-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UjugpxsR+fbMUansUFP1I7hWqaHsdUaZ/IAQmZKj+HMeIXpmpL7HOqywO1kY+rzl FS7RODJrUk2py4aWowuQNw== 0000891020-98-000895.txt : 19980528 0000891020-98-000895.hdr.sgml : 19980528 ACCESSION NUMBER: 0000891020-98-000895 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980527 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPTIMA PETROLEUM CORP CENTRAL INDEX KEY: 0000872248 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 980115468 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 000-19020 FILM NUMBER: 98632263 BUSINESS ADDRESS: STREET 1: 600 595 HOWE STREET STREET 2: VANCOUVER BRITISH COLUMBIA CITY: CANADA V6C 2T5 STATE: A1 BUSINESS PHONE: 6046846886 MAIL ADDRESS: STREET 1: 600 595 HOWE ST STREET 2: VANCOUVER BRITISH COLUMBIA CITY: CANADA V6C 2T5 STATE: A1 10-K/A 1 AMENDMENT NO. 1 TO THE 10-K FOR OPTIMA 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A-1 ------------------------------- ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: December 31, 1997 Commission file number: 019020 OPTIMA PETROLEUM CORPORATION (Exact name of registrant as specified in its charter) CANADA 98-0115468 (State of Incorporation) (I.R.S. Employee identification No.) #600, 595 HOWE STREET, VANCOUVER, BRITISH COLUMBIA V6C 2T5 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (604) 684-6886 Securities registered pursuant to Section 12(b) of the Act: ------------------------------- (Title of Each Class) (Name of Each Exchange on which Registered) COMMON STOCK, NO PAR VALUE NASDAQ (NMS) STOCK MARKET TORONTO STOCK EXCHANGE Securities registered pursuant to Section 12(g) of the Act: None ------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definite proxy or information statements incorporated by reference in Part III of this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing price of the Common Stock on March 17 , 1998 as reported on NASDAQ National Market System was approximately U.S.$8,409,524 Shares of Common Stock held by each senior officer and director and by each person who owns 5% or more of outstanding Common Stock have been excluded in that such person may be deemed to be affiliated. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As at March 17 , 1998, Registrant had outstanding 11,002,346 shares of Common Stock. -1- 2 OPTIMA PETROLEUM CORPORATION INDEX TO FORM 10-K/A-1
PART I ITEM 1. BUSINESS......................................................................3 ITEM 2. PROPERTIES...................................................................11 ITEM 3. LEGAL PROCEEDINGS............................................................12 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............................................................13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................................14 ITEM 6. SELECTED FINANCIAL DATA......................................................15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................................18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................22 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................................22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................................23 ITEM 11. EXECUTIVE COMPENSATION.......................................................25 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................................26 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...............................28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K......................................................29 ITEM 15. SIGNATURES...................................................................30
-2- 3 PART I ITEM 1. BUSINESS GENERAL Optima Petroleum Corporation (hereinafter referred to as "Optima" or the "Company"), along with its wholly owned United States subsidiary, Optima Energy (U.S.) Corporation, ("Optima US"), is engaged in the business of oil and gas exploration and development in Canada and the United States. The Company was incorporated under the name "Lathwell Resources Ltd.", by registration of Articles and Memorandum pursuant to the laws of the province of British Columbia on April 11, 1983. On February 5, 1988, consolidating its share capital on a 1 for 5 basis, the Company changed its name to "Optima Energy Corporation". On July 9, 1992, the Company changed its name to "Optima Petroleum Corporation" concurrently with a 1 for 2.5 consolidation of its share capital. It was continued under the Canada Business Corporation Act ("CBCA") on May 23, 1995. Effective December 1, 1992, the Company acquired through Optima US, from a director of the Company, a 100 percent interest in the common shares of Arenosa Resource Corporation ("Arenosa"), a company engaged in oil and gas exploration and production. Arenosa was acquired at fair value as determined by a December 1, 1992 reserve evaluation prepared by independent engineers and was approved by the shareholders. Arenosa was subsequently amalgamated into Optima US. On September 8, 1995 the Company acquired 100% of the shares of Roxbury Capital Corp. pursuant to a plan of arrangement under the CBCA. The purchase of Roxbury Capital Corp. was accounted for as an acquisition at a consideration of $6,186,272 in exchange for 1,374,727 common shares ($4.50 per share). Optima participates primarily as a working interest holder, in numerous oil and gas prospects which are operated either by itself or by third parties. By funding its proportionate share of drilling costs of a successfully completed well, Optima earns an interest in the well and in the related acreage, based on the terms of the applicable participation agreement. The Company's oil and gas interests as at December 31, 1997 are described under Item 2 on page(s)12-13. Canadian property interests are held by the Company and U.S. property interest by Optima U.S. Unless otherwise indicated all acquisitions or dispositions referred to in this section and elsewhere in this document have been negotiated on an arm's length basis. The Company's financial statements are stated in Canadian dollars (CDN$) and are prepared in accordance with Canadian generally accepted accounting principals ("GAAP"); reconciliations to U.S. GAAP are contained in footnotes to the financial statements. The value of the U.S. Dollar in relation to the Canadian Dollar was $1.00 U.S. equal to $1.4165 CDN as at March 17 , 1998. BUSINESS STRATEGY During fiscal 1997, the Company closed the sale of a substantial portion of its Canadian petroleum and natural gas interests for cash proceeds of $16,750,000 which was utilized to eliminate bank debt and focus solely on U.S. exploration. -3- 4 EXPLORATION STRATEGY The Company's exploration strategy is based on the identification and development of exploratory prospects to achieve reserve growth and to establish long term increased cash flow. Prospect selection criteria require that each prospect has the minimum potential for the discovery of 5,000,000 barrels of oil or 50 billion cubic feet of natural gas to the 100% working interest. The Company looks to acquire a significant ownership interest of between 25% and 50%. Prospects are identified and developed in conjunction with industry partners. The primary area of focus is the onshore Gulf Coast of Louisiana, USA. The Company believes that substantial oil and natural gas reserves can be established through the utilization of 3-D seismic and CAEX technology with specific applications in the Gulf Coast of Louisiana. The application of the sophisticated tools by experienced industry specialists can identify prospects with multiple productive zones, maximize the probability of success and mitigate the risk of dry holes. The Company's philosophy is to participate in the generation of the exploration prospects with its industry partners. The actual operation of the drilling and development programs in respect of the Gulf Coast is vested with local partners. The Company operates its major Canadian properties. OIL AND NATURAL GAS RESERVES Substantially all of the Company's oil and natural gas reserves are located in the state of Louisiana, USA. The Meridian Resources Joint Venture was evaluated by Ryder Scott Company whereas the remaining U.S. properties were evaluated by Laroche Petroleum Consultants Ltd. Both independent evaluations ("Evaluation Reports") were effective December 31, 1997. Commencing in 1995, the Company retained Ryder Scott Company to evaluate the TMR Joint Venture and had retained the Scotia Group, Inc. to evaluate solely the Elm Grove property. AMH Group Ltd. in 1995 and 1996 provided independent reserve appraisals for the Canadian properties. The crude oil and natural gas reserve estimates on which these evaluations are based were determined in accordance with generally accepted evaluation practices. The following table summarizes the Company's reserves. ALL EVALUATIONS OF FUTURE NET PRODUCTION REVENUE SET FORTH IN THE TABLES ARE STATED PRIOR TO PROVISIONS FOR INCOME TAXES AND INDIRECT COSTS. IT SHOULD NOT BE ASSUMED THAT THE DISCOUNTED FUTURE NET REVENUES SHOWN BELOW ARE REPRESENTATIVE OF THE FAIR MARKET VALUE OF OPTIMA'S RESERVES. Other assumptions and qualifications relating to costs, prices for future production and other matters are included in the Evaluation Reports Table No. 1 sets forth estimates of the Company's proved developed and undeveloped oil / gas reserves as of December 31, 1997. The Company's estimated total proved developed and undeveloped reserves of oil and natural gas as of December 31, 1997, 1996 and 1995 based upon the Evaluation Reports were as follows:
RESERVE QUANTITY INFORMATION WORKING INTEREST SHARE YEAR ENDED DECEMBER 31 TOTAL UNITED STATES CANADA --------------------- ---------------------- --------------------- GAS LIQUIDS GAS LIQUIDS GAS LIQUIDS MMCF MBBLS MMCF MBBLS MMCF MBBLS ---- ----- ---- ----- ---- ----- Proved Reserves 1997 3,288 876 3,288 876 - - 1996 20,397 1,450 5,143 1139 15,254 311 1995 32,954 748 11,328 331 21,626 417
In addition to the discussion below reference is made to the Consolidated Financial Statements and the Supplemental Oil and Gas Information (unaudited) included elsewhere within. Such discussion also contains information with respect to the Company's reserves at December 31, 1997, 1996 and 1995. -4- 5 For the fiscal years ended December 31, 1997, 1996 and 1995 the Company had the following working interest production:
PRODUCTION WORKING INTEREST SHARE YEAR ENDED DECEMBER 31 1997 1996 1995 ---- ---- ---- Oil Wells (bbls) Canada - 29,939 13,880 USA 141,210 123,760 57,242 Gas Wells (mcf) Canada - 1,608,454 763,999 USA 1,003,147 1,700,984 1,600,490
The following table sets forth the net proved reserves of the Company as at December 31, 1997, 1996 and 1995 and the discounted cash flow value thereof. The reserve information was derived from the evaluation reports provided by the Company's petroleum engineers:
FUTURE CASH FLOWS UNESCALATED PRICES AND COSTS, CANADIAN DOLLARS, WORKING INTEREST SHARES AS AT DECEMBER 31 ($000) 1997 1996 1995 ---- ---- ---- Future net cash flow before taxes $17,961 $63,086 $50,801 Future net cash flow discounted at 10% before taxes 12,541 43,015 29,473 Future net cash flow discounted at 10% after taxes (1) 12,541 41,536 29,473
Note: (1) Estimated income taxes have been reduced to give effect to tax benefits related to the use of the Company's available net operating loss carry forwards. In general, estimates of economically recoverable oil and natural gas reserves and of the future net revenues therefrom are based upon a number of variable factors and assumptions, such as historical production from the subject properties, the assumed effects of regulation by governmental agencies and assumptions concerning future oil and natural gas prices and future operating costs, all of which may vary considerably from actual results. All such estimates are to some degree, speculative, and classifications of such reserves are only attempts to define the degree of speculation involved. For these reasons, estimates of the economically recoverable oil and natural gas reserves attributed to any particular group of properties, classifications of such reserves based on risk of recovery and estimates of the future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. Therefore, the actual production, revenues, royalties, severance and excise taxes, development and operating expenditures with respect to the Company's reserves will likely vary from such estimates, and such variances could be material. In accordance with applicable requirements of the Securities and Exchange Commission, the estimated discounted future net revenues from estimated proved reserves are based on prices and costs as of the date of the estimate unless such prices or costs are contractually determined at such date. Actual future prices and costs may be materially higher or lower. Actual future net revenues also will be affected by factors such as actual production, supply and demand for oil and natural gas, curtailments or increases in consumption by natural gas purchasers, changes in governmental regulations or taxation and the impact of inflation on costs. -5- 6 OIL AND NATURAL GAS DRILLING ACTIVITIES The following table sets forth the gross and net numbers of productive, or dry exploratory and development wells that the Company drilled in each of 1997, 1996 and 1995.
GROSS NET -------------------------------------------------------------------------- PRODUCTIVE DRY TOTAL PRODUCTIVE DRY TOTAL CANADA Exploratory Wells 1997 (1) n/a n/a n/a n/a n/a n/a 1996 - 1 1 - .25 .25 1995 4 - 4 1.95 - 1.95 Development Wells 1997 (1) n/a n/a n/a n/a n/a n/a 1996 1 - 1 .15 - .15 1995 1 - 1 .33 - .33 USA Exploratory Wells 1997 4 2 6 .72 0.33 1.05 1996 5 5 10 .60 1.03 1.63 1995 1 4 5 .19 .33 .52 Development Wells 1997 2 - 2 .33 - .33 1996 1 - 1 .08 - .08 1995 1 - 1 .04 - .04 TOTAL Exploratory Wells 1997 4 2 6 .72 .33 1.05 1996 5 6 11 .60 1.28 1.88 1995 5 4 9 2.14 .33 2.00 Development Wells 1997 2 - 2 .33 - .33 1996 2 - 2 .23 - .23 1995 2 - 2 .37 - .37
(1) SOLD CANADIAN OPERATIONS EFFECTIVE JANUARY 1, 1997 PRODUCTION The following table summarizes the net volumes of oil, liquids and natural gas produced and sold, before royalty, as well as the average price received in respect to such sales. This table segments production between Canada and USA and represents all properties in which the Company holds interests: -6- 7
NATURAL GAS (CDN$) ------------------ CANADA USA TOTAL ------ --- ----- Net Production Average Sales Net Production Average Sales Company (mcf) (price/mcf) (mcf) (price/mcf) Production (mcf) --------------- ------------- -------------- ------------- ---------------- 1997 - n/a 1,003,147 $3.72 1,003,147 1996 1,608,454 $1.38 1,700,984 $3.58 3,309,438 1995 763,999 $1.59 1,600,491 $2.39 2,364,489 OIL AND LIQUIDS (CDN$) ---------------------- CANADA USA TOTAL ------ --- ----- Net Production Average Sales Net Production Average Sales Company (bbl) (price/bbl) (bbl) (price/bbl) Production (bbl) --------------- ------------- -------------- ------------- ---------------- 1997 - n/a 141,210 $27.75 141,210 1996 29,939 $28.52 123,760 $29.86 153,699 1995 13,880 $22.82 57,243 $24.50 71,122 ========== ================ ================ ================ =============== ==================
The following table summarizes the average production costs per unit of production, with natural gas converted to its energy equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil:
CANADA USA ------ --- 1997 n/a $3.29 1996 $2.51 $2.22 1995 $3.49 $1.34
ACREAGE The following table sets forth the development and undeveloped oil and natural gas acreage in which the Company held an interest as of December 31, 1997. Undeveloped acreage is considered to be those lease acres on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether or not such acreage contains proved reserves.
DEVELOPED UNDEVELOPED ------------------------- ------------------------------ GROSS NET GROSS NET Louisiana 5,929 829 (1) 52,592 7,292 New Mexico - - 2,664 661 Total 5,929 829 55,256 7,953
(1) includes 18,742 gross acres held under option -7- 8 TITLE TO PROPERTIES As is customary in the oil and natural gas industry, the Company makes only a cursory review of title to undeveloped petroleum and natural gas leases at the time they are acquired by the Company. However, before drilling commences, the Company causes a thorough title search to be conducted, and any material defects in title are remedied prior to the time actual drilling of a well on the lease begins. To the extent title opinions or other investigations reflect title defects, the Company, rather than the seller or lessor of the undeveloped property, is typically obligated to cure any such title defects at its expense. If the Company were unable to remedy or cure any title defect of a nature such that it would not be prudent to commence drilling operations on the property, the Company could suffer a loss of its entire investment in drilling operations on the property. The Company believes that it has good title to its oil and natural gas properties, some of which are subject to immaterial encumbrances, easements and restrictions. The oil and natural gas properties owned by the Company are also typically subject to royalty and other similar non-cost bearing interests customary in the industry, including the overriding royalty and participation rights granted with the Company's acquisition of prospects and to the Company's key employees and outside geologists. The Company does not believe that any of these encumbrances or burdens will materially affect the Company's ownership or use of its properties. In respect of its Canadian operations, the majority of its leases are in respect of petroleum and natural gas rights which are owned by the provincial government, referred to as Crown leases and drilling licenses, specifically the Government of Alberta. Accordingly, title opinions are normally not acquired in Canada in respect of mineral title prior to drilling a well on Crown leases granted by the Government of Alberta. MARKETING OF PRODUCTION The Company's production is marketed to third parties in conjunction with industry partners. Typically oil is sold at the wellhead at field posted prices and natural gas is sold under contract at a negotiated price based upon factors normally considered in the industry, such as price regulations, distances from the well to the pipeline, well pressure, estimated reserves, quality of natural gas and prevailing supply / demand conditions. MARKET CONDITIONS Production sold during 1997 was derived solely from oil and gas prospects in Louisiana, USA in which the Company holds interests ranging from 4 to 35 percent. The operators of these projects are responsible for the marketing and distribution of the natural gas and oil. Natural gas and oil is sold on a contractual basis in the spot market whereas buyers are subject to change periodically. Approximately 99 percent of revenue during fiscal 1997 was derived from petroleum and natural gas sales, net of royalties and production taxes. The Company's revenue, profitability and future rate of growth are substantially dependent upon prevailing prices for natural gas, and to a lesser extent, oil. Oil and natural gas prices have been extremely volatile in recent years and affected by many factors outside the control of the Company. The monthly average Gulf Coast spot price for natural gas at Henry Hub for 1997 has ranged between U.S.$2.85 per mcf and U.S.$4.49 per mcf. Because the majority of the Company's production and targeted prospects are natural gas, the Company is affected more by changes in natural gas prices than crude oil prices. However, the Company's recent discoveries in Louisiana produce more revenues from oil production than from natural gas. Accordingly, any substantial or extended decline in the price of oil and natural gas could have a material adverse effect on the Company's financial condition and results of operations, including reduced cash flow and borrowing capacity. In addition, sales of oil and natural gas have historically been seasonal in nature, which may lead to substantial differences in cash flow at various times throughout the year. The marketability of the Company's production depends in part upon the availability, proximity and capacity of natural gas gathering systems, pipelines and processing facilities. Federal and state regulation of oil and natural gas adversely affect the Company's ability to produce and market its oil and natural gas. If market factors were to change dramatically, the financial impact on the Company could be substantial. The availability of markets and the volatility of product prices are beyond control of the Company and thus represent significant risks. -8- 9 COMPETITION The Company operates a growing business in a competitive market. There are a number of risks inherent to the Company's business. There is competition from other oil and gas exploration and development companies with operations similar to those of the Company. Nevertheless, the market for the Company's existing and / or possible future production of petroleum and natural gas tends to be commodity oriented, rather than company oriented. Accordingly, the Company expects to compete by keeping its production costs low through judicious selection of which property to develop, the practice of joint venturing its interests, and keeping overhead charges under control. INDUSTRY RISKS The business of exploration for and production of oil and gas involves a substantial risk of investment loss. Drilling oil and gas wells involves the risk that the wells will be unproductive or that, although productive, the wells do not produce oil or gas in economic quantities. Other hazards, such as unusual or unexpected geological formations, pressures, fires, blowouts, loss of circulation of drilling fluids or other conditions may substantially delay or prevent completion of any well. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic if water or other deleterious substances are encountered, which impair or prevent the production of oil or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of crude oil and natural gas is affected by numerous factors beyond the control of the Company. These factors include market fluctuations, the world price of crude oil, the proximity and capacity of crude oil and natural gas pipelines and processing equipment and government regulations, including regulations relating to prices, taxes, royalties, land tenures, allowable production, the import and export of crude oil and natural gas and environmental protection. The effect of these factors cannot be predicted. As with any oil or gas property, there can be no assurance that oil or gas will continue to be produced from the Company's properties. Although the operators of the Company's properties maintain insurance in amounts customary in the industry for liability and property damage on behalf of the working interest participants, the Company may suffer losses from uninsurable hazards or from hazards which the Company may choose not to insure against because of high premium costs or other reasons. REGULATIONS In the United States, natural gas and oil production operations are subject to various types of regulation by state and federal agencies. Legislation affecting the natural gas and oil industry is under constant review for amendment or expansion. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue rules and regulations binding on the natural gas and oil industry and its individual members, some of which carry substantial penalties for failure to comply. Sale of natural gas in the United States is subject to regulation of production, transportation and pricing by governmental regulatory agencies. Generally, the regulatory agency in the state where a producing natural gas well is located supervises production activities and, in addition, the transportation of natural gas sold interstate. Prior to January, 1993, certain natural gas was subject to regulation by the Federal Energy Regulatory Commission ("FERC") under the Natural Gas Policy Act ("NGPA"). The NGPA prescribed maximum lawful prices for natural gas sales effective December 1, 1978. Effective January 1, 1993, natural gas prices were completely deregulated; consequently sales of Optima's natural gas after that date may be made at market prices. Although the transportation and sale of gas in interstate commerce remains heavily regulated, the FERC has recently sought to promote greater competition in natural gas markets by encouraging open access transportation by interstate pipelines, with the goal of expanding opportunities for producers to contract directly with local distribution companies and end-users. Sales in the Unites States of crude oil, condensate and gas liquids are not regulated and are made at market prices. States in which Optima U.S. conducts business regulate the production and sale of natural gas and oil, including requirements for obtaining drilling permits, the method of developing new fields, the spacing and operations of wells and the prevention of waste of natural gas and resources. In addition, most states regulate the rate of production and may establish maximum daily production allowable for wells on a market demand of conservation basis. -9- 10 To the best of it's knowledge, the Company believes that the operators of drilling programs in which the Company is a joint venture partner, have complied with all regulations in their respective locations involving non-Canadian projects. ENVIRONMENTAL The oil and gas industry is subject to environmental regulation pursuant to various federal, state and local laws in the U.S. These laws regulate storage and transportation of liquid hydrocarbons, use of facilities for treating, processing, recovering or otherwise handling hydrocarbons and wastes therefrom and abandonment and reclamation of well and facility sites. A breach of these laws may result in the imposition of fines and penalties. The Company must rely on its third party operators to conduct operations on these properties in accordance with applicable environmental and conservation laws. The Company believes that it is currently in substantial compliance with U.S. environmental laws and regulations. The Company has experienced no material financial effects to date from compliance with Canadian and U.S. environmental laws or regulations. The Company does not currently plan any material capital expenditures for Canadian or U.S. environmental control efforts. The Company does not act as operator in the U.S. in respect of any of the properties in which it holds interest nor does it intend to do so in the future. On January 9, 1995, the Environmental Protection Agency ("EPA") issued regulations prohibiting the discharge of produced water and produced sand derived from oil and gas operations in certain coastal areas (primarily state waters) of Louisiana and Texas, effective February 8, 1995. In connection with these new regulations, however, the EPA also issued an administrative order requiring affected permittees who must meet the no discharge requirement for produced water to do so by January 1, 1997, unless an earlier compliance date is required by Louisiana or Texas. The incremental cost to implement any required re-injection program is not significant. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liabilities for the costs of cleaning up the hazardous substances that have been released into the environment. The Company has not received any notification that it may be potentially responsible for cleanup costs under CERCLA. Stricter standards in environmental legislation may be imposed on the oil and gas industry in the future. For instance, certain oil and gas exploration and production wastes are currently excluded from regulations as "hazardous waste" under the federal Resource Conservation and Recovery Act ("RCRA"). From time to time, legislation has been proposed in Congress that would reclassify those exploration and production wastes as RCRA "hazardous wastes" and make the reclassified wastes subject to more stringent handling, disposal and clean-up requirements. If such legislation were to be enacted, it could increase the operating costs of the Company as well as the oil and gas industry in general. Furthermore, although petroleum, including crude oil and natural gas, is exempt from CERCLA, future amendments to CERCLA may remove this exemption. State initiatives to further regulate the disposal of oil and natural gas waste are under consideration in certain states, and these various initiatives could have a similar impact on the Company. GEOGRAPHIC SEGMENTS AND FOREIGN SALES The Company reported net revenue from operations for the fiscal year ended December 31, 1997 of CDN $5,068,219. The net revenue is calculated as gross sales of $7,649,415 less royalties and production taxes of $2,581,196. -10- 11 The following table sets forth results of operations for producing activities by geographic location, as of the fiscal year ended December 31, 1997.
