<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 2, 1998.
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
SEVEN SEAS PETROLEUM INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
YUKON TERRITORY 1311 73-1468669
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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<TABLE>
<S> <C>
HERBERT C. WILLIAMSON, III
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
1990 POST OAK BLVD., SUITE 960 1990 POST OAK BLVD., SUITE 960
HOUSTON, TEXAS 77056 HOUSTON, TEXAS 77056
(713) 622-8218 (713) 622-8218
(Address, including zip code, and telephone (Name, address, including zip code
number, including area code, of and telephone number, including area
registrant's principal executive offices) code, of agent for service)
</TABLE>
Copies to:
C. MICHAEL HARRINGTON AND
T. MARK KELLY
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
1001 FANNIN STREET
HOUSTON, TEXAS 77002-6760
(713) 758-2222
(713) 758-2346 (FAX)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT(1) PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
12 1/2% Series B Senior Notes due
2005............................ $110,000,000 100% $110,000,000 $32,450
=========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any jurisdiction in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
jurisdiction.
SUBJECT TO COMPLETION, DATED JULY 2, 1998
SEVEN SEAS PETROLEUM INC.
OFFER TO EXCHANGE ITS 12 1/2% SERIES B SENIOR NOTES DUE 2005,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR ANY AND ALL OF ITS OUTSTANDING 12 1/2% SERIES A
SENIOR NOTES DUE 2005.
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998 UNLESS EXTENDED.
Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation (the
"Company" or "Seven Seas"), hereby offers, upon the terms and subject to the
conditions set forth in this Prospectus (as the same may be amended or
supplemented from time to time, the "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal" and, together with this Prospectus, the
"Exchange Offer"), to exchange up to $110,000,000 aggregate principal amount of
its 12 1/2% Series B Senior Notes due 2005 (the "Exchange Notes"), which have
been registered under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for up to $110,000,000 aggregate principal amount
of its outstanding 12 1/2% Series A Senior Notes due 2005 (the "Original Notes"
and, together with the Exchange Notes, the "Notes"). On May 7, 1998, the Company
issued $110,000,000 aggregate principal amount of Original Notes. The Original
Notes were issued pursuant to exemptions from, or in transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws.
The terms of the Exchange Notes are substantially identical in all respects
to the terms of the Original Notes except that (i) the Exchange Notes will be
freely transferable by holders thereof (other than as provided herein) and
issued free of certain transfer restrictions and registration rights relating to
the Original Notes, and (ii) holders of the Exchange Notes will not be entitled
to certain rights of holders of the Original Notes under the Registration Rights
Agreement (as defined herein), which rights will terminate upon the consummation
of the Exchange Offer. See "Description of Notes" for a full discussion of the
terms of both the Original Notes and the Exchange Notes. The Exchange Notes will
evidence the same debt as the Original Notes and will be issued under and be
entitled to the benefits of the Indenture, dated as of May 7, 1998, governing
the terms of the Original Notes and the Exchange Notes. Interest on the Exchange
Notes will be payable semi-annually in arrears on May 15 and November 15 of each
year, commencing November 15, 1998. Interest on the Exchange Notes will accrue
from the issuance of the Original Notes, May 7, 1998.
The Company will accept for exchange any and all Original Notes that are
validly tendered and not withdrawn on or prior to 5:00 p.m., New York City time,
on , 1998 unless extended by the Company (the term "Expiration Date"
shall mean the latest date and time to which the Exchange Offer is extended).
Tenders of Original Notes may be withdrawn at any time prior to the Expiration
Date. The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Original Notes being tendered for exchange. However, the Exchange
Offer is subject to certain conditions that may be waived by the Company and to
the terms and provisions of the Registration Rights Agreement, dated as of May
7, 1998 (the "Registration Rights Agreement"), among the Company and Donaldson,
Lufkin & Jenrette Securities Corporation, Bear Stearns & Co. Inc., CIBC
Oppenheimer Corp., Credit Suisse First Boston Corporation and Paribas
Corporation (the "Initial Purchasers"). See "Exchange Offer -- Conditions to the
Exchange Offer." Original Notes may be tendered only in denominations of $1,000
principal amount and integral multiples thereof.
The Exchange Notes are being offered hereunder in order to satisfy certain
obligations of the Company contained in the Registration Rights Agreement. Based
on interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in certain interpretive letters addressed to third
parties in other transactions, the Company believes that Exchange Notes issued
pursuant to the Exchange Offer in exchange for Original Notes may be offered for
resale, resold and otherwise transferred by a holder thereof (other than any
holder that is an "affiliate" of the Company within the meaning of Rule 405 of
the Securities Act (an "Affiliate") or a broker-dealer), without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes are acquired in the ordinary
course of such holder's business and such holder is not participating, and has
no arrangement or understanding with any person to participate, in a
distribution (within the meaning of the
(continued on next page)
------------------------
SEE "RISK FACTORS" ON PAGE 13 FOR A DISCUSSION OF CERTAIN MATTERS THAT
SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER AND AN INVESTMENT IN
THE EXCHANGE NOTES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
, 1998
<PAGE> 3
(continued from previous page)
Securities Act) of such Exchange Notes. However, the Company has not sought its
own interpretive letter, and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. However, any holder
that is an Affiliate of the Company or who intends to participate in the
Exchange Offer for the purpose of distributing the Exchange Notes, or any
broker-dealer who purchased Original Notes from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act, (i) will
not be able to rely on the applicable interpretations of the staff of the
Commission set forth in the above-mentioned interpretive letters, (ii) will not
be entitled to tender such Original Notes in the Exchange Offer, and (iii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Original
Notes unless such sale or transfer is made pursuant to an exemption from such
requirements. In addition, if any broker-dealer holds Exchange Notes acquired
for its own account as a result of market-making or other trading activities and
exchanges such Original Notes for Exchange Notes then such broker-dealer must
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resales of Exchange Notes. The Letter of Transmittal states
that by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Original Notes where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of one year after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
There is no existing trading market for the Exchange Notes, and there can be
no assurance regarding the future development of a market for the Exchange
Notes. The Initial Purchasers have advised the Company that they currently
intend to make a market in the Exchange Notes. The Initial Purchasers are not
obligated to do so, however, and any market-making with respect to the Exchange
Notes may be discontinued at any time without notice. The Company does not
intend to apply for listing or quotation of the Exchange Notes on any securities
exchange or stock market.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No dealer-manager is being used in connection
with the Exchange Offer.
---------------------------
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. Reports, proxy statements and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, NW, Washington, D.C. 20549,
and at the Commission's Regional Offices at Seven World Trade Center, 13th
Floor, New York, New York 10048 and CitiCorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained by mail from the Public Reference Section of the Commission at 450 West
Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. Such reports,
proxy and information statements and other information concerning the Company
can also be inspected at the offices of the American Stock Exchange, 86 Trinity
Place, New York, New York, 10006. The reports, proxy statements and other
information may also be obtained from the Web site that the Commission maintains
at http:/www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-4 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which were
omitted in accordance with the rules and regulations of the Commission. For
further information, reference is hereby made to the Registration Statement. Any
statements contained herein concerning the provisions of any document filed as
an exhibit to the Registration Statement or otherwise filed with the Commission
are not necessarily complete, and in each instance reference is made to the copy
of such document so filed. Each such statement is qualified in its entirety by
such reference.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. All
statements included herein other than statements of historical fact are forward-
looking statements. Such forward-looking statements include, without limitation,
the statements in "Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business," regarding the Company's
financial position, estimated quantities of reserves, business strategy and
plans and objectives for future operations. Forward-looking statements in this
Prospectus generally are accompanied by words such as "anticipate," "believe,"
"estimate," "project," "potential" or "expect" or similar statements. Although
the Company believes that the expectations reflected in such forward-looking
statements are reasonable, no assurance can be given that such expectations will
prove correct. Factors that could cause the Company's results to differ
materially from the results discussed in such forward-looking statements are
discussed in "Risk Factors" and elsewhere in this Prospectus. All
forward-looking statements included herein and therein are expressly qualified
in their entirety by the cautionary statements in this paragraph.
2
<PAGE> 4
SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, references to "Seven Seas" or the "Company" mean Seven Seas Petroleum
Inc. and its subsidiaries (except in "Description of Notes" and "Certain
Canadian Federal Income Tax Considerations"). Certain terms relating to the oil
and gas business are defined in the "Glossary of Oil and Gas Terms" included in
this Prospectus.
THE COMPANY
Seven Seas is an independent international energy company engaged in the
exploration, development and production of oil and natural gas in Colombia. The
Company is the operator of an oil discovery ("Emerald Mountain") defined by two
association contracts with the Colombian national oil company (the "Dindal
Association Contract" and the "Rio Seco Association Contract", and,
collectively, the "Association Contracts"), covering a total of approximately
109,000 contiguous acres in central Colombia. The Company has focused its
efforts to date on delineating the oil and gas potential of Emerald Mountain.
The five exploratory wells completed on Emerald Mountain have achieved maximum
tested actual production rates ranging from 3,415 to 13,123 barrels per day
(Bbls/d). The Company has produced over 300,000 barrels of oil during test
production; however, continuous production of the oil field is scheduled to
begin in mid- to late 1999. Except for additional production testing, management
has made the decision to shut in the five completed wells until completion of
the infrastructure necessary to produce, process, and transport oil production
from Emerald Mountain. The Company's 57.7% working interest in Emerald Mountain
(before Colombian government participation) was acquired through a series of
transactions from 1995 through 1997. The Company has interests in three
additional association contracts in Colombia which, together with the Emerald
Mountain association contracts, cover over one million gross acres. As of
December 31, 1997, the Company's estimated net proved reserves attributable to
the delineation of 14,459 acres of Emerald Mountain were 32.2 MMBbls with an SEC
PV-10 of $144.9 million.
Certain members of the Company's management have been involved in the
Emerald Mountain project since its inception in 1992. The Company's executive
officers average approximately 29 years of experience in the oil and gas
industry, and predecessors of the Company have operated throughout the U.S. and
Canada since 1959. As of June 15, 1998, the Company's officers and directors
beneficially owned approximately 29% of the Company's outstanding common shares.
The Company anticipates developing Emerald Mountain in two phases. Phase I
of the development program includes development and delineation drilling and the
construction of production facilities and a 36-mile pipeline, scheduled for
completion in mid- to late 1999, which will allow Emerald Mountain production to
reach an existing pipeline with approximately 50,000 Bbls/d of currently
available transportation capacity. Phase II of the development program includes
further development and delineation drilling, construction of production
facilities and construction of a 45-mile pipeline to expand the capacity for
production from the field. The Company has contracted for the basic and
conceptual engineering of the transportation system, requested bids for tubular
supplies and anticipates selecting a project manager in the near future and is
preparing to solicit bids for the detailed engineering and construction of the
pipeline. Prior to the issuance of the Original Notes, the Company had financed
the operation, exploration and continued delineation of Emerald Mountain
primarily with private offerings of equity and convertible debt, providing the
Company with aggregate net proceeds of $47.0 million. The Company also issued
17.8 million common shares as consideration for a portion of its interest in
Emerald Mountain. On May 7, 1998, the Company issued the Original Notes in a
private placement and received net proceeds of approximately $106 million.
Approximately $37.8 million of the net proceeds are being held in a separate
account or in escrow to secure the first three years of interest payments on the
Original Notes and the remaining proceeds will enable the Company to fund its
operations and investments attributable to Phase I of the development program.
3
<PAGE> 5
RECENT DEVELOPMENTS
Drilling Activity. On June 5, 1998, Seven Seas announced that it had
successfully completed drilling operations on the El Segundo 6-E well, the
southernmost well on Emerald Mountain to date. This well is located in the
Dindal contract area, approximately 5.3 miles south of the El Segundo 1-E
discovery well and reached a total depth of 8,713 feet. Preliminary analyses
while drilling included the observation of highly fractured core samples and
over 300 feet of Cimarrona formation with no indication of oil-water contact.
On February 13, 1998, Seven Seas announced that the Tres Pasos 2-E well had
reached a total depth of 6,054 feet. The well is located 5.6 miles northwest of
the El Segundo 1-E discovery well in the Rio Seco contract area. The well
encountered 290 feet of Cimarrona formation with no indication of oil-water
contact. Due to an operational problem that resulted from a failure to properly
cement casing through the Cimarrona formation, the Company has decided to
sidetrack and drill a new well bore. On May 5, 1998, the Company announced that
the Tres Pasos 2-E sidetrack well reached a total depth of 5,880 feet with a
bottom hole location approximately 1,200 feet southeast of the original well
bore. The Company believes based on preliminary analyses, including oil shows
while drilling, that the well should be productive.
On January 30, 1998, Seven Seas announced the completion and results from
33 days of reservoir testing for the El Segundo 2-E well located in the Dindal
contract area. The well encountered 314 feet of Cimarrona formation and had a
maximum production rate of 5,381 Bbls/d and 826 Mcf/d of gas per day and there
was no evidence of oil-water contact. The production rate and interference data
confirm a significant extension of the reservoir approximately 3.7 miles to the
north of the El Segundo 1-E discovery well.
In November 1997, drilling commenced on the El Segundo 3-E well, the eighth
well to be drilled on Emerald Mountain and the sixth to be drilled in the Dindal
contract area. The drilling of the El Segundo 3-E was completed in February
1998, and the well encountered 292 feet of Cimarrona formation. After the
completion of drilling operations on the El Segundo 3-E, the Company experienced
significant mechanical problems while attempting to complete the well for
production testing. Due to a failure to effectively install the lower portion of
the well casing, it was not possible to achieve sufficient communication with
the Cimarrona formation to initiate production testing. The Company has
temporarily abandoned the El Segundo 3-E well pending a scheduled return to this
location in the third quarter of 1998.
Other International Interests. The Company is in the process of eliminating
any mandatory capital commitments outside of Colombia. In Papua New Guinea, the
Company signed a farm-out agreement with ARCO Papua New Guinea Inc. and retained
a 20% interest. The Company anticipates in the future it will either farm-out
its 20% interest or relinquish its rights in the property. In the Perth Basin in
Western Australia, the Company has signed a purchase and sale agreement with
Forcenergy International Inc., in which the Company will exchange its 11.77%
working interest for approximately $0.9 million. The Company will retain a small
overriding royalty interest and will also be reimbursed approximately $0.3
million for certain capital expenditures. The agreement is pending final
approval by an aboriginal council in Western Australia. In the Bass Strait Basin
offshore southeastern Australia, the Company is seeking to farm out its
interests. The Company has no required capital commitments for this prospect.
4
<PAGE> 6
THE EXCHANGE OFFER
Purpose and Effect of the
Exchange Offer........... The Original Notes were sold by the Company on May
7, 1998 in a private transaction not subject to the
registration requirements of the Securities Act. In
connection therewith, the Company and the Initial
Purchasers entered into the Registration Rights
Agreement providing for, among other things, the
Exchange Offer so that the Exchange Notes will be
freely transferable by the holders thereof (other
than as provided herein), and issued free of
certain transfer restrictions relating to the
Original Notes. See "The Exchange Offer -- Purpose
and Effect of the Exchange Offer" and "Plan of
Distribution."
Terms of the Exchange
Offer...................... Upon the terms and subject to the conditions set
forth in this Prospectus and in the Letter of
Transmittal, the Company will accept any and all
Original Notes validly tendered and not withdrawn
prior to the Expiration Date. The Company will
issue $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Original Notes accepted in the Exchange Offer.
Holders may tender some or all of their Original
Notes pursuant to the Exchange Offer. However,
Original Notes may be tendered only in integral
multiplies of $1,000 in principal amount. The terms
of the Exchange Notes are substantially identical
in all respects to the terms of the Original Notes
except that (i) the Exchange Notes will be freely
transferable by holders thereof (other than as
provided herein) and issued free of certain
transfer restrictions and registration rights
relating to the Original Notes, and (ii) the
holders of the Exchange Notes will not be entitled
to certain rights of holders of the Original Notes
under the Registration Rights Agreement, which
rights will terminate upon consummation of the
Exchange Offer. The Exchange Notes will evidence
the same debt as the Original Notes and will be
issued under and entitled to the benefits of the
Indenture. As of the date of this Prospectus,
$110,000,000 aggregate principal amount of the
Original Notes were outstanding.
Expiration Date............ 5:00 p.m., New York City time on ,
1998, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended. See "The Exchange Offer -- Expiration
Date; Extensions; Amendments."
Interest on the Exchange
Notes.................... Interest on the Exchange Notes will be payable
semi-annually in arrears on May 15 and November 15
of each year, commencing November 15, 1998.
Interest on the Exchange Notes will accrue from the
date of issuance of the Original Notes, May 7, 1998
(the "Closing Date" or the "Issue Date").
Consequently, holders who exchange their Original
Notes for Exchange Notes will receive the same
interest payment on November 15, 1998 that they
would have received had they not accepted the
Exchange Offer. See "The Exchange Offer -- Interest
on the Exchange Notes."
Procedure for Tendering.... Only a registered holder of Original Notes may
tender in the Exchange Offer. To tender in the
Exchange Offer, a holder must complete, sign and
date the Letter of Transmittal, or a facsimile
thereof, have the signature thereon guaranteed if
required by the Letter of Transmittal,
5
<PAGE> 7
and mail or otherwise deliver such Letter of
Transmittal or such facsimile, together with any
other required documents, to the Exchange Agent (as
identified below) prior to the Expiration Date. In
addition, (i) certificates for such Original Notes,
or a timely confirmation of a book-entry transfer
of such Original Notes, if such procedure is
available, into the Exchange Agent's account at The
Depository Trust Company ("DTC") pursuant to the
procedure for book-entry transfer described herein,
must be received by the Exchange Agent prior to the
Expiration Date, or (ii) the holder must comply
with the guaranteed delivery procedures described
below. See "The Exchange Offer -- Procedures for
Tendering."
Any beneficial owner whose Original Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender directly, such beneficial owner
must, prior to completing and executing the Letter
of Transmittal and delivering such beneficial
owner's Original Notes, either make appropriate
arrangements to register ownership of the Original
Notes in such owner's name or obtain a properly
completed bond power from the registered holder.
The transfer of record ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
Guaranteed Delivery
Procedures............... Holders of Original Notes who wish to tender their
Original Notes and whose Original Notes are not
immediately available or who cannot deliver their
Original Notes (or complete the procedures for book
entry transfer), the Letter of Transmittal or any
other required documents to the Exchange Agent
prior to the Expiration Date may tender their
Original Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
Withdrawal Rights.......... Except as otherwise provided herein, tenders of
Original Notes may be withdrawn at any time prior
to the Expiration Date. See "The Exchange
Offer -- Withdrawal Rights."
Conditions to the
Exchange Offer........... The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original
Notes being tendered for exchange. However, the
Exchange Offer is subject to certain conditions
that may be waived by the Company and to the terms
and conditions of the Registration Rights
Agreement. The Company reserves the right to
terminate or amend the Exchange Offer at any time
prior to the Expiration Date upon the occurrence of
any such conditions. See "The Exchange
Offer -- Conditions to the Exchange Offer."
Resales of Exchange
Notes...................... The Company is making the Exchange Offer of the
Exchange Notes in reliance on the position of the
staff of the Commission as set forth in certain
interpretive letters addressed to third parties in
other transactions. However, the Company has not
sought its own interpretive letter, and there can
be no assurance that the staff of the Commission
would make a similar determination with respect to
the Exchange Offer. Based on these interpretations
by the staff of the Commission, and subject to the
6
<PAGE> 8
two immediately following sentences, the Company
believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Original Notes may
be offered for resale, resold and otherwise
transferred by a holder thereof (other than a
holder who is an Affiliate or a broker-dealer)
without further compliance with the registration
and prospectus delivery requirements of the
Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such
holder's business and that such holder is not
participating, and has no arrangement or
understanding with any person to participate, in a
distribution (within the meaning of the Securities
Act) of such Exchange Notes. However, any holder of
Original Notes who is an Affiliate of the Company
or who intends to participate in the Exchange Offer
for the purpose of distributing Exchange Notes, or
any broker-dealer who purchased Original Notes from
the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act,
(i) will not be able to rely on the interpretations
of the staff of the Commission set forth in the
above-mentioned interpretive letters, (ii) will not
be entitled to tender such Original Notes in the
Exchange Offer, and (iii) must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any sale
or other transfer of such Original Notes unless
such sale or transfer is made pursuant to an
exemption from such requirements. In addition,
Participating Broker-Dealers (as defined herein)
will be required to deliver a prospectus meeting
the requirements of the Securities Act in
connection with any resales of Exchange Notes as
described under "The Exchange Offer -- Resales of
Exchange Notes."
Each holder of Original Notes who wishes to
exchange Original Notes for Exchange Notes in the
Exchange Offer will be required to make certain
representations, which are contained in the Letter
of Transmittal. Each Participating Broker-Dealer
must acknowledge that it acquired the Original
Notes for its own account as a result of
market-making activities or other trading
activities and must agree that it will deliver a
prospectus meeting the requirements of the
Securities Act in connection with any resale of
such Exchange Notes. See "Plan of Distribution."
Based on the position taken by the staff of the
Commission in the interpretive letters referred to
above, the Company believes that Participating
Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Exchange
Notes received upon exchange of such Original Notes
with this Prospectus.
Exchange Agent............. The Bank of Nova Scotia Trust Company of New York
is serving as exchange agent (the "Exchange Agent")
in connection with the Exchange Offer. The address,
telephone number and facsimile number of the
Exchange Agent are set forth under "The Exchange
Offer -- Exchange Agent."
Use of Proceeds............ There will be no cash proceeds payable to the
Company from the issuance of the Exchange Notes
pursuant to the Exchange Offer.
7
<PAGE> 9
THE NOTES
Securities Offered......... $110,000,000 aggregate principal amount of 12 1/2%
Series B Senior Notes due 2005.
Maturity Date.............. May 15, 2005.
Interest Payment Dates..... May 15 and November 15, commencing November 15,
1998.
Ranking.................... The Notes represent senior obligations of Seven
Seas, ranking pari passu in right and priority of
payment with all existing and future senior
Indebtedness (as defined) of Seven Seas and senior
in right and priority of payment to all
Indebtedness of Seven Seas that is expressly
subordinated to the Notes. On a pro forma basis
after giving effect to the issuance of the Original
Notes and the application of the net proceeds
therefrom, as of December 31, 1997, Seven Seas
would have had outstanding approximately $135.0
million of Indebtedness, including $25.0 million of
secured convertible Indebtedness. Seven Seas'
subsidiaries (the "Subsidiaries") would have had
approximately $7.0 million of outstanding
liabilities, including trade payables (excluding
the guarantee by Seven Seas Petroleum Holdings Inc.
of $25.0 million in aggregate principal amount of
secured convertible Indebtedness issued by Seven
Seas).
The Notes will be effectively subordinated to any
and all existing and future secured Indebtedness of
Seven Seas, including Indebtedness under the
proposed credit facility, to the extent of the
value of the assets securing such Indebtedness. The
Notes will be effectively senior to other senior
Indebtedness of Seven Seas to the extent of the
value of the Pledged Securities (as defined). See
"-- Eligible Securities and Pledged Securities."
The Notes will be effectively subordinated to all
liabilities of Seven Seas' Subsidiaries that are
not Guarantors (as defined) and to all existing and
future secured Indebtedness of Seven Seas'
Subsidiaries that are Guarantors, to the extent of
the value of the assets securing such Indebtedness.
The Indenture permits the future incurrence of
certain additional Indebtedness by Seven Seas and
its Subsidiaries. On the date of this Prospectus,
none of Seven Seas' Subsidiaries have guaranteed
Seven Seas' obligations under the Notes. However,
the Indenture provides that if any Restricted
Subsidiary (as defined) guarantees the payment of
any Indebtedness of Seven Seas (excluding the
guarantee by Seven Seas Petroleum Holdings Inc. of
$25.0 million of secured convertible Indebtedness
of Seven Seas) or any Indebtedness of any
Guarantor, then Seven Seas will cause the Notes to
be equally and ratably guaranteed by such
Restricted Subsidiary on the terms set forth in the
Indenture. In such event, Seven Seas' obligations
under the Notes will be fully and unconditionally
guaranteed on a senior or pari passu basis, jointly
and severally, by each Restricted Subsidiary of
Seven Seas that executes and delivers a
supplemental indenture to the Indenture. See
"Description of Notes."
Eligible Securities and
Pledged Securities......... As required by the Indenture dated as of May 7,
1998 (the "Indenture") between Seven Seas and The
Bank of Nova Scotia Trust Company of New York, as
Trustee (the "Trustee"), Seven Seas used a portion
of the proceeds to purchase a portfolio of U.S.
Government Securities, the
8
<PAGE> 10
scheduled interest and principal payments on which
are sufficient to provide for payment in full when
due of the first six regularly scheduled interest
payments on the Notes. Seven Seas is obligated to
maintain in a separate account, an amount of such
U.S. Government Securities (the "Eligible
Securities") sufficient to provide for payment in
full of the first two regularly scheduled interest
payments due November 15, 1998 and May 15, 1999,
until such payments are made. In order to comply
with Canadian withholding tax requirements, the
Eligible Securities will not be pledged as security
for the Notes. In the event of a bankruptcy of
Seven Seas or similar event, the Eligible
Securities will be available to the general
creditors of the Company as well as Holders of the
Notes. See "Description of Notes -- Eligible
Securities." Seven Seas has pledged the remaining
amount of such U.S. Government Securities (the
"Pledged Securities"), which is sufficient to
provide for payment in full of the four regularly
scheduled interest payments due November 15, 1999
through May 15, 2001, as security for the benefit
of the Holders. Such pledge will expire upon
payment of such interest payments. See "Description
of Notes -- Pledged Securities."
Optional Redemption........ The Notes will be redeemable, in whole or in part,
at the option of Seven Seas at any time on or after
May 15, 2002, in cash at the redemption prices set
forth herein, plus accrued and unpaid interest,
Liquidated Damages (as defined) and Additional
Amounts (as defined), if any, to the date of
redemption. Notwithstanding the foregoing, at any
time on or prior to May 15, 2001, Seven Seas may,
at its option, redeem up to 33 1/3% of the original
aggregate principal amount of the Notes with net
proceeds of an Equity or Strategic Investor
Offering (as defined) at a redemption price in cash
equal to 112.500% of the aggregate principal amount
thereof, plus accrued and unpaid interest,
Liquidated Damages and Additional Amounts, if any,
to the date of redemption; provided that at least
66 2/3% of the original aggregate principal amount
of the Notes remains outstanding after such
redemption and that no more than one-half of the
net proceeds of such Equity or Strategic Investor
Offering are used to effect such redemption. In
addition, upon a Change of Control Seven Seas will
have the option, at any time prior to May 15, 2002,
to redeem the Notes, in whole but not in part, at a
redemption price in cash equal to 100% of the
principal amount thereof plus the Applicable
Premium (as defined) and accrued and unpaid
interest, Liquidated Damages and Additional
Amounts, if any, to the date of redemption. See
"Description of Notes -- Optional Redemption."
Payment of Certain
Amounts.................... All payments of principal, interest and other
amounts due in respect of the Notes will be made in
U.S. dollars after withholding or deduction for or
on account of any taxes imposed in Canada, Colombia
or any other jurisdiction; provided, however, that
Seven Seas will pay Additional Amounts in respect
of any such withholding or deduction so that the
Holders (other than certain excluded Holders)
receive the amounts that would have been received
in the absence of such withholding or deduction,
subject to certain exceptions. See "Description of
Notes -- Payment of Additional Amounts."
Redemption for Tax
Reasons.................... The Notes will be redeemable, at the option of
Seven Seas, in whole but not in part, at any time
at a price in cash equal to 100% of the principal
amount thereof plus accrued and unpaid interest,
Liquidated Damages and Additional Amounts, if any,
to the date of redemption if (i) Seven
9
<PAGE> 11
Seas has or will become obligated to pay certain
Additional Amounts with respect to the Notes and
(ii) such obligation cannot be avoided by Seven
Seas after reasonable efforts. See "Description of
Notes -- Optional Tax Redemption."
Change of Control.......... Upon a Change of Control, (i) unless Seven Seas
redeems the Notes as provided in clause (ii) below,
Seven Seas will be required to offer to purchase
the Notes at a purchase price in cash equal to 101%
of the aggregate principal amount thereof, plus
accrued and unpaid interest, Liquidated Damages and
Additional Amounts, if any, to the date of
purchase, and (ii) Seven Seas will have the option,
at any time prior to May 15, 2002, to redeem the
Notes, in whole but not in part, at a redemption
price in cash equal to 100% of the principal amount
thereof plus the Applicable Premium and accrued and
unpaid interest, Liquidated Damages and Additional
Amounts, if any, to the date of redemption. See
"Risk Factors -- Risks Related to an Investment in
the Notes -- Limitation on Purchase of Notes Upon a
Change of Control" and "Description of
Notes -- Repurchase at the Option of Holders."
Seven Seas may be required to obtain the consent of
the lenders under the proposed credit facility,
however, in order to purchase Notes under such
circumstances and will be prohibited from
repurchasing Notes if such consent is not obtained.
See "Description of Existing Indebtedness." There
can be no assurance that Seven Seas will have
sufficient funds to repurchase the Notes in the
event of a Change of Control, and, in such
circumstances, an event of default may result under
the Indenture and other Indebtedness.
Certain Covenants.......... The Indenture contains certain covenants which,
among other things, limit the ability of Seven Seas
and its Restricted Subsidiaries to: pay dividends
or make certain other distributions, repurchase
equity interests, make investments, incur
additional Indebtedness and issue preferred stock,
engage in sale and leaseback transactions, incur or
suffer to exist certain liens, engage in certain
transactions with affiliates, sell assets and
engage in certain mergers and consolidations. In
addition, under certain circumstances, Seven Seas
will be required to make an offer to purchase the
Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest,
Liquidated Damages and Additional Amounts, if any,
to the date of purchase, with the proceeds from
certain asset sales. The Company has agreed to use
its reasonable best efforts to convert $25.0
million of outstanding secured convertible
Indebtedness into common shares and warrants. See
"Description of Notes -- Certain Covenants" and
"Description of Notes -- Repurchase at the Option
of Holders -- Asset Sales."
RISK FACTORS
See "Risk Factors," beginning on page 13 hereof, for a discussion of
certain factors that should be considered in connection with the Exchange Offer
and an investment in the Exchange Notes.
10
<PAGE> 12
SUMMARY HISTORICAL FINANCIAL DATA
The following table sets forth certain consolidated historical financial
data for the Company as of and for each of the periods indicated. The results of
operations during delineation and testing are not indicative of results after
the initiation of commercial production. The following data should be read in
conjunction with the "Selected Historical Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(IN THOUSANDS)
PERIOD FROM
INCEPTION
(FEBRUARY 3, 1995) YEARS ENDED DECEMBER 31, QUARTER ENDED MARCH 31,
THROUGH DECEMBER 31, ------------------------ ------------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues.................... $ 152 $ 575 $ 1,567 $ 433 $ 184
General and
administrative........... 1,071 2,455 8,714 917 1,120
Lease operating expenses.... -- 253 907 230 188
Depreciation and
amortization............. 38 111 148 17 84
Operating loss.............. (2,120) (2,259) (8,222) (760) (1,178)
Net loss.................... (2,120) (2,195) (7,928) (722) (1,115)
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents... $ 3,366 $ 10,620 $ 18,067 $ 11,637 $ 8,725
Total assets................ 4,170 235,501 291,914 192,295 292,020
Current liabilities......... 120 2,806 8,205 1,903 6,531
Minority interest........... -- 1,060 4,087 1,348 5,297
Total debt(1)............... -- -- 25,000 -- 25,000
Stockholders' equity........ 4,050 167,667 184,163 189,044 184,733
OTHER DATA:
Ratio of earnings to fixed
charges(2)............... (3) (3) (4) (4)
</TABLE>
- ---------------
(1) Consists of $25.0 million of the Company's 6% secured exchangeable
subordinated notes (the "Exchangeable Notes"), which are exchangeable for a
like principal amount of the Company's 6% secured convertible redeemable
debentures (the "Convertible Debentures") that may be converted into common
shares of the Company and warrants to purchase such shares at the option of
the holders thereof and, subject to certain conditions, at the option of the
Company.
(2) For purposes of determining the ratios of earnings to fixed charges,
earnings are defined as income (loss) before tax plus fixed charges. Fixed
charges consist of capitalized interest and amortization of debt issuance
costs.
(3) There were no fixed charges during this period.
(4) Earnings were insufficient to cover fixed charges during 1997 and the first
quarter of 1998 by $687,000 and $436,000, respectively.
11
<PAGE> 13
SUMMARY RESERVE AND PRODUCTION DATA
The following table sets forth summary information with respect to the
Company's estimated proved oil and gas reserves and the estimated future net
cash flows attributable thereto. Unless otherwise noted, all information in this
Prospectus relating to oil and gas reserves and the estimated future net
revenues and cash flows attributable thereto are based upon estimates prepared
by Ryder Scott Company Petroleum Engineers ("Ryder Scott"), an independent
petroleum engineering firm, and are net to the Company's interest.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
<S> <C>
Total net proved reserves:
Oil (MBbls)............................................... 32,160
Gas (MMcf)................................................ --
Total (MBOE).............................................. 32,160
Net proved developed reserves:
Oil (MBbls)............................................... 11,494
Gas (MMcf)................................................ --
Total (MBOE).............................................. 11,494
Estimated future net revenues before income taxes (in
thousands)(1)............................................. $241,700
Present value of estimated future net revenues before income
taxes
(in thousands)(1)(2)...................................... $144,866
Standardized measure of discounted future net cash flows (in
thousands)(1)(3).......................................... $100,617
</TABLE>
- ---------------
(1) Calculated using year end prices at December 31, 1997, net of gravity
adjustment and transportation costs.
(2) The present value of estimated future net revenues attributable to the
Company's proved reserves was prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pre-tax basis (SEC
PV-10).
(3) The standardized measure of discounted future net cash flows represents the
present value of estimated future net revenues from proved reserves after
income tax, discounted at 10% per annum.
ACREAGE SUMMARY
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------------------------------
GROSS ACRES NET ACRES(1)
----------------------- -----------------------
DEVELOPED UNDEVELOPED DEVELOPED UNDEVELOPED
<S> <C> <C> <C> <C>
Colombia:
Rio Seco/Dindal................................ 14,459 94,579 8,343 54,572
Montecristo/Rosablanca......................... -- 692,179 -- 519,134
Tapir.......................................... -- 232,613 -- 27,623
Papua New Guinea(2).............................. -- 1,200,000 -- 1,200,000
Australia(3)..................................... -- 2,394,546 -- 429,978
------ --------- ----- ---------
Total.................................. 14,459 4,613,917 8,343 2,231,307
</TABLE>
- ---------------
(1) Net acres are based on the Company's respective working interests and, in
Colombia, are before Colombian government participation. See
"Business -- Properties."
(2) The Company signed a farm-out agreement with ARCO Papua New Guinea Inc. for
all of this acreage and retained a 20% interest. The Company anticipates in
the future it will either farm-out its 20% interest or relinquish its rights
in the property.
(3) In the Perth Basin in Western Australia, the Company has signed a purchase
and sale agreement with Forcenergy Inc. The agreement is pending final
approval by an aboriginal council in Western Australia. In the Bass Strait
Basin offshore southeastern Australia, the Company is seeking to farm out
its interests.
12
<PAGE> 14
RISK FACTORS
In addition to the other information set forth elsewhere in this
Prospectus, the following factors relating to the Company and the Notes should
be carefully considered in connection with the Exchange Offer and an investment
in the Exchange Notes offered hereby.
RISKS RELATED TO THE COMPANY
SUBSTANTIAL INDEBTEDNESS; LACK OF CASH FLOW
At March 31 1998, after giving effect for the recently completed offering
of Original Notes, the Company had $135.0 million of indebtedness outstanding,
including $25.0 million secured indebtedness represented by the Exchangeable
Notes. The Company and its subsidiaries may incur additional indebtedness under
the terms of the Indenture governing the Notes under certain circumstances. This
level of indebtedness may pose substantial risks to the Company, including the
possibility that the Company may not generate sufficient cash flow from
operations to pay the principal and interest on such indebtedness. The Company
is currently negotiating with its lender for a $25 million credit facility which
is expected to close in the third quarter of 1998.
The Company's ability to generate revenues and cash flow to pay the
principal of and interest on the Notes and its other indebtedness will depend
upon the drilling and completion of additional wells. The Company has no
significant income-producing properties, and its principal assets, its interests
in the Dindal and Rio Seco Association Contracts, are in the early stage of
exploration and development. Since inception through December 31, 1997, the
Company incurred cumulative losses of $12.2 million and, because of its
continued exploration and development activities, expects that it will continue
to incur losses and that its accumulated deficit will increase until
commencement of production from the Dindal and Rio Seco Association Contracts in
quantities sufficient to cover operating expenses. The Company had oil sales in
1996 and 1997 of $0.2 million and $0.8 million, respectively, which pertained
solely to production testing of the Company's wells in Colombia. These sales
represented the Company's only sales of production since its inception. Although
the Company intends to continue to sell oil resulting from production tests,
significant production from the wells drilled to date is not expected to
commence until construction of production facilities and pipelines. The Company
has received preliminary plans and engineering specifications for the
construction of pipelines and production facilities. The construction of the
Phase I and Phase II pipelines and production facilities is subject to a number
of conditions, including negotiating construction contracts and obtaining
required environmental and construction permits, easements and rights of way.
The Company does not expect these facilities to be completed before mid-1999,
and no assurances can be given as to when such facilities will be completed.
Accordingly, no assurance can be given as to when significant production from
the wells will occur, if at all. If the Company is unsuccessful in constructing
production facilities and a pipeline or in increasing its proved reserves or
realizing future production from its properties, the Company may be unable to
pay all of the principal of and interest on its indebtedness when due. See
"-- Risks Related to the Construction of Pipeline and Production Facilities" and
"-- Risks Related to the Oil and Gas Industry."
The level of the Company's indebtedness will have certain important effects
on its future operations, including the fact that a substantial portion of the
Company's cash flow from operations likely will be dedicated to payments on
indebtedness and will not be available for other purposes. In addition, such
level of indebtedness may affect the Company's ability to finance its future
operations and capital needs and may limit its ability to pursue other business
opportunities. In addition, the Company's ability to meet its debt service
obligations and to limit its total indebtedness will depend upon the Company's
future performance, which will be subject to general economic conditions, the
economic and political environment in Colombia, prices received for the
Company's production and operating hazards inherent in the oil and gas business,
all of which are beyond the control of the Company.
The proposed credit facility and any agreement governing other
indebtedness, including the Indenture governing the Notes, contain or will
contain a number of covenants that will restrict the ability of the Company to
dispose of assets, merge or consolidate with another entity, incur additional
indebtedness, create liens, make capital expenditures or other investments or
acquisitions and otherwise restrict corporate activities.
13
<PAGE> 15
The proposed credit facility will also contain requirements that the Company
maintain certain financial ratios and may restrict the Company from prepaying
the Company's other indebtedness (including the Notes). The ability of the
Company to comply with such provisions may be affected by events that are beyond
the Company's control. The breach of any of these covenants could result in a
default under the proposed credit facility, the Indenture and agreements
governing other indebtedness. In addition, as a result of these covenants, the
ability of the Company to respond to changing business and economic conditions
and to secure additional financing, if needed, may be significantly restricted,
and the Company may be prevented from engaging in transactions that might
otherwise be considered beneficial to the Company. See "Description of Existing
Indebtedness" and "Description of Notes."
RISKS RELATED TO CONSTRUCTION OF PIPELINE AND PRODUCTION FACILITIES
The marketability of the Company's production depends upon the availability
and capacity of gathering systems, pipelines, compression and production
facilities, including storage, separation and reinjection facilities, and the
unavailability or lack of capacity thereof could result in the shut-in of
producing wells or the delay or discontinuance of development plans for
properties. In addition, regulation of oil and natural gas production and
transportation, general economic conditions and changes in supply and demand
could adversely affect the Company's ability to produce and market its oil and
natural gas on a profitable basis.
The Company has received preliminary plans and engineering specifications
for the construction of pipelines and production facilities. The construction of
the pipeline and the production facilities is subject to a number of conditions,
including negotiating construction contracts and obtaining required
environmental and construction permits, easements and rights of way. The Company
does not expect the Phase I facilities to be completed before mid-1999, and no
assurances can be given as to when such facilities will be completed. In
addition, the Company has not finalized its negotiations with the operator of
the Oleoductos Alto Magdalena ("OAM") pipeline for the transportation of 50,000
Bbls/d of currently available transportation capacity on the OAM pipeline. If
the Company is unsuccessful in constructing its pipeline and production
facilities or in increasing its proved reserves or realizing future production
from its properties, the Company may be unable to pay all of the principal of
and interest on its indebtedness (including the Notes) when due. See "-- Risks
Related to the Oil and Gas Industry."
NEED FOR SIGNIFICANT CAPITAL
The exploration and development of the Company's current properties and any
properties acquired in the future is expected to require substantial amounts of
additional capital which the Company expects to fund from proceeds from debt or
equity financings, or through encumbering properties or entering into
arrangements whereby certain costs of exploration will be paid by others to earn
an interest in the property. The Company has budgeted net capital expenditures
of approximately $62.2 million for 1998 and $141.6 million for 1999 and
approximately $9.0 million to participate in a deep exploratory well on Emerald
Mountain scheduled to be commenced in late 1998. The Company believes the net
proceeds from the offering of the Notes will be sufficient to finance its
initial net capital expenditure requirements estimated for Phase I, although no
assurance can be given as to the actual amount that will need to be spent.
Substantial amounts of capital will be needed to finance Phase II, and no
external sources of capital have yet been identified. Certain expenditures for
Phase II are expected to occur during Phase I. It is expected that additional
monies for capital expenditures will be financed through either debt or equity
financings in the future, as the Company does not expect any significant
revenues from operations until scheduled completion of the initial pipeline and
production facilities in mid-1999. There can be no assurance that the additional
debt or equity financing will be available to the Company on economically
acceptable terms. The Company has additional drilling-related commitments on its
Colombian properties of approximately $3.3 million through 2001, only a small
portion of which relate to the Dindal and Rio Seco Association Contracts. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's estimated capital expenditures assume in each case that each
of the associates in the Association Contracts approves and pays its
proportionate share of capital expenditures and that the Colombian national oil
company ("Ecopetrol") accepts the commerciality of Emerald Mountain and approves
and pays its proportionate share of capital expenditures beginning in the fourth
quarter of 1998. In
14
<PAGE> 16
some cases, Ecopetrol's proportionate share of capital expenditures may be paid
through the withholding of future production rather than through cash payment in
advance.
RISKS IN COLOMBIA AND OTHER FOREIGN OPERATIONS
Foreign properties, operations or investments may be adversely affected by
local political and economic developments, exchange controls, currency
fluctuations, royalty and tax increases, retroactive tax claims, renegotiation
of contracts with governmental entities, expropriation, import and export
regulations and other foreign laws or policies governing operations of
foreign-based companies, as well as by laws and policies of the United States
affecting foreign trade, taxation and investment. In addition, as the Company's
operations are governed by foreign laws, in the event of a dispute, the Company
may be subject to the exclusive jurisdiction of foreign courts and the
application of foreign laws or may not be successful in subjecting foreign
persons to the jurisdiction of courts in the United States. The Company may also
be hindered or prevented from enforcing its rights with respect to a
governmental instrumentality because of the doctrine of sovereign immunity.
The Company's business is subject to political risks inherent in all
foreign operations. While Colombia has no history of nationalizing its business
nor expropriation of foreign assets, the Company's oil and gas operations are
subject to certain risks, including: (i) loss of revenue, property, and
equipment as a result of unforeseen events such as expropriation,
nationalization, war and insurrection, (ii) risks of increases in taxes and
governmental royalties, (iii) renegotiation of contracts with governmental
entities, and (iv) changes in laws and policies governing operations of
foreign-based companies in Colombia. Guerrilla activity in Colombia has
disrupted the operation of oil and gas projects in many areas in Colombia but to
date has not affected the Dindal and Rio Seco Association Contracts areas. No
assurances can be given as to the future level or impact of future guerilla
activities, including after the construction of pipeline and production
facilities in the Dindal and Rio Seco Association Contracts areas, or the steps,
if any, that may be taken by the government in response to such activities. The
Company's other three association contracts are located in more remote areas
that have been subject to guerrilla activity. The government continues its
efforts through negotiation and legislation to reduce the problems and effects
of insurgent groups. These efforts include regulations containing sanctions such
as impairment or loss of contract rights on companies and contractors if found
to be giving aid to such groups. To date, guerrilla activities have not
materially disrupted operations in the areas where the other three association
contracts are located.
Colombia is among several nations whose progress in stemming the production
and transit of illegal drugs is subject to annual certification by the President
of the United States. In March 1996, the President of the United States
announced that Colombia would neither be certified nor granted a national
interest waiver. The consequences of the failure to receive certification
generally include the following: all bilateral aid, except anti-narcotics and
humanitarian aid, has been or will be suspended; the Export-Import Bank of the
United States and the Overseas Private Investment Corporation ("OPIC") will not
approve financing for new projects in Colombia; United States representatives at
multilateral lending institutions will be required to vote against all loan
requests from Colombia, although such votes will not constitute vetoes; and the
President of the United States and Congress retain the right to apply future
trade sanctions. In February 1998, the United States granted Colombia a
conditional certification, thereby allowing OPIC financing to again be
available. If the United States were to decertify Colombia in the future, such
actions could result in adverse economic consequences in Colombia and could
further heighten the political and economic risks associated with the Company's
operations in Colombia. In June 1998, Andres Pastiana, the Conservative Party
candidate, was elected president of Colombia, defeating the ruling Liberty Party
candidate in a runoff election. Pastiana, who takes office in early August 1998,
has publicly announced his desire to bring peace to the country, although no
assurances can be given regarding the policy changes that he may attempt to
introduce. See "Business -- Properties -- Colombia."
SUBSTANTIAL CONCENTRATION OF OPERATIONS
The Company's oil and gas properties are concentrated in Colombia and
specifically in the state of Cundinamarca. As of December 31, 1997, all of the
Company's proved reserves were attributable to Emerald
15
<PAGE> 17
Mountain. There are significant operating and economic risks associated with
conducting business in Colombia. Due to the Company's concentration in and
reliance on such operations for its future cash flow, if the operations in
Colombia were adversely affected, the Company would experience a material
adverse effect. See "-- Risks Inherent in Colombia and Other Foreign Operations"
and "-- Risks Related to the Oil and Gas Industry."
LIMITED OPERATING HISTORY AND HISTORICAL OPERATING LOSSES
The Company commenced its operations in 1995 and has only a limited
operating history. The Company also has had operating losses at an increasing
rate each year since inception. Holders of Notes, therefore, have limited
historical financial and operating information upon which to base an evaluation
of the Company's performance and an investment in the Exchange Notes. For
example, the only production to date has been test production. The Company is
not expected to have regular production until 1999. Therefore, estimates of
proved reserves and the level of future production attributable to such reserves
are difficult to determine, and there can be no assurance as to the volume of
recoverable reserves that will be realized. The Company's prospects must be
considered in light of the risks, expenses, delays and difficulties frequently
encountered by companies in the early stages of their development. The
development of the Company's business will continue to require substantial
expenditures. The Company's future financial results will depend primarily on
its ability to economically locate and produce hydrocarbons in commercial
quantities and on the market prices for oil and natural gas. There can be no
assurance that the Company will achieve or sustain profitability or positive
cash flows from operating activities in the future. See "-- Need for Significant
Capital," "Selected Combined Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business -- Oil
and Gas Reserves."
DEPENDENCE ON KEY PERSONNEL
The Company believes that its success will depend to a significant extent
upon the continued services of certain key executive officers and operating
personnel. The Company has entered into employment agreements with certain of
its key executive officers. See "Management -- Employment Agreements." The
Company also depends on the services of professionals such as engineers,
geologists and geophysicists. The loss of the services of certain key executive
officers and operating personnel or the loss of or shortage of significant
number of professionals could have a material adverse effect on the Company. The
Company does not maintain key employee insurance on any of its personnel.
POTENTIAL CONFLICTS
Certain of the directors of Seven Seas also serve as officers, directors or
consultants of other companies involved in natural resource development which
activities may be in competition with the Company and may result in conflicts of
interest. In the event a director has an interest in an investment or proposed
investment of the Company or other conflict of interest, it is the Company's
policy that such director not participate in the Company's decision-making with
respect thereto and that any transactions with such officers or directors be on
terms consistent with industry standards and sound business practices.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
The Company is continued under the laws of the Yukon Territory in Canada.
Three of the directors of the Company, and certain experts utilized by the
Company, are not residents of the United States and all or substantially all of
such persons' assets are located outside of the United States. As a result, it
may be difficult for holders of Notes to effect service within the United States
upon the directors and experts who are not residents of the United States or to
realize in the United States upon judgments of courts of the United States
against such persons and the Company predicated upon civil liability under the
United States federal securities laws. The Company has been advised by its
counsel that there is no assurance that judgments of U.S. courts for liabilities
predicated solely upon U.S. federal securities laws will be enforceable against
the Company or against any of its directors or experts who are not residents of
the United States.
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RISKS RELATED TO THE OIL AND GAS INDUSTRY
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon the
Company's own estimates or on those of Ryder Scott. Such estimates rely upon
various assumptions, including assumptions required by the Commission as to oil
and gas prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating oil and gas reserves is
complex, requiring significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data for each
reservoir. As a result, such estimates are inherently imprecise. Actual future
production, oil and gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves may vary
substantially from those estimated by the Company or Ryder Scott. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Prospectus. The Company's
properties may also be susceptible to hydrocarbon drainage from production by
other operators on adjacent properties. In addition, the Company's estimated
proved reserves may be subject to downward or upward revision based upon
production history, results of future exploration and development, prevailing
oil and gas prices, mechanical difficulties, government regulation and other
factors, many of which are beyond the Company's control. Actual production,
revenues, taxes, development expenditures and operating expenses with respect to
the Company's reserves will likely vary from the estimates used, and such
variances may be material.
Approximately 64% of the Company's total estimated proved reserves at
December 31, 1997 were undeveloped, which are by their nature less certain.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. The Company's reserve data assume that
substantial capital expenditures by the Company will be required to develop such
reserves. Although cost and reserve estimates attributable to the Company's oil
and gas reserves have been prepared in accordance with industry standards, no
assurance can be given that the estimated costs are accurate, that development
will occur as scheduled or that the results will be as estimated. See
"Business -- Oil and Gas Reserves."
The present value of future net revenues (SEC PV-10) referred to in this
Prospectus should not be construed as the current market value of the estimated
oil and gas reserves attributable to the Company's properties. In accordance
with applicable requirements of the Commission, the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by increases in consumption by gas and oil purchasers and changes in
governmental regulations or taxation. The timing of actual future net cash flows
from proved reserves, and thus their actual present value, will be affected by
the timing of both the production and the incurrence of expenses in connection
with development and production of oil and gas properties. In addition, the 10%
discount factor, which is required by the Commission to be used in calculating
discounted future net cash flows for reporting purposes, is not necessarily the
most appropriate discount factor based on interest rates in effect from time to
time and risks associated with the Company or the oil and gas industry in
general.
DRILLING, EXPLORATION AND DEVELOPMENT RISKS
Oil and gas exploration and development is a speculative business and
involves a high degree of risk. The Company has expended, and plans to continue
to expend, significant amounts of capital on the exploration and development of
its oil and gas interests. Even if the results of such activities are favorable,
subsequent drilling at significant costs must be conducted on a property to
determine if commercial development of the property is feasible. Oil and gas
drilling may involve unprofitable efforts, not only from dry holes but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. It is difficult to project the
costs of implementing an exploratory drilling program due to the inherent
uncertainties of drilling and completing wells in unknown formations, the costs
associated with encountering various drilling conditions such as underpressured
and overpressured zones and tools lost in the hole, and changes in drilling
plans and locations as a result of prior exploratory wells or additional seismic
data and interpretations thereof. The marketability of oil and gas which may be
acquired or discovered by the Company
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will be affected by the quality and viscosity of the production and by numerous
factors beyond its control, including market fluctuations, the proximity and
available capacity of oil and gas pipelines and production equipment, government
regulations, including regulations relating to prices, taxes, royalties, land
tenure, importing and exporting of oil and gas and environmental protection. The
Company's future drilling activities may not be successful, and, if
unsuccessful, such failure will have an adverse effect on the Company's future
results of operations and financial condition, including the Company's ability
to pay all of the principal and interest on its indebtedness, including the
Notes, when due. There can be no assurance the Company will be able to discover,
develop and produce sufficient reserves in Colombia or elsewhere to recover the
costs and expenses incurred in connection with the acquisition, exploration and
development thereof and achieve profitability.
Acquiring, developing and exploring for oil and natural gas involves many
risks, which even a combination of experience, knowledge and careful evaluation
may not be able to overcome. These risks include encountering unexpected
formations or pressures, premature declines of reservoirs, blow-outs, equipment
failures and other accidents in completing wells and otherwise, cratering, sour
gas releases, uncontrollable flows of oil, natural gas or well fluids, adverse
weather conditions, pollution, other environmental risks, fires and spills.
Losses resulting from such events could have a material adverse effect on the
Company.
As protection against operating hazards, the Company maintains insurance
against some, but not all, potential losses. The Company's coverages include,
but are not limited to, operator's extra expense, physical damage on certain
assets, employer's liability, comprehensive general liability, automobile,
workers' compensation and limited coverage for sudden environmental damages, but
all such coverages are subject to certain exceptions, conditions and
limitations. The Company does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages and
certain other risks is available at a reasonable cost. Accordingly, the Company
may be subject to liability or may lose substantial portions of its properties
in the event of environmental damages or certain other events. The occurrence of
an event that is not fully covered by insurance could have a material adverse
effect on the Company.
VOLATILITY OF OIL AND NATURAL GAS PRICES
The Company's revenues, future rate of growth, results of operations,
financial condition and ability to borrow funds or obtain additional capital, as
well as the carrying value of its properties, are substantially dependent upon
prevailing prices of oil and natural gas. Historically, the markets for oil and
natural gas have been volatile, and such markets are likely to continue to be
volatile in the future. Prices for oil and natural gas are subject to wide
fluctuation in response to relatively minor changes in the supply of and demand
for oil and natural gas, market uncertainty and a variety of additional factors
that are beyond the control of the Company. These factors include the level of
consumer product demand, weather conditions, domestic and foreign governmental
regulations, the price and availability of alternative fuels, political
conditions in the Middle East, actions of the Organization of Petroleum
Exporting Countries (OPEC), the foreign supply of oil and natural gas, the price
of foreign imports and overall economic conditions. It is impossible to predict
future oil and natural gas price movements with certainty. Declines in oil and
natural gas prices may materially adversely affect the Company's financial
condition, liquidity, ability to finance planned capital expenditures and
results of operations. Lower oil and natural gas prices also may reduce the
amount of oil and natural gas that the Company can produce economically. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Marketing."
The Company periodically reviews the carrying value of its oil and natural
gas properties under the full cost accounting rules of the Commission. Under
these rules, capitalized costs of proved oil and natural gas properties may not
exceed the present value of estimated future net revenues from proved reserves,
discounted at 10% (SEC PV-10) and adjusted for income tax effects. Application
of this "ceiling" test generally requires pricing future revenue at the
unescalated prices in effect as of the end of each fiscal quarter and requires a
write-down for accounting purposes if the ceiling is exceeded, even if prices
were depressed for only a short period of time. The Company may be required to
write down the carrying value of its oil and natural gas properties when oil and
natural gas prices are depressed or unusually volatile. If a write-down is
required, it
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would result in a charge to earnings, but would not impact cash flow from
operating activities. Once incurred, a write-down of oil and natural gas
properties is not reversible at a later date.
RESERVE REPLACEMENT RISK
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted, with the rate of decline depending on
reservoir characteristics. Except to the extent the Company conducts successful
exploration and development activities or acquires properties containing proved
reserves, or both, the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and natural gas production is, therefore,
highly dependent upon its level of success in finding or acquiring additional
reserves. The business of exploring for, developing or acquiring reserves is
capital intensive. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, the Company's ability
to make necessary capital investment to maintain or expand its asset base of oil
and natural gas reserves would be impaired. The failure of an operator of the
Company's wells to adequately perform operations, or such operator's breach of
the applicable agreements, could adversely impact the Company. In addition,
there can be no assurance that the Company's future exploration, development and
acquisition activities will result in additional proved reserves or that the
Company will be able to drill productive wells at acceptable costs. Furthermore,
although the Company's revenues could increase if prices for oil and natural gas
increase significantly, the Company's finding and development costs could also
increase. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ENVIRONMENTAL RISKS
Extensive national, provincial and/or local environmental laws and
regulations in Colombia and the other countries in which the Company operates
affect nearly all of the operations of the Company. These laws and regulations
set various standards regulating certain aspects of health and environmental
quality, provide for penalties and other liabilities for the violation of such
standards and establish in certain circumstances obligations to remediate
current and former facilities and off-site locations. In addition, special
provisions may be appropriate or required in environmentally sensitive areas of
operation, such as where the Company's Colombian interests are located and where
other independent producers of oil and gas have faced significant liability
resulting from environmental claims. There can be no assurance that the Company
will not incur substantial financial obligations in connection with
environmental compliance.
It is possible that the administration and enforcement of current
environmental laws and regulations or the passage of new environmental laws or
regulations in Colombia could result in substantial costs and liabilities in the
future or in delays in obtaining the necessary permits to conduct and expand the
Company's operations in such country. The Company has experienced and may
continue to experience delays in obtaining the necessary environmental permits
to expand its operations in Colombia.
Significant liability could be imposed on the Company for damages, clean-up
costs and/or penalties in the event of certain discharges into the environment,
environmental damage caused by previous owners of property purchased by the
Company or non-compliance with environmental laws or regulations. Such liability
could have a material adverse effect on the Company. Moreover, the Company
cannot predict what environmental legislation or regulations will be enacted in
the future or how existing or future laws or regulations will be administered or
enforced. Compliance with more stringent laws or regulations, or more vigorous
enforcement policies of any regulatory agency, could in the future require
material expenditures by the Company for the installation and operation of
systems and equipment for remedial measures, any or all of which could have a
material adverse effect on the Company. See "Business -- Regulation."
MARKETS
There is substantial uncertainty as to the prices which the Company may
receive for production from its existing oil reserves or from additional oil and
gas reserves, if any, which the Company may discover. The availability of a
ready market and the prices received for oil and gas produced depend upon
numerous factors beyond the control of the Company including, but not limited
to, adequate transportation facilities (such as
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pipelines), the marketing of competitive fuels, fluctuating market demand,
governmental regulation and world political and economic developments. Prices
for crude oil are subject to wide fluctuation in response to relatively minor
changes in supply and demand, market uncertainty and a variety of additional
factors that are beyond the control of the Company. It is possible that, under
market conditions prevailing in the future, the production and sale of oil, if
any, from certain of the Company's properties may not be commercially feasible
and the production of gas from the Company's oil and gas interests in Colombia
is not currently commercially feasible. The sale of oil from the production
tests on the Company's properties in Colombia has been sold to Ecopetrol.
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors in Colombia include major integrated oil and gas companies
and independent oil and gas companies. Many of its competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than the Company's and which, in many instances, have
been engaged in the oil and gas business for a longer time than the Company.
Such companies may be able to offer more attractive terms in obtaining
concessions for exploratory prospects and secondary operations and to pay more
for productive properties and exploratory prospects and to define, evaluate, bid
for and purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment.
REGULATION
The Company's operations are subject to regulations imposed by the local
regulatory authorities including, without limitation, currency regulation,
import and export regulation, taxation and environmental controls. The
regulations also generally specify, among other things, the extent to which
properties may be acquired or relinquished, permits necessary for drilling of
wells, spacing of wells, measures required for preventing waste of oil and gas
resources and, in some cases, rates of production and sales prices to be charged
to purchasers. Specifically, Colombian operations are governed by a number of
ministries and agencies including Ecopetrol, the Ministry of Mines and Energy,
the Ministry of Public Works and the Ministry of the Environment.
RISKS RELATED TO AN INVESTMENT IN THE NOTES
LIMITATION ON PURCHASE OF NOTES UPON A CHANGE OF CONTROL
Upon a Change of Control, (i) unless Seven Seas redeems the Notes pursuant
to clause (ii) below, the Holders of the Notes may require the Company to redeem
the Notes at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption and (ii) the Company will
have the option, at any time prior to May 15, 2002, to redeem the Notes, in
whole but not in part, at a redemption price equal to 100% of the principal
amount thereof plus the Applicable Premium and accrued and unpaid interest,
Additional Amounts and Liquidated Damages if any, to the date of redemption. The
Company has a commitment letter for a senior secured revolving credit facility,
which the Company expects will prohibit the repurchase of the Notes without the
consent of the lenders. In addition, certain of the events that constitute a
Change of Control hereunder would constitute a default under the proposed credit
facility, which would prohibit the purchase of the Notes by the Company unless
and until such time as the Company's indebtedness under the proposed credit
facility is repaid in full. There can be no assurance that the Company would
have sufficient financial resources available to satisfy all of its obligations
under the proposed credit facility and the Notes in the event of a Change of
Control. The Company's failure to purchase the Notes would result in a default
under the Indenture and under the proposed credit facility, each of which could
have adverse consequences for the Company and the holders of the Notes. See
"Description of Existing Indebtedness" and "Description of Notes -- Change of
Control." The definition of a "Change of Control" in the Indenture includes a
sale, lease, conveyance or transfer of "all or substantially all" of the assets
of the Company and certain of its Restricted Subsidiaries taken as a whole to a
person or group of persons. There is
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little case law interpreting the phrase "all or substantially all" in the
context of an indenture. Because there is no precise established definition of
this phrase, the ability of a holder of the Notes to require the Company to
repurchase such Notes as a result of a sale, lease, conveyance or transfer of
all or substantially all of the Company's assets to person or group of persons
may be uncertain.
HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION
The Company is a holding company that conducts substantially all of its
operations through Subsidiaries, and substantially all of the Company's assets
consist of equity in such Subsidiaries. The Company's interests in the
Association Contracts are held through Subsidiaries. Accordingly, the Company is
and will be dependent on its ability to obtain funds from its Subsidiaries to
service its indebtedness, including the Notes. There can be no assurance that
the Company will be able to obtain funds from its subsidiaries to service its
indebtedness.
The Notes are unsecured, except by the Pledged Securities, and effectively
subordinated in right of payment to all existing and future secured indebtedness
of the Company, which will include future borrowings under the proposed credit
facility or any future secured credit facility. Borrowings under the proposed
credit facility will be secured by liens on certain assets of the Company and
its Subsidiaries, including the stock of certain of the Company's Subsidiaries,
intercompany notes, equipment, inventory, contract rights, and a collateral
account that will include proceeds of sales of production under the Association
Contracts. The Company anticipates that borrowings under any future credit
facility will be secured in a similar manner. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." Accordingly, the lender under the proposed credit facility
has, and a lender under any future secured credit facility will have, a claim
with respect to the assets constituting collateral for any indebtedness
thereunder that will be satisfied prior to the unsecured claims of the holders
of the Notes. See "Description of Notes." In the event of a default on the Notes
or a bankruptcy, liquidation or reorganization of the Company, such collateral
will be available to satisfy obligations with respect to the indebtedness
secured thereby before any payment therefrom could be made on the Notes. Thus,
the Notes would be effectively subordinated to claims of the lender under the
proposed credit facility or any lender under a future secured credit facility to
the extent of such pledged collateral. At December 31, 1997, the Notes would
have been effectively subordinated to $25.0 million aggregate principal amount
of secured convertible Indebtedness of the Company represented by the
Exchangeable Notes.
The Notes are also effectively subordinated to all existing and future debt
and other liabilities of the Company's Subsidiaries that do not guarantee the
Notes. Seven Seas Petroleum Holdings Inc., a Restricted Subsidiary, is a
guarantor of the Exchangeable Notes issued in August 1997 by Seven Seas in an
aggregate principal amount of $25.0 million. In the event of an insolvency,
liquidation or other reorganization of any of the Subsidiaries of the Company,
creditors of Seven Seas' Subsidiaries, including trade creditors, would be
entitled to payment in full from the assets of such Subsidiaries before the
Company, as a stockholder, would be entitled to receive any distribution
therefrom.
FRAUDULENT CONVEYANCE AND OTHER ENFORCEABILITY CONSIDERATIONS RELATING TO
FUTURE SUBSIDIARY GUARANTEES
Although currently there are no Guarantors, the Company's obligations under
the Notes may under certain circumstances be guaranteed ("Subsidiary
Guarantees") on an unsecured senior basis by Guarantors in the future. Various
fraudulent conveyance laws have been enacted for the protection of creditors and
may be utilized by a court of competent jurisdiction to subordinate or avoid any
Subsidiary Guarantee issued by a Guarantor. It is also possible that under
certain circumstances a court could hold that the direct obligations of a
Guarantor could be superior to the obligations under the Subsidiary Guarantee.
The enforceability of each Subsidiary Guarantee is subject to all laws that may
be found to be otherwise applicable.
To the extent that a court were to find that at the time a Guarantor
entered into a Subsidiary Guarantee either (i) the Subsidiary Guarantee was
incurred by a Guarantor with the intent to hinder, delay or defraud any present
or future creditor or that a Guarantor contemplated insolvency with a design to
favor one or more creditors to the exclusion in whole or in part of others or
(ii) the Guarantor did not receive fair consideration or reasonably equivalent
value for issuing the Subsidiary Guarantee and, at the time it issued the
Subsidiary Guarantee, the Guarantor (a) was insolvent or rendered insolvent by
reason of the issuance of the Subsidiary Guarantee, (b) was engaged or about to
engage in a business or transaction for which the remaining assets of
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the Guarantor constituted unreasonably small capital or (c) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured, the court could avoid or subordinate the Subsidiary Guarantee in
favor of the Guarantor's other creditors. Among other things, a legal challenge
of a Subsidiary Guarantee issued by a Guarantor on fraudulent conveyance grounds
may focus on the benefits, if any, realized by the Guarantor as a result of the
issuance by the Company of the Notes. To the extent a Subsidiary Guarantee is
avoided as a fraudulent conveyance or a preference under bankruptcy laws or held
unenforceable for any other reason, the holders of the Notes would cease to have
any claim in respect of such Guarantor and would be creditors solely of the
Company.
ABSENCE OF PUBLIC MARKET FOR THE EXCHANGE NOTES
The Exchange Notes will be new securities for which currently there is no
trading market. The Company does not intend to apply for listing of the Exchange
Notes on any securities exchange or stock market. Although the Initial
Purchasers have informed the Company that they currently intend to make a market
in the Exchange Notes, the Initial Purchasers are not obligated to do so, and
any such market making may be subject to certain limitations and may be
discontinued at any time without notice. The liquidity of any market for the
Exchange Notes will depend upon the number of holders of the Exchange Notes, the
interest of securities dealers in making a market in the Exchange Notes and
other factors. Accordingly, there can be no assurance as to the development or
liquidity of any market for the Exchange Notes.
If the Exchange Notes are traded after their initial issuance, they may
trade at a discount from par, depending on prevailing interest rates, the market
for similar securities, general economic conditions and the financial condition
of the Company. Historically, the market for noninvestment grade debt has been
subject to disruptions that have caused substantial volatility in the prices of
securities similar to the Exchange Notes. There can be no assurance that the
market, if any, for the Exchange Notes will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on the holders of
the Exchange Notes.
CONSEQUENCES OF A FAILURE TO EXCHANGE ORIGINAL NOTES
The Original Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions. Original Notes that
remain outstanding after consummation of the Exchange Offer will continue to
bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Original Notes that remain
outstanding will not be entitled to any rights to have such Original Notes
registered under the Securities Act or to any similar rights under the
Registration Rights Agreement (subject to certain limited exceptions). The
Company does not intend to register under the Securities Act any Original Notes
that remain outstanding after consummation of the Exchange Offer (subject to
such limited exceptions, if applicable).
To the extent that Original Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Original Notes could be adversely
affected. In addition, to the extent that Original Notes are tendered and
accepted in connection with the Exchange Offer, any trading market for Original
Notes that remain outstanding after the Exchange Offer could be adversely
affected.
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USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a like
principal amount of Original Notes, the terms of which are identical in all
material respects to the Exchange Notes. The Original Notes surrendered in
exchange for the Exchange Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the Exchange Notes will not result in any
change in the capitalization of the Company.
The net proceeds to Seven Seas from the issuance of the Original Notes,
after deducting fees and expenses of approximately $0.6 million related to the
offering, were approximately $106 million, of which approximately $13.5 million
was used to purchase the Eligible Securities and approximately $24.3 million was
used to purchase the Pledged Securities. The Company expects to use the
remaining net proceeds from the issuance of the Original Notes, together with
cash flow from operations and, if necessary, borrowings under its proposed
credit facility, for its capital expenditures, general corporate purposes and as
otherwise permitted by the Indenture.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Original Notes were sold by the Company on the Issue Date to the
Initial Purchasers in a private transaction not subject to the registration
requirements of the Securities Act. The Initial Purchasers offered and sold the
Original Notes only to "qualified institutional buyers" (as defined in Rule 144A
under the Securities Act) in reliance on the exemption from the registration
requirements of the Securities Act provided by Rule 144A under the Securities
Act.
In connection with the sale of the Original Notes, the Company and the
Initial Purchasers entered into the Registration Rights Agreement, which
provides that, unless the Exchange Offer would not be permitted by applicable
federal law, (i) the Company will file a registration statement relating to the
Exchange Offer (the "Exchange Offer Registration Statement") with the Commission
on or prior to 60 days after the Issue Date, (ii) the Company will use its
reasonable best efforts to have the Exchange Offer Registration Statement
declared effective by the Commission at the earliest possible time, and (iii)
the Company will use its reasonable best efforts to cause the Exchange Offer
Registration Statement to be effective continuously, to keep the Exchange Offer
open for a period of at least 20 Business Days (as defined) and to cause the
Exchange Offer to be consummated no later than the 30th Business Day after the
Exchange Offer Registration Statement is declared effective by the Commission.
The Registration Statement of which this Prospectus is a part functions as the
Exchange Offer Registration Statement. The summary herein of certain provisions
of the Registration Rights Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference thereto, a copy of
which is filed as an exhibit to the Registration Statement.
Following the completion of the Exchange Offer (except as set forth in the
paragraph immediately below), holders of Original Notes not tendered will not
have any further registration rights and such Original Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for the Original Notes could be adversely affected upon completion of the
Exchange Offer. Unless the context otherwise requires, the term "holder" with
respect to the Exchange Offer means any person in whose name the Original Notes
are registered on the books of the Company or any other person who has obtained
a properly completed bond power from the registered holder, or any person whose
Original Notes are held of record by DTC who desires to deliver such Original
Notes by book-entry transfer at DTC.
If (i) the Company is not permitted to consummate the Exchange Offer
because the Exchange Offer is not permitted by any applicable law or (ii) any
holder notifies the Company on or prior to the 20th Business Day following the
consummation of the Exchange Offer that (A) it is prohibited by law or
Commission policy from participating in the Exchange Offer or (B) it may not
resell the Exchange Notes acquired by it in the Exchange Offer to the public
without delivering a prospectus and this Prospectus is not appropriate or
available for such resales by such holder, then the Company will file with the
Commission a shelf registration statement (a "Shelf Registration Statement") to
cover resales of the affected Notes, and the Company will use its reasonable
best efforts to have the Shelf Registration Statement declared effective at the
earliest possible time and to keep it effective for up to two years.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Original
Notes validly tendered and not withdrawn prior to the Expiration Date. The
Company will issue $1,000 principal amount of Exchange Notes in exchange for
$1,000 principal amount of Original Notes accepted in the Exchange Offer.
Holders may tender some or all of their Original Notes pursuant to the Exchange
Offer. However, Original Notes may be tendered only in integral multiples of
$1,000 in principal amount.
The terms of the Exchange Notes are substantially identical in all respects
to the terms of the Original Notes except that (i) the Exchange Notes will be
freely transferable by holders thereof (other than as provided herein) and
issued free of certain transfer restrictions and registration rights relating to
the Original
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Notes, and (ii) the holders of the Exchange Notes will not be entitled to
certain rights of holders of the Original Notes under the Registration Rights
Agreement, which rights will terminate upon consummation of the Exchange Offer.
The Exchange Notes will evidence the same debt as the Original Notes and will be
issued under and entitled to the benefits of the Indenture.
As of the date of this Prospectus, $110,000,000 aggregate principal amount
of the Original Notes was outstanding, all of which was represented by global
certificates registered in the name of Cede & Co., as nominee for DTC.
Holders of Original Notes do not have any appraisal or dissenters' rights
under the Business Corporations Act (Yukon Territory) or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission promulgated thereunder.
The Company shall be deemed to have accepted validly tendered Original
Notes when, as and if the Company has given oral or written notice thereof to
the Exchange Agent. The Exchange Agent will act as agent for the tendering
holders for the purpose of receiving the Exchange Notes from the Company and
delivering the Exchange Notes to such holders. If any tendered Original Notes
are not accepted for exchange because of an invalid tender, the occurrence of
certain other events set forth herein or otherwise, the certificates for any
such unaccepted Original Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m. New York City time, on
, 1998 unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. In order to extend the
Exchange Offer, the Company will notify the Exchange Agent of any extension by
oral or written notice and will make a public announcement thereof, each prior
to 9:00 a.m., New York City time, on the next business day after the previously
scheduled Expiration Date. The Company reserves the right, in its sole
discretion, (i) to delay acceptance of any Original Notes, to extend the
Exchange Offer, or, if any of the conditions set forth herein under
"-- Conditions to the Exchange Offer" shall have not been satisfied, to
terminate the Exchange Offer, or (ii) to amend the terms of the Exchange Offer
in any manner by giving oral or written notice of such delay, extension or
termination to the Exchange Agent. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the holders of Original Notes, and the Company will extend the
Exchange Offer for a period of time, depending on the significance of the
amendment and the manner of disclosure to the registered holders if the Exchange
Offer would otherwise expire during such time. Without limiting the manner in
which the Company may choose to make public announcements of any delay in
acceptance, extension, termination or amendment of the Exchange Offer, the
Company shall have no obligation to publish, advertise, or otherwise communicate
any such public announcement, other than by making a timely release to an
appropriate news agency.
INTEREST ON THE EXCHANGE NOTES
Interest on the Exchange Notes will be payable semi-annually in arrears on
May 15 and November 15 of each year, commencing November 15, 1998. Interest on
the Exchange Notes will accrue from the date of issuance of the Original Notes,
May 7, 1998. Consequently, holders who exchange their Original Notes for
Exchange Notes will receive the same interest payment on November 15, 1998 that
they would have received had they not accepted the Exchange Offer.
25
<PAGE> 27
PROCEDURES FOR TENDERING
The tender to the Company of Original Notes by a holder thereof pursuant to
any one of the procedures set forth below will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
Only a registered holder of Original Notes may tender in the Exchange
Offer. To tender in the Exchange Offer, a holder must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with any other
required documents, to the Exchange Agent prior to the Expiration Date. In
addition, (i) certificates for such Original Notes, or a timely confirmation of
a book-entry transfer of such Original Notes, if such procedure is available,
into the Exchange Agent's account at DTC pursuant to the procedure for
book-entry transfer described below, must be received by the Exchange Agent
prior to the Expiration Date, or (ii) the holder must comply with the guaranteed
delivery procedures described below.
Any beneficial owner whose Original Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender in the Exchange Offer should contact such registered holder promptly
and instruct such registered holder to tender on such beneficial owner's behalf.
If such beneficial holder wishes to tender directly, such beneficial owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Original Notes, either make appropriate arrangements to register
ownership of the Original Notes in such owner's name or obtain a properly
completed bond power from the registered holder. The transfer of record
ownership may take considerable time.
If the Letter of Transmittal is signed by the record holder(s) of the
Original Notes tendered thereby, the signature must correspond with the name(s)
written on the face of the Original Notes without alteration, enlargement or any
change whatsoever. If the Letter of Transmittal is signed by a participant in
DTC, the signature must correspond with the name as it appears on the security
position listing as the holder of the Original Notes. If the Letter of
Transmittal is signed by a person other than the registered holder of any
Original Notes listed therein, such Original Notes must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender the
Original Notes on behalf of the registered holder, in either case signed as the
name of the registered holder or holders appears on the Original Notes. If the
Letter of Transmittal or any Original Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
THE METHOD OF DELIVERY OF ORIGINAL NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE OPTION AND SOLE RISK OF
THE TENDERING HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY
RECEIVED BY THE EXCHANGE AGENT. DELIVERY IS RECOMMENDED BY OVERNIGHT OR HAND
DELIVERY SERVICE OR, IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR ORIGINAL NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal,
or (ii) for the account of an Eligible Institution. In the event that signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the
26
<PAGE> 28
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or another
"eligible guarantor institution" within the meaning of Rule 17Ad-15 under the
Exchange Act (an "Eligible Institution").
A tender will be deemed to have been received as of the date when (i) the
tendering holder's properly completed and duly signed Letter of Transmittal
accompanied by Original Notes (or a timely confirmation received of a book-entry
transfer of Original Notes into the Exchange Agents's account at DTC) is
received by the Exchange Agent, or (ii) a Notice of Guaranteed Delivery from an
Eligible Institution is received by the Exchange Agent. Issuances of Exchange
Notes in exchange for Original Notes tendered pursuant to a Notice of Guaranteed
Delivery by an Eligible Institution will be made only against submission of a
duly signed Letter of Transmittal (and any other required documents) and the
deposit of the tendered Original Notes with the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Original Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and all
Original Notes not properly tendered or any Original Notes the Company's
acceptance of which would, in the opinion of the Company or its counsel, be
unlawful. The Company also reserves the absolute right to waive any of the
conditions of the Exchange Offer or any defect or irregularity in tender of any
Original Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) shall
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Original Notes must be cured within
such time as the Company shall determine. Neither the Company, the Exchange
Agent nor any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Original Notes or incur any
liability for failure to give such notification. Tenders of Original Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Original Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to (i)
purchase or make offers for any Original Notes that remain outstanding after the
Expiration Date, or, as set froth under "-- Conditions to the Exchange Offer,"
to terminate the Exchange Offer, and (ii) to the extent permitted by applicable
law, purchase Original Notes in the open market, in privately negotiated
transactions or otherwise. The terms of any such purchases or offers may differ
from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Original
Notes at DTC for purposes of the Exchange Offer within two business days after
the date of this Prospectus, and any financial institution that is a participant
in DTC's book-entry transfer facility system may make book-entry delivery of the
Original Notes by causing DTC to transfer such Original Notes into the Exchange
Agent's account in accordance with DTC's procedures for such transfer. Although
delivery of Original Notes may be effected through book-entry transfer into the
Exchange Agent's account at DTC, the Letter of Transmittal, with any required
signature guarantees and any other required documents, must in any case (other
than as set forth in the next paragraph) be transmitted to and received by the
Exchange Agent on or prior to the Expiration Date at one of its addresses set
forth below under "-- Exchange Agent," or the guaranteed delivery procedures
described below.
DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the Exchange Offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system in place for sending a signed, hard copy of the Letter of
Transmittal. DTC is obligated to communicate those electronic instructions to
the Exchange Agent. To tender Original Notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to the Exchange Agent must
contain the character by which the participant acknowledges its receipt of and
agrees to be bound by the Letter of Transmittal.
27
<PAGE> 29
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Original Notes in the Exchange Offer and
(i) whose Original Notes are not immediately available, or (ii) who cannot
deliver their Original Notes (or complete the procedures for book-entry
transfer), the Letter of Transmittal or any other required documents to the
Exchange Agent prior to the Expiration Date, may effect a tender if:
(a) the tender is made by or through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder of the Original Notes, the
registration number or numbers of such Original Notes (if applicable), and
the total principal amount of Original Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within three business
days after the Expiration Date, the Letter of Transmittal, together with
the Original Notes in proper form for transfer (or a confirmation of a
book-entry transfer into the Exchange Agent's account at DTC) and any other
documents required by the Letter of Transmittal, will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal,
together with the certificate(s) representing all tendered Original Notes
in proper form for transfer (or a confirmation of such a book-entry
transfer) and all other documents required by the Letter of Transmittal are
received by the Exchange Agent within three business days after the
Expiration Date.
WITHDRAWAL RIGHTS
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to the Expiration Date.
To withdraw a tender of Original Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to the Expiration Date. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Original Notes to be withdrawn (the "Depositor"), (ii) identify the Original
Notes to be withdrawn (including, if applicable, the registration number or
numbers and total principal amount of such Original Notes), (iii) be signed by
the Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Original Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Original Notes to register the transfer
of such Original Notes into the name of the Depositor withdrawing the tender,
(iv) specify the name in which any such Original Notes are to be registered, if
different from that of the Depositor, and (v) if applicable because the Original
Notes have been tendered pursuant to the book-entry procedures, specify the name
and number of the participant's account at DTC to be credited, if different than
that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Original Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Original Notes so withdrawn are validly retendered. Any Original Notes which
have been tendered but which are not accepted for exchange will be returned to
the holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection or termination of the Exchange Offer. Properly withdrawn
Original Notes may be retendered by following one of the procedures described
above under "-- Procedures for Tendering" at any time prior to the Expiration
Date.
28
<PAGE> 30
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to issue Exchange Notes for, any Original
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Original Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any government agency with respect to the Exchange Offer
that, in the Company's judgment, would reasonably be expected to materially
impair the ability of the Company to proceed with the Exchange Offer, or
any material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in
the business or financial affairs of the Company or any of its subsidiaries
has occurred that, in the Company's judgment, would reasonably be expected
to materially impair the ability of the Company to proceed with the
Exchange Offer; or
(c) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted that, in the Company's
judgment, would reasonably be expected to materially impair the ability of
the Company to proceed with the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the holders of the Notes; or
(d) any governmental approval has not been obtained, which approval
the Company shall, in its judgment, deem necessary for the consummation of
the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Original
Notes and return all tendered Original Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Original Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Original Notes (see "-- Withdrawal Rights"), or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Original Notes which have not been withdrawn. If such waiver
constitutes a material change to the Exchange Offer, the Company will promptly
disclose such waiver by means of a prospectus supplement that will be
distributed to holders of Original Notes, and the Company will extend the
Exchange Offer for a period of time depending upon the significance of the
waiver and the manner of disclosure to the registered holders, if the Exchange
Offer would otherwise expire during such period.
RESALES OF EXCHANGE NOTES
The Company is making the Exchange Offer of the Exchange Notes in reliance
on the position of the staff of the Commission as set forth in certain
interpretive letters addressed to third parties in other transactions. However,
the Company has not sought its own interpretive letter, and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as it has in such interpretive letters to
third parties. Based on these interpretations by the staff of the Commission,
and subject to the two immediately following sentences, the Company believes
that Exchange Notes issued pursuant to the Exchange Offer in exchange for
Original Notes may be offered for resale, resold and otherwise transferred by a
holder thereof (other than a holder who is an Affiliate or a broker-dealer)
without further compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such Exchange Notes are
acquired in the ordinary course of such holder's business and that such holder
is not participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. However, any holder of Original Notes who is an Affiliate
of the Company or who intends to participate in the Exchange Offer for the
purpose of distributing Exchange Notes, or any broker-dealer who purchased
Original Notes from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (i) will not be able to rely on
the interpretations of the staff of the Commission set forth in the
above-mentioned interpretive letters, (ii) will not be entitled to tender such
Original Notes in the Exchange Offer, and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or other
29
<PAGE> 31
transfer of such Original Notes unless such sale or transfer is made pursuant to
an exemption from such requirements. In addition, as described below, if any
broker-dealer holds Original Notes acquired for its own account as a result of
market-making or other trading activities and exchanges such Original Notes for
Exchange Notes (such broker-dealer being referred to herein as a "Participating
Broker-Dealer"), then such Participating Broker-Dealer must deliver a prospectus
meeting the requirements of the Securities Act in connection with any resales of
Exchange Notes.
Each holder of Original Notes who wishes to exchange Original Notes for
Exchange Notes in the Exchange Offer will be required to represent that (i) it
is not an Affiliate, (ii) any Exchange Notes to be received by it are being
acquired in the ordinary course of its business, (iii) it has no arrangement or
understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes, and (iv) if such holder
is not a broker-dealer, such holder is not engaged in, and does not intend to
engage in, a distribution (within the meaning of the Securities Act) of such
Exchange Notes. The Letter of Transmittal contains the foregoing
representations. In addition, the Company may require such holder, as a
condition to such holder's eligibility to participate in the Exchange Offer, to
furnish to the Company (or an agent thereof) in writing information as to the
number of "beneficial owners" (within the meaning of Rule 13d-3 under the
Exchange Act) on behalf of whom such holder holds the Original Notes to be
exchanged in the Exchange Offer. Each Participating Broker-Dealer must
acknowledge that it acquired the Original Notes for its own account as the
result of market-making activities or other trading activities and must agree
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of such Exchange Notes. See "Plan of
Distribution." The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the staff of the Commission in the interpretive
letters referred to above, the Company believes that Participating Broker-
Dealers may fulfill their prospectus delivery requirements with respect to the
Exchange Notes received upon exchange of such Original Notes with a prospectus
meeting the requirements of the Securities Act, which may be the prospectus
prepared for an exchange offer so long as it contains a description of the plan
of distribution with respect to the resale of such Exchange Notes. Accordingly,
this Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer during the period referred to below in
connection with resales of Exchange Notes received in exchange for Original
Notes where such Original Notes were acquired by such Participating
Broker-Dealer for its own account as a result of market-making or other trading
activities. Subject to certain provisions set forth in the Registration Rights
Agreement, the Company has agreed that this Prospectus, as it may be amended or
supplemented from time to time, may be used by a Participating Broker-Dealer in
connection with resales of such Exchange Notes for a period of one year after
the Expiration Date. See "Plan of Distribution." Any person, including any
Participating Broker-Dealer, who is an Affiliate may not rely on such
interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
In that regard, each Participating Broker-Dealer who surrenders Original
Notes pursuant to the Exchange Offer will be deemed to have agreed, by execution
of the Letter of Transmittal, that upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact that makes any
statement contained in this Prospectus untrue in any material respect or which
causes this Prospectus to omit to state a material fact necessary in order to
make the statements contained herein, in the light of the circumstances under
which they were made, not misleading, or of the occurrence of certain other
events specified in the Registration Rights Agreement, such Participating
Broker-Dealer will suspend the sale of Exchange Notes pursuant to this
Prospectus until the Company has amended or supplemented this Prospectus to
correct such misstatement or omission and has furnished copies of the amended or
supplemented Prospectus to such Participating Broker-Dealer, or the Company has
given notice that the sale of Exchange Notes may be resumed, as the case may be.
30
<PAGE> 32
EXCHANGE AGENT
The Bank of Nova Scotia Trust Company of New York has been appointed as
Exchange Agent for the Exchange Offer. Questions and requests for assistance and
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent addressed as follows:
For Information by Telephone:
(212) 225-5427
The Bank of Nova Scotia Trust Company
of New York
Corporate Trust Department
23rd Floor
One Liberty Plaza
New York, NY 10006
By Facsimile Transmission (for Eligible Institutions Only):
(212) 225-5436
(Facsimile confirmation)
(212) 225-5427
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons solicitating acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
out-of pocket expenses incurred by it in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the
Original Notes and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company. The Company will pay all transfer
taxes, if any, applicable to the exchange of Original Notes pursuant to the
Exchange Offer. If, however, Exchange Notes or Original Notes not tendered or
accepted for exchange are to be delivered to, or are to be registered or issued
in the name of, any person other than the registered holder of the Original
Notes tendered, or if tendered Original Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a transfer
tax is imposed for any reason other than the exchange of Original Notes pursuant
to the Exchange Offer, then the amount of any such transfer taxes (whether
imposed on the registered holder or any other persons) will be payable by the
tendering holder. If satisfactory evidence of payment of such taxes or exemption
therefrom is not submitted with the Letter of Transmittal, the amount of such
transfer taxes will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Exchange Notes under
generally accepted accounting principles in the United States.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of the Exchange Offer, the Company will have
fulfilled its obligations under the Registration Rights Agreement and holders of
Original Notes who do not tender their Original Notes will not have any further
registration rights under the Registration Rights Agreement or otherwise
(subject to certain limited exceptions, if applicable). Accordingly, any holder
of Original Notes that does not exchange that
31
<PAGE> 33
holder's Original Notes for Exchange Notes will continue to hold such untendered
Original Notes and will be entitled to all the rights and limitations applicable
thereto under the Indenture, except to the extent such rights or limitations, by
their terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Original Notes that are not exchanged for Exchange Notes pursuant to
the Exchange Offer will remain restricted securities. Accordingly, such Original
Notes may be resold only (i) to the Company, (ii) to a person who the holder
reasonably believes is a qualified institutional buyer in compliance with Rule
144A, (iii) in an offshore transaction in compliance with Rule 903 or 904 of
Regulation S under the Securities Act, (iv) pursuant to Rule 144 under the
Securities Act, (v) in accordance with another exemption from the registration
requirements of the Securities Act (and based upon an opinion of counsel
acceptable to the Company) or (vi) pursuant to an effective registration
statement under the Securities Act and, in each case, in accordance with any
applicable securities laws of any state of the United States. Accordingly, to
the extent that Original Notes are tendered and accepted in the Exchange Offer,
the trading market for the untendered Original Notes could be adversely
affected.
32
<PAGE> 34
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth certain historical consolidated financial
data for the Company as of and for each of the periods indicated. The following
data should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PERIOD FROM
INCEPTION
(FEBRUARY 3, 1995) YEARS ENDED
THROUGH DECEMBER 31, QUARTER ENDED MARCH 31,
DECEMBER 31, -------------------- ------------------------
1995 1996 1997 1997 1998
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues...................... $ 152 $ 575 $ 1,567 $ 433 $ 184
Net loss...................... (2,120) (2,195) (7,928) (722) (1,115)
Net loss per common share..... (0.23) (0.17) (0.24) (0.03) (0.03)
Weighted average shares
outstanding................ 9,247 12,972 32,505 25,245 35,126
BALANCE SHEET DATA (END OF
PERIOD):
Cash and cash equivalents..... $ 3,366 $ 10,620 $ 18,067 $ 11,637 $ 8,725
Total assets.................. 4,170 235,501 291,914 192,295 292,020
Current liabilities........... 120 2,806 8,205 1,903 6,531
Minority interest............. -- 1,060 4,087 1,348 5,297
Stockholders' equity.......... 4,050 167,667 184,163 189,044 184,733
OTHER DATA:
Ratio of earnings to fixed
charges(1)................. (2) (2) (3) (3)
</TABLE>
- ---------------
(1) For purposes of determining the ratios of earnings to fixed charges,
earnings are defined as income (loss) before tax plus fixed charges. Fixed
charges consist of capitalized interest and amortization of debt issuance
costs.
(2) There were no fixed charges during this period.
(3) Earnings were insufficient to cover fixed charges during 1997 and the first
quarter of 1998 by $687,000 and $436,000, respectively.
33
<PAGE> 35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Seven Seas is an independent international energy company engaged in the
exploration, development and production of oil and natural gas in Colombia. The
Company is the operator of an oil discovery ("Emerald Mountain") defined by two
association contracts covering a total of approximately 109,000 contiguous acres
in central Colombia. The Company has focused its efforts to date on delineating
the oil and gas potential of Emerald Mountain from which there has been no
commercial production pending construction of pipeline and other infrastructure
facilities. The Company also has interests in three additional association
contracts in Colombia, which, together with the Emerald Mountain association
contracts, cover over one million gross acres. The Company also has certain
other interests in Australia and Papua New Guinea. As a result of its focus on
its Colombian properties, the Company is in the process of divesting or farming
out its oil and gas interests in Australia and Papua New Guinea.
TERMS OF ASSOCIATION CONTRACTS AND RELATED MATTERS
The Company has a 57.7% working interest (before Colombian government
participation) in the Association Contracts. An association contract gives the
parties to the contract a right to explore the contracted area and develop such
petroleum as may be found therein. The Colombian government receives a royalty
equal to 20% of production (after transportation costs are deducted). In the
event of commerciality, Ecopetrol has the right to acquire an initial 50%
working interest in the project. Ecopetrol's share of production and costs in
the Dindal contract area will increase if and when a commercial field produces
in excess of 60 MMBbls, up to a maximum interest of 70% if the field produces in
excess of 150 MMBbls. In addition, Ecopetrol's share of production and costs in
the Rio Seco contract area is also subject to increase if and when a commercial
field produces in excess of 60 MMBbls, up to a maximum interest of 75% depending
upon revenues and associated costs. Until commercial production is initiated,
the Company expects that the working interest owners will fund all costs
associated with the initiation of commercial production and that, upon such
initiation, Ecopetrol's 50% share of such costs will be repaid through proceeds
from their share of production.
To date, all oil produced by the Company has been from production testing
on Emerald Mountain. Upon the drilling of sufficient wells to reasonably define
the hydrocarbon-producing area and acceptance by Ecopetrol that the field is
capable of commercial production, oil produced from the Dindal and Rio Seco
contract areas may be sold to Ecopetrol or to third parties and Ecopetrol may
acquire their 50% working interest. In the event the production is required to
satisfy internal demand for oil in Colombia, the Company may be required to sell
some or all of its production to Ecopetrol at prevailing market prices.
COLOMBIAN TAXES
The Company's net income, as defined under Colombian law, from Colombian
sources is subject to Colombian corporate income tax at a rate of 35%. An
additional remittance tax is imposed upon remittance of profits abroad at a rate
of 7%.
ACCOUNTING POLICIES AND DEVELOPMENT STAGE ACCOUNTING
The Consolidated Financial Statements and Notes thereto included herein
have been prepared in accordance with generally accepted accounting principles
in the United States.
The Company's exploration and development activities have generated an
insignificant amount of revenue, thus requiring the financial statements to be
presented as a development stage enterprise. Accumulated losses are presented on
the balance sheet as "Deficit accumulated during the development stage." The
income statement presents revenues and expenses for each period presented and
also a cumulative total of both amounts from the Company's inception. The
statement of cash flows shows inflows and outflows for the each period presented
and from the Company's inception. The statement of stockholders' equity presents
the
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date and number of shares of each class of security issued for cash or other
consideration and the dollar amount assigned. In addition, the notes to
financial statements are required to identify the enterprise as development
stage.
