-----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, DXKVcwpQKIIIO9la7troVq1iGfd3j4E3splTOPIwtMXWzP80nlCJ3LmQ6jRSr/MQ PKJwm8kF2g8fECPG1PVV/A== 0000930661-97-000617.txt : 19970318 0000930661-97-000617.hdr.sgml : 19970318 ACCESSION NUMBER: 0000930661-97-000617 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970317 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIVA PETROLEUM INC /TX/ CENTRAL INDEX KEY: 0000910659 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751432205 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-13440 FILM NUMBER: 97557661 BUSINESS ADDRESS: STREET 1: 8235 DOUGLAS AVE STREET 2: STE 400 CITY: DALLAS STATE: TX ZIP: 75225 BUSINESS PHONE: 2146913464 MAIL ADDRESS: STREET 1: 8235 DOUGLAS AVE STREET 2: STE 400 CITY: DALLAS STATE: TX ZIP: 75225 10-K405 1 FORM 10-K405 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 [NO FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1996 ------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to ------ ------ Commission File Number 0-22258 AVIVA PETROLEUM INC. (Exact name of registrant as specified in its charter) TEXAS 75-1432205 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8235 DOUGLAS AVENUE, 75225 SUITE 400, DALLAS, TEXAS (Zip Code) (Address of principal executive offices) (214) 691-3464 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Names of each exchange ---------------------- Title of each class on which registered ------------------- ------------------- Depositary Receipts, American Stock Exchange each representing five shares of Common Stock, without par value Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value 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. x . ----- The aggregate market value of voting securities held by non-affiliates of the Registrant on February 28, 1997 was approximately $19,153,000. As of such date, the last sale price on the American Stock Exchange of a Depositary Share representing five shares of Common Stock, without par value ("Common Stock"), was U.S. $3.38, and the middle market price of Common Stock on the London Stock Exchange Limited was U.K. 34 pence. As of February 28, 1997, 31,482,716 shares of Registrant's Common Stock were outstanding, of which 10,324,615 shares of Common Stock were represented by Depositary Shares. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's definitive Proxy Statement for the 1997 Annual Meeting of Shareholders are incorporated in Part III by reference. TABLE OF CONTENTS TO FORM 10-K
Page ----- Part I Item 1. Business General...................................................... 1 Current Operations........................................... 1 Risks Associated with the Company's Business................. 2 Products, Markets and Methods of Distribution................ 4 Regulation................................................... 5 Competition.................................................. 9 Employees.................................................... 9 Item 2. Properties Productive Wells and Drilling Activity....................... 10 Undeveloped Acreage.......................................... 11 Title to Properties.......................................... 11 Federal Leases............................................... 11 Reserves and Future Net Cash Flows........................... 12 Production, Sales Prices and Costs........................... 12 Significant Properties Colombia................................................. 13 United States............................................ 16 Item 3. Legal Proceedings............................................... 17 Item 4. Submission of Matters to a Vote of Security Holders............. 17 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Price Range of Depositary Shares and Common Stock.... 18 Dividend History and Restrictions............................ 19 Item 6. Selected Financial Data......................................... 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations........................................ 21 Liquidity and Capital Resources.............................. 23 Item 8. Financial Statements and Supplementary Data..................... 26 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................................... 26 Part III Item 10. Directors and Executive Officers of the Registrant.............. 27 Item 11. Executive Compensation.......................................... 27 Item 12. Security Ownership of Certain Beneficial Owners and Management.. 27 Item 13. Certain Relationships and Related Transactions.................. 27 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 28 Signatures................................................................. 34
(i) PART I ITEM 1. BUSINESS General Aviva Petroleum Inc. (referred to collectively with its consolidated subsidiaries as the "Company"), a Texas corporation, through its subsidiaries, is engaged in the exploration for and production and development of oil and gas in Colombia and offshore in the United States. The Company was incorporated in 1973 and the common stock, without par value ("Common Stock"), of the Company has been traded on the London Stock Exchange Limited (the "London Stock Exchange") since 1982. Depositary shares ("Depositary Shares"), each representing the beneficial ownership of five shares of Common Stock, have traded on the Primary List of the American Stock Exchange since May 31, 1995, and prior to that on the Emerging Company Marketplace of the American Stock Exchange since November 14, 1994. The Company's principal executive offices are located in Dallas, Texas, and the Company maintains a field office in Venice, Louisiana. Current Operations Colombia. Through a wholly owned subsidiary, the Company is the owner of -------- interests in, and is engaged in exploration for, and development and production of oil from, four concessions granted by Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The Company's Colombian activities are carried out pursuant to four joint operating agreements between the Company's wholly owned subsidiary, Neo Energy, Inc. ("Neo"), and co-owner Argosy Energy International ("Argosy"), which operates the Colombian properties and is an affiliate of Garnet Resources Corporation ("Garnet"). Neither Garnet nor Argosy is affiliated with the Company. Neo has a 45% interest and Argosy has the remaining 55% interest in properties covered by the four joint operating agreements. Neo and Argosy are parties to four concession agreements with Ecopetrol called Santana, La Fragua, Yuruyaco and Aporte Putumayo. All four concessions are located in the Putumayo Basin of southwestern Colombia. The Company's exploration and development activities are currently concentrated in the Santana and Yuruyaco concessions. Twenty wells have been drilled on the Santana concession. Of the thirteen exploratory wells, seven have been productive and six were dry holes. Of the seven development wells, five have been productive. Drilling of an eighth development well commenced on February 25, 1997. Four fields have been discovered and have been declared commercial by Ecopetrol. Gross production from the Santana concession has totaled approximately 8.8 million barrels during the period from April 1992, when production commenced, through December 1996. The Company's share of this production totaled approximately 1.5 million barrels. The contract for the La Fragua concession, which adjoins Santana to the north, was approved by Ecopetrol in June 1992. The acquisition of seismic data required in the first two years of the contract has been completed. The Company has determined, however, that further exploration on this concession is not technically justified and the concession will likely be surrendered. See "Item 2. Properties -- Significant Properties -- Colombia." The contract for the Yuruyaco concession, which is adjacent to the eastern boundaries of the Santana and La Fragua concessions, was approved by Ecopetrol in September 1995. The Yuruyaco contract requires in the first and second contract years seismic surveys totaling 19 and 12 miles, respectively. A 2-D seismic program was initiated in late December 1996 that will satisfy such obligations. If the Company decides to proceed into the third year, the drilling of a test well would be required. 