FINANCIAL INFORMATION RELATING TO FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES (CDN$) 1997 1996 1995 ---- ---- ---- Petroleum and natural gas sales, net of royalties and petroleum taxes: Canada $ - $ 2,620,886 $ 1,311,114 USA 5,068,219 7,354,719 3,566,185 Operating Profit or (loss): Canada 484,513 110,215 159,597 USA (3,730,223) 2,554,535 584,425 Petroleum and natural gas interests, net of accumulated depletion and depreciation: Canada 1,211,921 16,848,304 16,553,994 USA 16,484,047 17,916,046 16,945,686
EMPLOYEES AND INDEPENDENT CONSULTANTS As at December 31, 1997, the Company directly employed no part-time or full-time individuals. However, nine individuals devote either all or a significant portion of their time to the affairs of the Company, through management agreements. Said agreements consist of those which provide for the services of the Company chairman; president and chief executive officer; secretary and chief financial officer; financial controller; production engineer; one individual who provides corporate communications; one individual who provides accounting services; and two individuals who provide clerical services. Refer to Item 10. Directors and Executive Officers of the Registrant, Item 11. Executive Compensation, and Item 13. Certain Relationships and Related Transactions for additional disclosure. As of December 31, 1997, Optima US directly or indirectly employed no full or part-time individuals. Management is administered by the same individuals who manage the affairs of the Company. ITEM 2. PROPERTIES DESCRIPTION The Company's corporate finance office is located in leased office space at #600 - 595 Howe Street, Vancouver, British Columbia, Canada, V6C 2T5. The registered office of the Company is Suite 2170, Bow Valley Square Four, 250 - 6th Avenue, S.W., Calgary, Alberta, T2P 3R7. Properties in which the Company holds interests are located in the states of Louisiana and New Mexico, in the USA. No material weather or environmental problems are anticipated. Oil and gas exploration, development and exploitation should not be inconsistent with the various areas' current mining, recreational and residential uses, which are minimal. Normal practices to reduce noise, changes to air quality and water quality are expected to be sufficient. The project operators have obtained all necessary permits for exploration work performed to date in each of their respective locations, and anticipate no material problems obtaining the necessary permits to proceed with development. The following discussion outlines the acquisition, the location, and summary of operations, for each of the properties in which the Company holds interests. -11- 12 ALBERTA PROPERTIES On May 30, 1997, the Company closed the sale of a substantial portion of its Canadian petroleum and natural gas interests for cash proceeds of $16,750,000. The sole remaining Canadian asset is a shut-in well located at Wildhay 05-10-58-23 W5M. This well is the subject of litigation between Optima and the drilling contractor. Optima's legal counsel has submitted a certificate of readiness to the Court of Queen's Bench, Judicial District of Calgary. It is anticipated that the trial will be scheduled for either the fourth quarter of 1998 or the first quarter of 1999. LOUISIANA PROPERTIES TURTLE BAYOU / KENT BAYOU PROSPECT As at December 31, 1997 there were 2 producing wells and another 4 wells being recompleted in new producing horizons. Gross daily field production for the month of February, 1998 average 3,440 MCF of natural gas and 124 barrels of condensate per day. The Company's working interest varies between 13.475% and 24.25% with a weighted average of barrels on proven reserves of 13.9%. A 3-D regional seismic survey is currently being shot which incorporates the Turtle Bayou field. The operator, American Explorer, Inc. has negotiated access to the data set which should be available later in 1998. Any further exploration will be contingent on the interpretation of this data set identifying new deep drilling targets. VALENTINE The Company owns a 35% working interest in 24 wells at an average 82.5% net revenue interest. Currently four wells are on production at an average daily rate of 698 MCF of natural gas and 149 barrels of oil. In mid 1997 an agreement was entered into with a major oil and gas company who has agreed to expend approximately US $ 10.0 million to earn a 50% interest in the Valentine field. The funds are being expended on the permitting, shooting and processing of a 3-D seismic survey to evaluate the deeper horizons. The gross acreage position at Valentine as at December 31, 1997 was 29,317 gross acres including 18,742 gross acres held under option. TMR JOINT VENTURE Pursuant to the master participation agreement with Meridian Resources Corporation ("TMR") dated October 1, 1993, the Company has evaluated ten prospect areas of which five have been drilled, four rejected pursuant to the geological and geophysical review, and one prospect at Stella is to be drilled during 1998. Seven features have been evaluated by drilling resulting in five gas wells, four oil wells and five dry holes. Optima US holds between 4% and 8% working interests in the wells operated by TMR pursuant to the joint venture. OTHER PROPERTIES Optima US acquired a 25% working interest in the Chrysler prospect in Lea County, New Mexico. The target is the Devonian formation and is supported by interpreted 3-D seismic. The first well, Savage #34-1 was spudded in December, 1996, drilled to 13,000 feet and abandoned on February 17, 1997. A second well is scheduled to be drilled in 1998. During 1996 two more wells were drilled to the Smackover "C" sands at East Haynesville. Both wells the Garrett #1 and Delaney #1 are producing in the Smackover "C". Further development will occur in this field once the Commissioner of Conservation, State of Louisiana assigns 320 acre production units in both the Smackover Lime and "C" formations. A hearing is schedule in mid-April, 1998. The Company holds a 28% working interest at East Haynesville. ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which the Company or its subsidiary is a party or by which any of its property is subject, other than ordinary and routine litigation to the business of producing and exploring for oil and natural gas, except as follows: S.W. HOLMWOOD The Company is a party to litigation in the United States District Court, Western District of Louisiana (Amoco Production Company vs. Texas Meridian Resource Exploration, Inc.) by virtue of its master participation agreement with Meridian Resource Corporation (formally known as Texas Meridian Resource Corporation). -12- 13 The litigation enures from a joint exploration agreement between the plaintiff and defendant whereby adjoining petroleum and natural gas leases were pooled on a 50% / 50% joint ownership basis. Two producing oil wells have been drilled and placed on production. The plaintiff is claiming a breach of trust and demands surrender of 100% of the wells ownership on a retroactive basis and has received a favorable summary judgement. The operator pending the court's granting of damages intends to appeal the judgement. The Company holds a beneficial 4% working interest. Since the outcome of this litigation is not determinable, the Company has recorded 100% of the cumulative net operating income to date aggregating to $1,023,000 as Revenue in Dispute in its consolidated financial statements. WILDHAY The Company is party to a statement of claim and counterclaim with a drilling contractor in the Judicial District of Calgary, Court of Queen's Bench, Alberta. The nature of this litigation is based on a contract wherein the drilling contractor drilled a well on behalf of the Company and a joint venture partner. The working interest participants are demanding $2,738,568 in throw away costs and expenses plus $1,001,755 for loss of the original well as well as $5,932,000 of reservoir damage from the drilling contractor. The well in question is reflected in the Company's consolidated financial statements in property and equipment at $1.1 million and an additional $1.2 million is included as a receivable from the Company's joint venture partner. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS At the Annual Meeting of Shareholders of the Company held on May 29, 1997, the Company's shareholders ratified the appointment of KPMG as the Company's independent auditors for 1997. The number of shares voted for and withheld with respect to the election of the directors and the number of shares voted for and against and the abstention for the ratification of the appointment of the Company's auditors were as follows:
NOMINEE FOR WITHHOLD / AGAINST ABSTAIN - ------- --- ------------------ ------- Robert L. Hodgkinson 7,127,717 11,371 93,450 William C. Leuschner 7,117,703 21,385 93,450 Ronald P. Bourgeois 7,108,339 30,749 93,450 Emile D. Stehelin 6,925,326 213,762 93,450 Martin G. Abbott 6,925,324 215,714 93,450 Appointment of Auditors 7,220,810 11,728 N/A
Additionally, the following proposals were approved at the Company's annual meeting:
NOMINEE AFFIRMATIVE VOTES WITHHOLD / AGAINST ABSTAIN Approval of an 6,933,825 298,713 N/A amendment to the Articles of Incorporation the permitting directors to appoint additional directors.
-13- 14 ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK AND EQUITY The Registrant's Common Shares and Warrants trade on the Toronto Stock Exchange in Ontario, Canada under the symbol "OPP" and "OPPwt" respectively. The Registrant's common shares trade on the NASDAQ in Washington, D.C., U.S.A. under the symbol "OPPCF". The following table lists trading volume and high and low trading prices for the last fiscal quarters. The current market price as of March 17 , 1998 was Cdn.$1.40 on the Toronto Stock Exchange, U.S.$1.16 on NASDAQ.
STOCK TRADING DATA COMMON SHARES (OPP) NASDAQ TORONTO STOCK EXCHANGE ------------------------------ -------------------------------- Period Ending Volume High Low Volume High Low - ------------- (U.S.$) (U.S.$) (Cdn.$) (Cdn.$) (Cdn.$) 1997 4th Quarter 3,501,452 $2.31 $1.50 1,278,905 $3.85 $1.50 3rd Quarter 2,252,291 $2.13 $1.38 465,172 $3.25 $2.00 2nd Quarter 1,713,721 $2.56 $2.00 488,271 $3.50 $2.75 1st Quarter 1,826,990 $3.06 $2.13 427,752 $4.10 $2.95 1996 4th Quarter 2,282,517 $3.13 $2.31 591,581 $4.50 $3.30 3rd Quarter 2,000,092 $3.37 $2.96 350,498 $5.10 $3.80 2nd Quarter 2,217,462 $3.63 $2.63 777,051 $4.90 $3.60 1st Quarter 1,679,407 $3.13 $2.50 344,848 $4.25 $3.50 1995 4th Quarter 2,112,338 $3.25 $2.13 286,456 $4.20 $3.40 3rd Quarter 2,047,898 $3.25 $2.00 427,692 $4.35 $2.90 2nd Quarter 945,104 $3.63 $2.25 98,763 $4.75 $3.25 1st Quarter 1,057,423 $4.00 $2.13 261,102 $5.25 $2.95 1994 4th Quarter 2,316,857 $4.75 $3.38 802,150 $6.38 $4.80 3rd Quarter 1,444,251 $5.50 $3.88 251,291 $7.50 $5.50 2nd Quarter 2,322,254 $5.00 $3.00 636,031 $6.88 $4.25 1st Quarter 2,534,871 $5.25 $3.50 540,257 $7.00 $4.75
As at March 17 , 1998 the Company has 918 shareholders of record. The Company has not paid cash dividends on the Common Shares and does not intend to pay cash dividends on the Common Shares in the foreseeable future. The Company currently intends to retain its cash for the continued development of its business including exploratory and developmental drilling activities. Holders of common stock are entitled to one vote for each share held of record on all matters to be acted upon by the shareholders. Holders of common stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, out of funds legally available therefore. -14- 15 Upon liquidation, dissolution or winding up of the Registrant, holders of common stock are entitled to receive pro rata the assets of the Registrant, if any, remaining after payments of all debts and liabilities. No shares have been issued subject to call or assessment. There are no preemptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender or sinking or purchase funds. Provisions as to the modification, amendment or variation of such shareholder rights or provisions are contained in the Canada Business Corporate Act ("CBCA"). Under the CBCA, the Articles of Incorporation documents otherwise provide, that any action to be taken by a resolution of the members may be taken by an ordinary resolution by a vote of a majority or more of the shares represented at the shareholder's meeting. The Registrant is a publicly-owned corporation, the shares of which are owned by Canadian residents, U.S. residents and residents of other countries. The Registrant is not owned or controlled directly or indirectly by another corporation or foreign government. ITEM 6. SELECTED FINANCIAL DATA All financial data should be read in conjunction with the Consolidated Financial Statements of Optima and related notes thereto included elsewhere in this report. The value of the U.S. Dollar in relation to the Canadian Dollar was CDN $1.4165 as at March 17 , 1998. The following table sets forth a history of the exchange rates for the U.S./Canadian Dollar during the past five fiscal years:
CANADIAN DOLLAR / U.S. DOLLAR ----------------------------- YEAR AVERAGE HIGH LOW CLOSE ---- ------- ---- --- ----- 1997 $1.43 $1.44 $1.41 $1.44 1996 $1.36 $1.39 $1.33 $1.37 1995 $1.37 $1.38 $1.35 $1.36 1994 $1.37 $1.41 $1.31 $1.40 1993 $1.28 $1.30 $1.28 $1.29
The Company's financial statements are stated in Canadian Dollars (Cdn$) and are prepared in accordance with Canadian Generally Accepted Accounting Principles ("Canadian GAAP"); reconciliations to United States Generally Accepted Accounting Principles ("U.S. GAAP") are contained in note 12 to the consolidated financial statements. -15- 16 The following table presents selected financial information:
SELECTED FINANCIAL DATA CANADIAN GAAP (CDN$ IN 000) -------------------------------------------------------------------- FISCAL YEAR ENDED DECEMBER 31 --------------------------------------------------------------------- 1997 1996 1995 1994 1993 (NOTE 1a) (NOTE 1b) (NOTE 1c) Operating revenue $ 7,649 $ 12,863 $ 6,762 $ 4,152 $ 3,984 Net income (loss) (4,835) 229 (1,155) (4,305) (261) Earnings (loss) per share (Note 2) (0.43) 0.02 (0.13) (0.56) (0.05) Working capital (Note 3) 7,857 1,289 747 17 2,833 Resource properties 17,696 34,764 33,500 22,260 16,780 Total assets 28,143 41,215 39,178 24,794 21,171 Long-term debt 143 6,120 7,390 1,849 1,349 Shareholders equity 25,738 31,472 28,478 20,838 19,167
SELECTED FINANCIAL DATA U.S. GAAP (CDN$ IN 000) --------------------------------------------------------------------- FISCAL YEAR ENDED DECEMBER 31 --------------------------------------------------------------------- 1997 1996 1995 1994 1993 (NOTE 1a) (NOTE 1b) (NOTE 1c) Operating revenue $ 7,649 $ 12,863 $ 6,762 $ 4,152 $ 3,984 Net income (loss) (4,035) 229 (1,955) (4,305) (201) Earnings (loss) per share (Note 2) (0.36) 0.02 (0.22) (0.56) (0.03) Working capital (Note 3) 7,857 1,289 747 17 2,833 Resource properties 17,696 33,964 32,700 22,260 16,780 Total assets 28,143 40,415 38,378 24,794 21,171 Long-term debt 143 6,120 7,390 1,849 1,349 Shareholders equity 25,738 30,672 27,678 20,838 19,167
-16- 17 NOTES TO SELECTED FINANCIAL DATA 1. COMPARABILITY OF SELECTED FINANCIAL DATA (a) Effective January 1, 1997, the Company sold a substantial portion of its Canadian petroleum and natural gas interests. The effects on 1997 results compared to prior years are discussed on page 18 under Results of Operations. (b) Effective September 8, 1995, the Company acquired Roxbury Capital Corp. ("Roxbury"). As a result of this acquisition, 1996 production and sales volumes increased significantly compared to 1995 as discussed on page 19 under Results of Operations. (c) 1995's results were also affected by the Roxbury acquisition and an increase in drilling activity as discussed on page 21 under Results of Operations. 2. NET INCOME (LOSS) PER SHARE Net income (loss) per share for Canadian and U.S. GAAP has been calculated based on the following weighted average numbers of shares outstanding:
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Weighted average number of shares 11,159,663 10,945,927 9,031,583 7,625,417 5,380,125 ========== ========== ========= ========= =========
3. WORKING CAPITAL Working capital is defined as total current assets less total current liabilities. 4. CANADIAN AND U.S. GAAP DIFFERENCES There are no material differences between Canadian and U.S. GAAP related to the above selected financial data except as follows: a) 1995's loss is $800,000 higher for U.S. GAAP as explained on page 21 under "Investment Carrying Value Adjustment". As a result of this adjustment, resource properties, total assets and shareholder's equity are all $800,000 lower under U.S. GAAP for 1995 and 1996. b) 1997's loss is $800,000 lower for U.S. GAAP as a result of the realization of the $800,000 writedown for Canadian GAAP purposes as part of the $2,250,000 write-down as explained on page 19 under "Investment Carrying Value". -17- 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
1997 1997 PERCENTAGE WORKING INTEREST YEAR ENDED DECEMBER 31, INCREASE INCREASE CDN$ 1997 1996 1995 (DECREASE) (DECREASE) ----------- ----------- ----------- ----------- ----------- Volume: Natural Gas (mcf) 1,003,147 3,309,438 2,364,489 (2,306,291) (70%) Oil (bbl) 141,210 153,699 71,122 (12,489) (8%) Average Price Per Unit: Natural Gas (/mcf) $ 3.72 $ 2.51 $ 2.13 $ 1.21 48% Oil (/bbl) $ 27.75 $ 29.60 $ 24.17 $ (1.85) (6%) Gross Revenues: Natural Gas $ 3,731,246 $ 8,313,466 $ 5,043,221 $(4,582,220) (55%) Oil 3,918,169 4,549,235 1,719,186 (631,066) (14%) ----------- ----------- ----------- ----------- ----------- Total Revenue $ 7,649,415 $12,862,701 $ 6,762,407 $(5,213,286) =========== =========== =========== =========== ===========
RESULTS OF OPERATIONS TWELVE MONTHS ENDED DECEMBER 31, 1997 TO TWELVE MONTHS ENDED DECEMBER 31, 1996 The Company reported a loss for the year of $4,835,220 being $0.43 per share as compared to earnings of $228,573 in 1996 or $0.02 per share. The decline of $5,063,793 is due to a combination of production volume declines, a $2,520,000 ceiling test writedown of U.S. resources properties and a $1,023,998 provision for revenue dispute. The 70% reduction in natural gas volume from 3,309,000 mcf in 1996 to 1,003,147 mcf is primarily due to the sale of Canadian petroleum and natural gas assets effective January 1, 1997. Canadian operations represented between 55% to 60% total entity production over the previous 12 to 18 months. Although oil production was also impacted by the Canadian asset sale, new production at Back Ridge, Louisiana resulted in only an 8% decline in oil production volume. Oil prices decline slightly by 6% whereas natural gas prices were 48% higher than 1996. The weighted average number of shares used in the calculation of earnings for the year was 11,159,633 shares whereas the 1996 calculations are based on 10,945,927 shares. The number of issued and outstanding shares was 11,318,894 as at January 1, 1997 but due to a share repurchase program was reduced to 11,002,346 shares at December 31, 1997. OPERATING EXPENSE Oil and natural gas operating expenses decreased from $1,649,650 in 1996 to $1,018,211 in 1997. On a boe basis, operating expenses increased to $3.29 as compared to $2.34 in 1996. The increase is due to workovers at Valentine and declining gas productivity at Lake Boeuf. INTEREST AND OTHER INCOME Interest revenue of $250,916 in 1997 as compared to $26,095 a year earlier reflects the significant improvement in the Company's cash position resulting from the sale of Canadian assets. INTEREST EXPENSE Proceeds from the sale of Canadian assets were utilized to pay off the Canadian bank loan. Additionally the Company reduced its U.S. bank loan to U.S. $100,000. As a result the interest and bank charges fell to $188,468 in 1997 as compared to $685,942 a year earlier. -18- 19 DEPLETION, DEPRECIATION AND AMORTIZATION Depletion and depreciation decreased to $4,269,785 in 1997 from $5,661,205 in 1996 or 25%. On a boe basis in 1997, the expense was $13.62 per boe versus $8.03 per boe in 1996 (this comparison is based on an energy equivalent of 6 mcf per boe). The calculation of depletion and depreciation is based on the Evaluation Reports as at December 31, 1997 prepared by the independent engineering consultants. These reports assume unescalated pricing and do not recognize the results of subsequent drilling and completion activity between December 31, 1997 and the filing date of this Annual Report. The amortization expense of $68,494 did not change from 1996 as deferred charges are being amortized over 60 months. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense of $1,691,779 in 1997 is an increase of $28,368 over 1996, a change of 2%. On a boe basis, general and administrative expenses were $5.40 per boe up 129% from $2.36 per boe in 1996. INVESTMENT CARRYING VALUE Pursuant to both Canadian and United States full cost method of accounting the Company is required to meet certain ceiling tests in respect of the carrying value of petroleum and natural gas interests on the balance sheet as at December 31, 1997. A ceiling test writedown of $2,520,000 of petroleum and natural gas interest was reflected in the Consolidated Statements of Operation and Deficit. BALANCE SHEET The Company's total assets as at December 31, 1997 were $28,143,343 as compared to $41,214,668 a year earlier. The decline of 32% over the past year is due to the combination of the sale of Canadian assets and paydown of Canadian and U.S. bank loans. Petroleum and natural gas interests were reduced to $17,695,968 (being $34,691,297 less $16,995,329) from $34,764,350 a year earlier. Canadian petroleum and natural gas interests are $1,211,921 as at December 31, 1997 as compared to $16,848,304 last year whereas U.S. petroleum and natural gas interests declined by $1,431,999 from $17,916,046 as at December 31, 1996 to $16,484,047 at the end of the current year. In respect of liabilities and shareholders' equity, long term debt declined to $143,050 from $6,119,670 being 98%. Shareholders' equity at December 31, 1997 decreased to $25,738,200 from $31,472,428 at the end of 1996. The decline of $5,734,226 being 18% is a result of the net loss of $4,835,220 along with the repurchase of common shares. TWELVE MONTHS ENDED DECEMBER 31, 1996 TO TWELVE MONTHS ENDED DECEMBER 31, 1995 The Company realized earnings for the year of $228,573 being $0.02 per share as compared to a loss in 1995 of $1,155,062 or $0.13 per share. This improvement of $1,384,235 is a result of increased oil and gas production and improved commodity prices. Gross natural gas volumes increased 40% from 2,364,489 MCF to 3,309,438 MCF. The increase in oil production was 116% from 71,122 barrels to 153,699 barrels. Combined with strong oil prices, this improvement resulted in gross oil revenue increasing by 165% from $1,719,186 in 1995 to $4,549,235 in 1996. The combined oil and gas revenue for 1996 was $12,862,701 as compared to $6,762,407 in 1995. The weighted average number of shares used in the calculation of earnings for the year was 10,945,927 shares whereas the 1995 calculations are based on 9,031,583 shares. The primary reason for this difference is the 1,374,227 shares from the Roxbury plan of arrangement which were issued in September, 1995 and shares issued from treasury in 1996. OPERATING EXPENSE Oil and natural gas operating expenses increased from $926,159 in 1995 to $1,649,650 in 1996. On a boe basis, operating expenses fell to $2.34 in 1996 from $3.03 in 1995 an improvement of 23%. Canadian operating costs fell from $3.49 per boe in 1995 to $2.51 in 1996. Although operating expenses in the U.S. varied slightly, $2.22 per boe in 1996 versus $2.34 per boe in 1995, the 110% increase in Canadian gas production accounts for the differential. -19- 20 INTEREST AND OTHER INCOME Interest revenue of $26,095 in 1996 did not vary significantly from $25,784 a year earlier. Short term Canadian interest rate averaged between 3% and 4.5% over the year. INTEREST EXPENSE Interest expense and bank charges were $685,942 in 1996, as compared to $461,531 in 1995. The primary reason for this increase was that the combined bank loan and debenture principal balance for 1996 averaged $7.5 million Canadian, whereas in 1995 the average principal balance was below $5.0 million. DEPLETION, DEPRECIATION AND AMORTIZATION Depletion and depreciation increased to $5,661,205 in 1996 from $3,207,118 in 1995, an increase of 77 % on a boe basis in 1996 expense was $8.03 per boe versus $6.84 in 1995 (this comparison is based on an energy equivalent of 6 mcf per boe). The calculation of depletion and depreciation is based on the Evaluation Reports as at December 31, 1996, prepared by the independent engineering consultants. These reports assume unescalated pricing and do not recognize the results of subsequent drilling and completion between December 31, 1996 and the filing date of this Annual Report. The amortization expense of $68,494 is derived from the costs of the 1995 Roxbury plan of arrangement in 1996. These deferred charges are being amortized on a straight line basis over 60 months from the date of acquisition. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense of $1,663,411 in 1996 is an increase of $193,328 over 1995, a change of 13%. On a boe basis, general and administrative expenses were $2.36 down 25% from $3.16 per boe in 1995. INVESTMENT CARRYING VALUE Pursuant to both Canadian and United States full cost method of accounting the Company is required to meet certain ceiling tests in respect of the carrying value of petroleum and natural gas interests on the balance as at December 31, 1996. The Company met these ceiling tests, and accordingly, no write-down of petroleum and natural gas interests was required. BALANCE SHEET The Company's total assets as at December 31, 1996 were $41,214,688 as compared to $39,178,076 a year earlier. This increase of 5% over the past year is due primarily to an improvement in working interest capital of $541,651. Whereas the increase in petroleum and natural gas interests to $34,764,350 (being $50,376,801 of capital costs less $15,612,451 in accumulated depreciation, depletion and write-offs) was only $1,264,670, a reduction in the level of year end activity reduced the advances to operators by $881,352. The note receivable at year end of $497,692 is in respect of the sale at Elm Grove which closed in 1996. In respect of liabilities and shareholders' equity, long term debt (including current portion) declined slightly to $6,850,617 from $7,390,400 a year earlier. This change is a combination of higher bank debt and the redemption of $829,000 of convertible debentures. Shareholders' equity at December 31, 1996 increased to $31,472,428 from $28,477,535. This change is a combination of $228,573 in income for the year end and the net issuance of 759,452 common shares for $2,766,320. TWELVE MONTHS ENDED DECEMBER 31, 1995 TO DECEMBER 31, 1994 The Company realized a substantial increase in production as compared to 1994 which contributed to the increase in gross revenue and earnings before interest, depletion, depreciation and taxes. Gross natural gas volumes increased 80% from 1,311,852 mcf to 2,364,489 mcf whereas oil production almost doubled to 71,122 barrels from 36,337. Based on a barrel of oil equivalent basis ("boe") of 10 to 1 (1 barrel equals 10 mcf) which in our opinion reflects the comparative financial value of oil and gas, production increased from 167,455 boe in 1994 to 307,571 in 1995, an increase of 82%. Gross revenue increased by 63% from $4,137,141 in 1994 to $6,762,407 in 1995. Whereas 75% of the Company's production is in the form of natural gas, the 17% decline in the average gas price resulted in the rate of increase in revenue to lag behind in the increase in production. -20- 21 Loss per share in 1995 fell to $0.13 per share being $1,155,062 from $0.56 in 1994, an improvement of 77%. The weighted average number of shares used in the calculation was 9,031,583 shares in 1995 as compared to 7,625,417 shares in 1994 and reflects the issuance of 1,374,727 shares from the Roxbury plan of arrangement. OPERATING EXPENSES Oil and natural gas operating expenses increased to $926,159 in 1995 from $615,477 in 1994. On a boe basis operating expense fell by 14% to $3.03 per boe in 1995 from $3.68 per boe in 1994. This improvement results from the benefit of economics of scale at Wildhay River and Lake Boeuf, where the Company is realizing higher production levels. INTEREST AND OTHER INCOME Interest revenue fell from $45,628 in 1994 to $25,784 reflecting lower short-term interest rates in Canada and a lower average cash balance throughout 1995. Other income of $47,748 is a result of the conversion of debentures received on the sale of marginal properties to SLN Ventures Corporation. INTEREST EXPENSE Interest expense and bank charges increased to $461,351 in 1995 from $126,399 in 1994 as a direct result of an increase of $5,561,400 in bank debt. DEPLETION, DEPRECIATION AND AMORTIZATION Depletion and depreciation increased substantially from $1,719,897 in 1994 to $3,207,118 in 1995, an increase of 86%. On a boe basis, the 1995 expense was $6.84 per boe versus $6.74 in 1994 (this comparison is based on 6 mcf equal to 1 barrel which is the energy equivalent). The calculation of depreciation and depletion is based on the Evaluation Reports as at December 31, 1995 which assumes unescalated commodity pricing and does not recognize the results of subsequent drilling and completion between December 31, 1995 and the filing date of this Annual Report. The amortization expense of $22,587 is derived from the costs of the plan of arrangement with Roxbury Capital Corporation. These deferred charges are being amortized on a straight line basis over 60 months from the date of acquisition. GENERAL AND ADMINISTRATIVE EXPENSE General and administrative expense of $1,470,083 in 1995 is an increase of $362,736 over 1994, a change of 33%. The increase is due to a combination of consultants expense and office rent absorbed in a plan of arrangement with Roxbury as well as on an increase in the level of remuneration. General and administrative expenses were $3.16 per boe in 1995 as compared to $4.34 per boe in 1994. INVESTMENT CARRYING VALUE ADJUSTMENT There was no write down of Petroleum and natural gas interests in 1995 as compared to $4,000,000 in 1994. The Company met the ceiling tests under Canadian generally accepted accounting principles. Under the United States full cost method of accounting for petroleum and natural gas interests, the Company using oil and gas prices at the balance sheet date, would have been required to write down its Canadian petroleum and natural gas interests by approximately $800,000. BALANCE SHEET Total assets as at December 31, 1995 were $39,178,076 as compared to $24,794,082 a year earlier. The major source of the change is in petroleum and natural gas interest of $33,499,680 (being $43,597,549 in capital costs less $10,097,869 in accumulated depreciation, depletion and write-offs) which increased $11,240,175 in 1995. During 1995 the Company participated in the drilling of 11 gross wells (2.84 net wells). Additionally, the increase in petroleum and natural gas interests reflects the acquisition of Roxbury and additional interests in Turtle Bayou, Louisiana. In respect of the liabilities and shareholders' equity, long term debt increased from $1,849,000 as at December 31, 1994 to $7,390,400 as at December 31, 1995. Shareholders' equity as at December 31, 1995 increased to $28,477,535 from $20,837,561. The major change is due to the issuance of 2,137,340 shares for $8,795,036 in cash -21- 22 and assets combined with the loss for the year of $1,155,062. LIQUIDITY AND CAPITAL RESOURCES TWELVE MONTHS ENDED DECEMBER 31, 1997 TO TWELVE MONTHS ENDED DECEMBER 31, 1996. Working capital as at December 31, 1997 was $7,856,820 as compared to $1,288,511 a year earlier. Cash and cash equivalents increased to $5,660,354 at year end from $2,055,062 at December 31, 1996. In addition, a further $703,996 of cash was held in trust to fund future abandonment and site restoration work in the Valentine field. An additional $715,250 of cash in trust in respect of a pending joint venture was release to the Company in early 1998 when a due diligence review resulted in cessation of negotiations. The increase in working capital of $6,568,309 over the fiscal year is primarily due to the sale of the Canadian operations. Cash flow from operations was $2,528,992 in 1997 as compared to $5,958,272 in 1996, a decline of $3,429,280 . After utilizing $1,807,809 of cash flow to reduce accounts payable, and a further $440,586 consumed in the sale of the Canadian petroleum and natural interests, the Company had $577,024 to finance its capital expenditures. A year earlier discretionary cash flow was $5,348,360, which represents a reduction of $4,771,336. Net receipts from investing activities for 1997 were $10,532,087 as compared to cash requirements of $6,045,068 in 1996. Proceeds from the sale of petroleum and natural interests, was $16,750,000 in 1997 as compared to $1,176,849 a year earlier. In respect of financial activities, the Company redeemed common shares in the amount of $899,006 and reduced its bank debt by $6,707,567. The Company as of the date of this annual report is not in a position to forecast 1998 capital requirements. The pending merger with American Explorer, Inc. (Refer to note 15 in the attached financial statements in respect of subsequent events) if consummated will allow for a more precise determination of capital requirements. IMPACT OF ACQUISITION ON RESULTS OF OPERATIONS In conjunction with the Company's pending merger with American Explorer, Inc., the Company intends to emigrate and continue in Delaware. As a result, the Company will change from reporting under Canadian GAAP to U.S. GAAP. The Company does not expect any material adverse tax consequences or material one time charges as a result of this emigration. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's financial statements are stated in Canadian Dollars (CDN$) and are prepared in accordance with Canadian GAAP; reconciliations to U.S. GAAP are contained in note 12 to the financial statements. The value of the U.S. Dollar in relation to the Canadian Dollar was U.S. $0.7060 as at March 17, 1998. INDEX TO FINANCIAL STATEMENTS Report of Independent Auditor. Consolidated Balance Sheets as at December 31, 1997 and 1996. Consolidated Statements of Operations and Deficit for the Years Ended December 31, 1997, 1996 and 1995. Consolidated Statements of Change in Financial Position for the Years Ended December 31, 1997, 1996 and 1995. Schedules of Consolidated General and Administrative Expense. Notes to Consolidated Financial Statements for the Years Ended December 31, 1997, 1996 and 1995. Consolidated Supplemental Oil and Gas Information. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. -22- 23 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists as of December 31, 1997, the names of all the Directors of the Registrant, their municipalities of residence, their current positions with the Company and their principal occupations during the past five years. Each Director will serve until the next annual general meeting or until his successor is duly elected, unless his office is vacated in accordance with the Articles of the Registrant. On February 28, 1998 the Company filed a Form 8-K announcing a merger agreement between American Explorer, LLC and the Company. Whereas the agreement is subject to a number of conditions which must be met to give effect to merger, the agreement provides for the nomination for election to the Board of Directors of Robert L. Hodgkinson, William C. Leuschner, both of whom currently serve as Directors; as well as Charles T. Goodson, Alfred J. Thomas II, Ralph J. Daigle, Robert R. Brooksher and Daniel G. Fournerat all of whom are residents of Lafayette, Louisiana.
