-----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, Js2zW20tIdZ3EQZ+xF6QT5VOO7xKgwL7nJCGLmraKDSttXVu68XuFxJmaFhXBQ5d WLZQ8e6DqaxozLX6ej5mpg== 0000950129-01-001874.txt : 20010409 0000950129-01-001874.hdr.sgml : 20010409 ACCESSION NUMBER: 0000950129-01-001874 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SEVEN SEAS PETROLEUM INC CENTRAL INDEX KEY: 0000947156 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 731468669 STATE OF INCORPORATION: B0 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13771 FILM NUMBER: 1592234 BUSINESS ADDRESS: STREET 1: 5555 SAN FELIPE STREET 2: SUITE 1700 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7136228218 MAIL ADDRESS: STREET 1: 5555 SAN FELIPE STREET 2: SUITE 1700 CITY: HOUSTON STATE: TX ZIP: 77056 10-K 1 h85747e10-k.txt SEVEN SEAS PETROLEUM INC. - DATED 12/31/2000 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 0-22483 SEVEN SEAS PETROLEUM INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) CAYMAN ISLANDS 73-1468669 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5555 SAN FELIPE, SUITE 1700 HOUSTON, TEXAS 77056 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 622-8218 Securities registered pursuant to Section 12(b) of the Act NAME OF EACH EXCHANGE TITLE OF CLASS ON WHICH REGISTERED -------------- ------------------- Ordinary shares -- par value $0.001 per share American 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 definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of March 30, 2001, there were 37,836,420 outstanding shares of the registrant's ordinary shares (also called "common shares"), par value $0.001 per share. The aggregate market value of the common shares held by non-affiliates of the registrant (treating all executive officers and directors of the registrant and their respective affiliates for this purpose as if they may be affiliates of the registrant) was approximately $111.8 million on March 30, 2001, based upon the closing sale price of the common shares on such date of $3.40 per share on the American Stock Exchange as reported by The Wall Street Journal. ================================================================================ 2 TABLE OF CONTENTS TO FORM 10-K
PAGE ---- PART I Item 1. Business 3 Item 2. Properties 10 Item 3. Legal Proceedings 17 Item 4. Submission of Matters to a Vote of Security Holders 18 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 19 Item 6. Selected Financial Data 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 20 Item 7a. Quantitative and Qualitative Disclosures about Market Risk 27 Item 8. Financial Statements and Supplementary Data 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 48 PART III Item 10. Directors and Officers of the Registrant 48 Item 11. Executive Compensation 49 Item 12. Security Ownership of Certain Beneficial Owners and Management 52 Item 13. Certain Relationships and Related Transactions 53 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 54
2 3 PART I ITEM 1. BUSINESS OVERVIEW AND HISTORY Seven Seas Petroleum Inc. ("Seven Seas") was incorporated under British Colombia law on February 3, 1995. On June 29, 1995, Seven Seas amalgamated with Rusty Lake Resources Inc. Rusty Lake was formed January 31, 1993, under Ontario law, when Lithium Corporation of Canada, Limited joined Stockgold Resources Inc. We continued Seven Seas as a Yukon Territory, Canada corporation in August 1996. In March 2001, we continued Seven Seas as a Cayman Islands exempted company limited by shares. Because we are devoting substantially all of our efforts to establishing a new business, we are a development stage company under the SEC's accounting rules. See "Risks Related to our Business -- We have a limited operating history" and "-- We have historical operating losses." We currently have working interests in six association contracts in Colombia: (1) Dindal, (2) Rio Seco, (3) Deep Dindal, (4) Cristales, (5) Rosablanca and (6) Tapir. We relinquished the Montecristo association contract in early 2001. The Dindal and Rio Seco association contracts cover areas that contain the Guaduas Oil Field. We acquired our initial 15% interest in the Dindal and Rio Seco association contracts in Colombia from GHK Company Colombia in 1995. Upon acquiring our Dindal and Rio Seco interests, we participated in drilling the El Segundo 1-E well, resulting in the discovery of the Guaduas Oil Field. In 1996, we acquired an additional 36.7% interest in both association contracts for $153.1 million of our securities, based on the closing stock price on the date of the acquisition. We acquired the interest when we acquired 100% of GHK Company Colombia and Esmeralda LLC, and 63% of Cimarrona LLC. On March 5, 1997, we acquired 100% of the outstanding voting stock held in Petrolinson, S.A. for $18.6 million of our securities, based on the weighted average of the closing prices for 30 day periods before and after the letter of intent was signed. The principal asset owned by Petrolinson, S.A. is a 6% participating interest in the association contracts. As consideration for the 6% participating interest in the association contracts, we issued to the sole shareholder of Petrolinson, S.A. 1,000,000 common shares of Seven Seas. This 6% interest was carried through exploration by the other 94% participating interest parties. In our 1999 Form 10-K and subsequent U.S Securities and Exchange Commission filings, we outlined three scenarios for moving forward with the development of the Guaduas Oil Field. Scenario 1 assumed that Empresa Colombiana de Petroleos, the Colombian national oil company also known as Ecopetrol, participated in the development of the Guaduas Oil Field. Scenario 2 assumed Ecopetrol did not participate in the development of the field, but authorized Seven Seas and our partners to proceed with development on a sole-risk basis. Sole-risk means that Seven Seas and our partners pay 100% of development costs and retain all revenues from production after the 20% Colombian royalty deduction. Ecopetrol has the right to start participating in development at any time subject to Seven Seas and partners' right to recover 200% of the development costs spent since Ecopetrol's decision not to participate plus certain exploration costs. Scenario 2 also assumed that together with our partners we would proceed to develop the field as proposed to Ecopetrol (i.e. construct a pipeline and drill development wells for production of 20,000 BOPD to 30,000 BOPD). Like Scenario 2, Scenario 3 assumed that Ecopetrol would elect not to participate, but assumed that we would modify our development program as proposed to Ecopetrol by postponing the construction of the pipeline and development drilling. After Ecopetrol elected not to participate in the development on May 23, 2000, together with our partners, we elected to proceed sole-risk under Scenario 2. In previous filings, including last year's Form 10-K, we stated that if we proceeded under Scenario 2, we expected to commence pipeline production approximately one year after Ecopetrol made its election. As of the filing date of this report, we are on schedule to complete the pipeline by mid-year 2001. For a more complete discussion of our association contracts, see "Properties - -- Colombian Properties -- Dindal and Rio Seco association contracts," "-- Deep Dindal association contract," "-- Cristales association contract," "-- Rosablanca association contract" and "-- Tapir association contract." 3 4 SEVEN SEAS PETROLEUM INC. CORPORATE STRUCTURE Following is a diagram of our corporate structure. We own 100% of all of our subsidiaries. [CHART] 4 5 OUR CURRENT STRATEGY Our strategy for 2001 includes the continued development of the Guaduas Oil Field and new exploration on our Colombian properties. DEVELOPMENT We are currently constructing a 36-mile pipeline that will connect the Guaduas Oil Field to international oil markets via Colombia's existing pipeline infrastructure. The pipeline will have an initial throughput capacity of approximately 25,000 barrels of oil per day (BOPD), expandable to approximately 40,000 BOPD with additional investment. We are also constructing production facilities for production of approximately 25,000 BOPD. Both the pipeline and production facilities are scheduled for completion in mid-2001. The gross costs of the pipeline and the production facilities are $24 million, our share of which is approximately $13.8 million. When the pipeline and production facilities are complete, we believe that initial pipeline production, which will be generated by existing productive wells, will be approximately 8,000 BOPD to 10,000 BOPD. We recently agreed with our Guaduas Oil Field partners to a two-year development well drilling program that provides for the drilling of nine development wells and one injector over the course of 2001 and 2002. We believe these wells will increase pipeline production from its initial rates to approximately 25,000 BOPD. In 2001, we plan to drill four of these nine development wells and the one injector well at a gross cost of approximately $22 million, our share of which is $13 million. The gross cost of the entire 2001--2002 development well program is estimated to cost $44 million, our share of which is $25 million. EXPLORATION We plan to drill three exploration wells in 2001: 1. Subthrust exploration well to test the subthrust Dindal prospect at an estimated gross cost of $15 million ($15 million net to us) 2. Santa Fe - 1 on the Rosablanca association contract at a gross cost of $1.0 million ($1.0 million net to us) 3. Tres Pasos 16 well to test the west-side of the Guaduas Oil Field structure at an estimated gross cost of $5.5 million ($3.0 million net us). In summary, in 2001 we plan to complete the construction of the pipeline and production facilities for the Guaduas Oil Field, drill four development wells and one injector well on the Guaduas Oil Field and drill three exploration wells on our Colombian properties. The estimated gross costs of this development and exploration strategy in 2001 are $68 million, our share of which is approximately $46 million. Our ability to fully implement our exploration and development strategy is subject to 1) securing financing for our share of the costs, 2) timely receiving required environmental permits, 3) contracting the required oil and gas services and equipment, and 4) completing the Guaduas--La Dorada pipeline and commencing pipeline utilization. For additional information on our 2001 strategy, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation - Our Current Strategy". FINANCING OUR DEVELOPMENT Under the terms of our $110 million senior notes, we are allowed to incur indebtedness that could be secured and senior to the senior notes, not to exceed the greater of (i) $25 million, or (ii) the sum of 100% of our cash and cash equivalents, plus 100% of our receivable from Ecopetrol and plus 30% of our discounted future net revenues from proved oil and gas reserves prepared in accordance with the rules of the United States Securities Exchange Commission. As of December 31, 2000 the maximum permitted amount of secured borrowing was approximately $130.3 million. Based on discussions we have had with banks and other institutions, we believe we can borrow a substantial amount of the cost of putting the pipeline on production at a rate of between 8,000 BOPD and 10,000 BOPD. In such event, we could secure the additional indebtedness with our share of the property. The senior notes also allow us to borrow an additional $10 million for project financing, e.g., pipeline and production facilities. We believe that once the pipeline is built to sustain production at a rate of between 8,000 BOPD and 10,000 BOPD, additional funds can be borrowed from the potential lenders referenced above to finance a significant portion of the costs necessary for development wells, flow lines and facilities to bring pipeline production to 25,000 BOPD. We cannot be certain that additional sources of financing will be available when needed or will be available on acceptable terms. For more information about our financing plans, see "Management's Discussion and Analysis of Financial Condition and Results of Operation - Financing Our Current Strategy" and "- Liquidity and Capital Resources." In December 2000, we entered into a $10 million loan agreement with Stillwater National Bank and Trust Company, N.A. On March 30, 2001, the loan's maturity date was extended from December 31, 2001 to April 1, 2002. The Stillwater National Bank loan is secured by all of the stock of the operating subsidiaries of Seven Seas and is guaranteed by Robert A. Hefner III, chairman and chief 5 6 executive officer of Seven Seas. Mr. Hefner received remuneration of $62,500 for his guarantee. The loan bears interest at an annual rate of the Prime Rate plus .75%, and interest is payable monthly until the loan is due in full on April 1, 2002. Seven Seas intends to use these funds for working capital and plans to replace, without penalty, this non-convertible loan with the proceeds from a larger financing planned for 2001. RISKS RELATED TO OUR BUSINESS In addition to the other information set forth elsewhere herein, the following factors relating to Seven Seas should be carefully considered when evaluating the company. This document includes "forward-looking statements" within the meaning of the federal securities laws. All statements included herein other than statements of historical fact are forward-looking statements. Such forward-looking statements include, without limitation, the statements in "Business" and "-- Management's Discussion and Analysis of Financial Condition and Results of Operations," regarding Seven Seas' financial position, estimated quantities of reserves, business strategy and plans and objectives for future operations. Forward-looking statements herein generally are accompanied by words such as "anticipate," "believe," "estimate," "project," "potential" or "expect" or similar statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, no assurance can be given that such expectations will prove correct. Factors that could cause Seven Seas' results to differ materially from the results discussed in such forward-looking statements are discussed in "Risk Factors" and elsewhere herein. All forward-looking statements included herein and therein are expressly qualified in their entirety by the cautionary statements in this paragraph. WE HAVE A LIMITED OPERATING HISTORY. We commenced our operations in 1995 and have only a limited operating history. Accordingly, we have limited historical financial and operating information upon which to base an evaluation of our performance. Our prospects must be considered in light of the risks, expenses, delays and difficulties frequently encountered by companies in the early stages of development. WE HAVE HISTORICAL OPERATING LOSSES. Since the date of our inception through December 31, 2000, we have incurred cumulative losses of $115.1 million. Our only production, as of December 31, 2000, has been our share of the approximately 1.2 million barrels of oil (0.5 million net to us) produced by the Guaduas Oil Field. We do not expect to have uninterrupted production transported through pipeline prior to mid-2001. Therefore, estimates of proved reserves and the level of future production attributable to such reserves are difficult to determine. We cannot assure you of the volume of recoverable reserves. Our business will continue to require substantial expenditures. We cannot be certain that we will achieve or sustain profitability or positive cash flows from operating activities in the future. WE HAVE SUBSTANTIAL INDEBTEDNESS AND DO NOT HAVE ENOUGH REVENUES TO PAY OUR DEBTS. As of December 31, 2000, we had $110 million of 12 1/2% senior notes due 2005 and had entered into a $10 million loan agreement with Stillwater National Bank and Trust Company N.A. Under certain circumstances, we may, or our subsidiaries may, become further indebted. This much debt could pose substantial risks to our business. The indebtedness may require us to use available funds for payment of principal and interest instead of further developing our properties. The debt could also inhibit our ability to raise additional capital. It is possible that we will not have enough cash flow from our operations to pay the principal and interest on our debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Liquidity and Capital Resources." OIL AND GAS PRICES WILL IMPACT OUR COMPANY The market prices for oil and natural gas historically have been volatile and are likely to continue to be volatile in the future. Oil and natural gas prices may fluctuate in response to relatively minor changes in supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. Decreases in oil and natural gas prices will adversely affect our future revenues, results of operations and cash flows. Additionally, decreases in oil and natural gas may impede our ability to raise additional capital. WE HAVE NOT HAD ANY SIGNIFICANT INCOME-PRODUCING PROPERTY UNTIL RECENTLY. We are a development stage company under the U.S. Security and Exchange Commission's accounting rules because we are devoting substantially all of our efforts to establishing a new business and have produced no significant revenue from the business. We did not have any significant income-producing property until we began trucking production in August 2000. We are currently selling our share of approximately 4,000 to 6,000 BOPD. Our principal assets are in the early stages of exploration and development. Since the date of our inception through December 31, 2000, we have incurred cumulative losses of $115.1 million. Because we continue to explore and develop, we expect to continue to incur losses until production from the Guaduas Oil Field occurs in quantities sufficient to cover operating expenses. Assuming we can borrow at an acceptable rate, we expect the amount of our debt to increase until production increases enough to cover our operating expenses. 6 7 ANY CASH FLOW WE EXPERIENCE MAY BE USED TO PAY OUR EXISTING DEBTS AND WE MAY NOT HAVE THE CASH FLOW WE NEED FOR OTHER PURPOSES. Any cash flow generated from our operations will likely be used to pay our debt. As a result, we may not have the cash flow available for other purposes. Additionally, our debt may affect our ability to finance our future operations and capital needs. IN ORDER TO MARKET PRODUCTION, WE WILL NEED PRODUCTION FACILITIES AND PIPELINES. We cannot market our full production capacity without proper production facilities and pipelines. We depend on the availability and capacity of gathering systems, pipelines, compression and production facilities. We must have adequate storage, separation and reinjection facilities. If these facilities are not available or they are not large enough, we could have to shut in producing wells, which means we would temporarily stop production from some wells even though the wells are capable of producing oil. We also could have to delay or discontinue our development plans. In December 2000 and January 2001, we signed construction contracts for the pipeline and the production facilities. We expect the pipeline and production facilities to be complete in mid-2001. See "Business -- Our Current Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operation -- Our Current Strategy." COLOMBIAN ENVIRONMENTAL LAWS HAVE DELAYED OUR OPERATION IN THE PAST AND MAY DO SO AGAIN IN THE FUTURE. Colombian environmental laws require us to get an environmental permit or approval before we conduct seismic operations, drill wells or construct pipelines. Our operations have been delayed in the past while we tried to get environmental permits. Our operations could be delayed again for the same reason. Failure to get the necessary licenses and permits may also prevent us from getting alternative financing. During 2000, total environmental costs attributable to our Colombian properties were $0.28 million gross ($0.16 million net to Seven Seas). POLITICAL AND ECONOMIC UNCERTAINTY IN COLOMBIA COULD WORSEN AT ANY TIME AND OUR OPERATIONS COULD BE DELAYED OR DISCONTINUED. Our business is subject to political and economic risks, including: o loss of revenue, property and equipment as a result of unforeseen events like expropriation, nationalization, war and insurrection; o risks of increases in import, export and transportation regulations and tariffs, taxes and governmental royalties; o renegotiation of contracts with governmental entities; o changes in laws and policies governing operations of foreign-based companies in Colombia; o exchange controls, currency fluctuations and other uncertainties arising out of foreign government sovereignty over international operations; o laws and policies of the United States affecting foreign trade, taxation and investment; and o the possibility of being subject to the exclusive jurisdiction of foreign courts in connection with legal disputes and the possible inability to subject foreign persons to the jurisdiction of courts in the United States. We have experienced an incident of guerrilla activity at one of our well locations; however, our operations were not materially disrupted by such activity. We do not know how guerrilla activity will affect us in the future, or what steps, if any, the Colombian government may take in response to guerrilla activities. IF WE DO NOT SATISFY THE WORK REQUIREMENTS OF OUR ASSOCIATION CONTRACTS, THE COLOMBIAN GOVERNMENT MAY TERMINATE ALL OR PART OF THE CONTRACTS. Our Colombian association contracts have certain work requirements. For more information on the specific contract terms and obligations, see "Properties -- Colombian Properties". We may not be able to satisfy our contractual obligations. If we do not comply with the work requirements of the association contracts, or successfully renegotiate the terms, Ecopetrol may terminate all or part of one or more of our contracts. OUR PLANS AND STRATEGY WILL CHANGE AS CONDITIONS DICTATE. We are still a development stage company. Our ability to make plans and forecasts is affected by numerous factors, many of which 7 8 are beyond our control. As an example, we did not meet our announced schedule for 2000. See "Business -- Our Current Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operation -- 2000 In Review." THE U.S. HAS IMPOSED IN THE PAST, AND MAY IMPOSE IN THE FUTURE, ECONOMIC AND TRADE SANCTIONS AGAINST COLOMBIA. The United States has imposed economic and trade sanctions against Colombia in the past, and may impose sanctions against Colombia in the future. Every year, the president of the United States reviews designated foreign countries for certification, including Colombia, and decides whether those countries have cooperated with the United States to prevent drug trafficking. In 1995, 1996, 1997 and 1998, the president found that Colombia had not taken sufficient steps to prevent drug trafficking and denied certification. As a result of Colombia's failure to receive U.S. certification, the U.S. imposed the following sanctions: o withholding all bilateral economic assistance; o blocking loans from the Export-Import Bank of the United States and the Overseas Private Investment Corporation; and o voting against multilateral assistance to Colombia in the World Bank and the InterAmerican Development Bank. Although Colombia received certification in February 1999, March 2000, and February 2001, if the United States imposes sanctions against Colombia again, we may not be able to get the financing we need to develop our Colombian properties. Sanctions by the United States could also cause Colombia to retaliate against us by nationalizing our Colombian assets. OUR OPERATIONS ARE CONCENTRATED IN COLOMBIA. Our oil and gas properties are concentrated in Colombia. All of our proved reserves are located in the capital state of Cundinamarca. As of December 31, 2000, all of our proved reserves were attributable to the Guaduas Oil Field. Due to our concentration in and reliance on such operations for our future cash flow, if our operations in Colombia were adversely affected, we would experience a material adverse effect. MARKETING During 2000, we sold all of the oil we produced from the Guaduas Oil Field to Refinerie del Nare and Ecopetrol. REGULATION GENERAL Our operations are affected by political developments and laws and regulations in the areas where we operate. In particular, oil and gas production operations and economics are affected by: o price controls; o tax laws and other laws related to the petroleum industry, and changes in those laws; o changing administrative regulations; and o the interpretation and application of existing regulations. Legislative and administrative regulations regarding the oil and gas industry change periodically. These changes occur for a variety of political, economic, environmental and other reasons. Many different governmental departments and agencies issue rules and regulations that are binding on the oil and gas industry. Some of these rules and regulations carry substantial penalties for any violation. The regulatory burden on the oil and gas industry increases our cost of doing business. All of our operations are affected by extensive environmental laws and regulations in Colombia. These laws and regulations set standards regulating health and environmental quality. They also establish penalties and other liabilities for any violations. Some of the laws and regulations require the violating party to remediate current and former facilities and off-site locations. Additionally, special provisions may be appropriate or required in environmentally sensitive areas of operation, such as where our Colombian interests are located and where other independent producers of oil and gas have faced significant liability resulting from environmental claims. Specifically, our Colombian operations are governed by a number of ministries and agencies. Our operations are governed by Ecopetrol, the Ministry of Mines and Energy and the Ministry of the Environment, among others. 8 9 Among other things, these regulations govern currency, imports and exports, taxation and environmental controls. The regulations also specify: o the extent to which properties may be acquired or relinquished; o permits required for drilling wells and for the spacing of those wells; o permits for developing and operating the field and pipeline transportation systems; o measures required for preventing the waste of oil and gas resources; and o rates of production and sales prices to be charged to purchasers. ENVIRONMENTAL MATTERS Our Colombian operations are subject to a variety of environmental laws and regulations. These environmental laws and regulations govern the discharge of certain materials into the environment and the disposal of oil and gas waste. They also are designed to protect human health and environmental quality. On the federal level, the Ministry of Environment regulates all activities that could adversely impact Colombia's environment and natural resources. The Ministry of Environment requires specific environmental licenses for various oil and gas exploration and production activities. Individual licenses are issued only upon completion of a detailed environmental impact study. In the past, we have experienced delays in obtaining our federal environmental licenses. We have also experienced delays in getting other local environmental permits that are required for expanding our Colombian operations. We may continue to experience these kinds of delays in the future. Despite these delays, we obtained the environmental licenses required for our development activities for the Guaduas Oil Field in July 2000. We have also received the licenses we need for production and development drilling activities. See "Property - Colombian Properties - Production facilities, gathering and pipeline systems for the Guaduas Oil Field." We are currently waiting for environmental permits to drill exploration wells on the Rosablanca association and Deep Dindal association contracts. Environmental laws and regulations could result in substantial costs and liabilities in the future. Significant liability could be imposed on us for damages, clean-up costs and/or penalties for discharges into the environment. We could also be liable for environmental damage caused by the previous owners of our property or for non-compliance with environmental laws or regulations. This kind of liability could have a material adverse effect on our operations. During 2000, total environmental costs attributable to our Colombian properties were $0.28 million gross ($0.16 million net to Seven Seas). We cannot predict what environmental legislation or regulations will be enacted in the future. We also cannot predict how existing or future laws or regulations will be administered or enforced. Compliance with stricter laws and regulations, or the more vigorous enforcement of environmental policies, could require us to make material expenditures for the installation and operation of systems and equipment for remedial measures. Any of these scenarios could have a material adverse effect on Seven Seas. COLOMBIAN FOREST RESERVE Two mutually overlying forest reserves existed in an area corresponding to the Dindal Association Contract, one prior to and another subsequent to the signing of this contract. The first forest reserve corresponds to a national reserve declared in 1981 and enlarged in 1985, that sets limits to economic activities within the reserve area. The national forest reserve does not prohibit oil and gas activities within the reserve area. However, Seven Seas must apply for an environmental license with the Colombian Ministry of Environment to conduct operations within the forest reserve area. The second forest reserve corresponds to a reserve declared by the municipality of Guaduas in 1998, forbidding oil-related activity in the mentioned reserve's area. The municipality of Guaduas subsequently revoked this reserve through the Land Use Plan that adopted the national forest reserve as the only existing reserve. ENVIRONMENTAL PENALTIES In March 2000, we paid a fine of approximately $223,000 to the Ministry of Environment in connection with a resolution issued against GHK Company Colombia by the Ministry of Environment in which it declared GHK Company Colombia to be in violation of a 1997 decree in connection with the construction of the El Segundo 7-E well location. We have filed an appeal for a reversal of the resolution. We believe that we have corrected the environmental violations claimed by the Ministry of Environment; however, the appeal process can take up to two years. The El Segundo 7-E location has been restored and we currently have no drilling activities planned at this location. 9 10 COMPETITION We encounter competition from other oil and gas companies in all areas of our operations, including the acquisition of producing properties. Our competitors in Colombia include major multi-national integrated oil and gas companies and both local and multi-national independent oil and gas companies. Many of our competitors are large, well-established companies with substantially larger operating staffs and greater capital resources than we have and which, in many instances, have been engaged in the oil and gas business for a longer time. Such companies may be able to offer more attractive terms in obtaining contracts for exploratory prospects and secondary operations and to pay more for productive properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial or human resources permit. Our ability to acquire additional properties and to discover reserves in the future will be dependent upon our ability to evaluate and select suitable properties and to consummate transactions in this highly competitive environment, as well as our ability to obtain adequate capital. EMPLOYEES As of December 31, 2000, we had 73 full-time employees, including geologists, geophysicists, engineers and other employees. Seven Seas is not subject to any collective bargaining agreement, and we believe that our relationship with our employees is good. ITEM 2. PROPERTIES GENERAL OVERVIEW Our Colombian operations are focused on the Guaduas Oil Field, located in the capital state of Cundinamarca in central Colombia, approximately 60 miles northwest of Bogota. The Guaduas Oil Field is located in a 109,000-acre area defined by the Dindal and Rio Seco association contracts. The village of Guaduas lies within the Dindal and Rio Seco association contract blocks and provides infrastructure for the local economy, which is primarily agrarian in nature. The area is accessible by the main road between Bogota and Medellin and the Colombian Caribbean coast. We are the operator and own a 57.7% working interest in the Guaduas Oil Field before Colombian government participation. As the operator of the field, we exercise direct supervision over all field operations, including drilling and production. The other interest owners are Cimarrona LLC (9.4%) and Sociedad International Petrolera S.A., known as Sipetrol, the international exploration and production subsidiary of the Chilean national oil company (32.9%). Collectively we are known as the "Associates". As of December 31, 2000, the Ryder Scott Company Petroleum Consultants estimated Seven Seas' net proved reserves attributable to the delineation of 12,821 acres of the Guaduas Oil Field were 47.9 million barrels with a present value (discounted continually over the expected life of the production at 10% per annum) of $ 394.1 million. We also have a 100% interest in the Deep Dindal, Cristales and Rosablanca association contracts and a 19.19% interest in the Tapir association contract. Additional information about each of these contract areas is provided later in this section. COLOMBIAN PROPERTIES DINDAL AND RIO SECO ASSOCIATION CONTRACTS - GUADUAS OIL FIELD The Dindal and Rio Seco association contracts cover adjoining areas of approximately 109,000 acres that contain the Guaduas Oil Field. The Dindal association contract has an effective date of March 23, 1993, and the Rio Seco association contract has an effective date of August 22, 1995. Both association contracts provided for a six-year exploration period followed by a maximum 22-year production period, with partial relinquishments of acreage, excluding commercial fields, required at the end of the sixth year of each contract. The Dindal exploration period has ended and we have 21 years left on the contract to produce the Guaduas Oil Field. Although the exploration period ended, Ecopetrol recently postponed the required relinquishment of Dindal association contract areas outside the Guaduas Oil Field and the five-kilometer buffer zone for as long as the Deep Dindal association contract is in the exploration period. The Deep Dindal association contract was issued in February 2001. See "--Deep Dindal association contract." We are obligated to drill one more exploration well on the Rio Seco association contract area before the exploration period of that contract ends in August 2001. At some point in the future, we may have to relinquish the smaller of 50% of the contract areas or all lands that fall outside a five kilometer buffer zone around the area designated to be the commercial field. In May 2000, Ecopetrol elected not to participate in the development and production of the Guaduas Oil Field. The Associates have elected to proceed on a sole-risk basis pursuant to the terms of the Dindal and Rio Seco association contracts. Ecopetrol retains the right to participate at a later date subject to the Associates recovering 200% of the costs incurred since Ecopetrol's May 2000 decision not to participate plus certain exploration costs. Under the terms of the Dindal and Rio Seco association contracts, the Associates pay 100% of all exploratory costs. As Ecopetrol elected not to participate in the development and production of the Guaduas Oil Field, the Associates will also pay 100% of the development costs. 10 11 The Associates are required to pay a royalty of 20% of all hydrocarbon production to the Colombian government. Because Ecopetrol elected not to participate at this time, the remaining 80% of production is divided among the Associates according to their proportionate interest in the association contract. If Ecopetrol participates in the future, the remaining 80% will be divided as follows: o Dindal association contract - Of the remaining 80% of production, Ecopetrol will receive 50% and the Associates will receive 50% until the contract area has produced in excess of 60 million barrels of oil, after which point Ecopetrol's interest in production will increase on a sliding scale. Such increases occur in 5% increments from 50% to 70% as accumulated production from the contract area increase in 30 million barrel increments from 60 million barrels to 150 million barrels. o Rio Seco association contract - Of the remaining 80% of production, Ecopetrol will receive 50% and the Associates will receive 50% until the contract area has produced 60 million barrels of oil, after which point Ecopetrol's interest will increase from 50% to 75% as the ratio of accumulated income attributable to the Associates (less any expenses reimbursed by Ecopetrol) increases from a one-to-one ratio to a two-to-one ratio. Under both contracts, if Ecopetrol does elect to participate, it would pay 50% of the go forward development and operating expenses. Our wholly owned subsidiary GHK Company Colombia serves as the operator of the Guaduas Oil Field, pursuant to the terms of operating agreements between Seven Seas, our subsidiaries and the other associates. GHK Company Colombia has exclusive responsibility for operations within the budgets and work programs approved by the executive committee and may demand payment in advance from each party of its respective shares of estimated subsequent monthly expenditures. Under the terms of a letter agreement dated September 11, 1992, as amended, between GHK Company Colombia and Dr. Jay Namson, the holders of interests in the association contracts, except for Petrolinson S.A., will be required to assign a proportionately reduced 2% working interest in the Dindal association contract and the Rio Seco association contracts to Dr. Namson after those interest holders recover from production of 100% of all costs incurred in connection with the exploration and development of the Dindal and Rio Seco association contract areas since the completion of the first-year work obligations under the Dindal association contract. Accordingly, when such costs have been recovered, we will be required to assign to Dr. Namson 2% of 55% from our 57.7% interests. DRILLING ACTIVITY ON THE RIO SECO AND DINDAL ASSOCIATION CONTRACTS To date, thirteen wells have been drilled on the Dindal and Rio Seco association contract areas. Seven of those wells are classified as oil and gas wells. Five of the wells did not produce commercial amounts of oil and gas during testing. One well remains to be tested. The first well, the Escuela 1, which was drilled on the Dindal contract area in 1994 prior to the time we acquired an interest in the association contract, did not encounter the Cimarrona formation, the oil and gas reservoir of the Guaduas Oil Field. It was plugged and abandoned as non-commercial. The second well, El Segundo 1-E, was the discovery well of the Guaduas Oil Field. The El Segundo 1-E commenced drilling in December 1995 and reached total depth in mid-January 1996. The well encountered the Cimarrona formation, at a measured depth of 5,718 feet. Due to the circulation problems encountered while drilling, we stopped drilling after penetrating only 88 feet of the Cimarrona. The well was then completed open hole in February 1996. Open hole means that the well did not have casing, which is heavy steel pipe used to seal off fluids from the hole or to keep the hole from caving in. During initial production testing conducted in 1996, the El Segundo 1-E produced oil at an average rate of 2,282 BOPD. As of December 31, 2001, cumulative oil production from this well was 48,435 barrels of oil. This well is currently being used as a field pressure observation well. A third well, El Segundo 1-N, reached total measured depth of 6,820 feet in November 1996. This well was intentionally deviated from the surface location of El Segundo 1-E to a bottom hole location approximately 2,000 feet north. The well encountered approximately 352 feet of oil saturated and highly fractured Cimarrona reservoir rocks. During initial production testing conducted between December 1996 and May 1997, the El Segundo 1-N produced oil at an average rate of 2,867 BOPD. During a long-term production test conducted in the fourth quarter of 1999, this well produced an average controlled rate of 1,750 BOPD. As of December 31, 2000, cumulative oil production from this well was 180,333 barrels of oil. A fourth well, El Segundo 1-S, was drilled and completed in September 1997 to a total measured depth of 6,920 feet. The bottom hole location of this well is located approximately 2,000 feet south of the surface location of the El Segundo 1-E well. During initial production testing, this well produced at an average rate of 3,201 BOPD. During the 1999 long-term production test, this well produced at an average controlled rate of 2,328 BOPD. Between August 2000, when post-exploration phase production commenced, 11 12 and December 31, 2000, this well produced oil at average controlled rate of 2,711 BOPD. Cumulative oil production as of December 31, 2000 from this well was 440,838 barrels of oil. In October 1997, a fifth well, the Tres Pasos 1-E was drilled at a location approximately 8,500 feet northwest of the El Segundo 1-E. The Tres Pasos 1-E was the first well on the Rio Seco association contract. The Tres Pasos 1-E well was completed at a measured depth of 6,150 feet. Analysis of reservoir pressure data during production testing indicated pressure communication with all three El Segundo 1 wells. We believe this pressure communication over a 8,500-feet distance supports core studies showing an intensive degree of inter-connected fractures. The pressure communication also supports core studies showing the large calculated permeability within the area of the Cimarrona formation investigated during production testing. During initial production testing conducted in the fourth quarter of 1997, the Tres Pasos 1-E produced oil at an average rate of 2,690 BOPD. It was further tested during the 1999 long-term production test at an average rate of 2,721 BOPD. Between August 2000, when post-exploration phase production commenced, and December 31, 2000, this well produced oil at an average controlled rate of 1,933 BOPD. Cumulative oil production as of December 31, 2000 from this well was 375,358 barrels of oil. In November 1997, the sixth well, El Segundo 2-E was drilled to a measured depth of 6,292 feet on the Dindal association contract. It was located approximately 19,532 feet north of the surface location of the El Segundo 1-E discovery well. Analysis of pressure data during production testing indicated pressure communication with the El Segundo 1-S well, which has a bottom hole location approximately 20,100 feet to the south of the El Segundo 2-E bottom hole. These data further confirmed the presence of a pervasive fracture system supporting the evidence for extensive permeability within the Cimarrona formation over the area investigated during the production testing. During initial production testing conducted in the fourth quarter of 1997 and the first quarter of 1998, the El Segundo 2-E produced oil at an average controlled rate of 2,730 BOPD. This well was not tested during the 1999 long-term production test. Between August 2000, when post-exploration phase production commenced, and December 31, 2000, this well produced oil at an average controlled rate of 742 BOPD. Cumulative oil production as of December 31, 2000 from this well was 47,219 barrels of oil. In December 1997, the seventh well, Tres Pasos 2-E, was drilled to a measured depth of 6,054 feet on the Rio Seco block approximately 29,600 feet northwest of the surface location of El Segundo 1-E. The well encountered 290 feet of the Cimarrona formation reservoir. Due to an operational problem that resulted from a failure to properly cement liner casing through the Cimarrona formation, we drilled a new side-tracked well bore. The Tres Pasos 2-E side-track reached a total measured depth of 5,880 feet with a bottom hole location approximately 900 feet southeast of the surface location. In October 2000, we completed and tested the side-track well bore of the Tres Pasos 2-E, which produced non-commercial quantities of oil and gas. We have temporarily abandoned the well pending the evaluation of a hydraulic fracture treatment. In November 1997, drilling commenced on the eighth well, El Segundo 3-E, located approximately 14,800 feet south of the surface location of the El Segundo 1-E well on the Dindal block. The drilling of El Segundo 3-E was completed at a measured depth of 8,021 feet in February 1998. The well encountered 292 feet of Cimarrona formation. Customary log analysis indicated similar characteristics of lithology and fracturing similar to that observed in previous wells; however, unlike the other wells, there were no oil shows, only natural gas shows. This well was not cored. After the completion of drilling operations on El Segundo 3-E, we experienced significant mechanical problems while attempting to complete the well for production testing. We have temporarily abandoned the El Segundo 3-E well. The ninth well, El Segundo 6-E, is located on the Dindal block approximately 28,000 feet south of the surface location of the El Segundo 1-E well. In June 1998, the El Segundo 6-E well reached a total measured depth from the surface of 8,669 feet. Our preliminary analyses while drilling indicated highly fractured core samples and over 300 feet of Cimarrona reservoir rocks with no apparent indication of oil-water contact and shows of oil and gas. During production, there was only a small show of oil and gas along with large quantities of water. Attempts to eliminate water migrating from behind the pipe were unsuccessful. During the second half of 2000, we redrilled the El Segundo 6-E well to a total measured depth of 9,250 feet. During a 15-day production test, the well produced oil and no water at an average rate of 320 barrels per day from a non-stimulated open hole portion of the Cimarrona formation. The production was not limited by the size of the pump used in the testing. However, sediments filling a significant portion of the open-hole productive zone may have reduced production. The Company will review the production and pressure data from the El Segundo 6-E redrill to determine future plans for the well, which may include cleaning out the Cimarrona portion of the well bore, running a slotted or cemented production liner, and stimulating all or selected intervals of the Cimarrona. Because the well is located approximately seven kilometers from the Guaduas Oil Field's existing production and loading facilities, the Company plans to delay future completion and production operations on the El Segundo 6-E redrill until the Guaduas - La Dorada pipeline is closer to its projected completion date of mid-2001. Cumulative oil production as of December 31, 2000 from this well was 4,937 barrels of oil. In July 1998, we completed drilling operations on the tenth well, Tres Pasos 4-E. This well is located on the Rio Seco association contract area, approximately 16,400 feet northwest from the surface location of the El Segundo 1-E discovery well. The well reached a total measured depth of approximately 6,300 feet. The Tres Pasos 4-E well encountered 303 feet of Cimarrona formation with oil and gas shows. However, the well bore did not appear to intersect the larger fracture system due to a rotation in reservoir fracture system orientation at the well's bottom hole location. Consequently, the well may not be commercially productive. We are still evaluating and 12 13 analyzing the well, using bottom hole pressure recording to determine whether a side-track lateral/horizontal well bore is warranted. In September 1998, we drilled the eleventh well, Tres Pasos 3-E, located on the Rio Seco block approximately 10,000 feet south of the Tres Pasos 1-E well. The Tres Pasos 3-E well encountered 282 feet of Cimarrona with oil and gas shows. Drilling was then extended to a total measured depth of 10,187 feet in the deeper Villeta formation where shows of oil and gas were encountered. In February 1999, we perforated the deeper Villeta formation, the secondary zone of interest, which resulted in natural gas shows but not in commercial quantities of oil and gas. The shallower Cimarrona formation objective has not yet been tested. Perforating and testing of the Cimarrona formation is scheduled in 2001. In December 1998, we completed drilling the twelfth well. This well, Tres Pasos 1-WH, was our first horizontal/lateral well. It is approximately 6,500 feet west and 2,300 feet north of the El Segundo 1-E. It was drilled to a measured depth of 7,180 feet on the Rio Seco block. The horizontal bore hole penetrated 1,160 feet of the Cimarrona reservoir. Significant rates of oil flow were encountered while drilling the reservoir and no indications of oil-water were encountered. The well was production tested from January 7, 1999 until May 18, 1999 at an average rate of 1,530 BOPD. During the long-term production test conducted in the fourth quarter of 1999, this well produced at an average rate of 1,689 BOPD. As of December 31, 2000, cumulative oil production from this well was 106,125 barrels of oil. In December 1999, we drilled the thirteenth well, El Segundo 4-E, on the Dindal block located approximately 8,200 feet southeast of the El Segundo 1-N discovery well. The well reached a measured depth of 6,200 feet. The well was production tested in February and March of 2000. According to preliminary analysis, the well did not encounter the Cimarrona reservoir. The El Segundo 4-E has been shut in for pressure build up after testing gas from the open hole at rates of approximately 200 mcf/d. We will determine the future disposition of the well based on further evaluation of this data. TABLE OF GUADUAS OIL FIELD WELLS The table below sets out cumulative and average production for the Guaduas Oil Field wells as of December 31, 2000.