The Company follows the full-cost method of accounting for oil and natural
gas properties. Under this method, all costs incurred in the acquisition,
exploration and development of oil and gas properties, including unproductive
wells, are capitalized in separate cost centers for each country. Such
capitalized costs include contract and concession acquisition, geological,
geophysical and other exploration work, drilling, completing and equipping oil
and gas wells, constructing production facilities and pipelines, and other
related costs. As of December 31, 1996, unevaluated oil and gas interests
included capitalized general and administrative costs of $0.1 million. No
additional general and administrative costs were capitalized during 1997. The
Company capitalized interest of $0.6 million in 1997.
The capitalized costs of oil and gas properties in each cost center are
amortized on the composite units of production method based on future gross
revenues from proved reserves. Sales or other dispositions of oil and gas
properties are normally accounted for as adjustments of capitalized costs. Gain
or loss is not recognized in income unless a significant portion of a cost
center's reserves is involved. Capitalized costs associated with the acquisition
and evaluation of unproved properties are excluded from amortization until it is
determined whether proved reserves can be assigned to such properties or until
the value of the properties is impaired. If the net capitalized costs of oil and
gas properties in a cost center exceed an amount equal to the sum of the present
value of estimated future net revenues from proved oil and gas reserves in the
cost center and the lower of cost or fair value of properties not being
amortized, both adjusted for income tax effects, such excess is charged to
expense.
As of December 31, 1997, the Company's exploration and development
activities have not generated significant revenues. As a result, the Company's
historical results of operations have been presented as a development stage
company; thus, period-to-period comparisons of such results and certain
financial data may not be meaningful or indicative of future results. In this
regard, future results of the Company will be materially dependent upon the
success of the Company's Emerald Mountain operations.
RESULTS OF DEVELOPMENT STAGE OPERATIONS
Three Months Ended March 31, 1998 as Compared to the Three Months Ended March
31, 1997
To date, oil revenues and lease operating expenses pertained solely to the
Company's share of crude oil produced during production testing of the Company's
wells on Emerald Mountain. Revenues from oil sales were zero and $0.3 million
for the quarter ended March 31, 1998 and 1997, respectively. Lease operating
expenses were $0.2 million and $0.2 million for the quarter ended March 31, 1998
and 1997, respectively. The 1998 lease operating expenses represent such costs
as tank rentals and other miscellaneous fixed costs.
Interest income was $0.2 million for the quarter ended March 31, 1998 as
compared to $0.1 million for the same period in 1997. The increase was the
consequence of higher cash balances resulting from the private placements of the
Company's securities.
General and administrative costs were $1.1 million during the three months
ended March 31, 1998 as compared to $0.9 million during the same period of 1997.
The increase was primarily attributable to the expansion of the Company's
operating activities and additions to its professional staff in the United
States and Colombia.
Depreciation and amortization was $0.1 million and zero for the quarter
ended March 31, 1998 and 1997, respectively. The increase was primarily
attributable to the amortization of costs incurred in issuing the Exchangeable
Notes in August 1997 (see "Liquidity and Capital Resources" below). As of March
31, 1998, the Company has not recorded depletion of its proved oil and gas
property as only insignificant quantities of oil have been produced during its
production testing plan.
The Company incurred net losses of $1.1 million and $0.7 million for the
three months ended March 31, 1998 and 1997, respectively for the reasons
indicated above.
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Year Ended December 31, 1997, 1996 and 1995
Oil revenues and lease operating expenses pertained solely to the Company's
share of crude oil produced during production testing of the Company's five
completed wells on Emerald Mountain, which comprised four wells producing in
1997 and two wells producing in 1996. Revenues from oil sales were $0.8 million,
$0.2 million, and zero in 1997, 1996, and for the period from inception on
February 3, 1995 to December 31, 1995 (the "1995 Period"), respectively. Lease
operating expenses were $0.9 million, $0.3 million and zero in 1997, 1996 and
the 1995 Period, respectively.
Colombian oil production (net to the Company, including minority interest)
of 56,546 barrels and 14,188 barrels in 1997 and 1996, respectively, pertained
solely to the Company's share of oil produced from production testing and was
sold to Ecopetrol at an average price of $13.79 per barrel in 1997 and $16.47
per barrel in 1996.
Interest income increased from $0.3 million in 1996 to $0.8 million in
1997. The increase was the consequence of higher cash balances resulting from
the private placements of the Company's securities. The increase from $0.2
million for the 1995 Period to $0.3 million for the year ended December 31, 1996
was also the consequence of higher cash balances resulting from private
placements of the Company's securities.
General and administrative costs were $8.7 million in 1997 as compared to
$2.5 million for 1996. The increase was primarily attributable to severance
costs paid to former executive officers and recognition of compensation expense
related to a change in the exercise period of stock options held by such
executives. In addition, the Company expanded its operating activities and added
to its professional staff in the U.S. and Colombia. General and administrative
costs increased from $1.1 million for the 1995 Period to $2.5 million for the
year ended December 31, 1996 primarily as a result of a full year of expenses
incurred by the Company in 1996 as compared to 1995, and the increase in
activities associated primarily with the acquisition of GHK Company Colombia
("GHK Colombia"), Esmeralda Limited Liability Company ("Esmeralda LLC"), and
Cimarrona Limited Liability Company ("Cimarrona LLC").
Depreciation and amortization remained constant at $0.1 million for the
years ended December 31, 1996 and 1997. Depreciation and amortization increased
from $37,671 for the 1995 Period to $0.1 million for the year ended December 31,
1996 primarily as a result of the acquisitions mentioned above and the inclusion
of a full year of expenses incurred by the Company in 1996 as compared to 1995.
The Company incurred net losses of $7.9 million and $2.2 million for the
years ended December 31, 1997 and 1996, respectively, and $2.1 million for the
1995 Period.
LIQUIDITY AND CAPITAL RESOURCES
The Company's activities have been funded primarily by the proceeds from
private placements of the Company's securities, including the Company's common
shares, special warrants and special notes, from inception through March 31,
1998, resulting in aggregate cash proceeds of $48.1 million. In 1996, the
Company acquired an additional 36.7% interest in the Association Contracts in
Colombia in exchange for the issuance of the Company's securities valued at
$153.1 million in the aggregate. From inception through March 31, 1998, the
Company had capital expenditures of $32.6 million for the acquisition,
exploration, and development of its oil and gas properties including $30.5
million with respect to its interests in Colombia and approximately $2.1
million, of which $1.1 million has been expensed, with respect to its interests
in other countries. Such expense included $0.5 million for the cost of an option
to acquire a 5% participating interest in three exploration blocks in North
Africa and $0.6 million associated with a dry hole in the San Jorge Basin,
Argentina. The Company's activities in North Africa and Argentina have been
discontinued.
The Company's primary capital commitments include Phases I and II of its
Emerald Mountain development program. The Company's capital expenditures
estimated for Phase I include $16.2 million for field development and
delineation and $60.7 million for pipeline and production facilities, which is
scheduled for completion in mid-1999. The Company's capital expenditures
estimated for Phase II include $65.2 million for field development and
delineation and $89.0 million for pipeline and production facilities, which is
scheduled for completion in mid-2000. The Company had working capital of $13.9
million as of December 31,
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1997. The Company believes that the net proceeds of the offering of Notes in May
1998 will be sufficient to fund the Phase I estimated capital expenditures;
however, Phase II will require additional financing. Certain expenditures for
Phase II are expected to occur during Phase I. In addition, the Company has
budgeted approximately $9.0 million to participate in drilling a deep
exploratory well on Emerald Mountain scheduled to be commenced in late 1998. The
Company expects that additional amounts may be funded through cash from
operations, joint ventures and other such arrangements, and debt or equity
financing, although there can be no assurance that debt or equity financing will
be available to the Company on economically acceptable terms. See
"Business -- Gathering and Pipeline System."
Colombia. During 1998, the Company plans to redrill the El Segundo 3-E well
and drill a total of seven additional wells on the Dindal and Rio Seco contract
areas, begin construction of a 36-mile pipeline to provide transportation
capacity of 50,000 Bbls/d, conduct seismic operations, and carry out other
development activities for an aggregate estimated cost of $62.2 million. The
pipeline is scheduled for completion in mid-1999. An exploratory well on the
Company's non-operated Tapir contract area in Colombia commenced drilling in
March 1998.
For the years ended December 31, 1997 and 1996, the Company had oil sales
of $0.8 million and $0.2 million, respectively, solely from production testing
of the Company's five completed wells on Emerald Mountain, which comprised four
wells producing in 1997 and two wells producing in 1996. Although the Company
intends to continue to sell oil resulting from production tests, significant
production is not expected until further evaluation and development of the field
through the drilling of additional wells and construction of production
facilities and pipelines. The Company has received preliminary plans for the
construction of pipelines and production facilities, and permitting and final
planning for pipelines and production facilities are now proceeding. Completion
of the first phase of these facilities is scheduled for mid-1999.
Australia and Papua New Guinea. The Company is in the process of
eliminating any mandatory capital commitments outside of Colombia. In Papua New
Guinea, the Company signed a farm-out agreement with ARCO Papua New Guinea Inc.
whereby the Company will retain a 20% carried interest with no required capital
expenditures. In the Perth Basin in Western Australia, the Company has signed a
purchase and sale agreement with Forcenergy International Inc. in which the
Company will exchange its 11.77% working interest for approximately $0.9
million. The Company will retain a small overriding royalty interest and will
also be reimbursed approximately $0.3 million for certain capital expenditures.
The agreement is pending its final approval by an aboriginal council in Western
Australia. In the Bass Strait Basin offshore southeast Australia, the Company is
seeking to farm out its interests. The Company has no required capital
commitments for this prospect.
Exchangeable Notes. In August 1997, the Company issued $25 million of
Exchangeable Notes in a private transaction with institutional and accredited
investors. Interest on the Special Notes is payable in arrears commencing on
December 31, 1997, at a rate of 6% per annum on December 31 and June 30 in each
year until maturity on August 7, 2003.
The Exchangeable Notes are exchangeable for a like principal amount of
Convertible Debentures on the earlier to occur of (i) the effectiveness of a
registration statement under the Securities Act covering the issuance of the
common shares and warrants upon conversion of the Convertible Debentures and
compliance with certain Canadian securities requirements or (ii) August 7, 1998.
The Convertible Debentures are convertible into Units consisting of a total of
2,173,913 common shares and warrants exercisable for 1,086,957 common shares.
Each warrant is exercisable for one common share at an exercise price of $15 and
will expire on August 7, 1998. Assuming exercise of all of the warrants, the
Company will receive proceeds of $16 million. The Convertible Debentures are
convertible into common shares at the option of the Company if a registration
statement covering the common shares and warrants has been declared effective
under the Securities Act and has been effective during the seven day notice
period prior to the Company's exercise of its conversion rights, provided that
the Company's shares have traded at or above U.S. $14.00 per share for 20
consecutive trading days on the Toronto Stock Exchange. The Exchangeable Notes
are, and the Convertible Debentures will be, secured by a pledge of shares of
certain of the Subsidiaries of the Company and are guaranteed by Seven Seas
Petroleum Holdings Inc.
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Notes. In May 1998, the Company completed the offering of the Notes and
received net proceeds of approximately $106 million, of which $37.8 million has
been escrowed to provide for the first three years of interest payable on the
Notes. Interest on the Notes is payable semi-annually on May 15 and November 15
of each year, commencing November 15, 1998. The Notes mature on May 15, 2005.
The Notes are redeemable at the option of the Company, in whole or in part, at
any time on or after May 15, 2002, at the prescribed redemption prices, plus
accrued and unpaid interest, Liquidated Damages and Additional Amounts, if any,
to the date of redemption. Notwithstanding the foregoing, at any time prior to
May 15, 2001, the Company may redeem up to 33 1/3% of the original aggregate
principal amount of the Notes with a portion of the net proceeds of an Equity or
Strategic Investor Offering, provided that at least 66 2/3% of the original
aggregate principal amount of the Notes remains outstanding immediately after
the occurrence of such redemption. The Notes may also be redeemed at the option
of the Company, in whole but not in part, at any time at a redemption price
equal to 100% of the principal amount thereof plus accrued and unpaid interest,
Liquidated Damages and Additional Amounts, if any, to the redemption date in the
event of certain changes affecting withholding taxes applicable to certain
payments on the Notes. Upon the occurrence of a Change of Control, (i) unless
the Company redeems the Notes as provided in clause (ii) below, the Company will
be required to offer to purchase the Notes at a purchase price equal to 101% of
the aggregate principal amount thereof, plus accrued and unpaid interest,
Liquidated Damages and Additional Amounts, if any, to the date of purchase, and
(ii) the Company will have the option, at any time prior to May 15, 2002, to
redeem the Notes, in whole but not in part, at a redemption price equal to 100%
of the principal amount thereof plus the Applicable Premium and accrued and
unpaid interest, Liquidated Damages and Additional Amounts, if any, to the date
of redemption.
Proposed Credit Facility. The Company currently is negotiating an agreement
with Banque Paribas providing for a $25 million senior secured revolving credit
facility. The revolving credit facility will have a term of three years.
Borrowings under the facility will bear interest, at the Company's option, at
LIBOR plus a margin of 2.75% or Citibank's base rate plus a margin of 1.00%;
provided, however, that, the applicable margins for both LIBOR and base rate
loans will increase by 1.25% under certain circumstances. An annual commitment
fee of 0.50% will be payable on the unused available portion of the facility. In
addition, the Company will pay a customary underwriting fee and other expenses
in connection with the facility. The facility will be secured by certain assets
of the Company, including the stock of certain of the Company's Subsidiaries.
The facility will also contain certain restrictive covenants which impose
limitations on the Company and its Subsidiaries, with respect to, among other
things, (i) the creation of liens, (ii) mergers, acquisitions or dispositions of
assets, (iii) incurrence of indebtedness, (iv) transactions with affiliates, (v)
sale-leaseback transactions and (vi) dividends and other restricted payments.
The covenants will not restrict the Company's ability to divest its interests in
Papua New Guinea or in Australia. The credit facility will also require the
Company to maintain a minimum current ratio, a minimum tangible net worth, and a
minimum debt coverage ratio. The credit facility will contain customary events
of default. While it is anticipated that the credit facility will be completed
in the third quarter of 1998, no assurance can be made that the credit facility
will be completed on the terms set forth above or on terms acceptable to the
Company.
YEAR 2000 DISCLOSURE
The "Year 2000 Issue" is a general term used to refer to certain business
implications of the arrival of the new millennium. In simple terms, on January
1, 2000, all hardware and software systems which use the two-digit year
convention could fail completely or create erroneous data as a result of the
system failing to recognize the two digit internal date "00" as representing the
Year 2000.
The Company has only been formed in the last three years and is engaged
solely in the exploration, development and production of oil and natural gas in
Colombia. As such, the Company engages in few transactions and relies minimally
on the hardware and software systems of third parties. Further, the Company's
hardware and software systems are all new and widely utilized and the Company
has been advised that all of these systems are Year 2000 compliant. The
Company's dependence on information systems and other operating equipment that
could potentially require remedial action to become Year 2000 compliant is low.
Similarly, the Company does not believe that the risks of system malfunction
resulting from the
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interrelationship of the Company's systems with those of customers, suppliers
and contractors is significant. The risk of reasonably foreseeable operation
disruptions and the corresponding legal risk of liability for disruptions caused
by non-Year 2000 compliant systems are similarly not major concerns to the
Company. Consequently, the Company does not believe that its internal systems
and operations have any material issues with respect to Year 2000 compliance.
The Company has not investigated the Year 2000 issue in respect of its
customers, suppliers and contractors and, in particular in respect of the
computer systems controlling the pipelines and distribution facilities with
which the Company proposes to connect. The failure of any such entities to
timely convert their computer systems or a conversion that is incompatible with
the Company's systems could have a material adverse effect on the Company's
business and future plans. While the Company will make every effort to evaluate
for Year 2000 compliance the computer systems controlling these pipeline and
distribution facilities, the Company may be subject to risks associated with the
Year 2000 issue as well as substantial costs in respect of remediation of these
systems. The Company will be reviewing the Year 2000 issue on an on-going basis
internally and with suppliers, customers and contractors.
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BUSINESS
OVERVIEW
Seven Seas is an independent international energy company engaged in the
exploration, development and production of oil and natural gas in Colombia. The
Company is the operator of an oil discovery ("Emerald Mountain") defined by two
association contracts covering a total of approximately 109,000 contiguous acres
in central Colombia. The Company has focused its efforts to date on delineating
the oil and gas potential of Emerald Mountain. The five exploratory wells
completed on Emerald Mountain have achieved maximum tested actual production
rates ranging from 3,415 to 13,123 Bbls/d. The Company has produced over 300,000
barrels of oil during test production; however, continuous production of the oil
field is scheduled to begin in mid- to late 1999. Except for additional
production testing, management has made the decision to shut in the five
completed wells until completion of the infrastructure necessary to produce,
process and transport oil production from Emerald Mountain. The Company's 57.7%
working interest in Emerald Mountain (before Colombian government participation)
was acquired through a series of transactions from 1995 through 1997. The
Company has interests in three additional association contracts in Colombia
which, together with the Emerald Mountain association contracts, cover over one
million gross acres. As of December 31, 1997 the Company's estimated net proved
reserves attributable to the delineation of 14,459 acres of Emerald Mountain
were 32.2 MMBbls with an SEC PV-10 of $144.9 million.
Certain members of the Company's management have been involved in the
Emerald Mountain project since its inception in 1992. The Company's executive
officers average approximately 29 years of experience in the oil and gas
industry, and predecessors of the Company have operated throughout the U.S. and
Canada since 1959. As of June 15, 1998, the Company's officers and directors
beneficially owned approximately 29% of the Company's outstanding common shares.
The Company anticipates developing Emerald Mountain in two phases. Phase I
of the development program includes development and delineation drilling and the
construction of production facilities and a 36-mile pipeline, scheduled for
completion in mid- to late 1999, which will allow Emerald Mountain production to
reach an existing pipeline with approximately 50,000 Bbls/d of currently
available transportation capacity. Phase II of the development program includes
further development and delineation drilling, construction of production
facilities and construction of a 45-mile pipeline to expand the capacity for
production from the field. The Company has contracted for the basic and
conceptual engineering of the transportation system, requested bids for tubular
supplies and anticipates selecting a project manager in the near future and is
preparing to solicit bids for the detailed engineering and construction of the
pipeline. Prior to the issuance of the Original Notes, the Company had financed
the operation, exploration and continued delineation of Emerald Mountain
primarily with private offerings of equity and convertible debt, providing the
Company with aggregate net proceeds of $47.0 million. The Company also issued
17.8 million common shares as consideration for a portion of its interest in
Emerald Mountain. On May 7, 1998, the Company issued the Original Notes in a
private placement and received net proceeds of approximately $106 million.
Approximately $37.8 million of the net proceeds are being held in a separate
account or in escrow to secure the first three years of interest payments on the
Original Notes and the remaining proceeds will enable the Company to fund its
operations and investments attributable to Phase I of the development program.
BUSINESS STRATEGY
The Company's strategy is to maximize value, cash flow and profitability
through: (i) continuing to develop and delineate Emerald Mountain; (ii)
maintaining a balance between development activities that generate near-term
cash flow and a longer-term exploration program; (iii) capitalizing on the
relative advantages of Emerald Mountain compared to other areas in Colombia to
achieve commercial production as soon as practicable; and (iv) mitigating the
risks of foreign operations.
Developing the Emerald Mountain Asset. As operator of Emerald Mountain, the
Company's goal is to continue rapidly and efficiently its field development and
delineation drilling program and to build the
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production facilities and pipeline infrastructure to allow its production to
reach existing transportation lines for access to export markets.
- Development and Delineation Drilling Activities. The Company's Phase I
drilling program, which is scheduled to be completed by mid- to late 1999,
includes capital expenditures of $16.2 million for Emerald Mountain field
development and delineation for 1998 and 1999. The Company's Phase II
drilling program, which is scheduled to be completed by mid-2000, includes
capital expenditures of $67.9 million for Emerald Mountain field
development and delineation for 1999-2000.
- Pipeline and Infrastructure Activities. The Company is engaged in
negotiations with leading oil pipeline, construction and engineering
firms to construct its processing, storage and related facilities and a
36-mile pipeline from Emerald Mountain to a connection with the existing
Oleoductos Alto Magdalena ("OAM") pipeline. Upon its scheduled completion
in mid- to late 1999, the Phase I pipeline is expected to transport
production from Emerald Mountain to the OAM pipeline, which has
approximately 50,000 Bbls/d of currently available transportation
capacity. The Company's 1998-1999 budgeted expenditures for these
activities are approximately $60.7 million for Phase I. Phase II of the
transportation plan provides for the construction of additional
production facilities and a 45-mile pipeline, which will run parallel to
the existing OAM pipeline. The completion of Phase II is scheduled to
occur by mid-2000 and is designed to provide capacity of approximately
250,000 Bbls/d at a cost of $89.0 million to the Company. The Company may
utilize joint ventures and other arrangements to reduce its capital
outlays for pipeline infrastructure and production facilities related to
Emerald Mountain.
Balancing Development Activities with Exploration Program. The Company
seeks to balance its development drilling program with an exploration program
focused on delineating and extending the reservoir limits of Emerald Mountain.
The Company utilizes advanced technology, including 2-D and 3-D seismic
techniques as well as other proven exploratory and development analytical tools.
Capitalizing on Favorable Operating Environment. The Company intends to
capitalize on the relative advantages of the location and characteristics of
Emerald Mountain, which it believes represents a more favorable operating
environment than most other discoveries and producing fields in Colombia. These
advantages include:
- The productive Upper Cretaceous Cimarrona formation at Emerald Mountain
is at the relatively shallow vertical depth of between approximately
6,000 and 7,500 feet and does not require the relatively more complicated
and more expensive drilling procedures needed to reach the deeper
formations that are found in many other areas of Colombia.
- Emerald Mountain benefits from accessible terrain at an average of
approximately 3,000 feet above sea level in a generally unforested area,
which is served by a major highway and is located near the existing OAM
pipeline.
- Emerald Mountain is located 60 miles northwest of Bogota in the capital
state of Cundinamarca in central Colombia, which has been characterized
by greater civil and political stability and by a higher population
density and military presence than more remote areas of Colombia.
- Colombia is a relatively stable democracy with a long history of
consistent GDP growth and an announced goal of aggressively expanding its
oil exports. Colombia's sovereign U.S. dollar rating as of June 29, 1998
was Baa3/BBB-.
Mitigating Risks of Foreign Operations. The Company seeks to mitigate
operating and financial risks associated with operating in Colombia by: (i)
building on its relationship with the Colombian government, which, through the
Colombian national oil company ("Ecopetrol"), has the right to back in to an
initial 50% working interest in Emerald Mountain upon its acceptance of a field
as commercial; (ii) continuing the high level of involvement of the Company's
Colombian advisory board consisting of prominent business and political leaders,
all of whom are shareholders of the Company, who provide advice and facilitate
operating in Colombia; (iii) building on existing favorable relationships with
the local community by, among other
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initiatives, providing local employment as well as medical and educational
assistance; (iv) employing local personnel with in-country oil and gas industry
expertise; and (v) operating primarily in U.S. dollars with the right to
expatriate profits from Colombia.
HISTORY
Seven Seas became subject to the laws of the Yukon Territory in August
1996. Seven Seas was formed effective June 29, 1995 as a result of an
amalgamation (the "Amalgamation"), under laws of the province of British
Columbia, of Rusty Lake Resources Ltd. ("Rusty Lake") and Seven Seas Petroleum
Inc. (the "Predecessor"), which was incorporated under the laws of British
Columbia on February 3, 1995. Rusty Lake was formed effective January 31, 1993
by an amalgamation of Lithium Corporation of Canada, Limited and Stockgold
Resources Inc. under the laws of Ontario.
Seven Seas was formed to participate in exploration and development
activities outside of North America. In August 1995, the Company purchased a
15.0% interest in Emerald Mountain from GHK Colombia, a subsidiary of The GHK
Company L.L.C. In July 1996, the Company acquired an additional 36.7% working
interest in Emerald Mountain through its acquisition of 100% of GHK Colombia and
Esmeralda LLC and 63% of Cimarrona LLC. In March 1997, the Company acquired an
additional 6.0% working interest in Emerald Mountain through its acquisition of
Petrolinson S.A., resulting in the Company's current ownership of a 57.7%
working interest in Emerald Mountain (before Colombian government
participation). In connection with these acquisitions, the Company issued a
total of 17.8 million common shares.
PROPERTIES
COLOMBIA -- EMERALD MOUNTAIN
Overview. The Company's Colombian operations are focused on Emerald
Mountain. The Emerald Mountain discovery is located on two adjoining concession
areas in central Colombia, approximately 60 miles northwest of Bogota. The
concession areas are defined by the Association Contracts with Ecopetrol. The
area is accessible via the main road between Bogota and Honda. The OAM pipeline
is approximately 12 miles west of Emerald Mountain, at its nearest point, and
provides an opportunity for oil transportation from Emerald Mountain, although
currently available capacity is limited to 50,000 Bbls/d. The village of Guaduas
lies within the block and provides infrastructure for the local economy, which
is primarily agrarian in nature. The Company owns a 57.7% working interest in
Emerald Mountain before Colombian government participation. The remaining
interests are owned by MTV Investments Limited Partnership (9.4%) and Sociedad
Internacional Petrolera, S.A. ("Sipetrol") (32.9%). Sipetrol is the
international exploration and production subsidiary of the Chilean national oil
company. As of December 31, 1997, the Company's estimated net proved reserves
attributable to the delineation of 14,459 acres of Emerald Mountain were 32.2
MMBbls with an SEC PV-10 of $144.9 million.
The Emerald Mountain geological structure is a large anticline. The primary
oil reservoir is the Upper Cretaceous Cimarrona formation, which comprises both
limestone and sandstone and is relatively under pressured. The Emerald Mountain
reserves are located at vertical depths of between approximately 6,000 and 7,500
feet and are characterized by low sulfur content (less than 1%), low paraffin
content and a medium gravity (18 degrees to 20 degrees API gravity).
The Cimarrona formation at Guaduas is an intensely fractured, highly
permeable oil reservoir with an average dip angle of 14 degrees. Special
pressure test analysis indicates the reservoir to be connected in all directions
by large fractures that allow hydrocarbons to flow readily through the
reservoir. These highly permeable fractures in conjunction with the angle of the
formation dip will allow the oil to be produced by a combination of efficient
oil recovery mechanisms called gravity drainage and gravity segregation.
Gravity drainage is a natural drive occurring when a well is drilled at a
point lower than the surrounding areas of producing formations causing the oil
to drain downhill into the well bore. Gravity drainage works
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particularly well when the rock is highly permeable as is the case in the
Cimarrona formation at Guaduas Field.
Gravity segregation is the separation of oil from gas by the force of
gravity due to the density differences of the fluids. As the Cimarrona is
produced the reservoir pressure is expected to decrease, resulting in gas being
liberated from the oil. Due to the reservoir dip and the high permeability, the
gas will readily flow up dip, forming a gas cap at the highest areas in the
reservoir and allowing less gas to be produced with the oil in the producing
wells located lower in the reservoir. Gas conservation is important because it
provides energy to move the fluids through the reservoir into the producing
wells. By conserving this energy, a higher fraction of the oil-in-place can be
recovered without any type of pressure maintenance.
Drilling activity. To date, nine wells have been drilled on the Dindal and
Rio Seco contract areas. The first well, the Escuela 1, which was drilled in
1994 prior to the acquisition of an interest in Emerald Mountain by the Company,
was plugged and abandoned as non-commercial. The discovery well on Emerald
Mountain was the second well drilled on the Dindal block, the El Segundo 1-E.
The El Segundo 1-E discovery well commenced drilling in December 1995 and
reached total depth in mid-January 1996. The well reached the expected Cimarrona
formation at a depth of 5,718 feet, but stopped drilling after penetrating only
88 feet of the Cimarrona formation due to circulation problems encountered while
drilling. The well was then completed for testing in February 1996. Production
testing produced oil at an actual maximum rate of 3,418 Bbls/d. A third well,
the El Segundo 1-N, reached total drilling depth of 6,820 feet in November 1996.
This well was intentionally deviated from the surface location of the El Segundo
1-E well to a bottom hole location approximately 2,000 feet north of the surface
location. The well encountered approximately 450 feet of oil saturated and
highly fractured Upper Cretaceous Cimarrona formation. During production
testing, the El Segundo 1-N produced oil at an actual maximum rate of 8,948
Bbls/d. A fourth well, the El Segundo 1-S, was drilled and completed in
September 1997 to a total depth of 6,920 feet. The bottom hole location of this
well is approximately 2,000 feet south of the surface location of the El Segundo
1-E well. In October 1997, the Company conducted production testing which
resulted in oil production at an actual maximum rate of 4,528 Bbls/d.
In October 1997, the Tres Pasos 1-E well was drilled and completed at a
vertical depth of 6,200 feet without evidence of any oil-water contact. This
well was the first to be drilled on the Rio Seco contract area and was located
approximately 1.6 miles northwest of the surface location of the El Segundo 1-E
well. Production testing of the Tres Pasos 1-E well was completed in December
1997 and resulted in oil being produced at an actual maximum rate of 13,123
Bbls/d. Analysis of reservoir pressure data during production testing indicated
pressure communication with the El Segundo 1 wells located to the southeast.
Such pressure communication over a 1.6 mile distance support drilling results
that indicate a consistently high and intensive degree of a well-connected
fracture system indicating an extensive storage capacity and permeability within
the area of the Cimarrona formation investigated during the production test.
The sixth well to be drilled on Emerald Mountain, the El Segundo 2-E,
completed drilling at a vertical depth of 6,292 feet in November 1997 on the
Dindal contract area approximately 3.7 miles north of the surface location of
the El Segundo 1-E discovery well. Production testing of the El Segundo 2-E was
completed in January 1998 and resulted in a maximum actual production rate of
5,381 Bbls/d. Analysis of pressure data during production testing evidenced
communication with the El Segundo 1-S well approximately 3.7 miles to the south.
This data further confirmed the presence of a uniform and pervasive fracture
system supporting the evidence for extensive storage capacity and permeability
within the Cimarrona formation over the area investigated by the production
testing.
Drilling of the seventh well on Emerald Mountain and the second on the Rio
Seco contract area, the Tres Pasos 2-E, commenced in December 1997 and was
completed in February 1998 at a location approximately 5.6 miles northwest of
the surface location of the El Segundo 1-E. This well was drilled to a vertical
depth of 6,054 feet and encountered 290 feet of the Cimarrona formation with no
evidence of any oil-water contact. Due to an operational problem that resulted
from a failure to properly cement liner casing through the Cimarrona formation,
the Company has decided to sidetrack and drill a new well bore. On May 5, 1998,
the Company announced that the Tres Pasos 2-E sidetrack well had reached a total
depth of 5,880 feet with a
43
<PAGE> 45
bottom hole location approximately 1,200 feet southeast of the original well
base. The Company believes based on preliminary analyses, including oil shows
while drilling, that the well should be productive.
In November 1997, drilling commenced on the El Segundo 3-E well located
approximately 2.8 miles south of the surface location of the El Segundo 1-E
well. This well was the eighth well to be drilled on Emerald Mountain and the
sixth to be drilled on the Dindal contract area. The drilling of the El Segundo
3-E was completed at a vertical depth of 8,021 feet in February 1998. The well
encountered 292 feet of Cimarrona formation that exhibited similar
characteristics in terms of lithology and fracturing as that exhibited in the
previous seven wells. After the completion of drilling operations on the El
Segundo 3-E, the Company experienced significant mechanical problems while
attempting to complete the well for production testing. Due to a failure to
effectively install the lower portion of the well casing, it was not possible to
achieve sufficient communication with the Cimarrona formation to initiate
production testing. The Company has temporarily abandoned the El Segundo 3-E
well pending a scheduled return to this location in the third quarter of 1998.
The Company moved the drilling rig to the surface location for the drilling
of the El Segundo 6-E well located approximately 5.3 miles south of the surface
location of the El Segundo 1-E well. The Company successfully completed drilling
operations on the El Segundo 6-E well in June 1998. The El Segundo 6-E well
reached a total depth from the surface of 8,713 feet. Preliminary analyses while
drilling included the observation of highly fractured core samples and over 300
feet of Cimarrona formation with no indication of oil-water contact.
<TABLE>
<CAPTION>
MAXIMUM ACTUAL MAXIMUM ACTUAL
DATE VERTICAL DEPTH OIL TEST RATE GAS TEST RATE
WELL NAME COMPLETED (FEET) (BBLS/D)(1) (MCF/D) DESCRIPTION
<S> <C> <C> <C> <C> <C>
Escuela 1(2) -- -- -- -- Non-commercial
El Segundo 1-E 2/96 5,718 3,415 1,350 Discovery well
El Segundo 1-N 11/96 6,820 8,948 3,500 Drilled from initial pad
El Segundo 1-S 9/97 6,920 4,528 451 Drilled from initial pad
Tres Pasos 1-E 10/97 6,200 13,123 6,000 Drilled 600' downdip to
northwest of ES 1-E
El Segundo 2-E 11/97 6,292 5,381 826 Drilled 3.7 miles north of ES
1-E; 1,168' below ES 1-N
El Segundo 3-E (3) 8,021 (3) (3) Drilled 2.8 miles south of ES
1-E and temporarily abandoned
Tres Pasos 2-E (4) 6,054 (4) (4) Drilled 5.6 miles to northwest
of ES 1-E
</TABLE>
- ---------------
(1) References are from production testing only and are not necessarily
indicative of flow rates that may be realized during commercial production.
Production tests are conducted to obtain an indication of the flow capacity
of individual wells and to give an indication of reservoir quality and
extent. Actual producing rates from individual wells will depend on the
results of an integrated reservoir study and an engineering production plan,
which will incorporate data from all wells in the field in a development
plan to maximize the economic recovery of oil from the reservoir.
(2) The Escuela 1 well, drilled in 1994, encountered Tertiary and Cretaceous
shales and siltstones from surface to total depth. This predominantly shale
section, emplaced by thrust faulting adjacent to the Cimarrona reservoir
section, is believed to form the eastern critical element of the trap for
the Cimarrona reservoir.
(3) While the anticipated Cimarrona formation was encountered, the Company
experienced significant mechanical problems while attempting to complete the
well for production testing and has temporarily abandoned the well pending a
scheduled return to this location in the third quarter of 1998.
(4) Due to an operational problem that resulted from a failure to properly
cement liner casing through the Cimarrona formation, the Company has decided
to sidetrack and drill a new well bore. On May 5, 1998, the Company
announced that the Tres Pasos 2-E sidetrack well reached a total depth of
5,880 feet with a
44
<PAGE> 46
bottom hole location approximately 1,200 feet southeast of the original well
bore. The Company believes based on preliminary analyses, including oil
shows while drilling, that the well should be productive.
Prospect Geology. The Emerald Mountain structure is formed by a faulted
anticlinal closure in the foot wall of the Bituima thrust fault system on the
eastern side of the Magdalena river valley. The primary oil reservoir tested to
date is the Upper Cretaceous Cimarrona formation which comprises both limestones
and sandstones. These reservoir sequences are charged with oil generated from
the immediately underlying Villeta (also called La Luna) shale which is
considered the principal source rock for the oil accumulations throughout
Colombia and Venezuela.
The Cimarrona formation is seen in surface outcrop to the north and west of
the structure, as well as in the Lasmo Madrigal #1 well, the AIPC Quina #1 well
and the Company's five delineation wells completed as of March 1998. From this
geologic control and completed well information, the Cimarrona is shown to be
depositionally complex, with a high degree of fracturing consistent in
directional orientation. The Cimarrona formation is on average approximately 290
feet in thickness and contains limestones, calcareous sandstones and siltstones.
Evidence for the structural trap is found in both seismic data over the
prospect and in surface geologic mapping. The trapping mechanism is believed to
be formed by structural closure in three directions (north, south and west), and
an imbricate fault within the Bituima thrust fault system to the east, which is
evidenced in the Escuela 1 well which was drilled in 1994, prior to the
acquisition of an interest in Emerald Mountain by the Company, and was plugged
and abandoned as a non-commercial well. The Escuela 1 well is located 2.5 miles
southeast of the El Segundo 1-E discovery well location and encountered Tertiary
and Cretaceous shales and siltstones from surface to total depth. This
predominantly shale section, emplaced by thrust faulting adjacent to the
Cimarrona reservoir section, is believed to form the eastern critical element of
the trap for the prospect.
Terms of Association Contracts and Related Matters. Association contracts
acquired from Ecopetrol, after receipt of the necessary approval by Colombian
governmental authorities as well as the approval of the board of Ecopetrol, are
mutually executed by the parties and subsequently recorded as a public deed in
Colombia. Therefore, ownership of an association contract is protected by
Colombian law.
The Association Contracts were issued by Ecopetrol in March 1993 and August
1995, respectively, and provide generally for a six-year exploration phase
followed by a 22-year production period, with partial relinquishments of
acreage, excluding commercial fields, required commencing at the end of the
sixth year of each contract. Under the terms of the Association Contracts,
Ecopetrol will receive a royalty equal to 20% of production (after
transportation costs are deducted) on behalf of the Colombian government and, in
the event a commercially feasible discovery is made, Ecopetrol will acquire a
50% interest in the remaining production, bear 50% of the development costs, and
reimburse the working interest owners, from Ecopetrol's share of future
production, for 50% of the working interest owners' costs of certain exploration
activities. Upon its acceptance of a field as commercial, Ecopetrol will acquire
a 50% interest therein and the interests of the other parties to the contract,
including the Company, will be reduced by 50%; all decisions regarding the
development of a commercial field will be made by an Executive Committee
consisting of representatives of the parties to the contract who will vote in
proportion to their respective interests in such contract. Decisions of the
Executive Committee will be made by the affirmative vote of the holders of over
50% of the interests in the contract.
Under the terms of the Dindal Association Contract, Ecopetrol's interest in
production and costs would increase after a commercial contract area produces in
excess of 60 MMBbls. Such increases occur in 5% increments from 50% to 70% as
accumulated production from any field increases in 30 million barrel increments
from 60 million barrels to 150 million barrels. Under the terms of the Rio Seco
Association Contract, after a commercial contract area produces in excess of 60
MMBbls, Ecopetrol's interest in production and costs would increase from 50% to
75% as the ratio of the accumulated income attributable to the parties to the
contract other than Ecopetrol to the accumulated development, exploration and
operating
45
<PAGE> 47
costs of such parties (less any expenses reimbursed by Ecopetrol) increases from
a one-to-one ratio to a two-to-one ratio.
Under the terms of the Association Contracts, in the event a discovery is
made and is not deemed to be commercially feasible by Ecopetrol, the working
interest owners may expend up to $2 million over a one-year period to further
develop the field, 50% of which will be reimbursed if Ecopetrol subsequently
accepts the commercial feasibility thereof. If Ecopetrol does not declare the
field commercial, the working interest owners may continue to develop the field
at its own expense. In such event, Ecopetrol will have the right to acquire a
50% interest therein upon payment of 200% of the amounts expended by the working
interest owners, which payment may be made out of Ecopetrol's share of future
production.
The Company and the other working interest owners have paid all costs of
the exploration program under the Association Contracts to date. Under the terms
of the Dindal and Rio Seco Association Contracts, the Company and its partners
are required to drill one well on each contract per year through 1999 and 2001,
respectively, and will continue to bear all exploration costs relating to a
field until such field is declared commercial. The Company plans to submit a
commerciality application to Ecopetrol in the second quarter of 1998 with
respect to its discovery. Such application is subject to approval by Ecopetrol,
which has the right to reject or delay acceptance of commerciality or to accept
commerciality and acquire a 50% working interest in the Association Contracts.
GHK Colombia, a wholly owned subsidiary of the Company, serves as the
operator of Emerald Mountain, pursuant to the terms of operating agreements
between the Company, its respective subsidiaries and the other working interest
owners. GHK Colombia has exclusive charge of carrying out the program of
operations within the budgets approved by the Operating Committee and may demand
payment in advance from each party of its respective shares of estimated monthly
expenditures.
Under the terms of a letter agreement dated September 11, 1992, as amended,
between GHK Colombia and Dr. Jay Namson, the holders of interests in the
Association Contracts, as a group, will be required to assign a 2% working
interest in the Dindal Association Contract and the Rio Seco Association
Contract to Dr. Namson after recovery from production of 100% of all costs
incurred in connection with the exploration and development of the Dindal and
Rio Seco contract areas since the completion of the first year work obligations
under the Dindal Association Contract. Accordingly, when such costs have been
recovered, the Company will be required to assign to Dr. Namson 2% of its
interests prior to the acquisition of the 6% Petrolinson interest (or a 0.517%
interest in the Association Contracts after adjusting for the acquisition of a
50% interest by Ecopetrol which is expected to occur prior to the assignment to
Dr. Namson).
COLOMBIA -- MONTECRISTO AND ROSABLANCA ASSOCIATION CONTRACTS
The Company owns a 75% working interest in the contiguous Montecristo and
Rosablanca association contract areas, which cover a total of approximately
692,000 gross acres in the northern Middle Magdalena Basin. During 1998, the
Company expects to reprocess and evaluate 2-D seismic data on the Montecristo
and Rosablanca contract areas.
COLOMBIA -- TAPIR ASSOCIATION CONTRACT
Overview. The Company acquired an 11.875% interest in the Tapir Association
Contract (the "Tapir Association Contract") in April 1996. The Tapir contract
area consists of 233,000 gross acres located in the Llanos Basin of east central
Colombia and is crossed by two oil pipelines carrying production from nearby oil
fields. Other interests in the Tapir Association Contract are held by Ampolex
(56.25%), Mohave Oil & Gas Corp. (10.205%), Doreal Energy (11.67%) and Heritage
Minerals (10%), which serves as the operator.
Exploration Prospects. There are three exploration prospect types on the
Tapir contract area: several conventional Llanos Basin small structural
closures, a deep Paleozoic anomaly and two basal Cretaceous stratigraphic
prospects. The small structural closures are relatively low risk, but are
expected to have low reserve potential. The Paleozoic prospect is of geologic
interest, but relies on unproven source and reservoir rocks and is therefore
high risk until further geologic work can be completed. The geologic risk for
the two
46
<PAGE> 48
Cretaceous stratigraphic prospects depends on the effectiveness of the lateral
seal between the Ubaque sandstone and the adjacent Paleozoic section.
The Mateguafa prospect, one of the small structural closures in the central
portion of the Tapir contract area, was selected as the first exploration drill
site in the Tapir contract area. The Company participated in the Mateguafa well,
drilling of which was completed in April 1998 to a total depth of 10,000 feet.
Completion operations have been suspended until late 1998 due to the annual
rainy season.
Existing Well. In 1993, the Macarenas #1 well, a discovery well, was
drilled on the Tapir contract area and produced 320 Bbls/d in a short-term test,
but was not completed for production. Since the well was drilled and tested,
additional oil pipeline infrastructure has been built in the area. The operator
plans to place the well on long-term production test after the completion of the
exploratory well to determine sustainable production rates and the extent of the
reservoir.
Terms of Tapir Association Contract. The Tapir Association Contract was
effective on February 6, 1995 on terms substantially similar to the Rio Seco
Association Contract. Heritage Minerals has completed a 51.5 square-mile seismic
program in the contract area, which satisfied the work program for the first
year of the Tapir Association Contract and part of the second year. The
commitment for the second year well has been satisfied by the drilling of the
Mateguafa well.
The Company acquired its interest in the Tapir Association Contract in
April 1996 in consideration for the payment of $0.1 million, which represents
reimbursement for past seismic costs and permit administration, and its
agreement to pay its proportionate share of the costs of a seismic program, the
first exploratory well, the production test on the Macarenas #1 well (assuming
the parties elect to proceed therewith) and certain additional costs to earn its
interest in the Tapir Association Contract. The Company estimates that its
proportionate share of these costs, which are required to be paid to retain its
interest in the Tapir Association Contract, is approximately $0.4 million.
AUSTRALIA
The following is a description of the Company's interests in Australia,
which the Company plans to divest or farm out.
Perth Basin Permits. The Company holds an 11.77% working interest in
Exploration Permit 381 ("EP381") and Exploration Permit 408 ("EP408"), both of
which relate to properties that are located in the Perth Basin, Western
Australia. Other interests in these permit areas are held by: Pennzoil
(44.115%), Amity Oil (30.115%) and GeoPetro Company (14%).
The Company has entered into a purchase and sale agreement with Forcenergy
International Inc. with respect to the sale of its interests in EP 381 and EP
408 for approximately $0.9 million and will be reimbursed approximately $0.3
million for certain capital expenditures. The required consents of governmental
authority and most third parties have been received. No absolute assurance can
be given that the Company will complete this sale, which is subject to obtaining
the final approval of an aboriginal council in Western Australia. Such approval
is expected to be received by September 1, 1998. If the sale is denied, the
Company will not have any continuing commitments for capital expenditures on
this property.
Bass Basin, Block T27P. The Company holds a 20% working interest in Block
T27P, a 1,800,000 acre block in approximately 70 meters of water, in the Bass
Basin, the central of three basins offshore southern Australia. The easternmost
basin is the Gippsland Basin where BHP Petroleum and Esso have a series of large
oil and gas fields. The westernmost basin is the Otway Basin, the site of recent
gas discoveries by BHP Petroleum and others which will likely serve the South
Australia and Victoria gas markets. Block T27P lies about halfway between the
Victoria coast to the north and the Tasmania coast to the south (about 56 miles
each way). The Bass Basin has been the site of a series of gas and oil shows and
discoveries, including the Yolla Field, which is adjacent to Block T27P. The
Yolla Field was discovered by Amoco in the mid-1980s and has not yet been fully
appraised or developed.
47
<PAGE> 49
Globex Exploration, the operator of the permit with an 80% working
interest, was granted the Offshore Petroleum Exploration Permit effective August
10, 1994 (the "Bass Basin Permit"). Globex completed a 620-mile 2-D seismic
program on the block. The remaining work commitment on the block consists of a
3-D seismic survey and two exploration wells. Globex has selected a drillable
prospect some 6.2 miles north of the Yolla Field and is seeking additional
participants in the block to share the cost of an exploratory well which is
estimated to be approximately $5 million. As suitable drilling rigs are not
available in the near term, Globex has applied for a permit extension in the
block until a suitable rig can be contracted.
In March 1996, the Company acquired a six-month option to purchase its
interest in the block for $0.3 million and exercised that option in September
1996. Pursuant to the terms of the option agreement, the Company may elect to
farm out up to 50% of its interest in the Bass Basin Permit. In addition, if
Globex Exploration and the other interest holders seek to enter into a farm-out,
the Company has agreed to participate proportionally with such parties in such
farm-out provided that its interest may not be reduced below 10%.
PAPUA NEW GUINEA
The Company holds 100% of exploration permit PPL-182 in southern Papua New
Guinea effective June 11, 1996. The permit covers an area of 1,200,000 acres
located both onshore and offshore in the Fly River Delta and the Gulf of Papua.
Past exploration activity within PPL-182 has resulted in the acquisition of
seismic data and the drilling of several exploratory wells. The Company's first
year work program consisted of a geological and geophysical review of existing
data. The Company has entered into an agreement with ARCO Papua New Guinea Inc.
("ARCO") for a farm out of its interest whereby ARCO will fund the Company's
obligation for the twelve-month period ended July 1998 for an 80% interest in
the subject exploration permit. In future periods, the Company has no obligation
to expend funds but may be subject to a forfeiture of its interest should the
Company decide not to continue to fund its remaining 20% interest. The Company
anticipates in the future it will farm-out its 20% interest or relinquish its
rights in the property.
48
<PAGE> 50
OIL AND GAS RESERVES
The following table sets forth estimated net proved oil and gas reserves of
the Company, the estimated future net revenues before income taxes, the present
value of estimated future net revenues before income taxes related to proved
reserves and the standardized measure of discounted future net cash flows
related to proved reserves, in each case as of December 31, 1997. All
information in this Prospectus relating to estimated net proved oil and gas
reserves and the estimated future net revenues and cash flows attributable
thereto is based upon a report from Ryder Scott. All calculations of estimated
net proved reserves have been made in accordance with the rules and regulations
of the Commission.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1997
<S> <C>
Total net proved reserves:
Oil (MBbls)............................................... 32,160
Gas (MMcf)................................................ --
Total (MBOE).............................................. 32,160
Net proved developed reserves:
Oil (MBbls)............................................... 11,494
Gas (MMcf)................................................ --
Total (MBOE).............................................. 11,494
Estimated future net revenues before income taxes (in
thousands)(1)............................................. $241,700
Present value of estimated future net revenues before income
taxes
(in thousands)(1)(2)...................................... $144,866
Standardized measure of discounted future net cash flows (in
thousands)(1)(3).......................................... $100,617
</TABLE>
- ---------------
(1) Calculated using an oil price of $10.15 per barrel net of gravity adjustment
and transportation costs.
(2) The present value of estimated future net revenues attributable to the
Company's proved reserves was prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pre-tax basis (SEC
PV-10).
(3) The standardized measure of discounted future net cash flows represents the
present value of estimated future net revenues from proved reserves after
income tax, discounted at 10% per annum.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, future rates of production and the timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth herein represent only estimates. Reserve engineering is a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact manner, and the accuracy of any reserve estimate
is a function of the quality of available data, engineering and geological
interpretation and judgment and the existence of development plans. As a result,
estimates of reserves made by different engineers for the same property will
often vary. Results of drilling, testing and production subsequent to the date
of an estimate may justify a revision of such estimates. Accordingly, reserve
estimates generally differ from the quantities of oil and gas ultimately
produced. Further, the estimated future net revenues from proved reserves and
the present value thereof are based upon certain assumptions, including
geological success, prices, future production levels and costs that may not
prove to be correct. Predictions about prices and future production levels are
subject to great uncertainty, and the meaningfulness of such estimates depends
on the accuracy of the assumptions upon which they are based.
49
<PAGE> 51
PRODUCTIVE WELLS
The following table sets forth the productive oil and gas wells owned by
the Company as of December 31, 1997:
<TABLE>
<CAPTION>
WELLS(1)
----------------------------
OIL GAS
------------ ------------
GROSS NET GROSS NET
<S> <C> <C> <C> <C>
Colombia................................................. 3 1.7 0 0.0
-- --- -- ---
Total.......................................... 3 1.7 0 0.0
</TABLE>
- ---------------
(1) One or more completions in the same well bore are counted as one well.
ACREAGE
The following table sets forth estimates of the developed and undeveloped
acreage for which oil and gas leases or concessions were held by the Company as
of December 31, 1997.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------------------- ---------------------------
GROSS ACRES NET ACRES(1) GROSS ACRES NET ACRES(1)
<S> <C> <C> <C> <C>
Colombia........................... 14,459 8,343 1,019,371 601,329
Papua New Guinea................... -- -- 1,200,000 1,200,000
Australia.......................... -- -- 2,394,546 429,978
------ ----- --------- ---------
Total.................... 14,459 8,343 4,613,917 2,231,307
</TABLE>
- ---------------
(1) New acres are based on the Company's respective working interests and, in
Colombia, are before Colombian government participation. See
"-- Properties."
DRILLING ACTIVITY
The following table sets forth the number of wells drilled by the Company
from inception through December 31, 1997:
<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENT
-------------------------- -------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
----------- ------------ ----------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Colombia................................ 3 1.7 0 0.0 0 0.0 0 0.0
== === == ==== == === == ===
Year ended December 31, 1996:
Colombia................................ 2 1.2 0 0.0 0 0.0 0 0.0
Argentina............................... 0 0.0 1 0.3 0 0.0 0 0.0
-- --- -- ---- -- --- -- ---
2 1.2 1 0.3 0 0.0 0 0.0
== === == ==== == === == ===
Year ended December 31, 1995:
Australia............................... 0 0.0 1 0.1 0 0.0 0 0.0
== === == ==== == === == ===
</TABLE>
Since December 31, 1997, the Company has drilled no gross productive
exploratory wells, no gross nonproductive exploratory wells, no gross productive
development wells, and no gross nonproductive development wells. In addition,
the Company is currently drilling five gross exploration wells (2.9 net to the
Company) and no gross development wells.
GATHERING AND PIPELINE SYSTEM
Transportation and marketing of crude oil to be produced from Emerald
Mountain is expected to be achieved through the construction of a 36-mile
pipeline northwest from Emerald Mountain to connect to the existing OAM
pipeline, a regulated common carrier, at the town of La Dorada along the
Magdalena River Valley. This 36-mile pipeline, which is part of the Company's
Phase I development plan, will have the capacity for 250,000 Bbls/d but will be
constrained by the currently available capacity of 50,000 Bbls/d on the
50
<PAGE> 52
OAM pipeline. The Company is negotiating with the operator of the OAM pipeline
for the transportation of 50,000 Bbls/d on the OAM pipeline; however, a final
contract has not been executed. Through the OAM pipeline, Emerald Mountain's
production will be transported to pipeline terminal and storage facilities at
Vasconia, which is located approximately 45 miles north of La Dorada. At
Vasconia, crude oil from Emerald Mountain may then be shipped through the
existing Oleoducto de Colombia ("ODC") and Oleoducto Central S.A. ("OCENSA")
pipelines, regulated common carriers, to the port city of Covenas on the
Caribbean for loading, export and sale. To avoid the capacity constraints on the
OAM pipeline, the Company intends to build its Phase II pipeline from the end of
its Phase I pipeline in La Dorada to Vasconia, where it will be able to utilize
approximately 250,000 Bbls/d of currently available capacity on the ODC and
OCENSA pipelines.
Phase I of the transportation plan provides for the construction of
compression, storage, separation, gas gathering and reinjection and other
production facilities and a 24-inch buried pipeline from the center of the
project northwest to connect to the OAM pipeline. The total cost of
infrastructure and pipeline construction of the Phase I transportation plan is
estimated to be $186.6 million, and the Company's share of such costs is
estimated to be $60.7 million. The Company has contracted the basic and
conceptual engineering of the transportation system, requested bids for the
tubular supplies and anticipates selecting a project manager in the near future
and is preparing to solicit bids for the detailed engineering and construction
of the pipeline. Phase I is scheduled to be completed by mid- to late 1999.
Phase II of the transportation plan provides for the construction of
additional production facilities and a new 24-inch pipeline parallel to the
existing OAM pipeline along the 45 miles from La Dorada to Vasconia. The
completion of Phase II is scheduled to occur by mid-2000 and is designed to
provide capacity for approximately 250,000 Bbls/d at a total cost of about
$308.5 million with the Company's share at $89.0 million.
Specifications, planning and engineering studies for the planned pipeline
and associated compression facilities to be constructed from Emerald Mountain to
Vasconia are being conducted by Brown & Root Energy Services and Technivance
Brown & Root S.A., subsidiaries of Halliburton Company. Construction of
additional pipelines beyond Phase I depends upon the negotiation and
consummation of construction and financing arrangements, availability of excess
capacity on existing pipelines and the completion of satisfactory contractual
arrangements to obtain such capacity.
MARKETING
Oil produced from the Dindal contract area to date under the long-term
production tests has been sold to Ecopetrol. Upon Ecopetrol's declaration of the
commerciality of the Company's discovery, oil produced from the Dindal and Rio
Seco contract areas may be sold to Ecopetrol or to third parties. In the event
the production is required to satisfy internal demand for oil in Colombia, the
Company may be required to sell some or all of its production to Ecopetrol at
prevailing market prices.
REGULATION
The Company's operations are affected by political developments and laws
and regulations in the areas in which it operates. In particular, oil and gas
production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry, by changes in such laws and by
changing administrative regulations and the interpretations and application of
such rules and regulations. Oil and gas industry legislation and agency
regulation is periodically changed for a variety of political, economic,
environmental and other reasons. Numerous governmental departments and agencies
issue rules and regulations binding on the oil and gas industry, some of which
carry substantial penalties for the failure to comply. The regulatory burden on
the oil and gas industry increases the Company's cost of doing business.
The Company's operations in Colombia are subject to a variety of national,
provincial, and local environmental laws and regulations governing the discharge
of materials into the environment, the disposal of oil and gas wastes, and the
protection of human health and environmental quality. On the federal level, the
Ministry of Environment regulates all activities that could have an adverse
impact on the environment and
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<PAGE> 53
natural resources of Colombia. The Ministry requires specific environmental
licenses for a variety of oil and gas exploration and production activities, and
individual licenses are issued only upon completion of a detailed environmental
impact study. The Company has experienced and may continue to experience delays
in obtaining the federal environmental licenses and other, local environmental
permits required for expansion of its operations in Colombia. Nevertheless, the
Company has obtained environmental licenses for its exploration and production
activities in the Dindal and Rio Seco contract areas, and the Company is in the
process of completing the environmental impact studies that must be performed in
order to obtain an environmental license for Phase I of the transportation plan.
In addition, the Company is currently planning to commence preparation of
environmental impact studies required for the issuance of environmental licenses
for exploration and production activities for the Rosa Blanca and Montecristo
contract areas.
The Company may be subject to fines or penalties for failure to comply with
environmental laws and regulations, or the Company may be subject to extensive
environmental clean-up obligations in connection with a release of regulated
materials into the environment. In Colombia, the Company could be subject to
extensive environmental clean-up obligations with respect to contamination at
properties operated by the Company even if the contamination was created by
previous owners or operators of the contaminated property. On March 18, 1998,
the Ministry of the Environment provided notice of its intention to investigate
alleged violations of environmental requirements with respect to location work
on the Company's El Segundo-6E exploratory well. The Company responded promptly
to the notice from the Ministry of the Environment by reporting that all of the
alleged violations had been corrected. In a subsequent site visit, Ministry
officials noted that the alleged violations had indeed been properly remedied.
Although no assurances can be given, the Company does not expect any fines or
penalties to be imposed in connection with the alleged environmental violations
at the Company's El Segundo-6E well. Furthermore, no assurances can be given
that new environmental requirements will not be imposed on the Company's
operations and activities, and the Company cannot predict how environmental laws
and regulations will be administered or enforced in the future in Colombia and
the other countries in which the Company operates. Significant changes in
environmental requirements or in the administration and enforcement of
environmental laws and regulations in areas where the Company operates could
have a material adverse effect on the Company.
COMPETITION
The Company encounters competition from other oil and gas companies in all
areas of its operations, including the acquisition of producing properties. The
Company's competitors in Colombia include major integrated oil and gas companies
and independent oil and gas companies. Many of its competitors are large,
well-established companies with substantially larger operating staffs and
greater capital resources than the Company's and which, in many instances, have
been engaged in the oil and gas business for a longer time than the Company.
Such companies may be able to offer more attractive terms in obtaining
concessions for exploratory prospects and secondary operations and to pay more
for productive properties and exploratory prospects and to define, evaluate, bid
for and purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment.
EMPLOYEES
At June 24, 1998 the Company had 52 full time employees, primarily
professionals, including geologists, geophysicists, and engineers.
LEGAL PROCEEDINGS
Petrolinson, S.A. and GHK Colombia (two of the Company's Subsidiaries),
along with Norman Rowlinson (the former owner of Petrolinson, S.A.) and the
heirs of Howard Thomas Corrigan, are defendants in a lawsuit recently filed in
the civil circuit court of Santa Fe de Bogota, Colombia by the heirs of Nicolas
Beltran Franco alleging that (i) a de facto company existed between Nicolas
Beltran Franco and the defendants with regards to the exploration and production
of the Dindal and Rio Seco contract areas and that
52
<PAGE> 54
(ii) prior to the execution of the Dindal and Rio Seco Association Contracts the
de facto company conducted exploration works in the Dindal and Rio Seco contract
areas, resulting in the plaintiffs having the right to participate in income
derived from the Dindal and Rio Seco contract areas. Despite the fact that none
of the plaintiffs is a party to the Association Contracts, the plaintiffs are
seeking 50% of the income generated by the alleged de facto company. It is
unclear from the statements made in the lawsuit, however, what percentage of the
Dindal and Rio Seco contract areas might be covered by the plaintiffs' claims
made through the alleged defacto company.
The Company's investigation of the claims made by the plaintiffs is in the
early stages; however, the Company believes that this lawsuit is without merit
and intends to defend the lawsuit vigorously. The Company believes that the
outcome of this lawsuit will not have a material adverse effect on the Company.
The Company's Colombian counsel, Raisbeck, Lara, Rodriguez & Rueda, members of
the law firm of Baker & McKenzie, based on their review of the matter to date,
are of the opinion that if the above-described claim is litigated to its
conclusion it is remote that the plaintiffs in such lawsuit would succeed on the
merits of their claim.
Other than the foregoing, there are no material proceedings to which the
Company is a party or to which any of its properties is subject.
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<PAGE> 55
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding each director
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Robert A. Hefner III......... 63 Chairman, Chief Executive Officer and Managing
Director
Breene M. Kerr............... 68 Vice Chairman
Larry A. Ray................. 50 Director, Executive Vice President and Chief
Operating Officer
Herbert C. Williamson, III... 49 Director, Executive Vice President and Chief
Financial Officer
Brian F. Egolf............... 49 Director
Sir Mark Thomson, Bt......... 57 Director
Robert B. Panero............. 68 Director
Gary F. Fuller............... 61 Director
James Scarlett............... 44 Director
</TABLE>
Set forth below is a description of the backgrounds of the directors and
executive officers of the Company.
Robert A. Hefner III has served as Chairman of the Board, Chief Executive
Officer and Managing Director of the Company since May 1997 and a director of
the Company since November 1996. Since 1959, Mr. Hefner has been Owner and
Managing Member of The GHK Company L.L.C., a private oil and gas exploration
company. See "Related Transactions -- The GHK Transaction."
Breene M. Kerr has served as Vice Chairman and director of the Company
since June 1997. Since 1994, Mr. Kerr has served as general partner of Talbot
Fairfield II L.P., an oil and gas exploration undertaking. From 1969 to 1995, he
has served as Chairman and director of Kerr Consolidated, an equipment sales and
leasing undertaking. Since 1993, Mr. Kerr has served as a director of Chesapeake
Energy Corp., a publicly traded oil and gas exploration company.
Larry A. Ray has served as Executive Vice President and Chief Operating
Officer of the Company since September 1997 and as director of the Company since
June 1997. Prior to joining the Company, he was Manager of The GHK Company
L.L.C., where he had served in various capacities since 1990.
Herbert C. Williamson, III has served as Executive Vice President, Chief
Financial Officer and director of the Company since September 1997. From 1995
through September 1997, Mr. Williamson served as Director in the Investment
Banking Department of Credit Suisse First Boston. He served as Vice Chairman and
Executive Vice President of Parker & Parsley Petroleum Company, a publicly
traded oil and gas exploration company (now Pioneer Natural Resources Company)
from 1985 through 1995.
Brian F. Egolf has been a director of the Company since November 1996. Mr.
Egolf is President of Petroleum Management Corporation, a private oil and gas
exploration company.
Sir Mark Thomson, Bt. has been a director of the Company since June 1997.
He is Managing Director of B&N Investments Limited, an investment management
company.
Robert B. Panero has been a director of the Company since June 1997. Mr.
Panero is Founder and President of Robert Panero Associates, international
strategic policy and project studies advisors.
Gary F. Fuller has been a director of the Company since June 1997. Mr.
Fuller is a Shareholder and Director of McAfee & Taft, attorneys-at-law.
54
<PAGE> 56
James Scarlett has been a director of the Company since June 1997. Mr.
Scarlett is a Partner in McMillan Binch, a Canadian law firm.
Each director holds office until the next annual meeting of stockholders
for the election of directors and until his successor has been duly elected and
qualified. Vacancies on the Board are filled by the remaining directors, and
directors elected to fill such vacancies hold office until the next annual
meeting of the Company's shareholders. Executive officers generally are elected
annually by the Board of Directors to serve, subject to the discretion of the
Board of Directors, until their successors are elected or appointed.
There is no family relationship between any of the directors or between any
director and any executive officer of the Company. For information regarding
certain business relationships between the Company and certain of its directors
and executive officers, see "Related Transactions."
COMMITTEES OF THE BOARD
The Company has established three standing committees of the Board of
Directors: an Executive Committee, an Audit Committee and a Stock Option and
Compensation Committee. Messrs. Hefner (Chairman), Kerr and Ray are members of
the Executive Committee. Messrs. Kerr, Thomson and Scarlett are members of the
Audit Committee. Messrs. Kerr, Egolf and Fuller are members of the Stock Option
and Compensation Committee (the "Compensation Committee").
The Executive Committee is delegated, during the intervals between the
meetings of the Board of Directors, all the powers of the Board in respect of
the management and direction of the business and affairs of the Company (except
only those specified in Subsection 116(2) of the Yukon Business Corporation Act)
in all cases in which specified direction in writing shall not have been given
by the Board.
The Audit Committee consults with the auditors of the Company and such
other persons as the members deem appropriate, reviews the preparations for and
scope of the audit of the Company's annual financial statements, makes
recommendations concerning the engagement and fees of the independent auditors,
and performs such other duties relating to the financial statements of the
Company as the Board of Directors may assign from time to time.
The Compensation Committee has all the powers of the Board of Directors,
including the authority to issue shares or other securities of the Company, in
respect of any matters relating to the administration of the Company's Amended
1996 Stock Option Plan, 1997 Stock Option Plan and compensation of officers,
directors, employees and other persons performing substantial services for the
Company. See "-- Executive Compensation -- Employee Benefit Plans."
DIRECTOR COMPENSATION
Directors who are also officers or employees of the Company are not
separately compensated for serving on the Board of Directors or as members of
Board committees. Directors who are not officers or employees of the Company are
eligible to participate in the Company's Amended 1996 Stock Option Plan and are
reimbursed for their out-of-pocket expenses incurred in connection with their
service as directors, including travel expenses. In June 1996, each non-employee
director received a five-year option to purchase 10,000 common shares at an
exercise price of $7.125 per share. In November 1996, upon their election as
directors, Messrs. Hefner and Egolf each received a five-year option to purchase
50,000 common shares at an exercise price of $18.75 per share. In May 1997, each
non-officer director received an option for 15,000 common shares at $10.90.
Messrs. Hefner and Egolf declined to accept such options. In June 1997, the
Company granted Mr. Ray an option to purchase 200,000 common shares at a price
of $10.70 per share. Such options vest one-third immediately with the remaining
vesting 50% at the end of one year from the date of grant and the remaining 50%
at the end of the second year from the date of grant. On September 9, 1997, the
Company granted Mr. Ray options to purchase an additional 200,000 common shares
at a price of $13.23 per share. Such options vest one-third each on the third,
fourth and fifth anniversaries of the date of grant. The Company granted options
to the other directors as follows on July 17, 1997 at an exercise price of
$10.70 per share: Mr. Hefner -- 300,000; Mr. Egolf -- 75,000; Mr.
Kerr -- 75,000; Mr. Fuller -- 75,000; Mr. Panero -- 50,000;
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<PAGE> 57
Mr. Scarlett -- 75,000; and Mr. Thomson -- 75,000. One-third of the options are
vested immediately, with the remaining vesting 50% at the end of one year from
the date of grant and the remaining 50% at the end of the second year from the
date of grant. Mr. Panero's options will vest 50% at the end of one year from
the date of grant and the remaining 50% at the end of the second year from the
date of grant. Mr. Panero also received a payment of $37,500 in lieu of 25,000
options which would have vested immediately. In September 1997, the Company
granted Mr. Williamson an option to purchase 500,000 Common Shares at an
exercise price of $13.23 per share, of which 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. On November 25, 1997, the
Company granted options at an exercise price of $18.55 per share to the
directors: 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; Mr. Thomson -- 25,000; and Mr. Ray -- 150,000.
Such options vest one-third each on the first, second, and third anniversaries
of the grant date. In each case, the Company granted these options at the
approximate prevailing market price on the date of grant.
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<PAGE> 58
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation paid by the Company to its Chief Executive Officer and each of the
other persons who served as executive officers of the Company whose annual
salary and bonus exceeded $100,000 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) $50,000 or (ii) 10% of individual
combined salary and bonus for the Named Executive Officer in that year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-----------------------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ------------------------- -------
-------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL SHARES UNDERLYING LTIP ALL OTHER
SALARY BONUS COMPENSATION AWARD(S) OPTIONS/SARS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert A. Hefner III......... 1997 -- -- -- -- 450,000 -- --
Chairman, Chief Executive 1996 50,000(2)
Officer and Managing
Director
Malcolm Butler(3)............ 1997 $ 13,301 -- -- -- 200,000 -- $250,000
Former Chief Executive
Officer
Albert E. Whitehead(3)....... 1997 $ 77,308 -- -- -- 50,000(4) -- $125,000(3)
Former Chairman of the
Board 1996 150,000 -- -- -- 185,000 -- 14,634(5)
and Chief Executive Officer 1995 125,000 -- -- -- 200,000 -- --
Larry A. Ray(6).............. 1997 $139,062 -- -- -- 550,000 -- $ 33,330(5)
Executive Vice President,
Chief Operating Officer and
Director
John P. Dorrier(7)........... 1997 $107,981 -- -- -- 40,000 -- $392,019
Former Executive Vice 1996 120,000 83,520 -- -- 151,000 -- 11,707
President 1995 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
$18.75 per share for his participation as a member of the Board of
Directors.
(3) On May 20, 1997, Mr. Whitehead resigned as an executive officer and director
of the Company. The Company entered into a consulting agreement with Mr.
Whitehead for a three-year term for $200,000 per annum. Mr. Malcolm Butler
was named Chief Executive Officer of the Company in May 1997 and received
options exercisable for 200,000 common shares at $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 $250,000, representing one year's
salary, as part of the settlement agreement with him.
(4) In May 1997, Mr. Whitehead was granted options exercisable for 50,000 common
shares at $10.90 per share. As part of the arrangements surrounding the
resignation of such person, the exercise period of the options for Mr.
Whitehead was extended from 90 days to 18 months, which extension was
approved by the shareholders at the Company's 1998 annual meeting.
(5) Consists solely of amounts contributed by the Company to the Named Executive
Officer's account in the Company's 401(k) Plan.
(6) Represents salary received from commencement of employment through December
31, 1997 from the Company, which amount does not reflect an annual rate of
compensation.
(7) Mr. Dorrier terminated his employment by the Company in September 1997 and
received payment for the remainder of compensation due under his contract of
employment. See "Employment Agreements" below.
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<PAGE> 59
OPTION/SAR GRANTS DURING 1997
The following table sets forth information regarding individual grants of
options by the Company during the fiscal year ended December 31, 1997 to each of
the Named Executive Officers, and their potential realizable values.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE VALUE
SHARES % OF TOTAL AT ASSUMED ANNUAL RATES OF
UNDERLYING OPTIONS/SARS EXERCISE SHARE PRICE APPRECIATION FOR
OPTIONS/SARS GRANTED TO OR BASE OPTION TERM(1)
GRANTED EMPLOYEES IN PRICE EXPIRATION ----------------------------
(#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hefner III...... 300,000 9.4% 10.70 07/17/2007 2,018,752 5,115,913
150,000 4.7% 18.55 11/25/2007 1,749,899 4,434,538
Malcolm Butler............ 200,000 6.3% 10.90 05/01/2002 602,294 1,330,912
Albert E. Whitehead....... 50,000 1.6% 10.90 05/01/2002 150,573 332,728
Larry A. Ray.............. 200,000 6.3% 10.70 06/12/2007 1,345,835 3,410,609
200,000 6.3% 13.23 09/09/2007 1,664,835 4,217,843
150,000 4.7% 18.55 11/25/2007 1,749,899 4,434,588
John P. Dorrier........... 40,000 1.3% 10.90 05/01/2002 120,459 266,112
</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.
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 year-end. The Company does not
have any outstanding stock appreciation rights.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY
ACQUIRED OPTIONS, WARRANTS/SARS AT OPTIONS, WARRANTS/SARS
ON VALUE FISCAL YEAR-END(#)(1) AT FISCAL YEAR-END($)(2)
EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Robert A. Hefner III..... 0 0 150,000 350,000 685,000 1,370,000
Malcolm Butler........... 0 0 200,000 0 1,330,000 0
Albert E. Whitehead...... 0 0 235,000 0 1,375,000 0
Larry A. Ray............. 0 0 66,666 483,334 456,662 1,777,338
John P. Dorrier.......... 131,000 1,883,089 135,000 0 576,600 0
</TABLE>
- ---------------
(1) Represents the difference between the exercise price of the option and the
closing price on the date of exercise.
(2) Based on a closing price on December 31, 1997 of $17.55 per share.
EMPLOYMENT AGREEMENTS
The Company and Mr. Dorrier entered into a three-year employment contract
which provided that he would receive an annual base salary of $150,000 and, in
the sole discretion of the Compensation Committee of the Board, 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 officer could have resigned upon three months'
prior written notice. The Company and Mr. Dorrier also entered into an agreement
which provides for payments to the executive in the event there is a Change of
Control (as defined) of the Company and the executive's employment is terminated
(i) by the Company within twelve months thereafter, (ii) by the executive within
six months thereafter, or (iii) by the executive between six and
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<PAGE> 60
twelve months after a Change of Control if a Triggering Event has occurred. In
any such event, the executive shall be entitled to a payment equal to the
aggregate salary payable for the remaining term of his employment agreement and
the Company shall pay the executive's health insurance premium for a period of
one year unless the executive has secured comparable health insurance prior
thereto. If bonuses were paid by the Company for the year in which the
executive's employment terminated, the executive shall be entitled to a bonus
equal to the most recent annual bonus paid to him for each year or part of the
year remaining on his employment agreement, provided that such bonus payment
shall only be paid with respect to a year that the Company otherwise pays
bonuses to some or all of its employees. In addition, all options held by the
executive shall be extended until the earlier to occur of the expiration date of
the option or eighteen months after the date of the termination of his
employment by the Company or the date of his notice of intent to terminate his
employment if he elected to resign. The agreement also provides 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
Company in May 1997, a Change of Control occurred with respect to such officers.
Mr. Dorrier terminated his employment with the Company in September 1997, and
received payment for the remainder of compensation due under his contract of
employment.
The Company has entered into a five-year employment agreement with Larry A.
Ray that provides for an annual base salary of $262,500 and, in the sole
discretion of the Compensation Committee of the Board, Mr. Ray may receive
annual merit increases, annual bonuses and stock option awards. As part of his
employment agreement, Mr. Ray was granted options to purchase 200,000 common
shares at an exercise price of $10.70 per share. One-third of the options vested
immediately and the remainder vest one-half each on the first and second
anniversaries of the date of grant. On September 9, 1997, the Company granted
Mr. Ray options to purchase an additional 200,000 common shares at a price of
$13.23 per share. Of the options granted to Mr. Ray, 95,000 are under the 1996
Stock Option Plan and 105,000 are subject to shareholder approval of the 1997
Stock Option Plan at the next annual or special meeting. Such options vest
one-third each on the third, fourth, and fifth anniversaries of the date of
grant. The employment agreement may be terminated for "cause" which includes
death or serious incapacity. Under the terms of the employment agreement, Mr.
Ray will receive payments equal to the amounts remaining to be paid under the
agreement in the event of a "Change in Control" and his employment terminates
for any reason, including resignation by Mr. Ray. For purposes of this
agreement, the term "Change in Control" means (1) any merger, consolidation, or
reorganization in which the Company is not the surviving entity (or survives
only as a subsidiary of an entity), (2) any sale, lease, exchange, or other
transfer of (or agreement to sell, lease, exchange, or otherwise transfer) all
or substantially all of the assets of the Company to any other person or entity
(in one transaction or a series of related transactions), (3) dissolution or
liquidation of the Company, (4) any person or entity, including a "group" as
contemplated by Section 13(d) of the Exchange Act, acquires or gains ownership
or control (including without limitation, power to vote) of more than 45% of the
outstanding shares of the Company's voting stock (based upon voting power), or
(5) as a result of or in connection with a contested election of directors, the
persons who were directors of the Company before such election cease to
constitute a majority of the Board of Directors; provided, however, that the
term "Change in Control" shall not include any reorganization, merger,
consolidation, sale, lease, exchange, or similar transaction involving solely
the Company and one or more previously wholly owned subsidiaries of the Company.
The Company has entered into a five-year employment agreement with Mr.
Herbert C. Williamson, III that provides for an annual base salary of $100,000,
and, in the sole discretion of the Compensation Committee of the Board, Mr.
Williamson may receive annual merit increases, annual bonuses and stock option
awards. As part of his employment agreement, Mr. Williamson was granted options
to purchase 500,000 common shares at an exercise price of $13.23 per share.
Options to purchase 150,000 common shares vest immediately, options to purchase
150,000 common shares vest on September 9, 1998, and options to purchase 50,000
common shares each vest on September 9, 1999, 2000, 2001 and 2002, respectively.
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 by the
stockholders at the next annual or special meeting. The remaining terms and
conditions of Mr. Williamson's employment agreement are substantially similar to
Mr. Ray's employment agreement.
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EMPLOYEE BENEFIT PLANS
AMENDED 1996 STOCK OPTION PLAN
The Company's Amended 1996 Stock Option Plan provides a means whereby
selected employees, senior officers and directors of the Company, or of any
affiliate thereof, may be granted incentive stock options to purchase common
shares of the Company in order to attract and retain the services or advice of
such employees, senior officers and directors, and to provide added incentive to
such persons by encouraging share ownership in the Company. The Amended 1996
Stock Option Plan may provide options to purchase up to 3,000,000 of the
Company's common shares that are presently authorized but unissued or
subsequently acquired by the Company. The Amended 1996 Stock Option Plan will
terminate no later than June 10, 2006.
Pursuant to the Board's authorization, the Amended 1996 Stock Option Plan
is administered by the Compensation Committee. In the event a member of the
Board or the Compensation Committee is eligible for options under the Amended
1996 Stock Option Plan, such member of the Board or Compensation Committee will
not vote with respect to the granting of any option to himself or herself, as
the case may be. The Compensation Committee has the authority, in its
discretion, to determine all matters relating to options granted under the plan,
including selection of the individuals to be granted options, the number of
shares to be subject to each option, the exercise price, and all other terms and
conditions of the options. Grants under the Amended 1996 Stock Option Plan do
not have to be identical in any respect, even when made simultaneously. The
Compensation Committee's interpretation and construction of any terms or
provisions of the Amended 1996 Stock Option Plan on any option issued
thereunder, or of any rule or regulation promulgated in connection therewith,
will be conclusive and binding on all interested parties.
Grants of incentive stock options may be made under the Amended 1996 Stock
Option Plan only to an individual who, at the time the option is granted, is an
employee, senior officer or director of the Company or an affiliate of the
Company, as that term is defined in the Business Corporations Act (Yukon
Territory), a trustee on behalf of such individual, or an entity, all of the
voting securities of which are beneficially owned by an employee or director.
The Compensation Committee will establish the maximum number of shares that
may be reserved pursuant to the exercise of each option and the price per share
at which such option is exercisable, provided that the number of shares that may
be reserved pursuant to the exercise of such options and granted to any person
shall not exceed 5% of the issued and outstanding share capital of the Company.
Furthermore, the exercise price of such options must not be less than the
closing price of the Company's shares on The Toronto Stock Exchange on the day
immediately preceding the date of grant of such options. The Compensation
Committee may establish the term of each option, but if not so established, the
term of each option will be five years from the date it is granted, but in no
event shall the term of any option exceed 10 years.
Subject to any vesting schedule established by the Compensation Committee,
each option may be exercised in whole or in part at any time and from time to
time. Options must be exercised by delivery to the Company of a notice of the
number of shares with respect to which the option is being exercised, together
with payment of the exercise price. Payment of the option exercise price must be
made in full at the time notice of exercise of the option is delivered to the
Company and may be in cash or, to the extent permitted by the Compensation
Committee and applicable laws and regulations, by delivery of Common Shares of
the Company held by the optionee having a fair market value (as determined in
the discretion of the Compensation Committee) equal to the exercise price.
Payment by the optionee in Common Shares will not be accepted unless the
optionee has owned the Common Shares for a period of at least 6 months.
Options granted under the Amended 1996 Stock Option Plan may not be
transferred, assigned, pledged, or hypothecated in any manner other than by will
or by the applicable laws of descent and distribution and shall not be subject
to execution, attachment, or similar process. In the event of death of an
optionee, the option may be exercised by the personal representative of the
optionee's estate or by the persons to whom the optionee's rights pass by will
or by the applicable laws of descent and distribution.
If the optionee's relationship with the Company or any affiliate ceases for
any reason other than termination for cause, death, or total disability, and
unless by its terms the option sooner terminates or expires,
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then the optionee may exercise, for a 90-day period thereafter that portion of
the optionee's option that is exercisable at the time of such cessation, but the
optionee's option shall terminate at the end of such 90-day period as to all
shares for which it has not theretofore been exercised, unless such expiration
has been waived in the agreement evidencing the option or by resolution adopted
at any time by the Compensation Committee. Upon the expiration of the 90-day
period following cessation of an optionee's relationship with the Company or an
affiliate, the Compensation Committee has sole discretion in a particular
circumstance to extend the exercise period following such cessation beyond such
90-day period, subject to any such extension being pre-cleared by the Toronto
Stock Exchange. If an optionee is terminated for cause, any option granted under
the Amended 1996 Stock Option Plan will automatically terminate as of the first
discovery by the Company of any reason for termination for cause, and such
optionee will thereupon have no right to purchase any shares pursuant to such
option. "Termination for cause" means dismissal for dishonesty, conviction or
confession of a crime punishable by law (except a minor violation), fraud,
misconduct, or disclosure of confidential information.
Subject to the terms and conditions and within the limitations of the
Amended 1996 Stock Option Plan, the Compensation Committee may modify or amend
outstanding options granted under the plan, subject to the prior approval of the
Toronto Stock Exchange. The modification or amendment of an outstanding option
will not, without the consent of the optionee, impair or diminish any of such
optionee's rights or any of the Company's obligations under such option.
The aggregate number and class of shares for which options may be granted
under the Amended 1996 Stock Option Plan, the number and class of shares covered
by each outstanding option and the exercise price per share thereof (but not the
total price), and each such option, must all be proportionately adjusted for any
increase or decrease in the number of issued common shares of the Company
resulting from a split-up or consolidation of shares or any like capital
adjustment, or the payment of any share dividend out of the ordinary course. In
the event of a liquidation or reorganization of the Company in which the
shareholders of the Company receive cash, shares, or other property in exchange
for or in connection with their common shares, any option granted under the
Amended 1996 Stock Option Plan will terminate, but the optionee will have the
right immediately prior to such liquidation or reorganization to exercise his
option to the extent the vesting requirements set forth in the option agreement
have been satisfied. If the shareholders of the Company receive shares in the
capital of another corporation in exchange for their common shares, all options
granted under the Amended 1996 Stock Option Plan must be converted into options
to purchase such other corporation's shares, unless the Company and such other
corporation, in their sole discretion, determine that any or all such options
must terminate in accordance with the foregoing provisions applicable to a
liquidation or reorganization. The amount and price of such converted options
must be adjusted in the same proportion as used for determining the number of
shares the holders of the common shares receive in any such exchange. Unless
accelerated by the Compensation Committee, the vesting schedule set forth in the
option agreement will continue to apply to such converted options.
The Board of Directors of the Company may at any time suspend, amend, or
terminate the Amended 1996 Stock Option Plan, but in the case of amendments to
the plan, such amendments must be pre-cleared with the Toronto Stock Exchange.
Any amendment to the Amended 1996 Stock Option Plan that increases the number of
shares that may be issued under the plan, changes the designation of the
participants or class of participants eligible for participation in the plan, or
otherwise materially increases the benefits accruing to the participants under
the plan, must be approved by the holders of a majority of the Company's
outstanding voting shares, voting either in person or by proxy at a duly held
shareholders meeting, within 12 months before or after any such amendment.
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan gives certain directors, officers, and employees
of the Company, and its subsidiaries and affiliates an opportunity to develop a
sense of proprietorship and personal involvement in the development and
financial success of the Company, and to encourage them to remain with and
devote their best efforts to the business of the Company, thereby advancing the
interests of the Company and its shareholders. Accordingly, the Company may
grant to certain directors, officers, and employees options to
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purchase up to an aggregate of 3,000,000 common shares of the Company common
shares pursuant to the 1997 Stock Option Plan. Such common shares may consist of
authorized but unissued common shares or previously issued common shares
reacquired by the Company. The 1997 Stock Option Plan is an amendment and
restatement of the plan as previously adopted by the Board on September 9, 1997,
and supersedes and replaces in its entirety such previously adopted plan. The
1997 Stock Option Plan, as amended and restated, was approved by the Company's
shareholders at the annual meeting in June 1998. Except with respect to options
then outstanding, the 1997 Stock Option Plan, as amended and restated, will
terminate upon and no further options will be granted thereunder after September
8, 2007.
The 1997 Stock Option Plan is administered by the Compensation Committee,
which has 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 Company's total common shares outstanding and during any
calendar year may not exceed 1,000,000 (subject to adjustment under certain
conditions described below). The 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 Compensation
Committee in selecting optionees, in establishing the number of common shares
which may be issued under each option and in construing the provisions of the
1997 Stock Option Plan will be final.
Options granted under the 1997 Stock Option Plan may be either incentive
stock options, within the meaning of section 422 of the 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 Company or any
parent or subsidiary corporation (as defined in section 424 of the Code) of the
Company at the time the option is granted. Non-Qualified Stock Options may be
granted to individuals who are directors (but not also employees), officers and
employees of the Company, any parent or subsidiary corporation of the Company,
or any other affiliate of the Company. 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
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company or of its parent or subsidiary corporation, within the
meaning of section 422(b)(6) of the Code, unless 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.
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 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 that 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 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 a fiduciary or otherwise, by the holder of the option.
The purchase price of common shares issued under each option will be
determined by the 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 Company and the optionee which shall contain such terms and
conditions as may be approved by the Compensation Committee, provided that each
such option must expire not later than 10 years 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
shares of common shares under the option in
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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 therefor ("Stock Appreciation
Rights"), on such terms and conditions as the Compensation Committee in its sole
discretion may prescribe. The 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
shares of (plus cash if necessary) having a fair market value equal to such
option price.
Common shares 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 Company effects a subdivision or
consolidation of common shares or the payment of a share dividend on common
shares without receipt of consideration by the Company, the number of shares
with respect to which such option may thereafter be 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 Company recapitalizes, reclassifies its capital stock, or otherwise
changes its capital structure (a "recapitalization"), the number and class of
shares covered by an option theretofore granted will be adjusted so that such
option will thereafter cover the number and class of shares and securities to
which the optionee would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the recapitalization, the optionee had
been the holder of record of the number of common shares then covered by such
option. If the Company 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 common share under any option theretofore granted shall be
reduced by the amount of such extraordinary dividend payable on a common share
if paid in cash or the fair market value (as determined by the Compensation
Committee) of any property distributable on a common share if paid in kind.
If in the event of any "Corporate Change," as defined in the 1997 Stock
Option Plan, the 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 Compensation Committee,
after which specified date all unexercised options and all rights of optionees
thereunder will terminate, (2) require the mandatory surrender to the Company by
selected optionees of some or all of the outstanding options held by such
optionees (irrespective of whether such options are then exercisable under the
provisions of the plan) as of a date, before or after such Corporate Change,
specified by the Compensation Committee, in which event the Compensation
Committee will thereupon cancel such options and the Company will pay to each
optionee an amount of cash per common share according to a formula specified in
the 1997 Stock Option Plan, (3) make any adjustments to options then outstanding
as the Compensation Committee, in its sole discretion, deems appropriate to
reflect such Corporate Change, or (4) provide that the number and class of
shares covered by an option theretofore granted will be adjusted so that such
option will thereafter cover the number and class of shares or 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.
The Board in its discretion may terminate the 1997 Stock Option Plan at any
time with respect to common shares for which options have not theretofore been
granted. The Board 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 may not make any 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
Company.
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RELATED TRANSACTIONS
THE GHK TRANSACTION
In April 1996, the Company 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 Company of an additional 35%
participating interest in the Association Contracts in consideration of the
issuance of up to 16,000,000 common shares by the Company to three entities
holding such interests or to their respective shareholders (collectively, the
"GHK Transaction"). Effective July 26, 1996, pursuant to the terms of three
separate share purchase agreements, the Company agreed to issue an aggregate of
16,777,143 common shares to nineteen unrelated parties, in consideration of the
Company's acquisition of (a) 100% of the issued and outstanding shares of GHK
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 transaction, the Company
acquired an additional 36.7% indirect interest in the Association Contracts. As
a condition to the GHK Transaction, the Company also entered into a registration
rights agreement, escrow agreement, management agreement and voting support
agreement, each of which is more particularly described below.
Pursuant to the terms of the share purchase agreement between the Company
and Robert A. Hefner III, the Company purchased 100% of the issued and
outstanding shares of GHK Colombia from Mr. Hefner in consideration for the
issuance of 5,002,972 Class A Preferred Shares Series 1 of the Company to him.
Pursuant to the terms of the share purchase agreement between the Company and
the members of Esmeralda LLC, the Company purchased 100% of the membership
interests of Esmeralda LLC from such members in consideration for the issuance
of an aggregate of 4,469,028 B Special Warrants (the "B Warrants") to such
members. Pursuant to the terms of the share purchase agreement between the
Company and the members of Cimarrona LLC, the Company purchased a 62.963%
membership interest in Cimarrona LLC from such members in consideration for the
issuance of an aggregate of 7,305,143 B Warrants to such members. The Preferred
Shares and the B Warrants were issued at a deemed price per share of $9.125
which was based upon the closing price of the Company's common shares on the
Canadian Dealer Network on July 26, 1996. Under the terms of the share purchase
agreement each of the parties agree to indemnify the other for certain matters
relating to the business prior to the transaction.
Each B Warrant was exercisable into one Common Share without payment of
additional consideration and was automatically converted into a Common Share, in
accordance with the terms of the Company's Articles of Continuance, in February
1997. Each Preferred Share was entitled to one vote per share, was exercisable
into one common share without payment of additional consideration and was also
automatically converted into a common share, in accordance with the terms of the
Company's Articles of Continuance, in February 1997.
The shares of GHK Colombia and the 62.963% interest in Cimarrona were
transferred to Seven Seas Petroleum Colombia Inc.; 50% of the membership
interest in Esmeralda was transferred to Seven Seas Petroleum Colombia Inc.; and
50% of such membership interest was transferred to Seven Seas Petroleum
Holdings, Inc., because a limited liability company was then required to have a
minimum of two members.
As a condition of completing the GHK Transaction, the Company also entered
into a registration rights agreement with the holders of the B Warrants and the
Preferred Shares which currently entitles such holders to notice of proposed
public offerings or private placements by the Company under the Securities Act
(Ontario) and to include common shares held by such holders in such offerings
subject to limitations which may be imposed by the managing underwriter of any
such offering.
As a condition of the Company obtaining the consent of the Ontario
Securities Commission to the GHK Transaction, the Company, the holders of
Preferred Shares and B Warrants and the Montreal Trust Company of Canada, as
trustee, entered into an escrow agreement dated July 26, 1996 (the "GHK Escrow
Agreement") pursuant to which 70% of the securities issued by the Company in the
GHK Transaction, or upon conversion or the securities issued therein, are held
in escrow. An aggregate of 11,744,000 common
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shares are currently held in escrow and such common shares may not be sold,
assigned, pledged, or transferred until released from escrow in accordance with
the terms of the GHK Escrow Agreement. Shares held in escrow may be voted by the
registered holders thereof. Pursuant to the terms of the GHK Escrow Agreement,
the securities held in escrow shall be released as follows: (i) one-third of the
securities deposited in escrow shall be released on each of July 26, 1997, 1998
and 1999 or (ii) the securities may be released in full if the Company or the
owner of such securities provides the Ontario Securities Commission with
technical reports acceptable to the director thereof that establish a
determinate value as of April 26, 1996 for the interests in the Association
Contracts transferred to the Company or its subsidiaries, of $118,908,000 or
more. If interim technical reports establish a determinate value of less than
$118,908,000 for such interests, proportionate releases from escrow may be
permitted.
Prior to the GHK Transaction, GHK Company L.L.C. ("GHK L.L.C."), an
Oklahoma limited liability company, the principal owner of which is Robert A.
Hefner III, provided administrative and management services to GHK 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 Company, GHK
Company Colombia and GHK L.L.C. entered into a management agreement pursuant to
which GHK L.L.C. was retained by GHK 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 $15,000 per month) plus an
additional $15,000 per month and to reimburse GHK L.L.C. for all expenses
incurred in the performance of its duties under the management agreement. The
costs and expenses under the JOA are paid by the interest holders under the
Association Contracts proportionately to their percentage interests therein.
From July 26, 1996 to June 30, 1997, GHK Colombia paid an aggregate of $374,109
to GHK L.L.C. for services provided under this agreement. The management
agreement was terminated June 30, 1997.
Under the terms of a voting support agreement executed in connection with
the GHK Transaction, Seven Seas, Robert A. Hefner III, Breene M. Kerr, Albert E.
Whitehead, George H. Plewes, and Timothy T. Stephens agreed to vote or cause to
be voted all shares owned or controlled by them in favor of the slate of
directors proposed by the Company's chief executive officer. The voting support
agreement also 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 GHK Escrow
Agreement, must first be offered to be made through Yorkton Securities, Inc. or
such other investment dealer as may be designated by the Board of Directors or
the securities sold would 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 Company. The voting support agreement terminated on May
20, 1997.
Prior to the GHK Transaction, neither Mr. Hefner, Mr. Egolf nor Mr. Kerr
was affiliated with the Company. As a result of the GHK Transaction, Messrs.
Hefner and Egolf were elected directors of the Company and Mr. Hefner and Mr.
Kerr became substantial shareholders of the Company. In addition, as a result of
an agreement between Mr. Hefner, in his capacity as the selling shareholder of
GHK Colombia, the members of Esmeralda LLC and Cimarrona LLC (collectively, the
"Sellers") and Mr. Egolf, the Sellers paid Mr. Egolf an aggregate of 83,886 B
Warrants, which were subsequently converted into 83,886 common shares of which
58,720 shares were held in escrow pursuant to the GHK Escrow Agreement, as
consideration for his services to the Sellers in connection with the GHK
Transaction. As of December 31, 1997, 39,147 shares remained subject to the GHK
Escrow Agreement.
TRANSACTIONS WITH FORMER DIRECTOR AND OFFICER
Mr. Albert E. Whitehead, formerly Chairman and Chief Executive Officer of
the Company and a director, may be deemed to be a promotor of the Company. In
connection with the formation of the predecessor of the Company in February
1995, Mr. Whitehead received 1,000,000 common shares for a total
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consideration of $1.00. As of condition of the common shares being listed on the
Toronto Stock Exchange ("TSE"), the TSE required Mr. Whitehead to place 500,000
common shares held by him in escrow in accordance with the TSE's founder stock
policy. Under the terms of the escrow agreement dated January 21, 1997 (the
"Founder's Escrow Agreement") between Mr. Whitehead, the Company and Montreal
Trust Company of Canada as escrow agent, one-third of the shares subject thereto
were to be released from escrow on each of June 29, 1996, 1997 and 1998 and,
accordingly, no common shares are currently subject to the Founder's Escrow
Agreement. For a description of the common shares and options held by Mr.