DIRECTORS - --------------------------------------------------------------------------------------------- NAME, AGE AND MUNICIPALITY POSITION WITH PRINCIPAL OCCUPATION FOR OF RESIDENCE THE COMPANY PREVIOUS FIVE YEARS - ---------------------------- ---------------------------------- ------------------------ WILLIAM C. LEUSCHNER, (69)** Chairman of the Board See below Calgary, Alberta Director ROBERT L. HODGKINSON, (48)** President, Chief Executive Officer, See below Vancouver, British Columbia Director RONALD P. BOURGEOIS, (46)* Chief Financial Officer, Secretary, See below Vancouver, British Columbia Director EMILE D. STEHELIN, (54)**/* Director See below Whitehorse, Yukon Territories MARTIN G. ABBOTT, (45)* Director See below Calgary, Alberta
* Member of the Company's Audit Committee. ** Member of the Company's Executive Committee WILLIAM C. LEUSCHNER: Director and Chairman of the Company since 1989. Mr. Leuschner is a professional geologist with a Bachelor of Geology from Texas A&M in 1950. In 1982, he founded Leuschner International Resources Ltd., a private hydrocarbon consulting and independent oil and gas producing firm, of which he is President. From 1982 to 1992, he was president of Arenosa Resource Corporation, a private oil and gas company, subsequently sold to the Company. Between 1984 and 1995, he was a Director of Skyline Natural Resources, a publicly-traded company on the Alberta Stock Exchange. ROBERT L. HODGKINSON: Director, President and Chief Executive Officer of the Company since 1989. From 1982 to November 1990, he was Vice President with L.O.M. Western Securities Ltd., a securities firm in Vancouver, British Columbia. From April 1993, to September 1995, Mr. Hodgkinson was a director of Roxbury Capital Corp. RONALD P. BOURGEOIS: Director and Chief Financial Officer since June 1993 and Secretary since August, 1993. Mr. Bourgeois is a chartered accountant with a Bachelor of Commerce (Hons) from the University of Manitoba in 1973 and achieved his chartered accountant designation in 1976 after articling with Coopers & Lybrand. Prior to his employment with the Company, Mr. Bourgeois served as the President of the General Partner of each limited partnership managed by Lakewood Capital Group Inc. from June, 1989 to June, 1993. He was also President of Q-Vest Petroleum -23- 24 Management Inc. a predecessor of Lakewood from February, 1987 to June, 1989. Both Lakewood Capital Group Inc. and Q-Vest Petroleum Management Inc. are oil and gas investment management companies. From September 1994 to September 1995, Mr. Bourgeois was a director and officer of Roxbury Capital Corp. EMILE STEHELIN: Director of the Company since 1989. Since 1972 he has been President and Director of E.V.E.M. Limited, a private holding company with interests in real estate, property management, construction and mining. MARTIN ABBOTT: Director of the Company since December 1994. Mr. Abbott is a lawyer with a Bachelor of Arts from the University of Alberta in 1973 and Bachelor of Law (LLB) from the same university in 1981. Mr. Abbott then articled with the law firm of Fenerty, Robertson, Fraser & Hatch and later became a partner with that firm, practising oil and gas business law, before joining the Calgary office of Blake, Cassels & Graydon in 1991. Mr. Abbott retired from the partnership of Blake, Cassels & Graydon to form TOM Capital Associates, Inc., a merchant banking firm, in 1995, where he is Managing Director. Mr. Abbott is a founder and director of Real Resources Inc., an Alberta Stock Exchange listed company. The directors of the Company are elected by the shareholders at each annual general meeting and typically hold office until the next annual general meeting at which time they may be re-elected or replaced. Casual vacancies on the board are filled by the remaining directors and the persons filling those vacancies hold office until the next annual general meeting at which time they may be re-elected or replaced. The senior officers are appointed by the board and hold office indefinitely at the pleasure of the board. COMMITTEES OF THE BOARD: Whereas the Company has no Compensation Committee to make recommendations as to the salary, bonuses and other compensation to be paid to the officers. The Executive Committee exercises all of the powers of the Board of Directors whenever the Board is not in session, subject to any restrictions, regulations, limitations or directions which may from time to time be imposed by the Board and save and except such acts as must by law be performed by the directors themselves. The Executive Committee held three meetings in 1997 and is composed of William C. Leuschner, Robert L. Hodgkinson and Emile D. Stehelin. The AUDIT COMMITTEE recommends to the Board of Directors the selection of independent auditors: reviews with the auditors the scope of the audit: reviews with the auditors and management of the Company the accounting principles, policies and practices; reviews the audited consolidated financial statements of the Company with the auditors prior to submission thereof to the Board of Directors for approval; and undertakes other duties that may be delegated to it. The Committee held one meeting in 1997 and is composed of Ronald P. Bourgeois, Emile D. Stehelin and Martin G. Abbott. -24- 25 ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION An "executive officer" is defined to mean the Chairman and any Vice-Chairman of the Board of Directors of the Company, when that person performs the functions of such office on a full-time basis, the President, any Vice President in charge of a principal business unit such as sales, finance or production, any officer of the Company or a subsidiary of the Company, or any person who performs a policy-making function in respect of the Company, whether or not such officer is also a director of the Company or of a subsidiary. The following is a discussion of the compensation being paid to the Company's executive officers. SUMMARY OF COMPENSATION The following table is a summary of compensation paid to the named executive officers and directors as a group for the three most recently completed financial years. Specific aspects of this compensation are dealt with in further detail in the following tables.
ANNUAL COMPENSATION LONG TERM COMPENSATION ---------------------------------- ----------------------------------------------- AWARDS PAYOUTS ----------------------- ---------------------- SECURITIES RESTRICTED FISCAL UNDER SHARES OR ALL OTHER NAME AND POSITION YEAR OTHER ANNUAL OPTIONS RESTRICTED LTIP COMPEN- OF PRINCIPAL ENDED SALARY BONUS COMPENSATIONS(1) GRANTED(2) SHARE UNITS PAY-OUTS(3) SATION(3) - -------------------- ----- ------ ----- ---------------- ---------- ----------- ----------- --------- Robert L. 1997 Nil N/A 150,000 Nil Nil Nil Nil Hodgkinson 1996 Nil N/A 150,000 200,000 Nil Nil Nil CEO, President 1995 Nil N/A 166,500 150,000 Nil Nil Nil & Director William C. 1997 Nil N/A 150,000 Nil Nil Nil Nil Leuschner 1996 Nil N/A 150,000 125,000 Nil Nil Nil Chairman, Director 1995 Nil N/A 149,000 150,000 Nil Nil Nil Ronald P. Bourgeois 1997 Nil N/A 118,000 Nil Nil Nil Nil CFO, Secretary 1996 Nil N/A 118,000 75,000 Nil Nil Nil & Director 1995 Nil N/A 96,000 125,000 Nil Nil Nil Emile D. Stehelin 1997 Nil N/A 0 25,000 Nil Nil Nil Director 1996 Nil N/A 0 50,000 Nil Nil Nil 1995 Nil N/A 0 50,000 Nil Nil Nil Martin G. Abbott 1997 Nil N/A 0 25,000 Nil Nil Nil Director 1996 Nil N/A 0 Nil Nil Nil Nil 1995 Nil N/A 0 50,000 Nil Nil Nil
(1) Directors fees are paid only to non-executive directors at the rate of $500 per meeting and are paid in the form of common shares of the Company. (2) All securities under options granted prior to the grant of April 3, 1995 were canceled pursuant to the terms and conditions of the current stock option plan. (3) The Company does not have a long term incentive plan nor a pension plan. -25- 26 OPTIONS GRANTED DURING THE MOST RECENTLY COMPLETED FISCAL YEAR During the Company's most recently completed fiscal year, there were no stock options granted to the Named Executive Officers. AGGREGATED OPTION EXERCISES DURING THE MOST RECENTLY COMPLETED FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES No incentive stock options were exercised by the Named Executive Officers, during a the fiscal year-end. All of the executive officers of the Company are entitled to reimbursement of all reasonable business expenses and to receive incentive stock options as they are granted from time to time by the Company. Reference should be made to "Stock Options" for particulars of stock options granted to Executive Officers. CDN$150,000 (which excluded reimbursement of expenses, office costs and GST tax) was paid during fiscal 1997 to Leuschner International Resources Ltd. (Leuschner), a consulting and independent oil and gas producing firm controlled by William C. Leuschner, Chairman and Director of the Company. A February 1, 1995 Agreement between the Company and Leuschner, provides for William C. Leuschner's services as Chairman (and one individual who provides clerical services). The renewable contract calls for consideration of CDN$150,000 per year, a monthly payment of $12,500, to the consulting firm. CDN $150,000 (which excluded reimbursement of expenses, office costs and GST tax) was paid during fiscal 1997 to Hodgkinson Equities Corporation, a private consulting firm in which Robert L. Hodgkinson, President/CEO and a Director of the Company, holds a 100 percent interest. The renewable contract calls for monthly payments of CDN$12,500 to Hodgkinson Equities Corporation. CDN$118,000 (which excluded reimbursement of expenses, office costs and GST tax) was paid during fiscal 1997 to Ronald Bourgeois. Effective January 1, 1998 Mr. Bourgeois' contract was renewed at CDN $120,000 per annum, at a monthly payment of CDN $10,000. STOCK OPTIONS Robert Hodgkinson, Emile Stehelin, William Leuschner, Ronald Bourgeois and Martin Abbott have been granted director incentive stock options in accordance with the policy of the Toronto Stock Exchange. These options are priced based on the average closing price of the Company's shares for the ten trading days immediately prior to the grant of option. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The authorized capital of the Registrant consists of 100,000,000 shares of common stock without par value of which 11,002,346 are outstanding as of December 31, 1997. All of the authorized shares of the Registrant are of the same class and, once issued, rank equally as to dividends, voting powers, and participation in assets. Holders of common stock are entitled to one vote for each share held of record on all matters to be acted upon by the shareholders. Holders of common stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors, in its discretion, out of funds legally available therefore. Upon liquidation, dissolution or winding up of the Registrant, holders of common stock are entitled to receive pro rata the assets of the Registrant, if any, remaining after payments of all debts and liabilities. No shares have been issued subject to call or assessment. There are no preemptive or conversion rights and no provisions for redemption or purchase for cancellation, surrender, or sinking or purchase funds. Provisions as to the modification, amendment or variation of such shareholder rights or provisions are contained in the CBCA. Under the CBCA, the Company's Articles of Incorporation otherwise provide, any action to be taken by a resolution of the members may be taken by an ordinary resolution by a vote of a majority or more of the shares represented at the shareholders' meeting. -26- 27 Debt Securities to be Registered. Not applicable. American Depository Receipts. Not applicable. Other Securities to be Registered. Not applicable.
The Registrant is a publicly-owned corporation, the shares of which are owned by Canadian residents, U.S. residents, and residents of other countries. The Registrant is not owned or controlled directly or indirectly by another corporation or any foreign government. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS The following table sets forth the beneficial ownership of the Company as at December 31, 1997 to the extent that each beneficial owner owns more than five percent of the common shares of the Company:
Per Number of Shares Cent Name and Address of Beneficially of Title of Class Beneficial Owner Owned Class - -------------- ---------------- ---------------- ----- Common Shares E. D. Stehelin, Whitehorse, Yukon, Canada 1,326,942 12.1 Common Shares Wellington Management, Boston, MA, USA 1,079,000 9.9 Common Shares State Street Research & Management, Boston, MA, USA 572,300 5.2 --------- ---- Total 2,996,442 27.2 ========= ====
SECURITY OWNERSHIP OF MANAGEMENT The following table sets forth the beneficial ownership as at December 31, 1997 of the Company's common shares by each of the Company's directors, certain of its executive officers and by all of its directors and executive officers as a group:
Name and Address of Amount and Nature of Per Cent Beneficial Owner Beneficial Ownership of Class - ---------------- -------------------- -------- R.L. Hodgkinson, Vancouver, B.C., Canada 118,000(1) 1.1 W.C. Leuschner, Calgary, Alberta, Canada 560,225(1) 5.1 R.P. Bourgeois, Vancouver, B.C., Canada 57,151(2) 0.5 E.D. Stehelin, Whitehorse, Yukon, Canada 1,326,942(3) 12.1 M.G. Abbott, Calgary, Alberta, Canada 15,626(3) 0.1 --------- ---- All directors and executive officers as a group (5 persons) 2,077,944 18.9 ========= ====
NOTES: (1) Excludes 200,000 exercisable stock options; (2) Excludes 153,000 exercisable stock options; (3) Excludes 100,000 exercisable stock options. -27- 28 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has entered into the following material transactions with directors, senior officers or principal holders of its securities: (a) 7804 Yukon Inc. is a private company owned indirectly as to 47.619048% by Robert L. Hodgkinson, president of the Company and 52.380952% by Emile D. Stehelin, Director of the Company. 7804 Yukon Inc. has acquired interests in the following prospects in which the Company has participated or is participating: Valentine and Vermilion, Louisiana. Each of these transactions were on terms as favorable as the Company obtained from unaffiliated parties. (b) Colima Oil Company, a company wholly owned by William C. Leuschner, Chairman and director of the Company, has acquired interests in the following prospects in which the Company has participated or is participating; Valentine and East Haynesville, Louisiana. Each of these transactions were on terms as favourable as the Company obtained from unaffiliated parties. (c) During October, 1995, Robert L. Hodgkinson acquired 115,000 shares of the Company at $3.35 per share pursuant to a private placement. This transaction was approved by the Toronto Stock Exchange. (d) During October, 1995, William C. Leuschner through Colima Oil Company acquired 34,500 shares of the Company at $3.35 per share pursuant to a private placement. This transaction was approved by the Toronto Stock Exchange. (e) Various loans to Optima were made in 1995 by companies controlled by Robert L. Hodgkinson, Emile D. Stehelin and William C. Leuschner. In May, 1995, Messieurs Hodgkinson, Leuschner and Stehelin advanced to the Company $116,500 each for a total of $349,500. These loans were unsecured and non-interest bearing. Mr. Hodgkinson was repaid in July, 1995 and Messieurs Leuschner and Stehelin were repaid the 19th of October, 1995. There are no loans outstanding as at December 31, 1997. The Company pursuant to the nature of the business from time to time is offered the opportunity to participate in oil and gas prospects. Directors, senior officers and their associates and affiliates are allowed to participate in these prospects only if it is determined by the Board of Directors that their interests are over and above the level of participation that is prudent for the Company in respects of its financial resources. Additionally, the terms of the transactions must be similar to the terms of the participation by the Company. Other than the above referenced situations, no Directors or Executive Officers and no associate or affiliate of the foregoing persons has or had any material interest, direct or indirect, in any transaction, or in any proposed transaction, which in either such case has materially affected or will materially affect the Company. -28- 29 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) INDEX TO FINANCIAL STATEMENTS: ANNUAL FINANCIAL STATEMENTS INCLUDED IN ITEM 8. (i) Independent Auditor's Report. (ii) Consolidated Balance Sheets as at December 31, 1997 and 1996. (iii) Consolidated Statements of Operations and Deficit for the Years Ended December 31, 1997, 1996 and 1995. (iv) Consolidated Statement of Change in Financial Position for the Years Ended December 31, 1997, 1996 and 1995. (v) Schedules of Consolidated General and Administrative Expense. (vi) Notes to Consolidated Financial Statements for the Years Ended December 31, 1997, 1996, and 1995. (vii) Consolidated Supplemental Oil and Gas Information. SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS: No financial statement schedules have been presented as they are not applicable, not required or the required information is included in the Consolidated Financial Statements or Notes thereto. (b) REPORTS ON FORM 8-K. A Form 8-K was filed on May 30, 1997 with the Securities and Exchange Commission. The Company reported the closing of the sale of a substantial position of its Canadian oil and gas assets for $16.8 million. This Form 8-K was attached to the Form 10-Q filed for the quarterly period ended June 30, 1997. (c) INDEX TO EXHIBITS
Exhibit No. Description of Exhibits -------- ----------------------- 3.1 Articles of Incorporation 3.2 Articles of Continuance CBCA 3.3 Approval and Special Committee Approval of Plan of Arrangement between Optima Petroleum Corporation and Roxbury Capital Corporation. 3.4 Subscription Agreements for Private Placements entered into during 1995 3.5 Approval of Payment in shares 3.6 Employment/Consulting Contracts for Officers and Directors 3.7 Registrant's April 3, 1995 Stock Option Plan, as amended at August 9, 1995 3.8 Registrant's April 10, 1996 Stock Option Plan 3.9 Approval of Share Compensation to Outside Directors 3.10 Approval of Share Compensation to Chief Financial Officer 3.11 Consent of Ryder Scott Company Petroleum Engineers 3.12 Consent of Laroche Petroleum Consultants, Ltd.
