ITEM 1. BUSINESS
Chieftain International Funding Corp. ("Funding Corp." or the "Company") is a Nevada subsidiary of Chieftain International (U.S.) Inc. ("Chieftain U.S."), a Nevada corporation which is, in turn, a wholly-owned subsidiary of Chieftain International, Inc., an Alberta, Canada corporation. The primary purpose of Funding Corp. is to finance business operations of Chieftain U.S.
On each of August 28, 1992 and November 5, 1992, Funding Corp. issued 100,000 common shares to Chieftain U.S. for total cash proceeds of $15.0 million.
Funding Corp. commenced operations on November 6, 1992 with the initial public offering of 2,400,000 $1.8125 Convertible Redeemable Preferred Shares ("Preferred Shares"). An additional 326,700 Preferred Shares were issued pursuant to the underwriter's exercise of an over-allotment option. Proceeds of the issuance of Preferred Shares, net of offering costs of $4.7 million, were $63.4 million. The Preferred Shares are redeemable at the option of the Company at $25.8056 per share during 1998 declining to $25.00 per share after December 31, 2001 plus accumulated and unpaid dividends. Each preferred share is convertible at any time at the option of the holder into 1.25 common shares of Chieftain International, Inc. (the ultimate parent company). Dividends on the Preferred Shares are paid quarterly at the annual rate of $1.8125 per share.
On November 6, 1992, Funding Corp. purchased 2,840,000 $1.8125 Redeemable Class B Preferred Shares of Chieftain U.S., its parent company, at $25.00 per share, and subsequently purchased an additional 300,000 of such shares to hold a total of 3,140,000 such shares. Funding Corp. receives quarterly dividends on such shares at the annual rate of $1.8125 per share. The shares are redeemable at the option of the issuer at $25.8056 per share during 1998 declining to $25.00 during 2002 and thereafter.
Since December 31, 1992, Funding Corp. has, from time to time, purchased short-term notes, payable by Chieftain U.S., with funds in excess of working capital requirements. Such notes bear interest at competitive money market rates.
Chieftain U.S. is engaged in the acquisition of gas and oil reserves through purchase and through exploration and development and in gas and oil production and sales in the United States. Its principal properties are located in the U.S. federal waters of the Gulf of Mexico and in southeast Utah. Reference is made to the information describing United States properties and operations in the Form 10-K Annual Report of Chieftain International, Inc. for the year ended December 31, 1997, which is attached as Exhibit 28 hereto. Chieftain International, Inc. has guaranteed dividend, conversion and redemption obligations of Funding Corp. with respect to the Preferred Shares.
EMPLOYEES
At December 31, 1997, Funding Corp. had no employees. Management services are provided by Chieftain International, Inc.
ITEM 2.
ITEM 2. PROPERTIES
Funding Corp. owns no physical properties. Its assets consist of investments in and advances to Chieftain U.S., its parent company.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Funding Corp. is not a party to any material legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company during the fourth quarter of 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
The high and low prices of the Chieftain International Funding Corp. $1.8125 Convertible Redeemable Preferred Shares (the "Preferred Shares") during each quarter since December 31, 1995 are shown below.
Price History of Chieftain International Funding Corp. $1.8125 Convertible Redeemable Preferred Shares on the American Stock Exchange
All of the Company's issued common shares are owned by its parent, Chieftain International (U.S.) Inc. The Preferred Shares were held by 53 shareholders of record on December 31, 1997.
The Company has made timely payment of quarterly dividends on the Preferred Shares, amounting to $0.453125 per share, for each quarter since the shares were issued in 1992.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for each of the five years in the period ended December 31, 1997 has been derived from the financial statements of Funding Corp. and should be read in conjunction with such financial statements and the related notes.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Funding Corp., a special purpose subsidiary of Chieftain International (U.S.) Inc., was formed in 1992 for the primary purpose of financing the U.S. business operations of its parent.
ANALYSIS OF OPERATING RESULTS
Funding Corp.'s income is derived from dividends on preferred shares and interest on short-term notes, all of which are issued by its parent company, Chieftain International (U.S.) Inc.
