<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
SEVEN SEAS PETROLEUM, INC.
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(Name of Registrant as Specified in its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
SEVEN SEAS PETROLEUM INC.
Suite 960, Three Post Oak Central
1990 Post Oak Boulevard
Houston, Texas 77056
(713) 622-8218 (Telephone)
(713) 621-9770 (Telecopier)
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the annual and special meeting of shareholders
(the "Meeting") of SEVEN SEAS PETROLEUM INC. (the "Corporation") will be held at
the Evergreen II room, The Houstonian Hotel, 111 North Post Oak Lane, Houston,
Texas, 77024, on Thursday, June 4, 1998 at 9:00 a.m. (Central Daylight Time) for
the following purposes:
1. to elect directors to hold office until the next annual meeting of the
Corporation's shareholders;
2. to appoint the auditors of the Corporation for the ensuing year and to
authorize the directors to fix the renumeration to be paid to such auditors;
3. to consider and, if thought advisable, to pass, with or without amendment, an
ordinary resolution (the "1997 Stock Option Plan Resolution") approving the
Seven Seas Petroleum Inc. 1997 Stock Option Plan, as described in the
Management Information Circular under "Matters for Consideration at the
Meeting -- 1997 Stock Option Plan Resolution";
4. to consider and, if thought advisable, to pass, with or without amendment, an
ordinary resolution (the "Former Management Option Resolution") approving an
extension of the exercise period applicable to certain options granted under
the Seven Seas Petroleum Inc. 1996 Stock Option Plan, as described in the
Management Information Circular under "Matters for Consideration at the
Meeting -- Former Management Option Resolution"; and
5. to transact such other business as may properly come before the Meeting or
any adjournment thereof.
Copies of the Annual Report and the consolidated financial statements of
the Corporation for the year ended December 31, 1997 and the auditors' report
thereon accompany this Notice of Annual and Special Meeting of Shareholders.
Shareholders who are unable to attend the Meeting are requested to
complete, sign and date the enclosed form of proxy and return it in the
addressed envelope provided for that purpose. To be effective, proxies must be
received before 5:00 p.m. (Eastern Daylight Time) on Tuesday, June 2, 1998 by
Montreal Trust Company of Canada, Proxy Department, 151 Front Street West, 8th
Floor, Toronto, Ontario M5J 2N1.
DATED April 6, 1998.
By Order of the Board of Directors of
SEVEN SEAS PETROLEUM INC.
Robert A. Hefner III
Chairman of the Board
<PAGE> 3
SEVEN SEAS PETROLEUM INC.
MANAGEMENT INFORMATION CIRCULAR
SOLICITATION OF PROXIES
THIS MANAGEMENT INFORMATION CIRCULAR IS FURNISHED IN CONNECTION WITH THE
SOLICITATION OF PROXIES BY THE MANAGEMENT OF SEVEN SEAS PETROLEUM INC. (THE
"CORPORATION") FOR USE AT THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS (THE
"MEETING") OF THE CORPORATION TO BE HELD AT THE EVERGREEN II ROOM, THE
HOUSTONIAN HOTEL, 111 NORTH POST OAK LANE, HOUSTON, TEXAS, ON THURSDAY, JUNE 4,
1998 AT 9:00 A.M. (CENTRAL DAYLIGHT TIME) FOR THE PURPOSES SET FORTH IN THE
NOTICE OF ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS (THE "NOTICE") ACCOMPANYING
THIS MANAGEMENT INFORMATION CIRCULAR. The solicitation of proxies will be
primarily by mail and possibly supplemented by telephone or other personal
contact to be made, without special compensation, by regular officers and
employees of the Corporation. The Corporation does not reimburse shareholders,
nominees or agents for the cost incurred in obtaining from their principals
authorization to execute forms of proxy. No solicitation will be made by
specifically engaged employees or soliciting agents. The cost of the
solicitation of proxies will be borne by the Corporation.
APPOINTMENT AND REVOCATION OF PROXIES
The persons named in the enclosed form of proxy are directors and officers
of the Corporation. A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED
NOT BE A SHAREHOLDER), OTHER THAN THE PERSONS NAMED, AS THE PROXY OF THE
SHAREHOLDER AND MAY EXERCISE THIS RIGHT EITHER BY INSERTING THAT PERSON'S NAME
IN THE BLANK SPACE PROVIDED IN THE ACCOMPANYING FORM OF PROXY AND STRIKING OUT
THE OTHER NAMES OR BY COMPLETING ANOTHER PROPER FORM OF PROXY. To be effective,
proxies must be received before 5:00 p.m. (Eastern Daylight Time) on Tuesday,
June 2, 1998 by Montreal Trust Company of Canada, Proxy Department, 151 Front
Street West, 8th Floor, Toronto, Ontario M5J 2N1.
Proxies given by shareholders for use at the Meeting may be revoked at any
time before their use. In addition to revocation in any other manner permitted
by law, a proxy may be revoked by depositing an instrument in writing signed by
the shareholder or by the shareholder's attorney duly authorized in writing at
the principal office of the Corporation, Suite 960, Three Post Oak Central, 1990
Post Oak Boulevard, Houston, Texas, USA 77056, or at the Corporation's
registered office, 2093 Second Avenue, Whitehorse, Yukon Territory, Canada Y1A
1B5, on or before the last business day preceding the date of the Meeting, or
any adjournment thereof, or with the Chairman of the Meeting on the day of the
Meeting, or any adjournment thereof.
VOTING AND DISCRETION OF PROXIES
The common shares of the Corporation (the "Common Shares") represented by
proxies solicited by management of the Corporation pursuant to this Management
Information Circular will be voted in accordance with the directions contained
therein. IF NO DIRECTIONS ARE GIVEN, THE COMMON SHARES WILL BE VOTED FOR THE
ELECTION OF MANAGEMENT'S NOMINEES AS DIRECTORS OF THE CORPORATION, FOR THE
APPOINTMENT OF MANAGEMENT'S NOMINEE AS AUDITORS OF THE CORPORATION AND
AUTHORIZING THE DIRECTORS TO FIX THEIR REMUNERATION, FOR THE 1997 STOCK OPTION
PLAN RESOLUTION AND FOR THE FORMER MANAGEMENT OPTION RESOLUTION. THE
ACCOMPANYING FORM OF PROXY CONFERS DISCRETIONARY AUTHORITY ON THE PERSONS NAMED
THEREIN IN RESPECT OF AMENDMENTS OR VARIATIONS TO THE MATTERS REFERRED TO IN THE
NOTICE AND IN RESPECT OF OTHER MATTERS THAT MAY PROPERLY COME BEFORE THE
MEETING, OR ANY ADJOURNMENT THEREOF.
At the date of this Management Information Circular, management knows of no
such amendments or variations or other matters that may properly come before the
Meeting but, if any such amendments, variations or other matters are properly
brought before the Meeting, the persons named in the proxies solicited by
management of the Corporation pursuant to this Management Information Circular
will vote thereon in accordance with their best judgment.
<PAGE> 4
VOTING SHARES AND PRINCIPAL SHAREHOLDERS
The Corporation is authorized to issue an unlimited number of Common Shares
(without par value), and an unlimited number of Class A Preferred Shares. As at
March 31, 1998, 35,216,606 Common Shares and no Class A Preferred Shares were
issued and outstanding.
The holders of Common Shares are entitled to one vote at the Meeting for
each Common Share held. Holders of Common Shares of record on April 27, 1998 are
entitled to receive notice of, and to vote at, the Meeting. The affirmative vote
of a majority of the votes cast at the Meeting is required for the approval of
each matter set forth in this Management Information Circular, except that the
Former Management Option Resolution requires the approval of a majority of the
Common Shares represented at the Meeting and voted on such resolution, excluding
persons having an interest in the options subject thereto and their associates.
See "Matters for Consideration at the Meeting -- Former Management Option
Resolution".
To the knowledge of the directors and senior officers of the Corporation,
the only person who beneficially owns, directly or indirectly, or exercises
control or direction over voting securities of the Corporation carrying more
than 10% of the voting rights attached to all securities of the Corporation is
Robert A. Hefner III, of Houston, Texas, who, as of March 31, 1998, owned
6,118,317 Common Shares, representing approximately 17% of the outstanding
Common Shares of the Corporation.
MATTERS FOR CONSIDERATION AT THE MEETING
ELECTION OF DIRECTORS
The articles of the Corporation provide that the Corporation shall have a
minimum of three (3), and a maximum of fifteen (15) directors to be elected
annually. The number of directors is currently fixed at nine (9).
The persons named in the accompanying form of proxy intend to vote for the
election as directors of the Corporation of the nine proposed nominees whose
names are set forth in the table below, all of whom are now directors of the
Corporation and have been since the dates indicated. If, before the Meeting, any
of the proposed nominees is unable or unwilling to serve as a director, the
persons named in the accompanying form of proxy are entitled to vote for other
nominees in their discretion. Management is not aware that any of the proposed
nominees is unable or unwilling to serve as a director. Each director elected
will hold office until the next annual meeting of shareholders or until his
office is vacated.