-29- 30 ITEM 15. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. OPTIMA PETROLEUM CORPORATION BY: /s/ ROBERT L. HODGKINSON -------------------------------- Robert L. Hodgkinson President Chief Executive Officer and Director Date: March 26 , 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Name Title Date ---- ----- ---- BY: /s/ ROBERT L. HODGKINSON President March 26, 1998 ------------------------------- Robert L. Hodgkinson Chief Executive Officer Director BY: /s/ WILLIAM C. LEUSCHNER Chairman of the Board March 26, 1998 ------------------------------- William C. Leuschner Director BY: /s/ RONALD P. BOURGEOIS Secretary March 26, 1998 ------------------------------- Ronald P. Bourgeois Chief Financial Officer Director
-30- 31 OPTIMA PETROLEUM CORPORATION Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 32 AUDITORS' REPORT TO THE SHAREHOLDERS We have audited the consolidated balance sheets of Optima Petroleum Corporation as at December 31, 1997 and 1996 and the consolidated statements of operations and deficit and changes in financial position for each of the years in the three year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1997 and 1996 and the results of its operations and the changes in its financial position for each of the years in the three year period ended December 31, 1997 in accordance with generally accepted accounting principles in Canada. /S/ KPMG Chartered Accountants Vancouver, Canada March 13, 1998 33 OPTIMA PETROLEUM CORPORATION Consolidated Balance Sheets December 31, 1997 and 1996
1997 1996 ------------ ------------ ASSETS CURRENT Cash and cash equivalents $ 5,660,354 $ 2,055,062 Cash in trust 715,250 -- Accounts receivable (Note 14(b)) 2,220,151 2,516,578 Note receivable - current portion (Note 4) 129,861 124,423 ------------ ------------ 8,725,616 4,696,063 OTHER Cash held in trust (Note 5) 703,996 638,142 Advances to operators (Note 6) 547,200 468,864 Note receivable - long term portion (Note 4) 265,077 373,269 Petroleum and natural gas interests, full cost method (Note 7) 17,695,968 34,764,350 Deferred charges 205,486 273,980 ------------ ------------ $ 28,143,343 $ 41,214,668 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT Accounts payable and accrued liabilities $ 868,796 $ 2,676,605 Current portion of long-term debt (Note 8) -- 730,947 ------------ ------------ 868,796 3,407,552 REVENUE IN DISPUTE (Note 14(a)) 1,023,998 -- LONG-TERM DEBT (Note 8) 143,050 6,119,670 SITE RESTORATION AND ABANDONMENT 369,297 215,018 SHAREHOLDERS' EQUITY Share capital (Note 9) Authorized 100,000,000 common shares Issued 11,002,346 (1996 - 11,318,894) common shares 30,891,689 31,790,695 Contributed surplus 608,222 608,222 Deficit (Note 9 (e)) (5,761,709) (926,489) ------------ ------------ 25,738,202 31,472,428 ------------ ------------ $ 28,143,343 $ 41,214,668 ============ ============
See accompanying notes to consolidated financial statements. ON BEHALF OF THE BOARD /s/ ROBERT L. HODGKINSON /s/ RONALD P. BOURGEOIS - ----------------------------------- ----------------------------------- Director Director 34 OPTIMA PETROLEUM CORPORATION Consolidated Statements of Operations and Deficit Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ OPERATING REVENUE Petroleum and natural gas sales $ 7,649,415 $ 12,862,701 $ 6,762,407 COSTS AND EXPENSES Royalties and production taxes 2,581,196 2,887,096 1,885,108 Operating costs 1,018,211 1,649,650 926,159 Depletion and depreciation 4,269,745 5,661,205 3,207,118 Write-down of petroleum and natural gas interests 2,520,000 -- -- Provision for revenue dispute (Note 14) 1,023,998 -- -- Gain on sale of Canadian petroleum and natural gas interests (518,025) -- -- General and administrative (Schedule) 1,691,779 1,663,411 1,470,083 Interest and other revenue (250,916) (26,095) (73,532) Foreign exchange gain (259,315) (3,789) (7,437) Interest and bank charges 188,468 685,942 461,531 Amortization of deferred financing costs 68,494 68,494 22,587 ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES (4,684,220) 276,787 (1,129,210) Income taxes (Note 11) 151,000 48,214 25,852 ------------ ------------ ------------ NET INCOME (LOSS) FOR THE YEAR (4,835,220) 228,573 (1,155,062) DEFICIT, beginning of year (926,489) (1,155,062) (10,602,526) Reduction of common share stated capital (Note 9(e)) -- -- 10,602,526 ------------ ------------ ------------ DEFICIT, end of year $ (5,761,709) $ (926,489) $ (1,155,062) ============ ============ ============ NET INCOME (LOSS) PER SHARE $ (0.43) $ 0.02 $ (0.13) ============ ============ ============
See accompanying notes to consolidated financial statements. 35 OPTIMA PETROLEUM CORPORATION Consolidated Statements of Changes In Financial Position Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ------------ ------------ ------------ CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES Net income (loss) for the year $ (4,835,220) $ 228,573 $ (1,155,062) Items not involving cash Gain on sale of Canadian petroleum and natural gas interests (518,025) -- -- Depletion, depreciation and amortization 4,338,239 5,729,699 3,229,705 Provision for revenue dispute 1,023,998 -- -- Write-down of petroleum and natural gas interests 2,520,000 -- -- ------------ ------------ ------------ 2,528,992 5,958,272 2,074,643 Changes in non-cash working capital: Accounts receivable 296,427 (44,195) (606,674) Accounts payable and accrued liabilities (1,807,809) (565,717) 362,006 Net working capital adjustments on sale of Canadian petroleum and natural gas interests (440,586) -- -- ------------ ------------ ------------ 577,024 5,348,360 1,829,975 ------------ ------------ ------------ FINANCING ACTIVITIES Issue (repurchase) of common shares (net of issue expenses) (899,006) 2,766,320 2,608,764 Increase in (repayment of) bank debt (6,707,567) 289,217 5,561,400 Note receivable 102,754 (497,692) -- Repayment of convertible debentures -- (829,000) -- Issue of securities on purchase of subsidiary -- -- 6,186,272 Conversion of convertible debentures -- -- (20,000) Site restoration and abandonment -- -- 36,574 ------------ ------------ ------------ (7,503,819) 1,728,845 14,373,010 ------------ ------------ ------------ INVESTING ACTIVITIES Proceeds on sale of petroleum and natural gas interests 16,750,000 1,176,849 925,863 Petroleum and natural gas interests (5,358,473) (7,955,920) (8,558,633) Advances to operators (78,336) 881,352 (903,652) Cash held in trust (781,104) (638,142) -- Debentures receivable -- 493,874 (493,874) Deferred charges -- (3,081) (278,783) Purchase of subsidiary (Note 3) -- -- (6,186,272) ------------ ------------ ------------ 10,532,087 (6,045,068) (15,495,351) ------------ ------------ ------------ INCREASE IN CASH 3,605,292 1,032,137 707,634 CASH AND CASH EQUIVALENTS, beginning of year 2,055,062 1,022,925 315,291 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 5,660,354 $ 2,055,062 $ 1,022,925 ============ ============ ============
See accompanying notes to consolidated financial statements. 36 OPTIMA PETROLEUM CORPORATION Schedules of Consolidated General and Administrative Expense Years ended December 31, 1997, 1996 and 1995
1997 1996 1995 ---------- ---------- ---------- Consultants $ 712,014 $ 681,248 $ 652,259 Office expense 368,348 232,418 248,918 Legal, audit and tax 207,786 207,237 173,193 Investor communication 157,667 247,666 146,800 Office rent 112,776 80,685 31,879 Travel 86,843 166,708 163,181 Public listing 33,970 39,942 50,503 Directors' fees 12,375 7,507 3,350 ---------- ---------- ---------- $1,691,779 $1,663,411 $1,470,083 ========== ========== ==========
37 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 1 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of presentation The consolidated financial statements are presented in accordance with generally accepted accounting principles applicable in Canada and expressed in Canadian dollars. Except as disclosed in Note 12, these financial statements conform, in all material respects, with generally accepted accounting principles in the United States. These consolidated financial statements reflect certain changes to previously issued consolidated financial statements, resulting from a review by the Securities and Exchange Commission. In accordance with Securities and Exchange Commission requirements, the presentation of certain items in the Statement of Operations and Deficit have been reclassified and additional items have been added to note 12 on U.S. and Canadian GAAP differences. (b) Basis of consolidation The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, Optima Energy (U.S.) Corporation. All intercompany transactions and balances have been eliminated. (c) Cash and cash equivalents Cash and cash equivalents include short-term investments with a maturity of ninety days or less at the time of issue. (d) Petroleum and natural gas interests The Company follows the full cost method of accounting for petroleum and natural gas interests whereby all costs of exploring and developing petroleum and natural gas reserves, net of government grants, are capitalized by individual country cost centre. Such costs include land acquisition costs, geological and geophysical expenses, costs of drilling both productive and non-productive wells and overhead charges directly related to acquisition, exploration and development activities. The total carrying value of the Company's petroleum and natural gas interests, less accumulated depletion, is limited to the estimated future net revenue from production of proved reserves, based on unescalated prices and costs plus the lower of cost and net realizable value of unproved properties, less estimated future development costs, general and administrative expenses, financing costs and income taxes. The carrying value of unproved properties is reviewed periodically to ascertain whether impairment has occurred. Where impairment has occurred, the costs have been written down to their net realizable value. For each cost centre, the costs associated with proved reserves are depleted on the unit-of-production method based on an independent engineering estimate of proved reserves, after royalties, with natural gas converted to its energy equivalent at a ratio of six thousand cubic feet of natural gas to one barrel of oil. Site restoration and abandonment costs, net of expected recoveries for production equipment and facilities, at the end of their useful life, are provided for on a unit-of-production basis. 38 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 2 - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The resource expenditure deductions for income tax purposes related to exploration and development activities funded by flow-through share arrangements are renounced to investors in accordance with income tax legislation. Petroleum and natural gas interests are reduced by the estimated renounced income tax benefits when the expenditures are incurred. Equipment is depreciated on a straight-line basis over five years. (e) Deferred charges Debt financing costs are amortized on a straight line basis over the terms of the related loans. (f) Foreign currency translation The operations of the Company's U.S. subsidiary are considered integrated with the operations of the Company, and thus, are translated under the temporal method. Under this method, transactions of the Company and its subsidiaries that are denominated in foreign currencies are recorded in Canadian dollars at exchange rates in effect at the related transaction dates. Monetary assets and liabilities denominated in foreign currencies are adjusted to reflect exchange rates at the balance sheet date. Exchange gains and losses arising on the translation of monetary assets and liabilities, except as they relate to long-term debt, are included in the determination of income for the year. Unrealized foreign exchange gains and losses related to long-term debt are deferred and amortized over the remaining term of the related debt. (g) Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant areas requiring the use of management estimates relate to the determination of rates for depreciation, depletion and amortization and the impairment of petroleum and natural gas interests. Actual results could differ from these estimates. (h) Fair value of financial instruments Financial instruments include cash and cash equivalents, cash in trust, accounts receivable, note receivable, accounts payable and accrued liabilities and the current and long term portions of long term debt. Fair values approximate carrying values for these financial instruments since they are short term in nature, receivable or payable on demand, or bear interest at floating rates. (i) Revenue recognition Petroleum and natural gas sales are recognized upon delivery to the metered gate at the common carrier pipeline. 39 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 3 - ------------------------------------------------------------------------------- 2. SALE OF CANADIAN PETROLEUM AND NATURAL GAS INTERESTS On May 30, 1997 the Company closed the sale of a substantial portion of its Canadian petroleum and natural gas interests for cash proceeds of $16,750,000. The following pro-forma summary presents comparative consolidated results of operations as if the disposition had occurred at the beginning of 1995:
1997 1996 1995 ----------- ----------- ----------- Petroleum and natural gas sales $ 7,649,415 $ 9,786,259 $ 5,233,031 Net income (loss) for the period (5,319,733) (212,883) (981,643) Income (loss) per share (0.47) (0.02) (0.11)
These unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the disposition been made as of these dates or of results which may occur in the future 3. PURCHASE OF ROXBURY CAPITAL CORP. On September 8, 1995 the Company acquired Roxbury Capital Corp. ("Roxbury") under a plan of arrangement whereby Roxbury shareholders exchanged all of the issued and outstanding common shares of Roxbury for newly issued common shares of the Company, at a ratio of seven Roxbury shares to one Company share. Net assets acquired, using the purchase method of accounting: Petroleum and natural gas properties $ 6,775,104 Working capital (48,585) Due to the Company (631,586) Advances to operators 5,692 Furniture and fixtures 2,845 Deferred charges 82,802 ----------- $ 6,186,272 ----------- Consideration given, based on an independent business valuation: 1,374,727 common shares of the Company $ 6,186,272 -----------
In addition, Roxbury shareholders received a warrant for every seven Roxbury shares exchanged, exercisable until February 28, 1997, for a Company common share at a price of $5.10 per share. The warrants were not exercised and expired on February 28, 1997. The purchase price of the Company's interest exceeded the net book value of the assets acquired by $1,389,355 and this amount has been allocated to the Company's depletable petroleum and natural gas interests. 40 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 4 - -------------------------------------------------------------------------------- 3. PURCHASE OF ROXBURY CAPITAL CORP. (CONTINUED) The operating results of Roxbury are included in the Company's consolidated results of operations from the date of acquisition. The following unaudited proforma summary presents the consolidated results of operations as if the acquisition had occurred at the beginning of 1994:
1995 1994 ----------- ----------- Petroleum and natural gas sales, net of royalties and production taxes $ 5,240,994 $ 3,290,811 Loss (2,239,737) (5,658,586) Loss per share (0.22) (0.54) ----------- -----------
These unaudited pro-forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made as of these dates or of results which may occur in the future. 4. NOTE RECEIVABLE The note is due on June 18, 2000, bears no interest, is repayable in four equal installments of $90,780 U.S. which commenced June 18, 1997 and is secured by a mortgage on certain U.S. oil and gas properties. 5. CASH HELD IN TRUST As a condition of a U.S. oil and gas property acquisition, the Company is obliged to keep cash on deposit to fund future abandonment costs. 6. ADVANCES TO OPERATORS The Company maintains joint accounts with operators engaged by the Company to perform exploration and development work on its petroleum and natural gas interests. 7. PETROLEUM AND NATURAL GAS INTERESTS
United Canada States Total ------------ ------------ ------------ 1997 Petroleum and natural gas interests $1,171,301 $ 33,306,560 $ 34,477,861 Other equipment 183,426 30,010 213,436 ---------- ------------ ------------ 1,354,727 33,336,570 34,691,297 Accumulated depreciation, depletion and write-offs (142,806) (16,852,523) (16,995,329) ---------- ------------ ------------ $1,211,921 $ 16,484,047 $ 17,695,968 ========== ============ ============
41 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 5 - -------------------------------------------------------------------------------- 7. PETROLEUM AND NATURAL GAS INTERESTS (CONTINUED)
United Canada States Total ------------ ------------ ------------ 1996 Petroleum and natural gas interests $ 19,523,978 $ 30,676,552 $ 50,200,530 Other equipment 151,695 24,576 176,271 ------------ ------------ ------------ 19,675,673 30,701,128 50,376,801 Accumulated depreciation, depletion and write-offs (2,827,369) (12,785,082) (15,612,451) ------------ ------------ ------------ $ 16,848,304 $ 17,916,046 $ 34,764,350 ============ ============ ============
As at December 31, 1997, unproved properties with capitalized costs of $2,911,126 (1996 - $4,441,055) were not subject to depletion. It is expected that these properties will be evaluated over the next one to three years. In calculating estimated future net revenue at December 31, 1995, the Company used forward sale gas prices received in February 1996. Had the Company used actual gas prices received at December 31, 1995, a write-down of $3,400,000 would have been required in the Company's petroleum and natural gas interests. 8. LONG TERM DEBT
1997 1996 ----------- ----------- Revolving $10,000,000 bank credit line, with a borrowing base of $3,969,000, bearing interest monthly at Canadian Prime Rate plus 1% for Canadian dollar drawdowns and U.S. Base Rate plus 0.5% for United States dollar drawdowns, secured by a fixed and floating charge debenture and a general assignment of book debts and Canadian oil and gas properties. The sale of the Canadian producing properties on May 30, 1997 terminated the credit line. $ -- $3,447,000 Revolving $5,000,000 (U.S.) bank credit line, with a borrowing base of $3,250,000 (U.S.), drawn to $100,000 (U.S.) bearing interest monthly at U.S. Base Rate plus 1.5%, secured by a revolving note due May 15, 1999 and U.S. oil and gas properties. 143,050 3,403,617 -------- ---------- 143,050 6,850,617 Less current portion of $5,000,000(U.S.) bank credit line ($533,304 U.S.) -- (730,947) -------- ---------- $143,050 $6,119,670 ======== ==========
42 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 6 - -------------------------------------------------------------------------------- 9. SHARE CAPITAL (a) Authorized The authorized share capital consists of 100,000,000 common shares without par value. (b) Issued
Number of Share Shares Capital ------------ ------------ Balance at December 31, 1994 8,422,102 $ 30,831,865 Issued for cash Private placements 400,000 1,340,000 Exercise of options 272,500 961,250 Purchase of subsidiary 1,374,727 6,186,272 In lieu of consulting fees 85,912 324,117 Conversion of debentures 4,201 20,000 Reduction of common share stated capital -- (10,602,526) Common share issue expenses -- (36,603) ------------ ------------ Balance at December 31, 1995 10,559,442 29,024,375 Issued for cash Exercise of options 514,500 1,825,250 Private placements 260,000 1,001,000 Exercise of warrants 714 3,641 In lieu of consulting fees 9,070 32,525 In lieu of directors fees 2,068 7,507 Shares repurchased and cancelled under Normal Course Issuer Bid (26,900) (99,530) Common share issue expenses -- (4,073) ------------ ------------ Balance at December 31, 1996 11,318,894 31,790,695 In lieu of consulting fees 6,000 21,780 In lieu of directors fees 552 2,004 Shares repurchased and cancelled under Normal Course Issuer Bid (323,100) (922,790) ------------ ------------ Balance at December 31, 1997 11,002,346 $ 30,891,689 ============ ============
43 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 7 - -------------------------------------------------------------------------------- 9. SHARE CAPITAL (CONTINUED) (c) Reserved in respect of options
Exercise Exercisable Holder Number Price On or Before - ------------------------------- ------------ --------- ---------------- Options Company directors and employees 193,000 $3.50 April 3, 1998 50,000 $3.55 April 3, 1998 100,000 $4.05 July 25, 1998 525,000 $4.15 June 12, 1999 50,000 $3.50 June 2, 1999 Non-related persons 120,000 $3.50 April 3, 1998 125,000 $3.50 June 2, 1999 --------- --------- -------------- 1,163,000
(d) Net income (loss) per share Net income (loss) per share has been calculated based on the following weighted average numbers of shares outstanding:
1997 1996 1995 ---------- ---------- --------- Weighted average number of shares 11,159,663 10,945,927 9,031,583 ---------- ---------- ---------
(e) Reduction of share capital On June 22, 1995, the shareholders of the Company passed a special resolution to reduce the stated capital of the Company's common shares by $10,602,526 which represents the Company's deficit at December 31, 1994. 10. RELATED PARTY TRANSACTIONS During 1996, the Company was charged consulting expenses of $417,780 (1996 - $395,463, 1995 - 404,017) by companies related by virtue of common directors. Office expense includes $117,600 (1996 - $115,962, 1995 - $115,416 ) paid to a related company. 44 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 8 - -------------------------------------------------------------------------------- 11. INCOME TAXES The benefit of the Company's losses for United States income tax purposes has not been recognized in the accounts. The amount of these losses and their expiry dates are as follows:
United States ------------- 2006 US $1,331,731 2007 2,299,528 2008 489,925 2009 1,211,359 2010 2,440,048 2011 845,280 2012 360,000 ------------- US $8,977,871 =============
The Company's effective tax rate differs from the expected statutory rate either because losses have not been tax effected or because previously unrecognized tax losses have been applied. 12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES (a) Accounting for income taxes Under the asset and liability method of Statement of Financial Accounting Standards No. 109 ("SFAS 109"), deferred income tax assets and liabilities, reduced by a valuation allowance to an amount more likely than not to be recovered, are measured using enacted tax rates for the future income tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. The approximate effect of each component of deferred income tax assets and liabilities at December 31, 1997 is as follows: Net operating losses deferred tax assets $ 5,137,000 Petroleum and natural gas interests deferred tax liabilities (44,000) ----------- Net deferred tax assets 5,093,000 Less valuation allowance (5,093,000) ----------- Deferred tax assets, net of valuation allowance $ -- ===========
The valuation allowance equals the entire amount of the net deferred tax assets as the recognition criteria for deferred tax assets has not been met. Therefore, there is no effect of applying the provisions of SFAS 109 on the Company's financial statements. 45 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 9 - -------------------------------------------------------------------------------- 12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES (CONTINUED) (b) Consolidated statements of changes in financial position Under United States accounting principles, the following items are not considered to be cash items and would not appear in the consolidated statements of changes in financial position: (i) the conversion of debentures (ii) the acquisition of subsidiary in exchange for the issuance of shares; and (iii) the issuance of shares on settlement of consulting fees and directors fees payable. As a result, cash flows from operating, financing and investing activities would be presented as follows under United States accounting principles:
1997 1996 1995 ------------ ------------ ------------ Cash flows from: Operating activities $ 600,808 $ 5,388,392 $ 2,154,092 Financing activities (7,527,603) 1,688,813 7,862,621 Investing activities 10,532,087 (6,045,068) (9,309,079) ----------- ----------- ----------- Increase in cash $ 3,605,292 $ 1,032,137 $ 707,634 =========== =========== ===========
Under United States accounting principles, the following supplementary cash flow information would be disclosed:
1997 1996 1995 -------- -------- -------- Interest paid $188,468 $685,942 $461,531 -------- -------- -------- Income taxes paid $151,000 $ 48,214 $ 25,852 ======== ======== ========
(c) Consolidated statements of operations and deficit
1997 1996 1995 ------------ ------------ ------------ Net income (loss) reported $ (4,835,220) $ 228,573 $ (1,155,062) Write-down of petroleum and natural gas interests 800,000 -- (800,000) ------------ ------------ ------------ Net income (loss) for U.S. GAAP $ (4,035,220) $ 228,573 $ (1,955,062) ------------ ------------ ------------ Net income (loss) per share for U.S. GAAP $ (0.36) $ 0.02 $ (0.22) ------------ ------------ ------------ Weighted average shares for U.S. GAAP 11,159,663 10,945,927 9,031,583 ------------ ------------ ------------
46 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 10 - -------------------------------------------------------------------------------- 12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES (CONTINUED) Under the United States full cost method of accounting for petroleum and natural gas interests, the Company, using sales prices at the balance sheet date, would have been required to write-down the Canadian petroleum and natural gas interests by approximately $800,000 in 1995. Accordingly, loss and loss per share for the year ended December 31, 1995 under United States accounting principles would be $1,955,062 and $0.22, respectively. The sale of the Canadian petroleum and natural gas interests in 1997 causes this $800,000 difference to reverse. Accordingly, loss and loss per share for the year ended December 31, 1997 under United States accounting principles would be $4,035,220 and $0.36, respectively. There is no difference between the weighted average number of shares for U.S. and Canadian GAAP (d) Balance sheets
1997 1996 ------------ ------------ Deficit reported $ (5,761,709) $ (926,489) Write-down of petroleum and natural gas interests -- (800,000) Reduction of common share stated capital (10,602,526) (10,602,526) ------------ ------------ Deficit for U.S. GAAP $(16,364,235) $(12,329,015) ============ ============
1997 1996 ----------- ----------- Share capital reported $30,891,689 $31,790,695 Reduction of common share stated capital 10,602,526 10,602,526 ----------- ----------- Share capital for U.S. GAAP $41,494,215 $42,393,221 =========== ===========
1997 1996 ------------ ------------ Petroleum and natural gas interest reported $ 17,695,968 $ 34,764,350 Write-down of petroleum and natural gas interests -- (800,000) ------------ ------------ Petroleum and natural gas interest under U.S. GAAP $ 17,695,968 $ 33,964,350 ============ ============
The write-down of petroleum and natural gas interest is discussed above under 12(c). The reduction of common share stated capital by off-setting an accumulated deficit against share captial is not allowed under U.S. GAAP. 47 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 11 - -------------------------------------------------------------------------------- 12. RECONCILIATION BETWEEN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA AND THE UNITED STATES (CONTINUED) (e) Shareholders' equity under U.S. GAAP
1997 1996 ------------ ------------ Opening shareholders' equity under U.S. GAAP $ 30,672,428 $ 27,677,427 Net income (loss) for U.S. GAAP (4,035,220) 228,573 Net share capital issued (repurchased) (899,006) 2,766,320 ------------ ------------ Closing shareholders' equity under U.S. GAAP $ 25,738,202 $ 30,672,428 ============ ============
(f) Concentrations of credit risk The Company does not have any significant concentrations of credit risk. (g) Accounting standards The Company is not aware of any new accounting standards which have been established but not yet effective, including Financial Accounting Standards 130, 131, and 132, which would have a significant or material effect on the Company's consolidated financial statements. 13. SEGMENTED INFORMATION All of the Company's activities are in one business segment, petroleum and natural gas exploration, development and production. Note 6 discloses the Company's petroleum and natural gas interests by geographic segment, and these interests comprise the majority of identifiable assets as at December 31, 1997 and 1996. The Company's operations by geographic segment for the years ended December 31, 1997, 1996 and 1995 were as follows: 48 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 12 - -------------------------------------------------------------------------------- 13. SEGMENTED INFORMATION (CONTINUED)
Canada United States Total ------------ ------------- ------------ 1997 Petroleum and natural gas sales -- $ 7,649,415 $ 7,649,415 Royalties and production taxes -- 2,581,196 2,581,196 Operating costs -- 1,018,211 1,018,211 Depreciation and depletion $ 33,512 4,236,233 4,269,745 Gain on sale of Canadian petroleum and natural gas interests (518,025) -- (518,025) Provision for revenue dispute -- 1,023,998 1,023,998 Write-down of petroleum and natural gas interests -- 2,520,000 2,520,000 ------------ ------------ ------------ 484,513 (3,730,223) (3,245,710) Unallocated costs: General and administrative 1,691,779 Interest and bank charges 188,468 Interest revenue (250,916) Foreign exchange (259,315) Amortization of deferred financing costs 68,494 Income taxes 151,000 ------------ ------------ ------------ Loss $ (4,835,220) ============ ============ ============ 1996 Petroleum and natural gas sales $ 3,076,442 $ 9,786,259 $ 12,862,701 Royalties and production taxes 455,556 2,431,540 2,887,096 Operating costs 746,835 902,815 1,649,650 Depreciation and depletion 1,763,836 3,897,369 5,661,205 ------------ ------------ ------------ 110,215 2,554,535 2,664,750 Unallocated costs: General and administrative 1,663,411 Interest and bank charges 685,942 Interest and other revenue (26,095) Foreign exchange (3,789) Amortization of deferred financing costs 68,494 Income taxes 48,214 ------------ ------------ ------------ Net Income $ 228,573 ============ ============ ============