1 The Aporte Putumayo block has produced since 1976. Declining production has, however, caused the block to be unprofitable under the terms of the contract. Neo and Argosy have, accordingly, notified Ecopetrol that they intend to relinquish this block pursuant to the terms of the concession agreement. Production from the Aporte Putumayo block was shutin effective March 31, 1995, and abandonment and restoration operations are continuing. Each concession is governed by a separate contract with Ecopetrol. Generally, the contracts cover a 28-year period and require certain exploration expenditures in the early years of the contract and, in the later years of the contract, permit exploitation of reserves that have been found. All of the contracts provide that Ecopetrol shall receive, on behalf of the Colombian Ministry of Mines, royalty payments in the amount of 20% of the gross proceeds of the oil produced pursuant to the respective contract, less certain costs of transporting the oil to the point of sale. Under each of the contracts, application must be made to Ecopetrol for a declaration of commerciality for each discovery. If Ecopetrol declares the discovery commercial, it has the right to a 50% reversionary interest in the field and is required to pay 50% of all future costs. If, alternatively, Ecopetrol declines to declare the discovery commercial, Neo and Argosy have the right to proceed with development and production at their own expense until such time as they have recovered 200% of the costs incurred, at which time Ecopetrol is entitled to back in for a 50% working interest in the field without payment or reimbursement of any historical costs. Exploration costs (as defined in the concession agreements) incurred by the co-owners prior to the declaration of commerciality are recovered by means of retention by the co-owners of all of the non-royalty proceeds of production from each well until costs relating to that well are recovered. United States. In the United States the Company, through its wholly owned ------------- subsidiary, Aviva America, Inc. ("AAI"), is engaged in the production of oil and gas attributable to its working interests in 16 offshore wells and, until December 23, 1996, approximately 350 onshore wells which were sold for $2,702,000 in cash, net of closing adjustments. For further information as to the sale of these assets, see Notes 1 and 10 of Notes to Consolidated Financial Statements. The Company acquired its interests in most of these wells through the acquisition of producing properties. On December 23, 1996, the Company completed the sale of all of its U.S. onshore oil and gas properties which were located primarily in Pennsylvania, Oklahoma and Wyoming. The Company now operates its remaining U.S. oil and gas properties, which are in the Gulf of Mexico offshore Louisiana, at Main Pass 41 and Breton Sound 31 fields. Risks Associated with the Company's Business General. The Company's operations are subject to oil field operating ------- hazards such as fires, explosions, blowouts, cratering and oil spills, any of which can cause loss of hydrocarbons, personal injury and loss of life, and can severely damage or destroy equipment, suspend drilling operations and cause substantial damage to subsurface structures, surrounding areas or property of others. As protection against operating hazards, the Company maintains broad insurance coverage, including indemnity insurance covering well control, redrilling and cleanup and containment expenses, Outer Continental Shelf Lands Act coverage, physical damage on certain risks, employers' liability, comprehensive general liability, appropriate auto and marine liability and workers' compensation insurance. The Company believes that such insurance coverage is customary for companies engaged in similar operations, but the Company may not be fully insured against various of the foregoing risks, because such risks are either not fully insurable or the cost of insurance is prohibitive. The Company does not carry business interruption insurance because of the prohibitively high cost. The occurrence of an uninsured hazardous event could have a material adverse effect on the financial condition of the Company. Colombia. The Company has expended significant amounts of capital for the -------- acquisition, exploration and development of its Colombian properties and plans to expend additional capital for exploration and 2 development of such properties. Even if the results of such activities are favorable, further drilling at significant costs must be conducted to determine the extent of the recoverable reserves. Failure to fund capital expenditures could result in forfeiture of all or part of the Company's interests in the applicable property. For additional information on the Company's concession obligations, see "-- Current Operations," and regarding its cash requirements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In addition, the Company's ability to continue its Colombian exploration and development programs is dependent upon the ability of its co-owner to finance its portion of such costs and expenses. There can be no assurance that the Company's co-owner will be in a position to pay, or provide for the payment of, its costs and expenses of joint projects. If the Company's co-owner cannot fund its obligations, the Company may be required to accept an assignment of the co- owner's interest therein and assume those funding obligations. If, thereafter, the Company were to be unable to raise sufficient funds to meet such obligations, the Company's interests in the affected properties may be forfeited. Moreover, even if the Company were to be able to raise sufficient funds, there could be no assurance that the Company would be able to discover, develop and produce sufficient reserves to recover the costs and expenses incurred in connection with the exploration and development thereof. In reports filed with the Securities and Exchange Commission, which are publicly available, Garnet has expressed its belief that it will be able to fund its share of capital expenditures relating to these properties through cash flow from production in Colombia and its existing working capital. The Company is subject to the other risks inherent in the ownership and development of foreign properties including, without limitation, cancellation or renegotiation of contracts, royalty and tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, environmental controls and other laws, regulations or international developments that may adversely affect the Company's properties. The Company does not maintain political risk insurance. Exploration and development of the Company's Colombian properties are dependent upon obtaining appropriate governmental approvals and permits. See "-- Regulation." The Company's Colombian operations are also subject to price risk. See "-- Products, Markets and Methods of Distribution." There are logistical problems, costs and risks in conducting oil and gas activities in remote, rugged and primitive regions in Colombia. The Company's operations are also exposed to potentially detrimental activities by local insurgents. In late 1990, the Colombian Government Armed Forces launched an aggressive effort to confront the leftist guerrillas who have operated within Colombia for many years. This military operation occurred on several fronts throughout the country. The guerrillas in the Putumayo area, where the Company's property is located, responded to these attacks by retaliating against several private companies. As a result of these retaliatory raids, the Company experienced two incidents in which damage to its drilling rig was sustained and a contractor's helicopter was destroyed. Although the Company's losses on those occasions were substantially recovered through insurance, there can be no assurance that such coverage will remain available or affordable. Although unrelated incidents have continued to occur in the vicinity of the Company's operations, including political protests by local residents that temporarily suspended production for approximately eight days during December 1994 and approximately nine days in August 1996, the level of guerrilla activity subsided in the first quarter of 1991 and the Company has not been the target of any significant guerrilla activity since then. Nonetheless, the Colombian army guards the Company's operations and there can be no assurance that the Company's operations in Colombia will not be the target of similar attacks in the future. United States. The Company's activities in the United States are subject to ------------- a variety of risks. The U.S. properties could, in certain circumstances, require expenditure of significant amounts of capital. Failure to fund its share of such costs could result in a diminution of value of, or under applicable operating agreements forfeiture of, the Company's interest. The Company's ability to fund such expenditures is also 3 dependent upon the ability of the other working interest owners to fund their share of the costs. If such working interest owners fail to do so, the Company could be required to pay its proportionate share or forego further development of such properties. The Company's activities in the United States are subject to various environmental regulations and to price risk. See "-- Regulation" and "-- Products, Markets and Methods of Distribution." Information