU or subordinate to the
Instruments.
(45) SUBSIDIARY means, as applied to any Person, any corporation of which more
than fifty percent (50%) of the outstanding shares of the capital stock having
ordinary voting power to elect a majority of the members of its board of
directors (without regard to the existence at the time of a right of the holders
of any class or classes of securities of such corporation to exercise such
voting power by reason of the happening of any contingency), or any partnership
of which such Person is the general partner or of which more than fifty percent
(50%) or more of the outstanding partnership interests, is at the time owned (i)
by such Person or (ii) by one
<PAGE>
- 6 -
or more Subsidiaries of such Person or (iii) by such Person and one or more
Subsidiaries of such Person.
(46) THIS INDENTURE, HEREIN, HEREOF, HERETO, HEREUNDER or similar expressions as
used in this Indenture shall mean this Indenture (including the schedules
hereto) and any and every deed supplemental hereto and not any particular
Section or Subsection of this Indenture.
(47) TIME OF EXPIRY means 5:00 p.m. (Calgary time), on the day which is one
calendar year from the Closing Date and if such day is not a Business Day, the
Time of Expiry shall be 5:00 p.m. (Calgary time) on the next following Business
Day.
(48) TRADING DAY means any day on which The Toronto Stock Exchange is open for
trading.
(49) TRUSTEE means Montreal Trust Company of Canada and its successors as
trustee hereunder for the time being of the trusts hereby created.
(50) UNIT means one (1) Common Share and one-half (1/2) of one (1) Purchase
Warrant. Following expiry of the Purchase Warrants, UNIT means one (1) Common
Share.
(51) 1933 REGISTRATION STATEMENT has the meaning attributed thereto in Section
2.10.
1.2 OUTSTANDING NOTES. Every Note issued by the Company and certified and
delivered by the Trustee hereunder shall be deemed to be outstanding until it
shall be cancelled or delivered to the Trustee for cancellation, or until it has
been exchanged for a Debenture hereunder, or monies for the payment thereof
shall have been set aside under Section 12.2, and where a new Note has been
issued in lieu of or in substitution for a Note which has been lost, stolen,
mutilated, destroyed or defaced only one of such Notes shall be counted for the
purpose of determining the aggregate principal amount of Notes outstanding.
1.3 OUTSTANDING DEBENTURES. Every Debenture issued by the Company and certified
and delivered by the Trustee hereunder shall be deemed to be outstanding until
it shall be cancelled or delivered to the Trustee for cancellation or until
monies for the payment shall have been set aside under Section 12.2, as the case
may be, and where a new Debenture has been issued in lieu of or in substitution
for a Debenture which has been lost, stolen, mutilated, destroyed or defaced,
only one of such Debentures shall be counted for the purposes of determining the
aggregate principal amount of Debentures outstanding and Debentures which have
been partially converted shall be deemed to be outstanding only to the extent of
the unconverted part of the principal amount thereof.
1.4 SAME DEBT. All Notes or Debentures issued upon any registration of transfer
or exchange of Notes, including pursuant to Section 2.6 hereof, shall be the
valid obligations of the Company, evidencing the same debt, and entitled to the
same benefits under this Indenture, as the Notes surrendered upon such
registration of transfer or exchange. For greater certainty, all interest
payments made upon the principal amount outstanding from time to time
<PAGE>
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under any Note shall be interest payments made upon the principal amount
outstanding from time to time upon any and all Debentures issued in exchange for
such Note pursuant to Section 2.6 hereof.
1.5 CURRENCY. All amounts of money are expressed in lawful money of the United
States of America.
1.6 COMPLETE AGREEMENT. This Agreement constitutes the complete agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, commitments, understandings or inducements, whether oral or
written, expressed or implied.
1.7 NUMBER AND GENDER. Words importing the singular number only shall include
the plural and vice versa and words importing the masculine gender shall include
the feminine and neuter genders.
1.8 SECTIONS; HEADINGS. The division of this Indenture into Sections, paragraphs
and subparagraphs, the provision of a table of contents and the insertion of
headings is for convenience of reference only and shall not affect its
interpretation.
1.9 GOVERNING LAW. This Indenture, the Notes and the Debentures shall be
interpreted in accordance with the laws of the Province of Ontario and the laws
of Canada applicable therein.
1.10 TIME OF ESSENCE. Time is of the essence of this Indenture.
SECTION 2 -- ISSUE AND EXCHANGE OF NOTES
2.1 TERMS OF NOTES. The principal amount of Notes which may be issued hereunder
shall be in the aggregate minimum amount of $22,000,000 and shall be limited to
an aggregate maximum amount of $25,000,000, exclusive of Notes issued upon any
transfer of, or exchange or substitution for, or by way of replacement upon
loss, theft, mutilation, destruction or defacement of, any Notes previously
issued. The Notes shall be designated as "6% Exchangeable Subordinated Notes" of
the Company, and shall be issued in the form set forth in Schedule 2.1, with
such additions, deletions and alterations as the Trustee shall approve. All
Notes shall be registered and certified by the Trustee and dated as of the day
on which they are issued and may be typewritten, mimeographed, printed or
lithographed and shall be numbered consecutively. The principal amount of each
Note shall be payable in full on the Note Maturity Date on presentation and
surrender of such Note at the Office of the Trustee. Interest on the Notes shall
accrue from the respective dates of the original issuance of the Notes or from
the last interest payment date to which interest shall have been paid or made
available for payment on the outstanding Notes, whichever shall be later, and
shall be payable on the principal amount outstanding at the rate of six percent
(6%) per annum (calculated and paid semi-annually in arrears), both before and
after the Note Maturity Date and both before and after default on December 31
and June 30 in each year until the Note Maturity Date, the first such payment to
be made on December 31, 1997 based on the number of days elapsed
<PAGE>
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from the Closing Date. The Company shall not have the right to prepay any
principal or interest due under the Notes.
2.2 DENOMINATIONS. The Notes shall be issued in fully registered form only in
denominations of $100 or multiples thereof.
2.3 SIGNATURE OF NOTES. The Notes shall be executed by any one of the Chairman
of the Board, the President, a Vice-President or the Secretary of the Company
and the signature of any of such officers may be manually applied to the Notes
or may be engraved, lithographed or otherwise mechanically reproduced in
facsimile on the Notes, and in either case shall bind the Company
notwithstanding that the person whose signature is so applied may not hold such
office at the time the Notes are certified by the Trustee. The Notes shall have
the corporate seal of the Company (or a facsimile reproduction thereof) affixed
thereto.
2.4 CERTIFICATION. No Note shall be issued or, if issued, shall be valid until
certified by the Trustee by the manual signature of a duly authorized
representative of the Trustee. Certification by the Trustee does not however
constitute any warranty as to the validity or security of the Notes but only as
to their due issuance by the Trustee pursuant to the Trust Indenture.
2.5 ISSUE OF NOTES.
(1) The Notes may be issued to such persons and on such terms as the
Company may determine, upon delivery by the Company to the Trustee
of written instructions as to the persons to whom the Notes are to
be issued. All Notes issued and outstanding under this Indenture
shall rank pari passu in all respects and are secured equally and
rateably without priority or preference of any one Note over any
other issued and outstanding under this Indenture.
(2) Notwithstanding paragraph (1) above, the Holder of each Note, by
purchasing the Note, represents to the Company that such purchaser:
(a) has full power and capacity under the laws applicable to such Holder
to purchase the Note and such purchase of the Note will not violate
any provisions of any laws applicable to the purchaser;
(b) is acquiring the Note as principal, for investment and not for
distribution, redistribution, assignment or resale to others; and
(c) understands the restrictions on disposition of the Notes set forth
in Section 2.16 of this Indenture and in the Note.
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2.6 TERMS OF DEBENTURES. The principal amount of Debentures which may be issued
in exchange for Notes hereunder shall be limited to an aggregate maximum amount
of $25,000,000 exclusive of Debentures issued upon any transfer of, or exchange
or substitution for, or by way of replacement upon loss, theft, mutilation,
destruction or defacement of any Debentures previously issued. The Debentures
shall be designated as "6% Convertible Subordinated Debentures" of the Company,
and shall be issued in the form set forth in Schedule 2.6 hereto with such
additions, deletions or alterations as the Trustee shall approve. All Debentures
shall be registered and certified by the Trustee and dated as of the day on
which they are issued and may be typewritten, mimeographed, printed or
lithographed and shall be numbered consecutively. The principal amount of each
Debenture shall be payable in full on the Debenture Maturity Date on
presentation and surrender of such Debenture at the Office of the Trustee.
Interest on the Debentures shall accrue from the respective date or dates of the
original issuance of the Notes in exchange for which such Debentures were issued
or from the last interest payment date to which interest shall have been paid or
made available for payment on the outstanding Debentures or the Notes in
exchange for which they were issued, whichever shall be later, and shall be
payable on the principal amount thereof at the rate of six percent (6%) per
annum (calculated and paid semi-annually, in arrears), both before and after the
Debenture Maturity Date and both before and after default, in arrears, on June
30 and December 31 in each year. The Debentures shall not be redeemable prior to
the Debenture Maturity Date.
2.7 DENOMINATIONS. The Debentures shall be issued in fully registered form only
in denominations of $100 or multiples thereof.
2.8 SIGNATURE OF DEBENTURES. The Debentures shall be executed by any one of the
Chairman of the Board, the President, a Vice-President or the Secretary of the
Company and the signature of any of such officers may be manually applied to the
Debentures or may be engraved, lithographed or otherwise mechanically reproduced
in facsimile on the Debentures, and in either case shall bind the Company
notwithstanding that the person whose signature is so applied may not hold such
office at the time the Debentures are certified by the Trustee. The Debentures
shall have the corporate seal of the Company (or a facsimile reproduction
thereof) affixed thereto.
2.9 CERTIFICATION. No Debenture shall be issued or, if issued, shall be valid
until certified by the Trustee by the manual signature of a duly authorized
representative of the Trustee. Certification by the Trustee does not however
constitute any warranty as to the validity or security of the Debentures but
only as to their due issuance by the Trustee pursuant to the Trust Indenture.
<PAGE>
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2.10 ISSUE OF DEBENTURES IN EXCHANGE FOR NOTES.
(1) The Notes will be exchangeable into Debentures (on the basis of $100
principal amount of Debentures for each $100 principal amount of
Notes held) at any time on or before 5:00 p.m. (Calgary time) on the
date (the "EXCHANGE DATE") which is the earlier of:
(a) the third (3rd) Business Day following the date upon which all
Qualification and Registration Requirements have been met (the
"FINAL RECEIPT DATE"); and
(b) the first Business Day which is twelve (12) months from the
Closing Date (the "CLEARANCE DATE").
(2) The Company covenants and agrees that, as soon as practicable
following the Closing Date, it will file the following documents:
(a) a preliminary prospectus (the "PRELIMINARY PROSPECTUS") with
the securities commissions (the "SECURITIES COMMISSIONS") in
the Qualifying Jurisdictions qualifying the distribution of
the Debentures upon the exchange of the Notes;
(b) a registration statement or registration statements (the "1933
REGISTRATION STATEMENT") under the United States Securities
Act of 1933 registering for resale the Common Shares and
Purchase Warrants comprising the Units and the Common Shares
issuable on exercise of the Purchase Warrants;
(c) all required filings with state securities or "blue sky"
administrators where the Company has offered and sold any of
the Notes, the Debentures, the Units, the Purchase Warrants
and the Common Shares issuable on exercise of the Purchase
Warrants (the "BLUE SKY FILINGS");
and will, as soon as practicably possible thereafter, use its best
efforts to:
(d) cause receipts for a (final) prospectus (the "PROSPECTUS") to
be issued by the Securities Commissions in the Qualifying
Jurisdictions; and
(e) cause the 1933 Registration Statement and Blue Sky Filings to
become effective;
((a) through (e) above, collectively, the "QUALIFICATION AND
REGISTRATION REQUIREMENTS").
<PAGE>
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(3) Once the Qualification and Registration Requirements are satisfied
and, if applicable, any necessary relief orders are obtained from
the appropriate Securities Commissions, each Noteholder shall be
deemed to have exercised the right of exchange attached to the Notes
on the third (3rd) Business Day after the Final Receipt Date and the
Company shall thereafter issue Debentures, dated as of the Final
Receipt Date, to the Noteholders on the basis of $100 principal
amount of Debentures for each $100 principal amount of Notes held,
without any further acts required by or on behalf of the
Noteholders. As soon as practicable following the satisfaction by
the Company of the Qualification and Registration Requirements, the
Company shall give written notice thereof to the Trustee (together
with copies of the prospectuses and registration statements filed,
the receipts issued therefor by the Securities Commissions and the
Blue Sky Filings) and shall give written notice or cause the Trustee
to give written notice to the holder of each Note so exercised that
the Qualification and Registration Requirements have been satisfied
and that such Note has been exercised.
(4) In the event the Company is unable to satisfy the Qualification and
Registration Requirements and, if applicable, obtain the relief
orders referred to in paragraph 3 above, from the appropriate
Securities Commissions prior to the Clearance Date, each Noteholder
shall be deemed to have exercised the right of exchange attached to
the Notes as of the Clearance Date and the Company shall thereafter
issue Debentures, dated as of the Clearance Date, to the Noteholder
on the basis of $100 principal amount of Debentures for each $100
principal amount of Notes held, without any further acts required by
or on behalf of the Noteholders.
(5) Notwithstanding paragraphs (1) to (4) above, each Holder of
Debentures issued in exchange for a Note, by acceptance of such
Debentures, represents to the Company that such person:
(a) has full power and capacity under the laws applicable to such person
to accept or purchase the Debentures and the acceptance of the
Debentures will not violate any provisions of any laws applicable to
such person;
(b) is acquiring the Debentures as principal, for investment and not for
distribution, redistribution, assignment or resale to others; and
(c) understands the restrictions on disposition of the Debentures set
forth in Section 2.16 of this Indenture and in the Debentures.
<PAGE>
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(6) Each Noteholder hereby acknowledges that upon deemed exercise of the
right of exchange attached to the Notes in accordance with the terms
of this Indenture, each Note will be cancelled.
(7) Each Note shall bear a legend indicating that the Note shall be
cancelled upon deemed exchange hereunder.
(8) The Trustee will not register any transfer of Notes after the
Exchange Date.
(9) All Debentures issued and outstanding under this Indenture shall
rank PARI PASSU in all respect and are secured equally and rateably
without priority or preference of any one Debenture over any other
issued and outstanding Debentures under this Indenture; provided
however, that the Debentures shall rank prior in right of payment
and security to any other debentures subsequently issued that are
convertible into Common Shares.
2.11 PAYMENT OF INTEREST. As interest becomes due on the Instruments (except
interest payable at the Note Maturity Date or Debenture Maturity Date, or upon
conversion of the Debentures), the Company shall, within five (5) Business Days
following each date on which interest on such Instruments becomes due, forward
or cause to be forwarded by prepaid post, to all Holders, at their respective
addresses appearing on the applicable register of holders hereinafter mentioned,
a cheque for such interest (less any tax required by law to be deducted) payable
to the order of each such Holder at each of the places at which interest upon
such Instruments is payable. The forwarding of such cheque shall satisfy and
discharge the liability for the interest on such Instruments to the extent of
the sums represented thereby (plus any amount of any tax deducted as aforesaid)
unless such cheque shall not be paid on presentation; provided that in the event
of the non-receipt of such cheque by the Holder, or the loss or destruction
thereof, the Company, upon being furnished with reasonable evidence of such
non-receipt, loss or destruction and indemnity reasonably satisfactory to it,
shall issue or cause to be issued to such holder a replacement cheque for the
amount of such cheque. Interest which is represented by a cheque which has not
been presented to the drawee for payment or which otherwise remains unclaimed
for a period of six (6) years from the date on which it became due shall be
forfeited to the Company. Payments of interest in accordance with the
requirements of this Section 2.11 may be effected, in the sole discretion of the
Company and with the consent of the relevant holder, by wire transfer or other
means of payment as may be agreed by the Company and such Holder.
All Notes or Debentures issued upon any registration of transfer or
exchange of Notes, including pursuant to Section 2.6 hereof, shall be the valid
obligations of the Company, evidencing the same debt, and entitled to the same
benefits under this Indenture, as the Notes surrendered upon such registration
of transfer or exchange. For greater certainty, all interest payments made upon
the principal amount outstanding from time to time under any Note shall be
interest payments made upon the principal amount outstanding from time to time
upon any and all Debentures issued in exchange for such Note pursuant to Section
2.6 hereof.
<PAGE>
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2.12 LOST INSTRUMENT. If any outstanding Instrument is lost, stolen, mutilated,
destroyed or defaced, the Company shall execute and deliver and the Trustee
shall certify a replacement Instrument of the same denomination, upon delivery
of an affidavit of loss, if applicable, and indemnification (including, if
required by the Trustee, a bond of indemnity) in an amount and subject to terms
and conditions satisfactory to the Company and the Trustee, and upon payment of
a reasonable fee. Any such replacement Instrument shall be entitled to the full
benefit hereof and shall rank equally in accordance with its terms with all then
outstanding Instruments.
2.13 REGISTRATION OF NOTES. The Trustee shall maintain at the Office of the
Trustee a register of Noteholders in which shall be entered the name and address
of the Holder of each of the Notes. Such name shall also be recorded on the Note
concerned. The Trustee shall also maintain at such location a register of
transfers in which shall be recorded the particulars of all transfers of Notes.
The person in whose name any Note shall be registered shall be deemed and
regarded as the owner thereof for all purposes of this Indenture and payment of
or on account of the principal of and interest on such Note shall be made only
to such holder thereof and such payment shall be good and sufficient discharge
to the Trustee and to the Company and any paying agent for the amount so paid.
2.14 REGISTRATION OF DEBENTURES. The Trustee shall maintain at the Office of the
Trustee a register of Debentureholders in which shall be entered the name and
address of the Holder of each of the Debentures. Such name shall also be
recorded on the Debenture concerned. The Trustee shall also maintain at such
location a register of transfers in which shall be recorded the particulars of
all transfers of Debentures. The person in whose name any Debenture shall be
registered shall be deemed and regarded as the owner thereof for all purposes of
this Indenture and payment of or on account of the principal of and interest on
such Debenture shall be made only to such holder thereof and such payment shall
be a good and sufficient discharge to the Trustee and to the Company and any
paying agent for the amount so paid.
2.15 TRANSFER. No transfer of an Instrument shall be valid or effective unless:
(1) it is made by the Holder (or by his duly appointed attorney,
executor or administrator) by written instrument in form and
execution satisfactory to the Trustee and upon compliance with any
reasonable requirements, including a reasonable transfer fee, that
the Trustee may prescribe;
(2) the provisions of Section 2.16 have been complied with;
(3) particulars of such transfer are entered in the register of
transfers kept by the Trustee pursuant to Section 2.14 or 2.15
hereof as the case may be; and
<PAGE>
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(4) particulars of such transfer are endorsed on the Instrument by the
Trustee.
Neither the Company nor the Trustee shall be bound to take notice of, or to see
to the execution of, any trust whether express, implied or constructive, in
respect of any Instrument, and may transfer any Instrument on the direction of
the person registered as the holder thereof whether such person is named as a
trustee or otherwise, as though that person were the beneficial owner of the
Instrument.
2.16 RESTRICTIONS ON EXCHANGES AND TRANSFERS.
(1) Neither the Company nor the Trustee shall be permitted to:
(a) make transfers or exchanges of Instruments (except for exchanges of
Notes for Debentures in accordance with Sections 2.10 and 2.12
hereof) on any interest payment date or during the fifteen (15)
Business Days next preceding such interest payment date; or
(b) make transfers of Notes on the Exchange Date.
SECTION 3 -- SECURITY
3.1 SECURITY.
(1) To secure the due repayment and satisfaction of all of the Company's
obligations and outstanding indebtedness and liabilities hereunder
and under the Notes and the Debentures exchanged therefor to the
Holders, the Company shall deliver to the Trustee on or prior to the
Closing Date the Security Documents and shall make any registration
or filing required to be made with respect thereto in order to grant
to the Trustee on behalf of the Holders a perfected Lien upon the
Collateral; provided that such Lien shall rank PARI PASSU with any
Lien created by the Company upon the Collateral in favour of the
holders of any non-convertible debentures or similar debt
instruments issued by the Company after the Closing Date.
(2) The Company shall, forthwith and from time to time on demand,
execute and do or cause to be executed and done all assurances and
things which in the reasonable opinion of Counsel to the Trustee may
reasonably be required to give the Trustee on behalf of the Holders
(so far as may be possible under any relevant laws) the Liens upon
the Collateral and the priority intended to be created by the
Security Documents.
(3) Forthwith after execution and delivery of the Security Documents and
from time to time, the Company shall, at the Trustee's request and
at the Company's expense register, file or record the same (or
instruments granting at least
<PAGE>
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equivalent security) in all offices where such registration, filing
or recording is in the reasonable opinion of Counsel to the Trustee
necessary or of advantage to the creation or perfection of the
Security Documents and the Liens upon the Collateral or intended so
to be and the Company shall deliver to the Trustee on demand
certificates establishing such registration, filing or recording,
and will, at the Trustee's request, do, observe and perform all
matters and things necessary or expedient to be done, observed and
performed for the purpose of creating, maintaining and preserving as
valid and effective security the Liens created by the Security
Documents and creating, maintaining and preserving the priority
thereof.
3.2 PRIOR CHARGES. The Company shall not and it hereby covenants that it will
not create or assume any Lien upon the Collateral or part thereof ranking or
purporting to rank in priority to or pari passu with the Liens created under the
Security Documents, except as expressly permitted by this Indenture.
3.3 DISCHARGE OF SECURITY. The Trustee shall, at the written request and at the
expense of the Company but subject to the advice of Counsel, cancel and
discharge the Lien created under the Security Documents, in accordance with this
Indenture and execute and deliver to the Company such deeds or other instruments
as shall, in the opinion of Counsel, be required to discharge such Liens and to
reconvey to the Company the Collateral and to release the Company from the
covenants herein contained (other than the provisions relating to the
indemnification of the Trustee) and upon delivery of such written request to the
Trustee, the estate and rights hereby granted and granted under the Security
Documents shall cease, terminate and be void; provided that the Company shall
have first satisfied the Trustee that it has paid or made due provision
satisfactory to the Trustee for the payment of all the principal amounts and
interest due or to become due on all of the Instruments outstanding hereunder at
the times and in the manner therein and herein provided, and also all other
amounts payable hereunder by the Company.
SECTION 4 -- SUBORDINATION
4.1 SUBORDINATION.
(1) The obligations and outstanding indebtedness and liabilities under
the Instruments are hereby expressly subordinated, to the extent and
in the manner provided in this Section 4.1 without any further
action or documentation whatsoever being necessary to give effect to
such subordination, in right of payment to the prior payment in full
of all Senior Debt. The subordination provided for in this Section
4.1 shall not apply if the holder of Senior Debt has subordinated
the Indebtedness for Borrowed Money owed to it by the Company to
Indebtedness for Borrowed Money owed by the Company which is not
Senior Debt.
<PAGE>
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(2) In the event of any insolvency or bankruptcy proceedings, or any
receivership, liquidation, reorganization or other similar
proceedings relating to the Company or to its property or assets, or
in the event of any proceedings for voluntary liquidation,
dissolution or other winding-up of the Company, whether or not
involving insolvency or bankruptcy, or any marshalling of the assets
and liabilities of the Company (collectively referred to as a
"PROCEEDING"), the holders of Senior Debt shall be entitled to
receive payment in full of all amounts owing in respect of
principal, interest or premium, if any, on all Senior Debt before
the Holders shall be entitled to receive any payment or distribution
of any kind or character, whether in cash, property or securities,
which may be payable or deliverable in any such event in respect of
the Instruments.
(3) Subject to the payment in full of all amounts owing in respect of
principal, interest or premium, if any, on all Senior Debt, the
rights of the Holders shall be subrogated to the rights of the
holders of Senior Debt to receive payments and distributions of
assets of the Company in respect of and on account of Senior Debt,
to the extent of the application thereto of monies or other assets
which would have been received by the Holders but for the provisions
of this Section 4.1, until the principal of and interest on this
Debenture shall be paid in full. No payment or distribution of
assets of the Company to the Trustee and the Holders which would be
payable or distributable to the holder of Senior Debt pursuant to
this Section 4.1 shall be a payment by the Company on account of the
obligations and outstanding indebtedness under the Instruments. The
provisions of this Section 4.1 are, and are intended, solely for the
purpose of defining the relative rights of the Holder on the one
hand, and the holders of the Senior Debt on the other hand. This
Section 4.1 shall not impair the obligation of the Company, which is
unconditional and absolute, to pay and satisfy to the Holders the
indebtedness, liabilities and obligations under this Indenture and
the Instruments as and when the due and payable in accordance with
the terms hereof, or to affect the relative rights of the Holders
and creditors of the Company other than the holders of the Senior
Debt nor shall anything herein or therein prevent the Trustee and
the Holders from exercising all remedies otherwise permitted by
applicable law upon default under this Indenture, subject to the
rights, if any, under this Section 4.1, of the holders of Senior
Debt upon the exercise of any such remedy.
(4) In the event that, notwithstanding the foregoing provisions of this
Section 4.1, the Trustee and the Holders shall have received any
payment after a Proceeding has commenced before all amounts owing in
respect of principal, interest or premium, if any, on all Senior
Debt has been paid in full, the Trustee and the Holders shall hold
such payment in a segregated account in trust for the benefit of the
holders of Senior Debt and shall forthwith upon the completion of
the Proceeding pay such payment over to such holders of Senior Debt
for application against unpaid Senior Debt.
<PAGE>
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(5) For greater certainty, this Section 4.1 shall not be construed so as
to prevent the Trustee and the Holders from receiving and retaining
any payments on account of this Indenture or the Instruments which
are made (i) in a manner that is consistent with the terms of this
Indenture or the Instruments and (ii) at any time when no event of
default or acceleration, as defined in any Senior Debt or the
instrument creating the same, has occurred and is continuing and in
respect of which notice has been given by or on behalf of the
holders of Senior Debt to the Company and the Trustee and the
Holders. However, unless written notice shall be given to the
Trustee by or on behalf of any holder of Senior Debt of the
occurrence of any default or acceleration with respect to such
Senior Debt or the existence of any other facts which would have the
result that any payment in respect of this Indenture or the
Instruments would be in contravention of the provisions of this
Section 4.1, the Trustee and the Holders shall be entitled to assume
that no such default has occurred, or that no such facts exist and
shall be entitled to accept and retain all payments of indebtedness
and liabilities under the Instruments.
(6) The holders of Senior Debt shall be entitled to rely on, and shall
be third party beneficiaries of, the provisions of this Section 4.1.
4.2 FURTHER ASSURANCES OF SUBORDINATION. The Trustee and the Holders shall, from
time to time, upon each request from the Company, at the Company's cost and
expense in each case, make, do, execute and cause to be made, done and executed,
all such further and other lawful acts, documents and assurances whatsoever
which the Company or any of its creditors or proposed creditors, respectively,
reasonably determines may be necessary in order to give effect to the
provisions, purposes and intent of Sections 3.1 and 4.1 including, for greater
certainty, such acts, documents and assurances reasonably required by the
Company to evidence the subordination effected hereby in favour of the holders
of Senior Debt and to give effect to Liens granted to holders of any
non-convertible debentures or similar debt instruments issued by the Company,
which Liens, for greater certainty, shall rank PARI PASSU with the Liens in the
Collateral created by the Security Documents.
SECTION 5 -- COVENANTS OF THE COMPANY
5.1 GENERAL. The Company covenants with the Trustee as follows:
(1) It will pay to the Holders the principal amount of the Instruments
and interest thereon as herein and therein provided;
(2) It will, and will cause each of its Subsidiaries to, maintain its
corporate existence, diligently preserve its rights, powers,
privileges, franchises and goodwill and carry on its business in a
proper and efficient manner; provided, however, that nothing herein
shall prevent the Company or any of its Subsidiaries from effecting
or completing any corporate reorganization,
<PAGE>
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restructuring, amalgamation or other similar process where, in the
opinion of such party, such reorganization, restructuring,
amalgamation or similar process is necessary or desirable for any of
the Company and its Subsidiaries to carry on its business and
affairs in a reasonable and efficient manner and no consent of the
Trustee or any Holder shall be required in order for the Company or
any of its Subsidiaries to effect or complete any such
reorganization, restructuring, amalgamation or similar process;
provided further that to the extent that the shares or other
ownership interests of such Subsidiaries form part of the
Collateral, any shares or ownership interests resulting from such
reorganization, restructuring, amalgamation or similar process shall
be subject to the security interest, and pledged by the shareholders
or owners thereof, in accordance with the terms of this Indenture
and the Security Documents;
(3) It will keep proper books of account and will record all dealings
and transactions in relation to its business;
(4) It will annually deliver, within one hundred and twenty (120) days
of the end of each financial year of the Company, a Certificate of
the Company certifying that it has complied with all requirements
contained in this Indenture that, if not complied with, would, with
the giving of notice, lapse of time or otherwise, constitute an
Event of Default, or, if there has been failure to comply, giving
particulars thereof;
(5) It will pay or cause to be paid from time to time, as the same
become payable, all taxes, rates, levies and assessments,
government, municipal or otherwise, legally levied, assessed or
imposed upon the Company, provided however, that nothing herein
contained shall require the Company to pay any such taxes, rates,
levies and assessments so long as it shall in good faith contest the
validity or amount thereof and stay the execution thereof;
(6) It will ensure that any debentures issued after the date hereof by
the Company that are convertible into equity are, by their terms,
after the occurrence of an Event of Default hereunder or an event of
default under the instrument or agreement under which such
debentures are issued, fully and expressly subordinated in right of
payment to the Instruments;
(7) It will observe and perform all of its conditions and covenants
contained in this Indenture or in the Instruments; and
(8) It will at all times, in relation to this Indenture and any action
to be taken hereunder, observe and comply with and be entitled to
the benefits of all Applicable Legislation.
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5.2 TRUSTEE'S REMUNERATION AND EXPENSES. The Company covenants that it will pay
to the Trustee from time to time reasonable remuneration for its services
hereunder and will pay or reimburse the Trustee upon its request for all
reasonable expenses, disbursements and advances incurred or made by the Trustee
in the administration or execution of the trusts hereby created (including the
reasonable compensation and the disbursements of its Counsel and all other
advisers and assistants not regularly in its employ) both before any default
hereunder and thereafter until all duties of the Trustee hereunder shall be
finally and fully performed, except any such expense, disbursement or advance as
may arise out of or result from the Trustee's negligence, wilful misconduct or
bad faith. The Trustee shall not have any recourse against the proceeds of the
offering of Notes or securities or other property held by it pursuant to this
Indenture for the payment of its fees.
5.3 GOVERNMENTAL REQUIREMENTS. If any Common Shares or Purchase Warrants of the
Company to be issued upon a conversion of the Debentures or Purchase Warrants
require any filing with or registration with or approval of any governmental
authority in any Qualifying Jurisdiction or compliance with any other
requirement under any law of any Qualifying Jurisdiction before such Common
Shares or Purchase Warrants may be validly issued upon any such conversion or
may be traded by the person to whom they have been issued pursuant to any such
conversion, the Company will take such action as may be necessary to cause any
such filing, registration to be made, or any such approval or compliance to be
obtained, as the case may be; provided that, in the event that such filing,
registration, approval or compliance is required only by reason of the
particular circumstances of or actions taken by any such person, the Company
will not be required to take such action.