CUMULATIVE OIL AVERAGE PRODUCTION AS TEST MEASURED OF PRODUCTION YEAR ASSOCIATION DEPTH 12/31/00(1) RATE(2) WELL NAME DRILLED CONTRACT (FEET) (BARRELS) (BARRELS/DAY) STATUS ----------------- --------- ----------- -------- ------------- ------------- -------------------------------- Escuela 1........ 1994 Dindal 7,802 -- -- Plugged and abandoned El Segundo 1-E... 1995/1996 Dindal 5,718 48,435 2,282 Discovery well; Pressure observation El Segundo 1-N... 1996 Dindal 6,820 180,333 1,750 Oil and gas well El Segundo 1-S... 1997 Dindal 6,920 440,838 2,328 Oil and gas well Tres Pasos 1-E... 1997 Rio Seco 6,150 375,358 2,721 Oil and gas well El Segundo 2-E... 1997 Dindal 6,292 47,219 742 Oil and gas well Tres Pasos 2-E... 1997 Rio Seco 5,880 -- -- Temporarily abandoned El Segundo 3-E... 1997 Dindal 8,021 -- -- Non-commercial test; may side-track El Segundo 6-E... 1998/2000 Dindal 9,250 4,937 320(3) Oil and gas well Tres Pasos 4E.... 1998 Rio Seco 6,300 -- -- Non-commercial test; may side-track Tres Pasos 3E.... 1998 Rio Seco 10,187 -- -- Waiting on Cimarrona completion Tres Pasos 1-WH.. 1998 Rio Seco 7,180 106,125 1,689 Oil and gas well El Segundo 4-E... 1999 Dindal 6,200 -- -- Evaluating test results
- ---------- (1) Cumulative production as of December 31, 2000 was 1,203,245 barrels of oil from the seven productive wells listed in the table. (2) Average rate of production during the 1999 long-term production test, unless the well was not produced at that time. If the well was not tested during the 1999 long-term production test, the rate refers to the average production rate during initial testing. (3) During a 15-day production test, the El Segundo 6-E tested at an average rate of 320 barrels per day. GEOLOGY AND RESERVOIR CHARACTERISTICS OF THE GUADUAS OIL FIELD The Guaduas Oil Field geological structure is a large anticlinal structure. An anticlinal structure is a sub-surface, geological structure that rises to a rounded peak. The primary oil reservoir is the Upper Cretacous Cimarrona formation, which is located on the west flank of the Villeta anticline with an average dip of 14 degrees at a depth of between approximately 6,000 and 8,000 vertical feet. The reservoir comprises both limestone and sandstone and is under-pressured. The oil is characterized by low sulfur content of approximately 0.5%, low paraffin content, a medium gravity of between 18 degrees to 20 degrees API, and a pour point of minus 34 degrees Fahrenheit. The reservoir is generally intensely fractured and has indicated high permeability in the wells that successfully produced oil and gas. Pressure test analysis indicates the reservoir to be connected in most directions by large fractures that allow hydrocarbons to flow 13 14 readily through the reservoir. We believe that these highly permeable fractures, in conjunction with the angle of the formation dip, will allow the oil to be produced by a combination of efficient oil recovery mechanisms, including gravity drainage, gravity segregation and pressure maintenance. PRODUCTION FACILITIES, GATHERING AND PIPELINE SYSTEMS FOR THE GUADUAS OIL FIELD In January 2000, we completed the construction of the production facility that has been used since August 2000 for the production of between 4,000 - 6,000 BOPD. We currently have four 5,000-barrel storage tanks at this production facility, providing storage capacity of 20,000 barrels. In July 2000 we received the required environmental permits for the Guaduas - - La Dorada Pipeline and the related production facilities. The approximate 36-mile Guaduas - La Dorada Pipeline will connect the Guaduas Oil Field to international oil markets via Colombia's existing pipeline infrastructure. Operations to construct this pipeline commenced in October 2000. We have completed the purchase of rights-of-way for the pipeline route, taken delivery of the 10-inch pipe for the pipeline, nearly completed the clearing of the pipeline route, and successfully completed underground river crossing, the most difficult part of the construction. As of the filing date of this report, the Guaduas - La Dorada Pipeline remained on schedule for a mid-year 2001 completion. The Guaduas - La Dorada Pipeline will transport Guaduas Oil Field production to La Dorada, a small town north of the field, where it will intersect with the Oleoducto Alto Magdalena (OAM) pipeline, a regional pipeline that transports oil production from the Upper and Middle Magdalena river valley to the oil refining and terminal city of Vasconia. In Vasconia, the OAM pipeline connects with the Oleoducto de Colombia (ODC) and the Oleoducto Central S.A. (OCENSA) pipelines, both of which transport oil to the export terminal facilities at the Caribbean port of Covenas. In early 2001, we signed an agreement to transport our share of the Guaduas Oil Field crude oil production through the OAM and ODC pipelines. DEEP DINDAL ASSOCIATION CONTRACT In February 2001, we acquired the Deep Dindal association contract, which is also known as an "on top" contract because it originated from the Dindal association contract. This association contract has the same surface area as the Dindal association contract (approximately 65,000 acres), but it only applies to the areas below the base of the Guaduas Oil Field. This area contains the subthrust Dindal prospect, which we plan to test with an exploration well in 2001. We have a 100% interest in this association contract subject to an obligation to assign some of this interest to Sipetrol and Cimarrona, our partners in the Guaduas Oil Field, pursuant to an Exploration agreement we signed with them in January 2001. Following the drilling of a exploration well to test the subthrust Dindal prospect, we will have to assign either a 25.85% collective interest to Sipetrol and Cimarrona, or a 9.4% interest percent to Cimarrona and provide Sipetrol with a 4.86% overriding royalty interest that is reducible by Colombian government participation in the project. Additional information on the exploration agreement, which is a part of a larger agreement with our partners, is available in a Form 8-K filed with the U.S. Securities and Exchange Commission on January 31, 2001. The terms of the Deep Dindal association contract are similar to the Rio Seco association contract terms insofar as the Associates are responsible for 100% of the exploration costs, Ecopetrol will have a right to participate in the development and production of a discovery, and Ecopetrol's interest will increase as the ratio of accumulated income attributable to the Associates (less any expenses reimbursed by Ecopetrol) increases from a one-to-one ratio to a two-to-one ratio. However, Ecopetrol's initial interest will be 30%, as compared to 50% under the Rio Seco and Dindal association contracts, and will increase only to 65%, as compared to 75% under the Rio Seco association contract and 70% under the Dindal association contract. Another benefit of the Deep Dindal association contract is that it is a full 28-year contract, including a 25-year production period, as compared to a 22-year production period under the Dindal and Rio Seco association contracts. The Deep Dindal association contract requires that we drill an exploration well during each of its two eighteen month exploration stages, the first of which commences on April 24, 2001, the effective date of the association contract, and the second of which commences at the end of the first. We plan to drill an exploration well at an estimated cost of $15 million in 2001 to satisfy the first eighteen-month requirement. Our plans are contingent upon 1) our ability to secure the financing for the 100% of the costs of drilling and testing this well, and 2) receiving the required environmental permit. In 1999, the Colombian government enacted a new royalty regime for oil and gas fields discovered after the date of enactment. Under the new regime, the royalty on oil and gas production of new discoveries will be a variable royalty that begins at 5% and rises to 20% as cumulative hydrocarbon production increases. Under the old royalty regime, oil and gas production was subject to a fixed 20% royalty. Because the Guaduas Oil Field was discovered before the enactment of the new royalty regime, production from this field will be subject to the fixed 20% royalty. If a discovery is made in the area covered by the Deep Dindal association contract, it will be subject to the new royalty regime. 14 15 CRISTALES ASSOCIATION CONTRACT In February 2001, we acquired the Cristales association contract, covering an area of approximately 200,000 gross contiguous acres located immediately to the east of the Dindal and Deep Dindal association contract areas. We have a 100% interest in this association contract. The fiscal terms of the Cristales association contract are identical to the Deep Dindal terms, with one exception: the Cristales association contract has a 6-year exploration period and a 22-year production period, as compared to a 3-year exploration period and a 25-year exploration period under the Deep Dindal association contract. Our first year obligation under this contract is to conduct remote sensing work and other geological and geochemical studies at an expected cost of $350,000. Colombia's new royalty regime will be applied to any discovery made with the Cristales association contract area. ROSABLANCA ASSOCIATION CONTRACT Effective February 28, 1998, we acquired a 75% interest in the adjoining Rosablanca and Montecristo association contract areas. In late 2000, we reached an agreement with Ecopetrol to drill one well on the Rosablanca association contract area and relinquish the Montecristo association contract to satisfy various second and third year work obligations under these contracts. Additionally, in accordance with the contract terms, we recently reduced the size of the Rosablanca contract area by approximately 74,000 acres. The Rosablanca contract now covers approximately 242,500 gross contiguous acres in the northern Middle Magdalena Basin. Under the terms of the recently signed agreement with Ecopetrol, the well on the Rosablanca contract was supposed to be started by February 28, 2001. However, we have not received the required environmental permit from the Colombian Ministry of Environment. Consequently, Ecopetrol granted us a six-month extension to drill this well. This well, to be called the Santa Fe - 1, will be drilled to an estimated total depth of 3400 feet at an estimated gross cost of $1.0 million. The terms of the Rosablanca association contract are similar to the Rio Seco association contract, but with two major beneficial changes. First, after a declaration of commerciality, Ecopetrol's interest in production and costs would be on an individual-field basis rather than being applicable to the entire contract. Second, the Rosablanca association contract provides for an additional term of four years in the event a gas field is discovered. Colombia's new royalty regime will be applied to any discovery made within the Rosablanca association contract area. On November 8, 2000, we notified Potomac Energy Corporation, a 25% working interest partner in the Rosablanca association contract, that it was in default of approximately $0.4 million of its share of costs under the joint operating agreement. Potomac had to remedy the default by January 8, 2001 to avoid forfeiting its interest in the contract area. Potomac did not remedy the default, and as a result, we now have a 100% interest in the association contract. TAPIR ASSOCIATION CONTRACT In April 1996, we acquired an 11.875% initial working interest in the Tapir association contract, which covers 116,795 acres in Colombia's Central Llanos basin and is located 40 miles east of the Cusiana Field. The Tapir association contract was effective on February 6, 1995 on terms substantially similar to the Rio Seco association contract. Mohave Colombia Corporation (Mohave) is the operator and 37.5% working interest owner of the Tapir association contract. The other two initial working interest owners are Doreal Energy Corporation with 12.5% and Solana Petroleum Exploration Colombia (Solana) with 38.125% In 1998, we participated in the Mateguafa-1 well, which produced oil at a rate of 777 BOPD during testing. In 1999, we participated in the Caporal-1 well to test a different prospect within the Tapir contract area. The Caporal-1 well was a dry hole. During the first half of 2000, we participated in the Mateguafa-2A well, located 1.8 kilometers south of the Mateguafa-1 well. This well has not been tested, but is scheduled for completion and testing operations in 2001 along with additional production testing of the Mateguafa-1 well. In August 2000, we signed a purchase and sale agreement with Solana to sell our 11.875% interest in the Tapir association contract for 3,000,000 common shares of Solana's parent corporation, Solana Petroleum Corporation. Seven Seas and Solana have subsequently agreed to terminate this purchase and sale agreement. Additionally, Solana is in default for failure to pay its participating share of Joint Account expenses, and has agreed to relinquish its interest in the Tapir association contract. We have agreed to be assigned our proportionate share of the interest in the Tapir association contract that Solana will relinquish. Upon receipt of that assignment, our interest in the Tapir association contract will increase to approximately 19.19% In January 2001, Mohave will begin the sixth year work program. The proposed program includes the construction of an all-weather road, production testing the Mateguafa 1 and 2 wells, and drilling an exploratory well. With our 19.19% interest in the Tapir association contract, our share of costs of the 2001 work program is estimated to be $2.1 million. We will, however, continue to look for a potential purchaser for our interest. OIL AND GAS RESERVES The following table sets forth our estimated net proved oil and gas reserves, the estimated future net revenues before income taxes, the present value of estimated future net revenues before income taxes related to proved reserves and the standardized measure of 15 16 discounted future net cash flows related to proved reserves, in each case as of December 31, 2000 and 1999. All information relating to estimated net proved oil and gas reserves and the estimated future net revenues and cash flows attributable thereto is based upon a report from Ryder Scott Company Petroleum Consultants. All calculations of estimated net proved reserves have been made in accordance with the rules and regulations of the United States Securities and Exchange Commission.
AS OF AS OF DECEMBER 31, DECEMBER 31, 2000(1) 1999 ------------ ------------ Total net proved reserves: Oil (MBbls) ................................................... 47,992 34,880 Gas (MMcf) .................................................... -- -- Total (MBOE) .................................................. 47,992 34,880 Net proved developed reserves: Oil (MBbls) ................................................... 15,853 11,001 Gas (MMcf) .................................................... -- -- Total (MBOE) .................................................. 15,853 11,001 Estimated future net revenues before income taxes (in thousands)(2) ............................................. $ 670,068 $ 605,603 Present value of estimated future net revenues before income taxes (in thousands)(2) ............................................. $ 394,054 $ 311,374 Standardized measure of discounted future net cash flows (in thousands)(2)(3) .......................................... $ 289,345 $ 230,967
- ---------- (1) The increase in the Company's net reserves is principally due to the May 2000 decision by Ecopetrol, Colombia's national oil company, not to participate in the development of the Guaduas Oil Field and to permit Seven Seas and its partners to proceed on a sole-risk basis. (2) The present value of estimated future net revenues was prepared using constant prices as of December 31, 2000 and 1999, discounted at 10% per annum on a pre-tax basis. The net price for 2000 was calculated using the December 31, 2000 price of $26.80 per barrel, less $8.64 per barrel for gravity adjustment and transportation and marketing costs, yielding a net price of $18.16 per barrel. The net price for 1999 was calculated using the December 31, 1999 price of $25.60 per barrel, less $4.50 per barrel for gravity adjustment and transportation and marketing costs, yielding a net price of $21.10 per barrel. (3) The standardized measure of discounted future net cash flows represents the present value of estimated future net revenues from proved reserves after income tax, discounted at 10% per annum. Reservoir engineering is a subjective process that involves estimating underground accumulations of gas and oil that cannot be measured in an exact way. The accuracy of any reserve estimate depends on the quality of available data, and on engineering and geological interpretation and judgment. As a result, estimates made by different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of the estimates. These revisions may be material. Accordingly, reserve estimates are generally different from the quantities of gas and oil that are ultimately recovered. Approximately 67% of our total estimated proved reserves at December 31, 2000 were undeveloped. Recovery of these reserves will require significant spending and successful drilling and completion operations. Although estimates of our reserves and related costs have been prepared in accordance with industry standards, we cannot be certain that the estimated costs are accurate, that development will occur as scheduled or that the results will be as estimated. PRODUCTIVE WELLS The following table sets forth the gross, or total, number of productive oil and gas wells in which we have an interest as of December 31, 2000 and also sets forth the net number as of the same date. The net number of productive wells is determined by multiplying the number of gross wells by our working interests in those wells.
WELLS(1) --------------------------------- OIL GAS --------------- --------------- GROSS NET(2) GROSS NET(2) ------ ------ ------ ------ Colombia ............ 9 4.4 0 0.0 ------ ------ Total .......... 9 4.4 0 0.0
- ---------- (1) One or more completions in the same well bore are counted as one well. (2) Net interests are based on our respective working interests in the association contracts that cover the areas in which these wells were drilled, and are before Ecopetrol's participation. 16 17 ACREAGE The following table sets forth estimates of our gross and net developed and undeveloped acreage for which oil and gas leases or association contracts were held as of December 31, 2000. The gross acres number reflects the total number of acres in which we have an interest, without regard to the size of that interest. Net acres are determined in the same way that net wells are determined, by multiplying the gross acres by our interest in those acres. Undeveloped acreage means acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas regardless of whether the acreage contains proved reserves.
DEVELOPED UNDEVELOPED --------------------------- --------------------------- GROSS ACRES NET ACRES(1) GROSS ACRES NET ACRES(1) ------------ ------------ ------------ ------------ Colombia .......... 12,821 7,398 719,474 524,206 Total ........ 12,821 7,398 719,474 524,206
- ---------- (1) Net acres are based on our respective working interests in the association contracts that cover these areas, and are before Ecopetrol's participation. DRILLING ACTIVITY The following table sets forth the number of wells drilled by us from inception through December 31, 2000:
EXPLORATORY DEVELOPMENT --------------------------------- --------------------------------- PRODUCTIVE DRY PRODUCTIVE DRY --------------- --------------- --------------- --------------- GROSS NET(1) GROSS NET(1) GROSS NET(1) GROSS NET(1) ------ ------ ------ ------ ------ ------ ------ ------ Year ended December 31, 2000: Colombia ........................ 2 0.8 0 0.0 0 0.0 0 0.0 Year ended December 31, 1999: Colombia ........................ 0 0.0 2 0.7 0 0.0 0 0.0 Year ended December 31, 1998: Colombia ........................ 2 0.8 5 2.9 0 0.0 0 0.0 Year ended December 31, 1997: Colombia ........................ 3 1.7 0 0.0 0 0.0 0 0.0 Year ended December 31, 1996: Colombia ........................ 2 1.2 0 0.0 0 0.0 0 0.0 Argentina ....................... 0 0.0 1 0.3 0 0.0 0 0.0 ------ ------ ------ ------ ------ ------ ------ ------ 2 1.2 1 0.3 0 0.0 0 0.0 Year ended December 31, 1995: Australia ....................... 0 0.0 1 0.1 0 0.0 0 0.0
- ---------- (1) Our net interests in wells located in Colombia are before Ecopetrol's participation. OTHER INFORMATION We have included additional information regarding our oil and gas operations in the notes to our 2000 consolidated financial statements. This information addresses: o our capitalized costs related to our oil and gas activities incurred in 2000, 1999 and 1998; o our development, property acquisition and exploration costs incurred in 2000, 1999 and 1998; o our proved reserves in 2000, 1999 and 1998; o the standardized measure of discounted future net cash flows attributable to our proved oil reserves for 2000, 1999 and 1998; and o the principal sources of changes in our standardized measure of discounted future net cash flows in 2000, 1999 and 1998. ITEM 3. LEGAL PROCEEDINGS HEIRS OF NICOLAS BELTRAN FRANCO Two of our subsidiaries, Petrolinson, S.A. and GHK Colombia, along with the former owner of Petrolinson, S.A., Norman Rowlinson and the heirs of Howard Thomas Corrigan, are defendants in a lawsuit that was filed in Santa Fe de Bogota, Colombia in 1998. The plaintiffs are the heirs of Nicolas Beltran Franco. The plaintiffs have two claims. First, they claim that a de facto company 17 18 existed between Nicolas Beltran Franco and the defendants concerning the Dindal and Rio Seco association contract areas. Second, they claim that before the Dindal and Rio Seco association contracts were executed, the de facto company conducted exploration works in the Dindal and Rio Seco association contract areas. The plaintiffs claim they have the right to participate in income earned from the Dindal and Rio Seco association contract areas. None of the plaintiffs are party to the association contracts. However, they are seeking 50% of the income generated by the de facto company they claim existed. It is not clear what percentage of the Dindal and Rio Seco association contract areas are covered by the plaintiffs' claims. Our Colombian counsel, Raisbeck, Lara, Rodriguez and Rueda, members of the law firm of Baker and McKenzie, believe that if this claim is litigated the chances of the plaintiffs succeeding are remote. SURFACE LOCATION A lawsuit was filed by the landowner of the El Segundo 1 surface location to cancel our surface lease. We responded to this claim on November 4, 1999, and have vigorously defended this claim. Examinations regarding the claim were held in September 2000, and the probatory stage of the matter was closed on March 21, 2001. Our Colombian legal counsel advised us that, on the basis of the claims asserted, it is unlikely that we will lose the lawsuit. NOTEHOLDER CLAIM A claim has been brought against Seven Seas by one of the noteholders in connection with the Special Notes issued on August 7, 1997. The claim, which is against Seven Seas and Yorkton Securities Inc., alleges that the noteholder was not initially advised of the right of Seven Seas to convert the debentures into units of common shares and warrants. The claim also alleges that there were errors in the methodology of effecting conversion pursuant to the indenture between Seven Seas and Montreal Trust Company of Canada dated August 7, 1997 such that the conversion was not effective. The plaintiff in the claim is seeking damages against Seven Seas in the amount of $340,000 for negligent misrepresentation and breach of contract or alternatively, for an order directing Seven Seas to exchange the units currently held by the plaintiff into a note in the amount of $340,000 payable on July 24, 2002 with interest payable thereon at a rate of 6% per annum or directing Seven Seas to reimburse the plaintiff in the amount of $340,000 for the purchase price of the Special Notes. Seven Seas believes it has meritorious defenses and intends to take appropriate steps to defend the action vigorously. FORMER MANAGEMENT Seven Seas and two of its officers and directors, Robert A. Hefner, III and Larry Ray, and one of its former directors, Breene M. Kerr, have been sued by four former Seven Seas officers and directors in DeCort, et al. v. Seven Seas Petroleum Inc., et al., Cause No. 2000-50498, District Court of Harris County, Texas, 133rd Judicial District. Plaintiffs allege that Seven Seas failed to obtain extensions of time in which the plaintiffs could exercise certain stock options granted to them, and that all defendants induced them to enter into separation agreements with Seven Seas that they would have not entered into but for Seven Seas' agreement to obtain an extension of time for plaintiffs to exercise their stock options. The plaintiffs filed the case October 2, 2000, seeking damages in excess of $13 million. The Company has responded, denying plaintiffs' allegations and the case is in the early stages of discovery. Mediation is currently scheduled for late April and a preliminary trial date has been set for June. Seven Seas intends to vigorously defend the case. FORMER EMPLOYEE A lawsuit has been filed against GHK Company Colombia in the Bogota labor court by a former employee who claims that he incurred $1.6 million in expenses in connection with a criminal action filed against him in Guaduas. Our Colombian legal counsel has advised us that it is unlikely that we will lose the lawsuit due to the fact that, upon his departure from service, the plaintiff acknowledged that GHK had paid in full all monies owed. OTHER Other than the cases mentioned above, and the penalty imposed by the Ministry of Environment described in "Business -- Regulation -- Environmental penalties" above, we are not a party to any material proceedings and our property is not the subject of a material proceeding. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 18 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common shares have been listed on the American Stock Exchange under the symbol "SEV" since January 9, 1998. From February 10, 1997 until March 9, 2001, our shares were also listed on The Toronto Stock Exchange in Toronto, Ontario, Canada under the symbol "SVS.U." Effective at the close of business on March 9, 2001, we delisted our shares from The Toronto Stock Exchangein connection with our continuance from the Yukon Territory to the Cayman Islands. The following tables summarize the high and low sales prices for each full quarterly period within the two most recent fiscal years. The prices listed below are stated in U.S. dollars, which is the currency in which they were quoted. THE TORONTO STOCK EXCHANGE
HIGH LOW -------- -------- 1999 First Quarter ................ $ 9.10 $ 3.60 Second Quarter ............... 5.05 2.65 Third Quarter ................ 4.05 2.36 Fourth Quarter ............... 3.15 1.51 2000 First Quarter ................ $ 3.00 $ 1.50 Second Quarter ............... 2.25 0.80 Third Quarter ................ 3.70 0.80 Fourth Quarter ............... 3.52 1.00
The following table summarizes the high and low sales prices as reported on the American Stock Exchange for the periods listed below. AMERICAN STOCK EXCHANGE
HIGH LOW -------- -------- 1999 First Quarter ................ $ 9.25 $ 3.56 Second Quarter ............... 5.13 2.50 Third Quarter ................ 4.19 2.50 Fourth Quarter ............... 3.19 1.50 2000 First Quarter ................ $ 3.19 1.69 Second Quarter ............... 2.06 0.94 Third Quarter ................ 3.88 1.00 Fourth Quarter ............... 3.88 0.81
As of March 28, 2001, there were approximately 679 shareholders of record. We have never declared or paid cash dividends on our common shares. We expect to retain all earnings in the foreseeable future for the development of our business. ITEM 6. SELECTED FINANCIAL DATA The following table sets forth certain historical consolidated financial data for Seven Seas as of and for each of the periods indicated. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and our consolidated financial statements and accompanying notes included elsewhere in this document.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) INCOME STATEMENT DATA: Revenue ................................... $ 6,434 $ 5,313 $ 3,797 $ 1,567 $ 575 Net loss .................................. (5,907) (6,789) (90,199) (7,928) (2,195) Net loss per common share ................. (0.16) (0.18) (2.49) (0.24) (0.17) Weighted average shares outstanding ............................ 37,836 37,862 36,204 32,505 12,972 BALANCE SHEET DATA (END OF PERIOD): Cash and cash equivalents ................. $ 12,128 $ 22,447 $ 38,147 $ 18,067 $ 10,620 Total assets .............................. 254,076 261,082 279,900 291,914 235,501 Current liabilities ....................... 8,704 9,714 12,357 8,205 2,806 Long-term debt ............................ 110,000 110,000 110,000 25,000 -- Minority interest ......................... -- -- 9,713 4,087 1,060 Stockholders' equity ...................... 110,669 116,574 123,098 184,163 167,667
19 20 In June 1999, we restructured our interest in Colombia resulting in the elimination of a minority interest owner in one of our subsidiaries. There was no impact on our net ownership interest in the Guaduas Oil Field. See footnote 14 to the financial statements for a further discussion. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION INTRODUCTION The following discussion is intended to assist in understanding our financial position and results of operations for each year in the three-year period ended December 31, 2000. OVERVIEW Our principal asset is a 57.7% interest, before participation by Ecopetrol, in the Dindal and Rio Seco association contracts, which cover the area in which the Guaduas Oil Field is located. As of December 31, 2000, Ryder Scott Company Petroleum Consultants estimated total proved recoverable reserves for the Guaduas Oil Field of 155.9 million barrels of oil, of which 47.9 million barrels of oil were attributable to our interest. Our current plans for the year 2001 are set forth under "Business -- Our Current Strategy." Whether we can achieve our objectives on schedule depends on a number of factors, many of which are not within our control. Factors include securing financing to fund our share of costs for our 2001 development and exploration strategy, timely environmental permitting, timely payments by the association contract partners of their share of these costs and the market price of oil field equipment and services. We will seek additional sources of financing through project financing, industry joint ventures or arrangements with industry service companies, commercial bank borrowings and traditional debt and equity financing. In our 1999 Form 10-K and subsequent U.S Securities and Exchange Commission filings, we outlined three scenarios for moving forward with the development of the Guaduas Oil Field. Scenario 1 assumed Ecopetrol participated in the development of the Guaduas Oil Field. Scenario 2 assumed Ecopetrol did not participate in the development of the field, but authorized Seven Seas and our partners to proceed with development on a sole-risk basis. Sole-risk means that Seven Seas and our partners pay 100% of development costs and retain all revenues from production after the 20% Colombian royalty deduction. Ecopetrol has the right to start participating in development at any time subject to Seven Seas and partners' right to recover 200% of the development costs spent since Ecopetrol's decision not to participate plus certain exploration costs. Scenario 2 also assumed that together with our partners we would proceed to develop the field as proposed to Ecopetrol (i.e. construct a pipeline and drill development wells for production of 20,000 BOPD to 30,000 BOPD). Like Scenario 2, Scenario 3 assumed that Ecopetrol would elect not to participate, but assumed that we would modify our development program as proposed to Ecopetrol by postponing the construction of the pipeline and development drilling. After Ecopetrol elected not to participate in the development on May 23, 2000, together with our partners, we elected to proceed sole-risk under Scenario 2. In previous filings, including last year's Form 10-K, we stated that if we proceeded under Scenario 2, we expected to commence pipeline production approximately one year after Ecopetrol made its election. As of the filing date of this report, we are on schedule to complete the pipeline by mid-year 2001. The following narrative summarizes the principal activities of 2000. 2000 IN REVIEW During the first quarter of 2000, we fulfilled our obligations under a September 23, 1999 Memorandum of Understanding agreement with Ecopetrol that eventually led to Ecopetrol's decision on whether to participate in the development of the Guaduas Oil Field. Specifically, we completed the long-term production test of the Guaduas Oil Field, producing close to 350,000 barrels of oil, conducted a pressure-build up test and completed and tested the El Segundo 4-E well. We continued our cost reduction program and reorganization of our Bogota office, reducing the number of positions by approximately 42 at an annualized savings of approximately $0.8 million. This cost reduction program, which commenced in 1999, contributed to a $0.4 million decrease in our general and administrative costs between 2000 and 1999, and a decrease of over $2.5 million between 2000 and 1998. Our 2000 general and administrative costs included over $1.3 million in non-reoccurring expenses associated with severance costs and our continuance to the Cayman Islands. Also during the first quarter of 2000, we hired J. Anthony Stuart, a 22-year employee of British Petroleum, as our drilling manager in our Bogota office. Mr. Stuart had spent the previous nine years working for BP in Colombia on the development of the 20 21 Cusiana-Cupiagua field, Colombia's largest known oil field. At the time of his retirement from BP, Mr. Stuart was serving as Drilling Operations Manager. In early 2001, we made Mr. Stuart Vice President of Operations of GHK Company Colombia, our subsidiary in Colombia and the operator of the Guaduas Oil Field. Mr. Stuart will oversee the drilling of the subthrust exploration well provided it is drilled this year. Concurrent with Mr. Stuart's promotion, we also named Claudia M. Vaca Vice President of Legal, Finance and Administration of GHK Company Colombia. Prior to this position, Ms. Vaca, who is a graduate of the Harvard Law School, was serving as GHK Company Colombia's General Counsel. In July and August of 2000, after Ecopetrol decided not to participate in the development of the Guaduas Oil Field and we decided to proceed sole-risk, the Colombian Ministry of Environment and Ministry of Mines and Energy granted all the permits and licenses required to develop and produce the Guaduas Oil Field. After we received the requisite Colombian governmental approvals and licenses, we commenced post-exploration phase production of the Guaduas Oil Field on August 9, 2000. With the exception of pre-scheduled field shut-in periods or road closures, we produced and trucked between 4,000 BOPD and 6,000 BOPD for the remainder of the year, resulting in gross total production of over 400,000 barrels of oil, 189,988 of which were net to our interest. In October 2000, we commenced operations for the construction of the pipeline, ordering long-lead items such as pipe and pumps, and we began to purchase rights-of-way. During the fourth quarter of 2000, we re-drilled, completed and tested the El Segundo 6-E well. During a fifteen day production test, the El Segundo 6-E produced at an average rate of 320 BOPD, establishing production seven kilometers south of the southern most productive well in the Guaduas Oil Field. In November 2000, R. Randolph Devening was appointed to our Board of Directors. Mr. Devening currently serves as Chief Executive Officer of Foodbrands America, Inc., a leading U.S. producer, marketer and distributor of frozen and refrigerated products. Mr. Devening joined Foodbrands America as Chairman, President and CEO in 1994 when it was a public company listed on the New York Stock Exchange and prior to it becoming a subsidiary of IBP, inc. Before joining Foodbrands America, Mr. Devening held various senior level positions, including Vice Chairman of the Board of Fleming Companies, Inc. Mr. Devening is a graduate of Stanford University and holds a Masters in Business Administration in Finance and Marketing from Harvard Business School. He currently serves as director of Hancock Fabrics, Inc., Keystone Automotive Operations, Inc., and Love's Country Stores, Inc. In December 2000, we secured a $10 million loan from Stillwater National Bank to be used primarily for the construction of the 36-mile Guaduas - La Dorada pipeline. Throughout the second half of the year, we were in negotiations with our Guaduas Oil Field partners regarding their participation in the pipeline and the subthrust Dindal prospect. These negotiations were completed in late-January 2001. Key aspects of the global partner agreement that we signed in January 2001 are as follows: o Sipetrol and Cimarrona elected to participate in the construction of the Guaduas - La Dorada pipeline. o Sipetrol and Cimarrona agreed to provide Seven Seas with the opportunity to earn certain of their interests in the subthrust Dindal prospect by drilling a subthrust exploration well and paying Sipetrol and Cimarrona's share of the costs of drilling and testing the well. Additional information on our global partner agreement is available in a Form 8-K filed with the U.S. Securities and Exchange Commission on January 31, 2001. In late 2000, we reached an agreement with Ecopetrol to drill an exploration well on the Rosablanca association contract area and relinquish the Montecristo association contract to satisfy various second and third year obligations under these contracts. One of the matters that culminated in early 2001, but which we worked on in 2000, was securing the Deep Dindal and Cristales association contracts. The Deep Dindal association contract, which is generically referred to as an "on top" contract because it originated from the Dindal association contract, covers the subthrust Dindal prospect located below the Guaduas Oil Field. The Deep Dindal contract provides better economic terms than the original Dindal association contract. The Cristales association contract covers approximately 300,000 acres immediately to the east of the Guaduas Oil Field and the subthrust Dindal prospect. Another matter that culminated in early 2001, but which we worked on in 2000, was continuing the Company to the Cayman Islands from the Yukon Territory, Canada. The principal reason for the change of domicile was to lower our future worldwide effective corporate tax rate. Other considerations were that most of our shareholders are not Canadian and all of our oil and gas revenues are from non-Canadian operations. On February 28, 2001 we received shareholder approval for the continuation, and effective March 1, 2001 we continued as a Cayman Island company. 