concerning the amounts of revenue, operating loss and identifiable assets attributable to each of the Company's geographic areas is set forth in Note 11 of the Notes to Consolidated Financial Statements contained elsewhere herein. Products, Markets and Methods of Distribution Colombia. The Company's oil is sold pursuant to sales contracts with -------- Ecopetrol. The contracts generally provide for cancellation by either party with notice. In the event of cancellation by Ecopetrol, the Company may export its oil production. Ecopetrol has historically purchased the Company's production, but there can be no assurance that it will continue to do so, nor can there be any assurance of ready markets for the Colombian production if Ecopetrol does not elect to purchase the production. The Company currently produces no natural gas in Colombia. See "Item 2. Properties." During each of the three years ended December 31, 1996, the Company received more than 10% of its revenue from Ecopetrol. Sales to Ecopetrol accounted for $9,437,000, or 68.6% of oil and gas revenue for 1996, $7,132,000, or 65.3% of oil and gas revenue for 1995 and $3,404,000, or 39.8% of oil and gas revenue for 1994, representing the Company's entire Colombian oil revenue. If Ecopetrol were to elect not to purchase the Company's Colombian oil production, the Company believes that other purchasers could be found for such production. United States. The Company does not refine or otherwise process domestic ------------- crude oil and condensate production. The domestic oil and condensate it produces are sold to refineries and oil transmission companies at posted field prices in the area where production occurs. The Company does not have long term contracts with purchasers of its domestic oil and condensate production. The Company's domestic gas production is primarily sold under short term arrangements at or close to spot prices. Some gas is committed to be processed through certain plants. The Company has not historically hedged any of its domestic production. During 1996, 1995 and 1994, the Company received more than 10% of its revenue from one domestic purchaser. Such revenue accounted for $1,609,000, or 11.7% of oil and gas revenue for 1996, $1,422,000, or 13.0% of oil and gas revenue for 1995 and $1,144,000, or 13.4% of oil and gas revenue for 1994. If this purchaser were to elect not to purchase the Company's oil and gas production, the Company believes that other purchasers could be found for such production. General. Oil and gas are the Company's only products. There is substantial ------- uncertainty as to the prices that the Company may receive for production from its existing oil and gas reserves or from oil and gas reserves, if any, which the Company may discover or purchase. The availability of a ready market and the prices received for oil and gas produced depend upon numerous factors beyond the control of the Company including, without limitation, adequate transportation facilities (such as pipelines), marketing of competitive fuels, fluctuating market demand, governmental regulation and world political and economic developments. World oil and gas markets are highly volatile and shortage or surplus conditions substantially affect prices. As a result, there have been dramatic swings in both oil and gas prices in recent years. From time to time there may exist a surplus of oil or natural gas supplies, the effect of which may be to reduce the amount or price of hydrocarbons that the Company may produce and sell while such surplus exists. 4 Regulation Environmental Regulation. The Company's operations are subject to foreign, ------------------------ federal, state, and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit by operators before drilling commences, restrict the types, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness areas, wetlands, and other protected areas, require remedial measures to mitigate pollution from former operations, such as plugging and abandoning wells, and impose substantial liabilities for pollution resulting from the Company's operations. The regulatory burden on the oil and gas industry increases the cost of doing business and consequently affects its profitability. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly waste handling, disposal, remedial, drilling, or operational requirements could have a significant impact on the operating costs of the Company, as well as significantly impair the Company's ability to compete with larger, more highly capitalized companies. Management believes that the Company is in substantial compliance with current applicable environmental laws and regulations and that continued compliance with existing requirements will not have a material impact on the Company's operations, capital expenditures, and earnings. Management further believes, however, that risks of substantial costs and liabilities are inherent in oil and gas operations, and there can be no assurance that significant costs and liabilities will not be incurred. Colombia. Any significant exploration or development of the Company's -------- Colombian concessions, such as conducting a seismic program, the drilling of an exploratory or developmental well or the construction of a pipeline, requires environmental review and the advance issuance of environmental permits by the Colombian government. In 1993, Instituto de Recursos Naturales y Ambiente ("Inderena"), the Colombian federal environmental agency, began reviewing the environmental standards and permitting processes for the oil industry in general, and in 1994 a new Ministry of the Environment was organized. In connection with its review, Inderena requested that additional environmental studies be submitted for the Company's area of operations north of the Caqueta River. See "Item 2. Properties -- Significant Properties -- Colombia -- Santana Concession." As a result of the review and requests for additional environmental studies, the Company's operations north of the Caqueta River were suspended pending review and approval of additional environmental studies submitted by the Company in January 1994 and the issuance of environmental licenses by the Ministry of the Environment. In May 1994, the suspension was lifted and certain of the required environmental licenses were issued, including a permit allowing the co-owners of the concession to conduct a seismic program in that area. Since the lifting of the above referenced suspension, the co-owners have received subsequent permits, without substantial delay, to drill development and exploratory wells, construct related production facilities and construct a 10- mile pipeline. There can be, however, no assurance that the Company will not experience future delays in obtaining necessary environmental licenses. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Item 2. Properties -- Significant Properties -- Colombia." United States. The Company believes that it is currently in ------------- substantial compliance with U.S. federal, state, and local environmental laws and regulations. The Company has experienced no material financial effects to date from compliance with these U.S. environmental laws or regulations and does not currently plan any significant capital expenditures for U.S. environmental control efforts. The Oil Pollution Act of 1990 ("OPA '90") and regulations thereunder impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA '90 assigns liability to each responsible party for oil spill removal costs and a variety of public and private damages from oil spills. While liability limits apply in some circumstances, a party cannot take advantage of liability 5 limits if the spill is caused by gross negligence or willful misconduct, the spill resulted from violation of a federal safety, construction, or operating regulation, or a party fails to report a spill or to cooperate fully in the cleanup. Few defenses exist to the liability imposed under OPA '90 for oil spills. The failure to comply with these requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal enforcement actions. Management of the Company is currently unaware of any oil spills for which the Company has been designated as a responsible party under OPA '90 and that will have a material adverse impact on the Company or its operations. OPA '90 also imposes ongoing requirements on facility operators, such as the preparation of an oil spill contingency plan. The Company has such plans in place. With recent amendments to OPA '90 signed into law by President Clinton on October 19, 1996, OPA '90 now requires responsible parties to establish and maintain $35 million in financial responsibility to cover environmental cleanup and restoration costs that might be incurred in connection with an oil spill in waters of the United States, including the waters of the Gulf of Mexico where