The following table sets forth the name and country of residence of each of
the proposed nominees for election as directors of the Corporation, their age,
the other positions and offices with the Corporation presently held by each of
them, their principal occupations or employment, their periods of service as
directors of the Corporation and the number of Common Shares beneficially owned,
controlled or directed by each of them as of March 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF COMMON
SHARES BENEFICIALLY
NAME AND COUNTRY OF PRINCIPAL OCCUPATION AND OWNED, CONTROLLED OR
ORDINARY RESIDENCE AGE POSITION WITH THE CORPORATION DIRECTED (4) DIRECTOR SINCE
------------------- --- ----------------------------- -------------------- --------------
<S> <C> <C> <C> <C>
ROBERT A. HEFNER III (1)............... 63 Chairman, Chief Executive 6,488,317 (5) November 8, 1996
Houston, Texas, Officer, Managing Director
United States and Director of the
Corporation; Managing Member
of The GHK Company L.L.C., a
private oil and gas
exploration company.
BREENE M. KERR (1)(2)(3)............... 68 Vice Chairman and Director of 2,958,417 (6) June 12, 1997
Easton, Maryland, the Corporation; General
United States Partner, Talbot Fairfield II
L.P., an oil and gas
exploration undertaking.
</TABLE>
2
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<TABLE>
<CAPTION>
NUMBER OF COMMON
SHARES BENEFICIALLY
NAME AND COUNTRY OF PRINCIPAL OCCUPATION AND OWNED, CONTROLLED OR
ORDINARY RESIDENCE AGE POSITION WITH THE CORPORATION DIRECTED (4) DIRECTOR SINCE
------------------- --- ----------------------------- -------------------- --------------
<S> <C> <C> <C> <C>
BRIAN F. EGOLF (2)..................... 49 Director of the Corporation; 126,386 (7) November 8, 1996
Santa Fe, New Mexico, United States President of Petroleum
Properties Management
Corporation, a private oil
and gas exploration company.
SIR MARK THOMSON BT. (3)............... 57 Director of the Corporation; 452,566 (8) June 12, 1997
Rotterdam, The Netherlands Managing Director of B&N
Investments Limited, an
investment management
company.
ROBERT B. PANERO....................... 69 Director of the Corporation; 17,445 (9) June 12, 1997
New York, New York, President of Robert Panero
United States Associates, international
strategic policy and project
studies advisors.
GARY F. FULLER (2)..................... 61 Director of the Corporation; 27,000 (10) June 12, 1997
Oklahoma City, Oklahoma, United States Shareholder and director of
McAfee & Taft,
attorneys-at-law
JAMES D. SCARLETT (3).................. 44 Director of the Corporation; 25,000 (10) June 12, 1997
Toronto, Ontario, Lawyer/Partner in McMillan
Canada Binch, Barristers &
Solicitors.
LARRY A. RAY (1)....................... 50 Executive Vice President, 193,887 (11) June 12, 1997
Houston, Texas, Chief Operating Officer and
United States Director of the Corporation.
HERBERT C. WILLIAMSON III.............. 49 Executive Vice President, 150,256 (12) September 11, 1997
Houston, Texas, Chief Financial Officer and
United States Director of the Corporation.
</TABLE>
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(1) Member of the Executive Committee.
(2) Member of the Stock Option and Compensation Committee.
(3) Member of the Audit Committee.
(4) The information as to Common Shares beneficially owned, controlled or
directed is not within the knowledge of the Corporation and has been
furnished by the proposed nominees individually. Unless otherwise
indicated, each of the nominees listed has sole voting and investment power
over the Common Shares owned. The number of Common Shares indicated
includes, in each case, the number of Common Shares issuable upon exercise
of options to purchase Common Shares ("Options") subject to the
Corporation's 1996 Stock Option Plan, as amended (the "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 March 31, 1998.
(5) Includes 350,000 Common Shares currently issuable upon exercise of Options,
20,000 Common 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 an escrow agreement (the "Escrow
Agreement") entered into by the Corporation and certain of its shareholders
as a condition of closing the GHK Transaction in July 1996. See "Interest
of Management and Others in Material Transactions".
3
<PAGE> 6
(6) Includes 25,000 Common Shares currently issuable upon exercise of an
Option, 738,579 Common Shares beneficially owned by a limited partnership
in which Mr. Kerr serves as a general partner and 2,194,838 Common Shares
held in escrow pursuant to the Escrow Agreement.
(7) 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, 50,000 Common Shares currently issuable upon exercise of
Options and 39,147 Common Shares held in escrow pursuant to the Escrow
Agreement.
(8) Includes 25,000 Common Shares currently issuable upon exercise of an Option
and 199,531 Common Shares held in escrow pursuant to the Escrow Agreement.
(9) Includes 16,666 Common Shares currently exercisable upon exercise of an
Option, 234 Common Shares held by Mr. Panero's wife and 363 Common Shares
held in escrow pursuant to the Escrow Agreement.
(10) Includes 25,000 Common Shares currently issuable upon exercise of an
Option.
(11) Includes 66,667 Common Shares currently issuable upon exercise of an Option
and an additional 124,500 Common Shares owned by Mr. Ray's wife.
(12) Includes 150,000 Common Shares currently issuable upon exercise of Options.
Each of the proposed nominees for election as a director of the Corporation
has held the principal occupation identified above for not less than five years,
except for Mr. Hefner, who became an officer of the Corporation in May 1997; Mr.
Kerr, who served as Chairman and a director of Kerr Consolidated, an equipment
sales and leasing undertaking, from 1969 to 1995; Mr. Ray, who was the
Corporation's Executive Vice President -- Operations from June 1997 to September
1997 and has served in a management capacity for The GHK Company L.L.C. since
1990; and Mr. Williamson, who served as a director in the Investment Banking
department of Credit Suisse First Boston from 1995 through September 1997, prior
to which he served as Vice Chairman and Executive Vice President of Parker &
Parsley Petroleum Company, an oil and gas exploration company.
DIRECTORS' COMPENSATION
Directors of the Corporation do not receive an annual retainer or meeting
fees in respect of their service as directors. Directors who also serve as
officers of the Corporation are not separately compensated for serving on the
Board of Directors or as members of Board committees. Non-employee directors are
eligible to participate in the Corporation's incentive stock plans and are
reimbursed for their out-of-pocket expenses incurred in connection with their
service as directors, including travel expenses.
In May 1997, options to acquire an aggregate of 125,000 Common Shares at an
exercise price of US$10.90 per share were granted to the directors holding
office at the end of April 1997 (Messrs. Whitehead, Millard, Zaozirny, McIntosh,
Plewes, Robinson, Hefner and Egolf). Messrs. Hefner and Egolf declined to accept
such options. See " -- Former Management Option Resolution" and Note 2 to the
Summary Compensation Table under "Statement of Executive Compensation".
In June 1997, the Corporation granted Mr. Ray an option to purchase 200,000
Common Shares at an exercise price of US$10.70 per share. One-third of these
options vested immediately, with the remaining options vesting in equal
instalments on the first and second anniversaries of the date of grant. On
September 9, 1997, the Corporation granted Mr. Ray options to purchase an
additional 200,000 Common Shares at an exercise price of US$13.23 per share.
These options will vest in equal instalments on the third, fourth and fifth
anniversaries of the date of grant. 105,000 of the options granted to Mr. Ray,
on September 7, 1997 are subject to approval of the 1997 Stock Option Plan at
the Meeting. See " -- 1997 Stock Option Plan Resolution".
In July 1997, the Corporation granted options to purchase Common Shares to
the directors currently holding office at an exercise price of US$10.70 per
share, as follows: Mr. Hefner -- 300,000; Mr. Egolf -- 75,000; Mr. Kerr --
75,000; Mr. Fuller -- 75,000; Mr. Scarlett -- 75,000; and Sir Mark Thomson --
75,000. One-third of the options granted vested immediately, with the remaining
options vesting in equal instalments on the first and second anniversaries of
the date of grant. On the same date, options to purchase 50,000 Common Shares at
an exercise price of US$10.70 per share were granted to Mr. Panero. These
options will vest in equal instalments on the first and second anniversaries of
the date of grant. Mr. Panero also received a payment of US$37,500 in lieu of
options to acquire 25,000 Common Shares that would have vested immediately.
In September 1997, the Corporation granted Mr. Williamson an option to
purchase 500,000 Common Shares at an exercise price of US$13.23 per share.
Options to purchase 150,000 Common Shares vested immediately, options to
purchase 150,000 Common Shares vest on September 9, 1998 and options to purchase
50,000 Common Shares vest on each of September 9, 1999, 2000, 2001 and 2002,
respectively. Of the options granted to Mr.
4
<PAGE> 7
Williamson, 150,000 are under the 1996 Stock Option Plan and 350,000 are subject
to approval of the 1997 Stock Option Plan at the Meeting. See " -- 1997 Stock
Option Plan Resolution".
In November 1997, the Corporation granted additional options to purchase
Common Shares to the directors currently holding office at an exercise price of
US$18.55 as follows: Mr. Hefner -- 150,000; Mr. Williamson -- 150,000; Mr. Egolf
- -- 100,000; Mr. Kerr -- 75,000; Mr. Fuller -- 75,000; Mr. Panero -- 25,000; Mr.
Scarlett -- 25,000; Sir Mark Thomson -- 25,000; and Mr. Ray -- 150,000. These
options vest in equal instalments on the first, second and third anniversaries
of the date of grant. These shares are all subject to approval of the 1997 Stock
Option Plan at the Meeting. See "-- 1997 Stock Option Plan Resolution".
MATERIAL INTEREST OF DIRECTORS
Mr. Hefner is the sole shareholder of The GHK Company L.L.C. ("GHK
L.L.C."). Effective July 1, 1997, the Corporation entered into an administrative
services agreement with GHK L.L.C. whereby the Corporation pays US$1,750 each
month to GHK L.L.C. for miscellaneous administrative expenses including the
administration of directors' travel arrangements. The Corporation recognized
US$10,500 of expense in connection with this agreement in 1997. In addition, GHK
L.L.C. pays certain miscellaneous costs incurred on behalf of the Corporation.