49 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 13 - -------------------------------------------------------------------------------- 13. SEGMENTED INFORMATION (CONTINUED)
Canada United States Total ----------- ------------- ----------- 1995 Petroleum and natural gas sales $ 1,529,376 $ 5,233,031 $ 6,762,407 Royalties and production taxes 218,262 1,666,846 1,885,108 Operating costs 491,795 434,364 926,159 Depreciation and depletion 659,722 2,547,396 3,207,118 ----------- ----------- ----------- 159,597 584,425 744,022 Unallocated costs: General and administrative 1,470,083 Interest and bank charges 461,531 Interest and other revenue (73,532) Foreign exchange (7,437) Amortization of deferred financing costs 22,587 Income taxes 25,852 ----------- ----------- ----------- Loss $(1,155,062) =========== =========== ===========
14. LITIGATION (a) S.W. HOLMWOOD The Company is a party to litigation in the United States District Court, Western District of Louisiana (Amoco Production Company vs. Texas Meridian Resource Exploration, Inc.) by virtue of its master participation agreement with Meridian Resource Corporation (formally known as Texas Meridian Resource Corporation). The litigation enures from a joint exploration agreement between the plaintiff and defendant whereby adjoining petroleum and natural gas leases were pooled on a 50% / 50% joint ownership basis. Two producing oil wells have been drilled and placed on production. The plaintiff is claiming a breach of trust and demands surrender of 100% of the wells ownership on a retroactive basis and has received a favorable summary judgement. The operator pending the court's granting of damages intends to appeal the judgement. The Company holds a beneficial 4% working interest. Since the outcome of this litigation is not determinable, the Company has recorded 100% of the cumulative net operating income to date aggregating to $1,023,000 as Revenue in Dispute. (b) WILDHAY The Company is party to a statement of claim and counterclaim with a drilling contractor in the Judicial District of Calgary, Court of Queen's Bench, Alberta. The nature of this litigation is based on a contract wherein the drilling contractor drilled a well on behalf of the Company and a joint venture partner. The working interest participants 50 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 14 - -------------------------------------------------------------------------------- 14. LITIGATION (CONTINUED) are demanding $2,738,568 in throw away costs and expenses plus $1,001,755 for loss of the original well as well as $5,932,000 of reservoir damage from the drilling contractor. The well in question is reflected in property and equipment at $1.1 million and an additional $1.2 million is included as a receivable from the Company's joint venture partner. 15. SUBSEQUENT EVENT On February 11, 1998, the Company entered into a Plan and Agreement of Merger ("Agreement") whereby the Company's wholly owned U.S. subsidiary Optima Energy (U.S.) Corporation would merge with American Explorer, L.L.C., ("American") a Louisiana limited liability company, Goodson Exploration Company ("Goodson"), a Louisiana corporation, NAB Financial, L.L.C. ("NAB"), a Louisiana limited liability company, and Dexco Energy, Inc. ("Dexco"), a Louisiana corporation (American, Goodson, NAB and Dexco collectively, referred to as the acquired companies). Goodson, NAB and Dexco are holding companies which own all the outstanding common shares of American. American is engaged in the acquisition of and exploration for oil and natural gas. Under the terms of the Agreement, the acquired companies would be merged with the Company's U.S. subsidiary in exchange for 7,335,001 common shares of the Company to be issued to the former shareholders of the acquired companies, which will represent approximately 40% of the post acquisition outstanding common shares of the Company. In addition, the Company will issue 1,667,001 in contingent stock issue rights which will be exchangeable for common shares of the Company if the Company's share price exceeds U.S. $5 per share for 20 consecutive trading days. The contingent stock issue rights will terminate on the third anniversary after issuance if the condition stated above is not met within the three year time limit. In addition, the Company is required to provide American with a loan agreement of U.S. $2.5 million prior to March 1, 1998, with an initial draw of U.S. $500,000 available at that date and further draws based on the consummation of this Agreement. The Agreement is subject to a number of conditions which must be met to give effect to the merger including but not limited to the following: - the receipt of various regulatory approvals; - the approval of the Agreement by the shareholders of the Company and the shareholders of the acquired companies; and - due diligence by both the Company and the acquired companies. If the agreement is consummated, the Company will account for the acquisition using the purchase method. The estimated purchase price based on the recent trading history of the Company's common shares is approximately $14 million. 51 OPTIMA PETROLEUM CORPORATION Notes to Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995 Page 15 - -------------------------------------------------------------------------------- SUPPLEMENTAL INFORMATION CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE CASH FLOWS AS AT DECEMBER 31, 1997, 1996 AND 1995 (UNAUDITED)
1997 1996 1995 ------- ------- ------- (000's) ------- PROVED Beginning of year 41,536 29,473 24,236 Petroleum and natural gas sales, net of royalties, production taxes and operating income (4,050) (8,326) (3,951) Unearned petroleum and natural gas sales, net of royalties, production taxes and operating expenses (1,024) -- -- Net changes in prices (6,992) 22,017 (3,572) Revisions of quantity estimates (6,093) (22,936) (3,332) Purchase of reserves in place -- 3,199 7,503 Discoveries 665 18,277 1,389 Sale of reserves in place (13,856) (1,634) (1,160) Changes in estimated future development costs (5,083) (9,468) (5,463) Development costs incurred 5,358 6,978 8,559 Net change in estimated future taxes 1,479 (1,479) -- Accretion of discount 2,916 2,947 2,424 Changes in production rates (timing) (2,315) 2,488 2,840 ------- ------- ------- End of year 12,541 41,536 29,473 ======= ======= =======
EX-3.2 2 CERTIFICAT OF CONTUNUANCE 1 EXHIBIT 3.2 [LOGO] Industry Canada Industrie Canada CERTIFICATE OF CONTINUANCE CANADA BUSINESS CORPORATIONS ACT OPTIMA PETROLEUM CORPORATION ______________________________________________ Name of corporation-Denomination de la societe I hereby certify that the above-named corporation was continued under section 187 of the Canada Business Corporations Act, as set out in the attached articles of continuance. /s/ Director - Directeur CERTIFICAT DE PROROGATION LOI REGISSANT LES SOCIETES PAR ACTIONS DE REGIME FEDERAL 304257-0 _______________________________________ Corporation number-Numero de la societe Je certifie que la societe susmentionnee a ete prorogee en vertu de l'article 187 de la Loi regissant les societes par actions de regime federal, tel qu'il est indique dans les clauses de prorogation ci-jointes. JUNE 14, 1994/LE 14 JUIN 1994 Date of Continuance - Date de la prorogation Canada EX-3.3 3 APPROVAL ANDSPECIAL COMMITTEE APPROVAL OF PLAN 1 EXHIBIT 3.3 OPTIMA PETROLEUM CORPORATION The following resolutions were passed by the SPECIAL COMMITTEE of OPTIMA PETROLEUM CORPORATION (the "Company") having been consented to in writing by all the members of the Special Committee as of the 30th day of June, 1995. SPECIAL COMMITTEE APPROVAL OF PLAN OF ARRANGEMENT WHEREAS the Company's Board of Directors appointed the Special Committee to consider the proposed arrangement ("Arrangement") between the Company and Roxbury Capital Corp. ("Roxbury") whereby the Company will acquire all of the issued and outstanding common shares of Roxbury in exchange for common shares and warrants of the Company on the basis of seven common shares and seven share purchase warrants of the Company for every one Roxbury common share, each share purchase warrant entitling the holder to acquire an additional common share of the Company prior to February 28, 1997 at a price of $5.10 per share; AND WHEREAS in considering the appropriateness of the proposed Arrangement, the Special Committee reviewed and considered, among other things: (a) information provided by management of the Company and Roxbury with respect to the business and operations of the Company and Roxbury on both a historical and prospective basis; (b) representations provided by management of the Company that the Arrangement will, in addition to streamlining management and operations of the Company and Roxbury, enhance the Company's property holdings by the consolidating the Company's and Roxbury's interests in the Company's principle producing properties; (c) information provided by the Company's financial advisors and legal counsel; (d) a valuation and fairness opinion prepared by BDO Valuation Inc. at the request of the boards of the Company and of Roxbury, which stated its opinion that the Arrangement is fair, from a financial point of view, to the Company's shareholders and Roxbury shareholders generally. 2 AND WHEREAS the Special Committee has concluded that the proposed Arrangement is fair and reasonable to, and in the best interests of, the Company and the Company's shareholders for the following principal reasons: (a) efficiencies from a management and operations perspective could be realized from the merger of Roxbury and the Company; (b) the availability of a larger asset base and market capitalization to fund ongoing exploration and development programs; and (c) the availability of Roxbury's tax pools in the U.S. to offset taxable cash flow from the Turtle Bayou Prospect in Louisiana. IT IS HEREBY RESOLVED THAT: 1. the Company proceed with the proposed arrangement on the basis set forth in the Arrangement Agreement and attached Plan of Arrangement dated June 30, 1995 (the "Arrangement Agreement"); 2. any one member of the Special Committee be and he is hereby authorized and directed to perform all such acts, deeds and things and execute all such documents and other writings as may be required to give effect to the true intent of this resolution. These resolutions may be signed by the members of the Special Committee in as many counterparts as may be deemed necessary, each of which so signed shall be deemed to be an original, and such counterparts together shall constitute one and the same instrument notwithstanding the date of execution and shall be deemed to bear the date set forth above. /s/ William Leuschner - --------------------- William Leuschner /s/ Emile Stehelin - --------------------- Emile Stehelin /s/ Martin G. Abbott - --------------------- Martin G. Abbott - 2 - 3 OPTIMA PETROLEUM CORPORATION The following resolutions were passed by the Directors of OPTIMA PETROLEUM CORPORATION (the "Company") having been consented to in writing by all the Directors of the Company as of the 30th day of June, 1995 APPROVAL OF PLAN OF ARRANGEMENT WHEREAS the Company's Board of Directors appointed the Special Committee to consider the proposed arrangement ("Arrangement") between the Company and Roxbury Capital Corp. ("Roxbury") whereby the Company will acquire all of the issued and outstanding common shares of Roxbury in exchange for common shares and warrants of the Company on the basis of seven common shares and seven share purchase warrants of the Company for every one Roxbury common share, each share purchase warrant entitling the holder to acquire an additional common share of the Company prior to February 28, 1997 at a price of $5.10 per share; AND WHEREAS the Special Committee has concluded that the proposed Arrangement is fair and reasonable to, and in the best interests of, the Company and the Company's shareholders and has recommended to the Board that the Company proceed with the Arrangement; IT IS HEREBY RESOLVED THAT: 1. the Company proceed with the proposed arrangement on the basis set forth in the Arrangement Agreement and attached Plan of Arrangement dated June 30, 1995 (the "Arrangement Agreement"); 2. the President and Chief Financial Officer of the Company be and they are hereby authorized to execute under seal of the Company the Arrangement Agreement; 3. subject to the receipt of all required shareholder, regulatory and court approvals to the Arrangement, the following share issuances be and are hereby approved: (a) the issuance of up to 1,374,727 shares (the Shares") issued at a deemed price of $4.50 per Share and up to 1,374,727 warrants ("Warrants") to the registered shareholders of Roxbury; (b) the issuance of up to 1,374,727 shares upon exercise of the Warrants; (c) the issuance of up to 15,000 shares upon exercise of stock options to the following directors of Roxbury as per paragraph 3.2(b) of the Plan of Arrangement:
Name of Director Number of shares Exercise Price Expiry Date under option --------------------------------------------------------------------------- John McCleery 4,300 $5.25 March 8/96 --------------------------------------------------------------------------- Ted Kozub 7,100 $5.25 March 8/96 --------------------------------------------------------------------------- David Block 3,600 $5.25 March 8/96
4 (d) the issuance of up to 122,300 shares upon exercise of outstanding Roxbury warrants to the following warrant holders:
Name of Warrant Holder Number of shares Exercise Expiry Date under warrant Price - ---------------------------------------------------------------------------------------- Emile Stehelin RRSP 7,300 $ 6.65 September 15, 1995 - ---------------------------------------------------------------------------------------- Eva Stehelin 17,900 $ 6.65 September 15, 1995 - ---------------------------------------------------------------------------------------- John McCleery RRSP 22,200 $ 6.65 September 15, 1995 - ---------------------------------------------------------------------------------------- Thornbury Estates 3,000 $ 6.65 September 15, 1995 - ---------------------------------------------------------------------------------------- Laurie Leuschner 10,700 $ 6.65 September 15, 1995 - ---------------------------------------------------------------------------------------- Geoffrey Kane 4,300 $ 6.65 September 15, 1995 - ---------------------------------------------------------------------------------------- Knapton Investments 2,900 $ 6.65 September 15, 1995 ======================================================================================== Robert L. Hodgkinson 10,700 $ 10.50 November 15, 1995 - ---------------------------------------------------------------------------------------- William C. Leuschner 10,700 $ 10.50 November 15, 1995 - ---------------------------------------------------------------------------------------- Emile Stehelin 10,700 $ 10.50 November 15, 1995 - ---------------------------------------------------------------------------------------- Ronald P. Bourgeois 3,900 $ 10.50 November 15, 1995 - ---------------------------------------------------------------------------------------- Harold Gershuny 5,000 $ 10.50 November 15, 1995 ======================================================================================== Sinclair Capital Corp. 13,000 $ 9.10 August 25, 1996 - ----------------------------------------------------------------------------------------
4. the Company make application to The Toronto Stock Exchange to list the 2,886,754 common shares to be issued and reserved for issuance pursuant to the foregoing share issuances; 5. any one director or officer of the Company be and he is hereby authorized and directed to perform all such acts, deeds and things and execute, under the seal of the Company or otherwise, all such documents and other writings as may be required to give effect to the true intent of this resolution including, without limitation, all treasury orders and the Warrant Indenture with Montreal Trust Company. These resolutions may be signed by the Directors in as many counterparts as may be deemed necessary, each of which so signed shall be deemed to be an original, and such counterparts together shall constitute - 2 - 5 one and the same instrument notwithstanding the date of execution and shall be deemed to bear the date as set forth above. /s/ William Leuschner /s/ Robert L. Hodgkinson - ----------------------------------- ----------------------------------- William Leuschner Robert L. Hodgkinson /s/ Emile Stehelin /s/ Ronald P. Bourgeois - ----------------------------------- ----------------------------------- Emile Stehelin Ronald P. Bourgeois /s/ Martin G. Abbott - ----------------------------------- Martin G. Abbott - 3 - EX-3.4 4 SUBSCRIPTION AGREEMENTS FOR PRIVATE PLACEMENTS 1 EXHIBIT 3.4 SUBSCRIPTION AGREEMENT - SS. 55(2)(4) THIS AGREEMENT MADE EFFECTIVE AS OF THE 10th DAY OF OCTOBER, 1996 (the "Effective Date"). BETWEEN: OPTIMA PETROLEUM CORPORATION Suite 600 - 595 Howe Street Vancouver, British Columbia, Canada, V6C 2T5; (the "Company") AND: QUEENSCLIFF MANAGEMENT LTD. Suite 500 - 221 West Esplanade North Vancouver, British Columbia V7M 3J3 (the "Purchaser") WHEREAS: A. The Purchaser wishes to subscribe for common shares, of the Company (the "Securities"); B. It is the intention of the parties to this Agreement that this subscription will be made pursuant to appropriate exemptions (the "Exemptions") from the registration and prospectus or equivalent requirements of all rules, policies, notices, orders and legislation of any kind whatsoever (collectively the "Securities Rules") of all jurisdictions applicable to this subscription; NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants and agreements herein contained, the receipt of which is hereby acknowledged, the parties covenant and agree with each other (the "Agreement") as follows: 1. Representations and Warranties of the Purchaser 1.1 The Purchaser represents and warrants to the Company, and acknowledges that the Company is relying on these representations and warranties to, among other things, ensure that it is complying with all of the applicable Securities Rules, that: 2 (a) in the case of the purchase by the Purchaser of the Securities as principal, the Purchaser is purchasing such Securities as principal for its own account, and not for the benefit of any other person, and is purchasing a sufficient number of Securities such that the aggregate acquisition cost to the Purchaser of such Securities is not less than $97,000, if the Purchaser is a resident of British Columbia, Alberta, Manitoba, New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or $150,000 if the Purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia; (b) in the case of the purchase of Securities by the Purchaser as agent for a disclosed principal, each beneficial purchaser of such Securities for whom the Purchaser is acting is purchasing as principal for its own account, and not for the benefit of any other person, and is purchasing a sufficient number of Securities so that such beneficial purchaser has an aggregate acquisition cost for such Securities of not less than $97,000, if the beneficial purchaser is a resident of British Columbia, Alberta, Manitoba, New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or $150,000 if the beneficial purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia, and the Purchaser is an agent with due and proper authority to execute this Agreement and all documentation in connection with the purchase on behalf of each beneficial purchaser; (c) in the case of the purchase of Securities by the Purchaser as a trustee or as agent for a principal which is undisclosed or identified by account number only, each beneficial purchaser of the Securities for whom the Purchaser is acting is purchasing as principal for its own account, and not for the benefit of any other person, and is purchasing a sufficient number of Securities so that such beneficial purchaser has an aggregate acquisition cost for such Securities of not less than $97,000, if the beneficial purchaser is a resident of British Columbia, Alberta, Manitoba, New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or $150,000 if the beneficial purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia, and the Purchaser is a trustee or agent with due and proper authority to execute this Agreement and all documentation in connection with the purchase on behalf of each beneficial purchaser; (d) neither the Purchaser nor any beneficial purchaser on whose behalf the Purchaser is acting has been formed, created, established or incorporated for the purpose of permitting the purchase of the Securities without a prospectus by groups of individuals whose individual share of the aggregate acquisition cost for such Securities is less than $97,000, if the beneficial purchaser is a resident of British Columbia, Alberta, Manitoba, New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or $150,000 if the beneficial purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia; - 2 - 3 (e) if the Purchaser and any beneficial purchaser for whom it is acting is resident of an "International Jurisdiction" (which means a country other than Canada or the United States) then: (i) the Purchaser is knowledgeable of, or has been independently advised as to, the applicable Securities Rules of the International Jurisdiction which would apply to this subscription, if there are any; (ii) the Purchaser is purchasing the Securities pursuant to Exemptions under the Securities Rules of that International Jurisdiction or, if such is not applicable, the Purchaser is permitted to purchase the Securities under the applicable Securities Rules of the International Jurisdiction without the need to rely on Exemptions; and (iii) the applicable Securities Rules do not require the Company to make any filings or seek any approvals of any kind whatsoever from any regulatory authority of any kind whatsoever in the International Jurisdiction; and the Purchaser will, if requested by the Company, deliver to the Company a certificate or opinion of local counsel from the International Jurisdiction which will confirm the matters referred to in subparagraphs (ii) and (iii) above to the satisfaction of the Company, acting reasonably; (f) the Purchaser and any beneficial purchaser for whom it is acting is not a "U.S. Person" (as defined under Regulation S made under the United States Securities Act of 1933, which definition includes an individual resident in the United States and an estate or trust of which any executor or administrator or trustee, respectively, is a U. S. Person) and the Purchaser understands and acknowledges that the Securities have not and will not be registered under the United States Securities Act of 1933, and, subject to certain exceptions, the Securities may not be offered or sold within the United States; (g) the Purchaser acknowledges that the Company is relying on the Exemptions in order to complete the trade and distribution of the Securities and the Purchaser is aware of the criteria of the Exemptions to be met by the Purchaser, including those referred to in the Form 20A attached hereto and, if applicable, the Purchaser meets those criteria; (h) the Purchaser acknowledges that because this subscription is being made pursuant to the Exemptions: (i) the Purchaser is restricted from using certain of the civil remedies available under the applicable Securities Rules; - 3 - 4 (ii) the Purchaser may not receive information that might otherwise be required to be provided to the Purchaser under the applicable Securities Rules if the Exemptions were not being used; and (iii) the Company is relieved from certain obligations that would otherwise apply under the applicable Securities Rules if the Exemptions were not being used; (i) the Securities are not being subscribed for by the Purchaser as a result of any material information about the Company's affairs that has not been publicly disclosed; (j) the offer and sale of these Securities was not accompanied by an advertisement and the Purchaser was not induced to purchase these Securities as a result of any advertisement made by the Company; and (k) if the Purchaser is a corporation, the Purchaser is a valid and subsisting corporation, has the necessary corporate capacity and authority to execute and deliver this Agreement and to observe and perform its covenants and obligations hereunder and has taken all necessary corporate action in respect thereof, or, if the Purchaser is a partnership, syndicate, trust or other form of unincorporated organization, the Purchaser has the necessary legal capacity and authority to execute and deliver this Agreement and to observe and perform its covenants and obligations hereunder and has obtained all necessary approvals in respect thereof, and, in either case, upon the Company executing and delivering this Agreement, this Agreement will constitute a legal, valid and binding contract of the Purchaser enforceable against the Purchaser in accordance with its terms and neither the agreement resulting from such acceptance nor the completion of the transactions contemplated hereby conflicts with, or will conflict with, or results, or will result, in a breach or violation of any law applicable to the Purchaser, any constating documents of the Purchaser or any agreement to which the Purchaser is a party or by which the Purchaser is bound. 1.2 The Company represents and warrants to the Purchaser, and acknowledges that the Purchaser is relying on these representations and warranties in entering into this Agreement, that: (a) the Company is a valid and subsisting corporation duly incorporated and in good standing under the laws of the jurisdiction in which it was incorporated, continued or amalgamated; (b) the Company is a reporting issuer in British Columbia, and Ontario and the Company is not, to the best of its knowledge, in material default of any of the requirements of the applicable Securities Rules of those jurisdictions; - 4 - 5 (c) the Company's subsidiaries (the "Subsidiaries"), if any, are valid and subsisting corporations and in good standing under the laws of the jurisdictions in which they were incorporated; (d) the common shares of the Company are listed and posted for trading on the VSE and TSE and, to the best of its knowledge, the Company is not in material default of any of the listing requirements of the VSE or TSE; (e) upon their issuance, the Shares will be validly issued and outstanding fully paid and non-assessable common shares of the Company registered as directed by the Purchaser, free and clear of all trade restrictions (except as may be imposed by operation of the applicable Securities Rules) and, except as may be created by the Purchaser, liens, charges or encumbrances of any kind whatsoever; (f) upon their issuance, the Warrants will be validly created, issued and outstanding, registered as directed by the Purchaser, and, upon their issuance, the shares issued on the exercise of the Warrants will be validly issued and outstanding fully paid and non-assessable common shares of the Company registered as directed by the Purchaser, and both will be free and clear of all trade restrictions (except as may be imposed by operation of the applicable Securities Rules) and, except as may be created by the Purchaser, liens, charges or encumbrances of any kind whatsoever; (g) the Company and its Subsidiaries, if any, hold all licences and permits that are required for carrying on their business in the manner in which such business has been carried on and the Company and its Subsidiaries, if any, have the corporate power and capacity to own the assets owned by them and to carry on the business carried on by them and they are duly qualified to carry on business in all jurisdictions in which they carry on business; (h) to the best of its knowledge, there are no material actions, suits, judgments, investigations or proceedings of any kind whatsoever outstanding, pending or threatened against or affecting the Company or its Subsidiaries, if any, at law or in equity or before or by any Federal, Provincial, State, Municipal or other governmental department, commission, board, bureau or agency of any kind whatsoever and, to the best of the Company's knowledge, there is no basis therefor; (i) the Company has good and sufficient right and authority to enter into this Agreement and complete its transactions contemplated under this Agreement on the terms and conditions set forth herein; and (j) to the best of its knowledge, the execution and delivery of this Agreement, the performance of its obligations under this Agreement and the completion of its transactions contemplated under this Agreement will not conflict with, or result - 5 - 6 in the breach of or the acceleration of any indebtedness under, or constitute default under, the constating documents of the Company or any indenture, mortgage, agreement, lease, licence or other instrument of any kind whatsoever to which the Company is a party or by which it is bound, or any judgment or order of any kind whatsoever of any Court or administrative body of any kind whatsoever by which it is bound. 2. SUBSCRIPTION 2.1 The Purchaser hereby subscribes the subscription funds (the "Subscription Funds") referred to below for and agrees to take up the common shares without par value in the capital stock of the Company (a "Share" or the "Shares") referred to below at a price of Cdn. $3.85 per Share. 