the Company has its operations, unless a formal risk assessment indicates that increased financial responsibility coverage is warranted. The Company's two U.S. properties, Main Pass Block 41 field, a federal lease on the outer continental shelf ("OCS") offshore Louisiana, and Breton Sound Block 31 field, on state leases offshore Louisiana, are subject to OPA '90 as amended. Management of the Company believes that these two properties comply in all material respects with the amended OPA '90 requirements. The Outer Continental Shelf Lands Act ("OCSLA") imposes a variety of requirements relating to safety and environmental protection on lessees and permittees operating on the OCS. Specific design and operational standards may apply to OCS vessels, rigs, platforms, vehicles, and structures. Violations of lease conditions or regulations issued pursuant to OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or private prosecution. With respect to the Federal Water Pollution Control Act, the United States Environmental Protection Agency ("EPA") issued regulations prohibiting the discharge of produced water and produced sand derived from oil and gas operations in certain coastal areas (primarily state waters) of Louisiana and Texas, effective February 8, 1995. In connection with these regulations, however, the EPA also issued an administrative order that effectively delayed compliance with the no discharge requirement for produced water until January 1, 1997. Effective August 27, 1996, the Louisiana Department of Environmental Quality ("LDEQ") officially assumed responsibility for compliance and enforcement issues for produced water as they relate to the Company's Breton Sound Block 31 facilities with the EPA operating in an oversight capacity. On December 30, 1996, the LDEQ adopted an emergency rule which, among other things, provided an extension of time, to July 1, 1997, to achieve compliance with the prohibitions against produced water discharges. The Company has filed an application pursuant to the emergency rule that, if approved, would allow the Company to continue with its current operations until January 1, 1999. Failing approval, or further extension of the deadline, the Company will be required to reinject the produced water into a suitable underground formation. Management of the Company does not expect the incremental cost to prepare and operate a reinjection well to have a material adverse effect on the Company's operating results. See "Item 2. Properties -- Significant Properties -- United States." The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural resources, and it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and 6 property damage allegedly caused by the hazardous substances released into the environment. The Company has not received any notification nor is it otherwise aware of circumstances indicating that it may be potentially responsible for cleanup costs under CERCLA. The federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes regulate the storage, treatment and disposal of wastes, including hazardous wastes. The EPA and various state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes, thereby making such disposal more costly. Furthermore, certain wastes generated by the Company's oil and natural gas operations that are currently exempt from treatment as hazardous wastes may in the future be designated as hazardous wastes and therefore be subject to more rigorous and costly operating and disposal requirements. Other Regulation - Colombia. The Company's Colombian operations are regulated --------------------------- by Ecopetrol, the Ministry of Mines and Energy, and the Ministry of the Environment, among others. The review of current environmental laws, regulations and the administration and enforcement thereof, or the passage of new environmental laws or regulations in Colombia, could result in substantial costs and liabilities in the future or in delays in obtaining the necessary permits to conduct the Company's operations in that country. These operations may also be affected from time to time in varying degrees by political developments in Colombia. Such political developments could result in cancellation or significant modification of the Company's contract rights with respect to such properties, or could result in tax increases and/or retroactive tax claims being assessed against the Company. Other Regulation - United States. Domestic exploration for and production and -------------------------------- sale of oil and gas are extensively regulated at both the national and local levels. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue, and have issued, rules and regulations applicable to the oil and gas industry that are often difficult and costly to comply with and that may carry substantial penalties for failure to comply. The regulations also generally specify, among other things, the extent to which acreage may be acquired or relinquished, permits necessary for drilling of wells, spacing of wells, measures required for preventing waste of oil and gas resources and, in some cases, rates of production and sales prices to be charged to purchasers. The heavy and increasing regulatory burdens on the oil and gas industry increase the costs of doing business and, consequently, affect profitability. Sales of domestic crude oil and condensate can be made by the Company at market prices not subject to price controls at this time. Prior to January 1, 1993, the sale of certain categories of domestic natural gas by the Company was subject to regulation under the Natural Gas Act ("NGA"), as amended, and the Natural Gas Policy Act of 1978, as amended. The Natural Gas Wellhead Decontrol Act of 1989 removed all NGA price and non-price controls which affected wellhead sales of natural gas. Commencing in April 1992, the Federal Energy Regulatory Commission ("FERC") issued Orders numbered 636, 636-A, and 636-B ("Order No. 636"), which require interstate pipelines to provide transportation separate, or "unbundled," from the pipelines' sales of gas. Also, Order No. 636 requires pipelines to provide open-access transportation on a basis that is equal for all gas supplies. Although Order No. 636 does not directly regulate the Company's activities, the FERC has stated that it intends for Order No. 636 to foster increased competition within all phases of the natural gas industry. It is unclear what impact, if any, increased competition within the natural gas industry under Order No. 636 will have on the Company's activities. Although Order No. 636, assuming it is upheld in its entirety in litigation initiated by parties not affiliated with the Company, could provide the Company with additional market access and more fairly applied transportation service rates, Order No. 636 could also subject the Company to more restrictive pipeline imbalance tolerances and greater penalties for violation of those tolerances. The FERC has issued final orders in all Order No. 636 pipeline restructuring proceedings. The United States Court of Appeals for the District of Columbia Circuit ("D.C. Circuit") has generally affirmed Order 7 No. 636 and remanded certain issues for further explanation or clarification. The issues remanded for further action do not appear to materially affect the Company. Numerous petitions for review of the individual pipeline restructuring orders are currently pending in that court. Although it is difficult to predict when all appeals of pipeline restructuring orders will be completed or their impact on the Company, the Company does not believe that it will be affected by the restructuring rule and orders any differently than other natural gas producers and marketers with which it competes. The FERC has announced several important transportation-related policy statements and proposed rule changes, including the appropriate manner in which interstate pipelines release capacity under Order No. 636 and, more recently, the price that shippers can charge for their released capacity. In addition, in 1995, the FERC issued a policy statement on how interstate natural gas pipelines can recover the costs of new pipeline facilities. In January 1996, the FERC issued a policy statement and a request for comments concerning alternatives to its traditional cost-of-service ratemaking methodology. A number of pipelines have obtained FERC authorization to charge negotiated rates as one such alternative. While any additional FERC action on these matters would affect the Company only indirectly, any new rules and policy statements may have the effect of enhancing competition in natural gas markets by, among other things, encouraging non-producer natural gas marketers to engage in certain purchase and sale transactions. The Company cannot predict what action the FERC will take on these matters, nor can it accurately predict whether the FERC's