21 22 During the fourth quarter of 2000, we commenced a search for a chief financial officer. In March 2001, we announced that Ronald A. Lefaive was joining our Company as Vice President of Finance and Chief Financial Officer. Mr. Lefaive has 25 years of finance and accounting experience in the domestic and international oil and gas industry, including positions with Halliburton Company, Chesapeake Energy Corporation, Phibro Energy Inc. and Shell Oil Company. Additionally, he has an extensive background in information technology. Mr. Lefaive is a certified public accountant and holds a Bachelor's of Business Administration degree in accounting from the University of Houston. In summary, in 2000, we took several important steps toward developing the Guaduas Oil Field and securing a sustained source of cash flow. We also positioned ourselves to test the upside potential of the subthrust Dindal prospect in the near future under favorable terms with our partners and Ecopetrol. OUR CURRENT STRATEGY Our strategy for 2001 and 2002 includes the continued development of the Guaduas Oil Field and new exploration. A summary of our strategy follows: Development Pipeline and Production Facilities - We expect to complete the 36-mile La Dorada - - Guaduas pipeline that will connect the Guaduas Oil Field to international oil markets via Colombia's existing pipeline infrastructure by mid 2001. The pipeline will have an initial capacity of approximately 25,000 BOPD, but can be increased to 40,000 BOPD with additional investment. Since we broke ground in January 2001, we have made the following progress: o Completed the purchase of rights-of-way for the pipeline route o Taken delivery of the 10-inch pipe for the pipeline o Nearly completed the clearing of the pipeline route o Successfully completed underground river crossing, the most difficult part of the construction o Secured access to existing pipelines that will transport Guaduas Oil Field production from La Dorada, the end point of the pipeline we are constructing, to the Caribbean port of Covenas We completed construction of a production facility for the production of 4,000 BOPD to 6,000 BOPD in January 2000. We now have four 5,000-barrel storage tanks on location, and we expect to complete the production facility for pipeline production by mid 2001. The gross costs of constructing the pipeline and production facilities are approximately $24 million, our share of which is approximately $13.8 million. Development Wells - We recently agreed with our Guaduas Oil Field partners to a two-year development well drilling schedule that provides for the drilling of nine development wells and one injector well for field pressure maintenance over the course of 2001 and 2002. We believe these wells will increase pipeline production of the Guaduas Oil Field from its initial rate of 8,000 BOPD - 10,000 BOPD to approximately 25,000 BOPD; however, actual production will depend on the results of the development wells. The gross costs of this development well drilling program is estimated to be $44 million, our share of which is approximately $25 million. In 2001, four development wells and one injector well are scheduled at a gross cost of $22 million, our share of which is approximately $13 million. Implementing this development drilling program will depend on our ability to finance our share of the costs. In summary, our 2001--2002 development strategy includes completing the Guaduas - La Dorada pipeline and production facilities for pipeline production and drilling nine development wells and one injector well at a gross cost of $68 million, our share of which is approximately $40 million. In 2001, we expect to complete the pipeline and production facilities and drill four of the nine developments wells and the one injector well. The gross cost of 2001 development operations, including the pipeline and production facilities is expected to be approximately $46 million, our share of which is approximately $27 million. Exploration Subthrust Dindal Prospect - In 2001, we plan to drill an exploration well to test the high potential subthrust Dindal prospect, located below the Guaduas Oil Field. As of February 2001, this prospect is covered by the Deep Dindal association contract that originated from the Dindal association contract. This new contract provides more favorable fiscal terms than the original Dindal association contract. Under the Deep Dindal association contract, our working interest after Ecopetrol elects to participate in the development of an oil and gas discovery starts at 70%, as compared to 50% under the Dindal contract. Additionally, as oil production increases, our working interest will gradually decrease to a minimum of 35%, as compared to 30% under the Dindal contract. In January 2001, we signed a global agreement with our Guaduas Oil Field partners that included a farm out of certain of their interests in the Deep Dindal association contract. As a result of an exploration agreement with our Guaduas Oil Field partners, we now have a 100% interest in the Deep Dindal association contract, subject to an obligation to assign between approximately 14% and 26% to our partners after the first well has been drilled and tested. 22 23 In last year's Form 10-K, we estimated the gross costs of drilling and completing this well would be approximately $18 million. This estimate was based on the assumption that we would have to drill the well outside of an area that the Municipality of Guaduas had declared a forest reserve prohibiting oil and gas operations. The Municipality has subsequently revoked that forest reserve and adopted a previously created national forest reserve as the only existing reserve. The existing forest reserve does not prohibit oil and gas activities, and in fact, the Escuela 1, the first well drilled on the Dindal association contract by our subsidiary GHK Company Colombia, was drilled from a surface location within the existing forest reserve. Although we must still receive a new environmental permit from the Colombian Ministry of Environment, we plan to re-use the Escuela location for the subthrust exploration well. As a result, we now estimate the cost of drilling and completing this well to be $15 million. Because we have a 100% working interest in the Deep Dindal association contract, we will be responsible for the entire cost of drilling and testing the well. Our ability to commence drilling of this well in 2001 is subject to 1) securing financing for the costs of the well, 2) timely receiving the required environmental permit, and 3) contracting a drilling rig. We plan to commence drilling this well as soon as possible after these three conditions have been satisfied, which we expect will be in late-summer 2001. Rosablanca exploration well - We plan to drill an exploration well on the Rosablanca association contract located in Colombia's Magdalena Valley, approximately 220 miles north of the Guaduas Oil Field. This well was scheduled to commence before February 28, 2001 to satisfy certain obligations under the Rosablanca contract. However, we have not received the required environmental permit from the Colombian Ministry of Environment. Ecopetrol recently granted a 6-month extension on our obligation as a result of this delay. This well, to be called the Santa Fe - 1 well, will be drilled to an estimated total depth of 3400 feet at an estimated gross cost of $1.0 million, of which we are responsible for 100%. Tres Pasos 16 exploration well - During the third quarter of 2001, we plan to commence drilling of the Tres Pasos 16 exploration well to test the west side of the Guaduas Oil Field structure. This well will satisfy the sixth-year exploration obligation under the Rio Seco association contract. We estimate the gross cost of this well will be $5.5 million, or $3.0 million net to Seven Seas. In summary, our planned exploration strategy in 2001 provides for the drilling of three exploration wells at a gross cost of approximately $22 million, our share of which is approximately $19 million. Coupled with our development strategy, the gross total of planned capital expenditures in 2001 is approximately $68 million, our share of which is approximately $46 million. Our ability to fully implement our exploration and development strategy is subject to 1) securing financing for our share of costs, 2) timely receiving required environmental permits, 3) contracting the required oil and gas services and equipment, and 4) completing the Guaduas - La Dorada pipeline and commencing pipeline production. For additional information on our financing plans, see the next section "-- Financing Our Current Strategy". FINANCING OUR CURRENT STRATEGY In December 2000, we entered into a $10 million loan agreement with Stillwater National Bank and Trust Company, N.A. On March 30, 2001, the loan's maturity date was extended from December 31, 2001 to April 1, 2002. The Stillwater National Bank loan is secured by all of the stock of the operating subsidiaries of Seven Seas and is guaranteed by Robert A. Hefner III, chairman and chief executive officer of Seven Seas. Mr. Hefner received remuneration of $62,500 for his guarantee. The loan carries a coupon of the Prime Rate plus .75%, and interest is payable monthly until the loan is due in full on April 1, 2002. Seven Seas intends to use these funds for working capital and plans to replace, without penalty, this non-convertible loan with the proceeds from a larger financing planned for 2001. Proceeds from the financing could also be used to finance the $6.9 million interest payment that will be due on November 15, 2001 on our $110 million senior notes. Furthermore, we believe that once the pipeline is built and is actually producing at the rate of between 8,000 BOPD and 10,000 BOPD, additional funds could be borrowed from the same or other lender(s) to finance a portion of the development costs necessary to bring production up to 25,000 BOPD. At this time, we do not know what percent or how much of our revenue will have to be dedicated to service the pipeline debt. However, we intend to arrange this financing in such a way that loan proceeds and cash flow reserves will be sufficient to meet our $6.9 million interest payment due on November 15, 2001 for our $110 million senior notes. Non-discretionary capital commitments for the year 2001 are the costs of constructing the pipeline (for an initial production rate of between 8,000 BOPD and 10,000 BOPD), drilling an exploratory well on the Rio Seco block, drilling an exploratory well on the Rosablanca block and the November 15, 2001 interest obligation for the $110 million senior notes. In the event we are unable to assign our interest in the Tapir association contract, we may be responsible for our proportionate share of all or a portion of the costs of the 2001 work program. See "Properties - Colombian Properties - Tapir association contract". The following table reflects our currently planned capital expenditures through the year 2001. 23 24
ESTIMATED COST ---------------------------- DESCRIPTION OF PROJECT/EXPENDITURE GROSS NET TO US STATUS - ---------------------------------- ------- --------- ------ (IN THOUSANDS) Pipeline and production facilities................ $24,000 $13,848 Construction underway. Exploratory well - Rosablanca block............... $ 1,000 $ 1,000 Obligation Exploratory well - Tres Pasos 16.................. $ 5,500 $ 3,025 Obligation Senior Note 11/15/01 Interest Payment............. $ 6,875 $ 6,875 Due 11/15/01 Tapir working program (2)......................... $ 2,129 $ 2,129 Potential obligation ------- ------- Non-Discretionary Sub-Total............ $39,504 $26,877 ======= ======= 2001 Development Drilling Program(1) Discretionary expenditure (4 development wells, 1 injector well)............ $22,000 $12,694 subject to financing Subthrust exploration well........................ $15,000 $15,000 Discretionary expenditure subject to financing ------- ------- Discretionary Sub-Total................ $37,000 $27,694 ======= ======= Grand Total............................ $76,504 $54,571
- ---------- (1) 2001 development drilling program is part of a two-year plan that has Guaduas Oil Field partner approval to increase pipeline production from its initial rate of 8,000 - 10,000 BOPD to 25,000 BOPD. Under this plan, we will drill an additional 5 development wells in 2002 at a gross cost of approximately $22 million, or $12.7 net to Seven Seas. (2) In the event we are unable to assign our interest in the Tapir association contract, we may be obligated to participate in all or a portion of the 2001 work program. Possible sources of financing include: o commercial bank borrowing; o industry joint ventures or similar arrangement with industry service and supplies companies; o forward sales of oil; and o debt and equity financing. All debt financing will be on a secured basis. Under the terms of our $110 million senior notes, we are permitted to incur general indebtedness that can be senior to our senior notes not exceeding the greater of (i) $25 million, or (ii) the sum of 100% of our cash and cash equivalents, plus 100% of our receivables from Ecopetrol, and plus 30% of our discounted future net revenues from proved oil and gas reserves prepared in accordance with the rules of the United States Securities and Exchange Commission. As of December 31, 2000, the maximum permitted amount of secured borrowing was approximately $130.3 million. We are also authorized under the terms of the senior notes to borrow an additional $10 million for project financing, such as to pay the purchase price or construction costs of the pipeline and production facilities. We have plans to seek approximately $45 million in new financing; however, there are no assurances that we will be successful. LIQUIDITY AND CAPITAL RESOURCES WORKING CAPITAL We had working capital, net of restricted investments, of $12.7 million, including unrestricted cash and cash equivalents of $12.1 million as of December 31, 2000. Our non-discretionary capital commitments for 2001 are approximately $17.9 million, not including a potential obligation on the Tapir association contract discussed above. Additionally, we have a $6.9 million interest payment due on November 15, 2001. Our non-discretionary expenditures in 2001 total $24.8 million, not including a potential obligation on the Tapir block. We plan to use our available cash as set forth under "Business -- Our Current Strategy". See also "-- Financing Our Current Strategy" EQUITY AND FINANCING ACTIVITIES As of December 31, 2000, we had 37,836,420 common shares, par value of $0.001, outstanding, of which none are restricted. At December 31, 2000, we had outstanding $110.0 million of 12 1/2 % senior notes due May 15, 2005. In accordance with the terms of the senior notes, we were required to hold in a separate account or in escrow monies to provide for the first three years of interest payable under the senior notes. We purchased $13.5 million in U.S. government securities from the proceeds of the senior notes and deposited the securities in a segregated account. The amount deposited into the segregated account was enough to pay the first two interest payments. We also purchased and pledged $25 million of U.S. government securities to ensure payment of the four scheduled interest payments on the notes from November 15, 1999 through May 15, 2001. As of December 31, 2000, after making five interest payments, we had $6.7 million in U.S. government securities remaining, which is sufficient to pay interest on the senior notes through May 2001. 24 25 Our activities from inception through December 31, 2000 were funded primarily by the proceeds from private placements of our securities, including our common shares, warrants and notes, resulting in aggregate cash proceeds of $157.0 million. Recent transactions include: o Exchangeable Notes. In August 1997, we issued $25.0 million of 6% exchangeable notes in a private transaction with institutional and accredited investors. The exchangeable notes accrued interest at a rate of 6% per annum and were payable on December 31 and June 30 in each year. The exchangeable notes were scheduled to mature on August 7, 2003. o Convertible Debentures. The exchangeable notes were exchanged for a like principal amount of 6% convertible debentures on August 5, 1998. The 6% convertible debentures were converted on August 6, 1998 into units consisting of 2,173,901 common shares and warrants exercisable for 1,086,957 common shares. o Purchase Warrants. On February 5, 1999, purchase warrants for $1.1 million of our common shares expired without exercise. We received proceeds of $0.3 million from the exercise of 18,913 warrants. These purchase warrants had been issued in association with the exchange and conversion of our previously outstanding $25.0 million issue of 6% exchangeable notes. o Senior Notes. In May 1998, we completed the offering of $110 million of 12 1/2% senior notes due May 15, 2005 and received net proceeds of approximately $106 million. Approximately $37.8 million of the proceeds was held in a separate account or in escrow to provide for the first three years of interest payable under the senior notes. Interest on the senior notes is payable semi-annually on May 15 and November 15 of each year. The escrow account is sufficient to pay interest through May 2001. The senior notes mature on May 15, 2005. The senior notes are redeemable at our option, in whole or in part, at any time on or after May 15, 2002, at the prescribed redemption price, plus accrued and unpaid interest, liquidated damages and additional amounts, if any, to the date of redemption. o Stillwater National Bank Loan. In December 2000, we entered into a $10 million loan agreement with Stillwater National Bank and Trust Company, N.A. On March 30, 2001, the loan's maturity date was extended from December 31, 2001 to April 1, 2002. The Stillwater National Bank loan is secured by all of the stock of the operating subsidiaries of Seven Seas and is guaranteed by Robert A. Hefner III, chairman and chief executive officer of Seven Seas. Mr. Hefner received remuneration of $62,500 for his guarantee. The loan bears interest at an annual rate of the Prime Rate plus .75%, and interest is payable monthly until the loan is due in full on April 1, 2002. Seven Seas intends to use these funds for working capital and plans to replace, without penalty, this non-convertible loan with the proceeds from a larger financing planned for 2001. As of the date of this filing, we had drawn $3 million on this loan. At any time prior to May 15, 2001, we may redeem up to 33 1/3% of the original aggregate principal amount of the $110 million senior notes at a redemption price of 112.50% of the principal amount redeemed with a portion of the net proceeds of an equity or strategic investor offering, provided that at least 66 2/3% of the original aggregate principal amount of the senior notes remains outstanding immediately after the redemption. In the event of certain changes affecting withholding taxes applicable to certain payments on the senior notes, the senior notes may be redeemed at our option, in whole but not in part, at any time at a redemption price equal to 100% of the principal amount thereof plus accrued and unpaid interest, liquidated damages and additional amounts, if any, to the redemption date. Upon the occurrence of a change of control: 1) unless we redeem the senior notes as provided in (2) below, we will be required to offer to purchase the senior notes at a purchase price equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, liquidated damages and additional amounts, if any, to the date of purchase; and 2) we will have the option, at any time prior to May 15, 2002, to redeem the senior notes, in whole but not in part, at a redemption price equal to 100% of the principal amount thereof plus the applicable premium and accrued and unpaid interest, liquidated damages and additional amounts, if any, to the date of redemption. The senior notes are senior obligations of Seven Seas and are ranked equally in right and priority of payment with all of our existing and future senior indebtedness. If our cash flow from operations is not sufficient to pay principal and interest on our debt when due, we would have to attempt to restructure or refinance the debt or sell assets to obtain funds. CAPITAL SPENDING From inception through December 31, 2000, we had cash expenditures for the exploration of oil and gas properties of $121.3 million. 25 26 ACCOUNTING POLICIES AND DEVELOPMENT STAGE ACCOUNTING The consolidated financial statements and notes thereto included in this document have been prepared in accordance with generally accepted accounting principles in the United States. Our exploration and development activities have not generated a substantial amount of revenue, thus requiring the financial statements to be presented as a development stage enterprise. Accumulated losses are presented on the balance sheet as "Deficit accumulated during the development stage." The income statement presents revenues and expenses for each period presented and also a cumulative total of both amounts from our inception. Period-to-period comparisons of such results and certain financial data may not be meaningful or indicative of future results. In this regard, future results of Seven Seas will be highly dependent upon the success of our Guaduas Oil Field operations. The statement of cash flows shows inflows and outflows for each period presented and from our inception. In addition, the Notes to Consolidated Financial Statements are required to identify the enterprise as development stage. We follow the full-cost method of accounting for oil and natural gas properties. Under this method, all costs incurred in the acquisition, exploration and development of oil and gas properties, including unproductive wells, are capitalized in separate cost centers for each country. Such capitalized costs include contract and concession acquisition, geological, geophysical and other exploration work, drilling, completing and equipping oil and gas wells, constructing production facilities and pipelines, and other related costs. We capitalized general and administrative costs of $0.2 million, $0.3 million, and $0.3 million in 2000, 1999, and 1998, respectively. We capitalized interest of $13.2 million, $13.8 million and $9.8 million in 2000, 1999 and 1998 respectively. The capitalized costs of oil and gas properties in each cost center are amortized on the composite units of production method based on future gross revenues from proved reserves. Sales or other dispositions of oil and gas properties are normally accounted for as adjustments of capitalized costs. Gain or loss is not recognized in income unless a significant portion of a cost center's reserves are involved. Capitalized costs associated with the acquisition and evaluation of unproved properties are excluded from amortization until it is determined whether proved reserves can be assigned to such properties or until the value of the properties is impaired. If the net capitalized costs of oil and gas properties in a cost center exceed an amount equal to the sum of the present value of estimated future net revenues from proved oil and gas reserves in the cost center and the lower of cost or fair value of properties not being amortized, both adjusted for income tax effects, such excess is charged to expense. RESULTS OF DEVELOPMENT STAGE OPERATIONS YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998 Revenues from oil sales were $4.6 million, $2.3 million and $0.02 million in 2000, 1999 and 1998, respectively. Lease operating expenses were $2.6 million, $2.5 million and $0.9 million in 2000, 1999 and 1998, respectively. The $2.3 million and $0.1 million increase during 2000 in oil and gas revenues and lease operating expenses, respectively, was due to the commencement of post-exploration phase production in August 2000. Oil production in Colombia (net to us, including minority interest through June 30, 1999) of 189,988 barrels, 199,216 barrels and 1,997 barrels in 2000, 1999 and 1998, respectively, pertaining solely to our share of oil produced, was sold to Refinerie del Nare and Ecopetrol at an average price of $25.02 per barrel in 2000, $12.50 per barrel in 1999 and $8.14 per barrel in 1998. Interest income was $1.8 million, $3.1 million and $3.8 million in 2000, 1999 and 1998, respectively. The decrease from 1999 to 2000 was the consequence of lower cash and investment balances resulting from the use of funds from the issuance of the senior notes in May 1998. General and administrative costs were $7.3 million, $7.7 million and $9.8 million in 2000, 1999 and 1998, respectively. Non-reoccurring general and administrative costs in 2000 amounted to $1.3 and were related to the migration of the Company to the Cayman Islands from the Yukon Territory and severance paid to certain employees as part of the Company's reorganization of its Bogota office. The costs incurred during 1998 included $2.1 million relating to costs incurred conducting feasibility studies for the proposed construction of pipeline and production facilities and other development activities in Colombia. Depletion, depreciation and amortization was $1.7 million, $1.8 million and $0.7 million in 2000, 1999 and 1998, respectively. We began recording depletion of our proved oil and gas properties in the fourth quarter 1999, resulting in increased amounts in 2000 and 1999. As required under the full cost method of accounting, capitalized costs are limited to the sum of (1) the present value of future net revenues, using current unescalated pricing and discounted at 10% per annum from proved reserves and (2) the lower of cost or estimated fair value of unevaluated properties, all net of expected income tax effects. There was no write-down in 1999 or 2000. At December 31, 1998, we recognized a non-cash write-down of oil and gas properties in the amount of $129.8 million pre-tax or $84.4 million after tax pursuant to this ceiling limitation. The write-down was primarily the result of the decline in crude oil prices and the 26 27 impairment of unevaluated properties due primarily to the failure of five non-commercial exploratory wells. Seven Seas incurred net losses of $5.9 million, $6.8 million and $90.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. The 1998 loss includes a non-cash write-down of $129.8 million pre-tax. The write-down of oil and gas properties reduced the temporary differences included in deferred tax liabilities resulting in an income tax benefit of $45.4 million and a write-down after taxes of $84.4 million. TAXES Our net income, as defined under Colombian law, from Colombian sources is subject to Colombian corporate income tax at a rate of 35%. An additional remittance tax is imposed upon remittance of profits abroad at a rate of 7%. During 2000, we were also subject to income taxes in Canada and the United States, where the statutory rates were 45% and 35% respectively. The Company had United States income tax expense of $0.04 million in 2000 and $0.06 million in 1999. FORWARD-LOOKING INFORMATION From time to time, Seven Seas may make certain statements that provide shareholders and the investing public with "forward-looking" information as defined by the federal securities laws. Words such as "anticipate," "assume," "believe," "estimate," "project," and similar expressions are intended to identify such forward-looking statements. Forward-looking statements may be made by management orally or in writing, including, but not limited to, in press releases, as part of this "Management's Discussion and Analysis of Financial Condition and Results of Operations" section and as part of other sections of Seven Seas' filings with the U.S. Securities and Exchange Commission. Such forward-looking statements may include, but not be limited to, statements concerning estimates of current and future results of operations, financial position, reserves, the timing and commencement of wells and development plans, drilling results as indicated by log analysis, core samples, examination of cuttings, hydrocarbons shows while drilling and production estimates from wells drilled based upon drill stem tests and other test data, future capacity under credit arrangements, future capital expenditures, liquidity requirements and liquidity sufficiency. Such forward-looking statements are subject to certain risks, uncertainties and assumptions, including without limitation, those defined below. Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results of current and future operations may vary materially from those anticipated, estimated or projected. Among the factors that have a direct bearing on Seven Seas' results of operations and the oil and gas industry in which it operates are uncertainties inherent in estimating oil and gas reserves and future hydrocarbon production and cash flows, particularly with respect to wells that have not been fully tested and with wells having limited production testing histories; access to additional capital; changes in the price of oil and natural gas, services and equipment; the limited exploration of the concessions; the status of existing and future contractual relationships with Ecopetrol; foreign currency fluctuation risks; Seven Seas' substantial indebtedness, the presence of competitors with greater financial resources and capacity; and difficulties and risks associated with operating in Colombia. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risk, including adverse changes in commodity prices, interest rates and foreign currency exchange rates as discussed below. Commodity risk The market prices for oil and natural gas historically have been volatile and are likely to continue to be volatile in the future. Oil and natural gas prices may fluctuate in response to relatively minor changes in supply of and demand for oil and natural gas, market uncertainty and a variety of additional factors that are beyond our control. Decreases in oil and natural gas prices will adversely affect our future revenues, results of operations and cash flows. Additionally, decreases in oil and natural gas may impede our ability to raise additional capital. Interest rate risk We consider our interest rate risk exposure to be minimal as a result of a fixed interest rate on the $110 million 12 1/2% Senior Notes. We currently have no open interest rate swap agreements. Foreign currency exchange rate risk We conduct business in several foreign currencies and are subject to foreign currency exchange rate risk on cash flows related to sales, expenses and capital expenditures. However, because predominately all transactions in our existing foreign operations are denominated in U.S. dollars, the U.S. dollar is the functional currency for all operations. 27 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE ---- Seven Seas Petroleum Inc. and Subsidiaries Report of Independent Public Accountants....................... 29 Consolidated Balance Sheets as of December 31, 2000 and 1999..................................................... 30 Consolidated Statements of Operations and Accumulated Deficit for the years ended December 31, 2000, 1999 and 1998 and from Inception (February 3, 1995) to December 31, 2000............................................ 31 Consolidated Statement of Stockholders' Equity for the period from Inception (February 3, 1995) to December 31, 2000......................................................... 32 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 and from Inception (February 3, 1995) to December 31, 2000...................... 33 Notes to Consolidated Financial Statements..................... 34
28 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Seven Seas Petroleum Inc.: We have audited the accompanying consolidated balance sheets of Seven Seas Petroleum Inc. (a Cayman Islands company in the development stage, formerly a Yukon Territory Canada corporation, see Note 1) and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and accumulated deficit, stockholders' equity, and cash flows for the years ended December 31, 2000, 1999 and 1998 and for the period from inception (February 3, 1995) to December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Seven Seas Petroleum Inc. and subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for the years ended 2000, 1999 and 1998 and for the period from inception to December 31, 2000 in conformity with accounting principles generally accepted in the United States. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has a net capital deficiency, is highly dependent on cash flows from a single production area that has a limited history and may have to seek additional financing to meet its existing commitments and operating needs. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Houston, Texas March 30, 2001 29 30 SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ------------------------ 2000 1999 ---------- ---------- ASSETS CURRENT ASSETS Cash and cash equivalents ..................................... $ 12,128 $ 22,447 Short-term investments ........................................ 1,168 -- Restricted short-term investments ............................. 6,734 13,312 Accounts receivable ........................................... 7,297 9,821 Interest receivable ........................................... 55 243 Inventory ..................................................... 563 764 Prepaids and other ............................................ 181 288 ---------- ---------- 28,126 46,875 Note receivable from related party .............................. 215 435 Restricted long-term investments ................................ -- 6,391 Land ............................................................ 1,071 1,065 Evaluated oil and gas properties, full-cost method, net of accumulated depletion of $1,497 at December 31, 2000 and $764 at December 31, 1999 ............................................. 115,609 96,244 Unevaluated oil and gas properties, full-cost method ............ 105,535 105,725 Fixed assets, net of accumulated depreciation of $1,054 at December 31, 2000 and $669 at December 31, 1999 ............... 840 1,060 Other assets, net of accumulated amortization of $1,675 at December 31, 2000 and $1,068 at December 31, 1999 ............. 2,680 3,287 ---------- ---------- TOTAL ASSETS .......................................... $ 254,076 $ 261,082 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable .............................................. $ 6,896 $ 7,917 Interest payable .............................................. 1,719 1,719 Other accrued liabilities ..................................... 89 78 ---------- ---------- 8,704 9,714 Long-term debt .................................................. 110,000 110,000 Deferred income taxes ........................................... 24,703 24,794 COMMITMENTS AND CONTINGENCIES (Note 12) STOCKHOLDERS' EQUITY Share capital-- Authorized unlimited common shares par value $0.001 per share; 37,836,420 and 37,833,420 issued and outstanding at December 31, 2000 and 1999, respectively ................... 225,807 225,805 Deficit accumulated during development stage .................. (115,138) (109,231) Treasury stock; 29 shares held at December 31, 2000 and 1999 ....................................................... -- -- ---------- ---------- Total Stockholders' Equity ............................ 110,669 116,574 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............ $ 254,076 $ 261,082 ========== ==========
The accompanying notes are an integral part of these financial statements. 30 31 SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT (IN THOUSANDS, EXCEPT SHARE DATA)
CUMULATIVE TOTAL FROM INCEPTION (FEBRUARY 3, YEAR ENDED DECEMBER 31, 1995) TO -------------------------------------------- DECEMBER 31, 2000 1999 1998 2000 ------------ ------------ ------------ ------------ REVENUE Crude oil sales ..................................... $ 4,632 $ 2,261 $ 16 $ 7,922 Interest income ..................................... 1,802 3,052 3,781 9,916 ------------ ------------ ------------ ------------ 6,434 5,313 3,797 17,838 EXPENSES General and administrative .......................... 7,256 7,683 9,761 36,940 Oil and gas operating expenses ...................... 2,612 2,491 942 7,205 Depletion, depreciation and amortization ..................................... 1,729 1,825 674 4,525 Interest expense .................................... 558 -- -- 558 Writedown of proved oil & gas properties ....................................... -- -- 129,789 129,789 Gain (loss) on sale of exploration properties ....................................... -- 670 (577) 124 Dry hole and abandonment costs ...................... -- -- -- 1,145 Geological and geophysical .......................... -- -- -- 47 Other (income) expense .............................. 146 (36) (97) (12) ------------ ------------ ------------ ------------ 12,301 12,633 140,492 180,321 NET LOSS BEFORE INCOME TAXES AND MINORITY INTEREST ............................................ (5,867) (7,320) (136,695) (162,483) INCOME TAX PROVISION (BENEFIT) ........................ 40 62 (45,718) (45,616) ------------ ------------ ------------ ------------ NET LOSS BEFORE MINORITY INTEREST ..................... (5,907) (7,382) (90,977) (116,867) MINORITY INTEREST ..................................... -- 593 778 1,729 ------------ ------------ ------------ ------------ NET LOSS .............................................. (5,907) (6,789) (90,199) (115,138) ------------ ------------ ------------ ------------ DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE, beginning of period .............................................. (109,231) (102,442) (12,243) -- ------------ ------------ ------------ ------------ DEFICIT ACCUMULATED DURING THE DEVELOPMENT STAGE, end of period .................... $ (115,138) $ (109,231) $ (102,442) $ (115,138) ============ ============ ============ ============ BASIC AND DILUTED NET LOSS PER COMMON SHARE ............................................... $ (0.16) $ (0.18) $ (2.49) $ (4.11) ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ......................................... 37,835,780 37,861,984 36,203,713 28,044,604 ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements. 31 32 SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE PERIOD FROM INCEPTION (FEBRUARY 3, 1995) THROUGH DECEMBER 31, 2000 (IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK PREFERRED STOCK -------------------------- --------------------------- DATE NUMBER AMOUNT NUMBER AMOUNT --------------------- ------------ ------------ ------------ ------------ Issuance of common share to founder .............. February 3, 1995 1 $ -- -- $ -- Issuance of common shares to founder for cash .... February 27, 1995 999,999 -- -- -- Issuance of common shares in a private placement for cash ($0.25 per share) ............ March 22, 1995 4,000,000 1,000 -- -- Issuance of common shares in private placements for cash ($0.75 per share): .......... May 31, 1995 5,687,666 4,266 -- -- June 9, 1995 979,000 734 -- -- Issuance of common shares in settlement of agents' fees ($0.75 per share): ................. May 31, 1995 284,383 213 -- -- June 9, 1995 48,950 37 -- -- Less: Common share issuance cost ................. May 31 - June 9, 1995 -- (250) -- -- Issuance of common shares in connection with the May 5, 1995 amalgamation agreement with Rusty Lake Resources ($0.25 per share) .......... June 29-30, 1995 680,464 170 -- -- Net loss ......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1995 ..................... 12,680,463 6,170 -- -- Issuance of special warrants in a brokered private placement for cash ($2.75 per warrant) .. March 15, 1996 -- -- -- -- Issuance of common shares to the Company's 401(k) plan ($7.875 per share) .................. April 29,1996 10,000 79 -- -- Purchase Treasury Stock ($8.00 per share) ........ June 26, 1996 -- -- -- -- Exercise of stock options for cash ($.75 per share) .......................................... Jan. - June 1996 305,000 229 -- -- Exercise of stock options for cash ($7.125 per share) ...................................... April 29, 1996 10,000 71 -- -- Issuance of exchangeable preferred stock in connection with business combination ($9.125 per share) .............................. July 26, 1996 -- -- 5,002,972 45,652 Issuance of special warrants in connection with business combination ($9.125 per warrant) .. July 26, 1996 -- -- -- -- Issuance of convertible special warrants in a brokered private placement for cash ($15.00 per warrant) ............................ October 16, 1996 -- -- -- -- Exercise of stock options for cash ($.75 per share) .......................................... July - December 1996 310,333 233 -- -- Net loss ......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1996 ..................... 13,315,796 6,782 5,002,972 45,652 Conversion of special warrants issued in connection with the business combination dated July 26, 1996 ($9.125 per share) .......... February 7, 1997 11,774,171 107,439 -- -- Conversion of the preferred shares in connection with the business combination dated July 26, 1996 ($9.125 per share) .......... February 7, 1997 5,002,972 45,652 (5,002,972) (45,652) Conversion of privately placed special warrants ($15.00 per warrant) ................... February 7, 1997 500,000 7,013 -- -- Conversion of privately placed special warrants ($2.75 per warrant) .................... February 7, 1997 2,000,000 5,096 -- -- Issuance of common shares in connection with the business combination ($18.55 per share) ..... March 5, 1997 1,000,000 18,550 -- -- Conversion of privately placed special warrants for cash ($3.50 per warrant) ........... March 14, 1997 1,000,000 3,500 -- -- Exercise of stock options ($.75-- 10.90 per share) .......................................... Jan. - Dec 1997 478,667 2,374 -- -- Net loss ......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1997 ..................... 35,071,606 196,406 -- -- Exercise of stock options ($.75-- $10.90 per share) .......................................... Jan. - Dec. 1998 514,000 5,351 -- -- Conversion of debentures ($11.50 per share, $2.90 per warrant) .............................. August 6, 1998 2,173,901 20,351 -- -- Exercise of warrants ($15.00 per share) .......... August 12, 1998 18,913 339 -- -- Net loss ......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1998 ..................... 37,778,420 222,447 -- -- Expiration of warrants ........................... February 5, 1999 -- 3,093 -- -- Stock issuance ($4.8125 per share) ............... April 1, 1999 55,000 265 -- -- Net loss ......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1999 ..................... 37,833,420 $ 225,805 -- $ -- ============ ============ ============ ============ Exercise of stock options ($.75 per share) ....... Jan. - Dec. 2000 3,000 2 -- -- Net loss ......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2000 ..................... 37,836,420 $ 225,807 -- $ -- ============ ============ ============ ============