Whitehead, see "Management -- Executive Compensation" and "Security Ownership of
Certain Beneficial Owners and Management."
TRANSACTIONS WITH DIRECTOR AND OFFICER
On November 1, 1997, the Executive Vice President and Chief Operating
Officer obtained a $200,000 loan from the Company, which was approved by the
disinterested members of the Board of Directors. This loan, which is secured by
Mr. Ray's personal residence, bears a 6.06% interest rate and is due November 1,
2002.
The Company's Chairman and Chief Executive Officer wholly owns GHK L.L.C.
Effective July 1, 1997, the Company entered into an administrative service
agreement with GHK L.L.C. The Company recognized $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 Company. The Company reimbursed
GHK L.L.C. $381,267 and $288,505 in 1997 and 1996, respectively, for such costs.
The Company believes the payments to GHK L.L.C. represent payment comparable to
those that would have been made in an arm's length transaction.
MTV Investments Limited Partnership ("MTV") owns 37.037% of Cimarrona LLC,
an Oklahoma limited liability company. Cimarrona LLC is a consolidated
subsidiary of the Company. Resulting from a cash call, MTV owed $541,000 to the
Company at December 31, 1997.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 15, 1998,
with respect to the beneficial ownership of the common shares, by (i) each
person known by the Company to own beneficially more than 5% of the issued and
outstanding common shares, (ii) each director of the Company and each of the
Named Executive Officers, and (iii) all executive officers and directors of the
Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
COMMON PERCENT
BENEFICIAL OWNER SHARES(1) OF CLASS
<S> <C> <C>
Robert A. Hefner III........................................ 5,387,917(2) 15%
c/o Seven Seas Petroleum Inc. Suite 960, Three Post Oak
Central 1990 Post Oak Boulevard Houston, Texas 77056
Breene M. Kerr.............................................. 2,793,417(3) 8%
c/o Brookside Company 115 Bay Street Easton, Maryland
21601
George Soros and Stanley F. Druckenmiller................... 3,058,000(4) 9%
888 Seventh Avenue, 33rd Floor New York, New York 10106
Robert W. Moore............................................. 2,184,900 6%
MTV Investments Limited Partnership 3600 West Main Street,
Suite 150 Norman, Oklahoma 73072
Brian F. Egolf.............................................. 126,386(5) *
Sir Mark Thomson, Bt........................................ 352,566(6) 1%
Robert B. Panero............................................ 597(7) *
Gary F. Fuller.............................................. 27,000(8) *
James Scarlett.............................................. 25,000(8) *
Herbert C. Williamson, III.................................. 150,256(9) *
Albert E. Whitehead......................................... 995,000(10) 3%
Malcolm Butler.............................................. 200,000(11) 1%
Larry A. Ray................................................ 173,886(12) *
John P. Dorrier............................................. 140,000(13) *
All Executive officers and directors as a group (12
persons).................................................. 10,372,005(14) 29%
</TABLE>
- ---------------
* Less than 1%
(1) Unless otherwise indicated, each of the parties listed has sole voting and
investment power over the common shares owned. The number of shares
indicated includes, in each case, the number of common shares issuable upon
exercise of options to purchase common shares ("Options") subject to the
Amended 1996 Stock Option Plan and 1997 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 June 15, 1998.
(2) Includes 150,000 common shares currently issuable upon exercise of Options,
15,000 shares held by an entity in which Mr. Hefner has a substantial
interest and 3,360,607 common shares beneficially owned by Mr. Hefner and
held in escrow pursuant to the GHK Escrow Agreement.
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(3) Includes 25,000 common shares currently issuable upon exercise of an
Option, consists of 853,201 shares beneficially owned by a limited
partnership in which Mr. Kerr serves as a general partner and includes
1,915,216 common shares held in escrow pursuant to the GHK Escrow
Agreement.
(4) Of the common shares identified, Mr. Soros, Mr. Druckenmiller, and Soros
Fund Management LLC. may be deemed the beneficial owner of 1,258,700 common
shares. Mr. Druckenmiller and Duquesne Capital Management, LLC may also be
deemed the beneficial owner of the remaining 1,799,300 common shares.
(5) 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 shares held in escrow pursuant to the GHK Escrow
Agreement.
(6) Includes 25,000 common shares currently issuable upon exercise of an Option
and 199,531 common shares held in escrow pursuant to the GHK Escrow
Agreement.
(7) Includes 234 common shares held by Mr. Panero's wife and 363 common shares
held in escrow pursuant to the GHK Escrow Agreement.
(8) Includes 25,000 common shares currently issuable upon exercise of Options.
(9) Includes 150,000 common shares currently issuable upon exercise of Options.
(10) Includes 235,000 common shares currently issuable upon exercise of Options
and 166,667 common shares held in escrow pursuant to the Founder's Escrow
Agreement. Mr. Whitehead resigned as an officer and director of the Company
in May 1997.
(11) Includes 200,000 common shares currently issuable upon exercise of Options.
(12) Includes 66,666 common shares currently issuable upon exercise of an Option
and an additional 104,500 common shares owned by Mr. Ray's wife.
(13) Includes 135,000 common shares currently issuable upon exercise of Options.
(14) Includes 1,086,666 common shares currently issuable upon exercise of
Options and an aggregate of 5,514,501 common shares and 166,667 common
shares held in escrow pursuant to the GHK Escrow Agreement and the
Founder's Escrow Agreement, respectively.
VOTING SUPPORT AGREEMENT
Under the terms of a voting support agreement by and between the Company
and Hazel Ventures Ltd., the sole shareholder of Petrolinson, S.A. ("Hazel
Ventures"), Hazel Ventures agreed that prior to July 19, 1998, it will vote all
common shares of the Company owned or controlled by it in favor of the slate of
directors proposed by the Company's Chief Executive Officer and will require any
purchaser of its shares to agree to be bound by the terms of the agreement
unless the purchaser acquires the shares in the open market. Hazel acquired
1,000,000 common shares, or 2.9% of the Company's outstanding common shares, in
exchange for the transfer of its ownership of Petrolinson, S.A., the holder of a
6% interest in the Association Contracts, to a subsidiary of the Company.
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DESCRIPTION OF EXISTING INDEBTEDNESS
Exchangeable Notes. In August 1997, the Company issued $25 million of
Exchangeable Notes in a private transaction with institutional and accredited
investors. Interest on the Exchangeable Notes is payable in arrears at a rate of
6% per annum on December 31 and June 30 in each year until maturity, commencing
on December 31, 1997.
A total of $13 million of the principal amount of the Exchangeable Notes
was issued pursuant to an agency agreement dated July 2, 1997 and the remaining
$12 million in principal amount of Exchangeable Notes was issued pursuant to a
private placement subscription agreement with a single investor. The
Exchangeable Notes were issued pursuant to a trust indenture made as of August
7, 1997 (the "Trust Indenture") between the Company and Montreal Trust Company
of Canada.
The Exchangeable Notes are exchangeable for a like principal amount of
Convertible Debentures on the earlier to occur of (i) the effectiveness of a
registration statement under the Securities Act, covering the issuance of the
common shares and warrants upon conversion of the Convertible Debentures and the
filing of a prospectus in compliance with certain Canadian securities
requirements and (ii) August 7, 1998. The Convertible Debentures are convertible
into Units at $11.50 per Unit, each Unit consisting of one common share and
one-half of one warrant, for a total of 2,173,913 common shares and 1,086,957
warrants. Each warrant is exercisable pursuant to an indenture made as of August
7, 1997 between the Company and Montreal Trust Company of Canada for one common
share at an exercise price of $15 and will expire on August 7, 1998. Assuming
exercise of all of the warrants, the Company will receive proceeds of $16
million. The Convertible Debentures are convertible into Units at the option of
holders at any time on the basis of one Unit for each $11.50 principal amount of
Convertible Debenture outstanding and are convertible at the option of the
Company if a registration statement and a prospectus covering the exchange into
Convertible Debentures and, in the United States, the common shares and warrants
have been declared effective under the Securities Act and certain Canadian
securities laws and have been effective during the seven-day notice period prior
to the Company's exercise of its conversion rights, provided that the Company's
shares have traded at or above $14.00 per share for 20 consecutive trading days
on the Toronto Stock Exchange. The Exchangeable Notes are, and the Convertible
Debentures will be, secured by a pledge of shares of certain of the subsidiaries
of the Company and are guaranteed by Seven Seas Petroleum Holdings, Inc.
pursuant to a limited recourse guarantee security and pledge agreement made as
of August 7, 1997 between the Company and Montreal Trust Company of Canada.
The Exchangeable Notes and Convertible Debentures are subordinate in right
of payment after default to any senior bank or financial institution financing
(whether currently existing or subsequently arising) and rank pari passu
(including the security interest thereon) with any subsequently issued
non-convertible debentures. The Trust Indenture contains anti-dilution
provisions and provision for adjustments in the class, number and price of
common shares and warrants upon the occurrence of certain events, including any
subdivision, consolidation or reclassification of the common shares of the
Company, payment of stock dividends or the amalgamation or other reorganization
of the Company.
Proposed Credit Facility. The Company currently is negotiating an agreement
with Banque Paribas providing for a $25 million senior secured revolving credit
facility. The revolving credit facility will have a term of three years.
Borrowings under the facility will bear interest, at the Company's option, at
LIBOR plus a margin of 2.75% or Citibank's base rate plus a margin of 1.00%;
provided, however, the applicable margins for both LIBOR and base rate loans
will increase by 1.25% under certain circumstances. An annual commitment fee of
0.50% will be payable on the unused available portion of the facility. In
addition, the Company will pay a customary underwriting fee and other expenses
in connection with the facility. All indebtedness under the credit facility will
be guaranteed subject to funding, by certain of the Company's Subsidiaries. The
facility will be secured by certain assets of the Company, including the stock
of certain of the Company's Subsidiaries. The facility will also contain certain
restrictive covenants which impose limitations on the Company and its
Subsidiaries, with respect to, among other things, (i) the creation of liens,
(ii) mergers, acquisitions or dispositions of assets, (iii) incurrence of
indebtedness, (iv) transactions with affiliates, (v) sale-leaseback transactions
and (vi) dividends and other restricted payments. The credit facility will also
require the
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Company to maintain a minimum current ratio, a minimum tangible net worth, and a
minimum debt coverage ratio. The credit facility will contain customary events
of default. While it is anticipated that the credit facility will be completed
in the third quarter of 1998, no assurance can be made that the credit facility
will be completed on the terms set forth above or on terms acceptable to the
Company.
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DESCRIPTION OF NOTES
GENERAL
The Original Notes were issued pursuant to the Indenture between Seven Seas
and the Trustee in a private transaction that was not subject to the
registration requirements of the Securities Act. The Exchange Notes will be
issued under the Indenture, which will be qualified under the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act. The Notes are subject to all such terms,
and prospective Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement of such terms. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. A copy of the Indenture is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. Definitions of
certain capitalized terms used in the Indenture and in the following summary are
set forth below under "-- Certain Definitions."
The Notes represent senior obligations of Seven Seas, ranking pari passu in
right and priority of payment with all existing and future senior Indebtedness
of Seven Seas and senior in right and priority of payment to all Indebtedness of
Seven Seas that is expressly subordinated to the Notes. On a pro forma basis
after giving effect to the issuance of the Original Notes and the application of
the net proceeds therefrom, as of December 31, 1997, Seven Seas would have had
outstanding approximately $135.0 million of Indebtedness, including $25.0
million of secured convertible Indebtedness represented by the Exchangeable
Notes. Seven Seas' Subsidiaries would have had approximately $7.0 million of
outstanding liabilities, including trade payables (but excluding the guarantee
by Seven Seas Petroleum Holdings Inc. of $25.0 million in aggregate principal
amount of the convertible Exchangeable Notes issued by Seven Seas).
The Notes will be effectively subordinated to any and all existing and
future secured Indebtedness of Seven Seas, including Indebtedness under the
proposed credit facility, to the extent of the value of the assets securing such
Indebtedness. The Notes will be effectively senior to other senior Indebtedness
of Seven Seas to the extent of the value of the Pledged Securities. See
"-- Pledged Securities." The Notes will be effectively subordinated to all
liabilities of Seven Seas' Subsidiaries that are not Guarantors and to all
existing and future secured Indebtedness of Seven Seas' Subsidiaries that are
Guarantors, to the extent of the value of the assets securing such Indebtedness.
On the date of this Prospectus, none of Seven Seas' subsidiaries have guaranteed
Seven Seas' obligations under the Notes. However, the Indenture provides that if
any Restricted Subsidiary guarantees the payment of any Indebtedness of Seven
Seas (other than any guarantee of the Notes and the guarantee of the
Exchangeable Notes or the Convertible Debentures by Seven Seas Petroleum
Holdings Inc.) or any Indebtedness of any Guarantor at any date subsequent to
the Issue Date, then Seven Seas will cause the Notes to be equally and ratably
guaranteed by such Restricted Subsidiary on a senior or pari passu basis. In
such event, Seven Seas' obligations under the Notes may be fully and
unconditionally guaranteed on a senior or pari passu basis, jointly and
severally, by each Restricted Subsidiary of Seven Seas that executes and
delivers a supplemental indenture to the Indenture pursuant to the terms of the
covenant described below under the caption "-- Certain Covenants -- Covenant to
Enter into Subsidiary Guarantees." The Indenture permits the future incurrence
of certain additional Indebtedness by Subsidiaries of Seven Seas pursuant to the
covenant described under "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Preferred Stock."
Any Original Notes that remain outstanding after the completion of the
Exchange Offer, together with the Exchange Notes issued in connection with the
Exchange Offer, generally will be treated as a single class of securities under
the Indenture.
As of the date hereof, all of Seven Seas' Subsidiaries constitute
Restricted Subsidiaries for the purposes of the Indenture. Under certain
circumstances, Seven Seas will be able to designate future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many
of the restrictive covenants set forth in the Indenture.
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PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $110 million and
will mature on May 15, 2005. Interest on the Notes will accrue at the rate of
12 1/2% per annum and will be payable semi-annually, in arrears on May 15 and
November 15, commencing on November 15, 1998, to Holders of record on the
immediately preceding May 1 and November 1. Interest on the Exchange Notes will
accrue from the date of issuance of the Original Notes, May 7, 1998.
Consequently, Holders who exchange their Original Notes for Exchange Notes will
receive the same interest on November 15, 1998 that they would have received had
they accepted the Exchange Offer. Interest will be computed on the basis of a
360-day year comprising twelve 30-day months. Principal, premium, if any,
Liquidated Damages and Additional Amounts, if any, and interest on the Notes are
payable at the office or agency of Seven Seas maintained for such purpose within
the City and State of New York or, at the option of Seven Seas, payment of
Liquidated Damages and Additional Amounts, if any, or interest may be paid on
Certificated Notes by check mailed to the Holders of the Notes at their
respective addresses set forth in the register of Holders of Notes; provided
that all payments with respect to Global Notes and Certificated Notes the
Holders of which have given wire transfer instructions to Seven Seas and its
paying agent prior to the applicable record date for such payment will be made
by wire transfer of immediately available funds to the accounts specified by the
Holders thereof. Until otherwise designated by Seven Seas, Seven Seas' office or
agency will be the office of the Trustee maintained for such purpose. Seven Seas
may change such office or agency without prior notice to Holders of the Notes,
and any of its Subsidiaries may act as Paying Agent or Registrar. The Notes are
issuable only in denominations of $1,000 and integral multiples thereof.
PAYMENT OF ADDITIONAL AMOUNTS
All payments of principal of, premium, if any, and interest on, each Note
and Liquidated Damages, if any, will be made free and clear of, and without
withholding or deduction for or on account of, any current or future taxes,
levies, imposts, deductions, withholdings, collections, duties, assessments or
charges of whatever nature and any fines, penalties, interest or liabilities
with respect thereto imposed, levied, collected, withheld or assessed by or on
behalf of Canada, the Cayman Islands, Colombia or any other jurisdiction with
which Seven Seas or any Guarantor has any connection (including any jurisdiction
from or through which payments under the Notes or the Subsidiary Guarantees are
made) or any political subdivision or authority therein or thereof having power
to tax (referred to herein as a "Tax" or "Taxes"), unless such withholding or
deduction is required by law or by regulation or governmental policy having the
force of law. In the event that any such withholding or deduction for or on
account of any Tax is required (excluding any Taxes imposed on a Holder by the
jurisdiction (or by a political subdivision thereof) under the laws of which (or
under the laws of a political subdivision of which) the Holder is organized or
if such Holder is an individual, the jurisdiction (or by a political subdivision
thereof) of which such Holder is a citizen or resident (such excluded Taxes are
referred to herein as "Excluded Taxes")), Seven Seas will pay such additional
amounts ("Additional Amounts") as will result in receipt by each Holder of any
Note of such amounts as would have been received by such Holder or the
beneficial owner with respect to such Note had no such withholding or deduction
of Taxes been required, provided that:
(a) No Additional Amounts shall be payable for or on account of any
Tax which would not have been imposed but for:
(1) the existence of any present or former connection between such
Holder or the beneficial owner of such Note and Canada, the Cayman
Islands, Colombia or any other jurisdiction with which Seven Seas or any
Guarantor has any connection (including any jurisdiction from or through
which payments under the Notes or the Subsidiary Guarantees are made) or
any political subdivision or authority therein (other than merely
holding such Note), including, without limitation, such Holder or the
beneficial owner of such Note being or having been a national,
domiciliary or resident of or treated as a resident thereof or being or
having been present or engaged in a trade or business therein or having
had a permanent establishment therein; or
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(2) the presentation of such Note (where presentation is required)
more than 30 days after the date on which the payment in respect of such
Note became due and payable or provided for, whichever is later, except
to the extent that such Holder would have been entitled to such
Additional Amounts if it had presented such Note for payment on any day
within such period of 30 days; or
(3) the failure of such Holder or the beneficial owner of such Note
to comply with a request by Seven Seas addressed to such Holder (A) to
provide information concerning the nationality, residence or identity of
such Holder or such beneficial owner or (B) to make any declaration or
other similar claim or satisfy any information or reporting requirement,
which, in the case of (A) or (B), is required or imposed by a statute,
treaty, regulation or administrative practice of the taxing jurisdiction
as a precondition to exemption from all or part of such tax, assessment
or other governmental charge; or
(4) the Holder not dealing at arm's length with Seven Seas (within
the meaning of the Income Tax Act (Canada)) at the time the payment to
which the Additional Amounts relate was made;
(5) any combination of items (1), (2), (3) and (4); and
(b) No Additional Amounts shall be payable to any Holder who is not
the beneficial owner of such Note (including a fiduciary or partnership) to
the extent that the beneficial owner of such Note would not have been
entitled to such Additional Amounts had it been the Holder of the Note.
In the event that Seven Seas fails to pay any Taxes (other than Excluded
Taxes) when due to the appropriate taxing authority and a Holder is subsequently
assessed by such taxing authority in respect of such Taxes, Seven Seas shall pay
such Taxes assessed to the taxing authority. In the event that a Holder
previously shall have paid such Taxes to the taxing authority, Seven Seas shall
promptly indemnify and reimburse such Holder in respect of all such Taxes so
paid plus interest at the rate borne by the Notes.
Whenever there is mentioned, in any context, the payment of principal,
premium or interest in respect of any Note or the net proceeds received on the
sale or exchange of any Note, such mention shall be deemed to include the
payment of Additional Amounts provided for in the Indenture to the extent that,
in such context, Additional Amounts are, were or would be payable in respect
thereof pursuant to the Indenture.
OPTIONAL TAX REDEMPTION
The Notes will be redeemable, at the option of Seven Seas, in whole, but
not in part, upon giving not less than 30 nor more than 60 days' notice to the
Holders (which notice shall be irrevocable), at 100% of the principal amount
thereof, premium, if any, plus accrued and unpaid interest, Liquidated Damages
and Additional Amounts, if any, to the date fixed for redemption, if (i) as a
result of any change in or amendment to the laws, treaties, regulations or
rulings of Canada, the Cayman Islands, Colombia or any other jurisdiction with
which Seven Seas or any Guarantor has any connection (including any jurisdiction
from or through which payments under the Notes or the Subsidiary Guarantees are
made) or any political subdivision or authority therein or thereof having power
to tax, (or of any political subdivision or taxing authority thereof or therein)
or any change in official position regarding the application or interpretation
of such laws, treaties, regulations or rulings (including a holding, judgment or
order by a court of competent jurisdiction) that is proposed and becomes
effective on or after the date of the Indenture, in making any payment due or to
become due under the Notes or the Indenture, Seven Seas is or would be required
on the next succeeding interest payment date to pay Additional Amounts and (ii)
such obligation cannot be avoided by Seven Seas taking reasonable measures
available to it (which shall not include the substitution of another Person as
obligor under the Notes). No such notice of redemption shall be given earlier
than 90 days prior to the earliest date on which Seven Seas would be obligated
to pay such Additional Amounts if a payment in respect of such Notes were then
due. Prior to the publication or mailing of any notice of redemption of the
Notes as described above, Seven Seas must deliver to the Trustee an Officers'
Certificate to the effect that Seven Seas' obligation to pay Additional Amounts
cannot be avoided by Seven Seas taking reasonable measures available to it.
Seven Seas will also deliver an opinion of an independent legal counsel of
recognized standing stating that Seven Seas would be obligated to pay Additional
Amounts due to the changes in laws, treaties, regulations or rulings. The
Trustee will accept such certificate and opinion as sufficient evidence of the
satisfaction of the conditions
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precedent set forth in clauses (i) and (ii) above, in which event it will be
conclusive and binding on the Holders.
OPTIONAL REDEMPTION
Except as set forth in "-- Optional Tax Redemption" and as set forth below,
the Notes will not be redeemable at Seven Seas' option prior to May 15, 2002.
Thereafter, the Notes will be subject to redemption for cash at the option of
Seven Seas, in whole or in part, upon not less than 30 nor more than 60 days'
notice to each Holder of Notes to be redeemed, at the following redemption
prices (expressed as percentages of principal amount thereof) if redeemed during
the 12-month period beginning on May 15 of each of the years indicated below, in
each case together with any accrued and unpaid interest and Liquidated Damages
and Additional Amounts, if any, thereon to the applicable redemption date:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
<S> <C>
2002........................................................ 106.250%
2003........................................................ 103.125%
2004........................................................ 100.000%
</TABLE>
Notwithstanding the foregoing, from time to time on or before May 15, 2001,
Seven Seas may (but will not have the obligation to) redeem for cash up to
33 1/3% of the original aggregate principal amount of the Notes at a redemption
price of 112.500% of the principal amount thereof, in each case plus any accrued
and unpaid interest and Liquidated Damages and Additional Amounts, if any,
thereon to the redemption date, with the net proceeds of any Equity or Strategic
Investor Offering; provided that at least 66 2/3% of the original aggregate
principal amount of the Notes remains outstanding immediately after the
occurrence of each such redemption and that no more than one-half of the net
proceeds of such Equity or Strategic Investor Offering are used to effect such
redemption; and provided, further,that each such redemption will occur within 60
days of the date of the closing of any such Equity or Strategic Investor
Offering.
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are listed, or, if the Notes are not so listed, on a pro rata basis, by
lot or by such method as the Trustee will deem fair and appropriate; provided
that no Notes of $1,000 in original principal amount or less will be redeemed in
part. Notices of redemption will be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. If any Note is to be redeemed in part only,
the notice of redemption that relates to such Note will state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest will cease to accrue on Notes or portions of them called for redemption
unless Seven Seas defaults in the payment thereof.
If a Change of Control occurs prior to May 15, 2002, the Company may redeem
all, but not less than all, of the Notes at a redemption price equal to 100% of
the principal amount thereof plus the Applicable Premium as of, and accrued but
unpaid interest, if any, to, the date of redemption, and Additional Amounts and
Liquidated Damages, if any, then due (subject to the right of Holders of record
on the relevant record date to receive interest due on the relevant interest
payment date). Within 30 days following any Change of Control, Seven Seas shall
mail a notice ("Change of Control Notice") to each Holder describing the
transaction or transactions that constitute the Change of Control and either (i)
provided such Change of Control occurs prior to May 15, 2002, notifying the
Holders that it is redeeming all of the Notes, or (ii) offering to repurchase
all or any part (equal to $1,000 or an integral multiple thereof) of such
Holder's Notes as described in "Repurchase at the Option of Holders -- Change of
Control" below. If Seven Seas elects to redeem the Notes, Seven Seas shall be
obligated to redeem the Notes no later than 90 days after the Change of Control.
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ELIGIBLE SECURITIES
As required by the Indenture, on the Issue Date Seven Seas purchased
Eligible Securities in an amount that will be sufficient upon receipt of
scheduled interest and principal payments on such securities to provide for
payment in full of the first two regularly scheduled interest payments due on
the Notes on November 15, 1998 and May 15, 1999. Seven Seas used approximately
$13.5 million of the net proceeds of the offering of the Original Notes to
acquire the Eligible Securities. Seven Seas deposited the Eligible Securities in
the Eligible Securities Account.
Immediately prior to the date of each of the first two regularly scheduled
interest payments, the Company may either deposit with the Trustee, from funds
otherwise available to the Company, cash sufficient to pay the interest
scheduled to be paid on such date, or the Company may withdraw from the Eligible
Securities Account proceeds sufficient to pay the interest then due. In the
event that the Company exercises the former option, the Company may withdraw
proceeds or Eligible Securities from the Eligible Securities Account in a like
amount. A failure by the Company to pay either of the first two regularly
scheduled interest payments due on the Notes in a timely manner will constitute
an immediate Event of Default under the Indenture, with no grace or cure period.
Interest earned on the Eligible Securities may be withdrawn by the Company
from the Eligible Securities Account and used for the Company's general
corporate purposes so long as after giving effect to such withdrawal, the
Eligible Securities Account continues to hold funds and Eligible Securities in
an amount sufficient to provide for payment in full of the first two regularly
scheduled interest payments due on the Notes (or, in the event that the first
regularly scheduled interest payment has been made, an amount sufficient to
provide for payment in full of the second regularly scheduled interest payment).
The Company is obligated to maintain such amounts in the Eligible Securities
Account at all times prior to the payment in full of the second regularly
scheduled interest payment on the Notes. At any date, the Company is permitted
to reinvest the Eligible Securities held in the Eligible Securities Account in
other Eligible Securities so long as, after giving effect to such reinvestment,
the amount of Eligible Securities held in the Eligible Securities Account is
sufficient, upon receipt of scheduled interest and principal payments on such
securities, to provide for payment of the remaining regularly scheduled interest
payments to be made through May 15, 1999.
Seven Seas has covenanted in the Indenture not to permit its current assets
less current liabilities (exclusive of any Eligible Securities shown on the
balance sheet of Seven Seas) to be less than (i) $10.0 million prior to November
15, 1998 and (ii) $5.0 million thereafter to May 15, 1999.
Unlike the Pledged Securities described under "-- Pledged Securities," the
Eligible Securities and the Eligible Securities Account do not constitute
security for the Notes. Accordingly, any Eligible Securities in the Eligible
Securities Account, upon a bankruptcy of the Company or similar event, will be
available to the general creditors of the Company as well as the Holders of the
Notes. The Company is prohibited, however, from incurring or suffering to exist
any Lien on, or with respect to, the Eligible Securities and the Eligible
Securities Account.
Upon payment of the first two regularly scheduled interest payments due on
the Notes in a timely manner, the Company's obligation to hold Eligible
Securities in the Eligible Securities Account will terminate.
PLEDGED SECURITIES
As also required by the Indenture, on the Issue Date Seven Seas purchased
and pledged to the Trustee, as security for the benefit of the Holders, Pledged
Securities in an amount that will be sufficient upon receipt of scheduled
interest and principal payments on such securities to provide for payment in
full of the four scheduled interest payments due on the Notes from November 15,
1999 through May 15, 2001. Seven Seas used approximately $24.3 million of the
net proceeds of the offering of the Original Notes to acquire the Pledged
Securities.
The Pledged Securities have been pledged by Seven Seas to the Trustee for
the benefit of the Holders pursuant to a Collateral Pledge and Security
Agreement, a copy of which is filed as an exhibit to the
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<PAGE> 77
Registration Statement, and are being held by the Trustee in the Pledge Account.
Immediately prior to the payment date of each of the four regularly scheduled
interest payments on the Notes from November 15, 1999 to May 15, 2001, Seven
Seas may either (a) deposit with the Trustee from funds otherwise available to
Seven Seas cash sufficient to pay the interest scheduled to be paid on such date
or (b) direct the Trustee to release from the Pledge Account proceeds sufficient
to pay interest then due on the Notes. In the event Seven Seas exercises the
option described in clause (a) above, Seven Seas may direct the Trustee to
release to Seven Seas a like amount of proceeds from the Pledge Account. A
failure to pay interest on the Notes in a timely manner on any of the four
scheduled interest payment dates from November 15, 1999 through May 15, 2001
will constitute an immediate Event of Default under the Indenture, with no grace
or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, based on the report of an internationally
recognized firm of independent public accountants selected by Seven Seas, to
provide for payment in full of the four regularly scheduled interest payments
due on the Notes from November 15, 1999 to May 15, 2001 that remain unpaid, the
Trustee will be permitted to pay to Seven Seas at Seven Seas' request, any such
excess amount. The Notes are secured by a first priority security interest in
the Pledged Securities and in the Pledge Account, and Seven Seas is prohibited
from incurring or suffering to exist any other Lien on or with respect to the
Pledged Securities or the Pledge Account. The Pledged Securities and the Pledge
Account also secure the payment of the principal amount, premium, if any,
Liquidated Damages and Additional Amounts, if any, on the Notes.
Once Seven Seas makes the scheduled interest payments due on the Notes from
November 15, 1999 through May 15, 2001, all of the remaining Pledged Securities,
if any, will be released from the Pledge Account and distributed to Seven Seas,
and thereafter the Notes will be unsecured.
PROVISION FOR SUBSIDIARY GUARANTEES
On the date of this Prospectus, none of Seven Seas' subsidiaries have
guaranteed Seven Seas' obligations under the Notes. However, the Indenture
provides that if any Restricted Subsidiary guarantees the payment of any
Indebtedness of Seven Seas (other than any guarantee of the Notes and the
guarantee of the Special Notes or the Convertible Debentures by Seven Seas
Petroleum Holdings, Inc.) or any Indebtedness of any Guarantor at any date
subsequent to the Issue Date, then Seven Seas will cause the Notes to be equally
and ratably guaranteed by such Restricted Subsidiary on a senior or pari passu
basis. In such event, Seven Seas' obligations under the Notes may be fully and
unconditionally guaranteed on a senior or pari passu unsecured basis, jointly
and severally, by each Subsidiary of Seven Seas that executes and delivers a
supplemental indenture to the Indenture pursuant to the terms of the covenant
described below under the caption "-- Covenant to Enter into Subsidiary
Guarantees." Seven Seas Petroleum Holdings Inc., a Restricted Subsidiary of
Seven Seas, has guaranteed the Exchangeable Notes issued in August 1997 by Seven
Seas in an aggregate principal amount of $25.0 million.
Notwithstanding the foregoing and the other provisions of the Indenture,
any Subsidiary Guarantee of the Notes by a Restricted Subsidiary shall provide
by its terms that it shall be automatically and unconditionally released and
discharged upon (i) any sale, exchange or transfer, to any Person that is not an
Affiliate of Seven Seas, of all of Seven Seas' Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release or
discharge of the Guarantee that resulted in the creation of such Subsidiary
Guarantee, except a discharge or release by or as a result of payment under such
Guarantee. The Indenture will provide that any Guarantor may consolidate with or
merge into or sell its assets to Seven Seas or another Guarantor without
limitation and will provide that any Guarantor may consolidate with or merge
into or sell its assets to other Persons upon terms and conditions similar to
those generally applicable to Seven Seas, as more fully set forth in the
Indenture. For a summary of such terms and conditions applicable to Seven Seas,
see "-- Certain Covenants -- Merger, Consolidation or Sale of Assets."
Although Holders of the Notes will be direct creditors of each Guarantor by
virtue of its Subsidiary Guarantee, existing or future creditors of a Guarantor,
a trustee in bankruptcy or a Guarantor as a debtor-in-
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possession could avoid or subordinate such Subsidiary Guarantee, under United
States fraudulent conveyance laws, if applicable, in the event that it were
successful in establishing that (i) the Subsidiary Guarantee was incurred with
intent to hinder, delay or defraud any present or future creditor or (ii) the
Guarantor in question did not receive fair consideration or reasonably
equivalent value for issuing its Subsidiary Guarantee and that it (a) was
insolvent at the time of such issuance, (b) was rendered insolvent by reason of
such issuance, (c) was engaged in a business or transaction for which its assets
constituted unreasonably small capital to carry on its business or (d) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured. Among other things, a legal challenge of such Subsidiary
Guarantee on United States fraudulent conveyance grounds may focus on the
benefits, if any, realized by the Guarantor in question as a result of the
issuance by Seven Seas of the Notes. The provisions of the Indenture would
generally limit the obligations of each Guarantor to the maximum amount that
would not constitute a fraudulent conveyance or transfer under applicable law.
To the extent that any Subsidiary Guarantee was avoided as a fraudulent
conveyance or held unenforceable for any other reason (or limited pursuant to
such provision), the holders of the Notes would cease to have any claim (or, as
applicable, have only a limited claim) in respect of a Guarantor and would be
solely creditors of Seven Seas or any Guarantor whose Subsidiary Guarantee was
not avoided or held unenforceable (or to the extent not so limited). In the
event of such limitation (and to the extent of such limitation), the claims of
the holders of the Notes would be subject to the prior payment of all
liabilities and Preferred Stock claims of the Subsidiaries who were not valid
Guarantors. See "Risk Factors -- Risks Related to an Investment in the
Notes -- Fraudulent Conveyance and Other Enforceability Considerations Relating
to Future Subsidiary Guarantees." Each Guarantor that makes a payment or
distribution under a Subsidiary Guarantee shall be entitled to contribution from
each other Guarantor so long as the exercise of such right does not impair the
rights of the Holders under the Subsidiary Guarantee.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
Seven Seas is not required to make any mandatory redemption, purchase or sinking
fund payments with respect to the Notes prior to the maturity date.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control at
any time and subject to Seven Seas' right to redeem all of the Notes as
described above in "Optional Redemption," each Holder of Notes shall have the
right to require Seven Seas to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages and Additional Amounts, if any, thereon to the
date of purchase (the "Change of Control Payment"). Within 30 days following any
Change of Control Seven Seas will mail a Change of Control Notice to each
Holder. The offer to repurchase shall be made in the Change of Control Notice
and shall offer to repurchase Notes pursuant to the procedures required by the
Indenture and described in the Change of Control Notice. Seven Seas will comply
with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
The Change of Control Offer will remain open for at least 20 Business Days
following its commencement but no longer than 40 days, except to the extent that
a longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Offer
Period (the "Change of Control Purchase Date"), Seven Seas will purchase all
Notes validly tendered and not properly withdrawn pursuant to the Change of
Control Offer. Payment for any Notes so purchased will be made in the same
manner as interest payments are made on the Notes.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest and Liquidated Damages and Additional Amounts, if
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any, will be paid to the Person in whose name a Note is registered at the close
of business on such interest record date, and no additional interest will be
payable to Holders who tender Notes pursuant to the Change of Control Offer.
On the Change of Control Purchase Date, Seven Seas will, to the extent
lawful, (1) accept for payment all Notes or portions thereof validly tendered
and not properly withdrawn pursuant to the Change of Control Offer, (2) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so validly tendered and not properly
withdrawn and (3) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by Seven Seas. The Paying
Agent will promptly mail to each Holder of Notes so validly tendered and not
properly withdrawn the Change of Control Payment for such Notes, and the Trustee
will promptly authenticate and mail (or cause to be transferred by book entry)
to each Holder a new Note equal in principal amount to any unpurchased portion
of the Notes surrendered, if any, provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. Seven Seas will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date.
Except as described above, the Indenture does not contain provisions that
permit the Holders of Notes to require Seven Seas to redeem the Notes or
otherwise afford the Holders of the Notes protection in the event of a takeover,
recapitalization, highly leveraged transaction or similar restructuring,
including an issuer recapitalization or similar transaction with management. The
existence of the Holder's right to require Seven Seas to repurchase such
Holder's Notes upon the occurrence of a Change of Control may or may not deter a
third party from seeking to acquire Seven Seas in a transaction that would
constitute a Change of Control.
Seven Seas' ability to repurchase Notes pursuant to a Change of Control
Offer may be limited by a number of factors. The proposed credit facility
provides that certain change of control events with respect to Seven Seas would
constitute a default thereunder permitting the lending parties thereto to
accelerate the Indebtedness thereunder. In addition, certain events that may
obligate Seven Seas to offer to repay all outstanding obligations under the
proposed credit facility may not constitute a Change of Control under the
Indenture. See "Description of Existing Indebtedness." Moreover, Seven Seas may
not have sufficient resources to repay Indebtedness under the proposed credit
facility, and Seven Seas may not have sufficient resources to repurchase
tendered Notes. Furthermore, any future credit agreements or other agreements
relating to senior Indebtedness to which Seven Seas becomes a party may contain
similar restrictions and provisions. In the event a Change of Control occurs at
a time when Seven Seas is directly or indirectly prohibited from purchasing
Notes, Seven Seas could seek the consent of its lenders to the purchase of Notes
or could attempt to refinance the borrowings that contain such prohibition. If
Seven Seas does not obtain such a consent or repay such borrowings, the purchase
of Notes will remain prohibited. The failure by Seven Seas to purchase tendered
Notes may constitute a breach of the Indenture that would, in turn, constitute a
default under the proposed credit facility or other Indebtedness and could lead
to the acceleration of the Indebtedness under the proposed credit facility or
such other Indebtedness. In any such event, the security granted in respect of
the proposed credit facility and any security granted in respect of any such
other Indebtedness could result in the Holders of the Notes receiving less
ratably than other creditors of Seven Seas.
"Change of Control" means the occurrence of any of the following: (i) any
Person, other than one or more Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 of the Exchange Act, provided that
such Person shall be deemed to have "beneficial ownership" of all shares that
any such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total voting power of the Voting Stock of Seven Seas; provided,
however, that the Permitted Holders beneficially own (as defined above),
directly or indirectly, in the aggregate a lesser percentage of the total voting
power of the Voting Stock of Seven Seas than such other Person and do not have
the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors (for the purposes of
this clause (i), such other Person shall be deemed to beneficially own any
Voting Stock of a specified corporation held by a parent corporation, if such
other Person is the beneficial owner (as defined in this clause (i)), directly
or indirectly, of more than 50% of the voting power of the Voting Stock of such
parent corporation and the Permitted Holders
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beneficially own (as defined above), directly or indirectly, in the aggregate a
lesser percentage of the voting power of the Voting Stock of such parent
corporation and do not have the right or ability by voting power, contract or
otherwise to elect or designate for election a majority of the board of
directors of such parent corporation); (ii) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board of
Directors (together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of Seven Seas was
approved by a vote of 66 2/3% of the directors of Seven Seas then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in office; or
(iii) the merger or consolidation of Seven Seas with or into another Person or
the merger of another Person with or into Seven Seas, or the sale of all or
substantially all the assets of Seven Seas to another Person (other than a
Person that is controlled by the Permitted Holders), and, in the case of any
such merger or consolidation, the securities of Seven Seas that are outstanding
immediately prior to such transaction and which represent 100% of the aggregate
voting power of the Voting Stock of Seven Seas are changed into or exchanged for
cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving corporation that represent
immediately after such transaction, at least a majority of the aggregate voting
power of the Voting Stock of the surviving corporation.
The definition of Change of Control includes a phrase relating to the sale,
lease or transfer of "all or substantially all" of the assets of Seven Seas and
its Restricted Subsidiaries, taken as a whole. Although there is a developing
body of case law interpreting the phrase "substantially all," there is no
precise definition of the phrase under applicable law. Accordingly, the ability
of a Holder of Notes to require Seven Seas to repurchase such Notes as a result
or a sale, lease or transfer of less than all of the assets of Seven Seas and
its Restricted Subsidiaries taken as a whole to another Person or group may be
uncertain.
ASSET SALES
The Indenture provides that Seven Seas will not, and will not permit any of
its Restricted Subsidiaries to, engage in an Asset Sale unless (i) Seven Seas
(or the Restricted Subsidiary, as the case may be) receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets or
Equity Interests sold or otherwise disposed of (evidenced in each case by a
resolution of the Board of Directors of such entity set forth in an Officers'
Certificate delivered to the Trustee) and (ii) at least 80% (100% in the case of
lease payments) of the consideration therefor received by Seven Seas or such
Restricted Subsidiary is in the form of the following (or any combination
thereof): (a) cash or Cash Equivalents, (b) the assumption by the purchaser of
liabilities other than subordinated Indebtedness and (c) any notes or other
obligations received by Seven Seas or any such Restricted Subsidiary from such
purchaser that are converted by Seven Seas or such Restricted Subsidiary into
cash or Cash Equivalents (to the extent of the cash or Cash Equivalents
received) within 180 days following the closing of such Asset Sale, will be
deemed to be cash for purposes of this provision (and shall be deemed to be Net
Proceeds upon receipt).
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
Seven Seas (or the Restricted Subsidiary, as applicable) may apply, or enter
into binding contracts (subject only to obtaining required governmental
approvals) irrevocably committing Seven Seas or such Restricted Subsidiary to
apply, such Net Proceeds to an investment in another business, the making of a
capital expenditure or the acquisition of other tangible assets, in each case in
the Oil and Gas Business, or Seven Seas (or the Restricted Subsidiary, as
applicable) may apply such Net Proceeds to the permanent reduction of
Indebtedness under the proposed credit facility or the permanent reduction of
any other senior Indebtedness of Seven Seas or the permanent reduction of any
long-term Indebtedness of such Restricted Subsidiary. Pending the final
application of any such Net Proceeds, Seven Seas or any such Restricted
Subsidiary may temporarily reduce outstanding revolving credit borrowings,
including borrowings under the proposed credit facility, or otherwise invest
such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net
Proceeds from Asset Sales that are not applied or invested, or committed to be
applied or invested as provided in the preceding sentence of this paragraph will
be deemed to constitute "Excess Proceeds." On the 366th day after an Asset Sale
or, if a governmental authority declines on or after such 366th day to grant or
issue a required approval in relation to a
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binding contract, then on the tenth Business Day thereafter, Seven Seas will be
required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated Damages
and Additional Amounts, if any, thereon to the date of purchase, in accordance
with the procedures set forth in the Indenture; provided, however, that if Seven
Seas is required to apply such Excess Proceeds to repurchase, or to offer to
repurchase, any Pari Passu Indebtedness, Seven Seas shall only be required to
offer to purchase the maximum principal amount of Notes that may be purchased
out of the amount of such Excess Proceeds multiplied by a fraction, the
numerator of which is the aggregate principal amount of Notes outstanding and
the denominator of which is the aggregate principal amount of Notes outstanding
plus the aggregate principal amount of Pari Passu Indebtedness outstanding (for
which such repurchase requirement exists). To the extent that the aggregate
amount of Notes so validly tendered and not properly withdrawn pursuant to an
Asset Sale Offer is less than the Excess Proceeds, Seven Seas may use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Notes surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes to be purchased on a pro
rata basis, by lot or by such other method as the Trustee deems fair and
appropriate. Upon completion of such Asset Sale Offer, the amount of Excess
Proceeds shall be reset at zero.
Notwithstanding the foregoing, Seven Seas will not be obligated to
repurchase more than 25% of the original aggregate principal amount of the Notes
pursuant to this covenant prior to the day following the fifth anniversary of
the issue date of the Notes (the "Five Year Date"), and the maximum amount to be
applied to the repurchase of Notes in connection with any Asset Sale Offer made
pursuant to this covenant having a purchase date prior to the day following the
Five Year Date shall be the lesser of (x) the Excess Proceeds and (y) 25% of the
original aggregate principal amount of the Notes less the aggregate principal
amount of Notes purchased pursuant to Asset Sale Offers relating to all prior
Asset Sales. To the extent that the amount of Excess Proceeds exceeds the amount
of Notes purchased because of the limitation imposed by the immediately
preceding sentence (the amount of such excess being the "Aggregate Unused
Proceeds"), such Aggregate Unused Proceeds shall constitute Excess Proceeds for
purposes of the first Asset Sale Offer that is made after the Five Year Date
and, in the event the amount of the Aggregate Unused Proceeds exceeds $10.0
million, promptly after the Five Year Date, Seven Seas shall commence an Asset
Sale Offer on a pro rata basis for an aggregate principal amount of Notes equal
to the Aggregate Unused Proceeds (and any other Excess Proceeds that arise
between the Five Year Date and such Asset Sale Offer) at a purchase price equal
to 101% of the principal amount of the Notes, plus accrued and unpaid interest
and Liquidated Damages and Additional Amounts, if any, thereon to the date of
purchase.
The Asset Sale Offer will remain open for a period of at least 20 Business
Days following its commencement but no longer than 40 days, except to the extent
that a longer period is required by applicable law (the "Asset Sale Offer
Period"). No later than five Business Days after the termination of the Asset
Sale Offer Period (the "Asset Sale Purchase Date"), Seven Seas will purchase the
principal amount of Notes required to be purchased pursuant to this covenant
(the "Asset Sale Offer Amount") or, if less than the Asset Sale Offer Amount has
been so validly tendered and not properly withdrawn, all Notes validly tendered
and not properly withdrawn in response to the Asset Sale Offer. Payment for any
Notes so purchased will be made in the same manner as interest payments are made
on the Notes.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
and Liquidated Damages and Additional Amounts, if any, will be paid to the
Person in whose name a Note is registered at the close of business on such
record date, and no additional interest will be payable to Holders who tender
Notes pursuant to the Asset Sale Offer.
Seven Seas will comply with the requirements of Rule 14e-l under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to any Asset Sale Offer.
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CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indenture provides that Seven Seas will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of Seven Seas' or any of its
Restricted Subsidiaries' Equity Interests (including, without limitation, any
payment in connection with any merger or consolidation involving Seven Seas)
other than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of Seven Seas or dividends or distributions payable to Seven
Seas or any Wholly Owned Subsidiary of Seven Seas; (ii) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of Seven Seas or any
Restricted Subsidiary of Seven Seas (other than any such Equity Interests owned
by Seven Seas or any Wholly Owned Subsidiary of Seven Seas); (iii) prepay,
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated in right of payment to the Notes or any
Subsidiary Guarantee, as applicable, except in accordance with the scheduled
mandatory redemption or repayment provisions set forth in the original
documentation governing such Indebtedness (but not pursuant to any mandatory
offer to repurchase upon the occurrence of any event); or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) Seven Seas would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
described under "-- Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by Seven Seas and its Restricted Subsidiaries
after the date of the Indenture, does not exceed the sum of, without
duplication, (i) 50% of the Consolidated Net Income of Seven Seas for the
period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of
Seven Seas' most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit or loss, less
100% of such deficit or loss), plus (ii) 100% of the aggregate net cash
proceeds received after the date of the Indenture by Seven Seas from the
issue or sale of, or from additional capital contributions in respect of,
Equity Interests of Seven Seas or of debt securities of Seven Seas that
have been converted into or exchanged for Equity Interests of Seven Seas
(other than (x) Equity Interests (or debt securities) sold to a Subsidiary
of Seven Seas and (y) Disqualified Stock or debt securities that have been
converted into or exchanged for Disqualified Stock), plus (iii) to the
extent that any Restricted Investment that was made after the date of the
Indenture is sold to a Person other than Seven Seas or a Restricted
Subsidiary for cash or otherwise liquidated or repaid for cash, the lesser
of the cash proceeds of such sale or other liquidation or repayment (after
deduction of items deducted in determining the Net Proceeds of an Asset
Sale) and the amount of the Restricted Investment (to the extent such
amount was included in the calculation of the amount of Restricted
Payments), plus (iv) the amount equal to the net reduction in Investments
in Unrestricted Subsidiaries resulting from (A) payments of dividends or
interest or other transfers of assets to Seven Seas or any Restricted
Subsidiary from Unrestricted Subsidiaries, (B) the redesignation of
Unrestricted Subsidiaries as Restricted Subsidiaries or (C) the receipt of
proceeds by Seven Seas or any Restricted Subsidiary from the sale or other
disposition of any portion of any Investment in an Unrestricted Subsidiary,
in the case of (A), (B) and (C), not to exceed the amount of Investments
previously made by Seven Seas or any Restricted Subsidiary in such
Unrestricted Subsidiary (to the extent such amount was included in the
calculation of the amount of Restricted Payments).
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The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (ii) the making of any Restricted Investment in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Subsidiary of Seven Seas) of, or from substantially concurrent additional
capital contributions in respect of, Equity Interests of Seven Seas (other than
Disqualified Stock); (iii) the redemption, repurchase, retirement or other
acquisition of any Equity Interests of Seven Seas in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Restricted
Subsidiary of Seven Seas) of, or from substantially concurrent additional
capital contributions (other than from a Restricted Subsidiary of Seven Seas) in
respect of, other Equity Interests of Seven Seas (other than any Disqualified
Stock); (iv) the defeasance, redemption or repurchase of subordinated
Indebtedness with the net cash proceeds from (X) an incurrence of Permitted
Refinancing Indebtedness or (Y) the substantially concurrent sale (other than to
a Restricted Subsidiary of Seven Seas) of, or from substantially concurrent
additional capital contributions (other than from a Restricted Subsidiary of
Seven Seas) in respect of, Equity Interests of Seven Seas (other than
Disqualified Stock); (v) any dividend or other distribution made by any Wholly
Owned Subsidiary of Seven Seas to another Wholly Owned Subsidiary of Seven Seas
or to Seven Seas; (vi) so long as no Default or Event of Default shall have
occurred and be continuing, the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of Seven Seas held by any employee
of Seven Seas or any of its Restricted Subsidiaries, provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $1.0 million in any calendar year; and (vii) the
acquisition of Equity Interests by Seven Seas in connection with the exercise of
stock options or stock appreciation rights by way of cashless exercise or in
connection with the satisfaction of withholding tax obligations related thereto.
In determining the aggregate amount of Restricted Payments made after the date
of the Indenture, 100% of the amounts described in the foregoing clauses (i) and
(vi) shall be included in such calculation, and none of the amounts (whether
positive or negative) described in the foregoing clauses (ii), (iii), (iv), (v)
and (vii) shall be included in such calculation.
As of the date hereof, all of Seven Seas' Subsidiaries are Restricted
Subsidiaries. The Board of Directors may designate any Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by Seven Seas
and its Restricted Subsidiaries (except to the extent repaid in cash) in the
Subsidiary so designated will be deemed to be Restricted Payments at the time of
such designation and will reduce the amount available for Restricted Payments
under the first paragraph of this covenant. Such designation will only be
permitted if such Restricted Payment would be permitted at such time and if such
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) will be the greater
of (i) book value or (ii) fair market value (evidenced by a resolution of the
Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) on the date of the Restricted Payment of the asset(s) proposed to be
transferred by Seven Seas or the applicable Restricted Subsidiary, as the case
may be, pursuant to the Restricted Payment. Not later than the date of making
any Restricted Payment, Seven Seas will deliver to the Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting forth
the basis upon which the calculations required by this covenant were computed,
which calculations shall be based upon Seven Seas' latest available financial
statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indenture provides that (a) Seven Seas will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness), (b) neither Seven Seas nor any
Guarantor will issue any Disqualified Stock and (c) Seven Seas will not permit
any of its Restricted Subsidiaries that are not Guarantors to issue any shares
of Preferred Stock; provided, however, that Seven Seas and any Guarantor may
incur Indebtedness (including Acquired Indebtedness) or issue shares of
Disqualified Stock if (i) the Fixed Charge Coverage Ratio for Seven Seas' most
recently ended four full consecutive fiscal quarters for which internal
financial statements
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are available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have been at
least 2.5 to 1, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock had been issued, as the case may
be, at the beginning of such four-quarter period and (ii) no Default or Event of
Default will have occurred and be continuing or would occur as a consequence
thereof.
The foregoing provisions will not apply to:
(i) the incurrence by Seven Seas and the Guarantors, if any, of
Indebtedness under the proposed credit facility not exceeding the greater
of (a) $25.0 million and (b) the Borrowing Base, less any amounts derived
from Asset Sales and applied to the required permanent reduction of such
Indebtedness (and a permanent reduction of the related commitment to lend
or in the amount available to be refinanced in the case of a revolving
credit facility) under the proposed credit facility as contemplated by the
covenant described under "Repurchase at the Option of Holders -- Asset
Sales";
(ii) the incurrence by Seven Seas and any Guarantor of Indebtedness
represented by the Original Notes and the Exchange Notes;
(iii) Existing Indebtedness;
(iv) the incurrence by Seven Seas or its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings,
Purchase Money Obligations or similar financing transactions relating to
its properties, assets and rights acquired after the date of issue of the
Notes, provided that the aggregate principal amount of such Indebtedness
under this clause does not exceed 100% of the cost of such properties,
assets and rights and provided, further, that the aggregate amount of
Indebtedness incurred pursuant to this clause (iv) does not at any time
exceed $10.0 million;
(v) the incurrence by Seven Seas or any Restricted Subsidiary of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness of such entity that was permitted by the Indenture to be
incurred;
(vi) the incurrence of Indebtedness of Seven Seas to a Restricted
Subsidiary; provided that any such Indebtedness is made pursuant to an
intercompany note and is subordinated in right of payment to the Notes; and
provided, further, that any subsequent issuance or transfer of any Capital
Stock or other event that results in any such Restricted Subsidiary ceasing
to be a Restricted Subsidiary or any subsequent transfer of any such
Indebtedness (except to Seven Seas or another Restricted Subsidiary) shall
be deemed, in each case, to be an incurrence of such Indebtedness;
(vii) the incurrence of Indebtedness of a Restricted Subsidiary to
Seven Seas or another Restricted Subsidiary; provided that (a) any such
Indebtedness is made pursuant to an intercompany note and (b) if a
Guarantor incurs such Indebtedness to a Restricted Subsidiary that is not a
Guarantor, such Indebtedness is subordinated in right of payment to the
Subsidiary Guarantee of such Guarantor; and provided, further, that any
subsequent issuance or transfer of any Capital Stock of any Restricted
Subsidiary to whom such Indebtedness is owed or any other event which
results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of any such Indebtedness (except to
Seven Seas or another Restricted Subsidiary) shall be deemed, in each case,
to be an incurrence of such Indebtedness;
(viii) the incurrence, assumption or creation of Hedging Obligations
of Seven Seas or a Restricted Subsidiary pursuant to interest rate
protection obligations, but only to the extent that the stated aggregate
notional amounts of such obligations do not exceed 105% of the aggregate
principal amount of the Indebtedness covered by such interest rate
protection obligations; the incurrence, assumption or creation of Hedging
Obligations under currency exchange contracts entered into for the purpose
of limiting risks that arise in the ordinary course of business of Seven
Seas and its Subsidiaries; and the incurrence, assumption or creation of
Hedging Obligations that Seven Seas or a Restricted Subsidiary enters into
for the purpose of protecting its production against fluctuations in oil or
natural gas prices;
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(ix) the incurrence by Seven Seas and its Restricted Subsidiaries of
Indebtedness in connection with one or more standby letters of credit, or
bid, performance or surety bonds or other reimbursement obligations, in
each case, issued in the conduct of the Oil and Gas Business and not in
connection with the borrowing of money or the obtaining of advances or
credit, not to exceed in the aggregate at any time outstanding 5.0% of the
consolidated total assets of Seven Seas;
(x) the incurrence by Seven Seas and its Restricted Subsidiaries of
Indebtedness in connection with one or more trade letters of credit, in
each case, issued in the ordinary course of business in the conduct of the
Oil and Gas Business and not in connection with the borrowing of money or
the obtaining of advances or credit;
(xi) issuance of any Guarantee by a Restricted Subsidiary of Seven
Seas of senior Indebtedness of Seven Seas that was permitted to be incurred
under the Indenture; provided that prior to or concurrently with the
issuance of such Guarantee such Restricted Subsidiary complies with the
terms of the covenant entitled "-- Provision for Subsidiary Guarantees;"
(xii) Indebtedness of Seven Seas or any Guarantor incurred to finance
Permitted Infrastructure Investments, in an aggregate principal amount that
does not at any time exceed $10.0 million; or
(xiii) the incurrence by Seven Seas and the Guarantors of Indebtedness
in an aggregate principal amount of up to $10.0 million (all or any portion
of which may be borrowed under the proposed credit facility, and which
shall be in addition to amounts which may be incurred pursuant to clauses
(i) through (xii) above).
Notwithstanding any other provision of this covenant, a Guarantee of
Indebtedness permitted by the terms of the Indenture at the time such
Indebtedness was incurred will not constitute a separate incurrence of
Indebtedness.
In the event that Indebtedness falls within more than one category of
permitted Indebtedness under the Indenture, Seven Seas will determine the
applicable category and such Indebtedness will only be counted once. If
Indebtedness is issued at less than the principal amount thereof, the amount of
such Indebtedness for purposes of the above limitations shall equal the amount
of the liability as determined in accordance with GAAP. Accrual of interest and
the accretion of accreted value will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
The Indenture provides that Seven Seas will not permit any Unrestricted
Subsidiary to incur any Indebtedness other than Non-Recourse Debt; provided,
however, if any such Indebtedness ceases to be Non-Recourse Debt, such event
shall be deemed to constitute an incurrence of Indebtedness by Seven Seas or a
Restricted Subsidiary.
SALE AND LEASEBACK TRANSACTIONS
The Indenture provides that Seven Seas will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that Seven Seas or any Guarantor may enter into a sale and leaseback
transaction if (i) Seven Seas or such Guarantor could have (a) incurred
Indebtedness in an amount equal to the Attributable Debt relating to such sale
and leaseback transaction pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant "-- Incurrence of Indebtedness and
Issuance of Preferred Stock" and (b) incurred a Lien to secure such Indebtedness
pursuant to the covenant "Liens," (ii) the net cash proceeds of such sale and
leaseback transaction are at least equal to the fair market value (as determined
in good faith by the Board of Directors and set forth in an Officers'
Certificate delivered to the Trustee) of the property that is the subject of
such sale and leaseback transaction and (iii) the transfer of assets in such
sale and leaseback transaction is permitted by, and the proceeds of such
transaction are applied in compliance with, the covenant under "Repurchase at
the Option of Holders -- Asset Sales."
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LIENS
The Indenture provides that Seven Seas will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
otherwise cause or suffer to exist or become effective any Lien securing
Indebtedness of any kind (other than Permitted Liens) on any of its property or
assets, now owned or hereafter acquired, or any interests therein or any income
or profits therefrom, unless all payments under the Notes are secured on an
equal and ratable basis with such Indebtedness so secured until such time as
such Indebtedness is no longer outstanding or is no longer secured by a Lien.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture provides that Seven Seas will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i) (a) pay dividends or make any
other distributions to Seven Seas or any of its Restricted Subsidiaries (1) on
its Capital Stock or (2) with respect to any other interest or participation in,
or measured by, its profits, or (b) pay any indebtedness owed to Seven Seas or
any of its Restricted Subsidiaries, (ii) make loans or advances to Seven Seas or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to Seven Seas or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of the Indenture, (b) the proposed credit
facility as in effect as of the date of the Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the proposed
credit facility as in effect on the date of the Indenture, (c) applicable law,
(d) the Indenture and the Notes, (e) any instrument governing Acquired
Indebtedness or Capital Stock of a Person acquired by Seven Seas or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Acquired Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that
the Consolidated Cashflow of such Person is not taken into account in
determining whether such acquisition was permitted by the terms of the
Indenture, (f) any encumbrance or restriction on assets subject to Capital Lease
Obligations or Purchase Money Obligation for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (g) by reason of customary
non-assignment provisions in leases and licenses entered into in the ordinary
course of business and consistent with past practices, (h) agreements relating
to the financing of the acquisition of real or tangible personal property
acquired after the date of the Indenture, provided, that such encumbrance or
restriction relates only to the property which is acquired and in the case of
any encumbrance or restriction that constitutes a Lien, such Lien constitutes a
Purchase Money Lien, (i) Permitted Refinancing Indebtedness, provided that the
restrictions contained in agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in agreements
governing the Indebtedness being refinanced, or (j) any merger agreements, stock
purchase agreements, asset sale agreements and similar agreements limiting the
transfer of properties and assets to be transferred or otherwise disposed of
pending consummation of the subject transactions in accordance with the terms
thereof.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that Seven Seas will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly enter into or permit to
exist any transaction or series of related transactions (including the purchase,
sale, lease, exchange, transfer or disposition of property or assets, the
rendering of any service, or any contract, agreement, understanding, loan,
advance or Guarantee) with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless (i) the terms of such Affiliate
Transaction are fair and reasonable to Seven Seas or such Restricted Subsidiary,
as the case may be, from a financial point of view and are at least as favorable
to Seven Seas or such Restricted Subsidiary as the terms that could be obtained
on such date by Seven Seas or such Restricted Subsidiary, as the case may be, in
a comparable transaction
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entered into on an arm's-length basis with an unrelated third party and (ii)
Seven Seas delivers to the Trustee (a) with respect to any Affiliate Transaction
entered into after the date of the Indenture involving aggregate consideration
in excess of $1.0 million, a resolution of the Board of Directors set forth in
an Officers' Certificate certifying that the terms of such Affiliate Transaction
have been set forth in writing and comply with clause (i) above and that such
Affiliate Transaction has been approved by a majority of the disinterested
members of the Board of Directors and (b) with respect to any Affiliate
Transaction involving aggregate consideration in excess of $5.0 million, an
opinion issued by an investment banking or appraisal firm of national standing
(in the United States or Canada) as to the fairness to Seven Seas or such
Restricted Subsidiary of such Affiliate Transaction from a financial point of
view; provided that the following will not be deemed to be Affiliate
Transactions: (1) reasonable fees and compensation paid to, and reasonable and
customary indemnity provided on behalf of, officers and directors of Seven Seas
or any Restricted Subsidiary as determined in good faith by the Board of
Directors, (2) loans or advances to employees in the ordinary course of business
in accordance with customary practices in the Oil and Gas Business, but in any
event not to exceed $0.5 million in the aggregate outstanding at any one time,
(3) transactions pursuant to agreements as in existence on the Issue Date, (4)
any employment, noncompetition or confidentiality agreements entered into by
Seven Seas or any of its Restricted Subsidiaries with its employees in the
ordinary course of business, (5) transactions between or among Seven Seas and a
Wholly Owned Subsidiary or between Wholly Owned Subsidiaries and (6)
transactions with joint ventures engaged in the Oil and Gas Business, provided
that no Equity Interest not owned by Seven Seas or its Restricted Subsidiaries
in such joint venture is owned by a Person that is otherwise an Affiliate of
Seven Seas and (7) Restricted Payments that are permitted by the provisions of
the Indenture described above under the caption "-- Restricted Payments."
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that Seven Seas shall not, in a single transaction
or series of related transactions, consolidate or merge with or into (whether or
not Seven Seas is the surviving corporation), or directly and/or indirectly
through its Restricted Subsidiaries sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its properties or assets
determined on a consolidated basis for Seven Seas and its Restricted
Subsidiaries taken as a whole in one or more related transactions, to another
Person unless (i) Seven Seas is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than Seven Seas) or
to which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made is a corporation organized or existing under the laws of
Canada, one of the provinces or territories thereof, one of the states of the
United States or the District of Columbia; (ii) the Person formed by or
surviving any such consolidation or merger (if other than Seven Seas) or the
Person to which such sale, assignment, transfer, lease, conveyance or other
disposition will have been made assumes all the obligations of Seven Seas under
the Notes and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after such transaction
no Default or Event of Default exists; (iv) Seven Seas or the Person formed by
or surviving any such consolidation or merger (if other than Seven Seas), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of Seven Seas
immediately preceding the transaction and (B) except in the case of a
consolidation or merger of Seven Seas with or into a Wholly Owned Subsidiary of
Seven Seas, will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock"; (v) each
Guarantor, if any, unless it is the other party to the transactions described
above, shall have by supplemental indenture confirmed that its Subsidiary
Guarantee shall apply to such Person's obligations under the Indenture and the
Notes; and (vi) Seven Seas delivers to the Trustee an Officers' Certificate and
an Opinion of Counsel addressed to the Trustee with respect to the foregoing
matters.
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COVENANT TO ENTER INTO SUBSIDIARY GUARANTEES
The Indenture provides that Seven Seas will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of Seven Seas (other
than any guarantee of the Notes and the guarantee of the Special Notes or the
Convertible Debentures by Seven Seas Petroleum Holdings Inc.) or any
Indebtedness of any Guarantor (in each case, the "Guaranteed Debt") unless (i)
if such Restricted Subsidiary is not then a Guarantor, then such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to the
Indenture providing for a Subsidiary Guarantee of payment of the Notes by such
Restricted Subsidiary, (ii) if the Guaranteed Debt is by its express terms
subordinated in right of payment to the Notes or the Subsidiary Guarantee of
such Guarantor, any such Guarantee of such Restricted Subsidiary with respect to
the Guaranteed Debt shall be subordinated in right of payment to such Restricted
Subsidiary's Subsidiary Guarantee with respect to the Notes substantially to the
same extent as the Guaranteed Debt is subordinated to the Notes or the
Subsidiary Guarantee of such Guarantor, (iii) such Restricted Subsidiary waives
and will not in any manner whatsoever claim or take the benefit or advantage of
any rights of reimbursement, indemnity or subrogation or any other rights
against Seven Seas or any other Restricted Subsidiary as a result of any payment
by such Restricted Subsidiary under its Subsidiary Guarantee, and (iv) such
Restricted Subsidiary shall deliver to the Trustee an opinion of counsel to the
effect that (a) such Subsidiary Guarantee of the Notes has been duly executed
and authorized and (b) such Subsidiary Guarantee of the Notes constitutes a
valid, binding and enforceable obligation of such Restricted Subsidiary, except
insofar as enforcement thereof may be limited by bankruptcy, insolvency or
similar laws (including, without limitation, all laws relating to fraudulent
transfers) and except insofar as enforcement thereof is subject to general
principles of equity.
CONVERSION OF CONVERTIBLE DEBT
Under the terms of the indenture for the Exchangeable Notes, Seven Seas has
agreed to use its reasonable best efforts to cause the exchange of the
Exchangeable Notes for Convertible Debentures and the conversion of the
Convertible Debentures into common shares and warrants to purchase common
shares. The Indenture provides that if any Exchangeable Notes or Convertible
Debentures remain outstanding on or after July 31, 1998 (a "Special Note
Default"), Seven Seas and the Guarantors (if any) agree to pay liquidated
damages ("Conversion Liquidated Damages"), which will accrue at the rate of
0.25% per annum as long as a Special Note Default continues. Following the cure
of any Special Note Default by the permanent retirement of all of the
Exchangeable Notes and Convertible Debentures, the accrual of Conversion
Liquidated Damages will cease. All accrued Conversion Liquidated Damages will be
paid by Seven Seas or the Guarantors (if any) in the same manner as interest
payments on the Notes.
LINE OF BUSINESS
Seven Seas will not, and will not permit any Subsidiary to, engage in any
line of business other than the Oil and Gas Business.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, Seven Seas
will furnish to the Holders of Notes, within 15 days after it is or would have
been required to file such with the Commission, (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Form 10-K and 10-Q if Seven Seas were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only,
reports thereon by the certified independent accountants of Seven Seas and (ii)
all current reports that would be required to be filed with the Commission on
Form 8-K if Seven Seas was required to file such reports. In addition, whether
or not required by the rules and regulations of the Commission, Seven Seas will
file copies of all such information and reports with the Commission for public
availability (unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition, Seven Seas has agreed that, for so long as any Notes
remain outstanding, it will furnish to the Holders and to
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securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A (d) (4) under the
Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages or Additional Amounts with respect to, the Notes; (ii)
default in payment when due of the principal of or premium, if any, on the
Notes, upon optional redemption, upon required repurchase, upon declaration or
otherwise; (iii) failure by Seven Seas to comply with the provisions described
under the captions "-- Change of Control," "-- Asset Sales," "-- Restricted
Payments," or "-- Merger, Consolidation, or Sale of Assets"; (iv) failure by
Seven Seas for 60 days after notice to comply with any of its other agreements
in the Indenture or the Notes; (v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by Seven Seas or any of its
Restricted Subsidiaries (or the payment of which is guaranteed by Seven Seas or
any of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of any applicable grace period provided in
such Indebtedness on the date of such default (a "Payment Default") or (b)
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of any such Indebtedness, together with
the principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (vi) failure by Seven Seas or any of its Restricted
Subsidiaries to pay final judgments aggregating in excess of $5.0 million, which
judgments are not paid, discharged or stayed for a period of 60 days; (vii)
certain events of bankruptcy or insolvency with respect to Seven Seas or any of
its Significant Subsidiaries or group of Restricted Subsidiaries that, taken
together (as of the latest audited consolidated financial statements for Seven
Seas and its Subsidiaries), would constitute a Significant Subsidiary; and
(viii) the security interest in the Pledged Securities shall cease to be in full
force and effect or enforceable in accordance with its terms other than in
accordance with its terms.
If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the then outstanding Notes may
declare all the Notes to be due and payable immediately. Upon such a
declaration, 100% of the principal amount of the Notes plus accrued and unpaid
interest, premium, if any, and Liquidated Damages and Additional Amounts, if
any, on the Notes shall be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to Seven Seas, any Significant Subsidiary
or any group of Restricted Subsidiaries that, taken together (as of the latest
audited consolidated financial statements for Seven Seas and its Subsidiaries),
would constitute a Significant Subsidiary, all outstanding Notes will become due
and payable without any declaration or further action or notice. Under certain
circumstances, the Holders of a majority in principal amount of the outstanding
Notes may rescind such acceleration with respect to the Notes and its
consequences. Subject to certain limitations, Holders of a majority in principal
amount of the then outstanding Notes may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Holders of the Notes notice of
any continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest on, or the principal of, premium and Liquidated Damages and Additional
Amounts, if any, on the Notes.
Seven Seas is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and Seven Seas is required, upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of Seven Seas,
as such, will have any liability for any obligations of Seven Seas under the
Notes, the Indenture or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each Holder by accepting a Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Seven Seas may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"), except for (i) the rights of Holders of outstanding Notes to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages and Additional Amounts, if any, on such Notes when such
payments are due from the trust referred to below, (ii) Seven Seas' obligations
with respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
Seven Seas' obligations in connection therewith and (iv) the Legal Defeasance
provisions of the Indenture. Such Legal Defeasance means that Seven Seas will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes. In addition, Seven Seas may, at its option and at any time,
elect to have the obligations of Seven Seas released with respect to certain
covenants that are described in the Indenture ("Covenant Defeasance"), and
thereafter any omission to comply with such obligations will not constitute a
Default or Event of Default with respect to the Notes. In the event Covenant
Defeasance occurs, certain events (not including nonpayment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "-- Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
Seven Seas must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in United States dollars, noncallable
Government Securities, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest and
Liquidated Damages and Additional Amounts, if any, on the outstanding Notes on
the stated maturity or on the applicable redemption date, as the case may be,
and Seven Seas must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) in the case of Legal Defeasance, Seven
Seas will have delivered to the Trustee an opinion of counsel in the United
States reasonably acceptable to the Trustee confirming that (A) Seven Seas has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable United States federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel will confirm that the Holders of
the outstanding Notes will not recognize income, gain or loss for United States
federal income tax purposes as a result of such Legal Defeasance and will be
subject to United States federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, and Seven Seas will have delivered to the Trustee
an opinion of counsel in Canada reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for Canadian federal income tax purposes as a result of such Legal
Defeasance and will be subject to Canadian federal income tax on the same
amounts, in the same manner and at the same times as could have been the case if
such Legal Defeasance had not occurred; (iii) in the case of Covenant
Defeasance, Seven Seas will have delivered to the Trustee an opinion of counsel
in the United States reasonably acceptable to the Trustee confirming that the
Holders of the outstanding Notes will not recognize income, gain or loss for
United States federal income tax purposes as a result of such Covenant
Defeasance and will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred, and Seven Seas will have delivered to
the Trustee an opinion of counsel in Canada reasonably acceptable to the Trustee
confirming that the Holders of the outstanding Notes will not recognize
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income, gain or loss for Canadian federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Canadian federal income tax on
the same amounts, in the same manner and at the same times as could have been
the case if such Covenant Defeasance had not occurred; (iv) no Default or Event
of Default will have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to such deposit) or insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under any
material agreement or instrument (other than the Indenture) to which Seven Seas
or any of its Subsidiaries is a party or by which Seven Seas or any of its
Subsidiaries is bound, including, without limitation, the proposed credit
facility; (vi) Seven Seas must have delivered to the Trustee an opinion of
counsel to the effect that on the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally; (vii) Seven Seas must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by Seven Seas with the intent of
preferring the Holders of Notes over the other creditors of Seven Seas with the
intent of defeating, hindering, delaying or defrauding creditors of Seven Seas
or others; and (viii) Seven Seas must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with.
INDEMNIFICATION FOR JUDGMENT CURRENCY FLUCTUATIONS
The obligations of Seven Seas to any Holder of Notes shall, notwithstanding
any judgment in a currency (the "Judgment Currency") other than United States
dollars (the "Agreement Currency"), be discharged only to the extent that on the
day following receipt by such Holder of Notes or the Trustee, as the case may
be, of any amount in the Judgment Currency, such Holder of Notes may in
accordance with normal banking procedures purchase the Agreement Currency with
the Judgment Currency. If the amount of the Agreement Currency so purchased is
less than the amount originally to be paid to such Holder of Notes or the
Trustee, as the case may be, in the Agreement Currency, Seven Seas agrees, as a
separate obligation and notwithstanding such judgment, to pay to such Holder of
Notes or the Trustee, as the case may be, the difference, and if the amount of
the Agreement Currency so purchased exceeds the amount originally to be paid to
such Holder of Notes or the Trustee, as the case may be, such Holder of Notes or
the Trustee, as the case may be, agrees to pay to or for the account of Seven
Seas such excess, provided that such Holder of Notes or the Trustee, as the case
may be, shall not have any obligation to pay any such excess as long as a
Default by Seven Seas in its obligations under the Notes or the Indenture has
occurred and is continuing, in which case such excess may be applied by such
Holder of Notes or the Trustee, as the case may be, to such obligations.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and Seven Seas may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. Seven Seas is not required to transfer or exchange any Note selected
for redemption. Also, Seven Seas is not required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Notes then outstanding (including
consents obtained in connection with a purchase of or tender offer or exchange
offer for Notes), and, subject to certain exceptions, any existing default or
compliance with any provision of the Indenture or the Notes may be waived with
the consent of the Holders of a majority in principal amount of the
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then outstanding Notes (including consents obtained in connection with a
purchase of or tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or the Liquidated Damages or Additional
Amounts payable with respect to any Note, change the fixed maturity of any Note
or alter the provisions with respect to the redemption or repurchase of the
Notes (other than provisions relating to the covenants described above under the
caption "-- Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the Payment Default that resulted from such acceleration), (v) make any Note
payable in money other than that stated in the Notes, (vi) make any change in
the provisions of the Indenture relating to waivers of past Defaults or the
rights of Holders of Notes to receive payments of principal of or interest,
premium, if any, or Liquidated Damages or Additional Amounts, if any, on the
Notes, (vii) waive a redemption or repurchase payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "-- Repurchase at the Option of Holders"), (viii) make any change in the
amendment provisions that require each Holder's consent or in the waiver
provisions, (ix) except as provided under the caption "-- Legal Defeasance and
Covenant Defeasance" or in accordance with the terms of any Subsidiary
Guarantee, release a Guarantor from its obligations under its Subsidiary
Guarantee or make any change in the Notes or the Subsidiary Guarantees that
would change the ranking thereof to anything other than pari passu in right of
payment to all senior Indebtedness of Seven Seas or the applicable Guarantor,
(x) release any of the Pledged Securities from the Lien of the Indenture except
in accordance with the terms of the Indenture, or (xi) make any modification to
the provisions of the Indenture described under "-- Payment of Additional
Amounts" that would adversely affect the rights of Holders to receive Additional
Amounts as described thereunder.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
Seven Seas, the Guarantors (with respect to a Subsidiary Guarantee or the
Indenture to which it is a party) and the Trustee may amend or supplement the
Indenture, the Notes or the Subsidiary Guarantees to cure any ambiguity, defect
or inconsistency, to provide for uncertificated Notes in addition to or in place
of certificated Notes, to provide for the assumption of Seven Seas' obligations
to Holders of Notes in the case of a merger or consolidation, to make any change
that would provide any additional rights or benefits to the Holders of Notes, to
further secure the Notes, to add to the covenants of Seven Seas for the benefit
of the Holders of the Notes or to surrender any right or power conferred upon
Seven Seas, to make any change that does not adversely affect the legal rights
of any such Holder under the Indenture, to comply with requirements of the
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act or to add any additional Guarantor or to release
any Guarantor from its Subsidiary Guarantee, in each case as provided in the
Indenture. The consent of the Holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment or supplement
to the Indenture or the Notes but is sufficient if such consent approves the
substance of such amendment or supplement.
GOVERNING LAW; CONSENT TO JURISDICTION AND SERVICE
The Indenture and the Notes will be governed by the laws of the State of
New York.
The Indenture will provide that Seven Seas will appoint CT Corporation as
Seven Seas' agent for service of process in any suit, action or proceeding with
respect to the Indenture or the Notes and for any actions brought under United
States federal or state securities laws brought in any United States federal or
state court located in the City of New York and submit to such jurisdiction.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture and the
foregoing summary of the terms of the Notes. Reference is made to the Indenture
for a full disclosure of all such terms, as well as any, other capitalized terms
used herein for which no definition is provided.
"Acquired Indebtedness" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary or is designated a Restricted
Subsidiary of such specified Person, including, without limitation, Indebtedness
incurred in connection with, or in contemplation of, such other Person merging
with or into or becoming a Subsidiary or Restricted Subsidiary of such specified
Person, and (ii) Indebtedness secured by a Lien encumbering any asset acquired
by such specified Person.
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination, (i) the sum of (a) discounted future net revenues
from proved oil and gas reserves of Seven Seas and its Restricted Subsidiaries
calculated in accordance with Commission guidelines before any state, federal or
foreign income taxes, as estimated by Seven Seas and confirmed by a nationally
recognized firm of independent petroleum engineers in a reserve report prepared
as of the end of Seven Seas' most recently completed fiscal year for which
audited financial statements are available, as increased by, as of the date of
determination, the estimated discounted future net revenues from (1) estimated
proved oil and gas reserves acquired since such year-end, which reserves were
not reflected in such year-end reserve report, and (2) estimated proved oil and
gas reserves attributable to upward revisions of estimates of proved oil and gas
reserves since such year-end due to exploration, development or exploitation
activities, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report), and decreased
by, as of the date of determination, the estimated discounted future net
revenues from (3) estimated proved oil and gas reserves produced or disposed of
since such year-end and (4) estimated oil and gas reserves attributable to
downward revisions of estimates of proved oil and gas reserves since such
year-end due to changes in geological conditions or other factors which would,
in accordance with standard industry practice, cause such revisions, in each
case calculated in accordance with Commission guidelines (utilizing the prices
utilized in such year-end reserve report); provided that, in the case of each of
the determinations made pursuant to clauses (1) through (4), such increases and
decreases shall be as estimated by Seven Seas' petroleum engineers, unless there
is a Material Change as a result of such acquisitions, dispositions or
revisions, in which event the discounted future net revenues utilized for
purposes of this clause (i)(a) shall be confirmed in writing by a nationally
recognized firm of independent petroleum engineers, (b) the capitalized costs
that are attributable to oil and gas properties of Seven Seas and its Restricted
Subsidiaries to which no proved oil and gas reserves are attributable, based on
Seven Seas' books and records as of a date no earlier than the date of Seven
Seas' latest annual or quarterly financial statements, (c) the Net Working
Capital on a date no earlier than the date of Seven Seas' latest consolidated
annual or quarterly financial statements, and (d) with respect to each other
tangible asset of Seven Seas or its Restricted Subsidiaries (excluding any
amounts with respect to Colombian Government Receivables), the greater of (A)
the net book value of such other tangible asset on a date no earlier than the
date of Seven Seas' latest consolidated annual or quarterly financial
statements, and (B) the appraised value, as estimated by a qualified independent
appraiser, of such other tangible asset, as of a date no earlier than the date
that is three years prior to the date of determination (or such later date on
which Seven Seas shall have a reasonable basis to believe that there has
occurred a material decrease in value since the determination of such appraised
value), minus (ii) the sum of (a) minority interests (other than a minority
interest in a Subsidiary that is a business trust or similar entity formed for
the primary purpose of issuing preferred securities the proceeds of which are
loaned to Seven Seas or a Restricted Subsidiary), (b) any net gas balancing
liabilities of Seven Seas and its Restricted Subsidiaries reflected in Seven
Seas' latest audited financial statements, (c) to the extent included in (i)(a)
above, the discounted future net revenues, calculated in accordance with
Commission guidelines (utilizing the prices utilized in Seven Seas' year-end
reserve report), attributable to reserves which are required to be delivered to
third parties to fully satisfy the obligations of Seven Seas and its Restricted
Subsidiaries with respect to Volumetric Production Payments on the schedules
specified with respect thereto and (d) to the extent included in (i)(a) above,
the discounted future net revenues, calculated in accordance with Commission
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guidelines, attributable to reserves subject to Dollar-Denominated Production
Payments which, based on the estimates of production and price assumptions
included in determining the discounted future net revenues specified in (i)(a)
above, would be necessary to fully satisfy the payment obligations of Seven Seas
and its Restricted Subsidiaries with respect to Dollar-Denominated Production
Payments on the schedules specified with respect thereto. If Seven Seas changes
its method of accounting from the full cost method to the successful efforts
method or a similar method of accounting, "Adjusted Consolidated Net Tangible
Assets" will continue to be calculated as if Seven Seas were still using the
full cost method of accounting.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or, indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Applicable Premium" means, with respect to a Note at any Redemption Date,
the greater of (i) 1.0% of the principal amount of such Note and (ii) the excess
of (a) the present value at such time of (1) the redemption price of such Note
at May 15, 2002 (such redemption price being described under "-- Optional
Redemption") plus (2) all required interest payments due on such Note through
May 15, 2002, computed in the case of (1) and (2) using a discount rate equal to
the Treasury Rate plus 50 basis points, over (b) the principal amount of such
Note.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback
transaction, including any disposition by means of a merger, consolidation or
similar transaction and including the issuance, sale or other transfer of any of
the Capital Stock of any Restricted Subsidiary of such Person) other than to
Seven Seas or to any of its Wholly Owned Subsidiaries (including the receipt of
proceeds of insurance paid on account of the loss of or damage to any asset and
awards of compensation for any asset taken by condemnation, eminent domain,
nationalization, expropriation or similar proceeding or action, but excluding
the receipt of proceeds of business interruption insurance or environmental
damage insurance or similar types of policies); and (ii) the issuance of Equity
Interests in any Restricted Subsidiaries or the sale of any Equity Interests in
any Restricted Subsidiaries (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than Seven Seas or a
Restricted Subsidiary), in each case, in one or a series of related
transactions. For purposes of this definition, the term "Asset Sale" shall not
include: (a) the sale, lease, conveyance, disposition or other transfer of all
or substantially all of the assets of Seven Seas, as permitted under "-- Certain
Covenants -- Merger, Consolidation or Sale of Assets," (b) the sale or lease of
equipment, inventory, accounts receivable or other assets in the ordinary course
of business, (c) a transfer of assets by Seven Seas to a Restricted Subsidiary
or by a Restricted Subsidiary to Seven Seas or to another Restricted Subsidiary,
(d) an issuance of Equity Interests by a Restricted Subsidiary to Seven Seas or
to another Restricted Subsidiary, (e) the making of a Restricted Payment or a
Permitted Investment that is permitted by the covenant described above under the
caption "-- Certain Covenants -- Restricted Payments," (f) any Production
Payment and Reserve Sale created, incurred, issued, assumed or guaranteed in
connection with the financing of, and within 60 days after the acquisition of,
the Property that is subject thereto, (g) sales, leases, conveyances or other
dispositions of assets the aggregate gross proceeds of which do not exceed
$250,000 in any twelve-month period, (h) the relinquishment of unexplored
acreage in accordance with the Association Contracts, (i) the abandonment,
farm-out, lease or sublease of developed or undeveloped oil and gas properties
in the ordinary course of business, (j) the trade or exchange by Seven Seas or
any Restricted Subsidiary of Seven Seas of any oil and gas property owned or
held by Seven Seas or such Subsidiary for any oil and gas property owned or held
by another Person in a single transaction or a series of related transactions
having a fair market value of less than $50.0 million, provided that (x) the
fair market value of the properties traded or exchanged by Seven Seas or such
Subsidiary (including any cash or Cash Equivalents, not to exceed 15% of such
fair market value) is reasonably equivalent to the fair market value of the oil
and gas property to be received by Seven Seas or such Subsidiary as determined
in good faith by (1) any officer of Seven Seas if such fair market value is less
than
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$5.0 million and (2) the Board of Directors of Seven Seas as certified by a
certified resolution delivered to the Trustee if such fair market value is equal
to or in excess of $5.0 million, and provided, further, that if such resolution
indicates that such fair market value is equal to or in excess of $20.0 million
such resolution shall be accompanied by a written appraisal by a nationally
recognized investment banking firm or appraisal firm, in each case specializing
or having a specialty in oil and gas properties, and (y) such trade or exchange
is approved by a majority of the Disinterested Directors of Seven Seas, or (k)
the sale or transfer of hydrocarbons or other mineral products for value in the
ordinary course of business.
"Association Contracts" means the Dindal Association Contract issued by
Ecopetrol in March 1993 and the Rio Seco Association Contract issued by
Ecopetrol in August 1995.
"Attributable Debt" in respect of a sale and leaseback transaction means,
as at the time of determination, the present value (discounted at the interest
rate implicit in such transaction, determined in accordance with GAAP) of the
total obligations of the lessee for net rental payments during the remaining
term of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended). As used in the preceding sentence, the "net rental
payment" under any lease for any such period shall mean the sum of rental and
other payments required to be paid with respect to such period by the lessee
thereunder, excluding any amounts required to be paid by such lessee on account
of maintenance and repairs, insurance, taxes, assessments, water rates or
similar charges. In the case of any lease which is terminable by the lessee upon
payment of a penalty, such net rental payment shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Board of Directors" means the Board of Directors of Seven Seas, or any
authorized committee of such Board of Directors.
"Borrowing Base" means, as of any date, the aggregate amount not to exceed
the sum of 100% of cash and Cash Equivalents that are not pledged to secure
Indebtedness plus 100% of Colombian Government Receivables plus 30% of Adjusted
Consolidated Net Tangible Assets.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"Cash Equivalents" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or Canada or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States or Canada, as the case may be, is pledged in support thereof) having
maturities no more than twelve months from the date of acquisition, (b) United
States dollar denominated (or foreign currency fully hedged) time deposits,
certificates of deposit, Eurodollar time deposits or Eurodollar certificates of
deposit of (i) any United States or Canadian commercial bank of recognized
standing having capital and surplus in excess of $500 million or (ii) any bank
whose short-term commercial paper rating from Standard & Poor's Rating Services
is at least A-1 or the equivalent thereof or from Moody's Investors Service,
Inc. is at least P-1 or the equivalent thereof (any such bank being an "Approved
Lender"), in each case with maturities of not more than twelve months from the
date of acquisition, (c) commercial paper and variable or fixed rate notes
issued by any Approved Lender (or by the parent company thereof) or commercial
paper or any variable rate notes issued by, or guaranteed by, any United States
or Canadian corporation rated A-1 (or the equivalent thereof) by Standard &
Poor's Ratings Services or P-1 (or the equivalent thereof) by Moody's Investors
Service, Inc. and maturing within twelve months of the date of acquisition, (d)
repurchase agreements with a bank or trust company or recognized securities
dealer having capital and surplus in excess of $500 million for direct
obligations issued by or fully guaranteed by the United States of America or
Canada in which Seven
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Seas shall have a perfected first priority security interest (subject to no
other Liens) and having, on the date of purchase thereof, a fair market value of
at least 100% of the amount of repurchase obligations, (e) deposits available
for withdrawal on demand with any commercial bank in Colombia not meeting the
qualifications specified in clause (b)(i) above, provided all such deposits do
not exceed $2.0 million in the aggregate at any one time, and (f) interests in
money market mutual funds which invest solely in assets or securities of the
type described in subparagraph (a), (b), (c) or (d) hereof.
"Colombian Government Receivables" means the aggregate accounts receivable
by Seven Seas or a Restricted Subsidiary from Ecopetrol or a successor agency or
ministry of the Colombian government with respect to the Association Contracts,
in the net amount recorded in accordance with GAAP on a consolidated basis on
the books of Seven Seas (net of any disputed, doubtful or uncertain amounts or
other offsets), as adjusted from time to time.
"Commission" means the United States Securities and Exchange Commission.
"Consolidated Cashflow" means, with respect to Seven Seas and its
Restricted Subsidiaries for any period, the sum of, without duplication, (i) the
Consolidated Net Income for such period, plus (ii) to the extent deducted from
Consolidated Net Income for such period, (x) the Fixed Charges for such period,
plus (y) noncash dividends on Seven Seas' Preferred Stock, plus (iii)
Consolidated Income Taxes for such period, plus (iv) consolidated depreciation,
amortization, depletion and other non-cash charges of Seven Seas and its
Restricted Subsidiaries required to be reflected as expenses on the books and
records of Seven Seas, determined on a consolidated basis in accordance with
GAAP (excluding any such noncash expense or charge to the extent that it
represents an accrual of or reserve for cash expenditures in any future period),
in each case for such period decreased (to the extent included in determining
Consolidated Net Income) by the sum of (a) the amount of deferred revenues that
are amortized during such period and are attributable to reserves that are
subject to Volumetric Production Payments and (b) amounts recorded in accordance
with GAAP as repayments of principal and interest pursuant to Dollar-Denominated
Production Payments during such period, minus (v) cash payments with respect to
any nonrecurring, non-cash charges previously added back pursuant to clause (iv)
and excluding (vi) the impact of foreign currency translations. Notwithstanding
the foregoing, the provision for taxes based on the income or profits of, and
the depreciation and amortization and other noncash charges of, a Restricted
Subsidiary of a Person shall be added to Consolidated Net Income to compute
Consolidated Cashflow only to the extent that the Net Income of such Restricted
Subsidiary was included in calculating the Consolidated Net Income of such
Person and only if a corresponding amount would be permitted at the date of
determination to be dividended to Seven Seas by such Restricted Subsidiary
without prior approval (that has not been obtained) pursuant to the terms of its
charter and all agreements, instruments, judgments, decrees, orders, statutes,
rules and governmental regulations applicable to such Restricted Subsidiary or
its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Subsidiaries (to the extent such income or profits were included in
computing Consolidated Net Income for such period), regardless of whether such
taxes or payments are required to be remitted to any governmental authority.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary of such Person or that is accounted for by the equity
method of accounting or by proportional consolidation by such Person shall be
included only to the extent of the amount of dividends or distributions paid in
cash to such Person or a Restricted Subsidiary of such Person; (ii) the Net
Income of, or any dividends or other distributions from, any Unrestricted
Subsidiary, to the extent otherwise included, shall be excluded to the extent
not distributed to such Person or one of its Restricted Subsidiaries; (iii) the
Net Income of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or
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indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary or its stockholders; (iv) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded; (v) the
cumulative effect of a change in accounting principles shall be excluded; (vi)
income or loss attributable to discontinued operations shall be excluded; (vii)
any increase in cost of sales or other write-offs resulting from the purchase
accounting treatment of any acquisitions shall be excluded; (viii) all other
extraordinary, unusual or nonrecurring gains and losses shall be excluded; (ix)
any ceiling limitation writedowns under Commission guidelines shall be treated
as capitalized costs, as if such writedown had not occurred and (x) with regard
to a non-Wholly Owned Subsidiary, any aggregate Net Income (or loss) in excess
of such Person's or such Subsidiary's pro rata share of such non-Wholly Owned
Subsidiary's Net Income (or loss) shall be excluded. Notwithstanding the
foregoing, for the purposes of the covenant described under "Certain
Covenants -- Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to Seven Seas or a Restricted
Subsidiary to the extent such dividends, repayments or transfers are actually
used to increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (c)(iv) thereof.
"Consolidated Net Worth" of a Person at any date means the amount by which
the assets of such Person and its consolidated Restricted Subsidiaries (less any
revaluation or other write-up subsequent to the date of the Indenture in any
such assets (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within twelve
months after the acquisition of such business)) exceed the sum of (a) the total
liabilities of such Person and its consolidated Restricted Subsidiaries, plus
(b) any Disqualified Stock of such Person or any consolidated Restricted
Subsidiaries of such Person issued to any Person other than such Person or a
Wholly Owned Subsidiary of such Person, in each case determined in accordance
with GAAP.
"Conversion Liquidated Damages" means liquidated damages owing pursuant to
the covenant described under the caption "-- Conversion of Convertible Debt."
"Convertible Debentures" means the convertible debentures issuable upon
exchange of the Special Notes.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Depository" means The Depository Trust Company, as the depository with
respect to the Notes, until a successor shall have been appointed and become
such Depository pursuant to the applicable provision of the Indenture, and,
thereafter, "Depository" shall mean or include such successor.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver its resolution under the Indenture, a member of the Board of Directors
who does not have any material direct or indirect financial interest (other than
an interest arising solely from the beneficial ownership of Capital Stock of
Seven Seas) in or with respect to such transaction or series of transactions.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the Holder thereof, in whole or in part, on or prior to the date
that is 91 days after the date that the Notes mature.
"Dollar-Denominated Production Payments" means production payment
obligations of Seven Seas or any Subsidiary which are payable from a specified
share of proceeds received from production from specific Properties, together
with all undertakings and obligations in connection therewith.