SECTION 6 -- CONVERSION OF DEBENTURES
6.1 EXERCISE OF CONVERSION RIGHTS. The holder of any Debenture shall have the
right at any time, at the Holder's option, to convert each $100 principal amount
of Debentures or any integral multiple thereof into Units at the Conversion
Price then in effect at any time prior to 5:00 p.m. (Calgary time) at the Office
of the Trustee on the Business Day immediately preceding the Debenture Maturity
Date. Such conversion may be effected by the surrender of the certificate
representing the Debenture to be so converted at the Office of the Trustee
accompanied by a written instrument of conversion in the form attached as
Schedule 6.1 (the "DEBENTUREHOLDER CONVERSION NOTICE"), signed by the
Debentureholder, giving notice as to the exercise of the right of conversion and
setting forth the name and address of the person in whose name the Common Shares
and Purchase Warrants issuable on such conversion are to be registered.
6.2 CONVERSION OF DEBENTURES BY THE COMPANY. The Company shall have the right at
any time and from time to time prior to 5:00 p.m. (Calgary time) on the Business
Day immediately preceding the Debenture Maturity Date to give notice in the form
attached hereto as Schedule 6.2 (the "COMPANY CONVERSION NOTICE") to the Trustee
of its intention to convert all or part of the Debentures into Units at the
Conversion Price, subject to each of the following conditions being met:
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(1) the Common Shares shall have traded at or above $14.00 (the "MINIMUM
PRICE") for twenty (20) consecutive Trading Days on The Toronto
Stock Exchange (the "TRADING PERIOD");
(2) the Company Conversion Notice shall have been delivered to the
Trustee within three (3) days following the Trading Period;
(3) the 1933 Registration Statement shall have remained in effect during
the first seven (7) days from and including the date the Company
Conversion Notice is received by the Trustee; provided however, that
notwithstanding any provision, term or condition of this Indenture
to the contrary, if the 1933 Registration Statement does not remain
in effect throughout such period of notice the Company may provide a
subsequent Company Conversion Notice to the Trustee within five (5)
days of the resumption of the effectiveness of the 1933 Registration
Statement, provided that the Common Shares have traded at or over
the Minimum Price on the Toronto Stock Exchange for two (2)
consecutive Trading Days following the resumption of the
effectiveness of the 1933 Registration Statement and prior to the
issuance by the Company of the subsequent Company Conversion Notice;
(4) no Event of Default shall exist hereunder; and
(5) no fact or circumstance which would constitute a "material change"
under applicable securities laws in any of the Qualifying
Jurisdictions shall have occurred with respect to the Company which
has not been disclosed to the public for a period of at least ten
(10) Trading Days prior to delivery of the Company Conversion
Notice;
and the conversion of the Debentures shall occur within seven (7) days from the
date the Company Conversion Notice has been delivered to the Trustee. The
Company shall deliver to the Trustee with the Company Conversion Notice a
certificate signed by two senior officers of the Company confirming the
satisfaction of the foregoing conditions (1) to (5) by the Company at the time
the Company Conversion Notice is delivered.
6.3 ISSUE OF UNITS. As promptly as practicable after the Conversion Time (as
defined herein) the Company shall issue and deliver or cause to be issued and
delivered by registered mail to the Debentureholder or his nominee or nominees
as aforesaid, at the address of such Debentureholder shown on the register of
Debentureholders, a certificate or certificates representing the number of fully
paid non-assessible Common Shares and Purchase Warrants into which such
Debenture was converted, as provided in Section 6.1 hereof together with, if
applicable, payment of any amounts due pursuant to Section 6.4.
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6.4 ADJUSTMENTS. Upon the conversion of any Debenture as aforesaid, no
adjustment or payment will be made by the Company for dividends on the Common
Shares issuable upon conversion. Accrued and unpaid interest from the next
preceding interest payment date will be payable on Debentures converted until
the Conversion Time.
6.5 NO FRACTIONAL SHARES. No fractional Common Share or scrip certificate
representing a fractional Common Share shall be issued upon the conversion of
any Debenture or group of Debentures. If the conversion of any Debenture or
group of Debentures would otherwise result in a fractional Common Share, the
Company shall, in lieu of issuing such fractional Common Share, pay to the
Debentureholder concerned, an amount in lawful money of the United States of
America equal to the value of the fractional Common Share based on the
prevailing Conversion Price on the conversion date.
6.6 TIME OF CONVERSION. The conversion of a Debenture shall be deemed to have
been made at the close of business on the date on which the Debenture is
surrendered for conversion in accordance with Section 6.1 or the Company
Conversion Notice is received by the Trustee pursuant to Section 6.2 so that the
rights as such of the Debentureholder shall terminate at such time (the
"CONVERSION TIME"), to the extent of conversion, and the person or persons
entitled to receive the Units into which the Debenture is converted shall be
deemed to have become the holder or holders of record of such Common Shares and
Purchase Warrants at such time.
6.7 CONVERSION PRICE. The conversion price per Unit (the "CONVERSION PRICE") for
purposes of this Section 6 shall be $11.50, subject to adjustment in accordance
with Section 6.8.
6.8 ADJUSTMENT OF NUMBER OF UNITS. The conversion right attached to the
Debentures shall be subject, under certain circumstances, to adjustment from
time to time as follows:
(1) If and whenever at any time from the date hereof and prior to the
Conversion Time, the Company shall:
(a) subdivide, redivide or reclassify its outstanding Common
Shares into a greater number of shares; or
(b) reduce, combine or consolidate its outstanding Common Shares
into a smaller number of shares;
the number of Common Shares and Purchase Warrants comprising each
Unit shall be adjusted immediately after the effective date of such
subdivision, redivision, change, reduction, combination or
consolidation, by multiplying the number of Common Shares
theretofore obtainable on the exercise thereof by a fraction of
which the numerator shall be the total number of Common Shares
outstanding immediately after such date and the denominator shall be
the total number of Common Shares outstanding immediately prior to
such date. Such
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adjustment shall be made successively whenever any event referred to
in this Section 6.8(1) shall occur. For greater certainty, the
issuance of additional Common Shares by the Company shall not result
in any adjustment being made pursuant to this Section 6.8.
(2) If and whenever at any time from the date hereof and prior to the
Debenture Maturity Date, there is a reclassification of the Common
Shares or a capital reorganization of the Company other than as
described in Section 6.8(1) or a consolidation, amalgamation or
merger of the Company with or into any other body corporate, trust,
partnership or other entity, or a sale or conveyance of the property
and assets of the Company as an entirety or substantially as an
entirety to any other body corporate, trust, partnership or other
entity, any Debentureholder who has not exercised its conversion
right prior to the record date or effective date, as the case may
be, of such reclassification, reorganization, consolidation,
amalgamation, merger, sale or conveyance, upon the exercise of such
right thereafter, shall be entitled to receive and shall accept, in
lieu of the number of Common Shares and Purchase Warrants issuable
on the exercise of such conversion right prior to such record date
or effective date, as the case may be, the number of shares or other
securities or property of the Company, any successor to the Company
or any body corporate, trust, partnership or other entity resulting
from such merger, amalgamation or consolidation, or to which such
sale or conveyance has been made, as the case may be, that such
Debentureholder would have been entitled to receive on such
reclassification, reorganization, consolidation, amalgamation,
merger, sale or conveyance, if, on the record date or the effective
date thereof, as the case may be, the Debentureholder had been the
registered holder of the number of Common Shares and Purchase
Warrants issuable on the exercise of such conversion right prior to
such record date or effective date, as the case may be. If
determined appropriate by the Trustee to give effect to or to
evidence the provisions of this Section 6.8(2), the Company, any
successor to the Company, or such body corporate, trust, partnership
or other entity, as the case may be, shall, prior to or
contemporaneously with any such reclassification, reorganization,
consolidation, amalgamation, merger, sale or conveyance, enter into
an indenture which shall provide, to the extent possible, for the
application of the provisions set forth in this Indenture with
respect to the rights and interests thereafter of the
Debentureholders to the end that the provisions set forth in this
Indenture shall thereafter correspondingly be made applicable, as
nearly as may reasonably be, with respect to any shares, other
securities or property to which a Debentureholder is entitled on the
exercise of its conversion rights thereafter. Any indenture entered
into between the Company and the Trustee pursuant to the provisions
of this Section 6.8(2) shall be a supplemental indenture entered
into pursuant to the provisions of Section 9 hereof. Any indenture
entered into between the Company, any successor to the Company or
such body corporate, trust, partnership or other entity and the
Trustee shall
<PAGE>
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provide for adjustments which shall be as nearly equivalent as may
be practicable to the adjustments provided in this Section 6.8 and
which shall apply to successive reclassifications, reorganizations,
amalgamations, consolidations, mergers, sales or conveyances.
(3) If and whenever at any time from the date hereof and prior to the
Debenture Maturity Date, the Company fixes a record date for the
making of a distribution to all or substantially all the holders of
its outstanding Common Shares or Purchase Warrants of dividends or
any other distribution of, or in the form of, property or
securities, including without limitation: (i) shares of any class;
(ii) rights, options or warrants; (iii) evidences of its
indebtedness; or (iv) assets, including shares of other
corporations, any Debentureholder who has not exercised its
conversion right prior to such record date, upon the exercise of
such right thereafter, shall be entitled to receive, without further
payment to the Company, and shall accept in addition to the number
of Common Shares and Purchase Warrants to which it was theretofore
entitled upon such exercise, the kind and amount of shares and other
securities or property which such holder would have been entitled to
receive as a result of such distribution, if, on the record date it
had been the registered holder of the number of Common Shares and
Purchase Warrants to which it was theretofore entitled upon
exercise.
(4) In any case in which this Section 6.8 shall require that an
adjustment shall become effective immediately after a record date
for an event referred to herein, the Company may defer, until the
occurrence of such event, issuing to the Holder of any Debenture
exercising his conversion rights after such record date and before
the occurrence of such event, the Common Shares and Purchase
Warrants or other securities issuable upon such exercise by reason
of the adjustment required by such event; provided, however, that
the Company shall deliver to such Holder an appropriate instrument
evidencing such Holder's right to receive such Common Shares and
Purchase Warrants or other securities upon the occurrence of the
event requiring such adjustment and the right to receive any
distributions made on such Common Shares and Purchase Warrants
declared in favour of holders of record of Common Shares and
Purchase Warrants on and after the date of exercise or such later
date as such Holder would but for the provisions of this Section
6.8(4), have become the holder of record of such additional Common
Shares and Purchase Warrants.
(5) The adjustments provided for in this Section 6.8 are cumulative.
After any adjustment pursuant to this Section 6.8, the term "Common
Shares" and "Purchase Warrants" where used in this Indenture shall
be interpreted to mean securities of any class or classes which, as
a result of such adjustment and all prior adjustments pursuant to
this Section 6.8, the Debentureholder is entitled to receive upon
the exercise of his conversion right, and the number of Common
Shares and Purchase Warrants indicated in any instrument of
conversion shall be
<PAGE>
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interpreted to mean the number of Common Shares and Purchase
Warrants or other property or securities a Debentureholder is
entitled to receive, as a result of such adjustment and all prior
adjustments pursuant to this Section 6.8.
(6) All shares or warrants of any class or other securities which a
Debentureholder is at the time in question entitled to receive on
the exercise of his conversion right, whether or not as a result of
adjustments made pursuant to this Section 6.8 shall, for the
purposes of the interpretation of this Indenture, be deemed to be
shares and warrants which such Debentureholder is entitled to
acquire pursuant to such conversion right.
(7) In the event of any question arising with respect to the adjustments
provided for in this Section 6.8 such question shall be conclusively
determined by the Company's auditors, or if they are unable or
unwilling to act, by such other firm of independent chartered
accountants as may be selected by the directors and which is
acceptable to the Trustee, who shall have access to all necessary
records of the Company, and such determination shall be binding upon
the Company, the Trustee, all Debentureholders and all other persons
interested therein.
(8) The adjustments provided for in this Section 6.8 shall, in the case
of adjust ments to the Conversion Price, be computed to the nearest
one-tenth of one cent and no adjustment in the Conversion Price
shall be required unless such adjustment would result in a change of
at least one percent (1%) in the prevailing Conversion Price
provided, however, that any adjustments which, except for the
provisions of this Section 6.8(8) would otherwise have been required
to be made, shall be carried forward and taken into account in the
event of any circumstances requiring any subsequent adjustment.
(9) If the purchase price provided for in any right, warrant or option
issued as described in Section 6.8(3) is decreased, the Conversion
Price shall, subject to Section 6.8(4), forthwith be changed so as
to decrease the Conversion Price to such Conversion Price as would
have been obtained had the adjustment made in connection with the
issuance of all such rights, options or securities been made upon
the basis of such purchase price as so decreased or such rate as so
increased.
(10) No adjustment in the Conversion Price shall be made in respect of
any event described in Section 6.8(2):
(a) if the Warrantholders are entitled to participate in such
event on the same terms MUTATIS MUTANDIS as if they had
exercised their purchase rights prior to the effective date or
record date or such event, subject to the prior approval of
The Toronto Stock Exchange to such participation if
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the Common Shares or the Purchase Warrants are then listed on
such exchange; or
(b) in respect of any rights to acquire shares which are presently
outstanding.
(11) In determining at any time and from time to time the number of
Common Shares outstanding at any particular time for purposes of
this Section 6.8 there shall be included that number of Common
Shares which would be outstanding upon conversion of all convertible
securities then outstanding, and upon exercise of all rights,
options or warrants then outstanding to purchase Common Shares, and
there shall be excluded any Common Shares (and Common Shares which
would be outstanding upon conversion of convertible securities) held
by or for the account of the Company.
(12) Upon the expiry of the period for conversion of convertible
securities and the exercise period for rights, options, warrants
(other than rights, options or warrants in respect of which the
Warrantholders are entitled to participate, as contemplated in
Section 6.8(10) to purchase Common Shares or convertible
securities), the Conversion Price shall be adjusted to what it would
have been if such unconverted convertible securities and unexercised
rights, options or warrants had not been issued.
(13) In case the Company after the date of this Indenture shall take any
action affecting the Common Shares, other than an action described
in this Section 6.8 which in the opinion of the board of directors
of the Company would materially adversely affect the rights of the
Debentureholders, the Conversion Price may be reduced in such
manner, if any, and at such time, by action of the directors, in
their sole discretion as they may determine to be equitable in the
circumstances, but subject in all cases to any necessary regulatory
approval. Failure by the directors to take any action so as to
provide for an adjustment on or prior to the effective date or
record date of any action by the Company affecting the Common Shares
shall be conclusive evidence that the board of directors of the
Company has determined that it is equitable to make no adjustment in
the circumstances.
6.9 NO ADJUSTMENT FOR STOCK OPTIONS. For greater certainty, in this Section 6,
no adjustment shall be made in the conversion rights attached to the Debentures
if the issue of Common Shares is being made pursuant to this Indenture or
pursuant to any stock option or stock purchase plan for directors, officers,
employees or consultants of the Company in force from time to time.
<PAGE>
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6.10 CERTIFICATE AS TO ADJUSTMENT. If any of the events referred to in Section
6.8 occur, the Company shall promptly file with the Trustee a Certificate of the
Company setting forth a brief statement of the facts and the consequent
adjustment required to be made by the provisions of this Indenture with respect
to conversion of Debentures. The Trustee shall promptly mail a copy of each such
certificate to each of the Debentureholders.
6.11 RESERVATION OF SHARES. At any time during which the number of authorized
Common Shares in the capital of the Company is limited, the Company shall
reserve out of such authorized, but unissued, Common Shares a sufficient number
thereof to provide for the conversion of all of the Debentures and the exercise
of any Purchase Warrants issued pursuant thereto at the lowest applicable
Conversion Price.
6.12 CANCELLATION OF DEBENTURES. All Debentures converted in whole or in part
pursuant to the provisions of this Section 6 shall be forthwith delivered to and
cancelled and destroyed by the Trustee and no Debenture shall be issued in
substitution therefor otherwise than in the case of a Debenture converted in
part in respect of the aggregate principal amount of the unconverted part of
such Debenture.
SECTION 7 -- DEFAULT AND ENFORCEMENT
7.1 TRUSTEE MAY REMEDY DEFAULT. If the Company fails to perform any of its
obligations hereunder, the Trustee may perform any of such obligations capable
of being performed by it but shall be under no obligation to do so. No such
performance by the Trustee and no waiver of default under any provision of this
Indenture shall prejudice the rights of the Trustee or of the Holders in respect
of any subsequent breach by the Company of the same or of any other obligation;
and no such performance by the Trustee shall relieve the Company from default
unless it makes good to the Trustee the non-performance and repays all sums
expended or advanced by the Trustee in so doing together with interest thereon
as herein provided.
7.2 EVENTS OF DEFAULT. Each of the following events shall constitute an event of
default ("EVENT OF DEFAULT"):
(1) if the Company defaults in payment of the principal of any
Instrument when the same becomes payable under the terms of this
Indenture or the Instruments; or
(2) if the Company defaults for a period of thirty (30) days in payment
of principal of or interest on any Indebtedness for Borrowed Money
incurred by the Company that ranks PARI PASSU or junior to the
Instruments; or
(3) if the Company defaults for a period of five (5) days in payment of
any interest on any Instrument when the same becomes payable under
the terms of this Indenture or the Instruments; or
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(4) if an order is made or an effective resolution is passed for the
dissolution, liquidation, reorganization, insolvency, winding-up or
other distribution of assets of the Company, or if the Company makes
an assignment for the benefit of its creditors or is declared
bankrupt or if a custodian or receiver is appointed under the
BANKRUPTCY AND INSOLVENCY ACT (Canada), or if a compromise or
arrangement is proposed by the Company to its creditors or any class
of its creditors; or
(5) if a receiver of all of the undertaking and assets of the Company or
any other officer with like powers is appointed or if a person with
a Lien on and over all of the undertaking and assets of the Company
validly takes possession of, or validly commences proceedings for
realizing any security upon, all of the undertaking and assets of
the Company (unless the same is disputed in good faith by the
Company); or
(6) if the Company does not perform any other material obligation of the
Company hereunder and, after written notice has been given by the
Trustee to the Company specifying such default the Company fails to
remedy the default within a period of twenty (20) days, unless the
Trustee (having regard to the subject matter of the neglect or
non-observance) agrees to a longer period; provided that in the case
of a default which cannot be remedied in such period, it shall not
be a default hereunder if the Company commences within such period
to take and diligently continues thereafter all necessary steps to
remedy the default.
7.3 ACCELERATION. If an Event of Default occurs and is continuing the Trustee
may, in its discretion, and shall in any event if so required by a Holders'
Resolution, declare the principal and interest of all Instruments then
outstanding and other moneys secured hereby to be due and payable. In such
event, anything therein or herein to the contrary notwithstanding, the amount
concerned shall forthwith become immediately due and payable to the Trustee on
demand, and the Company shall forthwith pay to the Trustee for the benefit of
the Holders the principal of, and accrued and unpaid interest, including
interest on interest in default, on the Instruments and all other moneys owing
hereunder.
7.4 DIRECTIONS OF HOLDERS. If an Event of Default occurs and is continuing the
Holders may, by Holders' Resolution, instruct the Trustee to declare the
principal and interest of all Instruments then outstanding to be due and payable
or to waive the default and/or to cancel any declaration made by the Trustee
pursuant to Section 7.3 hereof and the Trustee shall thereupon comply with the
Holders' Resolution, subject always to Section 10.2 hereof. The Trustee may, so
long as it has not become bound to enforce its rights hereunder, waive any Event
of Default if, in the Trustee's opinion, the default has been cured or adequate
satisfaction made therefor and the Company has made payment of all expenses to
which the Trustee and/or the Holders shall have been put by reason of such
default, and in such event, the Trustee may cancel any declaration theretofore
made by it pursuant to Section 7.3 hereof which shall nullify
<PAGE>
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any such declaration as if no such default had occurred; provided that no such
cancellation shall extend to or be taken in any manner whatsoever to affect any
subsequent default or the rights resulting therefrom, and if the Holders shall
have been notified of any declaration by the Trustee, then upon such
cancellation the Trustee shall notify the Holders thereof. No act or omission or
delay either of the Trustee or of the Holders shall extend to or be taken in any
manner whatsoever to affect any subsequent Event of Default or the rights
resulting therefrom, and provided that any delay shall not imply a waiver of the
act or omission.
7.5 NOTICE. If an Event of Default shall occur and be continuing, the Trustee
shall, within a reasonable time but not exceeding thirty (30) days after it
becomes aware of the occurrence of such Event of Default, give notice of such
Event of Default to the Holders in the manner provided in Section 13.2, provided
that, notwithstanding the foregoing, unless the Trustee shall have been
requested to do so by the holders of not less than two-thirds (2/3) of the
principal amount of the Instruments then outstanding, the Trustee shall not be
required to give such notice if the Trustee in good faith shall have determined
that the withholding of such notice is in the best interests of the Holders and
shall have so advised the Company in writing.
Where notice of the occurrence of an Event of Default has been given and
the Event of Default is thereafter cured, notice that the Event of Default is no
longer continuing shall be given by the Trustee to the Holders in the manner
provided in Section 13.2 within a reasonable time, but not exceeding thirty (30)
days, after the Trustee becomes aware that the Event of Default has been cured.
7.6 ENFORCEMENT. Subject to the provisions of Section 7.5, in case the Company
shall fail to pay to the Trustee, forthwith after the same shall have been
declared to be due and payable under Section 7.3, the principal and interest on
all Instruments then outstanding, together with any other amounts due hereunder,
the Trustee may in its discretion and shall upon receipt of a request in writing
signed by the Holders of not less than two-thirds (2/3) in principal amount of
the Instruments then outstanding and upon being indemnified to its reasonable
satisfaction against all costs, expenses and liabilities to be incurred, proceed
in its name as Trustee hereunder to obtain or enforce payment of the said
principal and interest on all the Instruments then outstanding, together with
any other amounts due hereunder and to enforce its rights and remedies under the
Security Documents in respect of the Collateral by such proceedings authorized
by this Indenture or by law or equity as the Trustee in such request shall have
been directed to take, or if such request contains no such direction, or if the
Trustee shall act without such request, then by such proceedings authorized by
this Indenture or by suit or law or in equity as the Trustee shall deem
expedient.
7.7 APPLICATION OF MONEYS. Except as otherwise herein provided, the moneys
arising from any enforcement of the rights of the Holders hereunder shall be
held by the Trustee or the receiver appointed and applied by it together with
any other moneys then or thereafter in its hands available for the purpose:
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(1) firstly, in payment of the remuneration of the receiver and the
Trustee and all reasonable sums expended or advanced by them
pursuant to this Indenture;
(2) secondly, in payment of the principal of all Instruments then
outstanding and then in payment of all accrued and unpaid interest,
including interest on overdue interest, on the Instruments, in each
case rateably and proportionately to the amounts owing on all
Instruments on account of principal and interest; and
(3) thirdly, as to the surplus (if any) of such moneys, in payment to
the Company or its assigns.
7.8 PAYMENTS ON INSTRUMENTS. Payment on any Instrument pursuant to Section 7.5
hereof shall be made by cheque to the registered Holder thereof. Before any
payment is made, the Instrument concerned shall be presented to the Trustee and
a memorandum of such payment shall be endorsed thereon. Fifteen days' notice of
every such payment shall be given to the Holders specifying the date when and
the place or places where the Instruments are to be presented for endorsement
and the amount of the payment and the application thereof as between principal
and interest. From and after the date specified in the notice, interest shall
accrue only on the amount owing on each Instrument after giving credit for the
amount of the payment specified in such notice unless it be duly presented on or
after the date so specified and payment of such amount is refused.
7.9 PROTECTION OF PERSONS DEALING WITH TRUSTEE. No person dealing with the
Trustee, or its agents, shall be obligated to enquire whether the powers which
the Trustee is purporting to exercise have become exercisable, or whether any
money remains due under this Indenture or the Instruments or as to the necessity
or expediency of the stipulations and conditions subject to which any sale is
made or otherwise as to the propriety or regularity of any sale or of any other
dealing by the Trustee, or to see to the application of any money paid to the
Trustee.
7.10 REMEDIES CUMULATIVE. No remedy herein conferred upon or reserved to the
Trustee or upon or to the Holders is intended to be exclusive of any other
remedy, but each and every such remedy shall be cumulative and shall be in
addition to every other remedy given hereunder or now existing or hereafter to
exist by law or by statute.
7.11 JUDGMENT AGAINST THE COMPANY. The Company covenants and agrees with the
Trustee that in case of any judicial or other proceedings to enforce the rights
of the Holders, judgement may be rendered against it and in favour of the
Holders or in favour of the Trustee, as Trustee for the Holders, for any amount
which may be proved to remain due with respect to the instruments and the
interest thereon and any other monies owing hereunder.
7.12 TRUSTEE APPOINTED ATTORNEY. The Company irrevocably appoints the Trustee to
be the attorney of the Company in the name and on behalf of the Company to
execute any instruments and do any acts and things which the Company ought to
execute and do, and has not executed or done, under the covenants and provisions
contained in this Indenture and
<PAGE>
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generally to use the name of the Company in the exercise of all or any of the
power hereby conferred on the Trustee, with full power of substitution and
revocation.
SECTION 8 -- CONCERNING THE HOLDERS
8.1 MEETINGS. In this Section 8, "meeting" means a meeting of the Holders and
"adjourned meeting" means a meeting adjourned in accordance with Section 8.8.
8.2 CONVENING MEETINGS. The Trustee may and, upon receipt of a written request
executed under corporate seal by the Company or signed by Holders holding not
less than twenty-five percent (25%) of the aggregate principal amount of
Instruments then outstanding, the Trustee shall convene a meeting, provided
adequate provision has been made by the Company or the Holders for the costs of
convening and holding such a meeting. Any such written request shall state
generally the reason for the meeting and the business to be transacted thereat.
8.3 PLACE OF MEETING. Every meeting shall be held in Toronto, Ontario, Canada.
8.4 NOTICE. The Trustee shall mail written notice of each meeting to each Holder
in the manner specified in Section 13 at least twenty (20) days before the date
of the meeting. The notice shall state the time and place of the meeting and
shall specify the general nature of business to be conducted thereat. It shall
not be necessary to specify in the notice of an adjourned meeting the nature of
the business to be transacted at the adjourned meeting. The accidental omission
to give notice of a meeting to any Holder shall not invalidate any resolution
passed at any such meeting.
8.5 PERSONS ENTITLED TO ATTEND. The Company may and the Trustee shall, each by
its authorized representatives, attend a meeting but shall have no vote as such.
The respective legal advisers of the Company, of the Trustee and of any Holders
may also attend a meeting but shall have no vote as such.
8.6 QUORUM. A quorum of the Holders shall consist of two or more persons present
in person and owning or representing by proxy the owners of not less than
twenty-five percent (25%) of the aggregate principal amount of the Instruments
then outstanding.
8.7 CHAIRMAN. A Holder or a proxy for a Holder shall be nominated by the Trustee
to be the chairman of the meeting. If the person so nominated is not present
within twenty-five (25) minutes from the time fixed for the holding of the
meeting, the Holders present in person or by proxy shall choose one of their
number to be chairman.
8.8 ADJOURNED MEETING. If a quorum of the Holders is not present within thirty
(30) minutes from the time fixed for holding a meeting, the meeting shall stand
adjourned to a date not less than ten (10) days nor more than thirty (30) days
later and at a place in Toronto, Ontario and at a time to be specified by the
chairman of the meeting. The Trustee shall
<PAGE>
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promptly send a notice of the adjourned meeting to all Holders. At the adjourned
meeting two or more persons present in person and owning or representing by
proxy the owners of outstanding Instruments shall, in any event, constitute a
quorum for the transaction of the business for which the original meeting was
convened.
8.9 VOTES. Votes may be given at a meeting in person or by a proxy appointed in
writing. A proxy need not be a Holder. A poll shall be taken on every question
submitted to a meeting and shall, except as otherwise required herein, require
the affirmative vote of not less than a majority of the votes given on the poll.
If the vote is tied the motion shall not be carried. On a poll each Holder shall
be entitled to one vote for every $100 principal amount of Instruments of which
he is the registered holder. A declaration made by the chairman of a meeting
that a resolution has been carried or lost shall be conclusive evidence thereof.
In the case of joint registered holders of an Instrument, any one of them
present in person or by proxy at the meeting may vote in the absence of the
other or others; but in case more than one of them be present in person or by
proxy, they shall vote together in respect of the Instruments of which they are
joint registered holders.
8.10 POWERS OF HOLDERS. By resolution passed pursuant to this Section 8 by not
less than two-thirds (2/3) of the votes cast in respect thereof (a "HOLDERS'
RESOLUTION"), the Holders may:
(1) agree to any modification, abrogation, alteration, compromise or
arrangement of the rights of the Holders whether arising under this
Indenture, the Instruments or otherwise in law, including rights of
the Trustee held in trust for the Holders, which shall be agreed to
by the Company; or
(2) direct or authorize the Trustee to exercise any discretion, power,
right, remedy or authority given to it by or under this Indenture or
the Instruments in the manner specified in such resolution or to
refrain from exercising any such discretion, power, right, remedy or
authority; or
(3) direct the Trustee to enforce any covenant on the part of the
Company contained in this Indenture or in the Instruments or to
waive any default by the Company in compliance with any provision of
this Indenture or the Instruments either unconditionally or upon any
conditions specified in such resolution, whether or not the security
hereof has become enforceable by reason of such default; or
(4) amend, alter or repeal any resolution passed pursuant to this
Section 8.10.
8.11 MINUTES OF MEETINGS. The Trustee shall make and maintain minutes and
records of all resolutions and proceedings at a meeting. Such minutes and
records shall be available at the Office of the Trustee for inspection by a
Holder or his authorized representative at reasonable times. If signed by the
chairman of the meeting or by the chairman of the next succeeding
<PAGE>
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meeting of the Holders, such minutes shall be prima facie evidence of the
matters therein stated.
8.12 WRITTEN RESOLUTIONS. Notwithstanding the foregoing, a written resolution or
instrument signed in one or more counterparts by the holders of not less than
two-thirds (2/3) of the aggregate outstanding principal amount of the
Instruments shall be deemed to be the same as and to have the same force and
effect as a Holder's Resolution duly passed at a meeting of the Holders.
8.13 BINDING EFFECT. A resolution of the Holders passed pursuant to this Section
8 shall be binding upon all Holders. Upon the passing of a Holders' resolution
at a meeting of the Holders, or upon the signing of a written resolution or
instrument pursuant to Section 8.12 hereof and delivery by the Company to the
Trustee of an original, certified or notarial copy, or copies, of such
resolution as executed or passed by the Holders the Trustee shall be entitled to
and shall give effect thereto, subject always to Section 11.2 hereof.