Dividends received on 3,140,000 redeemable Class B preferred shares amounted to $5,691,250 in each of the years 1997 and 1996. In addition to such dividend income, interest of $175,599 and $134,272 in 1997 and 1996,respectively, was earned on short-term investments.
Dividend income is expected to remain the same for 1997 while interest income is expected to increase, reflecting the larger amount of short-term investments held.
Dividends in the amount of $4,942,144 were paid in 1997, unchanged from 1996.
CAPITAL RESOURCES AND LIQUIDITY
Funding Corp. is dependent upon the dividend income from its investment in preferred shares of its parent company to provide funds for payment of dividends on its publicly-held preferred shares.
Funds provided from operations decreased to $815,049 in 1997 compared with $992,999 in 1996. Most of these funds were invested in short-term notes issued and payable by the parent company. Cash balances at December 31, 1997 and 1996 were $45,351 and $80,857 respectively.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following financial statements of Chieftain International Funding Corp. are included in Part IV of this report.
Auditors' Report
Balance Sheet as at December 31, 1997 and 1996
Statement of Income and Retained Earnings for the years ended December 31, 1997, 1996 and 1995
Statement of Changes in Financial Position for the years ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements between Funding Corp. and Funding Corp.'s auditors on accounting or financial disclosure matters.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Board of Directors of the Company consists of not less than three nor more than ten directors. The number of directors within these limits is fixed from time to time by resolution of the Board of Directors and is currently eight. Directors are elected annually by the common stockholder to hold office until the close of the next ensuing annual meeting.
Information is presented below with respect to the directors of the Company. The information includes age as of the date hereof, present position with the Company and other business experience during the past five years. Except as noted, all of the directors of the Company have served as such since the Company's formation in November, 1992 and all are also directors of Chieftain International (U.S.) Inc., the immediate parent of the Company and Chieftain International, Inc., the ultimate parent of the Company. S.C. Hurley became a director of each of such companies in 1997. Also presented is information with respect to directors' ownership of securities of the Company and its ultimate parent, and the ownership of such securities by the directors and executive officers as a group. A director need not be a shareholder of the Company.
(1) Percentages of less than one are omitted.
(2) Each $1.8125 Convertible Redeemable Preferred Share of Chieftain International Funding Corp. is convertible into 1.25 common shares of Chieftain International, Inc.
(3) Includes options, exercisable within 60 days, to purchase 50,000 shares.
(4) H.J. Kelly is a director of Baroid Corporation, Central Louisiana Electric Company Inc., Hibernia National Bank and Tidewater Inc.
(5) Includes options, exercisable within 60 days, to purchase 26,666 shares.
(6) Includes options, exercisable within 60 days, to purchase 26,166 shares.
(7) S.A. Milner is a director of Alberta Energy Company Ltd., Canadian Imperial Bank of Commerce and Canadian Pacific Limited.
(8) Includes options, exercisable within 60 days, to purchase 115,000 shares. In addition, an associate of Mr. Milner owns 15,000 common shares.
(9) D.E. Mitchell is a director of Alberta Energy Company Ltd. and Air Canada.
(10) L.G. Munin is a director of Lafarge Canada Inc. and Walden Residential Properties, Inc.
(11) Includes options, exercisable within 60 days, to purchase 75,833 shares.
(12) S.T. Peeler is a director of Calmat Co. and Homestake Mining Company.
(13) Includes options, exercisable within 60 days, to purchase 14,167 shares.
(14) Includes options, exercisable within 60 days, to purchase 495,328 shares.
EXECUTIVE OFFICERS
The following table lists the name and age of each Executive Officer and all positions and offices with the Company held by each such person. The officers are appointed each year at the directors' meeting immediately following the annual meeting of the shareholder. The next such meeting will be held on May 14, 1998.
With the following exceptions all of the officers have held positions as officers of the Company since its incorporation in 1992 and each officer presently holds and has held for more than five years positions as officers of Chieftain International, Inc. and Chieftain International (U.S.) Inc., the former, in each case, being his or her principal occupation. S.C. Hurley joined Chieftain in September, 1995 prior to which time he was the Vice President Exploration of a U.S. based integrated oil company. S.J. Milner and R.J. Stefure were appointed officers of the Company in June, 1995 and prior thereto held management positions with the Company and its immediate and ultimate parents.
