That 'misaligned' rubber seal hole in the stud's passageway is quite common in the engines made after 1975. I have seen it many, many times. What happened was:the cylinder's iron liner crept and rotated somewhat during operation, probably because of some debris left in the bored cylinders before the iron liners were installed (in other words, a small assembly mistake made a long, long time ago). So long as the rubber seal still fits into the hole, it won't cause any future issues. However, when the cylinder rotated it also cross-torqued the head gasket's metal ring in that area, which slightly damaged the high-pressure seal there. That's why the metal ring in the head gasket is now disintegrated or distorted, and when it finally broke far enough to let combustion pressure reach that offset drain hole, it then pressurized the crankcase, causing the white smoke.
So, what to do?
#1: if you just hone and re-ring the pistons, it will not last long and it will not have the high-RPM power it once had. The bores are no long a true round shape (this is normal) and introducing new, round rings will cause compression leakage. The 100% way to "fix" this is to rebore with the next oversize pistons (CrusinImage makes nice kits for the K7, I have used them many times). This would be the 0.5mm oversize set in this case.
#2: Before reassembling in ANY case, have the head milled flat, as it is not where the gasket leaked (at the least!). This usually means to have it flat-ground 0.0005"-0.010". Also the cylinders, and have them milled flat -0.010". This is sometimes referred to as "head flattening" and "cylinder deck milling". The reason: the head and cylinder are now warped where the gases escaped, so it's not flat and won't seal, period. Also: all new head gaskets today are 0.010" thicker than the one you just removed: it was made from asbestos, and that's outlawed now, so the head gaskets have grown in thickness from their original 0.8mm thickness to now 1.00mmm thick. This difference MUST be milled off the cylinder deck, or it WILL leak oil after reassembly, from those 2 oil ports at the center rear of the cylinders. PM me your mailing address and I will also send you 2 new O-rings to use in those holes at reassembly to prevent his problem, no charge.