SECTION 9 -- SUPPLEMENTAL INDENTURES
9.1 GENERAL. From time to time the Company, when authorized by the directors of
the Company, and the Trustee may, subject to the provisions of this Indenture,
and shall, when so required by this Indenture, execute and deliver indentures
supplemental hereto, which thereafter shall form part hereof, or may do and
perform any other acts and things for any one or more or all of the following
purposes:
(1) adding to the provisions hereof such additional covenants,
enforcement provisions, Events of Default and release provisions (if
any) as in the opinion of Counsel are necessary or advisable,
provided the same are not in the opinion of the Trustee prejudicial
to the interests of the Holders;
(2) adding to the covenants of the Company in this Indenture for the
protection of the Holders;
(3) evidencing the succession (or successive successions) of other
companies to the Company and the covenants of, and obligations
assumed by, such successor (or successors) in accordance with the
provisions of this Indenture;
(4) making such provisions not inconsistent with this Indenture as may
be deemed necessary or desirable with respect to matters or
questions arising hereunder;
(5) giving effect to a Holders' resolution;
<PAGE>
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(6) to rectify any ambiguity, defective provision, clerical omission or
mistake or manifest or other error contained herein or in any deed
or indenture supplemental or ancillary hereto; or
(7) for any other purpose not inconsistent with the provisions of this
Indenture.
SECTION 10 -- SUCCESSOR COMPANIES
10.1 AMALGAMATION, ETC. The Company shall not enter into any transaction whereby
all, or substantially all, of its undertaking and assets would become the
property of a successor company (whether by way of reconstruction,
reorganization, recapitalization, consolidation, amalgamation, merger, transfer,
sale or otherwise) unless prior to, or contemporaneously with, the consummation
of such transaction the successor company covenants with the Trustee by an
indenture or indentures satisfactory to the Trustee to pay the principal of the
Instruments and interest thereon according to their tenor and effect and all
other moneys payable hereunder and to perform all the obligations on the part of
the Company under this Indenture and to execute and do all other instruments and
things that the Trustee may reasonably require; provided, however, that such
reconstruction, reorganization, recapitalization, consolidation, amalgamation,
merger, transfer, sale or other transaction shall be upon such terms as
substantially to preserve, and not to impair, the rights and powers of the
Trustee and of the Holders hereunder.
10.2 NO EVENT OF DEFAULT. Notwithstanding anything to the contrary herein
expressed or implied, no transaction in respect whereof the provisions of
Section 10.1 are complied with and no resolution or order for winding-up the
Company for the purpose of carrying such transaction into effect shall
constitute an Event of Default.
10.3 TRUSTEE TO CONSENT. Upon obtaining an opinion of Counsel that the
provisions of this Section 10 have been complied with, including an opinion that
the transaction is on such terms as substantially to preserve and not to impair
the rights and powers of the Trustee and the Holders hereunder, the Trustee
shall consent to such transaction and execute and deliver such documents and do
such acts and things as, in its discretion, it may deem advisable, for the
completion of the transaction, whereupon the Company may be released and
discharged from liability under this Indenture and the Trustee may execute and
deliver all instruments which are necessary or reasonably required to that end.
10.4 SUBSTITUTIONS OF SUCCESSOR COMPANY. Whenever the provisions of this Section
10 have been complied with, the successor company shall succeed to, and be
substituted for, the Company with the same effect as if it had been a party to
this Indenture, and shall possess and may exercise each and every right of the
Company hereunder.
<PAGE>
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SECTION 11 -- CONCERNING THE TRUSTEE
11.1 INDEMNITY. Before doing any act or thing pursuant hereto, the Trustee shall
be entitled to be indemnified by the Company or by the Holders in an amount and
subject to terms and conditions satisfactory to it.
11.2 DUTIES OF TRUSTEE. By way of supplement to the provisions of any statute
for the time being relating to trustees, and notwithstanding any other provision
of this Indenture, in the exercise of the right, duties and obligations
prescribed or conferred by the terms of this Indenture, the Trustee shall
exercise that degree of care, diligence and skill that a reasonably prudent
trustee would exercise in comparable circumstances. Provided that the Trustee
shall have exercised such standard of care, diligence and skill, and in the
absence of wilful neglect, misconduct or fraud, the Company shall indemnify and
save harmless the Trustee from all loss, costs or damages it may suffer in
administering the trusts of this Indenture.
11.3 ACTION BY TRUSTEE. The Trustee shall not be obligated to do any act or
thing except when required to do so by this Indenture and, in the case of a
default, only when it has actual notice thereof.
11.4 CERTIFICATE OF THE COMPANY. The Trustee may accept a Certificate of the
Company as conclusive evidence of the truth of any fact relating to the Company
or its assets therein stated, but the Trustee may in its discretion require
further evidence or information before acting or relying on any such
certificate.
11.5 TRUSTEE MAY EMPLOY EXPERTS OR AGENTS. The Trustee may, at the Company's
expense, employ or retain such lawyers, accountants, engineers, appraisers or
other experts, advisers or agents as it may reasonably require for the purpose
of discharging its duties hereunder and shall not be responsible for any
misconduct, mistake or error of judgment on the part of any of them. The Trustee
may rely upon and act upon the opinion or advice of, or information obtained
from, any such lawyer, accountant, engineer, appraiser or other expert, adviser
or agent in relation to any matter arising in the administration of the trusts
hereof. The Trustee shall not incur any liability for the acts or omissions of
such lawyers, accountants, engineers, appraisers or other experts, advisers or
agents employed by the Trustee in good faith.
11.6 RESIGNATION OF TRUSTEE. The Trustee may resign its trust and be discharged
from all further obligations hereunder by giving to the Company written notice
at least ninety (90) days before the effective date of the resignation. If the
Trustee resigns, or becomes incapable of acting hereunder, the Company shall
forthwith appoint a new Trustee. Failing such appointment by the Company, the
retiring Trustee or any Holder may apply to a court of competent jurisdiction on
such notice as such court may direct, for the appointment of a new Trustee. The
Holders may, by Holders' resolution, remove the Trustee (including a Trustee
appointed by the Company or by a Judge as aforesaid) and appoint a new Trustee.
If any material conflict of interest in the role of the Trustee as a fiduciary
hereunder exists or shall
<PAGE>
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arise, the Trustee shall within ninety (90) days after ascertaining that it has
such a material conflict of interest, either eliminate such material conflict of
interest, or resign in the manner and with the effect as aforesaid.
11.7 INDENTURE LEGISLATION. The Company and the Trustee agree that each will at
all times in relation to this Indenture and any action to be taken hereunder,
observe and comply with and be entitled to the benefits of all Applicable
Legislation. If and to the extent that any provision of this Indenture limits,
qualifies or conflicts with any mandatory requirement of Applicable Legislation,
such mandatory requirement shall prevail.
11.8 MONEY HELD AND DEPOSITED. Any monies held by the Trustee in accordance with
the trusts hereunder may be deposited in the name of the Trustee in any of the
five largest, in terms of assets, Canadian chartered banks or, with the consent
of the Company, in the deposit department of the Trustee or any other loan or
trust company authorized to accept deposits under the laws of Canada or any
province thereof at the rate of interest then current on similar deposits.
Unless and until the Trustee shall have declared the principal of and
interest on the Instruments to be due and payable, the Trustee shall pay over to
the Company all interest received by the Trustee with respect to any investments
or deposits made pursuant to the provisions of this Section 11.8.
The Trustee shall incur no liability in respect of monies deposited with
anyone, including solicitors, except the Trustee unless the Trustee shall on its
own make such deposit without instructions or directions of the Company.
11.9 NOTICE. The Trustee shall not be required to give notice to third parties,
including the Holders, of the execution of this Trust Indenture.
11.10 USE OF PROCEEDS. The Trustee shall in no way be responsible for the use by
the Company of the proceeds of the issue hereunder.
11.11 NO INQUIRIES. The Trustee, prior to the certification and delivery of any
Instruments under any provisions of this Trust Indenture, shall not be bound to
make any inquiry or investigation as to the correctness of the matters set out
in any of the resolutions, opinions, certificates or other documents required by
the provisions of this Trust Indenture, but shall be entitled to accept and act
upon the resolutions, opinions, certificates or other documents. The Trustee may
nevertheless, in its discretion, require further proof in cases where it deems
further proof desirable. The Trustee shall not be bound to make any inquiry or
investigation as to the performance by the Company of the Company's covenants
hereunder.
<PAGE>
- 36 -
11.12 TRUSTEE NOT REQUIRED TO GIVE SECURITY. The Trustee shall not be required
to give any bonds or security with respect to the execution of the Trust and
powers of this Trust Indenture.
11.13 NO CONFLICT OF INTEREST. The Trustee represents to the Company that at the
date of execution and delivery by it of this Trust Indenture there exists no
material conflict of interest in the role of the Trustee as a fiduciary
hereunder but if, notwithstanding the provisions of this Section 11.13, such a
material conflict of interest exists, the validity and enforceability of this
Trust Indenture and the Instruments issued hereunder shall not be affected in
any manner whatsoever by reason only that such material conflict of interest
exists but the Trustee shall, within ninety (90) days after ascertaining that it
has a material conflict of interest, either eliminate such material conflict of
interest or resign in the manner and with the effect specified in Section 11.6
hereof.
11.14 TRUSTEE NOT ORDINARILY BOUND. Except as otherwise specifically provided
herein, the Trustee shall not be bound to do, observe or perform or see to the
observance or performance by the Company of any of the obligations herein
imposed upon the Company or of the covenants on the part of the Company herein
contained, nor in any way to supervise or interfere with the conduct of the
Company's business, and then only after it shall have been indemnified to its
satisfaction against all actions, proceedings, claims and demands to which it
may render itself liable and all costs, charges, damages and expenses which it
may incur by so doing. None of the provisions contained in this Indenture shall
require the Trustee to expend or risk its own funds or otherwise to incur
financial liability in the performance of any of its duties or in the exercise
of any of its rights or powers unless indemnified as aforesaid.
11.15 TRUSTEE MAY DEAL IN INSTRUMENTS. The Trustee may, in its personal or other
capacity, buy, sell, lend upon and deal in the Instruments and generally
contract and enter into financial transactions with the Company or otherwise,
without being liable to account for any profits made thereby.
SECTION 12 -- SATISFACTION AND RELEASE
12.1 GENERAL. This Indenture is executed and delivered upon the express
condition that if the Company pays or causes to be paid to the Holders the
principal of the Instruments and interest (including interest on overdue
interest) thereon and also pays all other sums payable hereunder by the Company
to the extent required and permitted by this Indenture, then this Indenture
shall be discharged and the rights hereby granted shall terminate and the
Trustee shall, at the request and cost of the Company, execute and deliver to
the Company such documents evidencing such discharge and termination as the
Company may reasonably require subject to advice of counsel.
<PAGE>
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12.2 NON-PRESENTATION OF INSTRUMENTS. In case the holder of any Instrument shall
fail to present the same for payment on the date on which the principal or
interest thereon or represented thereby becomes payable either at maturity or
otherwise:
(1) the Company shall be entitled to pay to the Trustee and direct it to
set aside, or
(2) in respect of moneys in the hands of the Trustee which may or should
be applied to the payment or redemption of the Instruments, the
Company shall be entitled to direct the Trustee to set aside, the
principal or interest, as the case may be, in trust to be paid,
without further interest, to the holder of such Instrument upon due
presentation or surrender thereof in accordance with the provisions
of this Indenture; and thereupon the principal or interest payable
on or represented by each Instrument in respect whereof such moneys
have been set aside shall be deemed to have been paid and the holder
thereof shall thereafter have no right in respect thereof except
that of receiving payment of the moneys so set aside by the Trustee
upon due presentation and surrender thereof, subject always to the
provisions of Section 12.3.
12.3 REPAYMENT OF UNCLAIMED MONEYS TO COMPANY. Any moneys in the hands of the
Trustee and set aside under Section 12.2 and not claimed by and paid, as
provided in said Section 12.2, to Holders within six (6) years after the date on
which payment first becomes due and payable shall be repaid to the Company by
the Trustee on demand, and thereupon the Trustee shall be released from all
further liability with respect to such moneys, and thereafter the Holders of the
Instruments in respect of which such moneys were so repaid to the Company shall
have no rights in respect thereof and the Company shall be discharged from its
obligations in respect thereof.
SECTION 13 -- NOTICES
13.1 NOTICE TO COMPANY. Any notice to the Company under the provisions of this
Indenture shall be valid and effective if delivered, or sent by telecopier
addressed to the Company at:
Seven Seas Petroleum Inc.
Suite 960
Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas 77056
U.S.A.
Attention: Vice President - Finance
Telecopier No.: (713) 621-9770
<PAGE>
- 38 -
with a copy to:
McMillan Binch
Suite 3800, South Tower
Royal Bank Plaza
Toronto, Ontario
M5J 2J7
Attention: James D. Scarlett
Telecopier No.: (416) 865-7048
and shall be deemed to have been effectively given on the date of delivery if
delivered, or the date of sending if sent by telecopier.
13.2 NOTICE TO THE HOLDERS. Any notice to the Holders under the provisions of
this Indenture shall be valid and effective if delivered or sent by ordinary
post or sent by telegram, telex or telecopier addressed to such Holder at their
address appearing on the applicable register and shall be deemed to have been
effectively given on the date of delivery if delivered, on the fifth Business
Day following the date of the postmark on such notice, if mailed, or the date of
sending by telegram, telex or telecopier, with a copy to:
Yorkton Securities Inc.
11th Floor
1055 Dunsmuir Street
Vancouver, BC
V7X 1L4
Attention: Verlee Webb
Telecopier No.: (604) 640-0320
Any such notice of communication given with respect to an instrument which is
registered in more than one name may be given to any of the people named on the
register and such notice of communication shall be sufficient to all such
holders. Accidental error or omission in giving notice to any one or more
holders shall not invalidate any action or proceeding founded thereon.
If, by reason of a strike, lockout or other work stoppage, actual or threatened,
involving postal employees, any notice to be given to the Holders hereunder
could reasonably be considered unlikely to reach its destination, such notice
shall be valid and effective only if it is delivered personally to such Holders
or if delivered to the address for such Holders contained in the register
maintained by the Trustee, by telecopy or other means of prepaid transmitted and
recorded communication.
13.3 NOTICE TO TRUSTEE. Any notice to the Trustee under the provisions of this
Indenture shall be valid and effective if delivered, or sent by telecopier
addressed to the Trustee at:
Montreal Trust Company of Canada
710 - 530 8th Avenue S.W.
<PAGE>
- 39 -
Calgary, Alberta
T2P 3S8
Attention: Manager, Corporate Trust
Telecopier No.: (403) 267-6598
with a copy to:
Yorkton Securities Inc.
11th Floor
1055 Dunsmuir Street
Vancouver, BC
V7X 1L4
Attention: Verlee Webb
Telecopier No.: (604) 640-0320
and shall be deemed to have been effectively given on the date of delivery if
delivered, or the date of sending if sent by telecopier.
SECTION 14 -- ACCEPTANCE OF TRUST BY TRUSTEE
14.1 GENERAL. The Trustee hereby accepts the trusts declared and provided in
this Indenture and agrees to perform the same upon the terms and conditions
hereinbefore set forth.
SECTION 15 -- FURTHER ASSURANCE
15.1 FURTHER ASSURANCES. The parties agree from time to time, as may be
reasonably required by any party hereto, to execute and deliver such further and
other documents and do all matters and things which may be convenient or
necessary to carry out the intention of this Trust Indenture more effectively
and completely.
<PAGE>
- 40 -
The parties have executed this Agreement.
SEVEN SEAS PETROLEUM INC.
By: _______________________
Name:
Title:
By: _______________________
Name:
Title:
MONTREAL TRUST COMPANY OF CANADA
By: _______________________
Name:
Title:
By: _______________________
Name:
Title:
<PAGE>
SCHEDULE 2.1 - FORM OF NOTES
THE NOTE REPRESENTED BY THIS CERTIFICATE AND THE UNDERLYING SECURITIES HAVE NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"1933 ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN THE
UNITED STATES OR TO U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE 1933 ACT)
WITHOUT REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES
LAWS, UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
THIS NOTE SHALL BE DEEMED TO BE EXCHANGED FOR A DEBENTURE OF THE COMPANY
PURSUANT TO THE TERMS OF THE TRUST INDENTURE REFERRED TO HEREIN AT WHICH TIME
THIS NOTE WILL BE CANCELLED.
No. US$
SEVEN SEAS PETROLEUM INC.
(continued under the laws of the Yukon Territory)
6% Exchangeable Subordinated Note
FOR VALUE RECEIVED Seven Seas Petroleum Inc. (herein called the
"COMPANY") hereby acknowledges itself indebted to and promises to pay to the
registered holder hereof as set out in Schedule "A" hereto (the "HOLDER") on the
date (the "Note Maturity Date") which is the earlier of (a) August 7, 2003 and
(b) such other date as the principal amount hereof shall become payable in
accordance with the provisions of the indenture (the "INDENTURE") dated as of
August 7, 1997, between the Company and Montreal Trust Company of Canada (the
"TRUSTEE"), on presentation and surrender of this Note at the principal office
in Calgary, Alberta, Canada, of the Trustee, the sum of ______________________
DOLLARS ($ _________________ ) in lawful money of the United States of America.
Interest shall be payable on the principal amount outstanding from time to time
at the rate of 6% per annum (calculated and paid semi-annually, in arrears) both
before and after the Note Maturity Date and both before and after default, on
December 31 and June 30 in each year, the first such payment to be made on
December 31, 1997. A capitalized term used in this Note and not defined shall
have the meaning given to it in the Indenture.
Within three business days following each date on which interest on this
Note becomes due (except for interest payable at the Note Maturity Date which
may, at the option of the Company, be paid upon presentation and surrender of
this Note), the Company shall forward or cause to be forwarded by prepaid post
to the Holder at the address appearing on the register of Noteholders maintained
by the Trustee, a cheque for such interest, less any tax
2.1 - 1
<PAGE>
required to be deducted. The forwarding of such cheque shall satisfy and
discharge the liability of the Company for interest on this Note to the extent
of the sum represented thereby (plus the amount of any tax deducted as
aforesaid) unless such cheque shall not be paid on presentation.
This Note is one of a series of like notes designated as 6% Convertible
Subordinated Notes of the Company (the "NOTES") issued pursuant to the
Indenture. The aggregate principal amount of Notes which may be issued under the
Indenture is limited to $25,000,000 in lawful money of the United States of
America. This Note and all other Notes now or hereafter issued and certified
under the Indenture shall rank pari passu in all respects and are secured
equally and rateably without priority or preference of any one Note over any
other by the Indenture. The Indenture is hereby referred to for a complete
statement of the rights of the holders of the Notes issued thereunder and of the
Company and of the Trustee in respect thereof and of the terms and conditions
upon which the Notes are issued and held, to all of which the Holder hereof by
acceptance of this Note assents.
The Indenture contains provisions dealing with the effect of default
under one or more of the Notes.
This Note is a direct obligation of the Company and, subject to the
terms and conditions of the Indenture, is secured by a charge over the issued
and outstanding shares of the Pledged Subsidiaries held by the Company and the
Pledgor Subsidiaries.
This Note shall be transferable subject to resale restrictions imposed
under applicable securities laws and stock exchange rules and policies; provided
however, that no transfer of this Note shall be valid or effective unless:
(a) it is made by the registered holder (or by his duly appointed
attorney) by written instrument in form and execution satisfactory to the
Trustee and upon compliance with any reasonable requirements that the Trustee
may prescribe;
(b) particulars of such transfer are entered in the Register kept by the
Trustee at its principal office in Calgary, Alberta, as provided in the
Indenture; and
(c) particulars thereof are endorsed on this Note by the Trustee.
The Notes will be subordinated to all Senior Debt of the Company. Each
Holder of this Note, by acceptance hereof, authorizes and directs the Trustee on
his behalf to take such action as may be necessary or appropriate to acknowledge
or effect the subordination provided for herein and appoints the Trustee as his
agent for any and all such purposes.
The principal hereof may become due or be declared due before the Note
Maturity Date, as more particularly provided in the Indenture.
2.1 - 2
<PAGE>
The Notes will be exchangeable into Debentures (on the basis of $100
principal amount of Debentures for each $100 principal amount of Notes held) at
any time on or before 5:00 p.m. (Calgary time) on the date (the "EXCHANGE DATE")
which is the earlier of:
(a) the third (3rd) Business Day following the date upon which all
Qualification and Registration Requirements have been met (the
"FINAL RECEIPT DATE"); and
(b) the first Business Day which is twelve (12) months from the
Closing Date (the "CLEARANCE DATE").
The Company covenants and agrees that, as soon as practicable following
the Closing Date, it will file the following documents:
(a) a preliminary prospectus (the "PRELIMINARY PROSPECTUS") with the
securities commissions (the "SECURITIES COMMISSIONS") in the
Qualifying Jurisdictions qualifying the distribution of the
Debentures upon exercise of the Notes;
(b) a registration statement or registration statements (the "1933
REGISTRATION STATEMENT") under the United States Securities Act
of 1933 registering for resale the Common Shares and Purchase
Warrants comprising the Units and the Common Shares issuable on
exercise of the Purchase Warrants;
(c) all required filings with state securities or "blue sky"
administrators where the Company has offered and sold any of the
Notes, the Debentures, the Units, the Purchase Warrants and the
Common Shares issuable on exercise of the Purchase Warrants (the
"BLUE SKY FILINGS");
and will, as soon as practicably possible thereafter, use its best efforts to:
(d) cause receipts for a (final) prospectus (the "PROSPECTUS") to be
issued by the Securities Commissions in the Qualifying
Jurisdictions; and
(e) cause the 1933 Registration Statement and Blue Sky Filings to
become effective ((a) through (e) above, collectively, the
"QUALIFICATION AND REGISTRATION REQUIREMENTS") .
Once the Qualification and Registration Requirements are satisfied and,
if applicable, following the obtaining of any necessary relief orders from the
appropriate Securities Commissions, each Noteholder shall be deemed to have
exercised the right of exchange attached to the Notes on the third (3rd)
Business Day after the Final Receipt Date and the Company shall thereafter issue
Debentures, dated as of the Final Receipt Date, to the Noteholders on the basis
of $100 principal amount of Debentures for each $100 principal amount of Notes
held without any further acts required on behalf of the Noteholders.
2.1 - 3
<PAGE>
As soon as practicable following the satisfaction by the Company of the
Qualification and Registration Requirements, the Company shall give written
notice thereof to the Trustee (together with copies of the prospectuses and
registration statements filed, the receipts issued therefor by the Securities
Commissions and the Blue Sky Filings) and shall give written notice or cause the
Trustee to give written notice to the holder of each Note so exercised that the
Qualification and Registration Requirements have been satisfied and that such
Note has been exercised.
In the event the Company is unable to satisfy the Qualification and
Registration Requirements and, if applicable, obtain the necessary relief orders
from the appropriate Securities Commissions prior to the Clearance Date, each
Noteholder shall be deemed to have exercised the right of exchange attached to
the Notes as of the Clearance Date and the Company shall thereafter issue
Debentures, dated as of the Clearance Date, to the Noteholder on the basis of
$100 principal amount of Debentures for each $100 principal amount of Notes held
without any further acts required by or on behalf of the Noteholders.
The Holder understands that upon exercise or deemed exercise of the
right of exchange attached to this Note and issue of Debentures in connection
therewith, in accordance with the terms of the Indenture, this Note will be
cancelled without any further acts required by or on behalf of the Noteholders.
The Indenture contains provisions whereby resolutions passed by the
holders of a specified majority of the principal amount of the Notes outstanding
under the Indenture at a meeting of the Noteholders or written instruments
signed by Noteholders may become binding upon all Noteholders.
This Note is issued subject to the provisions of the Indenture and each
Holder of this Note, by acceptance hereof, agrees to and shall be bound by such
provisions and such provisions are hereby incorporated by reference. In a case
of any conflict of inconsistency between the terms of this Note and the terms of
the Indenture, the terms of the Indenture shall prevail.
This Note is not valid until certified by the Trustee.
Each Holder of this Note, by the acceptance hereof, assents to the
foregoing terms and conditions and agrees to be bound by the same.
2.1 - 4
<PAGE>
IN WITNESS WHEREOF the Company has caused this Note to be executed under
corporate seal and signed by its duly authorized officer as of the date set
forth below.
SEVEN SEAS PETROLEUM INC.
Per: _________________________
This Note is one of the 6% Exchangeable Subordinated Notes of Seven Seas
Petroleum Inc. referred to in the Indenture referred to in the Note.
Certified by MONTREAL TRUST
COMPANY OF CANADA
Per: _________________________
Dated:
2.1 - 5
<PAGE>
SCHEDULE "A"
Registered Date of Trustee's
Holder Address Registration Signature
- ---------- ------- ------------ ---------
2.1 - 6
<PAGE>
SCHEDULE 2.6 - FORM OF DEBENTURES
THE DEBENTURE REPRESENTED BY THIS CERTIFICATE AND THE UNDERLYING SECURITIES HAVE
NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "1933 ACT") OR ANY STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN
THE UNITED STATES OR TO U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE 1933
ACT) WITHOUT REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES
LAWS, UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE.
No. US$
SEVEN SEAS PETROLEUM INC.
(continued under the laws of the Yukon Territory)
6% Convertible Subordinated Debenture
FOR VALUE RECEIVED Seven Seas Petroleum Inc. (herein called the
"COMPANY") hereby acknowledges itself indebted to and promises to pay to the
registered holder hereof set out in Schedule "B" hereto (the "HOLDER") on the
date (the "Debenture Maturity Date") earlier of (a) August 7, 2003 and (b) such
other date as the principal amount hereof shall become payable in accordance
with the provisions of the indenture (the "INDENTURE") dated as of August 7,
1997 between the Company and Montreal Trust Company of Canada (the "TRUSTEE"),
on presentation and surrender of this Debenture at the principal office in
Calgary, Alberta, Canada, of the Trustee, the sum of _________________________
_______________________________ DOLLARS ($___________) in lawful money of the
United States of America. Interest shall be payable on the principal amount
hereof at the rate of 6% per annum (calculated and paid semi-annually, in
arrears) both before and after the Debenture Maturity Date and both before and
after default, on December 31, and June 30 in each year, the first such payment
to be made on December 31, 1997. A capitalized term used in this Debenture and
not defined shall have the meaning given to it in the Indenture.
Within three business days following each date on which interest on
this Debenture becomes due (except for interest payable at the Debenture
Maturity Date which may, at the option of the Company, be paid upon presentation
and surrender of this Debenture), the Company shall forward or cause to be
forwarded by prepaid post to the Holder at the address appearing on the register
of Debentureholders maintained by the Trustee, a cheque for such interest, less
any tax required to be deducted. The forwarding of such cheque shall satisfy and
discharge the liability of the Company for interest on this Debenture to the
2.6 - 1
<PAGE>
extent of the sum represented thereby (plus the amount of any tax deducted as
aforesaid) unless such cheque shall not be paid on presentation.
This Debenture is one of a series of like debentures designated as
6% Convertible Subordinated Debentures of the Company (the "DEBENTURES") issued
pursuant to the Indenture. The aggregate principal amount of Debentures which
may be issued under the Indenture is limited to $25,000,000 in lawful money of
the United States of America. This Debenture and all other Debentures now or
hereafter issued and certified under the Indenture shall rank pari passu in all
respects and are secured equally and rateably without priority or preference of
any one Debenture over any other by the Indenture. The Indenture is hereby
referred to for a complete statement of the rights of the holders of Debentures
issued thereunder and of the Company and of the Trustee in respect thereof and
of the terms and conditions upon which the Debentures are issued and held, to
all of which the Holder by acceptance of this Debenture assents.
The Indenture contains provisions dealing with the effect of default
under one or more of the Debentures.
This Debenture is a direct obligation of the Company, subject to the
terms and conditions of the Indenture, and is secured by a Lien upon the
Collateral (as defined in the Indenture).
No transfer of this Debenture shall be valid or effective unless:
(1) it is made by the registered holder (or by his duly appointed
attorney) by written instrument in form and execution satisfactory
to the Trustee and upon compliance with any reasonable requirements
that the Trustee may prescribe;
(2) particulars of such transfer are entered in the register kept by the
Trustee at its principal office in Calgary, Alberta, as provided in
the Indenture; and
(3) particulars thereof are endorsed on this Debenture by the Trustee.
The Debentures will be subordinated to all Senior Debt of the
Company. Each Holder of this Debenture, by acceptance hereof, authorizes and
directs the Trustee on his behalf to take such action as may be necessary or
appropriate to acknowledge or effect the subordination provided for herein and
appoints the Trustee as his agent for any and all such purposes.
The principal hereof may become due or be declared due before the
Debenture Maturity Date, as more particularly provided in the Indenture.
2.6 - 2
<PAGE>
The outstanding principal amount of this Debenture is convertible in
whole or in part, subject to and in accordance with the provisions of the
Indenture, at the option of the Holder hereof, into units comprising one (1)
Common Share and one-half (1/2) of one (1) Purchase Warrant (a "Unit") at the
conversion price of $11.50 per Unit, subject to adjustment as set out in the
Indenture. Following the expiry of the Purchase Warrants on August 7, 1998, the
Debentures shall be convertible only into Common Shares, at the conversion price
of $11.50 per share, subject to and in accordance with the provisions of the
Indenture and the purchase warrant indenture made as of August 7, 1997 between
the Company and Montreal Trust Company of Canada, as trustee. Such conversion
shall be effected by the surrender of this Debenture at the principal office of
the Trustee in Calgary, Alberta, Canada, accompanied by a conversion form in the
form of Schedule "A" attached hereto signed by the Holder (with the appropriate
documentation) as to the exercise of such right of conversion and setting forth
the name and address of the person in whose name the Common Shares are to be
issued. This Debenture shall be converted in multiples of $100 only. Provision
is made in the Indenture for adjustment of the conversion price in certain
events specified in the Indenture. Accrued and unpaid interest from the next
preceding interest payment date will be payable on Debentures converted until
the Conversion Time.
Subject to and upon compliance with the provisions of the Indenture,
the Company shall have the right to give notice (the "COMPANY CONVERSION
NOTICE") to the Trustee of its intention to convert all or part of the
Debentures into Units at the Conversion Price, subject to each of the following
conditions being met:
(1) the Common Shares shall have traded at or above $14.00 (the "MINIMUM
PRICE") for twenty (20) consecutive Trading Days on The Toronto
Stock Exchange (the "TRADING PERIOD");
(2) the Company Conversion Notice shall have been delivered to the
Trustee within three (3) days following the Trading Period;
(3) the 1933 Registration Statement shall have remained in effect during
the first seven (7) days from and including the date the Company
Conversion Notice is received by the Trustee; provided however, that
notwithstanding any provision, term or condition of this Indenture
to the contrary, if the 1933 Registration Statement does not remain
in effect throughout such period of notice the Company may provide a
subsequent Company Conversion Notice to the Trustee within five (5)
days of the resumption of the effectiveness of the 1933 Registration
Statement, provided that the Common Shares have traded at or over
the Minimum Price on the Toronto Stock Exchange for two (2)
consecutive Trading Days following the resumption of the
effectiveness of the 1933 Registration Statement and prior to the
issuance by the Company of the subsequent Company Conversion Notice;
2.6 - 3
<PAGE>
(4) no Event of Default shall exist under the Indenture; and
(5) no fact or circumstance which would constitute a "material change"
under applicable securities laws in any of the Qualifying
Jurisdictions shall have occurred with respect to the Company which
has not been disclosed to the public for a period of at least ten
(10) Trading Days prior to delivery of the Company Conversion
Notice;
and the conversion of the Debentures shall occur within seven (7) days from the
date the Company Conversion Notice has been delivered to the Trustee. The
Company shall deliver to the Trustee with the Company Conversion Notice a
certificate signed by two senior officers of the Company confirming the
satisfaction of the foregoing conditions (1) to (5) by the Company at the time
the Company Conversion Notice is delivered.