"Eligible Institution" means either (i) a commercial banking institution
organized under the laws of the United States or Canada that has combined
capital and surplus of not less than US$150 million or its equivalent in foreign
currency or (ii) an investment banking firm organized under the laws of the
United States or Canada, that regularly supplies account management services,
that has equity in excess of
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$500 million or its equivalent in foreign currency, and, in either case of (i)
or (ii), whose debt is rated "A-3" or higher or "A" or higher according to
Moody's Investors Service, Inc., Standard & Poor's Ratings Services or Duff &
Phelps Credit Rating Co. (or such similar equivalent rating by at least one
"nationally recognized statistical rating organization" (as defined in Rule 436
under the Exchange Act)) at the time as of which any investment or rollover
therein is made.
"Eligible Securities" means the securities purchased by Seven Seas with a
portion of the net proceeds from the Offering of the Notes by Seven Seas which
shall consist of U.S. Government Securities to be deposited in the Eligible
Securities Account.
"Eligible Securities Account" means an account in the name of Seven Seas
held at an Eligible Institution.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity or Strategic Investor Offering" means an offering after the Issue
Date of Equity Interests, other than Disqualified Stock and other than Equity
Interests issuable upon conversion of warrants, options or other rights to
acquire Capital Stock of Seven Seas or any successor by merger to Seven Seas,
including a public offering pursuant to a registration statement filed with the
Commission or other securities commission (other than on Form S-8 or any other
form relating to securities issuable under any benefit plan of Seven Seas) or a
private placement to a third party engaged in the Oil and Gas Business.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.
"Exchange Offer" means the offer that may be made by Seven Seas pursuant to
the Registration Rights Agreement to exchange Exchange Notes for Notes.
"Existing Indebtedness" means the Indebtedness of Seven Seas and its
Restricted Subsidiaries (other than Indebtedness under the proposed credit
facility) in existence on the Issue Date.
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers, acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), and (ii) the consolidated interest incurred by such
Person and its Restricted Subsidiaries that was capitalized during such period,
and (iii) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a
Lien on assets of such Person or one of its Restricted Subsidiaries (whether or
not such Guarantee or Lien is called upon), and (iv) the product of (a) all
dividend payments, whether or not in cash, on any series of Preferred Stock of
any such Person payable to a party other than Seven Seas or a Wholly Owned
Subsidiary, other than dividend payments on Equity Interests payable solely in
Equity Interests of Seven Seas, times (b) a fraction, the numerator of which is
one and the denominator of which is one minus the then current combined federal,
state, provincial and local statutory tax rate of such Person, expressed as a
decimal, in each case, on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cashflow of such Person and its Restricted
Subsidiaries for such period of the most recent four consecutive fiscal quarters
for which financial statements are available prior to the date of such
determination to the Fixed Charges of such Person and its Restricted
Subsidiaries for such period. In the event that Seven Seas or any of its
Restricted Subsidiaries incurs, assumes, guarantees or repays any Indebtedness
(other than the incurrence or repayment of revolving credit borrowings used for
working capital, except to the extent that a repayment is accompanied by a
permanent reduction in revolving credit commitments) or issues Preferred Stock
subsequent to the commencement of the four-quarter reference period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall
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be calculated giving pro forma effect to such incurrence, assumption, guarantee
or redemption of Indebtedness, or such issuance or redemption of Preferred
Stock, as if the same had occurred at the beginning of the applicable
four-quarter reference period. For purposes of making the computation referred
to above, (i) acquisitions that have been made by Seven Seas or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date shall be, deemed to have occurred on the first day of the four-quarter
reference period and shall give pro forma effect to the Consolidated Cashflow
and Indebtedness of the Person which is the subject of any such acquisition, and
(ii) the Consolidated Cashflow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referenced Person or any of its
Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles in the United States
which are in effect on the date of the Indenture.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Guarantor" means any Restricted Subsidiary that shall have guaranteed,
pursuant to a supplemental indenture and the requirements therefor set forth in
the Indenture, the payment of all principal of, and interest and premium, if
any, on, the Notes and all other amounts payable under the Notes or the
Indenture.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other hedging agreements
or arrangements, in each case designed to protect such Person against
fluctuations in interest rates, currencies and oil and natural gas prices
entered into in the ordinary course of business in the Oil and Gas Business and
not for speculation.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, (i) any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any Property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP; (ii) all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person); (iii) the maximum fixed repurchase price of
Disqualified Stock issued by such Person, if held by a Person other than Seven
Seas or a Wholly Owned Subsidiary of Seven Seas; and (iv) to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person; provided that Indebtedness shall exclude Production Payments and
Reserve Sales. For purposes of this definition, the maximum fixed repurchase
price of any Disqualified Stock that does not have a fixed repurchase price
shall be calculated in accordance with the terms of such Disqualified Stock as
if such Disqualified Stock were repurchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture; provided, however,
that if such Disqualified Stock is not then permitted to be repurchased, the
repurchase price shall be the book value of such Disqualified Stock. The amount
of Indebtedness of any Person at any date shall be the outstanding balance at
such date of all unconditional obligations as described above and the maximum
liability at such date in respect of any contingent obligations described above
in this definition.
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"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, relocation and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
Seven Seas for consideration consisting of common equity securities of Seven
Seas shall not be deemed to be an Investment.
"Issue Date" means May 7, 1998.
"Legal Holiday" means a Saturday, a Sunday or a day on which federal
offices or banking institutions in the City of New York, in the city of the
Corporate Trust Office of the Trustee, or at a place of payment are authorized
by law, regulation or executive order to remain closed.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Liquidated Damages" means, collectively, all Registration Liquidated
Damages and all Conversion Liquidated Damages.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 20% during a fiscal quarter
in the estimated discounted future net cash flows from proved oil and gas
reserves of Seven Seas and its Restricted Subsidiaries, calculated in accordance
with clause (i)(a) of the definition of Adjusted Consolidated Net Tangible
Assets; provided, however, that the following will be excluded from the
calculation of Material Change: (i) any acquisitions during the quarter of oil
and gas reserves that have been estimated by a nationally recognized firm of
independent petroleum engineers and on which a report or reports exist and (ii)
any disposition of properties held at the beginning of such quarter that have
been disposed of as provided in the covenant described under the caption
"Repurchase at the Option of Holders -- Asset Sales."
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, and before reduction for
non-cash Preferred Stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries, and (ii) any items classified as extraordinary
gains or losses together with any related provision for taxes on such
extraordinary gains or losses.
"Net Proceeds" means the aggregate cash proceeds received by Seven Seas or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof, taxes paid or payable as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements), and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP and net of any Purchase
Money Obligations relating to the assets comprising such Asset Sale.
"Net Working Capital" means (i) all current assets of Seven Seas and its
Restricted Subsidiaries excluding cash and Cash Equivalents and Colombian
Government Receivables (to the extent included in current assets), minus (ii)
all current liabilities of Seven Seas and its Restricted Subsidiaries, except
current liabilities included in Indebtedness.
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"Non-Recourse Debt" means Indebtedness (i) as to which neither Seven Seas
nor any of its Restricted Subsidiaries (a) provides any Guarantee or credit
support of any kind (including any undertaking, Guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise), (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of Seven
Seas or any of its Restricted Subsidiaries to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity and (iii) the explicit terms of which provide that there is
no recourse against any of the assets of Seven Seas or its Restricted
Subsidiaries.
"Note Custodian" means the Trustee, as custodian with respect to the Global
Notes, or any successor entity, thereto.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary or any Vice President of such Person.
"Oil and Gas Business" means (i) the acquisition, exploration,
exploitation, development, operation or disposition of interests in oil, gas or
other hydrocarbon properties, (ii) the gathering, marketing, treating,
processing, storage, selling, transporting or refining of any production from
such interests or properties, (iii) any business relating to or arising from
exploration for or development, production, gathering, marketing, treatment,
processing, storage, sale, transportation or refining of oil, gas and other
minerals and products produced in association therewith or (iv) any activity
that is ancillary or necessary or desirable to facilitate the activities
described in clauses (i) through (iii) of this definition.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment to the Notes.
"Permitted Holders" means (i) Robert A. Hefner III and Breene M. Kerr, (ii)
any Person controlled directly or indirectly by either or both of the Persons
referred to in clause (i), and (iii) any trust, all of the beneficiaries of
which are any one or more of the Persons referred to in clause (i) of this
definition.
"Permitted Infrastructure Investment" means an investment made by Seven
Seas or any Restricted Subsidiary in production, processing, storage,
compression and pipeline facilities and infrastructure with respect to the
production and transportation of oil and natural gas from Emerald Mountain,
provided that the aggregate amount of such investment made by Seven Seas and its
Restricted Subsidiaries in any such facilities and infrastructure, as a
proportion of the total investments made by all Persons in such facilities and
infrastructure, does not at any time exceed the combined proportionate share of
the working interests of Seven Seas and its Restricted Subsidiaries in Emerald
Mountain.
"Permitted Investments" means (i) any Investments in Seven Seas or in a
Restricted Subsidiary of Seven Seas that is engaged in the Oil and Gas Business
and reasonable extensions or expansions thereof; (ii) any investments in Cash
Equivalents; (iii) investments by Seven Seas or any Restricted Subsidiary of
Seven Seas in a Person if as a result of such Investment (a) such Person becomes
a Wholly Owned Subsidiary of Seven Seas and such Person is engaged in the Oil
and Gas Business or (b) such Person is merged, consolidated or amalgamated with
or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, Seven Seas or a Wholly Owned Subsidiary of Seven Seas that is
engaged in the Oil and Gas Business; (iv) Investments made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described under "-- Asset Sales"; (v)
investments by Seven Seas or any of its Restricted Subsidiaries in an aggregate
amount not to exceed $10.0 million outstanding at any one time in the Oil and
Gas Business; (vi) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to Seven Seas or any
of its Subsidiaries or in satisfaction of judgments or pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of any
debtor; (vii) any operating agreements, joint ventures, partnership agreements,
working interests, royalty interests, mineral leases, processing agreements,
farm-out agreements,
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contracts for the sale, transportation or exchange of oil and natural gas,
unitization agreements, pooling arrangements, area of mutual interest
agreements, production sharing agreements or other similar or customary
agreements, transactions, properties, interests, or arrangements, and
Investments and expenditures in connection therewith or pursuant thereto, in
each case made or entered into in the ordinary course of business of the Oil and
Gas Business, excluding, however, investments in corporations; (viii) accounts
receivable created or acquired, and prepaid expenses arising, in the ordinary
course of business; (ix) the endorsements of negotiable instruments for
collection or deposit in the ordinary course of business; (x) Investments
existing on the date of the Indenture; (xi) the incurrence, assumption or
creation of Hedging Obligations that Seven Seas or a Restricted Subsidiary of
Seven Seas enter into in the ordinary course of the Oil and Gas Business for the
purpose of protecting its production against fluctuations in oil or natural gas
prices and otherwise in compliance with the Indenture; and (xii) Permitted
Infrastructure Investments.
"Permitted Liens" means (i) Liens securing Indebtedness permitted by clause
(i), (ii), (iii), (iv) (to the extent that the Liens securing such Indebtedness
are Purchase Money Liens), (v) (to the extent that the Liens securing Permitted
Refinancing Indebtedness have the same terms and relate to the same assets as
the Liens securing the Indebtedness to be exchanged or retired in relation
thereto), (viii), (ix), (x) (to the extent that cash on deposit may be
encumbered by the issuance of trade letters of credit), and (xi) (to the extent
related to the proposed credit facility), in each case under the covenant
entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"; (ii)
Liens in favor of Seven Seas or any Wholly Owned Subsidiary; (iii) Liens on
Property of a Person existing at the time such Person is merged into or
consolidated with Seven Seas or any Restricted Subsidiary of Seven Seas;
provided that such Liens were in existence prior to the contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated with Seven Seas; (iv) Liens on property of a
Person existing at the time such Person becomes a Restricted Subsidiary of Seven
Seas; (v) Liens on Property existing at the time of acquisition thereof by Seven
Seas or any Restricted Subsidiary of Seven Seas, provided that such Liens were
in existence prior to the contemplation of such acquisition; (vi) Liens to
secure the performance of statutory obligations, surety or appeal bonds,
performance bonds, tenders, bids, leases or other obligations of a like nature
incurred in the ordinary course of the Oil and Gas Business; (vii) Liens
existing on the date of the Indenture; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently conducted, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (ix)
carriers', warehousemen's, mechanics', materialmen's, repairmen's, or other
similar Liens arising in the ordinary course of business which are not overdue
for a period of more than 60 days or which are being contested in good faith by
appropriate proceedings diligently conducted; (x) easements, rights-of-way,
restrictions, minor defects or irregularities in title and other similar charges
or encumbrances not interfering in any material respect with the business of
Seven Seas or any of its Restricted Subsidiaries; (xi) statutory Liens of
landlords or of mortgagees of landlords arising by operation of law, provided
that the rental payments secured thereby are not yet due and payable; (xii)
Liens incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (xiii) Purchase Money Liens (including extensions and renewals
thereof); (xiv) interests of lessors in capital or operating leases; (xv) Liens
on deposits made in connection with Hedging Obligations; (xvi) other Liens
arising in the ordinary course of business of Seven Seas or any Restricted
Subsidiary which do not secure the payment of borrowed money and in the
aggregate do not materially adversely affect the value of the assets of Seven
Seas and its Restricted Subsidiaries, taken as a whole, or materially impair the
use of such Properties for the purposes for which such Properties are held by
Seven Seas or such Restricted Subsidiaries and (xvii) Liens arising in
connection with Production Payments and Reserve Sales.
"Permitted Refinancing Indebtedness" means any Indebtedness of Seven Seas
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Seven Seas or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or fully accreted value at stated
maturity, if applicable) of such Permitted Refinancing Indebtedness does not
exceed the original principal amount (or then current accreted value, if
applicable) of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of
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reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date at least as late as the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded and (iv) such Indebtedness is incurred either by Seven Seas
or by the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded provided, however,
that Permitted Refinancing Indebtedness shall not include (a) Indebtedness of a
Subsidiary of Seven Seas that refinances Indebtedness of Seven Seas or (b)
Indebtedness of Seven Seas or a Restricted Subsidiary that refinances
Indebtedness of an Unrestricted Subsidiary.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, or other business entity or government or agency or
political-subdivision thereof (including any subdivision or ongoing business of
any such entity or substantially all or the assets of any such entity,
subdivision or business).
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Indenture for the deposit of the Pledged Securities to be
purchased by Seven Seas with a portion of the net proceeds from the sale of the
Notes.
"Pledged Securities" means the U.S. Government Securities to be purchased
by Seven Seas and held in the Pledge Account in accordance with the Indenture.
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"Production Payments and Reserve Sales" means the grant or transfer by
Seven Seas or a Restricted Subsidiary to any Person of a royalty, overriding
royalty, net profits interest, production payment (whether a Volumetric
Production Payment or Dollar-Denominated Production Payment), partnership or
other interest in oil and gas properties, reserve or the right to receive all or
a portion of the production or the proceeds from the sale of production
attributable to such properties, in each case where the holder of such interest
has recourse solely to such production or proceeds of production, subject to the
obligation of the grantor or transferor to operate and maintain, or cause the
subject interests to be operated and maintained, in a reasonably prudent manner
or other customary standard or subject to the obligation of the grantor or
transferor to indemnify for environmental, title or other matters customary in
the Oil and Gas Business.
"Property" means any property of any kind whatsoever, whether real,
personal or mixed and whether tangible or intangible, including any right of
interest therein or thereto.
"proposed credit facility" means, collectively, (i) that certain proposed
credit facility, by and among Seven Seas, the lenders that may be from time to
time parties, as the foregoing may from time to time be amended, renewed,
supplemented or otherwise modified at the option of the parties thereto,
including any increases in the principal amount thereof and (ii) after the
proposed credit facility has been terminated and all then outstanding
Indebtedness thereunder or with respect thereto have been repaid in full in cash
and discharged, any successors to or replacements of (as designated by the Board
of Directors of Seven Seas in its sole judgment, and evidenced by a resolution)
such proposed credit facility, as such successors or replacements may from time
to time be amended, renewed, supplemented, modified or replaced, including any
increases in the principal amount thereof. The proposed credit facility, for
purposes of the Indenture, includes Indebtedness, incurred in accordance with
the covenant under the caption "Certain Covenants -- Incurrence of Indebtedness
and Issuance of Preferred Stock," pursuant to an underwritten public offering or
private placement of debt securities.
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"Purchase Money Lien" means a Lien granted on an asset or Property to
secure a Purchase Money Obligation or Capital Lease Obligation permitted to be
incurred under the Indenture and incurred solely to finance the purchase, or the
cost of construction or improvement, of such asset or property; provided
however, that such Lien encumbers only such asset or property and is granted
within 180 days of such acquisition.
"Purchase Money Obligations" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed solely to finance
the purchase, or the cost of construction or improvement, of real or personal
property to be used in the business of such Person or any of its Restricted
Subsidiaries in an amount that is not more than 100% of the cost, or fair market
value, as appropriate, of such property, and incurred within 90 days after the
date of such acquisition (excluding accounts payable to trade creditors incurred
in the ordinary course of business).
"Registration Liquidated Damages" means liquidated damages owing pursuant
to the Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the date of the Indenture, by and among Seven Seas and the Initial
Purchasers, as such agreement may be amended, modified or supplemented from time
to time.
"Responsible Officer," when used with respect to the Trustee, means any
officer of the Trustee with direct responsibility for the administration of the
Indenture and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of such Person
that is not an Unrestricted Subsidiary.
"Securities Act" means the United States Securities Act of 1933, as
amended.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the Indenture.
"Special Notes" or "Exchangeable Notes" means the promissory notes, with an
aggregate principal amount of $25.0 million, issued by Seven Seas in August
1997.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"Subsidiary Guarantee" means an unconditional guarantee of the Notes and
the Indenture given by any Restricted Subsidiary or other Person pursuant to the
terms of the Indenture or any supplement thereto.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15 (519) that
has become publicly available at least two business days prior to the Redemption
Date (or, if such Statistical Release is no longer published, any published
source or similar market data) most nearly equal to the period from the
Redemption Date to May 15, 2002, provided, however, that if the period from the
Redemption Date to May 15, 2002 is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of the United
States Treasury securities for which such yields are given, except that if the
period from the Redemption Date to May 15, 2002
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is less than one year, the weekly average yield on actually traded United States
Treasury securities adjusted to a constant maturity of one year shall be used.
"Trust Indenture Act" means the United States Trust Indenture Act of 1939
(15 U.S.C. sec.sec. 77aaa-77bbbb) as in effect on the date on which the
Indenture is qualified under the Trust Indenture Act.
"U.S. Government Securities" means (i) securities that are (a) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof and (ii) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Security which is specified in clause (i) above and held by
such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Security which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by the
custodian in respect of the U.S. Government Security or the specific payment of
principal or interest of the U.S. Government Security evidenced by such
depository receipt.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a resolution of the
Board of Directors of Seven Seas; but only to the extent that such Subsidiary:
(a) has no Indebtedness other than Non-Recourse Debt; (b) is not party to any
agreement, contract, arrangement or understanding with Seven Seas or any
Restricted Subsidiary of Seven Seas unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to Seven Seas or
such Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of Seven Seas; (c) is a Person with respect to
which neither Seven Seas nor any of its Restricted Subsidiaries has any direct
or indirect obligation (1) to subscribe for additional Equity Interests or (2)
to maintain or preserve such Person's financial condition or to cause such
Person to achieve or maintain any specified levels of profitability (it being
understood that agreements entered into in the ordinary course of the Oil and
Gas Business relating to transportation or throughput commitments will not
constitute such an obligation); and (d) has not guaranteed or otherwise directly
or indirectly provided credit support for any Indebtedness of Seven Seas or any
of its Restricted Subsidiaries. Any such designation by the Board of Directors
of Seven Seas shall be evidenced to the Trustee by filing with the Trustee a
resolution of the Board of Directors of Seven Seas giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the "Restricted
Payments" covenant. If, at any time, any Unrestricted Subsidiary would fail to
meet the foregoing requirements as an Unrestricted Subsidiary, it shall
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary shall be deemed to be incurred by a
Restricted Subsidiary of Seven Seas as of such date. The Board of Directors of
Seven Seas may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary, provided, that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of Seven Seas of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "Incurrence of Indebtedness and Issuance of
Preferred Stock" and (ii) no Default or Event of Default would be in existence
following such designation.
"Volumetric Production Payments" means production payment obligations of
Seven Seas or any of its Subsidiaries which are payable from a specified share
of production from specific Properties, together with all undertakings and
obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership and limited liability company interests) of
such Person then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then
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remaining installment, sinking fund, serial maturity or other required payments
of principal, including payment at final maturity, in respect thereof, by (b)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests of
which (other than directors' qualifying shares or shares required by applicable
law to be held by third parties) shall at the time be owned by such Person or by
one or more Wholly Owned Subsidiaries of such Person. Unrestricted Subsidiaries
shall not be included in the definition of Wholly Owned Subsidiary for any
purposes of the Indenture.
REGISTRATION RIGHTS
Seven Seas and the Initial Purchasers entered into the Registration Rights
Agreement on the Closing Date. Pursuant to the Registration Rights Agreement,
Seven Seas filed the Exchange Offer Registration Statement with the Commission
within the prescribed period. Upon the effectiveness of the Exchange Offer
Registration Statement, the Company commenced the Exchange Offer, offering to
certain Holders of Notes which constitute Transfer Restricted Securities the
opportunity to exchange their Transfer Restricted Securities for registered
Exchange Notes. See "The Exchange Offer."
If (i) the Exchange Offer is not permitted by applicable law or (ii) any
Holder of Notes which are Transfer Restricted Securities notifies Seven Seas
prior to the 20th Business Day following the consummation of the Exchange Offer
that (a) it is prohibited by law or Commission policy from participating in the
Exchange Offer or (b) it may not resell the Exchange Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus, and the prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales by it, Seven Seas will file with the Commission a
Shelf Registration Statement to register for public resale the Transfer
Restricted Securities held by any such Holder who provides Seven Seas with
certain information for inclusion in the Shelf Registration Statement. If Seven
Seas is required to file a Shelf Registration Statement, it will use its
reasonable best efforts to have it declared effective at the earliest possible
time and to keep the Shelf Registration Statement effective and available for
use by Holders for up to two years.
For the purposes of the Registration Rights Agreement, "Transfer Restricted
Securities" means (a) each Original Note until the earliest to occur of (i) the
date such Original Note is exchanged in the Exchange Offer for an Exchange Note
that is entitled to be resold to the public by the Holder thereof without
complying with the prospectus delivery requirements of the Securities Act, (ii)
the date such Original Note has been disposed of in accordance with a Shelf
Registration Statement or (iii) the date such Original Note is distributed to
the public pursuant to Rule 144 under the Securities Act and (b) each Exchange
Note until the date such Exchange Note is disposed of by a Participating
Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including delivery of the prospectus
contained therein).
The Registration Rights Agreement provides that (i) if Seven Seas fails to
file an Exchange Offer Registration Statement with the Commission on or prior to
the 60th day after the Closing Date, (ii) if the Exchange Offer Registration
Statement is not declared effective by the Commission on or prior to the 120th
day after the Closing Date, (iii) if the Exchange Offer is not consummated on or
before the 30th Business Day after the Exchange Offer Registration Statement is
declared effective, (iv) if obligated to file a Shelf Registration Statement and
Seven Seas fails to file the Shelf Registration Statement with the Commission on
or prior to the 60th day after such filing obligation arises, (v) if obligated
to file a Shelf Registration Statement and the Shelf Registration Statement is
not declared effective on or prior to the 120th day after the obligation to file
a Shelf Registration Statement arises, or (vi) if the Exchange Offer
Registration Statement or the Shelf Registration Statement, as the case may be,
is declared effective but thereafter ceases to be effective or useable in
connection with resales of the Transfer Restricted Securities during the period
specified in the Registration Rights Agreement, for such time of
noneffectiveness or non-usability (each, a "Registration Default"), Seven Seas
agrees to pay to each Holder of Transfer Restricted Securities affected thereby
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liquidated damages ("Registration Liquidated Damages") in an amount equal to
$0.05 per week per $1,000 in principal amount of Transfer Restricted Securities
held by such Holder for each week or portion thereof that the Registration
Default continues for the first 90-day period immediately following the
occurrence of such Registration Default. The amount of the Registration
Liquidated Damages shall increase by an additional $0.05 per week per $1,000 in
principal amount of Transfer Restricted Securities with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up to
a maximum amount of Registration Liquidated Damages of $0.50 per week per $1,000
in principal amount of Transfer Restricted Securities. Seven Seas shall not be
required to pay Registration Liquidated Damages for more than one Registration
Default at any given time. Following the cure of all Registration Defaults, the
accrual of Registration Liquidated Damages will cease.
All accrued Registration Liquidated Damages shall be paid by Seven Seas to
Holders entitled thereto in the manner, and at the times, provided for the
payment of interest in the Indenture.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of Seven Seas, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
or resign.
The Holders of a majority in principal amount of the then outstanding Notes
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that in case an Event of Default occurs
(which is not cured), the Trustee is required, in the exercise of its power, to
use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee is under no obligation to exercise any
of its fights or powers under the Indenture at the request of any Holder of
Notes, unless such Holder has offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
BOOK-ENTRY; DELIVERY; FORM AND TRANSFER
The Exchange Notes initially will be in the form of one or more registered
global notes without interest coupons (collectively, the "Global Notes"). Upon
issuance, the Global Notes will be deposited with the Trustee, as custodian for
The Depository Trust Company ("DTC"), in New York, New York, and registered in
the name of DTC or its nominee for credit to the accounts of DTC's Direct and
Indirect Participants (as defined below).
Transfer of beneficial interests in any Global Notes will be subject to the
applicable rules and procedures of DTC and its Direct or Indirect Participants,
which may change from time to time.
The Global Notes may be transferred, in whole and not in part, only to
another nominee of DTC or to a successor of DTC or its nominee in certain
limited circumstances. Beneficial interests in the Global Notes may be exchanged
for Notes in certificated form in certain limited circumstances. See
"-- Transfer of Interests in Global Notes for Certificated Notes."
DEPOSITARY PROCEDURES
DTC has advised Seven Seas that DTC is a limited-purpose trust company
created to hold securities for its participating organizations (collectively,
the "Direct Participants") and to facilitate the clearance and settlement of
transactions in those securities between Direct Participants through electronic
book-entry changes in accounts of Participants. The Direct Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations. Access to DTC's system is also available to
other entities that clear through, or maintain a direct or indirect, custodial
relationship with a Direct Participant (collectively, the "Indirect
Participants").
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DTC has advised Seven Seas that, pursuant to DTC's procedures, DTC will
maintain records of the ownership interests of its Direct Participants in the
Global Notes and the transfer of ownership interests by and between Direct
Participants. DTC will not maintain records of the ownership interests of, or
the transfer of ownership interests by and between, Indirect Participants or
other owners of beneficial interests in the Global Notes. Direct Participants
and Indirect Participants must maintain their own records of the ownership
interests of, and the transfer of ownership interests by and between, Indirect
Participants and other owners of beneficial interests in the Global Notes.
The laws of some states in the United States require that certain persons
take physical delivery in definitive, certificated form, of securities that they
own. This may limit or curtail the ability to transfer beneficial interests in a
Global Note to such persons. Because DTC can act only on behalf of Direct
Participants, which in turn act on behalf of Indirect Participants and others,
the ability of a person having a beneficial interest in a Global Note to pledge
such interest to persons or entities that are not Direct Participants in DTC, or
to otherwise take actions in respect of such interests, may be affected by the
lack of physical certificates evidencing such interests. For certain other
restrictions on the transferability of the Notes see "-- Transfers of Interests
in Global Notes for Certificated Notes."
EXCEPT AS DESCRIBED IN "-- TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR
CERTIFICATED NOTES," OWNERS OF BENEFICIAL INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Under the terms of the Indenture, Seven Seas, the Guarantors (if any) and
the Trustee will treat the persons in whose names the Notes are registered
(including Notes represented by Global Notes) as the owners thereof for the
purpose of receiving payments and for any and all other purposes whatsoever.
Payments in respect of the principal, premium, if any, interest and Liquidated
Damages and Additional Amounts, if any, and interest on Global Notes registered
in the name of DTC or its nominee will be payable by the Trustee to DTC or its
nominee as the registered holder under the Indenture. Consequently, neither
Seven Seas, the Trustee nor any agent of Seven Seas or the Trustee has or will
have any responsibility or liability for (i) any aspect of DTC's records or any
Direct Participant's or Indirect Participant's records relating to or payments
made on account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised Seven Seas that its current payment practice (for payments
of principal, interest and the like) with respect to securities such as the
Notes is to credit the accounts of the relevant Direct Participants with such
payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the Global Notes as shown on
DTC's records. Payments by Direct Participants and Indirect Participants to the
beneficial owners of the Notes will be governed by standing instructions and
customary practices between them and will not be the responsibility of DTC, the
Trustee, Seven Seas or the Subsidiary Guarantors. Neither Seven Seas, the
Guarantors (if any) nor the Trustee will be liable for any delay by DTC or its
Direct Participants or Indirect Participants in identifying the beneficial
owners of the Notes, and Seven Seas and the Trustee may conclusively rely on and
will be protected in relying on instructions from DTC or its nominee as the
registered owner of the Notes for all purposes.
Transfers of beneficial interests in the Global Notes between Direct
Participants in DTC will be effected in accordance with DTC's procedures, and
will be settled in immediately available funds. Transfers between Indirect
Participants who hold an interest through a Direct Participant will be effected
in accordance with the procedures of such Direct Participant but generally will
settle in immediately available funds.
DTC has advised Seven Seas that it will take any action permitted to be
taken by a Holder of Notes only at the direction of one or more Direct
Participants to whose account interests in the Global Notes are credited and
only in respect of such portion of the aggregate principal amount of the Notes
to which such Direct Participant or Direct Participants has or have given
direction. However, if there is an Event of Default under the Indenture, DTC
reserves the right to exchange Global Notes (without the direction of one or
more of its
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Direct Participants) for Notes in certificated form, and to distribute such
certificated forms of Notes to its Direct Participants. See "-- Transfers of
Interests in Global Notes for Certificated Notes."
Although DTC has agreed to the foregoing procedures to facilitate transfers
of interests in the Global Notes among Direct Participants, DTC is under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of Seven Seas, the Guarantors
(if any) or the Trustee shall have any responsibility for the performance by DTC
or its Direct and Indirect Participants of their respective obligations under
the rules and procedures governing any of their operations.
The information in this section concerning DTC and its book-entry systems
has been obtained from sources that Seven Seas believes to be reliable, but
Seven Seas takes no responsibility for the accuracy thereof.
TRANSFERS OF INTERESTS IN GLOBAL NOTES FOR CERTIFICATED NOTES
An entire Global Note may be exchanged for definitive Notes in registered,
certificated form without interest coupons ("Certificated Notes") if (i) DTC
notifies Seven Seas that it is unwilling or unable to continue as depositary for
the Global Notes and Seven Seas thereupon fails to appoint a successor
depositary within 90 days or (ii) Seven Seas, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Certificated Notes.
In either such case, Seven Seas will notify the Trustee in writing that, upon
surrender by the Direct and Indirect Participants of their interests in such
Global Note, Certificated Notes will be issued to each person that such Direct
and Indirect Participants and DTC identify as being the beneficial owner of the
related Notes.
Beneficial interests in Global Notes held by any Direct or Indirect
Participant may be exchanged for Certificated Notes upon request to DTC by such
Direct Participant (for itself or on behalf of an Indirect Participant) to the
Trustee in accordance with customary DTC procedures. Certificated Notes
delivered in exchange for any beneficial interest in any Global Note will be
registered in the names, and issued in any approved denominations, requested by
DTC on behalf of such Direct or Indirect Participants (in accordance with DTC's
customary procedures).
Neither Seven Seas, the Guarantors (if any) nor the Trustee will be liable
for any delay by the Holder of any Global Note or DTC in identifying the
beneficial owners of Notes, and Seven Seas and the Trustee may conclusively rely
on, and will be protected in relying on, instructions from the Holder of the
Global Note or DTC for all purposes.
SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, interest and Liquidated
Damages and Additional Amounts, if any) be made by wire transfer of immediately
available same day funds to the accounts specified by the Holder of such Global
Note. With respect to Certificated Notes, Seven Seas will make all payments of
principal, premium, if any, interest and Liquidated Damages and Additional
Amounts, if any, by wire transfer of immediately available same day funds to the
accounts specified by the Holders thereof or, if no such account is specified,
by mailing a check to each such Holder's registered address. Seven Seas expects
that secondary trading in the Certificated Notes will also be settled in
immediately available funds.
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PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchanged Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with any resale of Exchange Notes
received in exchange for Original Notes where such Original Notes were acquired
as a result of market-making activities or other trading activities. The Company
has agreed that for a period of one year after the Expiration Date, it will use
reasonable efforts to make this Prospectus, as amended or supplemented,
available to any Participating Broker-Dealer for use in connection with any such
resale; provided that such Participating Broker-Dealer indicates in the Letter
of Transmittal that it is a Participating Broker-Dealer. In addition, until
, 1998, all broker-dealers effecting transactions in the Exchange
Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of Exchange Notes
by Participating Broker-Dealers or any other persons. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-the-
counter market, in negotiated transactions, through the writing of options on
the Exchange Notes or a combination of such methods of resale, at market prices
prevailing at the time of resale, at prices related to such prevailing market
prices or at negotiated prices. Any such resale may be made directly to
purchasers or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such broker-dealer and/or the
purchasers of any such Exchange Notes. Any broker-dealer that resells Exchange
Notes that were received by it for its own account pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such
Exchange Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act, and any profit on any resale of Exchange Notes and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
For a period of one year after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any Participating Broker-Dealer that requests
such documents in the Letter of Transmittal.
By acceptance of this Exchange Offer, each broker-dealer that receives
Exchange Notes pursuant to the Exchange Offer agrees that, upon receipt of
notice from the Company of the happening of any event which makes any statement
in the Prospectus untrue in any material respect or which requires the making of
any changes in the Prospectus in order to make the statements therein not
misleading (which notice the Company agrees to deliver promptly to such
broker-dealer), such broker-dealer will suspend use of the Prospectus until (i)
the Company has amended or supplemented the Prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
Prospectus to such broker-dealer or (ii) the Company has advised such
broker-dealer that use of the Prospectus may be resumed. If the Company gives
any such notice to suspend the use of the Prospectus, it shall extend the one
year period referred to above by the number of days during the suspension
period.
The Company has agreed to pay all expenses incident to the Company's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders (including any Participating Broker-Dealers) and certain
parties related to the holders against certain liabilities, including
liabilities under the Securities Act.
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CERTAIN UNITED STATES TAX CONSEQUENCES TO U.S. HOLDERS
The following is a summary of certain United States federal income tax
consequences of the purchase, ownership and disposition of the Notes which may
be relevant to a holder or prospective purchaser of one or more of such Notes.
The tax consequences to a holder of the Notes may vary depending upon the
particular situation of such holder. The legal conclusions expressed in this
summary are based upon current provisions of the Code, applicable Treasury
Regulations ("Regulations"), judicial authority and administrative rulings and
practice, all as in effect as of the date of this Prospectus, and all of which
are subject to change, either prospectively or retroactively. These authorities
are subject to various interpretations and it is therefore possible that the tax
treatment of the Notes may differ from the treatment described below.
Legislative, judicial or administrative changes or interpretations may be
forthcoming that could alter or modify the statements and conclusions set forth
herein. Any such changes or interpretations may or may not be retroactive and
could affect the tax consequences to holders.
This summary deals only with persons who will hold the Notes as capital
assets, and does not address tax considerations applicable to investors who may
be subject to special tax rules, such as financial institutions, tax exempt
organizations, insurance companies, foreign persons, dealers in securities or
currencies, persons who hold Notes as a hedge or as a position in a "straddle"
for tax purposes, and persons who have a "functional currency" other than the
U.S. dollar. In addition, the following summary is limited to the United States
federal income tax consequences relevant to a U.S. holder of the Notes. A U.S.
holder of a Note means (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized under the laws of
the U.S. or any political subdivision thereof, (iii) a trust if a court within
the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have the
authority to control all substantial decisions of the trust, (iv) an estate the
income of which is subject to U.S. federal income tax regardless of source, or
(v) a person otherwise subject to U.S. federal income tax on a net income basis.
In addition, the description does not consider the effect of any applicable
foreign, state, local or other tax laws or estate or gift tax considerations.
HOLDERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE
APPLICATION OF U.S. FEDERAL INCOME TAX LAWS, AS WELL AS THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION, TO THEIR PARTICULAR SITUATIONS.
PAYMENT OF INTEREST
Interest on a Note generally will be includable in the income of a holder
as ordinary income at the time such interest is received or accrued, in
accordance with such holder's method of accounting for United States federal
income tax purposes.
CONTINGENT PAYMENTS
As more fully described under "Description of Notes -- Registration
Rights," in the event of a Registration Default, Seven Seas is obligated to pay
Liquidated Damages amounts. Under the Regulations, certain contingent payments
on debt instruments (like the Liquidated Damages amounts payable in the event of
a Registration Default) must be accrued into gross income by a holder
(regardless of such holder's method of accounting). However, any payment subject
to a remote or incidental contingency (i.e.,there is a remote likelihood that
the contingency will occur or the potential amount of the contingent payment is
insignificant relative to the remaining payments on the debt instrument) is not
considered a contingent payment and is ignored until payment, if any, is
actually made. The determination of whether a contingency is remote or
incidental is made as of the Issue Date. Seven Seas intends to take the position
that the Liquidated Damages payments resulting from a Registration Default are
subject to a remote or incidental contingency. Accordingly, any Liquidated
Damages payments resulting from a Registration Default should be includable in
the income of a holder in accordance with such holder's method of accounting for
United States federal income tax purposes.
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EXCHANGE OFFER
Pursuant to the Regulations, the exchange of Original Notes for Exchange
Notes pursuant to the Exchange Offer should not constitute a significant
modification of the terms of the Notes, and, accordingly, such exchange should
be treated as a "non-event" for federal income tax purposes. Therefore, such
exchange should have no federal income tax consequences to holders of Notes.
SALES, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement (including redemption) of a Note,
other than the exchange of an Original Note for an Exchange Note (see
"-- Exchange Offer" above), a holder of a Note generally will recognize gain or
loss in an amount equal to the difference between the amount of cash and the
fair market value of any property received on the sale, exchange or retirement
of the Note (other than in respect of accrued and unpaid interest on the Note,
which amounts are treated as ordinary interest income) and such holder's
adjusted tax basis in the Note. Such gain or loss will generally be capital gain
or loss, and will generally be long-term capital gain if the Note is held for
more than 12 months. For individuals, long-term capital gains generally are
subject to a maximum tax rate of 28% (20% for assets held more than 18 months).
The deductibility of capital losses is subject to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to payments of
principal and interest on the Notes, and backup withholding at a rate of 31%
will apply to interest payments on the Notes made to holders other than certain
exempt recipients (such as corporations) and to proceeds realized by such
holders on dispositions of Notes if the holder: (i) fails to furnish its social
security or other taxpayer identification Number ("TIN") within a reasonable
time after request therefor, (ii) furnishes an incorrect TIN, (iii) fails to
report properly interest or dividend income, or (iv) fails under certain
circumstances, to provide a certified statement, signed under penalty of
perjury, that the TIN provided is its correct number and that the Holder is not
subject to backup withholding. Any amount withheld from a payment to a holder
under the backup withholding rules is allowable as a refund or as a credit
against such holder's federal income tax liability, provided that the required
information is furnished to the Internal Revenue Service. Holders of Notes
should consult their tax advisors as to their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption.
CERTAIN CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following is, as of the date hereof, a summary of the principal
Canadian federal income tax consequences to a holder who acquires an Exchange
Note pursuant to the Exchange Offer and who, for purposes of the Income Tax Act
(Canada) (the "ITA") and at all relevant times, is not resident in Canada. This
summary is based on the current provisions of the ITA and the regulations
thereunder, the current administrative practices of Revenue Canada, and all
specific proposals to amend the ITA and the regulations announced by or on
behalf of the Minister of Finance prior to the date hereof. This summary does
not otherwise take into account or anticipate changes in the law, whether by
judicial, governmental or legislative decision or action, nor does it take into
account tax legislation or considerations of any province or territory of Canada
or any jurisdiction other than Canada. The provisions of provincial income tax
legislation vary from province to province in Canada and in some cases differ
from federal income tax legislation.
THIS SUMMARY IS OF A GENERAL NATURE ONLY AND IS NOT INTENDED TO BE, AND
SHOULD NOT BE INTERPRETED AS, LEGAL OR TAX ADVICE TO ANY PARTICULAR HOLDER OF
NOTES. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE
TAX CONSEQUENCES TO THEM OF THE ACQUISITION AND EFFECT OF CANADIAN, PROVINCIAL,
TERRITORIAL, AND LOCAL TAX LAWS.
The payment by Seven Seas of interest, principal or premium, if any, on the
Exchange Notes to a holder who is not resident in Canada and with whom Seven
Seas deals at arm's length within the meaning of the ITA
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will be exempt from Canadian withholding tax. For the purposes of the ITA,
related persons (as therein defined) are deemed not to deal at arm's length, and
it is a question of fact whether persons not related to each other deal at arm's
length.
No other taxes on income (including taxable capital gains) will be payable
under the ITA in respect of the exchange of an Original Note for an Exchange
Note in the Exchange Offer or in respect of the holding, redemption or
disposition of the Exchange Notes by holders who are neither residents nor
deemed to be residents of Canada for the purposes of ITA and who do not use or
hold and are not deemed by such laws to use or hold the Exchange Notes in
carrying on business in Canada for the purposes of the ITA, except that in
certain circumstances holders who are non-resident insurers carrying on an
insurance business in Canada and elsewhere may be subject to such taxes.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed on for the
Company by Vinson & Elkins L.L.P., Houston, Texas, and by Preston, Willis &
Lackowicz, Whitehorse, Yukon Territory.
EXPERTS
The audited financial statements of the Company included in this Prospectus
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of such firm as experts in giving such report.
PETROLEUM ENGINEERS
Information relating to the estimated proved reserves of oil and natural
gas and the related estimates of future net revenues and present values thereof
as of December 31, 1997 included in this Prospectus and in the notes to the
financial statements of the Company have been prepared by Ryder Scott Company
Petroleum Engineers, independent petroleum engineers.
112
<PAGE> 114
GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus.
Anticlinal closure means a subsurface, geological structure in the form of
a sine curve (i.e., the formation rises to a rounded peak) as a result of which
any oil in the deposit will normally rise to the highest point in the structure.
API gravity means an indication of density of crude oil or other liquid
hydrocarbons as measured by a system recommended by the American Petroleum
Institute (API), measured in degrees relative to the specific gravity scale. The
higher the API gravity measure, the lighter the compound. For example, asphalt
has an API gravity of 8, and gasoline has an API gravity of 50.
Appraisal Well means a well drilled subsequent to a discovery well in order
to confirm potential recoverable reserve quantities prior to development
drilling of the field.
Bbls means barrels.
Bbls/d means barrels per day of crude oil.
Bcf means one billion cubic feet of natural gas.
BOE means barrels of oil equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Commerciality means the acceptance by Ecopetrol of a field as productive in
commercial quantities, in accordance with an association contract with
Ecopetrol.
Commission means the United States Securities and Exchange Commission.
Completion means the installation of permanent equipment for the production
of crude oil or gas, or in the case of a dry hole, the reporting of abandonment
to the appropriate agency.
Delineation well means an exploratory well drilled to extend a known
reservoir.
Development well means a well drilled within the proved area of an oil or
gas reservoir to the depth of a stratigraphic horizon known to be productive.
Drill stem test means a method of determining the presence of oil and gas
in a formation. When the depth to be tested has been reached in a well being
drilled, a special tool is lowered into the hole. The drilling mud is removed
and the contents of the formation allowed to flow into the tool while an
instrument measures the pressure.
Ecopetrol means Empresa Colombiana de Petroleos, the Colombian national oil
company.
Exploratory well means a well drilled to find and produce oil and gas
reserves in an unproved area, to find a new reservoir in a field previously
found to be productive of oil and gas in another reservoir, or to extend a known
reservoir.
Farm-out means an agreement whereby the owner of a lease agrees to assign
or transfer the lease (or some portion of it), retaining some interest (such as
an overriding royalty or right to share in production), subject to the drilling
of one or more wells as a prerequisite to completion of the transfer.
Field means an area consisting of a single reservoir or multiple reservoirs
all grouped on or related to the same individual geological structure feature
and/or stratigraphic condition.
Gross wells or gross acres means the total number of wells or acres in
which the Company has an interest, without regard to the size of that interest.
MBbls means one thousand barrels of crude oil.
MBbls/d means one thousand barrels per day of crude oil.
MBOE means one thousand barrels of oil equivalent.
Mcf means one thousand cubic feet of natural gas.
Mcf/d means one thousand cubic feet per day of natural gas.
MMBbls means one million barrels of crude oil.
113
<PAGE> 115
MMcf means one million cubic feet of natural gas.
Net wells or net acres are determined by multiplying gross wells or acres
by the Company's working interest in those wells or acres.
Oil means crude oil and condensate.
Operator means any person, partnership, corporation or other entity engaged
in the business of exercising direct supervision over the drilling or completion
of or production from a well.
Overriding royalty interest means an interest in oil and gas produced at
the surface, free of the expense of production.
Productive well means a well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed reserves means those proved reserves that can be expected
to be recovered through existing wells with existing equipment and operating
methods.
Proved reserves means the estimated quantities of crude oil, natural gas
and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped reserves means those reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
reasonable certainty that there is continuity of production from the existing
productive formation. Estimates for proved undeveloped reserves are attributable
to any acreage for which an application of fluid injection or other improved
technique is contemplated, only when such techniques have been proved effective
by actual tests in the area and in the same reservoir.
Reservoir means a porous and permeable underground formation containing a
natural accumulation of producible oil and/or gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest means an interest in an oil and gas property entitling the
owner to a share of oil or gas production free of costs of production.
SEC PV-10 means the present value of estimated net revenues attributable to
the Company's proved reserves prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pre-tax basis using
Commission guidelines.
Seismic means the use of shock waves generated by controlled explosions of
dynamite or other means to ascertain the nature and contour of underground
geological structures.
2-D seismic survey means seismic that is run, acquired and processed to
yield a two-dimensional picture of the subsurface. Two dimensional seismic is
generally prepared in a grid or ray pattern.
3-D seismic survey means seismic that is run, acquired and processed to
yield a three-dimensional picture of the subsurface.
Undeveloped acreage means acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and gas regardless of whether such acreage contains proved reserves.
Working interest means the operating interest that gives the owner the
right to share in production or revenues from the producing venture, subject to
all royalties and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
114
<PAGE> 116
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of March 31, 1998
(unaudited) and December 31, 1997...................... F-2
Condensed Statements of Consolidated Operations and
Accumulated Deficit for the three months ended March
31, 1998 and 1997 and the Cumulative Total from
Inception (February 3, 1995 to March 31, 1998
(unaudited)............................................ F-3
Condensed Statements of Consolidated Cash Flows for the
three months ended March 31, 1998 and 1997 and the
Cumulative Total from Inception (February 3, 1995) to
March 31, 1998 (unaudited)............................. F-4
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ F-5
Report of Independent Public Accountants.................. F-8
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-9
Statements of Consolidated Operations for the years ended
December 31, 1997 and 1996 and from Inception (February
3, 1995) to December 31, 1995.......................... F-10
Statement of Consolidated Stockholders' Equity for the
years ended December 31, 1997 and 1996 and from
Inception (February 3, 1995) to December 31, 1997...... F-11
Statements of Consolidated Cash Flows for the years ended
December 31, 1997 and 1996 and from Inception (February
3, 1995) to December 31, 1995.......................... F-12
Notes to Consolidated Financial Statements................ F-13
</TABLE>
F-1
<PAGE> 117
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents................................. $ 8,725 $ 18,067
Marketable securities..................................... -- 44
Accounts receivable....................................... 3,802 3,865
Prepaids and other........................................ 109 118
-------- --------
12,636 22,094
Note receivable from related party.......................... 200 200
Land........................................................ 441 --
Evaluated oil and gas interests, full-cost method........... 47,652 46,117
Unevaluated oil and gas interests, full-cost method......... 229,338 221,713
Fixed assets, net of accumulated depreciation of $61 at
March 31, 1998 and $43 at December 31, 1997............... 333 304
Other assets, net of accumulated amortization of $260 at
March 31, 1998 and $194 at December 31, 1997........... 1,420 1,486
-------- --------
TOTAL ASSETS................................................ $292,020 $291,914
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable.......................................... $ 5,497 $ 6,885
Accrued compensation...................................... 659 1,228
Interest payable.......................................... 375 --
Other accrued liabilities................................. -- 92
-------- --------
6,531 8,205
Long-term debt.............................................. 25,000 25,000
Deferred income taxes....................................... 70,459 70,459
Minority interest........................................... 5,297 4,087
STOCKHOLDERS' EQUITY
Share capital --
Authorized unlimited common shares without par value and
unlimited Class A preferred shares without par value;
35,226,606 and 35,071,606 issued and outstanding common
shares at March 31, 1998 and December 31, 1997,
respectively........................................... 198,091 196,406
Deficit accumulated during development stage................ (13,358) (12,243)
Treasury stock, 29 shares held at December 31, 1998 and
December 31, 1997......................................... -- --
-------- --------
Total Stockholders' Equity.................................. 184,733 184,163
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $292,020 $291,914
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 118
SEVEN SEAS PETROLEUM INC AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CONSOLIDATED OPERATIONS
AND ACCUMULATED DEFICIT
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
FROM INCEPTION
(FEBRUARY 3,
THREE MONTHS ENDED MARCH 31, 1995)
---------------------------- TO MARCH 31,
1998 1997 1998
<S> <C> <C> <C>
REVENUE
Crude oil sales................................. $ -- $ 319 $ 1,013
Interest income................................. 184 114 1,465
----------- ----------- -----------
184 433 2,478
EXPENSES
General and administrative...................... 1,120 917 13,360
Lease operating expenses........................ 188 230 1,348
Depreciation and amortization................... 84 20 381
Dry hole and abandonment costs.................. -- 17 1,145
Geological and geophysical...................... -- 9 47
Other (income) expense.......................... (30) -- (55)
Loss on sale of resource properties............. -- -- 31
----------- ----------- -----------
1,362 1,193 16,257
NET LOSS BEFORE INCOME TAXES...................... (1,178) (760) (13,779)
INCOME TAX EXPENSE................................ 15 -- 15
NET LOSS BEFORE MINORITY INTEREST................. (1,193) (760) (13,794)
MINORITY INTEREST................................. 78 38 436
----------- ----------- -----------
NET LOSS.......................................... $ (1,115) $ (722) $ (13,358)
=========== =========== ===========
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE,
BEGINNING OF PERIOD............................. (12,243) (4,315) --
DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE,
END OF PERIOD................................... $ (13,358) $ (5,037) $ (13,358)
=========== =========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE....... $ (0.03) $ (0.03) $ (0.67)
=========== =========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........ 35,126,162 25,245,027 19,812,121
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 119
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CUMULATIVE
TOTAL FROM
INCEPTION
THREE MONTHS ENDED (FEBRUARY 3,
MARCH 31, 1995)
------------------- TO MARCH 31,
1998 1997 1998
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................. $ (1,115) $ (722) $(13,358)
Add (subtract) items not requiring (providing) cash:
Compensation expense...................................... -- -- 2,140
Minority interest......................................... (78) -- (436)
Common stock contribution to 401(k) retirement plan....... -- -- 79
Dry hole and abandonment costs............................ -- 3 1,140
Gain on sale of marketable securities..................... (6) -- (6)
Loss on sale of resource properties....................... -- -- 31
Depreciation and amortization............................. 84 18 381
Changes in working capital excluding changes to cash and
cash equivalents:
Accounts receivable.................................... (478) (30) (2,920)
Prepaids and other, net................................ 9 (1) (109)
Accounts payable....................................... (427) (904) 1,065
Other accrued liabilities.............................. (92) -- --
-------- ------- --------
Cash Flow Used in Operating Activities...................... (2,103) (1,636) (11,993)
-------- ------- --------
INVESTING ACTIVITIES
Exploration of oil and gas properties..................... (9,746) (1,169) (32,112)
Purchase of land.......................................... (441) -- (441)
Proceeds from acquisition................................. -- 12 630
Proceeds from sale of property............................ -- -- 84
Proceeds from sale of marketable securities............... 50 50
Note receivable from related party........................ -- -- (200)
Other asset additions..................................... (47) (27) (561)
-------- ------- --------
Cash Flow Used in Investing Activities...................... (10,184) (1,184) (32,550)
-------- ------- --------
FINANCING ACTIVITIES
Proceeds from special warrants issued..................... -- -- 12,109
Proceeds from share capital issued........................ 1,116 3,549 12,610
Proceeds from additional paid-in capital contributed...... -- -- 1
Proceeds from issuance of special notes................... -- -- 25,000
Costs of issuing special notes............................ -- -- (1,573)
Contributions by minority interest........................ 1,829 288 5,121
Purchase of treasury stock................................ -- -- --
-------- ------- --------
Cash Flow Provided by Financing Activities.................. 2,945 3,837 53,268
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (9,342) 1,017 8,725
Cash and cash equivalents, beginning of period.............. 18,067 10,620 --
-------- ------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 8,725 $11,637 $ 8,725
======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 120
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited, condensed consolidated financial statements
include the accounts of Seven Seas Petroleum Inc. and it subsidiaries
(collectively referred to as "Seven Seas" or the "Company") after elimination of
intercompany balances and transactions.
The unaudited, condensed consolidated financial statements of the Company
for the periods indicated herein have been prepared by the Company pursuant to
the rules and regulations of the Securities and Exchange Commission and in
accordance with generally accepted accounting principles for interim financial
reporting. Accordingly, they do not include all of the information and footnotes
required by the GAAP for complete financial statements. In the opinion of
management, all adjustment, consisting of normal recurring accruals, necessary
to present fairly the information in the accompanying condensed consolidated
financial statements have been included. Interim period results are not
necessarily indicative of the results of operations or cash flows for a full
year period. The condensed financial statements included herein should be read
in conjunction with the audited financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1997.
Seven Seas Petroleum Inc. (a Yukon Territory, Canada corporation) was
formed on February 3, 1995. Seven Seas is a development stage enterprise
engaging in acquisition, exploration, and development of interests in oil and
gas projects worldwide. The Company's primary business operations to date have
been the exploration and development of its interests in Colombia, South
America.
The Company has yet to generate any significant revenue from oil and gas
sales and has no assurance of future revenues. The Company's principal asset is
its 57.7 percent working interest in the Dindal Association Contract and Rio
Seco Association Contract (collectively, the "Association Contracts" or the
"Emerald Mountain Project"). The Association Contracts were issued by Empresa
Colombiana de Petroleos ("Ecopetrol"), the National Oil Company of Colombia, in
March 1993 and August 1995, respectively, and entitle the Company to engage in
exploration, development, and production activities in Colombia. To date, five
exploratory wells have been drilled and completed on Emerald Mountain and have
encountered on average 303 feet of Cimarrona formation at vertical depths
between 6,000 and 7,500 feet. For the five wells where production testing has
been completed, actual per well production rates realized ranged from 3,415 to
13,123 barrels per day with an average in excess of 7,079 barrels per day.
Currently two additional wells are drilling or completing and one well has been
drilled and temporarily abandoned pending potential sidetrack operations or
re-drilling. The Company plans to rapidly and efficiently continue its field
development and delineation drilling program and to build the production
facilities and pipeline infrastructure to allow its production to reach existing
transportation lines for access to export markets.
Seven Seas is subject to several categories of risk associated with its
development stage activities. Oil and gas exploration and development is a
speculative business and involves a high degree of risk. The Company has
expended, and plans to expend, significant amounts of capital on the acquisition
and exploration of its properties, and most of such properties have not been
fully evaluated for hydrocarbon potential. The exploration and development of
current properties and any properties acquired in the future are expected to
require substantial amounts of additional capital which the Company may be
required to raise through debt or equity financings, which might involve
encumbering properties or entering into arrangements where certain costs of
exploration will be paid by others to earn an interest in the property. Seven
Seas' success currently depends to a high degree on its activities in Colombia.
However, there are risks that result because the Company has acquired, and
intends to continue to acquire, interests in properties outside of North
America, in some cases in countries that may be considered politically and
economically unstable.
F-5
<PAGE> 121
2. SUBSEQUENT EVENT
The Company issued $110 million aggregate principal amount of 12 1/2%
Senior Notes due 2005 (the "Notes") in a private transaction on May 7, 1998 that
was not subject to registration requirements of the Securities Act of 1933. The
Notes mature on May 15, 2005. Interest on the Notes will be payable semi-
annually, in arrears on May 15 and November 15 commencing November 15, 1998 to
holders of record on the immediately preceding May 1 and November 1.
The Notes will represent senior obligations of the Company, ranking pari
passu in right and priority of payment with all existing and future senior
indebtedness and senior in right and priority of payment to all indebtedness
that is expressly subordinated to the Notes.
In accordance with the terms of the Notes, the Company purchased $13.5
million of U.S. Government Securities from the proceeds of the Notes and
deposited such securities in a segregated account in an amount that will be
sufficient to provide for payment of the first two scheduled interest payments.
Additionally, the Company purchased and pledged to the Bank of Nova Scotia Trust
Company New York, the Trustee, as security for the benefit of the holders of the
Notes, U.S. Government Securities in an amount that will be sufficient to
provide payment of the four scheduled interest payments on the Notes from
November 15, 1999 through May 15, 2001.
Banque Paribas has provided a commitment letter (the "Commitment Letter")
pursuant to which Banque Paribas has agreed to provide a $25 million senior
secured revolving credit facility. The Commitment Letter provides that the
revolving credit facility will have a term of three years. Borrowings under the
facility will bear interest, at the Company's option, at LIBOR plus a margin of
2.75% or Citibank's base rate plus a margin of 1.00%. The amount available under
the facility will be subject to periodic redetermination based on the value of
the Company's reserves. A commitment fee of 0.50% is payable on the unused
portion of the facility. In addition, the indebtedness under the credit facility
will be guaranteed, subject to funding, by certain of the Company's
Subsidiaries. The facility will be secured by certain assets of the Company and
certain of its subsidiaries, including the stock of certain of the Company's
Subsidiaries, intercompany notes, equipment, inventory, contract rights, and a
collateral account that will include proceeds of sales of production under the
Association Contracts. The facility will also contain certain restrictive
covenants which impose limitations on the Company and its Subsidiaries, with
respect to, among other things, (i) the creation of liens, (ii) mergers,
acquisitions or dispositions of assets, (iii) incurrence of indebtedness, (iv)
transactions with affiliates, (v) sale-leaseback transactions and (vi) dividends
and other restricted payments. The credit facility will also require the company
to maintain a minimum current ratio, a minimum tangible net working capital, and
a minimum debt coverage ratio. The credit facility will contain customary events
of default. No assurance can be made that the credit facility will be completed
on the terms set forth in the Commitment Letter or on terms acceptable to the
Company prior to the time additional funds are required by the Company.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income" ("Statement No. 130") and
Statement No. 131, "Disclosures About Segments of an Enterprise and Related
Information ("Statement No. 131"). In February 1998, the FASB issued Statement
No. 132 "Employers' Disclosure About Pension and Other Post-retirement Benefits"
("Statement No. 132") that revised disclosure requirements for pension and other
post-retirement benefits. Statement No. 132 does not impact the Company's
disclosure or reporting. During the first quarter of 1998, the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants issued two Statements of Position ("SOP"), SOP 98-5 "Reporting on
the Costs of Start-up Activities and SOP 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use".
Statement No. 130 established standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This standard does not currently alter the Company's
reporting or disclosure.
F-6
<PAGE> 122
Statement No. 131 established standards for the way public enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to share holders. It also
established standards for related disclosure about products and services,
geographic areas and major customers. Statement No. 131 will not currently
impact the Company's disclosure or reporting.
SOP 98-1 establishes guidance on the accounting for the costs of computer
software developed or obtained for internal use. The Company's current
accounting policies adhere to the provisions of the SOP.
SOP 98-5 provides guidance on the accounting for start up costs and
organization costs, and must be adopted for fiscal years beginning after
December 15, 1998. At adoption, the Company will be required to record the
cumulative effect of a change in accounting principle to write off any
unamortized start up or organization costs remaining on the balance sheet. The
Company plans to adopt the SOP in the first quarter of 1999.
F-7
<PAGE> 123
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Seven Seas Petroleum Inc.:
We have audited the accompanying consolidated balance sheets of Seven Seas
Petroleum Inc. (a Yukon Territory, Canada corporation in the development stage)
and subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of operations and accumulated deficit, stockholders' equity and cash
flows for the years then ended and for the period from inception (February 3,
1995) to December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Seven Seas
Petroleum Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years then ended and
for the period from inception (February 3, 1995) to December 31, 1995 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 27, 1998
F-8
<PAGE> 124
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
CURRENT
Cash and cash equivalents................................. $ 18,067,189 $ 10,620,477
Marketable securities..................................... 43,795 43,795
Accounts receivable....................................... 3,865,180 1,241,430
Prepaids and other........................................ 118,447 --
------------ ------------
22,094,611 11,905,702
Note receivable from related party.......................... 200,000 --
Evaluated oil and gas interests, full-cost method........... 46,116,873 1,611,665
Unevaluated oil and gas interests, full-cost method......... 221,713,473 221,884,126
Fixed assets, net of accumulated depreciation of $42,716 at
December 31, 1997 and $12,194 at December 31, 1996........ 303,623 74,219
Other assets, net of accumulated amortization of $194,166 at
December 31, 1997 and $76,622 at December 31, 1996........ 1,485,544 25,270
------------ ------------
TOTAL ASSETS.............................................. $291,914,124 $235,500,982
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT
Accounts payable.......................................... $ 6,885,573 $ 2,560,665
Accrued compensation...................................... 1,228,000 --
Other accrued liabilities................................. 91,917 245,000
------------ ------------
8,205,490 2,805,665
Long-term debt.............................................. 25,000,000 --
Deferred income taxes....................................... 70,458,512 63,967,775
Minority interest........................................... 4,087,022 1,060,433
COMMITMENTS AND CONTINGENCIES (Note 10)..................... -- --
STOCKHOLDERS' EQUITY
Share capital --
Authorized unlimited common shares without par value and
unlimited Class A preferred shares without par value;
35,071,606 and 13,315,796 issued and outstanding common
shares at December 31, 1997 and December 31, 1996,
respectively........................................... 196,405,889 6,781,616
Preferred share subscriptions -- 5,002,972 shares at
December 31, 1996......................................... -- 45,652,120
Special warrant subscriptions -- 14,274,171 warrants at
December 31, 1996......................................... -- 119,548,227
Deficit accumulated during development stage................ (12,242,557) (4,314,622)
Treasury stock, 29 shares held at December 31, 1997 and
December 31, 1996......................................... (232) (232)
------------ ------------
Total Stockholders' Equity................................ 184,163,100 167,667,109
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................ $291,914,124 $235,500,982
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE> 125
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CONSOLIDATED OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM TOTAL
INCEPTION FROM INCEPTION
(FEBRUARY 3, (FEBRUARY 3,
YEAR ENDED DECEMBER 31, 1995) TO 1995) TO
--------------------------- DECEMBER 31, DECEMBER 31,
1997 1996 1995 1997
<S> <C> <C> <C> <C>
REVENUE
Crude oil sales................. $ 779,767 $ 233,682 $ -- $ 1,013,449
Interest income................. 787,189 341,599 152,383 1,281,171
------------ ----------- ----------- ------------
1,566,956 575,281 152,383 2,294,620
EXPENSES
General and administrative...... 8,714,333 2,454,884 1,070,765 12,239,982
Lease operating expenses........ 907,218 252,504 -- 1,159,722
Depreciation and amortization... 148,065 111,334 37,671 297,070
Dry hole and abandonment
costs........................ 16,952 4,910 1,122,806 1,144,668
Geological and geophysical...... 27,372 10,521 9,769 47,662
Other (income) expense.......... (25,331) -- -- (25,331)
Loss on sale of resource
properties................... -- -- 31,357 31,357
------------ ----------- ----------- ------------
9,788,609 2,834,153 2,272,368 14,895,130
NET LOSS BEFORE MINORITY
INTEREST........................ (8,221,653) (2,258,872) (2,119,985) (12,600,510)
MINORITY INTEREST................. 293,718 64,235 -- 357,953
------------ ----------- ----------- ------------
NET LOSS.......................... $ (7,927,935) $(2,194,637) $(2,119,985) $(12,242,557)
============ =========== =========== ============
DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE, beginning of
period.......................... (4,314,622) (2,119,985) -- --
DEFICIT ACCUMULATED DURING THE
DEVELOPMENT STAGE, end of
period.......................... $(12,242,557) $(4,314,622) $(2,119,985) $(12,242,557)
============ =========== =========== ============
BASIC AND DILUTED NET LOSS PER
COMMON SHARE.................... $ (0.24) $ (0.17) $ (0.23) $ (0.66)
============ =========== =========== ============
WEIGHTED AVERAGE
COMMON SHARES OUTSTANDING....... 32,504,872 12,971,871 9,247,101 18,515,541
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE> 126
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CONSOLIDATED STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------
DATE NUMBER AMOUNT
<S> <C> <C> <C>
Issuance of common share to founder....................... February 3, 1995 1 $ --
Issuance of common shares to founder for cash............. February 27, 1995 999,999 1
Issuance of common shares in a private placement for cash
($0.25 per share)........................................ March 22, 1995 4,000,000 1,000,000
Issuance of common shares in private placements for cash
($0.75 per share)........................................ May 31, 1995 5,687,666 4,265,750
June 9, 1995 979,000 734,250
Issuance of common shares in settlement of agents' fees
($0.75 per share)........................................ May 31, 1995 284,383 213,287
June 9, 1995 48,950 36,713
Less: Common share issuance cost.......................... May 31 - June 9, 1995 -- (250,000)
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake Resources
($0.25 per share)........................................ June 29-30, 1995 680,464 170,116
Net loss.................................................. -- --
---------- ------------
BALANCE AT DECEMBER 31, 1995.............................. 12,680,463 6,170,117
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant)................... March 15, 1996 -- --
Issuance of common shares to the Company's 401(k) plan
($7.875 per share)....................................... April 29, 1996 10,000 78,750
Purchase Treasury Stock ($8.00 per share)................. June 26, 1996 -- --
Exercise of stock options for cash ($.75 per share)....... Jan. - June 1996 305,000 228,750
Exercise of stock options for cash ($7.125 per share)..... April 29, 1996 10,000 71,250
Issuance of exchangeable preferred stock in connection
with business combination ($9.125 per share)............. July 26, 1996 -- --
Issuance of special warrants in connection with business
combination ($9.125 per warrant)......................... July 26, 1996 -- --
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant).......... October 16, 1996 -- --
Exercise of stock options for cash ($.75 per share)....... July - December 1996 310,333 232,749
Net loss.................................................. -- --
---------- ------------
BALANCE AT DECEMBER 31, 1996.............................. 13,315,796 6,781,616
Conversion of special warrants issued in connection with
the business combination dated July 26, 1996 ($9.125 per
share)................................................... February 7, 1997 11,774,171 107,439,309
Conversion of the preferred shares in connection with the
business combination dated July 26, 1996 ($9.125 per
share)................................................... February 7, 1997 5,002,972 45,652,120
Conversion of privately placed special warrants ($15.00
per warrant)............................................. February 7, 1997 500,000 7,013,370
Conversion of privately placed special warrants ($2.75 per
warrant)................................................. February 7, 1997 2,000,000 5,095,548
Issuance of common shares in connection with the business
combination ($18.55 per share)........................... March 5, 1997 1,000,000 18,550,000
Conversion of privately placed special warrants for cash
($3.50 per warrant)...................................... March 14, 1997 1,000,000 3,500,000
Exercise of stock options ($.75 - 10.90 per share)........ Jan. - December 1997 478,667 2,373,926
Net loss.................................................. -- --
---------- ------------
BALANCE AT DECEMBER 31, 1997.............................. 35,071,606 $196,405,889
========== ============
<CAPTION>
PREFERRED STOCK SPECIAL WARRANTS
------------------------- ---------------------------
NUMBER AMOUNT NUMBER AMOUNT
<S> <C> <C> <C> <C>
Issuance of common share to founder....................... -- $ -- -- $ --
Issuance of common shares to founder for cash............. -- -- -- --
Issuance of common shares in a private placement for cash
($0.25 per share)........................................ -- -- -- --
Issuance of common shares in private placements for cash
($0.75 per share)........................................ -- -- -- --
-- -- -- --
Issuance of common shares in settlement of agents' fees
($0.75 per share)........................................ -- -- -- --
-- -- -- --
Less: Common share issuance cost.......................... -- -- -- --
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake Resources
($0.25 per share)........................................ -- -- -- --
Net loss.................................................. -- -- -- --
---------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1995.............................. -- -- -- --
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant)................... -- -- 2,000,000 5,095,548
Issuance of common shares to the Company's 401(k) plan
($7.875 per share)....................................... -- -- -- --
Purchase Treasury Stock ($8.00 per share)................. -- -- -- --
Exercise of stock options for cash ($.75 per share)....... -- -- -- --
Exercise of stock options for cash ($7.125 per share)..... -- -- -- --
Issuance of exchangeable preferred stock in connection
with business combination ($9.125 per share)............. 5,002,972 45,652,120 -- --
Issuance of special warrants in connection with business
combination ($9.125 per warrant)......................... -- -- 11,774,171 107,439,309
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant).......... -- -- 500,000 7,013,370
Exercise of stock options for cash ($.75 per share)....... -- -- -- --
Net loss.................................................. -- -- -- --
---------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1996.............................. 5,002,972 45,652,120 14,274,171 119,548,227
Conversion of special warrants issued in connection with
the business combination dated July 26, 1996 ($9.125 per
share)................................................... -- -- (11,774,171) (107,439,309)
Conversion of the preferred shares in connection with the
business combination dated July 26, 1996 ($9.125 per
share)................................................... (5,002,972) (45,652,120) -- --
Conversion of privately placed special warrants ($15.00
per warrant)............................................. -- -- (500,000) (7,013,370)
Conversion of privately placed special warrants ($2.75 per
warrant)................................................. -- -- (2,000,000) (5,095,548)
Issuance of common shares in connection with the business
combination ($18.55 per share)........................... -- -- -- --
Conversion of privately placed special warrants for cash
($3.50 per warrant)...................................... -- -- -- --
Exercise of stock options ($.75 - 10.90 per share)........ -- -- -- --
Net loss.................................................. -- -- -- --
---------- ------------ ----------- -------------
BALANCE AT DECEMBER 31, 1997.............................. -- $ -- -- $ --
========== ============ =========== =============
<CAPTION>
DEFICIT
ACCUMULATED
TREASURY STOCK DURING
--------------- DEVELOPMENT
NUMBER AMOUNT PHASE TOTAL
<S> <C> <C> <C> <C>
Issuance of common share to founder....................... -- $ -- $ -- $ --
Issuance of common shares to founder for cash............. -- -- -- 1
Issuance of common shares in a private placement for cash
($0.25 per share)........................................ -- -- -- 1,000,000
Issuance of common shares in private placements for cash
($0.75 per share)........................................ -- -- -- 4,265,750
-- -- -- 734,250
Issuance of common shares in settlement of agents' fees
($0.75 per share)........................................ -- -- -- 213,287
-- -- -- 36,713
Less: Common share issuance cost.......................... -- -- -- (250,000)
Issuance of common shares in connection with the May 5,
1995 amalgamation agreement with Rusty Lake Resources
($0.25 per share)........................................ -- -- -- 170,116
Net loss.................................................. -- -- (2,119,985) (2,119,985)
--- ----- ------------ ------------
BALANCE AT DECEMBER 31, 1995.............................. -- -- (2,119,985) 4,050,132
Issuance of special warrants in a brokered private
placement for cash ($2.75 per warrant)................... -- -- -- 5,095,548
Issuance of common shares to the Company's 401(k) plan
($7.875 per share)....................................... -- -- -- 78,750
Purchase Treasury Stock ($8.00 per share)................. 29 (232) -- (232)
Exercise of stock options for cash ($.75 per share)....... -- -- -- 228,750
Exercise of stock options for cash ($7.125 per share)..... -- -- -- 71,250
Issuance of exchangeable preferred stock in connection
with business combination ($9.125 per share)............. -- -- -- 45,652,120
Issuance of special warrants in connection with business
combination ($9.125 per warrant)......................... -- -- -- 107,439,309
Issuance of convertible special warrants in a brokered
private placement for cash ($15.00 per warrant).......... -- -- -- 7,013,370
Exercise of stock options for cash ($.75 per share)....... -- -- -- 232,749
Net loss.................................................. -- -- (2,194,637) (2,194,637)
--- ----- ------------ ------------
BALANCE AT DECEMBER 31, 1996.............................. 29 (232) (4,314,622) 167,667,109
Conversion of special warrants issued in connection with
the business combination dated July 26, 1996 ($9.125 per
share)................................................... -- -- -- --
Conversion of the preferred shares in connection with the
business combination dated July 26, 1996 ($9.125 per
share)................................................... -- -- -- --
Conversion of privately placed special warrants ($15.00
per warrant)............................................. -- -- -- --
Conversion of privately placed special warrants ($2.75 per
warrant)................................................. -- -- -- --
Issuance of common shares in connection with the business
combination ($18.55 per share)........................... -- -- -- 18,550,000
Conversion of privately placed special warrants for cash
($3.50 per warrant)...................................... -- -- -- 3,500,000
Exercise of stock options ($.75 - 10.90 per share)........ -- -- -- 2,373,926
Net loss.................................................. -- -- (7,927,935) (7,927,935)
--- ----- ------------ ------------
BALANCE AT DECEMBER 31, 1997.............................. 29 $(232) $(12,242,557) $184,163,100
=== ===== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-11
<PAGE> 127
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE TOTAL
INCEPTION FROM INCEPTION
YEAR ENDED DECEMBER 31, (FEBRUARY 3, 1995) (FEBRUARY 3, 1995)
-------------------------- TO DECEMBER 31, TO DECEMBER 31,
1997 1996 1995 1997
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................................... $ (7,927,935) $(2,194,637) $(2,119,985) $(12,242,557)
Add (subtract) items not requiring
(providing) cash:
Compensation Expense....................... 2,140,250 -- -- 2,140,250
Minority interest.......................... (293,718) (64,235) -- (357,953)
Common stock contribution to 401(k)
retirement plan.......................... -- 78,750 -- 78,750
Dry hole and abandonment costs............. 16,952 -- 1,122,806 1,139,758
Loss on sale of resource properties........ -- -- 31,357 31,357
Depreciation and amortization.............. 148,065 111,334 37,671 297,070
Changes in working capital excluding
changes to cash and cash equivalents:
Accounts receivable...................... (2,082,750) (316,431) (43,642) (2,442,823)
Prepaids and other, net.................. (118,447) 482 (482) (118,447)
Accounts payable......................... 1,389,194 (17,472) 120,305 1,492,027
Other accrued liabilities................ (153,083) 245,000 -- 91,917
------------ ----------- ----------- ------------
Cash Flow Used in Operating Activities....... (6,881,472) (2,157,209) (851,970) (9,890,651)
------------ ----------- ----------- ------------
INVESTING ACTIVITIES
Exploration of oil and gas properties...... (16,359,726) (4,309,446) (1,696,943) (22,366,115)
Proceeds from acquisition.................. -- 630,226 -- 630,226
Proceeds from sale of property............. -- -- 84,336 84,336
Note receivable from related party......... (200,000) -- -- (200,000)
Other asset additions...................... (280,194) (64,135) (169,821) (514,150)
------------ ----------- ----------- ------------
Cash Flow Used in Investing Activities....... (16,839,920) (3,743,355) (1,782,428) (22,365,703)
------------ ----------- ----------- ------------
FINANCING ACTIVITIES
Proceeds from special warrants issued...... -- 12,108,917 -- 12,108,917
Proceeds from share capital issued......... 4,961,726 532,750 6,000,001 11,494,477
Proceeds from additional paid-in capital
contributed.............................. -- 999 -- 999
Proceeds from issuance of special notes.... 25,000,000 -- -- 25,000,000
Costs of issuing special notes............. (1,572,929) -- -- (1,572,929)
Contributions by minority interest......... 2,779,307 513,004 -- 3,292,311
Purchase of treasury stock................. -- (232) -- (232)
------------ ----------- ----------- ------------
Cash Flow Provided by Financing Activities... 31,168,104 13,155,438 6,000,001 50,323,543
------------ ----------- ----------- ------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS.................. 7,446,712 7,254,874 3,365,603 18,067,189
Cash and cash equivalents, beginning
of period.................................. 10,620,477 3,365,603 -- --
------------ ----------- ----------- ------------
CASH AND CASH EQUIVALENTS,
END OF PERIOD.............................. $ 18,067,189 $10,620,477 $ 3,365,603 $ 18,067,189
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE> 128
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DEVELOPMENT STAGE OPERATIONS:
Seven Seas Petroleum Inc. (a Yukon Territory, Canada corporation) was
formed on February 3, 1995. Seven Seas Petroleum Inc. and its subsidiaries
(collectively referred to as "Seven Seas" or the "Company") are collectively a
development stage enterprise engaging in acquisition, exploration, and
development of interests in oil and gas projects worldwide. The Company's
primary business operations to date have been the exploration and development of
its interests in Colombia, South America.
The Company has yet to generate any significant revenue from oil and gas
sales and has no assurance of future revenues. The Company's principal asset is
its 57.7 percent working interest in the Dindal Association Contract and Rio
Seco Association Contract (collectively, the "Association Contracts" or the
"Emerald Mountain Project"). The Association Contracts were issued by Empresa
Colombiana de Petroleos ("Ecopetrol"), the National Oil Company of Colombia, in
March 1993 and August 1995, respectively, and entitle the Company to engage in
exploration, development, and production activities in Colombia. In 1994, a
predecessor to the Company drilled the Escuela #1, which was non-commercial. The
five exploratory wells completed to date on Emerald Mountain have encountered on
average 303 feet of Cimarrona formation at vertical depths between 6,000 and
7,500 feet. For the five wells where production testing has been completed,
actual per well production rates realized ranged from 3,415 to 13,123 barrels
per day with an average in excess of 7,079 barrels per day. The Company plans to
rapidly and efficiently continue its field development and delineation drilling
program and to build the production facilities and pipeline infrastructure to
allow its production to reach existing transportation lines for access to export
markets.
Seven Seas is subject to several categories of risk associated with its
development stage activities. Oil and gas exploration and development is a
speculative business and involves a high degree of risk. The Company has
expended, and plans to expend, significant amounts of capital on the acquisition
and exploration of its properties, and most of such properties have not been
fully evaluated for hydrocarbon potential. The exploration and development of
current properties and any properties acquired in the future are expected to
require substantial amounts of additional capital which the Company may be
required to raise through debt or equity financings, which might involve
encumbering properties or entering into arrangements where certain costs of
exploration will be paid by others to earn an interest in the property. Seven
Seas' success currently depends to a high degree on its activities in Colombia.
However, there are risks that result because the Company has acquired, and
intends to continue to acquire, interests in properties outside of North
America, in some cases in countries that may be considered politically and
economically unstable.
2. BUSINESS COMBINATION:
On June 29, 1995 the Supreme Court of British Columbia approved the May 5,
1995 amalgamation of Seven Seas and Rusty Lake Resources Ltd. Stockholders of
Rusty Lake Resources Ltd. were issued one common share in Seven Seas, the new
company after the amalgamation, for each 35 common shares held in Rusty Lake
Resources Ltd. Additional shares of Seven Seas were issued in settlement of
certain indebtedness of Rusty Lake Resources Ltd. This transaction has been
reflected as an acquisition by Seven Seas using the purchase method of
accounting, whereby the assets acquired and liabilities assumed were fair valued
and Rusty Lake Resources Ltd. has been prospectively reflected in the Company's
financial statements since
F-13
<PAGE> 129
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
June 29, 1995. The net assets of Rusty Lake Resources Ltd. were recorded on the
books of Seven Seas as follows:
<TABLE>
<S> <C>
Marketable securities....................................... $ 3,370
Goods and services tax receivable........................... 3,099
Resource properties......................................... 115,693
Other assets (organization costs)........................... 87,481
Accounts payable............................................ (39,527)
Share capital (680,464 shares).............................. (170,116)
</TABLE>
On July 26, 1996 the Company acquired 100 percent of the outstanding stock
which represented 100 percent of the voting shares held in GHK Company Colombia
and Esmeralda LLC. Additionally, on the same date, the Company acquired 62.963
percent of the outstanding shares and voting stock in Cimarrona LLC. This
transaction has been reflected as an acquisition by Seven Seas using the
purchase method of accounting, whereby the assets acquired and liabilities
assumed were fair valued and the operations of the acquired entities have been
reflected in the Company's financial statements since July 26, 1996. As
consideration for the increased interest from these acquisitions, Seven Seas
issued to the stockholders in GHK Company Colombia, Esmeralda LLC and Cimarrona
LLC a combination of preferred shares and special warrants which were
exchangeable into a total of 16,777,143 common shares upon the earlier of the
approval of a prospectus qualifying the exchange, or one year from the closing
of the transaction. Of the 16,777,143 preferred shares and special warrants,
5,002,972 preferred shares were issued for all of the common shares in GHK
Company Colombia, 4,469,028 special warrants were issued for all of the common
shares in Esmeralda LLC, and 7,305,143 special warrants were issued for 62.963
percent of the common shares in Cimarrona LLC. The remaining 37.037 percent
interest in Cimarrona LLC represents a minority interest which is reflected as
such on the balance sheet. The 16,777,143 preferred shares and special warrants
were recorded based on the closing stock price of Seven Seas on July 26, 1996 at
$9.125 totaling $153,091,430. Collectively, the acquisition of these three
companies resulted in the purchase of an additional 36.7 percent participating
interest in the Association Contracts in which the Company previously held a 15
percent participating interest. All three entities were oil and gas exploration
companies whose only material asset was the participating interest they held in
the Association Contracts in Colombia. Net assets acquired include $217,090,298
assigned to oil and gas properties (which are subject to future evaluation based
on further appraisal drilling) and other nominal net working capital, less
amounts attributable to the minority interest in Cimarrona LLC. Because of the
differences in tax basis and the financial statement valuation of such acquired
oil and gas properties, $63,967,775 of deferred Colombian and U.S. income taxes
was also recorded in this acquisition (see Notes 3 and 5) and is included in the
amount assigned to oil and gas properties. Income and expenditures incurred by
these three entities after July 26, 1996 are included in the statements of
operations and accumulated deficit for the years ended December 31, 1997 and
1996.
Of the 16,777,143 preferred shares and special warrants issued, 11,744,000
are held subject to an escrow agreement, whereby one third of the securities are
released each year for three years. The securities may be released earlier based
upon a valuation of the Seven Seas interests in the Association Contracts. On
July 26, 1997, one-third of the 11,744,000 common shares or 3,914,667 was
released from escrow pursuant to the escrow agreement.
On February 7, 1997 approvals were granted by the Ontario Securities
Commission, British Columbia Securities Commission and the Alberta Securities
Commission for the prospectus filed to qualify 11,774,171 special warrants and
5,002,972 preferred shares which were automatically converted to common shares.
These shares were issued in connection with the acquisition of a 36.7 percent
participating interest in the Association Contracts in Colombia by the Company
on July 26, 1996.
F-14
<PAGE> 130
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On March 5, 1997 the Company acquired 100 percent of the outstanding voting
stock held in Petrolinson, S.A. The terms of the transaction were agreed to in a
letter of intent dated November 22, 1996. The principal asset owned by
Petrolinson, S.A. is a six percent participating interest in the Association
Contracts. As consideration for the six percent participating interest in the
Association Contracts, Seven Seas issued to the sole shareholder in Petrolinson,
S.A. 1,000,000 common shares of Seven Seas Petroleum Inc. The common shares
issued to the sole shareholder of Petrolinson, S.A. were subject to an escrow
agreement, the terms of which provided for a 120 day escrow of shares commencing
from March 5, 1997 with an option by the Company to extend the escrow period for
an additional 30 days. The 1,000,000 common shares issued to the sole
shareholder of Petrolinson, S.A. were released from escrow on July 3, 1997, in
accordance with the escrow agreement as described above. This six percent
interest will be carried through exploration by the other 94 percent
participating interest parties. This transaction has been reflected in 1997 as
an acquisition by Seven Seas using the purchase method of accounting, whereby
the assets acquired and liabilities assumed were fair valued and the acquired
operations have been reflected in the Company's financial statements since March
5, 1997. The 1,000,000 common shares were recorded based on the weighted average
closing stock price of Seven Seas for the period beginning 30 days prior to and
30 days subsequent to the date the Letter of Intent was signed, November 22,
1996, or $18.55. This represents a transaction cost of $18,550,000. Net assets
acquired include $25,035,701 assigned to oil and gas properties (most of which
is subject to future evaluation based on further appraisal drilling) and other
nominal net working capital. Because of the differences in tax basis and the
financial statement valuation of such acquired oil and gas properties,
$6,490,737 of deferred Colombian income tax was also recorded in this
acquisition (see Notes 3 and 5) and is included in the amount assigned to oil
and gas properties.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company follows U.S. generally accepted accounting principles. A
summary of the Company's significant policies is set out below:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues, and expenses. Actual results could differ from the estimates and
assumptions used. Significant estimates include depreciation, depletion, and
amortization of proved oil and gas reserves. Oil and natural gas reserve
estimates, which are the basis for depletion and the ceiling test, are
inherently imprecise and expected to change as future information becomes
available.
RECLASSIFICATION OF PRIOR PERIOD STATEMENTS
Consistent with the asset/liability method of accounting for income taxes,
the Company recorded deferred income tax liabilities relating to the
acquisitions of GHK Company Colombia, Esmeralda LLC, and 62.963% of Cimarrona
LLC in 1996 and Petrolinson, S.A. on March 5, 1997. The credit to deferred
income tax liabilities and the corresponding increase in unevaluated oil and gas
interests amounted to $70,458,512 and $63,967,775 at December 31, 1997 and 1996,
respectively. The nature of the amounts recorded is described in Note 5. Certain
adjustments have been made to the 1996 net operating loss carryforward, deferred
tax assets, and the related valuation allowances, none of which affected
reported results of operations, as estimates used in the calculation of the
assets have been revised. Additionally, certain other minor reclassifications
have been made to conform to current reporting practices.
F-15
<PAGE> 131
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned and majority owned subsidiaries, after eliminating all
material intercompany accounts and transactions.
STATEMENT OF CASH FLOWS
Cash and cash equivalents include bank deposits and short-term investments,
which upon acquisition have a maturity of three months or less. The Company made
a cash payment for interest of $600,000 in 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The recorded amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value because of the short-term maturity of
those investments. As described in Note 6, the Company issued $25 million of
convertible Special Notes, with a 6% stated interest rate, which mature in 2003.
It is not practical to estimate the fair value of these Special Notes as a
quoted market price has not yet been obtained. The Company intends to file the
required registration statement in order to comply with the conversion option on
these notes.
MARKETABLE SECURITIES
The Company has adopted Statement of Financial Accounting Standards No. 115
("SFAS 115"), "Accounting for Certain Investments in Debt and Equity
Securities." SFAS 115 requires that all investments in debt securities and
certain investments in equity securities be reported at fair value except for
those investments which management has the intent and the ability to hold to
maturity. Investments which are held-for-sale are classified based on the stated
maturity and management's intent to sell the securities. Changes in fair value
are reported as a separate component of stockholders' equity, but were
immaterial for all periods presented herein.
ACCOUNTS RECEIVABLE
Accounts receivable included the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
<S> <C> <C>
Crude oil sales.................................. $ 291,049 $ 58,845
Joint interest billing........................... 3,013,318 1,117,635
Advances......................................... 541,000 --
Other............................................ 19,813 64,950
---------- ----------
Total Accounts Receivable.............. $3,865,180 $1,241,430
========== ==========
</TABLE>
OIL AND GAS INTERESTS
The Company follows the full-cost method of accounting for oil and natural
gas properties. Under this method, all costs incurred in the acquisition,
exploration and development, including unproductive wells, are capitalized in
separate cost centers for each country. Such capitalized costs include contract
and concession acquisition, geological, geophysical and other exploration work,
drilling, completing and equipping oil and gas wells, constructing production
facilities and pipelines, and other related costs. As of December 31, 1996
unevaluated oil and gas interests include capitalized employee costs related to
exploration and property evaluation of $140,628. No additional general and
administrative costs were capitalized during 1997. The Company capitalized
interest of $600,000 in 1997.
F-16
<PAGE> 132
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The capitalized costs of oil and gas properties in each cost center are
amortized on composite units of production method based on future gross revenues
from proved reserves. Sales or other dispositions of oil and gas properties are
normally accounted for as adjustments of capitalized costs. Gain or loss is not
recognized in income unless a significant portion of a cost center's reserves is
involved. Capitalized costs associated with the acquisition and evaluation of
unproved properties are excluded from amortization until it is determined
whether proved reserves can be assigned to such properties or until the value of
the properties is impaired. If the net capitalized costs of oil and gas
properties in a cost center exceed an amount equal to the sum of the present
value of estimated future net revenues from proved oil and gas reserves in the
cost center and the lower of cost or fair value of properties not being
amortized, both adjusted for income tax effects, such excess is charged to
expense.
Since the Company has only produced test quantities of oil, a provision for
depletion has not been made.
Substantially all the Company's exploration and production activities are
conducted jointly with others and the accounts reflect only the Company's
proportionate interest in such activities.
FOREIGN CURRENCY TRANSLATION
The Company's foreign operations are a direct and integral extension of the
parent company's operations and the majority of all costs associated with
foreign operations are paid in U.S. dollars as opposed to the local currency of
the operations; therefore, the reporting and functional currency is the U.S.
dollar. Gains and losses from foreign currency transactions are recognized in
current net income. Monetary items are translated using the exchange rate in
effect at the balance sheet date; non-monetary items are translated at
historical exchange rates. Revenues and expenses are translated at the average
rates in effect on the dates they occur. No material translation gains or losses
were incurred during the periods presented.
INCOME TAXES
The Company follows the asset/liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards 109,
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences of (i) temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements and (ii) operating loss and tax credit
carryforwards for tax purposes. Deferred tax assets are reduced by a valuation
allowance when, based upon management's estimates, it is more likely than not
that a portion of the deferred tax assets will not be realized in a future
period.
FIXED ASSETS
Fixed assets are recorded at cost. Depreciation is provided on a
straight-line basis over three to five years.
ORGANIZATION COSTS
Organization costs represent the normal cost of incorporating the Company.
In association with the amalgamation agreement with Rusty Lake Resources Ltd.,
organization costs of $87,481 were recorded to reflect the excess purchase price
of Seven Seas common shares provided to Rusty Lake Resources Ltd. stockholders
over and above the net asset value of Rusty Lake Resources Ltd. as of June 29,
1995. Organization costs were amortized on a straight-line basis over two years.
EARNINGS PER SHARE
The Company has implemented Financial Accounting Standards Board Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share."
SFAS 128 establishes standards for computing
F-17
<PAGE> 133
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing and presenting EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share," and makes them comparable
to international EPS standards. This statement is effective for financial
statements issued for periods ending after December 15, 1997. The statement
requires restatement of all prior-period EPS data presented. Considering the
guidelines as prescribed by SFAS 128, the Company's adoption of this statement
does have a significant effect on EPS since the exercise or conversion of any
potential shares would be antidilutive and result in a lower loss per share.
Options to purchase 3,878,500 common shares at a weighted average option
exercise price of $13.15 per common share were outstanding at December 31, 1997.
All shares issued in connection with the conversion of preferred shares and
special warrants during 1996 were not considered outstanding until registration
with the Canadian Securities Commissions occurred on February 7, 1997, including
the shares held in escrow for the former shareholders of GHK Company Colombia,
Esmeralda LLC and Cimarrona LLC. The common shares held in escrow were
considered in the weighted average shares outstanding since they are considered
outstanding by the transfer agent and have voting rights.
4. CASH AND CASH EQUIVALENTS:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Cash...................................................... $ 2,156,973 $ 170,684
Short-term investments.................................... 15,910,216 10,449,793
----------- -----------
Total cash and cash equivalents........................... $18,067,189 $10,620,477
=========== ===========
</TABLE>
The carrying value of short-term investments approximates fair value.
5. INCOME TAXES:
The geographical sources of loss before minority interest were as follows:
<TABLE>
<CAPTION>
PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
<S> <C> <C> <C>
United States............................... $(4,515,142) $ (277,456) $ --
Foreign..................................... (3,706,511) (1,981,416) (2,119,985)
----------- ----------- -----------
Loss before minority interest............... $(8,221,653) $(2,258,872) $(2,119,985)
=========== =========== ===========
</TABLE>
No deferred taxes were recorded during the periods presented, as there were
no significant changes in the temporary differences between the book and tax
bases of assets and liabilities. Deferred U.S. and Colombian income taxes have
been provided for the book-tax basis differences related to the Colombian
acquisitions discussed further in Note 2. These foreign subsidiaries' cumulative
undistributed earnings are considered to be
F-18
<PAGE> 134
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indefinitely reinvested outside of Canada and, accordingly, no Canadian deferred
income taxes have been provided thereon. The Company's net deferred income tax
liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
<S> <C> <C>
Deferred Tax Liabilities.................................. $70,458,512 $63,967,775
Deferred Tax Asset........................................ 3,128,306 2,058,506
Valuation Allowance....................................... (3,128,306) (2,058,506)
----------- -----------
Total Deferred Tax.............................. $70,458,512 $63,967,775
=========== ===========
</TABLE>
The Company did not record any current or deferred income tax provision or
benefit in any of the periods presented. The Company's provision for income
taxes differs from the amount computed by applying statutory rates, which are
45% in Canada and 35% in the United States and Colombia, due principally to the
valuation allowance recorded against its deferred tax asset account relating
primarily to net operating tax loss carryforwards.
Temporary differences included in the deferred tax liabilities relate
primarily to excess of book over tax basis on acquired oil and gas properties.
During 1997, deferred Colombian income tax in the amount of $6,490,737 was
recorded in the acquisition of Petrolinson, S.A., as described in Note 2.
Deferred tax assets principally consist of net operating loss carryforwards.