SPECIAL WARRANTS TREASURY STOCK --------------------------- -------------------------- NUMBER AMOUNT NUMBER AMOUNT ------------ ------------ ------------ ------------ Issuance of common share to founder ............... -- $ -- -- Issuance of common shares to founder for cash ..... -- -- -- -- Issuance of common shares in a private placement for cash ($0.25 per share) ............. -- -- -- -- Issuance of common shares in private placements for cash ($0.75 per share): ........... -- -- -- -- -- -- -- -- Issuance of common shares in settlement of agents' fees ($0.75 per share): .................. -- -- -- -- -- -- -- -- Less: Common share issuance cost .................. -- -- -- -- Issuance of common shares in connection with the May 5, 1995 amalgamation agreement with Rusty Lake Resources ($0.25 per share) ........... -- -- -- -- Net loss .......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1995 ...................... -- -- -- -- Issuance of special warrants in a brokered private placement for cash ($2.75 per warrant) ... 2,000,000 5,096 -- -- Issuance of common shares to the Company's 401(k) plan ($7.875 per share) ................... -- -- -- -- Purchase Treasury Stock ($8.00 per share) ......... -- -- 29 -- Exercise of stock options for cash ($.75 per share) ........................................... -- -- -- -- Exercise of stock options for cash ($7.125 per share) ....................................... -- -- -- -- Issuance of exchangeable preferred stock in connection with business combination ($9.125 per share) ............................... -- -- -- -- Issuance of special warrants in connection with business combination ($9.125 per warrant) ... 11,774,171 107,439 -- -- Issuance of convertible special warrants in a brokered private placement for cash ($15.00 per warrant) ............................. 500,000 7,013 -- -- Exercise of stock options for cash ($.75 per share) ........................................... -- -- -- -- Net loss .......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1996 ...................... 14,274,171 119,548 29 -- Conversion of special warrants issued in connection with the business combination dated July 26, 1996 ($9.125 per share) ........... (11,774,171) (107,439) -- -- Conversion of the preferred shares in connection with the business combination dated July 26, 1996 ($9.125 per share) ........... -- -- -- -- Conversion of privately placed special warrants ($15.00 per warrant) .................... (500,000) (7,013) -- -- Conversion of privately placed special warrants ($2.75 per warrant) ..................... (2,000,000) (5,096) -- -- Issuance of common shares in connection with the business combination ($18.55 per share) ...... -- -- -- -- Conversion of privately placed special warrants for cash ($3.50 per warrant) ............ -- -- -- -- Exercise of stock options ($.75 -- 10.90 per share) ........................................... -- -- -- -- Net loss .......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1997 ...................... -- -- 29 -- Exercise of stock options ($.75 -- $10.90 per share) ........................................... -- -- -- -- Conversion of debentures ($11.50 per share, $2.90 per warrant) ............................... 1,086,957 3,148 -- -- Exercise of warrants ($15.00 per share) ........... (18,913) (55) -- -- Net loss .......................................... -- -- -- -- ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1998 ...................... 1,068,044 3,093 29 -- Expiration of warrants ............................ (1,068,044) (3,093) -- -- Stock issuance ($4.8125 per share) ................ -- -- -- -- Net loss .......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1999 ...................... -- $ -- 29 -- ============ ============ ============ ============ Exercise of stock options ($.75 per share) ........ -- -- -- -- Net loss .......................................... -- -- -- -- ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2000 ...................... -- $ -- 29 -- ============ ============ ============ ============
DEFICIT ACCUMULATED DURING DEVELOPMENT PHASE TOTAL ------------ ------------ Issuance of common share to founder ............... $ -- $ -- Issuance of common shares to founder for cash ..... -- -- Issuance of common shares in a private placement for cash ($0.25 per share) ............. -- 1,000 Issuance of common shares in private placements for cash ($0.75 per share): ........... -- 4,266 -- 734 Issuance of common shares in settlement of agents' fees ($0.75 per share): .................. -- 213 -- 37 Less: Common share issuance cost .................. -- (250) Issuance of common shares in connection with the May 5, 1995 amalgamation agreement with Rusty Lake Resources ($0.25 per share) ........... -- 170 Net loss .......................................... (2,120) (2,120) ------------ ------------ BALANCE AT DECEMBER 31, 1995 ...................... (2,120) 4,050 Issuance of special warrants in a brokered private placement for cash ($2.75 per warrant) ... -- 5,096 Issuance of common shares to the Company's 401(k) plan ($7.875 per share) ................... -- 79 Purchase Treasury Stock ($8.00 per share) ......... -- -- Exercise of stock options for cash ($.75 per share) ........................................... -- 229 Exercise of stock options for cash ($7.125 per share) ....................................... -- 71 Issuance of exchangeable preferred stock in connection with business combination ($9.125 per share) ............................... -- 45,652 Issuance of special warrants in connection with business combination ($9.125 per warrant) ... -- 107,439 Issuance of convertible special warrants in a brokered private placement for cash ($15.00 per warrant) ............................. -- 7,013 Exercise of stock options for cash ($.75 per share) ........................................... -- 233 Net loss .......................................... (2,195) (2,195) ------------ ------------ BALANCE AT DECEMBER 31, 1996 ...................... (4,315) 167,667 Conversion of special warrants issued in connection with the business combination dated July 26, 1996 ($9.125 per share) ........... -- -- Conversion of the preferred shares in connection with the business combination dated July 26, 1996 ($9.125 per share) ........... -- -- Conversion of privately placed special warrants ($15.00 per warrant) .................... -- -- Conversion of privately placed special warrants ($2.75 per warrant) ..................... -- -- Issuance of common shares in connection with the business combination ($18.55 per share) ...... -- 18,550 Conversion of privately placed special warrants for cash ($3.50 per warrant) ............ -- 3,500 Exercise of stock options ($.75-- 10.90 per share) ........................................... -- 2,374 Net loss .......................................... (7,928) (7,928) ------------ ------------ BALANCE AT DECEMBER 31, 1997 ...................... (12,243) 184,163 Exercise of stock options ($.75-- $10.90 per share) ........................................... -- 5,351 Conversion of debentures ($11.50 per share, $2.90 per warrant) ............................... -- 23,499 Exercise of warrants ($15.00 per share) ........... -- 284 Net loss .......................................... (90,199) (90,199) ------------ ------------ BALANCE AT DECEMBER 31, 1998 ...................... (102,442) 123,098 Expiration of warrants ............................ -- -- Stock issuance ($4.8125 per share) ................ -- 265 Net loss .......................................... (6,789) (6,789) ------------ ------------ BALANCE AT DECEMBER 31, 1999 ...................... $ (109,231) $ 116,574 ============ ============ Exercise of stock options ($.75 per share) ........ -- 2 Net loss .......................................... (5,907) (5,907) ------------ ------------ BALANCE AT DECEMBER 31, 2000 ...................... $ (115,138) $ (110,669) ============ ============
The accompanying notes are an integral part of these financial statements. 32 33 SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
CUMULATIVE TOTAL FROM INCEPTION (FEBRUARY 3, YEAR ENDED DECEMBER 31, 1995) TO -------------------------------------------- DECEMBER 31, 2000 1999 1998 2000 ------------ ------------ ------------ ------------ OPERATING ACTIVITIES Net loss ...................................................... $ (5,907) $ (6,789) $ (90,199) $ (115,138) Add (subtract) items not requiring (providing) cash: Compensation expense .......................................... -- -- -- 2,140 Minority interest ............................................. -- (593) (778) (1,729) Common stock contribution to 401(k) retirement plan ........... -- -- -- 79 Depletion, depreciation and amortization ...................... 1,729 1,825 679 4,530 Writedown of proved oil & gas properties ...................... -- -- 129,789 129,789 Gain (loss) on sale of exploration properties ................. -- 670 (577) 124 Dry hole and abandonment costs ................................ -- -- -- 1,140 Gain on sale of marketable securities ......................... -- -- (6) (6) Loss on sale of fixed assets .................................. 2 -- -- 2 Deferred income tax benefit ................................... (91) 62 (45,727) (45,756) Amortization of investments ................................... (781) (1,357) -- (2,138) Changes in working capital excluding changes to cash and cash equivalents: Accounts receivable ......................................... 2,524 (1,879) (3,238) (5,035) Interest receivable ......................................... 188 289 (532) (55) Inventory ................................................... 201 348 (1,316) (767) Prepaids and other, net ..................................... 107 (63) (107) (181) Accounts payable ............................................ (398) 1,381 2,128 4,603 Other accrued liabilities and other ......................... 569 (252) 487 896 ------------ ------------ ------------ ------------ Cash Flow Used in Operating Activities ........................ (1,857) (6,358) (9,397) (27,502) ------------ ------------ ------------ ------------ INVESTING ACTIVITIES Exploration of oil and gas properties ......................... (21,090) (29,958) (47,889) (121,303) Purchase of land .............................................. (6) (1) (1,257) (1,264) Purchase of investments ....................................... (1,168) -- (38,301) (39,469) Proceeds from acquisition ..................................... -- -- -- 630 (Payment to withdraw) proceeds from sale of property .......... -- (250) 1,163 997 Proceeds from sale of marketable securities ................... -- -- 50 50 Proceeds from sale of investments ............................. 13,750 19,955 -- 33,705 Note receivable from employees ................................ 220 (235) -- (215) Other asset additions ......................................... (170) (239) (1,242) (2,165) ------------ ------------ ------------ ------------ Cash Flow Used in Investing Activities ........................ (8,464) (10,728) (87,476) (129,034) ------------ ------------ ------------ ------------ FINANCING ACTIVITIES Proceeds from special warrants issued ......................... -- -- 284 12,393 Proceeds from share capital issued ............................ 2 -- 3,972 15,468 Proceeds from additional paid-in capital contributed .......... -- -- -- 1 Proceeds from issuance of long-term debt ...................... -- -- 110,000 135,000 Costs of issuing long-term debt ............................... -- -- (4,248) (5,821) Contributions by minority interest ............................ -- 1,386 6,945 11,623 ------------ ------------ ------------ ------------ Cash Flow Provided by Financing Activities .................... 2 1,386 116,953 168,664 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................................. (10,319) (15,700) 20,080 12,128 Cash and cash equivalents, beginning of period ................ 22,447 38,147 18,067 -- ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD ...................... $ 12,128 $ 22,447 $ 38,147 $ 12,128 ============ ============ ============ ============
Supplemental disclosures of cash flow information: The Company incurred interest costs of $13.8 million, $13.8 million, and $9.8 million for the years ended December 31, 2000, 1999 and 1998, respectively, and $13.2 million, $13.8 million, and $9.8 million was capitalized during the respective periods. Cash paid for interest for the years ended December 31, 2000, 1999 and 1998 was $13.8 million, $13.8 million, and $8.1 million, respectively. The Company paid $100,000, zero, and $30,000 for estimated income taxes during the year ended December 31, 2000, 1999, and 1998, respectively. The accompanying notes are an integral part of these financial statements. 33 34 SEVEN SEAS PETROLEUM INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE ENTERPRISE) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. DEVELOPMENT STAGE OPERATIONS: FORMATION Seven Seas Petroleum Inc. (a Cayman Islands exempted company limited by shares, formerly a Yukon Territory, Canada corporation, Note 15) was formed on February 3, 1995. Seven Seas Petroleum Inc. and its subsidiaries (collectively referred to as "Seven Seas" or the "Company") are a development stage enterprise engaged in the exploration, development and production of oil and natural gas in Colombia. The Company is the operator of an oil discovery, known as the "Guaduas Oil Field," which is located in an area defined by the Rio Seco and Dindal association contracts covering a total of approximately 109,000 contiguous acres in central Colombia. The Company owns a 57.7% working interest in these two association contracts before participation by Empresa Colombiana de Petroleos ("Ecopetrol"), the Colombian national oil company. The Company has no significant income producing properties and its principal assets, its interests in the association contracts, are in the early stage of exploration and development. ACTIVITY TO DATE As of December 31, 2000, the Company has spent $242.2 million to acquire and $80.3 million to delineate the reserve potential of the Guaduas Oil Field. The Company has participated in the drilling of twelve exploratory wells within the Dindal and Rio Seco association contract areas, seven of which are classified as oil and gas wells. Four of the twelve did not produce commercial amounts of oil and gas during testing and one remains to be tested. As of December 31, 2000, the Guaduas Oil Field had produced a cumulative volume of approximately 1.2 million (0.5 million net to Seven Seas) barrels of oil. Since inception through December 31, 2000, the Company incurred cumulative losses of $115.1 million and, because of its continued exploration and development activities, expects that it will continue to incur losses and that its accumulated deficit will increase until commencement of production from the Guaduas Oil Field occurs in quantities sufficient to cover operating expenses. CURRENT STRATEGY The Company's strategy for 2001 includes the continued development of the Guaduas Oil Field and new exploration on its Colombian properties. DEVELOPMENT The Company is currently constructing a 36-mile pipeline that will connect the Guaduas Oil Field to international oil markets via Colombia's existing pipeline infrastructure. The pipeline will have an initial throughput capacity of approximately 25,000 barrels of oil per day (BOPD), expandable to approximately 40,000 BOPD with additional investment. Seven Seas is also constructing production facilities for production of approximately 25,000 BOPD. Both the pipeline and production facilities are scheduled for completion in mid-2001. The gross costs of the pipeline and the production facilities are approximately $24 million, of which the Company will be responsible for approximately $13.8 million. When the pipeline and production facilities are complete, the Company believes that initial pipeline production, which will be generated by existing productive wells, will be approximately 8,000 BOPD to 10,000 BOPD. The Company recently agreed with its Guaduas Oil Field partners to a two-year development well drilling program that provides for the drilling of nine development wells and one injector over the course of 2001 and 2002. The Company believes these wells will increase pipeline production from its initial rates to approximately 25,000 BOPD. In 2001, Seven Seas plans to drill four of these nine development wells and the one injector well at a gross cost of approximately $22 million, the Company's share of which is approximately $13 million. The gross cost of the entire 2001--2002 development well program is estimated to cost approximately $44 million, the Company's share of which is $25 million. EXPLORATION The Company plans to drill three exploration wells in 2001: 1. The Subthrust exploration well to test the subthrust Dindal prospect at an estimated gross cost of $15 million ($15 million net to the Company) 2. The Santa Fe - 1 on the Rosablanca association contract at an estimated gross cost of $1.0 million ($1.0 million net to the Company) 3. The Tres Pasos 16 well to test the west-side of the Guaduas Oil Field structure at an estimated gross cost of $5.5 million ($3.0 million net to the Company). 34 35 In summary, in 2001 the Company plans to complete the construction of the pipeline and production facilities for the Guaduas Oil Field, drill four development wells and one injector well on the Guaduas Oil Field and drill three exploration wells on its Colombian properties. The estimated gross costs of this development and exploration strategy in 2001 are $67.5 million, the Company's share of which is approximately $45.8 million. The Company's ability to fully implement our exploration and development strategy is subject to 1) securing financing for its share of the costs, 2) timely receiving required environmental permits, 3) contracting the required oil and gas services and equipment and 4) completing the Guaduas--La Dorada pipeline and commencing pipeline utilitization. CAPITAL AVAILABILITY AND LIQUIDITY The Company's sources of cash in 2001 will come from cash and cash equivalents of $12.1 million, availability of $10 million under the Stillwater National Bank loan and operating cash flows from production in the Guaduas Oil Field. Production from the Guaduas Oil Field has a very short history and is subject to all the normal risks of oil and gas operations. Further, to achieve full production rates, the Guaduas--La Dorada pipeline and related production facilities will need to be completed and in operation by mid-2001. The Company's cash requirements in 2001 include commitments under existing oil and gas agreements of approximately $17.9 million (not including a potential obligation of $2.1 million on the Tapir association contract), the November 2001 interest payment of $6.9 million on the $110 million senior notes and general and administrative expenses. The Company's ability to meet its existing commitments and operating needs is highly dependent on production from the Guaduas Oil Field. The Company's dependence on production is such that (i) if it is interrupted for an extended period of time, (ii) if the prices received or the costs incurred fail to meet expectations or (iii) if the pipeline and related production facilities are not completed and in operation as planned, then the Company will likely not be able to meet 2001 cash requirements. In that case, the Company will have to seek additional financing to meet its existing commitments and operating needs in 2001. Failure to obtain additional financing would raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Under the terms of the Company's $110 million senior notes, it is permitted to incur general indebtedness that can be senior to its senior notes not exceeding the greater of (i) $25 million, or (ii) the sum of 100% of its cash and cash equivalents, plus 100% of its receivables from Ecopetrol, and plus 30% of its discounted future net revenues from proved oil and gas reserves prepared in accordance with the rules of the United States Securities and Exchange Commission. As of December 31, 2000, the permitted amount was approximately $130.3 million. The Company is also allowed to borrow an additional $10 million for project financing, e.g., pipeline and production facilities. Any additional financing obtained by the Company to execute its business plans may result in a dilution of current stakeholder interests. Seven Seas cannot be certain that additional sources of financing will be available when needed or will be available on acceptable terms. The Company has suffered recurring losses from operations, has an accumulated deficit, has not generated positive cash flow from operations, has significant unproved property balances, is nearing the end of the exploration phase of its association contracts, is highly dependant on the actions of Ecopetrol, and will likely require additional capital to fully execute its business plans. RISK FACTORS Seven Seas is subject to several categories of risk associated with its development stage activities. Oil and gas exploration and development is a speculative business and involves a high degree of risk. Among the factors that have a direct bearing on Seven Seas' prospects are uncertainties inherent in estimating oil and gas reserves and future hydrocarbon production and cash flows, particularly with respect to wells that have not been fully tested and with wells having limited production testing histories; access to additional capital; changes in the price of oil and natural gas, services and equipment; the limited exploration of the association contracts; the status of existing and future contractual relationships with Ecopetrol; regulation in Colombia; lack of significant income producing property; foreign currency fluctuation risks; Seven Seas' substantial indebtedness, the presence of competitors with greater financial resources and capacity; and difficulties and risks associated with operating in Colombia. 2. BACKGROUND: On June 29, 1995 the Supreme Court of British Columbia approved the May 5, 1995 amalgamation of Seven Seas and Rusty Lake Resources Ltd. Stockholders of Rusty Lake Resources Ltd. were issued one common share in Seven Seas, the new company after the amalgamation, for each 35 common shares held in Rusty Lake Resources Ltd. Additional shares of Seven Seas were issued in settlement of certain indebtedness of Rusty Lake Resources Ltd. This transaction has been reflected as an acquisition by Seven Seas using the purchase method of accounting, whereby the assets acquired and liabilities assumed were recorded at the fair value and Rusty Lake Resources Ltd. has been prospectively reflected in the Company's financial statements since June 29, 1995. 35 36 On July 26, 1996 the Company acquired 100 percent of the outstanding stock which represented 100 percent of the voting shares held in GHK Company Colombia and Esmeralda LLC. Additionally, on the same date, the Company acquired 62.963 percent of the outstanding shares and voting stock in Cimarrona LLC. This transaction has been reflected as an acquisition by Seven Seas using the purchase method of accounting, whereby the assets acquired and liabilities assumed were fair valued and the operations of the acquired entities have been reflected in the Company's financial statements since July 26, 1996. As consideration for the increased interest from these acquisitions, Seven Seas issued to the stockholders in GHK Company Colombia, Esmeralda LLC and Cimarrona LLC a combination of preferred shares and special warrants which were exchangeable into a total of 16,777,143 common shares upon the earlier of the approval of a prospectus qualifying the exchange, or one year from the closing of the transaction. Of the 16,777,143 preferred shares and special warrants, 5,002,972 preferred shares were issued for all of the common shares in GHK Company Colombia, 4,469,028 special warrants were issued for all of the common shares in Esmeralda LLC, and 7,305,143 special warrants were issued for 62.963 percent of the common shares in Cimarrona LLC. The remaining 37.037 percent interest in Cimarrona LLC represents a minority interest which is reflected as such on the balance sheet. The 16,777,143 preferred shares and special warrants were recorded based on the closing stock price of Seven Seas on July 26, 1996 at $9.125 per share totaling $153.1 million. Collectively, the acquisition of these three companies resulted in the purchase of an additional 36.7 percent participating interest in the Dindal and Rio Seco association contracts in which the Company previously held a 15 percent participating interest. All three entities were oil and gas exploration companies whose only material asset was the participating interest they held in the Dindal and Rio Seco association contracts in Colombia. Net assets acquired include $217.1 million assigned to oil and gas properties and other nominal net working capital, less amounts attributable to the minority interest in Cimarrona LLC. Because of the differences in tax basis and the financial statement valuation of such acquired oil and gas properties, $64.0 million of deferred Colombian and U.S. income taxes was also recorded in this acquisition (see Note 6) and is included in the amount assigned to oil and gas properties. Income and expenditures incurred by these three entities after July 26, 1996 are included in the statements of operations and accumulated deficit for the years ended December 31, 1998, 1997 and 1996. Of the 16,777,143 preferred shares and special warrants issued, 11,744,000 were held subject to an escrow agreement, whereby one third of the securities are released each year for three years. The securities could have been released earlier based upon a valuation of the Seven Seas interests in the Dindal and Rio Seco association contracts. As of July 26, 1999, all of the common shares have been released from escrow pursuant to the escrow agreement. On February 7, 1997 approvals were granted by the Ontario Securities Commission, British Columbia Securities Commission and the Alberta Securities Commission for the prospectus filed to qualify 11,774,171 special warrants and 5,002,972 preferred shares which were automatically converted to common shares. These shares were issued in connection with the acquisition of a 36.7 percent participating interest in the Dindal and Rio Seco association contracts in Colombia by the Company on July 26, 1996, as described above. On March 5, 1997 the Company acquired 100 percent of the outstanding voting stock held in Petrolinson, S.A. The terms of the transaction were agreed to in a letter of intent dated November 22, 1996. The principal asset owned by Petrolinson, S.A. is a six percent participating interest in the Dindal and Rio Seco association contracts. As consideration for the six percent participating interest in these association contracts, Seven Seas issued to the sole shareholder in Petrolinson, S.A. 1,000,000 common shares of Seven Seas Petroleum Inc. The common shares issued to the sole shareholder of Petrolinson, S.A. were subject to an escrow agreement, the terms of which provided for a 120 day escrow of shares commencing from March 5, 1997 with an option by the Company to extend the escrow period for an additional 30 days. The 1,000,000 common shares issued to the sole shareholder of Petrolinson, S.A. were released from escrow on July 3, 1997, in accordance with the escrow agreement as described above. This six percent interest will be carried through exploration by the other 94 percent participating interest parties. This transaction was reflected in 1997 as an acquisition by Seven Seas using the purchase method of accounting, whereby the assets acquired and liabilities assumed were fair valued and the acquired operations have been reflected in the Company's financial statements since March 5, 1997. The 1,000,000 common shares were recorded at a price of $18.55, based on the weighted average closing stock price of Seven Seas for the period beginning 30 days prior to and ending 30 days subsequent to the date the letter of intent was signed, November 22, 1996, which represented a transaction cost of $18.6 million. Net assets acquired include $25.0 million assigned to oil and gas properties (most of which is subject to future evaluation based on further appraisal drilling) and other nominal net working capital. Because of the differences in tax basis and the financial statement valuation of such acquired oil and gas properties, $6.5 million of deferred Colombian income tax was also recorded in this acquisition (see Notes 3 and 6) and is included in the amount assigned to oil and gas properties. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The Company follows accounting principles generally accepted in the United States. A summary of the Company's significant policies is set out below: 36 37 USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses. Actual results could differ from the estimates and assumptions used. Significant estimates include depreciation, depletion and amortization of proved oil and gas reserves. Oil and natural gas reserve estimates, which are the basis for depletion and the ceiling test, are inherently imprecise and expected to change as future information becomes available. CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, after eliminating all material intercompany accounts and transactions. FAIR VALUE OF FINANCIAL INSTRUMENTS The recorded amounts of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short-term maturity of those investments. The fair value of the Company's 12 1/2% $110 million Senior Notes was $44.6 million at December 31, 2000. INVESTMENTS The Company has adopted Statement of Financial Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 requires that all investments in debt securities and certain investments in equity securities be reported at fair value except for those investments which management has the intent and the ability to hold to maturity (see Note 5). Investments which are held-for-sale are classified based on the stated maturity and management's intent to sell the securities. Changes in fair value are reported as a separate component of stockholders' equity, but were immaterial for all periods presented herein. ACCOUNTS RECEIVABLE Accounts receivable included the following at December 31, 2000 and 1999 (In thousands):
DECEMBER 31, ----------------------- 2000 1999 ---------- ---------- Crude oil sales ............................. $ 4,476 $ 4,445 Joint interest billing ...................... 2,808 5,067 Other ....................................... 13 309 ---------- ---------- Total accounts receivable ......... $ 7,297 $ 9,821 ========== ==========
INVENTORY Inventories consist primarily of goods used in the Company's operations and are stated at the lower of average cost or market value. OIL AND GAS INTERESTS The Company follows the full-cost method of accounting for oil and natural gas properties. Under this method, all costs incurred in the acquisition, exploration and development, including unproductive wells, are capitalized in separate cost centers for each country. Such capitalized costs include association contract and concession acquisition, geological, geophysical and other exploration work, drilling, completing and equipping oil and gas wells, constructing production facilities and pipelines, and other related costs. We capitalized general and administrative costs of $0.2 million, $0.3 million, and $0.3 million in 2000, 1999 and 1998, respectively. The Company capitalized interest of $13.2 million, $13.8 million and $9.8 million in 2000, 1999 and 1998, respectively. The capitalized costs of oil and gas properties in each cost center are amortized on composite units of production method based on future gross revenues from proved reserves. Sales or other dispositions of oil and gas properties are normally accounted for as adjustments of capitalized costs. Gain or loss is not recognized in income unless a significant portion of a cost center's reserves is involved. Capitalized costs associated with the acquisition and evaluation of unproved properties are excluded from amortization until it is determined whether proved reserves can be assigned to such properties or until the value of the properties is impaired. If the net capitalized costs of oil and gas properties in a cost center exceed an amount equal to the sum of the present value of estimated future net revenues from proved oil and gas reserves in the cost center and the lower of cost or fair value of properties not being amortized, both adjusted for income tax effects, such excess is charged to expense. There was not a write-down in 2000 or 1999. At December 31, 1998, the Company recognized a non-cash write-down of oil and gas properties in the amount of $129.8 million pre-tax or $84.4 million after tax pursuant to this ceiling limitation. The write-down was primarily the result of the decline in crude oil prices and the impairment of unevaluated properties due primarily to the failure of four non-commercial exploratory wells. 37 38 The Company began to record a provision for depletion of its oil and gas properties in the fourth quarter of 1999. The Company recorded depletion of $0.7 million and $0.8 million in 2000 and 1999, respectively. Depletion per barrel was $3.86 and $3.83 in 2000 and 1999, respectively. Substantially all the Company's exploration and production activities are conducted jointly with others and the accounts reflect only the Company's proportionate interest in such activities. REVENUE RECOGNITION The Company records as revenue only that portion of production sold and allocable to its ownership interest in the related property. FOREIGN CURRENCY TRANSLATION The Company's foreign operations are a direct and integral extension of the parent company's operations and the majority of all costs associated with foreign operations are paid in U.S. dollars as opposed to the local currency of the operations; therefore, the reporting and functional currency is the U.S. dollar. Gains and losses from foreign currency transactions are recognized in current net income. Monetary items are translated using the exchange rate in effect at the balance sheet date; non-monetary items are translated at historical exchange rates. Revenues and expenses are translated at the average rates in effect on the dates they occur. No material translation gains or losses were incurred during the periods presented. INCOME TAXES The Company follows the asset/liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of (i) temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements and (ii) operating loss and tax credit carryforwards for tax purposes. Deferred tax assets are reduced by a valuation allowance when, based upon management's estimates, it is more likely than not that a portion of the deferred tax assets will not be realized in a future period. FIXED ASSETS Fixed assets are recorded at cost. Depreciation is provided on a straight-line basis over eighteen months to five years. EARNINGS PER SHARE The Company has implemented Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share." SFAS 128 establishes standards for computing and presenting earnings per share. Options to purchase 4,188,848 common shares at a weighted average option exercise price of $7.82 per common share were outstanding at December 31, 2000. CONTINGENCIES Liabilities and other contingencies are recognized upon determination of an exposure, which when analyzed indicates that it is both probable that an asset has been impaired or that a liability has been incurred and that the amount of such loss is reasonably estimatable. Costs to remedy or defend against such contingencies are charged to expense as they are incurred. NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement, as amended by SFAS 137 and SFAS 138, establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company will adopt this Statement as of January 1, 2001 and expects that SFAS 133 will not have a material impact on the Company's disclosure and reporting. In the first quarter of 2000, FASB issued Interpretation No. 44 "Accounting for Certain Transactions involving Stock Compensation - an interpretation of APB No. 25 ("the Interpretation") which clarifies the application of APB 25 for certain issues associated with accounting for the issuance or subsequent modification of stock compensation and is effective July 1, 2000. For 38 39 certain modifications, including stock option repricings made subsequent to December 15, 1998, the Interpretation requires that variable plan accounting be applied to those modified awards prospectively from July 1, 2000. In January and November 1999, the Company repriced certain employee stock options for 706,000 shares of stock at a weighted average exercise price of $14.47 to a new exercise price of $9.00 through the cancellation of existing options and issuance of new options at or above current market prices. Upon adoption of this statement, the exercise price of the repriced options exceeded the Company's stock price resulting in no compensation expense to be recognized over future vesting. Subsequent to the adoption of the Interpretation, the Company may be required to record the effects of the changes in its stock price and the corresponding change in intrinsic value of the repriced options in its results of operations as compensation expense. 4. CASH AND CASH EQUIVALENTS: The Company considers highly liquid investments with a maturity of three months or less as cash equivalents. The following table sets forth the Company's cash and cash equivalents (in thousands):
DECEMBER 31, ----------------------- 2000 1999 ---------- ---------- Cash ............................................. $ 4,472 $ 1,371 Cash equivalents ................................. 7,656 21,076 ---------- ---------- Total cash and cash equivalents ........ $ 12,128 $ 22,447 ========== ==========
5. INVESTMENTS AND RESTRICTED INVESTMENTS: At December 31, 2000, all the Company's investments were classified as held-to-maturity. The securities have a maturity date within one year, are classified as short-term investments as part of current assets, and are stated at amortized cost as of December 31, 2000. The calculation of gross unrealized loss for the year ended December 31, 2000 was as follows (In thousands):
AMORTIZED UNREALIZED FAIR VALUE COST LOSS ---------- ---------- ---------- RESTRICTED SHORT-TERM INVESTMENTS U.S. Treasury Strip, face value of $6,875,000, due May 15, 2001 ............................................ 6,732 6,734 (2) ---------- ---------- ---------- Total Short-term restricted investments ...................................... $ 6,732 $ 6,734 $ (2) ========== ========== ==========
Net unrealized losses on held-to-maturity securities have not been recognized in the accompanying consolidated financial statements. The restricted investments were pledged or placed in escrow for the first three years of interest payments on the $110 million 12 1/2% Senior Notes (see Note 7). 6. INCOME TAXES: The geographical sources of income (loss) before income taxes and minority interest were as follows (In thousands):
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- United States ......................................... $ 95 $ 727 $ 3,348 Foreign ............................................... (5,962) (8,047) (140,043) ---------- ---------- ---------- Loss before income taxes and minority interest .................................. $ (5,867) $ (7,320) $ (136,695) ========== ========== ==========
Deferred U.S. and Colombian income taxes have been provided for the book-tax basis differences related to the Colombian acquisitions discussed in Note 2. These foreign subsidiaries' cumulative undistributed earnings are considered to be indefinitely reinvested outside of Canada and, accordingly, no Canadian deferred income taxes have been provided thereon. The Company's net deferred income tax liabilities consist of the following (In thousands):
DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Deferred tax liabilities ............... $ (24,732) $ (25,033) $ (25,033) Deferred tax asset ..................... 24,595 14,927 8,953 Valuation allowance .................... (24,566) (14,688) (8,652) ---------- ---------- ---------- Total deferred tax ........... $ (24,703) $ (24,794) $ (24,732) ========== ========== ==========