actions will achieve the goal of increasing competition in markets in which the Company's natural gas is sold. However, the Company does not believe that it will be affected by any action taken materially differently than other natural gas producers with which it competes. The Outer Continental Shelf Lands Act ("OCSLA") requires that all pipelines operating on or across the Outer Continental Shelf ("OCS") provide open-access, non-discriminatory service. Although the FERC has chosen not to impose the regulations of Order No. 509, in which the FERC implemented The OCSLA, with respect to gatherers and other non-jurisdictional entities, the FERC has retained the authority to exercise jurisdiction over those entities if necessary to permit non-discriminatory access to service on the OCS. A portion of the Company's operations are located on federal oil and gas leases, which are administered by the United States Department of the Interior Minerals Management Service ("MMS"). Such leases are issued through competitive bidding, contain relatively standardized terms and require compliance with detailed MMS regulations and orders pursuant to the OCSLA. In addition to permits required from other agencies, lessees must obtain a permit from the MMS prior to commencement of drilling. To cover the various obligations of lessees on the OCS, the MMS generally requires that lessees have substantial net worth or post substantial bonds or other acceptable assurances that such obligations will be met. The cost of such bonds or other surety can be substantial and there is no assurance that bonds or other surety can be obtained in all cases. The MMS is conducting an inquiry into certain agreements from which producers on MMS leases have received settlement proceeds that are royalty bearing and the extent to which producers have paid the appropriate royalties on those proceeds. The Company believes that this inquiry will not have a material impact on its financial condition, liquidity or results of operations. The MMS issued a notice of proposed rulemaking in which it proposes to amend its regulations governing the calculation of royalties and the valuation of natural gas produced from federal leases. The principal feature in this proposed rule would establish an alternative market-index based method to calculate royalties on certain natural gas production sold pursuant to non- arm's-length sales contracts. In addition, the MMS recently issued a notice of proposed rulemaking in which it proposes to amend its regulations governing the calculation of royalties and the valuation of crude oil produced from federal leases. The principal features in this proposed rule would modify the valuation procedures for both arm's-length and non-arm's-length crude oil transactions to decrease reliance on crude oil posted prices and assign a value to crude oil that better reflects market value, establish a new MMS form for collecting value differential data, and amend the valuation procedure for the sale of federal royalty oil. The Company 8 cannot predict what action the MMS will take on these matters, nor can it predict at this stage in the rulemaking proceeding how the Company might be affected by these amendments to the MMS' regulations. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at market prices. Effective as of January 1, 1995, the FERC implemented regulations establishing an indexing system for transportation rates for oil that could increase the cost of transporting oil to the purchaser. The Company is not able to predict what effect, if any, this order will have on it, but other factors being equal, it may tend to increase transportation costs or reduce wellhead prices for oil. State Regulation. Production of any domestic oil and gas by the Company is ---------------- affected by state regulations. Many states in which the Company has operated have statutory provisions regulating the production and sale of oil and gas, including provisions regarding deliverability. Such statutes, and the regulations promulgated in connection therewith, are generally intended to prevent waste of oil and gas and to protect correlative rights to produce oil and gas between owners of a common reservoir. Certain state regulatory authorities also regulate the amount of oil and gas produced by assigning allowable rates of production to each well or proration unit. The Company cannot accurately predict the effect that any of the aforementioned orders or the challenges to the orders will have on the Company's operations. Additional proposals and proceedings that might affect the oil and natural gas industries are pending before Congress, the FERC and the courts. These include Congressional energy bills and executive branch energy initiatives which have as their goal the decreased reliance by the United States on foreign energy supplies. The Company cannot accurately predict when or whether any such proposals or proceedings may become effective. Competition The Company encounters strong competition from other independent operators and from major oil companies in acquiring properties suitable for exploration, in contracting for drilling equipment and in securing trained personnel. Many of these competitors have financial and other resources substantially greater than those available to the Company. The Company's ability to discover reserves in the future depends on its ability to select, generate and acquire suitable prospects for future exploration. The Company does not currently generate its own prospects and depends exclusively upon external sources for the generation of oil and gas prospects. Employees As of December 31, 1996, Aviva had 10 full-time employees, all in the United States. 9 ITEM 2. PROPERTIES Productive Wells and Drilling Activity The following table summarizes the Company's developed acreage and productive wells at December 31, 1996. "Gross" refers to the total acres or wells in which the Company has a working interest, and "net" refers to gross acres or wells multiplied by the percentage working interest owned by the Company.
Developed Acreage /(1)/ Gross Net -------- -------- United States 3,240 1,482 Colombia 79,965 35,118 -------- -------- 83,205 36,600 ======== ========
Productive Wells /(2)/ Oil Gas -------------- -------------- Gross Net Gross Net ------ ------ ------ ------ United States /(3)/ 10 5.21 6 2.69 Colombia 12 1.89 - - ------ ------ ------ ------ 22 7.10 6 2.69 ====== ====== ====== ======
(1) Developed acreage is acreage assignable to productive wells. (2) Productive wells represent producing wells and wells capable of producing. (3) Two of the oil wells and one of the gas wells are dually completed. During the periods indicated, the Company drilled or participated in the drilling of the following development and exploratory wells.
Net Wells Drilled ------------------------- Development Exploratory ----------------------- ----------------------- Productive Dry Productive Dry ---------- ---------- ---------- ---------- 1996 United States 0.4 - - - Colombia 0.3 - - 0.3 ---------- ---------- ---------- ---------- Total 0.7 - - 0.3 ========== ========== ========== ========== 1995 United States 0.1 - - - Colombia 0.5 0.2 - 0.3 ---------- ---------- ---------- ---------- Total 0.6 0.2 - 0.3 ========== ========== ========== ========== 1994 United States 0.1 - - - Colombia - - - 0.3 ---------- ---------- ---------- ---------- Total 0.1 - - 0.3 ========== ========== ========== ==========
In addition, at March 17, 1997, there was one gross (0.2 net) development well in progress in Colombia. 10 In the above table, a productive well is an exploratory or development well that is not a dry well. A dry well is an exploratory or a development well found to be incapable of producing either oil or gas in commercial quantities. A development well is a well drilled within the proved area of an oil and gas reservoir to the depth of a stratigraphic horizon known to be productive. An exploratory well is any well that is not a development well. Undeveloped Acreage The Company's undeveloped acreage in Colombia is held pursuant to concession agreements with the Colombian government. These agreements may, by operations of their terms, require the relinquishment of certain portions of the undeveloped acreage in 1997. See "-- Significant Properties." The Company does not have an undeveloped acreage position in the United States because of the costs of maintaining such a position. Oil and gas leases in the United States generally can be acquired by the Company for specific prospects on reasonable terms either directly or through farmout arrangements. The following table shows the undeveloped acreage held by the Company in Colombia at December 31, 1996. Undeveloped acreage is acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and gas, regardless of whether such acreage contains proved reserves.