The Corporation reimbursed GHK L.L.C. US$381,267 in 1997 for such costs. For
information concerning other transactions between GHK L.L.C., the Corporation
and their respective affiliates and insiders, please see "Interest of Management
and Others in Material Transactions".
Mr. Fuller is a shareholder and director of the McAfee & Taft law firm,
which provides legal services to the Corporation and its affiliates. In
addition, Mr. Scarlett is a partner in the law firm of McMillan Binch, which is
the Corporation's Canadian legal counsel.
VOTING SUPPORT AGREEMENT
Under the terms of a voting support agreement between the Corporation and
Hazel Ventures Ltd., the former sole shareholder of Petrolinson S.A. ("Hazel
Ventures"), Hazel Ventures agreed that, prior to July 19, 1998, it will vote all
Common Shares of the Corporation owned or controlled by it in favour of the
slate of directors proposed by the Corporation'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 Ventures acquired 1,000,000 Common Shares, or 2.9% of the Corporation's
outstanding Common Shares, in exchange for the transfer of its ownership of
Petrolinson S.A., the holder of a 6% interest in certain association contracts,
to a subsidiary of the Corporation.
APPOINTMENT OF AUDITORS
The persons named in the accompanying form of proxy intend to vote for the
reappointment of Arthur Andersen L.L.P. as auditors of the Corporation, to hold
office until the close of the next annual meeting of shareholders. It is
proposed that the remuneration to be paid to the auditors be fixed by the Board
of Directors. Arthur Andersen L.L.P. was first appointed auditors of the
Corporation on June 29, 1995. Representatives of the auditors will be present at
the Meeting, will be offered the opportunity to make a statement if such
representatives desire to do so and will be available to respond to appropriate
questions.
1997 STOCK OPTION PLAN RESOLUTION
The Corporation's Board of Directors approved the Seven Seas Petroleum Inc.
1997 Stock Option Plan (the "1997 Stock Option Plan") at a meeting on September
9, 1997, and subsequently amended the 1997 Stock Option Plan by increasing the
maximum number of Common Shares issuable under options granted in any year from
500,000 to 1,000,000.
The 1997 Stock Option Plan will give certain directors, officers, and
employees of the Corporation, its subsidiaries and its affiliates an opportunity
to develop a sense of proprietorship and personal involvement in the development
and financial success of the Corporation, and to encourage them to remain with
and devote their best efforts to the business of the Corporation, thereby
advancing the interests of the Corporation and its shareholders. Accordingly,
the Corporation may grant to certain directors, officers, and employees options
to purchase up to an aggregate of 3,000,000 Common Shares pursuant to the 1997
Stock Option Plan. Such Common Shares may consist of authorized but unissued
Stock or previously issued Stock reacquired by the Corporation.
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<PAGE> 8
Effectiveness of the 1997 Stock Option Plan is subject to approval by the
Corporation's shareholders at the Meeting and all options granted under the 1997
Stock Option Plan are subject to, and contingent upon, such shareholder
approval. If the 1997 Stock Option Plan is not approved by the shareholders,
then all options granted thereunder will be void and of no further force and
effect, and no additional options will be granted under the plan. Except with
respect to options then outstanding, the 1997 Stock Option Plan, as it may be
amended and restated, will terminate and no further option will be granted
thereunder after September 8, 2007.
ADMINISTRATION
The 1997 Stock Option Plan will be administered by the Stock Option and
Compensation Committee, which will have sole authority to select the optionees
from among those individuals eligible under the plan and to establish the number
of Common Shares which may be issued under each option. The maximum number of
Common Shares that may be subject to options granted under the plan to an
individual optionee may not exceed 5% of the total number of Common Shares
outstanding and during any calendar year may not exceed 1,000,000 Common Shares
(subject to adjustment under certain conditions described below). The Stock
Option and Compensation Committee is authorized to interpret the 1997 Stock
Option 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 Stock Option and Compensation Committee
in selecting optionees, in establishing the number of Common Shares that may be
issued under each option and in construing the provisions of the 1997 Stock
Option Plan will be final.
SECURITIES SUBJECT TO PLAN
Options granted under the 1997 Stock Option Plan may be either incentive
stock options, within the meaning of section 422 of the United States Internal
Revenue Code of 1986, as amended (the "Code") ("Incentive Stock Options"), or
options which do not constitute Incentive Stock Options ("Non-Qualified Stock
Options"). Incentive Stock Options may be granted only to individuals who are
employees (including officers and directors who are also employees) of the
Corporation or any parent or subsidiary corporation (as defined in section 424
of the Code) of the Corporation at the time the option is granted. Non-Qualified
Stock Options may be granted to individuals who are directors (but not also
employees), officers and employees of the Corporation, any parent or subsidiary
corporation of the Corporation, or any other affiliate of the Corporation.
Options may be granted to the same individual on more than one occasion. No
Incentive Stock Option will be granted to an individual if, at the time the
option is granted, such individual owns securities possessing more than 10% of
the total combined voting power of all classes of securities of the Corporation
or of its parent or subsidiary corporation, within the meaning of section
422(b)(6) of the Code, unless at the time such option is granted the option
price is at least 110% of the fair market value of Common Shares subject to the
option and such option by its terms is not exercisable after the expiration of
five years from the date of grant.
TERMS OF OPTIONS/SARS
Each option that is an Incentive Stock Option and all rights granted
thereunder will 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 United States Employee Retirement Income Security
Act of 1974, as amended, or the rules thereunder, and will be exercisable during
the optionee's lifetime only by the optionee or the optionee's guardian or legal
representative. Each option that is a Non-Qualified Stock Option will bear the
same transfer restrictions as an Incentive Stock Option, except a Non-Qualified
Stock Option may be assigned to a limited liability company or partnership if
(i) the terms of such transfer are approved in advance by the Stock Option and
Compensation Committee, (ii) 95% or more of all the member or partnership
interests in such limited liability company or partnership are held by the
holder of the option and members of his family, determined in accordance with
section 318(a)(1) of the Code, or trusts for their benefit, (iii) such limited
liability company or partnership is treated as a partnership for federal income
tax purposes, and (iv) such limited liability company or partnership is
controlled, directly or indirectly, as fiduciary or otherwise, by the holder of
the option.
The purchase price of Common Shares issued under each option will be
determined by the Stock Option and Compensation Committee, but such purchase
price must not be less than the fair market value of Common Shares subject to
the option on the date the option is granted. Each option must be evidenced by a
written agreement between the Corporation and the optionee which shall contain
such terms and conditions as may be approved by the Stock Option and
Compensation Committee, provided that each such option must expire not later
than 10 years
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<PAGE> 9
after its date of grant. The terms and conditions of the respective option
agreements need not be identical. An option agreement may provide for the
surrender of the right to purchase Common Shares under the option in return for
a payment in cash or Common Shares equal in value to the excess of the fair
market value of the Common Shares with respect to which the right to purchase is
surrendered over the option price therefore ("Stock Appreciation Rights"), on
such terms and conditions as the Stock Option and Compensation Committee in its
sole discretion may prescribe. The Stock Option and Compensation Committee will
retain final authority (i) to determine whether an optionee will be permitted,
or (ii) to approve an election by an optionee, to receive cash in full or
partial settlement of such 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 Common Shares (plus cash if necessary) having a
fair market value equal to such option price.
CHANGES IN STOCK
Stock with respect to which options may be granted are Common Shares as
presently constituted, but if and whenever, prior to the expiration of an option
theretofore granted, the Corporation effects a subdivision or consolidation of
Common Shares or the payment of a stock dividend on Common Shares without
receipt of consideration by the Corporation, the number of Common Shares with
respect to which such option may thereafter by exercised (i) in the event of an
increase in the number of outstanding shares, will be proportionately increased,
and the purchase price per share will be proportionately reduced, and (ii) in
the event of a reduction in the number of outstanding shares, will be
proportionately reduced, and the purchase price per share will be
proportionately increased.
If the Corporation recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of securities covered by an option theretofore granted will be adjusted so
that such option will thereafter cover the number and class of 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 Common Shares then covered by such
option. If the Corporation declares an extraordinary dividend, which arises from
any sale or exchange of assets, payable in cash or any other property, then the
purchase price per share under any option theretofore granted shall be reduced
by the amount of such extraordinary dividend payable on a share if paid in cash
or the fair market value (as determined by the Stock Option and Compensation
Committee) of any property distributable on a share if paid in kind.
In the event of any "Corporate Change", as defined in the 1997 Stock Option
Plan, the Stock Option and Compensation Committee, acting in its sole discretion
without the consent or approval of any optionee, will 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 Stock Option and
Compensation Committee, after which specified date all unexercised options and
all rights of optionees thereunder will terminate, (2) require the mandatory
surrender to the Corporation 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 Stock Option and Compensation
Committee, in which event the Stock Option and Compensation Committee will
thereupon cancel such options and the Corporation will pay to each optionee an
amount of cash per share according to a formula specified in the 1997 Stock
Option Plan, (3) make any adjustments to options then outstanding as the Stock
Option and Compensation Committee, in its sole discretion, deems appropriate to
reflect such Corporate Change, or (4) provide that the number and class of
securities covered by an option theretofore granted will be adjusted so that
such option will thereafter cover the number and class of securities or property
(including, without limitation, cash) to which the optionee would have been
entitled pursuant to the terms of any Corporate Change if, immediately prior to
such Corporate Change, the optionee had been the holder of record of the number
of Common Shares then covered by such option.