2.2 On or before the 10th day of November, 1996, the Purchaser shall deliver to the Company, the Subscription Funds for the Securities subscribed for in the form of cash, solicitor's trust cheque, certified cheque, bank draft, money order or wire transfer payable to the Company. The Company will be entitled to use the Subscription Funds immediately upon the receipt thereof. Pending receipt of Regulatory Approval, the Subscription Funds will be considered a loan from the Purchaser to the Company which will be repaid in full on December 31, 1996 should Regulatory Approval not be obtained by the date specified in paragraph 4.1. 3. COVENANTS, AGREEMENTS AND ACKNOWLEDGMENTS 3.1 The Purchaser covenants and agrees with the Company to: (a) concurrent with the execution of this Agreement, fully complete and execute the TSE questionnaire and, if the Purchaser is an individual (which means a natural person, but does not include a partnership, unincorporated association, unincorporated syndicate, unincorporated organization or trust, or a natural person in his capacity as a trustee, executor, administrator or personal or other legal representative), the Form 20A scheduled to this Agreement; and (b) hold and not sell, transfer or in any manner dispose of the Shares prior to midnight on the first anniversary of the Effective Date unless the Purchaser has obtained the prior written consent of the TSE to the sale, transfer or disposition, and the sale, transfer or disposition is made in accordance with all applicable Securities Rules. 3.2 The Purchaser acknowledges and agrees that the Shares will be subject to such trade restrictions as may be imposed by operation of the applicable Securities Rules, and the share certificate or certificates representing the Shares will bear such legends as may be required by the applicable Securities Rules and by the rules and policies of the TSE. - 6 - 7 3.3 The Company covenants and agrees with the Purchaser to: (a) file the documents necessary to be filed under the applicable Securities Rules, including Forms 20 (or the forms equivalent thereto), within the required time; and (b) use its best efforts to obtain Regulatory Approval prior to the deadline referred to herein. 4. REGULATORY APPROVAL 4.1 Notwithstanding any other term of this Agreement, this Agreement and the subscription provided for hereunder are subject to the Company obtaining the approval of the TSE ("Regulatory Approval") by the 22nd day of November, 1996. In the event that Regulatory Approval is not obtained by this date, this Agreement will terminate and be of no further force and effect and the Subscription Funds will be returned to the Purchaser without interest or deduction. 5. CLOSING 5.1 The completion of the subscription contemplated under this Agreement shall occur on or before the tenth business day (the "Closing Date") following the date Regulatory Approval is given. The Company shall deliver to the Purchaser, no later than the Closing Date, a share certificate or certificates representing the Shares to the Purchaser as provided for below by the Purchaser. 6. GENERAL 6.1 For the purposes of this Agreement, time is of the essence. 6.2 The parties hereto shall execute and deliver all such further documents and instruments and do all such acts and things as may, either before or after the execution of this Agreement, be reasonably required to carry out the full intent and meaning of this Agreement. 6.3 This Agreement shall be subject to, governed by and construed in accordance with the laws of British Columbia. 6.4 This Agreement may not be assigned by either party hereto. 6.5 This Agreement may be signed by the parties in as many counterparts as may be deemed necessary, each of which so signed shall be deemed to be an original, and all such counterparts together shall constitute one and the same instrument. - 7 - 8 IN WITNESS WHEREOF the parties have executed this written Agreement effective as of the Effective Date. The CORPORATE SEAL of ) OPTIMA PETROLEUM CORPORATION was ) hereunto affixed in the presence of: ) ) c/s ) ____________________________________ ) TO BE COMPLETED BY THE PURCHASER: A. NAME AND ADDRESS (NOTE: CANNOT BE A U.S. ADDRESS) The name and address (to establish the Purchaser's jurisdiction of residence for the purpose of determining the applicable Securities Rules) of the purchaser (the "Purchaser") is as follows: Queenscliff Management Ltd. Suite 500 - 221 West Esplanade North Vancouver, B.C. V7M 3J3 B. REGISTRATION INSTRUCTIONS (NOTE: CANNOT BE A U.S. ADDRESS) The name and address of the person in whose name the Purchaser's Securities are to be registered is as follows (if the name and address is the same as was inserted in paragraph A above, then insert "N/A"): N /A _________________________________ Name _________________________________ Street Address _________________________________ _________________________________ City and Province _________________________________ Country _____________ Postal Code C. DELIVERY INSTRUCTIONS (NOTE: CANNOT BE A U.S. ADDRESS) The name and address of the person to whom the certificates representing the Purchaser's Securities referred to in paragraph A above are to be delivered is as follows (if the name and address is the same as was inserted in paragraph A above, then insert "N/A"): N /A _________________________________ Name _________________________________ Street Address - 8 - 9 _________________________________ _________________________________ City and Province _________________________________ Country _____________ Postal Code D. SUBSCRIPTION AMOUNT The minimum is Cdn. $97,000 if the Purchaser is a resident (as per the address inserted in paragraph A above) of British Columbia. Alberta, Manitoba. New Brunswick, Prince Edward Island, Newfoundland or an International Jurisdiction, or Cdn. $150,000 if the Purchaser is a resident of Saskatchewan, Ontario, Quebec or Nova Scotia.: Subscription Funds: Cdn. $1,001,000. Number of Securities: 260,000 Shares Note: The number of Securities must equal the Subscription Funds divided by price of Cdn. $3.85 per Security. TO BE COMPLETED AND SIGNED BY THE PURCHASER: Queenscliff Management Ltd. Name of the "Purchaser" - use the name inserted in paragraph A above. Per: /s/ David N. Matheson __________________________________ Signature of Purchaser President __________________________________ Title (if applicable) - 9 - EX-3.6 5 EMPLOYMENT/CONSULTING CONTRACTS FOR OFFICERS/DIR 1 EXHIBIT 3.6 CONSULTING AGREEMENT THIS AGREEMENT dated for reference the 1st day of February, 1996 (the "Effective Date"). BETWEEN: OPTIMA PETROLEUM CORPORATION, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; (the "Company") AND: HODGKINSON EQUITIES CORPORATION, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; (the "Consultant") WHEREAS the Company has agreed to hire the Consultant and the Consultant has agreed to provide his services to the Company on the terms and conditions hereinafter set forth. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants and agreements herein contained, the parties hereto agree (the "Agreement") as follows: 1. RETAINER 1.1 The Company hereby retains the services of the Consultant, and in particular its principal shareholder, Robert L. Hodgkinson ("RLH") to provide to the Company, the services normally expected of a president and chief executive officer (the "services"), and the Consultant hereby agrees to provide such services to the Company upon the terms and conditions contained in this Agreement. 2. DURATION OF SERVICE 2.1 Subject to termination as provided for in section 7, this Agreement shall be for an initial term of 23 months commencing on the Effective Date. Provided that this Agreement has not been terminated by either party pursuant to section 7, the Company may renew this Agreement for further one year terms by providing to the Consultant written notice of same at least 30 days prior to the expiration of the current term or the renewal term, as the case may be. 2 3. REMUNERATION 3.1 The Consultant shall be paid a fee of $12,500 per month payable for each calendar month on the last business day of such month. 3.2 Subject to all necessary regulatory approvals, the Consultant shall be entitled to: (a) the grant of 200,000 stock options pursuant the Company's stock option plan, such stock options to have the following terms: (i) they will be non-transferable and have a term of three years commencing from the date regulatory approval is obtained; (ii) they will be exercisable at the lowest price permitted by the applicable regulatory authorities; (iii) they will otherwise be subject to the terms and conditions normally required by the applicable regulatory authorities in order to secure regulatory approval. 3.3 The Consultant shall be reimbursed for all reasonable travelling and other out-of-pocket expenses actually and properly incurred by him in connection with his duties hereunder provided that the Consultant first furnishes statements and vouchers for all such expenses to the Company. Individual expense items in excess of $12,500 must be preapproved by the Company. 4. DUTIES OF CONSULTANT 4.1 The Consultant shall have, subject always to the general or specific instructions and directions of the board of directors of the Company (the "Board"), full power and authority to manage the business and affairs of the Company that would normally be managed by a senior officer having the title and capacity of RLH, except in respect of such matters and duties as by law must be transacted or performed by the Board. 4.2 The Consultant shall: (a) conform to all lawful instructions and directions from time to time given to him by the Board; (b) devote sufficient time and attention to the business and affairs of the Company, as would typically be expected of a president and chief executive officer; - 2 - 3 (c) well and faithfully serve the Company and use his best efforts to promote the interests of the Company; (d) provide to the Company those services normally expected of a president and chief executive officer; and (e) consent to serve as a director of the Company and, if requested, of any of the Company's affiliates or subsidiaries. 4.3 Subject to the provisions of the Canada Business Corporations Act, the bylaws of the Company and provided that RLH acted honestly and in good faith with a view to the best interests of the Company, or, 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, and the directors of the Company shall cause the Company to indemnify the Consultant and RLH and his heirs and personal representatives against all costs, damages, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or them and resulting from RLH acting as a director and officer of the Company in his normal course of duties. In addition, should the directors cause the Company to purchase and maintain insurance for the benefit of any person who is or was serving as a director of the Company then the directors shall also cause the Company to purchase and maintain insurance for the benefit of the Consultant against any and all liability incurred by him as a director and officer of the Company. 5. CONFIDENTIALITY 5.1 Unless permitted by resolution of the Directors of the Company (excluding RLH if he is a Director), the Consultant shall not, during the term of this Agreement or at any time thereafter, use for his own purposes or for any purposes other than those of the Company any intellectual property or knowledge or confidential information of any kind whatsoever he may acquire in relation to the Company's business or the business of its subsidiaries, and such shall be and remain the property of the Company. 6. NON-COMPETITION 6.1 Subject to paragraph 7.2, the Consultant shall not, without the prior written consent of the Company, which consent (given by a Director other than the Consultant), will not be unreasonably withheld, during the term of this Agreement and during the six month period immediately following the termination of this Agreement, within the area in which the Company operated at the time of termination (the "Prohibited Area"): (a) directly or knowingly indirectly engage in or become financially interested in (otherwise then through an investment in a publicly traded or private entity in - 3 - 4 which the Consultant has no other interest or control), either individually or as a partner, shareholder, agent, manager, owner, advisor or financial backer of any person, persons, firm, association, venture, entity or corporation of any kind whatsoever that carries on the business of oil and gas exploration, development or production (collectively the "Prohibited Businesses"); or (b) divert or attempt to divert any business of the Company or of any of its subsidiaries, to any other competitive establishment, by direct or indirect inducement or otherwise. 6.2 The Company acknowledges and consents to the ongoing participation of the Consultant and RLH in Australian Oilfields Pty Ltd. as a consultant, director, officer and shareholder. 7. TERMINATION 7.1 Either of the parties hereto may, subject to paragraph 7.2 hereof, give to the other three months notice in writing of its intention to terminate this Agreement and on the expiration of such period this Agreement shall be wholly terminated. Such three months notice may expire on any day of the month and any remuneration payable hereunder shall be proportioned to the date of such termination. 7.2 In the event of a merger, takeover or amalgamation or change of control of the Company which results in a termination of the Consultant's services at any time prior to December 31, 1997, the provisions of paragraph 6.1 will not apply to such a termination and the Company will pay to the Consultant an amount equal to 24 months of fees under this Agreement. The Consultant agrees to accept the termination payment in full satisfaction of any claim it may have against the Company whether under the terms of this Agreement or otherwise. 7.3 Notwithstanding anything else contained herein, the Company may at any time terminate the Consultant's services for cause or if the Consultant fails to perform or comply with any material term or condition of this Agreement. In the event the Consultant's services are terminated under the provisions of this paragraph 7.4, or in the event the Consultant gives the Company notice of termination, no compensation whatever shall be payable to the Consultant after such termination. 8. REGULATORY APPROVAL 8.1 This Agreement is subject to all necessary regulatory approvals. If such approvals are not obtained, this Agreement shall terminate and be of no further force and effect. - 4 - 5 8.2 The Company agrees to use its reasonable best efforts as to implement the terms of this Agreement including, but not limited to, obtaining all approvals from the Company's shareholders to the allocation of stock options to the Officer as provided for in paragraph 3.2 hereof. 9. General 9.1 The headings and section references in this Agreement are for convenience of reference only and do not form a part of this Agreement and are not intended to interpret, define or limit the scope, extent or intent of this Agreement or any provision thereof. 9.2 Time is hereby expressly made of the essence of this Agreement with respect to the performance by the parties of their respective obligations under this Agreement. 9.3 This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns. This Agreement may not be assigned by either party hereto without the prior express written consent of the other party. 9.4 This Agreement supersedes all prior agreements entered into between the parties and constitutes the entire agreement between the parties hereto relating to the subject matter hereof and may not be amended, waived or discharged except by an instrument in writing executed by the party against whom enforcement of such amendment, waiver or discharge is sought and this Agreement supersedes all prior agreements between the parties. 9.5 Each of the parties hereto hereby covenants and agrees to execute such further and other documents and instruments and do such further acts and other things as may be necessary to implement and carry out the intent of this Agreement. 9.6 All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed by postage prepaid double registered mail addressed as follows: To the Company: OPTIMA PETROLEUM CORPORATION, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; Attention: The President - 5 - 6 To the Consultant: HODGKINSON EQUITIES CORPORATION, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; Attention: The President or to such other address as may be given in writing by the Company or the Consultant and shall be deemed to have been received, if delivered, on the date of delivery and if mailed as aforesaid at Vancouver, British Columbia then on the third business day following the posting thereof. IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written. OPTIMA PETROLEUM CORPORATION Per: /s/ Ronald P. Bourgeois ----------------------- Authorized Signatory HODGKINSON EQUITIES CORPORATION Per: /s/ Robert L Hodgkinson _______________________ Authorized Signatory - 6 - 7 CONSULTING AGREEMENT MEMORANDUM OF AGREEMENT made as of the 1st day of February, 1995. BETWEEN: LEUSCHNER INTERNATIONAL RESOURCES LTD. 1200 Bow Valley Square One 202 - 6th Avenue S.W. Calgary, A.B. T2P 2R9 William C. Leuschner, President (hereinafter called the "Consultant") OF THE FIRST PART AND: OPTIMA PETROLEUM CORPORATION, a company incorporated under the laws of the Province of British Columbia and Alberta having its office at #600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5. (hereinafter called the "Company") OF THE SECOND PART THIS AGREEMENT WITNESSETH that in consideration of the mutual covenants and agreements herein contained and for other good and valuable consideration it is hereby agreed as follows: 1. The Consultant shall serve the Company in such capacity or capacities as may from time to time be determined by the management of the Company. 2. The contract of the Consultant hereunder shall commence on February 1, 1995 and continue until terminated as hereinafter provided. 3. The contract of the Consultant hereunder may be terminated in the following manner in the following circumstances: (a) at any time by notice in writing from the Company to the Consultant for cause; (b) by not less than 30 days notice in writing given by either party to the other, which notice in writing may be given at any time; (c) contract subject to review at twelve month intervals. 8 4. Upon any notice being given pursuant to subparagraph 3(a) herein or upon the expiration of the said period of 30 days referred to in subparagraph 3(b) and subparagraph 3(c) herein, as the case may be, this Agreement and the contract of the Consultant hereunder shall be wholly terminated and determined, except paragraphs 8, 9 and 10 herein, which shall continue in full force and effect. Upon any such termination, the Consultant shall have no claim against the Company for damages or otherwise except in respect of payment of remuneration as provided for in paragraph 6 to the effective date of termination. 5 (a) The Consultant shall devote said time to the Company as required in order to carry out the duties determined in accordance with paragraph I herein; (b) During the continuance of his contract hereunder, the Consultant shall well and faithfully serve the Company including, without limiting the generality of the foregoing, the submission to the Company of all reports and other communications whenever the same may be required by the Company, and shall use, at all times, his best efforts to; 6 (a) The remuneration of the Consultant for his services hereunder shall be at a rate of $150,000 per annum, payable $8,000.00 on a monthly basis in arrears, plus 1,285 common shares of Optima Petroleum Corporation on a monthly basis in arrears, or such other remuneration as may from time to time be mutually agreed upon in writing between the Company and the Consultant; (b) Where stock options comprise a part of the remuneration, such options should be for a three year term, exercisable at the rate of one third per year unless otherwise approved by the option committee. (c) The Consultant shall be reimbursed for travelling and other out-of-pocket expenses actually and properly incurred by his in connection with his duties only with prior approval from the Company and upon furnishment of statements and vouchers as and when required by it. 7. The Consultant shall not (either during the continuance of his contract by the Company or at any time thereafter) disclose the private affairs of the Company or any secrets of the Company to any person other than to the directors of the Company or those persons who the Company shall, in writing, approve of and shall not (either during the continuance of his contract by the Company or at any time thereafter) use for his own purposes or for any purpose of other than those of the Company any such information he may acquire in relation to the Company's business. 9 8. The Consultant agrees that all trade secrets and secret information (including trade secrets and secret information discovered or developed by the Consultant or discovered or developed by others and used by or disclosed to the Consultant) which he may acquire respecting any matters relating to oil and gas exploration on the Company's properties, during his term of contract hereunder shall at all times (both during the continuance of his contract by the Company an at all times thereafter) and for all purposes be held by the Consultant in a fiduciary capacity and solely for the benefit of the Company and the Consultant agrees that he will not (either during the continuance of his contract by the Company or any time thereafter) use for his own purpose any trade secret or secret information aforesaid or disclose, divulge or communicate orally, in writing or otherwise to any person or persons any trade secret or secret information aforesaid, except such information which, by any applicable securities laws, is required to be publicly disclosed. 9. Any notice in writing required or permitted to be given to the Company or the Consultant hereunder shall be properly given if delivered to the Consultant personally or mailed by registered mail, postage prepaid, addressed to the Consultant at the address set out above. Any such notice mailed as aforesaid shall be deemed to have been received by and given to the Consultant on the day following the date of mailing. Either party may at any time give notice in writing to the other of any change of address of the party giving such notice and from and after the giving of such notice, the address therein specified shall be deemed to be the address of such party for the giving of notices hereunder. 10. Any and all previous agreements, written or oral, between the parties hereto or on their behalf relating to the contract of the Consultant by the Company are hereby terminated and cancelled and each of the parties hereto hereby releases and forever discharges the other party hereto of and from all manner of actions, causes of action, claims and demands whatsoever under or in respect of any such agreement. 11. This Agreement shall be deemed to have been made in and shall be construed in accordance with the laws of the Province of British Columbia and for the purposes of all legal proceedings, this Agreement shall be deemed to have been performed in such Province and the courts of such Province shall have jurisdiction to entertain any action arising under this Agreement; provided always that nothing herein contained shall prevent the Company from proceeding at its election against the Consultant in the courts of any other province or country in which the Consultant resides. 12. It is agreed by and between the parties hereto that this Agreement is subject to being accepted for filing by the respective regulatory bodies. 10 13. The provisions hereof, where the context permits, shall enure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Consultant and the successors and assigns of the Company respectively. When the context so requires or permits, the masculine gender should be read as if the feminine were expressed. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the day and year first above written. THE CORPORATE SEAL of LEUSCHNER INTERNATIONAL RESOURCES LTD. /s/ William C. Leuschner - --------------------------------------- William C. Leuschner, President - --------------------------------------- THE CORPORATE SEAL of OPTIMA PETROLEUM CORPORATION was hereunto affixed in the presence of: /s/ Robert L. Hodgkinson - --------------------------------------- Robert L. Hodgkinson, President 11 CONSULTING AGREEMENT THIS AGREEMENT dated for reference the 1st day of January, 1996 (the "Effective Date"). BETWEEN: OPTIMA PETROLEUM CORPORATION, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; (the "Company") AND: RONALD P. BOURGEOIS, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; (the "Consultant") WHEREAS the Company has agreed to hire the Consultant and the Consultant has agreed to provide his services to the Company on the terms and conditions hereinafter set forth. NOW THEREFORE THIS AGREEMENT WITNESSES that in consideration of the mutual covenants and agreements herein contained, the parties hereto agree (the "Agreement") as follows: 1. RETAINER 1.1 The Company hereby retains the services of the Consultant to provide to the Company, the services normally expected of a secretary and chief financial officer (the "services"), and the Consultant hereby agrees to provide such services to the Company upon the terms and conditions contained in this Agreement. 2. DURATION OF SERVICE 2.1 Subject to termination as provided for in section 7, this Agreement shall be for an initial term of 24 months commencing on the Effective Date. Provided that this Agreement has not been terminated by either party pursuant to section 7, the Company may renew this Agreement for further one year terms by providing to the Consultant written notice of same at least 30 days prior to the expiration of the current term or the renewal term, as the case may be. 12 3. REMUNERATION 3.1 The Consultant shall be paid a monthly fee per month payable for each calendar month on the last business day of such month consisting of: (a) $8,000; and (b) subject to all necessary regulatory approvals, 500 shares of the Company issued at a deemed price of $3.63 per share. 3.2 The Company will pay the monthly fee for maintaining a disability insurance policy for the Consultant which provides coverage for the Consultant of $6,000 per month pursuant to the terms of policy. 3.3 Subject to all necessary regulatory approvals, the Consultant shall be entitled to: (a) the grant of 150,000 stock options pursuant the Company's stock option plan, such stock options to have the following terms: (i) they will be non-transferable and have a term of three years commencing from the date regulatory approval is obtained; (ii) they will be exercisable at the lowest price permitted by the applicable regulatory authorities; (iii) they will otherwise be subject to the terms and conditions normally required by the applicable regulatory authorities in order to secure regulatory approval. 3.4 The Consultant shall be reimbursed for all reasonable travelling and other out-of-pocket expenses actually and properly incurred by him in connection with his duties hereunder provided that the Consultant first furnishes statements and vouchers for all such expenses to the Company. Individual expense items in excess of $12,500 must be pre-approved by the Company. 3.5 At the request of the Board, the Consultant shall devote a specified portion of his time to an affiliated company of the Company, in which case the remuneration payable pursuant to this section 3 will be apportioned between and be payable by the Company and the affiliated company. - 2 - 13 3.6 The Consultant shall be eligible for a bonus of $5,000, payable in cash or an equivalent paid holiday as agreed to by the Company and the Consultant, upon the successful completion of the sale of the Company's Elm Grove assets. 4. DUTIES OF CONSULTANT 4.1 The Consultant shall have, subject always to the general or specific instructions and directions of the board of directors of the Company (the "Board"), full power and authority to manage the business and affairs of the Company that would normally be managed by a senior officer having the title and capacity of the Consultant, except in respect of such matters and duties as by law must be transacted or performed by the Board. 4.2 The Consultant shall: (a) conform to all lawful instructions and directions from time to time given to him by the Board; (b) devote sufficient time and attention to the business and affairs of the Company, as would typically be expected of a secretary and chief financial officer; (c) well and faithfully serve the Company and use his best efforts to promote the interests of the Company; (d) provide to the Company those services normally expected of a secretary and chief financial officer; and (e) consent to serve as a director of the Company and, if requested, of any of the Company's affiliates or subsidiaries. 4.3 Subject to the provisions of the Canada Business Corporations Act, the bylaws of the Company and provided that the Consultant acted honestly and in good faith with a view to the best interests of the Company, or, 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, and the directors of the Company shall cause the Company to indemnify the Consultant and his heirs and personal representatives against all costs, damages, charges and expenses, including an amount paid to settle an action or satisfy a judgment, reasonably incurred by him or them and resulting from his acting as a director and officer of the Company in his normal course of duties. In addition, should the directors cause the Company to purchase and maintain insurance for the benefit of any person who is or was serving as a director of the Company then the directors shall also cause the Company to purchase and maintain insurance for the benefit of the Consultant against any and all liability incurred by him as a director and officer of the Company. - 3 - 14 5. CONFIDENTIALITY 5.1 Unless permitted by resolution of the Directors of the Company (excluding the Consultant if he is a Director), the Consultant shall not, during the term of this Agreement or at any time thereafter, use for his own purposes or for any purposes other than those of the Company any intellectual property or knowledge or confidential information of any kind whatsoever he may acquire in relation to the Company's business or the business of its subsidiaries, and such shall be and remain the property of the Company. 