The Indenture contains provisions whereby resolutions passed by the
holders of a specified majority of the principal amount of the Debentures
outstanding under the Indenture at a meeting of the Debentureholders or written
instruments signed by Debentureholders may become binding upon all
Debentureholders. The Indenture also contains provision for adjustment of the
conversion price at which the principal amount of this Debenture may be
converted, in the event of certain reorganizations of share capital, corporate
reorganizations and other events affecting the Common Shares.
This Debenture is issued subject to the provisions of the Indenture
and each Holder of this Debenture, by acceptance hereof, agrees to and shall be
bound by such provisions and such provisions are hereby incorporated by
reference. In a case of any conflict or inconsistency between the terms of this
Debenture and the terms of the Indenture, the terms of the Indenture shall
prevail.
This Debenture is not valid until certified by the Trustee.
The Holder of this Debenture, by the acceptance hereof, assents to
the foregoing terms and conditions and agrees to be bound by the same.
2.6 - 4
<PAGE>
IN WITNESS WHEREOF the Company has caused this Debenture to be
executed under corporate seal and signed by its duly authorized officer as of
the date set forth below.
SEVEN SEAS PETROLEUM INC.
Per: ____________________________
This Debenture is one of the 6% Convertible Subordinated Debentures of Seven
Seas Petroleum Inc. referred to in the Indenture referred to in the Debenture.
Certified by MONTREAL TRUST
COMPANY OF CANADA
Per: ____________________________
Dated: __________________________
2.6 - 5
<PAGE>
SCHEDULE "B"
Registered Date of Trustee's
Holder Address Registration Signature
- ---------- ------- ------------ ---------
2.6 - 6
<PAGE>
SCHEDULE 6.1 - FORM OF DEBENTUREHOLDER CONVERSION NOTICE
DEBENTUREHOLDER CONVERSION NOTICE
TO: SEVEN SEAS PETROLEUM INC.
The undersigned registered holder of the attached Debenture hereby
irrevocably elects to convert such Debenture (or $ principal amount thereof)
into Units of Seven Seas Petroleum Inc. in accordance with the terms of the
Indenture referred to in such Debenture and directs that the Common Shares and
Purchase Warrants issuable and deliverable upon such conversion be issued and
delivered to the person indicated below. If Common Shares and Purchase Warrants
are to be issued in the name of a person other than the registered holder, all
requisite transfer taxes must be tendered by the undersigned.
DATED: _______________________
_______________________________
Registered Holder
NOTE: If shares are to be issued in the name of a person other than the
registered holder, all requisite documentation reasonably required
by the Trustee must be provided, including, if appropriate, a
guarantee of the signature by a bank, a trust company or a member
firm of a stock exchange acceptable to the Trustee.
(print name in which Common Shares issued on conversion are to be issued,
delivered and registered)
_______________________________
Name
_______________________________
Address
_______________________________
(City, Province/State, Country, Postal
Code)
_______________________________
Name of Guarantor
_______________________________
Authorized Signature
6.1 - 1
<PAGE>
SCHEDULE 6.2 - FORM OF COMPANY CONVERSION NOTICE
COMPANY CONVERSION NOTICE
TO: MONTREAL TRUST COMPANY OF CANADA
In accordance with Section 6.2 of the Indenture, the undersigned hereby
irrevocably gives notice of its intention to cause the conversion of
US$__________ of Debentures into Units of Seven Seas Petroleum Inc.
The Corporation represents and warrants that it has complied with and met
the conditions set forth in Section 6.2 of the Indenture prior to issuing this
Company Conversion Notice and acknowledges that the Trustee is relying on this
representation and warranty.
Capitalized terms used herein shall have the meanings given to such term
in the Indenture dated as of August 7, 1997 between Seven Seas Petroleum Inc.
and Montreal Trust Company of Canada.
Dated: _______________
SEVEN SEAS PETROLEUM INC.
Per: _______________________________ c/s
Name:
Title:
6.2 - 1
------------------------------------------------------------
LIMITED RECOURSE GUARANTEE, SECURITY
AND PLEDGE AGREEMENT
Made as of August 7, 1997
Between
SEVEN SEAS PETROLEUM HOLDINGS INC.
as the "Guarantor"
and
MONTREAL TRUST COMPANY OF CANADA,
on behalf of the Holders
as the "Secured Party"
------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
RECITALS...............................................................1
SECTION 1 -- INTERPRETATION
1.1 Certain Defined Terms............................................1
(1) Adverse Claim..............................................1
(2) Agreement..................................................2
(3) Collateral.................................................2
(4) Corporation................................................2
(5) Debenture Maturity Date....................................2
(6) Equity Securities..........................................2
(7) Event of Default...........................................2
(8) Governmental Body..........................................2
(9) Holders....................................................2
(10) Instruments................................................2
(11) Maturity Date..............................................2
(12) Note Maturity Date.........................................2
(13) Obligations................................................2
(14) Pledged Securities.........................................2
(15) Security Interest..........................................3
1.2 Indenture........................................................3
SECTION 2 -- LIMITED RECOURSE GUARANTEE
2.1 Limited Recourse Guarantee.......................................3
2.2 Realization on Security Interest.................................3
2.3 Need Not Exhaust Recourse........................................3
2.4 Continuing Agreement.............................................4
2.5 Additional Obligations...........................................4
2.6 Waiver of Subrogation............................................4
2.7 Obligations Not Affected.........................................4
SECTION 3 -- GRANT OF SECURITY INTEREST
3.1 Security Interest................................................6
3.2 Delivery of Pledged Securities...................................6
3.3 Attachment of Security Interest..................................7
3.4 Perfection of Personal Property..................................7
3.5 Termination of Security Interest. ...............................7
SECTION 4 -- REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 Representations and Warranties of the Guarantor..................7
4.2 Covenants of the Guarantor.......................................9
(i)
<PAGE>
SECTION 5 -- DEALING WITH PLEDGED SECURITIES AND REALIZATION
5.1 Rights and Duties of the Secured Party..........................10
5.2 Voting Rights...................................................10
5.3 Payment of Dividends and Interest Payments. ...................10
5.4 Default.........................................................11
5.5 Remedies Upon an Event of Default...............................11
5.6 Remedies, etc., Cumulative......................................13
5.7 Consent. .......................................................13
5.8 Application of Proceeds.........................................13
5.9 Purchasers of Pledged Collateral................................13
5.10 Payment of Expenses.............................................13
SECTION 6 -- GENERAL
6.1 Benefit of the Agreement........................................13
6.2 Rights and Waivers..............................................14
6.3 Notice..........................................................14
6.4 Further Assurances..............................................15
6.5 Power of Attorney...............................................16
6.6 Additional Security and Merger..................................16
6.7 Complete Agreement..............................................16
6.8 Amendment.......................................................16
6.9 Severability....................................................16
6.10 Governing Law...................................................16
6.11 Paramountcy.....................................................17
SCHEDULES
SCHEDULE 1.1(j) Pledged Securities
SCHEDULE 3.2 Stock Power/Power of Attorney
SCHEDULE 5.2 Irrevocable Proxy
(ii)
<PAGE>
- 1 -
LIMITED RECOURSE GUARANTEE, SECURITY
AND PLEDGE AGREEMENT
This Agreement is made as of August 7, 1997, between
SEVEN SEAS PETROLEUM HOLDINGS INC., a Cayman
Islands corporation,
as "GUARANTOR"
and
MONTREAL TRUST COMPANY OF CANADA, on behalf of
the Holders,
as "SECURED PARTY"
RECITALS
A. Seven Seas Petroleum Inc., as issuer (the "ISSUER"), has entered into an
indenture made as of August 7, 1997 (as amended, supplemented, restated or
otherwise modified from time to time, the "INDENTURE") with the Secured Party.
B. To secure due repayment and satisfaction of all of the Issuer's present and
future liabilities and obligations under, in respect of or relating to the
Instruments and to secure due performance by the Issuer of all of its other
present and future obligations under the Indenture and the Instruments, whether
absolute or contingent, present or future, of the Issuer to Holders from time to
time outstanding (collectively, the "OBLIGATIONS"), the Guarantor has agreed to
guarantee the Obligations and, as security therefor, to grant a security
interest in and pledge the Collateral to the Secured Party pursuant to this
Agreement.
FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1 -- INTERPRETATION
1.1 CERTAIN DEFINED TERMS. In this Agreement:
(1) ADVERSE CLAIM has the meaning given to it in Section 53(1) of the BUSINESS
CORPORATIONS ACT (Ontario).
<PAGE>
- 2 -
(2) AGREEMENT means this agreement and all amendments, restatements,
modifications and supplements and any exhibits or schedules to any of the
foregoing made hereto by written agreement between the Guarantor and the Secured
Party.
(3) COLLATERAL means (a) all of Guarantor's membership interest in Esmeralda
Limited Liability Company, an Oklahoma limited liability company, and all rights
to vote, approve or consent to any action or matter pertaining to the business
of Esmeralda Limited Liability Company; and (b) the Pledged Securities.
(4) CORPORATION means any of the corporations listed on Schedule 1.1(j) and
their respective successors.
(5) DEBENTURE MATURITY DATE has the meaning given to it in the Indenture.
(6) EQUITY SECURITIES means all shares, options, warrants, interests,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited partnership or equivalent entity, whether
voting or non-voting or participating or non-participating.
(7) EVENT OF DEFAULT has the meaning given to it in Section 5.4 of this
Agreement.
(8) GOVERNMENTAL BODY means any government, parliament, legislature, regulatory
authority, agency, tribunal, department, commission, board or court or other
law, regulation or rule-making entity (including a Minister of the Crown),
national or supra-national, having or purporting to have jurisdiction on behalf
of any nation, state, province, municipality or district, or any subdivision
thereof, any federal, provincial, state, county, municipal or other Canadian
federal, provincial, state or local governmental or regulatory authority,
agency, board, body, commission, instrumentality, court or quasi-governmental
authority.
(9) HOLDERS has the meaning given to it in the Indenture.
(10) INSTRUMENTS has the meaning given to it under the Indenture.
(11) MATURITY DATE means the Note Maturity Date or the Debenture Maturity Date,
as applicable.
(12) NOTE MATURITY DATE has the meaning given to it in the Indenture.
(13) OBLIGATIONS means the obligations and liabilities under this Agreement of
the Guarantor to the Holders.
(14) PLEDGED SECURITIES means all issued and outstanding voting and/or Equity
Securities of the Corporations owned directly or indirectly by the Guarantor,
including, without limitation, the Equity Securities listed in Schedule 1.1(j).
<PAGE>
- 3 -
(15) SECURITY INTEREST means any mortgage, hypothec, security interest, pledge,
privilege, assignment, lien, charge, whether fixed or floating, encumbrance or
other security arrangement of any kind or nature whatsoever whether or not
filed, recorded or otherwise perfected under the applicable laws of any
jurisdiction.
1.2 INDENTURE. Capitalized terms not defined herein have the meanings given to
them in the Indenture
SECTION 2 -- LIMITED RECOURSE GUARANTEE
2.1 LIMITED RECOURSE GUARANTEE. The Guarantor hereby guarantees the payment, and
punctual and complete performance by the Issuer of the Obligations to the
Holders on demand, the liability of the Guarantor hereunder being limited to the
Collateral and any proceeds arising on realization of the Security Interest
constituted by Section 3.1 hereunder. Notwithstanding any other provision of
this Agreement, the Secured Party shall not have any recourse against the
Guarantor under this Agreement save and except for the right to enforce the
Security Interest constituted by Section 3.1 and any other rights and remedies
of the Secured Party contained herein or at law or equity with respect to the
enforcement of the Security Interest constituted by Section 3.1.
2.2 REALIZATION ON SECURITY INTEREST. The guarantee made by the Guarantor
hereunder is made for the sole purpose of enabling the Secured Party to obtain
an effective pledge and security interest in and to the Collateral, the
Agreement being security for payment of the obligations hereunder of the
Guarantor to the Holders. Notwithstanding any other provisions hereof:
(1) the liability of the Guarantor to the Holders is limited to the
extent such liability (if any) is required to permit the Secured
Party to realize upon the security granted by the Guarantor to the
Secured Party pursuant to the Agreement; and
(2) in the event that the Guarantor shall default in its obligations
hereunder, the sole recourse of the Secured Party against the
Guarantor shall be with respect to the security granted by the
Guarantor to the Secured Party pursuant to the terms of this
Agreement, or any amounts received upon the realization of such
security pursuant to the terms of this Agreement, and the Secured
Party shall not under any circumstances have any right to payment
from the Guarantor or against any of its other property or assets.
2.3 NEED NOT EXHAUST RECOURSE. The Secured Party shall not be bound to exhaust
its recourse against the Issuer or others or any security it may at any time
hold before being entitled to enforce its rights under this Agreement. The
Guarantor renounces all benefits of discussion and division.
<PAGE>
- 4 -
2.4 CONTINUING AGREEMENT. This Agreement shall be a continuing agreement and
shall cover all the Obligations and it shall apply to and secure any ultimate
unperformed portion of the Obligations determined without regard to any
compromise, arrangement, settlement or release of the Issuer, whether arising by
private agreement, pursuant to a reorganization, restructuring or arrangement
under applicable statute law, operation of law or otherwise. This Agreement
shall not be considered as wholly or partially satisfied by the payment or
liquidation at any time or times of any sum or sums of money for the time being
due or remaining unpaid to the Holders, and all dividends, compositions,
proceeds of security valued and payments received by the Secured Party or any of
the Holders from the Issuer or from others or from estates shall be regarded for
all purposes as payments in gross without any right on the part of the Guarantor
to claim in reduction of the liability under this Agreement the benefit of any
such dividends, compositions, proceeds or payments or any collateral held by the
Secured Party or any of the Holders or proceeds thereof. This Agreement shall
not be affected by the loss of capacity of the Guarantor or by any change in the
name of the Issuer, or by the acquisition of the Issuer's business by a
corporation, or by any change whatsoever in the objects, capital structure or
constitution of the Issuer, or by the Issuer's business being amalgamated with
any other corporation, but shall, notwithstanding the happening of any such
event, continue to apply in respect of all the Obligations and in this
instrument the word "ISSUER" shall include every such firm and corporation.
2.5 ADDITIONAL OBLIGATIONS. The Guarantor's obligations hereunder shall not be
affected by any lack or limitation of status or of power, incapacity of the
Issuer or that the Issuer may not be a legal or suable entity, or any
irregularity, defect or informality in the borrowing or obtaining of such
monies, advances, renewals, credits or credit facilities, or any other reason,
similar or not, the whole whether or not known to any of the Holders or the
Secured Party.
2.6 WAIVER OF SUBROGATION. So long as any of the Obligations are outstanding,
the Guarantor waives any right it may have, now or in the future, to be
subrogated to the Holders' claims against the Issuer, however arising, whether
in law or in equity, by operation of law or otherwise, that might otherwise
arise if the security interests created by this Agreement are enforced in whole
or in part. The Guarantor confirms that it shall have no claim to any monies or
property received or recovered by the Secured Party or any of the Holders unless
and until the Obligations are fully and permanently satisfied and performed and
that its claims shall be restricted to its claims otherwise arising to any
surplus in the hands of the Secured Party or any of the Holders.
2.7 OBLIGATIONS NOT AFFECTED. The obligations of the Guarantor hereunder shall
not be affected or impaired by any act, omission, matter or thing whatsoever,
occurring before, upon or after any demand for payment hereunder (and whether or
not known to the Guarantor, the Secured Party or any of the Holders) which, but
for this provision, might constitute a whole or partial defence to a claim
against the Guarantor hereunder or might operate to release or otherwise
exonerate the Guarantor from any of its obligations hereunder or otherwise
affect such obligations, including, without limitation:
<PAGE>
- 5 -
(1) any limitation of status or power, disability, incapacity or other
circumstance relating to the Issuer or any other individual,
partnership, corporation, business trust, joint stock company,
trust, unincorporated association, joint venture, Governmental Body
or other entity of whatever nature (a "PERSON"), including any
insolvency, bankruptcy, liquidation, reorganization, readjustment,
composition, dissolution, winding-up or other proceeding involving
or affecting the Issuer, the Guarantor or any other Person;
(2) any irregularity, defect, unenforceability or invalidity in respect
of any indebtedness or other obligation of the Issuer, or any other
Person under the Indenture or any Instrument;
(3) any failure of the Issuer or any other Person, whether or not
without fault on their part, to perform or comply with any of the
provisions of the Indenture or the Instruments or to give notice
thereof to the Guarantor;
(4) the taking or enforcing or exercising or the refusal or neglect to
take or enforce or exercise any right or remedy against the Issuer,
or any other Person or their respective assets, or the release or
discharge of any such right or remedy;
(5) the granting of time, renewals, extensions, compromises,
concessions, waivers, releases, discharges (other than by a complete
irrevocable written discharge executed by the Secured Party) and
other indulgences to the Issuer or any other Person;
(6) any amendment, variation, modification, supplement or replacement of
the Indenture or any Instrument (other than this Agreement and then
only as expressly provided by such amendment, variation,
modification, supplement or replacement) or any other document or
instrument;
(7) any change in the ownership, control, name, objects, businesses,
assets, capital structure or constitution of the Issuer or any other
Person;
(8) any merger or amalgamation of the Issuer with any Person or Persons;
(9) the occurrence of any change in the laws, rules, regulations or
ordinances of any jurisdiction or by any present or future action of
any Governmental Body or court amending, varying, reducing or
otherwise affecting, or purporting to amend, vary, reduce or
otherwise affect, any of the obligations of the Issuer under the
Indenture or any Instrument or the obligations of the Guarantor
under this Agreement;
<PAGE>
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(10) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against the Issuer, the Holders or
the Secured Party, or any other person, or which the Issuer may have
at any time against any of the Holders or the Secured Party whether
in connection with the Indenture, the Instruments or otherwise; and
(11) any other circumstance (other than by complete and irrevocable
payment of the Obligations and by a complete irrevocable written
discharge executed by the Secured Party or the Holders) that might
otherwise constitute a legal or equitable discharge or defence of
the Issuer under the Indenture and the Instruments, or of the
Guarantor in respect of any guarantee hereunder.
SECTION 3 -- GRANT OF SECURITY INTEREST
3.1 SECURITY INTEREST. As general and continuing collateral security for the
payment and performance of all Obligations, the Guarantor hereby irrevocably
mortgages, charges, assigns, transfers, delivers, pledges, hypothecates and
grants a security interest to and in favour of the Secured Party in the
Collateral, including, without limitation:
(1) all Pledged Securities, together with any renewals thereof,
substitutions therefor and additions thereto and all certificates
and instruments evidencing or representing the Pledged Securities;
and
(2) any and all other Equity Securities issued by the Corporations that
may at any time be received or receivable by or otherwise
distributed to or acquired by the Guarantor in substitution for, or
in addition to, or in exchange for, any of the Pledged Securities,
including, without limitation, any shares or other securities
resulting from the subdivision, consolidation, change, conversion or
reclassification of any of the Pledged Securities, the
reorganization or amalgamation of any Corporation with any other
body corporate, the issuance by the Corporations of any additional
Equity Securities, or the occurrence of any event which results in
the substitution, addition to, or exchange of the Pledged
Securities.
3.2 DELIVERY OF PLEDGED SECURITIES. All certificates, instruments and other
documents representing or evidencing the Pledged Securities, duly endorsed in
blank for transfer or accompanied by stock powers or powers of attorney duly
executed in blank (substantially in the form of the stock power/power of
attorney attached as Schedule 3.2) and otherwise in form satisfactory to the
Secured Party, shall, forthwith be delivered to and remain in the custody of the
Secured Party or its nominee. If at any time or from time to time after the date
of this Agreement the Guarantor shall be entitled to receive or shall receive
any Equity Securities in any of the Corporations (by purchase, stock dividend or
other distribution or as a result of any reclassification, increase or reduction
of capital or any reorganization or otherwise) in addition to or in substitution
or exchange for those described in Schedule 1.1(j), the Guarantor will forthwith
<PAGE>
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deposit such Equity Securities with the Secured Party and deliver to the Secured
Party certificates, instruments or other documents representing such Equity
Securities, duly endorsed in blank for transfer or accompanied by a stock
power/power of attorney in respect of each such certificate duly executed in
blank by the Guarantor, and will at the same time deliver to the Secured Party a
certificate (which shall constitute a supplement to Schedule 1.1(j)) executed by
the Guarantor describing such Equity Securities and confirming that such
securities have been duly pledged to the Secured Party and are subject to the
Security Interest granted hereunder. Upon the occurrence of an Event of Default
which is continuing, all Pledged Securities may, at the option of the Secured
Party, be registered in the name of the Secured Party or its nominee.
3.3 ATTACHMENT OF SECURITY INTEREST. The Guarantor and the Secured Party hereby
acknowledge that (1) value has been given and (2) the Guarantor has rights in
the Collateral. The Guarantor and the Secured Party agree that the Secured
Party's Security Interest in the Collateral shall attach as of the date hereof.
3.4 PERFECTION OF PERSONAL PROPERTY. The Guarantor hereby authorizes the Secured
Party to file such financing statements, financing change statements and other
documents and do such acts, matters and things as the Secured Party may deem
appropriate to perfect on an ongoing basis and continue the Security Interest
constituted hereby, to protect and preserve the Collateral and after an Event of
Default to realize upon the same and the Guarantor hereby irrevocably
constitutes and appoints the officer or officers of the Secured Party from time
to time having responsibility for administration of the terms of the Indenture
the true and lawful attorney of the Guarantor with full power of substitution,
to do any of the foregoing in the name of the Guarantor whenever and wherever it
may be deemed necessary or expedient.
3.5 TERMINATION OF SECURITY INTEREST. This Agreement and the Security Interest
granted hereunder shall terminate upon final and irrevocable satisfaction of all
obligations, indebtedness and liabilities of the Issuer to the Holders under the
Indenture. As soon as practicable after such termination, any Collateral then in
custody of the Secured Party or its nominee shall be delivered to the Guarantor
with all certificates being duly endorsed in blank for transfer or accompanied
by a power of attorney/stock power in respect of each such certificate duly
executed in blank by the Secured Party.
SECTION 4 -- REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR. The Guarantor represents
and warrants to the Secured Party (upon each of which representations and
warranties the Secured Party specifically relies) as follows:
(1) The Guarantor is the sole legal and beneficial owner and the
registered holder of the Collateral, free and clear of any Adverse
Claims and any security interest, other than Security Interests
under this Agreement and any Security Interests which may arise at
law;
<PAGE>
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(2) The Guarantor has full power and authority and legal right to enter
this Agreement and to grant the limited recourse guarantee and
Security Interests contained herein;
(3) no consent, approval, authorization or other order of any Person and
no consent, authorization, approval or other action by, and no
notice to or filing with, any Governmental Body is required to be
made or obtained by the Guarantor either (a) for the granting of the
Security Interest by the Guarantor in, to or of the Collateral
pursuant to this Agreement or for the execution, delivery or
performance of this Agreement by the Guarantor; or (b) for the
exercise by the Secured Party of the voting or other rights provided
for in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement, except as may be required in connection
with such disposition by laws affecting the offering and sale of
securities generally or as otherwise has been obtained;
(4) all Equity Securities of any Corporation forming part of the
Collateral are and will be, until the Maturity Date, validly issued,
fully paid and non-assessable;
(5) there is no existing agreement, option, right or privilege capable
of becoming an agreement or option pursuant to which the Guarantor
would be required to sell or otherwise dispose of any of the
Collateral;
(6) the Security Interest granted hereunder will constitute a valid
Security Interest in the Collateral upon delivery to the Secured
Party of the share certificates representing the Collateral or upon
registration of notice thereof in prescribed form under applicable
personal property security legislation, if such registration is
required in order to perfect a Security Interest in the Collateral,
which Security Interest ranks prior to the rights of all other
Persons; and
(7) this Agreement has been duly executed and delivered by the Guarantor
and constitutes a legal, valid and binding obligation of the
Guarantor enforceable against the Guarantor in accordance with its
terms, subject to (i) applicable bankruptcy, insolvency, moratorium
or similar laws affecting creditors' rights generally; and (ii) the
fact that specific performance and injunctive relief may be given at
the discretion of the court.
<PAGE>
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4.2 COVENANTS OF THE GUARANTOR. The Guarantor covenants to and in favour of the
Secured Party that, until all the Obligations are performed or paid in full, it
shall:
(1) assist in maintaining and preserving such Security Interest until
the Maturity Date;
(2) take all necessary actions which, in its reasonable opinion, are
necessary to ensure that the Corporations do not issue Equity
Securities to any person other than the Guarantor and use all
reasonable best efforts to maintain its current ownership interest
in Esmeralda Limited Liability Company;
(3) not (and not purport to) sell, give, assign, transfer, pledge,
mortgage, charge, hypothecate or otherwise dispose, encumber or deal
with, any of its interest in the Collateral or incur or permit to
exist any Security Interest on or in the Collateral other than the
Security Interest granted under this Agreement, any other Security
Interest granted in favour of a financial institution in respect of
the incurrence by the Issuer of Senior Debt, provided that (i) the
transferee of such Collateral becomes bound to the terms of this
Agreement, and (ii) does such other acts and delivers such other
documents and legal opinion as may reasonably be required by the
Secured Party to ensure that the Secured Party has a valid perfected
Security Interest in such Collateral, which Security Interest shall
rank prior to the rights of all Persons other than those Persons
specified in Section 3.1 of the Indenture and those Persons to whom
the Issuer has incurred obligations, indebtedness and liabilities
which constitute Senior Debt;
(4) ensure that at the request of the Secured Party all Collateral shall
be registered in the name of the Secured Party or its nominee upon
the occurrence of an Event of Default, that any certificates
representing the Collateral shall be forthwith delivered to and may
remain in the custody of the Secured Party or its nominee, and that
all certificates, instruments or other documents representing or
evidencing any Collateral acquired or obtained by the Guarantor
after the date of this Agreement shall forthwith (and in any event
within ten (10) Business Days) after the Guarantor acquires or
obtains such Collateral be delivered to, and may remain in the
custody of the Secured Party or its nominee; and
(5) ensure that such stock powers, powers of attorney, board resolutions
and similar documents with respect to the Collateral as the Secured
Party may reasonably request, satisfactory in form and substance to
the Secured Party, shall be delivered to the Secured Party or its
nominee from time to time upon request.
<PAGE>
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SECTION 5 -- DEALING WITH PLEDGED SECURITIES AND REALIZATION
5.1 RIGHTS AND DUTIES OF THE SECURED PARTY.
(1) The Secured Party shall have and be entitled to exercise all such
powers hereunder as are specifically delegated to the Secured Party
by the terms hereof, together with such powers as are incidental
thereto. The Secured Party may execute any of its duties hereunder
by or through its employees and shall be entitled to retain counsel
and to act in reliance upon the advice of such counsel concerning
all matters pertaining to its duties hereunder.
(2) The Secured Party and any nominee on its behalf shall be bound to
exercise in the holding of the Collateral, the same degree of care
as it would exercise with respect to similar property of its own of
similar value held in the same place. Neither the Secured Party nor
any nominee acting on its behalf, nor any director, officer or
employee of the Secured Party shall be liable for any action taken
or omitted to be taken by it hereunder or in connection herewith,
except for its own gross negligence, wilful misconduct or bad faith.
the Secured Party is hereby released from all responsibilities for
any depreciation in or loss of value of any part of the Collateral.
5.2 VOTING RIGHTS. So long as no Event of Default has occurred and is
continuing, the Guarantor shall be entitled to exercise, in a manner which does
not contravene any provision of this Agreement, all voting power from time to
time exercisable in respect of the Collateral and any and all other rights with
respect to the Collateral, and give consents, waivers and ratification in
respect thereof. All such rights of the Guarantor to vote and to give consents,
waivers and ratifications shall cease upon the occurrence and during the
continuance of an Event of Default and Section 5.5 shall become applicable. The
Guarantor agrees following the occurrence of an Event of Default to grant an
irrevocable proxy (in the form of the proxy attached as Schedule 5.2) to vote
the Collateral from and after the occurrence of an Event of Default and while it
continues. Upon the occurrence of an Event of Default and while it continues,
the Guarantor shall be prohibited from exercising its voting rights with respect
to the Collateral and thereupon all such rights of the Guarantor to vote and
give consents, waivers and ratifications shall cease immediately.
5.3 PAYMENT OF DIVIDENDS AND INTEREST PAYMENTS.
(1) The Guarantor shall be entitled to receive any and all cash
dividends or interest payments on the Collateral; and if the
Collateral shall have been registered in the name of the Secured
Party or its nominee, the Secured Party shall execute and deliver
(or cause to be executed and delivered) to the Guarantor all such
dividend orders and other instruments as the Guarantor may request
for the purpose of enabling the Guarantor to receive the dividends
or other payments which the Guarantor is authorized to receive
pursuant to this Section 5.3(1).
<PAGE>
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(2) The Secured Party shall be entitled to receive directly, and to
retain as part of the Collateral:
(a) all other or additional Equity Securities distributed by way
of dividend in respect of the Collateral;
(b) all other or additional Equity Securities distributed in
respect of the Collateral by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar
rearrangement; and
(c) all other or additional Equity Securities which may be
distributed in respect of the Collateral by reason of any
consolidation, merger, exchange of stock, conveyance of
assets, liquidation or similar corporate reorganization or
other disposition of Collateral.
5.4 DEFAULT. An Event of Default as defined under the Indenture shall constitute
an Event of Default under this Agreement.
5.5 REMEDIES UPON AN EVENT OF DEFAULT. Upon the occurrence of an Event of
Default and while it continues, the Secured Party may, upon such notice to the
Guarantor as may be required by applicable law, take all or any of the following
actions:
(1) transfer all or any part of the Collateral into the name of the
Secured Party or its nominee;
(2) vote any or all of the Collateral (whether or not transferred to the
Secured Party or its nominee) and give or withhold all consents,
waivers and ratifications in respect thereof and otherwise act with
respect thereto as though it were the outright owner thereof;
(3) exercise any and all rights of conversion, exchange, subscription or
any other rights, privileges or options pertaining to any of the
Collateral as if it were the absolute owner thereof, including,
without limitation, the right to exchange at its discretion any and
all of the Collateral upon the merger, consolidation,
reorganization, recapitalization or other readjustment of any
Corporation or upon the exercise by any Corporation or the Secured
Party of any right, privilege or option pertaining to any shares of
the Collateral, and in connection therewith, to deposit and deliver
any and all of the Collateral with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms
and conditions as it may determine, all without liability except to
account for property actually received by it;
(4) from time to time realize upon, collect, sell, transfer, assign,
give options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof, in
<PAGE>
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such commercially reasonable manner as may seem to it advisable, and
for the purposes thereof each and every requirement relating thereto
and prescribed by law or otherwise is hereby waived by the Guarantor
to the extent permitted by law and the Guarantor agrees that in any
offer or sale of any of the Collateral the Secured Party is hereby
authorized to comply with any limitation or restriction in
connection with such offer or sale as it may be advised by counsel
is necessary in order to avoid any violation of applicable law
(including, without limitation, compliance with such procedures as
may restrict the number of prospective bidders and purchasers,
requiring that such prospective bidders and purchasers have certain
qualifications, and restricting such prospective bidders and
purchasers to persons who will represent their own account for
investment and not with a view to the distribution or resale of such
Collateral), or in order to obtain any required approval of the sale
of or the purchase by any Governmental Body or official, and the
Guarantor further agrees that such compliance shall not result in
such sale being considered or deemed not to have been made in a
commercially reasonable manner, nor shall the Secured Party be
liable in any way by reason of the fact that such Collateral is sold
in compliance with any such limitation or restriction; and
(5) purchase any or all of the Collateral, whether in connection with a
sale made under the power of sale herein contained or pursuant to
judicial proceedings or otherwise;
provided, however, that the Secured Party shall not be bound to deal with the
Collateral as aforesaid, and shall not be liable for any loss which may be
occasioned by any failure to do so and no action of the Secured Party permitted
hereunder shall impair or affect any rights of the Secured Party in and to the
Collateral.