As of December 31, 1997 and 1996, the Company's subsidiaries had net
operating loss carryforwards in various foreign jurisdictions (primarily Canada)
of approximately $3,700,000 and $2,200,000, respectively. These loss
carryforwards will expire beginning in 2002 if not utilized to reduce Canadian
income taxes. In addition, the Company had during 1997 and 1996 approximately
$1,537,000 and $37,000, respectively, of U.S. tax net operating loss
carryforwards expiring in varying amounts beginning in 2011. A valuation
allowance has been provided for the deferred tax assets resulting primarily from
these loss carryforwards because their future realization is not currently
deemed probable by management.
6. LONG-TERM DEBT:
In August 1997, the Company issued $25 million of Special Notes in a
private transaction to institutional and accredited investors. Interest on the
Special Notes is due and payable in arrears at a rate of 6% per annum on
December 31 and June 30 in each year until maturity, commencing on December 31,
1997. The Special Notes are exchangeable for a like principal amount of
convertible redeemable debentures (the "Debentures") on or before August 7,
1998. At the option of the Company, the Debentures are convertible into common
shares and warrants if a registration statement for resale of the common shares
has been declared effective under the Securities Act of 1933, as amended (the
"Securities Act") and has been effective during the seven-day notice period
required by the Company to the holders of Debentures of its intent to exercise
its conversion rights, provided that the Company's common shares have traded at
or above $14.00 per share for 20 consecutive trading days on the Toronto Stock
Exchange. The Special Notes and Debentures are secured by a pledge of the shares
of the Company's subsidiaries and a guarantee by Seven Seas Petroleum Holdings
Inc.
The Special Notes will be deemed to be exchanged upon the earlier to occur
of (i) the effectiveness of a registration statement under the Securities Act,
covering the issuance of the common shares and warrants upon conversion of the
Debentures and compliance by the Company with certain Canadian securities
requirements or (ii) August 7, 1998. The Debentures are convertible into units
(the "Units") on the basis of one Unit for each $11.50 principal amount of
Debentures outstanding (initially 2,173,913 Units), subject to adjustment. Each
Unit consists of one common share and one-half of a common share purchase
warrant (the "Warrants"). The Debentures mature on August 7, 2003.
F-19
<PAGE> 135
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Each whole Warrant is exercisable for one common share at an exercise price
of $15.00 per share. The Warrants expire August 7, 1998.
7. EQUITY:
On March 15, 1996, a brokered private placement was carried out in Canada.
The Company issued 2,000,000 special warrants at $2.75 per warrant for a net
offering after commissions and expenses of $5,095,548 to a third party financial
brokerage institution. Each special warrant was convertible into one unit. Each
unit consisted of one share of common stock and a one-half common share purchase
warrant at $3.50 per full share. The warrants were convertible at the earlier of
(a) one year from date of issuance or (b) the date an approval is issued for a
prospectus qualifying the conversion in the appropriate jurisdictions. On March
14, 1997, the 1,000,000 common share purchase warrants were exercised and
converted to common shares for net proceeds of $3,500,000.
On October 16, 1996, another brokered private placement was carried out in
Canada. Seven Seas issued to a third party financial brokerage institution
500,000 special warrants at $15.00 per warrant for a net offering after
commissions and expenses of $7,013,370. Each special warrant was convertible
into one unit. Each unit consisted of one share of common stock and a one-half
common share purchase warrant at $18.50 per full share. The warrants were
convertible at the earlier of (a) one year from date of issuance or (b) the date
an approval is issued for a prospectus qualifying the conversion in the
appropriate jurisdictions. The 250,000 common share purchase warrants were not
converted at $18.50 and expired October 16, 1997.
An approval for qualification of the conversion of the 2,000,000 and
500,000 special warrants issued in the brokered private placements on March 15
and October 16, 1996, respectively, was received on February 7, 1997 by the
Ontario, Alberta, and British Columbia Securities Commissions. All special
warrants were exercised and have been converted to common shares.
The proceeds of the brokered private placements on March 15 and October 16,
1996 were used for drilling, seismic and production facilities related to the
Company's participation in the Association Contracts and for further exploration
activities.
8. STOCK BASED COMPENSATION PLANS:
Officers, directors and employees have been granted stock options under the
Company's Amended 1996 Stock Option Plan and the 1997 Stock Option Plan, which
is subject to approval by the shareholders (collectively referred to as "the
Plans"). Pursuant to the Plans, 6,000,000 shares were authorized for issuance,
of which 3,878,500 were outstanding as of December 31, 1997. The options granted
under the Amended 1996 Stock Option Plan were not subject to vesting
requirements and expire five years from the date of grant. Options granted under
the 1997 Stock Option Plan have been granted with either no vesting requirement
or vesting cumulatively on the anniversary of the grant date over a period of
two to five years and expire ten years from the date of grant. Option agreements
between the Company and optionees under the 1997 Stock Option Plan may include
stock appreciation rights. Under each plan, the option price equals the stock's
market price on the date of grant.
The Compensation Committee of the Board of Directors is responsible for
administering the plans, determining the terms upon which options may be
granted, prescribing, amending and rescinding such interpretations and
determinations and granting options to employees, directors, and officers.
F-20
<PAGE> 136
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents a summary of stock option transactions for the
three years ended December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
COMMON SHARES OPTION PRICE PER SHARE
<S> <C> <C>
Granted......................................... 985,000 $ .75
--------- ------
December 31, 1995................................. 985,000 .75
Granted......................................... 805,000 12.86
Exercised....................................... (625,333) .85
--------- ------
December 31, 1996................................. 1,164,667 9.07
Granted......................................... 3,197,500 13.56
Exercised....................................... (478,667) 3.05
Revoked......................................... (5,000) 12.25
--------- ------
December 31, 1997................................. 3,878,500 $13.51
========= ======
</TABLE>
Exercisable stock options amounted to 1,697,665; 764,667; and 985,000 at
December 31, 1997, 1996, and 1995, respectively. The weighted average fair value
of options granted during 1997, 1996, and 1995 were $7.68; $4.65; and $0.19,
respectively. The following table summarizes stock options outstanding and
exercisable at December 31, 1997:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------------------- ---------------------------
WEIGHTED WEIGHTED
EXERCISE PRICE AVERAGE AVERAGE
RANGE SHARES AVERAGE LIFE EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$.75................. 33,000 2.5 $ .75 33,000 $ .75
7.13................ 325,000 3.5 7.13 325,000 7.13
10.70-10.90......... 1,458,000 7.0 10.76 774,665 10.81
12.25-13.23......... 740,000 9.7 13.18 160,000 13.17
18.23-18.75......... 1,322,500 8.1 18.61 405,000 18.74
---------- --- ------ --------- ------
3,878,500 1,697,665
========== =========
</TABLE>
As part of the arrangements surrounding the resignations of four former
officers, the exercise period of the options during their employment was
extended from ninety days to eighteen months. This action gave rise to a new
measurement date and the Company was required to record compensation expense of
$2,140,250 during 1997, representing the market value of the common shares on
the new measurement date less the exercise price of the options granted. Only
the exercisable options granted to the former Chairman, former President, former
Chief Financial Officer, and former Vice President of Exploration were
considered in the computation. The extension of the exercise period is subject
to approval by vote of the shareholders. Should the extension of the exercise
period be approved for all employees, the Company will be required to record
additional compensation expense of $3,603,425 using the March 26, 1998 closing
stock price.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the
Company applies APB Opinion 25 in accounting for its stock option plan, and
accordingly does not recognize compensation cost as it relates to SFAS 123.
F-21
<PAGE> 137
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
If the Company had elected to recognize compensation cost based on the fair
value of the options granted at the grant date as prescribed by SFAS 123, net
loss and net loss per share would have increased to the proforma amounts shown
below:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
<S> <C> <C> <C>
Pro Forma Net Loss................ ($32,426,733) ($5,938,372) ($2,309,940)
Pro Forma Net Loss Per Share...... ($1.00) ($.46) ($.25)
</TABLE>
The effects of applying SFAS 123 in this proforma are not indicative of
future amounts.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the year ended December 31, 1997: weighted average risk free
interest rate of 6.28 percent; no dividend yield; volatility of .3555; and
expected life of five to ten years. The Company granted options prior to public
trading on the Canadian Dealer Network on June 30, 1995. Consequently, the
underlying common shares had no historic volatility prior to June 30, 1995. The
fair values of the options granted prior to June 30, 1995 were based on the
difference between the present value of the exercise price of the option and the
estimated fair value price of the common shares.
9. OPERATIONS BY GEOGRAPHIC AREA:
The Company operates in one industry segment. Information about the
Company's operations for 1997, 1996, and from inception (February 3, 1995) to
December 31, 1995 by geographic area is shown below:
<TABLE>
<CAPTION>
OTHER
FOREIGN
CANADA UNITED STATES COLOMBIA AREAS TOTAL
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Revenues..................... $ 753,433 $ 2,020 $ 810,077 $ 1,426 $ 1,566,956
Operating Loss............... (1,780,784) (4,515,142) (1,837,368) (88,359) (8,221,653)
Capital Expenditures......... -- 57,572 19,050,432 471,046 19,579,050
Identifiable Assets.......... 17,462,002 488,463 272,981,939 981,720 291,914,124
Depreciation and
Amortization.............. 110,695 20,708 16,662 -- 148,065
Year ended December 31, 1996
Revenues..................... $ 333,598 $ -- $ 239,345 $ 2,338 $ 575,281
Operating Loss............... (1,402,204) (277,456) (438,948) (140,264) (2,258,872)
Capital Expenditures......... -- -- 4,335,166 271,405 4,606,571
Identifiable Assets.......... 10,497,084 46,939 224,436,899 520,060 235,500,982
Depreciation and
Amortization.............. -- 66,490 42,755 2,089 111,334
</TABLE>
<TABLE>
<CAPTION>
OTHER
FOREIGN
CANADA COLOMBIA ARGENTINA NORTH AFRICA AREAS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Period from inception
through December 31, 1995
Revenues................. $ 147,372 $ -- $ -- $ -- $ 5,011 $ 152,383
Operating Loss........... (863,787) (3,147) (625,771) (509,878) (117,402) (2,119,985)
Capital Expenditures..... -- 369,723 622,006 500,800 204,414 1,696,943
Identifiable Assets...... 3,565,647 385,999 -- -- 218,791 4,170,437
Depreciation and
Amortization.......... 36,875 297 -- -- 499 37,671
</TABLE>
F-22
<PAGE> 138
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. COMMITMENTS AND CONTINGENCIES:
The Company is, from time to time, party to certain legal actions and
claims arising in the ordinary course of business. While the outcome of these
events cannot be predicted with certainty, management does not expect these
matters to have a materially adverse effect on the financial position or results
of the Company.
The Company leases property and equipment under various operating leases.
Aggregate minimum lease payments under existing contracts as of December 31,
1997, are as follows: $84,732 for 1998; $41,182 for 1999; $4,495 for 2000 and
thereafter. Rental expense amounted to $84,492 in 1997; $82,928 in 1996; $58,536
in 1995.
The Company has certain related commitments under existing oil and gas
exploration concession agreements. Management estimates future expenditures for
such commitments to be approximately of $863,000 in 1998; $2,385,000 in 1999;
$30,000 in 2000; and $30,000 in 2001.
11. RELATED PARTY TRANSACTIONS:
On November 1, 1997, the Executive Vice President and Chief Operating
Officer obtained a $200,000 loan from the Company. This loan bears a 6.06%
interest rate and is due November 1, 2002. The Company recognized interest
income of $2,020 in 1997.
The Company's Chairman and Chief Executive Officer wholly owns GHK Company
LLC ("GHK"). Effective July 1, 1997, the Company has entered into an
administrative service agreement with GHK. The Company recognized $10,500 of
such expenses in 1997. In addition, GHK pays certain miscellaneous costs
incurred on behalf of the Company. The Company reimbursed GHK $381,267 and
$288,505 in 1997 and 1996, respectively, for such costs.
MTV Investments Limited Partnership ("MTV") owns 37.037 percent of
Cimarrona LLC ("Cimarrona"), an Oklahoma company; Cimarrona is a consolidated
subsidiary of the Company. Resulting from cash calls, MTV owed $541,000 to the
Company at December 31, 1997.
12. SUBSEQUENT EVENTS (UNAUDITED):
The Company has signed a letter of intent to sell its 11.77 percent
interest in the Southern Perth Basin Permits (EP381 and EP408) located in
Southwestern Australia. The Company will receive cash of $850,000, reimbursement
of $263,000 for certain capital expenditures, and retain a small overriding
royalty interest in each permit. Completion of the transaction contemplated by
the letter of intent is subject to several conditions, including obtaining
approvals of third parties and governmental authorities. No assurance can be
given that the Company will complete this sale.
F-23
<PAGE> 139
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED):
Capitalized costs at December 31, 1997 and 1996, respectively, relating to
the Company's oil and gas activities are shown below:
<TABLE>
<CAPTION>
COLOMBIA OTHERS TOTAL
<S> <C> <C> <C>
As of December 31, 1997
Proved properties......................... $ 46,116,873 $ -- $ 46,116,873
============ ======== ============
Unproved properties....................... $220,771,518 $941,955 $221,713,473
Less: Dry Hole and Abandonment............ -- -- --
------------ -------- ------------
Unproved properties, net.................. $220,771,518 $941,955 $221,713,473
============ ======== ============
As of December 31, 1996
Proved properties......................... $ 1,611,665 $ -- $ 1,611,665
============ ======== ============
Unproved properties....................... $221,413,217 $475,819 $221,889,036
Less: Dry Hole and Abandonment............ -- (4,910) (4,910)
------------ -------- ------------
Unproved properties, net.................. $221,413,217 $470,909 $221,884,126
============ ======== ============
</TABLE>
Costs incurred during the years ended December 31, 1997, 1996, and 1995,
respectively, were as follows:
<TABLE>
<CAPTION>
COLOMBIA ARGENTINA NORTH AFRICA OTHERS TOTAL
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Development cost............ $ 165,829 $ -- $ -- $ -- $ 165,829
Property acquisition cost:
Proved.................... 4,331,169 -- -- -- 4,331,169
Unproved.................. 20,704,532 -- -- -- 20,704,532
Exploration cost............ 18,661,979 -- -- 471,046 19,133,025
------------ -------- -------- -------- ------------
Total cost
incurred........ $ 43,863,509 $ -- $ -- $471,046 $ 44,334,555
============ ======== ======== ======== ============
Year ended December 31, 1996
Property acquisition cost:
Proved.................... $ 1,554,041 $ -- $ -- $ -- $ 1,554,041
Unproved.................. 215,536,257 -- -- 250,000 215,786,257
Exploration cost............ 5,564,861 -- -- 21,405 5,586,266
------------ -------- -------- -------- ------------
Total cost
incurred........ $222,655,159 $ -- $ -- $271,405 $222,926,564
============ ======== ======== ======== ============
Year ended December 31, 1995
Property acquisition cost:
Proved.................... $ -- $ -- $ -- $ -- $ --
Unproved.................. 106,383 75,000 500,800 6,073 688,256
Exploration cost............ 263,340 547,006 -- 198,341 1,008,687
------------ -------- -------- -------- ------------
Total cost
incurred........ $ 369,723 $622,006 $500,800 $204,414 $ 1,696,943
============ ======== ======== ======== ============
</TABLE>
As of December 31, 1997, the Company has not made a provision for
depletion. The Company has produced only insignificant amounts of oil under its
production-testing plan. At such time that the Company completes its evaluation
of the Association Contracts and if a significant level of production of proved
reserves occurs, the currently excluded oil and gas properties will be included
in the amortization base. The Company anticipates completion of its evaluation
of the Association Contracts mid-year 1998 and will commence development
immediately if the evaluation proves successful.
F-24
<PAGE> 140
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXPLORATION COSTS
The Company has been involved in exploration activities in Colombia,
Australia, Argentina, Turkey and Papua New Guinea. Also, the Company purchased
an option for the right to participate in future exploration activities in North
Africa, but the option was never exercised. Additionally, the Company acquired
oil and gas properties in Colombia totaling $25,035,701 and $217,090,298 in 1997
and 1996, respectively. Capitalized acquisition costs incurred during 1997 and
1996 include $6,490,737 and $63,967,775, respectively, of deferred income tax as
disclosed in Note 2, Business Combination.
The Company had oil and gas sales of $779,767 and $233,682 in 1997 and
1996, respectively, pertaining to production testing of the exploratory wells on
the Association Contracts in Colombia.
On May 16, 1995, the Company entered into an agreement whereby Seven Seas
purchased an option for $500,000 to acquire a 5 percent participating interest
in three exploration blocks in North Africa upon completion of the first
exploration well drilled. The first exploration well was completed as a dry hole
in July of 1995. After careful review, Seven Seas decided not to exercise its
option. The cost of the option, $500,000, plus additional costs of $800 incurred
toward purchasing this option was originally recorded as unproved oil and gas
interests and was subsequently expensed.
The El Catamarqueno X-1 test well on the Sur Rio Deseado Block in the San
Jorge Basin, Argentina, was determined to be unsuccessful during the first week
of January 1996, prior to release of the 1995 financial statements.
Consequently, the Company determined that further drilling on the block was not
justified and exploration costs of $622,006 incurred in Argentina during 1995
were expensed in 1995.
Ecopetrol has the right to back into Seven Seas' participating interest in
the Association Contracts upon declaration of commerciality at an initial 50
percent participating interest. Ecopetrol's interest can increase based upon
accumulated production levels. Ecopetrol will at the time of commerciality bear
50 percent of the future costs in the field and reimburse the other parties in
these two blocks for 50 percent of previously incurred costs associated with
successful wells.
PROVED RESERVES (UNAUDITED)
Proved reserves represent estimated quantities of crude oil which
geological and engineering data demonstrate to be reasonably recoverable in the
future from known reservoirs under existing economic and operating conditions.
Estimates of proved developed oil reserves are subject to numerous uncertainties
inherent in the process of developing the estimates including the estimation of
the reserve quantities and estimated future rates of production and timing of
development expenditures. The accuracy of any reserve estimate is a function of
the quantity and quality of available data and of engineering and geological
interpretation and judgement. Results of drilling, testing and production
subsequent to the date of the estimate may justify revision of such estimate.
Additionally, the estimated volumes to be commercially recoverable may fluctuate
with changes in the price of oil.
Estimates of future recoverable oil reserves and projected future net
revenues as of December 31, 1997 were provided by Ryder Scott Company Petroleum
Engineers. The Company's proved reserves were comprised entirely of crude oil in
Colombia.
F-25
<PAGE> 141
SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Proved developed and undeveloped reserves (barrels):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Beginning of year........................................... 818,000 --
Extensions and discoveries.................................. 31,342,245 818,000
---------- -------
End of year................................................. 32,160,245 818,000
========== =======
Proved developed............................................ 11,494,236 408,000
========== =======
</TABLE>
The following table presents the standardized measure of discounted future
net cash flows relating to proved oil reserves. Future cash inflows and costs
were computed using prices and costs in effect at the end of the year without
escalation less a gravity and transportation adjustment of $6.85 to reference
prices. The reference price for the year end was West Texas Intermediate $17.00
per barrel. Future income taxes were computed by applying the appropriate
statutory income tax rate to the pretax future net cash flows reduced by future
tax deductions and net operating loss carryforwards.
Standardized Measure of Discounted Future Net Cash Flows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Future cash inflows...................................... $326,426,492 $12,520,000
Future costs
Production............................................. 50,986,737 2,112,000
Development............................................ 33,740,255 1,939,000
------------ -----------
Future net cash flows before income taxes................ 241,699,500 8,469,000
Future income taxes...................................... 78,141,020 4,027,000
------------ -----------
Future net cash flows.................................... 163,558,480 4,442,000
10% discount factor...................................... 62,941,503 641,000
------------ -----------
Standardized measure of discounted future net cash
flows.................................................. $100,616,977 $ 3,801,000
============ ===========
</TABLE>
Principal sources of changes in the standardized measure of discounted
future net cash flows during 1997:
<TABLE>
<S> <C>
Beginning of year........................................... $ 3,801,000
Net change in production costs.............................. (1,741,552)
Extensions, discoveries, and additions, less related
costs..................................................... 141,402,293
Net change in future development costs...................... (1,611,820)
Net change in income taxes.................................. (41,969,044)
Accretion of discount....................................... 736,100
------------
End of year................................................. $100,616,977
============
</TABLE>
The standardized measure of discounted future net cash flows shown above
relates to the Company's discovery of oil on the Association Contracts in
Colombia.
The standardized measure of discounted future net cash flows does not
purport to present the fair market value of the Company's proved reserves. An
estimate of fair value would also take into account, among other things, the
recovery of reserves in excess of proved reserves, anticipated future changes in
prices and costs and a discount factor more representative of the time value of
money and the risks inherent in reserve estimates.
F-26
<PAGE> 142
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................. 2
Disclosure Regarding Forward-Looking
Statements........................... 2
Summary................................ 3
Risk Factors........................... 13
Use of Proceeds........................ 23
The Exchange Offer..................... 24
Selected Historical Financial Data..... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 34
Business............................... 40
Management............................. 54
Related Transactions................... 64
Security Ownership of Certain
Beneficial Owners and Management..... 67
Description of Existing Indebtedness... 69
Description of Notes................... 71
Plan of Distribution................... 109
Certain United States Tax Consequences
to U.S. Holders...................... 110
Certain Canadian Federal Income Tax
Considerations....................... 111
Legal Matters.......................... 112
Experts................................ 112
Petroleum Engineers.................... 112
Glossary of Oil and Gas Terms.......... 113
Index to Consolidated Financial
Statements........................... F-1
</TABLE>
======================================================
======================================================
U.S. $110,000,000
SEVEN SEAS PETROLEUM INC.
OFFER TO EXCHANGE ITS 12 1/2% SERIES B SENIOR NOTES DUE 2005, WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT, FOR ANY AND ALL OF ITS OUTSTANDING 12 1/2%
SERIES A SENIOR NOTES DUE 2005
------------------------
PROSPECTUS
------------------------
, 1998
======================================================
<PAGE> 143
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Yukon Business Corporations Act and the Company's Bylaws provide the
following authority to indemnify directors or officers or former directors or
officers of the Company or of a company of which the Company is or was a
shareholder:
(1) Except in respect of an action by or on behalf of the corporation
or a body corporate to procure a judgment in its favor, a corporation may
indemnify a director or officer of the corporation, a former director or
officer of the corporation or a person who acts or acted at the
corporation's request as a director or officer of a body corporate of which
the corporation is or was a shareholder or creditor, and his heirs and
legal representatives, against all costs, charges and expenses, including
an amount paid to settle an action or satisfy a judgment, reasonably
incurred by him in respect of any civil, criminal or administrative action
or proceeding to which he is made a party by reason of being or having been
a director or officer of that corporation or body corporate, if (a) he
acted honestly and in good faith with a view to the best interests of the
corporation, and (b) in the case of a criminal or administrative action or
proceeding that is enforced by a monetary penalty, he had reasonable
grounds for believing that his conduct was lawful.
(2) A corporation may, with the approval of the Supreme Court,
indemnify a person referred to in subsection (1) in respect of an action by
or on behalf of the corporation or body corporate to procure a judgment in
its favor, to which he is made a party by reason by being or having been a
director or an officer of the corporation or body corporate, against all
costs, charges and expenses reasonably incurred by him in connection with
the action if he fulfills the conditions set out in paragraphs (1)(a) and
(b).
The Yukon Business Corporations Act also provides that:
(3) Notwithstanding anything in subsections (1) through (6), a person
referred to in subsection (1) is entitled to indemnity from the corporation
in respect of all costs, charges and expenses reasonably incurred by him in
connection with the defense of any civil, criminal or administrative action
or proceeding to which he is made a party by reason of being or having been
a director or officer of the corporation or body corporate, if the person
seeking indemnity (A) was substantially successful on the merits of his
defense of the action or proceeding, (B) fulfills the conditions set out in
paragraphs (1)(a) and (b), and (C) is fairly and reasonably entitled to
indemnity.
(4) A corporation may purchase and maintain insurance for the benefit
of any person referred to in subsection (1) against any liability incurred
by him (a) in his capacity as a director or officer of the corporation,
except when the liability relates to his failure to act honestly and in
good faith with a view to the best interests of the corporation, or (b) in
his capacity as a director or officer of another body corporate if he acts
or acted in that capacity at the corporation's request, except when the
liability relates to his failure to act honestly and in good faith with a
view to the best interests of the body corporate.
(5) A corporation or a person referred to in subsection (1) may apply
to the Supreme Court for an order approving an indemnity under this section
and the Supreme Court may so order and make any further order it thinks
fit.
(6) On an application under subsection (5), the Supreme Court may
order notice to be given to any interested person and that person is
entitled to appear and be heard in person or by counsel.
The Bylaws of the Company also provide that the provisions for
indemnification contained in the Bylaws (outlined in subsections (1) and (2)
above) shall not be deemed exclusive of any other rights to which a person
seeking indemnification may be entitled under any Bylaws, agreement, vote of
shareholders or disinterested directors or otherwise both as to an action in his
official capacity and as to an action in any other
II-1
<PAGE> 144
capacity while holding such office and shall continue as to a person who has
ceased to be a director of officer and shall enure to the benefit of the heirs
and legal representatives of such person. The Company maintains director's and
officer's insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
The following instruments and documents are included as Exhibits to this
Registration Statement. Exhibits incorporated by reference are so indicated by
parenthetical information.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DOCUMENT
------- ----------------
<C> <S>
(3) -- Articles of Incorporation and By-laws
*(A) -- The Amalgamation Agreement effective June 29, 1995 by and
between Seven Seas Petroleum Inc., a British Columbia
corporation; and Rusty Lake Resources Ltd.
*(B) -- Certificate of Continuance and Articles of Continuance
into the Yukon Territory
*(C) -- By-Laws
(4) -- Instruments defining the rights of security holders,
including indentures
+(A) -- Indenture dated as of May 7, 1998 between the Company and
The Bank of Nova Scotia Trust Company of New York, as
Trustee
+(B) -- Registration Rights Agreement dated as of May 7, 1998
among the Company and the Initial Purchasers
+(C) -- Collateral Pledge and Security Agreement dated as of May
7, 1998 between the Company and The Bank of Nova Scotia
Trust Company of New York, as Trustee
(5) -- Opinion re Legality
+(A) -- Opinion of Vinson & Elkins L.L.P.
+(B) -- Opinion of Preston, Willis & Lackowicz
(8) -- Opinion re Tax Matters
+(A) -- Opinion of Vinson & Elkins L.L.P.
+(B) -- Opinion of McMillan Binch
(10) -- Material Contracts
*(A) -- Agreement dated August 14, 1995 by and between the
Company and GHK Company Colombia, as amended by letter
agreement dated November 30, 1995
*(B) -- The Association Contract by and between Ecopetrol, GHK
Company Colombia and Petrolinson, S.A. relating to the
Dindal block, as amended
*(C) -- The Association Contract by and between Ecopetrol and GHK
Company Colombia relating to the Rio Seco block
*(D) -- Joint Operating Agreement dated as of August 1, 1994 by
and between GHK Company Colombia and the holders of
interests in the Dindal block
*(E) -- The GHK Company Colombia Share Purchase Agreement dated
as of July 26, 1996 by and between Robert A. Hefner III,
Seven Seas Petroleum Colombia Inc. and the Company
*(F) -- The Cimarrona Purchase Agreement dated as of July 26,
1996 by and between the members of Cimarrona Limited
Liability Company, the Company, Seven Seas Petroleum
Colombia Inc., and Robert A. Hefner III
</TABLE>
II-2
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DOCUMENT
------- ----------------
<C> <S>
*(G) -- The Esmeralda Purchase Agreement dated as of July 26,
1996 by and between the members of Esmeralda Limited
Liability Company, Robert A. Hefner III, the Company,
Seven Seas Petroleum Holdings, Inc. and Seven Seas
Petroleum Colombia Inc.
*(H) -- The Registration Rights Agreement dated as of July 26,
1996 by and between the Company and certain individuals
*(I) -- Shareholders' Voting Support Agreement dated as of July
26, 1996 by and between Seven Seas Petroleum Inc. and
Messrs. Hefner, Kerr, Whitehead, Plewes and Stephens
*(J) -- Management Services Agreement by and among GHK Company
Colombia, the Company and The GHK Company LLC
*(K) -- The Escrow Agreement for a Natural Resources Company by
and among Montreal Trust Company as trustee, the Company
and certain individuals and entities
*(L) -- The Escrow Agreement for a Natural Resources Company by
and among Montreal Trust Company, as trustee, the Company
and Albert E. Whitehead
*(M) -- Amended 1996 Stock Option Plan
*(N) -- Form of Incentive Stock Option Agreement
*(O) -- Form of Directors' Stock Option Agreement
*(P) -- Form of Employment Agreement between the Company and each
of Messrs. Stephens, Dorrier and DeCort
*(Q) -- Form of Agreement between the Company and each of Messrs.
Stephens, Dorrier and DeCort relating to a change of
control
*(R) -- Form of Employment Agreement between the Company and
Larry A. Ray
*(S) -- Settlement Agreement between the Company and Mr.
Whitehead dated May 20, 1997
*(T) -- Petrolinson S.A. Share Purchase Agreement dated February
14, 1997, between Hazel Ventures LTD., Seven Seas
Petroleum Colombia Inc. and Seven Seas Petroleum Inc.
*(U) -- Pledge Agreement dated March 5, 1997 among Hazel Ventures
LTD., Seven Seas Petroleum Inc., Seven Seas Petroleum
Colombia Inc., and Integro Trust (BVI Limited)
*(V) -- Shareholder Voting Support Agreement made as of March 5,
1997 between Seven Seas Petroleum Inc. and Hazel Ventures
LTD.
*(W) -- Purchase Warrant Indenture made as of August 7, 1997
between Seven Seas Petroleum Inc. and Montreal Trust
Company of Canada
*(X) -- Indenture made as of August 7, 1997 between Seven Seas
Petroleum Inc. and Montreal Trust Company of Canada
*(Y) -- Limited Recourse Guarantee, Security and Pledge Agreement
made as of August 7, 1997 between Seven Seas Petroleum
Holdings Inc. and Montreal Trust Company of Canada
*(Z) -- Limited Recourse Guarantee, Security and Pledge Agreement
made as of August 7, 1997 between Seven Seas Petroleum
Colombia Inc. and Montreal Trust Company of Canada
*(AA) -- Private Placement Subscription Agreement made as of
August 7, 1997 between Seven Seas Petroleum Inc. and
Jasopt Pty Limited
*(BB) -- 1997 Stock Option Plan
+(12) -- Statement regarding computation of ratios
*(21) -- Subsidiaries of the Registrant
(23) -- Consent of experts and counsel
+(A) -- Consent of Ryder Scott Company Petroleum Engineers
+(B) -- Consent of Arthur Andersen LLP
+(C) -- Consent of Raisbeck, Lana, Rodriguez & Rueda, members of
the law firm of Baker & McKenzie
(D) -- Consent of Vinson & Elkins L.L.P. (included in Exhibits
5(A) and 8(A))
</TABLE>
II-3
<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DOCUMENT
------- ----------------
<C> <S>
(E) -- Consent of Preston, Willis & Lackowicz (included in
Exhibit 5(B))
(F) -- Consent of McMillan Binch (included in Exhibit 8(B))
(24) -- Power of Attorney (included in signature page)
+(25) -- Statement of Eligibility of The Bank of Nova Scotia Trust
Company of New York
*(27) -- Financial Data Schedule
99 -- Additional Exhibits
+(A) -- Form of Letter of Transmittal
+(B) -- Form of Letter to Clients
+(C) -- Form of Letter to Registered Holders and DTC Participants
+(D) -- Form of Notice of Guaranteed Delivery
</TABLE>
- ---------------
* Incorporated herein by reference to like exhibit in Registration on Form 10
(File No. 022483).
+ Filed herewith.
The Company agrees to furnish to the Commission upon request a copy of each
instrument with respect to long-term debt (other than the Notes).
(b) Consolidated Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or notes thereto.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To respond to requests for information that is incorporated by
reference into the Prospectus, pursuant to Item 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the Registration Statement through the date of responding
to the request.
(2) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired or involved
therein, that was not the subject of and included in the Registration
Statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE> 147
POWER OF ATTORNEY
Each director and/or officer of the registrant whose signature appears
below hereby appoints the Agent for Service named in this registration
statement, as his attorney-in-fact to sign in his name and behalf, in any and
all capacities stated below, and to file with the Securities and Exchange
Commission, any and all amendments, including post-effective amendments, to this
registration statement.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, the State of
Texas on July 2, 1998.
SEVEN SEAS PETROLEUM INC.
By:
/s/ HERBERT C. WILLIAMSON, III
----------------------------------
Name: Herbert C. Williamson, III
Title: Executive Vice President
and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ROBERT A. HEFNER III Chairman, Chief Executive Officer July 2, 1998
- ----------------------------------------------------- and Managing Director (Principal
Robert A. Hefner III Executive Officer)
/s/ LARRY A. RAY Director, Executive Vice President July 2, 1998
- ----------------------------------------------------- and Chief Operating Officer
Larry A. Ray
/s/ HERBERT C. WILLIAMSON, III Director, Executive Vice President July 2, 1998
- ----------------------------------------------------- and Chief Financial Officer
Herbert C. Williamson, III (Principal Financial and
Accounting Officer)
/s/ BREENE M. KERR Vice Chairman July 2, 1998
- -----------------------------------------------------
Breene M. Kerr
/s/ BRIAN F. EGOLF Director July 2, 1998
- -----------------------------------------------------
Brian F. Egolf
Director
- -----------------------------------------------------
Sir Mark Thomson, Bt.
Director
- -----------------------------------------------------
Robert B. Panero
</TABLE>
II-5
<PAGE> 148
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
Director
- -----------------------------------------------------
Gary F. Fuller
/s/ JAMES SCARLETT Director July 2, 1998
- -----------------------------------------------------
James Scarlett
</TABLE>
II-6
<PAGE> 149
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DOCUMENT
------- ----------------
<C> <S>
(3) -- Articles of Incorporation and By-laws
*(A) -- The Amalgamation Agreement effective June 29, 1995 by and
between Seven Seas Petroleum Inc., a British Columbia
corporation; and Rusty Lake Resources Ltd.
*(B) -- Certificate of Continuance and Articles of Continuance
into the Yukon Territory
*(C) -- By-Laws
(4) -- Instruments defining the rights of security holders,
including indentures
+(A) -- Indenture dated as of May 7, 1998 between the Company and
The Bank of Nova Scotia Trust Company of New York, as
Trustee
+(B) -- Registration Rights Agreement dated as of May 7, 1998
among the Company and the Initial Purchasers
+(C) -- Collateral Pledge and Security Agreement dated as of May
7, 1998 between the Company and The Bank of Nova Scotia
Trust Company of New York, as Trustee (included in
Exhibit 4(A) as Exhibit D)
(5) -- Opinion re Legality
+(A) -- Opinion of Vinson & Elkins L.L.P.
+(B) -- Opinion of Preston, Willis & Lackowicz
(8) -- Opinion re Tax Matters
+(A) -- Opinion of Vinson & Elkins L.L.P.
+(B) -- Opinion of McMillan Binch
(10) -- Material Contracts
*(A) -- Agreement dated August 14, 1995 by and between the
Company and GHK Company Colombia, as amended by letter
agreement dated November 30, 1995
*(B) -- The Association Contract by and between Ecopetrol, GHK
Company Colombia and Petrolinson, S.A. relating to the
Dindal block, as amended
*(C) -- The Association Contract by and between Ecopetrol and GHK
Company Colombia relating to the Rio Seco block
*(D) -- Joint Operating Agreement dated as of August 1, 1994 by
and between GHK Company Colombia and the holders of
interests in the Dindal block
*(E) -- The GHK Company Colombia Share Purchase Agreement dated
as of July 26, 1996 by and between Robert A. Hefner III,
Seven Seas Petroleum Colombia Inc. and the Company
*(F) -- The Cimarrona Purchase Agreement dated as of July 26,
1996 by and between the members of Cimarrona Limited
Liability Company, the Company, Seven Seas Petroleum
Colombia Inc., and Robert A. Hefner III
*(G) -- The Esmeralda Purchase Agreement dated as of July 26,
1996 by and between the members of Esmeralda Limited
Liability Company, Robert A. Hefner III, the Company,
Seven Seas Petroleum Holdings, Inc. and Seven Seas
Petroleum Colombia Inc.
*(H) -- The Registration Rights Agreement dated as of July 26,
1996 by and between the Company and certain individuals
*(I) -- Shareholders' Voting Support Agreement dated as of July
26, 1996 by and between Seven Seas Petroleum Inc. and
Messrs. Hefner, Kerr, Whitehead, Plewes and Stephens
*(J) -- Management Services Agreement by and among GHK Company
Colombia, the Company and The GHK Company LLC
*(K) -- The Escrow Agreement for a Natural Resources Company by
and among Montreal Trust Company as trustee, the Company
and certain individuals and entities
*(L) -- The Escrow Agreement for a Natural Resources Company by
and among Montreal Trust Company, as trustee, the Company
and Albert E. Whitehead
*(M) -- Amended 1996 Stock Option Plan
</TABLE>
<PAGE> 150
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DOCUMENT
------- ----------------
<C> <S>
*(N) -- Form of Incentive Stock Option Agreement
*(O) -- Form of Directors' Stock Option Agreement
*(P) -- Form of Employment Agreement between the Company and each
of Messrs. Stephens, Dorrier and DeCort
*(Q) -- Form of Agreement between the Company and each of Messrs.
Stephens, Dorrier and DeCort relating to a change of
control
*(R) -- Form of Employment Agreement between the Company and
Larry A. Ray
*(S) -- Settlement Agreement between the Company and Mr.
Whitehead dated May 20, 1997
*(T) -- Petrolinson S.A. Share Purchase Agreement dated February
14, 1997, between Hazel Ventures LTD., Seven Seas
Petroleum Colombia Inc. and Seven Seas Petroleum Inc.
*(U) -- Pledge Agreement dated March 5, 1997 among Hazel Ventures
LTD., Seven Seas Petroleum Inc., Seven Seas Petroleum
Colombia Inc., and Integro Trust (BVI Limited)
*(V) -- Shareholder Voting Support Agreement made as of March 5,
1997 between Seven Seas Petroleum Inc. and Hazel Ventures
LTD.
*(W) -- Purchase Warrant Indenture made as of August 7, 1997
between Seven Seas Petroleum Inc. and Montreal Trust
Company of Canada
*(X) -- Indenture made as of August 7, 1997 between Seven Seas
Petroleum Inc. and Montreal Trust Company of Canada
*(Y) -- Limited Recourse Guarantee, Security and Pledge Agreement
made as of August 7, 1997 between Seven Seas Petroleum
Holdings Inc. and Montreal Trust Company of Canada
*(Z) -- Limited Recourse Guarantee, Security and Pledge Agreement
made as of August 7, 1997 between Seven Seas Petroleum
Colombia Inc. and Montreal Trust Company of Canada
*(AA) -- Private Placement Subscription Agreement made as of
August 7, 1997 between Seven Seas Petroleum Inc. and
Jasopt Pty Limited
*(BB) -- 1997 Stock Option Plan
+(12) -- Statement regarding computation of ratios
*(21) -- Subsidiaries of the Registrant
(23) -- Consent of experts and counsel
+(A) -- Consent of Ryder Scott Company Petroleum Engineers
+(B) -- Consent of Arthur Andersen LLP
+(C) -- Consent of Raisbeck, Lana, Rodriguez & Rueda, members of
the law firm of Baker & McKenzie
(D) -- Consent of Vinson & Elkins L.L.P. (included in Exhibits
5(A) and 8(A))
(E) -- Consent of Preston, Willis & Lackowicz (included in
Exhibit 5(B))
(F) -- Consent of McMillan Binch (included in Exhibit 8(B))
(24) -- Power of Attorney (included in signature page)
+(25) -- Statement of Eligibility of The Bank of Nova Scotia Trust
Company of New York
*(27) -- Financial Data Schedule
99 -- Additional Exhibits
+(A) -- Form of Letter of Transmittal
+(B) -- Form of Letter to Clients
+(C) -- Form of Letter to Registered Holders and DTC Participants
+(D) -- Form of Notice of Guaranteed Delivery
</TABLE>
- ---------------
* Incorporated herein by reference to like exhibit in Registration on Form 10
(File No. 022483).
+ Filed herewith.
<PAGE> 1
EXHIBIT 4(A)
- --------------------------------------------------------------------------------
SEVEN SEAS PETROLEUM INC.
as Issuer
$110,000,000
12 1/2% Senior Notes due 2005
---------------
INDENTURE
Dated as of May 7, 1998
---------------
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK
as Trustee
- --------------------------------------------------------------------------------
<PAGE> 2
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
Trust Indenture
Act Section Indenture Section
- ------------------ --------------------
<S> <C>
310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(a)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
(a)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
(a)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.10
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
311(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.11
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
312(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2
313(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
(b)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6, 7.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6, 10.2
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.6
314(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.25, 10.2
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.25
(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3
(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.24, 4.25
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4
(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
315(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5, 10.2
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1
(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.11
316(a)(last sentence) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.9
(a)(1)(A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.5
(a)(1)(B) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.7
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.12
317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.8
(a)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.9
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4
318(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1
(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . N/A
(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1
</TABLE>
- -------------
N/A means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 1.2 OTHER DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 1.4 RULES OF CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ARTICLE II
THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.1 FORM AND DATING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SECTION 2.2 EXECUTION AND AUTHENTICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.3 REGISTRAR AND PAYING AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 2.5 HOLDER LISTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 2.6 TRANSFER AND EXCHANGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 2.7 REPLACEMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.8 OUTSTANDING NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.9 TREASURY NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
SECTION 2.10 TEMPORARY NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.11 CANCELLATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.12 DEFAULTED INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.13 RECORD DATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
SECTION 2.14 COMPUTATION OF INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 2.15 CUSIP NUMBER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE III
REDEMPTION AND REPURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 3.1 NOTICES TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 3.2 SELECTION OF NOTES TO BE REDEEMED . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SECTION 3.3 NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
SECTION 3.6 NOTES REDEEMED IN PART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 3.7 OPTIONAL REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
SECTION 3.8 OPTIONAL TAX REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
SECTION 3.9 MANDATORY REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>
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ARTICLE IV
COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.1 PAYMENT OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SECTION 4.3 CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.4 MAINTENANCE OF PROPERTIES AND INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
SECTION 4.5 COMPLIANCE WITH LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.6 REPORTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.7 TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.8 STAY, EXTENSION AND USURY LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
SECTION 4.9 CHANGE OF CONTROL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
SECTION 4.10 ASSET SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
SECTION 4.11 RESTRICTED PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
SECTION 4.12 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK . . . . . . . . . . . . . . . . . 53
SECTION 4.13 SALE AND LEASEBACK TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
SECTION 4.14 LIENS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 4.15 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES . . . . . . . . . . 57
SECTION 4.16 TRANSACTIONS WITH AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
SECTION 4.17 COVENANT TO ENTER INTO SUBSIDIARY GUARANTEES . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 4.18 CONVERSION OF CONVERTIBLE DEBT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
SECTION 4.19 LINE OF BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 4.20 ADDITIONAL AMOUNTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
SECTION 4.21 PAYMENT CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
SECTION 4.22 COMPLIANCE CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
SECTION 4.23 ELIGIBLE SECURITIES ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
SECTION 4.24 PLEDGE ACCOUNT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 4.25 COMPLIANCE WITH TIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
SECTION 4.26 MAINTENANCE OF CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
ARTICLE V
SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
SECTION 5.1 MERGER, CONSOLIDATION OR SALE OF ASSETS OF SEVEN SEAS . . . . . . . . . . . . . . . . . . . . 66
SECTION 5.2 SUCCESSOR CORPORATION OF SEVEN SEAS SUBSTITUTED . . . . . . . . . . . . . . . . . . . . . . . 66
ARTICLE VI
DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 6.1 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
SECTION 6.2 ACCELERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 6.3 OTHER REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 6.4 WAIVER OF EXISTING DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
SECTION 6.5 CONTROL BY MAJORITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
</TABLE>
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SECTION 6.6 LIMITATION ON SUITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 6.7 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . 70
SECTION 6.8 COLLECTION SUIT BY TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 6.10 PRIORITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
SECTION 6.11 UNDERTAKING FOR COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
ARTICLE VII
TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 7.1 DUTIES OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
SECTION 7.2 RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 7.4 TRUSTEE'S DISCLAIMER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SECTION 7.5 NOTICE OF DEFAULTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 7.7 COMPENSATION AND INDEMNITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
SECTION 7.8 REPLACEMENT OF TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST SEVEN SEAS . . . . . . . . . . . . . . . . . . . . . 78
ARTICLE VIII
LEGAL DEFEASANCE AND COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . 78
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
SECTION 8.3 COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
SECTION 8.4 CONDITIONS TO LEGAL DEFEASANCE OR COVENANT DEFEASANCE . . . . . . . . . . . . . . . . . . . . 79
SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST; OTHER
MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 8.6 REPAYMENT TO SEVEN SEAS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
SECTION 8.7 REINSTATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
ARTICLE IX
AMENDMENT, SUPPLEMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
SECTION 9.2 WITH CONSENT OF HOLDERS OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 9.5 NOTATION ON OR EXCHANGE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
</TABLE>
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ARTICLE X
MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 10.1 TRUST INDENTURE ACT CONTROLS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
SECTION 10.2 NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
SECTION 10.3 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . 87
SECTION 10.4 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION . . . . . . . . . . . . . . . . . . . . . . . . 87
SECTION 10.5 GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
SECTION 10.6 LEGAL HOLIDAYS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
SECTION 10.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS . . . . . . . . . . 88
SECTION 10.8 INDEMNIFICATION FOR JUDGMENT CURRENCY FLUCTUATIONS . . . . . . . . . . . . . . . . . . . . . 88
SECTION 10.9 CONSENT TO JURISDICTION AND SERVICE OF PROCESS . . . . . . . . . . . . . . . . . . . . . . . 89
SECTION 10.10 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . 89
SECTION 10.11 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
SECTION 10.12 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
SECTION 10.13 COUNTERPART ORIGINALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
SECTION 10.14 TABLE OF CONTENTS, HEADINGS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
</TABLE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A . . . . . Form of Note
Exhibit B-1 . . . . Form of Certificate for Exchange or Registration of Transfer from 144A Global Note to
Regulation S Global Note
Exhibit B-2 . . . . Form of Certificate for Exchange or Registration of Transfer from Regulation S Global Note to
144A Global Note
Exhibit B-3 . . . . Form of Certificate for Exchange or Registration of Transfer of Definitive Notes
Exhibit B-4 . . . . Form of Certificate for Exchange or Registration of Transfer from 144A Global Note or
Regulation S Global Note to Definitive Note
Exhibit C . . . . . Form of Supplemental Indenture
Exhibit D . . . . . Form of Collateral Pledge and Security Agreement
</TABLE>
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<PAGE> 7
INDENTURE, dated as of May 7, 1998, between Seven Seas Petroleum Inc.,
a corporation organized under the laws of Yukon Territory, Canada ("Seven Seas"
or the "Company"), and The Bank of Nova Scotia Trust Company of New York, as
trustee (the "Trustee").
Each party agrees as follows for the benefit of each other and for the
equal and ratable benefit of the Holders of the 12 1/2% Series A Senior Notes
due 2005 (the "Series A Notes") and the 12 1/2% Series B Senior Notes due 2005
(the "Series B Notes" and, together with the Series A Notes, the "Notes"):
ARTICLE I
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.1 DEFINITIONS
"144A Global Note" means a permanent global senior note that contains
the paragraph referred to in footnote 1 and the additional schedule referred to
in footnote 4 to the form of the Note attached hereto as Exhibit A, and that is
deposited with the Note Custodian and registered in the name of the Depository
or its nominee, representing a series of Notes sold in reliance on Rule 144A or
in reliance on another exemption from the registration requirements of the
Securities Act.
"Acquired Indebtedness" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary or is designated a Restricted
Subsidiary of such specified Person, including, without limitation,
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary or Restricted Subsidiary
of such specified Person, and (ii) Indebtedness secured by a Lien encumbering
any asset acquired by such specified Person.
"Adjusted Consolidated Net Tangible Assets" means (without
duplication), as of the date of determination, (i) the sum of (a) discounted
future net revenues from proved oil and gas reserves of Seven Seas and its
Restricted Subsidiaries calculated in accordance with Commission guidelines
before any state, federal or foreign income taxes, as estimated by Seven Seas
and confirmed by a nationally recognized firm of independent petroleum
engineers in a reserve report prepared as of the end of Seven Seas' most
recently completed fiscal year for which audited financial statements are
available, as increased by, as of the date of determination, the estimated
discounted future net revenues from (1) estimated proved oil and gas reserves
acquired since such year-end, which reserves were not reflected in such year-
end reserve report, and (2) estimated proved oil and gas reserves attributable
to upward revisions of estimates of proved oil and gas reserves since such
year-end due to exploration, development or exploitation activities, in each
case calculated in accordance with Commission guidelines (utilizing the prices
utilized in such year-end reserve report), and decreased by, as of the date of
determination, the estimated discounted future net revenues from (3) estimated
proved oil and gas reserves produced or disposed of since such year-end and (4)
estimated oil and gas reserves attributable to downward revisions of estimates
of proved oil and
<PAGE> 8
gas reserves since such year-end due to changes in geological conditions or
other factors which would, in accordance with standard industry practice, cause
such revisions, in each case calculated in accordance with Commission
guidelines (utilizing the prices utilized in such year-end reserve report);
provided that, in the case of each of the determinations made pursuant to
clauses (1) through (4), such increases and decreases shall be as estimated by
Seven Seas' petroleum engineers, unless there is a Material Change as a result
of such acquisitions, dispositions or revisions, in which event the discounted
future net revenues utilized for purposes of this clause (i)(a) shall be
confirmed in writing by a nationally recognized firm of independent petroleum
engineers, (b) the capitalized costs that are attributable to oil and gas
properties of Seven Seas and its Restricted Subsidiaries to which no proved oil
and gas reserves are attributable, based on Seven Seas' books and records as of
a date no earlier than the date of Seven Seas' latest annual or quarterly
financial statements, (c) the Net Working Capital on a date no earlier than the
date of Seven Seas' latest consolidated annual or quarterly financial
statements, and (d) with respect to each other tangible asset of Seven Seas or
its Restricted Subsidiaries (excluding any amounts with respect to Colombian
Government Receivables), the greater of (A) the net book value of such other
tangible asset on a date no earlier than the date of Seven Seas' latest
consolidated annual or quarterly financial statements, and (B) the appraised
value, as estimated by a qualified independent appraiser, of such other
tangible asset, as of a date no earlier than the date that is three years prior
to the date of determination (or such later date on which Seven Seas shall have
a reasonable basis to believe that there has occurred a material decrease in
value since the determination of such appraised value), minus (ii) the sum of
(a) minority interests (other than a minority interest in a Subsidiary that is
a business trust or similar entity formed for the primary purpose of issuing
preferred securities the proceeds of which are loaned to Seven Seas or a
Restricted Subsidiary), (b) any net gas balancing liabilities of Seven Seas and
its Restricted Subsidiaries reflected in Seven Seas' latest audited financial
statements, (c) to the extent included in (i)(a) above, the discounted future
net revenues, calculated in accordance with Commission guidelines (utilizing
the prices utilized in Seven Seas' year-end reserve report), attributable to
reserves which are required to be delivered to third parties to fully satisfy
the obligations of Seven Seas and its Restricted Subsidiaries with respect to
Volumetric Production Payments on the schedules specified with respect thereto
and (d) to the extent included in (i)(a) above, the discounted future net
revenues, calculated in accordance with Commission guidelines, attributable to
reserves subject to Dollar-Denominated Production Payments which, based on the
estimates of production and price assumptions included in determining the
discounted future net revenues specified in (i)(a) above, would be necessary to
fully satisfy the payment obligations of Seven Seas and its Restricted
Subsidiaries with respect to Dollar-Denominated Production Payments on the
schedules specified with respect thereto. If Seven Seas changes its method of
accounting from the full cost method to the successful efforts method or a
similar method of accounting, "Adjusted Consolidated Net Tangible Assets" will
continue to be calculated as if Seven Seas were still using the full cost
method of accounting.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall
mean
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the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Applicable Premium" means, with respect to a Note at any redemption
date, the greater of (i) 1.0% of the principal amount of such Note and (ii) the
excess of (a) the present value at such time of (1) the redemption price of
such Note at May 15, 2002 (as set forth in Section 3.7) plus (2) all required
interest payments due on such Note through May 15, 2005, computed in the case
of (1) and (2) using a discount rate equal to the Treasury Rate plus 50 basis
points, over (b) the principal amount of such Note.
"Applicable Procedures" means, with respect to any transfer or
exchange of beneficial interests in a Global Note, the rules and procedures of
the Depository that apply to such transfer and exchange.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets (including, without limitation, by way of a sale and
leaseback transaction, including any disposition by means of a merger,
consolidation or similar transaction and including the issuance, sale or other
transfer of any of the Capital Stock of any Restricted Subsidiary of such
Person) other than to Seven Seas or to any of its Wholly Owned Subsidiaries
(including the receipt of proceeds of insurance paid on account of the loss of
or damage to any asset and awards of compensation for any asset taken by
condemnation, eminent domain, nationalization, expropriation or similar
proceeding or action, but excluding the receipt of proceeds of business
interruption insurance or environmental damage insurance or similar types of
policies); and (ii) the issuance of Equity Interests in any Restricted
Subsidiaries or the sale of any Equity Interests in any Restricted Subsidiaries
(other than directors' qualifying shares or shares required by applicable law
to be held by a Person other than Seven Seas or a Restricted Subsidiary), in
each case, in one or a series of related transactions. For purposes of this
definition, the term "Asset Sale" shall not include: (a) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of Seven Seas, as permitted under Section 5.1, (b) the sale or lease of
equipment, inventory, accounts receivable or other assets in the ordinary
course of business, (c) a transfer of assets by Seven Seas to a Restricted
Subsidiary or by a Restricted Subsidiary to Seven Seas or to another Restricted
Subsidiary, (d) an issuance of Equity Interests by a Restricted Subsidiary to
Seven Seas or to another Restricted Subsidiary, (e) the making of a Restricted
Payment or a Permitted Investment that is permitted by Section 4.11, (f) any
Production Payment and Reserve Sale created, incurred, issued, assumed or
guaranteed in connection with the financing of, and within 60 days after the
acquisition of, the Property that is subject thereto, (g) sales, leases,
conveyances or other dispositions of assets the aggregate gross proceeds of
which do not exceed $250,000 in any twelve-month period, (h) the relinquishment
of unexplored acreage in accordance with the Association Contracts, (i) the
abandonment, farm-out, lease or sublease of developed or undeveloped oil and
gas properties in the ordinary course of business, (j) the trade or
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<PAGE> 10
exchange by Seven Seas or any Restricted Subsidiary of Seven Seas of any oil
and gas property owned or held by Seven Seas or such Subsidiary for any oil and
gas property owned or held by another Person in a single transaction or a
series of related transactions having a fair market value of less than $50.0
million, provided that (x) the fair market value of the properties traded or
exchanged by Seven Seas or such Subsidiary (including any cash or Cash
Equivalents, not to exceed 15% of such fair market value) is reasonably
equivalent to the fair market value of the oil and gas property to be received
by Seven Seas or such Subsidiary as determined in good faith by (1) any officer
of Seven Seas if such fair market value is less than $5.0 million and (2) the
Board of Directors of Seven Seas as certified by a certified resolution
delivered to the Trustee if such fair market value is equal to or in excess of
$5.0 million, and provided, further, that if such resolution indicates that
such fair market value is equal to or in excess of $20.0 million such
resolution shall be accompanied by a written appraisal by a nationally
recognized investment banking firm or appraisal firm, in each case specializing
or having a specialty in oil and gas properties, and (y) such trade or exchange
is approved by a majority of the Disinterested Directors of Seven Seas, or (k)
the sale or transfer of hydrocarbons or other mineral products for value in the
ordinary course of business.
"Association Contracts" means the Dindal Association Contract issued
by Ecopetrol in March 1993 and the Rio Seco Association Contract issued by
Ecopetrol in August 1995.
"Attributable Debt" in respect of a sale and leaseback transaction
means, as at the time of determination, the present value (discounted at the
interest rate implicit in such transaction, determined in accordance with GAAP)
of the total obligations of the lessee for net rental payments during the
remaining term of the lease included in such sale and leaseback transaction
(including any period for which such lease has been extended or may, at the
option of the lessor, be extended). As used in the preceding sentence, the
"net rental payment" under any lease for any such period shall mean the sum of
rental and other payments required to be paid with respect to such period by
the lessee thereunder, excluding any amounts required to be paid by such lessee
on account of maintenance and repairs, insurance, taxes, assessments, water
rates or similar charges. In the case of any lease which is terminable by the
lessee upon payment of a penalty, such net rental payment shall also include
the amount of such penalty, but no rent shall be considered as required to be
paid under such lease subsequent to the first date upon which it may be so
terminated.
"Board of Directors" means the Board of Directors of Seven Seas, or
any authorized committee of such Board of Directors.
"Borrowing Base" means, as of any date, the aggregate amount not to
exceed the sum of 100% of cash and Cash Equivalents that are not pledged to
secure Indebtedness plus 100% of Colombian Government Receivables plus 30% of
Adjusted Consolidated Net Tangible Assets.
"Business Day" means any day other than a Legal Holiday.
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"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital
lease that would at such time be required to be capitalized on a balance sheet
in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or Canada or any agency
or instrumentality thereof (provided that the full faith and credit of the
United States or Canada, as the case may be, is pledged in support thereof)
having maturities no more than twelve months from the date of acquisition, (b)
United States dollar denominated (or foreign currency fully hedged) time
deposits, certificates of deposit, Eurodollar time deposits or Eurodollar
certificates of deposit of (i) any United States or Canadian commercial bank of
recognized standing having capital and surplus in excess of $500 million or
(ii) any bank whose short-term commercial paper rating from Standard & Poor's
is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or
the equivalent thereof (any such bank being an "Approved Lender"), in each case
with maturities of not more than twelve months from the date of acquisition,
(c) commercial paper and variable or fixed rate notes issued by any Approved
Lender (or by the parent company thereof) or commercial paper or any variable
rate notes issued by, or guaranteed by, any United States or Canadian
corporation rated A-1 (or the equivalent thereof) by Standard & Poor's or P-1
(or the equivalent thereof) by Moody's and maturing within twelve months of the
date of acquisition, (d) repurchase agreements with a bank or trust company or
recognized securities dealer having capital and surplus in excess of $500
million for direct obligations issued by or fully guaranteed by the United
States of America or Canada in which Seven Seas shall have a perfected first
priority security interest (subject to no other Liens) and having, on the date
of purchase thereof, a fair market value of at least 100% of the amount of
repurchase obligations, (e) deposits available for withdrawal on demand with
any commercial bank in Colombia not meeting the qualifications specified in
clause (b)(i) above, provided all such deposits do not exceed $2.0 million in
the aggregate at any one time, and (f) interests in money market mutual funds
which invest solely in assets or securities of the type described in
subparagraph (a), (b), (c) or (d) hereof.
"Cedel" means Cedel Bank, societe anonyme.
"Change of Control" means the occurrence of any of the following: (i)
any Person, other than one or more Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 of the Exchange Act,
provided that such Person shall be deemed to have "beneficial ownership" of all
shares that any such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of the total voting power of the Voting Stock of
Seven Seas; provided, however, that the Permitted Holders beneficially own (as
defined above), directly or indirectly, in the aggregate a lesser
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<PAGE> 12
percentage of the total voting power of the Voting Stock of Seven Seas than
such other Person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
Board of Directors (for the purposes of this clause (i), such other Person
shall be deemed to beneficially own any Voting Stock of a specified corporation
held by a parent corporation, if such other Person is the beneficial owner (as
defined in this clause (i)), directly or indirectly, of more than 50% of the
voting power of the Voting Stock of such parent corporation and the Permitted
Holders beneficially own (as defined above), directly or indirectly, in the
aggregate a lesser percentage of the voting power of the Voting Stock of such
parent corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
board of directors of such parent corporation); (ii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors (together with any new directors whose election by such
Board of Directors or whose nomination for election by the shareholders of
Seven Seas was approved by a vote of 66-2/3% of the directors of Seven Seas
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors then in
office; or (iii) the merger or consolidation of Seven Seas with or into another
Person or the merger of another Person with or into Seven Seas, or the sale of
all or substantially all the assets of Seven Seas to another Person (other than
a Person that is controlled by the Permitted Holders), and, in the case of any
such merger or consolidation, the securities of Seven Seas that are outstanding
immediately prior to such transaction and which represent 100% of the aggregate
voting power of the Voting Stock of Seven Seas are changed into or exchanged
for cash, securities or property, unless pursuant to such transaction such
securities are changed into or exchanged for, in addition to any other
consideration, securities of the surviving corporation that represent
immediately after such transaction, at least a majority of the aggregate voting
power of the Voting Stock of the surviving corporation.
"Colombian Government Receivables" means the aggregate accounts
receivable by Seven Seas or a Restricted Subsidiary from Ecopetrol or a
successor agency or ministry of the Colombian government with respect to the
Association Contracts, in the net amount recorded in accordance with GAAP on a
consolidated basis on the books of Seven Seas (net of any disputed, doubtful or
uncertain amounts or other offsets), as adjusted from time to time.
"Commission" means the United States Securities and Exchange
Commission.
"Company Order" means a written order or request signed in the name of
an Officer and delivered to the Trustee.
"Consolidated Cashflow" means, with respect to Seven Seas and its
Restricted Subsidiaries for any period, the sum of, without duplication, (i)
the Consolidated Net Income for such period, plus (ii) to the extent deducted
from Consolidated Net Income for such period, (x) the Fixed Charges for such
period, plus (y) noncash dividends on Seven Seas' Preferred Stock, plus (iii)
Consolidated Income Taxes for such period, plus (iv) consolidated depreciation,
amortization, depletion and other non-cash charges of Seven Seas and its
Restricted Subsidiaries required to be reflected as expenses
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on the books and records of Seven Seas, determined on a consolidated basis in
accordance with GAAP (excluding any such noncash expense or charge to the
extent that it represents an accrual of or reserve for cash expenditures in any
future period), in each case for such period decreased (to the extent included
in determining Consolidated Net Income) by the sum of (a) the amount of
deferred revenues that are amortized during such period and are attributable to
reserves that are subject to Volumetric Production Payments and (b) amounts
recorded in accordance with GAAP as repayments of principal and interest
pursuant to Dollar-Denominated Production Payments during such period, minus
(v) cash payments with respect to any nonrecurring, non-cash charges previously
added back pursuant to clause (iv) and excluding (vi) the impact of foreign
currency translations. Notwithstanding the foregoing, the provision for taxes
based on the income or profits of, and the depreciation and amortization and
other noncash charges of, a Restricted Subsidiary of a Person shall be added to
Consolidated Net Income to compute Consolidated Cashflow only to the extent
that the Net Income of such Restricted Subsidiary was included in calculating
the Consolidated Net Income of such Person and only if a corresponding amount
would be permitted at the date of determination to be dividended to Seven Seas
by such Restricted Subsidiary without prior approval (that has not been
obtained) pursuant to the terms of its charter and all agreements, instruments,
judgments, decrees, orders, statutes, rules and governmental regulations
applicable to such Restricted Subsidiary or its stockholders.
"Consolidated Income Taxes" means, with respect to any Person for any
period, taxes imposed upon such Person or other payments required to be made by
such Person by any governmental authority which taxes or other payments are
calculated by reference to the income or profits of such Person or such Person
and its Subsidiaries (to the extent such income or profits were included in
computing Consolidated Net Income for such period), regardless of whether such
taxes or payments are required to be remitted to any governmental authority.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary of such Person or that is accounted for by the
equity method of accounting or by proportional consolidation by such Person
shall be included only to the extent of the amount of dividends or
distributions paid in cash to such Person or a Restricted Subsidiary of such
Person; (ii) the Net Income of, or any dividends or other distributions from,
any Unrestricted Subsidiary, to the extent otherwise included, shall be
excluded to the extent not distributed to such Person or one of its Restricted
Subsidiaries; (iii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or its
stockholders; (iv) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition
shall be excluded; (v) the cumulative effect of a change in accounting
principles shall be excluded; (vi) income or loss attributable to discontinued
operations
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<PAGE> 14
shall be excluded; (vii) any increase in cost of sales or other write-offs
resulting from the purchase accounting treatment of any acquisitions shall be
excluded; (viii) all other extraordinary, unusual or nonrecurring gains and
losses shall be excluded; (ix) any ceiling limitation writedowns under
Commission guidelines shall be treated as capitalized costs, as if such
writedown had not occurred and (x) with regard to a non-Wholly Owned
Subsidiary, any aggregate Net Income (or loss) in excess of such Person's or
such Subsidiary's pro rata share of such non-Wholly Owned Subsidiary's Net
Income (or loss) shall be excluded. Notwithstanding the foregoing, for the
purposes of Section 4.11 only, there shall be excluded from Consolidated Net
Income any dividends, repayments of loans or advances or other transfers of
assets from Unrestricted Subsidiaries to Seven Seas or a Restricted Subsidiary
to the extent such dividends, repayments or transfers are actually used to
increase the amount of Restricted Payments permitted pursuant to Section
4.11(c)(iv).
"Consolidated Net Worth" of a Person at any date means the amount by
which the assets of such Person and its consolidated Restricted Subsidiaries
(less any revaluation or other write-up subsequent to the date of this
Indenture in any such assets (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within twelve months after the acquisition of such business))
exceed the sum of (a) the total liabilities of such Person and its consolidated
Restricted Subsidiaries, plus (b) any Disqualified Stock of such Person or any
consolidated Restricted Subsidiaries of such Person issued to any Person other
than such Person or a Wholly Owned Subsidiary of such Person, in each case
determined in accordance with GAAP.
"Conversion Liquidated Damages" means liquidated damages owing
pursuant to Section 4.18.
"Convertible Debentures" means the convertible debentures for which
the Special Notes may be exchanged.
"Corporate Trust Office of the Trustee" shall be at the address of the
Trustee specified in Section 10.2 hereof or such other address as to which the
Trustee may give notice to Seven Seas.
"Credit Facility" means, collectively, (i) that certain proposed
credit facility, substantially as described in the Offering Memorandum by and
among Seven Seas, the lenders that may be from time to time parties as the
foregoing may from time to time be amended, renewed, supplemented or otherwise
modified at the option of the parties thereto, including any increases in the
principal amount thereof and (ii) after such proposed credit facility has been
terminated and all then outstanding Indebtedness thereunder or with respect
thereto has been repaid in full in cash and discharged, any successors to or
replacements (as designated by the Board of Directors of Seven Seas in its sole
judgment, and evidenced by a resolution) of such proposed credit facility, as
such successors or replacements may from time to time be amended, renewed,
supplemented, modified or replaced, including any increases in the principal
amount thereof. The Credit Facility, for purposes of this definition, may
include any issue of Indebtedness, incurred in accordance with Section 4.12,
pursuant to an underwritten public offering or a private placement of debt
securities.
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"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Definitive Notes" means Notes that are substantially in the form of
the Note attached hereto as Exhibit A, that do not include the information or
text called for by footnotes 1, 3 and 4 thereto.
"Depository" means the Depository Trust Company as the depository with
respect to the Notes, until a successor shall have been appointed and become
such Depository pursuant to the applicable provision of this Indenture, and,
thereafter, "Depository" shall mean or include such successor.
"Disinterested Director" means, with respect to any transaction or
series of transactions in respect of which the Board of Directors is required
to deliver its resolution under this Indenture, a member of the Board of
Directors who does not have any material direct or indirect financial interest
(other than an interest arising solely from the beneficial ownership of Capital
Stock of Seven Seas) in or with respect to such transaction or series of
transactions.
"Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date that is 91 days after the date that the Notes mature.
"Dollar-Denominated Production Payments" means production payment
obligations of Seven Seas or any Subsidiary which are payable from a specified
share of proceeds received from production from specific Properties, together
with all undertakings and obligations in connection therewith.
"Eligible Institution" means either (i) a commercial banking
institution organized under the laws of the United States or Canada that has
combined capital and surplus of not less than US$150 million or its equivalent
in foreign currency or (ii) an investment banking firm organized under the laws
of the United States or Canada, that regularly supplies account management
services, that has equity in excess of $500 million or its equivalent in
foreign currency, and, in either case of (i) or (ii), whose debt is rated "A-3"
or higher or "A" or higher according to Moody's, Standard & Poor's or Duff &
Phelps Credit Rating Co. (or such similar equivalent rating by at least one
"nationally recognized statistical rating organization" (as defined in Rule 436
under the Exchange Act)) at the time as of which any investment or rollover
therein is made.
"Eligible Securities" means the securities purchased by Seven Seas
with a portion of the net proceeds from the offering of the Notes by Seven Seas
which shall consist of U.S. Government Securities to be deposited in the
Eligible Securities Account.
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"Eligible Securities Account" means an account in the name of Seven
Seas held at an Eligible Institution.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity or Strategic Investor Offering" means an offering after the
Issue Date of Equity Interests, other than Disqualified Stock and other than
Equity Interests issuable upon conversion of warrants, options or other rights
to acquire Capital Stock of Seven Seas or any successor by merger to Seven
Seas, including a public offering pursuant to a registration statement filed
with the Commission or other securities commission (other than on Form S-8 or
any other form relating to securities issuable under any benefit plan of Seven
Seas) or a private placement to a third party engaged in the Oil and Gas
Business.
"Euroclear" means Morgan Guaranty Trust Company of New York, the
Brussels office, as operator of the Euroclear system.
"Exchange Act" means the United States Securities Exchange Act of
1934, as amended.
"Exchange Offer" means the offer that may be made by Seven Seas
pursuant to the Registration Rights Agreement to exchange Series B Notes for
Series A Notes.
"Exchange Offer Registration Statement" has the meaning set forth in
the Registration Rights Agreement.
"Existing Guarantee" means the guarantee by Seven Seas Petroleum
Holdings Inc., as in effect on the Issue Date, of the Special Notes and the
Convertible Debentures issued in August 1997 by Seven Seas.
"Existing Indebtedness" means the Indebtedness of Seven Seas and its
Restricted Subsidiaries (other than Indebtedness under the Credit Facility) in
existence on the Issue Date.
"Fixed Charges" means, with respect to any Person for any period, the
sum, without duplication, of (i) the consolidated interest expense of such
Person and its Restricted Subsidiaries for such period, whether paid or accrued
(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers, acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), and (ii) the consolidated
interest incurred by such Person and its Restricted Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Restricted
Subsidiaries or secured by a Lien on assets of such Person or one of
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its Restricted Subsidiaries (whether or not such Guarantee or Lien is called
upon), and (iv) the product of (a) all dividend payments, whether or not in
cash, on any series of Preferred Stock of any such Person payable to a party
other than Seven Seas or a Wholly Owned Subsidiary, other than dividend
payments on Equity Interests payable solely in Equity Interests of Seven Seas,
times (b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state, provincial and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cashflow of such Person and its
Restricted Subsidiaries for such period of the most recent four consecutive
fiscal quarters for which financial statements are available prior to the date
of such determination to the Fixed Charges of such Person and its Restricted
Subsidiaries for such period. In the event that Seven Seas or any of its
Restricted Subsidiaries incurs, assumes, guarantees or repays any Indebtedness
(other than the incurrence or repayment of revolving credit borrowings used for
working capital, except to the extent that a repayment is accompanied by a
permanent reduction in revolving credit commitments) or issues Preferred Stock
subsequent to the commencement of the four-quarter reference period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio is
made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall be
calculated giving pro forma effect to such incurrence, assumption, guarantee or
redemption of Indebtedness, or such issuance or redemption of Preferred Stock,
as if the same had occurred at the beginning of the applicable four-quarter
reference period. For purposes of making the computation referred to above,
(i) acquisitions that have been made by Seven Seas or any of its Restricted
Subsidiaries, including through mergers or consolidations and including any
related financing transactions, during the four-quarter reference period or
subsequent to such reference period and on or prior to the Calculation Date
shall be, deemed to have occurred on the first day of the four-quarter
reference period and shall give pro forma effect to the Consolidated Cashflow
and Indebtedness of the Person which is the subject of any such acquisition,
and (ii) the Consolidated Cashflow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iii) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall
be excluded, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referenced Person or any of its
Restricted Subsidiaries following the Calculation Date.
"GAAP" means generally accepted accounting principles in the United
States which are in effect on the date of this Indenture.
"Global Note" means, individually and collectively, the Regulation S
Global Note and the 144A Global Note.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without
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<PAGE> 18
limitation, letters of credit and reimbursement agreements in respect thereof),
of all or any part of any Indebtedness.
"Guarantor" means any Restricted Subsidiary that shall have
guaranteed, pursuant to a supplemental indenture and the requirements therefor
set forth in this Indenture, the payment of all principal of, and interest and
premium, if any, on, the Notes and all other amounts payable under the Notes or
this Indenture.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other hedging
agreements or arrangements, in each case designed to protect such Person
against fluctuations in interest rates, currencies and oil and natural gas
prices entered into in the ordinary course of business in the Oil and Gas
Business and not for speculation.
"Holder" means a Person in whose name a Note is registered on the
Registrar's books.
"Indebtedness" means, with respect to any Person, (i) any indebtedness
of such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any Property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP; (ii) all indebtedness
of others secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person); (iii) the maximum fixed repurchase
price of Disqualified Stock issued by such Person, if held by a Person other
than Seven Seas or a Wholly Owned Subsidiary of Seven Seas; and (iv) to the
extent not otherwise included, the Guarantee by such Person of any indebtedness
of any other Person; provided that Indebtedness shall exclude Production
Payments and Reserve Sales. For purposes of this definition, the maximum fixed
repurchase price of any Disqualified Stock that does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Disqualified Stock as if such Disqualified Stock were repurchased on any date
on which Indebtedness shall be required to be determined pursuant to this
Indenture; provided, however, that if such Disqualified Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Disqualified Stock. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability at such date in respect of any
contingent obligations described in this definition.
"Indenture" means this Indenture, as amended or supplemented from time
to time.
"Indirect Participant" means a person who holds an interest through a
Participant.
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"Initial Purchasers" means Donaldson, Lufkin & Jenrette Securities
Corporation, Bear, Stearns & Co. Inc., CIBC Oppenheimer Corp., Credit Suisse
First Boston Corporation and Paribas Corporation.
"Institutional Accredited Investor" means an institutional "accredited
investor" as defined in Rule 501(a)(1), (2), (3) or (7) of the Securities Act.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel, relocation and
similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
Seven Seas for consideration consisting of common equity securities of Seven
Seas shall not be deemed to be an Investment.
"Issue Date" means May 7, 1998.
"Legal Holiday" means a Saturday, a Sunday or a day on which federal
offices or banking institutions in the City of New York, in the city of the
Corporate Trust Office of the Trustee, or at a place of payment are authorized
by law, regulation or executive order to remain closed.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease
in the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidated Damages" means, collectively, all Registration Liquidated
Damages and all Conversion Liquidated Damages.
"Material Change" means an increase or decrease (excluding changes
that result solely from changes in prices) of more than 20% during a fiscal
quarter in the estimated discounted future net cash flows from proved oil and
gas reserves of Seven Seas and its Restricted Subsidiaries, calculated in
accordance with clause (i)(a) of the definition of Adjusted Consolidated Net
Tangible Assets; provided, however, that the following will be excluded from
the calculation of Material Change: (i) any acquisitions during the quarter of
oil and gas reserves that have been estimated by a nationally recognized firm
of independent petroleum engineers and on which a report or reports exist and
(ii) any disposition of properties held at the beginning of such quarter that
have been disposed of as provided in Section 4.10.
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<PAGE> 20
"Maturity Date" means May 15, 2005.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP, and before reduction for
noncash Preferred Stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries, and (ii) any items classified as extraordinary
gains or losses together with any related provision for taxes on such
extraordinary gains or losses.
"Net Proceeds" means the aggregate cash proceeds received by Seven
Seas or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), and any reserve for adjustment in
respect of the sale price of such asset or assets established in accordance
with GAAP and net of any Purchase Money Obligations relating to the assets
comprising such Asset Sale.
"Net Working Capital" means (i) all current assets of Seven Seas and
its Restricted Subsidiaries excluding cash and Cash Equivalents and Colombian
Government Receivables (to the extent included in current assets), minus (ii)
all current liabilities of Seven Seas and its Restricted Subsidiaries, except
current liabilities included in Indebtedness.
"Non-Recourse Debt" means Indebtedness (i) as to which neither Seven
Seas nor any of its Restricted Subsidiaries (a) provides any Guarantee or
credit support of any kind (including any undertaking, Guarantee, indemnity,
agreement or instrument that would constitute Indebtedness) or (b) is directly
or indirectly liable (as a guarantor or otherwise), (ii) no default with
respect to which (including any rights that the holders thereof may have to
take enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of Seven
Seas or any of its Restricted Subsidiaries to declare a default under such
other Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity and (iii) the explicit terms of which provide that
there is no recourse against any of the assets of Seven Seas or its Restricted
Subsidiaries.
"Note Custodian" means the Trustee, as custodian with respect to the
Global Notes, or any successor entity thereto.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Offering Memorandum" means the Offering Memorandum dated May 1, 1998,
relating to Seven Seas' offering and placement of the Series A Notes.
"Officer" means, with respect to any Person, the Chairman of the
Board, any Vice Chairman, the Chief Executive Officer, the President, the Chief
Operating Officer, the Chief Financial Officer or any Vice President of such
Person.
"Officers' Certificate" means a certificate signed on behalf of Seven
Seas by two Officers of Seven Seas, one of whom must be the principal executive
officer, the principal financial officer or the principal accounting officer of
Seven Seas, that meets the requirements of Section 10.3 hereof.
"Oil and Gas Business" means (i) the acquisition, exploration,
exploitation, development, operation or disposition of interests in oil, gas or
other hydrocarbon properties, (ii) the gathering, marketing, treating,
processing, storage, selling, transporting or refining of any production from
such interests or properties, (iii) any business relating to or arising from
exploration for or development, production, gathering, marketing, treatment,
processing, storage, sale, transportation or refining of oil, gas and other
minerals and products produced in association therewith or (iv) any activity
that is ancillary or necessary or desirable to facilitate the activities
described in clauses (i) through (iii) of this definition.
"Opinion of Counsel" means an opinion from legal counsel who is
reasonably acceptable to the Trustee, that meets the requirements of Section
10.3 hereof. The counsel may be an employee of or counsel to Seven Seas, any
Subsidiary of Seven Seas or the Trustee.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in
right of payment to the Notes.
"Participant" means, with respect to DTC, Euroclear or Cedel, a Person
who has an account with DTC, Euroclear or Cedel, respectively (and, with
respect to DTC, shall include Euroclear and Cedel).
"Permitted Holders" means (i) Robert A. Hefner III and Breene M. Kerr,
(ii) any Person controlled directly or indirectly by either or both of the
Persons referred to in clause (i), and (iii) any trust, all of the
beneficiaries of which are any one or more of the Persons referred to in clause
(i) of this definition.
"Permitted Infrastructure Investment" means an investment made by
Seven Seas or any Restricted Subsidiary in production, processing, storage,
compression and pipeline facilities and infrastructure with respect to the
production and transportation of oil and natural gas from Emerald
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Mountain, provided that the aggregate amount of such investment made by Seven
Seas and its Restricted Subsidiaries in any such facilities and infrastructure,
as a proportion of the total investments made by all Persons in such facilities
and infrastructure, does not at any time exceed the combined proportionate
share of the working interests of Seven Seas and its Restricted Subsidiaries in
Emerald Mountain.
"Permitted Investments" means (i) any Investments in Seven Seas or in
a Restricted Subsidiary of Seven Seas that is engaged in the Oil and Gas
Business and reasonable extensions or expansions thereof; (ii) any investments
in Cash Equivalents; (iii) Investments by Seven Seas or any Restricted
Subsidiary of Seven Seas in a Person if as a result of such Investment (a) such
Person becomes a Wholly Owned Subsidiary of Seven Seas and such Person is
engaged in the Oil and Gas Business or (b) such Person is merged, consolidated
or amalgamated with or into, or transfers or conveys substantially all of its
assets to, or is liquidated into, Seven Seas or a Wholly Owned Subsidiary of
Seven Seas that is engaged in the Oil and Gas Business; (iv) Investments made
as a result of the receipt of non-cash consideration from an Asset Sale that
was made pursuant to and in compliance with Section 4.10 hereof; (v)
investments by Seven Seas or any of its Restricted Subsidiaries in an aggregate
amount not to exceed $10.0 million outstanding at any one time in the Oil and
Gas Business; (vi) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to Seven Seas or any
of its Subsidiaries or in satisfaction of judgments or pursuant to any plan of
reorganization or similar arrangement upon the bankruptcy or insolvency of any
debtor; (vii) any operating agreements, joint ventures, partnership agreements,
working interests, royalty interests, mineral leases, processing agreements,
farm-out agreements, contracts for the sale, transportation or exchange of oil
and natural gas, unitization agreements, pooling arrangements, area of mutual
interest agreements, production sharing agreements or other similar or
customary agreements, transactions, properties, interests, or arrangements, and
Investments and expenditures in connection therewith or pursuant thereto, in
each case made or entered into in the ordinary course of the Oil and Gas
Business, excluding, however, investments in corporations; (viii) accounts
receivable created or acquired, and prepaid expenses arising, in the ordinary
course of business; (ix) the endorsements of negotiable instruments for
collection or deposit in the ordinary course of business; (x) Investments
existing on the date of this Indenture; (xi) the incurrence, assumption or
creation of Hedging Obligations that Seven Seas or a Restricted Subsidiary of
Seven Seas enter into in the ordinary course of the Oil and Gas Business for
the purpose of protecting its production against fluctuations in oil or natural
gas prices and otherwise in compliance with this Indenture; and (xii) Permitted
Infrastructure Investments.
"Permitted Liens" means (i) Liens securing Indebtedness permitted by
clauses (i), (ii), (iii), (iv) (to the extent that the Liens securing such
Indebtedness are Purchase Money Liens), (v) (to the extent that the Liens
securing Permitted Refinancing Indebtedness have the same terms and relate to
the same assets as the Liens securing the Indebtedness to be exchanged or
retired in relation thereto), (viii), (ix), (x) (to the extent that cash on
deposit may be encumbered by the issuance of trade letters of credit), and (xi)
(to the extent related to the Credit Facility) in each case, under the covenant
in Section 4.12 herein; (ii) Liens in favor of Seven Seas or any Wholly Owned
Subsidiary; (iii) Liens on Property of a Person existing at the time such
Person is merged into or consolidated
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with Seven Seas or any Restricted Subsidiary of Seven Seas; provided that such
Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with Seven Seas; (iv) Liens on Property of a Person
existing at the time such Person becomes a Restricted Subsidiary of Seven Seas;
(v) Liens on Property existing at the time of acquisition thereof by Seven Seas
or any Restricted Subsidiary of Seven Seas, provided that such Liens were in
existence prior to the contemplation of such acquisition; (vi) Liens to secure
the performance of statutory obligations, surety or appeal bonds, performance
bonds, tenders, bids, leases or other obligations of a like nature incurred in
the ordinary course of the Oil and Gas Business; (vii) Liens existing on the
date of this Indenture; (viii) Liens for taxes, assessments or governmental
charges or claims that are not yet delinquent or that are being contested in
good faith by appropriate proceedings promptly instituted and diligently
conducted, provided that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (ix) carriers',
warehousemen's, mechanics', materialmen's, repairmen's, or other similar Liens
arising in the ordinary course of business which are not overdue for a period of
more than 60 days or which are being contested in good faith by appropriate
proceedings diligently conducted; (x) easements, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances not interfering in any material respect with the business of Seven
Seas or any of its Restricted Subsidiaries; (xi) statutory Liens of landlords or
of mortgagees of landlords arising by operation of law, provided that the rental
payments secured thereby are not yet due and payable; (xii) Liens incurred or
deposits made in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (xiii)
Purchase Money Liens (including extensions and renewals thereof); (xiv)
interests of lessors in capital or operating leases; (xv) Liens on deposits made
in connection with Hedging Obligations; (xvi) other Liens arising in the
ordinary course of business of Seven Seas or any Restricted Subsidiary which do
not secure the payment of borrowed money and in the aggregate do not materially
adversely affect the value of the assets of Seven Seas and its Restricted
Subsidiaries, taken as a whole, or materially impair the use of such Properties
for the purposes for which such Properties are held by Seven Seas or such
Restricted Subsidiaries and (xvii) Liens arising in connection with Production
Payments and Reserve Sales.
"Permitted Refinancing Indebtedness" means any Indebtedness of Seven
Seas or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of Seven Seas or any of its Restricted Subsidiaries;
provided that: (i) the principal amount (or fully accreted value at stated
maturity, if applicable) of such Permitted Refinancing Indebtedness does not
exceed the original principal amount (or then current accreted value, if
applicable) of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus the amount of reasonable expenses incurred in
connection therewith); (ii) such Permitted Refinancing Indebtedness has a final
maturity date at least as late as the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Notes, such Permitted Refinancing Indebtedness has a final
maturity date later than the final maturity date of, and
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<PAGE> 24
is subordinated in right of payment to, the Notes on terms at least as
favorable to the Holders of Notes as those contained in the documentation
governing the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded and (iv) such Indebtedness is incurred either by Seven
Seas or by the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded provided,
however, that Permitted Refinancing Indebtedness shall not include (a)
Indebtedness of a Subsidiary of Seven Seas that refinances Indebtedness of
Seven Seas or (b) Indebtedness of Seven Seas or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
limited liability company, or other business entity or government or agency or
political subdivision thereof (including any subdivision or ongoing business of
any such entity or substantially all or the assets of any such entity,
subdivision or business).
"Pledge Account" means an account established with the Trustee
pursuant to the terms of this Indenture for the deposit of the Pledged
Securities to be purchased by Seven Seas with a portion of the net proceeds
from the sale of the Notes.
"Pledge Agreement" means the Collateral Pledge and Security Agreement,
substantially in the form of Exhibit D attached hereto, dated as of the date of
this Indenture, by and between the Trustee and Seven Seas, governing the
disbursement of funds from the Pledge Account, as amended from time to time.
"Pledged Securities" means the U.S. Government Securities to be
purchased by Seven Seas and held in the Pledge Account in accordance with this
Indenture and the Pledge Agreement.
"Preferred Stock," as applied to the Capital Stock of any Person,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"Production Payments and Reserve Sales" means the grant or transfer by
Seven Seas or a Restricted Subsidiary to any Person of a royalty, overriding
royalty, net profits interest, production payment (whether a Volumetric
Production Payment or Dollar-Denominated Production Payment), partnership or
other interest in oil and gas properties, reserve or the right to receive all
or a portion of the production or the proceeds from the sale of production
attributable to such properties, in each case where the holder of such interest
has recourse solely to such production or proceeds of production, subject to
the obligation of the grantor or transferor to operate and maintain, or cause
the subject interests to be operated and maintained, in a reasonably prudent
manner or other customary standard or subject to the obligation of the grantor
or transferor to indemnify for environmental, title or other matters customary
in the Oil and Gas Business.
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"Property" means any property of any kind whatsoever, whether real,
personal or mixed and whether tangible or intangible, including any right of
interest therein or thereto.
"Purchase Money Lien" means a Lien granted on an asset or Property to
secure a Purchase Money Obligation or Capital Lease Obligation permitted to be
incurred under this Indenture and incurred solely to finance the purchase, or
the cost of construction or improvement, of such asset or property; provided
however, that such Lien encumbers only such asset or property and is granted
within 180 days of such acquisition.
"Purchase Money Obligations" of any Person means any obligations of
such Person to any seller or any other Person incurred or assumed solely to
finance the purchase, or the cost of construction or improvement, of real or
personal property to be used in the business of such Person or any of its
Restricted Subsidiaries in an amount that is not more than 100% of the cost, or
fair market value, as appropriate, of such property, and incurred within 90
days after the date of such acquisition (excluding accounts payable to trade
creditors incurred in the ordinary course of business).
"Qualified Institutional Buyer" or "QIB" shall have the meaning
specified in Rule 144A under the Securities Act.
"Registration Liquidated Damages" means liquidated damages owing
pursuant to the Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the date of this Indenture, by and among Seven Seas and
the Initial Purchasers, as such agreement may be amended, modified or
supplemented from time to time.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Note" means a permanent global senior note that
contains the paragraph referred to in footnote 1 and the additional schedule
referred to in footnote 3 to the form of the Note attached hereto as Exhibit A,
and that is deposited with the Note Custodian and registered in the name of the
Depository or its nominee, representing a series of Notes sold in reliance on
Regulation S.
"Responsible Officer," when used with respect to the Trustee, means
any officer of the Trustee with direct responsibility for the administration of
this Indenture and also means, with respect to a particular corporate trust
matter, any other officer to whom such matter is referred because of his
knowledge of and familiarity with the particular subject.
"Restricted Beneficial Interest" means any beneficial interest of a
Participant or Indirect Participant in the 144A Global Note or the Regulation S
Global Note.
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"Restricted Global Notes" means the 144A Global Note and the
Regulation S Global Note, each of which shall bear the Private Placement
Legend.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of such
Person that is not an Unrestricted Subsidiary.
"Rule 144A" means Rule 144A under the Securities Act.
"Securities Act" means the United States Securities Act of 1933, as
amended.
"Shelf Registration Statement" means the Shelf Registration Statement
as defined in the Registration Rights Agreement.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date of this Indenture.
"Special Notes" means the promissory notes, with an aggregate
principal amount of $25.0 million, issued by Seven Seas in August 1997.
"Standard & Poor's" means Standard & Poor's Ratings Services, a
division of The McGraw-Hill Companies, Inc., and its successors.
"Stated Maturity" means when used with respect to any Indebtedness or
any installment of interest thereon, the date specified in the instrument
evidencing or governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or such installment of interest is due and
payable.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or one or more
Subsidiaries of such Person (or any combination thereof).
"Subsidiary Guarantee" means an unconditional guarantee of the Notes
and this Indenture given by any Restricted Subsidiary or other Person pursuant
to the terms of this Indenture or any supplement hereto.
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"Supplemental Indenture" means a supplement to this Indenture
substantially in the form of Exhibit C hereto.
"Transfer Restricted Securities" means Notes that bear or are required
to bear the Private Placement Legend.
"Treasury Rate" means the weekly average yield to maturity at the time
of computation of United States Treasury securities with a constant maturity
(as compiled and published in the most recent Federal Reserve Statistical
Release H.15 (519) that has become publicly available at least two business
days prior to the Redemption Date (or, if such Statistical Release is no longer
published, any published source or similar market data) most nearly equal to
the period from the Redemption Date to May 15, 2002, provided, however, that if
the period from the Redemption Date to May 15, 2002 is not equal to the
constant maturity of a United States Treasury security for which a weekly
average yield is given, the Treasury Rate shall be obtained by linear
interpolation (calculated to the nearest one-twelfth of a year) from the weekly
average yields of the United States Treasury securities for which such yields
are given, except that if the period from the Redemption Date to May 15, 2002
is less than one year, the weekly average yield on actually traded United
States Treasury securities adjusted to a constant maturity of one year shall be
used.
"Trust Indenture Act" or "TIA" means the United States Trust Indenture
Act of 1939 (15 U.S.C. Sections 77aaa-77bbbb) as in effect on the date on which
this Indenture is qualified under the Trust Indenture Act, except as provided
in Section 9.3 hereof.
"Trustee" means the party named as such in the preamble to this
Indenture until a successor replaces it in accordance with the applicable
provisions of this Indenture and thereafter means the successor serving
hereunder.
"Unrestricted Global Notes" means one or more Global Notes that do not
and are not required to bear the Private Placement Legend.
"Unrestricted Subsidiary" means any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a resolution
of the Board of Directors of Seven Seas; but only to the extent that such
Subsidiary: (a) has no Indebtedness other than Non-Recourse Debt; (b) is not
party to any agreement, contract, arrangement or understanding with Seven Seas
or any Restricted Subsidiary of Seven Seas unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to
Seven Seas or such Restricted Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of Seven Seas; (c) is a Person
with respect to which neither Seven Seas nor any of its Restricted Subsidiaries
has any direct or indirect obligation (1) to subscribe for additional Equity
Interests or (2) to maintain or preserve such Person's financial condition or
to cause such Person to achieve or maintain any specified levels of
profitability (it being understood that agreements entered into in the ordinary
course of the Oil and Gas Business relating to transportation or throughput
commitments will not constitute such an obligation); and (d) has not guaranteed
or otherwise directly or indirectly provided credit support for any
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Indebtedness of Seven Seas or any of its Restricted Subsidiaries. Any such
designation by the Board of Directors of Seven Seas shall be evidenced to the
Trustee by filing with the Trustee a resolution of the Board of Directors of
Seven Seas giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by Section 4.11 hereof. If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary, it
shall thereafter cease to be an Unrestricted Subsidiary for purposes of this
Indenture and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of Seven Seas as of such date. The Board
of Directors of Seven Seas may at any time designate any Unrestricted
Subsidiary to be a Restricted Subsidiary, provided, that such designation shall
be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of
Seven Seas of any outstanding Indebtedness of such Unrestricted Subsidiary and
such designation shall only be permitted if (i) such Indebtedness is permitted
under Section 4.12 and (ii) no Default or Event of Default would be in
existence following such designation.
"U.S. Government Securities" means (i) securities that are (a) direct
obligations of the United States of America for the payment of which the full
faith and credit of the United States of America is pledged or (b) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America, which, in either case, are not callable or redeemable at the
option of the issuer thereof and (ii) depository receipts issued by a bank (as
defined in Section 3(a)(2) of the Securities Act) as custodian with respect to
any U.S. Government Security which is specified in clause (i) above and held by
such bank for the account of the holder of such depository receipt, or with
respect to any specific payment of principal or interest on any U.S. Government
Security which is so specified and held, provided that (except as required by
law) such custodian is not authorized to make any deduction from the amount
payable to the holder of such depository receipt from any amount received by
the custodian in respect of the U.S. Government Security or the specific
payment of principal or interest of the U.S. Government Security evidenced by
such depository receipt.
"Volumetric Production Payments" means production payment obligations
of Seven Seas or any of its Subsidiaries which are payable from a specified
share of production from specific Properties, together with all undertakings
and obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership and limited liability company interests) of
such Person then outstanding and normally entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years
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(calculated to the nearest one-twelfth) that will elapse between such date and
the making of such payment, by (ii) the then outstanding principal amount of
such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Restricted Subsidiary
of such Person all of the outstanding Capital Stock or other ownership
interests of which (other than directors' qualifying shares or shares required
by applicable law to be held by third parties) shall at the time be owned by
such Person or by one or more Wholly Owned Subsidiaries of such Person.