There are no family relationships among the executive officers and directors except between S.A. Milner and D.E. Mitchell, O.C. who are first cousins and between S.A. Milner and S.J. Milner who are father and son.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The directors and officers, including the chief executive officer, receive no compensation in their capacities as directors and officers of Funding Corp. All of the officers are employees of and receive remuneration from Chieftain International, Inc.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows the share ownership in the voting securities of the Company of each person or company beneficially owning, or exercising control or direction over, more than five per cent of the outstanding shares of the Company.
Information with respect to shares beneficially owned in the registrant and its ultimate parent, Chieftain International, Inc., by directors and executive officers of the Company, is presented in Item 10, "Directors and Executive Officers".
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the terms of an informal understanding between the Company and Chieftain International, Inc.("Chieftain Canada"), Chieftain Canada provides management services as required to enable the Company to carry on its business.
Chieftain Canada has unconditionally guaranteed certain obligations of the Company with respect to the Preferred Shares. The Preferred Shares are redeemable, at the option of the Company, at $25.8056 per share during 1998, declining to $25.00 per share after December 31, 2001 plus accumulated and unpaid dividends. Each Preferred Share has a liquidation preference of $25.00 and is convertible at any time into 1.25 common shares of Chieftain Canada at the option of the holder. Reference is made to Exhibits 4(a), "Form of Certificate of Designation of Preferred Stock of Funding Corp.", and 4(b), "Form of Subordinated Guarantee Agreement of Chieftain International, Inc.".
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K
The following is a listing of the financial statements which are included in this Form 10-K report.
FINANCIAL STATEMENTS
Reference is made to the list of financial statements on page 6 of this report.
EXHIBITS
Reference is made to the Index to Exhibits on page 17 of this report.
REPORTS ON FORM 8-K
The registrant filed no reports on Form 8-K during the fourth quarter of the year ended December 31, 1997.
AUDITORS' REPORT
To the Shareholders of Chieftain International Funding Corp.
We have audited the balance sheets of Chieftain International Funding Corp. as at December 31, 1997 and 1996 and the statements of income and retained earnings and changes in financial position for each of the years in the three-year period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1997 and 1996 and the results of its operations and the changes in its financial position for each of the years in the three-year period ended December 31, 1997 in accordance with generally accepted accounting principles.
PRICE WATERHOUSE Chartered Accountants
Edmonton, Alberta February 4, 1998
CHIEFTAIN INTERNATIONAL FUNDING CORP.
(a subsidiary of Chieftain International (U.S.) Inc.)
BALANCE SHEET
APPROVED BY THE BOARD
/s/ S.A. Milner Director
/S/ L.G. Munin Director
CHIEFTAIN INTERNATIONAL FUNDING CORP.
STATEMENT OF INCOME AND RETAINED EARNINGS
CHIEFTAIN INTERNATIONAL FUNDING CORP.
STATEMENT OF CHANGES IN FINANCIAL POSITION
CHIEFTAIN INTERNATIONAL FUNDING CORP.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
Chieftain International Funding Corp. ("Funding Corp."), a special purpose subsidiary of Chieftain International (U.S.) Inc., was formed in 1992 for the primary purpose of financing the U.S. business operations of its parent. Funding Corp.'s income is derived from dividends on preferred shares and interest on short-term notes, all of which are issued by its parent company, Chieftain International (U.S.) Inc. The financial statements are expressed in U.S. currency since the assets and operations of Funding Corp. are denominated in U.S. dollars.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING POLICIES
The financial statements of Funding Corp. are prepared in conformity with Canadian generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make informed judgements and estimates. Actual results may differ from those estimates. Material differences between Canadian and U.S. accounting principles which affect Funding Corp. are specifically referred to in these Notes to Financial Statements.