AMENDMENT AND TERMINATION
The Board of Directors in its discretion may terminate the 1997 Stock
Option Plan at any time with respect to Stock for which options have not
theretofore been granted. The Board of Directors has the right to alter or amend
the plan, or any part thereof, from time to time. No change in any outstanding
option will be made which would impair the rights of the optionee without the
consent of such optionee. The Board of Directors may not make any
7
<PAGE> 10
alteration or amendment which would increase the aggregate number of Common
Shares which may be issued pursuant to the provisions of the 1997 Stock Option
Plan or change the class of individuals eligible to receive options under the
plan without the approval of the shareholders of the Corporation.
The form of the 1997 Stock Option Plan Resolution is attached as Schedule
"A" to this Management Information Circular. Every holder of Common Shares
entitled to vote at the Meeting will be entitled to cast one vote for each
Common Share held. The 1997 Stock Option Plan Resolution requires the approval
of a majority of the Common Shares represented at the Meeting and voted on such
resolution.
The persons named in the accompanying form of proxy intend to vote in
favour of the 1997 Stock Option Plan Resolution.
UNITED STATES FEDERAL INCOME TAX ASPECTS
Non-Qualified Stock Options/Stock Appreciation Rights. As a general rule,
no federal income tax is imposed on the optionee upon the grant of a
Non-Qualified Stock Option such as those under the 1997 Stock Option Plan
(whether or not including a Stock Appreciation Right) and the Corporation is not
entitled to a tax deduction by reason of such grant. Generally, upon the
exercise of a Non-Qualified Stock Option, the optionee will be treated as
receiving compensation taxable as ordinary income in the year of exercise in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the option price paid for such shares. In the case of the exercise
of a Stock Appreciation Right, the optionee will be treated as receiving
compensation taxable as ordinary income in the year of exercise in an amount
equal to the cash received plus the fair market value of the shares distributed
to the optionee. Upon the exercise of a Non-Qualified Stock Option or Stock
Appreciation Right, which is subject to the application of Section 162(m) of the
Code as discussed below, the Corporation may claim a deduction for compensation
paid at the same time and in the same amount as compensation income is
recognized to the optionee assuming any federal income tax withholding
requirements are satisfied. Upon a subsequent disposition of the shares received
upon exercise of such award, any appreciation after the date of exercise should
qualify as a capital gain. If such shares received upon the exercise of a
Non-Qualified Stock Option or Stock Appreciation Right are transferred to the
optionee subject to certain restrictions, then the taxable income realized by
the optionee, unless the optionee elects otherwise, and the Corporation's tax
deduction (assuming any federal income tax withholding requirements are
satisfied) should be deferred and should be measured at the fair market value of
the shares at the time the restrictions lapse. Certain restrictions imposed on
officers, directors, and 10% shareholders by Section 16(b) of the United States
Securities Exchange Act of 1934, if applicable, constitute such a restriction
during the period prescribed thereby if other shares have been purchased by such
an individual within six months of the exercise of a Non-Qualified Stock Option
or Stock Appreciation Right.
Incentive Stock Options. The Incentive Stock Options under the 1997 Stock
Option Plan are intended to constitute "incentive stock options" within the
meaning of Section 422 of the Code. Incentive Stock Options are subject to
special federal income tax treatment. No federal income tax is imposed on the
optionee upon the grant or exercise of an Incentive Stock Option if the optionee
does not dispose of shares acquired pursuant to the exercise within the two-year
period beginning on the date the option was granted or within the one-year
period beginning on the date the option was exercised (collectively, the
"holding period"). In such event, the Corporation would not be entitled to any
deduction for federal income tax purposes in connection with the grant or
exercise of the option or the disposition of the shares so acquired. With
respect to an Incentive Stock Option, the difference between the fair market
value of the Stock on the date of exercise and the exercise price must be
included in the optionee's alternative minimum taxable income. However, if the
optionee exercises an Incentive Stock Option and disposes of the shares received
in the same year and the amount realized is less than the fair market value of
the shares on the date of exercise, the amount included in alternative minimum
taxable income will not exceed the amount realized over the adjusted basis of
the shares.
Upon disposition of the shares received upon exercise of an Incentive Stock
Option after the holding period, any appreciation of the shares above the
exercise price constitutes capital gain. If an optionee disposes of shares
acquired pursuant to his or her exercise of an Incentive Stock Option prior to
the end of the holding period, the optionee will be treated as having received,
at the time of disposition, compensation taxable as ordinary income. In such
event, and subject to the application of Section 162(m) of the Code as discussed
below, the Corporation may claim a deduction for compensation paid at the same
time, and in the same amount as compensation is treated as received by the
optionee. The amount treated as compensation is the excess of the fair market
value of the shares at
8
<PAGE> 11
the time of exercise (or in the case of a sale in which a loss would be
recognized, the amount realized on the sale if less) over the exercise price;
any amount realized in excess of the fair market value of the shares at the time
of exercise would be treated as short-term or long-term capital gain, depending
on the holding period of the shares.
Section 162(m) of the Code. Section 162(m) of the Code precludes a public
corporation from taking a deduction for annual compensation in excess of $1
million paid to its chief executive officer or any of its four highest-paid
officers. However, compensation that qualifies under Section 162(m) of the Code
as "performance based" is specifically exempt from the deduction limit. Based on
Section 162(m) of the Code and the regulations issued thereunder, the
Corporation believes that the income generated in connection with the exercise
of stock options granted by the Stock Option and Compensation Committee under
the 1997 Stock Option Plan should qualify as performance-based compensation and,
accordingly, the Corporation's deductions for such compensation should not be
limited to Section 162(m) of the Code.
The 1997 Stock Option Plan is not qualified under Section 401(a) of the
Code.
The comments set forth in the above paragraphs are only a summary of
certain of the United States federal income tax consequences relating to the
1997 Stock Option Plan. No consideration has been given to the effects of state,
local, or other tax laws on the 1997 Stock Option Plan or optionees.
INAPPLICABILITY OF ERISA
Based upon current law and published interpretations, the Corporation does
not believe the 1997 Stock Option Plan is subject to any of the provisions of
the Employee Retirement Income Security Act of 1974.
FORMER MANAGEMENT OPTION RESOLUTION
On May 1, 1997, the Corporation's Compensation Committee (as it was then
constituted) approved a recommendation to the Board of Directors that options to
acquire an aggregate of 485,000 Common Shares at an exercise price of US$10.90
per share be granted under the 1996 Stock Option Plan to certain directors,
officers and employees of the Corporation. The option grants recommended by the
Compensation Committee were approved at the May 20, 1997 meeting of the Board of
Directors, together with a motion amending the exercise period otherwise
applicable to certain of those options and other options previously granted
under the 1996 Stock Option Plan. In the course of that Board of Directors
meeting, Messrs. Butler and Stephens resigned as Chief Executive Officer and
President of the Corporation, respectively, and Messrs. Whitehead, Millard,
McIntosh, Robinson and Zaozirny tendered their resignations as directors,
effective immediately.
9
<PAGE> 12
Under the 1996 Stock Option Plan, options are exercisable by a plan
participant for 90 days following the date the optionee ceases to be a director,
officer, manager or full-time employee of the Corporation for any reason (other
than death), after which time the options expire. The amendment approved by
former Board of Directors would, subject to shareholder and stock exchange
approvals, allow certain optionees to exercise options held by them to be
exercised for a period of 18 months following the date the optionee ceases to be
a director, officer, manager or full-time employee of the Corporation. Details
of the options subject to the amended exercise period (the "Former Management
Options") are set forth in the following table:
<TABLE>
<CAPTION>
COMMON SHARES
UNDER OPTIONS
OPTIONEE AND POSITION EXERCISE PRICE TO BE AMENDED
--------------------- -------------- -------------
<S> <C> <C>
JAMES A. MILLARD............................................ US$10.90 15,000
Former director
WILLIAM G. MCINTOSH......................................... US$10.90 15,000
Former director
HARVEY S. ROBINSON.......................................... US$10.90 15,000
Former director
JOHN B. ZAOZIRNY............................................ US$10.90 15,000
Former director US$7.125 10,000
GEORGE H. PLEWES............................................ US$10.90 15,000
Former director US$7.125 10,000
MALCOLM BUTLER.............................................. US$10.90 200,000
Former Chief Executive Officer
ALBERT E. WHITEHEAD......................................... US$10.90 50,000
Former Chairman and director US$18.75 85,000
US$7.125 100,000
TIMOTHY T. STEPHENS......................................... US$10.90 50,000
Former President US$18.75 82,000
US$7.125 90,000
DAVID F. DECORT............................................. US$18.75 54,000
Former Chief Financial Officer
JOHN P. DORRIER............................................. US$10.90 24,000
Former Executive Vice President US$18.75 71,000
US$7.125 40,000
GALE STATON................................................. US$18.75 3,000
Former employee
LAURA BROWN................................................. US$10.90 4,000
Employee US$18.75 5,000
US$7.125 5,000
US$ 0.75 3,000
</TABLE>
The rules and regulations of The Toronto Stock Exchange (the "TSE Rules")
do not restrict the exercise period applicable to options granted by listed
companies, subject to the limitation that any such options must expire not more
than 10 years after the date of grant. However, the TSE Rules require
shareholder approval of any material amendment to a listed company's stock
incentive plan, including amendments to the terms of outstanding options granted
under such a plan. Accordingly, The Toronto Stock Exchange (the "TSE") advised
the Corporation that it would only allow the extension of the exercise period
applicable to the Former Management Options listed above on the following terms:
10
<PAGE> 13
1. The amendment to the terms of the Former Management Options must be approved
by an ordinary resolution of the Corporation's shareholders, excluding votes
attaching to Common Shares beneficially owned by the optionees and their
associates.