The Company's provision for income taxes differs from the amount computed by applying statutory rates, which are 45% in Canada and 35% in the United States and Colombia, due principally to the valuation allowance recorded against its deferred tax asset account relating primarily to net operating tax loss carryforwards. In 1998, the Company released the valuation allowance attributable to US net operating loss carryforwards, resulting in a deferred tax benefit of $0.3 million, net of current US tax expense of $8,700 and a reduction in deferred tax liabilities of $45.4 million was recognized relating to the Company's write-down of oil and gas properties. 39 40 Temporary differences included in the deferred tax liabilities relate primarily to the excess of book over tax basis on acquired oil and gas properties in Colombia. Portions of the Company's Colombia assets are owned through a U.S. subsidiary. No U.S. deferred tax liabilities related to the excess of book over tax basis on acquired Colombian properties have been recorded. The potential for incremental U.S. income tax associated with the excess of book over tax basis depends on the ability to generate sufficient taxable income of the appropriate character in the future. As of December 31, 2000, the Company's subsidiaries had net operating loss carryforwards in various foreign jurisdictions (primarily Canada) of approximately $46.4 million. In addition, the Company had at December 31, 2000, $7.4 million of U.S. tax net operating loss carryforwards. The Canadian loss carryforwards will expire beginning in 2002 if not utilized to reduce Canadian income taxes. In addition, the US tax net operating loss carryforwards expire in varying amounts over the years 2011-2020. A valuation allowance has been provided for all of the Canadian and U.S. deferred tax assets relating to the remaining loss carryforwards because their future realization is not currently deemed more likely than not by management. The continuation of Seven Seas-Yukon as Seven Seas-Cayman, mentioned in Note 15, will result in Seven Seas ceasing to be resident in Canada for the purposes of the Canadian Tax Act. As a result, Seven Seas-Yukon's current taxation year is deemed to have ended immediately before the continuation. In addition, Seven Seas-Yukon is deemed to have disposed of all of its property immediately before the continuation for proceeds equal to the fair market value of such property. Accordingly, Seven Seas is subject to Canadian federal income tax on any income and net taxable capital gains that result from such deemed disposition. Seven Seas is also subject to an additional tax of 25% of the amount by which the fair market value of Seven Seas' assets, net of certain liabilities, exceeds the paid-up capital of the outstanding Seven Seas-Yukon shares immediately before the continuation. Management of Seven Seas believes that, based on the preliminary appraisal of the value of its assets, the current tax cost of its assets, the amount of its existing liabilities and the paid-up capital of its shares outstanding as of December 31, 2000, no Canadian federal income taxes is payable as a result of the continuation. The continuation of a Canadian corporation to a jurisdiction outside Canada is a taxable event for Canadian purposes. However, any conclusion about whether there will be any tax due or the amount thereof will depend on the facts and its not a legal determination. Several factual determinations influence this, including 1) the value of Seven Seas' assets, 2) the tax attributes of its assets, 3) the amount of its liabilities, and 4) the "paid-up capital" of its outstanding shares. 7. DEBT AND LONG-TERM OBLIGATIONS: Exchangeable Notes. In August 1997, the Company issued $25 million of Exchangeable Notes in a private transaction with institutional and accredited investors. The Exchangeable Notes accrued interest at a rate of 6% per annum and were payable on December 31 and June 30 in each year, commencing December 31, 1997. The Exchangeable Notes were scheduled to mature on August 7, 2003. The Exchangeable Notes were exchanged for a like principal amount of Convertible Debentures on August 5, 1998. The Convertible Debentures were converted on August 6, 1998 into units consisting of a total of 2,173,901 common shares and warrants exercisable for 1,086,957 common shares. The Company received proceeds of $0.3 million from the exercise of 18,913 warrants. On February 5, 1999, the remaining warrants expired unexercised. Senior Notes. The Company issued $110 million aggregate principal amount of 12 1/2% Senior Notes due 2005 (the "Senior Notes") in a private transaction on May 7, 1998 that was not subject to registration requirements of the Securities Act of 1933. The Senior Notes mature on May 15, 2005. Interest on the Senior Notes is payable semi-annually in arrears on May 15 and November 15. The Senior Notes place restrictions on, among other things, net working capital balances, dividend distributions, changes in control, and asset sales and indebtedness. The Senior Notes represent senior obligations of the Company, ranking pari passu in right and priority of payment with all existing and future senior indebtedness and senior in right and priority of payment to all indebtedness that is expressly subordinated to the Senior Notes. In accordance with the terms of the Senior Notes, the Company purchased $13.5 million in U.S. Government Securities from the proceeds of the Senior Notes and deposited such securities in a segregated account in an amount that will be sufficient to provide for payment of the first two scheduled interest payments (see Note 5). Additionally, the Company purchased and pledged to the Bank of Nova Scotia Trust Company New York, the Trustee, as security for the benefit of the holders of the Senior Notes, U.S. Government Securities of $25 million that will be sufficient to provide payment of the four scheduled interest payments on the Notes from November 15, 1999 through May 15, 2001. The Company does not have funds in escrow for interest payments commencing with the November 15, 2001 payment. Such securities are classified as restricted short-term investments as of December 31, 2000. (see Note 5). 40 41 Stillwater National Bank Loan. In December 2000, the Company entered into a $10 million loan agreement with Stillwater National Bank and Trust Company, N.A. On March 30, 2001, the loan's maturity date was extended from December 31, 2001 to April 1, 2002. The Stillwater National Bank loan is secured by all of the stock of the operating subsidiaries of Seven Seas and is guaranteed by Robert A. Hefner III, chairman and chief executive officer of Seven Seas. Mr. Hefner received remuneration of $62,500 for his guarantee. The loan bears interest at an annual rate of the Prime Rate plus .75%, and interest is payable monthly until the loan is due in full on April 1, 2002. Seven Seas intends to use these funds for working capital and plans to replace, without penalty, this non-convertible loan with the proceeds from a larger financing planned for 2001. As of the issuance date of these financial statements, the Company had drawn $3.0 million on this loan. 8. EQUITY: On March 15, 1996, a brokered private placement was carried out in Canada in which the Company issued to a third party financial brokerage institution 2,000,000 special warrants at $2.75 per warrant for net offering proceeds after commissions and expenses of $5.1 million. Each special warrant was convertible into one unit. Each unit consisted of one share of common stock and a one-half common share purchase warrant at $3.50 per full share. The warrants were convertible at the earlier of (a) one year from date of issuance or (b) the date an approval is issued for a prospectus qualifying the conversion in the appropriate jurisdictions. On March 14, 1997, the 1,000,000 common share purchase warrants were exercised and converted to common shares for net proceeds of $3.5 million. On October 16, 1996, another brokered private placement was carried out in Canada. Seven Seas issued to a third party financial brokerage institution 500,000 special warrants at $15.00 per warrant for a net offering after commissions and expenses of $7.0 million. Each special warrant was convertible into one Unit (see Note 7). Each Unit consisted of one share of common stock and a one-half common share purchase warrant at $18.50 per full share. The warrants were convertible at the earlier of (a) one year from date of issuance or (b) the date an approval is issued for a prospectus qualifying the conversion in the appropriate jurisdictions. The 250,000 common share purchase warrants were not exercised and expired October 16, 1997. An approval for qualification of the conversion of the 2,000,000 and 500,000 special warrants issued in the brokered private placements on March 15 and October 16, 1996, respectively, was received on February 7, 1997 by the Ontario, Alberta, and British Columbia Securities Commissions. All special warrants were exercised and have been converted to common shares. The proceeds of the brokered private placements on March 15 and October 16, 1996 were used for drilling, seismic and production facilities related to the Company's participation in the Dindal and Rio Seco association contracts and for further exploration activities. 9. STOCK BASED COMPENSATION PLANS: Officers, directors and certain employees have been granted stock options under the Company's Amended 1996 Stock Option Plan and the Amended and Restated 1997 Stock Option Plan (collectively referred to as "the Plans"). Pursuant to the Plans, 6,000,000 shares were authorized for issuance, of which 4,188,848 were outstanding as of December 31, 2000. The Compensation Committee may establish the term of each incentive stock option granted under the Amended 1996 Stock Option Plan, but if not so established, the term of each option will be five years from the date it is granted, but in no event shall the term of any option exceed ten years. Options granted under the Amended and Restated 1997 Stock Option Plan have been granted with either no vesting requirement or vesting cumulatively on the anniversary of the grant date over a period of two to five years and expire ten years from the date of grant. Option agreements between the Company and optionees under the 1997 Stock Option Plan may include stock appreciation rights; however, no such rights are currently outstanding. Under the Plans, the option price equals not less than the average of the high and low trading price of the Company's stock on the date of grant. The Compensation Committee of the Board of Directors is responsible for administering the Plans, determining the terms upon which options may be granted, prescribing, amending and rescinding such interpretations and determinations and granting options to employees, directors, and officers. The following table presents a summary of stock option transactions for the three years ended December 31, 2000:
WEIGHTED AVERAGE COMMON OPTION PRICE SHARES PER SHARE ---------------- ---------------- December 31, 1997 ...... 3,878,500 $ 13.51 Granted ................. 820,500 13.97 Exercised ............... (514,000) 8.02 Revoked ................. (703,833) 17.13 ---------------- ---------------- December 31, 1998 ...... 3,481,167 13.69 Granted ................. 1,553,434 6.06 Revoked ................. (1,590,000) 14.03 ---------------- ---------------- December 31, 1999 ...... 3,444,601 10.10 Granted ................. 1,025,581 2.44 Exercised ............... (3,000) 0.75 Revoked ................. (278,334) 16.29 ---------------- ---------------- December 31, 2000 ...... 4,188,848 $ 7.82 ================ ================
41 42 Exercisable stock options amounted to 3,399,850, 2,091,935, and 1,718,829 at December 31, 2000, 1999, and 1998, respectively. The weighted average fair value of options granted during 2000, 1999, and 1998 were $1.58, $3.16 and $8.77, respectively. The following table summarizes stock options outstanding and exercisable at December 31, 2000:
OUTSTANDING EXERCISABLE ------------------------------------------------ ------------------------------- WEIGHTED WEIGHTED EXERCISE PRICE AVERAGE AVERAGE AVERAGE RANGE SHARES LIFE EXERCISE PRICE SHARES EXERCISE PRICE - ------------------------------ -------------- -------------- -------------- -------------- -------------- $1.06 - 1.94 ................. 345,787 5.5 $ 1.44 245,787 $ 1.49 2.00 - 2.94 ................. 377,564 5.2 2.69 295,564 2.67 3.00 - 3.94 ................. 719,664 8.4 3.02 284,331 3.04 4.22 - 4.81 ................. 375,000 8.4 4.26 375,000 4.26 6.16 - 7.13 ................. 10,000 4.3 6.64 10,000 6.64 8.06 - 8.63 ................. 175,000 4.8 8.46 158,334 8.45 9.00 ........................ 1,008,500 7.4 9.00 853,501 9.00 10.70 - 10.90 ............... 629,000 6.5 10.70 629,000 10.70 14.09 ....................... 18,000 7.6 14.09 18,000 14.09 18.55 - 18.75 ............... 530,333 5.7 18.59 530,333 18.59 -------------- -------------- 4,188,848 3,399,850 ============== ==============
As part of the arrangements surrounding the resignations of four former officers, the exercise period of the options granted during their employment was extended from ninety days to eighteen months. This action gave rise to a new measurement date and the Company was required to record compensation expense of $2.1 million during 1997, representing the market value of the common shares on the new measurement date less the exercise price of the options granted. Only the exercisable options granted to the former Chairman, former President, former Chief Financial Officer, and former Vice President of Exploration were considered in the computation. During 1999, the Company re-priced options granted to certain employees by canceling existing options with exercise prices at or above market prices on the date of grant. In accordance with the provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), the Company applies APB Opinion 25 in accounting for its stock option plan, and accordingly does not recognize compensation cost at fair value as it relates to SFAS 123. If the Company had elected to recognize compensation cost based on the fair value of the options granted at the grant date as prescribed by SFAS 123, net loss and net loss per share would have increased to the proforma amounts shown below:
DECEMBER 31, -------------------------------------- 2000 1999 1998 ---------- ---------- ---------- Pro Forma Net Loss (In thousands) ...... $ (7,524) $ (11,695) $ (97,393) Pro Forma Net Loss Per Share ........... $ (0.20) $ (0.31) $ (2.69)
The effects of applying SFAS 123 in this proforma are not indicative of future amounts. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the year ended December 31, 2000: weighted average risk free interest rate of 6.08 percent; no dividend yield; volatility of .8258; and expected life of ten years. The Company granted options prior to public trading on the Canadian Dealer Network on June 30, 1995. Consequently, the underlying common shares had no historic volatility prior to June 30, 1995. The fair values of the options granted prior to June 30, 1995 were based on the difference between the present value of the exercise price of the option and the estimated fair value price of the common shares. 10. DEFINED CONTRIBUTION PLAN: The Company offers a qualified defined contribution plan, which is a combined salary reduction plan under Section 401(k) of the Internal Revenue Code. Participants can invest from 1% to 15% of earnings, up to the maximum allowed by law, among several investment alternatives, including a Company stock fund. The Company does not match funds invested in the Plan and recognized no expense in 2000, 1999, or 1998, respectively due to contributions to the Plan. 42 43 11. OPERATIONS BY GEOGRAPHIC AREA: The Company has one operating and reporting segment. Information about the Company's operations for 2000, 1999 and 1998 by geographic area is shown below (In thousands):
OTHER UNITED FOREIGN CANADA STATES COLOMBIA AREAS TOTAL --------- --------- --------- --------- --------- Year ended December 31, 2000 Revenues .......................... $ 1,696 $ 12 $ 4,726 $ -- $ 6,434 Operating Income (Loss) ........... (2,633) 95 (3,314) (15) (5,867) Capital Expenditures .............. -- 151 6,540 -- 6,691 Identifiable Assets ............... 56,147 750 197,116 63 254,076 Depletion, depreciation and amortization ................... 607 289 833 -- 1,729 Year ended December 31, 1999 Revenues .......................... $ 2,938 $ 12 $ 2,363 $ -- $ 5,313 Operating Income (Loss) ........... (979) 727 (6,378) (690) (7,320) Capital Expenditures .............. -- 74 12,521 250 12,845 Identifiable Assets ............... 69,515 1,082 190,404 81 261,082 Depletion, depreciation and amortization ................... 607 332 886 -- 1,825 Year ended December 31, 1998 Revenues .......................... $ 3,626 $ 12 $ 159 $ -- $ 3,797 Operating Income (Loss) ........... (2,714) 3,348 (137,761) 432 (136,695) Capital Expenditures .............. -- 997 43,568 115 44,680 Identifiable Assets ............... 91,067 1,430 186,902 501 279,900 Depreciation and amortization ..... 485 140 49 -- 674
12. COMMITMENTS AND CONTINGENCIES: The Company leases property and equipment under various operating leases. Aggregate minimum lease payments under existing contracts as of December 31, 2000, are as follows: $0.3 million for 2001; $0.3 million for 2002; and $0.1 million for 2003 and none thereafter. Rental expense amounted to $0.3 million in 2000; $0.3 million in 1999; $0.2 million in 1998. The Company has certain non-discretionary related commitments under existing oil and gas agreements. Management estimates future expenditures for such commitments to be approximately $17.9 million in 2001 (not including a potential obligation on the Tapir association contract), $0.5 million in 2002 and none thereafter. ENVIRONMENTAL PENALTIES On June 8, 1998, the Ministry of Environment required the Company's subsidiary, GHK Company Colombia, to perform some remedial work on the El Segundo 6-E location and access road. GHK Company Colombia performed the work, and thereafter reported to the Ministry of Environment that all the work had duly been completed. In various site visits, ministry officials have confirmed that the alleged violations have been properly remedied. On July 8, 1999, GHK Company Colombia filed all the documentation, confirming total compliance with the requirements. In March 2000, the Company paid a fine of approximately $223,000 to the Ministry of Environment in connection with a resolution issued against GHK Company Colombia by the Ministry of Environment in which it declared GHK Company Colombia to be in violation of a 1997 decree in connection with the construction of the El Segundo 7-E well location. The Company has filed an appeal for a reversal of the resolution and believes that we have corrected the environmental violations claimed by the Ministry of Environment. However, the appeal process can take up to two years. The El Segundo 7-E location has been restored and the Company currently does not have drilling activities planned at this location. HEIRS OF NICOLAS BELTRAN FRANCO Two of the Company's subsidiaries, Petrolinson, S.A. and GHK Company Colombia, along with the former owner of Petrolinson, S.A., Norman Rowlinson and the heirs of Howard Thomas Corrigan, are defendants in a lawsuit that was filed in Santa Fe de Bogota, Colombia in 1998. The plaintiffs, who are the heirs of Nicolas Beltran Franco, have two claims. First, they claim that a de facto company existed between Nicolas Beltran Franco and the defendants concerning the Dindal and Rio Seco association contract areas. Second, they claim that before the Dindal and Rio Seco association contracts were executed, the de facto company conducted exploration works in the Dindal and Rio Seco association contract areas. The plaintiffs claim they have the right to participate in income earned from the Dindal and Rio Seco association contract areas. None of the plaintiffs are party to the association contracts. However, they are seeking 50% of the income generated by the de facto company they claim existed. It is not clear what percentage of the Dindal and Rio Seco association contract areas are covered by the plaintiffs' claims. The Company's Colombian counsel, Raisbeck, Lara, Rodriguez and Rueda, members of the law firm of Baker and McKenzie, believe that if this claim is litigated the chances of the plaintiffs succeeding are remote. SURFACE LOCATION A lawsuit was filed by the landowner of the El Segundo 1 surface location to cancel the Company's surface lease. The Company responded to this claim on November 4, 1999, and has vigorously defended this claim. Examinations regarding the claim were held in 43 44 September 2000, and the probatory stage of the matter was closed on March 21, 2001. The Company's Colombian legal counsel, Gamba, Barrera, Arriaga y Asociados, has advised the Company that, on the basis of the claims asserted, it is unlikely that it will lose the lawsuit. NOTEHOLDER CLAIM A claim has been brought against Seven Seas by one of the noteholders in connection with the Special Notes issued on August 7, 1997. The claim, which is against Seven Seas and Yorkton Securities Inc., alleges that the noteholder was not initially advised of the right of Seven Seas to convert the debentures into units of common shares and warrants. The claim also alleges that there were errors in the methodology of effecting conversion pursuant to the indenture between Seven Seas and Montreal Trust Company of Canada dated August 7, 1997 such that the conversion was not effective. The plaintiff in the claim is seeking damages against Seven Seas in the amount of $340,000 for negligent misrepresentation and breach of contract or alternatively, for an order directing Seven Seas to exchange the units currently held by the plaintiff into a note in the amount of $340,000 payable on July 24, 2002 with interest payable thereon at a rate of 6% per annum or directing Seven Seas to reimburse the plaintiff in the amount of $340,000 for the purchase price of the Special Notes. Seven Seas believes it has meritorious defenses and intends to take appropriate steps to defend the action vigorously. FORMER MANAGEMENT Seven Seas and two of its officers and directors, Robert A. Hefner, III and Larry Ray, and one of its former directors, Breene M. Kerr, have been sued by four former Seven Seas officers and directors in DeCort, et al. v. Seven Seas Petroleum Inc., et al., Cause No. 2000-50498, District Court of Harris County, Texas, 133rd Judicial District. Plaintiffs allege that Seven Seas failed to obtain extensions of time in which the plaintiffs could exercise certain stock options granted to them, and that all defendants induced them to enter into separation agreements with Seven Seas that they would have not entered into but for Seven Seas' agreement to obtain an extension of time for plaintiffs to exercise their stock options. The plaintiffs filed the case on October 2, 2000, seeking damages in excess of $13 million. The Company has responded, denying plaintiffs' allegations and the case is in the early stages of discovery. Mediation is currently scheduled for late April and a preliminary trial date has been set for June. Seven Seas intends to vigorously defend the case. FORMER EMPLOYEE A lawsuit has been filed against GHK Company Colombia in the Bogota labor court by a former employee who claims that he incurred $1.6 million in expenses in connection with a criminal action filed against him in Guaduas. Our Colombian legal counsel has advised us that it is unlikely that we will lose the lawsuit due the fact that, upon his departure from service, the plaintiff acknowledged that GHK had paid in full all monies owed. The Company is, from time to time, party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the financial position or results of operations or cash flows of the Company. 13. RELATED PARTY TRANSACTIONS: On November 1, 1997, the Company's Executive Vice President and Chief Operating Officer obtained a $200,000 loan from the Company. This loan bears a 6.06% interest rate and is due November 1, 2002. The Company recognized interest income of $12,000 in 2000, 1999 and 1998, respectively. The Company's Chairman and Chief Executive Officer, Mr. Robert A. Hefner III, beneficially owns 100% of The GHK Company LLC ("GHK"). Effective July 1, 1997, the Company has entered into an administrative service agreement with GHK. The Company recognized expenses related to this agreement of $21,000, $21,000 and $28,000 in 2000, 1999 and 1998, respectively. In addition, GHK pays certain miscellaneous costs incurred on behalf of the Company. The Company reimbursed GHK $23,000, $31,000 and $0.1 million in 2000, 1999 and 1998, respectively, for such costs. Mr. Hefner, owns 100% of the shares of The GHK Corporation ("GHK Corp."). GHK Corp. owns an executive aircraft, which Mr. Hefner and other Seven Seas executives and employees use for certain business travel. The Company has entered into an agreement with GHK Corp. whereby the Company pays GHK Corp. the lesser of the cost of a first class airline ticket or the total actual expenses for each specific flight. The Company had $24,000, $57,000 and $31,000 in expenditures for such air travel during 2000, 1999 and 1998, respectively. In December 2000, the Company entered into a loan agreement with Stillwater National Bank and Trust Company, N.A. Mr. Hefner guaranteed this loan and received $62,500 in remuneration for the guarantee. 44 45 McAfee & Taft, A Professional Corporation, serves as Seven Seas' corporate counsel. Gary F. Fuller is a shareholder of McAfee & Taft and has been a member of Seven Seas' board of directors since 1997. The Company incurred expenses from McAfee & Taft in the amounts of $499,340, $267,368 and $45,955 in 2000, 1999 and 1998, respectively. 14. MINORITY INTEREST: In June 1999, Seven Seas Petroleum Inc. ("SSPI") completed the reorganization of certain of its subsidiaries, three of which owned working interests in the Dindal and Rio Seco association contracts, through a series of tax-free transactions. Prior to these transactions, Seven Seas Petroleum Holdings Inc (SSPH), a wholly owned subsidiary of SSPI, owned 100% of the stock of Seven Seas Petroleum Colombia Inc. ("SSPC") and 50% of Esmeralda L.L.C. SSPC owned the remaining 50% of Esmeralda L.L.C. and 62.963% of Cimarrona L.L.C. with MTV Investments Ltd. ("MTV"), the minority interest owner in Cimarrona L.L.C., owning the remaining 37.037%. In the reorganization transactions, SSPH first assigned its membership interest in Esmeralda L.L.C. to SSPC as a capital contribution, giving SSPC 100% ownership of Esmeralda L.L.C. Next, Esmeralda L.L.C. was merged into Cimarrona L.L.C. SSPH continued to own 100% of the stock of SSPC. Cimarrona L.L.C. and its members, MTV and SSPC, entered into an agreement whereby the assets, obligations, and liabilities of Cimarrona L.L.C. which were proportionately attributable to SSPC (through the Company's interests in Esmeralda L.L.C. and Cimarrona L.L.C.) were merged into SSPC in exchange for SSPC's interest in Cimarrona L.L.C. As a result, MTV became the sole member of Cimarrona L.L.C. and accordingly, Cimarrona L.L.C. is no longer a consolidated subsidiary of the Company. In summary, MTV maintained its proportionate interest in the Dindal and Rio Seco association contracts as a working interest owner and Seven Seas' net interest in the association contracts was not changed. 15. SUBSEQUENT EVENTS: In February 2001, the Company acquired a 100% interest in the Deep Dindal association contract, subject to an obligation to assign certain of those interests to Sipetrol and Cimarrona, its partners in the Guaduas Oil Field. Following the drilling of a exploration well on the Deep Dindal association contract, the Company will have to assign either a 25.85% collective interest to Sipetrol and Cimarrona, or a 9.4% interest percent to Cimarrona and provide Sipetrol with a 4.86% overriding royalty interest that is reducible by Colombian government participation in the project. Also in February 2001, the Company acquired a 100% interest in the Cristales association contract, located immediately to the east of the Dindal and Deep Dindal association contracts. The Company released the Montecristo association contract. No oil and gas reserves were attributable to this contract area. On February 28, 2001, Seven Seas shareholders approved a proposal to continue the Company to the Cayman Islands from the Yukon Territory. Effective March 1, 2001, Seven Seas was continued as a Cayman Island company. See Note 6. In March 2001, Seven Seas announced that it had hired Ronald A. Lefaive as Vice-President of Finance and Chief Financial Officer. On March 30, 2001, the Company extended the maturity date on its $10 million loan with Stillwater National Bank and Trust Company from December 31, 2001 to April 1, 2002. SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED): Capitalized costs at December 31, 2000, 1999 and 1998 respectively, relating to the Company's oil and gas activities are shown below (In thousands):
COLOMBIA OTHERS TOTAL -------- -------- -------- As of December 31, 2000 Proved properties .......... $117,106 $ -- $117,106 ======== ======== ======== Unproved properties ........ $105,494 $ 41 $105,535 ======== ======== ======== As of December 31, 1999 Proved properties .......... $ 97,008 $ -- $ 97,008 ======== ======== ======== Unproved properties ........ $105,684 $ 41 $105,725 ======== ======== ======== As of December 31, 1998 Proved properties .......... $ 74,993 $ -- $ 74,993 ======== ======== ======== Unproved properties ........ $112,655 $ 461 $113,116 ======== ======== ========
The above costs include capitalized interest of $13.2 million, $13.8 million and $9.8 million for the years ended December 31, 2000, 1999 and 1998, respectively. 45 46 Costs incurred during the years ended December 31, 2000, 1999 and 1998, respectively, were as follows (In thousands):
COLOMBIA OTHERS TOTAL -------- -------- -------- Year ended December 31, 2000 Development cost ....................... $ 1,731 $ -- $ 1,731 Property acquisition cost: Proved ............................... -- -- -- Unproved ............................. -- -- -- Exploration cost ....................... 18,177 -- 18,177 -------- -------- -------- Total cost incurred .......... $ 19,908 $ -- $ 19,908 ======== ======== ======== Year ended December 31, 1999 Development cost ....................... $ -- $ -- $ -- Property acquisition cost: Proved ............................... -- -- -- Unproved ............................. -- -- -- Exploration cost ....................... 26,453 250 26,703 -------- -------- -------- Total cost incurred .......... $ 26,453 $ 250 $ 26,703 ======== ======== ======== Year ended December 31, 1998 Development cost ....................... $ -- $ -- $ -- Property acquisition cost: Proved ............................... -- -- -- Unproved ............................. 160 -- 160 Exploration cost ....................... 50,387 115 50,502 -------- -------- -------- Total cost incurred .......... $ 50,547 $ 115 $ 50,662 ======== ======== ========
The Company had oil and gas sales of $4.6 million, $2.3 million, and $.02 million in 2000, 1999 and 1998, respectively. The Company recognized $0.7 million and $0.8 million for depletion during 2000 and 1999, respectively. EXPLORATION COSTS The Company has been involved in exploration activities in Colombia, Australia, Argentina, Turkey and Papua New Guinea. The Company purchased an option for the right to participate in future exploration activities in North Africa, but the option was never exercised. Additionally, the Company acquired oil and gas properties in Colombia totaling zero, zero, and $.1 million in 2000, 1999, and 1998, respectively. There were deferred income taxes included in capitalized acquisition costs during 2000, 1999 and 1998, as disclosed in Note 2. Ecopetrol has the right to back into Seven Seas' participating interest in the Colombian association contracts at the start of the development stage of any oil and gas discovery made on a given association contract area. Ecopetrol's interest will commence at between 30% and 50% depending on the terms of the association contract and will increase to between 65% and 75% as the volume of oil production increases. Should Ecopetrol elect to participate in the development and production of an oil and gas field, it will pay its share of the future development costs and will pay some portion of the exploration costs incurred prior to its decision to participate. In May 2000, Ecopetrol elected not to participate in the development and exploration of the Guaduas Oil Field. Seven Seas and its Guaduas Oil Field partners have elected to proceed on a sole-risk basis pursuant to the terms of the Dindal and Rio Seco association contracts. Ecopetrol retains the right to participate at a later date subject to Seven Seas and it partners recovering 200% of the costs incurred since Ecopetrol's May 2000 decision not to participate plus certain exploration costs. PROVED RESERVES (UNAUDITED) Proved reserves represent estimated quantities of crude oil which geological and engineering data demonstrated to be reasonably certain of recoverability in the future from known reservoirs under existing economic and operating conditions. The accuracy of any reserve estimate is a function of the quantity and quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Additionally, the estimated volumes to be commercially recoverable may fluctuate with changes in the price of oil. Estimates of proved reserves have been determined using the most economic development strategy; however, the Company is currently in the development stage and has several critical steps to realize such commercial economic production (see Note 1). These critical steps constitute significant assumptions made in the estimate of the proved reserves and include, among other assumptions, declaration of commerciality by Ecopetrol, costs associated with the construction of a pipeline and production facilities and additional developmental drilling. Additionally, the reserve estimates assume that future production will be transported to existing pipelines through the proposed pipeline to market and that capacity will be available or existing pipelines for the Company's production. Estimates of future recoverable oil reserves and projected future net revenues for all periods presented were provided by Ryder Scott Company Petroleum Consultants. The Company's proved reserves were comprised entirely of crude oil in Colombia. Proved developed and undeveloped reserves (barrels):
2000 1999 1998 ------------ ------------ ------------ Beginning of year ................. 34,879,888 38,719,235 32,160,245 Extensions and discoveries ........ -- -- -- Revision of estimate .............. 13,112,068 (3,839,347) 6,558,990 ------------ ------------ ------------ End of year ....................... 47,991,956 34,879,888 38,719,235 ============ ============ ============ Proved developed .................. 15,853,372 11,000,540 20,238,430 ============ ============ ============
46 47 The following table presents the Standardized Measure of Discounted Future Net Cash Flows relating to proved oil reserves. Future cash inflows and costs were computed using prices and costs in effect at the end of the year without escalation less a gravity and transportation adjustment of $8.64 to reference prices. The reference price for the year ended December 31, 2000 was West Texas Intermediate of $26.80 per barrel. Future income taxes were computed by applying the appropriate statutory income tax rate to the pretax future net cash flows reduced by future tax deductions and net operating loss carryforwards. Standardized Measure of Discounted Future Net Cash Flows (In thousands):
2000 1999 1998 -------- -------- -------- Future cash inflows ........................................ $871,534 $735,965 $292,292 Future costs Production ............................................... 131,944 92,958 32,543 Development .............................................. 69,522 37,404 33,574 Future income taxes ........................................ 201,315 183,387 64,632 -------- -------- -------- Future net cash flows ...................................... 468,753 422,216 161,543 10% discount factor ........................................ 179,408 191,249 71,693 -------- -------- -------- Standardized measure of discounted future net cash flows .................................................... $289,345 $230,967 $ 89,850 ======== ======== ========
Principal sources of changes in the Standardized Measure of Discounted Future Net Cash Flows during 2000, 1999 and 1998 (In thousands):
2000 1999 1998 ---------- ---------- ---------- Beginning of year .......................................... $ 230,967 $ 89,850 $ 100,617 Sales and transfers of net production costs ................ (2,020) -- -- Net change in price and production costs ................... (54,573) 230,452 (35,777) Extensions, discoveries, and additions, less related costs .................................................... -- -- -- Revision of quantity estimates ............................. 103,766 (36,260) 26,373 Net change in future development costs ..................... 26,511 (3,830) 147 Net change in income taxes ................................. (24,303) (52,069) 18,221 Accretion of discount ...................................... 31,138 11,588 14,486 Changes in production rates and other ...................... (22,141) (8,764) (34,217) ---------- ---------- ---------- End of year ................................................ $ 289,345 $ 230,967 $ 89,850 ========== ========== ==========
The Standardized Measure of Discounted Future Net Cash Flows shown above relates to the Company's discovery of oil on the Association Contracts in Colombia. The Standardized Measure of Discounted Future Net Cash Flows does not purport to present the fair market value of the Company's proved reserves. An estimate of fair value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs and a discount factor more representative of the time value of money and the risks inherent in reserve estimates. Under the full cost accounting rules of the U.S. Securities and Exchange Commission, the Company reviews the carrying value of its proved oil and gas properties each quarter on a country-by-country basis. Under these rules, capitalized costs of proved oil and gas properties, net of accumulated depletion, depreciation and amortization and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved oil and gas reserves, discounted at 10 percent, plus the lower of cost or fair value of unproved properties included in the costs of being amortized, net of related tax effects. These rules generally require pricing future oil and gas production at the unescalated oil and gas prices at the end of each fiscal quarter and require a write-down if the "ceiling" is exceeded. Given the volatility of oil and gas prices, it is reasonably possible that the Company's estimate of discounted future net cash flows from proved oil and gas reserves could change in the near term. If oil and gas price decline significantly, even if only for a short period of time, it is possible that write-downs of oil and gas properties could occur in the future. SUPPLEMENTARY FINANCIAL INFORMATION Selected Quarterly Data. Results of development stage operations by quarter for the years ended December 31, 2000 and 1999 were (in thousands, except per share amounts):
2000 QUARTER ENDED ------------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ Operating revenues ........... $ 568 $ 454 $ 2,334 $ 3,078 Less costs and expenses ...... 3,373 1,984 2,556 4,388 ------------ ------------ ------------ ------------ (2,805) (1,530) (222) (1,310) Net loss ..................... $ (2,805) $ (1,530) $ (242) $ (1,330) ============ ============ ============ ============ Net loss per share ........... $ (0.07) $ (0.04) $ (0.01) $ (0.04) ============ ============ ============ ============
1999 QUARTER ENDED ------------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------ ------------ ------------ ------------ Operating revenues ........... $ 996 $ 887 $ 828 $ 2,602 Less costs and expenses ...... 2,207 5,134 2,104 3,188 ------------ ------------ ------------ ------------ (1,211) (4,247) (1,276) (586) Net loss ..................... $ (1,104) $ (3,781) $ (1,286) $ (618) ============ ============ ============ ============ Net loss per share ........... $ (0.03) $ (0.10) $ (0.03) $ (0.02) ============ ============ ============ ============
47 48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following information, which was provided to us by the individuals, shows each director and executive officer's (i) name and age; (ii) principal positions with Seven Seas; (iii) principal occupation or employment during the last five years; (iv) other public directorships and (v) starting date as a director or executive officer. No family relationship exists among any of the Seven Seas executive officers and directors.