Undeveloped Acres --------------------- Gross Net ------- ------- Colombia 153,987 69,295
Title to Properties The Company has not performed a title examination for offshore U.S. leases in federal waters because title emanates from the United States government. Title examinations also are not performed in Colombia, where mineral title emanates from the national government. The Company believes that it generally has satisfactory title to all of its oil and gas properties. The Company's working interests are subject to customary royalty and overriding royalty interests generally created in connection with their acquisition, liens incident to operating agreements, liens for current taxes and other burdens and minor liens, encumbrances, easements and restrictions. The Company believes that none of such burdens materially detracts from the value of such properties or its interest therein or will materially interfere with the use of the properties in the operation of the Company's business. Federal Leases The Company conducts a portion of its operations on federal oil and gas leases and therefore must comply with numerous additional regulatory restrictions, including certain nondiscrimination statutes. Certain of the Company's operations on federal leases must be conducted pursuant to appropriate permits or approvals issued by various federal agencies. Pursuant to certain federal leases, approval of certain operations must be obtained from one or more government agencies prior to the commencement of such operation. Federal leases are subject to extensive regulation. See "Item 1. Business -- Regulation." 11 Reserves and Future Net Cash Flows See Supplementary Information Related to Oil and Gas Producing Activities in "Item 8. Financial Statements and Supplementary Data" for information with respect to the Company's reserves and future net cash flows. The Company will file with the Department of Energy (the "DOE") a statement with respect to the Company's estimate of proved oil and gas reserves as of December 31, 1996, that is not the same as that included in the estimate of proved oil and gas reserves as of December 31, 1996, as set forth in "Item 8. Financial Statements and Supplementary Data" elsewhere herein. The information filed with the DOE includes the estimated proved reserves of the properties of which the Company is the operator, whereas the estimated proved reserves contained in Item 8 hereof include only the Company's percentage share of the estimated proved reserves of all properties in which the Company has an interest. Production, Sales Prices and Costs The following table summarizes the Company's oil production in thousands of barrels and natural gas production in millions of cubic feet for the years indicated:
Year ended December 31, --------------------------- 1996 1995 1994 ------- ------- ------- Oil /(1)/ United States 94 106 99 Colombia 476 435 250 Gas United States 1,146 1,184 1,839 Colombia - - -
(1) Includes crude oil and condensate. 12 The average sales price per barrel of oil and per thousand cubic feet ("MCF") of gas produced by the Company and the average production (lifting) cost per dollar of oil and gas revenue and per barrel of oil equivalent (6 MCF: 1 barrel) were as follows for the years indicated:
Year ended December 31, /(1)/ -------------------------------------- 1996 1995 1994 ------ ------ ------ Average sales price per barrel of oil /(2)/ United States $20.68 $16.78 $15.40 Colombia $19.82 $16.39 $13.60 Average sales price per MCF of gas United States $ 2.07 $ 1.70 $ 1.97 Colombia $ - $ - $ - Average production cost per dollar of oil and gas revenue United States $ 0.45 $ 0.52 $ 0.43 Colombia $ 0.31 $ 0.44 $ 0.67 Average production cost per barrel of oil equivalent United States $ 6.76 $ 6.46 $ 5.50 Colombia $ 6.11 $ 7.15 $ 9.15
(1) All amounts are stated in United States dollars. (2) Includes crude oil and condensate. Significant Properties Colombia. -------- The Company's Colombian properties consist of four concessions, all of which are located in the Putumayo Basin in southwestern Colombia along the eastern front of the eastern cordillera of the Andes Mountains. The Company has a 45% working interest in each of the concessions, which is subject to various reversionary interests in favor of Ecopetrol as described below. Argosy, as operator of the properties, carries out the program of operations for the four concessions. The program is determined, with consideration of the obligations contained in the concession agreements, by an operating committee comprised of two representatives from each of Argosy and Neo. The Aporte Putumayo concession, which consists of approximately 77,000 acres and contains three shutin wells, has been in effect since 1972 and is currently being abandoned. The Santana concession, which consists of approximately 86,000 acres and contains 12 producing wells, has been in effect since 1987. No wells have yet been drilled on the La Fragua or Yuruyaco concessions, which consist of approximately 32,000 acres and 39,000 acres, respectively. The La Fragua concession has been in effect since 1992, whereas the Yuruyaco concession was acquired in 1995. The Santana, La Fragua and Yuruyaco concessions are contiguous, while the Aporte Putumayo concession is approximately 50 kilometers to the southwest of the Santana concession. Production from the concessions is sold pursuant to sales contracts with Ecopetrol. Although sales prices vary between concessions, the contracts generally provide that 25% of the sales proceeds will be paid in Colombian pesos. As a result of certain currency restrictions, pesos resulting from these payments must generally remain in Colombia and are used by the Company to pay local expenses. Neo's pretax income from Colombian sources, as defined under Colombian law, is subject to Colombian income taxes at a statutory rate of 35% (37.5% prior to 1996), although a "presumptive" minimum income tax based on net assets, as defined under Colombian law, may apply in years of little or no net income. Neo's income after Colombian income taxes is subject to a Colombian remittance tax that accrues at a rate of 12% (10% for 1997 and 7% thereafter). Payment of the remittance tax may be deferred under certain 13 circumstances if Neo reinvests such income in Colombia. See Note 7 of the Notes to Consolidated Financial Statements contained elsewhere herein. The Colombian government also imposes a production tax which averaged approximately $1.33 per barrel during 1996 and is equal to 7% of the oil price in effect through December 1997 for three of the four fields in the Santana concession. For the remaining field, the production tax is effective through 2000 at 7%, 5.5%, 4% and 2.5% of the oil price for 1997, 1998, 1999 and 2000, respectively. Any new discoveries declared commercial by Ecopetrol will be exempt from the production tax. Santana Concession. The Santana concession is subject to a "risk- ------------------ sharing" contract pursuant to which Ecopetrol has the option to participate on the basis of a 30% working interest in exploration activities in the concession. If a commercial field is discovered, Ecopetrol's working interest increases to 50% and the costs theretofore incurred and attributable to the 20% working interest differential will be recouped by the co-owners from Ecopetrol's share of production on a well by well basis. The risk-sharing contract provides that, when 7 million barrels of cumulative production from