The Guarantor recognizes that the Secured Party may be unable to
effect a public sale of any or all of the Collateral by reason of certain
prohibitions contained in the SECURITIES ACT (Ontario) (the "SECURITIES ACT")
and other applicable securities laws, but may be compelled to resort to one or
more private sales thereof to a restricted group of purchasers who will be
obliged to agree, among other things, to acquire such securities for their own
account for investment and not with a view to the distribution or resale
thereof. The Guarantor acknowledges and agrees that any such private sale may
result in prices and other terms less favourable to the seller than if such sale
were a public sale and notwithstanding such circumstances, agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
manner. The Secured Party shall not be under any obligation to delay a sale of
any of the Collateral for the period of time necessary to permit the issuer of
such securities to register such securities for public sale under the Securities
Act, or under other applicable securities laws, even if the issuer would agree
to do so.
<PAGE>
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5.6 REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of the Secured
Party provided for in this Agreement or now or hereafter existing at law or in
equity or by statute shall be cumulative and concurrent and shall be in addition
to every other such right, power or remedy. In addition to the rights and
remedies provided herein and in addition to any other rights the Secured Party
may have at law or in equity, the Secured Party has all the remedies of a
secured party under the PERSONAL PROPERTY SECURITY ACT (Ontario) (the "PPSA").
The exercise or beginning of the exercise by the Secured Party of any one or
more of the rights, powers or remedies provided for in this Agreement or now or
hereafter existing at law or in equity or by statute or otherwise shall not
preclude the simultaneous or later exercise by the Secured Party of all such
other rights, powers or remedies, and no failure or delay on the part of the
Secured Party to exercise any such right, power or remedy shall operate as a
waiver thereof.
5.7 CONSENT. The Guarantor hereby irrevocably approves, authorizes and consents
to any sale, transfer or other disposition of any or all of the Collateral by
the Secured Party in accordance with the terms of this Agreement.
5.8 APPLICATION OF PROCEEDS. After payment of expenses as provided in Section
5.10, the balance of any proceeds received by the Secured Party in connection
with realizing, collecting, selling, transferring, delivering or obtaining
payment of the Collateral or any part thereof shall be applied on account of the
obligations, indebtedness and liabilities of the Issuer to the Holders in
accordance with the Indenture.
5.9 PURCHASERS OF PLEDGED COLLATERAL. Upon any sale of any of the Collateral
hereunder (whether by virtue of the power of sale herein granted, pursuant to
judicial process or otherwise), the receipt of the Secured Party or the officer
making the sale shall be a sufficient discharge to the purchaser or purchasers
of the Collateral so sold, and such purchaser or purchasers shall not be
obligated to see to the application of any part of the purchase money paid over
to the Secured Party or such officer or be answerable in any way for the
misapplication or non-application thereof.
5.10 PAYMENT OF EXPENSES. The Secured Party may charge on its own behalf and
also pay to others all out-of-pocket expenses of the Secured Party and others,
including the fees and disbursements of any experts or advisers (including,
without limitation, lawyers) retained by the Secured Party, incurred in
connection with selling, transferring, delivering or obtaining payment in
respect of the sale, transfer or delivery of the Collateral or any part thereof,
or in connection with the administration or amendment of this Agreement or
incidental to the care, safe keeping or otherwise of any and all of the
Collateral and may deduct the amount of such sums from any proceeds of the
Collateral.
SECTION 6 -- GENERAL
6.1 BENEFIT OF THE AGREEMENT. This Agreement shall be binding upon the Guarantor
and its heirs, executors, administrators, legal or personal representatives,
successors and permitted
<PAGE>
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assigns and shall enure to the benefit of and be enforceable by the Secured
Party and its successors and assigns. In the event there has been an assignment
or transfer by the Secured Party to an assignee or a transferee in accordance
with the terms of the Indenture, the Secured Party is authorized to endorse all
or any part of the Collateral to such assignee or transferee and such assignee
or transferee of such endorsed Collateral shall be entitled to the benefits of
this Agreement. This Agreement and the rights of the Secured Party hereunder
shall also enure to the benefit of any of the Secured Party's nominees or
successors, including upon an Event of Default.
6.2 RIGHTS AND WAIVERS. The Guarantor hereby agrees that, without the necessity
of any reservation of rights against the Guarantor and without notice to or
further agreement by the Guarantor, any demand for payment of any of the
Obligations made by the Secured Party may be rescinded by the Secured Party and
the Obligations of the Guarantor or any other party upon or for any part
thereof, or any collateral security or guarantee therefor or right of set-off or
compensation with respect thereto, may, from time to time, in whole or in part,
be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered, or released by the Secured Party and any collateral security
documents or guarantees or documents in connection therewith may be amended,
modified, supplemented or terminated, in whole or in part, as the Secured Party
may deem advisable from time to time, and any collateral security at any time
held by the Secured Party for the payment of the Obligations may be released in
accordance with this Agreement all without the necessity of any reservation of
rights against the Guarantor and without notice to or further assent by the
Guarantor, which will remain bound hereunder, notwithstanding any such renewal,
extension, modification, acceleration, compromise, amendment, supplement,
termination, sale, exchange, waiver, surrender, pledge or release. The Guarantor
waives diligence, presentment, protest, demand for payment and notice of default
or non-payment to or upon the Guarantor with respect to the Obligations.
6.3 NOTICE.
(1) Any notice to the Guarantor under the provisions of this Agreement
shall be valid and effective if delivered, or sent by telecopier addressed to
the Guarantor at:
Seven Seas Petroleum Holdings Inc.
Suite 960
Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas 77056 U.S.A.
Attention: Vice President - Finance
Telecopier No.: (713) 621-9770
with a copy to:
<PAGE>
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McMillan Binch
Suite 3800, South Tower
Royal Bank Plaza
Toronto, Ontario
M5J 2J7
Attention: James D. Scarlett
Telecopier No.: (416) 865-7048
and shall be deemed to have been effectively given on the date of delivery if
delivered, or the date of sending if sent by telecopier.
(2) Any notice to the Secured Party under the provisions of this Agreement
shall be valid and effective if delivered, or sent by telecopier addressed to
the Secured Party at:
Montreal Trust Company of Canada
710 - 530 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
Attention: Manager, Corporate Trust
Telecopier No.: (403) 267-6598
with a copy to:
Yorkton Securities Inc.
11th Floor
1055 Dunsmuir Street
Vancouver, BC
V7X 1L4
Attention: Verlee Webb
Telecopier No.: (604) 640-0320
and shall be deemed to have been effectively given on the date of delivery if
delivered, or the date of sending if sent by telecopier.
6.4 FURTHER ASSURANCES. The Guarantor shall at its expense from time to time,
do, execute and deliver, or cause to be done, executed and delivered, all such
financing statements, further assignments, documents, acts, matters and things
as may be required or deemed advisable by the Secured Party acting reasonably
for the purpose of giving effect to this Agreement or for the purpose of
establishing compliance with the representations, conditions and warranties and
covenants herein contained.
<PAGE>
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6.5 POWER OF ATTORNEY. The Guarantor hereby irrevocably constitutes and appoints
the officer or officers of the Secured Party from time to time having
responsibility for administration of the terms of the Indenture the true and
lawful attorney of the Guarantor, as and from the happening of an Event of
Default and during the continuance thereof, with full power of substitution, to
do, make and execute all such statements, assignments, documents, acts, matters
or things with the right to use the name of the Guarantor whenever and wherever
such officer may deem necessary or expedient and from time to time to exercise
all rights and powers and to perform all acts of ownership in respect to the
Collateral in accordance with this Agreement.
6.6 ADDITIONAL SECURITY AND MERGER. The Security Interest constituted by this
Agreement is in addition and without prejudice to any other security now or
hereafter held by the Secured Party. Neither the taking and holding of the
Collateral nor the obtaining of any judgment by the Secured Party shall operate
as a merger of any Obligation or any other indebtedness or liability of the
Guarantor to the Secured Party or to any Holder or operate to prejudice the
security constituted by this Agreement.
6.7 COMPLETE AGREEMENT. This Agreement constitutes the complete agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, commitments, understandings or inducements, whether oral or
written, expressed or implied.
6.8 AMENDMENT. Neither this Agreement nor any provision hereof may be amended,
modified, waived, discharged or terminated orally nor may any of the Collateral
be released, except in accordance with this Agreement or except by an instrument
in writing duly signed by or on behalf of the Secured Party hereunder.
6.9 SEVERABILITY. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
6.10 GOVERNING LAW. This Agreement is governed by and will be construed and
interpreted in accordance with the laws of the Province of Ontario and the laws
of Canada applicable therein.
<PAGE>
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6.11 PARAMOUNTCY. To the degree that any provisions contained in this Agreement
are inconsistent with those in the Indenture, the provisions of the Indenture
shall prevail.
IN WITNESS WHEREOF the Guarantor has executed and delivered this Agreement as a
Deed and the Secured Party has executed this Agreement the day and year first
above written.
SEVEN SEAS PETROLEUM
HOLDINGS INC., as Guarantor
By: _________________________
Name: _______________________
Title: ______________________
By: _________________________
Name: _______________________
Title: ______________________
MONTREAL TRUST COMPANY OF
CANADA, as Secured Party
By: _________________________ C.S.
Name: _______________________
Title: ______________________
By: _________________________
Name: _______________________
Title: ______________________
<PAGE>
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SCHEDULE 1.1(J)
PLEDGED SECURITIES
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
TYPE OF PLEDGED PLEDGED EQUITY OF TOTAL
CORPORATION EQUITY SECURITIES SECURITIES OUTSTANDING CERTIFICATE NO.
<S> <C> <C> <C> <C>
Seven Seas Petroleum Common Shares, par 1 100 2
Columbia Inc. value US$1.00 each
</TABLE>
<PAGE>
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SCHEDULE 3.2
STOCK POWER/POWER OF ATTORNEY
FOR VALUE RECEIVED, SEVEN SEAS PETROLEUM HOLDINGS INC. hereby sells,
assigns and transfers unto Montreal Trust Company of Canada ____________ shares
in the capital of ____________ standing in its name on the books of the said
Corporation represented by Certificate No. _____________, herewith, and
irrevocably constitutes and appoints _____________________________ as its
attorney to transfer such stock on the books of such Corporation with full power
of substitution in the premises.
EXECUTED this ____________ day of ___________, ___________.
SEVEN SEAS PETROLEUM HOLDINGS INC.
By:_________________________________ C.S.
Name:
Title:
By:_________________________________
Name:
Title:
<PAGE>
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SCHEDULE 5.2
IRREVOCABLE PROXY
The undersigned agrees to and hereby grants to MONTREAL TRUST
COMPANY OF CANADA (the "SECURED PARTY") an irrevocable proxy to vote, or to
execute and deliver written consents or otherwise act with respect to, all
[SHARES/MEMBERSHIP INTERESTS] in the capital (the "SHARES") of
______________________ now owned or hereafter acquired by the undersigned as
fully, to the same extent and with the same effect as the undersigned might or
could do under any applicable laws or regulations governing the rights and
powers of shareholders of a [CAYMAN ISLANDS CORPORATION/OKLAHOMA LIMITED
LIABILITY COMPANY]. The undersigned hereby affirms that this proxy is given
pursuant to a certain limited recourse guarantee, security and pledge agreement
dated as of the date hereof made by it in favour of the Secured Party (as
amended, supplemented, restated or otherwise modified from time to time, the
"PLEDGE") and as such is coupled with an interest and is irrevocable. It is
further understood by the undersigned that this proxy is exercisable by the
Secured Party only from and after the occurrence of and during the continuance
of an Event of Default (as defined in the Pledge) and ending on the Maturity
Date (as defined in the Pledge) or otherwise ending only when the Secured Party
shall have terminated this proxy in writing.
THIS PROXY SHALL REMAIN IN FULL FORCE AND EFFECT AND BE
ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE OR ASSIGNEE OF THE
SHARES.
Dated as of this _____ day of ___________, ___________.
SEVEN SEAS PETROLEUM HOLDINGS INC.
By:_________________________________ C.S.
Name:
Title:
By:_________________________________
Name:
Title:
------------------------------------------------------------
LIMITED RECOURSE GUARANTEE, SECURITY
AND PLEDGE AGREEMENT
Made as of August 7, 1997
Between
SEVEN SEAS PETROLEUM COLOMBIA INC.
as the "Guarantor"
and
MONTREAL TRUST COMPANY OF CANADA,
on behalf of the Holders
as the "Secured Party"
------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
RECITALS...............................................................1
SECTION 1 -- INTERPRETATION
1.1 Certain Defined Terms............................................1
(1) Adverse Claim..............................................1
(2) Agreement..................................................2
(3) Collateral.................................................2
(4) Corporation................................................2
(5) Debenture Maturity Date....................................2
(6) Equity Securities..........................................2
(7) Event of Default...........................................2
(8) Governmental Body..........................................2
(9) Holders....................................................2
(10) Instruments................................................2
(11) Maturity Date..............................................2
(12) Note Maturity Date.........................................2
(13) Obligations................................................2
(14) Pledged Securities.........................................3
(15) Security Interest..........................................3
1.2 Indenture........................................................3
SECTION 2 -- LIMITED RECOURSE GUARANTEE
2.1 Limited Recourse Guarantee.......................................3
2.2 Realization on Security Interest.................................3
2.3 Need Not Exhaust Recourse........................................4
2.4 Continuing Agreement.............................................4
2.5 Additional Obligations...........................................4
2.6 Waiver of Subrogation............................................4
2.7 Obligations Not Affected.........................................5
SECTION 3 -- GRANT OF SECURITY INTEREST
3.1 Security Interest................................................6
3.2 Delivery of Pledged Securities...................................7
3.3 Attachment of Security Interest..................................7
3.4 Perfection of Personal Property..................................7
3.5 Termination of Security Interest. ...............................7
SECTION 4 -- REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 Representations and Warranties of the Guarantor..................8
4.2 Covenants of the Guarantor.......................................9
(i)
<PAGE>
SECTION 5 -- DEALING WITH PLEDGED SECURITIES AND REALIZATION
5.1 Rights and Duties of the Secured Party..........................10
5.2 Voting Rights...................................................10
5.3 Payment of Dividends and Interest Payments. ...................10
5.4 Default.........................................................11
5.5 Remedies Upon an Event of Default...............................11
5.6 Remedies, etc., Cumulative......................................13
5.7 Consent. .......................................................13
5.8 Application of Proceeds.........................................13
5.9 Purchasers of Pledged Collateral................................13
5.10 Payment of Expenses.............................................13
SECTION 6 -- GENERAL
6.1 Benefit of the Agreement........................................13
6.2 Rights and Waivers..............................................14
6.3 Notice..........................................................14
6.4 Further Assurances..............................................15
6.5 Power of Attorney...............................................16
6.6 Additional Security and Merger..................................16
6.7 Complete Agreement..............................................16
6.8 Amendment.......................................................16
6.9 Severability....................................................16
6.10 Governing Law...................................................16
6.11 Paramountcy.....................................................17
SCHEDULES
SCHEDULE 1.1(j) Pledged Securities
SCHEDULE 3.2 Stock Power/Power of Attorney
SCHEDULE 5.2 Irrevocable Proxy
(ii)
<PAGE>
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LIMITED RECOURSE GUARANTEE, SECURITY
AND PLEDGE AGREEMENT
This Agreement is made as of August 7, 1997, between
SEVEN SEAS PETROLEUM COLOMBIA INC., a Cayman
Islands corporation,
as "GUARANTOR"
and
MONTREAL TRUST COMPANY OF CANADA, on behalf of
the Holders,
as "SECURED PARTY"
RECITALS
A. Seven Seas Petroleum Inc., as issuer (the "ISSUER"), has entered into an
indenture made as of August 7, 1997 (as amended, supplemented, restated or
otherwise modified from time to time, the "INDENTURE") with the Secured Party.
B. To secure due repayment and satisfaction of all of the Issuer's present and
future liabilities and obligations under, in respect of or relating to the
Instruments and to secure due performance by the Issuer of all of its other
present and future obligations under the Indenture and the Instruments, whether
absolute or contingent, present or future, of the Issuer to Holders from time to
time outstanding (collectively, the "OBLIGATIONS"), the Guarantor has agreed to
guarantee the Obligations and, as security therefor, to grant a security
interest in and pledge the Collateral to the Secured Party pursuant to this
Agreement.
FOR VALUE RECEIVED, the parties agree as follows:
SECTION 1 -- INTERPRETATION
1.1 CERTAIN DEFINED TERMS. In this Agreement:
(1) ADVERSE CLAIM has the meaning given to it in Section 53(1) of the BUSINESS
CORPORATIONS ACT (Ontario).
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(2) AGREEMENT means this agreement and all amendments, restatements,
modifications and supplements and any exhibits or schedules to any of the
foregoing made hereto by written agreement between the Guarantor and the Secured
Party.
(3) COLLATERAL means (a) all of Guarantor's membership interest in Cimarrona
Limited Liability Company and Esmeralda Limited Liability Company, each an
Oklahoma limited liability company, and all rights to vote, approve or consent
to any action or matter pertaining to the business of Cimarrona Limited
Liability Company and Esmeralda Limited Liability Company; and (b) the Pledged
Securities.
(4) CORPORATION means any of the corporations listed on Schedule 1.1(j) and
their respective successors.
(5) DEBENTURE MATURITY DATE has the meaning given to it in the Indenture.
(6) EQUITY SECURITIES means all shares, options, warrants, interests,
participations or other equivalents (regardless of how designated) of or in a
corporation, partnership, limited partnership or equivalent entity, whether
voting or non-voting or participating or non-participating.
(7) EVENT OF DEFAULT has the meaning given to it in Section 5.4 of this
Agreement.
(8) GOVERNMENTAL BODY means any government, parliament, legislature, regulatory
authority, agency, tribunal, department, commission, board or court or other
law, regulation or rule-making entity (including a Minister of the Crown),
national or supra-national, having or purporting to have jurisdiction on behalf
of any nation, state, province, municipality or district, or any subdivision
thereof, any federal, provincial, state, county, municipal or other Canadian
federal, provincial, state or local governmental or regulatory authority,
agency, board, body, commission, instrumentality, court or quasi-governmental
authority.
(9) HOLDERS has the meaning given to it in the Indenture.
(10) INSTRUMENTS has the meaning given to it under the Indenture.
(11) MATURITY DATE means the Note Maturity Date or the Debenture Maturity Date,
as applicable.
(12) NOTE MATURITY DATE has the meaning given to it in the Indenture.
(13) OBLIGATIONS means the obligations and liabilities under this Agreement of
the Guarantor to the Holders.
(14) PLEDGED SECURITIES means all issued and outstanding voting and/or Equity
Securities of the Corporations owned directly or indirectly by the Guarantor,
including, without limitation, the Equity Securities listed in Schedule 1.1(j).
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(15) SECURITY INTEREST means any mortgage, hypothec, security interest, pledge,
privilege, assignment, lien, charge, whether fixed or floating, encumbrance or
other security arrangement of any kind or nature whatsoever whether or not
filed, recorded or otherwise perfected under the applicable laws of any
jurisdiction.
1.2 INDENTURE. Capitalized terms not defined herein have the meanings given to
them in the Indenture
SECTION 2 -- LIMITED RECOURSE GUARANTEE
2.1 LIMITED RECOURSE GUARANTEE. The Guarantor hereby guarantees the payment, and
punctual and complete performance by the Issuer of the Obligations to the
Holders on demand, the liability of the Guarantor hereunder being limited to the
Collateral and any proceeds arising on realization of the Security Interest
constituted by Section 3.1 hereunder. Notwithstanding any other provision of
this Agreement, the Secured Party shall not have any recourse against the
Guarantor under this Agreement save and except for the right to enforce the
Security Interest constituted by Section 3.1 and any other rights and remedies
of the Secured Party contained herein or at law or equity with respect to the
enforcement of the Security Interest constituted by Section 3.1.
2.2 REALIZATION ON SECURITY INTEREST. The guarantee made by the Guarantor
hereunder is made for the sole purpose of enabling the Secured Party to obtain
an effective pledge and security interest in and to the Collateral, the
Agreement being security for payment of the obligations hereunder of the
Guarantor to the Holders. Notwithstanding any other provisions hereof:
(1) the liability of the Guarantor to the Holders is limited to the
extent such liability (if any) is required to permit the Secured
Party to realize upon the security granted by the Guarantor to the
Secured Party pursuant to the Agreement; and
(2) in the event that the Guarantor shall default in its obligations
hereunder, the sole recourse of the Secured Party against the
Guarantor shall be with respect to the security granted by the
Guarantor to the Secured Party pursuant to the terms of this
Agreement, or any amounts received upon the realization of such
security pursuant to the terms of this Agreement, and the Secured
Party shall not under any circumstances have any right to payment
from the Guarantor or against any of its other property or assets.
2.3 NEED NOT EXHAUST RECOURSE. The Secured Party shall not be bound to exhaust
its recourse against the Issuer or others or any security it may at any time
hold before being entitled to enforce its rights under this Agreement. The
Guarantor renounces all benefits of discussion and division.
<PAGE>
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2.4 CONTINUING AGREEMENT. This Agreement shall be a continuing agreement and
shall cover all the Obligations and it shall apply to and secure any ultimate
unperformed portion of the Obligations determined without regard to any
compromise, arrangement, settlement or release of the Issuer, whether arising by
private agreement, pursuant to a reorganization, restructuring or arrangement
under applicable statute law, operation of law or otherwise. This Agreement
shall not be considered as wholly or partially satisfied by the payment or
liquidation at any time or times of any sum or sums of money for the time being
due or remaining unpaid to the Holders, and all dividends, compositions,
proceeds of security valued and payments received by the Secured Party or any of
the Holders from the Issuer or from others or from estates shall be regarded for
all purposes as payments in gross without any right on the part of the Guarantor
to claim in reduction of the liability under this Agreement the benefit of any
such dividends, compositions, proceeds or payments or any collateral held by the
Secured Party or any of the Holders or proceeds thereof. This Agreement shall
not be affected by the loss of capacity of the Guarantor or by any change in the
name of the Issuer, or by the acquisition of the Issuer's business by a
corporation, or by any change whatsoever in the objects, capital structure or
constitution of the Issuer, or by the Issuer's business being amalgamated with
any other corporation, but shall, notwithstanding the happening of any such
event, continue to apply in respect of all the Obligations and in this
instrument the word "ISSUER" shall include every such firm and corporation.
2.5 ADDITIONAL OBLIGATIONS. The Guarantor's obligations hereunder shall not be
affected by any lack or limitation of status or of power, incapacity of the
Issuer or that the Issuer may not be a legal or suable entity, or any
irregularity, defect or informality in the borrowing or obtaining of such
monies, advances, renewals, credits or credit facilities, or any other reason,
similar or not, the whole whether or not known to any of the Holders or the
Secured Party.
2.6 WAIVER OF SUBROGATION. So long as any of the Obligations are outstanding,
the Guarantor waives any right it may have, now or in the future, to be
subrogated to the Holders' claims against the Issuer, however arising, whether
in law or in equity, by operation of law or otherwise, that might otherwise
arise if the security interests created by this Agreement are enforced in whole
or in part. The Guarantor confirms that it shall have no claim to any monies or
property received or recovered by the Secured Party or any of the Holders unless
and until the Obligations are fully and permanently satisfied and performed and
that its claims shall be restricted to its claims otherwise arising to any
surplus in the hands of the Secured Party or any of the Holders.
2.7 OBLIGATIONS NOT AFFECTED. The obligations of the Guarantor hereunder shall
not be affected or impaired by any act, omission, matter or thing whatsoever,
occurring before, upon or after any demand for payment hereunder (and whether or
not known to the Guarantor, the Secured Party or any of the Holders) which, but
for this provision, might constitute a whole or partial defence to a claim
against the Guarantor hereunder or might operate to release or otherwise
exonerate the Guarantor from any of its obligations hereunder or otherwise
affect such obligations, including, without limitation:
<PAGE>
- 5 -
(1) any limitation of status or power, disability, incapacity or other
circumstance relating to the Issuer or any other individual,
partnership, corporation, business trust, joint stock company,
trust, unincorporated association, joint venture, Governmental Body
or other entity of whatever nature (a "PERSON"), including any
insolvency, bankruptcy, liquidation, reorganization, readjustment,
composition, dissolution, winding-up or other proceeding involving
or affecting the Issuer, the Guarantor or any other Person;
(2) any irregularity, defect, unenforceability or invalidity in respect
of any indebtedness or other obligation of the Issuer, or any other
Person under the Indenture or any Instrument;
(3) any failure of the Issuer or any other Person, whether or not
without fault on their part, to perform or comply with any of the
provisions of the Indenture or the Instruments or to give notice
thereof to the Guarantor;
(4) the taking or enforcing or exercising or the refusal or neglect to
take or enforce or exercise any right or remedy against the Issuer,
or any other Person or their respective assets, or the release or
discharge of any such right or remedy;
(5) the granting of time, renewals, extensions, compromises,
concessions, waivers, releases, discharges (other than by a complete
irrevocable written discharge executed by the Secured Party) and
other indulgences to the Issuer or any other Person;
(6) any amendment, variation, modification, supplement or replacement of
the Indenture or any Instrument (other than this Agreement and then
only as expressly provided by such amendment, variation,
modification, supplement or replacement) or any other document or
instrument;
(7) any change in the ownership, control, name, objects, businesses,
assets, capital structure or constitution of the Issuer or any other
Person;
(8) any merger or amalgamation of the Issuer with any Person or Persons;
(9) the occurrence of any change in the laws, rules, regulations or
ordinances of any jurisdiction or by any present or future action of
any Governmental Body or court amending, varying, reducing or
otherwise affecting, or purporting to amend, vary, reduce or
otherwise affect, any of the obligations of the Issuer under the
Indenture or any Instrument or the obligations of the Guarantor
under this Agreement;
<PAGE>
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(10) the existence of any claim, set-off or other rights which the
Guarantor may have at any time against the Issuer, the Holders or
the Secured Party, or any other person, or which the Issuer may have
at any time against any of the Holders or the Secured Party whether
in connection with the Indenture, the Instruments or otherwise; and
(11) any other circumstance (other than by complete and irrevocable
payment of the Obligations and by a complete irrevocable written
discharge executed by the Secured Party or the Holders) that might
otherwise constitute a legal or equitable discharge or defence of
the Issuer under the Indenture and the Instruments, or of the
Guarantor in respect of any guarantee hereunder.
SECTION 3 -- GRANT OF SECURITY INTEREST
3.1 SECURITY INTEREST. As general and continuing collateral security for the
payment and performance of all Obligations, the Guarantor hereby irrevocably
mortgages, charges, assigns, transfers, delivers, pledges, hypothecates and
grants a security interest to and in favour of the Secured Party in the
Collateral, including, without limitation:
(1) all Pledged Securities, together with any renewals thereof,
substitutions therefor and additions thereto and all certificates
and instruments evidencing or representing the Pledged Securities;
and
(2) any and all other Equity Securities issued by the Corporations that
may at any time be received or receivable by or otherwise
distributed to or acquired by the Guarantor in substitution for, or
in addition to, or in exchange for, any of the Pledged Securities,
including, without limitation, any shares or other securities
resulting from the subdivision, consolidation, change, conversion or
reclassification of any of the Pledged Securities, the
reorganization or amalgamation of any Corporation with any other
body corporate, the issuance by the Corporations of any additional
Equity Securities, or the occurrence of any event which results in
the substitution, addition to, or exchange of the Pledged
Securities.
3.2 DELIVERY OF PLEDGED SECURITIES. All certificates, instruments and other
documents representing or evidencing the Pledged Securities, duly endorsed in
blank for transfer or accompanied by stock powers or powers of attorney duly
executed in blank (substantially in the form of the stock power/power of
attorney attached as Schedule 3.2) and otherwise in form satisfactory to the
Secured Party, shall, forthwith be delivered to and remain in the custody of the
Secured Party or its nominee. If at any time or from time to time after the date
of this Agreement the Guarantor shall be entitled to receive or shall receive
any Equity Securities in any of the Corporations (by purchase, stock dividend or
other distribution or as a result of any reclassification, increase or reduction
of capital or any reorganization or otherwise) in addition to or in substitution
or exchange for those described in Schedule 1.1(j), the Guarantor will forthwith
<PAGE>
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deposit such Equity Securities with the Secured Party and deliver to the Secured
Party certificates, instruments or other documents representing such Equity
Securities, duly endorsed in blank for transfer or accompanied by a stock
power/power of attorney in respect of each such certificate duly executed in
blank by the Guarantor, and will at the same time deliver to the Secured Party a
certificate (which shall constitute a supplement to Schedule 1.1(j)) executed by
the Guarantor describing such Equity Securities and confirming that such
securities have been duly pledged to the Secured Party and are subject to the
Security Interest granted hereunder. Upon the occurrence of an Event of Default
which is continuing, all Pledged Securities may, at the option of the Secured
Party, be registered in the name of the Secured Party or its nominee.
3.3 ATTACHMENT OF SECURITY INTEREST. The Guarantor and the Secured Party hereby
acknowledge that (1) value has been given and (2) the Guarantor has rights in
the Collateral. The Guarantor and the Secured Party agree that the Secured
Party's Security Interest in the Collateral shall attach as of the date hereof.
3.4 PERFECTION OF PERSONAL PROPERTY. The Guarantor hereby authorizes the Secured
Party to file such financing statements, financing change statements and other
documents and do such acts, matters and things as the Secured Party may deem
appropriate to perfect on an ongoing basis and continue the Security Interest
constituted hereby, to protect and preserve the Collateral and after an Event of
Default to realize upon the same and the Guarantor hereby irrevocably
constitutes and appoints the officer or officers of the Secured Party from time
to time having responsibility for administration of the terms of the Indenture
the true and lawful attorney of the Guarantor with full power of substitution,
to do any of the foregoing in the name of the Guarantor whenever and wherever it
may be deemed necessary or expedient.
3.5 TERMINATION OF SECURITY INTEREST. This Agreement and the Security Interest
granted hereunder shall terminate upon final and irrevocable satisfaction of all
obligations, indebtedness and liabilities of the Issuer to the Holders under the
Indenture. As soon as practicable after such termination, any Collateral then in
custody of the Secured Party or its nominee shall be delivered to the Guarantor
with all certificates being duly endorsed in blank for transfer or accompanied
by a power of attorney/stock power in respect of each such certificate duly
executed in blank by the Secured Party.