PRESENT POSITION PRINCIPAL OCCUPATION DURING THE LAST COMMENCEMENT NAME AGE WITH SEVEN SEAS FIVE YEARS; OTHER DIRECTORSHIPS WITH SEVEN SEAS - ----------------------- --- ---------------- ------------------------------------ --------------- R. Randolph Devening(2) ........ 58 Director President and Chief Executive 11/00 Officer of Foodbrands America, Inc.; Director of Hancock Fabrics, Inc., Keystone Operations, Inc., and Love's Travel Stops Country Stores, Inc. Brian F. Egolf(2)(3)............ 52 Director President of Petroleum Properties 11/96 Management Corporation, a private oil and gas exploration company Gary F. Fuller(1)(3)............ 64 Director Shareholder of McAfee & Taft, 5/97 A Professional Corporation Robert A. Hefner III(1)......... 66 Chairman, Chief Managing Member of The GHK Company 11/96 Executive Officer, L.L.C., a private oil and gas Managing Director exploration company and Director Ronald A. Lefaive .............. 53 Vice President of Senior Manager of Global Administrative 3/01 Finance and Chief Services of Halliburton Company from Financial Officer 1999 to March 2001; Senior Vice President - Accounting, Controller and Chief Accounting Officer at Chesapeake Energy Corporation from 1993 to 1999 Robert B. Panero(2) ............ 72 Director President of Robert Panero Associates, 5/97 International Strategic Policy and Project Studies Advisors Larry A. Ray(1) ................ 53 President, Chief President since November 2000; Chief 6/97 Operating Officer, Operating Officer since September Corporate 1997, Chief Financial Officer from Secretary and April 1999 to March 2001; Executive Director Vice President from September 1999 to November 2000; Executive Vice President - Operations from June 1997 to September 1997 Dr. James R. Schlesinger(3) .... 72 Director Senior Advisor to the investment 9/99 banking firm Lehman Brothers; Chairman of the Board of Trustees of the MITRE Corporation
- ---------- (1) Member of the Executive Committee (2) Member of the Audit Committee (3) Member of the Compensation Committee Each of our directors and officers has held the principal occupation identified above for not less than five years, except for Mr. Lefaive, who became an officer of Seven Seas in March 2001, Mr. Hefner, who became an officer of Seven Seas in May 1997, and Mr. Ray, who was appointed President in November 2000 and Chief Operating Officer in September 1997. 48 49 Prior to his association with the Company, Mr. Lefaive was employed by Halliburton Company as a senior manager responsible for global administrative services within the information technology department. From 1993 to 1999, he served in various financial capacities within Chesapeake Energy Corporation in Oklahoma City, Oklahoma, the last being Senior Vice President - Accounting, Controller and Chief Accounting Officer. From 1991 to 1993, Mr. Lefaive was Controller for Phibro Energy Production, Inc., an international exploration and production subsidiary of Phibro Energy, whose principal operations were located in Russia. From 1982 to 1991, Mr. Lefaive served as Assistant Controller, General Auditor, and Manager of Management Information Systems at Conquest Exploration Company in Houston, Texas. Prior to joining Conquest, Mr. Lefaive held various financial staff and management positions with The Superior Oil Company from 1980 to 1982 and Shell Oil Company from 1975 to 1982. Mr. Lefaive is a Certified Public Accountant and graduated from the University of Houston in 1975. Mr. Ray served as Seven Seas' Executive Vice President from September 1997 to November 2000 and was appointed Chief Financial Officer of Seven Seas on an interim basis between April 1999 and March 2001. From June 1997 to September 1997, Mr. Ray served as Seven Seas' Executive Vice President of Operations. Prior to joining Seven Seas, Mr. Ray served in a management capacity for The GHK Company L.L.C. In November 2000, R. Randolph Devening was appointed to our Board of Directors. Mr. Devening currently serves as Chief Executive Officer of Foodbrands America, Inc., a leading U.S. producer, marketer and distributor of frozen and refrigerated products. Mr. Devening joined Foodbrands America as Chairman, President and CEO in 1994 when it was a public company listed on the New York Stock Exchange and prior to it becoming a subsidiary of IBP, inc. Before joining Foodbrands America, Mr. Devening held various senior level positions, including Vice Chairman of the Board of Fleming Companies, Inc. Mr. Devening is a graduate of Stanford University and holds a Masters in Business Administration in Finance and Marketing from Harvard Business School. He currently serves as director of Hancock Fabrics, Inc., Keystone Automotive Operations, Inc., and Love's Travel Stops & Country Stores, Inc. OTHER KEY EMPLOYEES During the first quarter of 2000, we hired J. Anthony Stuart, a 22-year employee of British Petroleum, as our drilling manager in our Bogota office. Mr. Stuart had spent the previous nine years working for BP in Colombia on the development of the Cusiana-Cupiagua field, Colombia's largest known oil field. At the time of his retirement from BP, Mr. Stuart was serving as Drilling Operations Manager. In early 2001, we made Mr. Stuart Vice President of Operations of GHK Company Colombia, our subsidiary in Colombia and the operator of the Guaduas Oil Field. Mr. Stuart will oversee the drilling of the subthrust exploration well provided it is drilled this year. Concurrent with Mr. Stuart's promotion, we also named Claudia M. Vaca Vice President of Legal, Finance and Administration of GHK Company Colombia. Prior to this position, Ms. Vaca, who is a graduate of the Harvard Law School, was serving as GHK Company Colombia's General Counsel. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE The following of Seven Seas' directors, officers and 10% beneficial owners filed untimely reports required by Section 16(a) of the Securities Exchange Act of 1934 during the 2000 fiscal year: William W. Daily and Breene M. Kerr failed to file a required Form 5; R. Randolph Devening filed an untimely Form 3; and each of Robert A. Hefner III, Larry A. Ray, Brian F. Egolf, Gary F. Fuller, Robert B. Panero, Dr. James R. Schlesinger and Sir Mark Thomson Bt. filed an untimely Form 5. ITEM 11. EXECUTIVE COMPENSATION Directors who are not officers or employees are paid such remuneration as the board determines and are eligible to participate in our 1996 and 1997 stock option plans. They are also reimbursed for their out-of-pocket expenses incurred in connection with their services as directors, including travel expenses. We also maintain directors' and officers' insurance. Mr. Hefner was awarded options to purchase 221,108 common shares in lieu of cash compensation of $450,000 for services provided and to be provided from August 1, 1999 through July 31, 2000. On August 13, 1999, Mr. Hefner began receiving, in lieu of cash compensation, options to purchase 9,213 common shares semi-monthly, on our payroll days, through July 31, 2000. Such options vest upon receipt and are priced at the average of the high and low trading price on the American Stock Exchange on each respective payroll day. Mr. Hefner was also awarded options to purchase 423,888 common shares in lieu of cash compensation of $450,000 for services provided from August 1, 2000 through July 31, 2001. Mr. Hefner received options to purchase 17,662 common shares semi-monthly, on our payroll days between August 1, 2000 and February 28, 2001. Instead of receiving options to purchase 17,662 common shares semi-monthly through July 31, 2001, Mr. Hefner will receive options to purchase 88,310 common shares on May 15, 2001 and July 30, 2001. The exercise price is the average of the high and low trading price on the American Stock Exchange on each respective grant date. Sir Mark Thomson Bt. was awarded options to purchase 350,000 common shares vesting on October 31, 2000 at an exercise price of $4.2 per share, an amount greater than the fair market value of the stock on the date awarded. 49 50 On September 30, 2000, Dr. Schlesinger was awarded options to purchase 822 common shares at an exercise price of $2.9375 for his service as a second year director during third quarter 2000. On December 31, 2000, Dr. Schlesinger was awarded options to purchase 7,061 common shares at an exercise price of $1.2813 for his service as a second-year director during fourth quarter 2000. Non-employee directors who had been directors for more than one year at the end of 1999 were awarded options to purchase 23,260 common shares in lieu of cash compensation of $35,000 for services provided during 2000. Independent directors serving on the Audit Committee for 2000 were awarded options to purchase 24,922 common shares; those serving on the Compensation Committee were awarded options to purchase 28,245 common shares; and independent directors serving on both the Compensation Committee and the Audit Committee for 2000 were awarded options to purchase 29,906 common shares in lieu of compensation. Accordingly, Mr. Egolf was awarded 29,206 options; Mr. Fuller was awarded 29,206 options; and Mr. Panero was awarded 24,922 options. One-quarter of the options awarded in 2000 to each independent director were granted on March 31, 2000, June 30, 2000, September 30, 2000 and December 31, 2000. The exercise price for all the options granted to non-employee directors in 2000 was the average between the high and low trading prices on the American Stock Exchange on the date of grant. All options vested immediately upon grant and will expire on July 30, 2004, if not sooner exercised. On November 13, 2000, Mr. Devening was awarded options to purchase 75,000 common shares at an exercise price of $2.781 per share, of which options to purchase 25,000 common shares vested immediately and options to purchase 25,000 common shares vest on each of November, 2001 and 2002. On April 7, 2000, Mr. Ray was awarded options to purchase 200,000 common shares at an exercise price of $3.00, an amount greater than the fair market value of the shares at the time of grant. One-quarter of these options vest six months after the date of grant, one-quarter vest twelve months after the date of grant, one-quarter vest eighteen months after the date of grant, and one-quarter vest twenty-four months after the date of grant. SUMMARY COMPENSATION TABLE The following table sets forth certain summary information regarding the compensation Seven Seas paid to our Chief Executive Officer and our other three most highly compensated officers whose total compensation during the fiscal year ended December 31, 2000 exceeded $100,000.
ANNUAL COMPENSATION LONG TERM COMPENSATION AWARDS ------------------------------------ ---------------------------------------------------- PAYOUTS RESTRICTED SECURITIES ------- OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARD OPTIONS PAYOUTS COMPENSATION - --------------------------- ---- --------- ----- --------------- ---------- ---------- ------- ------------- Robert A. Hefner, III,..... 2000 $ -- -- -- -- 305,598 -- -- Chairman and Chief Executive 1999 281,250 -- -- -- 92,130 -- -- Officer 1998 450,000 -- -- -- -- -- -- Sir Mark Thomson, Bt,...... 2000 $ 370,313 -- -- -- -- -- President and Director 1999 295,160 -- -- -- 350,000 -- -- 1998 -- -- -- -- -- -- -- Larry A. Ray,.............. 2000 $ 334,417 -- 200,000 President, Chief Operating 1999 300,000 -- -- -- 550,000 -- -- Officer, Corporate Secretary 1998 262,500 -- -- -- -- -- -- and Director William W. Daily,.......... 2000 $ 25,397(2) -- $342,494(3) Executive Vice President, 1999 330,000 -- -- -- -- -- -- President of GHK Company 1998 120,000(4) -- -- -- 237,500 -- -- Colombia and Director
- ---------- (1) Except as otherwise indicated, the dollar value of perquisites and other personal benefits for each of the named executive officers was less than established reporting thresholds and did not exceed the lesser of $50,000 or 10% of combined salary and bonus in each year covered. (2) Represents salary received from January 1, 2000 through January 28, 2000 from Seven Seas, which amount does not reflect an annual rate of compensation. (3) Represents termination payment from Seven Seas pursuant to severance agreement dated January 28, 2000, including payroll tax. 50 51 (4) Represents salary received from commencement of employment through December 31, 1998 from Seven Seas, which amount does not reflect an annual rate of compensation. OPTION GRANTS DURING 2000 The following table sets forth information regarding individual grants of options by Seven Seas during the fiscal year ended December 31, 2000 to the named executive officers and their potential realizable values.
INDIVIDUAL GRANTS ------------------------------------------------ POTENTIAL REALIZABLE % OF TOTAL MARKET VALUE AT ASSUMED NUMBER OF OPTION VALUE ANNUAL RATES OF SHARE SHARES GRANTED TO EXERCISE PER SHARE PRICE APPRECIATION FOR UNDERLYING EMPLOYEES OR BASE ON THE OPTION TERM(1) OPTIONS IN FISCAL PRICE PER DATE OF EXPIRATION ---------------------- NAME GRANTED YEAR SHARE GRANT DATE 5% 10% - ---- ---------- ---------- --------- --------- ---------- -------- -------- Robert A. Hefner, III... 9,213(2) 0.90% 2.00 2.00 07/30/04 11,588 29,366 Robert A. Hefner, III... 9,213(2) 0.90% 2.00 2.00 07/30/04 11,588 29,366 Robert A. Hefner, III... 9,213 0.90% 2.13 2.13 07/30/04 12,312 31,202 Robert A. Hefner, III... 9,213 0.90% 2.00 2.00 07/30/04 11,588 29,366 Robert A. Hefner, III... 9,213 0.90% 2.69 2.69 07/30/04 15,571 39,461 Robert A. Hefner, III... 9,213 0.90% 1.94 1.94 07/30/04 11,226 28,449 Robert A. Hefner, III... 9,213 0.90% 1.81 1.81 07/30/04 10,502 26,613 Robert A. Hefner, III... 9,213 0.90% 1.75 1.75 07/30/04 10,140 25,696 Robert A. Hefner, III... 9,213 0.90% 1.13 1.13 07/30/04 6,518 16,519 Robert A. Hefner, III... 9,213 0.90% 1.06 1.06 07/30/04 6,156 15,601 Robert A. Hefner, III... 9,213 0.90% 1.47 1.47 07/30/04 8,510 21,566 Robert A. Hefner, III... 9,213 0.90% 1.19 1.19 07/30/04 6,880 17,436 Robert A. Hefner, III... 9,213 0.90% 1.09 1.09 07/30/04 6,337 16,060 Robert A. Hefner, III... 9,209 0.90% 1.28 1.28 07/30/04 7,420 18,805 Robert A. Hefner, III... 35,324 3.44% 2.81 2.81 07/30/05 62,480 158,336 Robert A. Hefner, III... 17,662 1.72% 3.22 3.22 07/30/05 35,752 90,604 Robert A. Hefner, III... 17,662 1.72% 2.94 2.94 07/30/05 32,628 82,687 Robert A. Hefner, III... 17,662 1.72% 2.47 2.47 07/30/05 27,422 69,492 Robert A. Hefner, III... 17,662 1.72% 2.69 2.69 07/30/05 29,852 75,650 Robert A. Hefner, III... 17,662 1.72% 2.81 2.81 07/30/05 31,240 79,168 Robert A. Hefner, III... 17,662 1.72% 1.75 1.75 07/30/05 19,438 49,260 Robert A. Hefner, III... 17,662 1.72% 1.47 1.47 07/30/05 16,314 41,343 Robert A. Hefner, III... 17,662 1.72% 1.28 1.28 07/30/05 14,232 36,065 Larry A. Ray............ 200,000 19.50% 3.00 2.03 04/07/10 377,337 956,245
- ---------- (1) The assumed rates of annual appreciation are calculated from the date of grant through the assumed expiration date. Actual gains, if any, on option exercises and common share holdings are dependent on the future performance of the common shares and overall stock market conditions. There can be no assurance that the value reflected in the table will be achieved. (2) Options exercisable when stock trades above $10.90. We have not granted any stock appreciation rights to the named executive officers or to our other employees or directors. AGGREGATED OPTION EXERCISES DURING 2000 AND FISCAL YEAR-END OPTION VALUES The following table provides information relating to options exercised by the named executive officers during 2000 and the number and value of unexercised options held by the named executive officers at year-end. Seven Seas does not have any outstanding stock appreciation rights:
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS, IN-THE-MONEY OPTIONS, SHARES SECURITIES UNDERLYING UNEXERCISED OPTIONS VALUE OF UNEXERCISED IN-THE-MONEY OPTIONS ACQUIRED VALUE AT DECEMBER 31, 2000 AT DECEMBER 31, 2000 ON REALIZED ----------------------------------------- ----------------------------------------- NAME EXERCISE (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---- -------- -------- ----------- ------------- ----------- ------------- Robert A. Hefner, III.. -- -- 897,728 -- $9,141.38 -- Sir Mark Thomson, Bt... -- -- 450,000 -- -- -- Larry A. Ray........... -- -- 466,666 283,334 -- -- William W. Daily(3).... -- -- 237,500 -- -- --
- ---------- (1) Represents the difference between the exercise price of the option and the closing price on the date of exercise. 51 52 (2) Based on a closing price on December 31, 2000 of $1.38 per share. Options are "in-the-money" at the fiscal year-end if the market value of the underlying securities on that date exceeds the exercise price of the option. (3) The options granted to Mr. Daily vested immediately on January 20, 2000, pursuant to his severance agreement. EMPLOYMENT AGREEMENTS We entered into a five-year employment agreement with Larry A. Ray dated June 12, 1997 that provides for an annual base salary of $262,500 and also provides that, in the sole discretion of the Compensation Committee of the board, Mr. Ray may receive annual merit increases, annual bonuses and stock option awards. As part of his employment agreement, Mr. Ray was granted options to purchase 200,000 common shares at an exercise price of $10.70 per share. One-third of the options vested immediately and the remainder vest one-half each on the first and second anniversaries of the date of grant. The employment agreement may be terminated for cause, which includes death or serious incapacity. Under the terms of the employment agreement, Mr. Ray will receive payments equal to the amounts remaining to be paid under the agreement in the event of a change in control or if his employment terminates for any reason. For purposes of this agreement, the term "change in control" means: o any merger, consolidation or reorganization in which Seven Seas is not the surviving entity (or survives only as a subsidiary of an entity); o any sale, lease, exchange or other transfer of (or agreement to sell, lease, exchange or otherwise transfer) all or substantially all of our assets to any other person or entity (in one transaction or a series of related transactions); o dissolution or liquidation of Seven Seas; o any person or entity, including a group as contemplated by Section 13(d) of the Exchange Act, acquires or gains ownership or control (including without limitation, power to vote) of more than 45% of the outstanding shares of our voting stock (based upon voting power); or o as a result of or in connection with a contested election of directors, the persons who were directors of Seven Seas before the election cease to constitute a majority of the board of directors; provided, however, that the term "change in control" does not include any reorganization, merger, consolidation, sale, lease, exchange or similar transaction involving solely Seven Seas and one or more previously wholly-owned subsidiaries of Seven Seas. We entered into a three-year employment agreement with William W. Daily dated September 1, 1998 that provided for an annual base salary of $330,000. Mr. Daily was also entitled to receive annual merit increases, annual bonuses and stock option awards, at the sole discretion of the Compensation Committee. As a part of his employment agreement, Mr. Daily was granted options to purchase 237,500 common shares at an exercise price of $9.00 per share. The remaining terms of his employment agreement were substantially similar to Mr. Ray's employment agreement. Mr. Daily resigned his employment with Seven Seas effective January 28, 2000. Under the terms of a severance agreement with Mr. Daily dated January 28, 2000, we agreed to pay a termination payment of $330,000 to Mr. Daily and all options granted to him vested immediately. We entered into a fifteen-month employment agreement with Sir Mark Thomson, Bt dated August 1, 1999 that provided for an annual base salary of $450,000. Upon signing, Sir Mark Thomson Bt received a signing bonus of $107,660 for services provided to Seven Seas prior to the date of his employment agreement. The employment agreement also provided that other such bonuses, if any, could be awarded at the sole discretion of the Compensation Committee. As a part of his employment agreement, Sir Mark Thomson Bt was granted options to purchase 350,000 common shares at an exercise price of $4.2 per share, such options to vest October 31, 2000 or upon the occurrence of a change in control. Sir Mark Thomson Bt. was also eligible to receive other stock option grants at our discretion. The remaining terms of the employment agreement were substantially similar to Mr. Ray's employment agreement. Sir Mark Thomson Bt's tenure with the company lapsed on October 31, 2000 pursuant to the terms of his employee agreement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Below, we have listed information as of March 15, 2001, about the beneficial ownership of the common shares. This table shows ownership by (i) each person who we know beneficially owns more than 5% of the issued and outstanding common shares, (ii) each director and each of the named officers and (iii) all of our executive officers and directors as a group. 52 53
NUMBER OF PERCENT BENEFICIAL OWNER COMMON SHARES(1) OF CLASS - ---------------- ---------------- -------- Robert A. Hefner, III...................... 5,839,937(2) 15.0% c/o Seven Seas Petroleum, Inc. Suite 1700, 5555 San Felipe Houston, Texas 77056 Breene M. Kerr............................. 2,733,031(3) 7.2% c/o Brookside Company 115 Bay Street Easton, MD 21601 State Street Research & Management Company. 2,262,300(4) 6.0% One Financial Centre, 30th Floor Boston, Massachusetts 02111 Robert W. Moore............................ 2,542,000 6.7% MTV Limited Partnership 3600 West Main Street, Suite 150 Norman, Oklahoma 73072 Larry A. Ray............................... 623,886(5) 1.6% Brian F. Egolf............................. 336,269(6) * Gary F. Fuller............................. 223,899(7) * Robert B. Panero........................... 118,259(8) * Dr. James R. Schlesinger................... 63,305(9) * R. Randolph Devening....................... 25,000(10) * All executive officers and directors as a group (7 persons)........................ 7,230,555(11) 18.7%
- ---------- * Less than 1% (1) Unless we indicated otherwise, each of the parties listed has sole voting and investment power over the shares owned. The number of shares listed includes the number of common shares that would be issued if certain stock options that are currently exercisable were exercised subject to our Amended 1996 Stock Option Plan and our 1997 Stock Option Plan. For purposes of this table, options are deemed to be currently exercisable if they may be exercised within 60 days following March 29, 2001. (2) Includes 1,056,686 common shares currently issuable upon exercise of options and 15,000 common shares held by an entity in which Mr. Hefner has a substantial interest. (3) Includes 172,112 common shares currently issuable upon exercise of options and 2,560,919 common shares beneficially owned by a limited partnership in which Mr. Kerr serves as a general partner. (4) Based on a Schedule 13G for the year ended December 31, 2000, State Street has sole power to vote 2,168,400 shares and sole power to dispose of 2,262,300 shares. (5) Includes 516,666 common shares currently issuable upon exercise of options, 2,720 shares in Mr. Ray's retirement account and an additional 104,500 owned by Mr. Ray's wife. (6) Includes 274,533 common shares currently issuable upon exercise of options and 25,000 common shares owned by a trust for the benefit of members of Mr. Egolf's family. (7) Includes 208,399 common shares currently issuable upon exercise of options. Also includes 4,000 common shares owned by a limited liability company, of which Mr. Fuller and his wife each own a 50% interest and share voting and investment powers, and 10,000 common shares owned by a limited partnership of which Mr. Fuller has the voting and investment power as a trustee of a trust which is the sole general partner. Mr. Fuller has a 35.65% interest in the partnership as a limited partner. Also includes 3,500 common shares owned by Mr. Fuller's wife as to which he disclaims beneficial ownership. (8) Includes 117,480 common shares currently issuable upon exercise of options and 779 common shares held by Mr. Panero's wife. (9) Includes 63,305 common shares currently issuable upon exercise of options. (10) Includes 25,000 common shares currently issuable upon exercise of options. (11) Includes 2,262,069 common shares currently issuable upon exercise of options. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On November 1, 1997, the Executive Vice President and Chief Operating Officer obtained a $200,000 loan from the Company. This loan bears a 6.06% interest rate and is due November 1, 2002. The Company recognized interest income of $12,000 in 2000, 1999 and 1998, respectively. 53 54 The Company's Chairman and Chief Executive Officer, Mr. Robert A. Hefner III, beneficially owns 100% of The GHK Company LLC ("GHK"). Effective July 1, 1997, the Company has entered into an administrative service agreement with GHK. The Company recognized $21,000, $21,000 and $28,000 of such expenses in 2000, 1999 and 1998, respectively. In addition, GHK pays certain miscellaneous costs incurred on behalf of the Company. The Company reimbursed GHK $23,000, $31,000 and $0.1 million in 2000, 1999 and 1998, respectively, for such costs. Mr. Hefner owns 100% of the shares of The GHK Corporation ("GHK Corp."). GHK Corp. owns an executive aircraft, which Mr. Hefner and other Seven Seas executives and employees use for certain business travel. The Company has entered into an agreement with GHK Corp. whereby the Company pays GHK Corp. the lesser of the cost of a first class airline ticket or the total actual expenses for each specific flight. The Company had $24,000, $57,000 and $31,000 in expenditures for such air travel during 2000, 1999 and 1998, respectively. In December 2000, the Company entered into a loan agreement with Stillwater National Bank and Trust Company, N.A. Mr. Hefner guaranteed this loan and received $62,500 in remuneration for the guarantee. McAfee & Taft, A Professional Corporation, serves as Seven Seas' corporate counsel. Gary F. Fuller is a shareholder of McAfee & Taft and has been a member of Seven Seas' board of directors since 1997. The Company incurred expenses from McAfee & Taft in the amounts of $499,340, $267,368 and $45,955 in 2000, 1999 and 1998, respectively. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Financial Statements and Schedules: (1) Financial Statements: The financial statements required to be filed are included under Item 8 of this report. (2) Schedules: All schedules for which provision is made in applicable accounting regulations of the SEC have been omitted as the schedules are either not required under the related instructions, are not applicable or the information required thereby is set forth in the Company's Consolidated Financial Statements or the Notes thereto. (3) Exhibits: The following instruments and documents are included as Exhibits to this document. Exhibits incorporated by reference are so indicated by parenthetical information. EXHIBIT NUMBER DESCRIPTION (3) Articles of Incorporation and By-laws (A)* Certificate of Continuance to the Cayman Islands (B)* Memorandum of Association (C)* Articles of Association (4) Instruments defining the rights of security holders, including indentures (A) Indenture dated as of May 7, 1998 between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and The Bank of Nova Scotia Trust Company of New York, as Trustee, incorporated by reference to Exhibit 4(A) in Registration on Form S-4 filed on July 2, 1998 (File No. 333-58499) (B) Registration Rights Agreement dated as of May 7, 1998 among Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and the Initial Purchasers, incorporated by reference to Exhibit 4(B) in Registration on Form S-4 filed on July 2, 1998 (File No. 333-58499) (C) Collateral Pledge and Security Agreement dated as of May 7, 1998 between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and The Bank of Nova Scotia Trust Company of New York, as Trustee, incorporated by reference to Exhibit 4(C) in Registration on Form S-4 filed on July 2, 1998 (File No. 333-58499) 54 55 (10) Material Contracts (A) Letter Agreement dated August 14, 1995 by and between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and GHK Company Columbia, as amended by letter agreement dated November 30, 1995, incorporated by reference to Exhibit 10(A) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (B) The Association Contract by and between Ecopetrol and GHK Company Colombia and Petrolinson, S.A. relating to the Dindal block, as amended, incorporated by reference to Exhibit 10(B) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (C) The Association Contract by and between Ecopetrol and GHK Company Colombia relating to the Rio Seco block, incorporated by reference to Exhibit 10(C) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (D) Joint Operating Agreement dated as of August 1, 1994 by and between GHK Company Colombia and the holder of interests in the Dindal block, incorporated by reference to Exhibit 10(D) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (E) Management Services Agreement by and among GHK Company Colombia, Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and The GHK Company L.L.C., incorporated by reference to Exhibit 10(J) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (F) Amended 1996 Stock Option Plan, incorporated by reference to Exhibit 10(M) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (G) Form of Incentive Stock Option Agreement, incorporated by reference to Exhibit 10(N) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (H) Form of Directors' Stock Option Agreement, incorporated by reference to Exhibit 10(O) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (I)** Form of Employment Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Larry A. Ray, incorporated by reference to Exhibit 10(R) in Registration on Amendment No. 1 to Form 10, filed September 15, 1997 (File No. 000-22483) (J) Settlement Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Mr. Whitehead dated May 20, 1997, incorporated by reference to Exhibit 10(S) in Registration on Amendment No. 1 to Form 10, filed September 15, 1997 (File No.000-22483) (K) 1997 Stock Option Plan, incorporated by reference to Exhibit 10(BB) in Registration on Amendment No. 1 to Form 10 filed September 15, 1997 (File No. 000-22483) (L) The Association Contract by and between Ecopetrol and Seven Seas Petroleum Colombia relating to the Rosablanca block, incorporated by reference to Exhibit 10(B) on Form 10-K for the year ended December 31, 1997 (File No. 001-13771) (M) The Association Contract by and between Ecopetrol and Seven Seas Petroleum Colombia relating to the Montecristo block, incorporated by reference to Exhibit 10(C) on Form 10-K for the year ended December 31, 1997 (File No. 001-13771) (N)** Form of Employment Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation and Sir Mark Thomson Bt, incorporated by reference to Exhibit 10(V) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) (O)** Severance Agreement with Herbert C. Williamson III, incorporated by reference to Exhibit 10(W) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) 55 56 (P)** Severance Agreement with William W. Daily, incorporated by reference to Exhibit 10(X) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) (Q) Memorandum of Understanding with Empresa Colombiana de Petroleos, incorporated by reference to Exhibit 10(Y) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) (R) Global Operating License, incorporated by reference to Exhibit 10(W) on Form S-4, filed January 10, 2001 (File No. 333-53470) (S) Loan Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Stillwater National Bank and Trust Company, N.A., dated December 20, 2000, and related Guaranty Agreement and Guarantor Security Agreement, incorporated by reference to Exhibit 10(X) on Form S-4, filed January 10, 2001 (File No. 333-53470) (T) Promissory Note dated December 20, 2000 from Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Stillwater National Bank and Trust Company, N.A., incorporated by reference to Exhibit 10(Y) on Form S-4, filed January 10, 2001 (File No. 333-53470) (U) Stock Pledge Agreement by Seven Seas Petroleum Corporation, a Yukon Territory, Canada corporation, Seven Seas Petroleum Holdings Inc., a Cayman Island corporation, and Seven Seas Petroleum Columbia Inc., a Cayman Islands corporation, in favor of Stillwater National Bank and Trust Company, N.A., incorporated by reference to Exhibit 10(Z) on Form S-4, filed January 10, 2001 (File No. 333-53470) (V) Construction Contract dated December 27, 2000 between Seven Seas Petroleum Corporation Inc., a Yukon Territory, Canada corporation, and Cosacol Ltd., incorporated by reference to Exhibit 10(AA) on Form S-4, filed January 10, 2001 (File No. 333-53470) (23) Consent of experts and counsel *(A) Consent of Arthur Andersen LLP (24) Power of Attorney (included in signature page) - ---------- * Filed herewith. ** Management contract, compensatory plan or agreement. (b) Consolidated Financial Statement Schedules All schedules are omitted as the required information is inapplicable or the information is presented in the financial statements or notes thereto. (b) Reports on Form 8-K None 56 57 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, Seven Seas has duly caused this report to be signed on its behalf as of the 30th day of March 2001 by the undersigned, thereunto duly authorized. SEVEN SEAS PETROLEUM INC. By: /s/ ROBERT A. HEFNER III ------------------------------ Robert A. Hefner III Chief Executive Officer (Principal Executive Officer) By: /s/ RONALD A. LEFAIVE ------------------------------ Ronald A. Lefaive Chief Financial Officer (Principal Financial Officer) The undersigned officers and directors of Seven Seas, hereby severally constitute and appoint Robert A. Hefner III and Larry A. Ray, and each of them, severally, his true and lawful attorneys-in-fact with full power to them and each of them to sign for him, and in his name as officer or director, or both, of Seven Seas, the Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (and any and all amendments thereto), granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and to perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed as of the 30th day of March 2001 by the following persons in their capacity as directors of the Registrant. /s/ ROBERT A. HEFNER III Chairman and Chief Executive Officer ---------------------------- Robert A. Hefner III /s/ LARRY A. RAY President, Chief Operating Officer, Corporate ---------------------------- Secretary and Director Larry A. Ray /s/ R. RANDOLPH DEVENING Director ---------------------------- R. Randolph Devening /s/ BRIAN EGOLF Director ---------------------------- Brian Egolf /s/ GARY F. FULLER Director ---------------------------- Gary F. Fuller /s/ ROBERT B. PANERO Director ---------------------------- Robert B. Panero /s/ DR. JAMES R. SCHLESINGER Director ---------------------------- Dr. James R. Schlesinger