the concession have been attained, Ecopetrol's revenue interest and share of operating costs increases to 65% but it remains obligated for only 50% of capital expenditures. In mid-June 1996, the 7 million barrel threshold was reached. At that time, the Company's revenue interest in the concession declined from 18% to 12.6% and its share of operating expenses declined from 22.5% to 15.75%. The Santana concession is divided by the Caqueta River. Two fields located south of the river, the Toroyaco and Linda fields, were declared commercial by Ecopetrol and commenced production in 1992. There are currently four producing wells in the Toroyaco field and three producing wells in the Linda field. During 1995, a 3-D seismic survey covering the Toroyaco and Linda fields was completed. Based on this survey, one development well was drilled in each field during 1996 and one additional development location for each field has been identified for drilling in 1997. The Company and its co-owner ("Co-owners") constructed a 42-kilometer pipeline (the "Uchupayaco Pipeline") which was completed and commenced operations during 1994 to transport oil production from the Toroyaco and Linda fields to the Trans-Andean Pipeline owned by Ecopetrol, through which the Company's production is transported to the port of Tumaco on the Pacific coast of Colombia. The Uchupayaco Pipeline replaced a trucking operation that transported oil production from the fields to the Trans-Andean Pipeline. Two additional fields, the Mary and Miraflor fields, were discovered north of the Caqueta River and were declared commercial by Ecopetrol during 1993. Except for oil produced during production tests of wells located in these fields, the production was shutin until the first quarter of 1995 when construction of a pipeline was completed and commercial production began. With the completion of this pipeline, the Co-owners have direct pipeline access from all four fields to the Pacific coast port of Tumaco. There are currently four producing wells in the Mary field and one producing well in the Miraflor field. A 3-D seismic survey has recently been completed over the Mary and Miraflor fields and such data is currently being interpreted. This survey is expected to define the limits of these fields, identify possible locations for additional development wells, and ascertain the prospectivity of areas adjacent to the Mary and Miraflor fields. At the present time, the Co-owners anticipate drilling at least one additional development well in the Miraflor field during the fourth quarter of 1997. During 1996 the Co-owners drilled one exploratory well, the Palmera #1, on the Santana concession. The well encountered water-bearing sands in the principal zones of interest and was plugged and abandoned. The Co-owners have fulfilled all the initial exploration obligations required by the Santana risk-sharing contract. The contract requires that the Co-owners submit work programs for approval by Ecopetrol for each of the next two years of the contract. The current work program contemplates the drilling of certain 14 development wells (one of which is currently in progress) and completing the above referenced 3-D seismic program. In 1993, the Co-owners relinquished 50% of the original Santana concession area in accordance with the terms of the contract. In July 1995, an additional 25% of the original contract area was relinquished. A final relinquishment is required in 1997 such that all remaining contract areas except for those areas within five kilometers of a commercial field or an area under development must be relinquished. Production from the Santana concession has been sold to Ecopetrol pursuant to a sales contract that became effective January 1, 1995 and was extended through January 31, 1997 (the "1996 Sales Contract"). Prices under the contract are determined differently depending on whether (in the discretion of Ecopetrol) the produced crude is exported. If the crude is exported, the price received by the Company is the export price less specified handling and commercialization charges and subject to an adjustment (specified in the contract) for the quality of the produced crude as compared with the overall pipeline blend at the point of export (the "Pipeline Blend Adjustment"). If the crude is not exported, the price received by the Company is the previous month's average posted price for Cano Limon crude less specified handling and transportation charges and subject to (i) the Pipeline Blend Adjustment and (ii) an adjustment for the quality of the overall pipeline blend at the point of sale as compared with the quality of Cano Limon crude (the "Cano Limon Adjustment"). Under the contract, the Cano Limon Adjustment is based on a comparative analysis performed by a specified independent engineer. That analysis, which was performed in March of 1996, determined that the Cano Limon Adjustment is a decrease of $0.56 per barrel. In 1996, Ecopetrol exported the crude each month, with the exception of November, and the sales price averaged $19.82 per barrel. At December 31, 1996, the date as of which the standardized measure of discounted future net cash flows applicable to the Company's proved oil and gas reserves was prepared, Ecopetrol was exporting the crude oil. Accordingly, for purposes of determining the standardized measure applicable to the Company's Colombian reserves, the Company used the export price of $22.60 per barrel (which does not include the Cano Limon adjustment). If Ecopetrol had not been exporting the crude oil at December 31, 1996, the standardized measure applicable to the Company's Colombian reserves at December 31, 1996 would have been approximately $37.8 million rather than $38.7 million. Such decrease would not have resulted in a ceiling test write-down of the Company's Colombian oil and gas properties. During February 1997, the Company entered into a new sales contract (the "1997 Sales Contract") with Ecopetrol that became effective February 1, 1997 and continues through December 31, 1997. The terms of the 1997 Sales Contract are similar to the 1996 Sales Contract. La Fragua Concession. The La Fragua concession is subject to an -------------------- "association" contract whereunder the Co-owners fulfill all exploration obligations without Ecopetrol's participation until a field is declared commercial, as described above. The association contract also provides that Ecopetrol's working interest increases on a sliding scale from 50% to 70% as cumulative production from the concession increases from 60 million barrels to 150 million barrels. The Co-owners have completed their seismic obligations for the first two years of the La Fragua concession and were obligated to acquire additional seismic data for the third year. The Co-owners have determined, however, that it was not technically justified to explore this concession further and, accordingly, requested and received from Ecopetrol a change of commitment that would allow the Co-owners to substitute certain exploratory expenditures within the Santana concession for the remaining seismic commitment on the La Fragua concession. The indigenous people of the new commitment area, however, have objected to the proposed exploratory work and it appears unlikely that the Co-owners will be able to comply with the new commitment. Management of the Company believes that the Co-owners have no further obligation with respect to this concession and, accordingly, have requested that