SECTION 4 -- REPRESENTATIONS, WARRANTIES AND COVENANTS
4.1 REPRESENTATIONS AND WARRANTIES OF THE GUARANTOR. The Guarantor represents
and warrants to the Secured Party (upon each of which representations and
warranties the Secured Party specifically relies) as follows:
(1) The Guarantor is the sole legal and beneficial owner and the
registered holder of the Collateral, free and clear of any Adverse
Claims and any security interest, other than Security Interests
under this Agreement and any Security Interests which may arise at
law;
<PAGE>
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(2) The Guarantor has full power and authority and legal right to enter
this Agreement and to grant the limited recourse guarantee and
Security Interests contained herein;
(3) no consent, approval, authorization or other order of any Person and
no consent, authorization, approval or other action by, and no
notice to or filing with, any Governmental Body is required to be
made or obtained by the Guarantor either (a) for the granting of the
Security Interest by the Guarantor in, to or of the Collateral
pursuant to this Agreement or for the execution, delivery or
performance of this Agreement by the Guarantor; or (b) for the
exercise by the Secured Party of the voting or other rights provided
for in this Agreement or the remedies in respect of the Collateral
pursuant to this Agreement, except as may be required in connection
with such disposition by laws affecting the offering and sale of
securities generally or as otherwise has been obtained;
(4) all Equity Securities of any Corporation forming part of the
Collateral are and will be, until the Maturity Date, validly issued,
fully paid and non-assessable;
(5) there is no existing agreement, option, right or privilege capable
of becoming an agreement or option pursuant to which the Guarantor
would be required to sell or otherwise dispose of any of the
Collateral;
(6) the Security Interest granted hereunder will constitute a valid
Security Interest in the Collateral upon delivery to the Secured
Party of the share certificates representing the Collateral or upon
registration of notice thereof in prescribed form under applicable
personal property security legislation, if such registration is
required in order to perfect a Security Interest in the Collateral,
which Security Interest ranks prior to the rights of all other
Persons; and
(7) this Agreement has been duly executed and delivered by the Guarantor
and constitutes a legal, valid and binding obligation of the
Guarantor enforceable against the Guarantor in accordance with its
terms, subject to (i) applicable bankruptcy, insolvency, moratorium
or similar laws affecting creditors' rights
<PAGE>
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generally; and (ii) the fact that specific performance and
injunctive relief may be given at the discretion of the court.
4.2 COVENANTS OF THE GUARANTOR. The Guarantor covenants to and in favour of the
Secured Party that, until all the Obligations are performed or paid in full, it
shall:
(1) assist in maintaining and preserving such Security Interest until
the Maturity Date;
(2) take all actions which, in its reasonable opinion, are necessary to
ensure that the Corporations do not issue Equity Securities to any
person other than the Guarantor and use all reasonable best efforts
to maintain its current ownership interest in Esmeralda Limited
Liability Company and to maintain a 50% ownership interest in
Cimarrona Limited Liability Company;
(3) not (and not purport to) sell, give, assign, transfer, pledge,
mortgage, charge, hypothecate or otherwise dispose, encumber or deal
with, any of its interest in the Collateral or incur or permit to
exist any Security Interest on or in the Collateral other than the
Security Interest granted under this Agreement, any other Security
Interest granted in favour of a financial institution in respect of
the incurrence by the Issuer of Senior Debt, provided that (i) the
transferee of such Collateral becomes bound to the terms of this
Agreement, and (ii) does such other acts and delivers such other
documents and legal opinion as may reasonably be required by the
Secured Party to ensure that the Secured Party has a valid perfected
Security Interest in such Collateral, which Security Interest shall
rank prior to the rights of all Persons other than those Persons
specified in Section 3.1 of the Indenture and those Persons to whom
the Issuer has incurred obligations, indebtedness and liabilities
which constitute Senior Debt;
(4) ensure that at the request of the Secured Party all Collateral shall
be registered in the name of the Secured Party or its nominee upon
the occurrence of an Event of Default, that any certificates
representing the Collateral shall be forthwith delivered to and may
remain in the custody of the Secured Party or its nominee, and that
all certificates, instruments or other documents representing or
evidencing any Collateral acquired or obtained by the Guarantor
after the date of this Agreement shall forthwith (and in any event
within ten (10) Business Days) after the Guarantor acquires or
obtains such Collateral be delivered to, and may remain in the
custody of the Secured Party or its nominee; and
(5) ensure that such stock powers, powers of attorney, board resolutions
and similar documents with respect to the Collateral as the Secured
Party may reasonably request, satisfactory in form and substance to
the Secured Party, shall be delivered to the Secured Party or its
nominee from time to time upon request.
<PAGE>
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SECTION 5 -- DEALING WITH PLEDGED SECURITIES AND REALIZATION
5.1 RIGHTS AND DUTIES OF THE SECURED PARTY.
(1) The Secured Party shall have and be entitled to exercise all such
powers hereunder as are specifically delegated to the Secured Party
by the terms hereof, together with such powers as are incidental
thereto. The Secured Party may execute any of its duties hereunder
by or through its employees and shall be entitled to retain counsel
and to act in reliance upon the advice of such counsel concerning
all matters pertaining to its duties hereunder.
(2) The Secured Party and any nominee on its behalf shall be bound to
exercise in the holding of the Collateral, the same degree of care
as it would exercise with respect to similar property of its own of
similar value held in the same place. Neither the Secured Party nor
any nominee acting on its behalf, nor any director, officer or
employee of the Secured Party shall be liable for any action taken
or omitted to be taken by it hereunder or in connection herewith,
except for its own gross negligence, wilful misconduct or bad faith.
the Secured Party is hereby released from all responsibilities for
any depreciation in or loss of value of any part of the Collateral.
5.2 VOTING RIGHTS. So long as no Event of Default has occurred and is
continuing, the Guarantor shall be entitled to exercise, in a manner which does
not contravene any provision of this Agreement, all voting power from time to
time exercisable in respect of the Collateral and any and all other rights with
respect to the Collateral, and give consents, waivers and ratification in
respect thereof. All such rights of the Guarantor to vote and to give consents,
waivers and ratifications shall cease upon the occurrence and during the
continuance of an Event of Default and Section 5.5 shall become applicable. The
Guarantor agrees following the occurrence of an Event of Default to grant an
irrevocable proxy (in the form of the proxy attached as Schedule 5.2) to vote
the Collateral from and after the occurrence of an Event of Default and while it
continues. Upon the occurrence of an Event of Default and while it continues,
the Guarantor shall be prohibited from exercising its voting rights with respect
to the Collateral and thereupon all such rights of the Guarantor to vote and
give consents, waivers and ratifications shall cease immediately.
5.3 PAYMENT OF DIVIDENDS AND INTEREST PAYMENTS.
(1) The Guarantor shall be entitled to receive any and all cash
dividends or interest payments on the Collateral; and if the
Collateral shall have been registered in the name of the Secured
Party or its nominee, the Secured Party shall execute and deliver
(or cause to be executed and delivered) to the Guarantor all such
dividend orders and other instruments as the Guarantor may request
for the purpose of enabling the Guarantor to receive the dividends
or other payments which the Guarantor is authorized to receive
pursuant to this Section 5.3(1).
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(2) The Secured Party shall be entitled to receive directly, and to
retain as part of the Collateral:
(a) all other or additional Equity Securities distributed by way
of dividend in respect of the Collateral;
(b) all other or additional Equity Securities distributed in
respect of the Collateral by way of stock-split, spin-off,
split-up, reclassification, combination of shares or similar
rearrangement; and
(c) all other or additional Equity Securities which may be
distributed in respect of the Collateral by reason of any
consolidation, merger, exchange of stock, conveyance of
assets, liquidation or similar corporate reorganization or
other disposition of Collateral.
5.4 DEFAULT. An Event of Default as defined under the Indenture shall constitute
an Event of Default under this Agreement.
5.5 REMEDIES UPON AN EVENT OF DEFAULT. Upon the occurrence of an Event of
Default and while it continues, the Secured Party may, upon such notice to the
Guarantor as may be required by applicable law, take all or any of the following
actions:
(1) transfer all or any part of the Collateral into the name of the
Secured Party or its nominee;
(2) vote any or all of the Collateral (whether or not transferred to the
Secured Party or its nominee) and give or withhold all consents,
waivers and ratifications in respect thereof and otherwise act with
respect thereto as though it were the outright owner thereof;
(3) exercise any and all rights of conversion, exchange, subscription or
any other rights, privileges or options pertaining to any of the
Collateral as if it were the absolute owner thereof, including,
without limitation, the right to exchange at its discretion any and
all of the Collateral upon the merger, consolidation,
reorganization, recapitalization or other readjustment of any
Corporation or upon the exercise by any Corporation or the Secured
Party of any right, privilege or option pertaining to any shares of
the Collateral, and in connection therewith, to deposit and deliver
any and all of the Collateral with any committee, depositary,
transfer agent, registrar or other designated agency upon such terms
and conditions as it may determine, all without liability except to
account for property actually received by it;
(4) from time to time realize upon, collect, sell, transfer, assign,
give options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof, in
<PAGE>
- 12 -
such commercially reasonable manner as may seem to it advisable, and
for the purposes thereof each and every requirement relating thereto
and prescribed by law or otherwise is hereby waived by the Guarantor
to the extent permitted by law and the Guarantor agrees that in any
offer or sale of any of the Collateral the Secured Party is hereby
authorized to comply with any limitation or restriction in
connection with such offer or sale as it may be advised by counsel
is necessary in order to avoid any violation of applicable law
(including, without limitation, compliance with such procedures as
may restrict the number of prospective bidders and purchasers,
requiring that such prospective bidders and purchasers have certain
qualifications, and restricting such prospective bidders and
purchasers to persons who will represent their own account for
investment and not with a view to the distribution or resale of such
Collateral), or in order to obtain any required approval of the sale
of or the purchase by any Governmental Body or official, and the
Guarantor further agrees that such compliance shall not result in
such sale being considered or deemed not to have been made in a
commercially reasonable manner, nor shall the Secured Party be
liable in any way by reason of the fact that such Collateral are
sold in compliance with any such limitation or restriction; and
(5) purchase any or all of the Collateral, whether in connection with a
sale made under the power of sale herein contained or pursuant to
judicial proceedings or otherwise;
provided, however, that the Secured Party shall not be bound to deal with the
Collateral as aforesaid, and shall not be liable for any loss which may be
occasioned by any failure to do so and no action of the Secured Party permitted
hereunder shall impair or affect any rights of the Secured Party in and to the
Collateral.
The Guarantor recognizes that the Secured Party may be unable to
effect a public sale of any or all of the Collateral by reason of certain
prohibitions contained in the SECURITIES ACT (Ontario) (the "SECURITIES ACT")
and other applicable securities laws, but may be compelled to resort to one or
more private sales thereof to a restricted group of purchasers who will be
obliged to agree, among other things, to acquire such securities for their own
account for investment and not with a view to the distribution or resale
thereof. The Guarantor acknowledges and agrees that any such private sale may
result in prices and other terms less favourable to the seller than if such sale
were a public sale and notwithstanding such circumstances, agrees that any such
private sale shall be deemed to have been made in a commercially reasonable
manner. The Secured Party shall not be under any obligation to delay a sale of
any of the Collateral for the period of time necessary to permit the issuer of
such securities to register such securities for public sale under the Securities
Act, or under other applicable securities laws, even if the issuer would agree
to do so.
<PAGE>
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5.6 REMEDIES, ETC., CUMULATIVE. Each right, power and remedy of the Secured
Party provided for in this Agreement or now or hereafter existing at law or in
equity or by statute shall be cumulative and concurrent and shall be in addition
to every other such right, power or remedy. In addition to the rights and
remedies provided herein and in addition to any other rights the Secured Party
may have at law or in equity, the Secured Party has all the remedies of a
secured party under the PERSONAL PROPERTY SECURITY ACT (Ontario) (the "PPSA").
The exercise or beginning of the exercise by the Secured Party of any one or
more of the rights, powers or remedies provided for in this Agreement or now or
hereafter existing at law or in equity or by statute or otherwise shall not
preclude the simultaneous or later exercise by the Secured Party of all such
other rights, powers or remedies, and no failure or delay on the part of the
Secured Party to exercise any such right, power or remedy shall operate as a
waiver thereof.
5.7 CONSENT. The Guarantor hereby irrevocably approves, authorizes and consents
to any sale, transfer or other disposition of any or all of the Collateral by
the Secured Party in accordance with the terms of this Agreement.
5.8 APPLICATION OF PROCEEDS. After payment of expenses as provided in Section
5.10, the balance of any proceeds received by the Secured Party in connection
with realizing, collecting, selling, transferring, delivering or obtaining
payment of the Collateral or any part thereof shall be applied on account of the
obligations, indebtedness and liabilities of the Issuer to the Holders in
accordance with the Indenture.
5.9 PURCHASERS OF PLEDGED COLLATERAL. Upon any sale of any of the Collateral
hereunder (whether by virtue of the power of sale herein granted, pursuant to
judicial process or otherwise), the receipt of the Secured Party or the officer
making the sale shall be a sufficient discharge to the purchaser or purchasers
of the Collateral so sold, and such purchaser or purchasers shall not be
obligated to see to the application of any part of the purchase money paid over
to the Secured Party or such officer or be answerable in any way for the
misapplication or non-application thereof.
5.10 PAYMENT OF EXPENSES. The Secured Party may charge on its own behalf and
also pay to others all out-of-pocket expenses of the Secured Party and others,
including the fees and disbursements of any experts or advisers (including,
without limitation, lawyers) retained by the Secured Party, incurred in
connection with selling, transferring, delivering or obtaining payment in
respect of the sale, transfer or delivery of the Collateral or any part thereof,
or in connection with the administration or amendment of this Agreement or
incidental to the care, safe keeping or otherwise of any and all of the
Collateral and may deduct the amount of such sums from any proceeds of the
Collateral.
SECTION 6 -- GENERAL
6.1 BENEFIT OF THE AGREEMENT. This Agreement shall be binding upon the Guarantor
and its heirs, executors, administrators, legal or personal representatives,
successors and permitted
<PAGE>
- 14 -
assigns and shall enure to the benefit of and be enforceable by the Secured
Party and its successors and assigns. In the event there has been an assignment
or transfer by the Secured Party to an assignee or a transferee in accordance
with the terms of the Indenture, the Secured Party is authorized to endorse all
or any part of the Collateral to such assignee or transferee and such assignee
or transferee of such endorsed Collateral shall be entitled to the benefits of
this Agreement. This Agreement and the rights of the Secured Party hereunder
shall also enure to the benefit of any of the Secured Party's nominees or
successors, including upon an Event of Default.
6.2 RIGHTS AND WAIVERS. The Guarantor hereby agrees that, without the necessity
of any reservation of rights against the Guarantor and without notice to or
further agreement by the Guarantor, any demand for payment of any of the
Obligations made by the Secured Party may be rescinded by the Secured Party and
the Obligations of the Guarantor or any other party upon or for any part
thereof, or any collateral security or guarantee therefor or right of set-off or
compensation with respect thereto, may, from time to time, in whole or in part,
be renewed, extended, amended, modified, accelerated, compromised, waived,
surrendered, or released by the Secured Party and any collateral security
documents or guarantees or documents in connection therewith may be amended,
modified, supplemented or terminated, in whole or in part, as the Secured Party
may deem advisable from time to time, and any collateral security at any time
held by the Secured Party for the payment of the Obligations may be released in
accordance with this Agreement all without the necessity of any reservation of
rights against the Guarantor and without notice to or further assent by the
Guarantor, which will remain bound hereunder, notwithstanding any such renewal,
extension, modification, acceleration, compromise, amendment, supplement,
termination, sale, exchange, waiver, surrender, pledge or release. The Guarantor
waives diligence, presentment, protest, demand for payment and notice of default
or non-payment to or upon the Guarantor with respect to the Obligations.
6.3 NOTICE.
(1) Any notice to the Guarantor under the provisions of this Agreement
shall be valid and effective if delivered, or sent by telecopier addressed to
the Guarantor at:
Seven Seas Petroleum Holdings Inc.
Suite 960
Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas 77056 U.S.A.
Attention: Vice President - Finance
Telecopier No.: (713) 621-9770
with a copy to:
<PAGE>
- 15 -
McMillan Binch
Suite 3800, South Tower
Royal Bank Plaza
Toronto, Ontario
M5J 2J7
Attention: James D. Scarlett
Telecopier No.: (416) 865-7048
and shall be deemed to have been effectively given on the date of delivery if
delivered, or the date of sending if sent by telecopier.
(2) Any notice to the Secured Party under the provisions of this Agreement
shall be valid and effective if delivered, or sent by telecopier addressed to
the Secured Party at:
Montreal Trust Company of Canada
710 - 530 8th Avenue S.W.
Calgary, Alberta
T2P 3S8
Attention: Manager, Corporate Trust
Telecopier No.: (403) 267-6598
with a copy to:
Yorkton Securities Inc.
11th Floor
1055 Dunsmuir Street
Vancouver, BC
V7X 1L4
Attention: Verlee Webb
Telecopier No.: (604) 640-0320
and shall be deemed to have been effectively given on the date of delivery if
delivered, or the date of sending if sent by telecopier.
6.4 FURTHER ASSURANCES. The Guarantor shall at its expense from time to time,
do, execute and deliver, or cause to be done, executed and delivered, all such
financing statements, further assignments, documents, acts, matters and things
as may be required or deemed advisable by the Secured Party acting reasonably
for the purpose of giving effect to this Agreement or for the purpose of
establishing compliance with the representations, conditions and warranties and
covenants herein contained.
<PAGE>
- 16 -
6.5 POWER OF ATTORNEY. The Guarantor hereby irrevocably constitutes and appoints
the officer or officers of the Secured Party from time to time having
responsibility for administration of the terms of the Indenture the true and
lawful attorney of the Guarantor, as and from the happening of an Event of
Default and during the continuance thereof, with full power of substitution, to
do, make and execute all such statements, assignments, documents, acts, matters
or things with the right to use the name of the Guarantor whenever and wherever
such officer may deem necessary or expedient and from time to time to exercise
all rights and powers and to perform all acts of ownership in respect to the
Collateral in accordance with this Agreement.
6.6 ADDITIONAL SECURITY AND MERGER. The Security Interest constituted by this
Agreement is in addition and without prejudice to any other security now or
hereafter held by the Secured Party. Neither the taking and holding of the
Collateral nor the obtaining of any judgment by the Secured Party shall operate
as a merger of any Obligation or any other indebtedness or liability of the
Guarantor to the Secured Party or to any Holder or operate to prejudice the
security constituted by this Agreement.
6.7 COMPLETE AGREEMENT. This Agreement constitutes the complete agreement
between the parties with respect to the subject matter hereof and supersedes all
prior agreements, commitments, understandings or inducements, whether oral or
written, expressed or implied.
6.8 AMENDMENT. Neither this Agreement nor any provision hereof may be amended,
modified, waived, discharged or terminated orally nor may any of the Collateral
be released, except in accordance with this Agreement or except by an instrument
in writing duly signed by or on behalf of the Secured Party hereunder.
6.9 SEVERABILITY. Any provision in this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof or affecting the validity or enforceability of such
provision in any other jurisdiction.
6.10 GOVERNING LAW. This Agreement is governed by and will be construed and
interpreted in accordance with the laws of the Province of Ontario and the laws
of Canada applicable therein.
<PAGE>
- 17 -
6.11 PARAMOUNTCY. To the degree that any provisions contained in this Agreement
are inconsistent with those in the Indenture, the provisions of the Indenture
shall prevail.
IN WITNESS WHEREOF the Guarantor has executed and delivered this Agreement as a
Deed and the Secured Party has executed this Agreement the day and year first
above written.
SEVEN SEAS PETROLEUM
COLOMBIA INC., as Guarantor
By: _________________________
Name: _______________________
Title: ______________________
By: _________________________
Name: _______________________
Title: ______________________
MONTREAL TRUST COMPANY OF
CANADA, as Secured Party
By: _________________________ C.S.
Name: _______________________
Title: ______________________
By: _________________________
Name: _______________________
Title: ______________________
<PAGE>
- 18 -
SCHEDULE 1.1(J)
PLEDGED SECURITIES
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE
TYPE OF PLEDGED EQUITY PLEDGED EQUITY OF TOTAL
CORPORATION SECURITIES SECURITIES OUTSTANDING CERTIFICATE NO.
<S> <C> <C> <C> <C>
GHK Company Common Stock, par value 1,000 100 3
Colombia Inc. US$0.50 per share
Petrolinson, S.A. Common Shares, nominal 5,000 100 1-6
value US$10.00 per share
</TABLE>
<PAGE>
- 19 -
SCHEDULE 3.2
STOCK POWER/POWER OF ATTORNEY
FOR VALUE RECEIVED, SEVEN SEAS PETROLEUM COLOMBIA INC. hereby sells,
assigns and transfers unto Montreal Trust Company of Canada ______________
shares in the capital of __________________ standing in its name on the books of
the said Corporation represented by Certificate No. _________________, herewith,
and irrevocably constitutes and appoints _____________________________ as its
attorney to transfer such stock on the books of such Corporation with full power
of substitution in the premises.
EXECUTED this ____________ day of ________, ________.
SEVEN SEAS PETROLEUM COLOMBIA INC.
By:_________________________________ C.S.
Name:
Title:
By:_________________________________
Name:
Title:
<PAGE>
- 20 -
SCHEDULE 5.2
IRREVOCABLE PROXY
The undersigned agrees to and hereby grants to MONTREAL TRUST
COMPANY OF CANADA (the "SECURED PARTY") an irrevocable proxy to vote, or to
execute and deliver written consents or otherwise act with respect to, all
[SHARES/MEMBERSHIP INTERESTS] in the capital (the "SHARES") of
_______________________________ now owned or hereafter acquired by the
undersigned as fully, to the same extent and with the same effect as the
undersigned might or could do under any applicable laws or regulations governing
the rights and powers of shareholders of a [CAYMAN ISLANDS CORPORATION/OKLAHOMA
LIMITED LIABILITY COMPANY]. The undersigned hereby affirms that this proxy is
given pursuant to a certain limited recourse guarantee, security and pledge
agreement dated as of the date hereof made by it in favour of the Secured Party
(as amended, supplemented, restated or otherwise modified from time to time, the
"PLEDGE") and as such is coupled with an interest and is irrevocable. It is
further understood by the undersigned that this proxy is exercisable by the
Secured Party only from and after the occurrence of and during the continuance
of an Event of Default (as defined in the Pledge) and ending on the Maturity
Date (as defined in the Pledge) or otherwise ending only when the Secured Party
shall have terminated this proxy in writing.
THIS PROXY SHALL REMAIN IN FULL FORCE AND EFFECT AND BE
ENFORCEABLE AGAINST ANY DONEE, TRANSFEREE OR ASSIGNEE OF THE
SHARES.
Dated as of this _____ day of ________, ________.
SEVEN SEAS PETROLEUM COLOMBIA INC.
By:_________________________________ C.S.
Name:
Title:
By:_________________________________
Name:
Title:
THE SECURITIES TO WHICH THIS AGREEMENT RELATES HAVE NOT BEEN REGISTERED UNDER
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT") OR ANY
STATE SECURITIES LAWS, AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO
U.S. PERSONS (AS DEFINED HEREIN) WITHOUT REGISTRATION UNDER THE 1933 ACT AND ANY
APPLICABLE STATE SECURITIES LAWS, UNLESS AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT
TO: SEVEN SEAS PETROLEUM INC.
Suite 960, Three Post Oak Central
1900 Post Oak Boulevard
Houston, Texas 77056
PURCHASE OF SPECIAL NOTES
1. SUBSCRIPTION
1.1 Jasopt Pty Limited (A.C.N. 065 064 164)(the "Subscriber") hereby irrevocably
subscribes for and agrees to purchase from SEVEN SEAS PETROLEUM INC. (the
"Company") subject to the terms and conditions set forth herein 120,000
exchangeable notes (the "Special Notes") of the Company at par. The Special
Notes form part of a larger private placement (the "Private Placement") of an
aggregate of up to $25,000,000 of Special Notes, of which US$12,000,000 are
being sold hereunder and of which up to up to US$13,000,000 (the"Brokered
Portion") are being sold by the Company pursuant to an agency agreement dated as
of July 2, 1997 (the "Agency Agreement") between Yorkton Securities Inc. (the
"Agent") and the Company. Subject to the terms hereof, this subscription will be
effective upon its acceptance by the Company. By acceptance of this offer, the
Company covenants, agrees and confirms that the Subscriber will have the benefit
of the representations, warranties, covenants, agreements, terms and conditions
set forth herein.
1.2 All dollar amounts set out herein refer to United States dollars, unless
otherwise indicated.
2. DESCRIPTION OF SECURITIES
2.1 The Special Notes will be issued in registered form in multiples of US$100
and each Special Note will entitle the Subscriber to receive upon exchange, or
deemed exchange, a like principal amount of convertible redeemable (the
"Debentures") of the Company without the payment of any additional
consideration.
<PAGE>
- 2 -
2.2 The Special Notes will be exchangeable into Debentures at any time on or
before 5:00 p.m. (Vancouver time) on the date (the "Exchange Date") which is the
earlier of:
(i) the third business day following the date upon which all
Qualification and Registration Requirements (as hereinafter defined)
have been met; and
(ii) the first business day which is twelve (12) months from the Closing
Date (as hereinafter defined).
All Special Notes not exercised prior to the Exchange Date will be deemed
to be exchanged for Debentures on the Exchange Date without further action or
notice on the part of the holder.
2.3 The Debentures will be issued in registered form in multiples of US$100 and
will become due on the first business day following five (5) years from the
Closing Date (the "Due Date").
2.4 The Debentures will be convertible into units (the "Units") of the Company
by the holder on three (3) business days notice, in whole or in part, on the
basis of one Unit for each US$11.50 principal amount of Debentures outstanding.
Each Unit will consist of one (1) common share of the Company (collectively, the
"Shares") and one-half (1/2) of one common share purchase warrant (collectively,
the "Warrants"). Each whole Warrant will entitle the holder of one (1) common
share (collectively, the "Warrant Shares") of the Company at any time on or
before 5:00 p.m. (Vancouver time) on the first business day following one (1)
year from the Closing Date at a price of US$15 per share.
2.5 The Special Notes and Debentures will bear interest on the outstanding
principal amount at the rate of 6% per annum, payable semi-annually in arrears,
on December 31 and June 30 of each year and will be secured by a pledge of
shares of subsidiaries of the company. The Special Notes and the Debentures will
be subordinate in right of payment after default to any senior bank or financial
institution financing (whether currently existing or subsequently arising) and
will rank pari passu (including the security interest thereon) with any
subsequently issued non-convertible debentures.
2.6 If any time after the Exchange Date the Company's common shares have traded
at or over US$14.00 for twenty consecutive trading days on the Toronto Stock
Exchange (the "TSE"), the Company may, within ten days, cause the Debentures to
be converted on seven days notice provided that the 1933 Registration Statement
(as hereinafter defined), must remain in effect throughout such seven day notice
period. If the 1933 Registration Statement does not remain in effect throughout
such notice period the Company may again provide such seven day notice within
five days of resumption of the effectiveness of the 1933 Registration Statement,
provided that the Company's common shares have traded at or over US$14.00 on the
TSE for two consecutive trading days following such resumption.
<PAGE>
- 3 -
2.7 In this Agreement, "Securities" means the Special Notes, the Debentures, the
Units, the Shares, the Warrants, and the Warrant Shares. All of the Securities
will be transferable, subject to applicable law.
2.8 The foregoing description of Securities in subsections 2.1 to 2.7 is a
summary only. The terms and conditions governing the Notes and Debentures will
be contained in a trust indenture (the "Trust Indenture") between the Company
and Montreal Trust Company of Canada (the "Trustee") and the terms and
conditions governing the Warrants will be contained in a warrant indenture (the
"Warrant Indenture") between the Company and the Trustee. The Trust Indenture
and Warrant Indenture shall be mutually satisfactory to the Company, the
Subscriber and the Agent.
3. QUALIFICATION AND REGISTRATION REQUIREMENTS
3.1 The Company covenants that as soon as practicable following the Closing
Date, it will file the following documents:
(a) a preliminary prospectus (the "Preliminary Prospectus") with the
securities commissions (the "Securities Commissions") in all
Canadian provinces in which holders of Special Notes are resident
(the "Canadian Jurisdictions"), qualifying the distribution of the
Debentures upon exchange of the Special Notes;
(b) a registration statement or registration statements (the "1933
Registration Statement") under the United States Securities Act of
1933 (the "1933 Act") registering for resale the Shares, Warrants
and Warrant Shares;
(c) all required filings with state securities or "blue sky"
administrators where the Company or the holders of Securities
propose to offer and sell any of the Securities (the "Blue Sky
Filings"),
and will use its best efforts to:
(i) cause receipts for a (final) Prospectus (the "Prospectus") to
be issued by the Securities Commissions in the Canadian
Jurisdictions; and
(ii) cause the 1933 Registration Statement and Blue Sky Filings to
become effective
(collectively, the "Qualification and Registration Requirements") as
soon as practicably possible thereafter.
3.2 The Company will cause the 1933 Registration Statement to remain effective
until two (2) years following the date upon which all Debentures have been
redeemed, converted, or otherwise retired.
<PAGE>
- 4 -
3.3 Notwithstanding section 3.2 herein, the Company may, upon notice to the
holders of Debentures, temporarily suspend sales under the 1933 Registration
Statement during any reasonable period in which its board of directors
determines that because of material developments, it would not be practicable to
maintain a current prospectus, provided that in such event, the Company will
take all necessary steps to update the prospectus disclosure and notify the
holders that sales under the 1933 Registration Statement may resume as soon as
practicable.
3.4 The Company will, upon notice from any holder of Securities, make all
required filings with state securities or "blue sky" administrators in any state
in which such holder proposes to offer and sell any of the Securities provided
that (i) no alternative exemption is available for such offer and sale, (ii)
such holder provides the Company with all necessary information to enable the
Company to make such filings, and (iii) the required filing may only be made by
the Company.
3.5 In the event that the Company does not obtain a receipt for the Prospectus
in any Canadian Jurisdiction, the Debentures, Shares, Warrants and Warrant
Shares will be subject to statutory hold periods during which these securities
may not be resold in such Canadian Jurisdiction. The Company is not a reporting
issuer in any jurisdiction other than Ontario, British Columbia and Alberta (the
"Reporting Jurisdictions"); accordingly, hold periods attaching to the
Securities in jurisdictions outside of the Reporting Jurisdictions may never
expire. In addition, any Special Notes that are exchanged prior to the issuance
of a receipt for the Prospectus by the Securities Commissions will result in
statutory restrictions on the resale of the Debentures, Shares and Warrant
Shares. Further, notwithstanding filing of a Prospectus in the Canadian
Jurisdictions, all Securities will be legended for a period of not less that one
year from the date of Closing pursuant to the 1933 Act. The Subscriber is
advised to consult its own legal advisors in connection with any applicable
resale restrictions.
4. PAYMENT
4.1 The aggregate Subscription Price shall be paid by cheque or by wire in
accordance with the following instructions:
Southwest Bank of Texas, N.A.
ABA Number:113011258
Account Name: Seven Seas Petroleum Inc.