57 58 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- (3) Articles of Incorporation and By-laws (A)* Certificate of Continuance to the Cayman Islands (B)* Memorandum of Association (C)* Articles of Association (4) Instruments defining the rights of security holders, including indentures (A) Indenture dated as of May 7, 1998 between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and The Bank of Nova Scotia Trust Company of New York, as Trustee, incorporated by reference to Exhibit 4(A) in Registration on Form S-4 filed on July 2, 1998 (File No. 333-58499) (B) Registration Rights Agreement dated as of May 7, 1998 among Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and the Initial Purchasers, incorporated by reference to Exhibit 4(B) in Registration on Form S-4 filed on July 2, 1998 (File No. 333-58499) (C) Collateral Pledge and Security Agreement dated as of May 7, 1998 between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and The Bank of Nova Scotia Trust Company of New York, as Trustee, incorporated by reference to Exhibit 4(C) in Registration on Form S-4 filed on July 2, 1998 (File No. 333-58499) (10) Material Contracts (A) Letter Agreement dated August 14, 1995 by and between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and GHK Company Columbia, as amended by letter agreement dated November 30, 1995, incorporated by reference to Exhibit 10(A) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (B) The Association Contract by and between Ecopetrol and GHK Company Colombia and Petrolinson, S.A. relating to the Dindal block, as amended, incorporated by reference to Exhibit 10(B) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (C) The Association Contract by and between Ecopetrol and GHK Company Colombia relating to the Rio Seco block, incorporated by reference to Exhibit 10(C) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (D) Joint Operating Agreement dated as of August 1, 1994 by and between GHK Company Colombia and the holder of interests in the Dindal block, incorporated by reference to Exhibit 10(D) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (E) Management Services Agreement by and among GHK Company Colombia, Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and The GHK Company L.L.C., incorporated by reference to Exhibit 10(J) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (F) Amended 1996 Stock Option Plan, incorporated by reference to Exhibit 10(M) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (G) Form of Incentive Stock Option Agreement, incorporated by reference to Exhibit 10(N) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (H) Form of Directors' Stock Option Agreement, incorporated by reference to Exhibit 10(O) in Registration on Form 10 filed April 30, 1997 (File No. 000-22483) (I)** Form of Employment Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Larry A. Ray,
58 59 incorporated by reference to Exhibit 10(R) in Registration on Amendment No. 1 to Form 10, filed September 15, 1997 (File No. 000-22483) (J) Settlement Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Mr. Whitehead dated May 20, 1997, incorporated by reference to Exhibit 10(S) in Registration on Amendment No. 1 to Form 10, filed September 15, 1997 (File No.000-22483) (K) 1997 Stock Option Plan, incorporated by reference to Exhibit 10(BB) in Registration on Amendment No. 1 to Form 10 filed September 15, 1997 (File No. 000-22483) (L) The Association Contract by and between Ecopetrol and Seven Seas Petroleum Colombia relating to the Rosablanca block, incorporated by reference to Exhibit 10(B) on Form 10-K for the year ended December 31, 1997 (File No. 001-13771) (M) The Association Contract by and between Ecopetrol and Seven Seas Petroleum Colombia relating to the Montecristo block, incorporated by reference to Exhibit 10(C) on Form 10-K for the year ended December 31, 1997 (File No. 001-13771) (N)** Form of Employment Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation and Sir Mark Thomson Bt, incorporated by reference to Exhibit 10(V) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) (O)** Severance Agreement with Herbert C. Williamson III, incorporated by reference to Exhibit 10(W) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) (P)** Severance Agreement with William W. Daily, incorporated by reference to Exhibit 10(X) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) (Q) Memorandum of Understanding with Empresa Colombiana de Petroleos, incorporated by reference to Exhibit 10(Y) on Form 10-K for the year ended December 31, 1999 (File No. 001-13771) (R) Global Operating License, incorporated by reference to Exhibit 10(W) on Form S-4, filed January 10, 2001 (File No. 333-53470) (S) Loan Agreement between Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Stillwater National Bank and Trust Company, N.A., dated December 20, 2000, and related Guaranty Agreement and Guarantor Security Agreement, incorporated by reference to Exhibit 10(X) on Form S-4, filed January 10, 2001 (File No. 333-53470) (T) Promissory Note dated December 20, 2000 from Seven Seas Petroleum Inc., a Yukon Territory, Canada corporation, and Stillwater National Bank and Trust Company, N.A., incorporated by reference to Exhibit 10(Y) on Form S-4, filed January 10, 2001 (File No. 333-53470) (U) Stock Pledge Agreement by Seven Seas Petroleum Corporation, a Yukon Territory, Canada corporation, Seven Seas Petroleum Holdings Inc., a Cayman Island corporation, and Seven Seas Petroleum Columbia Inc., a Cayman Islands corporation, in favor of Stillwater National Bank and Trust Company, N.A., incorporated by reference to Exhibit 10(Z) on Form S-4, filed January 10, 2001 (File No. 333-53470) (V) Construction Contract dated December 27, 2000 between Seven Seas Petroleum Corporation Inc., a Yukon Territory, Canada corporation, and Cosacol Ltd., incorporated by reference to Exhibit 10(AA) on Form S-4, filed January 10, 2001 (File No. 333-53470) (23) Consent of experts and counsel *(A) Consent of Arthur Andersen LLP (24) Power of Attorney (included in signature page)
- ---------- * Filed herewith. ** Management contract, compensatory plan or agreement. 59 EX-3.A 2 h85747ex3-a.txt CERTIFICATE OF COMTINUANCE TO THE CAYMAN ISLANDS 1 EXHIBIT 3(A) CERTIFICATE OF REGISTRATION BY WAY OF CONTINUATION I,DONNELL HARLEE DIXON, Assistant Registrar of Companies in and for the Cayman Islands DO HEREBY CERTIFY, pursuant to the Companies Law CAP. 22, that all the requirements of the said Law in respect of Registration were complied with by SEVEN SEAS PETROLEUM INC. an Exempted Company registered by way of continuation in the Cayman Islands with Limited Liability with effect from 1st Day of March, Two Thousand One. Give under my hand and Seal at George Town in the Island of Grand Cayman this 1st Day of March, Two Thousand One [SEAL] /s/ DONNELL H. DIXON Assistant Registrar of Companies, Cayman Islands, B.W.I. EX-3.B 3 h85747ex3-b.txt MEMORANDOM OF ASSOCIATION 1 ANNEX A MEMORANDUM OF ASSOCIATION OF SEVEN SEAS PETROLEUM INC., AN EXEMPTED COMPANY LIMITED BY SHARES 1. The name of the Company is Seven Seas Petroleum Inc. (the "Company"). 2. The Registered Office of the Company shall be situated at the offices of: Walkers Walker House, Mary Street P.O. Box 265GT George Town, Grand Cayman, Cayman Islands or at such other place as the Board of Directors may from time to time determine. 3. The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any objective not prohibited by any law as provided by Section 7(4) of The Companies Law (2000 Revision), as may be amended, modified or re-enacted from time to time (the "Statute"). 4. The Company shall have and be capable of exercising all the functions of a natural person of full capacity irrespective of any question of corporate benefit as provided by Section 27(2) of the Statute 5. Nothing in the preceding sections shall be deemed to permit the Company to carry on the business of a Bank or Trust Company without being licensed in that behalf under the provisions of the Banks and Trust Companies Law (2000 Revision), or to carry on Insurance Business from within the Cayman Islands or the business of an Insurance Manager, Agent, Sub-agent or Broker without being licensed in that behalf under the provisions of the Insurance Law (1999 Revision), or to carry on the business of Company Management without being licensed in that behalf under the provisions of the Companies Management Law (1999 Revision). 6. The Company will not trade in the Cayman Islands with any person, firm or corporation except in furtherance of the business of the Company carried on outside the Cayman Islands; provided that nothing in this section shall be construed as to prevent the Company from effecting and concluding contracts in the Cayman Islands, and exercising in the Cayman Islands all of its powers necessary for the carrying on of its business outside the Cayman Islands. 7. The liability of the members is limited to the amount, if any, unpaid on shares respectively held by them. 8. The share capital of the Company is US$200,000 divided into 150,000,000 Ordinary Shares of a nominal or par value of US$0.001 per share, and 50,000,000 shares of a nominal or par value of US$0.001 per share which may be designated and created as shares of any other classes or series of shares with the respective rights and restrictions determined upon the creation thereof by action of the Board of Directors, with power for the Company insofar as is permitted by law, to redeem, call or purchase any of its shares and to increase or reduce the said capital subject to the provisions of the Statute and the Articles of Association and to issue any part of its capital, whether original, redeemed, called or increased with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions and so that unless the conditions of issue shall otherwise expressly declare every issue of shares whether declared to be ordinary, preference or otherwise shall be subject to the powers hereinabove contained. 9. The Company may exercise the power contained in Section 224 of the Statute to deregister in the Cayman Islands and be registered by way of continuance in some other jurisdiction. 10. The directors may, between annual meetings of members, appoint one or more additional directors of the Company to serve until the next annual meeting of members, but the number of additional directors shall not at any time exceed one-third of the number of directors who held office at the expiration of the last annual meeting of the Company. A-1 EX-3.C 4 h85747ex3-c.txt ARTICLES OF ASSOCIATION 1 ANNEX B ARTICLES OF ASSOCIATION OF SEVEN SEAS PETROLEUM INC., AN EXEMPTED COMPANY LIMITED BY SHARES CONTENTS ONE......... INTERPRETATION TWO......... BUSINESS OF THE COMPANY THREE....... BORROWING AND SECURITY FOUR........ DIRECTORS FIVE........ COMMITTEES SIX......... OFFICERS SEVEN....... CONFLICT OF INTEREST AND PROTECTION OF DIRECTORS, OFFICERS AND OTHERS EIGHT....... SHARES NINE........ DIVIDENDS AND RIGHTS TEN......... MEETINGS OF MEMBERS ELEVEN...... DIVISIONS AND DEPARTMENTS TWELVE...... INFORMATION AVAILABLE TO MEMBERS THIRTEEN.... NOTICES FOURTEEN.... EFFECTIVE DATE AND REPEAL
B-1 2 SECTION ONE INTERPRETATION 1.01 DEFINITIONS The Regulations or Articles contained or incorporated in Table "A" Regulations For Management of a Company Limited by Shares in the First Schedule to the Companies Law (2000 Revision) of the Cayman Islands (the "Statute") shall not apply to this Company, and the following Articles shall be the Articles of Association of the Company. The following terms shall have the following meanings wherever they appear herein, and such meanings shall be equally applicable to both the singular and plural forms of the terms herein defined. "Articles" means these Articles of Association, as originally framed or as from time to time altered by Special Resolution. "Board of Directors," "board" and "directors" means the board of directors of the Company as of the applicable date. "Company" means Seven Seas Petroleum Inc., a Cayman Islands exempted company limited by shares. Where agreement, consent or other action of the Company is provided for herein, such action shall not require approval of the Members, except as expressly required by the Statute or these Articles. "dollar," "dollars" or "$" means dollars of the United States. "dividend" includes bonus. "holder," in relation to any shares, means the member whose name is entered in the Register as the holder of such shares. "member" has the meaning ascribed to it in Section 38 of the Statute. "Memorandum" means the Memorandum of Association of the Company, as may be amended from time to time. "Month" means calendar month. "Ordinary Resolution" means a resolution passed by a majority of such Members as, being entitled to do so, vote in person or by proxy at any general meeting of the Company at which the required quorum is present in person or by proxy. "Ordinary Shares" has the meaning ascribed to it in Section 8. "Paid-up" means fully paid, paid-up and/or credited as fully paid or paid-up. "person" means any individual, corporation, partnership, limited liability company, unincorporated association or other legal entity. "Register" means the Register of Members of the Company as maintained in accordance with Section 40 of the Statute. "Registered Office" means the registered office of the Company maintained in accordance with Section 50 and Section 51 of the Statute, and as may be relocated from time to time. "shares" means any Ordinary Shares or other shares issued in the capital of the Company. "shares generally entitled to vote" means any share which entitles the holder to attend and vote at all general meetings of the Company and excludes (a) any share where the right to vote at general meetings of the Company is conditional on the Company being in default of an obligation with respect to a right attaching to the class or series of share to which that share belongs and/or (b) any share where the right to vote relates solely to such a class or series of shares (other than the Ordinary Shares). "Special Resolution" has the same meaning as in the Statute. B-2 3 "Statute" means the Companies Law (2000 Revision) of the Cayman Islands, as amended, and every statutory modification or re-enactment thereof for the time being in force. "written" and "in writing" includes all modes of representing or reproducing words in visible form. Words importing the singular number shall also include the plural number and vice-versa. Words importing the masculine gender shall also include the feminine gender. SECTION TWO BUSINESS OF THE COMPANY 2.01 REGISTERED OFFICE, RECORDS OFFICE AND ADDRESS FOR SERVICE Until changed in accordance with the Statute, the registered office of the Company, the designated records office (if separate from the registered office) of the Company and the post office box (if any) designated as the address for service upon the Company by mail shall initially be at the address or addresses in the Cayman Islands specified in the Memorandum and thereafter as the board may from time to time determine. 2.02 FINANCIAL YEAR The financial year of the Company shall end on such date in each year as the board may from time to time by resolution determine. 2.03 EXECUTION OF INSTRUMENTS Deeds, transfers, assignments, contracts, obligations, certificates and other instruments may be signed on behalf of the Company by at least one person holding the office of chairman, president, vice president, chief financial officer, director, secretary, treasurer, assistant secretary or assistant treasurer or any other office created by resolution of the board. In addition, the board may from time to time direct the manner in which and the person or persons by whom any particular instrument or class of instrument may or shall be signed. Any signing officer may affix the corporate seal to any instrument requiring the same. 2.04 BANKING ARRANGEMENTS The banking business of the Company including, without limitation, the borrowing of money and the giving of security therefor, shall be transacted with such banks, trust companies or other bodies corporate or organizations as may from time to time be designated by or under the authority of the board. Such banking business or any part thereof shall be transacted under such agreements, instructions and delegations of powers as the board may from time to time prescribe or authorize. 2.05 VOTING RIGHTS IN OTHER BODIES CORPORATE The signing officers of the Company may execute and deliver proxies and arrange for the issuance of voting certificates or other evidence of the right to exercise the voting rights attaching to any securities held by the Company. Such instruments, certificates or other evidence shall be in favor of such person or persons as may be determined by the officers executing such proxies or arranging for the issuance of voting certificates or such other evidence of the right to exercise such voting rights. In addition, the board, or failing the board, the signing officers of the Company, may from time to time direct the manner in which and the person or persons by whom any particular voting rights or class of voting rights may or shall be exercised. B-3 4 SECTION THREE BORROWING AND SECURITY 3.01 BORROWING POWER Without limiting the borrowing powers of the Company as set forth in the Statute, but subject to the Memorandum the board may from time to time on behalf of the Company, without authorization of the shareholders: (a) borrow money upon the credit of the Company in such amounts and on such terms as may be deemed expedient by obtaining loans or advances or by way of overdraft or otherwise; (b) issue, reissue, sell or pledge bonds, debentures, notes or other evidences of indebtedness or guarantee of the Company, whether secured or unsecured, for such sums and at such prices as may be deemed expedient; (c) to the extent permitted by the Statute, give a guarantee on behalf of the Company to secure performance of any past, present or future indebtedness, liability or obligation of the Company, present or future; and (d) delegate to a committee of the board, a director or an officer of the Company all or any of the powers conferred aforesaid or by the Statute to such extent and in such manner as the directors may determine. Nothing in this section limits or restricts the borrowing of money by the Company on bills of exchange or promissory notes made, drawn, accepted or endorsed by or on behalf of the Company. SECTION FOUR DIRECTORS 4.01 NUMBER OF DIRECTORS AND QUORUM Until changed in accordance with the Statute, the board shall consist of not fewer than three (3) and not more than fifteen (15) Subject to Clause 4.06, the quorum for the transaction of business at any meeting of the board shall consist of a majority of the directors. 4.02 QUALIFICATION No person shall be qualified for election as a director if he is a minor; if he is a mentally disordered person; if he has been found to be a person of unsound mind by a court; if he is not an individual; or if he has the status of a bankrupt. A director need not be a shareholder. 4.03 CONSENT TO ACT A person who is elected or appointed a director is not a director unless: (a) he was present at the meeting when he was elected or appointed and did not refuse to act as a director, or (b) if he was not present at the meeting when he was elected or appointed, he consented to act as director in writing before his election or appointment or within 10 days after it, or he has acted as a director pursuant to the election or appointment. 4.04 ELECTION AND TERM Members of the Company shall, by ordinary resolution at the first meeting of shareholders and at each succeeding annual meeting at which an election of directors is required, elect directors to hold office for a term B-4 5 expiring not later than the close of the annual meeting of shareholders following the election. At each annual meeting of shareholders, all directors whose term of office has expired or then expires shall retire but, if qualified, shall be eligible for re-election. A director not elected for an expressly stated term ceases to hold office at the close of the first annual meeting of shareholders following his election. Notwithstanding the foregoing, if directors are not elected at a meeting of members, the incumbent directors continue in office until their successors are elected. The number of directors to be elected at any such meeting shall be the number of directors whose term of office has expired or expires unless the directors or the members otherwise determine. It is not necessary that all the directors elected at a meeting of members hold office for the same term. If the Memorandum so provides, the directors may, between annual meetings of members, appoint one or more additional directors of the Company to serve until the next annual meeting of members, but the number of additional directors shall not at any time exceed one-third of the number of directors who held office at the expiration of the last annual meeting of the Company. 4.05 REMOVAL OF DIRECTORS Subject to the provisions of the Statute, the members may by ordinary resolution passed at a special meeting, remove any director or directors from office, and the vacancy created by such removal may be filled at the same meeting, failing which it may be filled by the directors. 4.06 VACATION OF OFFICE A director ceases to hold office when: he dies; he ceases to be qualified for election as a director; or his written resignation is sent or delivered to the Company; or if a time is specified in such resignation, at the time so specified, whichever is later. 4.07 VACANCIES Subject to the Statute, a quorum of the board may fill a vacancy in the board. In the absence of a quorum of the board, the directors then in office shall forthwith call a special meeting of members to fill the vacancy and if they fail to call such meeting or if they are no directors then in office, any member may call the meeting. 4.08 ACTION BY THE BOARD The board shall manage the business and affairs of the Company. Subject to the Memorandum, the powers of the board may be exercised by resolution passed at a meeting at which a quorum is present or by resolution in writing signed by all the directors who would be entitled to vote on the resolution at a meeting of the board. Where there is a vacancy in the board, a quorum of directors may exercise all the powers of the board. 4.09 MEETING BY TELEPHONE A director may participate in a meeting of the board or of a committee of the board by means of telephone or other communications facilities that permit all persons participating in the meeting to hear each other, and a director participating in a meeting by those means is deemed to be present at the meeting. 4.10 CALLING OF MEETINGS; PLACE OF MEETINGS Meetings of the board shall be held at such time and at such place as the board, the chairman of the board, the president or any two directors, may determine; provided that, pursuant to Section 194 of the Statute, at least one meeting of the Board of Directors in each calendar year shall be held in the Cayman Islands. 4.11 NOTICE OF MEETING Notice of the time and place of each meeting of the board shall be given in the manner provided in Clause 17.01 to each director not less than 48 hours before the time when the meeting is to be held. A Notice B-5 6 of a meeting of directors need not specify the purpose of or the business to be transacted at the meeting, except where the Statute or these Articles require such purpose or business to be specified, including any proposal to: (a) submit to the members any question or matter requiring approval of the shareholders; (b) fill a vacancy among the directors or in the office of auditor; (c) issue securities; (d) declare dividends; (e) purchase, redeem or otherwise acquire shares of the Company; (f) pay a commission for the sale of shares of the Company; (f) approve a management proxy circular; (g) approve any annual financial statements; or (h) adopt, amend or repeal the Memorandum. A director may in any manner waiver notice of or otherwise consent to the meeting of the board; and attendance of a director at a meeting of directors is a waiver of notice of the meeting, except when a director attends a meeting for the express purpose of objecting to the transaction of business on the grounds that the meeting is not lawfully called. 4.12 FIRST MEETING OF NEW BOARD Provided a quorum of directors is present, the board may without notice hold a meeting immediately following an annual meeting of shareholders. 4.13 ADJOURNED MEETING Notice of an adjourned meeting of the board is not required if the time and place of the adjourned meeting is announced at the original meeting. 4.14 REGULAR MEETING The board may from time to time appoint a day or days in any month or months for regular meetings of the board at a place and hour to be named. A copy of any resolution of the board fixing the place and time of such regular meetings shall be sent to each director forthwith after being passed, or forthwith after such director's appointment, whichever is later, but no other notice shall be required for any such regular meeting except where the Statute or this Article requires the purpose thereof or the business to be transacted thereat to be specified. 4.15 VOTES TO GOVERN At all meetings of the board, every question shall be decided by a majority of the votes cast on the question. In case of an equality of votes the chairman of the meeting shall be entitled to a second or casting vote. 4.16 REMUNERATION AND EXPENSES The directors shall be paid such remuneration for their services as the board may from time to time determine. The directors shall also be entitled to be reimbursed for traveling and other expenses properly incurred by them in attending meetings of the board or any committee thereof. Nothing herein contained shall preclude any director from serving the Company in any other capacity and receiving remuneration therefor. B-6 7 SECTION FIVE COMMITTEES 5.01 COMMITTEE OF DIRECTORS The board may appoint a committee of directors, however designated, and delegate to such committee any of the powers of the board except those which, under the Statute, a committee of directors has no authority to exercise. 5.02 TRANSACTION OF BUSINESS The powers of a committee of directors may be exercised by meeting at which a quorum is present or by resolution in writing signed by all members of such committee who would have been entitled to vote on the resolution at a meeting of the committee. Meetings of such committee may be held at any place in or outside the Cayman Islands. 5.03 PROCEDURE Unless otherwise determined by the board, each committee shall have the power to fix its quorum, to elect its chairman and to regulate it procedure. SECTION SIX OFFICERS 6.01 APPOINTMENT Subject to the Memorandum, the board may from time to time appoint a president, one or more vice-presidents (to which title may be added words indicating seniority or function), a secretary, a treasurer and such other officers as the board may determine, including one or more assistants to any of the officers so appointed. One person may hold more than one office. The board may specify the duties of, and, in accordance with this article and subject to the Statute, delegate powers to manage the business and affairs of the Company to such officers. 6.02 CHAIRMAN OF THE BOARD The chairman of the board shall be the chief executive officer and, subject to the authority of the board, shall have general supervision of the business and affairs of the Company; and he shall, subject to the Statute, have such other powers and duties as the board may specify. The chairman of the board, if any, or in his absence, the president, shall preside as chairman at every meeting of the directors and members, or if there is no chairman of the board or neither the chairman of the board nor the president is present within fifteen minutes of the time appointed for holding the meeting or is willing to act as chairman or, if the chairman of the board, if any, and the president have advised the secretary that they will not be present at the meeting, the directors present shall choose one of their number to be chairman of the meeting. 6.03 PRESIDENT The president shall be the chief operating officer and, subject to the authority of the board, shall have general supervision of the business of the Company; and he shall, subject to the Statute, have such other powers and duties as the board may specify. During the absence or disability of the chairman of the board, or if no chairman of the board has been appointed, the president shall also have the powers and duties of that office. 6.04 VICE-PRESIDENT A vice-president shall, subject to the Statute, have such powers and duties as the board or the chief executive officer may specify. B-7 8 6.05 SECRETARY The secretary shall attend and be the secretary of all meetings of the board, members and committees of the board and shall enter or cause to be entered in records kept for that purpose in minutes of all proceedings thereat; he shall give or cause to be given, as and when instructed, all notices to members, directors, officers, auditors and members of committees of the board; he shall be the custodian of the stamp or mechanical device generally used for affixing the corporate seal of the Company and of all books, papers, records, documents and instruments belonging to the Company, except when some other officer or agent has been appointed for that purpose; and he shall, subject to the Statute, have such other powers and duties as the board or the chief executive officer may specify. 6.06 TREASURER The treasurer shall keep proper accounting records in compliance with the Statute and shall be responsible for the deposit of money, the safekeeping of securities and the disbursement of the funds of the Company; he shall render to the board whenever required an account of all his transactions as treasurer and of the financial position of the Company; and he shall subject to the Statute, have such other powers and duties as the board or the chief executive officer may specify. 6.07 POWERS AND DUTIES OF OTHER OFFICERS The powers and duties of all other officers shall, subject to the Statute, be such as the terms of their engagement shall for or as the board or (except for those powers and duties are specified only by the board) the chief executive officer may specify. Any of the powers and duties of an officer to whom an assistant has been appointed may be exercised and performed by such assistant, unless the board or the chief executive officer otherwise directs. 6.08 VARIATION OF POWERS AND DUTIES The board and (except as aforesaid) the chief executive officer may from time to time and subject to the provisions of the Statute, vary, add to or limit the powers and duties of any officer. 6.9 TERM OF OFFICE The board, in its discretion, may remove any officer of the Company, without prejudice to such officer's rights under any employment contract. Otherwise each officer appointed by the board shall hold office until his successor is appointed or until his earlier resignation. 6.10 TERMS OF EMPLOYMENT AND REMUNERATION The terms of employment and the remuneration of officers appointed by the board shall be settled by the board from time to time. 6.11 AGENTS AND ATTORNEYS The board shall have power from time to time to appoint agents or attorneys for the Company in or outside the Cayman Islands with such powers of management or otherwise (including the power to subdelegate) as may be thought fit. 6.12 FIDELITY BONDS The board may require such officers, employees and agents of the Company as the board deems advisable to furnish bonds for the faithful discharge of their powers and duties, in such form and with such surety as the board may from time to time determine. B-8 9 SECTION SEVEN CONFLICT OF INTEREST AND PROTECTION OF DIRECTORS, OFFICERS AND OTHERS 7.01 CONFLICT OF INTEREST A director or officer who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or proposed material contract with the Company shall disclose the nature and extent of his interest at the time and in the manner provided by the Statute. Any such contract or proposed contract shall be referred to the board or shareholders for approval even if such contract is one that in the ordinary course of the Company's business would not require approval by the board or shareholders, and a director whose interest in a contract is so referred to the board shall not vote on any resolution to approve the same except as provided by the Statute. 7.02 LIMITATION OF LIABILITY Subject to the Statute, no director or officer for the time being of the Company shall be liable for the acts, receipts, neglects or defaults of any other director or officer or employee, or for the joining in any receipt or act for conformity, or for any loss or damage or expense happening to the Company through the insufficiency or deficiency of title to any property acquired by the Company or for or on behalf of the Company or for the insufficiency or deficiency of any security in or upon which any of the money of or belonging to the Company shall be placed or invested, or for any loss or damage arising from the bankruptcy, insolvency or tortious act of any person, firm or corporation including any person, firm or corporation with whom or with which any moneys, securities or effects shall be lodged or deposited, or for any loss, conversion, misapplication or misappropriation of or any damage resulting from any dealing with any moneys, securities or other assets of or belonging to the Company or for any other loss, damage or misfortune whatsoever which may happen in the execution of the duties of his respective office or trust or in relation thereto unless the same shall happen by or through his failure to exercise the powers and to discharge the duties of his office honestly and in good faith with a view to the best interest of the Company and to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. 7.03 INDEMNITY Subject to the Statute, the Company shall indemnify a director or officer, a former director or officer, and a person who acts or acted at the Company's request as a director or officer of a body corporate of which the Company is or was a shareholder or creditor, and his heirs and legal representatives, against all costs, charges and expenses, including any amount paid to settle an action or satisfy a judgment, reasonably incurred by him in respect of any civil, criminal or administrative action or proceeding to which he is made a party by reason of being or having been a director or officer of the Company or such body corporate, if: (a) he acted honestly and in good faith with a view to the best interests of the Company; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, he had reasonable grounds for believing his conduct was lawful. 7.04 INSURANCE The Company may, subject to and in accordance with the Statute, purchase and maintain insurance for the benefit of any director or officer as such against any liability incurred by him. B-9 10 SECTION EIGHT SHARES 8.01 AUTHORIZED SHARE CAPITAL The authorized share capital of the Company as of the date of adoption of these Articles is US$200,000 divided into 150,000,000 Ordinary Shares of a nominal or par value of US$0.001 per share, with the rights as set out in these Articles and the Memorandum, and 50,000,000 shares of a nominal or par value of US$.001 per share which may be designated and created as shares of any other classes or series of shares with the respective rights and restrictions determined upon the creation thereof by action of the Board of Directors. 8.02 ALLOTMENT Subject to the provisions of these Articles, all unissued shares for the time being in the capital of the Company shall be at the disposal of the Board of Directors, and the Board of Directors may designate, re-designate, allot, grant options over or otherwise dispose of them to such person, upon such terms and conditions and at such times as they deem proper. 8.03 PREEMPTIVE RIGHTS No holder of Ordinary Shares or any other shares (unless such right is expressly conferred on the holders of such shares) shall, by reason of such holding, have any preemptive or preferential right to subscribe to or purchase any shares or any notes, debentures, bonds or other securities of the Company, whether or not the issuance of any such shares, notes, debentures, bonds or other securities would adversely affect the dividend, voting or any other rights of such holder. 8.04 FRACTIONAL SHARES The directors may issue fractions of a share of any class or series of shares, and, if so issued, a fraction of a share (calculated to three decimal points) shall be subject to and carry the corresponding fraction of liabilities (whether with respect to any unpaid amount thereon, contribution, calls or otherwise), limitations, preferences, privileges, qualifications, restrictions, rights (including, without limitation, voting and participation rights) and other attributes of a whole share of the same class or series of shares. If more than one fraction of a share of the same class or series is issued to or acquired by the same member such fractions shall be accumulated. For the avoidance of doubt, in these Articles the expression "share" shall include a fraction of a share. 8.05 REDEEMED SHARES Any shares which have been redeemed or otherwise repurchased by the Company shall have the status of authorized but unissued shares and may be subsequently issued in accordance with the Memorandum and these Articles. 