FINANCIAL ASSETS AND LIABILITIES
Funding Corp.'s financial instruments that are included in the Balance Sheet are comprised of cash, intercompany receivables, all current liabilities and preferred shares issued, the fair values of which, other than the preferred shares issued (see Note 3), approximate their carrying amounts due to their short-term or demand nature.
INCOME TAXES
Funding Corp. and its parent company file corporate income tax returns on a consolidated basis. As a result, income taxes payable have been offset by the parent company's tax losses and are reflected in the amount due from the parent company.
Funding Corp. follows the tax allocation method of accounting for the tax effect of all timing differences between taxable income and accounting income.
U.S. accounting principles require corporations to account for deferred income taxes using the liability method. The effect on Funding Corp. of the application of such method is not material.
2. INVESTMENT IN PREFERRED SHARES OF PARENT
On November 6, 1992, Funding Corp. purchased 2,840,000 $1.8125 Redeemable Class B Preferred Shares at $25.00 per share of Chieftain International (U.S.) Inc., its parent company. Subsequent to that date, FundingCorp. purchased an additional 300,000 of such shares to hold a total of 3,140,000 shares. The shares pay quarterly dividends at the annual rate of $1.8125 per share. The shares are redeemable at the option of the parent company at $25.8056 during 1998 declining to $25.00 per share after December 31, 2001, plus accumulated and unpaid dividends.
3. PREFERRED SHARES
The Articles of Funding Corp. authorize the issue of a maximum of 10,000,000 preferred shares with a par value $1.00 each.
On November 6, 1992, Funding Corp. sold 2,400,000 shares of $1.8125 convertible redeemable preferred stock at $25.00 per share through an underwritten public offering in the United States. On December 2, 1992, Funding Corp. sold an additional 326,700 preferred shares pursuant to an over-allotment option granted to the underwriters, resulting in a total issuance of 2,726,700 shares. Proceeds of the issuance of preferred shares, net of offering costs of $4.7 million, were $63.4 million. The preferred shares are redeemable, at the option of Funding Corp., at $25.8056 per share during 1998, declining to $25.00 per share after December 31, 2001 plus accumulated and unpaid dividends. Each preferred share has a liquidation preference of $25.00 and is convertible at any time at the option of the holder into 1.25 common shares of Chieftain International, Inc. (the ultimate parent company). Chieftain International, Inc. has guaranteed dividend, conversion and redemption obligations of Funding Corp. with respect to the preferred shares.
Canadian generally accepted accounting principles require the disclosure of the fair value of a financial instrument of this nature and define the fair value as the amount at which the instrument could be exchanged in a current transaction between willing parties. The estimated fair value of Funding Corp.'s preferred shares at December 31, 1997 is $72,427,969 (1996 - $88,617,750) which is the market value of the securities into which these shares are convertible.
4. SHARE CAPITAL
On August 28, 1992, Funding Corp. issued 100,000 common shares, par value $0.01 each, for net cash proceeds of $1,000 and, on November 5, 1992 issued 100,000 common shares, par value $0.01 each, to its parent for net cash proceeds of $14,999,000.
5. INCOME TAXES
The actual tax rate differed from the expected tax rate for the following reason:
6. TRANSACTIONS WITH AFFILIATES
All dividend and interest income of Funding Corp. is received from Chieftain International (U.S.) Inc. Certain administrative services are provided to Funding Corp. by Chieftain International, Inc.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CHIEFTAIN INTERNATIONAL FUNDING CORP.
Dated: March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT - --------- -------
** 3(e) Articles of Incorporation of Funding Corp. ** 3(f) Amended Articles of Incorporation of Funding Corp. ** 3(g) Bylaws of Funding Corp. ** 4(a) Form of Certificate of Designation of Preferred Stock of Funding Corp. ** 4(b) Form of Subordinated Guarantee Agreement of Chieftain International, Inc. **** 24 Consent of Price Waterhouse. 27 Financial Data Schedule. **** 28 Form 10-K of Chieftain International, Inc. for the year ended December 31, 1997.
** Previously filed as an exhibit to the Registration Statement of the registrant on Form S-1/S-3, File No. 33-51630. **** Filed herewith.