Account Number: 172391
Attention: Bill Phelan
Phone Number: 713-888-4608
5. QUESTIONNAIRE AND UNDERTAKING AND DIRECTION
5.1 The Subscriber must complete, sign and return the following documents along
with one (1) executed copy of this Subscription to the Company:
<PAGE>
- 5 -
(a) Schedule I, a direction to the Company with respect to registration
and delivery instructions;
(b) Schedule II, a questionnaire and undertaking required by The Toronto
Stock Exchange (the "TSE");
5.2 The Subscriber shall complete, sign and return to the Company as soon as
possible on request by the Company any other documents, questionnaire, notices
and undertakings as may be required by regulatory authorities, stock exchanges
and applicable law. The Subscriber acknowledges that the Company will file with
the TSE, the questionnaire and undertakings of the Subscriber.
6. CLOSING
6.1 Delivery and payment of the Special Notes will be completed at the offices
of McMillan Binch, Barristers and Solicitors, 200 Bay Street, South Tower, Royal
Bank Plaza, Toronto, Ontario, M5J 2J7, at 11:00 a.m. (Toronto Time) (the
"Closing Time") on July 30, 1997 or such earlier or later date(s) or time(s) as
each of the Company, the Subscriber and the Agent shall mutually agree (the
"Closing Date") at which time certificates representing the Special Notes
(collectively, the "Special Note Certificates") will be available for delivery
to the Subscriber.
7. CONDITIONS OF CLOSING
7.1 The purchase and sale of the Special Notes and the Closing shall be subject
to the following conditions:
(a) the Company having obtained all requisite regulatory approvals
required to be obtained by the Company in respect of the Private
Placement including, without limitation, the TSE's acceptance for
filing thereof, on terms mutually acceptable to the Company and the
Agent, acting reasonably;
(b) the Company having complied fully with all relevant statutory and
regulatory requirements required to be complied with prior to the
Closing Time in connection with the Private Placement;
(c) the Company having taken all necessary corporate action to authorize
and approve this Agreement, the subscription agreements pursuant to
the Brokered Portion (the "Brokered Subscriptions"), the Agency
Agreement, the Trust Indenture, the Warrant Indenture, the issuance
of the Special Notes and the Securities, and all other matters
relating thereto;
<PAGE>
- 6 -
(d) the Agent and the Subscriber having received at the Closing Time
favourable legal opinions of counsel to the Company addressed to the
Agent, the Agent's counsel, the Subscriber and the Subscriber's
counsel, acceptable in all reasonable respects to counsel to the
Agent and counsel to the Subscriber to the following effect:
(i) the Company and its Subsidiaries are corporations validly
existing and in good standing under the laws of their
respective jurisdictions of incorporation, continuation or
amalgamation and are qualified to carry on business and own
their assets under the laws of each jurisdiction in which they
respectively carry on business and own assets;
(ii) the Company and the Subsidiaries have all requisite corporate
capacity, power and authority to execute and deliver this
Agreement, the Agency Agreement, the Brokered Subscriptions,
the Trust Indenture, and the Warrant Indenture and to perform
all transactions contemplated hereby and thereby;
(iii) the authorized and issued capital of the Company consists of
an unlimited number of common shares without par value and an
unlimited number of Class A preference shares issuable in
series, of which 32,657,939 common shares are validly issued
and outstanding as fully paid and non-assessable and opinions
as to the authorized and issued capital of each of the
Subsidiaries;
(iv) each of this Agreement, the Agency Agreement, the Brokered
Subscriptions, the Trust Indenture, the Warrant Indenture and
the Pledge Agreement to be entered into by the Company has
been duly authorized, executed and delivered by the Company
and constitutes, and the certificates representing the Special
Notes, the Debentures and the Warrants have been duly
authorized and, when executed and delivered by the Company,
will constitute, legal, valid and binding obligations of the
Company enforceable in accordance with their terms, except
that;
A. the enforcement thereof may be limited by bankruptcy,
insolvency and other laws affecting the enforcement of
creditors' rights generally;
B. rights of indemnity, contribution and waiver of
contribution thereunder may be limited under applicable
law; and
<PAGE>
- 7 -
C. equitable remedies, including without limitation,
specific performance and injunctive relief, may be
granted only in the discretion of a court of competent
jurisdiction;
(v) all necessary corporate actions has been taken by the Company
to authorize the creation and issuance of the Special Notes
subject to the terms of the Trust Indenture;
(vi) the Shares and Warrants to be issued upon the conversion of
the Debentures have been allotted for issuance to the
Subscriber and the subscribers pursuant to the Brokered
Subscriptions and the Shares will, when issued upon the due
conversion of the Debentures in accordance with the terms of
the Trust Indenture, be validly issued to the holders thereof
without additional payment;
(vii) the Warrant Shares to be issued upon the exercise of the
Warrants have been allotted for issuance to the holders, from
time to time, of the Warrants and such securities will, when
issued upon the due exercise of the Warrants in accordance
with the terms of the Warrant Indenture, be validly issued to
the holders thereof as fully paid and non-assessable;
(viii)the issue and sale of the Special Notes has been effected in
such a manner as to be exempt, either by statute or regulation
or order, from the prospectus and registration requirements of
the securities legislation of the Canadian Jurisdictions,
subject to the filing of all necessary reports, certificates
or undertakings required to be filed under applicable
securities legislation in each of the Canadian Jurisdictions;
(ix) upon meeting the Qualification and Registration Requirements
the exchange or deemed exchange of the Special Notes, the
Securities will not be subject to any statutory hold period
under the laws of the Canadian Jurisdictions or the United
States federal securities laws and no other documents are
required to be filed, proceedings taken or approvals, permits,
consents, orders or authorizations of regulatory authorities
required to be obtained under the applicable securities
legislation, in connection with issuance of the Securities and
the first trade of the Securities through registrants
registered under the applicable securities laws who have
complied with such applicable laws (subject to control person
restrictions under securities legislation in each of the
Canadian Jurisdictions);
(x) in the event that receipts for the Prospectus are not issued
by the Commissions in the Canadian Jurisdictions, then the
issuance of the
<PAGE>
- 8 -
Securities and Warrant Shares will be exempt from the
registration and prospectus requirements of the applicable
securities laws of the Canadian Jurisdictions, and the
Securities and Warrant Shares shall be subject to certain
specified resale restrictions imposed under the securities
laws of the Canadian Jurisdictions;
(xi) the execution and delivery of this Agreement, the Agency
Agreement, the Brokered Subscriptions, the Trust Indenture and
the Warrant Indenture and the performance of the transactions
contemplated hereby and thereby do not and will not result in
a breach of, and do not create a state of facts which, after
notice or lapse of time or both, will result in a breach of,
and do not and will not conflict with, any of the terms,
conditions or provisions of the constating documents of the
Company;
(xii) the forms of certificate representing the Special Notes and
Warrants have been approved and adopted by the directors of
the Company and conform with all applicable corporate
legislation and requirements;
(xiii)at the Closing Time, the Trustee will have been duly appointed
by the Company as the registrar and transfer agent of the
Shares and the Trustee will be appointed as the trustee in
respect of the Special Notes and Warrants;
(xiv) the Company is a "reporting issuer" in the Provinces of
Ontario, British Columbia and Alberta within the meaning of
the applicable securities legislation in such Provinces and is
not included on the list of defaulting reporting issuers
maintained by the British Columbia, Ontario and Alberta
Securities Commissions;
(xv) based solely on a review of the share registers of the
Subsidiaries, the Company owns 100% of the issued and
outstanding shares of the Subsidiaries (except Cimarrona LLC
in which the Company, through Seven Seas Petroleum Colombia
Inc., holds a 62.963% membership interest) and, to the best of
counsel's knowledge, the shares of the Subsidiaries held
directly or indirectly by the Company are all owned free and
clear of all mortgages, liens, charges, pledges, security
interests, encumbrances, claims and demands whatsoever;
in giving the opinions contemplated above, counsel to the Company
and all local counsel shall be entitled to rely, as to matters of
fact, upon the representations, warranties and acknowledgments of
the Subscriber contained in this Agreement, and of subscribers
pursuant to the Brokered Subscriptions, representations, warranties
and covenants of the Agent contained in the Agency Agreement, a
<PAGE>
- 9 -
certificate of fact of the Company signed by an officer in a
position to have knowledge of such facts and their accuracy and
certificates of such public officials and other persons as are
necessary or desirable;
(e) the Agent and the Subscriber having received a certificate of the
Company dated the Closing Date signed by the Chief Executive Officer
of the Company and by such other officer or director acceptable to
the Agent and the Subscriber certifying as to certain matters
reasonably requested by the Agent and the Subscriber including
certification that:
(i) the Company has complied with all covenants and satisfied all
terms and conditions of this Agreement and the Agency
Agreement on its part to be complied with and satisfied up to
the Closing Time;
(ii) all of the representations and warranties contained in this
Agreement and in the Agency Agreement are true and correct as
of the Closing Date with the same force and effect as if made
at and as of the Closing Date, after giving effect to the
transactions contemplated hereby;
(iii) since the date hereof, there has been no material adverse
change (actual, proposed or prospective, whether financial or
otherwise) in the business, affairs, operations, assets,
liabilities (contingent or otherwise) or capital of the
Company and its Subsidiaries on a consolidated basis;
(iv) no order, ruling or determination having the effect of ceasing
or suspending trading in any securities of the Company
(including the Special Notes and the Securities) has been
issued and no proceedings for such purposes are pending, or,
to the knowledge of such officers, contemplated or threatened;
(v) the Company is a "reporting issuer" not in default under
securities laws of the Provinces of Ontario, British Columbia
and Alberta and no material change relating to the Company has
occurred with respect to which the requisite material change
statement has not been filed;
(vi) the Public Record does not contain a "misrepresentation" as
defined in the applicable securities legislation of the
Canadian Jurisdictions as at the date of such filing;
(vii) except for the matters disclosed in the Public Record, there
is no pending or threatened action or proceeding against the
Company or its Subsidiaries before any court, governmental
agency or arbitrator that is likely to have a
<PAGE>
- 10 -
materially adverse effect upon the financial condition or
operations of the Company or its Subsidiaries;
(viii)the execution and delivery of this Agreement, the Agency
Agreement, the Brokered Subscriptions, the Trust Indenture and
the Warrant Indenture and the performance of the transactions
contemplated thereby do not and will not result in a breach
of, and do not create a state of facts which, after notice, or
lapse of time or both, will result in a breach of, and do not
and will not conflict with, any of the terms, conditions or
provisions of the constating documents or by-laws of the
Company or any trust indenture, agreement, or instrument to
which the Company is contractually bound on the Closing Date;
and
(f) the Agent and the Subscriber having received a "blue-sky memorandum"
in relation to the Private Placement prepared by the Company's
United States counsel relating to compliance with state corporate
and securities laws in the United States.
8. ACKNOWLEDGMENTS OF SUBSCRIBER
8.1 The Subscriber acknowledges, and agrees that:
(a) the Securities have not been registered under the 1933 Act, or under
any state securities laws, and cannot be offered or resold without
registration under the 1933 Act and the securities laws of all
applicable states of the United States unless an exemption from
registration is available or registration is not required pursuant
to Regulation S under the 1933 Act;
(b) its decision to execute this Subscription and purchase the Special
Notes agreed to be purchased hereunder has not been based upon any
oral or written representation as to fact or otherwise made by or on
behalf of the Company, and that its decision is based entirely upon
its review (the receipt of which is acknowledged) of information
which has been filed by the Company with the Securities Commissions
or the United States Securities and Exchange Commission (the "SEC")
in compliance, or intended compliance, with applicable securities
legislation (collectively the "Public Record") including the
Company's unaudited financial statements for the three month period
ending March 31, 1997 and its audited financial statements for the
year ending December 31, 1996 (collectively the "Financial
Statements");
(c) no prospectus has been filed with respect to the Special Notes under
applicable Canadian securities legislation, and accordingly:
<PAGE>
- 11 -
(i) the Subscriber is restricted from using certain of the civil
remedies available under such legislation;
(ii) the Subscriber will not receive information that might
otherwise be required to be provided to it under such
legislation; and
(iii) the Company is relieved from certain obligations that would
otherwise apply under such legislation;
(d) it has been advised to consult its own legal advisors with respect
to the merits and risks of an investment in the Securities and with
respect to applicable resale restrictions and it is solely
responsible (and the Company is in no way responsible) for
compliance with applicable resale restrictions.
(e) the Company is a reporting issuer in the Reporting Jurisdictions
only and the Company cannot ensure that Qualification and
Registration Requirements will be met notwithstanding the Company's
efforts and that any Securities issued to a Subscriber other than
pursuant to a prospectus may be subject to indefinite resale
restrictions imposed under the laws of the Jurisdiction in which
such Subscriber is resident;
(f) to the knowledge of the Subscriber, the sale of the Special Notes
was not accompanied by any advertisement;
(g) the offer made by this Subscription is irrevocable (subject to the
right of the Subscriber to terminate this Subscription as provided
in section 21) and requires acceptance by the Company;
(h) this Subscription is not enforceable by the Subscriber unless it has
been accepted by the Company and the Subscriber waives any
requirement on the Company's behalf to communicate its acceptance
for this Subscription to the Subscriber;
(i) the Securities are speculative investments which involve a
substantial degree of risk;
(j) the Subscriber has had access to and has received all such
information concerning the Company that the Subscriber has
considered necessary in connection with the Subscriber's investment
decision;
(k) the Subscriber has not been provided with, nor has it requested, nor
does it have any need to receive an offering memorandum or any other
document describing the business and affairs of the Company in order
to assist it in making an investment decision in respect of the
Private Placement;
<PAGE>
- 12 -
(l) the subscription proceeds will be available to the Company on
closing of the Private Placement and will not be returned to the
Subscriber notwithstanding any delays or inability to meet the
Qualification and Registration Requirements;
(m) no agency, governmental authority, regulatory body, stock exchange
or other entity has made any finding or determination as to the
merit for investment of, nor have any such agencies or governmental
authorities made any recommendation or endorsement with respect to,
the Securities; and
(n) as the Subscriber is not a U.S. Person, the Subscriber further
acknowledges that:
(i) no offers to sell the Special Notes were made by any person to
the Subscriber while the Subscriber was in the United States;
(ii) the Subscriber was outside the United States at the time of
execution and delivery of this Subscription; and
(iii) any person who exercises a Special Note, Debenture or a
Warrant will be required to provide the Company with written
certification that it is not a U.S. Person and the Special
Note, Debenture or Warrant is not being exercised within the
United States by or on behalf of a U.S. Person.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SUBSCRIBER
9.1 The Subscriber hereby represents, warrants and covenants to the Company
(which representations, warranties and covenants shall survive closing) that:
(a) the Subscriber has no knowledge of a "material fact" or "material
change" (as those terms are defined in the applicable Canadian
securities legislation) in respect of the affairs of the Company
that has not been generally disclosed to the public;
(b) the Subscriber is purchasing the Special Notes as principal for its
own account and is resident in the jurisdiction set out under the
heading "Name and Address of Subscriber" on the execution page of
this Agreement;
(c) the Subscriber has the legal capacity and competence to enter into
and execute this Subscription and to take all actions required
pursuant hereto and, if the Subscriber is a corporation, it is duly
incorporated and validly subsisting under the laws of its
jurisdiction of incorporation and all necessary approvals by its
directors, shareholders and others have been obtained to authorize
execution of this Subscription on behalf of the Subscriber;
<PAGE>
- 13 -
(d) the entering into of this Subscription and the transactions
contemplated hereby do not result in the violation of any of the
terms and provisions of any law applicable to, or the constating
documents of, the Subscriber or of any agreement, written or oral,
to which the Subscriber may be a party or by which the Subscriber is
or may be bound;
(e) the Subscriber has duly and validly authorized, executed and
delivered this Subscription and except as specifically provided
otherwise herein, it constitutes a valid and binding agreement of
the Subscriber enforceable against the Subscriber,
(f) in connection with the Subscriber's investment in the Securities,
the Subscriber has not relied upon the Company or the Company's
legal counsel or advisers for investment, legal or tax advice, and
has, if desired, in all cases sought the advice of the Subscriber's
own personal investment advisor, legal counsel and tax advisers and
the Subscriber is either experienced in or knowledgeable with regard
to the affairs of the Company, or either alone or with its
professional advisors is capable, by reason of knowledge and
experience in financial and business matters in general, and
investments in particular, of evaluating the merits and risks of an
investment in the Special Notes and is able to bear the economic
risk of the investment and it can otherwise be reasonably assumed to
have the capacity to protect its own interest in connection with the
investment in the Special Notes;
(g) the Subscriber is not a U.S. Person and is not acquiring the
Securities offered hereby for the account or benefit of a U.S.
Person;
(h) no person has made to the Subscriber any written or oral
representations:
(i) that any person will resell or repurchase the Securities;
(ii) that any person will refund the purchase price for the
Securities; and
(iii) as to the future price or value of the Securities.
(i) the Securities are not being acquired directly or indirectly, for
the account or benefit of a U.S. Person or a person in the United
States, and the Subscriber does not have any agreement or
understanding (either written or oral) with any U.S. Person or a
person in the United States respecting:
(i) the transfer or assignment of any rights or interests in any
of the Securities;
(ii) the division of profits, losses, fees, commissions, or any
financial stake in connection with this Subscription; or
<PAGE>
- 14 -
(iii) the voting of the Shares or Warrant Shares;
(j) the current structure of this transaction and all transactions and
activities contemplated hereunder is not a scheme to avoid the
registration requirements of the 1933 Act;
(k) the Subscriber is entirely at arm's length with the Company and
following conversion of Debentures and Warrants into common shares
of the Company, the Subscriber, including any parties acting in
concert with the Subscriber, will not, directly or indirectly,
beneficially own or exercise control or direction over 10% or more
of the outstanding voting securities of the Company;
(l) the Subscriber will comply with the applicable provisions of all
relevant securities legislation concerning the purchase and holding
of the Special Notes and any resale of the Securities; and
(m) the Subscriber is resident of an International Jurisdiction (defined
in this Subscription to mean a country other than Canada or the
United States) and as such:
(i) the Subscriber is knowledgeable of, or has been independently
advised as to, the International Securities Laws (which is
defined in this Subscription to mean, in respect of each and
every offer or sale of Special Notes, the securities
legislation having application and the rules, policies,
notices and orders issued by the securities regulatory
authorities having jurisdiction over the Subscriber and the
Private Placement, other than the laws of Canada and the U.S.,
which would apply to this subscription, if there are any);
(ii) the Subscriber is purchasing the Special Notes pursuant to
exemptions from any prospectus, registration or similar
requirements under the International Securities Laws of the
International Jurisdiction and or, if such is not applicable,
the Subscriber is permitted to purchase the Special Notes
under the International Securities Laws of the International
Jurisdiction without the need to rely on exemptions;
(iii) the International Securities Laws do not require the Company
or to make any filings or seek any approvals of any kind
whatsoever from any regulatory authority of any kind
whatsoever in the International Jurisdiction;
<PAGE>
- 15 -
(iv) the Securities are being acquired for investment only and not
with a view to resale and distribution and the distribution of
the Securities to the Subscriber by the Company complies with
all International Securities Laws;
10. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
10.1 The Company represents and warrants to the Subscriber and acknowledges that
the Subscriber is relying upon such representations and warranties, as follows:
(a) the Company and its subsidiaries are valid and subsisting
corporations duly incorporated and in good standing under the laws
of the jurisdiction in which they are incorporated, continued or
amalgamated;
(b) the Company has complied, or will comply, with all applicable
corporate and securities laws and regulations in connection with the
offer, sale and issuance of the Securities;
(c) the Company and its subsidiaries are the beneficial owners of or
have the right to acquire the interests in the properties, business
and assets or the interests in the properties, business or assets
referred to in the Public Record and except as disclosed in the
Public Record, all agreements by which the Company or its
subsidiaries holds an interest in a property, business or asset are
in good standing according to their terms, and the properties are in
good standing under the applicable laws of the jurisdictions in
which they are situated;
(d) the Company has been duly incorporated, continued or amalgamated and
is validly existing under the laws of the jurisdiction of
incorporation and is duly qualified to carry on its business and is
in good standing in each jurisdiction in which it conducts its
business or in which the ownership, leasing or operation of its
property and assets requires such qualification and it has all
requisite corporate power and authority to carry on its business as
now conducted and as currently proposed to be conducted and to own,
lease and operate its property and assets;
(e) each of the Subsidiaries of the Company is properly described in
Schedule "A" hereto and has been duly incorporated, continued or
amalgamated and is validly existing under the laws of the
jurisdiction and is duly qualified to carry on its business and is
in good standing in each jurisdiction in which the manner in which
it conducts its business or the ownership, leasing or operation of
its property and assets requires such qualification and has all
requisite corporate
<PAGE>
- 16 -
power and authority to carry on its business as now conducted and as
currently proposed to be conducted and to own, lease and operate its
property and assets;
(f) the Company is a reporting issuer in good standing under the
securities laws of Ontario, Alberta and British Columbia, and no
material change relating to the Company has occurred within the last
twelve (12) months with respect to which the requisite material
change report has not been filed under any applicable securities
laws and no such disclosure has been made on a confidential basis;
(g) the Company has (and in the case of the qualification for
distribution of the Securities by the Prospectus, will have) full
corporate power and authority to undertake the Offering and file the
Prospectus, and to issue the Special Notes, the Securities and the
Warrant Shares;
(h) at the Closing Time, the Special Notes will be duly and validly
created, authorized and issued and the Debentures, the Shares,
Warrants and Warrant Shares will be duly and validly authorized,
allotted and reserved for issuance upon the conversion of the
Special Notes or Debentures and the exercise of the Warrants,
respectively, and the Debentures, the Shares, Warrants and Warrant
Shares will, upon exercise in accordance with the respective terms
of the Trust Indenture and the Warrant Indenture, be issued as fully
paid and non-assessable securities;
(i) the authorized capital of the Company consists of an unlimited
number of common shares without par value and an unlimited number of
Class A preference shares issuable in series, of which 32,657,939
common shares are issued and outstanding as at the date hereof as
fully paid and non-assessable;
(j) the Company has full corporate power and authority to enter into
this Agreement, the Trust Indenture and the Warrant Indenture and to
perform its obligations set out herein and therein and each of this
Agreement, the Trust Indenture and the Warrant Indenture has been,
or will be upon execution and delivery thereof, duly authorized,
executed and delivered by the Company and constitutes, or will
constitute when executed and delivered, a legal, valid and binding
obligation of the Company enforceable in accordance with their
respective terms;
(k) neither the Company nor its Subsidiaries, is in default or breach
of, and the execution and delivery of each of this Agreement, the
Trust Indenture and the Warrant Indenture by the Company, and the
performance of the transactions contemplated thereby will not result
in a breach of, and do not create a state of facts which, after
notice or lapse of time or both, will result in a breach of, and do
not and will not conflict with, any of the terms, conditions or
provisions of
<PAGE>
- 17 -
the constating documents, resolutions or by-laws of the Company or
any material indenture, contract, agreement (written or oral),
instrument, lease or other document to which the Company or its
Subsidiaries is a party or by which the Company or its Subsidiaries
is or will be contractually bound as of the Closing Time;
(l) neither the Company nor its Subsidiaries is a party to, and neither
the Company nor its Subsidiaries has granted any agreement, warrant,
option or right, or any privilege capable of becoming an agreement,
option or right for the purchase, subscription or issuance of any
common shares or securities convertible into or exchangeable for
common shares except as disclosed in the Public Record and as
summarized in Schedule "B" hereto;
(m) the audited annual financial statements of the Company as at and for
the year ended December 31, 1996 and the unaudited financial
statements of the Company as at and for the three month period ended
March 31, 1997 (collectively, the "Financial Statements") present
fairly, in all material respects, the financial position of the
Company and its Subsidiaries as at the dates set out therein and the
results of their operations and the changes in their financial
position for periods then ended, in accordance with generally
accepted Canadian accounting principles;
(n) except as disclosed in the Public Record, there has not been any
material change in the assets, liabilities or obligations (absolute,
accrued, contingent or otherwise) of the Company or its
Subsidiaries, as set forth in the Financial Statements and there has
not been any material adverse change in the business, operations or
condition (financial or otherwise) or results of the operations of
the Company or its Subsidiaries, since March 31, 1997 and since that
date there have been no material facts, transactions, events or
occurrences which could materially adversely affect the business of
the Company or its Subsidiaries;
(o) to the best of the knowledge of the Company, the Company and its
Subsidiaries have conducted and are conducting their business in all
material respects in compliance with all applicable laws, by-laws,
rules and regulations of each jurisdiction in which their business
is carried on and hold all material licences, registrations,
permits, consents or qualifications (whether governmental,
regulatory or otherwise) required in order to enable their business
to be carried on as now conducted and all such material licences,
registrations, permits, consents and qualifications are valid and
subsisting and in good standing and neither the Company nor its
Subsidiaries have received notice of proceedings relating to the
revocation or modification of any such material license,
registration, permit consent or qualification which, if the subject
of an unfavourable decision, ruling or finding, would materially
adversely affect the
<PAGE>
- 18 -
conduct of the business, operations, condition (financial or
otherwise) or income of the Company or its Subsidiaries;
(p) the Company has not, directly or indirectly, declared or paid any
dividend or declared or made any other distribution on any of its
common shares or securities of any class, or, directly or
indirectly, redeemed, purchased or otherwise acquired any of its
common shares or securities or agreed to do any of the foregoing;
(q) there is not, in the constating documents or articles of the Company
or in any agreement, mortgage, note, debenture, indenture or other
instrument or document to which the Company is a party, any
restriction upon or impediment to the declaration or payment of
dividends by the directors of the Company or the payment of
dividends by the Company to the holders of its common shares;
(r) the issued and outstanding common shares of the Company are listed
and posted for trading on the TSE;
(s) the Trustee at its office in Toronto, Ontario has been duly
appointed as the transfer agent and registrar for all of the
outstanding common shares of the Company;
(t) this Agreement and any other written or oral representations made by
the Company to the Subscriber in connection with the Private
Placement will be accurate in all material respects and will omit no
fact, the omission of which will make such representation
misleading;
(u) the Company is not a "reporting issuer" or a reporting company in
any jurisdiction other than Ontario, British Columbia and Alberta;
(v) all filings made by the Company under which it has received or is
entitled to government loans or incentives, have been made in
accordance, in all material respects, with applicable legislation
and contain no misrepresentations of a material fact or omit to
state any material fact which could cause any amount previously paid
to the Company or previously accrued on the accounts thereof to be
recovered or disallowed;
(w) the minute books of the Company and its Subsidiaries are true and
correct and contain the minutes of all meetings and all resolutions
of the directors and shareholders thereof;
(x) the Company has taken all steps necessary to obtain the consent of
the TSE and has complied with all other regulatory requirements
applicable on the offering
<PAGE>
- 19 -
and sale of the Special Notes on a "private placement" basis as
contemplated by the Offering;
(y) the shares of the Subsidiaries held directly or indirectly by the
Company are all owned free and clear of all mortgages, liens,
charges, pledges, security interests, encumbrances, claims and
demands whatsoever;
(z) the auditors of the Company who audited the consolidated financial
statements of the Company most recently delivered to the security
holders of the Company and delivered their report with respect
thereto, are independent public accountants;
(aa) the Company and each of the Subsidiaries has established on its
books and records reserves that they are adequate for the payment of
all taxes not yet due and payable and there are no liens for taxes
on the assets of the Company or the Subsidiaries; there are no
audits known by the Company's management to be pending of the tax
returns of the Company or the Subsidiaries (whether federal,
provincial, local or foreign) and there are no claims which have
been or may be asserted relating to any such tax returns, which
audits and claims, if determined adversely, would result in the
assertion by any government agency of any deficiency that would have
a material adverse effect on the assets, properties, business,
results of operations, prospects or condition (financial or
otherwise) of the Company or the Subsidiaries, considered as a
single enterprise;
(bb) neither Revenue Canada, Customs, Taxation and Excise, the Internal
Revenue Service of the United States or any other taxation authority
has asserted or, to the best of the Company's knowledge, threatened
to assert any assessment, claim or liability for taxes due or to
become due in connection with anyy review or examination of the tax
returns of the Company or the Subsidiaries filed for any year would
have a material adverse effect on the assets, properties, business,
results of operations, prospects or condition (financial or
otherwise) of the Company or the Subsidiaries, considered as a
single enterprise;
(cc) each of the material contracts referred to in the Public Record to
which the Company is a party have been duly authorized, executed and
delivered by the parties thereto and is a legal, valid and binding
obligation of the parties thereto enforceable in accordance with its
respective terms and the Company is not in default in any material
respect thereunder;
(dd) the Company is not a party to any material contracts other than as
disclosed in Schedule "C" hereto;
<PAGE>
- 20 -
(ee) the Company and its Subsidiaries own all right, title and benefit to
all registered or unregistered trademarks, trade or brand names,
copyrights, copyright applications, designs, industrial designs,
patents, patent applications and all other intellectual or
industrial property of or pertaining to the business of the Company
and its Subsidiaries;
(ff) to the best of the Company's knowledge, the conduct of the business
of the Company and its respective Subsidiaries does not infringe
upon the trademarks, trade names, service marks or copyrights, trade
secrets, know-how, designs, patents, or other proprietary rights or
technology, domestic or foreign, of any other person, firm or
corporation;
(gg) all of the representations and warranties made by the Company in
this Agreement will continue to be true and correct as of the
Closing Time;
(hh) the Public Record together with this Subscription and any other
written representations made by the Company to an investor or
potential investor in connection with the offer and sale of Special
Notes are accurate in all material respects and omit no fact, the
omission of which would make such representation misleading in light
of the circumstances in which such representation was made;
(ii) the creation, issuance and sale of the Securities by the Company
does not and will not conflict with and does not and will not result
in a breach of any of the terms, conditions or provisions of its
constating documents or any agreement or instrument to which the
Company is a party;
(jj) the Company and its subsidiaries are duly registered or licensed to
carry on business in the jurisdictions in which they carry on
business or own property or assets;
(kk) neither the Company nor any of its subsidiaries is a party to any
actions, suits or proceedings which could materially affect its
business or financial condition, and to the best of the Company's
knowledge no such actions, suits or proceedings have been threatened
as at the date hereof, except as disclosed in the Public Record;
(ll) no order ceasing or suspending trading in the securities of the
Company or prohibiting sale of such securities has been issued to
the Company or its directors, officers or promoters and to the best
of the Company's knowledge no investigations or proceedings for such
purposes are pending or threatened;
<PAGE>
- 21 -
(mm) at the Closing Date, every consent, approval, authorization or order
that is required for the transactions herein contemplated to occur
at Closing will have been obtained and will be in effect;
(nn) the Company will reserve sufficient shares in the treasury of the
Company to enable it to issue the Shares and Warrant Shares;
(oo) all the information and statements to be contained in the Prospectus
and Registration Statement relating to the Securities (except
information and statements relating solely to the Agent) will be
true and correct except as modified or superseded by any amendment
or supplement thereto and together will constitute full, true and
plain disclosure of all material facts relating to the Company and
the Securities as required by applicable securities laws, will
contain no misrepresentations and will not omit any information
which is necessary to make any statement contained therein not
misleading in light of the circumstances in which it was made; and
(pp) other than as disclosed in the Public Record, no person has any
right, agreement or option, present or future, contingent or
absolute, or any right capable of becoming a right, agreement or
option for the issue or allotment of any unissued common shares of
the Company or any other security convertible or exchangeable for
any such shares or to require the Company to purchase, redeem or
otherwise acquire any of the issued or outstanding shares of the
Company.