8.06 POWER OF BOARD The Board of Directors shall have the fullest powers permitted by law to pay all or any monies in respect of the redemption or purchase of any shares out of the Company's share capital and share premium account. 8.07 SECURITIES REGISTER The Company shall maintain a Register of Members in accordance with Section 40 of the Statute. 8.08 TRANSFER AGENTS AND REGISTRARS The board may from time to time appoint one or more trust companies as its agent or agents to maintain the central securities register or registers, and an agent or agents to maintain branch securities registers. Such B-10 11 a person may be designated as transfer agent or registrar according to his functions and one person may be appointed both registrar and transfer agent. The board may at any time terminate any such appointment. 8.09 REGISTRATION OF TRANSFER Subject to the provisions of the Statute, no transfer of shares shall be registered in a securities register except upon presentation of the certificate representing such shares with a transfer endorsed thereon or delivered therewith duly executed by the registered holder or by his attorney or successor duly appointed, together with such reasonable assurances or evidence of signature, identification and authority to transfer as the board may from time to time prescribe, upon payment of all applicable taxes and any fees prescribed by the board, upon compliance with such restrictions on transfer as are authorized by the Memorandum and upon satisfaction of any lien referred to in Clause 8.16. 8.10 DECLINING OR SUSPENDING TRANSFER Subject to the rules of any stock exchange on which the shares in question may be listed and except as otherwise expressly provided by the terms of issue of the shares of any class or series, the Board of Directors may, in its absolute discretion and without assigning any reason therefore, decline to register any transfer of any share. The registration of transfers may be suspended at such times and for such periods as the Board of Directors may from time to time determine provided always that such registration shall not be suspended for more than 30 days in any year. 8.11 NON-RECOGNITION OF TRUSTS Subject to the provision of the Statute, the Company may treat as the absolute owner of a share the person in whose name the share is registered in the securities register as if that person had full legal capacity and authority to exercise all rights of ownership, irrespective of any indication to the contrary through knowledge or notice or description in the Company's records or on the share certificate. 8.12 SHARE CERTIFICATES Every holder of one or more shares of the Company shall be entitled, at his option, to a share certificate, or to a non-transferable written acknowledgement of his right to obtain a share certificate, stating the name of the person to whom the certificate or acknowledgement was issued, and the number and class or series of shares held by him as shown on the securities register. Share certificates and acknowledgments of a shareholder's right to a share certificate, shall subject to the Statute, be in such form as the board shall from time to time approve. Any share certificate shall be signed in accordance with Clause 2.03 and need not be under the corporate seal; provided that, unless the board otherwise determines, certificates representing shares in respect of which a transfer agent and/or registrar has been appointed shall not be valid unless countersigned by or on behalf of such transfer agent and/or registrar. The signature of one other signing officers or, in the case of share certificates which are not valid unless countersigned by or on behalf of a transfer agent and/or registrar, the signatures of both signing officers, may be printed or mechanically reproduced in facsimile upon share certificates and every such facsimile signature shall for all purposes be deemed to be the signature of the officer whose signature it reproduces and shall be binding upon the Company. A share certificate executed as aforesaid shall be valid notwithstanding that one or both of the officers whose facsimile signatures appears thereon no longer holds office at the date of issue of the certificate. 8.13 REPLACEMENT OF SHARE CERTIFICATE The board or any officer or agent designated by the board may in its or his discretion direct the issue of a new share certificate in lieu of and upon cancellation of a share certificate that has been mutilated or in substitution for a share certificate claimed to have been lost, destroyed or wrongfully taken on payment of a reasonable fee, and on such terms as to indemnity, reimbursement of expenses and evidence of loss and of title as the board may from time to time prescribe, whether generally or in any particular case. B-11 12 8.14 JOINT SHAREHOLDERS If two or more persons are registered as joint holders of any share, the Company shall not be bound to issue more than one certificate in respect thereof, and delivery of such certificate to one of such persons shall be sufficient delivery to all of them. Any one of such person may give effectual receipts for the certificate issued in respect thereof or for any dividend, bonus, return of capital or other money payable or warrant issuable in respect of such share. 8.15 DECEASED SHAREHOLDER In the event of the death of a holder, or of one of the joint holders, of any share, the Company shall not be required to make any entry in the securities register in respect thereof or to make payment of any dividends thereon except upon production of all such documents as may be required by law and upon compliance with the reasonable requirements of the Company and its transfer agents. 8.16 LIEN FOR INDEBTEDNESS If the Memorandum provides that the Company has a lien on shares registered in the name of a shareholder or his legal representative for a debt of that shareholder to the Company, such lien may be enforced, subject to the Statute and to any other provision of the Memorandum by the sale of the shares thereby affected or by any other action, suit, remedy or proceeding authorized or permitted by law or by equity and, pending such enforcement, the Company may refuse to register a transfer of the whole or any part of such shares. 8.17 COMMISSIONS The Board of Directors may from time to time authorize the Company to pay a commission to any person in consideration of his subscribing or agreeing to subscribe (whether absolutely or conditionally) for any shares in the Company or procuring or agreeing to procure subscriptions (whether absolute or conditional) for any shares of the Company. SECTION NINE ORDINARY SHARES 9.01 RIGHTS OF PURCHASER The Board of Directors may allot, issue or grant any option, right, warrant or other security exercisable for, convertible into or exchangeable for, or otherwise dispose of, any shares or securities of the Company at such times and on such terms as it deems proper. Upon approval of the Board of Directors , such number of Ordinary Shares, or other shares or securities of the Company, as may be required for such purpose shall be reserved for issuance in connection with any option, right, warrant or other security of the Company or any other person that is exercisable for, convertible into, exchangeable for or otherwise issuable in respect of such Ordinary Shares or other shares or securities of the Company. 9.02 RIGHTS TO NOTICE AND TO VOTE Subject to the provisions of applicable law and any rights granted to any series or class of shares other than Ordinary Shares, the holders of Ordinary Shares shall have and possess the exclusive right to notice of general meetings of the Company and the exclusive power to vote on resolutions put to general meetings of the Company. B-12 13 SECTION TEN OTHER CLASSES OR SERIES OF SHARES 10.01 DESIGNATION OF ADDITIONAL CLASSES OR SERIES The Board of Directors is authorized, without obtaining any vote or consent of the holders of any class or series of shares unless expressly provided by the terms of issue of a class or series, subject to any limitations prescribed by law, to provide from time to time for the issuance of other classes or series of shares and, in accordance with applicable procedures of the Statute, to establish the characteristics of each class or series including, without limitation, the following: (a) the number of shares of that class or series, which may subsequently be increased or decreased (but not below the number of shares of that class or series then in issue) by resolution of the Board of Directors, and the distinctive designation thereof; (b) the voting powers, full or limited, if any, of the shares of that class or series, including without limitation, the authority to confer multiple votes per share, voting rights as to specified matters or issues such as mergers, consolidations or sales of assets, or voting rights to be exercised either together with holders of Ordinary Shares as a single class, or independently as a separate class; (c) the rights in respect of dividends, if any, on the shares of that class or series; the rate at which such dividends shall be payable and/or cumulate, which rate may be determined on factors external to the Company and which dividends may be payable in cash, shares of capital or other securities or property of the Company; whether dividends shall be cumulative and, if so, from which date or dates; the relative rights or priority, if any, of payment of dividends on shares of that class or series; and any limitation, restrictions or conditions on the payment of dividends; (d) the relative amounts, and the relative rights or priority, if any, of payment in respect of shares of that class or series, which the holder of the shares of that class or series shall be entitled to receive upon any liquidation, dissolution or winding up of the Company; (e) any redemption, repurchase, retirement and sinking fund rights, preferences and limitations of that class or series, the amount payable on shares of that class or series in the event of such redemption, repurchase or retirement, the terms and conditions of any sinking fund, the manner of creating such fund or funds and whether any of the foregoing shall be cumulative or non-cumulative; (f) the terms, if any, upon which the shares of that class or series shall be convertible into or exchangeable for shares of any other classes, series, or other securities, whether or not issued by the Company; (g) the restrictions, limitation and conditions, if any, upon issuance of indebtedness of the Company so long as any shares of that class or series are in issue; and (h) any other preferences and relative, participating, optional or other rights and limitation not inconsistent with applicable law. SECTION ELEVEN VARIATION OF RIGHTS OF SHARES 11.01 RIGHTS OF CLASSES OR SERIES (a) If at any time the share capital of the Company is divided into different classes or series of shares, the rights attached to any class or series (unless otherwise provided by the terms of issue of the shares of that class) may, whether or not the Company is being wound-up, be varied and amended with the consent in writing of the holders of all of the issued shares of that class or series, or with the sanction of a Special Resolution passed at a separate general meeting of the holders of such class or series. B-13 14 (b) The provisions of these Articles relating to general meetings of the Company shall apply to every such separate general meeting of the holders of one class or series of shares (unless otherwise expressly provided by the terms of issue of the shares of that class or series). (c) Separate general meetings of the holders of a class or series of shares or the seeking of a consent of the holders of a class or series of shares may only be called at the direction of the Board of Directors (unless otherwise expressly provided by the terms of issue of the shares of that class or series). Nothing in this Section Eleven gives any member or group of members the right to call a class or series meeting or demand a class or series vote or consent. 11.02 CREATION OF OTHER SHARES The rights conferred upon the holders of the shares of any class or series issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the shares of that class or series, be deemed to be varied by the creation or issue of further shares ranking in any respect prior to or pari passu therewith. The rights of the holders of Ordinary Shares shall not be deemed to be varied by the creation or issue of shares with preferred or other rights, which may be effected by the Board of Directors as provided in these Articles without any vote or consent of the holders of Ordinary Shares. SECTION TWELVE REDEMPTION AND REPURCHASE 12.01 REDEMPTION OR REPURCHASE The Ordinary Shares are not redeemable by the Company or the holder. Subject as set out herein, the Company is authorized to purchase any issued Ordinary Shares in such circumstances and on such terms as shall be agreed by the Company and the holder thereof, subject always to the laws of the Cayman Islands, and the Company may deduct from the price for such shares the aggregate amount of any outstanding debts, liabilities and engagements to or with the Company (whether presently payable or not) by the holder of such shares, either alone or jointly with any other person, whether a member or not. Without limiting the foregoing, the Company may, from time to time, upon the agreement of a member, purchase all or part of the Ordinary Shares of any such member, whether or not the Company has made a similar offer to all or any of the other members. SECTION THIRTEEN DIVIDENDS AND RIGHTS 13.01 DIVIDENDS Subject to the provisions of the Statute, the board may from time to time declare dividends payable to the shareholders according to their respective rights and interest in the Company. Dividends may be paid in money or property or by issuing fully paid shares of the Company. 13.02 DIVIDEND CHEQUES A dividend payable in cash shall be paid by cheque drawn on the Company's banks or one of them to the order of each registered holder of shares of the class or series in respect of which it has been declared and mailed by prepaid ordinary mail to such registered holder at his recorded address, unless such holder otherwise directs. In the case of joint holders the cheque shall, unless such joint holders otherwise direct, be made payable to the order of all such joint holders and mailed to them at their recorded address. The mailing of such cheque as aforesaid, unless the same is not paid on due presentation, shall satisfy and discharge the liability for the dividend to the extent of the sum represented thereby plus the amount of any tax which the Company is required to and does withhold. B-14 15 13.03 NON-RECEIPT OF CHEQUES In the event of non-receipt of any dividend cheque by the person to whom it is sent as aforesaid, the Company shall issue to such person a replacement check for a like amount on such terms as to indemnity, reimbursement or expenses and evidence of non-receipt and of title as the board may from time to time prescribe, whether generally or any particular case. 13.04 RECORD DATE FOR DIVIDENDS AND RIGHTS The board may fix in advance a date, preceding by not more than 50 days the date for the payment of any dividend or the date for the issue of any warrant or other evidence of right to subscribe for securities of the Company, as a record date for the determination of the persons entitled to receive payment of such dividend or to receive the right to subscribe for such securities, provided that if the Company is a distributing corporation, notice of any such record date is given, not less than seven days before such record date, in the manner provided in the Statute. Where no record date is fixed in advance as aforesaid, the record date for the determination of the persons entitled to receive payment of any dividend or to receive the right to subscribe for securities of the Company shall be at the close of business on the day on which the resolution relating to such dividend or right to subscribe is passed by the board. 13.05 UNCLAIMED DIVIDENDS Any dividend unclaimed after a period of six years from the date on which the same has been declared to be payable shall be forfeited and shall revert to the Company. SECTION FOURTEEN MEETING OF MEMBERS 14.01 ANNUAL MEETINGS Subject to the Statute, the annual meeting of the members shall be held at such time in each year and, subject to Clause 14.03, at such place as the board, the chairman of the board or the president may from time to time determine, for the purpose of consideration of the financial statements and reports required by the Statute to be placed before the annual meeting, electing directors if required, appointing auditors if required and transacting such other business as may properly be brought before the meeting. 14.02 SPECIAL MEETINGS The board, the chairman of the board or the president shall have power to call a special meeting of the members at any time. 14.03 PLACE OF MEETINGS Subject to the Memorandum of the Company, meetings of the members shall be held at that place determined by the directors. 14.04 NOTICE OF MEETINGS Notice of the time and place of each meeting of members shall be given in the manner provided in Clause 17.01 not less than 21 nor more than 50 days before the date of the meeting to each director and to each shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to vote at the meeting. Notice of a meeting of the members called for any purpose other than consideration of the financial statements and auditor's report, election of directors and re-appointment of incumbent auditor shall state the nature of such business in sufficient detail to permit the member to form a reasoned judgment thereon and shall state the text of any B-15 16 special resolution to be submitted to the meeting. A shareholder may in any manner waive notice of or otherwise consent to a meeting of shareholders. 14.05 RECORD DATE FOR NOTICE The board may fix in advance a date, preceding the date of any meeting of members by not more than 50 days and not less than 21 days, a record date for the determination of the members entitled to notice of meeting. If no such record date is so fixed, the record date for the determination of the shareholders entitled to receive notice of the meeting shall be at the close of business on the day immediately preceding the day on which the notice is sent or, if no notice is sent, shall be the day on which the meeting is held. 14.06 LIST OF MEMBERS ENTITLED TO NOTICE (1) The Company shall prepare a list of members entitled to receive notice of a meeting, arranged in alphabetical order and showing the number and class of shares held by each member, (a) if a record date with respect to such meeting is fixed under Section 14.05, not later than ten days after that date; or (b) if no record date with respect to such meeting is so fixed, (i) at the close of business on that day immediately preceding the day on which notice is given, or, (ii) where no notice is given, the day on which such meeting is held. (2) A member may examine any list of shareholders prepared under subsection (1) of this Section (a) during usual business hours at the registered office of the Company or at the place where its central securities register is maintained; and (b) at the meeting of members to which the list relates. 14.07 MEETINGS WITHOUT NOTICE A meeting of members may be held without notice at any time and place permitted by the Statute: (a) if all shareholders entitled to vote thereat are present in person or represented or if those not present or represented waive notice of or otherwise consent to such meeting being held, and (b) if the directors are present or waive notice of or otherwise consent to such meeting being held; so long as such members or directors present are not attending for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called. At such a meeting, any business may be transacted which the Company at a meeting of members may transact. If the meeting is held at a place outside the Cayman Islands, members not present or represented by proxy, but who have waived notice of or otherwise consented to such meeting, shall also be deemed to have consented to the meeting being held at such place. 14.08 CHAIRMAN AND SECRETARY The chairman of any meeting of members shall be the chairman of the board, or in his absence, the president. If no such officer is present within 15 minutes from the time fixed for holding the meeting, the chairman shall be any other director appointed by the board. If the secretary of the Company is absent, the chairman shall appoint some person, who need not be a shareholder, to act as secretary of the meeting. 14.09 PERSONS ENTITLED TO BE PRESENT The only persons entitled to be present at a meeting of members shall be those entitled to vote thereat, the directors and auditors of the Company and others who, although not entitled to vote, are entitled or B-16 17 required under any provision of the Statute or the Memorandum or these Articles to be present at the meeting. Any other person may be admitted only on the invitation of the Chairman of the meeting or with consent of the meeting. 14.10 QUORUM A quorum for the transaction of business at any meeting of members shall be at least two persons present in person, each being a member entitled to vote thereat or a duly appointed proxy or representative for an absent shareholder so entitled, and representing in the aggregate not less than a majority of the outstanding shares of the Company, entitled to vote at the meeting. If a quorum is present at the opening of any meeting of members, the members present or represented may proceed with the business of the meeting notwithstanding that a quorum is not present throughout the meeting. If a quorum is not present at the opening of any meeting of members, the members present or represented may adjourn the meeting to a fixed time and place but may not transact any other business until a quorum is present. 14.11 RIGHT TO VOTE Every person named in the list referred to in Clause 14.06 shall be entitled to vote the shares shown thereon opposite his name at the meeting to which such list relates, except to the extent that: (a) where the Company has fixed a record date in respect of such meeting, such person has transferred any of his shares after such record date or, where the Company has not fixed a record date in respect of such meeting, such person has transferred any of his shares after the date on which such list is prepared, and (b) the transferee, having produced properly endorsed certificates evidencing such shares or having otherwise established that he owns such shares, has demanded not later than 10 days before the meeting that his name be included in such list. In any such excepted case, the transferee shall be entitled to vote the transferred shares at such meeting. If the Company is not required to prepare a list under Clause 14.06, subject to the provisions of the Statute and this article as to proxies and representative, at any meeting of members, every person shall be entitled to vote at the meeting who at the time is entered in the securities register as the holder of one or more shares carrying the right to vote at such meeting. 14.12 PROXIES AND REPRESENTATIVES Every member entitled to vote at a meeting of members may appoint a proxyholder, or one or more alternate proxyholders, who need not be members, to attend and act at the meeting in the manner and to the extent authorized and with the authority conferred by the proxy. A proxy shall be in writing executed by the member or his attorney and shall conform with the requirements of the Statute. Alternately, every such member which is a body corporate or association may authorize by resolution of its directors or governing body an individual, who need not be a member, to represent it at a meeting of members and such individual may exercise on the members behalf all the powers it could exercise if it were an individual member. The authority of such an individual shall be established by depositing with the Company a certified copy of such resolution, or in such other manner as may be satisfactory to the secretary of the Company or the chairman of the meeting. 14.13 TIME FOR DEPOSIT OF PROXIES The board may specify in a notice calling a meeting of the members a time, preceding, the time of such meeting or an adjournment thereof by not more than 48 hours exclusive of non-business days, before which proxies to be used at such meeting must be deposited. A proxy shall be acted upon only if, prior to the time so specified, it shall have been deposited with the Company or an agent thereof specified in such notice or, if no such time is specified in such notice, it has been received by the secretary of the Company or by the chairman of the meeting or any adjournment thereof prior to the time of voting. B-17 18 14.14 SHARES HELD JOINTLY If two or more persons hold shares jointly, any one of them present in person or represented at a meeting of members may, in the absence of the other or others, vote the shares; but if two or more of those persons are present in person or represented and vote, they shall vote as one on the shares jointly held by them. 14.15 VOTES TO GOVERN At any meeting of members, every question shall, unless otherwise required by the Statute, the Memorandum or these Articles, be determined by the majority of the votes cast on the question. In the case of an equality of votes either upon show of hands or upon a poll, the chairman of the meeting shall not be entitled to a second or casting vote. 14.16 SHOW OF HANDS Subject to the provisions of the Statute, any question at a meeting of members shall be decided by a show of hands unless a ballot thereon is required or demanded as hereinafter provided. Upon a show of hands every person who is present and entitled to vote shall have one vote. Whenever a vote by show of hands shall have been taken upon a question, unless a ballot thereon is so required or demanded, a declaration by the chairman of the meeting that the vote upon the question has been carried or carried by a particular majority or not carried and an entry to that effect in the minutes of the meeting shall be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against any resolution or other proceeding in respect of the said question, and the result of the vote so taken shall be the decision of the shareholders upon the said question. 14.17 BALLOTS On any question proposed for consideration at a meeting of members, any member or proxyholder entitled to vote at the meeting may require or demand a ballot, either before or on the declaration of the result of any vote by show of hands. A ballot so required or demanded shall be taken in such manner as the chairman shall direct. A requirement or demand for a ballot may be withdrawn at any time prior to the taking of the ballot. If a ballot is taken, each person present shall be entitled, in respect of the shares which he is entitled to vote at a meeting upon the question, to that number of votes provided by the Statute or the Memorandum, and the result of the ballot so taken shall be the decision of the members upon the said question. 14.18 ADMISSION OR REJECTION OF A VOTE In case of any dispute as to the admission or rejection of a vote, the chairman shall determine the same and such determination made in good faith shall be final and conclusive. 14.19 ADJOURNMENT If a meeting of the members is adjourned by one or more adjournments for an aggregate of less than 30 days, it shall not be necessary to give notice of the adjourned meeting, other than by announcement at the time of an adjournment. If a meeting of members is adjourned by one or more adjournments for an aggregate of 30 days or more, notice of the adjourned meeting shall be given as for an original meeting. 14.20 RESOLUTION IN WRITING A resolution in writing signed by all the members entitled to vote on that resolution at a meeting of members is as valid as if it had been passed at a meeting of the members. 14.21 ONLY ONE SHAREHOLDER Where the Company has only one member, or only one holder of any class or series of shares, the member present in person or by proxy constitutes a meeting. B-18 19 SECTION FIFTEEN DIVISION AND DEPARTMENTS 15.01 CREATION AND CONSOLIDATION OF DIVISIONS The board may cause the business and operations of the Company or any part thereof to be divided or to be segregated into one or more divisions upon such basis, including without limitation, character or type of operation, geographical territory, product manufactured or service rendered, as the board may consider appropriate in each case. The board may also cause the business and operations of any such division to be further divided into sub-units to be consolidated upon such basis as the board may consider appropriate in each case. 15.02 NAME OF DIVISION Subject to law, any division or its sub-units may be designated by such name as the board may from time to time determine and may transact business, enter into contracts, sign cheques and other documents of any kind and do all acts and things under such name. Any such contract, cheque or document shall be binding upon the Company as if it has been entered into or signed in the name of the Company. 15.03 OFFICERS OF DIVISION From time to time the board or, if authorized by the board, the chief executive officer, may appoint one or more officers for any division, prescribe their powers and duties and settle their terms of employment and remuneration. The board or, if authorized by the board, the chief executive officer, may remove at its or his pleasure any officer so appointed without prejudice to such officer's rights under any employment contract. Officers of divisions or their sub-units shall not, as such, be officers of the Company. SECTION SIXTEEN INFORMATION AVAILABLE TO SHAREHOLDERS 16.01 NON-PUBLIC INFORMATION Except as provided by the Statute, no shareholder shall be entitled to discovery of any information respecting any details or conduct of the Company's business which in the opinion of the directors would be inexpedient in the interests of the Company to communicate to the public. 16.02 AVAILABLE INFORMATION The directors, may, from time to time, subject to the rights conferred by the Statute, determine whether and to what extent and at what time and place and under what circumstances or regulations, the documents, books and registers and accounting records of the Company or any of them shall be open to inspection of shareholders and no shareholder shall have any right to inspect any document or book or register or accounting records of the Company except as conferred by statute or authorized by the Board of Directors or by a resolution of the members. SECTION SEVENTEEN NOTICES 17.01 METHOD OF GIVING NOTICES Any notice (which term includes any communication or document) to be given (which term includes sent, delivered or served) pursuant to the Statute, the regulations thereunder, the Memorandum, these Articles or otherwise to a member, director, officer, auditor or member of a committee of the board shall be B-19 20 sufficiently given if delivered personally to the person to whom it is to be given or if delivered to his recorded address or if mailed to him at his recorded address by prepaid ordinary or air mail or if sent to him at his recorded address by any means of prepaid transmitted or recorded communication including facsimile transmission. A notice so delivered shall be deemed to have been given when it is delivered personally or to the recorded address as aforesaid; a notice so mailed shall be deemed to have been given when dispatched or delivered to the appropriate communication company or agency or its representative for dispatch. The secretary may change or cause to be changed the recorded address of any shareholder, director, officer, auditor or member of a committee of the board in accordance with any information believed by him to be reliable. 17.02 NOTICE TO HOLDERS OF JOINTLY HELD SHARES If two or more persons are registered as joint holders of any share, any notice shall be addressed to all of such joint holders, but notice to one of such persons shall be sufficient notice to all of them. 17.03 COMPUTATION OF TIME In computing the date when notice must be given under any provision requiring a specified number of days' notice of any meeting or other event, the date of giving the notice shall be excluded and the date of the meeting or other event shall be included. 17.04 UNDELIVERED NOTICES If notices given to a member pursuant to Clause 17.01 are returned on three consecutive occasions because he cannot be found, the Company shall not be required to give any further notices to such member until he informs the Company in writing of his new address. 17.05 OMISSIONS AND ERRORS The accidental omission to give any notice to any member, director, officer, auditor or member of a committee of the board or the non-receipt of any notice by any such person or any error in any notice not affecting the substance thereof shall not invalidate any action taken at the meeting held pursuant to such notice or otherwise founded thereon. 17.06 PERSONS ENTITLED BY DEATH OR OPERATION OF LAW Every person who, by operation of law, transfer, death of a shareholder or any other means whatsoever shall become entitled to any share, shall be bound by every notice in respect of such share which shall have been duly given to the shareholder from whom he derives his title to such share prior to his name and address being entered on the securities register (whether such notice was given before or after happening of the event upon which he became so entitled) and prior to his furnishing to the Company the proof of authority or evidence of his entitlement prescribed by the Statute. 17.07 WAIVER OF NOTICE Any member (or his duly appointed proxy holder), director, officer, auditor or member of a committee of the board may at any time waive any notice, or waive or abridge the time for any notice, required to be given to him under any provision of the Statute, the regulations thereunder, the Memorandum, these Articles or otherwise and such waiver or abridgement shall cure any default in the giving or in the time of such notice, as the case may be. Any such waiver or abridgement shall be in writing except a waiver or notice of a meeting of members or of the board which may be given in any manner. 17.08 AMENDMENT OF ARTICLES OF ASSOCIATION Subject to the Statute and the rights attaching to the various classes of shares, the Company may at any time and from time to time by Special Resolution alter or amend these Articles in whole or in part. B-20 21 17.09 REGISTRATION BY WAY OF CONTINUATION The Company may by Special Resolution resolve to be registered by way of continuation in a jurisdiction outside the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing. In furtherance of a resolution adopted pursuant to this Article, the directors may cause an application to be made to the Registrar of Companies to deregister the Company in the Cayman Islands or such other jurisdiction in which it is for the time being incorporated, registered or existing and may cause all such further steps as they consider appropriate to be taken to effect the transfer by way of continuation of the Company. SECTION EIGHTEEN REPEAL 18.01 REPEAL All previous articles of the Company are repealed as of the coming into force of these Articles. Such repeal shall not affect the previous operation of any article so repealed or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred under, or the validity of any contract or agreement made pursuant to, or the validity of any memorandum of association (as defined in the Statute) or predecessor charter documents of the Company obtained pursuant to, any such article prior to its repeal. All officers and persons acting under any such article so repealed shall continue to act as if appointed under the provisions of this Article and all resolutions of the shareholders or the board or a committee of the board with continuing effect passed under any repealed article shall continue to be good and valid except to the extent inconsistent with this Article and until amended or repealed. MADE BY the board the day of , 2000. B-21 EX-23.A 5 h85747ex23-a.txt CONSENT OF ARTHUR ANDERSEN LLP 1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-46749 on Form S-8. ARTHUR ANDERSEN LLP Houston, Texas March 30, 2001 -----END PRIVACY-ENHANCED MESSAGE-----