2. The description of the Former Management Option Resolution included in this
Management Information Circular must contain all pertinent information
concerning the Former Management Options, as required by the TSE Rules.
3. No Common Shares may be issued on the exercise of the Former Management
Options during the period from the expiry date otherwise applicable under the
1996 Stock Option Plan (90 days after the optionee ceases to be employed by,
or serve as a director of, the Corporation) until the date of the Meeting.
4. If the Former Management Option Resolution is approved by shareholders at the
Meeting, a certified copy of the resolution and other applicable filings and
fees must be provided to the TSE.
If the Former Management Option Resolution is approved, the persons named
in the table above will be entitled to exercise the options granted to them
until the earlier of the expiry date otherwise applicable to such options and 18
months after the date the optionee ceases to be employed by, or serve as a
director of, the Corporation. In the case of Messrs. Whitehead, Butler,
Stephens, Zaozirny, McIntosh, Millard and Robinson, this extension would permit
the exercise of the Former Management Options until November 20, 1998. If the
Former Management Option Resolution is not approved, the options held by persons
named in the table above who are no longer employed by, or serving as directors
of, the Corporation will be exercisable only between June 5, 1998 and July 4,
1998, and no extensions of this exercise period will be accepted by the TSE.
The form of the Former Management Option Resolution is attached as Schedule
"B" to this Management Information Circular. Every holder of Common Shares
entitled to vote at the Meeting will be entitled to cast one vote for each
Common Share held. In accordance with the TSE's requirements, the Former
Management Option Resolution requires the approval of a majority of the Common
Shares represented at the Meeting and voted on such resolution, excluding any
Common Shares held by the optionees identified in the foregoing table and their
associates.
The persons named in the accompanying form of proxy intend to vote in
favour of the Former Management Option Resolution. Mr. Hefner has advised
management that he will vote the Common Shares over which he personally
exercises control in favour of the Former Management Option Resolution.
11
<PAGE> 14
STATEMENT OF EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation paid by the Corporation to its Chief Executive Officer and each of
the other persons who served as executive officers of the Corporation whose
annual salary and bonus exceeded the equivalent of C$100,000 (approximately
US$70,000) for the fiscal year ended December 31, 1997 (the "Named Executive
Officers"). The table does not include perquisites and other personal benefits
for any individual for whom the aggregate amount of such compensation does not
exceed the lesser of (i) the equivalent of C$50,000 (approximately US$35,000) or
(ii) 10% of individual combined salary and bonus for the Named Executive Officer
in that year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
LONG TERM
Annual Compensation (1) COMPENSATION AWARDS
--------------------------------- SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS GRANTED (#) COMPENSATION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Robert A. Hefner III 1997 -- -- 450,000 --
Chairman, Chief Executive
Officer and Managing Director 1996 -- -- 50,000(2) --
- -------------------------------------------------------------------------------------------------------------------------
Malcolm Butler (3) 1997 US$13,301 -- 200,000 US$250,000
Former Chief Executive Officer
- -------------------------------------------------------------------------------------------------------------------------
Albert E. Whitehead (3) 1997 US$77,308 50,000(4) US$125,000(3)
Former Chairman of the Board 1996 US$150,000 -- 185,000 US$14,634(5)
and Chief Executive Officer 1995 US$125,000 -- 200,000 --
- -------------------------------------------------------------------------------------------------------------------------
Larry A. Ray (6) 1997 US$139,062 -- 550,000 US$33,330(5)
Executive Vice President,
Chief Operating Officer and
Director
- -------------------------------------------------------------------------------------------------------------------------
Timothy T. Stephens (3) 1997 US$67,644 -- 50,000(4) US$525,000(3)
Former President 1996 US$135,000 US$93,840 172,000(6) US$13,170(5)
1995 US$106,875 -- 250,000 --
- -------------------------------------------------------------------------------------------------------------------------
John P. Dorrier (7) 1997 US$107,981 -- 40,000 US$392,019
Former Executive Vice President 1996 US$120,000 US$83,520 151,000 US$11,707
1995 US$80,000 -- 125,000 --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) The dollar value of perquisites and other personal benefits for each of the
Named Executive Officers was less than established reporting thresholds.
(2) Mr. Hefner was granted options exercisable for 50,000 Common Shares at
US$18.75 per share for his participation as a member of the Board of
Directors.
(3) On May 20, 1997, Messrs. Whitehead and Stephens resigned as executive
officers and directors of the Corporation. As part of a settlement agreement
with Mr. Stephens, the Corporation agreed to pay Mr. Stephens US$525,000.
The Corporation also entered into a consulting agreement with Mr. Whitehead
for a three-year term for US$200,000 per annum. Mr. Butler was named Chief
Executive Officer of the Corporation in May 1997 and received options
exercisable for 200,000 Common Shares at US$10.90 per share, but resigned on
May 20, 1997 when Mr. Hefner was named Chief Executive Officer. Mr. Butler
received a lump sum payment of US$250,000, representing one year's salary,
as part of the settlement agreement with him.
(4) In May 1997, Messrs. Whitehead and Stephens were each granted options
exercisable for 50,000 Common Shares at US$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 by 18
months, subject to shareholder approval at the Meeting. See "Matters for
Consideration at the Meeting -- Former Management Option Resolution".
(5) Consists solely of amounts contributed by the Corporation to the Named
Executive Officer's account in the Corporation's 401(k) Plan.
(6) Represents salary received from commencement of employment through December
31, 1997 from the Corporation, which amount does not reflect an annual rate
of compensation.
(7) Mr. Dorrier terminated his employment with the Corporation in September 1997
and received payment for the remainder of compensation due under his
contract of employment. See "-- Employment Agreements" below.
During the year ended December 31, 1997, the aggregate remuneration paid by
the Corporation and by each of its subsidiaries (i) to the directors of the
Corporation in their capacity as directors of the Corporation and any of its
12
<PAGE> 15
subsidiaries, was US$37,500, and (ii) to the officers of the Corporation who
received in their capacity as officers or employees of the Corporation and its
subsidiaries aggregate remuneration in excess of C$40,000 (approximately
US$28,000), was US$2,112,366. The estimated aggregate cost to the Corporation
and its subsidiaries during the year ended December 31, 1997 of all benefits
proposed to be paid to such directors and officers under any pension or
retirement plan upon retirement at normal retirement age was US$40,321. The
aggregate of all other remuneration payments to such directors and officers (i)
made during the year ended December 31, 1997 and (ii) proposed to be made in the
future by the Corporation or any of its subsidiaries pursuant to an existing
compensation arrangement (excluding government or similar benefit plans) was
US$1,849,065 and US$2,182,552, respectively.
OPTION GRANTS DURING 1997
The following table sets forth information regarding individual grants of
options by the Corporation during the fiscal year ended December 31, 1997 to
each of the Named Executive Officers, and their potential realizable values.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SHARES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS MARKET VALUE SHARE PRICE APPRECIATION
OPTIONS GRANTED TO EXERCISE OR OF SHARES for Option Term (1)
GRANTED EMPLOYEES IN BASE PRICE PER ON THE DATE EXPIRATION ---------------------------
NAME (#) FISCAL YEAR SHARE OF GRANT DATE 5%(US$) 10%(US$)
<S> <C> <C> <C> <C> <C> <C> <C>
Robert A.
Hefner, III 300,000 9.4% US$10.70 US$10.70 07/17/2007 2,018,752 5,115,913
150,000(2) 4.7% US$18.55 US$18.55 11/25/2007 1,749,899 4,434,538
Malcolm
Butler 200,000 6.3% US$10.90 US$10.90 05/01/2002 602,294 1,330,912
Albert E.
Whitehead 50,000 1.6% US$10.90 US$10.90 05/01/2002 150,573 332,728
Larry A.
Ray 200,000 6.3% US$10.70 US$10.70 06/12/2007 1,345,835 3,410,609
200,000(3) 6.3% US$13.23 US$13.23 09/09/2007 1,664,835 4,217,843
150,000(2) 4.7% US$18.55 US$18.55 11/25/2007 1,749,899 4,434,588
Timothy T.
Stephens 50,000 1.6% US$10.90 US$10.90 05/01/2002 150,573 332,728
John P.