Unrestricted Subsidiaries shall not be included in the definition of Wholly
Owned Subsidiary for any purposes of this Indenture.
SECTION 1.2 OTHER DEFINITIONS
<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C>
"Additional Amounts" 4.20
"Affiliate Transaction" 4.16
"Aggregate Unused Proceeds" 4.10
"Agreement Currency" 10.7
"Asset Sale Offer" 4.10
"Asset Sale Offer Amount" 4.10
"Asset Sale Offer Period" 4.10
"Asset Sale Purchase Date" 4.10
"Authorized Agent" 10.8
"Bankruptcy Law" 6.1
"Change of Control Notice" 3.7
"Change of Control Offer" 4.9
"Change of Control Offer Period" 4.9
"Change of Control Payment" 4.9
"Change of Control Purchase Date" 4.9
"Covenant Defeasance" 8.3
"Custodian" 6.1
"DTC" 2.3
"Event of Default" 6.1
"Excess Proceeds" 4.10
"Excluded Taxes" 4.20
"Five Year Date" 4.10
"Group of Subsidiaries" 6.1
"Guaranteed Debt" 4.17
"incur" 4.12
"Interest" 2.13
"Judgment Currency" 10.7
"Legal Defeasance" 8.2
"Non-Excluded Taxes" 4.19
</TABLE>
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<TABLE>
<S> <C>
"Notice of Default" 6.1
"Paying Agent" 2.3
"Payment Default" 6.1
"Private Placement Legend" 2.6
"Registrar" 2.3
"Restricted Payments" 4.11
"Seven Seas Funds" 4.23
"Special Note Default" 4.18
"Taxes" 4.20
</TABLE>
SECTION 1.3 INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT
Whenever this Indenture refers to a provision of the Trust Indenture
Act, the provision is incorporated by reference in and made a part of this
Indenture.
The following Trust Indenture Act terms used in this Indenture have
the following meanings:
"indenture securities" means the Notes;
"indenture security Holder" means a Holder of a Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee; and
"obligor" on the Notes means Seven Seas and any successor thereto.
All other terms used in this Indenture that are defined by the Trust
Indenture Act, defined by the Trust Indenture Act reference to another statute
or defined by Commission rule under the Trust Indenture Act have the meanings
so assigned to them.
SECTION 1.4 RULES OF CONSTRUCTION
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means "including without limitation";
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(5) words in the singular include the plural, and in the
plural include the singular;
(6) provisions apply to successive events and
transactions; and
(7) references to sections of or rules under the
Securities Act shall be deemed to include substitute, replacement of
successor sections or rules adopted by the Commission from time to
time.
ARTICLE II
THE NOTES
SECTION 2.1 FORM AND DATING
(a) Form of Notes. The Notes and the Trustee's certificate of
authentication shall be substantially in the form set forth in Exhibit A
hereto. The Notes may have notations, legends or endorsements required by law,
stock exchange rule or usage. Each Note shall be dated the date of its
authentication. The Notes shall be in denominations of $1,000 and integral
multiples thereof. The form of the Series A Notes and the Series B Notes will
be the same except that the Private Placement Legend will be omitted from the
Series B Notes. The Series A Notes and the Series B Notes shall be considered
one series for purposes of voting, seniority and any similar rights.
The terms and provisions contained in the Notes shall constitute, and
are hereby expressly made, a part of this Indenture; and Seven Seas and the
Trustee, by their execution and delivery of this Indenture, expressly agree to
such terms and provisions and to be bound thereby.
(b) Global Notes. Notes offered and sold to (i) QIBs in reliance
on Rule 144A and (ii) Institutional Accredited Investors who are not QIBs,
shall be issued initially in the form of 144A Global Notes, which shall be
deposited on behalf of the purchasers of the Notes represented thereby with the
Note Custodian, and registered in the name of the Depository or a nominee of
the Depository, duly executed by Seven Seas and authenticated by the Trustee as
hereinafter provided. The aggregate principal amount of the 144A Global Notes
may from time to time be increased or decreased by adjustments made on the
records of the Trustee and the Depository or its nominee as hereinafter
provided.
Notes offered and sold in reliance on Regulation S shall be issued in
the form of the Regulation S Global Note, which shall be deposited on behalf of
the purchasers of the Notes represented thereby with the Note Custodian, and
registered in the name of the Depository or the nominee of the Depository for
the accounts of designated agents holding on behalf of Euroclear or Cedel, duly
executed by Seven Seas and authenticated by the Trustee as hereinafter
provided. The aggregate principal amount of the Regulation S Global Note may
from time to time be increased or decreased by adjustments made on the records
of the Trustee and the Depository or its nominee, as the case may be, in
connection with transfers of interest as hereinafter provided.
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Each Global Note shall represent such of the outstanding Notes as
shall be specified therein and each shall provide that it shall represent the
aggregate amount of outstanding Notes from time to time endorsed thereon and
that the aggregate amount of outstanding Notes represented thereby may from
time to time be reduced or increased, as appropriate, to reflect exchanges,
redemptions, and transfers of interests. Any endorsement of a Global Note to
reflect the amount of any increase or decrease in the amount of outstanding
Notes represented thereby shall be made by the Trustee or the Note Custodian,
at the direction of the Trustee, in accordance with instructions given by the
Holder thereof as required by Section 2.6 hereof.
Except as set forth in Section 2.6 hereof, the Global Notes may be
transferred, in whole and not in part, only to a nominee of the Depository or
to a successor of the Depository or its nominee.
(c) Book-Entry Provisions. This Section 2.1(c) shall apply only
to Global Notes deposited with or on behalf of the Depository.
Seven Seas shall execute and the Trustee shall, in accordance with
this Section 2.1(c), authenticate and deliver the Global Notes that (i) shall
be registered in the name of the Depository or the nominee of the Depository
and (ii) shall be delivered by the Trustee to the Depository or pursuant to the
Depository's instructions or held by the Note Custodian.
Participants shall have no rights either under this Indenture with
respect to any Global Note held on their behalf by the Depository or by the
Note Custodian as custodian for the Depository or under such Global Note, and
the Depository may be treated by Seven Seas, the Trustee and any agent of Seven
Seas, or the Trustee as the absolute owner of such Global Note for all purposes
whatsoever. Nothing herein shall prevent Seven Seas, the Trustee or any agent
of Seven Seas or the Trustee from giving effect to any written certification,
proxy or other authorization furnished by the Depository or impair, as between
the Depository and its Participants, the operation of customary practices of
such Depository governing the exercise of the rights of an owner of a
beneficial interest in any Global Note.
(d) Definitive Notes. Notes issued in certificated form shall be
substantially in the form of Exhibit A attached hereto (but without including
the text referred to in footnotes 1, 3 and 4 thereto).
(e) Provisions Applicable to Forms of Notes. The Notes may also
have such additional provisions omissions, variations or substitutions as are
not inconsistent with the provisions of this Indenture and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with this Indenture,
any applicable law or with any rules made pursuant thereto or with the rules of
any securities exchange or governmental agency or as may be determined
consistently herewith by the Officers of Seven Seas executing such Notes, as
conclusively evidenced by their execution of such Notes. All Notes will be
otherwise substantially identical except as provided herein.
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Subject to the provisions of this Article 2, a Holder of a Global Note
may grant proxies and otherwise authorize any Person to take any action that a
Holder is entitled to take under this Indenture or the Notes.
SECTION 2.2 EXECUTION AND AUTHENTICATION
Two Officers shall sign the Notes for Seven Seas by manual or
facsimile signature.
If an Officer whose signature is on a Note no longer holds that office
at the time a Note is authenticated, the Note shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual signature
of the Trustee. The signature shall be conclusive evidence that the Note has
been authenticated under this Indenture. The form of Trustee's certificate of
authentication to be borne by the Notes shall be substantially as set forth in
Exhibit A hereto.
The Trustee shall, upon a written order of Seven Seas signed by two
Officers, authenticate Notes for original issue up to the aggregate principal
amount stated in the Notes. The aggregate principal amount of Notes
outstanding at any time may not exceed such amount except as provided in
Section 2.7 hereof.
The Trustee may appoint an authenticating agent acceptable to Seven
Seas to authenticate the Notes. An authenticating agent may authenticate a
Note whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Seven Seas or
an Affiliate of Seven Seas.
SECTION 2.3 REGISTRAR AND PAYING AGENT
Seven Seas shall maintain (i) an office or agency where the Notes may
be presented for registration of transfer or for exchange ("Registrar") and
(ii) an office or agency where the Notes may be presented for payment ("Paying
Agent"). The Registrar shall keep a register of the Notes and of their
transfer and exchange. Seven Seas may appoint one or more co-registrars and
one or more additional paying agents. The term "Registrar" includes any
co-registrar and the term "Paying Agent" includes any additional paying agent.
Seven Seas may change any Paying Agent or Registrar without notice to any
Holder. Seven Seas shall notify the Trustee in writing of the name and address
of any Agent not a party to this Indenture. If Seven Seas fails to appoint or
maintain another entity as Registrar or Paying Agent, the Trustee shall act as
such. Seven Seas or any of its Subsidiaries may act as Paying Agent or
Registrar.
Seven Seas initially appoints the Depository Trust Company ("DTC") to
act as Depository with respect to the Global Notes.
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<PAGE> 34
Seven Seas initially appoints the Trustee to act as the Registrar and
Paying Agent and to act as Note Custodian with respect to the Global Notes.
SECTION 2.4 PAYING AGENT TO HOLD MONEY IN TRUST
Seven Seas shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal, premium or Liquidated Damages and Additional Amounts, if any, or
interest on the Notes, and shall notify the Trustee of any default by Seven
Seas in making any such payment. While any such default continues, the Trustee
may require a Paying Agent to pay all money held by it to the Trustee. Seven
Seas at any time may require a Paying Agent to pay all money held by it to the
Trustee. Upon payment over to the Trustee, the Paying Agent (if other than
Seven Seas or a Subsidiary) shall have no further liability for the money. If
Seven Seas or a Subsidiary acts as Paying Agent, it shall segregate and hold in
a separate trust fund for the benefit of the Holders all money held by it as
Paying Agent. Upon any bankruptcy or reorganization proceedings relating to
Seven Seas, the Trustee shall serve as Paying Agent for the Notes.
SECTION 2.5 HOLDER LISTS
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA Section 312(a). If the Trustee
is not the Registrar, Seven Seas shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Holders of
Notes, and Seven Seas, shall otherwise comply with TIA Section 312(a).
SECTION 2.6 TRANSFER AND EXCHANGE
(a) Transfer and Exchange of Global Notes. The transfer and
exchange of beneficial interests in Global Notes shall be effected through the
Depository, in accordance with this Indenture and the procedures of the
Depository therefor, which shall include restrictions on transfer comparable to
those set forth herein to the extent required by the Securities Act.
Beneficial interests in a Global Note may be transferred to Persons who take
delivery thereof in the form of a beneficial interest in the same Global Note
in accordance with the transfer restrictions set forth in the legend in
subsection (f) of this Section 2.6. Transfers of beneficial interests in the
Global Notes to Persons required to take delivery thereof in the form of an
interest in another Global Note shall be permitted as follows:
(i) 144A Global Note to Regulation S Global Note. If, at
any time, an owner of a beneficial interest in a 144A Global Note
deposited with the Depository (or the Note Custodian) wishes to
transfer its beneficial interest in such 144A Global Note to a Person
who is required or permitted to take delivery thereof in the form of
an interest in a Regulation S Global Note, such owner shall, subject
to the Applicable Procedures, exchange or cause
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the exchange of such interest for an equivalent beneficial interest in
a Regulation S Global Note as provided in this Section 2.6(a)(i). Upon
receipt by the Trustee of (1) instructions given in accordance with
the Applicable Procedures from a Participant directing the Trustee to
credit or cause to be credited a beneficial interest in the Regulation
S Global Note in an amount equal to the beneficial interest in the
144A Global Note to be exchanged, (2) a written order given in
accordance with the Applicable Procedures containing information
regarding the Participant account of the Depository and the Euroclear
or Cedel account to be credited with such increase, and (3) a
certificate in the form of Exhibit B-1 hereto given by the owner of
such beneficial interest stating that the transfer of such interest
has been made in compliance with the transfer restrictions applicable
to the Global Notes and pursuant to and in accordance with Rule 903 or
Rule 904 of Regulation S, then the Trustee, as Registrar, shall
instruct the Depository to reduce or cause to be reduced the aggregate
principal amount at maturity of the applicable 144A Global Note and to
increase or cause to be increased the aggregate principal amount at
maturity of the applicable Regulation S Global Note by the principal
amount at maturity of the beneficial interest in the 144A Global Note
to be exchanged or transferred, to credit or cause to be credited to
the account of the Person specified in such instructions, a beneficial
interest in the Regulation S Global Note equal to the reduction in the
aggregate principal amount at maturity of the 144A Global Note, and to
debit, or cause to be debited, from the account of the Person making
such exchange or transfer the beneficial interest in the 144A Global
Note that is being exchanged or transferred.
(ii) Regulation S Global Note to 144A Global Note. Prior
to the expiration of the 40-day distribution compliance period, an
owner of a beneficial interest in a Regulation S Global Note will not
be permitted to transfer its interest to a Person who is required or
permitted to take delivery thereof in the form of an interest in a
144A Global Note. If, at any time, after the expiration of the 40-day
distribution compliance period, an owner of a beneficial interest in a
Regulation S Global Note deposited with the Depository or with the
Note Custodian wishes to transfer its beneficial interest in such
Regulation S Global Note to a Person who is required or permitted to
take delivery thereof in the form of an interest in a 144A Global
Note, such owner shall, subject to the Applicable Procedures, exchange
or cause the exchange of such interest for an equivalent beneficial
interest in a 144A Global Note as provided in this Section 2.6(a)(ii).
Upon receipt by the Trustee of (1) instructions from Euroclear or
Cedel, if applicable, and the Depository, directing the Trustee, as
Registrar, to credit or cause to be credited a beneficial interest in
the 144A Global Note equal to the beneficial interest in the
Regulation S Global Note to be exchanged, such instructions to contain
information regarding the Participant account with the Depository to
be credited with such increase, (2) a written order given in
accordance with the Applicable Procedures containing information
regarding the participant account of the Depository and (3) a
certificate in the form of Exhibit B-2 attached hereto given by the
owner of such beneficial interest stating (A) if the transfer is
pursuant to Rule 144A, that the Person transferring such interest in a
Regulation S Global Note reasonably believes that the Person acquiring
such interest in a 144A Global Note is a QIB and is obtaining such
beneficial interest in a
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transaction meeting the requirements of Rule 144A and any applicable
blue sky or securities laws of any state of the United States, (B)
that the transfer complies with the requirements of Rule 144 under the
Securities Act or (C) if the transfer is pursuant to any other
exemption from the registration requirements of the Securities Act,
that the transfer of such interest has been made in compliance with
the transfer restrictions applicable to the Global Notes and pursuant
to and in accordance with the requirements of the exemption claimed,
such statement to be supported by an Opinion of Counsel from the
transferee or the transferor in form reasonably acceptable to Seven
Seas and to the Registrar and in each case, in accordance with any
applicable securities laws of any state of the United States or any
other applicable jurisdiction, then the Trustee, as Registrar, shall
instruct the Depository to reduce or cause to be reduced the aggregate
principal amount at maturity of such Regulation S Global Note and to
increase or cause to be increased the aggregate principal amount at
maturity of the applicable 144A Global Note by the principal amount at
maturity of the beneficial interest in the Regulation S Global Note to
be exchanged or transferred, and the Trustee, as Registrar, shall
instruct the Depository, concurrently with such redemption, to credit
or cause to be credited to the account of the Person specified in such
instructions a beneficial interest in the applicable 144A Global Note
equal to the reduction in the aggregate principal amount at maturity
of such Regulation S Global Note and to debit or cause to be debited
from the account of the Person making such transfer the beneficial
interest in the Regulation S Global Note that is being exchanged or
transferred.
(b) Transfer and Exchange of Definitive Notes. When Definitive
Notes are presented by a Holder to the Registrar with a request to register the
transfer of the Definitive Notes or to exchange such Definitive Notes for an
equal principal amount of Definitive Notes of other authorized denominations,
the Registrar shall register the transfer or make the exchange as requested
only if the Definitive Notes are presented or surrendered for registration of
transfer or exchange, are endorsed and contain a signature guarantee or
accompanied by a written instrument of transfer in form satisfactory to the
Registrar duly executed by such Holder or by his attorney duly authorized in
writing and contains a signature guarantee, and the Registrar received the
following documentation (all of which may be submitted by facsimile):
(i) in the case of Definitive Notes that are Transfer
Restricted Securities, such request shall be accompanied by the
following additional information and documents, as applicable:
(A) if such Transfer Restricted Security is being
delivered to the Registrar by a Holder for registration in the
name of such Holder, without transfer, or such Transfer
Restricted Security is being transferred to Seven Seas, a
certification to that effect from such Holder (in
substantially the form of Exhibit B-3 hereto); or
(B) if such Transfer Restricted Security is being
transferred to a QIB in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 under the Securities Act or in an
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offshore transaction pursuant to and in compliance with Rule
904 under the Securities Act or pursuant to an effective
registration statement under the Securities Act, a
certification to that effect from such Holder (in
substantially the form of Exhibit B-3 hereto); or
(C) if such Transfer Restricted Security is being
transferred in reliance on any other exemption from the
registration requirements of the Securities Act, a
certification to that effect from such Holder (in
substantially the form of Exhibit B-3 hereto) and an Opinion
of Counsel reasonably acceptable to Seven Seas to the effect
that such transfer is in compliance with the Securities Act.
(c) Exchange of a Beneficial Interest in a 144A Global Note or
Regulation S Global Note for a Definitive Note.
(i) Any Person having a beneficial interest in a 144A
Global Note or Regulation S Global Note may upon request, subject to
the Applicable Procedures, exchange such beneficial interest for a
Definitive Note. The Trustee or the Note Custodian, at the direction
of the Trustee, shall, in accordance with the standing instructions
and procedures existing between the Depository and the Note Custodian,
cause the aggregate principal amount of 144A Global Notes or
Regulation S Global Notes, as applicable, to be reduced accordingly
and, following such reduction, Seven Seas shall execute and, the
Trustee shall authenticate and deliver to the transferee a Definitive
Note in the appropriate principal amount, upon receipt by the Trustee
of written instructions or such other form of instructions as is
customary for the Depository (or Euroclear or Cedel, if applicable),
from the Depository or its nominee on behalf of any Person having a
beneficial interest in a 144A Global Note or Regulation S Global Note,
and, in the case of a Transfer Restricted Security, the following
additional information and documents (all of which may be submitted by
facsimile):
(A) if such beneficial interest is being
transferred to the Person designated by the Depository as
being the beneficial owner, a certification to that effect
from such Person (in substantially the form of Exhibit B-4
hereto); or
(B) if such beneficial interest is being
transferred to a QIB in accordance with Rule 144A under the
Securities Act or pursuant to an exemption from registration
in accordance with Rule 144 under the Securities Act or in an
offshore transaction pursuant to and in compliance with Rule
904 under the Securities Act or pursuant to an effective
registration statement under the Securities Act, a
certification to that effect from the transferor (in
substantially the form of Exhibit B-4 hereto); or
(C) if such beneficial interest is being
transferred in reliance on any other exemption from the
registration requirements of the Securities Act a
certification to that effect from the transferee (in
substantially the form of Exhibit B-4 hereto) and
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an Opinion of Counsel from the transferee or the transferor
reasonably acceptable to Seven Seas to the effect that such
transfer is in compliance with the Securities Act.
(ii) Definitive Notes issued in exchange for a beneficial
interest in a 144A Global Note or Regulation S Global Note, as
applicable, pursuant to this Section 2.6(c) shall be registered in
such names and in such authorized denominations as the Depository,
pursuant to instructions from its Participants or Indirect
Participants or otherwise, shall instruct the Trustee. The Trustee
shall deliver such Definitive Notes to the Persons in whose names such
Notes are so registered. Following any such issuance of Definitive
Notes, the Trustee, as Registrar, shall instruct the Depository to
reduce or cause to be reduced the aggregate principal amount at
maturity of the applicable Global Note to reflect the transfer.
(d) Restrictions on Transfer and Exchange of Global Notes.
Notwithstanding any other provision of this Indenture (other than the
provisions set forth in subsection (f) of this Section 2.6), a Global Note may
not be transferred as a whole except by the Depository to a nominee of the
Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository or by the Depository or any such nominee to a
successor Depository or a nominee of such successor Depository.
(e) Authentication of Definitive Notes in Absence of Depository.
If at any time:
(i) the Depository for the Global Notes notifies Seven
Seas that the Depository is unwilling or unable to continue as
Depository for the Global Notes and a successor Depository for the
Global Notes is not appointed by Seven Seas within 90 days after
delivery of such notice; or
(ii) Seven Seas, in its sole discretion, notifies the
Trustee in writing that it elects to cause the issuance of Definitive
Notes under this Indenture,
then Seven Seas, shall execute, and the Trustee shall, upon receipt of an
authentication order in accordance with Section 2.2 hereof, authenticate and
deliver, Definitive Notes in an aggregate principal amount equal to the
principal amount of the Global Notes in exchange for such Global Notes.
(f) Legends.
(i) Except as permitted by the following paragraphs (ii),
(iii) and (iv), each certificate evidencing Global Notes and
Definitive Notes (and all Notes issued in exchange therefor or
substitution thereof) shall bear a legend (the "Private Placement
Legend") in substantially the following form:
"THIS NOTE (OR ITS PREDECESSOR) HAS NOT BEEN REGISTERED UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND, ACCORDINGLY, MAY NOT BE OFFERED,
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SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHIN THE UNITED
STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS,
EXCEPT AS SET FORTH IN THE NEXT SENTENCE. BY ITS ACQUISITION
HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE HOLDER: (1)
REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER"
(AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) (A "QIB"),
OR (B) IT HAS ACQUIRED THIS NOTE IN AN OFFSHORE TRANSACTION IN
COMPLIANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2)
AGREES THAT IT WILL NOT RESELL OR OTHERWISE TRANSFER THIS NOTE
EXCEPT (A) TO SEVEN SEAS OR ANY OF ITS SUBSIDIARIES, (B) TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QIB PURCHASING
FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (C) IN AN
OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR
904 OF THE SECURITIES ACT, (D) IN A TRANSACTION MEETING THE
REQUIREMENTS OF RULE 144 UNDER THE SECURITIES ACT, (E) IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT (AND BASED UPON AN OPINION
OF COUNSEL ACCEPTABLE TO SEVEN SEAS) OR (F) PURSUANT TO AN
EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN
ACCORDANCE WITH THE APPLICABLE SECURITIES LAWS OF ANY STATE OF
THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (3)
AGREES THAT IT WILL DELIVER TO EACH PERSON TO WHOM THIS NOTE
OR AN INTEREST HEREIN IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
THE EFFECT OF THIS LEGEND. AS USED HEREIN, THE TERMS
"OFFSHORE TRANSACTION" AND "UNITED STATES" HAVE THE MEANINGS
GIVEN TO THEM BY RULE 902 OF REGULATION S UNDER THE SECURITIES
ACT. THE INDENTURE CONTAINS A PROVISION REQUIRING THE TRUSTEE
TO REFUSE TO REGISTER ANY TRANSFER OF THIS NOTE IN VIOLATION
OF THE FOREGOING."
(ii) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by a
Global Note) pursuant to Rule 144 under the Securities Act or pursuant
to an effective registration statement under the Securities Act:
(A) in the case of any Transfer Restricted
Security that is a Definitive Note, the Registrar shall permit
the Holder thereof to exchange such Transfer Restricted
Security for a Definitive Note that does not bear the legend
set forth in (i) above and rescind any restriction on the
transfer of such Transfer Restricted Security upon receipt of
a certification from the transferring holder substantially in
the form of Exhibit B-4 hereto; and
(B) in the case of any Transfer Restricted
Security represented by a Global Note, such Global Note shall
not be required to bear the legend set forth in (i) above, but
shall continue to be subject to the provisions of Section
2.6(a) hereof; provided,
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<PAGE> 40
however, that with respect to any request for an exchange of a
Transfer Restricted Security that is represented by a Global
Note for a Definitive Note that does not bear the legend set
forth in (i) above, which request is made in reliance upon
Rule 144, the Holder thereof shall certify in writing to the
Registrar that such request is being made pursuant to Rule 144
(such certification to be substantially in the form of Exhibit
B-4 hereto).
(iii) Upon any sale or transfer of a Transfer Restricted
Security (including any Transfer Restricted Security represented by a
Global Note) in reliance on any exemption from the registration
requirements of the Securities Act (other than exemptions pursuant to
Rule 144A or Rule 144 under the Securities Act) in which the Holder or
the transferee provides an Opinion of Counsel to Seven Seas in form
and substance reasonably acceptable to Seven Seas (which Opinion of
Counsel shall also state that the transfer restrictions contained in
the legend are no longer applicable):
(A) in the case of any Transfer Restricted
Security that is a Definitive Note, the Registrar shall permit
the Holder thereof to exchange such Transfer Restricted
Security for a Definitive Note that does not bear the legend
set forth in (i) above and rescind any restriction on the
transfer of such Transfer Restricted Security; and
(B) in the case of any Transfer Restricted
Security represented by a Global Note, such Global Note shall
not be required to bear the legend set forth in (i) above, but
shall continue to be subject to the provisions of Section
2.6(a) hereof.
(iv) Notwithstanding the foregoing, upon the occurrence of
the Exchange Offer in accordance with the Registration Rights
Agreement, Seven Seas shall issue and, upon receipt of an
authentication order in accordance with Section 2.2 hereof, the
Trustee shall authenticate (i) one or more Unrestricted Global Notes
in aggregate principal amount equal to the principal amount of the
Restricted Beneficial Interests validly tendered and not properly
withdrawn by Persons that certify in the letter of transmittal
delivered in the Exchange Offer that they are not (x) broker-dealers,
(y) Persons participating in the distribution of the Series B Notes or
(z) Persons who are affiliates (as defined in Rule 144) of Seven Seas
and accepted for exchange in the Exchange Offer and (ii) Definitive
Notes that do not bear the Private Placement Legend in an aggregate
principal amount equal to the principal amount of the Restricted
Definitive Notes accepted for exchange in the Exchange Offer.
Concurrently with the issuance of such Notes, the Trustee shall cause
the aggregate principal amount of the applicable Restricted Global
Notes to be reduced accordingly and Seven Seas shall execute and the
Trustee shall authenticate and deliver to the Persons designated by
the Holders of Definitive Notes so accepted Definitive Notes in the
appropriate principal amount.
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(g) Cancellation and/or Adjustment of Global Notes. At such time
as all beneficial interests in Global Notes have been exchanged for Definitive
Notes, redeemed, repurchased or cancelled, all Global Notes shall be returned
to or retained and cancelled by the Trustee in accordance with Section 2.11
hereof. At any time prior to such cancellation, if any beneficial interest in
a Global Note is exchanged for Definitive Notes, redeemed, repurchased or
cancelled, the principal amount of Notes represented by such Global Note shall
be reduced accordingly and an endorsement shall be made on such Global Note, by
the Trustee or the Notes Custodian, at the direction of the Trustee, to reflect
such reduction.
(h) General Provisions Relating to Transfers and Exchanges.
(i) To permit registrations of transfers and exchanges,
Seven Seas shall execute and the Trustee shall authenticate Global
Notes and Definitive Notes at the Registrar's request.
(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but Seven Seas may require
payment of a sum sufficient to cover any stamp or transfer tax or
similar governmental charge payable in connection therewith (other
than any such stamp or transfer taxes or similar governmental charge
payable upon exchange or transfer pursuant to Sections 2.10, 3.6, 4.9,
4.10 and 9.5 hereto).
(iii) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive
Notes shall be the valid obligations of Seven Seas, evidencing the
same debt, and entitled to the same benefits under this Indenture, as
the Global Notes or Definitive Notes surrendered upon such
registration of transfer or exchange.
(iv) The Registrar shall not be required: (A) to issue, to
register the transfer of or to exchange Notes during a period
beginning at the opening of fifteen (15) Business Days before the day
of any selection of Notes for redemption under Section 3.2 hereof and
ending at the close of business on the day of selection, (B) to
register the transfer of or to exchange any Note so selected for
redemption in whole or in part, except the unredeemed portion of any
Note being redeemed in part, or (C) to register the transfer of or to
exchange a Note between a record date and the next succeeding interest
payment date.
(v) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and Seven Seas may deem
and treat the Person in whose name any Note is registered as the
absolute owner of such Note for the purpose of receiving payment of
principal of and interest on such Notes and for all other purposes,
and neither the Trustee, any Agent nor Seven Seas shall be affected by
notice to the contrary.
(vi) The Trustee shall authenticate Global Notes and
Definitive Notes in accordance with the provisions of Section 2.2
hereof.
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SECTION 2.7 REPLACEMENT OF NOTES
If any mutilated Note is surrendered to the Trustee, or Seven Seas and
the Trustee receives evidence to its satisfaction of the destruction, loss or
theft of any Note, Seven Seas shall issue and the Trustee, upon the written
order of Seven Seas signed by two Officers of Seven Seas, shall authenticate a
replacement Note if the Trustee's requirements are met. If required by the
Trustee or Seven Seas, an indemnity bond must be supplied by the Holder that is
sufficient in the judgment of the Trustee and Seven Seas to protect Seven Seas,
the Trustee, any Agent and any authenticating agent from any loss that any of
them may suffer if a Note is replaced. Seven Seas and the Trustee may charge
for their expenses in replacing a Note.
Every replacement Note is an additional obligation of Seven Seas and
shall be entitled to all of the benefits of this Indenture equally and
proportionately with all other Notes duly issued hereunder.
SECTION 2.8 OUTSTANDING NOTES
The Notes outstanding at any time are all the Notes authenticated by
the Trustee except for those cancelled by it, those delivered to it for
cancellation, those reductions in the interest in a Global Note effected by the
Trustee in accordance with the provisions hereof, and those described in this
Section as not outstanding. Except as set forth in Section 2.9 hereof, a Note
does not cease to be outstanding because Seven Seas or an Affiliate of Seven
Seas holds the Note.
If a Note is replaced pursuant to Section 2.7 hereof, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Note is held by a bona fide purchaser.
If the principal amount of any Note is considered paid under Section
4.1 hereof, it ceases to be outstanding and interest on it ceases to accrue.
If the Paying Agent (other than Seven Seas, a Subsidiary or an
Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Notes payable on that date, then on and after that date such
Notes shall be deemed to be no longer outstanding and shall cease to accrue
interest.
SECTION 2.9 TREASURY NOTES
In determining whether the Holders of the required principal amount of
Notes have concurred in any direction, waiver or consent, Notes owned by Seven
Seas, or by any Person directly or indirectly controlling or controlled by or
under direct or indirect common control with Seven Seas, shall be considered as
though not outstanding, except that for the purposes of determining whether the
Trustee shall be protected in relying on any such direction, waiver or consent,
only Notes that a Trustee knows are so owned shall be so disregarded.
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SECTION 2.10 TEMPORARY NOTES
Until Definitive Notes are ready for delivery, Seven Seas may prepare
and the Trustee shall authenticate temporary Notes upon a written order of
Seven Seas signed by two Officers of Seven Seas. Temporary Notes shall be
substantially in the form of Definitive Notes but may have variations that
Seven Seas considers appropriate for temporary Notes and as shall be reasonably
acceptable to the Trustee. Without unreasonable delay, Seven Seas shall
prepare and the Trustee shall authenticate Definitive Notes in exchange for
temporary Notes.
Holders of temporary Notes shall be entitled to all of the benefits of
this Indenture.
SECTION 2.11 CANCELLATION
Seven Seas at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment.
The Trustee and no one else shall cancel all Notes surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall destroy
cancelled Notes (subject to the record retention requirement of the Exchange
Act). Certification of the destruction of all cancelled Notes shall be
delivered to Seven Seas. Seven Seas may not issue new Notes to replace Notes
that it has paid or that have been delivered to the Trustee for cancellation.
SECTION 2.12 DEFAULTED INTEREST
If Seven Seas defaults in a payment of interest on the Notes, it shall
pay the defaulted interest in any lawful manner plus, to the extent lawful,
interest payable on the defaulted interest, to the Persons who are Holders on a
subsequent special record date, in each case at the rate provided in the Notes
and in Section 4.1 hereof. Seven Seas shall notify the Trustee in writing of
the amount of defaulted interest proposed to be paid on each Note and the date
of the proposed payment. Seven Seas shall fix or cause to be fixed each such
special record date and payment date, provided that no such special record date
shall be less than 10 days prior to the related payment date for such defaulted
interest. At least 15 days before the special record date, Seven Seas (or,
upon the written request of Seven Seas, the Trustee in the name and at the
expense of Seven Seas) shall mail or cause to be mailed to Holders a notice
that states the special record date, the related payment date and the amount of
such interest to be paid.
SECTION 2.13 RECORD DATE
The record date for purposes of determining the identity of Holders of
the Notes entitled to vote or consent to any action by vote or consent
authorized or permitted under this Indenture shall be determined as provided
for in TIA Section 316(c).
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SECTION 2.14 COMPUTATION OF INTEREST
Interest on the Notes shall be computed on the basis of a 360-day year
comprised of twelve 30-day months. For the purposes of the Interest Act
(Canada) the yearly rate of interest which is equivalent to the rate payable
hereunder is the rate payable multiplied by the actual number of days in the
year for which such calculation is made and divided by 360.
SECTION 2.15 CUSIP NUMBER
Seven Seas in issuing the Notes may use a "CUSIP" number, and if it
does so, the Trustee shall use the CUSIP number in notices of redemption or
exchange as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness or accuracy of the CUSIP
number printed in the notice or on the Notes and that reliance may be placed
only on the other identification numbers printed on the Notes. Seven Seas
shall promptly notify the Trustee of any change in the CUSIP number.
ARTICLE III
REDEMPTION AND REPURCHASE
SECTION 3.1 NOTICES TO TRUSTEE
If Seven Seas elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.7 hereof, it shall furnish to the Trustee,
at least 45 days (unless a shorter period is acceptable to the Trustee) but not
more than 60 days before a redemption date, an Officers' Certificate setting
forth (i) the paragraph of the Notes and clause of this Indenture pursuant to
which the redemption shall occur, (ii) the redemption date, (iii) the principal
amount of Notes to be redeemed and (iv) the redemption price.
SECTION 3.2 SELECTION OF NOTES TO BE REDEEMED
If less than all of the Notes are to be redeemed at any time,
selection of the Notes for redemption will be made by the Trustee in compliance
with the requirements of the principal national securities exchange, if any, on
which the Notes are listed or, if the Notes are not so listed, on a pro rata
basis, by lot or by such other method as the Trustee considers fair and
appropriate; provided that no Notes of $1,000 in original principal amount or
less will be redeemed in part. In the event of partial redemption by lot, the
particular Notes to be redeemed shall be selected, unless otherwise provided
herein, not less than 30 nor more than 60 days prior to the redemption date by
the Trustee from the outstanding Notes not previously called for redemption.
The Trustee shall promptly notify Seven Seas in writing of the Notes
selected for redemption and, in the case of any Note selected for partial
redemption, the portion of the principal amount thereof to be redeemed. Notes
and portions of Notes selected shall be in amounts of $1,000 or integral
multiples of $1,000; except that if all of the Notes of a Holder are to be
redeemed, the entire
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outstanding principal amount of Notes held by such Holder, even if not an
integral multiple of $1,000, shall be redeemed. Except as provided in the
preceding sentence, provisions of this Indenture that apply to Notes called for
redemption also apply to portions of Notes called for redemption.
The provisions of the two preceding paragraphs of this Section 3.2
shall not apply with respect to any redemption affecting only a Global
certificate, whether such Global certificate is to be redeemed in whole or in
part. In case of any such redemption in part, the unredeemed portion of the
principal amount of the Global certificate shall remain outstanding.
SECTION 3.3 NOTICE OF REDEMPTION
At least 30 days but not more than 60 days before a redemption date,
Seven Seas shall mail or cause to be mailed, by first class mail, a notice of
redemption to each Holder whose Notes are to be redeemed at its registered
address.
The notice shall identify the Notes to be redeemed and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the
principal amount of such Note to be redeemed and that, after the redemption
date upon surrender of such Note, a new Note or Notes in principal amount equal
to the unredeemed portion shall be issued upon cancellation of the original
Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the
Paying Agent to collect the redemption price;
(f) that, unless Seven Seas defaults in making such redemption
payment, interest on Notes called for redemption ceases to accrue on and after
the redemption date;
(g) the paragraph of the Notes and/or Section of this Indenture
pursuant to which the Notes called for redemption are being redeemed; and
(h) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed on the
Notes.
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If any of the Notes to be redeemed is in the form of a Global Note,
then such notice shall be modified by Seven Seas to the extent appropriate to
accord with the Applicable Procedures for redemptions.
At Seven Seas' request, the Trustee shall give the notice of
redemption in Seven Seas' name and at its expense; provided, however, that
Seven Seas shall have delivered to the Trustee, at least 45 days prior to the
redemption date (unless a shorter time is acceptable to the Trustee), an
Officers' Certificate requesting that the Trustee give such notice and setting
forth the information to be stated in such notice as provided in the preceding
paragraph.
SECTION 3.4 EFFECT OF NOTICE OF REDEMPTION
Once notice of redemption is mailed in accordance with Section 3.3
hereof, Notes called for redemption become irrevocably due and payable on the
redemption date at the redemption price. A notice of redemption may not be
conditional. Failure to give such notice by mailing to any Holder of Notes or
any defect therein shall not affect the validity of any proceedings for
redemption of other Notes.
SECTION 3.5 DEPOSIT OF REDEMPTION PRICE
On or prior to the redemption date, Seven Seas shall deposit with the
Trustee or with the Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 2.4 hereof)
immediately available funds sufficient to pay the redemption price of and
accrued and unpaid interest, if any, and Liquidated Damages and Additional
Amounts, if any, on all Notes to be redeemed on that date. The Trustee or the
Paying Agent shall promptly return to Seven Seas any money deposited with the
Trustee or the Paying Agent by Seven Seas in excess of the amounts necessary to
pay the amount referred to in the immediately preceding sentence.
If Seven Seas complies with the provisions of the preceding paragraph,
on and after the redemption date, interest shall cease to accrue on the Notes
or the portions of Notes called for redemption. If a Note is redeemed on or
after an interest record date but on or prior to the related interest payment
date, then any accrued and unpaid interest (and Liquidated Damages and
Additional Amounts, if any) shall be paid to the Person in whose name such Note
was registered at the close of business on such record date. If any Note
called for redemption shall not be so paid upon surrender for redemption
because of the failure of Seven Seas to comply with the preceding paragraph,
interest (and Liquidated Damages and Additional Amounts, if any) shall be paid
on the unpaid principal, from the redemption date until such principal is paid,
and to the extent lawful on any interest not paid on such unpaid principal, in
each case at the rate provided in the Notes and in Section 4.1 hereof.
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SECTION 3.6 NOTES REDEEMED IN PART
Upon surrender of a Note that is redeemed in part (with, if the
Company or the Trustee so requires, due endorsement by, or a written instrument
of transfer in form reasonably satisfactory to the Company and the Trustee,
duly executed by the Holder thereof or such Holder's attorney duly authorized
in writing), Seven Seas shall issue and, upon Seven Seas' written request, the
Trustee shall authenticate for the Holder at the expense of Seven Seas a new
Note equal in principal amount to the unredeemed portion of the Note
surrendered. The records of the Registrar and the Depository shall reflect any
partial redemption of any Global Note.
SECTION 3.7 OPTIONAL REDEMPTION
(a) Except as set forth in clauses (b) and (c) of this Section 3.7
and in Section 3.8, the Notes shall not be redeemable at Seven Seas' option
prior to May 15, 2002. Thereafter, the Notes shall be subject to redemption
for cash at the option of Seven Seas, in whole or in part, upon not less than
30 nor more than 60 days' notice to each Holder of Notes to be redeemed, at the
following redemption prices (expressed as percentages of principal amount
thereof) if redeemed during the twelve-mouth period beginning on May 15 of each
of the years indicated below, in each case together with any accrued and unpaid
interest and Liquidated Damages and Additional Amounts, if any, thereon to the
applicable redemption date:
<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2002 106.250%
2003 103.125%
2004 100.000%
</TABLE>
(b) Notwithstanding the provisions of clause (a) of this Section
3.7, from time to time on or before May 15, 2002, Seven Seas may (but shall not
have the obligation to) redeem for cash up to 33-1/3% of the original aggregate
principal amount of the Notes at a redemption price of 112.500% of the
principal amount thereof, in each case plus any accrued and unpaid interest and
Liquidated Damages and Additional Amounts, if any, thereon to the redemption
date, with the Net Proceeds of any Equity or Strategic Investor Offering;
provided that at least 66-2/3% of the original aggregate principal amount of
the Notes remains outstanding immediately after the occurrence of each such
redemption and that no more than one-half of the net proceeds of such Equity or
Strategic Investor Offering are used to effect such redemption; and provided,
further, that each such redemption shall occur within 60 days of the date of
the closing of any such Equity or Strategic Investor Offering.
(c) Within 30 days following any Change of Control, Seven Seas
shall mail a notice ("Change of Control Notice") to each Holder describing the
transaction or transactions that constitute the Change of Control and either
(i) provided such Change of Control occurs prior to May 15, 2002, notifying the
Holders that it is redeeming all of the Notes pursuant to this Section 3.7, or
(ii) offering
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to repurchase all or any part (equal to $1,000 or an integral multiple thereof)
of such Holder's Notes pursuant to Section 4.9 hereof. If Seven Seas elects to
redeem the Notes pursuant to this Section 3.7, Seven Seas shall be obligated to
redeem the Notes no later than 90 days after the Change of Control. The
redemption price for each Note shall equal 100% of the principal amount thereof
plus the Applicable Premium (as determined by the Company) as of, and accrued
but unpaid interest, if any, to, the date of redemption, and Additional Amounts
and Liquidated Damages, if any then due, (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date). If the Change of Control occurs on or after May 15,
2002, Seven Seas shall not have any right to redeem the Notes pursuant to this
Section 3.7, but shall continue to be obligated to provide a Change of Control
Notice to each Holder and to repurchase the Notes pursuant to Section 4.9.
(d) Any redemption pursuant to this Section 3.7 shall be made
pursuant to the provisions of Sections 3.1 through 3.6 hereof.
SECTION 3.8 OPTIONAL TAX REDEMPTION
The Notes will be redeemable, at the option of Seven Seas, in whole,
but not in part, upon giving not less than 30 nor more than 60 days' notice to
the Holders (which notice shall be irrevocable), at 100% of the principal
amount thereof, premium, if any, plus accrued and unpaid interest, Liquidated
Damages and Additional Amounts, if any, to the date fixed for redemption, if
(i) as a result of any change in or amendment to the laws, treaties,
regulations or rulings of Canada, the Cayman Islands, Colombia or any other
jurisdiction with which Seven Seas or any Guarantor has any connection
(including any jurisdiction from or through which payments under the Notes or
the Subsidiary Guarantees are made) or any political subdivision or authority
therein or thereof having power to tax, (or of any political subdivision or
taxing authority thereof or therein) or any change in official position
regarding the application or interpretation of such laws, treaties, regulations
or rulings (including a holding, judgment or order by a court of competent
jurisdiction) that is proposed and becomes effective on or after the date of
this Indenture, in making any payment due or to become due under the Notes or
this Indenture, Seven Seas is or would be required on the next succeeding
interest payment date to pay Additional Amounts and (ii) such obligation cannot
be avoided by Seven Seas taking reasonable measures available to it (which
shall not include the substitution of another Person as obligor under the
Notes). No such notice of redemption shall be given earlier than 90 days prior
to the earliest date on which Seven Seas would be obligated to pay such
Additional Amounts if a payment in respect of such Notes were then due. Prior
to the publication or mailing of any notice of redemption of the Notes as
described above, Seven Seas must deliver to the Trustee an Officers'
Certificate to the effect that Seven Seas' obligation to pay Additional Amounts
cannot be avoided by Seven Seas taking reasonable measures available to it.
Seven Seas will also deliver an opinion of an independent legal counsel of
recognized standing stating that Seven Seas would be obligated to pay
Additional Amounts due to the changes in laws, treaties, regulations or
rulings. The Trustee will accept such certificate and opinion as sufficient
evidence of the satisfaction of the conditions precedent set forth in clauses
(i) and (ii) above, in which event it will be conclusive and binding on the
Holders.
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SECTION 3.9 MANDATORY REDEMPTION
Except as set forth in Section 4.9 and Section 4.10, Seven Seas is not
required to make any mandatory redemption, purchase or sinking fund payments
with respect to the Notes prior to the Maturity Date.
ARTICLE IV
COVENANTS
SECTION 4.1 PAYMENT OF NOTES
Seven Seas shall pay or cause to be paid the principal of, premium, if
any, and interest and Additional Amounts, if any, on the Notes on the dates and
in the manner provided in the Notes. Principal, premium, if any, and interest
and Additional Amounts, if any, shall be considered paid on the date due if the
Paying Agent, if other than Seven Seas or a Subsidiary thereof, holds as of
10:00 a.m. Eastern Time on the due date money deposited by Seven Seas in
immediately available funds and designated for and sufficient to pay all
principal premium, if any, and interest and Additional Amounts, if any then
due. Seven Seas shall pay all Liquidated Damages, if any, in the same manner
on the date and in the amounts set forth in the Registration Rights Agreement
and herein. Seven Seas will promptly notify the Trustee of a Registration
Default (as defined in the Registration Rights Agreement) under the
Registration Rights Agreement and any cure thereof.
Seven Seas shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue principal at the rate equal to
1% per annum in excess of the then applicable interest rate on the Notes to the
extent lawful; it shall pay interest (including post-petition interest in any
proceeding under any Bankruptcy Law) on overdue installments of interest and
Liquidated Damages and Additional Amounts, if any (without regard to any
applicable grace period) at the same rate to the extent lawful.
SECTION 4.2 MAINTENANCE OF OFFICE OR AGENCY
Seven Seas shall maintain in the City of New York, an office or agency
(which may be an office of the Trustee or an affiliate of the Trustee,
Registrar or co-registrar) where Notes may be surrendered for registration of
transfer or for exchange and where notices and demands to or upon Seven Seas in
respect of the Notes and this Indenture may be served. Seven Seas shall give
prompt written notice to the Trustee of the location, and any change in the
location, of such office or agency. If at any time Seven Seas shall fail to
maintain any such required office or agency or shall fail to furnish the
Trustee with the address thereof, such presentations, surrenders, notices and
demands may be made or served at the Corporate Trust Office of the Trustee.
Seven Seas may also from time to time designate one or more other
offices or agencies where the Notes may be presented or surrendered for any or
all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any
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manner relieve Seven Seas, of its obligation to maintain an office or agency in
the City of New York for such purposes. Seven Seas, shall give prompt written
notice to the Trustee of any such designation or rescission and of any change
in the location of any such other office or agency.
Seven Seas hereby designates the Corporate Trust Office of the Trustee
as one such office or agency of Seven Seas in accordance with Section 2.3
hereof.
SECTION 4.3 CORPORATE EXISTENCE
Subject to Article V and Section 4.10 hereof, Seven Seas shall do or
cause to be done all things necessary to preserve and keep in full force and
effect (i) its corporate existence, and the corporate, partnership or other
existence of each of its Subsidiaries, in accordance with the respective
organizational documents (as the same may be amended from time to time) of each
of Seven Seas or any such Subsidiary and (ii) the rights (charter and
statutory), licenses and franchises of each of Seven Seas and its Subsidiaries;
provided, however, that Seven Seas shall not be required to preserve any such
right, license or franchise, or the corporate, partnership or other existence
of any of its Subsidiaries, if the Board of Directors shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
Seven Seas and its Subsidiaries, taken as a whole, and that the loss thereof is
not adverse in any material respect to the Holders of the Notes.
SECTION 4.4 MAINTENANCE OF PROPERTIES AND INSURANCE
(a) Seven Seas shall cause all material Properties owned by or
leased by it or any of its Subsidiaries useful and necessary to the conduct of
its business or the business of any of its Subsidiaries to be improved or
maintained and kept in normal condition, repair and working order and shall
cause to be made all necessary repairs, renewals, replacements, betterments and
improvements thereof, all as in its judgment may be necessary, so that the
business carried on in connection therewith may be properly conducted at all
times; provided, however, that nothing in this Section 4.4 shall prevent Seven
Seas or any of its Subsidiaries from discontinuing the use, operation or
maintenance of any of such Properties, or disposing of any of them, if such
discontinuance or disposal is, in the judgment of the Board of Directors or of
the board of directors of any Subsidiary of Seven Seas concerned, or of an
officer (or other agent employed by Seven Seas or of any of its Subsidiaries)
of Seven Seas or any of its Subsidiaries having managerial responsibility for
any such property, desirable in the conduct of the business of Seven Seas or
any Subsidiary of Seven Seas, and if such discontinuance or disposal is not
adverse in any material respect to the Holders as determined by the Board of
Directors or such board, officer or agent and evidenced in an Officer's
Certificate delivered to the Trustee.
(b) To the extent available at commercially reasonable rates,
Seven Seas shall maintain, and shall cause its Subsidiaries, to the extent such
Subsidiaries maintain operations, to maintain, insurance with responsible
carriers against such risks and in such amounts, and with such deductibles,
retentions, self-insured amounts and co-insurance provisions, as are
customarily carried by similar businesses of similar size.
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SECTION 4.5 COMPLIANCE WITH LAWS
Seven Seas shall comply, and shall cause its Subsidiaries to comply,
with all applicable statutes, rules, regulations, orders and restrictions in
respect of the conduct of their respective businesses and the ownership of
their respective properties, except for such noncompliances as would not in the
aggregate have a material adverse effect on the financial condition or results
of operations of Seven Seas and its Subsidiaries taken as a whole.
SECTION 4.6 REPORTS
(a) Whether or not required by the rules and regulations of the
Commission, so long as any Notes are outstanding, Seven Seas shall furnish to
all Holders of Notes, within 15 days after it is or would have been required to
file such with the Commission, (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Form 10-K and 10-Q if Seven Seas was required to file such Forms,
including a "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and, with respect to the annual information only, a
report thereon by the certified independent accountants of Seven Seas and (ii)
all current reports that would be required to be filed with the Commission on
Form 8-K if Seven Seas were required to file such reports. In addition,
whether or not required by the rules and regulations of the Commission, Seven
Seas will file copies of all such information and reports with the Commission
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request.
(b) For so long as any Notes remain outstanding, Seven Seas shall
furnish to all Holders and to securities analysts and prospective investors,
upon their request, the information required to be delivered pursuant to Rule
144A(d)(4) under the Securities Act.
SECTION 4.7 TAXES
Seven Seas shall pay, and shall cause each of its Restricted
Subsidiaries to pay prior to delinquency, all material Taxes, assessments, and
governmental levies except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment is not
adverse in any material respect to the Holders of the Notes.
SECTION 4.8 STAY, EXTENSION AND USURY LAWS
Seven Seas covenants (to the extent that it may lawfully do so) that
it shall not at any time insist upon, plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, that may affect the covenants
or the performance of this Indenture; and Seven Seas (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it shall not, by resort to any such law, hinder, delay
or impede the execution of any power herein granted to
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the Trustee, but shall suffer and permit the execution of every such power as
though no such law has been enacted.
SECTION 4.9 CHANGE OF CONTROL
Upon the occurrence of a Change of Control at any time and subject to
Seven Seas' right to redeem all of the Notes pursuant to Section 3.7, each
Holder of Notes shall have the right to require Seven Seas to repurchase all or
any part (equal to $1,000 or an integral multiple thereof) of such Holder's
Notes pursuant to the offer described below (the "Change of Control Offer") at
an offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages and Additional Amounts,
if any, thereon to the date of purchase (the "Change of Control Payment"). The
offer to repurchase shall be made in the Change of Control Notice, delivered
pursuant to Section 3.7(c), and shall offer to repurchase Notes pursuant to the
procedures required by this Indenture and described in the Change of Control
Notice. If any of the Notes subject to a change of Control Offer is in the
form of a Global certificate, such notice shall be modified by the Company to
the extent appropriate to accord with the Applicable Procedures for
repurchases. Seven Seas shall comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to
the extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.
The Change of Control Offer shall remain open for a period of at least
20 Business Days following its commencement but no longer than 40 days, except
to the extent that a longer period is required by applicable law (the "Change
of Control Offer Period"). No later than five Business Days after the
termination of the Change of Control Offer Period (the "Change of Control
Purchase Date"), Seven Seas shall purchase all Notes validly tendered and not
properly withdrawn pursuant to the Change of Control Offer. Payment for any
Notes so purchased shall be made in the same manner as interest payments are
made on the Notes.
If the Change of Control Purchase Date is on or after an interest
record date and on or before the related interest payment date, any accrued and
unpaid interest and Liquidated Damages and Additional Amounts, if any, shall be
paid to the Person in whose name a Note is registered at the close of business
on such interest record date, and no additional interest will be payable to
Holders who tender Notes pursuant to the Change of Control Offer.
Upon the commencement of a Change of Control Offer, Seven Seas shall
send, by first class mail, a notice to each of the Holders, with a copy of each
such notice to the Trustee. The notice shall contain all instructions and
materials necessary to enable such Holders to tender Notes pursuant to the
Change of Control Offer. The Change of Control Offer shall be made to all
Holders. The notice, which shall govern the terms of the Change of Control
Offer, shall state:
(a) that the Change of Control Offer is being made pursuant to
this covenant and the length of time the Change of Control Offer shall remain
open;
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(b) the purchase price and the Change of Control Purchase Date;
(c) that any Note which is not validly tendered or are otherwise
not accepted for payment shall continue to accrue interest;
(d) that, unless Seven Seas defaults in making such payment, any
Note accepted for payment pursuant to the Change of Control Offer shall cease
to accrue interest after the Change of Control Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to any
Change of Control Offer shall be required to surrender the Note, with the form
entitled "Option of Holder to Elect Purchase" on the reverse of the Note
completed, or transfer by book-entry transfer, to Seven Seas, a depository, if
appointed by Seven Seas, or a Paying Agent at the address specified in the
notice no later than the close of business on the last day of the Change of
Control Offer Period; and
(f) that Holders shall be entitled to withdraw their election if
the Paying Agent receives, not later than the close of business on the last day
of the Change of Control Offer Period, a telegram, facsimile transmission or
letter setting forth the name of the Holder, the principal amount of the Note
the Holder delivered for purchase and a statement that such Holder is
withdrawing his election to have such Note (or specified portion thereof)
purchased.
On the Change of Control Purchase Date, Seven Seas will, to the extent
lawful, (1) accept for payment all Notes or portions thereof validly tendered
and not properly withdrawn pursuant to the Change of Control Offer, (2) deposit
with the Paying Agent an amount equal to the Change of Control Payment in
respect of all Notes or portions thereof so validly tendered and not properly
withdrawn and (3) deliver or cause to be delivered to the Trustee the Notes so
accepted together with an Officers' Certificate stating the aggregate principal
amount of Notes or portions thereof being purchased by Seven Seas. The Paying
Agent shall promptly mail to each Holder of Notes so validly tendered and not
properly withdrawn the Change of Control Payment for such Notes, and the
Trustee shall promptly authenticate and mail (or cause to be transferred by
book entry) to each Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any, provided that each such
new Note shall be in a principal amount of $1,000 or in integral multiple
thereof. Seven Seas will publicly announce the results of the Change of
Control Offer on or as soon as practicable after the Change of Control Purchase
Date.
SECTION 4.10 ASSET SALES
Seven Seas will not, and will not permit any of its Restricted
Subsidiaries to, engage in an Asset Sale unless (i) Seven Seas (or the
Restricted Subsidiary, as the case may be) receives consideration at the time
of such Asset Sale at least equal to the fair market value of the assets or
Equity Interests sold or otherwise disposed of (evidenced in each case by a
resolution of the Board of Directors of such entity set forth in an Officers'
Certificate delivered to the Trustee) and (ii) at least 80% (100% in the case
of lease payments) of the consideration therefor received by Seven Seas
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or such Restricted Subsidiary is in the form of the following (or any
combination thereof): (a) cash or Cash Equivalents, (b) the assumption by the
purchaser of liabilities other than subordinated Indebtedness and (c) any notes
or other obligations received by Seven Seas or any such Restricted Subsidiary
from such purchaser that are converted by Seven Seas or such Restricted
Subsidiary into cash or Cash Equivalents (to the extent of the cash or Cash
Equivalents received) within 180 days following the closing of such Asset Sale,
will be deemed to be cash for purposes of this provision (and shall be deemed
to be Net Proceeds upon receipt).
Within 365 days after the receipt of any Net Proceeds from an Asset
Sale, Seven Seas (or the Restricted Subsidiary, as applicable) may apply, or
enter into binding contracts (subject only to obtaining required governmental
approvals) irrevocably committing Seven Seas or such Restricted Subsidiary to
apply, such Net Proceeds to an investment in another business, the making of a
capital expenditure or the acquisition of other tangible assets, in each case,
in the Oil and Gas Business, or Seven Seas (or the Restricted Subsidiary, as
applicable) may apply such Net Proceeds to the permanent reduction of
Indebtedness under the Credit Facility or the permanent reduction of any other
senior Indebtedness of Seven Seas or the permanent reduction of any long-term
Indebtedness of such Restricted Subsidiary. Pending the final application of
any such Net Proceeds, Seven Seas or any such Restricted Subsidiary may
temporarily reduce outstanding revolving credit borrowings, including
borrowings under the Credit Facility, or otherwise invest such Net Proceeds in
any manner that is not prohibited by this Indenture. Any Net Proceeds from
Asset Sales that are not applied or invested, or committed to be applied or
invested as provided in the preceding sentence of this paragraph shall be
deemed to constitute "Excess Proceeds." On the 366th day after the receipt of
any Net Proceeds from an Asset Sale or, if a governmental authority declines on
or after such 366th day to grant or issue a required approval in relation to a
binding contract, then on the tenth Business Day thereafter, Seven Seas will be
required to make an offer to all Holders of Notes (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages and Additional Amounts, if any, thereon to the date of purchase, in
accordance with the procedures set forth in this Indenture; provided, however,
that if Seven Seas is required to apply such Excess Proceeds to repurchase, or
to offer to repurchase, any Pari Passu Indebtedness, Seven Seas shall only be
required to offer to purchase the maximum principal amount of Notes that may be
purchased out of the amount of such Excess Proceeds multiplied by a fraction,
the numerator of which is the aggregate principal amount of Notes outstanding
and the denominator of which is the aggregate principal amount of Notes
outstanding plus the aggregate principal amount of Pari Passu Indebtedness
outstanding (for which such repurchase requirement exists). To the extent that
the aggregate amount of Notes so validly tendered and not properly withdrawn
pursuant to an Asset Sale Offer is less than the applicable amount of Excess
Proceeds, Seven Seas may use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes surrendered by
Holders thereof exceeds the applicable amount of Excess Proceeds, Seven Seas
shall notify the Trustee of the aggregate principal amount of Notes that are to
be purchased and the Trustee shall select the Notes to be purchased in
authorized denominations on a pro rata basis, by lot or by such other method as
the Trustee deems
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fair and appropriate. Upon completion of such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero.
Notwithstanding the foregoing, Seven Seas will not be obligated to
repurchase more than 25% of the original aggregate principal amount of the
Notes pursuant to this covenant prior to the day following the fifth
anniversary of the issue date of the Notes (the "Five Year Date"), and the
maximum amount to be applied to the repurchase of Notes in connection with any
Asset Sale Offer made pursuant to this covenant having a purchase date prior to
the day following the Five Year Date shall be the lesser of (x) the Excess
Proceeds and (y) 25% of the original aggregate principal amount of the Notes
less the aggregate principal amount of Notes purchased pursuant to Asset Sale
Offers relating to all prior Asset Sales. To the extent that the amount of
Excess Proceeds exceeds the amount of Notes purchased because of the limitation
imposed by the immediately preceding sentence (the amount of such excess being
the "Aggregate Unused Proceeds"), such Aggregate Unused Proceeds shall
constitute Excess Proceeds for purposes of the first Asset Sale Offer that is
made after the Five Year Date and, in the event the amount of the Aggregate
Unused Proceeds exceeds $10.0 million, promptly after the Five Year Date, Seven
Seas shall commence an Asset Sale Offer on a pro rata basis for an aggregate
principal amount of Notes equal to the Aggregate Unused Proceeds (and any other
Excess Proceeds that arise between the Five Year Date and such Asset Sale
Offer) at a purchase price equal to 101% of the principal amount of the Notes,
plus accrued and unpaid interest and Liquidated Damages and Additional Amounts,
if any, thereon to the date of purchase.
The Asset Sale Offer shall remain open for a period of 20 Business
Days following its commencement but no longer than 40 days, except to the
extent that a longer period is required by applicable law (the "Asset Sale
Offer Period"). No later than five Business Days after the termination of the
Asset Sale Offer Period (the "Asset Sale Purchase Date"), Seven Seas shall
purchase the principal amount of Notes required to be purchased pursuant to
this covenant (the "Asset Sale Offer Amount") or, if less than the Asset Sale
Offer Amount has been so validly tendered and not properly withdrawn, all Notes
validly tendered and not properly withdrawn in response to the Asset Sale
Offer. Payment for any Notes so purchased shall be made in the same manner as
interest payments are made on the Notes.
If the Asset Sale Purchase Date is on or after an interest record date
and on or before the related interest payment date, any accrued and unpaid
interest and Liquidated Damages and Additional Amounts, if any, will be paid to
the Person in whose name a Note is registered at the close of business on such
record date, and no additional interest will be payable to Holders who tender
Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, Seven Seas shall send,
by first class mail, a notice to the Trustee and each of the Holders, with a
copy to the Trustee. The notice shall contain all instructions and materials
necessary to enable such Holders to tender Notes pursuant to the Asset Sale
Offer. The Asset Sale Offer shall be made to all Holders. The notice, which
shall govern the terms of the Asset Sale Offer, shall state:
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(a) that the Asset Sale Offer is being made pursuant to
this covenant and the length of time the Asset Sale Offer shall remain
open;
(b) the Asset Sale Offer Amount, the purchase price and
the Asset Sale Purchase Date;
(c) that any Notes which are not validly tendered or are
not otherwise accepted for payment shall continue to accrete or accrue
interest;
(d) that, unless Seven Seas defaults in making such
payment, any Note accepted for payment pursuant to the Asset Sale
Offer shall cease to accrete or accrue interest after the Asset Sale
Purchase Date;
(e) that Holders electing to have a Note purchased
pursuant to any Asset Sale Offer shall be required to surrender the
Note, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the Note completed, or transfer by book-entry transfer,
to Seven Seas, a depository, if appointed by Seven Seas, or a Paying
Agent at the address specified in the notice no later than the close
of business on the last day of the Asset Sale Offer Period;
(f) that Holders shall be entitled to withdraw their
election if the Paying Agent receives, not later than close of
business on the last day of the Asset Sale Offer Period, a telegram,
facsimile transmission or letter setting forth the name of the Holder,
the principal amount of the Note the Holder delivered for purchase and
a statement that such Holder is withdrawing his election to have such
Note purchased;
(g) that, if the aggregate principal amount of Notes
surrendered by Holders and any Pari Passu Indebtedness surrendered by
holders or lenders thereof, collectively exceeds the Asset Sale Offer
Amount, the Trustee shall select the Notes and such Pari Passu
Indebtedness to be purchased on a pro rata basis, by lot or by such
other method as the Trustee deems fair and appropriate (with such
adjustments as may be deemed appropriate by Seven Seas so that only
Notes in denominations of $1,000, or integral multiples thereof, shall
be purchased); and
(h) that Holders whose Notes were purchased only in part
shall be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered (or transferred by book-entry
transfer).
If any of the Notes subject to the Asset Sale Offer is in the form of
a Global Note, then such notice shall be modified by Seven Seas to the extent
appropriate to accord with the Applicable Procedures for repurchases.
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On or before the Asset Sale Purchase Date, Seven Seas shall, to the
extent lawful, accept for payment, on a pro rata basis to the extent necessary,
the Asset Sale Offer Amount of Notes or portions thereof validly tendered and
not properly withdrawn pursuant to the Asset Sale Offer, or if less than the
Asset Sale Offer Amount has been validly tendered and not properly withdrawn,
all Notes validly tendered and not properly withdrawn, and shall deliver to the
Trustee an Officers' Certificate stating that such Notes or portions thereof
were accepted for payment by Seven Seas in accordance with the terms of this
covenant. Seven Seas shall promptly (but in any case not later than five days
after the Asset Sale Purchase Date) cause to be mailed or delivered to each
tendering Holder an amount equal to the purchase price of the Notes validly
tendered and not properly withdrawn by such Holder and accepted by Seven Seas
for purchase, and upon surrender of a Note that is to be purchased in part
(with, if Seven Seas or the Trustee so requires, due endorsement by, or a
written instrument of transfer in form reasonably satisfactory to Seven Seas
and the Trustee, duly executed by the Holder thereof or such Holder's attorney
duly authorized in writing) Seven Seas shall promptly issue a new Note, and the
Trustee, upon delivery of an Officers' Certificate from Seven Seas, shall
authenticate and mail or deliver such new Note to such Holder, in a principal
amount equal to any unpurchased portion of the Note surrendered. Any Note not
so accepted shall be promptly mailed or delivered by Seven Seas to the Holder
thereof. Seven Seas shall publicly announce the results of the Asset Sale
Offer on the Asset Sale Purchase Date.
Seven Seas will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to any Asset Sale Offer.
SECTION 4.11 RESTRICTED PAYMENTS
Seven Seas shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or
make any distribution on account of Seven Seas' or any of its Restricted
Subsidiaries' Equity Interests (including, without limitation, any payment in
connection with any merger or consolidation involving Seven Seas) other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of Seven Seas or dividends or distributions payable to Seven Seas or any
Wholly Owned Subsidiary of Seven Seas; (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of Seven Seas or any
Restricted Subsidiary of Seven Seas (other than any such Equity Interests owned
by Seven Seas or any Wholly Owned Subsidiary of Seven Seas); (iii) prepay,
purchase, redeem, defease or otherwise acquire or retire for value any
Indebtedness that is subordinated in right of payment to the Notes or any
Subsidiary Guarantee, as applicable, except in accordance with the scheduled
mandatory redemption or repayment provisions set forth in the original
documentation governing such Indebtedness (but not pursuant to any mandatory
offer to repurchase upon the occurrence of any event); or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of and after giving effect to such Restricted
Payment:
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(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) Seven Seas would, at the time of such Restricted Payment and
after giving proforma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to the
Fixed Charge Coverage Ratio test set forth in the first paragraph of Section
4.12; and
(c) such Restricted Payment, together with the aggregate of all
other Restricted Payments made by Seven Seas and its Restricted Subsidiaries
after the date of this Indenture, does not exceed the sum of, without
duplication, (i) 50% of the Consolidated Net Income of Seven Seas for the
period (taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of this Indenture to the end of Seven Seas'
most recently ended fiscal quarter for which internal financial statements are
available at the time of such Restricted Payment (or, if such Consolidated Net
Income for such period is a deficit or loss, less 100% of such deficit or
loss), plus (ii) 100% of the aggregate net cash proceeds received after the
date of this Indenture by Seven Seas from the issue or sale of, or from
additional capital contributions in respect of, Equity Interests of Seven Seas
or of debt securities of Seven Seas that have been converted into or exchanged
for Equity Interests of Seven Seas (other than (x) Equity Interests (or debt
securities) sold to a Subsidiary of Seven Seas and (y) Disqualified Stock or
debt securities that have been converted into or exchanged for Disqualified
Stock), plus (iii) to the extent that any Restricted Investment that was made
after the Issue Date is sold to a Person other than Seven Seas or a Restricted
Subsidiary for cash or otherwise liquidated or repaid for cash, the lesser of
the cash proceeds of such sale or other liquidation or repayment (after
deduction of items deducted in determining the Net Proceeds of an Asset Sale)
and the amount of the Restricted Investment (to the extent such amount was
included in the calculation of the amount of Restricted Payments), plus (iv)
the amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from (A) payments of dividends or interest or other
transfers of assets to Seven Seas or any Restricted Subsidiary from
Unrestricted Subsidiaries, (B) the redesignation of Unrestricted Subsidiaries
as Restricted Subsidiaries or (C) the receipt of proceeds by Seven Seas or any
Restricted Subsidiary from the sale or other disposition of any portion of any
Investment in an Unrestricted Subsidiary, in the case of (A), (B) and (C), not
to exceed the amount of Investments previously made by Seven Seas or any
Restricted Subsidiary in such Unrestricted Subsidiary (to the extent such
amount was included in the calculation of the amount of Restricted Payments).
The foregoing provisions will not prohibit (i) the payment of any
dividend within 60 days after the date of declaration thereof, if at said date
of declaration such payment would have complied with the provisions of this
Indenture; (ii) the making of any Restricted Investment in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of Seven Seas) of, or from substantially concurrent
additional capital contributions in respect of, Equity Interests of Seven Seas,
(other than Disqualified Stock); (iii) the redemption, repurchase, retirement or
other acquisition of any Equity Interests of Seven Seas in exchange for, or out
of the proceeds of, the substantially concurrent sale (other than to a
Restricted Subsidiary of Seven Seas) of, or from
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substantially concurrent additional capital contributions (other than from a
Subsidiary of Seven Seas) in respect of, other Equity Interests of Seven Seas
(other than any Disqualified Stock); (iv) the defeasance, redemption or
repurchase of subordinated Indebtedness with the net cash proceeds from (X) an
incurrence of Permitted Refinancing Indebtedness or (Y) the substantially
concurrent sale (other than to a Restricted Subsidiary of Seven Seas) of, or
from substantially concurrent additional capital contributions (other than from
a Subsidiary of Seven Seas) in respect of, Equity Interests of Seven Seas
(other than Disqualified Stock); (v) any dividend or other distribution made by
any Wholly Owned Subsidiary of Seven Seas to another Wholly Owned Subsidiary of
Seven Seas or to Seven Seas; (vi) so long as no Default or Event of Default
shall have occurred and be continuing, the repurchase, redemption or other
acquisition or retirement for value of any Equity Interests of Seven Seas held
by any employee of Seven Seas or any of its Restricted Subsidiaries, provided
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any calendar year;
and (vii) the acquisition of Equity Interests by Seven Seas in connection with
the exercise of stock options or stock appreciation rights by way of cashless
exercise or in connection with the satisfaction of withholding tax obligations
related thereto. In determining the aggregate amount of Restricted Payments
made after the date hereof, 100% of the amounts described in the foregoing
clauses (i) and (vi) shall be included in such calculation and none of the
amounts (whether positive or negative) described in the foregoing clauses (ii),
(iii), (iv), (v) and (vii) shall be included in such calculation.
As of the Issue Date, all of Seven Seas' Subsidiaries are Restricted
Subsidiaries. The Board of Directors may designate any Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by Seven
Seas and its Restricted Subsidiaries (except to the extent repaid in cash) in
the Subsidiary so designated shall be deemed to be Restricted Payments at the
time of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of this covenant. Such designation will
only be permitted if such Restricted Payment would be permitted at such time
and if such Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the
greater of (i) book value or (ii) fair market value (evidenced by a resolution
of the Board of Directors set forth in an Officers' Certificate delivered to
the Trustee) on the date of the Restricted Payment of the asset(s) proposed to
be transferred by Seven Seas or the applicable Restricted Subsidiary, as the
case may be, pursuant to the Restricted Payment. Not later than the date of
making any Restricted Payment, Seven Seas shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by this covenant
were computed, which calculations shall be based upon Seven Seas' latest
available financial statements.
SECTION 4.12 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
Seven Seas will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable,
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contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Indebtedness); neither Seven Seas nor any
Guarantor will issue any Disqualified Stock; and Seven Seas will not permit any
of its Restricted Subsidiaries that are not Guarantors to issue any shares of
Preferred Stock; provided, however, that Seven Seas and any Guarantor may incur
Indebtedness (including Acquired Indebtedness) or issue shares of Disqualified
Stock if (i) the Fixed Charge Coverage Ratio for Seven Seas' most recently
ended four full consecutive fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least 2.5 to 1, determined on a pro forma basis (including a pro
forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period and (ii) no
Default or Event of Default will have occurred and be continuing or would occur
as a consequence thereof.
The foregoing provisions shall not apply to:
(i) the incurrence by Seven Seas and the Guarantors, if
any, of Indebtedness under the Credit Facility not exceeding the
greater of (a) $25.0 million and (b) the Borrowing Base, less any
amounts derived from Asset Sales and applied to the required permanent
reduction of such Indebtedness (and a permanent reduction of the
related commitment to lend or in the amount available to be refinanced
in the case of a revolving credit facility) under the Credit Facility
as contemplated by Section 4.10;
(ii) Existing Indebtedness;
(iii) the incurrence by Seven Seas and any Guarantor of
Indebtedness represented by the Notes;
(iv) the incurrence by Seven Seas or its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings, Purchase Money Obligations or similar financing
transactions relating to its properties, assets and rights acquired
after the date of issue of the Notes, provided that the aggregate
principal amount of such Indebtedness under this clause does not
exceed 100% of the cost of such properties, assets and rights and
provided, further, that the aggregate amount of Indebtedness incurred
pursuant to this clause (iv) does not at any time exceed $10.0
million;
(v) the incurrence by Seven Seas or any Restricted
Subsidiary of Permitted Refinancing Indebtedness in exchange for, or
the net proceeds of which are used to extend, refinance, renew,
replace, defease or refund, Indebtedness of such entity that was
permitted by this Indenture to be incurred;
(vi) the incurrence of Indebtedness of Seven Seas to a
Restricted Subsidiary; provided that any such Indebtedness is made
pursuant to an intercompany note and is subordinated in right of
payment to the Notes; and provided, further, that any subsequent
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issuance or transfer of any Capital Stock or other event that results
in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of any such Indebtedness (except
to Seven Seas or another Restricted Subsidiary) shall be deemed, in
each case, to be an incurrence of such Indebtedness;
(vii) the incurrence of Indebtedness of a Restricted
Subsidiary to Seven Seas or another Restricted Subsidiary; provided
that (a) any such Indebtedness is made pursuant to an intercompany
note and (b) if a Guarantor incurs such Indebtedness to a Restricted
Subsidiary that is not a Guarantor, such Indebtedness is subordinated
in right of payment to the Subsidiary Guarantee of such Guarantor; and
provided, further, that any subsequent issuance or transfer of any
Capital Stock of any Restricted Subsidiary to whom such Indebtedness
is owed or any other event which results in any such Restricted
Subsidiary ceasing to be a Restricted Subsidiary or any subsequent
transfer of any such Indebtedness (except to Seven Seas or another
Restricted Subsidiary) shall be deemed, in each case, to be an
incurrence of such Indebtedness;
(viii) the incurrence, assumption or creation of Hedging
Obligations of Seven Seas or a Restricted Subsidiary pursuant to
interest rate protection obligations, but only to the extent that the
stated aggregate notional amounts of such obligations do not exceed
105% of the aggregate principal amount of the Indebtedness covered by
such interest rate protection obligations; the incurrence, assumption
or creation of Hedging Obligations under currency exchange contracts
entered into for the purpose of limiting risks that arise in the
ordinary course of business of Seven Seas and its Subsidiaries; and
the incurrence, assumption or creation of Hedging Obligations that
Seven Seas or a Restricted Subsidiary enters into for the purpose of
protecting its production against fluctuations in oil or natural gas
prices;
(ix) the incurrence by Seven Seas and its Restricted
Subsidiaries of Indebtedness in connection with one or more standby
letters of credit, or bid, performance or surety bonds or other
reimbursement obligations, in each case, issued in the conduct of the
Oil and Gas Business and not in connection with the borrowing of money
or the obtaining of advances or credit, not to exceed in the aggregate
at any time outstanding 5.0% of consolidated total assets of Seven
Seas;
(x) issuance of any Guarantee by a Restricted Subsidiary
of Seven Seas of senior Indebtedness of Seven Seas that was permitted
to be incurred under this Indenture; provided that prior to or
concurrently with the issuance of such Guarantee such Restricted
Subsidiary complies with Section 4.17 hereof;
(xi) Indebtedness of Seven Seas or any Guarantor incurred
to finance Permitted Infrastructure Investments, in an aggregate
principal amount that does not at any time exceed $10.0 million;
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(xii) the incurrence by Seven Seas and its Restricted
Subsidiaries of Indebtedness in connection with one or more trade
letters of credit, in each case, issued in the ordinary course of
business in the conduct of the Oil and Gas Business and not in
connection with the borrowing of money or the obtaining of advances or
credit; or
(xiii) the incurrence by Seven Seas and the Guarantors of
Indebtedness in an aggregate principal amount of up to $10.0 million
(all or any portion of which may be borrowed under the Credit
Facility, and which shall be in addition to amounts which may be
incurred pursuant to clauses (i) through (xii) above).
Notwithstanding any other provision of this covenant a Guarantee of
Indebtedness permitted by the terms of this Indenture at the time such
Indebtedness was incurred shall not constitute a separate incurrence of
Indebtedness.
In the event that Indebtedness falls within more than one category of
permitted Indebtedness as set out above, Seven Seas shall determine the
applicable category and such Indebtedness shall only be counted once. If
Indebtedness is issued at less than the principal amount thereof, the amount of
such Indebtedness for purposes of the above limitations shall equal the amount
of the liability as determined in accordance with GAAP. Accrual of interest
and the accretion of accreted value will not be deemed to be an incurrence of
Indebtedness for purposes of this Section 4.12.
Seven Seas shall not permit any Unrestricted Subsidiary to incur any
Indebtedness other than Non-Recourse Debt; provided, however, if any such
Indebtedness ceases to be Non-Recourse Debt, such event shall be deemed to
constitute an incurrence of Indebtedness by Seven Seas or a Restricted
Subsidiary.
SECTION 4.13 SALE AND LEASEBACK TRANSACTIONS
Seven Seas will not, and will not permit any of its Restricted
Subsidiaries to, enter into any sale and leaseback transaction; provided that
Seven Seas or any Guarantor may enter into a sale and leaseback transaction if
(i) Seven Seas or such Guarantor could have (a) incurred Indebtedness in an
amount equal to the Attributable Debt relating to such sale and leaseback
transition pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of Section 4.12 hereof and (b) incurred a Lien to secure such
Indebtedness pursuant to Section 4.14 hereof, (ii) the net cash proceeds of
such sale and leaseback transaction are at least equal to the fair market
value (as determined in good faith by the Board of Directors and set forth in
an Officers' Certificate delivered to the Trustee) of the property that is the
subject of such sale and leaseback transaction and (iii) the transfer of assets
in such sale and leaseback transaction is permitted by, and the proceeds of
such transaction are applied in compliance with, Section 4.10 hereof.
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SECTION 4.14 LIENS
Seven Seas will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or otherwise
cause or suffer to exist or become effective any Lien securing Indebtedness of
any kind (other than Permitted Liens) on any of its property or assets, now
owned or hereafter acquired, or any interests therein or any income or profits
therefrom, unless all payments under the Notes are secured on an equal and
ratable basis with such Indebtedness so secured until such time as such
Indebtedness is no longer outstanding or is no longer secured by a Lien.
SECTION 4.15 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
Seven Seas will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i) (a) pay dividends or make any other distributions
to Seven Seas or any of its Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to Seven Seas or any of its
Restricted Subsidiaries, (ii) make loans or advances to Seven Seas or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets
to Seven Seas or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) Existing
Indebtedness as in effect on the date of this Indenture, (b) the Credit
Facility as in effect as of the date of this Indenture, and any amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings thereof, provided, that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive with respect to such
dividend and other payment restrictions than those contained in the Credit
Facility as in effect on the date of this Indenture, (c) applicable law, (d)
this Indenture and the Notes, (e) any instrument governing Acquired
Indebtedness or Capital Stock of a Person acquired by Seven Seas or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Acquired Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other than
the Person, or the property or assets of the Person, so acquired, provided that
the Consolidated Cashflow of such Person is not taken into account in
determining whether such acquisition was permitted by the terms of this
Indenture, (f) any encumbrance or restricted on assets subject to Capital Lease
Obligations or Purchase Money Obligations for property acquired in the ordinary
course of business that impose restrictions of the nature described in clause
(iii) above on the property so acquired, (g) by reason of customary
non-assignment provisions in leases and licenses entered into in the ordinary
course of business and consistent with past practices, (h) agreements relating
to the financing of the acquisition of real or tangible personal property
acquired after the date of this Indenture; provided, that such encumbrance or
restriction relates only to the property which is acquired and in the case of
any encumbrance or restriction that constitutes a Lien, such Lien constitutes a
Purchase Money Lien, (i) Permitted Refinancing Indebtedness,
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provided that the restrictions contained in agreements governing such Permitted
Refinancing Indebtedness are no more restrictive than those contained in
agreements governing the Indebtedness being refinanced, or (j) any merger
agreements, stock purchase agreements, asset sale agreements and similar
agreements limiting the transfer of properties and assets to be transferred or
otherwise disposed of pending consummation of the subject transactions in
accordance with the terms thereof.
SECTION 4.16 TRANSACTIONS WITH AFFILIATES
Seven Seas will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly enter into or permit to exist any
transaction or series of related transactions (including the purchase, sale,
lease, exchange, transfer or disposition of property or assets, the rendering
of any service, or any contract, agreement, understanding, loan, advance or
Guarantee) with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (i) the terms of such Affiliate Transaction
are fair and reasonable to Seven Seas or such Restricted Subsidiary, as the
case may be, from a financial point of view and are at least as favorable to
Seven Seas or such Restricted Subsidiary as the terms which could be obtained
on such date by Seven Seas or such Restricted Subsidiary, as the case may be,
in a comparable transaction entered into on an arm's-length basis with an
unrelated third party and (ii) Seven Seas delivers to the Trustee (a) with
respect to any Affiliate Transaction entered into after the date of this
Indenture involving aggregate consideration in excess of $1.0 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that the terms of such Affiliate Transaction have been set forth in
writing and comply with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $5.0 million, an opinion issued by an investment
banking or appraisal firm of national standing (in the United States or Canada)
as to the fairness to Seven Seas or such Restricted Subsidiary of such
Affiliate Transaction from a financial point of view; provided that the
following will not be deemed to be Affiliate Transactions: (1) reasonable fees
and compensation paid to, and reasonable and customary indemnity provided on
behalf of, officers and directors of Seven Seas or any Restricted Subsidiary as
determined in good faith by the Board of Directors, (2) loans or advances to
employees in the ordinary course of business in accordance with customary
practices in the Oil and Gas Business, but in any event not to exceed $0.5
million in the aggregate outstanding at any one time, (3) transactions pursuant
to agreements as in existence on the Issue Date, (4) any employment,
noncompetition or confidentiality agreements entered into by Seven Seas or any
of its Restricted Subsidiaries with its employees in the ordinary course of
business, (5) transactions between or among Seven Seas and a Wholly Owned
Subsidiary or between Wholly Owned Subsidiaries and (6) transactions with joint
ventures engaged in the Oil and Gas Business, provided that no Equity Interest
not owned by Seven Seas or its Restricted Subsidiaries in such joint venture is
owned by a Person that is otherwise an Affiliate of Seven Seas and (7)
Restricted Payments that are permitted by the provisions of this Indenture as
described in Section 4.11.
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SECTION 4.17 COVENANT TO ENTER INTO SUBSIDIARY GUARANTEES
Seven Seas will not permit any Restricted Subsidiary to guarantee the
payment of any Indebtedness of Seven Seas (other than any guarantee of the
Notes and the Existing Guarantee) or any Indebtedness of any Guarantor (in each
case, the "Guaranteed Debt") unless (i) if such Restricted Subsidiary is not
then a Guarantor, then such Restricted Subsidiary simultaneously executes and
delivers a Supplemental Indenture providing for a Subsidiary Guarantee of
payment of the Notes by such Restricted Subsidiary, (ii) if the Guaranteed Debt
is by its express terms subordinated in right of payment to the Notes or the
Subsidiary Guarantee of such Guarantor, any such Guarantee of such Restricted
Subsidiary with respect to the Guaranteed Debt shall be subordinated in right
of payment to such Restricted Subsidiary's Subsidiary Guarantee with respect to
the Notes substantially to the same extent as the Guaranteed Debt is
subordinated to the Notes or the Subsidiary Guarantee of such Guarantor, (iii)
such Restricted Subsidiary waives and will not in any manner whatsoever claim
or take the benefit or advantage of any rights of reimbursement, indemnity or
subrogation or any other rights against Seven Seas or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee, and (iv) such Restricted Subsidiary shall deliver to the
Trustee an Opinion of Counsel to the effect that (a) such Subsidiary Guarantee
of the Notes has been duly executed and authorized and (b) such Subsidiary
Guarantee of the Notes constitutes a valid, binding and enforceable obligation
of such Restricted Subsidiary, except insofar as enforcement thereof may be
limited by bankruptcy, insolvency or similar laws (including, without
limitation, all laws relating to fraudulent transfers) and except insofar as
enforcement thereof is subject to general principles of equity.
Notwithstanding the foregoing, any Subsidiary Guarantee shall be
automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person that is not an Affiliate of Seven Seas, of
all of Seven Seas' Capital Stock in, or all or substantially all the assets of,
such Restricted Subsidiary (which sale, exchange or transfer is not prohibited
by this Indenture) or (ii) the release or discharge of the Guarantee that
resulted in the creation of such Subsidiary Guarantee, except a discharge or
release by or as a result of payment under such Guarantee.
SECTION 4.18 CONVERSION OF CONVERTIBLE DEBT
Seven Seas will use its reasonable best efforts to cause the
conversion of the Special Notes into the Convertible Debentures and the
conversion of the Convertible Debentures into common shares and warrants to
purchase common shares. If any Special Notes or Convertible Debentures remain
outstanding on or after July 31, 1998 (a "Special Note Default"), Seven Seas
and the Guarantors (if any) agree to pay liquidated damages ("Conversion
Liquidated Damages"), which will accrue at the rate of 0.25%, of the principal
amount of the Notes held by Holder, per annum as long as a Special Note Default
continues. Following the cure of the Special Note Default by the permanent
retirement of all of the Special Notes and Convertible Debentures, the accrual
of Conversion Liquidated Damages will cease. Seven Seas shall pay all accrued
Conversion Liquidated
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Damages on each interest payment date in the same manner as such payments are
to be made hereunder.
SECTION 4.19 LINE OF BUSINESS
Seven Seas shall not, and shall not permit any Subsidiary to, engage
in any line of business other than the Oil and Gas Business.
SECTION 4.20 ADDITIONAL AMOUNTS
Seven Seas will make all payments of principal of, premium, if any,
and interest on, each Note and Liquidated Damages, if any, free and clear of,
and without withholding or deduction for or on account of, any current or
future taxes, levies, imports, deductions, withholdings, collections, duties,
assessments or charges of whatever nature and any fines, penalties, interest or
liabilities with respect thereto imposed, levied, collected, withheld or
assessed by or on behalf of Canada, the Cayman Islands, Colombia or any other
jurisdiction with which Seven Seas or any Guarantor has any connection
(including any jurisdiction from or through which payments under the Notes or
the Subsidiary Guarantees are made) or any political subdivision or authority
therein or thereof having power to tax (referred to herein as a "Tax" or
"Taxes"), unless such withholding or deduction is required by law or by
regulation or governmental policy having the force of law. In the event that
any such withholding or deduction for or on account of any Tax is required,
(excluding any Taxes imposed on a Holder by the jurisdiction (or by a political
subdivision thereof) under the laws of which (or under the laws of a political
subdivision of which) the Holder is organized or if such Holder is an
individual, the jurisdiction (or by a political subdivision thereof) of which
such Holder is a citizen or resident (such excluded Taxes are referred to
herein as "Excluded Taxes")), Seven Seas will pay such additional amounts
("Additional Amounts") as will result in receipt by each Holder of any Note of
such amounts as would have been received by such Holder or the beneficial owner
with respect to such Note had no such withholding or deduction of Taxes been
required, provided that:
(a) No Additional Amounts shall be payable for or on account of
any Tax which would not have been imposed but for:
(1) the existence of any present or former connection
between such Holder or the beneficial owner of such Note and Canada,
the Cayman Islands, Colombia or any other jurisdiction with which
Seven Seas or any Guarantor has any connection (including any
jurisdiction from or through which payments under the Notes or the
Subsidiary Guarantees are made) or any political subdivision or
authority therein (other than merely holding such Note), including,
without limitation, such Holder or the beneficial owner of such Note
being or having been a national, domiciliary or resident of or treated
as a resident thereof or being or having been present or engaged in a
trade or business therein or having had a permanent establishment
therein; or
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(2) the presentation of such Note (where presentation is
required) more than 30 days after the date on which the payment in
respect of such Note became due and payable or provided for, whichever
is later, except to the extent that such Holder would have been
entitled to such Additional Amounts if it had presented such Note for
payment on any day within such period of 30 days; or
(3) the failure of such Holder or the beneficial owner of
such Note to comply with a request by Seven Seas addressed to such
Holder (A) to provide information concerning the nationality,
residence or identity of such Holder or such beneficial owner or (B)
to make any declaration or other similar claim or satisfy any
information or reporting requirement, which, in the case of (A) or
(B), is required or imposed by a statute, treaty, regulation or
administrative practice of the taxing jurisdiction as a precondition
to exemption from all or part of such tax, assessment or other
governmental charge; or
(4) the Holder not dealing at arm's length with Seven
Seas (within the meaning of the Income Tax Act (Canada)) at the time
the payment to which the Additional Amounts relate was made;
(5) any combination of items (1 ), (2), (3) and (4); and
(b) No Additional Amounts shall be payable to any Holder who is
not the beneficial owner of such Note (including a fiduciary or partnership) to
the extent that the beneficial owner of such Note would not have been entitled
to such Additional Amounts had it been the Holder of the Note.
In the event that Seven Seas fails to pay any Taxes (other than
Excluded Taxes) when due to the appropriate taxing authority and a Holder is
subsequently assessed by such taxing authority in respect of such Taxes, Seven
Seas shall pay such Taxes assessed to the taxing authority. In the event that
a Holder previously shall have paid such Taxes to the taxing authority, Seven
Seas shall promptly indemnify and reimburse such Holder in respect of all such
Taxes so paid plus interest at the rate borne by the Notes.
Whenever there is mentioned, in any context, the payment of principal,
premium or interest in respect of any Note or the net proceeds received on the
sale or exchange of any Note, such mention shall be deemed to include the
payment of Additional Amounts provided for in this Indenture to the extent
that, in such context, Additional Amounts are, were or would be payable in
respect thereof pursuant to this Indenture.
SECTION 4.21 PAYMENT CERTIFICATIONS
At least 10 days prior to the first date on which payment of principal
and any premium, interest, Liquidated Damages or Additional Amounts, if any, on
the Notes is to be made, and at least 10 days prior to any subsequent such date
if there has been any change with respect to the matters
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set forth in the Officers' Certificate described in this Section 4.21, Seven
Seas will furnish the Trustee and the Paying Agent, if other than the Trustee,
with an Officers' Certificate instructing the Trustee and the Paying Agent
whether such payment of principal, premium, interest, Liquidated Damages or
Additional Amounts, if any, on the Notes (whether or not in the form of
Definitive Notes) shall be made to the Holders without withholding for or on
account of Taxes, unless the withholding or deduction of such Taxes is then
required by law. If any such withholding shall be required, then such
Officers' Certificate shall specify the amount, if any, required to be withheld
on such payments to such Holders and Seven Seas will pay to the Trustee or the
Paying Agent the Additional Amounts pursuant to the terms of this Indenture and
the Notes. Seven Seas shall indemnify the Trustee and the Paying Agent for,
and hold them harmless against, any loss, liability or expense reasonably
incurred without negligence or bad faith on their part arising out of or in
connection with actions taken or omitted by any of them in reliance on any
Officers' Certificate furnished to them pursuant to this Section 4.21.
SECTION 4.22 COMPLIANCE CERTIFICATE
(a) Seven Seas shall deliver to the Trustee, within 90 days after
the end of each fiscal year, an Officers' Certificate stating that a review of
the activities of Seven Seas and its Subsidiaries during the preceding fiscal
year has been made under the supervision of the signing Officers with a view to
determining whether Seven Seas has kept, observed, performed and fulfilled its
obligations under this Indenture, and further stating, as to each such Officer
signing such certificates that to the best of his or her knowledge Seven Seas
has kept, observed, performed and fulfilled each and every covenant contained
in this Indenture and is not in default in the performance or observance of any
of the terms, provisions and conditions of this Indenture (or, if a Default or
Event of Default shall have occurred describing all such Defaults or Events of
Default of which he or she may have knowledge and what action Seven Seas is
taking, or proposes to take with respect thereto) and that to the best of his
or her knowledge no event has occurred and remains in existence by reason of
which payments on account of the principal of or interest, if any, on the Notes
is prohibited or if such event has occurred, a description of the event and
what action Seven Seas is taking or proposes to take with respect thereto.
(b) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.6(a) hereof shall be accompanied by
a written statement of the independent public accountants of Seven Seas (who
shall be a firm of established national reputation) that in making the
examination necessary for certification of such financial statements, nothing
has come to their attention that would lead them to believe that Seven Seas has
violated any provisions of Article IV or Article V hereof (except that, such
written statement need not address Seven Seas' compliance with the provisions
of Section 4.2 or 4.14 hereof) or, if any such violation has occurred,
specifying the nature and period of existence thereof, it being understood that
such accountants shall not be liable directly or indirectly to any Person for
any failure to obtain knowledge of any such violation.
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(c) Seven Seas shall, so long as any of the Notes are outstanding,
deliver to the Trustee, forthwith upon any Officer becoming aware of any
Default or Event of Default, an Officers' Certificate specifying such Default
or Event of Default and what action Seven Seas is taking or proposes to take
with respect thereto.
SECTION 4.23 ELIGIBLE SECURITIES ACCOUNT
(a) On the Issue Date, Seven Seas shall purchase, and deposit in
the Eligible Securities Account, Eligible Securities in an aggregate principal
amount which, in the opinion of an internationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, is (i) equal to the first two regularly scheduled
interest payments due on the Notes on November 15, 1998 and May 15, 1999 and
(ii) such that receipt of scheduled principal and interest payments on such
Eligible Securities will result in receipt of United States dollars in an
amount and at a time sufficient to provide for payment in full when due of each
of those regularly scheduled interest payments.