6. NON-COMPETITION 6.1 Subject to paragraph 7.2, the Consultant shall not, without the prior written consent of the Company, which consent (given by a Director other than the Consultant), will not be unreasonably withheld during the term of this Agreement and during the six month period immediately following the termination of this Agreement, within the area in which the Company operated at the time of termination (the "Prohibited Area"): (a) directly or knowingly indirectly engage in or become financially interested in (otherwise then through an investment in a publicly traded or private entity in which the Consultant has no other interest or control), either individually or as a partner, shareholder, agent, manager, owner, advisor or financial backer of any person, persons, firm, association, venture, entity or corporation of any kind whatsoever that carries on the business of oil and gas exploration, development or production (collectively the "Prohibited Businesses"); or (b) divert or attempt to divert any business of the Company or of any of its subsidiaries, to any other competitive establishment, by direct or indirect inducement or otherwise. 7. TERMINATION 7.1 Either of the parties hereto may, notwithstanding anything else contained herein, give to the other three months notice in writing of its intention to terminate this Agreement and on the expiration of such period this Agreement shall be wholly terminated. Such three months notice may expire on any day of the month and any remuneration payable hereunder shall be proportioned to the date of such termination. 7.2 In the event the Company terminates the Consultant's services pursuant to paragraph 7.1 at any time prior to December 31, 1997, the provisions of paragraph 6.1 will not apply to such a termination and the Company will pay to the Consultant an amount equal to 24 months of fees under this Agreement. - 4 - 15 7.3 The Consultant agrees to accept the termination payment in full satisfaction of any claim it may have against the Company whether under the terms of this Agreement or otherwise. 7.4 Notwithstanding paragraph 7.1 hereof, the Company may at any time terminate the Consultant's services for cause or if the Consultant fails to perform or comply with any material term or condition of this Agreement. In the event the Consultant's services are terminated under the provisions of this paragraph 7.4, or in the event the Consultant gives the Company notice of termination, no compensation whatever shall be payable to the Consultant after such termination. 8. REGULATORY APPROVAL 8.1 This Agreement is subject to all necessary regulatory approvals. If such approvals are not obtained, this Agreement shall terminate and be of no further force and effect. 8.2 The Company agrees to use its reasonable best efforts as to implement the terms of this Agreement including, but not limited to, obtaining all approvals from the Company's shareholders to the allocation of stock options to the Officer as provided for in paragraph 3.2 hereof. 9. GENERAL 9.1 The headings and section references in this Agreement are for convenience of reference only and do not form a part of this Agreement and are not intended to interpret, define or limit the scope, extent or intent of this Agreement or any provision thereof. 9.2 Time is hereby expressly made of the essence of this Agreement with respect to the performance by the parties of their respective obligations under this Agreement. 9.3 This Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns. This Agreement may not be assigned by either party hereto without the prior express written consent of the other party. 9.4 This Agreement supersedes all prior agreements entered into between the parties and constitutes the entire agreement between the parties hereto relating to the subject - 5 - 16 matter hereof and may not be amended, waived or discharged except by an instrument in writing executed by the party against whom enforcement of such amendment, waiver or discharge is sought and this Agreement supersedes all prior agreements between the parties. 9.5 Each of the parties hereto hereby covenants and agrees to execute such further and other documents and instruments and do such further acts and other things as may be necessary to implement and carry out the intent of this Agreement. 9.6 All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed by postage prepaid double registered mail addressed as follows: To the Company: OPTIMA PETROLEUM CORPORATION, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; Attention: The President To the Consultant: RONALD P. BOURGEOIS, Suite 600 - 595 Howe Street, Vancouver, British Columbia, V6C 2T5; or to such other address as may be given in writing by the Company or the Consultant and shall be deemed to have been received, if delivered, on the date of delivery and if mailed as - 6 - 17 aforesaid at Vancouver, British Columbia then on the third business day following the posting thereof. IN WITNESS WHEREOF the parties have executed this Agreement as of the day and year first above written. OPTIMA PETROLEUM CORPORATION Per: /s/ Robert L. Hodgkinson ------------------------ Authorized Signatory SIGNED, SEALED AND DELIVERED ) by RONALD P. BOURGEOIS ) in the presence of: ) ) /s/ Michael Wilhelm ) /s/ RONALD P. BOURGEOIS - ----------------------------------- ) ------------------------- Signature of Witness ) RONALD P. BOURGEOIS ) Name: Michael Wilhelm ) ----------------------------- ) Address: 3329 W. 3rd Ave. ) -------------------------- ) Vancouver, B.C. ) - ----------------------------------- ) Occupation: Comptroller ) ----------------------- ) - 7 - EX-3.7 6 STOCK OPTION PLAN DATED APRIL, 3, 1995 1 EXHIBIT 3.7 OPTIMA PETROLEUM CORPORATION STOCK OPTION PLAN DATED APRIL 3, 1995 Approved by the Board of Directors as of April 3, 1995. Approved by the Shareholders on June 22, 1995. 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 Definitions................................................... 1 1.2 Choice of Law................................................. 3 1.3 Headings...................................................... 3 ARTICLE II PURPOSE AND PARTICIPATION 2.1 Purpose....................................................... 3 2.2 Participation................................................. 3 2.3 Notification of Award......................................... 4 2.4 Copy of Plan.................................................. 4 2.5 Limitation.................................................... 4 ARTICLE III TERMS AND CONDITIONS OF OPTIONS 3.1 Board to Issue Shares......................................... 4 3.2 Number of Shares.............................................. 4 3.3 Term of Option................................................ 5 3.4 Termination of Option......................................... 5 3.5 Exercise Price................................................ 6 3.6 Additional Terms.............................................. 7 3.7 Assignment of Options......................................... 8 3.8 Adjustments................................................... 8 3.9 Approvals..................................................... 8 ARTICLE IV EXERCISE OF OPTION 4.1 Exercise of Option............................................ 8 4.2 Issue of Share Certificates................................... 8 4.3 Condition of Issue............................................ 9 ARTICLE V ADMINISTRATION 5.1 Administration................................................ 9 5.2 Interpretation................................................ 9 - i - 3 ARTICLE VI AMENDMENT AND TERMINATION 6.1 Prospective Amendment ........................................ 9 6.2 Retrospective Amendment ...................................... 10 6.3 Termination .................................................. 10 6.4 Agreement .................................................... 10 - ii - 4 STOCK OPTION PLAN ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 Definitions As used herein, unless there is something in the subject matter or context inconsistent therewith, the following terms shall have the meanings set forth below: (a) "Administrator" means, initially, the secretary of the Company and thereafter shall mean such director or other senior officer or employee of the Company as may be designated as Administrator by the Board from time to time. (b) "Award Date" means the date on which the board awards a particular Option. (c) "Board" means the board of directors of the Company. (d) "Canada Business Corporations Act" means the Canada Business Corporations Act, R.S.C. 1985, c.C-44 and any amendments thereto. (e) "Company" means Optima Petroleum Corporation, including its affiliates, as defined in the Canada Business Corporations Act. (f) "Director" means any individual holding the office of director of the Company. (g) "Employee" means any individual regularly employed on a full-time basis by the Company or any of its subsidiaries and such other individuals as may, from time to time, be permitted by the rules and policies of the applicable Regulatory Authorities to be granted options as employees or as an equivalent thereto. (h) "Exercise Notice" means the notice respecting the exercise of an Option, in the form set out as Schedule "B" hereto, duly executed by the Option Holder. (i) "Exercise Period" means the period during which a particular Option may be exercised and is the period from and including the Award Date through to and including the Expiry Date. (j) "Exercise Price" means the price at which an Option may be exercised as determined in accordance with paragraph 3.5. (k) "Expiry Date" means the date determined in accordance with paragraph 3.3 and after which a particular Option cannot be exercised. 5 (l) "Market Value" means the market value of the Company's Shares as determined in accordance with paragraph 3.5. (m) "Option" means an option to acquire Shares, awarded to a Director or Employee pursuant to the Plan. (n) "Option Certificate" means the certificate, in the form set out as Schedule "A" hereto, evidencing an Option. (o) "Option Holder" means a Director, Employee or Other Person, or former Director, Employee or Other Person, who holds directly or indirectly through a wholly owned holding company or registered retirement savings plan an unexercised and unexpired Option or, where applicable, the Personal Representative of such person. (p) "Other Persons" means other persons who provide services to the Company and who are entitled to receive options therefor pursuant to the rules of the Regulatory Authorities. (q) "Plan" means this stock option plan. (r) "Personal Representative" means: (i) in the case of a deceased Option Holder, the executor or administrator of the deceased duly appointed by a court or public authority having jurisdiction to do so; and (ii) in the case of an Option Holder who for any reason is unable to manage his or her affairs, the person entitled by law to act on behalf of such Option Holder. (s) "Regulatory Authorities" means all stock exchanges and other organized trading facilities on which the Company's Shares are listed and all securities commissions or similar securities regulatory bodies having jurisdiction over the Company. (t) "Share" or "Shares" means, as the case may be, one or more common shares without par value in the capital stock of the Company. 1.2 Choice of Law The Plan is established under and the provisions of the Plan shall be subject to and interpreted and construed in accordance with the laws of the Province of British Columbia. - 2 - 6 1.3 Headings The headings used herein are for convenience only and are not to affect the interpretation of the Plan. ARTICLE II PURPOSE AND PARTICIPATION 2.1 Purpose The purpose of the Plan is to provide the Company with a share-related mechanism to attract, retain and motivate qualified Directors, Employees and Other Persons, to reward such of those Directors, Employees and Other Persons as may be awarded Options under the Plan by the Board from time to time for their contributions toward the long term goals of the Company and to enable and encourage such Directors, Employees and Other Persons to acquire Shares as long term investments. 2.2 Participation The Board shall, from time to time and in its sole discretion, determine those Directors, Employees and Other Persons, if any, to whom Options are to be awarded. The Board may, in its sole discretion, grant the majority of the Options to insiders of the Company. However, in no case will the issuance of Shares under the Plan and under any proposed or existing share compensation arrangement result in: (a) the number of Shares reserved for issuance pursuant to Options granted: (i) to insiders exceeding 10% of the Company's issued and outstanding share capital; or (ii) to any one person exceeding 5% of the Company's issued and outstanding share capital; (b) the number of Shares issued within a one year period: (i) to insiders exceeding 10% of the Company's issued and outstanding share capital; or (ii) to any one insider and its associates exceeding 5% of the Company's issued and outstanding share capital. 2.3 Notification of Award - 3 - 7 Following the approval by the Board of the awarding of an Option, the Administrator shall notify the Option Holder in writing of the award and shall enclose with such notice the Option Certificate representing the Option so awarded. 2.4 Copy of Plan Each Option Holder, concurrently with the notice of the award of the Option, shall be provided with a copy of the Plan. A copy of any amendment to the Plan shall be promptly provided by the Administrator to each Option Holder. 2.5 Limitation The Plan does not give any Option Holder that is: (a) a Director the right to serve or continue to serve as a Director of the Company; (b) an Employee the right to be or to continue to be employed by the Company; or (c) an Other Person the right to be or continue to be retained by the Company to provide services to the Company. ARTICLE III TERMS AND CONDITIONS OF OPTIONS 3.1 Board to Issue Shares The Shares to be issued to Option Holders upon the exercise of Options shall be authorized and unissued Shares, the issuance of which shall have been authorized by the Board. 3.2 Number of Shares Subject to adjustment as provided for in paragraph 3.7 of this Plan, the aggregate maximum number of Shares which will be available for purchase pursuant to Options granted under this Plan will not exceed 1,200,000 Shares. If any Option expires or otherwise terminates for any reason without having been exercised in full, the number of Shares in respect of which the Option expired or terminated shall again be available for the purposes of the Plan. 3.3 Term of Option Subject to paragraph 3.4, the Expiry Date of an Option shall be the date so fixed by the Board at the time the particular Option is awarded, provided that such date shall be no later than the tenth anniversary of the Award Date of such Option. - 4 - 8 3.4 Termination of Option An Option Holder may exercise an Option in whole or in part at any time or from time to time during the Exercise Period provided that, with respect to the exercise of part of an Option, the Board may at any time and from time to time fix a minimum number of Shares in respect of which an Option Holder may exercise part of any Option held by such Option Holder. Any Option or part thereof not exercised within the Exercise Period shall terminate and become null, void and of no effect as of 5:00 p.m. local time in Vancouver, British Columbia on the Expiry Date. The Expiry Date of an Option shall be the earlier of the date so fixed by the Board at the time the Option is awarded and the date established, if applicable, in sub-paragraphs (a) to (d) below: (a) Death If the Option Holder should die while he or she is still entitled to exercise the Option, then the Expiry Date shall be the first anniversary of the Option Holder's date of death; or (b) Ceasing to hold Office If the Option Holder holds his or her Option as Director of the Company and then ceases to be a Director of the Company other than by reason of death, the Expiry Date of the Option shall be the 30th day following the date the Option Holder ceases to be a Director of the Company unless the Option Holder ceases to be a Director of the Company as a result of: (i) ceasing to meet the qualifications set forth in section 105 of the Canada Business Corporations Act; (ii) an ordinary resolution having been passed by the shareholders of the Company pursuant to section 109 of the Canada Business Corporations Act; or (iii) an order made by any Regulatory Authority having jurisdiction to so order; in which case the Expiry Date shall be the date the Option Holder ceases to be a Director of the Company. (c) Ceasing to be Employed If the Option Holder holds his or her Option as an Employee of the Company and then ceases to be an Employee of the Company other than by reason of death, the Expiry Date of the Option shall be the 30th day following the date the Option - 5 - 9 Holder ceases to be an Employee of the issuer unless the Option Holder ceases to be an Employee of the Company as a result of: (i) termination for cause; or (ii) an order made by any Regulatory Authority having jurisdiction to so order; in which case the Expiry Date shall be the date the Option Holder ceases to be an Employee of the Company. (d) Ceasing to Provide Services If the Option Holder holds his or her Option as an Other Person of the Company and then ceases to provide services to the Company other than by reason of death, the Expiry Date of the Option shall be the 30th day following the date the Option Holder ceases to provide services to the Company as a result of (i) termination for cause; or (ii) an order made by any Regulatory Authority having jurisdiction to so order; in which case the Expiry Date shall be the date the Option Holder ceases to provide services to the Company. (e) Holding Company Ceasing to be Wholly-Owned If the Option Holder holds his or her Option indirectly through a wholly-owned holding company, the Expiry Date shall be the date the Option Holder ceases to wholly-own such holding company. 3.5 Exercise Price The price at which an Option Holder may purchase a Share upon the exercise of an Option shall be as set forth in the Option Certificate issued in respect of such Option and in any event shall not be less than the Market Value of the Company's Shares as of the Award Date. The Market Value of the Company's Shares for a particular Award Date shall be determined as follows: (a) if the Company's Shares are listed on more than one organized trading facility, then Market Value shall be the simple average of the Market Values determined for each organized trading facility on which those Shares are listed as determined for each organized trading facility in accordance with subparagraphs (b) and (c) below; - 6 - 10 (b) for each organized trading facility on which the Shares are listed, Market Value will be the weighted average trading price of the Shares for those days that the Shares traded over the ten trading day period immediately preceding the Award Date; (c) if the Company's Shares trade on an organized trading facility outside of Canada, then the Market Value determined for that organized trading facility will be converted into Canadian dollars at a conversion rate determined by the Administrator having regard for the published conversion rates as of the Award Date; (d) if the Company's Shares are listed on one or more organized trading facilities but have not traded during the ten trading day period immediately preceding the Award Date, then the Market Value will be, subject to the necessary approvals of the applicable Regulatory Authorities, that value as is determined by resolution of the Board; and (e) if the Company's Shares are not listed on an organized trading facility, then the Market Value will be, subject to the necessary approvals of the applicable Regulatory Authorities, that value as is determined by resolution of the Board. 3.6 Additional Terms Subject to all applicable securities laws and regulations and the rules and policies of all applicable Regulatory Authorities, the Board may attach other terms and conditions to the grant of a particular Option, such terms and conditions to be referred to in a schedule attached to the Option Certificate. These terms and conditions may include, but are not necessarily limited to, the following: (a) providing that an Option expires on the date the Option Holder ceases to be a Director or Employee of the Company or, if an Other Person, ceases to provide services to the Company; (b) providing that a portion or portions of an Option vest after certain periods of time or expire after certain periods of time; and (c) providing that an Option be exercisable immediately, in full, notwithstanding that it has vesting provisions, upon the occurrence of certain events, such as a friendly or hostile takeover bid for the Company. - 7 - 11 3.7 Assignment of Options Options may not be assigned or transferred, provided that the Personal Representative of an Option Holder may, to the extent permitted by paragraph 4.1, exercise the Option within the Exercise Period. 3.8 Adjustments If, prior to the complete exercise of any Option, the Shares are consolidated, subdivided, converted, exchanged or reclassified or in any way substituted for (collectively the "Event"), an Option, to the extent that it has not been exercised, shall be adjusted by the Board in accordance with such Event in the manner the Board deems appropriate. No fractional shares shall be issued upon the exercise of the Options and accordingly, if as a result of the Event, an Option Holder would become entitled to a fractional share, such Option Holder shall have the right to purchase only the next lowest whole number of shares and no payment or other adjustment will be made with respect to the fractional interest so disregarded. 3.9 Approvals This Plan and any amendments hereto are subject to all necessary approvals of the applicable Regulatory Authorities. ARTICLE IV EXERCISE OF OPTION 4.1 Exercise of Option An Option may be exercised only by the Option Holder or the Personal Representative of any Option Holder. An Option Holder or the Personal Representative of any Option Holder may exercise an Option in whole or in part at any time or from time to time during the Exercise Period up to 5:00 p.m. local time in British Columbia on the Expiry Date by delivering to the Administrator an Exercise Notice, the applicable Option Certificate and a certified cheque or bank draft payable to "Optima Petroleum Corporation" in an amount equal to the aggregate Exercise Price of the Shares to be purchased pursuant to the exercise of the Option. 4.2 Issue of Share Certificates As soon as practicable following the receipt of the Exercise Notice, the Administrator shall cause to be delivered to the Option Holder a certificate for the Shares so purchased and if the Option has not been completely exercised, the Administrator shall concurrently forward a new Option Certificate to the Option Holder for the balance of Shares available under the Option. - 8 - 12 4.3 Condition of Issue The Options and the issue of Shares by the Company pursuant to the exercise of Options are subject to the terms and conditions of this Plan and to compliance with the applicable securities laws, regulations, rules and policies of the Regulatory Authorities. The Option Holder agrees to comply with all such laws, regulations, rules and policies and agrees to furnish to the Company any information, report and/or undertakings required to comply with, and to fully cooperate with the Company in complying with, such laws, regulations, rules and policies. ARTICLE V ADMINISTRATION 5.1 Administration The Plan shall be administered by the Administrator on the instructions of the Board. The Board may make, amend and repeal at any time and from time to time such regulations not inconsistent with the Plan as it may deem necessary or advisable for the proper administration and operation of the Plan and such regulations shall form part of the Plan. The Board may delegate to the Administrator, to any Director, officer or employee of the Company or to a committee consisting of such persons such administrative duties and powers as it may see fit. 5.2 Interpretation The interpretation by the Board of any of the provisions of the Plan and any determination by it pursuant thereto shall be final and conclusive and shall not be subject to any dispute by any Option Holder. No member of the Board or any personal acting pursuant to authority delegated by it hereunder shall be liable for any action or determination in connection with the Plan made or taken in good faith and each member of the Board and each such person shall be entitled to indemnification with respect to any such action or determination in the manner provided for by the Company. ARTICLE VI AMENDMENT AND TERMINATION 6.1 Prospective Amendment The Board may from time to time amend the Plan and the terms and conditions of any Option to be granted and, without limitation, may make amendments for the purpose of meeting any changes in any relevant law, rule or regulation applicable to the Plan, any Option or the Shares, or for any other purpose which may be permitted by all relevant laws, regulations, rules and policies provided that any such amendment shall not alter the terms or conditions of any Option - 9 - 13 or impair any right of any Option Holder pursuant to any Option awarded prior to such amendment. 6.2 Retrospective Amendment The Board may from time to time, subject to any necessary approvals of the Regulatory Authorities, retrospectively amend the Plan and, with the consent of the affected Option Holders, retrospectively amend the terms and conditions of any Options which have been previously granted. 6.3 Termination The Board may terminate the Plan at any time provided that any Option awarded prior to the date of such termination and the rights of the Option Holder of such Option shall continue to be governed by the provisions of the Plan. 6.4 AGREEMENT THE COMPANY AND EVERY OPTION AWARDED HEREUNDER SHALL BE BOUND BY AND SUBJECT TO THE TERMS AND CONDITIONS OF THE PLAN. BY ACCEPTING AN OPTION GRANTED HEREUNDER, THE OPTION HOLDER HAS EXPRESSLY AGREED WITH THE COMPANY TO BE BOUND BY THE TERMS OF THE PLAN. - 10 - 14 SCHEDULE "A" OPTIMA STOCK OPTION PLAN OPTION CERTIFICATE This Certificate is issued pursuant to the provisions of the Optima Petroleum Corporation ("Optima") Stock Option Plan (the "Plan") and evidences that ___________________ is the holder (the "Option Holder") of an option (the "Option") to purchase up to ________ common shares (the "Shares") in the capital stock of Optima at a purchase price of $_________ per Share. Subject to the provisions of the Plan: (a) the Award Date of this Option is _____________, 19_; and (b) the Expiry Date of this Option is ______________, 19__. This Option may be exercised at any time and from time to time from and including the Award Date through to and including up to 5:00 local time in Vancouver, British Columbia on the Expiry Date by delivery to the Administrator of the Plan an Exercise Notice, in the form provided in the Plan, together with this Certificate and a certified cheque or bank draft payable to "Optima Petroleum Corporation" in an amount equal to the aggregate of the Exercise Price of the Shares in respect of which this Option is being exercised. This Certificate and the Option evidenced hereby is not assignable, transferable or negotiable and is subject to the detailed terms and conditions contained in the Plan, the terms and conditions of which the Option Holder hereby expressly agrees with Optima to be bound by. This Certificate is issued for convenience only and in the case of any dispute with regard to any matter in respect hereof, the provisions of the Plan and the records of Optima shall prevail. This Option is also subject to the terms and conditions contained in the schedules, if any, attached hereto. The foregoing Option has been awarded this ________ day of _________ 19__. OPTIMA PETROLEUM CORPORATION Per: ___________________ - 11 - 15 SCHEDULE "B" OPTIMA STOCK OPTION PLAN NOTICE OF EXERCISE OF OPTION TO: The Administrator, Stock Option Plan Optima Petroleum Corporation Suite 600 - 595 Howe Street Vancouver, B.C. V6C 2T5 The undersigned hereby irrevocably gives notice, pursuant to the Optima Petroleum Corporation ("Optima") Stock Option Plan (the "Plan"), of the exercise of the Option to acquire and hereby subscribes for (CROSS OUT INAPPLICABLE ITEM): (a) all of the Shares; or (b) _________________ of the Shares; which are the subject of the Option Certificate attached hereto. The undersigned tenders herewith a certified cheque or bank draft (CIRCLE ONE) payable to "Optima Petroleum Corporation" in an amount equal to the aggregate Exercise Price of the aforesaid shares and directs Optima to issue the certificate evidencing said shares in the name of the undersigned to be mailed to the undersigned at the following address: _________________________________ _________________________________ _________________________________ _________________________________ DATED the ________ day of __________________ 19__. ______________________________ SIGNATURE OF OPTION HOLDER - 12 - EX-3.8 7 REGISTRANTS APRIL 10, 1996 STOCK OPTION PLAN 1 EXHIBIT 3.8 OPTIMA PETROLEUM CORPORATION STOCK OPTION PLAN dated April 10, 1996 Approved by the Board of Directors as of April 10, 1996, Approved by the Shareholders on May 24, 1996. 2 TABLE OF CONTENTS ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 Definitions................................................ 1 1.2 Choice of Law.............................................. 2 1.3 Headings................................................... 3 ARTICLE 11 PURPOSE AND PARTICIPATION 2.1 Purpose.................................................... 3 2.2 Participation.............................................. 3 2.3 Notification of Award...................................... 4 2.4 Copy of Plan............................................... 4 2.5 Limitation................................................. 