Dorrier 40,000 1.3% US$10.90 US$10.90 05/01/2002 120,459 266,112
</TABLE>
(Notes to this Table commence on page 15)
13
<PAGE> 16
For the purposes of the Business Corporations Act (Yukon), details of
option grants to the directors and officers of the Corporation during the year
ended December 31, 1997 are set forth in the following table:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR MARKET VALUE
OPTIONS EMPLOYEES IN BASE PRICE ON THE DATE OF
NAME DATE GRANTED GRANTED FISCAL YEAR ($/SH) GRANT ($/SH) EXPIRATION DATE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hefner, III 7/17/97 300,000 9.4% US$10.70 US$10.70 7/17/2007
11/25/97 150,000(2) 4.7% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Larry A. Ray 6/12/97 200,000 6.3% US$10.70 US$10.70 6/12/2007
9/9/97 200,000(3) 6.3% US$13.23 US$13.23 9/9/2007
11/25/97 150,000(2) 4.7% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Herbert C. Williamson,
III 9/9/97 500,000(4) 15.6% US$13.23 US$13.23 9/9/2007
11/25/97 150,000(2) 4.7% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Brian Egolf 7/17/97 75,000 2.3% US$10.70 US$10.70 7/17/2007
11/25/97 100,000(2) 3.1% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Breene M. Kerr 7/17/97 75,000 2.3% US$10.70 US$10.70 7/17/2007
11/25/97 75,000(2) 2.3% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Gary Fuller 7/17/97 75,000 2.3% US$10.70 US$10.70 7/17/2007
11/25/97 75,000(2) 2.3% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Robert B. Panero 7/17/97 50,000 1.6% US$10.70 US$10.70 7/17/2007
11/25/97 25,000(2) 0.8% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
James Scarlett 7/17/97 75,000 2.3% US$10.70 US$10.70 7/17/2007
11/25/97 25,000(2) 0.8% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Sir Mark Thomson Bt. 7/17/97 75,000 2.3% US$10.70 US$10.70 7/17/2007
11/25/97 25,000(2) 0.8% US$18.55 US$18.55 11/25/2007
- ---------------------------------------------------------------------------------------------------------------------------------
Albert E. Whitehead 5/1/97 50,000 1.6% US$10.90 US$10.90 5/1/2002
- ---------------------------------------------------------------------------------------------------------------------------------
Timothy T. Stephens 5/1/97 50,000 1.6% US$10.90 US$10.90 5/1/2002
- ---------------------------------------------------------------------------------------------------------------------------------
Malcolm Butler 5/1/97 200,000 6.3% US$10.90 US$10.90 5/1/2002
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(Notes to this Table commence on page 15)
14
<PAGE> 17
The high and low trading prices for the Corporation's Common Shares during
each month in 1997 were as follows (trading information for the month of January
1997 is based on prices quoted on the Canadian Dealing Network; all other
information is based on prices quoted on The Toronto Stock Exchange commencing
on February 10, 1997):
<TABLE>
<CAPTION>
DATE HIGH LOW
---- -------- --------
<S> <C> <C>
January..................................................... US$17.38 US$16.75
February.................................................... 17.40 9.75
March....................................................... 13.20 9.00
April....................................................... 11.50 8.25
May......................................................... 13.10 9.80
June........................................................ 12.50 10.45
July........................................................ 12.00 9.60
August...................................................... 14.00 9.85
September................................................... 14.10 10.75
October..................................................... 18.60 11.80
November.................................................... 19.40 17.15
December.................................................... 20.05 16.95
</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 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) Subject to shareholder approval at the Meeting. See "Matters for
Consideration at the Meeting -- Former Management Option Resolution".
(3) 105,000 of the options granted to Mr. Ray on September 9, 1997 are subject
to shareholder approval at the Meeting. See "Matters for Consideration at
the Meeting -- 1997 Stock Option Plan Resolution".
(4) 350,000 of the options granted to Mr. Williamson on September 9, 1997 are
subject to shareholder approval at the Meeting. See "Matters for
Consideration at the Meeting -- 1997 Stock Option Plan Resolution".
No stock appreciation rights have been granted by the Corporation to the
Named Executive Officers or to other employees or directors of the Corporation.
AGGREGATED OPTION EXERCISES DURING 1997 AND FISCAL YEAR-END OPTION VALUES
The following table provides information related to options exercised by
the Named Executive Officers during 1997 and the number and value of unexercised
options held by the Named Executive Officers at December 31, 1997. The
Corporation does not have any outstanding stock appreciation rights:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
SHARES OPTIONS AT
ACQUIRED DECEMBER 31, 1997
ON VALUE (#) (1)
EXERCISE REALIZED -------------------------------------
NAME (#) (US$) (1) EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Robert A. Hefner III -- -- 150,000 350,000
- ------------------------------------------------------------------------------------------------
Malcolm Butler -- -- 200,000 --
- ------------------------------------------------------------------------------------------------
Albert E. Whitehead -- -- 235,000 --
- ------------------------------------------------------------------------------------------------
Larry A. Ray -- -- 66,666 483,334
- ------------------------------------------------------------------------------------------------
Timothy T. Stephens 21,667 282,420 222,000 --
- ------------------------------------------------------------------------------------------------
John P. Dorrier 131,000 1,883,089 135,000 --
- ------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------- -------------------------------------
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS AT
December 31, 1997 (US$)(2)
-------------------------------------
NAME EXERCISABLE UNEXERCISABLE
<S> <C> <C>
Robert A. Hefner III 685,000 1,370,000
- --------------------------------------------------------------------------------------
Malcolm Butler 1,330,000 --
- ------------------------------------------------------------------------------------------------
Albert E. Whitehead 1,375,000 --
- ------------------------------------------------------------------------------------------------
Larry A. Ray 456,662 1,777,338
- ------------------------------------------------------------------------------------------------
Timothy T. Stephens 1,270,750 --
- ------------------------------------------------------------------------------------------------
John P. Dorrier 576,600 --
- ------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) Represents the difference between the exercise price of the option and the
closing price on the date of exercise.
(2) The value of unexercised in-the-money options has been calculated using the
closing price of the Common Shares on the TSE on December 31, 1997 of
US$17.55, less the exercise price of the in-the-money stock options. Options
are "in-the-money" at financial year end if the market value of the
underlying securities on that date exceeds the exercise price of the option.
15
<PAGE> 18
For the purposes of the Business Corporations Act (Yukon), details of
option exercises by the directors and officers of the Corporation during the
year ended December 31, 1997 are set forth in the following table.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
DATE OF ON DATE OF SHARES ACQUIRED VALUE REALIZED
NAME (1) EXERCISE EXERCISE PRICE EXERCISE(2) ON EXERCISE(#) (US$)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Timothy T. Stephens 1/15/97 $ 0.75 $17.00 5,000 81,250
1/20/97 $ 0.75 $18.00 5,000 86,250
4/22/97 $ 0.75 $10.60 11,667 114,920
- ---------------------------------------------------------------------------------------------------------------------------------
John P. Dorrier 10/29/97 $ 0.75 $18.00 47,533 819,944
11/6/97 $ 0.75 $17.90 27,467 471,059
11/24/97 $7.125 $18.90 40,000 471,000
12/18/97 $10.90 $18.50 16,000 121,600
- ---------------------------------------------------------------------------------------------------------------------------------
David F. Decort 2/10/97 $ 0.75 $16.00 40,000 610,000
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ---------------
(1) No director or officer, other than those listed above, exercised any options
during the year ended December 31, 1997.
(2) Please refer to the chart setting out the high and low trading prices for
the Corporation's Common Shares for each month in 1997 in "-- Option Grants
during 1997".
EMPLOYMENT AGREEMENTS
The Corporation and Mr. Dorrier entered into a three-year employment
contract which provided that he would receive an annual base salary of
US$150,000 and, in the sole discretion of the Compensation Committee of the
Board of Directors, could have received annual merit increases, annual bonuses
and stock option awards. The contract could have been terminated for "cause",
which includes death or serious incapacity, and the executive could have
resigned upon three months' prior written notice. The Corporation and Mr.
Dorrier also entered into an agreement which provided for payments to the
executive in the event there is a "Change of Control" of the Corporation and the
executive's employment is terminated (i) by the Corporation 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 Corporation 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 were paid by the
Corporation 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 in which the Corporation otherwise pays bonuses to some or all of its
employees. In addition, all 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 Corporation
or the date of his notice of intent to terminate his employment if he elected to
resign. The agreement also provided 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. As
a result of the resignation by the directors of the Corporation in May 1997, a
"Change of Control" occurred with respect to Mr. Dorrier's contract, and Mr.
Dorrier resigned as an officer in September 1997.
The Corporation has entered into a five-year employment agreement with Mr.
Ray effective June 12, 1997 that currently provides for an annual base salary of
US$262,500 and, in the sole discretion of the Compensation Committee of the
Board of Directors, 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
US$10.70 per share. One-third of the options vested immediately and the
remainder vests one-half each on the first and second anniversaries of the date
of grant. On September 9, 1997, the Corporation granted Mr. Ray options to
purchase an additional 200,000 Common Shares at a price of US$13.23 per share.
Of the additional Common Shares subject to options granted to Mr. Ray, 95,000
are issuable under the 1996 Stock Option Plan and 105,000 are issuable subject
to shareholder approval of the 1997 Stock Option Plan at the 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
16
<PAGE> 19
employment agreement, Mr. Ray will receive payment 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" means (1) any
merger, consolidation or reorganization in which the Corporation 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 Corporation to
any other person or entity (in one transaction or a series of related
transactions), (3) dissolution or liquidation of the Corporation, (4) any person
or entity, including a "group" as contemplated by Section 13(d) of the United
States 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 Corporation'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 Corporation 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 Corporation and one or more previously wholly-owned subsidiaries of the
Corporation.
The Corporation has entered into a five-year employment agreement with Mr.
Williamson effective September 9, 1997 that provides for an annual base salary
of US$100,000 and, in the sole discretion of the Compensation Committee of the
Board of Directors, Mr. Williamson may receive annual merit increases, annual
bonuses and stock option awards. As part of his employment agreement, Mr.
Williamson was granted options to purchase 500,000 Common Shares at an exercise
price of US$13.23 per share. Options to purchase 150,000 Common Shares vested
immediately, options to purchase 150,000 Common Shares vest on September 9, 1998
and options to purchase 50,000 Common Shares vest on each of September 9, 1999,
2000, 2001 and 2002, respectively. Of the options granted to Mr. Williamson,
150,000 are under the 1996 Stock Option Plan and 350,000 are subject to approval
of the 1997 Stock Option Plan at the Meeting. The remaining terms and conditions
of Mr. Williamson's employment agreement are substantially similar to Mr. Ray's
employment agreement.