(b) Seven Seas agrees to retain Eligible Securities in the
Eligible Securities Account in an aggregate principal amount which shall
satisfy Section 4.23(a) (or, in the event the first regularly scheduled
interest payment has been made, in an amount sufficient to provide for payment
in full of the interest payment due on the Notes on May 15, 1999) until the
Eligible Securities and amounts, if any, in the Eligible Securities Account
shall be released to it by the Eligible Institution in accordance with Section
4.23(e) hereof.
(c) Seven Seas may reinvest proceeds of the Eligible Securities
retained in the Eligible Securities Account in other Eligible Securities;
provided that Seven Seas may only so reinvest the Eligible Securities if, based
on the report of an internationally recognized firm of independent public
accountants (selected by Seven Seas) expressed in a written certification
thereof delivered to the Trustee, after giving effect to such reinvestment, the
aggregate principal amount of Eligible Securities retained in the Eligible
Securities Account is (i) at least equal to the first two regularly scheduled
interest payments due on the Notes on November 15, 1998 and May 15, 1999 (or,
in the event the first regularly scheduled interest payment has been made, in
an amount sufficient to provide for payment in full of the interest payment due
on the Notes on May 15, 1999) and (ii) such that receipt of scheduled principal
and interest payments on such Eligible Securities will result in receipt of
United States dollars in an amount and at a time sufficient to provide for
payment in full when due of each of those regularly scheduled interest payments
(or, in the event the first regularly scheduled interest payment has been made,
in an amount sufficient to provide for payment in full of the interest payment
due on the Notes on May 15, 1999).
(d) Seven Seas agrees that all principal payments made on,
interest earned on or other distributions or amounts paid with respect to the
Eligible Securities shall be retained in the Eligible Securities Account;
provided that Seven Seas may withdraw interest earned on the Eligible
Securities from the Eligible Securities Amount if after giving effect to such
withdrawal, the aggregate principal amount of Eligible Securities retained in
the Eligible Securities Account is (i)
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at least equal to the first two regularly scheduled interest payments due on
the Notes on November 15, 1998 and May 15, 1999 (or, in the event the first
regularly scheduled interest payment has been made, in an amount sufficient to
provide for payment in full of the interest payment due on the Notes on May 15,
1999) and (ii) such that receipt of scheduled principal and interest payments
on such Eligible Securities will result in receipt of United States dollars in
an amount and at a time sufficient to provide for payment in full when due of
each of those regularly scheduled interest payments (or, in the event the first
regularly scheduled interest payment has been made, in an amount sufficient to
provide for payment in full of the interest payment due on the Notes on May 15,
1999).
(e) Seven Seas agrees that the Eligible Securities and any amounts
retained in the Eligible Securities Account will only be disbursed from the
Eligible Securities Account as follows:
(i) Not less than three Business Days prior to the date
of either of the first two regularly scheduled interest payments due
on the Notes, Seven Seas may direct the Eligible Institution in
writing to transfer from the Eligible Securities Account to the
Trustee in its capacity as Paying Agent (or, if applicable, any
successor Paying Agent), United States dollars in immediately
available funds necessary to provide for payment in full or of any
portion of the next regularly scheduled interest payment on the Notes
when due. Upon receipt of such written request, the Eligible
Institution shall take such action as is necessary to provide for the
payment of such amount of United States dollars in immediately
available funds directly to the Trustee as Paying Agent (or, if
applicable, any successor Paying Agent) from proceeds of the Eligible
Securities held in the Eligible Securities Account.
(ii) If Seven Seas elects to pay either of the first two
regularly scheduled interest payments (or portions thereof) on the
Notes from a source of funds other than the Eligible Securities
Account (the "Seven Seas Funds"), then Seven Seas may on at least two
Business Days' prior written notice, after payment when due of such
regularly scheduled interest payment or portion thereof or upon a
Defeasance under Article VIII hereunder (evidenced by an Officer's
Certificate delivered to the Trustee and the Eligible Institution
stating that such regularly scheduled interest payment or portion
thereof has been made when due in accordance with the terms of this
Indenture), direct the Eligible Institution in writing to release to
Seven Seas or as it may direct an amount of funds or Eligible
Securities from the Eligible Securities Account less than or equal to
the amount of Seven Seas Funds so expended. Upon receipt of such
written direction from Seven Seas, together with the Officers'
Certificate described in the preceding sentence, the Eligible
Institution shall take such action as is necessary to provide for the
payment to Seven Seas of the amount requested from the Eligible
Securities Account.
(iii) Upon payment in full when due of the first two
regularly scheduled interest payments on the Notes, evidenced by an
Officers' Certificate delivered to the Eligible Institution stating
that such regularly scheduled interest payments have been made in full
when due in accordance with this Indenture, the Eligible Institution
shall, at Seven Seas'
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written direction, release to Seven Seas the Eligible Securities and
amounts, if any, remaining in the Eligible Securities Account.
(f) Notwithstanding any other provision in this Indenture, Seven
Seas may not, and may not permit any Restricted Subsidiary to, directly or
indirectly, incur or suffer to exist any Lien on, or with respect to, the
Eligible Securities and the Eligible Securities Account.
SECTION 4.24 PLEDGE ACCOUNT
(a) On the Issue Date Seven Seas shall deposit in the Pledge
Account, for the benefit of Holders and owners of beneficial ownership
interests in the Notes, sufficient proceeds to purchase Pledged Securities in
an amount which, in the opinion of an internationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, will result in the receipt of United States dollars
in immediately available funds in an amount and at a time sufficient to provide
for payment in full when due of the four regularly scheduled interest payments
due on the Notes from November 15, 1999 through May 15, 2001 upon receipt of
scheduled principal and interest payments on the Pledged Securities. Seven
Seas shall contract for the purchase of the Pledged Securities with
instructions for delivery to Trustee and provide such information to the
Trustee; if for any reason the amount of proceeds deposited in the Pledge
Account is insufficient to pay for the Pledged Securities and any associated
costs, Seven Seas shall immediately provide to Trustee the necessary additional
funds.
(b) Seven Seas hereby agrees that all of its rights and
obligations with respect to the Pledged Securities shall be as set forth in the
Pledge Agreement.
SECTION 4.25 COMPLIANCE WITH TIA
Seven Seas agrees to comply with all provisions of the TIA applicable
to it, including without limitation, Section 314(b) thereof.
SECTION 4.26 MAINTENANCE OF CURRENT ASSETS
Seven Seas will not permit current assets less current liabilities
(without giving effect to Eligible Securities shown on the balance sheet of
Seven Seas) as determined in accordance with GAAP ("Net Current Assets Amount")
to be (i) less than $10 million for the period from the issue date of the Notes
to November 15, 1998 and (ii) less than $5 million for the period from November
16, 1998 to May 15, 1999. Seven Seas shall furnish to the Trustee an Officers'
Certificate indicating compliance with the terms of this provision promptly
following the determination of the Net Current Assets Amount at the end of each
financial quarter of Seven Seas ending on or before May 15, 1999.
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ARTICLE V
SUCCESSORS
SECTION 5.1 MERGER, CONSOLIDATION OR SALE OF ASSETS OF SEVEN SEAS
Seven Seas shall not, in a single transaction or series of related
transactions, consolidate or merge with or into (whether or not Seven Seas is
the surviving corporation), or directly and/or indirectly through its
Restricted Subsidiaries sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets determined on a
consolidated basis for Seven Seas and its Restricted Subsidiaries taken as a
whole in one or more related transactions, to another Person unless (i) Seven
Seas is the surviving corporation or the Person formed by or surviving any such
consolidation or merger (if other than Seven Seas) or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made is a corporation organized or existing under the laws of Canada, one of
the provinces or territories thereof, one of the states of the United States or
the District of Columbia; (ii) the Person formed by or surviving any such
consolidation or merger (if other than Seven Seas) or the Person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the obligations of Seven Seas under the Notes and this
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) immediately after such transaction no
Default or Event of Default exists; (iv) Seven Seas or the Person formed by or
surviving any such consolidation or merger (if other than Seven Seas), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made (A) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of Seven Seas
immediately preceding the transaction and (B) except in the case of a
consolidation or merger of Seven Seas with or into a Wholly Owned Subsidiary of
Seven Seas, will, at the time of such transaction and after giving pro forma
effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set
forth in the first paragraph of Section 4.12; (v) each Guarantor, if any,
unless it is the other party to the transactions described above, shall have by
supplemental indenture confirmed that its Subsidiary Guarantee shall apply to
such Person's obligations under this Indenture and the Notes; and (vi) Seven
Seas shall have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel addressed to the Trustee with respect to the foregoing
matters.
SECTION 5.2 SUCCESSOR CORPORATION OF SEVEN SEAS SUBSTITUTED
Upon any consolidation or merger, or any sale, assignment, transfer,
lease conveyance or other disposition of all or substantially all of the
Properties or assets of Seven Seas in accordance with Section 5.1 hereof, the
successor corporation formed by such consolidation or into or with which Seven
Seas is merged or to which such sale, assignment, transfer, lease, conveyance
or other disposition is made shall succeed to, and be substituted for Seven
Seas under this Indenture and the Notes (so that from and after the date of
such consolidation, merger, sale, lease, conveyance or other disposition, the
provisions of this Indenture referring to "Seven Seas" shall refer instead to
the successor corporation and not to Seven Seas), and may exercise every right
and power of Seven Seas
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under this Indenture with the same effect as if such successor Person had been
named as Seven Seas herein; provided, however, that the predecessor corporation
shall not be relieved from the obligation to pay the principal, premium if any,
and interest and Liquidated Damages and Additional Amounts, if any, on the
Notes except in the case of a sale of all or substantially all of Seven Seas'
Properties or assets that meets the requirements of Section 5.1 hereof.
ARTICLE VI
DEFAULTS AND REMEDIES
SECTION 6.1 EVENTS OF DEFAULT
An "Event of Default" occurs if:
(a) Seven Seas defaults in the payment of interest on, or
Liquidated Damages or Additional Amounts with respect to, any Note when the
same becomes due and payable and the Default continues for a period of 30 days;
(b) Seven Seas defaults in the payment of the principal of or
premium, if any, on any Note when the same becomes due and payable at maturity,
upon optional redemption, upon required repurchase, upon declaration or
otherwise;
(c) Seven Seas fails to comply with any covenant, condition or
agreement on the part of Seven Seas to be observed or performed pursuant to
Section 4.9, 4.10, 4.11, or 5.1 hereof;
(d) Seven Seas fails to comply with any of its other agreements or
covenants in, or provisions of, the Notes or this Indenture and the Default
continues for a period of 60 days after there has been given to Seven Seas by
the Trustee or to Seven Seas and the Trustee by the Holders of at least 25% in
principal amount of the outstanding Notes a written notice specifying such
Default and requiring it to be remedied and stating that such notice is a
"Notice of Default" hereunder;
(e) a Default occurs under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by Seven Seas or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by Seven Seas or any of its
Restricted Subsidiaries), whether such Indebtedness or Guarantee exists on the
date of this Indenture or shall be created thereafter, which default (i) is
caused by a failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the applicable grace period provided in
such Indebtedness on the date of such default (a "Payment Default") or (ii)
results in the acceleration of such Indebtedness prior to its express maturity
and, in each case, the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more;
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(f) a final judgment or final judgments for the payment of money
are entered by a court or courts of competent jurisdiction against Seven Seas
or any of its Restricted Subsidiaries, and such judgment or judgments are not
paid, discharged or stayed for a period of 60 days, provided that the aggregate
of all such undischarged and unpaid judgments exceeds $5.0 million;
(g) Seven Seas or any of its Significant Subsidiaries or group of
Restricted Subsidiaries that, together taken (as of the latest audited
consolidated financial statement for Seven Seas and its Subsidiaries), would
constitute a Significant Subsidiary (a "Group of Subsidiaries"), pursuant to or
within the meaning of any Bankruptcy Law:
(i) commences a voluntary case;
(ii) consents to the entry of an order for relief against
it in an involuntary case;
(iii) consents to the appointment of a Custodian of it or
for all or substantially all of its property;
(iv) makes a general assignment for the benefit of its
creditors; or
(v) generally is not paying its debts as they become due;
(h) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(i) is for relief against Seven Seas or any Significant
Subsidiary or Group of Subsidiaries in an involuntary case;
(ii) appoints a Custodian of Seven Seas or any Significant
Subsidiary or Group of Subsidiaries or for all or substantially all of
the property of Seven Seas or any Significant Subsidiary or Group of
Subsidiaries;
(iii) orders the liquidation of Seven Seas or any
Significant Subsidiary or Group of Subsidiaries; or
(iv) and in each case the order or decree remain unstayed
and in effect for 30 consecutive days;
(i) the security interest in the Pledged Securities shall cease to
be in full force and effect or enforceable in accordance with its terms other
than in accordance with its terms.
The term "Bankruptcy Law" means Title 11 U.S. Code or any similar
federal or state law or the Bankruptcy and Insolvency Act (Canada) or any
similar law in Canada, any province or any other jurisdiction with which Seven
Seas or any Subsidiary has any connection, for the relief of debtors.
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The term "Custodian" means any receiver, trustee, assignee, liquidator or
similar official under any Bankruptcy Law.
SECTION 6.2 ACCELERATION
If an Event of Default (other than an Event of Default specified in
clause (g) or (h) of Section 6.1) occurs and is continuing, the Trustee or the
Holders of at least 25% in aggregate principal amount of the then outstanding
Notes by written notice to Seven Seas, may declare the unpaid principal of and
any premium and accrued interest, and Liquidated Damages and Additional
Amounts, if any, on all the Notes to be due and payable. Upon such
declaration, 100% of the principal amount of the Notes plus any premium and
accrued and unpaid interest, and Liquidated Damages and Additional Amounts, if
any, on the Notes shall be due and payable immediately. If an Event of Default
specified in clause (g) or (h) of Section 6.1 relating to Seven Seas, any
Significant Subsidiary or any Group of Subsidiaries occurs, all such amounts
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder. The Holders
of a majority in principal amount of the then outstanding Notes by written
notice to the Trustee may rescind an acceleration and its consequences if the
rescission would not conflict with any judgment or decree and if all existing
Events of Default (except nonpayment of principal or interest or Liquidated
Damages or Additional Amounts that has become due solely because of the
acceleration) have been cured or waived. The Trustee may withhold from Holders
of the Notes notice of any continuing Default or Event of Default (except a
Default or Event of Default relating to the payment of principal or interest)
if it determines that withholding notice is in their interest.
SECTION 6.3 OTHER REMEDIES
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal, premium, if
any, and interest and Liquidated Damages and Additional Amounts, if any, on the
Notes or to enforce the performance of any provision of the Notes, this
Indenture or the Pledge Agreement.
The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder of a Note in exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
SECTION 6.4 WAIVER OF EXISTING DEFAULTS
Subject to Section 6.7 and Section 9.2, Holders of not less than a
majority in aggregate principal amount of the then outstanding Notes by notice
to the Trustee may on behalf of the Holders of all of the Notes waive any
existing Default or Event of Default and its consequences hereunder, except a
continuing Default or Event of Default in the payment of the principal of,
premium and
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Liquidated Damages and Additional Amounts, if any, or interest on, the Notes
(including in connection with an offer to purchase). Upon any such waiver,
such Default shall cease to exist, and any Event of Default arising therefrom
shall be deemed to have been cured for every purpose of this Indenture; but no
such waiver shall extend to any subsequent or other Default or impair any right
consequent thereon.
SECTION 6.5 CONTROL BY MAJORITY
Holders of a majority in principal amount of the then outstanding
Notes may direct the time, method and place of conducting any proceeding for
exercising any remedy available to the Trustee or exercising any trust or power
conferred on it, including, without limitation, under the Pledge Agreement.
However, the Trustee may refuse to follow any direction that conflicts with law
or this Indenture or the Pledge Agreement or that the Trustee determines may be
unduly prejudicial to the rights of other Holders of Notes or that may involve
the Trustee in personal liability.
SECTION 6.6 LIMITATION ON SUITS
A Holder of a Note may pursue a remedy with respect to this Indenture
or the Notes only if:
(a) the Holder of a Note gives to the Trustee written notice of a
continuing Event of Default;
(b) the Holders of at least 25% in aggregate of the principal
amount of the then outstanding Notes make a written request to the Trustee to
pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and, if
requested, provide to the Trustee indemnity satisfactory to the Trustee against
any loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days
after receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in
aggregate of the principal amount of the then outstanding Notes do not give
the Trustee a direction inconsistent with the request.
SECTION 6.7 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT
Notwithstanding any other provision of this Indenture, the right of
any Holder of a Note to receive payment of principal, premium and Liquidated
Damages and Additional Amounts, if any, and interest on the Note, on or after
the respective due dates expressed in the Note (including in connection with an
offer to purchase), or to bring suit for the enforcement of any such payment on
or after such respective dates, shall not be impaired or affected without the
consent of such Holder.
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SECTION 6.8 COLLECTION SUIT BY TRUSTEE
If an Event of Default specified in Section 6.1 (a) or (b) occurs and
is continuing, the Trustee is authorized to recover judgment in its own name
and as trustee of an express trust against Seven Seas for the whole amount of
principal of, premium and Liquidated Damages and Additional Amounts, if any,
and interest remaining unpaid on the Notes and interest on overdue principal
and, to the extent lawful, interest and such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel, and any other amounts due to the Trustee under Section
7.7.
SECTION 6.9 TRUSTEE MAY FILE PROOFS OF CLAIM
The Trustee is authorized to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel)
and the Holders of the Notes allowed in any judicial proceedings relative to
Seven Seas (or any other obligor upon the Notes), its creditors or its property
and will be entitled and empowered to collect, receive and distribute any money
or other property payable or deliverable on any such claims and any custodian
in any such judicial proceeding is hereby authorized by each Holder to make
such payments to the Trustee, and in the event that the Trustee shall consent
to the making of such payments directly to the Holders, to pay to the Trustee
any amount due to it for the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel, and any other amounts due
the Trustee under Section 7.7 hereof. To the extent that the payment of any
such compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel, and any other amounts due the Trustee under Section 7.7
hereof out of the estate in any such proceeding, shall be denied for any
reason, payment of the same shall be secured by a Lien on, and shall be paid
out of, any and all distributions, dividends, money, securities and other
properties that the Holders may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee
to authorize or consent to or accept or adopt on behalf of my Holder any plan
of reorganization, or an adjustment or composition affecting the Notes or the
rights of any Holder, or to authorize the Trustee to vote in respect of the
claim of any Holder in any such proceeding.
SECTION 6.10 PRIORITIES
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.7 hereof, including payment of all compensation, expenses and
liabilities incurred, and all advances made, by the Trustee and the costs and
expenses of such collection;
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Second: to Holders of Notes for amounts due and unpaid on the Notes
for principal, premium, Additional Amounts and Liquidated Damages, if any, and
interest, ratably, without preference or priority of any kind, according to the
amounts due and payable on the Notes for principal, premium and Liquidated
Damages and Additional Amounts, if any, and interest, respectively; and
Third: to Seven Seas or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Notes pursuant to this Section 6.10.
SECTION 6.11 UNDERTAKING FOR COSTS
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder
of a Note pursuant to Section 6.7 hereof, or a suit by Holders of more than 10%
in aggregate of the principal amount of the then outstanding Notes.
ARTICLE VII
TRUSTEE
SECTION 7.1 DUTIES OF TRUSTEE
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely
by the express provisions of this Indenture and the Pledge Agreement
and the Trustee need perform only those duties that are specifically
set forth in this Indenture and the Pledge Agreement and no others,
and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(ii) in the absence of bad faith on its part the Trustee
may conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this
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Indenture or the Pledge Agreement. However, the Trustee shall examine
the certificates and opinions to determine whether or not they conform
to the requirements of this Indenture.
(c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph
(b) of this Section;
(ii) the Trustee shall not be liable for any error of
judgment made in good faith by a Responsible Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent
facts; and
(iii) the Trustee shall not be liable with respect to any
action it takes or omits to take in good faith in accordance with a
direction received by it pursuant to Section 6.5 hereof.
(d) Whether or not therein expressly so provided, every provision
of this Indenture and the Pledge Agreement that in any way relates to the
Trustee is subject to the provisions of this Section.
(e) No provision of this Indenture or the Pledge Agreement shall
require the Trustee to expend or risk its own funds or incur any liability.
The Trustee shall be under no obligation to exercise any of its rights and
powers under this Indenture or the Pledge Agreement at the request of any
Holders, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense.
(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with Seven Seas.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
SECTION 7.2 RIGHTS OF TRUSTEE
(a) The Trustee may conclusively rely upon any document believed
by it to be genuine and to have been signed or presented by the proper Person.
The Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel or both. The Trustee
shall not be liable for any action it takes or omits to take in good faith in
reliance on such Officers' Certificate or Opinion of Counsel. The Trustee may
consult with counsel and the written advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
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(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any attorney or agent
appointed with due care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith that it believes to be authorized or within the
rights or powers conferred upon it by this Indenture.
(e) The Trustee shall not be bound to make any investigation into
the facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, direction or other paper or
document, but the Trustee, in its discretion, may make such further inquiry or
investigation into such facts or matters as it may see fit, and if the Trustee
shall determine to make such further inquiry or investigation, it shall be
entitled to examine the books, records and premises of Seven Seas, personally
or by agent or attorney.
(f) Unless otherwise specifically provided in this Indenture and
subject to Section 7.2(b), any demand, request, direction or notice from Seven
Seas shall be sufficient if signed by an Officer of Seven Seas.
(g) The Trustee shall be under no obligation to exercise any of
the rights or powers vested in it by this Indenture or the Pledge Agreement at
the request or direction of any of the Holders unless such Holders shall have
offered to the Trustee reasonable security or indemnity against the costs,
expenses and liabilities that might be incurred by it in compliance with such
request or direction.
(h) the Trustee shall not be liable with respect to the validity
or perfection of any security interest to be created under the Pledge Agreement
or this Indenture.
SECTION 7.3 INDIVIDUAL RIGHTS OF TRUSTEE
The Trustee in its individual or any other capacity may become the
owner or pledgee of Notes and may otherwise deal with Seven Seas or any
Affiliate of Seven Seas with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest (as defined in the Trust Indenture Act) it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue as
Trustee or resign. Any Agent may do the same with like rights and duties. The
Trustee is also subject to Sections 7.10 and 7.11 hereof.
SECTION 7.4 TRUSTEE'S DISCLAIMER
The Trustee shall not be responsible for and makes no representation
as to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for Seven Seas' use of the proceeds from the Notes or any money
paid to Seven Seas or upon Seven Seas' direction under any provision of this
Indenture, it shall not be responsible for the use or application of any money
received by any Paying Agent other than the Trustee, and it shall not be
responsible for any
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statement or recital herein or any statement in the Notes or any other document
in connection with the sale of the Notes or pursuant to this Indenture other
than its certificate of authentication.
SECTION 7.5 NOTICE OF DEFAULTS
If a Default or Event of Default occurs and is continuing and if it is
known to the Trustee, the Trustee shall mail to Holders of Notes a notice of
the Default or Event of Default within 90 days after it occurs. Except in the
case of a Default or Event of Default in payment of principal of, premium, if
any, or interest on any Note, the Trustee may withhold the notice if and so
long as a committee of its Responsible Officers in good faith determines that
withholding the notice is in the interests of the Holders of the Notes.
SECTION 7.6 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES
Within 60 days after each May 15th beginning with May 15, 1999, and
for so long as Notes remain outstanding, the Trustee shall mail to the Holders
of the Notes a brief report dated as of such reporting date that complies with
TIA Section 313(a) (but if no event described in TIA Section 313(a) has
occurred within the twelve months preceding the reporting date, no report need
be transmitted). The Trustee also shall comply with TIA Section 313(b)(2).
The Trustee shall also transmit by mail all reports as required by TIA Section
313(c).
A copy of each report at the time of its mailing to the Holders of
Notes shall be mailed to Seven Seas and filed with the Commission and each
stock exchange on which the Notes are listed in accordance with TIA Section
313(d). Seven Seas shall promptly notify the Trustee when the Notes are listed
on any stock exchange.
SECTION 7.7 COMPENSATION AND INDEMNITY
Seven Seas shall pay to the Trustee from time to time such
compensation as agreed to between Seven Seas and the Trustee for its acceptance
of this Indenture and the Pledge Agreement and services hereunder and
thereunder. The Trustee's compensation shall not be limited by any law on
compensation of a trustee of an express trust. Seven Seas shall reimburse the
Trustee promptly upon request for all reasonable disbursements, advances and
expenses incurred or made by it in addition to the compensation for its
services. Such expenses shall include the reasonable compensation,
disbursements and expenses of the Trustee's agents and counsel.
Seven Seas shall indemnify the Trustee against any and all losses,
liabilities or expenses (including reasonable attorneys' fees) incurred by it
arising out of or in connection with the acceptance or administration of its
duties under this Indenture and the Pledge Agreement, including the costs and
expenses of enforcing this Indenture and the Pledge Agreement against Seven
Seas (including this Section 7.7) and defending itself against any claim
(whether asserted by Seven Seas or any Holder or any other Person) or liability
in connection with the exercise or performance of any of its powers or duties
hereunder or thereunder, except to the extent any such loss, liability or
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expense may be attributable to its negligence or bad faith. The Trustee shall
notify Seven Seas promptly of any claim for which it may seek indemnity.
Failure by the Trustee to so notify Seven Seas shall not relieve Seven Seas of
its obligations hereunder. Seven Seas shall defend the claim and the Trustee
shall cooperate in the defense. The Trustee may have separate counsel and
Seven Seas shall pay the reasonable fees and expenses of such counsel. Seven
Seas need not pay for any settlement made without its consent, which consent
shall not be unreasonably withheld.
The obligations of Seven Seas under this Section 7.7 shall survive the
resignation or removal of the Trustee and the satisfaction and discharge of
this Indenture.
To secure Seven Seas' payment obligations in this Section, the Trustee
shall have a Lien prior to the interest of the Holders of the Notes on all
money or Property held or collected by the Trustee, except that held in trust
to pay principal, premium, Additional Amounts and Liquidated Damages, if any,
and interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(g) or 6.1(h) hereof occurs, the expenses and
the compensation for the services (including the fees and expenses of its
agents and counsel) are intended to constitute expenses of administration under
any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section 313(b)(2)
to the extent applicable.
SECTION 7.8 REPLACEMENT OF TRUSTEE
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section.
The Trustee may resign in writing at any time and be discharged from
the trust hereby created by so notifying Seven Seas. The Holders of Notes of a
majority in aggregate of the principal amount of the then outstanding Notes may
remove the Trustee by so notifying the Trustee and Seven Seas in writing.
Seven Seas may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee or
its property; or
(d) the Trustee becomes incapable of acting.
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If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, Seven Seas shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in aggregate of the principal amount of the then outstanding
Notes may appoint a successor Trustee to replace the successor Trustee
appointed by Seven Seas.
If a successor Trustee does not take office within 60 days after the
retiring Trustee notifies Seven Seas of its resignation is removed, the
retiring Trustee, Seven Seas, or the Holders of Notes of at least 10% in
aggregate of the principal amount of the then outstanding Notes may petition
any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note who has
been a Holder of a Note for at least six months, fails to comply with Section
7.10, such Holder of a Note may petition any court of competent jurisdiction
for the removal of the Trustee and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to Seven Seas. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly
transfer all property held by it as Trustee to the successor Trustee, provided
all sums owing to the Trustee hereunder have been paid and subject to the Lien
provided for in Section 7.7 hereof. Notwithstanding replacement of the Trustee
pursuant to this Section 7.8, Seven Seas' obligations under Section 7.7 hereof
shall continue for the benefit of the retiring Trustee.
SECTION 7.9 SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
the successor corporation without any further act shall be the successor
Trustee. Within 30 days of such event, the successor Trustee shall mail a
notice of its succession to Seven Seas and the Holders of the Notes.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION
There shall at all times be a Trustee hereunder that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or
state authorities and that has a combined capital and surplus of at least $50.0
million (in the case of each successor Trustee) as set forth in its most recent
published annual report of condition.
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This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST SEVEN SEAS
The Trustee is subject to TIA Section 31l(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE VIII
LEGAL DEFEASANCE AND
COVENANT DEFEASANCE
SECTION 8.1 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE
Seven Seas may, at the option of its Board of Directors evidenced by a
resolution set forth in an Officers' Certificate, at any time, elect to have
either Section 8.2 or 8.3 hereof be applied to all outstanding Notes upon
compliance with the conditions set forth below in this Article Eight.
SECTION 8.2 LEGAL DEFEASANCE AND DISCHARGE
Upon Seven Seas' exercise under Section 8.1 hereof of the option
applicable to this Section 8.2, Seven Seas shall, subject to the satisfaction
of the conditions set forth in Section 8.4 hereof, be deemed to have been
discharged from its obligations with respect to all outstanding Notes on the
date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that Seven Seas shall
be deemed to have paid and discharged the entire Indebtedness represented by
the outstanding Notes, which shall thereafter be deemed to be "outstanding"
only for the purposes of Section 8.5 hereof and the other sections of this
Indenture referred to in (a) and (b) below, and to have satisfied all its other
obligations under such Notes and this Indenture (and the Trustee, on demand of
and at the expense of Seven Seas, shall execute proper instruments
acknowledging the same), except for the following provisions which shall
survive until otherwise terminated or discharged hereunder: (a) the rights of
Holders of outstanding Notes to receive solely from the trust fund described in
Section 8.4 hereof, and as more fully set forth in such Section, payments in
respect of the principal of, premium, if any, and interest and Liquidated
Damages and Additional Amounts, if any, on such Notes when such payments are
due, (b) Seven Seas' obligations with respect to such Notes under Article 2 and
Section 4.2 hereof, (c) the rights, powers, trusts, duties and immunities of
the Trustee hereunder and Seven Seas' obligations in connection therewith and
(d) this Article Eight. Subject to compliance with this Article Eight, Seven
Seas may exercise its option under this Section 8.2 notwithstanding the prior
exercise of its option under Section 8.3 hereof.
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SECTION 8.3 COVENANT DEFEASANCE
Upon Seven Seas' exercise under Section 8.1 hereof of the option
applicable to this Section 8.3, Seven Seas shall, subject to the satisfaction
of the conditions set forth in Section 8.4 hereof, be released from its
obligations under the covenants contained in Sections 4.7, 4.9, 4.10, 4.11,
4.12, 4.13, 4.14, 4.15, 4.16, 4.17, 4.18 and 4.19 and Section 5.1(iv) hereof
with respect to the outstanding Notes on and after the date the conditions set
forth below are satisfied (hereinafter, "Covenant Defeasance"), and the Notes
shall thereafter be deemed not "outstanding" for the purposes of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder (it being understood that such
Notes shall not be deemed outstanding for accounting purposes). For this
purpose such Covenant Defeasance means that, with respect to the outstanding
Notes and Subsidiary Guarantees, if any, Seven Seas and any Subsidiary
Guarantor may omit to comply with and shall have no liability in respect of any
term, condition or limitation set forth in any such covenant, whether directly
or indirectly, by reason of any reference elsewhere herein to any such covenant
or by reason of any reference in any such covenant to any other provision
herein or in any other document and such omission to comply shall not
constitute a Default or an Event of Default under Sections 6.1(c) and 6.1(d),
but, except as specified above, the remainder of this Indenture and such Notes
and Subsidiary Guarantees, if any, shall be unaffected thereby. In addition,
upon Seven Seas' exercise under Section 8.1 of the option applicable to Section
8.3, Sections 6.1(c) through 6.1(f) and Section 6.1(i) shall not constitute
Events of Default.
SECTION 8.4 CONDITIONS TO LEGAL DEFEASANCE OR COVENANT DEFEASANCE
The following shall be the conditions to application of either Section
8.2 or Section 8.3 to the outstanding Notes and Subsidiary Guarantees (if any):
(a) Seven Seas must irrevocably deposit with the Trustee, in
trust, for the benefit of the Holders of the Notes, cash in United States
dollars, non-callable U.S. Government Securities, or a combination thereof, in
such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants, to pay the principal of, premium, if
any, and interest and Liquidated Damages and Additional Amounts, if any, on the
outstanding Notes of the Stated Maturity or on the applicable redemption date,
as the case may be, and Seven Seas must specify whether the Notes are being
defeased to maturity or to a particular redemption date;
(b) in the case of Legal Defeasance, Seven Seas shall have
delivered to the Trustee an Opinion of Counsel in the United States confirming
that, (i) Seven Seas has received from, or there has been published by, the
Internal Revenue Service a ruling or (ii) since the date of this Indenture,
there has been a change in the applicable United States federal income tax law,
in either case to the effect that, and based thereon such Opinion of Counsel
shall confirm that, the Holders of the outstanding Notes will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such Legal Defeasance and will be subject to United States federal income
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tax on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred;
(c) in the case of Covenant Defeasance, Seven Seas shall have
delivered to the Trustee an Opinion of Counsel in the United States confirming
that the Holders of the outstanding Notes will not recognize income, gain or
loss for United States federal income tax purposes as a result of such Covenant
Defeasance and will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Covenant Defeasance had not occurred;
(d) Seven Seas will have delivered to the Trustee an Opinion of
Counsel in Canada confirming that the Holders of the outstanding Notes will not
recognize income, gain or loss for Canadian federal income tax purposes as a
result of such Legal Defeasance and will be subject to Canadian federal income
tax on the same amounts, in the same manner and at the same times as could have
been the case if such Legal Defeasance had not occurred;
(e) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of
Default resulting from the borrowing of funds to be applied to such deposit) or
insofar as Section 6.1(g) or 6.1(h) hereof is concerned, at any time in the
period ending on the 91st day after the date of deposit;
(f) such Legal Defeasance or Covenant Defeasance shall not result
in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than this Indenture) to which Seven Seas or any
of its Subsidiaries is a party or by which Seven Seas or any of its
Subsidiaries is bound, including, without limitation, the Credit Facility;
(g) Seven Seas shall have delivered to the Trustee an Opinion of
Counsel to the effect that on the 91st day following the deposit, the trust
funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(h) Seven Seas shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by Seven Seas with the intent
of preferring the Holders of Notes over any other creditors of Seven Seas or
with the intent of defeating, hindering, delaying or defrauding creditors of
Seven Seas or others; and
(i) Seven Seas shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for or relating to the Legal Defeasance or the Covenant
Defeasance, as the case may be, have been complied with.
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SECTION 8.5 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS
Subject to Section 8.6 hereof, all money and non-callable U.S.
Government Securities (including the proceeds thereof) deposited with the
Trustee (or other qualifying trustee, collectively for purposes of this Section
8.5, the "Trustee") pursuant to Section 8.4 hereof in respect of the
outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the
payment, either directly or through any Paying Agent (including Seven Seas
acting as Paying Agent) as the Trustee may determine, to the Holders of such
Notes of all sums due and to become due thereon in respect of principal,
premium, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
Seven Seas shall pay and indemnify the Trustee against any tax, fee or
other charge imposed on or assessed against the cash or non-callable U.S.
Government Securities deposited pursuant to Section 8.4 hereof or the principal
and interest received in respect thereof.
Anything in this Article Eight to the contrary notwithstanding, the
Trustee shall deliver or pay to Seven Seas from time to time upon the request
of Seven Seas, any money or non-callable U.S. Government Securities held by it
as provided in Section 8.4 hereof which, in the opinion of a nationally
recognized firm of independent public accountants expressed in a written
certification thereof delivered to the Trustee (which may be the opinion
delivered under Section 8.4(a) hereof), are in excess of the amount thereof
that would then be required to be deposited to effect an equivalent Legal
Defeasance or Covenant Defeasance.
SECTION 8.6 REPAYMENT TO SEVEN SEAS
Subject to applicable escheat and abandoned property laws, any money
deposited with the Trustee or any Paying Agent, or then held by Seven Seas, in
trust for the payment of the principal of, premium if any, Liquidated Damages
and Additional Amounts or interest on any Note and remaining unclaimed for two
years after such principal, and premium, if any, Liquidated Damages and
Additional Amounts, if any, or interest has become due and payable shall be
paid to Seven Seas on its request or (if then held by Seven Seas) shall be
discharged from such trust; and the Holder of such Note shall thereafter, as a
creditor, look only to Seven Seas for payment thereof, and all liability of the
Trustee or such Paying Agent with respect to such trust money, and all
liability of Seven Seas as trustee thereof, shall thereupon cease; provided,
however, that the Trustee or such Paying Agent, before being required to make
any such repayment, may at the expense of Seven Seas cause to be published
once, in The New York Times and The Wall Street Journal (national edition),
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such
notification or publication, any unclaimed balance of such money then remaining
will be repaid to Seven Seas.
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SECTION 8.7 REINSTATEMENT
If the Trustee or Paying Agent is unable to apply any United States
dollars or non-callable U.S. Government Securities in accordance with Section
8.5 hereof, by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application,
then Seven Seas' obligations under this Indenture and the Notes shall be
revived and reinstated as though no deposit had occurred pursuant to Section
8.2 or 8.3 hereof, as the case may be, until such time as the Trustee or Paying
Agent is permitted to apply all such money in accordance with Section 8.5
hereof, as the case may be; provided, however, that, if Seven Seas makes any
payment of principal of, premium, if any, or interest on any Note following the
reinstatement of its obligations, Seven Seas shall be subrogated to the rights
of the Holders of such Notes to receive such payment from the money held by the
Trustee or Paying Agent.
ARTICLE IX
AMENDMENT, SUPPLEMENT AND
WAIVER
SECTION 9.1 WITHOUT CONSENT OF HOLDERS OF NOTES
Notwithstanding Section 9.2 of this Indenture, Seven Seas, the
Guarantors, if any, and the Trustee may amend or supplement this Indenture, the
Notes or the Pledge Agreement without the consent of any Holder of a Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for certificated Notes in addition to or in place
of uncertificated Notes;
(c) to provide for the assumption of Seven Seas' obligations to
the Holders of the Notes pursuant to Article 5 hereof;
(d) to make any change that would provide any additional rights or
benefits to the Holders of the Notes, to further secure the Notes, to add to
the covenants of Seven Seas for the benefit of the Holders of the Notes or to
surrender any right or power conferred upon Seven Seas, or to make any change
that does not adversely affect the legal rights hereunder of any Holder of the
Notes;
(e) to comply with requirements of the Commission in order to
effect or maintain the qualification of this Indenture under the Trust
Indenture Act; or
(f) to add any additional Guarantor or to release any Guarantor
from its Subsidiary Guarantee in accordance with this Indenture.
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Upon the request of Seven Seas accompanied by a resolution of its
Board of Directors authorizing the execution of any such amendment or
supplement, and upon receipt by the Trustee of the documents described in
Section 9.6 hereof, the Trustee shall join with Seven Seas in the execution of
any amendment or supplement authorized or permitted by the terms of this
Indenture and to make any further appropriate agreements and stipulations that
may be therein contained, but the Trustee shall not be obligated to enter into
such amendment or supplement that affects its own rights, duties or immunities
under this Indenture, the Pledge Agreement or otherwise.
SECTION 9.2 WITH CONSENT OF HOLDERS OF NOTES
Except as provided below in this Section 9.2, Seven Seas and the
Trustee may amend or supplement this Indenture (including Sections 4.9 and 4.10
hereof), the Notes and the Pledge Agreement amended or supplemented with the
consent of the Holders of at least a majority in aggregate of the principal
amount of Notes then outstanding (including consents obtained in connection
with a purchase of or tender offer or exchange offer for the Notes).
Upon the request of Seven Seas accompanied by a resolution of its
Board of Directors authorizing the execution of any such amendment or
supplement, and upon the filing with the Trustee of evidence satisfactory to
the Trustee of the consent of the Holders of Notes as aforesaid, and upon
receipt by the Trustee of the documents described in Section 9.6 hereof, the
Trustee shall join with Seven Seas in the execution of such amendment or
supplement unless such amendment or supplement affects the Trustee's own
rights, duties or immunities under this Indenture or otherwise, in which case
the Trustee may in its discretion, but shall not be obligated to, enter into
such amendment or supplement.
It shall not be necessary for the consent of the Holders of Notes
under this Section 9.2 to approve the particular form of any proposed
amendment, supplement or waiver, but it shall be sufficient if such consent
approves the substance thereof.
After an amendment, supplement or waiver under this Section becomes
effective, Seven Seas shall mail to the Holders of Notes affected thereby a
notice briefly describing the amendment, supplement or waiver. Any failure of
Seven Seas to mail such notice, or any defect therein, shall not, however, in
any way impair or affect the validity of any such amendment, supplement or
waiver.
Subject to Sections 6.4 and 6.7 hereof and the provisions of this
Section, the Holders of a majority in aggregate principal amount of the Notes
then outstanding may waive any existing Default or Event of Default compliance
in a particular instance by Seven Seas with any provision of this Indenture,
the Notes or the Pledge Agreement. However, without the consent of each Holder
affected, an amendment or waiver may not (with respect to any Notes held by a
non-consenting Holder):
(a) reduce the principal amount of Notes whose Holders must
consent to an amendment, supplement or waiver;
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(b) reduce the principal of or the Liquidated Damages or
Additional Amounts payable with respect to any Note, change the fixed maturity
of any Note or alter or waive any of the provisions with respect to the
redemption or repurchase of the Notes, except as provided above with respect to
Sections 4.9 and 4.10 hereof;
(c) reduce the rate of or change the time for payment of interest,
including default interest, on any Note;
(d) waive a Default or Event of Default in the payment of
principal of or premium, if any, or interest on the Notes (except a rescission
of acceleration of the Notes by the Holders of at least a majority in aggregate
principal amount of the then outstanding Notes and a waiver of the Payment
Default that resulted from such acceleration);
(e) make any Note payable in money other than that stated in the
Notes;
(f) make any change in the provisions of this Indenture relating
to waivers of past Defaults or the rights of Holders of Notes to receive
payments of principal of or interest, premium, if any, or Liquidated Damages or
Additional Amounts, if any, on the Notes;
(g) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants under Sections 4.9 or 4.10
hereof);
(h) make any change in Section 6.4 or 6.7 hereof or in the
foregoing amendment and waiver provisions;
(i) except as provided in Article VIII hereof, or in accordance
with the terms of any Subsidiary Guarantee, release a Guarantor from its
obligations under its Subsidiary Guarantee or make any changes in the Notes or
the Subsidiary Guarantees that would change the ranking thereof to anything
other than pari passu in right of payment to all Senior Indebtedness of Seven
Seas or the applicable Guarantor;
(j) release any of the Pledged Securities from the Lien of this
Indenture or the Pledge Agreement except in accordance with the terms of this
Indenture; or
(k) make any modification to the provisions in Section 4.20 hereof
that would adversely affect the rights of Holders to receive Additional Amounts
as described thereunder.
SECTION 9.3 COMPLIANCE WITH TRUST INDENTURE ACT
Every amendment or supplement to this Indenture or the Notes shall be
set forth in an amended or supplemental Indenture that complies with the Trust
Indenture Act as then in effect.
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SECTION 9.4 REVOCATION AND EFFECT OF CONSENTS
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder of a Note is a continuing consent by the Holder of a Note and
every subsequent Holder of a Note or portion of a Note that evidences the same
debt as the consenting Holder's Note, even if notation of the consent is not
made on any Note. However, any such Holder of a Note or subsequent Holder of a
Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment
becomes effective. An amendment, supplement or waiver becomes effective in
accordance with its terms and thereafter binds every Holder.
SECTION 9.5 NOTATION ON OR EXCHANGE OF NOTES
The Trustee may place in appropriate notation about an amendment,
supplement or waiver on any Note thereafter authenticated. Seven Seas in
exchange for all Notes may issue and the Trustee shall authenticate new Notes
that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or issue a new Note shall not
affect the validity and effect of such amendment, supplement or waiver.
SECTION 9.6 TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amendment or supplement authorized pursuant
to this Article IX if the amendment or supplement does not adversely affect the
rights, duties, liabilities or immunities of the Trustee. Seven Seas may not
sign an amendment or supplement until the Board of Directors approves it. In
executing any amendment or supplement, the Trustee shall be entitled to receive
indemnity reasonably satisfactory to it and to receive and (subject to Section
7.1) shall be fully protected in relying upon, in addition to the documents
required by Section 9.2, an Officers' Certificate and an Opinion of Counsel
stating that the execution of such amended or supplemental indenture is
authorized or permitted by this Indenture and the Pledge Agreement, if
applicable.
ARTICLE X
MISCELLANEOUS
SECTION 10.1 TRUST INDENTURE ACT CONTROLS
If any provision of this Indenture limits, qualifies or conflicts with
the duties imposed by TIA Section 318(c), the imposed duties shall control.
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SECTION 10.2 NOTICES
Any notice or communication by Seven Seas or the Trustee to the others
is duty given if in writing and delivered in Person or mailed by first class
mail (registered or certified, return receipt requested), telecopier or
overnight air courier guaranteeing next day delivery, to the others' address:
If to Seven Seas:
Seven Seas Petroleum Inc.
1990 Post Oak Blvd., Suite 960
Houston, Texas 77056
Attention: President
Telephone No.: 713-622-8218
Telecopier No.: 713-621-9770
With a copy to:
Vinson & Elkins
1001 Fannin, Suite 2300
First City Tower
Houston, Texas 77002
Attention: T. Mark Kelly
Telephone No. 713-758-4592
Telecopier No. 713-615-5531
If to the Trustee:
The Bank of Nova Scotia Trust Company of New York
One Liberty Plaza, 23rd Floor
New York, NY 10006
Attention: Corporate Trust Department
Telephone No.. 212-225- 5422
Telecopier No.: 212-225-5436
Seven Seas or the Trustee, by notice to the others may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given; at the time delivered by hand, if
personally delivered; when receipt acknowledged, if telecopied; and the next
Business Day after timely delivery to the courier, if sent by overnight air
courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first class
mail, certified or registered, return receipt requested, or by overnight air
courier guaranteeing next day delivery to its address shown on the register
kept by the Registrar. Any notice or communication shall also be so
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mailed to any Person described in TIA Section 313(c), to the extent required by
the Trust Indenture Act. Failure to mail a notice or communication to a Holder
or any defect in it shall not affect its sufficiency with respect to other
Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If Seven Seas mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Notes. Seven
Seas, the Trustee, the Registrar and anyone else shall have the protection of
TIA Section 312(c).
SECTION 10.3 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT
Upon any request or application by Seven Seas to the Trustee to take
any action under this Indenture, Seven Seas, upon request, shall furnish to the
Trustee:
(a) an Officers' Certificate in form reasonably satisfactory to
the Trustee (which shall include the statements set forth in Section 10.4
hereof) stating that, in the opinion of the signers, all conditions precedent
and covenants, if any, provided for in this Indenture relating to the proposed
action have been satisfied; and
(b) an Opinion of Counsel in form reasonably satisfactory to the
Trustee (which shall include the statements set forth in Section 10.4 hereof)
stating that, in the opinion of such counsel, all such conditions precedent and
covenants have been satisfied.
SECTION 10.4 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION
Each certificate (other than the certificates provided pursuant to
Section 4.22) or opinion with respect to compliance with a condition or
covenant provided for in this Indenture shall include:
(a) a statement that the person making such certificate or opinion
has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions contained in
such certificate or opinion are based;
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(c) a statement that, in the opinion of such person, he has made
such examination or investigation as is necessary to enable him to express an
informed opinion as to whether such covenant or condition has been complied
with; and
(d) a statement as to whether, in the opinion of such person, such
condition or covenant has been complied with; provided, however, that with
respect to matters of fact an Opinion of Counsel may rely on an Officers'
Certificate or certificates of public officials.
SECTION 10.5 GOVERNING LAW
THIS INDENTURE, THE NOTES AND THE SUBSIDIARY GUARANTEES, IF ANY, SHALL
BE, GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW
YORK.
SECTION 10.6 LEGAL HOLIDAYS
In any case where a payment date shall not be a Business Day, then
(notwithstanding any other provisions of this Indenture, the Notes or any
Subsidiary Guarantee) payment of interest or principal (and premium, if any)
need not be made on such date but may be made on the next succeeding Business
Day with the same force and effect as if made on the Interest Payment Date or
date established for payment of Defaulted Interest pursuant to Section 4.1 or
Maturity, and no interest shall accrue with respect to such payment for the
period from and after such Interest Payment Date or date established for
payment of Defaulted Interest pursuant to Section 4.1 or Maturity, as the case
may be, to the next succeeding Business Day.
SECTION 10.7 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS
No past, present or future director, officer, employee, incorporator
or stockholder of Seven Seas, as such, shall have any liability for any
obligations of Seven Seas under the Notes, this Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder by accepting a Note waives and releases all such liability. The
waiver and release are part of the consideration for issuance of the Notes.
SECTION 10.8 INDEMNIFICATION FOR JUDGMENT CURRENCY FLUCTUATIONS
The obligations of Seven Seas to any Holder of Notes shall,
notwithstanding any judgment in a currency (the "Judgment Currency") other than
United States dollars (the "Agreement Currency"), be discharged only to the
extent that on the day following receipt by such Holder of Notes or the
Trustee, as the case may be, of any amount in the Judgment Currency, such
Holder of Notes may in accordance with normal banking procedures purchase the
Agreement Currency with the Judgment Currency. If the amount of the Agreement
Currency so purchased is less than the amount originally to be paid to such
Holder of Notes or the Trustee, as the case may be, in the Agreement Currency,
Seven Seas agrees, as a separate obligation and notwithstanding such
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judgment, to pay to such Holder of Notes or the Trustee, as the case may be,
the difference, and if the amount of the Agreement Currency so purchased
exceeds the amount originally to be paid to such Holder of Notes or the
Trustee, as the case may be, such Holder of Notes or the Trustee, as the case
may be, agrees to pay to or for the account of Seven Seas such excess, provided
that such Holder of Notes or the Trustee, as the case may be, shall not have
any obligation to pay any such excess as long as a Default by Seven Seas in its
obligations under the Notes or this Indenture has occurred and is continuing,
in which case such excess may be applied by such Holder of Notes or the
Trustee, as the case may be, to such obligations.
SECTION 10.9 CONSENT TO JURISDICTION AND SERVICE OF PROCESS
Seven Seas and each Guarantor, if any, hereby appoints the principal
office of CT Corporation System in The City of New York which, on the date
hereof, is located at 1633 Broadway, New York, New York 10019, as the
authorized agent thereof (the "Authorized Agent") upon whom process may be
served in any action, suit or proceeding arising out of or based on this
Indenture or the Notes which may be instituted in the Supreme Court of the
State of New York or the United States District Court for the Southern District
of New York, in either case in The Borough of Manhattan, The City of New York,
by the Trustee or any Holder of any Note, and Seven Seas and each Guarantor, if
any, hereby waives any objection which it may now or hereafter have to the
laying of venue of any such proceeding and expressly and irrevocably accepts
and submits, for the benefit of the Trustee and the Holders from time to time
of the Notes, to the nonexclusive jurisdiction of any such court in respect of
any such action, suit or proceeding, for itself and with respect to its
properties, revenues and assets. Such appointment shall be irrevocable unless
and until the appointment of a successor authorized agent for such purpose, and
such successor's acceptance of such appointment, shall have occurred. Seven
Seas and each Guarantor, if any, agrees to take any and all actions, including
the filing of any and all documents and instruments, that may be necessary to
continue such appointment in full force and effect as aforesaid. Service of
process upon the Authorized Agent with respect to any such action shall be
deemed, in every respect, effective service of process upon Seven Seas and any
such Guarantor. Notwithstanding the foregoing, any action against Seven Seas
or any Guarantor arising out of or based on any Note may also be instituted by
the Trustee or Holder of such Note in any court in the jurisdiction of
organization of Seven Seas or such Guarantor, and Seven Seas and each
Guarantor, if any, expressly accepts the jurisdiction of any such court in any
such action. Seven Seas shall require the Authorized Agent to agree in writing
to accept the foregoing appointment as agent for service of process.
SECTION 10.10 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS
This Indenture may not be used to interpret any other indenture, loan
or debt agreement of Seven Seas or its Subsidiaries or of any other Person.
Any such indenture, loan or debt agreement may not be used to interpret this
Indenture.
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SECTION 10.11 SUCCESSORS
All agreements of Seven Seas in this Indenture and the Notes shall
bind its successors. All agreements of the Trustee in this Indenture shall
bind its successors.
SECTION 10.12 SEVERABILITY
In case any provision in this Indenture or in the Notes shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 10.13 COUNTERPART ORIGINALS
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
SECTION 10.14 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, and their respective corporate seals to be hereunto affixed,
as of the date first written above.
SEVEN SEAS PETROLEUM INC.
By: /s/ Herbert C. Williamson, III
-----------------------------------------
Name: Herbert C. Williamson, III
Title: Executive Vice President and Chief
Financial Officer
THE BANK OF NOVA SCOTIA TRUST
COMPANY OF NEW YORK, as Trustee
By: /s/ John F. Neylan
-----------------------------------------
Name: John F. Neylan
Title: Assistant Trust Officer
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<PAGE> 1
EXHIBIT 4(B)
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated as of May 7, 1998
by and among
Seven Seas Petroleum Inc.
and
Donaldson, Lufkin & Jenrette
Securities Corporation
Bear, Stearns & Co. Inc.
CIBC Oppenheimer Corp.
Credit Suisse First Boston Corporation
Paribas Corporation
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<PAGE> 2
This Registration Rights Agreement (this "Agreement") is made and
entered into as of May 7, 1998, by and among Seven Seas Petroleum Inc., a
corporation organized under the laws of the Yukon Territory, Canada (the
"Company"), and Donaldson, Lufkin & Jenrette Securities Corporation, Bear,
Stearns & Co. Inc., CIBC Oppenheimer Corp., Credit Suisse First Boston and
Paribas Corporation (each an "Initial Purchaser" and, collectively, the
"Initial Purchasers"), each of whom has agreed to purchase the Company's
12 1/2% Series A Senior Notes due 2005 (the "Series A Notes") pursuant to the
Purchase Agreement (as defined below).
This Agreement is made pursuant to the Purchase Agreement, dated May
1, 1998, (the "Purchase Agreement"), by and among the Company, certain
subsidiaries of the Company and the Initial Purchasers. In order to induce the
Initial Purchasers to purchase the Series A Notes, the Company has agreed to
provide the registration rights set forth in this Agreement. The execution and
delivery of this Agreement is a condition to the obligations of the Initial
Purchasers set forth in Section 9 of the Purchase Agreement. Capitalized terms
used herein and not otherwise defined shall have the meaning assigned to them
the Indenture (the "Indenture"), dated as of May 7, 1998, between the Company
and The Bank of Nova Scotia Trust Company of New York, as Trustee, relating to
the Series A Notes and the Series B Notes (as defined below).
The parties hereby agree as follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
Act: The Securities Act of 1933, as amended.
Affiliate: As defined in Rule 144 of the Act.
Broker-Dealer: Any broker or dealer registered under the Exchange
Act.
Business Day: Any day on which the New York Stock Exchange is open for
trading and which is not a legal United States holiday.
Certificated Securities: Definitive Notes, as defined in the
Indenture.
Closing Date: The date hereof.
Commission: The Securities and Exchange Commission.
Consummate: An Exchange Offer shall be deemed "Consummated" for
purposes of this Agreement upon the occurrence of (a) the filing and
effectiveness under the Act of the Exchange Offer Registration Statement
relating to the Series B Notes to be issued in the Exchange Offer, (b) the
maintenance of such Exchange Offer Registration Statement continuously
effective and the
<PAGE> 3
keeping of the Exchange Offer open for a period not less than the period
required pursuant to Section 3(b) hereof and (c) the delivery by the Company to
the Registrar under the Indenture of Series B Notes in the same aggregate
principal amount as the aggregate principal amount of Series A Notes tendered
by Holders thereof pursuant to the Exchange Offer.
Consummation Deadline: As defined in Section 3(b) hereof.
Effectiveness Deadline: As defined in Sections 3(a) and 4(a) hereof.
Exchange Act: The Securities Exchange Act of 1934, as amended.
Exchange Offer: The exchange and issuance by the Company of a
principal amount of Series B Notes (which shall be registered pursuant to the
Exchange Offer Registration Statement) equal to the outstanding principal
amount of Series A Notes that are tendered by such Holders in connection with
such exchange and issuance.
Exchange Offer Registration Statement: The Registration Statement
relating to the Exchange Offer, including the related Prospectus.
Exempt Resales: The transactions in which the Initial Purchasers
propose to sell the Series A Notes to certain "qualified institutional buyers,"
as such term is defined in Rule 144A under the Act and pursuant to Regulation S
under the Act.
Filing Deadline: As defined in Sections 3(a) and 4(a) hereof.
Guarantor: Any subsidiary of the Company that has guaranteed the
Series A Notes or Series B Notes as provided in the Indenture.
Holders: As defined in Section 2 hereof.
Indenture: The Indenture, dated the Closing Date, among the Company
and The Bank of Nova Scotia Trust Company, as trustee (the "Trustee"), pursuant
to which the Series A Notes and the Series B Notes are to be issued, as such
Indenture is amended or supplemented from time to time in accordance with the
terms thereof.
NASD: National Association of Securities Dealers, Inc.
Person: An individual, partnership, corporation, trust,
unincorporated organization, or a government or agency or political subdivision
thereof.
Prospectus: The prospectus included in a Registration Statement at
the time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
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<PAGE> 4
Recommencement Date: As defined in Section 6(d) hereof.
Registration Default: As defined in Section 5 hereof.
Registration Statement: Any registration statement of the Company and
the Guarantors (if any) relating to (a) an offering of Series B Notes pursuant
to an Exchange Offer or (b) the registration for resale of Transfer Restricted
Securities pursuant to the Shelf Registration Statement, in each case, (i) that
is filed pursuant to the provisions of this Agreement and (ii) including the
Prospectus included therein, all amendments and supplements thereto (including
post-effective amendments) and all exhibits and material incorporated by
reference therein.
Regulation S: Regulation S promulgated under the Act.
Rule 144: Rule 144 promulgated under the Act.
Series B Notes: The Company's 12 1/2% Series B Senior Notes due 2005
to be issued pursuant to the Indenture: (i) in the Exchange Offer or (ii) as
contemplated by Section 4 hereof.
Shelf Registration Statement: As defined in Section 4 hereof.
Suspension Notice: As defined in Section 6(d) hereof.
TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section
77aaa-77bbbb) as in effect on the date of the Indenture.
Transfer Restricted Securities: Each Series A Note, until the
earliest to occur of (a) the date on which such Series A Note is exchanged in
the Exchange Offer for a Series B Note which is entitled to be resold to the
public by the Holder thereof without complying with the prospectus delivery
requirements of the Act, (b) the date on which such Series A Note has been
disposed of in accordance with a Shelf Registration Statement (and the
purchasers thereof have been issued Series B Notes), or (c) the date on which
such Series A Note is distributed to the public pursuant to Rule 144 under the
Act (and purchasers thereof have been issued Series B Notes) and each Series B
Note until the date on which such Series B Note is disposed of by a
Broker-Dealer pursuant to the "Plan of Distribution" contemplated by the
Exchange Offer Registration Statement (including the delivery of the Prospectus
contained therein).
SECTION 2. HOLDERS
A Person is deemed to be a holder of Transfer Restricted Securities
(each, a "Holder") whenever such Person owns Transfer Restricted Securities.
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<PAGE> 5
SECTION 3. REGISTERED EXCHANGE OFFER
(a) Unless the Exchange Offer shall not be permitted by
applicable federal law (after the procedures set forth in Section 6(a)(i) below
have been complied with), the Company and the Guarantors (if any) shall (i)
cause the Exchange Offer Registration Statement to be filed with the Commission
as soon as practicable after the Closing Date, but in no event later than 60
days after the Closing Date (such 60th day being the "Filing Deadline"), (ii)
use their reasonable best efforts to cause such Exchange Offer Registration
Statement to become effective at the earliest possible time, but in no event
later than 120 days after the Closing Date (such 120th day being the
"Effectiveness Deadline"), (iii) in connection with the foregoing, (A) file all
pre-effective amendments to such Exchange Offer Registration Statement as may
be necessary in order to cause it to become effective, (B) file, if applicable,
a post-effective amendment to such Exchange Offer Registration Statement
pursuant to Rule 430A under the Act and (C) cause all necessary filings, if
any, in connection with the registration and qualification of the Series B
Notes to be made under the Blue Sky laws of such jurisdictions as are necessary
to permit Consummation of the Exchange Offer, and (iv) upon the effectiveness
of such Exchange Offer Registration Statement, commence and Consummate the
Exchange Offer. The Exchange Offer shall be on the appropriate form permitting
(i) registration of the Series B Notes to be offered in exchange for the Series
A Notes that are Transfer Restricted Securities and (ii) resales of Series B
Notes by Broker-Dealers that tendered into the Exchange Offer Series A Notes
that such Broker-Dealer acquired for its own account as a result of
market-making activities or other trading activities (other than Series A Notes
acquired directly from the Company or any of its Affiliates) as contemplated by
Section 3(c) below.
(b) The Company and the Guarantors (if any) shall use
their reasonable best efforts to cause the Exchange Offer Registration
Statement to be effective continuously, and shall keep the Exchange Offer open
for a period of not less than the minimum period required under applicable
federal and state securities laws to Consummate the Exchange Offer; provided,
however, that in no event shall such period be less than 20 Business Days. The
Company and the Guarantors (if any) shall cause the Exchange Offer to comply
with all applicable federal and state securities laws. No securities other
than the Series B Notes shall be included in the Exchange Offer Registration
Statement. The Company and the Guarantors (if any) shall use their respective
reasonable best efforts to cause the Exchange Offer to be Consummated on the
earliest practicable date after the Exchange Offer Registration Statement has
become effective, but in no event later than 30 Business Days thereafter (such
30th Business Day being the "Consummation Deadline").
(c) The Company shall include a "Plan of Distribution"
section in the Prospectus contained in the Exchange Offer Registration
Statement and indicate therein that any Broker-Dealer who holds Transfer
Restricted Securities that were acquired for the account of such Broker-Dealer
as a result of market-making activities or other trading activities (other than
Series A Notes acquired directly from the Company or any Affiliate of the
Company), may exchange such Transfer Restricted Securities pursuant to the
Exchange Offer. Such "Plan of Distribution" section shall also contain all
other information with respect to such sales by such Broker-Dealers that the
Commission may require in order to permit such sales pursuant thereto, but such
"Plan of Distribution" shall not name
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<PAGE> 6
any such Broker-Dealer or disclose the amount of Transfer Restricted Securities
held by any such Broker-Dealer, except to the extent required by the Commission
as a result of a change in policy, rules or regulations after the date of this
Agreement. See the Shearman & Sterling no-action letter (available July 2,
1993).
Because such Broker-Dealer may be deemed to be an "underwriter" within
the meaning of the Act and must, therefore, deliver a prospectus meeting the
requirements of the Act in connection with its initial sale of any Series B
Notes received by such Broker-Dealer in the Exchange Offer, the Company and the
Guarantors (if any) shall permit the use of the Prospectus contained in the
Exchange Offer Registration Statement by such Broker-Dealer to satisfy such
prospectus delivery requirement. To the extent necessary to ensure that the
Prospectus contained in the Exchange Offer Registration Statement is available
for sales of Series B Notes by Broker-Dealers, the Company and the Guarantors
(if any) agree to use their respective reasonable best efforts to keep the
Exchange Offer Registration Statement continuously effective, supplemented,
amended and current as required by and subject to the provisions of Section
6(a) and (c) hereof and in conformity with the requirements of this Agreement,
the Act and the policies, rules and regulations of the Commission as announced
from time to time, for a period of one year from the Consummation Deadline or
such shorter period as will terminate when all Transfer Restricted Securities
covered by such Registration Statement have been sold pursuant thereto. The
Company and the Guarantors (if any) shall provide sufficient copies of the
latest version of such Prospectus to such Broker-Dealers, promptly upon
request, and in no event later than one day after such request, at any time
during such period.
SECTION 4. SHELF REGISTRATION
(a) Shelf Registration. If (i) the Exchange Offer is not
permitted by applicable law (after the Company and the Guarantors (if any) have
complied with the procedures set forth in Section 6(a)(i) below) or (ii) if any
Holder of Transfer Restricted Securities shall notify the Company within 20
Business Days following the Consummation Deadline that (A) such Holder was
prohibited by law or Commission policy from participating in the Exchange Offer
or (B) such Holder may not resell the Series B Notes acquired by it in the
Exchange Offer to the public without delivering a prospectus and the Prospectus
contained in the Exchange Offer Registration Statement is not appropriate or
available for such resales by such Holder or (C) such Holder is a Broker-Dealer
and holds Series A Notes acquired directly from the Company or any of its
Affiliates, then the Company and the Guarantors (if any) shall:
(x) cause to be filed, on or prior to 60 days after the
earlier of (i) the date on which the Company determines that the
Exchange Offer Registration Statement cannot be filed as a result of
clause (a)(i) above and (ii) the date on which the Company receives
the notice specified in clause (a)(ii) above (such earlier date, the
"Filing Deadline"), a shelf registration statement pursuant to Rule
415 under the Act (which may be an amendment to the Exchange Offer
Registration Statement (the "Shelf Registration Statement")), relating
to all Transfer Restricted Securities, and
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<PAGE> 7
(y) use their respective reasonable best efforts to cause
such Shelf Registration Statement to become effective at the earliest
possible time, but in no event later than 60 days after the Filing
Deadline for the Shelf Registration Statement (such 60th day the
"Effectiveness Deadline").
If, after the Company has filed an Exchange Offer Registration
Statement that satisfies the requirements of Section 3(a) above, the Company is
required to file and make effective a Shelf Registration Statement solely
because the Exchange Offer is not permitted under applicable federal law (i.e.,
clause (a)(i) above), then the filing of the Exchange Offer Registration
Statement shall be deemed to satisfy the requirements of clause (x) above;
provided that, in such event, the Company shall remain obligated to meet the
Effectiveness Deadline set forth in clause (y).
To the extent necessary to ensure that the Shelf Registration
Statement is available for sales of Transfer Restricted Securities by the
Holders thereof entitled to the benefit of this Section 4(a) and the other
securities required to be registered therein pursuant to Section 6(b)(ii)
hereof, the Company and the Guarantors (if any) shall use their respective
reasonable best efforts to keep any Shelf Registration Statement required by
this Section 4(a) continuously effective, supplemented, amended and current as
required by and subject to the provisions of Sections 6(b) and (c) hereof and
in conformity with the requirements of this Agreement, the Act and the
policies, rules and regulations of the Commission as announced from time to
time, for a period of at least two years (as extended pursuant to Section
6(c)(i)) following the Closing Date, or such shorter period as will terminate
when all Transfer Restricted Securities covered by such Shelf Registration
Statement have been sold pursuant thereto.
(b) Provision by Holders of Certain Information in
Connection with the Shelf Registration Statement. No Holder of Transfer
Restricted Securities may include any of its Transfer Restricted Securities in
any Shelf Registration Statement pursuant to this Agreement unless and until
such Holder furnishes to the Company in writing, within 20 days after receipt
of a request therefor, the information specified in Item 507 or 508, as
applicable, of Regulation S-K of the Act for use in connection with any Shelf
Registration Statement or Prospectus or preliminary prospectus included
therein. No Holder of Transfer Restricted Securities shall be entitled to
liquidated damages pursuant to Section 5 hereof unless and until such Holder
shall have provided all such information. Each selling Holder agrees to
promptly furnish additional information required to be disclosed in order to
make the information previously furnished to the Company by such Holder not
materially misleading.
SECTION 5. LIQUIDATED DAMAGES
If (i) any Registration Statement required by this Agreement is not
filed with the Commission on or prior to the applicable Filing Deadline, (ii)
any such Registration Statement has not been declared effective by the
Commission on or prior to the applicable Effectiveness Deadline, (iii) the
Exchange Offer has not been Consummated on or prior to the Consummation
Deadline or (iv) any
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<PAGE> 8
Registration Statement required by this Agreement is filed and declared
effective but shall thereafter cease to be effective or fail to be usable for
its intended purpose without being succeeded immediately by a post-effective
amendment to such Registration Statement that cures such failure and that is
itself declared effective within 5 days of filing such post-effective amendment
to such registration statement (each such event referred to in clauses (i)
through (iv), a "Registration Default"), then the Company and the Guarantors
(if any) hereby jointly and severally agree to pay to each Holder of Transfer
Restricted Securities affected thereby liquidated damages in an amount equal to
$.05 per week per $1,000 in principal amount of Transfer Restricted Securities
held by such Holder for each week or portion thereof that the Registration
Default continues for the first 90-day period immediately following the
occurrence of such Registration Default. The amount of the liquidated damages
shall increase by an additional $.05 per week per $1,000 in principal amount of
Transfer Restricted Securities with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
liquidated damages of $.50 per week per $1,000 in principal amount of Transfer
Restricted Securities; provided that the Company and the Guarantors (if any)
shall in no event be required to pay liquidated damages for more than one
Registration Default at any given time. Notwithstanding anything to the
contrary set forth herein, (1) upon filing of the Exchange Offer Registration
Statement (and/or, if applicable, the Shelf Registration Statement), in the
case of (i) above, (2) upon the effectiveness of the Exchange Offer
Registration Statement (and/or, if applicable, the Shelf Registration
Statement), in the case of (ii) above, (3) upon Consummation of the Exchange
Offer, in the case of (iii) above, or (4) upon the filing of a post-effective
amendment to the Registration Statement or an additional Registration Statement
that causes the Exchange Offer Registration Statement (and/or, if applicable,
the Shelf Registration Statement) to again be declared effective or made usable
in the case of (iv) above, the liquidated damages payable with respect to the
Transfer Restricted Securities as a result of such clause (i), (ii), (iii) or
(iv), as applicable, shall cease.
All accrued liquidated damages shall be paid to the Holders entitled
thereto, in the manner provided for the payment of interest in the Indenture,
on each Interest Payment Date, as more fully set forth in the Indenture and the
Series A Notes. Notwithstanding the fact that any securities for which
liquidated damages are due cease to be Transfer Restricted Securities, all
obligations of the Company and the Guarantors (if any) to pay liquidated
damages with respect to securities shall survive until such time as such
obligations with respect to such securities shall have been satisfied in full.
SECTION 6. REGISTRATION PROCEDURES
(a) Exchange Offer Registration Statement. In connection
with the Exchange Offer, the Company and the Guarantors (if any) shall (x)
comply with all applicable provisions of Section 6(c) below, (y) use their
respective reasonable best efforts to effect such exchange and to permit the
resale of Series B Notes by Broker-Dealers that tendered in the Exchange Offer
Series A Notes that such Broker-Dealer acquired for its own account as a result
of its market-making activities or other trading activities (other than Series
A Notes acquired directly from the Company or any of
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<PAGE> 9
its Affiliates) being sold in accordance with the intended method or methods of
distribution thereof, and (z) comply with all of the following provisions:
(i) If, following the date hereof there has been
announced a change in Commission policy with respect to exchange
offers such as the Exchange Offer, that in the reasonable opinion of
counsel to the Company raises a substantial question as to whether the
Exchange Offer is permitted by applicable federal law, the Company and
the Guarantors (if any) hereby agree to seek a no-action letter or
other favorable decision from the Commission allowing the Company and
the Guarantors (if any) to Consummate an Exchange Offer for such
Transfer Restricted Securities. The Company and the Guarantors (if
any) hereby agree to pursue the issuance of such a decision to the
Commission staff level. In connection with the foregoing, the Company
and the Guarantors (if any) hereby agree to take all such other
actions as may be requested by the Commission or otherwise required in
connection with the issuance of such decision, including without
limitation (A) participating in telephonic conferences with the
Commission staff, (B) delivering to the Commission staff an analysis
prepared by counsel to the Company setting forth the legal bases, if
any, upon which such counsel has concluded that such an Exchange Offer
should be permitted and (C) diligently pursuing a resolution (which
need not be favorable) by the Commission staff.
(ii) As a condition to its participation in the Exchange
Offer, each Holder of Transfer Restricted Securities (including,
without limitation, any Holder who is a Broker Dealer) shall furnish,
upon the request of the Company, prior to the Consummation of the
Exchange Offer, a written representation to the Company and the
Guarantors (if any) which may be contained in the letter of
transmittal contemplated by the Exchange Offer Registration Statement)
to the effect that (A) it is not an Affiliate of the Company, (B) it
is not engaged in, and does not intend to engage in, and has no
arrangement or understanding with any person to participate in, a
distribution of the Series B Notes to be issued in the Exchange Offer
and (C) it is acquiring the Series B Notes in its ordinary course of
business. Each Holder using the Exchange Offer to participate in a
distribution of the Series B Notes hereby acknowledges and agrees
that, if the resales are of Series B Notes obtained by such Holder in
exchange for Series A Notes acquired directly from the Company or an
Affiliate thereof, it (1) could not, under Commission policy as in
effect on the date of this Agreement, rely on the position of the
Commission enunciated in Morgan Stanley and Co., Inc. (available June
5, 1991) and Exxon Capital Holdings Corporation(available May 13,
1988), as interpreted in the Commission's letter to Shearman &
Sterling dated July 2, 1993, and similar no-action letters (including,
if applicable, any no-action letter obtained pursuant to clause (i)
above), and (2) must comply with the registration and prospectus
delivery requirements of the Act in connection with a secondary resale
transaction and that such a secondary resale transaction must be
covered by an effective registration statement containing the selling
security holder and plan of distribution information required by Item
507 or 508, as applicable, of Regulation S-K.
(iii) Prior to effectiveness of the Exchange Offer
Registration Statement, the Company and the Guarantors (if any) shall
provide a supplemental letter to the Commission
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(A) stating that the Company and the Guarantors (if any) are
registering the Exchange Offer in reliance on the position of the
Commission enunciated in Exxon Capital Holdings Corporation (available
May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991)
as interpreted in the Commission's letter to Shearman & Sterling dated
July 2, 1993, and, if applicable, any no-action letter obtained
pursuant to clause (i) above, (B) including a representation that
neither the Company nor any Guarantor (if any) has entered into any
arrangement or understanding with any Person to distribute the Series
B Notes to be received in the Exchange Offer and that, to the best of
the Company's and each Guarantor's (if any) information and belief,
each Holder participating in the Exchange Offer is acquiring the
Series B Notes in its ordinary course of business and has no
arrangement or understanding with any Person to participate in the
distribution of the Series B Notes received in the Exchange Offer and
(C) any other undertaking or representation required by the Commission
as set forth in any no-action letter obtained pursuant to clause (i)
above, if applicable.
(b) Shelf Registration Statement.
(i) In connection with the Shelf Registration Statement,
the Company and the Guarantors (if any) shall (x) comply with
all the provisions of Section 6(c) below and (y) use their
respective reasonable best efforts to effect such registration
to permit the sale of the Transfer Restricted Securities being
sold in accordance with the intended method or methods of
distribution thereof (as indicated in the information furnished
to the Company pursuant to Section 4(b) hereof), and pursuant
thereto the Company and the Guarantors (if any) will prepare
and file with the Commission a Registration Statement relating
to the registration on any appropriate form under the Act,
which form shall be available for the sale of the Transfer
Restricted Securities in accordance with the intended method or
methods of distribution thereof within the time periods and
otherwise in accordance with the provisions hereof.
(ii) issue, upon the request of any Holder or purchaser of
Series A Notes covered by any Shelf Registration Statement
contemplated by this Agreement, Series B Notes having an
aggregate principal amount equal to the aggregate principal
amount of Series A Notes sold pursuant to the Shelf
Registration Statement and surrendered to the Company for
cancellation; the Company shall register Series B Notes on the
Shelf Registration Statement for this purpose and issue the
Series B Notes to the purchasers of securities subject to the
Shelf Registration Statement in the names as such purchasers
shall designate.
(c) General Provisions. In connection with any
Registration Statement and any related Prospectus required by this Agreement,
the Company and the Guarantors (if any) shall:
(i) use their respective reasonable best efforts to keep
such Registration Statement continuously effective and provide all
requisite financial statements for the period specified in Section 3
or 4 of this Agreement, as applicable. Upon the occurrence of any
event that would cause any such Registration Statement or the
Prospectus contained therein
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<PAGE> 11
(A) to contain an untrue statement of material fact or omit to state
any material fact necessary to make the statements therein not
misleading or (B) not to be effective and usable for resale of
Transfer Restricted Securities during the period required by this
Agreement, the Company and the Guarantors (if any) shall file promptly
an appropriate amendment to such Registration Statement curing such
defect, and, if Commission review is required, use their respective
reasonable best efforts to cause such amendment to be declared
effective as soon as practicable.
(ii) prepare and file with the Commission such amendments
and post-effective amendments to the applicable Registration Statement
as may be necessary to keep such Registration Statement effective for
the applicable period set forth in Section 3 or 4 hereof, as the case
may be; cause the Prospectus to be supplemented by any required
Prospectus supplement, and as so supplemented to be filed pursuant to
Rule 424 under the Act, and to comply fully with Rules 424, 430A and
462, as applicable, under the Act in a timely manner; and comply with
the provisions of the Act with respect to the disposition of all
securities covered by such Registration Statement during the
applicable period in accordance with the intended method or methods of
distribution by the sellers thereof set forth in such Registration
Statement or supplement to the Prospectus;
(iii) advise each Holder promptly and, if requested by such
Holder, confirm such advice in writing, (A) when the Prospectus or any
Prospectus supplement or post-effective amendment has been filed, and,
with respect to any applicable Registration Statement or any
post-effective amendment thereto, when the same has become effective,
(B) of any request by the Commission for amendments to the
Registration Statement or amendments or supplements to the Prospectus
or for additional information relating thereto, (C) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement under the Act or of the suspension by any state
securities commission of the qualification of the Transfer Restricted
Securities for offering or sale in any jurisdiction, or the initiation
of any proceeding for any of the preceding purposes, (D) of the
existence of any fact or the happening of any event that makes any
statement of a material fact made in the Registration Statement, the
Prospectus, any amendment or supplement thereto or any document
incorporated by reference therein untrue, or that requires the making
of any additions to or changes in the Registration Statement in order
to make the statements therein not misleading, or that requires the
making of any additions to or changes in the Prospectus in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. If at any time the Commission
shall issue any stop order suspending the effectiveness of the
Registration Statement, or any state securities commission or other
regulatory authority shall issue an order suspending the qualification
or exemption from qualification of the Transfer Restricted Securities
under state securities or Blue Sky laws, the Company and the
Guarantors (if any) shall use their respective reasonable best efforts
to obtain the withdrawal or lifting of such order at the earliest
possible time;
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<PAGE> 12
(iv) subject to Section 6(c)(i), if any fact or event
contemplated by Section 6(c)(iii)(D) above shall exist or have
occurred, prepare a supplement or post-effective amendment to the
Registration Statement or related Prospectus or any document
incorporated therein by reference or file any other required document
so that, as thereafter delivered to the purchasers of Transfer
Restricted Securities, the Prospectus will not contain an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(v) furnish to each Holder in connection with such
exchange or sale, if any, before filing with the Commission, copies of
any Registration Statement or any Prospectus included therein or any
amendments or supplements to any such Registration Statement or
Prospectus (including all documents incorporated by reference after
the initial filing of such Registration Statement), which documents
will be subject to the review and comment of such Holders in
connection with such sale, if any, for a period of at least five
Business Days, and the Company will not file any such Registration
Statement or Prospectus or any amendment or supplement to any such
Registration Statement or Prospectus (including all such documents
incorporated by reference) to which such Holders shall reasonably
object within five Business Days after the receipt thereof. A Holder
shall be deemed to have reasonably objected to such filing if such
Registration Statement, amendment, Prospectus or supplement, as
applicable, as proposed to be filed, contains an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading or fails to comply with the
applicable requirements of the Act;
(vi) promptly prior to the filing of any document that is
to be incorporated by reference into a Registration Statement or
Prospectus, provide copies of such document to each Holder in
connection with such exchange or sale, if any, make the Company's and
each Guarantor's (if any) representatives available for discussion of
such document and other customary due diligence matters, and include
such information in such document prior to filing thereof as such
Holders may reasonably request;
(vii) make available, at reasonable times, for inspection
by each Holder and any attorney or accountant retained by such
Holders, all financial and other records, pertinent corporate
documents of the Company and the Guarantors (if any) and cause the
Company's and each Guarantor's (if any) officers, directors and
employees to supply all information reasonably requested by any such
Holders, attorney or accountant in connection with such Registration
Statement or any post-effective amendment thereto subsequent to the
filing thereof and prior to its effectiveness;
(viii) if requested by any Holders in connection with such
exchange or sale, promptly include in any Registration Statement or
Prospectus, pursuant to a supplement or post-effective amendment if
necessary, such information as such Holders may reasonably request to
have included therein, including, without limitation, information
relating to the "Plan of Distribution" of the Transfer Restricted
Securities; and make all required filings of
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<PAGE> 13
such Prospectus supplement or post-effective amendment as soon as
practicable after the Company is notified of the matters to be
included in such Prospectus supplement or post-effective amendment;
(ix) furnish to each Holder in connection with such
exchange or sale, without charge, at least one copy of the
Registration Statement, as first filed with the Commission, and of
each amendment thereto, including all documents incorporated by
reference therein and all exhibits (including exhibits incorporated
therein by reference);
(x) deliver to each Holder without charge, as many copies
of the Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto as such Persons reasonably may
request; the Company and the Guarantors (if any) hereby consent to the
use (in accordance with law) of the Prospectus and any amendment or
supplement thereto by each selling Holder in connection with the
offering and the sale of the Transfer Restricted Securities covered by
the Prospectus or any amendment or supplement thereto;
(xi) upon the request of any Holder, enter into such
agreements (including underwriting agreements) and make such
representations and warranties and take all such other actions in
connection therewith in order to expedite or facilitate the
disposition of the Transfer Restricted Securities pursuant to any
applicable Registration Statement contemplated by this Agreement as
may be reasonably requested by any Holder in connection with any sale
or resale pursuant to any applicable Registration Statement. In such
connection, the Company and the Guarantors (if any) shall:
(A) upon request of any Holder, furnish (or in
the case of paragraphs (2) and (3), use their respective
reasonable best efforts to cause to be furnished) to each
Holder upon the effectiveness of the Shelf Registration
Statement and, upon Consummation of the Exchange Offer, to
each Holder who is a Broker-Dealer who received Series B Notes
in the Exchange Offer:
(1) a certificate, dated such date,
signed on behalf of the Company and each Guarantor
(if any) by (x) the President or any Vice President
and (y) a principal financial or accounting officer
of the Company and such Guarantor (if any),
confirming, as of the date thereof, the matters set
forth in Sections 6(w), 9(a) and 9(b) of the Purchase
Agreement and such other similar matters as such
Holders may reasonably request;
(2) an opinion, dated the date of
Consummation of the Exchange Offer or the date of
effectiveness of the Shelf Registration Statement, as
the case may be, of counsel for the Company and the
Guarantors (if any) covering matters similar to those
set forth in paragraph (e) of Section 9 of the
Purchase Agreement and such other matters as such
Holder may reasonably request, and in any event
including a statement to the effect that such counsel
has participated in conferences with officers and
other representatives of the
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<PAGE> 14
Company and the Guarantors (if any), representatives
of the independent public accountants for the Company
and the Guarantors (if any) and have considered the
matters required to be stated therein and the
statements contained therein, although such counsel
has not independently verified the accuracy,
completeness or fairness of such statements; and that
such counsel advises that, on the basis of the
foregoing (relying as to materiality to the extent
such counsel deems appropriate upon the statements of
officers and other representatives of the Company and
the Guarantors (if any) and without independent check
or verification), no facts came to such counsel's
attention that caused such counsel to believe that
the applicable Registration Statement, at the time
such Registration Statement or any post-effective
amendment thereto became effective and, in the case
of the Exchange Offer Registration Statement, as of
the date of Consummation of the Exchange Offer,
contained an untrue statement of a material fact or
omitted to state a material fact required to be
stated therein or necessary to make the statements
therein not misleading, or that the Prospectus
contained in such Registration Statement as of its
date and, in the case of the opinion dated the date
of Consummation of the Exchange Offer, as of the date
of Consummation, contained an untrue statement of a
material fact or omitted to state a material fact
necessary in order to make the statements therein, in
the light of the circumstances under which they were
made, not misleading. Without limiting the
foregoing, such counsel may state further that such
counsel assumes no responsibility for, and has not
independently verified, the accuracy, completeness or
fairness of the financial statements, notes and
schedules and other financial data included in any
Registration Statement contemplated by this Agreement
or the related Prospectus; and
(3) a customary comfort letter, dated
the date of Consummation of the Exchange Offer, or as
of the date of effectiveness of the Shelf
Registration Statement, as the case may be, from the
Company's independent accountants, in the customary
form and covering matters of the type customarily
covered in comfort letters to underwriters in
connection with underwritten offerings, and affirming
the matters set forth in the comfort letters
delivered pursuant to Section 9(h) of the Purchase
Agreement; and
(B) deliver such other documents and certificates as may
be reasonably requested by the selling Holders to evidence
compliance with the matters covered in clause (A) above and
with any customary conditions contained in the any agreement
entered into by the Company and the Guarantors (if any)
pursuant to this clause (xi);
(xii) prior to any public offering of Transfer Restricted
Securities, cooperate with the selling Holders and their counsel in
connection with the registration and qualification of the Transfer
Restricted Securities under the securities or Blue Sky laws of such
jurisdictions as the selling Holders may request and do any and all
other acts or things necessary or
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<PAGE> 15
advisable to enable the disposition in such jurisdictions of the
Transfer Restricted Securities covered by the applicable Registration
Statement; provided, however, that neither the Company nor any
Guarantor (if any) shall be required to register or qualify as a
foreign corporation where it is not now so qualified or to take any
action that would subject it to the service of process in suits or to
taxation, other than as to matters and transactions relating to the
Registration Statement, in any jurisdiction where it is not now so
subject;
(xiii) in connection with any sale of Transfer Restricted
Securities that will result in such securities no longer being
Transfer Restricted Securities, cooperate with the Holders to
facilitate the timely preparation and delivery of certificates
representing Transfer Restricted Securities to be sold and not bearing
any restrictive legends; and to register such Transfer Restricted
Securities in such denominations and such names as the selling Holders
may request at least two Business Days prior to such sale of Transfer
Restricted Securities;
(xiv) use their respective reasonable best efforts to cause
the disposition of the Transfer Restricted Securities covered by the
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the
seller or sellers thereof to consummate the disposition of such
Transfer Restricted Securities, subject to the proviso contained in
clause (xii) above;
(xv) provide a CUSIP number for all Transfer Restricted
Securities not later than the effective date of a Registration
Statement covering such Transfer Restricted Securities and provide the
Trustee under the Indenture with printed certificates for the Transfer
Restricted Securities which are in a form eligible for deposit with
the Depository Trust Company;
(xvi) otherwise use their respective reasonable best
efforts to comply with all applicable rules and regulations of the
Commission, and make generally available to its security holders with
regard to any applicable Registration Statement, as soon as
practicable, a consolidated earnings statement meeting the
requirements of Rule 158 of the Act (which need not be audited)
covering a twelve-month period beginning after the effective date of
the Registration Statement (as such term is defined in paragraph (c)
of Rule 158 under the Act);
(xvii) cause the Indenture to be qualified under the TIA not
later than the effective date of the first Registration Statement
required by this Agreement and, in connection therewith, cooperate
with the Trustee and the Holders to effect such changes to the
Indenture as may be required for such Indenture to be so qualified in
accordance with the terms of the TIA; and execute and use their
respective reasonable best efforts to cause the Trustee to execute,
all documents that may be required to effect such changes and all
other forms and documents required to be filed with the Commission to
enable such Indenture to be so qualified in a timely manner; and
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<PAGE> 16
(xviii) provide promptly to each Holder, upon request, each
document filed with the Commission pursuant to the requirements of
Section 13 or Section 15(d) of the Exchange Act.
(d) Restrictions on Holders. Each Holder agrees by
acquisition of a Transfer Restricted Security that, upon receipt of the notice
referred to in Section 6(c)(iii)(C) or any notice from the Company of the
existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in
each case, a "Suspension Notice"), such Holder will forthwith discontinue
disposition of Transfer Restricted Securities pursuant to the applicable
Registration Statement until (i) such Holder has received copies of the
supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or
(ii) such Holder is advised in writing by the Company that the use of the
Prospectus may be resumed, and has received copies of any additional or
supplemental filings that are incorporated by reference in the Prospectus (in
each case, the "Recommencement Date"). Each Holder receiving a Suspension
Notice hereby agrees that it will either (i) destroy any Prospectuses, other
than permanent file copies, then in such Holder's possession which have been
replaced by the Company with more recently dated Prospectuses or (ii) deliver
to the Company (at the Company's expense) all copies, other than permanent file
copies, then in such Holder's possession of the Prospectus covering such
Transfer Restricted Securities that was current at the time of receipt of the
Suspension Notice. The time period regarding the effectiveness of such
Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall
be extended by a number of days equal to the number of days in the period from
and including the date of delivery of the Suspension Notice to the date of
delivery of the Recommencement Date.
SECTION 7. REGISTRATION EXPENSES
(a) All expenses incident to the Company's and each
Guarantor's (if any) performance of or compliance with this Agreement will be
borne by the Company, regardless of whether a Registration Statement becomes
effective, including without limitation: (i) all registration and filing fees
and expenses; (ii) all fees and expenses of compliance with federal securities
and state Blue Sky or securities laws; (iii) all expenses of printing
(including printing certificates for the Series B Notes to be issued in the
Exchange Offer and printing of Prospectuses), messenger and delivery services
and telephone; (iv) all fees and disbursements of counsel for the Company, the
Guarantors (if any) and the Holders of Transfer Restricted Securities; (v) all
application and filing fees in connection with listing the Series B Notes on a
national securities exchange or automated quotation system pursuant to the
requirements hereof; and (vi) all fees and disbursements of independent
certified public accountants of the Company and the Guarantors (if any)
(including the expenses of any special audit and comfort letters required by or
incident to such performance).
The Company will, in any event, bear its and the Guarantors' (if any)
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), the expenses
of any annual audit and the fees and expenses of any Person, including special
experts, retained by the Company or the Guarantors (if any).
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<PAGE> 17
(b) In connection with any Registration Statement
required by this Agreement (including, without limitation, the Exchange Offer
Registration Statement and the Shelf Registration Statement), the Company and
the Guarantors (if any) will reimburse the Initial Purchasers and the Holders
of Transfer Restricted Securities who are tendering Series A Notes into in the
Exchange Offer and/or selling or reselling Series A Notes or Series B Notes
pursuant to the "Plan of Distribution" contained in the Exchange Offer
Registration Statement or the Shelf Registration Statement, as applicable, for
the reasonable fees and disbursements of not more than one counsel, who shall
be Andrews & Kurth L.L.P., unless another firm shall be chosen by the Holders
of a majority in principal amount of the Transfer Restricted Securities for
whose benefit such Registration Statement is being prepared.
SECTION 8. INDEMNIFICATION
(a) The Company and the Guarantors (if any) agree jointly
and severally to indemnify and hold harmless each Holder, its directors,
officers and each Person, if any, who controls such Holder (within the meaning
of Section 15 of the Act or Section 20 of the Exchange Act), from and against
any and all losses, claims, damages, liabilities, judgments, (including without
limitation, any legal or other expenses incurred in connection with
investigating or defending any matter, including any action that could give
rise to any such losses, claims, damages, liabilities or judgments) caused by
any untrue statement or alleged untrue statement of a material fact contained
in any Registration Statement, preliminary prospectus or Prospectus (or any
amendment or supplement thereto) provided by the Company to any Holder or any
prospective purchaser of Series B Notes or registered Series A Notes, or caused
by any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages, liabilities or
judgments are caused by an untrue statement or omission or alleged untrue
statement or omission that is based upon information relating to any of the
Holders furnished in writing to the Company by any of the Holders.
(b) Each Holder of Transfer Restricted Securities agrees,
severally and not jointly, to indemnify and hold harmless the Company and the
Guarantors (if any) and their respective directors and officers, and each
person, if any, who controls (within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act) the Company, or the Guarantors (if any) to the
same extent as the foregoing indemnity from the Company and the Guarantors (if
any) set forth in section (a) above, but only with reference to information
relating to such Holder furnished in writing to the Company by such Holder
expressly for use in any Registration Statement. In no event shall any Holder,
its directors, officers or any Person who controls such Holder be liable or
responsible for any amount in excess of the amount by which the total amount
received by such Holder with respect to its sale of Transfer Restricted
Securities pursuant to a Registration Statement exceeds (i) the amount paid by
such Holder for such Transfer Restricted Securities and (ii) the amount of any
damages that such Holder, its directors, officers or any Person who controls
such Holder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission.
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<PAGE> 18
(c) In case any action shall be commenced involving any
person in respect of which indemnity may be sought pursuant to Section 8(a) or
8(b) (the "indemnified party"), the indemnified party shall promptly notify the
person against whom such indemnity may be sought (the "indemnifying person") in
writing and the indemnifying person shall assume the defense of such action,
including the employment of counsel reasonably satisfactory to the indemnified
party and the payment of all fees and expenses of such counsel, as incurred
(except that in the case of any action in respect of which indemnity may be
sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required
to assume the defense of such action pursuant to this Section 8(c), but may
employ separate counsel and participate in the defense thereof, but the fees
and expenses of such counsel, except as provided below, shall be at the expense
of the Holder). Any indemnified party shall have the right to employ separate
counsel in any such action and participate in the defense thereof, but the fees
and expenses of such counsel shall be at the expense of the indemnified party
unless (i) the employment of such counsel shall have been specifically
authorized in writing by the indemnifying party, (ii) the indemnifying party
shall have failed to assume the defense of such action or employ counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such action (including any impleaded parties) include both the indemnified
party and the indemnifying party, and the indemnified party shall have been
advised by such counsel that there may be one or more legal defenses available
to it which are different from or additional to those available to the
indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party).