4 ARTICLE III TERMS AND CONDITIONS OF OPTIONS 3.1 Board to Issue Shares...................................... 4 3.2 Number of Shares........................................... 4 3.3 Term of Option............................................. 5 3.4 Termination of Option...................................... 5 3.5 Exercise Price............................................. 6 3.6 Additional Terms........................................... 7 3.7 Assignment of Options...................................... 8 3.8 Adjustments................................................ 8 3.9 Approvals.................................................. 8 ARTICLE IV EXERCISE OF OPTION 4.1 Exercise of Option......................................... 8 4.2 Issue of Share Certificates................................ 8 4.3 Condition of Issue......................................... 9 ARTICLE V ADMINISTRATION 5.1 Administration............................................. 9 5.2 Interpretation............................................. 9 5.3 Status of Option granted under Previous Plans.............. 9 - i - 3 ARTICLE VI AMENDMENT AND TERMINATION 6.1 Prospective Amendment...................................... 9 6.2 Retrospective Amendment.................................... 10 6.3 Termination................................................ 10 6.4 Agreement.................................................. 10 - ii - 4 STOCK OPTION PLAN ARTICLE I DEFINITIONS AND INTERPRETATION 1.1 Definitions As used herein, unless there is something in the subject matter or context inconsistent therewith, the following terms shall have the meanings set forth below: (a) "Administrator" means, initially, the secretary of the Company and thereafter shall mean such director or other senior officer or employee of the Company as may be designated as Administrator by the Board from time to time. (b) "Award Date" means the date on which the board awards a particular Option. (c) "Board" means the board of directors of the Company. (d) "Canada Business Corporations Act" means the Canada Business Corporations Act, R.S.C. 1985, c.C-44 and any amendments thereto. (e) "Company" means Optima Petroleum Corporation, including its affiliates, as defined in the Canada Business Corporations Act. (f) "Director" means any individual holding the office of director of the Company. (g) "Employee" means any individual regularly employed on a full-time basis by the Company or any of its subsidiaries and such other individuals as may, from time to time, be permitted by the rules and policies of the applicable Regulatory Authorities to be granted options as employees or as an equivalent thereto. (h) "Exercise Notice" means the notice respecting the exercise of an Option, in the form set out as Schedule "B" hereto, duly executed by the Option Holder. (i) "Exercise Period" means the period during which a particular Option may be exercised and is the period from and including the Award Date through to and including the Expiry Date. (j) "Exercise Price" means the price at which an Option may be exercised as determined in accordance with paragraph 3.5. (k) "Expiry Date" means the date determined in accordance with paragraph 3.3 and after which a particular Option cannot be exercised. 5 (l) "Market Value" means the market value of the Company's Shares as determined in accordance with paragraph 3.5. (m) "Option" means an option to acquire Shares. awarded to a Director or Employee pursuant to the Plan. (n) "Option Certificate" means the certificate, in the form set out as Schedule "A" hereto, evidencing an Option. (o) "Option Holder" means a Director, Employee or Other Person, or former Director, Employee or Other Person, who holds directly or indirectly through a wholly owned holding company or registered retirement savings plan an unexercised and unexpired Option or, where applicable, the Personal Representative of such person. (p) "Other Persons" means other persons who provide services to the Company and who are entitled to receive options therefor pursuant to the rules of the Regulatory Authorities. (q) "Plan" means this stock option plan. (r) "Personal Representative" means: (i) in the case of a deceased Option Holder, the executor or administrator of the deceased duly appointed by a court or public authority having jurisdiction to do so; and (ii) in the case of an Option Holder who for any reason is unable to manage his or her affairs, the person entitled by law to act on behalf of such Option Holder. (s) "Regulatory Authorities" means all stock exchanges and other organized trading facilities on which the Company's Shares are listed and all securities commissions or similar securities regulatory bodies having jurisdiction over the Company. (t) "Share" or "Shares" means, as the case may be, one or more common shares without par value in the capital stock of the Company. 1.2 Choice of Law The Plan is established under and the provisions of the Plan shall be subject to and interpreted and construed in accordance with the laws of the Province of British Columbia. - 2 - 6 1.3 Headings The headings used herein are for convenience only and are not to affect the interpretation of the Plan. ARTICLE 11 PURPOSE AND PARTICIPATION 2.1 Purpose The purpose of the Plan is to provide the Company with a share-related mechanism to attract, retain and motivate qualified Directors, Employees and Other Persons, to reward such of those Directors, Employees and Other Persons as may be awarded Options under the Plan by the Board from time to time for their contributions toward the long term goals of the Company and to enable and encourage such Directors, Employees and Other Persons to acquire Shares as long term investments. 2.2 Participation The Board shall, from time to time and in its sole discretion, determine those Directors, Employees and Other Persons, if any, to whom Options are to be awarded. The Board may, in its sole discretion, grant the majority of the Options to insiders of the Company. However, in no case will the issuance of Shares under the Plan and under any proposed or existing share compensation arrangement result in: (a) the number of Shares reserved for issuance pursuant to Options granted: (i) to insiders exceeding 10% of the Company's issued and outstanding share capital; or (ii) to any one person exceeding 5% of the Company's issued and outstanding share capital; (b) the number of Shares issued within a one year period: (i) to insiders exceeding 10% of the Company's issued and outstanding share capital; or (ii) to any one insider and its associates exceeding 5% of the Company's issued and outstanding share capital. - 3 - 7 2.3 Notification of Award Following the approval by the Board of the awarding of an Option, the Administrator shall notify the Option Holder in writing of the award and shall enclose with such notice the Option Certificate representing the Option so awarded. 2.4 Copy of Plan Each Option Holder, concurrently with the notice of the award of the Option, shall be provided with a copy of the Plan. A copy of any amendment to the Plan shall be promptly provided by the Administrator to each Option Holder. 2.5 Limitation The Plan does not give any Option Holder that is: (a) a Director the right to serve or continue to serve as a Director of the Company; (b) an Employee the right to be or to continue to be employed by the Company; or (c) an Other Person the right to be or continue to be retained by the Company to provide services to the Company. ARTICLE III TERMS AND CONDITIONS OF OPTIONS 3.1 Board to Issue Shares The Shares to be issued to Option Holders upon the exercise of Options shall be authorized and unissued Shares, the issuance of which shall have been authorized by the Board. 3.2 Number of Shares Subject to adjustment as provided for in paragraph 3.7 of this Plan, the aggregate maximum number of Shares which will be available for purchase pursuant to Options granted under this Plan will not exceed 750,000 Shares. If any Option expires or otherwise terminates for any reason without having been exercised in full, the number of Shares in respect of which the Option expired or terminated shall again be available for the purposes of the Plan. - 4 - 8 3.3 Term of Option Subject to paragraph 3.4, the Expiry Date of an Option shall be the date so fixed by the Board at the time the particular Option is awarded, provided that such date shall be no later than the tenth anniversary of the Award Date of such Option. 3.4 Termination of Option An Option Holder may exercise an Option in whole or in part at any time or from time to time during the Exercise Period provided that, with respect to the exercise of part of an Option, the Board may at any time and from time to time fix a minimum number of Shares in respect of which an Option Holder may exercise part of any Option held by such Option Holder. Any Option or part thereof not exercised within the Exercise Period shall terminate and become null, void and of no effect as of 5:00 p.m. local time in Vancouver, British Columbia on the Expiry Date. The Expiry Date of an Option shall be the earlier of the date so fixed by the Board at the time the Option is awarded and the date established, if applicable, in sub-paragraphs (a) to (d) below: (a) Death If the Option Holder should die while he or she is still entitled to exercise the Option, then the Expiry Date shall be the first anniversary of the Option Holder's date of death; or (b) Ceasing to hold Office If the Option Holder holds his or her Option as Director of the Company and then ceases to be a Director of the Company other than by reason of death, the Expiry Date of the Option shall be the 30th day following the date the Option Holder ceases to be a Director of the Company unless the Option Holder ceases to be a Director of the Company as a result of: (i) ceasing to meet the qualifications set forth in section 105 of the Canada Business Corporations Act; (ii) an ordinary resolution having been passed by the shareholders of the Company pursuant to section 109 of the Canada Business Corporations Act; or (iii) an order made by any Regulatory Authority having jurisdiction to so order; in which case the Expiry Date shall be the date the Option Holder ceases to be a Director of the Company. - 5 - 9 (c) Ceasing to be Employed If the Option Holder holds his or her Option as an Employee of the Company and then ceases to be an Employee of the Company other than by reason of death, the Expiry Date of the Option shall be the 30th day following the date the Option Holder ceases to be an Employee of the issuer unless the Option Holder ceases to be an Employee of the Company as a result of: (i) termination for cause; or (ii) an order made by any Regulatory Authority having jurisdiction to so order; in which case the Expiry Date shall be the date the Option Holder ceases to be an Employee of the Company. (d) Ceasing to Provide Services If the Option Holder holds his or her Option as an Other Person of the Company and then ceases to provide services to the Company other than by reason of death, the Expiry Date of the Option shall be the 30th day following the date the Option Holder ceases to provide services to the Company as a result of: (i) termination for cause; or (ii) an order made by any Regulatory Authority having jurisdiction to so order; in which case the Expiry Date shall be the date the Option Holder ceases to provide services to the Company. (e) Holding Company Ceasing to be Wholly-Owned If the Option Holder holds his or her Option indirectly through a wholly-owned holding company, the Expiry Date shall be the date the Option Holder ceases to wholly-own such holding company. 3.5 Exercise Price The price at which an Option Holder may purchase a Share upon the exercise of an Option shall be as set forth in the Option Certificate issued in respect of such Option and in any event shall not be less than the Market Value of the Company's Shares as of the Award Date. The Market Value of the Company's Shares for a particular Award Date shall be determined as follows: (a) if the Company's Shares are listed on more than one organized trading facility, then Market Value shall be the simple average of the Market Values determined - 6 - 10 for each organized trading facility on which those Shares are listed as determined for each organized trading facility in accordance with subparagraphs (b) and (c) below, but in any event not less than the closing price of the Shares on the Toronto Stock Exchange on the business day immediately prior to the Award Date; (b) for each organized trading facility on which the Shares are listed, Market Value will be the closing price of the Shares on the business day immediately prior to the Award Date; (c) if the Company's Shares trade on an organized trading facility outside of Canada, then the Market Value determined for that organized trading facility will be converted into Canadian dollars at a conversion rate determined by the Administrator having regard for the published conversion rates as of the Award Date; (d) if the Company's Shares are listed on one or more organized trading facilities but have not traded on the Award Date, then the Market Value will be, subject to the necessary approvals of the applicable Regulatory Authorities, that value as is determined by resolution of the Board; and (e) if the Company's Shares are not listed on an organized trading facility, then the Market Value will be, subject to the necessary approvals of the applicable Regulatory Authorities, that value as is determined by resolution of the Board. 3.6 Additional Terms Subject to all applicable securities laws and regulations and the rules and policies of all applicable Regulatory Authorities, the Board may attach other terms and conditions to the grant of a particular Option, such terms and conditions to be referred to in a schedule attached to the Option Certificate. These terms and conditions may include, but are not necessarily limited to, the following: (a) providing that an Option expires on the date the Option Holder ceases to be a Director or Employee of the Company or, if an Other Person, ceases to provide services to the Company; (b) providing that a portion or portions of an Option vest after certain periods of time or expire after certain periods of time; and (c) providing that an Option be exercisable immediately, in full, notwithstanding that it has vesting provisions, upon the occurrence of certain events, such as a friendly or hostile takeover bid for the Company. - 7 - 11 3.7 Assignment of Options Options may not be assigned or transferred, provided that the Personal Representative of an Option Holder may, to the extent permitted by paragraph 4.1, exercise the Option within the Exercise Period. 3.8 Adjustments If, prior to the complete exercise of any Option, the Shares are consolidated, subdivided, converted, exchanged or reclassified or in any way substituted for (collectively the "Event"), an Option, to the extent that it has not been exercised, shall be adjusted by the Board in accordance with such Event in the manner the Board deems appropriate. No fractional shares shall be issued upon the exercise of the Options and accordingly, if as a result of the Event, an Option Holder would become entitled to a fractional share, such Option Holder shall have the right to purchase only the next lowest whole number of shares and no payment or other adjustment will be made with respect to the fractional interest so disregarded. 3.9 Approvals This Plan and any amendments hereto are subject to all necessary approvals of the applicable Regulatory Authorities. ARTICLE IV EXERCISE OF OPTION 4.1 Exercise of Option An Option may be exercised only by the Option Holder or the Personal Representative of any Option Holder. An Option Holder or the Personal Representative of any Option Holder may exercise an Option in whole or in part at any time or from time to time during the Exercise Period up to 5:00 p.m. local time in British Columbia on the Expiry Date by delivering to the Administrator an Exercise Notice, the applicable Option Certificate and a certified cheque, bank draft or cheque from a Toronto Stock Exchange member broker firm payable to "Optima Petroleum Corporation" in an amount equal to the aggregate Exercise Price of the Shares to be purchased pursuant to the exercise of the Option. Alternately, the Option Holder may arrange for a Toronto Stock Exchange member broker firm to deliver a cheque against delivery of the Shares purchased. 4.2 Issue of Share Certificates As soon as practicable following the receipt of the Exercise Notice, the Administrator shall cause to be delivered to the Option Holder a certificate for the Shares so purchased and if the Option - 8 - 12 has not been completely exercised, the Administrator shall concurrently forward a new Option Certificate to the Option Holder for the balance of Shares available under the Option. 4.3 Condition of Issue The Options and the issue of Shares by the Company pursuant to the exercise of Options are subject to the terms and conditions of this Plan and to compliance with the applicable securities laws, regulations, rules and policies of the Regulatory Authorities. The Option Holder agrees to comply with all such laws, regulations, rules and policies and agrees to furnish to the Company any information, report and/or undertakings required to comply with, and to fully cooperate with the Company in complying with, such laws, regulations, rules and policies. ARTICLE V ADMINISTRATION 5.1 Administration The Plan shall be administered by the Administrator on the instructions of the Board. The Board may make, amend and repeal at any time and from time to time such regulations not inconsistent with the Plan as it may deem necessary or advisable for the proper administration and operation of the Plan and such regulations shall form part of the Plan. The Board may delegate to the Administrator, to any Director, officer or employee of the Company or to a committee consisting of such persons such administrative duties and powers as it may see fit. 5.2 Interpretation The interpretation by the Board of any of the provisions of the Plan and any determination by it pursuant thereto shall be final and conclusive and shall not be subject to any dispute by any Option Holder. No member of the Board or any personal acting pursuant to authority delegated by it hereunder shall be liable for any action or determination in connection with the Plan made or taken in good faith and each member of the Board and each such person shall be entitled to indemnification with respect to any such action or determination in the manner provided for by the Company. 5.3 Status of Options granted under Previous Plans Any existing options granted prior to the implementation of this Plan will remain subject to the plan under which they were granted and such previous plans will remain in effect with respect to such options so long as such options remain outstanding. - 9 - 13 ARTICLE VI AMENDMENT AND TERMINATION 6.1 Prospective Amendment The Board may from time to time amend the Plan and the terms and conditions of any Option to be granted and, without limitation, may make amendments for the purpose of meeting any changes in any relevant law, rule or regulation applicable to the Plan, any Option or the Shares, or for any other purpose which may be permitted by all relevant laws, regulations, rules and policies provided that any such amendment shall not alter the terms or conditions of any Option or impair any right of any Option Holder pursuant to any Option awarded prior to such amendment. 6.2 Retrospective Amendment The Board may from time to time, subject to any necessary approvals of the Regulatory Authorities, retrospectively amend the Plan and, with the consent of the affected Option Holders, retrospectively amend the terms and conditions of any Options which have been previously granted. 6.3 Termination The Board may terminate the Plan at any time provided that any Option awarded prior to the date of such termination and the rights of the Option Holder of such Option shall continue to be governed by the provisions of the Plan. 6.4 Agreement The Company and every Option awarded hereunder shall be bound by and subject to the terms and conditions of the Plan. By accepting an Option granted hereunder, the Option Holder has expressly agreed with the Company to be bound by the terms of the Plan. - 10 - 14 SCHEDULE "A" OPTIMA STOCK OPTION PLAN OPTION CERTIFICATE This Certificate is issued pursuant to the provisions of the Optima Petroleum Corporation ("Optima") Stock Option Plan (the "Plan") and evidences that _____________________ is the holder (the "Option Holder") of an option (the "Option") to purchase up to ___________ common shares (the "Shares") in the capital stock of Optima at a purchase price of $________________ per Share. Subject to the provisions of the Plan: (a) the Award Date of this Option is _______________ 19_; and (b) the Expiry Date of this Option is ________________ 19__. This Option may be exercised at any time and from time to time from and including the Award Date through to and including up to 5:00 local time in Vancouver, British Columbia on the Expiry Date by delivery to the Administrator of the Plan an Exercise Notice, in the form provided in the Plan, together with this Certificate and a certified cheque, bank draft or cheque from a Toronto Stock Exchange member broker firm payable to "Optima Petroleum Corporation" in an amount equal to the aggregate of the Exercise Price of the Shares in respect of which this Option is being exercised. Alternately, the Option Holder may arrange for a Toronto Stock Exchange member broker firm to deliver a cheque against delivery of the Shares purchased. This Certificate and the Option evidenced hereby is not assignable, transferable or negotiable and is subject to the detailed terms and conditions contained in the Plan, the terms and conditions of which the Option Holder hereby expressly agrees with Optima to be bound by. This Certificate is issued for convenience only and in the case of any dispute with regard to any matter in respect hereof, the provisions of the Plan and the records of Optima shall prevail. This Option is also subject to the terms and conditions contained in the schedules, if any, attached hereto. The foregoing Option has been awarded this ________ day of __________, 19__. OPTIMA PETROLEUM CORPORATION Per: _____________________ - 11 - 15 SCHEDULE"B" OPTIMA STOCK OPTION PLAN NOTICE OF EXERCISE OF OPTION TO: The Administrator, Stock Option Plan Optima Petroleum Corporation Suite 600 - 595 Howe Street Vancouver, B.C. V6C 2T5 The undersigned hereby irrevocably gives notice, pursuant to the Optima Petroleum Corporation ("Optima") Stock Option Plan (the "Plan"), of the exercise of the Option to acquire and hereby subscribes for (CROSS OUT INAPPLICABLE ITEM): (a) all of the Shares; or (b) ___________________ of the Shares; which are the subject of the Option Certificate attached hereto. The undersigned tenders herewith a certified cheque, bank draft or cheque from a Toronto Stock Exchange member broker firm, or has instructed a Toronto Stock Exchange member broker firm to deliver against delivery of the aforementioned shares a cheque (CIRCLE ONE), payable to "Optima Petroleum Corporation" in an amount equal to the aggregate Exercise Price of the aforesaid shares and directs Optima to issue the certificate evidencing said shares in the name of the undersigned to be mailed to the undersigned, or delivered against payment to the following member broker firm (CIRCLE ONE), at the following address: __________________________ __________________________ __________________________ __________________________ DATED the ____ day of ________________ 19__. ________________________________ SIGNATURE OF OPTION HOLDER - 12 - EX-3.10 8 APPROVAL OF SHARE COMPENSATION TO OUTSIDE DIRECTOR 1 EXHIBIT 3.10 OPTIMA PETROLEUM CORPORATION The following resolutions were passed by the Directors of OPTIMA PETROLEUM CORPORATION (the "Company") having been consented to in writing by all the Directors of the Company as of the 22nd day of February 1996. ----------------------------------------------------------------- APPROVAL OF SHARE COMPENSATION TO OUTSIDE DIRECTORS - --------------------------------------------------- WHEREAS: (a) at a meeting of the directors held on September 13, 1994, the directors passed a resolution approving the payment to each of the Company's outside directors of $500 for each directors' meeting attended, effective as of the next directors' meeting; (b) directors' meetings were held on December 15, 1994, March 24, 1995, June 22, 1995, August 30, 1995 and December 14, 1995 but neither of the Company's outside directors (Emile Stehelin, who attended all of the meetings and Martin Abbott, who attended all but one of the meetings) has received payment for their attendance at these meetings; (c) Messrs. Stehelin and Abbott have agreed to accept 689 common shares and 551 common shares of the Company respectively in full payment of their outstanding fees; (d) in payment of the $500 fee per meeting, the Company wishes to issue 138 common shares per outside director per meeting attended for meetings during the 1996 fiscal year, up to an aggregate of 2,500 common shares; IT IS HEREBY RESOLVED THAT: 1. subject to the receipt of regulatory approval and shareholder approval, the Company be and it is hereby authorized to issue 689 common shares of the Company to Emile Stehelin and 551 common shares of the Company to Martin Abbott in consideration of past directors' meeting attended, all at a deemed price of $3.63 per share; 2. subject to the receipt of regulatory approval and shareholder approval, the Company be and it is hereby authorized to issue up to an aggregate of 2,500 common shares of the Company to its outside directors at a rate of 138 common shares per outside director per meeting attended, at a deemed price of $3.63 per share; 3. the Company make application to The Toronto Stock Exchange for approval of the foregoing share issuances; 2 4. the Company make application to The Toronto Stock Exchange to list 3,740 common shares to be issued and reserved for issuance pursuant to the foregoing share compensation arrangements; 5. any one or more of the Directors and Senior Officers of the Company be authorized and directed to perform all such acts, deeds and things and execute, under the seal of the Company or otherwise, all such documents and other writings, including treasury orders, as may be required to give effect to the true intent of this resolution. APPROVAL OF SHARE COMPENSATION TO CHIEF FINANCIAL OFFICER WHEREAS the Company has entered into a management agreement, effective January 1, 1996 for a two year period expiring December 31, 1997, with Ronald P. Bourgeois, the Company's Chief Financial Officer, providing for the payment of a monthly fee of $8,000 as well as the monthly issuance of 500 shares at a deemed issue price of $3.63 per share. IT IS HEREBY RESOLVED THAT: 1. the management agreement (the "Management Agreement") between the Company and Ronald P. Bourgeois be and it is hereby approved, ratified and confirmed; 2. the execution of the Management Agreement by any one Director of the Company, under the seal of the Company if applicable, is hereby approved, ratified and confirmed; 3. subject to the receipt of regulatory approval and shareholder approval, the Company be and it is hereby authorized to issue 500 common shares per month up to an aggregate of 12,000 common shares of the Company to Ronald P. Bourgeois, at a deemed price of $3.63 per share; 4. the Company make application to The Toronto Stock Exchange for approval of the foregoing share issuances; 5. the Company make application to The Toronto Stock Exchange to list 12,000 common shares to be issued and reserved for issuance pursuant to the foregoing share compensation arrangement; 6. any one or more of the Directors and Senior Officers of the Company be authorized and directed to perform all such acts, deeds and things and execute, under the seal of the Company or otherwise, all such documents and other writings, including treasury orders, as may be required to give effect to the true intent of this resolution. These resolutions may be signed by the Directors in as many counterparts as may be deemed necessary, each of which so signed shall be deemed to be an original, and such counterparts - 2 - 3 together shall constitute one and the same instrument notwithstanding the date of execution and shall be deemed to bear the date as set forth above. /s/ William Leuschner /s/ Robert L. Hodgkinson - ------------------------------- ----------------------------------- William Leuschner Robert L. Hodgkinson /s/ Emile Stehelin /s/ Ronald P. Bourgeois - ------------------------------- ----------------------------------- Emile Stehelin Ronald P. Bourgeois /s/ Martin G. Abbott - ------------------------------- Martin G. Abbott - 3 - EX-3.11 9 CONSENT OF RYDER SCOTT COMPANY 1 EXHIBIT 3.11 [RYDER SCOTT COMPANY PETROLEUM ENGINEERS LETTERHEAD] CONSENT OF RYDER SCOTT COMPANY PETROLEUM ENGINEERS We hereby consent to the reference to our reviews dated March 6, 1998, March 13, 1997, and March 6, 1996, which were used to prepare the Estimated Future Reserves Attributable to Certain Leasehold Interests of Optima Petroleum Corporation as of December 31, 1997, December 31, 1996, and December 31, 1995, respectively, and to the reference to Ryder Scott Company Petroleum Engineers as experts in the field of petroleum engineering. /s/ Ryder Scott Company ---------------------------------- Petroleum Engineers March 23, 1998 EX-3.12 10 CONSENT OF LAROCHE PETROLEUM CONSULANTA, LTD. 1 EXHIBIT 3.12 [LAROCHE PETROLEUM CONSULTANTS, LTD. LETTERHEAD] CONSENT OF LAROCHE PETROLEUM CONSULTANTS, LTD. We consent to incorporation by reference in the Registration Statement of Optima Energy (U.S.) Corporation the reference to our appraisal report as of December 31, 1997, which appears in the December 31, 1997 annual report on Form 10-K of Optima Energy (U.S.) Corporation. LaRoche Petroleum Consultants, Ltd. By: /s/ William M. Kazmann ----------------------------------- William M. Kazmann, Partner March 19, 1997 -----END PRIVACY-ENHANCED MESSAGE-----