INDEBTEDNESS TO CORPORATION OF DIRECTORS, EXECUTIVE OFFICERS AND SENIOR OFFICERS
On November 1, 1997, Mr. Ray obtained a US$200,000 loan from the
Corporation to finance the purchase of his residence. This loan bears a 6.06%
interest rate, is unsecured and is due on November 1, 2002.
Since January 1, 1997, no other director, executive officer or senior
officer of the Corporation, or any associate or affiliate of any such director,
executive officer or senior officer is or has been indebted to the Corporation
or any of its subsidiaries, or is or has been indebted to another entity where
such indebtedness is or has been the subject of a guarantee, support agreement,
letter of credit or other similar arrangement or understanding provided by the
Corporation or any of its subsidiaries, other than routine indebtedness.
REPORT ON EXECUTIVE COMPENSATION
The Corporation's policy with respect to executive compensation and the
amount thereof is determined by the Stock Option and Compensation Committee of
the Board of Directors (the "Compensation Committee"). In establishing and
implementing compensation policy, the Compensation Committee considers the
recommendations of the Chief Executive Officer and considers comparative
industry data. Issues relating to compensation are considered by the
Compensation Committee periodically throughout the year as needed on a
case-by-case basis and in the early part of each year based upon individual and
corporate performance during the preceding year.
The guiding philosophy of the Compensation Committee in the determination
of executive compensation is to attract and retain qualified and experienced
executives and provide reasonable base salaries and incentives for performance
geared to the Corporation's success. Since the Corporation does not presently
have any significant revenue, the Compensation Committee's focus has been toward
modest salaries, not to award cash bonuses and to provide incentives through
stock option awards with delayed vesting provisions. The Compensation Committee
believes that stock options, coupled with delayed vesting provisions to
encourage continued service, are the best way to link the interests of
management with those of the shareholders.
Robert A Hefner III was appointed Chief Executive Officer of the
Corporation in May, 1996. His compensation for 1997 consisted entirely of a
grant of 450,000 stock options based on an assessment of his individual
performance and significance to the development of the Corporation's business.
17
<PAGE> 20
Submitted by the Compensation Committee:
Breene M. Kerr
Brian F. Egolf
Gary F. Fuller
PERFORMANCE GRAPH
The following graph charts performance of an investment in the Common
Shares against the TSE 300 Composite Index and the TSE Oil & Gas Index, assuming
an investment of US$100 on June 30, 1995. Between June 10, 1995 and February 6,
1997, the Common Shares were traded on the Canadian Dealing Network. The Common
Shares commenced trading on the TSE on February 7, 1997 and on the American
Stock Exchange on January 9, 1998. The Common Shares trade in U.S. dollars on
the TSE and the American Stock Exchange.
18
<PAGE> 21
[GRAPH]
19
<PAGE> 22
STATEMENT OF CORPORATE GOVERNANCE POLICIES
In accordance with the report of The Toronto Stock Exchange Committee on
Corporate Governance in Canada, companies listed on the TSE are required to
disclose their corporate governance practices with reference to the Guidelines
for Improved Corporate Governance in Canada (the "Guidelines") set out in the
TSE Company Manual, copies of which are available from the TSE or the
Corporation.
MANDATE AND RESPONSIBILITIES OF THE BOARD
The fundamental objective of the Board of Directors is to ensure that the
Corporation operates in a fashion which maximizes shareholder value over the
long term. The Board of Directors carries out all of its duties and
responsibilities in a manner consistent with that fundamental objective. The
principal duty and responsibility of the Board of Directors is to oversee the
management and operations of the Corporation, with the day-to-day management of
the business and affairs of the Corporation delegated by the Board of Directors
to the Chief Executive Officer and other executive officers.
Responsibilities of the Board of Directors also include overseeing the
conduct of the Corporation's business, providing leadership and direction to its
management and setting policies. Strategic direction for the Corporation is
developed through the Board of Directors' planning process. Through this
process, the Board of Directors adopts the operating plan for the coming year,
and monitors management's progress relating to that plan through a regular
reporting and review process. To date, no formal position descriptions for the
Board of Directors and the Chief Executive Officer have been developed as
recommended by the Guidelines.
The Board of Directors met eight times during 1997 excluding periodic
telephone conference calls of directors. Three regular meetings of the Board of
Directors are currently scheduled for 1998. Each of the directors attended at
least 75% of the meetings of the Board of Directors and any committee on which
he serves.
COMPOSITION AND SIZE OF THE BOARD
The nine-member Board of Directors is elected by the shareholders of the
Corporation, with three directors, Robert A. Hefner III, Herbert C. Williamson
III and Larry A. Ray, who are "related" to the Corporation within the meaning of
the Guidelines. In addition to serving as a director, Mr. Hefner is the
Corporation's Chairman and Chief Executive Officer, Mr. Williamson is the
Executive Vice President and Chief Financial Officer, and Mr. Ray is the
Corporation's Executive Vice President and Chief Operating Officer. In view of
the current developmental state of the Corporation's business, and the fact that
a majority of the directors are regularly involved in the business and affairs
of the Corporation, the Board of Directors has concluded that the functions of
Chairman and Chief Executive Officer of the Corporation do not need to be
separated at this time. The six "unrelated" directors are independent of
management and free from any interest, business or other relationships that
could, or could reasonably be perceived to, materially interfere with their
ability to act with a view to the best interests of the Corporation, other than
interests and relationships arising from shareholding. The Corporation does not
have a "significant shareholder", that is, a shareholder with the ability to
exercise a majority of the votes for the election of the Board of Directors.
COMMITTEES OF THE BOARD
The Board of Directors has established three standing committees: an
Executive Committee, an Audit Committee and a Stock Option and Compensation
Committee. Each committee is currently composed of three directors and also has
available to it as a resource such members of management as may from time to
time be determined to be appropriate.
The Executive Committee is delegated, during the intervals between meetings
of the Board of Directors all the powers of the Board of Directors in respect of
the management and direction of the business and affairs of the Corporation
(except only those specified in subsection 116(2) of the Business Corporations
Act (Yukon)) in all cases in which specific direction in writing shall not have
been given by the Board of Directors. All expenditures authorized by the
Executive Committee shall be reported to the Board of Directors at its next
meeting. Messrs. Hefner (Chairman), Kerr and Ray are members of the Executive
Committee.
The Audit Committee consults with the auditors of the Corporation and such
other persons as the members deem appropriate, reviews the preparations for and
scope of the Corporation's annual financial statements, makes recommendations
concerning the engagement and fees of the independent auditors, and performs
such other duties
20
<PAGE> 23
relating to the financial statements of the Corporation as the Board of
Directors may assign from time to time. Messrs. Kerr, Thompson and Scarlett are
members of the Audit Committee.
The Stock Option and Compensation Committee has all the powers of the Board
of Directors, including the authority to issue shares or other securities of the
Corporation, in respect of any matters relating to the administration of the
1996 Stock Option Plan, the 1997 Stock Option Plan and compensation of officers,
directors, employees and other persons performing substantial services for the
Corporation. See "Statement of Executive Compensation". Messrs. Kerr, Egolf and
Fuller are members of the Stock Option and Compensation Committee.
The Guidelines contemplate that committees of the Board of Directors should
generally be composed of outside directors, a majority of whom are unrelated
directors. The Corporation complies with the requirements of the Business
Corporations Act (Yukon) in that the majority of the members of the Audit
Committee are not officers or employees of the Corporation or its affiliates. In
addition, a majority of the members of the Stock Option and Compensation
Committee are unrelated directors. The Board of Directors feels it is
appropriate to have Messrs. Hefner and Ray serve on the Executive Committee, as
they possess particular expertise as to the operations of the Corporation.
DECISION REQUIRING BOARD OF DIRECTORS APPROVAL AND EXPECTATIONS OF
MANAGEMENT
The Board of Directors has delegated to the Chief Executive Officer and
senior management responsibility for the day-to-day management of the business
of the Corporation. Matters of policy and issues outside the normal course of
business are brought before the Board for its review and approval, along with
all matters requiring the review and approval of the Board of Directors under
applicable legislation. The Chief Executive Officer and senior management review
the Corporation's progress in relation to the current operating plan at Board of
Directors meetings, which are held at regular intervals during the year (usually
quarterly). Financial, operational and strategic issues facing the Corporation
are reviewed, monitored and approved at the Board of Directors meetings.
RECRUITMENT OF NEW DIRECTORS AND ASSESSMENT OF BOARD PERFORMANCE
The Board of Directors has not established a committee of non-management
directors with the responsibility for proposing new nominees to serve on the
Board of Directors and for assessing directors on an ongoing basis. Instead, any
director may propose new nominees to the Board of Directors for consideration by
the Board of Directors as a whole. In addition, although no formal orientation
and education program for new directors has been established, all recent
appointees to the Board of Directors have had extensive industry, legal or
corporate governance experience as a result of prior employment or service as a
director.
The Guidelines also contemplate that a corporate board should implement a
process to be carried out by an appropriate committee for assessing the
effectiveness of the board as a whole, the committees of the Board of Directors
and the contribution of individual directors. Due to the size and composition of
the Board of Directors, the Board of Directors is of the view that a formal
process of assessment is unnecessary and instead, committee and individual
director's effectiveness is assessed on an informal basis.
SHAREHOLDER FEEDBACK
Under the direction of the Chief Executive Officer, there is a shareholder
relations program in place which involves one of the directors, Mr. Egolf, being
available to respond to shareholder inquiries and concerns on a regular basis.