11. COVENANTS OF THE COMPANY
The Company hereby covenants to and with the Subscriber that it will:
(a) allow the Subscriber Agent and its counsel to conduct all due
diligence in connection with the Private Placement which the
Subscriber may reasonably require;
(b) use its best efforts to obtain any necessary regulatory consents to
the Private Placement on such terms as are mutually acceptable to
the Subscriber and the Company, acting reasonably;
(c) duly, punctually and faithfully fulfil all legal requirements to
permit the creation, issuance, offering and sale of the Special
Notes including, without limitation, compliance with all applicable
securities legislation in the Canadian Jurisdictions to enable the
Special Notes to be offered for sale and sold in accordance with
this Agreement;
<PAGE>
- 22 -
(d) ensure that the offer, sale and distribution of the Special Notes
and the distribution of the Securities will fully comply with the
requirements of applicable securities legislation in the Canadian
Jurisdictions;
(e) ensure that at the respective times of filing and at all times
subsequent to the filing thereof during the distribution of the
Securities, the Preliminary Prospectus, and the Prospectus will
fully comply with the requirements of applicable securities
legislation;
(f) upon obtaining Receipts for the Prospectus in the Canadian
Jurisdictions, cause the Trustee to deliver one copy of the
Prospectus and the certificates representing the Securities to each
person who is to acquire the Securities pursuant to the Prospectus;
(g) duly and punctually perform all the obligations to be performed by
it under this Agreement, the Trust Indenture and the Warrant
Indenture;
(h) during the period commencing on the date hereof and ending on the
conclusion of the distribution of the Securities, give the
Subscriber prompt written notice of:
(i) any material change (actual, proposed, anticipated, or
threatened) in or affecting the business, affairs, operations,
assets, liabilities (contingent or otherwise), capital or
control of the Company;
(ii) any material change in or misrepresentation of a material fact
contained or referred to in the Preliminary Prospectus or the
Prospectus; and
(iii) the occurrence of a material fact, which, in any such case,
is, or may be, of such nature as to result in a
misrepresentation in the Preliminary Prospectus; or result in
the Preliminary Prospectus or the Prospectus not complying
with applicable securities laws;
provided that if the Company is uncertain as to whether a material
change, change, occurrence or event of the nature referred to in
this subparagraph has occurred, the Company shall promptly inform
the Agent of the full particulars of the occurrence giving rise to
the uncertainty and shall consult with the Agent as to whether the
occurrence is of such nature.
In this Agreement, the terms "material change", "material fact",
"misrepresentation" and "distribution" have the meanings ascribed
thereto in the applicable securities legislation of the Canadian
Jurisdictions;
<PAGE>
- 23 -
(i) during the period commencing on the date hereof and ending on the
conclusion of the distribution of the Securities, promptly inform
the Subscriber of:
(i) any request of any securities commission, stock exchange, or
similar regulatory authority for any amendment to the
Preliminary Prospectus, the Prospectus or any part of the
Public Record or for any additional information;
(ii) the issuance by a securities commission, stock exchange or
similar regulatory authority or by any other competent
authority of any order to cease or suspend trading of any
securities of the Company or of the institution or threat of
institution of any proceedings for that purpose; and
(iii) the receipt by the Company of any communication from any
securities commission, stock exchange, or similar regulatory
authority relating to the Preliminary Prospectus, the
Prospectus, any other part of the Public Record or the
distribution of the Special Notes or the Securities; and
(j) unless it would be unlawful to do so, accept this Agreement within
one business day of the Agreement being submitted to it by the
Subscriber;
(k) take all steps necessary prior to the Closing Time to obtain the
consent of the TSE and comply with all other regulatory requirements
applicable on the offering and sale of the Special Notes as
contemplated by the Private Placement prior to the Closing Time;
(l) prepare and file promptly at the Subscriber's request any amendment
to the Preliminary Prospectus or Prospectus which in the reasonable
opinion of the Agent, the Subscriber and the Company may be
necessary or advisable; and
(m) use its best efforts to obtain from the Ontario Securities
Commission forthwith after the Closing Time a ruling exempting from
the prospectus requirements of the SECURITIES ACT (Ontario) the
first trade in Warrant Shares acquired upon exercise of the
Warrants.
12. ACKNOWLEDGEMENT AND WAIVER
12.1 The Subscriber acknowledges that the decision to purchase the special Notes
and to acquire the Units issuable on exercise thereof was made solely on the
basis of publicly available information. The Subscriber hereby waives to the
fullest extent permitted by law, any rights of withdrawal, rescission or
compensation for damages (other than as expressly described herein and in the
Prospectus) to which the Subscriber might otherwise be entitled in
<PAGE>
- 24 -
connection with the distribution of the Securities issuable upon exercise of the
Special Notes pursuant to the Prospectus to be filed in each of the Qualifying
Jurisdictions.
13. CONTRACTUAL RIGHT OF ACTION FOR RESCISSION
13.1 In the event that a holder of Special Notes, who acquires Debentures upon
the exercise of the Special Notes as provided for in the Prospectus, is or
becomes entitled under the securities legislation of any Canadian Jurisdiction
to the remedy of rescission by reason of the Prospectus or any amendment thereto
containing a misrepresentation, the Subscriber shall be entitled to rescission
not only of the exercise of the Special Notes but also pursuant to the Private
Placement pursuant to which the Special Notes were initially acquired, and shall
be entitled in connection with such rescission to a full refund of all
consideration paid on the acquisition of the Special Notes. In the event such
holder is a permitted assignee of the interest of the Subscriber, such permitted
assignee shall be entitled to exercise the rights of rescission and refund
granted hereunder as if such permitted assignee were the Subscriber. The
foregoing is in addition to any other right or remedy available to a holder of
Special Notes under Section 121 of the BRITISH COLUMBIA SECURITIES ACT, or the
equivalent provisions of the securities legislation of any other Canadian
Jurisdiction, or otherwise at law.
14. RESALE RESTRICTIONS AND LEGENDING OF SECURITIES
14.1 The Subscriber acknowledges that any resale of the Securities will be
subject to resale restrictions contained in the securities legislation
applicable to the Subscriber or to the proposed transferee. The Company is not a
reporting issuer in any province or territory of Canada other than the Reporting
Jurisdictions and, accordingly, any applicable hold periods under the laws of
such other jurisdictions may never expire. The Subscriber acknowledges that if
the Company is unable to obtain a receipt for the Prospectus in the
jurisdictions in which the Subscriber resides, the Securities maybe subject to
restrictions on resale for an additional or an indefinite period of time.
14.2 The Subscriber acknowledges that the Securities have not been registered
under the 1933 Act or the securities laws of any State of the United States. The
Securities may not be offered or sold in the United States unless registered in
accordance with federal securities laws and all applicable State securities laws
or exemptions from such requirements are available. The Special Notes may bear a
legend denoting the foregoing and, in addition, if the Subscriber is a U.S.
Person or person in the United States, the Debentures, Shares and Warrant Shares
may bear a legend denoting the foregoing.
14.3 The Subscriber hereby acknowledges that in the event that:
(a) the Company is unable to obtain a receipt for the Prospectus in any
of the Canadian Jurisdictions; or
<PAGE>
- 25 -
(b) any Special Notes are exercised by the Subscriber prior to the
issuance of a receipt for the Prospectus by the securities
commission in any of the Canadian Jurisdictions,
a legend may be placed on the certificates representing the Debentures, Shares
and Warrant Shares to the effect that the securities represented by such
certificates are subject to a hold period and may not be traded until the expiry
of such hold period except as permitted by applicable securities legislation.
15. GOVERNING LAW
15.1 This Subscription is governed by the laws of the Province of Ontario and
the federal laws of Canada applicable therein. The Subscriber irrevocably
attorns to the jurisdiction of the courts of the Province of Ontario.
16. SURVIVAL
16.1 This Subscription, including, without limitation, the representations,
warranties, acknowledgements and covenants contained herein, shall survive and
continue in full force and effect and be binding upon the Subscriber
notwithstanding the completion of the purchase of the Special Notes by the
Subscriber pursuant hereto, the completion of the issue of Special Notes of the
Company and any subsequent disposition by the Subscriber of the Securities.
17. ASSIGNMENT
17.1 This Subscription is not transferable or assignable.
18. EXECUTION
18.1 The Company shall be entitled to rely on delivery by facsimile machine of
an executed copy of this Subscription and acceptance by the Company of such
facsimile copy shall be equally effective to create a valid and binding
agreement between the Subscriber and the Company in accordance with the terms
hereof.
19. SEVERABILITY
19.1 The invalidity or unenforceability of any particular provision of this
Subscription shall not affect or limit the validity or enforceability of the
remaining provisions of this Subscription.
<PAGE>
- 26 -
20. TERMINATION RIGHTS
(a) The Subscriber shall be entitled, at its option, to terminate all of
its obligations under this Agreement, by notice to that effect
delivered to the Company at any time prior to the Closing Time in
the event that:
(i) there shall occur or come into effect any event, condition or
circumstance which constitutes a material change financial or
otherwise (actual, proposed or prospective) in the business,
affairs, operations, assets, liabilities (contingent or
otherwise), prospects, condition or capital of the Company or
its Subsidiaries, considered as a single enterprise, which
would reasonably be expected to have a material adverse effect
on the business of the Company or its Subsidiaries or the
market price or value of the Special Notes or the Securities;
(ii) there is an enquiry or investigation (whether formal or
informal) by any securities regulatory authority in relation
to the Company or any of the Company's directors or officers
which in the opinion of the Subscriber seriously affects or
may seriously affect the Private Placement;
(iii) any order to cease trading in the securities of the Company is
made by a competent securities regulatory authority and that
order is still in effect; or
(iv) there should develop, occur or come into effect any
catastrophe of national or international consequence or any
action, governmental law or regulation, inquiry or other
occurrence of any nature whatsoever which, in the opinion of
the Subscriber, seriously affects or may seriously affect the
financial markets or the business of the Company or its
Subsidiaries.
(b) If the Subscriber terminates this agreement pursuant to this section
20, there shall be no further liability on the part of the
Subscriber or of the Company to the Subscriber; and
(c) The right of the Subscriber to terminate its obligations under this
Agreement is in addition to such other remedies as it may have or
has in respect of any default, act or failure to act of the Company
in respect of any of the matters contemplated by this Agreement.
21. ENTIRE AGREEMENT
21.1 Except as expressly provided in this Agreement and in the agreements,
instruments and other documents contemplated or provided for herein, this
Agreement contains the entire
<PAGE>
- 27 -
agreement between the parties with respect to the sale of the Special Notes and
there are no other terms, conditions, representations or warranties, whether
expressed, implied, oral or written, by statute, by common law, by the Company,
by the Subscriber or by anyone.
22. LANGUAGE
23. The undersigned hereby acknowledges that it has consented to and requested
that the documents relating in any way to the purchase and sale of the
Securities be drawn up in the English language only. Le soussigne reconnait
avoir consenti et requis que la documentation relative a l'achat et la vente des
valeurs mobilireres soit redigee en langue anglaise seulement.
IN WITNESS WHEREOF the Subscriber has duly executed this Subscription as of the
date first above mentioned.
JASOPT PTY LIMITED
(A.C.N. 065 064 164)
________________________________
Name:
Office:
________________________________
(Address of Subscriber)
________________________________
(City, Province, Postal Code of Subscriber)
<PAGE>
- 28 -
ACCEPTANCE
This Agreement is hereby accepted by SEVEN SEAS PETROLEUM INC.
DATED at ________________________________, the __________ day of ______________
________________, 1997.
SEVEN SEAS PETROLEUM INC.
Per: ____________________________
Authorized Signing Officer
<PAGE>
SCHEDULE I TO THE PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT
Seven Seas Petroleum Inc.
Suite 960, Three Post Oak Central
1900 Post Oak Boulevard
Houston, Texas 77056
Dear Sirs:
Re: SEVEN SEAS PETROLEUM INC. - PRIVATE PLACEMENT OF SPECIAL NOTES
1. DELIVERY - please deliver the Special Notes certificates(s) to:
______________________________________________________________
______________________________________________________________
2. REGISTRATION - registration of the single certificate which is to be
delivered at closing should be made as follows:
______________________________________________________________ (name)
______________________________________________________________ (address)
3. The undersigned hereby acknowledges that it will deliver to Seven Seas
Petroleum Inc. all such additional completed forms in respect of the
Subscriber's purchase of Special Notes of Seven Seas Petroleum Inc. as may
be required for filing with the appropriate securities commissions and
regulatory authorities and stock exchanges.
DATED: 1997.
JASOPT PTY LIMITED
(A.C.N. 065 064 164)
Per. ____________________________
(Signature)
____________________________
(position)
<PAGE>
1
SCHEDULE II TO THE PRIVATE PLACEMENT SUBSCRIPTION AGREEMENT
THE TORONTO STOCK EXCHANGE
PRIVATE PLACEMENT QUESTIONNAIRE AND UNDERTAKING
To be completed by each proposed private placement purchaser of listed
securities or securities which are convertible into listed securities.
QUESTIONNAIRE
1. DESCRIPTION OF TRANSACTION
(a) NAME OF THE ISSUER OF THE SECURITIES
Seven Seas Petroleum Inc.
(b) NUMBER AND DESCRIPTION OF SECURITIES TO BE PURCHASED
____________________ Special Notes, each Special Note entitling the
holder thereof to receive upon exchange, or deem exchange, a like
principal amount of convertible redeemable debentures (the
"Debentures) of the Company without payment of any additional
consideration. The Special Notes will be exchangeable into
Debentures at any time on or before 5.00 p.m (Vancouver time) on the
date (the "Exchange Date") which is the earlier of: (i) the third
business day following the date upon which all Qualification and
Registration Requirements (as defined in the Subscription Agreement)
have been met; and (ii) the first business day following twelve (12)
months from the Closing Date (as defined in the Subscription
Agreement). All Special Notes not exchanged prior to the Exchange
Date will be deemed to be exchanged for Debentures on the Exchange
Date without further action or notice on the part of the holders
thereof.
The Debentures will be convertible into units (the "Units") of the
Company by holders on three (3) business days notice, in whole or in
part, on the basis of one Unit for each US$11.50 principal amount of
Debentures outstanding. Each Unit will consist of one common share
of the Company and one-half of one common share purchase warrant
(collectively, the "Warrants"). Each whole Warrant will entitle the
holder thereof to acquire one additional common share of the Company
at any time on or before 5:00 p.m. (Vancouver time) on the first
business day following one (1) year from the Closing Date at a price
of US$15 per share.
<PAGE>
2
(c) PURCHASE PRICE
The Special Notes will be issued in multiples of US$100.
2. DETAILS OF PURCHASER
(a) NAME OF PURCHASER:
_____________________________________________________________
(b) ADDRESS:
_____________________________________________________________
_____________________________________________________________
(c) IF THE PURCHASER IS A CORPORATION, STATE THE JURISDICTION OF
INCORPORATION:
_____________________________________________________________
(d) GENERAL NATURE OF BUSINESS:
_____________________________________________________________
_____________________________________________________________
(e) NAMES AND ADDRESSES OF PERSONS HAVING A GREATER THAN 5% BENEFICIAL
INTEREST IN THE PURCHASER:
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
3. DEALINGS OF PURCHASER IN SECURITIES OF THE ISSUER
Give details of all trading by the purchaser in the securities of the
issuer (other than debt securities which are not convertible into equity
securities), directly or indirectly, within the 60 days preceding the date
hereof:
<PAGE>
3
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
4. RELATIONSHIP TO ISSUER
(a) State if purchaser has any relationship with Issuer, direct or
indirect:
_____________________________________________________________
(b) If the answer to (a) is "yes", give details:
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
(c) Does the purchase own any securities of the issuer at the date
hereof (other than debt securities which are not convertible into
equity securities); if so, give particulars:
_____________________________________________________________
_____________________________________________________________
_____________________________________________________________
<PAGE>
4
UNDERTAKING
TO: THE TORONTO STOCK EXCHANGE
The undersigned has subscribed for and agreed to purchase, as principal, the
securities described in Item 1 of this Private Placement Questionnaire and
Undertaking.
The undersigned undertakes not to sell or otherwise dispose of any of the said
securities so purchased or any securities derived therefrom for the lessor of:
1. a period of six months from the date of the closing of the
transaction herein or for such period as is prescribed by applicable
securities legislation, whichever is longer; and
2. a period ending on the date that a receipt for a final prospectus
relating to the said securities or any securities derived therefrom
has been issued by the Ontario Securities Commission.
without the prior consent of The Toronto Stock Exchange and any other regulatory
body having jurisdiction.
DATED at this day of 199 .
JASOPT PTY LIMITED
(A.C.N. 065 064 164)
_________________________________
(Authorized Signature)
_________________________________
(Please print here name of individual whose
signature appears above, if different from
name of purchaser printed above)
SEVEN SEAS PETROLEUM INC.
1997 STOCK OPTION PLAN
I. PURPOSE OF THE PLAN
The SEVEN SEAS PETROLEUM INC. 1997 STOCK OPTION PLAN (the "Plan") is
intended to provide a means whereby certain employees of SEVEN SEAS PETROLEUM
INC., a Yukon Territory corporation (the "Company"), and its subsidiaries may
develop a sense of proprietorship and personal involvement in the development
and financial success of the Company, and to encourage them to remain with and
devote their best efforts to the business of the Company, thereby advancing the
interests of the Company and its shareholders. Accordingly, the Company may
grant to certain employees ("Optionees") the option ("Option") to purchase
shares of the common stock of the Company ("Stock"), as hereinafter set forth.
Options granted under the Plan may be either incentive stock options, within the
meaning of section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code"), ("Incentive Stock Options") or options which do not constitute
Incentive Stock Options.
II. ADMINISTRATION
The Plan shall be administered by a committee (the "Committee") of, and
appointed by, the Board of Directors of the Company (the "Board"), and the
Committee shall be (a) comprised solely of two or more outside directors (within
the meaning of section 162(m) of the Code and applicable interpretive authority
thereunder), and (b) constituted so as to permit the Plan to comply with Rule
16b-3, as currently in effect or as hereinafter modified or amended ("Rule
16b-3"), promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act"). The Committee shall have sole authority to select the Optionees
from among those individuals eligible hereunder and to establish the number of
shares which may be issued under each Option; provided, however, that,
notwithstanding any provision in the Plan to the contrary, the maximum number of
shares that may be subject to Options granted under the Plan to an individual
Optionee during any calendar year may not exceed 500,000 (subject to adjustment
in the same manner as provided in Paragraph VIII hereof with respect to shares
of Stock subject to Options then outstanding). The limitation set forth in the
preceding sentence shall be applied in a manner which will permit compensation
generated under the Plan to constitute "performance-based" compensation for
purposes of section 162(m) of the Code, including, without limitation, counting
against such maximum number of shares, to the extent required under section
162(m) of the Code and applicable interpretive authority thereunder, any shares
subject to Options that are canceled or repriced. In selecting the Optionees
from among individuals eligible hereunder and in establishing the number of
shares that may be issued under each Option, the Committee may take into account
the nature of the services rendered by such individuals, their present and
potential contributions to the Company's success and such other factors as the
Committee in its discretion shall deem relevant. The Committee is authorized to
interpret the Plan and may from time to time adopt such rules and regulations,
consistent with the provisions of the Plan, as it may deem advisable to carry
out the Plan. All decisions made by the Committee in
-1-
<PAGE>
selecting the Optionees, in establishing the number of shares which may be
issued under each Option and in construing the provisions of the Plan shall be
final.
III. OPTION AGREEMENTS
(a) Each Option shall be evidenced by a written agreement between the
Company and the Optionee ("Option Agreement") which shall contain such terms and
conditions as may be approved by the Committee. The terms and conditions of the
respective Option Agreements need not be identical. Specifically, an Option
Agreement may provide for the surrender of the right to purchase shares under
the Option in return for a payment in cash or shares of Stock or a combination
of cash and shares of Stock equal in value to the excess of the fair market
value of the shares with respect to which the right to purchase is surrendered
over the option price therefor ("Stock Appreciation Rights"), on such terms and
conditions as the Committee in its sole discretion may prescribe; provided,
that, except as provided in Subparagraph VIII(c) hereof, the Committee shall
retain final authority (i) to determine whether an Optionee shall be permitted,
or (ii) to approve an election by an Optionee, to receive cash in full or
partial settlement of Stock Appreciation Rights. Moreover, an Option Agreement
may provide for the payment of the option price, in whole or in part, by the
delivery of a number of shares of Stock (plus cash if necessary) having a fair
market value equal to such option price.
(b) For all purposes under the Plan, the fair market value of a share of
Stock on a particular date shall be equal to the mean of the high and low sales
prices of the Stock (i) reported by the National Market System of NASDAQ on that
date or (ii) if the Stock is listed on a national stock exchange, reported on
the stock exchange composite tape on that date; or, in either case, if no prices
are reported on that date, on the last preceding date on which such prices of
the Stock are so reported. If the Stock is traded over the counter at the time a
determination of its fair market value is required to be made hereunder, its
fair market value shall be deemed to be equal to the average between the
reported high and low or closing bid and asked prices of Stock on the most
recent date on which Stock was publicly traded. In the event Stock is not
publicly traded at the time a determination of its value is required to be made
hereunder, the determination of its fair market value shall be made by the
Committee in such manner as it deems appropriate.
(c) Each Option and all rights granted thereunder shall not be
transferable other than by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of the Employee Retirement Income Security Act of 1974, as amended, or the
rules thereunder, and shall be exercisable during the Optionee's lifetime only
by the Optionee or the Optionee's guardian or legal representative.
IV. ELIGIBILITY OF OPTIONEE
Options may be granted only to individuals who are employees (including
officers and directors who are also employees) of the Company or any parent or
subsidiary corporation (as defined in section 424 of the Code) of the Company at
the time the Option is granted; provided, however, that Options which do not
constitute Incentive Stock Options may be granted to individuals who are
-2-
<PAGE>
directors (but not also employees) of the Company or any such parent or
subsidiary corporation. Options may be granted to the same individual on more
than one occasion. No Incentive Stock Option shall be granted to an individual
if, at the time the Option is granted, such individual owns stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company or of its parent or subsidiary corporation, within the meaning of
section 422(b)(6) of the Code, unless (i) at the time such Option is granted the
option price is at least 110% of the fair market value of the Stock subject to
the Option and (ii) such Option by its terms is not exercisable after the
expiration of five years from the date of grant. To the extent that the
aggregate fair market value (determined at the time the respective Incentive
Stock Option is granted) of stock with respect to which Incentive Stock Options
are exercisable for the first time by an individual during any calendar year
under all incentive stock option plans of the Company and its parent and
subsidiary corporations exceeds $100,000, such excess Incentive Stock Options
shall be treated as Options which do not constitute Incentive Stock Options. The
Committee shall determine, in accordance with applicable provisions of the Code,
Treasury Regulations and other administrative pronouncements, which of an
Optionee's Incentive Stock Options will not constitute Incentive Stock Options
because of such limitation and shall notify the Optionee of such determination
as soon as practicable after such determination.
V. SHARES SUBJECT TO THE PLAN
The aggregate number of shares which may be issued under Options granted
under the Plan shall not exceed 3,000,000 shares of Stock. Such shares may
consist of authorized but unissued shares of Stock or previously issued shares
of Stock reacquired by the Company. Any of such shares which remain unissued and
which are not subject to outstanding Options at the termination of the Plan
shall cease to be subject to the Plan, but, until termination of the Plan, the
Company shall at all times make available a sufficient number of shares to meet
the requirements of the Plan. Should any Option hereunder expire or terminate
prior to its exercise in full, the shares theretofore subject to such Option may
again be subject to an Option granted under the Plan to the extent permitted
under Rule 16b-3. The aggregate number of shares which may be issued under the
Plan shall be subject to adjustment in the same manner as provided in Paragraph
VIII hereof with respect to shares of Stock subject to Options then outstanding.
Exercise of an Option in any manner, including an exercise involving a Stock
Appreciation Right, shall result in a decrease in the number of shares of Stock
which may thereafter be available, both for purposes of the Plan and for sale to
any one individual, by the number of shares as to which the Option is exercised.
Separate stock certificates shall be issued by the Company for those shares
acquired pursuant to the exercise of an Incentive Stock Option and for those
shares acquired pursuant to the exercise of any Option which does not constitute
an Incentive Stock Option.
VI. OPTION PRICE
The purchase price of Stock issued under each Option shall be determined
by the Committee, but (i) in the case of an Incentive Stock Option, such
purchase price shall not be less than the fair market value of Stock subject to
the Option on the date the Option is granted, and (ii) in the case of
-3-
<PAGE>
an option that does not constitute an Incentive Stock Option, such purchase
price shall not be less than 85% of the fair market value of Stock subject to
the Option on the date the Option is granted.
VII. TERM OF PLAN
The Plan shall be effective upon the date of its adoption by the Board,
provided the Plan is approved by the shareholders of the Company within twelve
months thereafter. Notwithstanding any provision in this Plan or in any Option
Agreement, no Option shall be exercisable prior to such shareholder approval.
Except with respect to Options then outstanding, if not sooner terminated under
the provisions of Paragraph IX, the Plan shall terminate upon and no further
Options shall be granted after the expiration of ten years from the date of its
adoption by the Board.
VIII. RECAPITALIZATION OR REORGANIZATION
(a) The existence of the Plan and the Options granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities, the
dissolution or liquidation of the Company or any sale, lease, exchange or other
disposition of all or any part of its assets or business or any other corporate
act or proceeding.
(b) The shares with respect to which Options may be granted are shares of
Stock as presently constituted, but if, and whenever, prior to the expiration of
an Option theretofore granted, the Company shall effect a subdivision or
consolidation of shares of Stock or the payment of a stock dividend on Stock
without receipt of consideration by the Company, the number of shares of Stock
with respect to which such Option may thereafter be exercised (i) in the event
of an increase in the number of outstanding shares shall be proportionately
increased, and the purchase price per share shall be proportionately reduced,
and (ii) in the event of a reduction in the number of outstanding shares shall
be proportionately reduced, and the purchase price per share shall be
proportionately increased.
(c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Stock covered by an Option theretofore granted shall be
adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the Optionee would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Optionee had been the holder of record of the number of
shares of Stock then covered by such Option. If (i) the Company shall not be the
surviving entity in any merger, consolidation or other reorganization (or
survives only as a subsidiary of an entity), (ii) the Company sells, leases or
exchanges all or substantially all of its assets to any other person or entity,
(iii) the Company is to be dissolved and liquidated, (iv) any person or entity,
including a "group" as contemplated by Section 13(d)(3) of the 1934 Act,
acquires or gains ownership or control (including, without limitation, power to
vote) of more than 50% of the outstanding shares of the Company's voting stock
(based upon voting power), or (v) as a result of or in connection with a
contested election of directors, the persons who were directors of the
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Company before such election shall cease to constitute a majority of the Board
(each such event is referred to herein as a "Corporate Change"), no later than
(a) ten days after the approval by the shareholders of the Company of such
merger, consolidation, reorganization, sale, lease or exchange of assets or
dissolution or such election of directors or (b) thirty days after a change of
control of the type described in Clause (iv), the Committee, acting in its sole
discretion without the consent or approval of any Optionee, shall act to effect
one or more of the following alternatives, which may vary among individual
Optionees and which may vary among Options held by any individual Optionee: (1)
accelerate the time at which Options then outstanding may be exercised so that
such Options may be exercised in full for a limited period of time on or before
a specified date (before or after such Corporate Change) fixed by the Committee,
after which specified date all unexercised Options and all rights of Optionees
thereunder shall terminate, (2) require the mandatory surrender to the Company
by selected Optionees of some or all of the outstanding Options held by such
Optionees (irrespective of whether such Options are then exercisable under the
provisions of the Plan) as of a date, before or after such Corporate Change,
specified by the Committee, in which event the Committee shall thereupon cancel
such Options and the Company shall pay to each Optionee an amount of cash per
share equal to the excess, if any, of the amount calculated in Subparagraph (d)
below (the "Change of Control Value") of the shares subject to such Option over
the exercise price(s) under such Options for such shares, (3) make such
adjustments to Options then outstanding as the Committee deems appropriate to
reflect such Corporate Change (provided, however, that the Committee may
determine in its sole discretion that no adjustment is necessary to Options then
outstanding) or (4) provide that the number and class of shares of Stock covered
by an Option theretofore granted shall be adjusted so that such Option shall
thereafter cover the number and class of shares of stock or other securities or
property (including, without limitation, cash) to which the Optionee would have
been entitled pursuant to the terms of the agreement of merger, consolidation or
sale of assets and dissolution if, immediately prior to such merger,
consolidation or sale of assets and dissolution, the Optionee had been the
holder of record of the number of shares of Stock then covered by such Option.
(d) For the purposes of clause (2) in Subparagraph (c) above, the "Change
of Control Value" shall equal the amount determined in clause (i), (ii) or
(iii), whichever is applicable, as follows: (i) the per share price offered to
shareholders of the Company in any such merger, consolidation, reorganization,
sale of assets or dissolution transaction, (ii) the price per share offered to
shareholders of the Company in any tender offer or exchange offer whereby a
Corporate Change takes place, or (iii) if such Corporate Change occurs other
than pursuant to a tender or exchange offer, the fair market value per share of
the shares into which such Options being surrendered are exercisable, as
determined by the Committee as of the date determined by the Committee to be the
date of cancellation and surrender of such Options. In the event that the
consideration offered to shareholders of the Company in any transaction
described in this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Committee shall determine the fair cash equivalent
of the portion of the consideration offered which is other than cash.
(e) Any adjustment provided for in Subparagraphs (b) or (c) above shall be
subject to any required shareholder action.
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(f) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities, and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Stock subject to Options theretofore granted or the purchase price per
share.
IX. AMENDMENT OR TERMINATION OF THE PLAN
The Board in its discretion may terminate the Plan at any time with
respect to any shares for which Options have not theretofore been granted. The
Board shall have the right to alter or amend the Plan or any part thereof from
time to time; provided, that no change in any Option theretofore granted may be
made which would impair the rights of the Optionee without the consent of such
Optionee; and provided, further, that the Board may not make any alteration or
amendment which would increase the aggregate number of shares which may be
issued pursuant to the provisions of the Plan or change the class of individuals
eligible to receive Options under the Plan without the approval of the
shareholders of the Company.
X. SECURITIES LAWS
(a) The Company shall not be obligated to issue any Stock pursuant to any
Option granted under the Plan at any time when the offering of the shares
covered by such Option have not been registered under the Securities Act of 1933
and such other state and federal laws, rules or regulations as the Company or
the Committee deems applicable and, in the opinion of legal counsel for the
Company, there is no exemption from the registration requirements of such laws,
rules or regulations available for the offering and sale of such shares.
(b) It is intended that the Plan and any grant of an Option made to a
person subject to Section 16 of the 1934 Act meet all of the requirements of
Rule 16b-3. If any provision of the Plan or any such Option would disqualify the
Plan or such Option under, or would otherwise not comply with, Rule 16b-3, such
provision or Option shall be construed or deemed amended to conform to Rule
16b-3.
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CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountant of GHK Company Colombia, Esmeralda
Limited Liability Company, and Cimarrona Limited Liability Company, I hereby
consent to the use of my reports and to all references to my Firm included in or
made a part of this Registration Statement.
/s/ JERRY L. WILLIAMS, CPA
Jerry L. Williams, CPA
Oklahoma City, Oklahoma
September 5, 1997
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made a part of this
Registration Statement.
ARTHUR ANDERSEN LLP
Houston, Texas
September 9, 1997