In any such case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the fees and expenses of more than one separate firm of attorneys
(in addition to any local counsel) for all indemnified parties and all such
fees and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by a majority of the Holders, in the case of the parties
indemnified pursuant to Section 8(a), and by the Company and the Guarantors (if
any), in the case of parties indemnified pursuant to Section 8(b). The
indemnifying party shall indemnify and hold harmless the indemnified party from
and against any and all losses, claims, damages, liabilities and judgments by
reason of any settlement of any action (i) effected with its written consent or
(ii) effected without its written consent if the settlement is entered into
more than twenty business days after the indemnifying party shall have received
a request from the indemnified party for reimbursement for the fees and
expenses of counsel (in any case where such fees and expenses are at the
expense of the indemnifying party) and, prior to the date of such settlement,
the indemnifying party shall have failed to comply with such reimbursement
request, except to the extent that the reasonableness of the fees subject to
such reimbursement request are in good faith disputed and such disputed fees
have been substantiated in writing in appropriate detail to the indemnifying
party. No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement or compromise of, or consent to the
entry of judgment with respect to, any pending or threatened action in respect
of which the indemnified party is or could have been a party and indemnity or
contribution may be or could have been sought hereunder by the indemnified
party, unless such settlement, compromise or judgment (i) includes an
unconditional release of the indemnified party from all liability on claims
that are or could have been the subject
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<PAGE> 19
matter of such action and (ii) does not include a statement as to or an
admission of fault, culpability or a failure to act, by or on behalf of the
indemnified party.
(d) To the extent that the indemnification provided for
in this Section 8 is unavailable to an indemnified party in respect of any
losses, claims, damages, liabilities or judgments referred to therein, then
each indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages, liabilities or judgments (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Guarantors (if any), on the one hand, and the Holders, on the
other hand, from their sale of Transfer Restricted Securities or (ii) if the
allocation provided by clause 8(d)(i) is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause 8(d)(i) above but also the relative fault of the Company
and the Guarantors (if any), on the one hand, and of the Holder, on the other
hand, in connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any other
relevant equitable considerations. The relative fault of the Company and the
Guarantors (if any), on the one hand, and of the Holder, on the other hand,
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or such
Guarantor (if any), on the one hand, or by the Holder, on the other hand, and
the parties' relative intent, knowledge, access to information and opportunity
to correct or prevent such statement or omission. The amount paid or payable
by a party as a result of the losses, claims, damages, liabilities and
judgments referred to above shall be deemed to include, subject to the
limitations set forth in the second paragraph of Section 8(a), any legal or
other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim.
The Company, the Guarantors (if any) and each Holder agree that it
would not be just and equitable if contribution pursuant to this Section 8(d)
were determined by pro rata allocation (even if the Holders were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any
matter, including any action that could have given rise to such losses, claims,
damages, liabilities or judgments. Notwithstanding the provisions of this
Section 8, no Holder, its directors, its officers or any Person, if any, who
controls such Holder shall be required to contribute, in the aggregate, any
amount in excess of the amount by which the total received by such Holder with
respect to the sale of Transfer Restricted Securities pursuant to a
Registration Statement exceeds (i) the amount paid by such Holder for such
Transfer Restricted Securities and (ii) the amount of any damages which such
Holder has otherwise been required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
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<PAGE> 20
such fraudulent misrepresentation. The Holders' obligations to contribute
pursuant to this Section 8(c) are several in proportion to the respective
principal amount of Transfer Restricted Securities held by each Holder
hereunder and not joint.
SECTION 9. RULE 144A AND RULE 144
The Company and each Guarantor (if any) agrees with each Holder, for
so long as any Transfer Restricted Securities remain outstanding and during any
period in which the Company or such Guarantor (if any) (i) is not subject to
Section 13 or 15(d) of the Exchange Act, to make available, upon request of any
Holder, to such Holder or beneficial owner of Transfer Restricted Securities in
connection with any sale thereof and any prospective purchaser of such Transfer
Restricted Securities designated by such Holder or beneficial owner, the
information required by Rule 144A(d)(4) under the Act in order to permit
resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii)
is subject to Section 13 or 15 (d) of the Exchange Act, to make all filings
required thereby in a timely manner in order to permit resales of such Transfer
Restricted Securities pursuant to Rule 144.
SECTION 10. MISCELLANEOUS
(a) Remedies. The Company and the Guarantors (if any)
acknowledge and agree that any failure by the Company and/or the Guarantors (if
any) to comply with their respective obligations under Sections 3 and 4 hereof
may result in material irreparable injury to the Initial Purchasers or the
Holders for which there is no adequate remedy at law, that it will not be
possible to measure damages for such injuries precisely and that, in the event
of any such failure, the Initial Purchasers or any Holder may obtain such
relief as may be required to specifically enforce the Company's and the
Guarantor's (if any) obligations under Sections 3 and 4 hereof. The Company
and the Guarantors (if any) further agree to waive the defense in any action
for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. Neither the Company nor
any Guarantor (if any) will, on or after the date of this Agreement, enter into
any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders in this Agreement or otherwise conflicts with the
provisions hereof. Neither the Company nor any Guarantor (if any) has
previously entered into any agreement granting any registration rights with
respect to its securities to any Person, except as disclosed in the Offering
Memorandum. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders
of the Company's and the Guarantors' (if any) securities under any agreement in
effect on the date hereof.
(c) Amendments and Waivers. The provisions of this
Agreement may not be amended, modified or supplemented, and waivers or consents
to or departures from the provisions hereof may not be given unless (i) in the
case of Section 5 hereof and this Section 10(c)(i), the
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<PAGE> 21
Company has obtained the written consent of Holders of all outstanding Transfer
Restricted Securities and (ii) in the case of all other provisions hereof, the
Company has obtained the written consent of Holders of a majority of the
outstanding principal amount of Transfer Restricted Securities (excluding
Transfer Restricted Securities held by the Company or its Affiliates).
Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof that relates exclusively to the rights of Holders whose
Transfer Restricted Securities are being tendered pursuant to the Exchange
Offer, and that does not affect directly or indirectly the rights of other
Holders whose Transfer Restricted Securities are not being tendered pursuant to
such Exchange Offer, may be given by the Holders of a majority of the
outstanding principal amount of Transfer Restricted Securities subject to such
Exchange Offer.
(d) Joinder of Guarantors. If following the date of this
Agreement any subsidiary of the Company shall become a Guarantor, the Company
shall cause such subsidiary to enter into an agreement whereby such subsidiary
will agree to be bound by the terms and conditions of this Agreement applicable
to Guarantors.
(e) Third Party Beneficiary. The Holders shall be third
party beneficiaries to the agreements made hereunder between the Company and
the Guarantors (if any), on the one hand, and the Initial Purchasers, on the
other hand, and shall have the right to enforce such agreements directly to the
extent they may deem such enforcement necessary or advisable to protect its
rights or the rights of Holders hereunder.
(f) Notices. All notices and other communications
provided for or permitted hereunder shall be made in writing by hand-delivery,
first-class mail (registered or certified, return receipt requested), telex,
telecopier, or air courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the
records of the Registrar under the Indenture, with a copy to the
Registrar under the Indenture; and
(ii) if to the Company or the Guarantors (if any):
Seven Seas Petroleum Inc.
1990 Post Oak Blvd., Suite 960
Houston, Texas 77056
Telecopier No.: 713-621-9770
Attention: Herb C. Williamson, III
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With a copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002-6760
Telecopier No.: 713-758-2346
Attention: T. Mark Kelly
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
receipt acknowledged, if telecopied; and on the next business day, if timely
delivered to an air courier guaranteeing overnight delivery.
Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the Trustee at the
address specified in the Indenture.
(g) Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders; provided, that nothing herein shall be deemed
to permit any assignment, transfer or other disposition of Transfer Restricted
Securities in violation of the terms hereof or of the Purchase Agreement or the
Indenture. If any transferee of any Holder shall acquire Transfer Restricted
Securities in any manner, whether by operation of law or otherwise, such
Transfer Restricted Securities shall be held subject to all of the terms of
this Agreement, and by taking and holding such Transfer Restricted Securities
such Person shall be conclusively deemed to have agreed to be bound by and to
perform all of the terms and provisions of this Agreement, including the
restrictions on resale set forth in this Agreement and, if applicable, the
Purchase Agreement, and such Person shall be entitled to receive the benefits
hereof.
(h) Counterparts. This Agreement may be executed in any
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement.
(i) Headings. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(j) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(k) Severability. In the event that any one or more of
the provisions contained herein, or the application thereof in any
circumstance, is held invalid, illegal or unenforceable, the
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<PAGE> 23
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions contained herein shall not be affected
or impaired thereby.
(l) Entire Agreement. This Agreement is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties
hereto in respect of the subject matter contained herein. There are no
restrictions, promises, warranties or undertakings, other than those set forth
or referred to herein with respect to the registration rights granted with
respect to the Transfer Restricted Securities. This Agreement supersedes all
prior agreements and understandings between the parties with respect to such
subject matter.
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<PAGE> 24
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
SEVEN SEAS PETROLEUM INC.
By: /s/ Herbert C. Williamson, III
-----------------------------------
Name: Herbert C. Williamson, III
Title: Executive Vice President and
Chief Financial Officer
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
BEAR, STEARNS & CO. INC.
CIBC OPPENHEIMER CORP.
CREDIT SUISSE FIRST BOSTON
CORPORATION
PARIBAS CORPORATION
By: Donaldson, Lufkin & Jenrette
Securities Corporation
The foregoing Registration Rights
Agreement is hereby confirmed and
accepted as of the date first above
written. By: /s/ Ralph Eads
-----------------------------------
Name: Ralph Eads
Title: Managing Director
<PAGE> 1
EXHIBIT 4(C)
COLLATERAL PLEDGE AND SECURITY AGREEMENT
COLLATERAL PLEDGE AND SECURITY AGREEMENT, dated as of May 7, 1998,
among SEVEN SEAS PETROLEUM INC., a corporation organized under the laws of the
Yukon Territory, Canada ("Seven Seas" or the "Pledgor"), and THE BANK OF NOVA
SCOTIA TRUST COMPANY OF NEW YORK, as trustee (the "Trustee"), for the Holders
of the Notes (as defined herein) (this "Pledge Agreement" or this "Agreement").
Capitalized terms used but not otherwise defined herein shall have the meanings
given to such terms in the Indenture (as defined herein).
W I T N E S S E T H :
WHEREAS the Pledgor and the Trustee have entered into that certain
Indenture dated as of May 7, 1998 (as amended, restated, supplemented or
otherwise modified from time to time, the "Indenture"), pursuant to which the
Pledgor is issuing $110,000,000 in aggregate principal amount of its 12 1/2%
Senior Notes due 2005 (the "Notes");
WHEREAS the Pledgor has agreed, pursuant to the Indenture, to purchase
a portfolio of U.S. Government Securities initially consisting of those
securities listed in Exhibit A hereto (together with any replacement or
substitute securities, the "Pledged Securities") with scheduled principal and
interest payments on such Pledged Securities that, based upon the certificate
furnished to the Trustee of an internationally recognized firm of independent
certified public accountants selected by the Pledgor, will result in the
receipt of scheduled interest and principal payments in respect of the Pledged
Securities, in amounts sufficient and at the times necessary to provide for
payment in full of the four regularly scheduled interest payments due on the
Notes from November 15, 1999 through May 15, 2001 (the "Four Payments"); and
WHEREAS, to secure the payment and performance by the Pledgor of its
obligations under the Indenture and the Notes, including without limitation all
principal of, interest on, and any premium, Additional Amounts and Liquidated
Damages on, the Notes and all obligations of the Pledgor to the Trustee under
the Indenture and hereunder, including without limitation, pursuant to Section
11 and Section 13 hereof (all such obligations to the Holders and the Trustee,
collectively, the "Obligations"), the Pledgor has agreed (i) to place the
Pledged Securities in the Pledge Account (as defined herein) held by the
Trustee for the ratable benefit of the Holders of the Notes; and (ii) to grant
to the Trustee for itself and for the ratable benefit of the Holders of the
Notes a security interest in the Pledged Securities and the Pledge Account and
execute and deliver this Pledge Agreement.
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<PAGE> 2
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Pledge and Grant of Security Interest. The Pledgor hereby
pledges to the Trustee for itself and for the ratable benefit of the Holders of
the Notes, and grants to the Trustee for itself and for the ratable benefit of
the Holders of the Notes, a continuing first priority security interest in and
to (i) all of the Pledgor's right, title and interest in Securities Account No.
55087 maintained at The Bank of Nova Scotia, New York Agency (the "Securities
Account") and the "SEVEN SEAS PLEDGE ACCOUNT," Account No. 190575, maintained
with the Trustee (the "Pledge Account,") all Pledged Securities now or
hereafter existing, and any and all security entitlements (as defined in 8-102
of the Uniform Commercial Code of the State of New York (the "UCC")), (ii) all
certificates or other evidence of ownership representing the Pledged
Securities, the Pledge Account and any and all security entitlements (as
defined in 8-102 of the UCC) related thereto or the Securities Account and
(iii) all products and proceeds of any of the Pledged Securities and the Pledge
Account, including, without limitation, all dividends, interest, principal
payments, cash, options, warrants, rights, instruments, subscriptions and other
property or proceeds from time to time received, receivable or otherwise
distributed or distributable in respect of or in exchange for any or all of the
Pledged Securities (items (i), (ii) and (iii), collectively, the "Collateral").
The parties acknowledge that the Securities Account constitutes a securities
account and that all Collateral held in, carried in or credited to the
Securities Account shall constitute financial assets under the UCC.
2. Security for Obligations. This Pledge Agreement and the
Collateral secure the prompt and complete payment and performance when due
(whether at stated maturity, by acceleration or otherwise) of all of the
Obligations.
3. Delivery/Control of Collateral; Pledge Account; Interest. (a)
All certificates or instruments, if any, representing or evidencing the Pledged
Securities shall be delivered to and held by or on behalf of the Trustee
pursuant hereto or shall be delivered to the Trustee through the book-entry
facilities of the applicable depositary and shall be registered in the name of
the Trustee, as Trustee, or its nominee, in each case, for its benefit and for
the ratable benefit of the holders of the Notes such that the Trustee is the
"entitlement holder" (as defined in 8-102 of the UCC) therefore and has
"control" (as defined in 8-106 of the UCC) thereof.
(b) Concurrently with the execution and delivery of this Pledge
Agreement, the Trustee shall establish the "SEVEN SEAS PLEDGE ACCOUNT,"
referred to in Section 1 above, for the deposit of the Pledged Securities (the
"Pledge Account") at its offices at One Liberty Plaza, New York, New York.
Subject to the other terms and conditions of this Pledge Agreement, all funds
or other property accepted by the Trustee pursuant to this Pledge Agreement
shall be held in the Pledge Account for its benefit and the ratable benefit of
the Holders of the Notes. The Pledged Securities, and the proceeds of any such
Pledged Securities, shall remain on deposit in the Pledge Account until
withdrawn in accordance with this Agreement. If and to the extent the Pledged
Securities comprise certificated securities (as defined in Section 8-102 of the
UCC), such Pledged Securities shall be registered in the name of the Trustee,
as Trustee, or its nominee, in each case for its benefit and for
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<PAGE> 3
the ratable benefit of the Holders of the Notes, and possession thereof shall
be maintained within the State of New York.
(c) All interest earned on or other distributions or amounts paid
with respect to any Collateral shall be retained in the Pledge Account and may
be reinvested by the Trustee, at the direction (and for the account, benefit
and risk) of the Pledgor, in other U.S. Government Securities; provided that
the Pledgor may only direct the Trustee so to reinvest such interest,
distributions or amounts if, based on the report of an internationally
recognized firm of independent public accountants selected by the Pledgor and
addressed to the Trustee, scheduled principal and interest payments on the
Pledged Securities retained in the Pledge Account will result in receipt of
United States dollars in an amount and at a time sufficient to provide for
payment in full when due of each of the Four Payments (or, in the event any of
the Four Payments shall have been made (from Pledgor Funds, as defined below),
the remaining unpaid Four Payments.
4. Disbursement. (a) Prior to the date of any of the Four
Payments, the Pledgor may direct the Trustee in writing to liquidate, if
necessary, Pledged Securities and to transfer from the Pledge Account to the
Trustee on the payment date in its capacity as Paying Agent (or, if applicable,
any successor Paying Agent), United States dollars in immediately available
funds necessary to provide for payment in full of all or any portion of the
next regularly scheduled interest payment on the Notes. Upon receipt of such
written request, the Trustee shall follow such instructions (including, without
limitation, disposition of Pledged Securities) and transfer such amount of
United States dollars in immediately available funds directly to the Trustee as
Paying Agent (or, if applicable, any successor Paying Agent) from proceeds of
the Pledged Securities held in the Pledge Account.
(b) If the Pledgor elects to pay any of the Four Payments from a
source of funds other than the Pledge Account (the "Pledgor's Funds"), then the
Pledgor shall, at least three Business Days' prior to the payment date for such
payment notify Trustee of such election. Provided that no Default or Event of
Default exists under the Indenture, after payment of such regularly scheduled
interest payment, Pledgor may direct the Trustee in writing to release to the
Pledgor, or as it may direct, an amount of funds or Pledged Securities from the
Pledge Account less than or equal to the amount of such payment. If the
Trustee is not the Paying Agent, such direction shall include an Officers'
Certificate delivered to the Trustee stating that such regularly scheduled
interest payment constituting one of such Four Payments, has been made in
accordance with the terms of the Indenture. Upon receipt of such written
direction from the Pledgor the Trustee shall take such action as is necessary
to provide for the prompt payment to the Pledgor of the amount of funds or
Pledged Securities requested from the Pledge Account.
(c) If at any time (a) the scheduled payments of principal of and
interest on the Pledged Securities exceeds 100% of the amount in cash required,
based on the report of an internationally recognized firm of independent
certified public accountants selected by the Pledgor and addressed to the
Trustee, to provide for timely payment in full of the Four Payments (or, in the
event any of the regularly scheduled interest payments due on or prior to
November 15, 2000 have been made, an
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<PAGE> 4
amount in cash sufficient to provide for timely payment in full of the
remaining unpaid regularly scheduled interest payment or payments due through
May 15, 2001) and no Default or Event of Default exists, the Pledgor may direct
the Trustee in writing to release to the Pledgor or as it directs an amount of
funds or Pledged Securities, at the Pledgor's sole option, less than or equal
to such excess. Upon receipt of such written direction from the Pledgor,
together with such report of such internationally recognized firm of
independent certified public accountants, the Trustee shall take such action as
is necessary to provide for the prompt payment to the Pledgor of the amount of
funds or Pledged Securities requested from the Pledge Account.
(d) Upon payment in full of the Four Payments, if no Default or
Event of Default exists, the security interest in the Collateral evidenced by
this Pledge Agreement shall terminate and be of no further force or effect.
Furthermore, upon release of any Collateral from the Pledge Account in
accordance with the terms of this Pledge Agreement, the security interest
created by this Pledge Agreement in the Collateral so released shall terminate
and be of no further force or effect.
5. Representations and Warranties. The Pledgor hereby represents
and warrants that:
(a) the execution, delivery and performance by the
Pledgor of this Pledge Agreement have been duly authorized by the
Pledgor and do not contravene or constitute a default under any
provision of applicable law, regulation, the certificate of
incorporation or the bylaws, as the case may be, of the Pledgor, or of
any judgment, injunction, order, decree or any material agreement or
instrument binding upon the Pledgor, and do not result in the creation
or imposition of any Lien on any asset of the Pledgor, except for the
security interests granted under this Pledge Agreement and the
Indenture;
(b) no financing statement covering any of the Collateral
is on file in any public office, other than financing statements filed
pursuant to this Pledge Agreement, if any;
(c) (i) if the securities are uncertificated, upon
recordation of the Pledged Securities in an account, under Trustee's
name, at the "Securities Intermediary," as defined in the UCC, or,
(ii) if the Pledged Securities are certificated, upon the delivery to
the Trustee of the certificates, representing the Pledged Securities
and notation on the records of the Trustee that it holds the Pledged
Securities as pledgee, the pledge of the Collateral pursuant to this
Pledge Agreement will constitute a valid and perfected first priority
security interest in and to the Collateral, securing the payment and
performance of the Obligations for the benefit of its Trustees and the
ratable benefit of the Holders of the Notes, enforceable as such
against all creditors of the Pledgor and any Persons purporting to
purchase any of the Collateral from the Pledgor;
(d) no consent of any other Person and no consent,
authorization, approval, or other action by, and no notice to or
filing with, any governmental authority or regulatory body in the
United States, Canada or otherwise, including, without limitation, any
taxing authority, is required to be obtained or made by the Pledgor as
of the date hereof either (i) for
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<PAGE> 5
the pledge by the Pledgor of the Collateral pursuant to this Pledge
Agreement or for the execution, delivery or performance of this Pledge
Agreement by the Pledgor (except for any filings and notations
necessary to perfect the security interest created hereby in the
Collateral) or (ii) for the exercise by the Trustee of the rights
provided for in this Pledge Agreement or the remedies in respect of
the Collateral pursuant to this Pledge Agreement; and
(e) the pledge of the Collateral pursuant to this Pledge
Agreement is not prohibited by any applicable law or government
regulation, release, interpretation or opinion of the Board of
Governors of the Federal Reserve System or other regulatory agency in
the United States, Canada or otherwise (including, without limitation,
any taxing authority or Regulations T, U and X of the Board of
Governors of the Federal Reserve System).
6. Further Assurances. The Pledgor agrees promptly to take such
actions and to execute and deliver or cause to be executed and delivered, any
instruments to the Trustee and take any other actions that are necessary or, in
the opinion of the Trustee, desirable, to perfect, continue the perfection of,
confirm and assure the first priority of the Trustee's security interest in the
Collateral, to protect the Collateral against the rights, claims or interests
of third persons, or to otherwise effect the purposes of this Pledge Agreement.
Notwithstanding the foregoing, the Trustee shall have no duty or obligation to
ensure the maintenance or perfection of any security interest hereunder.
7. Covenants. The Pledgor covenants and agrees with the Trustee
and the Holders of the Notes from and after the date of this Pledge Agreement
until the payment in full of cash of (i) each of the Four Payments under the
terms of the Indenture and (ii) all Obligations due and owing under the
Indenture and the Notes prior to the payment of the Four Payments as follows:
(a) The Pledgor agrees that it (i) will not sell or
otherwise dispose of, or grant any option or other interest with
respect to, any of the Collateral, (ii) will not create or permit to
exist any Lien upon or with respect to any of the Collateral, except
for the Liens created pursuant to this Pledge Agreement or the
Indenture and (iii) will at all times be the sole beneficial owner of
the Collateral.
(b) The Pledgor agrees that it will not (i) enter into
any agreement or understanding that purports to or may restrict or
inhibit the Trustee's rights or remedies hereunder, including, without
limitation, the Trustee's right to sell or otherwise dispose of the
Collateral, or (ii) with regard to the Collateral, fail to pay or
discharge when the same is due any tax, assessment or levy of any
nature with respect thereto.
8. Power of Attorney. (a) The Pledgor hereby appoints and
constitutes the Trustee as the Pledgor's attorney-in-fact to exercise to the
fullest extent permitted by law all of the following powers upon and at any
time after the occurrence and during the continuance of an Event of Default:
(1) collection of proceeds of any Collateral;
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<PAGE> 6
(2) conveyance of any item of Collateral to any purchaser
thereof as specified herein;
(3) giving of any notices or recording of any Liens
pursuant to Section 6 hereof;
(4) making any payments or taking any acts pursuant to
Section 9 hereof; and
(5) paying or discharging taxes or Liens levied or placed
upon the Collateral, the legality or validity thereof
and the amounts necessary to discharge the same to be
determined by the Trustee in its sole and reasonable
discretion, and any such payments made by the Trustee
shall become Obligations of the Pledgor to the
Trustee, due and payable immediately upon demand.
(b) The Trustee's authority under this Section 8 shall include,
without limitation, the authority to endorse and negotiate any checks or
instruments representing proceeds of Collateral in the name of the Pledgor,
execute and give receipt for any certificate of ownership or any document
constituting Collateral, transfer title to any item of Collateral, to the
extent permitted by applicable law, sign the Pledgor's name on all financing
statements or any other documents deemed necessary or appropriate by the
Trustee to preserve, process or perfect the security interest in the
Collateral, and to file the same, and to prepare, sign the Pledgor's name and
file any notice of Lien, and to take any other actions arising from or incident
to the powers granted to the Trustee in this Pledge Agreement. This power of
attorney is coupled with an interest and shall be irrevocable by the Pledgor.
9. Trustee May Perform. If the Pledgor fails to perform any
agreement contained herein, the Trustee may, but shall not be obligated to,
itself perform or cause performance of such agreement, and the reasonable
expenses incurred by or on behalf of the Trustee in connection therewith shall
be payable by the Pledgor under Section 13 hereof.
10. No Imposition of Duties. The rights and powers granted to the
Trustee hereunder are being granted in order to preserve and protect the
security interest of the Holders of Notes in and to the Collateral granted
hereby and shall not be interpreted to, and shall not, impose any duties on the
Trustee in connection therewith other than those imposed hereunder or under
applicable law.
11. Indemnity. The Pledgor shall indemnify, defend and hold
harmless the Trustee and its directors, officers, agents and employees from and
against all claims, actions, obligations, losses, liabilities and expenses,
including costs, fees and disbursements of counsel, the costs of
investigations, and claims for damages, arising from the Trustee's performance
under this Pledge Agreement, except insofar as the same may have been caused by
such indemnified person's own negligent action, its own negligent failure to
act or its own willful misconduct or unlawful act. The obligations of the
Pledgor under this Section 11 shall survive the resignation or removal of the
Trustee and the termination of this Agreement.
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<PAGE> 7
12. Remedies upon Event of Default. If an Event of Default shall
have occurred and be continuing:
(a) The Trustee shall have and may exercise with
reference to the Collateral any or all of the rights and remedies of a
secured party under the UCC, and as otherwise granted herein or under
any other applicable law or under any other agreement now or hereafter
in effect executed by the Pledgor, including, without limitation, the
right and power to sell, at public or private sale or sales, or
otherwise dispose of, or otherwise utilize the Collateral and any part
or parts thereof, in any manner authorized or permitted under the UCC
after default by a debtor, and to apply the proceeds thereof toward
payment of any costs and expenses and attorneys' fees and expenses
thereby incurred by the Trustee and toward payment of the Obligations
as provided in paragraph 12(c) below. Specifically, and without
limiting the foregoing, the Trustee shall have the right to take
possession of all or any part of the Collateral or any security
therefor and of all books, records, papers and documents of the
Pledgor or in the Pledgor's possession or control relating to the
Collateral that are not already in the Trustee's possession, and for
such purposes may enter upon any premises upon which any of the
Collateral or any security therefor or any of said books, records,
papers and documents are situated and remove the same therefrom
without any liability for trespass or damages thereby occasioned. To
the extent permitted by law, the Pledgor expressly waives any notice
of sale or other disposition of the Collateral and all other rights or
remedies of the Pledgor or formalities prescribed by law relative to
sale or disposition of the Collateral or exercise of any other right
or remedy of the Trustee existing after an Event of Default. To the
extent any such notice is required and cannot be waived, the Pledgor
agrees that if such notice is given in the manner provided in Section
17 hereof at least ten days before the time of the sale or
disposition, such notice shall be deemed reasonable and shall fully
satisfy any requirement for giving of said notice. The Trustee shall
not be obligated to make any sale of Collateral regardless of notice
of sale having been given. The Trustee may adjourn any public or
private sale. The Pledgor further agrees to use its best efforts to
do or cause to be done all such other acts as may be necessary to
effect the intention of this Section 12.
(b) All rights to marshaling of assets of the Pledgor,
including any such right with respect to the Collateral, are hereby
waived by the Pledgor. The Pledgor shall not contest or support any
other Person in contesting the validity or priority of the security
interests created under this Pledge Agreement.
(c) Any money collected by the Trustee pursuant to this
Section 12 shall be applied in the following order, at the date or
dates fixed by the Trustee and, in case of the distribution of such
money on account of principal (or premium, if any) or interest, upon
presentation of the Notes and the notation thereon of the payment (if
only partially paid) and upon surrender thereof if fully paid):
(i) FIRST: to the payment of all amounts due the Trustee
under Sections 11 and 13 of this Pledge Agreement;
and
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<PAGE> 8
(ii) SECOND: to the payment of the amounts then due and
unpaid for interest on the Notes, ratably, without
preference or priority of any kind, according to the
amounts due and payable on such Notes for interest;
and
(iii) THIRD: to the payment of the amounts then due and
unpaid for principal of (and premium, Additional
Amounts and Liquidated Damages, if any) on the Notes,
ratably without preference or priority of any kind,
according to the amounts due and payable on such
Notes for principal (and premium, if any); and
(iv) FOURTH: to the Pledgor.
The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 12 in accordance with the Indenture.
13. Fees and Expenses. The Pledgor shall, upon demand, pay to the
Trustee the amount of its fees (which shall be in an amount previously agreed
to by the Pledgor and the Trustee) and any and all reasonable expenses
(including, without limitation, the reasonable fees, expenses and disbursements
of counsel, experts and agents retained by the Trustee) that the Trustee may
incur in connection with (i) the administration of this Pledge Agreement, (ii)
the custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (iii) the exercise or enforcement of
any of the rights of the Trustee and the holders of the Notes hereunder or (iv)
the failure by the Pledgor to perform or observe any of the provisions hereof.
The obligations of the Pledgor under this Section 13 shall survive the
resignation or removal of the Trustee and the termination of this Agreement.
14. Continuing Security Interest; Termination. This Pledge
Agreement shall terminate upon the payment in full of each of the Four Payments
to the Holders of the Notes provided no Default or Event of Default exists. If
a Default or Event of Default exists at such time, this Pledge Agreement shall
not terminate until such Default or Event of Default, and any subsequent
Default or Event of Default, is cured and waived. At such time, the Trustee
shall, at the written request of the Pledgor, reassign and redeliver to the
Pledgor all of the Collateral hereunder that has not been sold, disposed of,
retained or applied by the Trustee in accordance with the terms of this Pledge
Agreement and the Indenture. Such reassignment and redelivery shall be without
warranty (either express or implied) by or recourse to the Trustee, except as
to the absence of any prior assignments by the Trustee of its interest in the
Collateral, and shall be at the expense of the Pledgor. This Pledge Agreement
shall be binding upon the Pledgor, its successors and assigns, and shall inure,
together with the rights and remedies of the Trustee hereunder, to the benefit
of the Trustee and the Holders of the Notes and their respective successors,
transferees and assigns.
15. Authority of the Trustee. (a) The Trustee shall have and be
entitled to exercise all powers hereunder that are specifically granted to the
Trustee by the terms hereof, together with such powers as are reasonably
incident thereto. The Trustee may perform any of its duties hereunder or
-8-
<PAGE> 9
in connection with the Collateral by or through agents or employees and shall
be entitled to retain counsel and to act in reliance upon the advice of counsel
concerning all such matters. None of the Trustee or any director, officer,
employee, attorney or agent of the Trustee shall be liable to the Pledgor for
any action taken or omitted to be taken by it or them hereunder, except for its
or their own negligent action, negligent failure to act or willful misconduct;
provided that (i) each such person shall not be liable for any error of
judgment made in good faith by it unless it is proved that such person was
negligent in ascertaining the pertinent facts and (ii) the Trustee shall not be
liable with respect to any action it takes or omits to take in good faith in
accordance with a direction or request received by it pursuant to Section 6.5
of the Indenture or Section 16(d) hereof. The Trustee shall not be responsible
for the validity, effectiveness or sufficiency hereof or of any document or
security furnished pursuant hereto. The Trustee and its directors, officers,
employees, attorneys and agents shall be entitled to rely on any communication,
instrument or document believed by it or them to be genuine and correct and to
have been signed or sent by the proper Person(s).
(b) The Pledgor acknowledges that the rights and responsibilities
of the Trustee under this Pledge Agreement with respect to any action taken by
the Trustee or the exercise or non-exercise by the Trustee of any option,
right, request, judgment or other right or remedy provided for herein or
resulting or arising out of this Pledge Agreement shall, as between the Trustee
and the holders of the Notes, be governed by the Indenture and by such other
agreements with respect thereto as may exist from time to time among them, but,
as between the Trustee and the Pledgor, the Trustee shall be conclusively
presumed to be acting as agent for the holders of the Notes with full and valid
authority so to act or refrain from acting, and the Pledgor shall not be
obligated or entitled to make any inquiry respecting such authority.
(c) The Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Agreement and no implied covenants
or obligations shall be read in this Agreement against the Trustee. The
Trustee shall not be deemed to have knowledge of a Default or an Event of
Default under the Indenture unless informed in writing by the Pledgor or the
Holder of any Note or unless a Trust Officer shall have actual knowledge
thereof.
(d) The Trustee shall not be required to exercise any remedies
hereunder unless required by law or requested in writing to do so by the
Holders of not less than a majority in principal amount of the outstanding
Notes and only if furnished with indemnity satisfactory to the Trustee. The
Trustee may consult with counsel and shall not be liable for any action taken
in good faith in reliance upon advice of such counsel except for its bad faith,
its own negligent action, its own negligent failure to act or its own wilful
misconduct or unlawful act. The Trustee makes no representation or warranty
and shall have no responsibility concerning the value or validity of the
Collateral or the validity or perfection of the pledge thereof.
(e) Any resignation or removal of the Trustee under the Indenture
shall result in the simultaneous resignation or removal, as the case may be, of
the Trustee hereunder and any appointment of a successor Trustee under the
Indenture shall result in the simultaneous appointment of the same successor
Trustee hereunder.
-9-
<PAGE> 10
(f) The Trustee shall be deemed to have exercised reasonable care
in the custody and preservation of the Collateral in its possession if the
Collateral is accorded treatment substantially equal to that which the Trustee
accords its own property, it being understood that neither the Trustee nor the
Holders of the Notes shall have responsibility for (i) ascertaining or taking
action with respect to calls, conversions, exchanges, maturities, tenders or
other matters relative to any Collateral, whether or not any such Person has or
is deemed to have knowledge of such matters, or (ii) taking any necessary steps
to preserve rights against any parties with respect to any Collateral.
(g) Notwithstanding anything herein to the contrary, the
exculpations, immunities and protections available to the Trustee under the
Indenture shall be available to the Trustee hereunder.
16. Notices. Any communication, notice or demand to be given
hereunder shall be in writing and delivered in person or mailed by first class
mail, postage prepaid, addressed to the Trustee and the Company at the
addresses specified in the Indenture. Notice may also be given in such other
form and manner or to such other address as shall be designated by any party
hereto to each other party hereto in a written notice delivered in accordance
with the terms of the Indenture.
17. No Waiver; Cumulative Rights. No failure on the part of the
Trustee to exercise, and no delay in exercising, any right, remedy or power
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise by the Trustee of any right, remedy or power hereunder preclude any
other or future exercise of any other right, remedy or power. Each and every
right, remedy and power hereby granted to the Trustee or allowed it by law or
other agreement shall be cumulative and not exclusive the one of any other, and
may be exercised by the Trustee from time to time.
18. Benefits of Pledge Agreement. Nothing in this Pledge
Agreement, whether express or implied, shall give to any Person other than the
parties hereto and their successors hereunder, and the Holders, any benefit or
any legal or equitable right, remedy or claim under this Pledge Agreement.
19. Applicable Law. THIS PLEDGE AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
20. Consent to Jurisdiction and Service. (a) The Pledgor
irrevocably submits to the jurisdiction of any United States federal or state
court located in the Borough of Manhattan in The City of New York, New York
over any suit, action or proceeding arising out of or relating to this
Collateral Pledge and Security Agreement. The Pledgor irrevocably waives, to
the fullest extent permitted by laws any objection which it may have to the
laying of the venue of any such suit, action or proceeding brought in such a
court and any claim that any suit, action or proceeding brought in such a court
has been brought in an inconvenient forum. The Pledgor agrees that final
judgment in any such suit, action or proceeding brought in such a court shall
be conclusive and binding upon the Pledgor and may be enforced in the courts of
Canada (or any other courts to the jurisdiction of which
-10-
<PAGE> 11
the Pledgor is subject) by a suit upon such judgment, provided that service of
process is effected upon the Pledgor in the manner specified in Section 21(b)
or as otherwise permitted by law.
(b) As long as this Collateral Pledge and Security Agreement
remains in effect, the Pledgor will at all times have an authorized agent in
the Borough of Manhattan, The City of New York, New York upon whom process may
be served in any legal action or proceeding arising out of or relating to this
Collateral Pledge and Security Agreement. Service of process upon such agent
shall be deemed in every respect effective service of process upon the Pledgor
in any such legal action or proceeding. The Pledgor hereby irrevocably
appoints CT Corporation system, whose address is, as of the date hereof, 1633
Broadway, New York, New York 10019, as its agent for such purpose and covenants
and agrees that service of process in any such legal action or proceeding may
be made upon it at the office of such agent at said address (or at such other
address in the Borough of Manhattan, The City of New York, New York as the
Pledgor may designate by written notice to the Trustee).
(c) The Pledgor hereby consents to process being served in any
suit, action or proceeding of the nature referred to in Section 21(a) and
Section 21(b) hereof by service upon such agent. The Pledgor irrevocably
waives, to the fullest extent permitted by law, all claim of error by reason of
any such service and agrees that such service (i) shall be deemed in every
respect effective service of process upon the Pledgor in any such suit, action
or proceeding and (ii) shall, to the fullest extent permitted by law, be taken
and held to be valid personal service.
(d) Nothing in this Section shall affect the right of the Trustee
or any Holder of Notes to serve process in any manner permitted by law or limit
the right of the Trustee to bring proceedings against the Pledgor in the courts
of any jurisdiction or jurisdictions.
21. Execution in Counterparts. This Pledge Agreement may be
executed in any number of counterparts, each of which shall be an original, but
such counterparts shall together constitute one and the same instrument.
22. Trust Indenture Act. From and after qualification of the
Indenture under the Trust Indenture Act, the Pledgor shall provide the annual
opinion required by Section 314(b) of the Trust Indenture Act and shall comply
with Section 314(d) thereof, to the extent applicable, in connection with any
release or substitution of Collateral hereunder.
-11-
<PAGE> 12
IN WITNESS WHEREOF, the undersigned have executed this Collateral
Pledge and Security Agreement effective as of the date first above written.
"Pledgor"
SEVEN SEAS PETROLEUM INC.
By: /s/ Herbert C. Williamson, III
------------------------------------
Print Name: Herbert C. Williamson, III
Title: Executive Vice President
and Chief Financial Officer
"Trustee"
THE BANK OF NOVA SCOTIA TRUST
COMPANY OF NEW YORK, as Trustee
By: /s/ John F. Neylan
------------------------------------
Print Name: John F. Neylan
Title: Assistant Trust Officer
<PAGE> 13
EXHIBIT A
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
VALUE AT
--------
ISSUE PRICE YIELD MATURITY
----- ----- ----- --------
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
United States
Treasury Strips (1) 11/15/99 92.10100 5.490 $6,875,000
- ------------------------------------------------------------------------------------------
United States
Treasury Strips (1) 05/15/00 89.58700 5.520 6,875,000
- ------------------------------------------------------------------------------------------
United States
Treasury Strips (1) 11/15/00 87.16000 5.530 6,875,000
- ------------------------------------------------------------------------------------------
United States
Treasury Strips (1) 05/15/01 84.76500 5.550 6,875,000
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Separately Traded Registered and Interest Principal Security
<PAGE> 14
<TABLE>
<CAPTION>
1999
(a)
------------
<S> <C>
no bold after the box head, rm before the bd,x, outside
paren..................................................... tab
</TABLE>
<TABLE>
<CAPTION>
1999
(A)
------------
<S> <C>
bold command right after the boxhead command, no roman
before the bd,x........................................... tab
</TABLE>
<TABLE>
<CAPTION>
1999
(A)
------------
<S> <C>
roman, bd,x inside the paren, no other bold in the box
head...................................................... tab
</TABLE>
<TABLE>
<CAPTION>
1999
(a)
------------
<S> <C>
roman, bd,x outside the paren, no previous bold in the box
head...................................................... tab
</TABLE>
<TABLE>
<CAPTION>
1999
(a)
------------
<S> <C>
just bd,x outside the paren, no previous bold in the box
head...................................................... tab
</TABLE>
2
<PAGE> 1
EXHIBITS 5(A) AND 8(A)
OPINION OF VINSON & ELKINS L.L.P.
Houston, Texas
July 2, 1998
Seven Seas Petroleum Inc.
1990 Post Oak Boulevard, Suite 960
Houston, Texas 77056
Ladies and Gentlemen:
We have acted as counsel for Seven Seas Petroleum Inc., a Yukon Territorial
corporation (the "Company"), in connection with the proposed issuance by the
Company of up to $110 million in aggregate principal amount of its 12 1/2%
Series B Senior Notes due 2005 (the "Series B Notes"), in exchange for an
equivalent amount of its outstanding 12 1/2% Series A Senior Notes due 2005 (the
"Series A Notes"). The terms of the offer to exchange the Series B Notes for the
Series A Notes (the "Exchange Offer") are described in a Registration Statement
on Form S-4 to be filed by the Company with the Securities and Exchange
Commission (the "Registration Statement"), for the registration of the Series B
Notes under the Securities Act of 1933, as amended (the "1933 Act"). The Series
A Notes have been, and the Series B Notes will be, issued pursuant to an
Indenture, dated as of May 7, 1998 (the "Indenture"), between the Company and
The Bank of Nova Scotia Trust Company of New York, as Trustee.
In rendering this opinion, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals and the conformity with original
documents of all documents submitted to us as certified or photostatic copies.
We have also assumed the truth, accuracy and completeness of all
representations, warranties and certifications made by the Company.
With respect to the opinion expressed below as to the due authorization by
the Company of the Series B Notes, we have relied solely upon the opinion of
even date hereof of Preston, Willis & Lackowicz, Canadian counsel to the
Company, which is being filed as an exhibit to the Registration Statement.
Based upon the foregoing and subject to the qualifications hereinafter set
forth, we are of the opinion that the Series B Notes have been duly authorized
for issuance and, when the Registration Statement has become effective under the
1933 Act, and the Series B Notes have been duly executed, issued and
authenticated in accordance with the Indenture and issued and sold in exchange
for the Series A Notes as contemplated by the Registration Statement and in
accordance with the Exchange Offer, the Series B Notes will constitute valid and
legally binding obligations of the Company, subject to (i) bankruptcy,
insolvency, reorganization, moratorium, liquidation, rearrangement, fraudulent
transfer, fraudulent conveyance and other similar laws (including court
decisions) now or hereafter in effect and affecting the rights and remedies of
creditors generally or providing for the relief of debtors, (ii) the refusal of
a particular court to grant equitable remedies, including, without limitation,
specific performance and injunctive relief, and (iii) general principles of
equity (regardless of whether such remedies are sought in a proceeding in equity
or at law).
We are further of the opinion that the statements contained in the
prospectus constituting a part of the Registration Statement under the caption
"CERTAIN UNITED STATES TAX CONSEQUENCES TO U.S. HOLDERS ," as qualified therein,
constitute an accurate description, in general terms, of the indicated United
States federal income tax consequences to a U.S. holder of the purchase,
ownership and disposition of the Series B Notes.
We are members of the Texas Bar. The opinions expressed herein are limited
exclusively to the federal laws of the United States of America and the laws of
the State of New York, and we are expressing no opinion as to the effect of the
laws of any other jurisdiction, domestic or foreign.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the statements made with respect to us under the
caption "Legal Matters" in the prospectus included as part of
<PAGE> 2
the Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act and the rules and regulations thereunder.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 5(B)
OPINION OF PRESTON, WILLIS & LACKOWICZ
June 30, 1998
Seven Seas Petroleum Inc.
1990 Post Oak Blvd., Suite 960
Houston, Texas 77056
Dear Sirs/Mesdames:
RE: SEVEN SEAS PETROLEUM INC.
We have acted as counsel for Seven Seas Petroleum Inc., incorporated
pursuant to the laws of the Yukon Territory (the "Corporation"), in connection
with the proposed issuance by the Corporation of up to $110 million in aggregate
principal amount of its 12 1/2% Series B Senior Notes due 2005 (the "Series B
Notes"), in exchange for an equivalent amount of its outstanding 12 1/2% Series
A Senior Notes due 2005 (the "Series A Notes"). The terms of the offer to
exchange the Series B Notes for the Series A Notes (the "Exchange Offer") are
described in a Registration Statement on Form S-4 to be filed by the Corporation
with the Securities and Exchange Commission (the "Registration Statement"), for
the registration of the Series B Notes under the Securities Act of 1933, as
amended. In connection therewith, we, as your counsel, have examined such
certificates, instruments and documents and reviewed such questions of law as we
have considered necessary or appropriate for the purposes of this opinion.
Based upon the foregoing, we are of the opinion that the Series B Notes
have been duly authorized for issuance by the Corporation.
The foregoing opinion is limited exclusively to the federal laws of Canada
and to the laws of the Yukon Territory.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Prospectus forming a
part of the Registration Statement under the caption "Legal Matters." In giving
this consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act and the rules and
regulations thereunder.
Yours very truly,
PRESTON, WILLIS & LACKOWICZ
/s/ PAUL W. LACKOWICZ
<PAGE> 1
EXHIBITS 5(A) AND 8(A)
OPINION OF VINSON & ELKINS L.L.P.
Houston, Texas
July 2, 1998
Seven Seas Petroleum Inc.
1990 Post Oak Boulevard, Suite 960
Houston, Texas 77056
Ladies and Gentlemen:
We have acted as counsel for Seven Seas Petroleum Inc., a Yukon Territorial
corporation (the "Company"), in connection with the proposed issuance by the
Company of up to $110 million in aggregate principal amount of its 12 1/2%
Series B Senior Notes due 2005 (the "Series B Notes"), in exchange for an
equivalent amount of its outstanding 12 1/2% Series A Senior Notes due 2005 (the
"Series A Notes"). The terms of the offer to exchange the Series B Notes for the
Series A Notes (the "Exchange Offer") are described in a Registration Statement
on Form S-4 to be filed by the Company with the Securities and Exchange
Commission (the "Registration Statement"), for the registration of the Series B
Notes under the Securities Act of 1933, as amended (the "1933 Act"). The Series
A Notes have been, and the Series B Notes will be, issued pursuant to an
Indenture, dated as of May 7, 1998 (the "Indenture"), between the Company and
The Bank of Nova Scotia Trust Company of New York, as Trustee.
In rendering this opinion, we have assumed the genuineness of all
signatures, the legal capacity of natural persons, the authenticity of all
documents submitted to us as originals and the conformity with original
documents of all documents submitted to us as certified or photostatic copies.
We have also assumed the truth, accuracy and completeness of all
representations, warranties and certifications made by the Company.
With respect to the opinion expressed below as to the due authorization by
the Company of the Series B Notes, we have relied solely upon the opinion of
even date hereof of Preston, Willis & Lackowicz, Canadian counsel to the
Company, which is being filed as an exhibit to the Registration Statement.
Based upon the foregoing and subject to the qualifications hereinafter set
forth, we are of the opinion that the Series B Notes have been duly authorized
for issuance and, when the Registration Statement has become effective under the
1933 Act, and the Series B Notes have been duly executed, issued and
authenticated in accordance with the Indenture and issued and sold in exchange
for the Series A Notes as contemplated by the Registration Statement and in
accordance with the Exchange Offer, the Series B Notes will constitute valid and
legally binding obligations of the Company, subject to (i) bankruptcy,
insolvency, reorganization, moratorium, liquidation, rearrangement, fraudulent
transfer, fraudulent conveyance and other similar laws (including court
decisions) now or hereafter in effect and affecting the rights and remedies of
creditors generally or providing for the relief of debtors, (ii) the refusal of
a particular court to grant equitable remedies, including, without limitation,
specific performance and injunctive relief, and (iii) general principles of
equity (regardless of whether such remedies are sought in a proceeding in equity
or at law).
We are further of the opinion that the statements contained in the
prospectus constituting a part of the Registration Statement under the caption
"CERTAIN UNITED STATES TAX CONSEQUENCES TO U.S. HOLDERS ," as qualified therein,
constitute an accurate description, in general terms, of the indicated United
States federal income tax consequences to a U.S. holder of the purchase,
ownership and disposition of the Series B Notes.
We are members of the Texas Bar. The opinions expressed herein are limited
exclusively to the federal laws of the United States of America and the laws of
the State of New York, and we are expressing no opinion as to the effect of the
laws of any other jurisdiction, domestic or foreign.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the statements made with respect to us under the
caption "Legal Matters" in the prospectus included as part of
<PAGE> 2
the Registration Statement. In giving this consent, we do not admit that we are
within the category of persons whose consent is required under Section 7 of the
Securities Act and the rules and regulations thereunder.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
<PAGE> 1
EXHIBIT 8(B)
OPINION OF MCMILLAN BINCH
July 2, 1998
Seven Seas Petroleum Inc.
1990 Post Oak Blvd., Suite 960
Houston, Texas 77056
Dear Sirs and Mesdames:
You have requested our opinion as to the material Canadian federal income
tax consequences expected to result to certain holders who are not residents of
Canada from the exchange of Original Notes for Exchange Notes of Seven Seas
Petroleum Inc., a corporation formed under the laws of the Yukon Territory (the
"Company"), pursuant to an Exchange Offer as set forth in the Prospectus (the
"Prospectus") included in the Registration Statement dated July 2, 1998 and
exhibits thereto filed with the Securities and Exchange Commission (the
"Registration Statement"). Capitalized terms not defined herein have the
meanings attributed to them in the Prospectus.
Based on the facts as set forth in the Prospectus and subject to the
limitations and qualifications set forth therein, it is our opinion that the
material Canadian federal income tax consequences expected to result to holders
who, for the purposes of the Income Tax Act (Canada), are not resident in
Canada, deal at arm's length with the Company, hold Original Notes and Exchange
Notes as capital property and do not use or hold and are not deemed to use or
hold Original Notes and Exchange Notes in carrying on business in Canada and
whose Original Notes are exchanged for Exchange Notes in the Exchange Offer,
under currently applicable law, are as stated under the caption "Certain
Canadian Federal Income Tax Considerations" on page 111 of the Prospectus
included in the Registration Statement.
This opinion is based on the provisions of Income Tax Act (Canada) in
effect on the date hereof, the regulations thereunder, specific proposals to
amend the Income Tax Act (Canada) and the regulations thereunder announced by
the Canadian Minister of Finance prior to the date hereof and our understanding
of the current administrative and assessing practices of Revenue Canada, all of
which are subject to change either prospectively or retroactively.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement.
Yours truly,
/s/ MCMILLAN BINCH
<PAGE> 1
EXHIBIT 12
SEVEN SEAS PETROLEUM INC.
RATIO OF EARNINGS TO FIXED CHARGES
The following illustrates the computation of the historical ratio of
earnings to fixed charges:
<TABLE>
<CAPTION>
THREE
(IN THOUSANDS) MONTHS
FISCAL YEAR ENDED
--------------------------- MARCH 31,
1997 1996 1995 1998
------- ------- ------- ---------
<S> <C> <C> <C> <C>
EARNINGS
Pretax earnings (loss).................................... $(7,928) $(2,195) $(2,120) $(1,115)
Add (Deduct):
Fixed charges (see below).............................. 687 -- -- 436
Reverse effect of inclusion of interest capitalized in
fixed charges above.................................. (600) -- -- (370)
------- ------- ------- -------
(7,841) (2,195) (2,120) (1,049)
======= ======= ======= =======
FIXED CHARGES(A)............................................ 687 -- -- 436
======= ======= ======= =======
Ratio of Earnings to Fixed Charges.......................... -- -- -- --
======= ======= ======= =======
Additional earnings necessary to bring ratio to 1.0x........ $ 687 -- -- $ 436
======= ======= ======= =======
</TABLE>
- ---------------
(a) Consists of capitalized interest and amortization of debt issuance costs.
<PAGE> 1
EXHIBIT 23(A)
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
We hereby consent to the use of our name in this Form S-4 Registration
Statement of Seven Seas Petroleum Inc. as it occurs in the following locations:
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C>
"Summary Reserve and Production Data" 12
"Oil and Gas Reserves" 49
"Petroleum Engineers" 112
"Proved Reserves (Unaudited)" F-25
</TABLE>
/s/ RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
------------------------------------
Ryder Scott Company
Petroleum Engineers
July 2, 1998
<PAGE> 1
EXHIBIT 23(B)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in this registration
statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
July 2, 1998
<PAGE> 1
EXHIBIT 23(C)
CONSENT OF COUNSEL
We hereby consent to the use of our name under "Business -- Legal
Proceedings" in this registration statement.
/s/RAISBECK, LARA, RODRIGUES &
RUEDA
Members of the firm Baker & McKenzie
Bogota, Colombia
June 23, 1998
<PAGE> 1
EXHIBIT 25
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
---------------------
STATEMENT OF ELIGIBILITY UNDER THE
TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY
OF A TRUSTEE PURSUANT TO SECTION 305(B)(2)
------
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)
<TABLE>
<S> <C>
NEW YORK 13-5691211
(Jurisdiction of incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification No.)
ONE LIBERTY PLAZA, NEW YORK, NEW YORK 10006
(Address of principal executive offices) (Zip Code)
</TABLE>
SEVEN SEAS PETROLEUM INC.
(Exact name of obligor as specified in its charter)
<TABLE>
<S> <C>
YUKON TERRITORY, CANADA 73-1468669
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
1990 POST OAK BLVD., SUITE 960
HOUSTON, TEXAS 77056
(Address of principal executive offices)
12 1/2% SENIOR NOTES DUE 2005
(Title of indenture securities)
<PAGE> 2
GENERAL
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to
which it is subject.
Federal Reserve Bank of New York, 33 Liberty Street, New York, N.Y.
10045.
State of New York Banking Department, State House, Albany, N.Y.
(b) Whether it is authorized to exercise corporate trust powers.
The Trustee is authorized to exercise corporate trust powers.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
The obligor is not an affiliate of the Trustee.
ITEM 3. THROUGH ITEM 15. NOT APPLICABLE.
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
1. A copy of the articles of association of the trustee as now in effect.
A copy of the Organizational Certificate of the Trustee, as now in
effect, is on file with the Securities and Exchange Commission as
Exhibit 1 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement No. 333-6688 and is
incorporated herein by reference thereto.
2. A copy of the certificate of authority of the trustee to commence
business, if not contained in the articles of association.
A copy of the Certificate of Authority for the Trustee to commence
business is on file with the Securities and Exchange Commission as
Exhibit 2 to the Statement of Eligibility and Qualification of Trustee
(Form T-1) filed with the Registration Statement No. 333-6688 and is
incorporated herein by reference thereto.
3. A copy of the authorization of the trustee to exercise corporate trust
powers, if such authorization is not contained in the documents specified in
paragraph (1) or (2), above.
A copy of the authorization of the Trustee to exercise corporate trust
powers is contained in the documents identified as Exhibits 1 and 2.
4. A copy of the existing by-laws of the trustee, or instruments
corresponding thereto.
A copy of the By-Laws of the Trustee, as now in effect, is on file with
the Securities and Exchange Commission as Exhibit 4 to the Statement of
Eligibility and Qualification of Trustee (Form T-1) filed with the
Registration Statement No. 333-6688 and is incorporated herein by
reference thereto.
<PAGE> 3
5. A copy of each indenture referred to in Item 4. if the obligor is in
default.
Not applicable.
6. The consents of United States institutional trustees required by Section
321(b) of the Act.
The consent of the Trustee required by Section 321(b) of the Act is on
file with the Securities and Exchange Commission as Exhibit 6 to the
Statement of Eligibility and Qualification of Trustee (Form T-1) filed
with the Registration Statement No. 333-27685 and is incorporated by
reference thereto.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or examining authority.
A copy of the latest report of condition of the Trustee published
pursuant to law or the requirements of its supervising or examining
authority is annexed hereto as Exhibit 7 and made a part hereof.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, The Bank of Nova Scotia Trust Company of New York, a
corporation organized and existing under the laws of State of New York, has duly
caused this statement of eligibility to be signed on its behalf by the
undersigned, thereunto duly authorized, all in the City of New York, and State
of New York, on the 24th day of June, 1998.
THE BANK OF NOVA SCOTIA TRUST
COMPANY OF NEW YORK
By: /s/ GEORGE E. TIMMES
-------------------------------------
George E. Timmes
Vice President
<PAGE> 4
EXHIBIT 7
Consolidated Report of Condition for Insured Commercial and State-Chartered
Savings Banks for March 31, 1998.
ASSETS
<TABLE>
<CAPTION>
THOUSANDS OF
DOLLARS
------------
<S> <C>
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin........ $ 50
Interest-bearing balances................................. 0
Securities:
Held-to-maturity securities............................... 1,774
Available-for-sale securities............................. 0
Federal funds sold and securities purchased under agreements
to resell................................................. 1,350
Loans and lease financing receivables:
Loans and leases, net of unearned income.................. 0
Allowance for loan and lease losses....................... 0
Allocated transfer risk reserve........................... 0
Loans and leases, net of unearned income and allowances... 0
Trading assets.............................................. 0
Premises and fixed assets................................... 12
Other real estate owned..................................... 0
Investments in unconsolidated subsidiaries and associated
companies................................................. 0
Customers' liability to this bank on acceptances
outstanding............................................... 0
Intangible assets........................................... 0
Other assets................................................ 115
------
Total assets...................................... $3,301
======
LIABILITIES
Deposits:
In domestic offices....................................... $1,021
Noninterest-bearing.................................... 303
Interest-bearing....................................... 718
In foreign offices, Edge and Agreement subsidiaries, and
IBFs................................................... 0
Noninterest-bearing.................................... 0
Interest-bearing....................................... 0
Federal funds purchased and securities sold under agreements
to repurchase............................................. 0
Demand notes issued to the U.S. Treasury.................... 0
Trading liabilities......................................... 0
Other borrowed money........................................ 0
Bank's liability on acceptances executed and outstanding.... 0
Subordinated notes and debentures........................... 0
Other liabilities........................................... 46
------
Total liabilities................................. 1,067
------
EQUITY CAPITAL
Perpetual preferred stock and related surplus............... 0
Common stock................................................ 1,000
Surplus..................................................... 1,000
Undivided profits and capital reserves/Net unrealized
holding gains (losses).................................... 234
Cumulative foreign currency translation adjustments......... 0
------
Total equity capital.............................. 2,234
------
Total liabilities and equity capital.............. $3,301
======
</TABLE>
<PAGE> 1
EXHIBIT 99(A)
SEVEN SEAS PETROLEUM INC.
LETTER OF TRANSMITTAL
FOR
OFFER TO EXCHANGE
12 1/2% SERIES B SENIOR NOTES DUE 2005
FOR ALL OUTSTANDING
12 1/2% SERIES A SENIOR NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED BY
SEVEN SEAS PETROLEUM INC. (THE "EXPIRATION DATE").
THE EXCHANGE AGENT
FOR THE EXCHANGE OFFER IS:
THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK
<TABLE>
<S> <C>
For Information by Telephone:
(212) 225-5427
The Bank of New Scotia Trust Company of New York
Corporate Trust Department
23rd Floor
One Liberty Plaza
New York, New York 10006
</TABLE>
By Facsimile Transmission (for Eligible Institutions only):
(212) 225-5436
(Facsimile Confirmation)
(212) 225-5427
(Originals of all documents sent by facsimile should be sent promptly by
registered or certified mail, by hand, or by overnight delivery service.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A
NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. THE
INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
TRANSMITTAL IS COMPLETED.
The undersigned hereby acknowledges receipt and review of the Prospectus
dated , 1998 (the "Prospectus") of Seven Seas Petroleum Inc., a
Yukon Territory, Canada corporation (the "Company"), and this Letter of
Transmittal (the "Letter of Transmittal"), which together describe the Company's
offer (the "Exchange Offer") to exchange its 12 1/2% Series B Senior Notes due
2005 (the "Exchange Notes"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), for a like principal amount of its
issued and outstanding 12 1/2% Series A Senior Notes due 2005 (the "Original
Notes"). Capitalized terms used but not defined herein have the respective
meaning given to them in the Prospectus.
The Company reserves the right, at any time or from time to time, to extend
the Exchange Offer at its discretion, in which event the term "Expiration Date"
shall mean the latest date to which the Exchange Offer is extended. The Company
shall notify the Exchange Agent and each registered holder of the Original Notes
of any extension by oral or written notice prior to 9:00 a.m., New York City
time, on the next business day after the previously scheduled Expiration Date.
-1-
<PAGE> 2
This Letter of Transmittal is to be used by a holder of Original Notes if
original Original Notes are to be forwarded herewith. An Agent's Message (as
defined in the next sentence) is to be used if delivery of Original Notes is to
be made by book-entry transfer to the account maintained by the Exchange Agent
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to
the procedures set forth in the Prospectus under the caption "The Exchange
Offer -- Terms of the Exchange Offer -- Procedures for Tendering." The term
"Agent's Message" means a message, transmitted by the Book-Entry Transfer
Facility and received by the Exchange Agent and forming a part of the
confirmation of a book-entry transfer ("Book-Entry Confirmation"), which states
that the Book-Entry Transfer Facility has received an express acknowledgment
from a participant tendering Original Notes which are the subject of such
Book-Entry Confirmation and that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal and that the Company may enforce
such agreement against such participant. Holders of Original Notes whose
Original Notes are not immediately available, or who are unable to deliver their
Original Notes and all other documents required by this Letter of Transmittal to
the Exchange Agent on or prior to the Expiration Date, or who are unable to
complete the procedure for book-entry transfer on a timely basis, must tender
their Original Notes according to the guaranteed delivery procedures set forth
in the Prospectus under the caption "The Exchange Offer -- Terms of the Exchange
Offer -- Guaranteed Delivery Procedures." See Instruction 2. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
The term "holder" with respect to the Exchange Offer means any person in
whose name Original Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder. The undersigned has completed, executed and delivered this
Letter of Transmittal to indicate the action the undersigned desires to take
with respect to the Exchange Offer. Holders who wish to tender their Original
Notes must complete this Letter of Transmittal in its entirety.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL AND THE PROSPECTUS CAREFULLY
BEFORE CHECKING ANY BOX BELOW.
THE INSTRUCTIONS INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED.
QUESTIONS AND REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS
AND THIS LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT.
-2-
<PAGE> 3
List below the Original Notes to which this Letter of Transmittal relates.
If the space below is inadequate, list the registered numbers and principal
amount on a separate signed schedule and affix the list to this Letter of
Transmittal.
<TABLE>
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
DESCRIPTION OF ORIGINAL NOTES TENDERED
- ------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED OWNER(S)
AS (IT/THEY) APPEAR(S) ON THE 12 1/2% SERIES A
SENIOR NOTES AGGREGATE PRINCIPAL AMOUNT
DUE 2005 (THE "ORIGINAL NOTES") REPRESENTED BY ORIGINAL NOTES
- ------------------------------------------------------------------------------------------------------------
CERTIFICATE AMOUNT OF
NUMBER(S)* ORIGINAL NOTES PRINCIPAL AMOUNT
OF ORIGINAL NOTES* TENDERED TENDERED
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
TOTAL PRINCIPAL**
- ------------------------------------------------------------------------------------------------------------
* Need not be completed by book-entry holders.
** Unless otherwise indicated, any tendering holder of Original Notes will be deemed to have tendered the
entire aggregate principal amount represented by such Original Notes. All tenders must be in integral
multiples of $1,000.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
(If additional space is required, attach a continuation sheet in substantially
the above form.)
METHOD OF DELIVERY
[ ] Check here if tendered Original Notes are enclosed herewith.
[ ] Check here if tendered Original Notes are being delivered by book-entry
transfer made to an account maintained by the Exchange Agent with a
Book-Entry Transfer Facility and complete the following:
Name of Tendering Institution:
Account Number:
Transaction Code Number:
[ ] Check here if tendered Original Notes are being delivered pursuant to a
Notice of Guaranteed Delivery and complete the following:
Name(s) of Registered Holder(s):
Date of Execution of Notice of Guaranteed Delivery:
Window Ticket Number (if available):
Name of Eligible Institution that guaranteed delivery:
Account Number (If delivered by book-entry transfer):
-3-
<PAGE> 4
SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
1. The undersigned hereby tenders to the Company the Original Notes
described above pursuant to the Company's offer of $1,000 principal amount of
registered Exchange Notes, in exchange for each $1,000 principal amount of the
Original Notes, upon the terms and subject to the conditions contained in the
Prospectus, receipt of which is hereby acknowledged, and this Letter of
Transmittal.
2. The undersigned hereby represents and warrants that it has full
authority to tender, exchange, assign and transfer the Original Notes described
above. The undersigned will, upon request, execute and deliver any additional
documents deemed by the Exchange Agent or the Company to be necessary or
desirable to complete the exchange, assignment and transfer of Original Notes.
3. The undersigned understands that the tender of the Original Notes
pursuant to all of the procedures set forth in the Prospectus will constitute an
agreement between the undersigned and the Company as to the terms and conditions
set forth in the Prospectus.
4. The undersigned acknowledge(s) that this Exchange Offer is being made in
reliance upon interpretations contained in no-action letters issued to third
parties by the staff of the Securities and Exchange Commission (the "SEC"),
including Exxon Capital Holdings Corporation, SEC No-Action (available May 13,
1988), Morgan Stanley & Co. Inc., SEC No-Action Letter (available June 5, 1991)
and Mary Kay Cosmetics, Inc., SEC No-Action Letter (available June 5, 1991),
that the Exchange Notes issued in exchange for the Original Notes pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by holders thereof (other than a broker-dealer who purchased Original Notes
exchanged for such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act and any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holders' business and
such holders are not participating in, and have no arrangement with any person
to participate in, the distribution of such Exchange Notes.
5. Unless the box under the heading "Special Registration Instructions" is
checked, the undersigned hereby represents and warrants that:
(i) the Exchange Notes acquired pursuant to the Exchange Offer are
being obtained in the ordinary course of business of the holder;
(ii) the holder is not engaging in and does not intend to engage in a
distribution of such Exchange Notes;
(iii) the holder does not have an arrangement or understanding with
any person to participate in the distribution of such Exchange Notes; and
(iv) the holder is not an "affiliate," as such term is defined under
Rule 405 promulgated under the Securities Act, of the Company.
6. The undersigned may, if, and only if, unable to make all of the
representations and warranties contained in Item 5 above, elect to have its
Original Notes registered in the shelf registration statement described in the
registration rights agreement (the "Registration Rights Agreement") dated as of
May 7, 1998 among the Company and the Initial Purchasers. Such election may be
made by checking the box under "Special Registration Instructions" on page 7. By
making such election, the undersigned agrees, as a holder of Transfer Restricted
Securities participating in a shelf registration, to indemnify and hold harmless
the Company, each of the Guarantors, if any, and each person, if any, who
controls the Company or any of the Guarantors within the meaning of either
Section 15 of the Securities Act or Section 20 of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and each of their respective officers and
directors,
-4-
<PAGE> 5
from and against any and all losses, liabilities, claims, damages and judgments
caused by any untrue statement or alleged untrue statement of a material fact
contained in any Registration Statement or Prospectus, or in any supplement
thereto or amendment thereof, or caused by the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; but only with respect to information relating to the
undersigned furnished in writing by or on behalf of the undersigned expressly
for use in the Registration Statement, the Prospectus or any amendments or
supplements thereto. Any such indemnification shall be governed by the terms and
subject to the conditions set forth in the Registration Rights Agreement,
including, without limitation, the provisions regarding notice, retention of
counsel, contribution and payment of expenses set forth therein. The above
summary of the indemnification provision of the Registration Rights Agreement is
not intended to be exhaustive and is qualified in its entirety by the
Registration Rights Agreement.
7. If the undersigned is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Original Notes that were acquired as a
result of market-making activities or other trading activities, it acknowledges
that it will deliver a prospectus in connection with any resale of such Exchange
Notes; however, by so acknowledging and delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act. If the undersigned is a broker-dealer and Original Notes
held for its own account were not acquired as a result of market-making or other
trading activities, such Original Notes cannot be exchanged pursuant to the
Exchange Offer.
8. Any obligation of the undersigned hereunder shall be binding upon the
successors, assigns, executors, administrators, trustees in bankruptcy and legal
and personal representatives of the undersigned.
9. Unless otherwise indicated herein under "Special Delivery Instructions,"
please issue the certificates for the Exchange Notes in the name of the
undersigned.
-5-
<PAGE> 6
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed only (i) if Original Notes in a principal amount not tendered,
or Exchange Notes issued in exchange for Original Notes accepted for exchange,
are to be issued in the name of someone other than the undersigned, or (ii) if
Original Notes tendered by book-entry transfer which are not exchanged are to be
returned by credit to an account maintained at the Book-Entry Transfer Facility.
Issue Exchange Notes and/or Original Notes to:
Name
- ----------------------------------------
(Type or Print)
Address
- --------------------------------------
- ------------------------------------------------
(Zip Code)
- ------------------------------------------------
(Tax Identification or Social Security Number)
(Complete Substitute Form W-9)
Credit Unexchanged Original Notes
Delivered by Book-Entry Transfer
to the Book-Entry Transfer Facility
Set Forth Below:
- ------------------------------------------------
Book-Entry Transfer Facility
Account Number:
- ------------------------------------------------
- ------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 5 AND 6)
To be completed ONLY if the Exchange Notes are to be issued or sent to
someone other than the undersigned or to the undersigned at an address other
than as indicated above.
Mail [ ] Issue [ ] (check appropriate boxes)
Certificates to:
Name
- ----------------------------------------
(Type or Print)
Address
- --------------------------------------
- ------------------------------------------------
(Zip Code)
- ------------------------------------------------
(Tax Identification or Social Security Number)
- ------------------------------------------------
-6-
<PAGE> 7
SPECIAL REGISTRATION INSTRUCTIONS
To be completed ONLY if (i) the undersigned satisfies the conditions set
forth in Item 6 above, (ii) the undersigned elects to register its Original
Notes in the shelf registration statement described in the Registration Rights
Agreement and (iii) the undersigned agrees to indemnify certain entities and
individuals as set forth in Item 6 above. (See Item 6.)
[ ] By checking this box the undersigned hereby (i) represents that it is unable
to make all of the representations and warranties set forth in Item 5 above,
(ii) elects to have its Original Notes registered pursuant to the shelf
registration statement described in the Registration Rights Agreement and
(iii) agrees to indemnify certain entities and individuals identified in,
and to the extent provided in, Item 6 above.
SPECIAL BROKER-DEALER INSTRUCTIONS
[ ] Check here if you are a broker-dealer and wish to receive 10 additional
copies of the Prospectus and 10 copies of any amendments or supplements
thereto.
Name
- --------------------------------------------------------------------------------
Address
- --------------------------------------------------------------------------------
(Zip Code)
- --------------------------------------------------------------------------------
IMPORTANT
PLEASE SIGN HERE WHETHER OR NOT
ORIGINAL NOTES ARE BEING PHYSICALLY TENDERED HEREBY
(COMPLETE ACCOMPANYING SUBSTITUTE FORM W-9 ON REVERSE SIDE)
(Signature(s) of Registered Holders of Original Notes)
- ------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Dated , 1998
(The above lines must be signed by the registered holder(s) of Original
Notes as name(s) appear(s) on the Original Notes or on a security position
listing, or by person(s) authorized to become registered holder(s) by a properly
completed bond power from the registered holder(s), a copy of which must be
transmitted with this Letter of Transmittal. If Original Notes to which this
Letter of Transmittal relate are held of record by two or more joint holders,
then all such holders must sign this Letter of Transmittal. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
then such person must (i) set forth his or her full title below and (ii) unless
waived by the Company, submit evidence satisfactory to the Company of such
person's authority so to act. See Instruction 5 regarding completion of this
Letter of Transmittal, printed below.)
Name(s)
- --------------------------------------------------------------------------------
(Please Type or Print)
Capacity:
- --------------------------------------------------------------------------------
Address:
- --------------------------------------------------------------------------------
(Include Zip Code)
Area Code and Telephone Number:
- ---------------------------------------------------------------------------
-7-
<PAGE> 8
MEDALLION SIGNATURE GUARANTEE
(IF REQUIRED BY INSTRUCTION 5)
Certain signatures must be Guaranteed by an Eligible Institution.
Signature(s) Guaranteed by an Eligible Institution:
(Authorized Signature)
- --------------------------------------------------------------------------------
(Title)
- --------------------------------------------------------------------------------
(Name of Firm)
- --------------------------------------------------------------------------------
(Address, Include Zip Code)
(Area Code and Telephone Number)
- -------------------------------------------------------------------------
Dated: ______________ , 1998
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND ORIGINAL NOTES OR BOOK-ENTRY
CONFIRMATIONS.
All physically delivered Original Notes or any confirmation of a book-entry
transfer to the Exchange Agent's account at the Book-Entry Transfer Facility of
Original Notes tendered by book-entry transfer (a "Book-Entry Confirmation"), as
well as a properly completed and duly executed copy of this Letter of
Transmittal or Agent's Message or facsimile hereof, and any other documents
required by this Letter of Transmittal, must be received by the Exchange Agent
at its address set forth herein prior to 5:00 p.m., New York City time, on the
Expiration Date. The method of delivery of the tendered Original Notes, this
Letter of Transmittal and all other required documents to the Exchange Agent is
at the election and risk of the holder and, except as otherwise provided below,
the delivery will be deemed made only when actually received or confirmed by the
Exchange Agent. If such delivery is by mail, it is recommended that registered
mail, properly insured, with return receipt requested, be used. Instead of
delivery by mail, it is recommended that the holder use an overnight or hand
delivery service. In all cases, sufficient time should be allowed to assure
delivery to the Exchange Agent before the Expiration Date. No Letter of
Transmittal or Original Notes should be sent to the Company.
2. GUARANTEED DELIVERY PROCEDURES.
Holders who wish to tender their Original Notes and whose Original Notes
are not immediately available or who cannot deliver their Original Notes, this
Letter of Transmittal or any other documents required hereby to the Exchange
Agent prior to the Expiration Date or who cannot complete the procedure for
book-entry transfer on a timely basis and deliver an Agent's Message, must
tender their Original Notes according to the guaranteed delivery procedures set
forth in the Prospectus. Pursuant to such procedures a tender may be effected if
the Exchange Agent has received at its office, on or prior to the Expiration
Date, a letter, telegram or facsimile transmission from an Eligible Institution
setting forth the name and address of the tendering holder, the name(s) in which
the Original Notes are registered and the certificate number(s) of the Original
Notes to be tendered, and stating that the tender is being made thereby and
guaranteeing that, within three business days after the date of execution of
such letter, telegram or facsimile transmission by the Eligible Institution,
such Original Notes, in proper form for transfer (or a confirmation of
book-entry transfer of such Original Notes into the Exchange Agent's account at
DTC), will be delivered by such Eligible Institution together with a properly
completed and duly executed Letter of Transmittal (and any other required
documents). Unless Original Notes being tendered by the above-described method
are deposited with the
-8-
<PAGE> 9
Exchange Agent within the time period set forth above (accompanied or preceded
by a properly completed Letter of Transmittal and any other required documents),
the Company may, at its option, reject the tender.
Any holder of Original Notes who wishes to tender Original Notes pursuant
to the guaranteed delivery procedures described above must ensure that the
Exchange Agent receives the Notice of Guaranteed Delivery prior to 5:00 p.m.,
New York City time, on the Expiration Date. Upon request of the Exchange Agent,
a Notice of Guaranteed Delivery will be sent to holders who wish to tender their
Original Notes according to the guaranteed delivery procedures set forth above.
See "The Exchange Offer -- Terms of the Exchange Offer -- Guaranteed Delivery
Procedures" section of the Prospectus.
3. TENDER BY HOLDER.
Only a holder of Original Notes may tender such Original Notes in the
Exchange Offer. Any beneficial holder of Original Notes who is not the
registered holder and who wishes to tender should arrange with the registered
holder to execute and deliver this Letter of Transmittal on his behalf or must,
prior to completing and executing this Letter of Transmittal and delivering his
Original Notes, either make appropriate arrangements to register ownership of
the Original Notes in such holder's name or obtain a properly completed bond
power from the registered holder.
4. PARTIAL TENDERS.
Tenders of Original Notes will be accepted only in integral multiples of
$1,000. If less than the entire principal amount of any Original Notes is
tendered, the tendering holder should fill in the principal amount-tendered in
the third column of the box entitled "Description of Original Notes Tendered"
above. The entire principal amount of Original Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. If the
entire principal amount of all Original Notes is not tendered, then Original
Notes for the principal amount of Original Notes not tendered and Exchange Notes
issued in exchange for any Original Notes accepted will be sent to the holder at
his or her registered address, unless a different address is provided in the
appropriate box on this Letter of Transmittal, promptly after the Original Notes
are accepted for exchange.
5. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES.
If this Letter of Transmittal (or facsimile hereof) is signed by the record
holder(s) of the Original Notes tendered hereby, the signature must correspond
with the name(s) as written on the face of the Original Notes without
alteration, enlargement or any change whatsoever. If this Letter of Transmittal
(or facsimile hereof) is signed by a participant in the Book-Entry Transfer
Facility, the signature must correspond with the name as it appears on the
security position listing as the holder of the Original Notes.
If this Letter of Transmittal (or facsimile hereof) is signed by the
registered holder or holders of Original Notes listed and tendered hereby and
the Exchange Notes issued in exchange therefor are to be issued (or any
untendered principal amount of Original Notes is to be reissued) to the
registered holder, the said holder need not and should not endorse any tendered
Original Notes, nor provide a separate bond power. In any other case, such
holder must either properly endorse the Original Notes tendered or transmit a
properly completed separate bond power with this Letter of Transmittal, with the
signatures on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal (or facsimile hereof) is signed by a person
other than the registered holder or holders of any Original Notes listed, such
Original Notes must be endorsed or accompanied by appropriate bond powers, in
each case signed as the name of the registered holder or holders appears on the
Original Notes.
If this Letter of Transmittal (or facsimile hereof) or any Original Notes
or bond powers are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the
-9-
<PAGE> 10
Company, evidence satisfactory to the Company of their authority to act must be
submitted with this Letter of Transmittal.
Endorsements on Original Notes or signatures on bond powers required by
this Instruction 5 must be guaranteed by an Eligible Institution.
No signature guarantee is required if (i) this Letter of Transmittal (or
facsimile hereof) is signed by the registered holder(s) of the Original Notes
tendered herein (or by a participant in the Book-Entry Transfer Facility whose
name appears on a security position listing as the owner of the tendered
Original Notes) and the Exchange Notes are to be issued directly to such
registered holder(s) (or, if signed by a participant in the Book-Entry Transfer
Facility, deposited to such participant's account at such Book-Entry Transfer
Facility) and neither the box entitled "Special Delivery Instructions" nor the
box entitled "Special Registration Instructions" has been completed, or (ii)
such Original Notes are tendered for the account of an Eligible Institution. In
all other cases, all signatures on this Letter of Transmittal (or facsimile
hereof) must be guaranteed by an Eligible Institution.
6. SPECIAL REGISTRATION AND DELIVERY INSTRUCTIONS.
Tendering holders should indicate, in the applicable box or boxes, the name
and address (or account at the Book-Entry Transfer Facility) to which Exchange
Notes or substitute Original Notes for principal amounts not tendered or not
accepted for exchange are to be issued or sent, if different from the name and
address of the person signing this Letter of Transmittal. In the case of
issuance in a different name, the taxpayer identification or social security
number of the person named must also be indicated.
Tax law requires that a holder of any Original Notes which are accepted for
exchange must provide the Company (as payor) with its- correct taxpayer
identification number ("TIN"), which, in the case of a holder who is an
individual is his or her social security number. If the Company is not provided
with the correct TIN, the holder may be subject to a $50 penalty imposed by
Internal Revenue Service. (If withholding results in an overpayment of taxes, a
refund may be obtained). Certain holders (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
To prevent backup withholding, each tendering holder must provide such
holder's correct TIN by completing the Substitute Form W-9 set forth herein,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN), and that (i) the holder has not been notified by the Internal Revenue
Service that such holder is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the holder that such holder is no longer subject to backup withholding.
If the Original Notes are registered in more than one name or are not in the
name of the actual owner, see the enclosed "Guidelines for Certification of
Taxpayer Identification Number of Substitute Form W-9" for information on which
TIN to report.
The Company reserves the right in its sole discretion to take whatever
steps are necessary to comply with the Company's obligations regarding backup
withholding.
7. VALIDITY OF TENDERS.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered Original Notes will be
determined by the Company, in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any or all
tenders not in proper form or the acceptance for exchange of which may, in the
opinion of counsel for the Company, be unlawful. The Company also reserves the
absolute right to waive any of the conditions of the Exchange Offer or any
defect or irregularity in the tender of any Original Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Original Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify holders of defects
-10-
<PAGE> 11
or irregularities with respect to tenders of Original Notes, neither the
Company, the Exchange Agent, nor any other person shall be under any duty to
give notification of any defects or irregularities in tenders or incur any
liability for failure to give such notification. Tenders of Original Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Original Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
8. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive, in whole or part, any of
the conditions to the Exchange Offer set forth in the Prospectus.
9. NO CONDITIONAL TENDER.
No alternative, conditional, irregular or contingent tender of Original
Notes on transmittal of this Letter of Transmittal will be accepted.
10. MUTILATED, LOST, STOLEN OR DESTROYED ORIGINAL NOTES.
Any holder whose Original Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Requests for assistance or for additional copies of the Prospectus or this
Letter of Transmittal may be directed to the Exchange Agent at the address or
telephone number set forth on the cover page of this Letter of Transmittal.
Holders may also contact their broker, dealer, commercial bank, trust company or
other nominee for assistance concerning the Exchange Offer.
12. WITHDRAWAL.
Tenders may be withdrawn only pursuant to the limited withdrawal rights set
forth in the Prospectus under the caption "The Exchange Offer -- Withdrawal
Rights."
IMPORTANT: THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE HEREOF
(TOGETHER WITH THE ORIGINAL NOTES DELIVERED BY BOOK-ENTRY TRANSFER OR IN
ORIGINAL HARD COPY FORM) MUST BE RECEIVED BY THE EXCHANGE AGENT, OR THE NOTICE
OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE EXCHANGE AGENT, PRIOR TO THE
EXPIRATION DATE.
-11-
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
-------------------------------------
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT Social Security Number
FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING BELOW. OR
-------------------------------------
Employer Identification Number
------------------------------------------------------------------------------------------
Department of the PART 2 -- Certification Under penalties of perjury, I certify that:
Treasury -- (1) The number shown on this form is my correct Taxpayer Identification Number (or I am
Internal Revenue waiting for a number to be issued to me) and
Service (2) I am not subject to backup withholding either because I have not been notified by the
PAYER'S REQUEST FOR Internal Revenue Service ("IRS") that I am subject to backup withholding as a result
TAXPAYER IDENTIFICATION of failure to report all interest or dividends, or the IRS has notified me that I am
NUMBER (TIN) no longer subject to backup withholding.
Certificate Instructions -- You must cross out item (2) in Part 2 above if you have been
notified by the IRS that you are subject to backup withholding because of under reporting
interest or dividends on your tax return. However, if after being notified by the IRS that
you were subject to backup withholding you received another notification from the IRS
stating that you are no longer subject to backup withholding, do not cross out item (2).
------------------------------------------------------------------------------------------
SIGNATURE ____________ PART 3 --
DATE ____________, 1998 Awaiting TIN [ ]
Please complete the Certificate of
Awaiting Taxpayer Identification Number
below.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW
THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF
THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number to the payor within 60
days, 31% of all reportable payments made to me thereafter will be withheld
until I provide a number.
Signature ____________________ Date ______________ , 1998
CERTIFICATE FOR FOREIGN RECORD HOLDERS
Under penalties of perjury, I certify that I am not a United States citizen
or resident (or I am signing for a foreign corporation, partnership, estate or
trust).
Signature ____________________ Date ______________ , 1998
-12-
<PAGE> 1
EXHIBIT 99(B)
SEVEN SEAS PETROLEUM INC.
LETTER TO CLIENTS
FOR
TENDER OF ALL OUTSTANDING
12 1/2% SERIES A SENIOR NOTES DUE 2005
IN EXCHANGE FOR
12 1/2% SERIES B SENIOR NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE UNLESS PREVIOUSLY ACCEPTED
FOR EXCHANGE.
To Our Clients:
We are enclosing herewith a Prospectus, dated 1998, of Seven Seas
Petroleum Inc., a Yukon Territory, Canada corporation (the "Company"), and a
related Letter of Transmittal, which together constitute the Company's offer
(the "Exchange Offer") to exchange its 12 1/2% Series B Senior Notes due 2005
(the "Exchange Notes"), which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), for a like principal amount of its
issued and outstanding 12 1/2% Series A Senior Notes due 2005 (the "Original
Notes"), upon the terms and subject to the conditions set forth in the Exchange
Offer.
The Exchange Offer is not conditioned upon any minimum number of Original
Notes being tendered.
We are the holder of record of Original Notes held by us for your own
account. A tender of such Original Notes can be made only by us as the record
holder and pursuant to your instructions. The Letter of Transmittal is furnished
to you for your information only and cannot be used by you to tender Original
Notes held by us for your account.
We request instructions as to whether you wish to tender any or all of the
Original Notes held by us for your account pursuant to the terms and conditions
of the Exchange Offer. We also request that you confirm that we may on your
behalf make the representations and warranties contained in the Letter of
Transmittal.
Very truly yours,
PLEASE RETURN YOUR INSTRUCTIONS TO US IN THE ENCLOSED ENVELOPE WITHIN AMPLE
TIME TO PERMIT US TO SUBMIT A TENDER ON YOUR BEHALF PRIOR TO THE EXPIRATION
DATE.
-13-
<PAGE> 2
INSTRUCTION TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER PARTICIPANT
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1998 (the "Prospectus") of Seven Seas Petroleum Inc., a Yukon
Territory, Canada corporation (the "Company"), and the accompanying Letter of
Transmittal (the "Letter of Transmittal"), that together constitute the
Company's offer (the "Exchange Offer") to exchange its 12 1/2% Series B Senior
Notes due 2005 (the "Exchange Notes"), for all of its outstanding 12 1/2% Series
A Senior Notes due 2005 (the "Original Notes"). Capitalized terms used but not
defined herein have the meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to the action to be taken by you relating to the
Exchange Offer with respect to the Original Notes held by you for the account of
the undersigned.
The aggregate face amount of the Original Notes held by you for the account
of the undersigned is (FILL IN AMOUNT):
$ of the 12 1/2% Series A Senior Notes due 2005.
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
[ ] To TENDER the following Original Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF ORIGINAL NOTES TO BE TENDERED) (IF
ANY):
[ ] NOT to TENDER any Original Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Original Notes held by you
for the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations, that (i) the
Exchange Notes acquired in exchange for Original Notes pursuant to the Exchange
Offer are being acquired in the ordinary course of business of the person
receiving such Exchange Notes, whether or not the undersigned, (ii) the
undersigned is not engaging in and does not intend to engage in a distribution
of the Exchange Notes, (iii) the undersigned does not have any arrangement or
understanding with any person to participate in the distribution of Exchange
Notes, and (iv) neither the undersigned nor any such other person is an
"affiliate" (within the meaning of Rule 405 under the Securities Act of 1933, as
amended) of the Company. If the undersigned is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Original Notes, it
acknowledges that it will deliver a prospectus in connection with any resale of
such Exchange Notes.
SIGN HERE
Name of beneficial owner(s):
- --------------------------------------------------------------------------------
Signature(s)
Name(s):
- --------------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
(Please Print)
Address:
- --------------------------------------------------------------------------------
Telephone number:
- --------------------------------------------------------------------------------
Taxpayer Identification or Social Security Number:
- ----------------------------------------------------------
Date:
- --------------------------------------------------------------------------------
-14-
<PAGE> 1
EXHIBIT 99(C)
SEVEN SEAS PETROLEUM INC.
LETTER TO REGISTERED HOLDERS AND
DEPOSITORY TRUST COMPANY PARTICIPANTS
FOR
TENDER OF ALL OUTSTANDING
12 1/2% SERIES A SENIOR NOTES DUE 2005
IN EXCHANGE FOR
12 1/2% SERIES B SENIOR NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1998, UNLESS EXTENDED (THE "EXPIRATION DATE").
ORIGINAL NOTES TENDERED IN THE EXCHANGE OFFER MAY BE WITHDRAWN AT ANY TIME
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE UNLESS PREVIOUSLY
ACCEPTED FOR EXCHANGE.
To Registered Holders and Depository Trust Company Participants:
We are enclosing herewith the material listed below relating to the offer
by Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation (the
"Company"), to exchange its 12 1/2% Series B Senior Notes due 2005 (the
"Exchange Notes"), which have been registered under the Securities Act of 1933,
as amended (the "Securities Act"), for a like principal amount of its issued and
outstanding 12 1/2% Series A Senior Notes due 2005 (the "Original Notes") upon
the terms and subject to the conditions set forth in the Company's Prospectus,
dated , 1998, and the related Letter of Transmittal (which together
constitute the "Exchange Offer").
Enclosed herewith are copies of the following documents:
1. Prospectus dated , 1998;
2. Letter of Transmittal (together with accompanying Substitute Form
W-9 Guidelines);
3. Notice of Guaranteed Delivery;
4. Letter which may be sent to your clients for whose account you hold
Original Notes in your name or in the name of your nominee; and
5. Letter which may be sent from your clients to you with such
client's instruction with regard to the Exchange Offer.
We urge you to contact your clients promptly. Please note that the Exchange
Offer will expire on the Expiration Date unless extended.
The Exchange Offer is not conditioned upon any minimum number of Original
Notes being tendered.
Pursuant to the Letter of Transmittal, each holder of Original Notes will
represent to the Company that (i) the Exchange Notes acquired in exchange for
Original Notes pursuant to the Exchange Offer are being acquired in the ordinary
course of business of the person receiving such Exchange Notes, whether or not
the undersigned, (ii) the undersigned is not engaging in and does not intend to
engage in a distribution of the Exchange Notes, (iii) the undersigned does not
have any arrangement or understanding with any person to participate in the
distribution of Exchange Notes, and (iv) neither the undersigned nor any such
other person is an "affiliate" (within the meaning of Rule 405 under the
Securities Act of 1933, as amended) of the Company. If the holder is a
broker-dealer that will receive Exchange Notes for its own account in exchange
for Original Notes that were acquired as a result of market-making activities or
other trading activities, it acknowledges that it will deliver a prospectus in
connection with any resale of such Exchange Notes.
-15-
<PAGE> 2
The enclosed Letter to Clients contains an authorization by the beneficial
owners of the Original Notes for you to make the foregoing representations.
The Company will not pay any fee or commission to any broker or dealer or
to any other persons (other than the Exchange Agent) in connection with the
solicitation of tenders of Original Notes pursuant to the Exchange Offer.
Additional copies of the enclosed material may be obtained from the
undersigned.
Very truly yours,
SEVEN SEAS PETROLEUM INC.
-16-
<PAGE> 1
EXHIBIT 99.4
SEVEN SEAS PETROLEUM INC.
NOTICE OF GUARANTEED DELIVERY OF 12 1/2% SERIES A SENIOR NOTES DUE 2005
As set forth in the Prospectus dated , 1998 (as the same may be
amended or supplemented from time to time, the "Prospectus") of Seven Seas
Petroleum Inc. (the "Issuer") under the caption "The Exchange
Offer -- Procedures for Tendering" and in the Letter of Transmittal for Offer to
Exchange 12 1/2% Series B Senior Notes due 2005 (the "Letter of Transmittal"),
this form or one substantially equivalent hereto must be used to accept the
Exchange Offer (as defined below) of the Issuer if: (i) certificates for the
above-referenced notes (the "Original Notes") are not immediately available,
(ii) time will not permit all required documents to reach the Exchange Agent (as
defined below) on or prior to the Expiration Date (as defined in the Prospectus)
or (iii) the procedures for book-entry transfer cannot be completed on or prior
to the Expiration Date. Such form may be delivered by hand or transmitted by
telegram, telex, facsimile transmission or letter to the Exchange Agent.
TO: THE BANK OF NOVA SCOTIA TRUST COMPANY OF NEW YORK (THE "EXCHANGE AGENT")
For Information by Telephone:
(212) 225-5427
The Bank of Nova Scotia Trust Company of New York
Corporate Trust Department
23rd Floor
One Liberty Plaza
New York, NY 10006
By Facsimile Transmission (for Eligible Institutions Only):
(212) 225-5436
(Facsimile confirmation)
(212) 225-5427
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR NUMBER OTHER THAN THOSE SHOWN
ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE VALID DELIVERY.
Ladies and Gentlemen:
The undersigned hereby tenders to the Issuer, upon the terms and conditions
set forth in the Prospectus and the Letter of Transmittal (which together
constitute the "Exchange Offer"), receipt of which are hereby acknowledged, the
principal amount of Original Notes set forth below pursuant to the guaranteed
delivery procedures described in the Prospectus and the Letter of Transmittal.
The undersigned understands and acknowledges that the Exchange Offer will
expire at 5:00 p.m., New York City time, on , 1998, unless extended
by the Issuer. With respect to the Exchange Offer, "Expiration Date" means such
time and date, or if the Exchange Offer is extended, the latest time and date to
which the Exchange Offer is so extended by the Issuer.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
1
<PAGE> 2
DESCRIPTION OF ORIGINAL NOTES TENDERED
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL
AMOUNT
CERTIFICATE NUMBER(S) (IF KNOWN) OF ORIGINAL NOTES OR REPRESENTED BY PRINCIPAL AMOUNT
ACCOUNT NUMBER AT THE BOOK-ENTRY FACILITY OLD NOTES TENDERED
<S> <C> <C>
================================================================================
================================================================================
Total:
- --------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE Signature(s):
- --------------------------------------------- Name(s):
Capacity (full
title), if signing
Address: in a representative
(Zip Code) capacity:
Area Code and Telephone Number:
Taxpayer
Identification or
Social
Dated: ------------------------------ Security Number:
</TABLE>
GUARANTEE OF DELIVERY
The undersigned, a member of a recognized signature guarantee medallion
program within the meaning of Rule 17Ad-15 under the Securities Exchange Act of
1934, as amended, hereby guarantees (a) that the above-named person(s) own(s)
the above-described securities tendered hereby within the meaning of Rule 10b-4
under the Securities Exchange Act of 1934, (b) that such tender of the
above-described securities complies with Rule 10b-4, and (c) that delivery to
the Exchange Agent of certificates tendered hereby, in proper form for transfer,
or delivery of such certificates pursuant to the procedure for book-entry
transfer, in either case with delivery of a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) and any other required documents,
is being made within three business days after the date of execution of a Notice
of Guaranteed Delivery of the above-named person.
(Name of Firm)
Sign here:
(Authorized Signature)
Name:
(Please Type or Print)
(Area Code and Telephone Number)
Address Zip Code ______________
Dated: , 1998
2