Shareholder concerns of a significant nature are directed to the Chief Executive
Officer for information and resolution, and management reports to the Board of
Directors on these matters and other major shareholder and investor matters.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
In April 1996, the Corporation and GHK Colombia, an Oklahoma corporation
controlled by Robert A. Hefner III, entered into a non-binding letter of intent
governing a proposed acquisition by the Corporation of an additional 35%
participating interest in two association contracts with Ecopetrol, the
Colombian national oil company (the "Association Contracts"), in consideration
of the issuance of up to 16,000,000 Common Shares by the Corporation 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 Corporation agreed to
issue an aggregate of 16,777,143 Common Shares to nineteen unrelated parties in
21
<PAGE> 24
consideration of the Corporation's acquisition of (a) 100% of the issued and
outstanding shares of GHK 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 LLC, which holds a 9.776% interest in
the Association Contracts, and (c) 62.963% membership interest in Cimarrona LLC,
which holds a 25.38% interest in the Association Contracts. As a result of the
GHK Transaction, the Corporation acquired an additional 36.7% indirect interest
in the Association Contracts.
Prior to the GHK Transaction, GHK L.L.C. provided administrative and
management services to GHK Colombia in connection with its obligations as
operator of the Dindal and Rio Seco contract areas. As a condition of completing
the GHK Transaction, the Corporation, GHK Company Colombia and GHK L.L.C.
entered into a management agreement (the "Management Agreement") pursuant to
which GHK L.L.C. was retained by GHK Colombia to perform the duties and
obligations of GHK Colombia under the Association Contracts and as operator of
the Dindal contract area under the joint operating agreement dated August 1,
1996 (the "JOA"). GHK 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 US$15,000 per month) plus an
additional US$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 Colombia paid an aggregate of
US$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 (the "Voting Support
Agreement") executed in connection with the GHK Transaction, the Corporation,
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 favour of the slate of directors proposed by the
Corporation's Chief Executive Officer. The Voting Support Agreement also
provided that a sale by Messrs. Hefner and Kerr of a block of 10,000 Common
Shares or more which were initially subject to the 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 was unable or unwilling to sell such securities in a timely manner at a
price acceptable to the seller, the seller could sell to a third party without
being subject to the Voting Support Agreement, provided that such sale was not
to a person or one or more of a group of persons acting in concert, who was
acquiring the securities of the seller in connection with a takeover bid, other
than where such takeover bid was an offer made generally to the shareholders of
the Corporation. The Voting Support Agreement terminated on May 20, 1997.
Prior to the GHK Transaction, none of Messrs. Hefner, Egolf or Kerr was
affiliated with the Corporation. As a result of the GHK Transaction, Messrs.
Hefner and Egolf were elected directors of the Corporation and Messrs. Hefner
and Kerr became substantial shareholders of the Corporation. In addition, as a
result of an agreement between Mr. Hefner, in his capacity as the selling
shareholder of GHK Colombia, the members of Esmeralda LLC and Cimarrona LLC and
Mr. Egolf (collectively, the "Sellers"), the Sellers paid Mr. Egolf an aggregate
of 83,886 B Special Warrants, which were subsequently converted into 83,886
Common Shares of which 58,720 Common 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 December 31, 1997, 39,147 of such Common Shares
remained subject to the Escrow Agreement.
MTV Investments Limited Partnership ("MTV") owns 37.037% of Cimarrona LLC,
an Oklahoma company. Cimarrona LLC is a consolidated subsidiary of the
Corporation. Resulting from a cash call, MTV owed US$541,000 to the Corporation
at December 31, 1997.
MANAGEMENT CONTRACTS
Except as described under "Matters for Consideration of the Meeting --
Election of Directors -- Material Interest of Directors", there are no
management functions of the Corporation or its subsidiaries which are to any
substantial degree performed by a person other than the directors or senior
officers of the Corporation or its subsidiaries.
22
<PAGE> 25
GENERAL
Information contained in this Management Information Circular is given as
of May 1, 1998 unless otherwise noted. The contents and the sending of this
Management Information Circular have been approved by the Board of Directors of
the Corporation.
SHAREHOLDER PROPOSALS
Proposals of Shareholders intended to be presented at the 1999 Annual
Meeting of Shareholders must be received by the Corporation at its principal
executive office by December 31, 1998 in order for such proposals to be included
in the Corporation's management information circular and form of proxy for such
meeting. Shareholders submitting such proposals are requested to address them to
the Secretary, Seven Seas Petroleum Inc., Suite 960, Three Post Oak Central,
1990 Post Oak Boulevard, Houston, Texas 77056.
DATED April 6, 1998
By Order of the Board of Directors of
SEVEN SEAS PETROLEUM INC.
LOGO
Robert A. Hefner III
Chairman of the Board
23
<PAGE> 26
SCHEDULE A
1997 STOCK OPTION PLAN RESOLUTION
RESOLVED AS AN ORDINARY RESOLUTION THAT:
1. The 1997 Stock Option Plan, as described in the section of the Management
Information Circular entitled "Matters for Consideration at the Meeting --
1997 Stock Option Plan Resolution", is authorized and approved.
2. Any director or officer of the Corporation is authorized and directed for and
on behalf of the Corporation to execute and deliver all documents and to do
all acts and things necessary or desirable to give effect to this resolution.
<PAGE> 27
SCHEDULE B
FORMER MANAGEMENT OPTION RESOLUTION
RESOLVED AS AN ORDINARY RESOLUTION THAT:
1. The 18 month extension of the exercise period applicable to certain options
granted under the Corporation's 1996 Stock Option Plan, as described in the
section of the Management Information Circular entitled "Matters for
Consideration at the Meeting -- Former Management Option Resolution", is
authorized and approved.
2. Any director or officer of the Corporation is authorized and directed for and
on behalf of the Corporation to execute and deliver all documents and to do
all acts and things necessary or desirable to give effect to this resolution.
<PAGE> 28
SEVEN SEAS PETROLEUM INC.
FORM OF PROXY
SOLICITED BY MANAGEMENT FOR THE ANNUAL AND SPECIAL MEETING OF SHAREHOLDERS
OF SEVEN SEAS PETROLEUM INC. TO BE HELD ON THURSDAY, JUNE 4, 1998
The undersigned holder of common shares of Seven Seas Petroleum Inc. (the
"Corporation") hereby appoints Robert A. Hefner III, Chairman of the Board,
Chief Executive Officer and Managing Director of the Corporation, or failing
him, Larry A. Ray, Executive Vice President and Chief Operating Officer of the
Corporation, or instead of either of them, ____________________________________,
as the proxy of the undersigned, with the power of substitution, to attend and
act for and on behalf of the undersigned at the annual and special meeting of
shareholders of the Corporation to be held on Thursday, June 4, 1998, and any
adjournment thereof, with all the powers that the undersigned could exercise if
the undersigned were personally present at the meeting, or any adjournment
thereof, including the authority to vote the common shares of the Corporation
represented by this proxy (the "Common Shares") in the proxyholder's discretion
except as specified below.
The undersigned directs that the Common Shares shall be:
1. VOTED FOR [ ] OR WITHHELD FROM VOTING [ ] in respect of the election of
directors.
2. VOTED FOR [ ] OR WITHHELD FROM VOTING [ ] in respect of the appointment
of auditors and authorizing the directors to fix their remuneration.
3. VOTED FOR [ ] OR VOTED AGAINST [ ] the 1997 Stock Option Plan Resolution
attached as Schedule A to the accompanying Management Information
Circular.
4. VOTED FOR [ ] OR VOTED AGAINST [ ] the Former Management Option
Resolution attached as Schedule B to the accompanying Management
Information Circular.
5. VOTED IN THE PROXYHOLDER'S DISCRETION IN RESPECT OF AMENDMENTS OR
VARIATIONS TO MATTERS REFERRED TO IN THE ACCOMPANYING NOTICE OF ANNUAL
AND SPECIAL MEETING OF SHAREHOLDERS AND IN RESPECT OF OTHER MATTERS THAT
MAY PROPERLY COME BEFORE THE MEETING, OR ANY ADJOURNMENT THEREOF.
The Common Shares will be voted in
accordance with the directions
contained in this proxy. If no
directions are given, the Common Shares
will be voted FOR the election of
directors, FOR the appointment of
auditors and authorizing the directors
to fix their remuneration, FOR the 1997
Stock Option Plan Resolution, and FOR
the Former Management Option
Resolution. This proxy may be revoked
by following the procedure set forth in
the accompanying Management Information
Circular.
DATED __________________________, 1998.
_______________________________________
Signature of Shareholder(s)
(1) This form of proxy should be dated
and signed by the shareholder or by
the shareholder's attorney duly
authorized in writing. If the
shareholder is a corporation, this
form of proxy should be signed by
the duly authorized officer(s) of
the corporation or by the
corporation's attorney duly
authorized in writing. If this form
of proxy is not dated, it will be
deemed to bear the date on which it
is mailed by the person making the
solicitation.
(2) A SHAREHOLDER HAS THE RIGHT TO
APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) OTHER THAN THE PERSONS
NAMED ABOVE AS THE PROXY OF THE
SHAREHOLDER AND MAY EXERCISE THIS
RIGHT EITHER BY INSERTING THAT
PERSON'S NAME IN THE BLANK SPACE
PROVIDED IN THIS FORM OF PROXY AND
STRIKING OUT THE OTHER NAMES OR BY
COMPLETING ANOTHER PROPER FORM OF
PROXY.