Ecopetrol 15 allow the Co-owners to surrender the concession without further expenditure. Management of the Company believes that Ecopetrol will agree to such request, although there can be no assurance of that. Yuruyaco Concession. The Yuruyaco concession, acquired by the Company in -------------------- September 1995, is an "association" contract whereunder the Company and its co- owner fulfill all exploration obligations without Ecopetrol's participation until a field is declared commercial by Ecopetrol. At such time, Ecopetrol will earn a 50% share in the commercial field and must reimburse its 50% share of successful exploratory wells, seismic and stratigraphic wells, dry step-out exploratory wells and development wells and facilities through its 50% share of production. The contract also provides that Ecopetrol's working interest will be 50% up to 60 million barrels. For production in excess of 60 million barrels, Ecopetrol's interest will increase from 50% to 75%, based on a measure of profitability as defined in the contract. The contract obligations of the Yuruyaco association contract require the Co- owners to perform in the first and second contract years seismic surveys totaling 19 and 12 miles, respectively. A 2-D seismic program was initiated in late December 1996 that will satisfy such obligations. If the Co-owners decide to proceed into the third year, the drilling of a test well would be required. Aporte Putumayo Concession. The discoveries on the Aporte Putumayo -------------------------- concession were not declared commercial by Ecopetrol and the properties have been operated by Argosy and Neo without participation by Ecopetrol. There are no remaining exploration obligations under this contract. In a letter dated December 1, 1993, the Company and its co-owner notified Ecopetrol of their intention to relinquish the concession to Ecopetrol as provided in the contract. Ecopetrol has accepted the relinquishment, which is pending the completion of abandonment and restoration operations. United States. ------------- The Company's oil and gas properties in the United States are located in the Gulf of Mexico offshore Louisiana at Main Pass 41 and Breton Sound 31 fields. Both of these properties are operated by the Company. Main Pass Block 41 is a federal lease located approximately 25 miles east of Venice, Louisiana, in 50 feet of water. During 1996, the Company successfully completed one development well and recompleted one existing well bringing the number of productive wells in the field up to six. The field's 1996 production averaged 58 barrels of oil per day and 685 MCF per day, net to the Company's interest, from eight completions in four sands between 6,000 and 7,500 feet. The Company owns a 35% interest in this field. Main Pass Block 41 represents approximately 67% of the Company's total net U.S. proved reserves at January 1, 1997. Breton Sound Block 31 is located 20 miles offshore Louisiana in 16 feet of water. The field is approximately 55 miles southeast of New Orleans on state leases. During 1996, seven wells averaged 153 barrels of oil per day and 85 MCF of gas per day, net to the Company's interest, from two sands completed between 5,500 feet and 6,500 feet. The Company's interests in the leases comprising the field vary from 41% to 67%. Breton Sound Block 31 Field represents approximately 33% of the Company's total net proved U.S. reserves at January 1, 1997. The interpretation of 3-D seismic data in 1996 has identified two deep and several shallow prospects in the Breton Sound 31 field. The Company is currently discussing plans with prospective industry partners to farm-in to the Company's acreage by drilling one or more exploratory wells that would test the deep prospects. As for the shallow prospects, the Company anticipates that it will drill at least one exploratory well; however, formal plans have not been finalized. The Company leases corporate office space in Dallas, Texas containing approximately 5,100 square feet pursuant to a lease which expires in January 1999. The lease is cancelable in January 1998. The annual lease payments for these offices are $77,000. 16 ITEM 3. LEGAL PROCEEDINGS There are no legal proceedings to which the Company is a party or to which its properties are subject which are, in the opinion of management, likely to have a material adverse effect on the Company's results of operations or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of the Company's fiscal year ended December 31, 1996. 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Price Range of Depositary Shares and Common Stock The Company's Depositary Shares, each representing the beneficial ownership of five shares of Common Stock, have been admitted to trading on the American Stock Exchange Emerging Company Marketplace since November 14, 1994 and on the Primary List of the American Stock Exchange since May 31, 1995 (collectively the "ASE"). In addition, the Company's Common Stock has been traded on the London Stock Exchange since 1982 and has been quoted in the National Quotation Bureau's Daily Quotation Sheets (known as the "pink sheets") since December 1993. The following table sets forth, for the periods indicated and subject to the following qualifications, the high and low prices for the Depositary Shares on the ASE and the high and low prices for the Common Stock on the London Stock Exchange. In the United States, trading of Depositary Shares on the ASE and of Common Stock through the pink sheets has been limited. During 1996, only an aggregate of 812,500 Depositary Shares were traded on the ASE. In the United Kingdom, the average daily trading volume of the Common Stock on the London Stock Exchange during 1996 was approximately 65,000 shares. The London Stock Exchange prices indicated in the table are the middle market prices for the Common Stock as published in the Daily Official List and do not represent actual transactions. Prices on the London Stock Exchange are expressed in British pounds sterling, and, accordingly, the prices for the Common Stock traded on the London Stock Exchange included in the following table are similarly expressed. For ease of reference, these prices are also expressed in U.S. dollars, having been converted using the exchange rate in effect on the first day on which the stock price attained the high or low price indicated. 18
1996 1995 1994 ----------------------- ----------------------- ----------------------- High Low High Low High Low ------ ------ ------ ------ ------ ------ ASE - --- Depositary Shares /(1)/ - ----------------------- First Quarter $ 4.38 $3.88 $6.13 $5.13 $ - $ - Second Quarter $11.38 $3.50 $7.38 $5.13 $ - $ - Third Quarter $ 6.25 $3.00 $5.38 $4.00 $ - $ - Fourth Quarter $ 5.75 $3.00 $4.88 $4.25 $5.13 $4.75 London Stock Exchange - --------------------- Common Stock - ------------ First Quarter (Pounds) (Pounds) 0.46 (Pounds) 0.34 (Pounds) 0.55 (Pounds) 0.47 (Pounds) 0.66 (Pounds) 0.51 US$ $ 0.71 $0.52 $0.87 $0.73 $0.98 $0.76 Second Quarter (Pounds) (Pounds) 0.41 (Pounds) 0.25 (Pounds) 0.58 (Pounds) 0.53 (Pounds) 0.58 (Pounds) 0.50 US$ $ 0.63 $0.38 $0.93 $0.84 $0.86 $0.75 Third Quarter (Pounds) (Pounds) 0.34 (Pounds) 0.25 (Pounds) 0.53 (Pounds) 0.45 (Pounds) 0.50 (Pounds) 0.43 US$ $ 0.53 $0.38 $0.85 $0.71 $0.77 $0.66 Fourth Quarter (Pounds) (Pounds) 0.41 (Pounds) 0.28 (Pounds) 0.55 (Pounds) 0.38 (Pounds) 0.65 (Pounds) 0.46 US$ $ 0.67 $0.43 $0.85 $0.59 $1.06 $0.73
(1) Representing five shares of Common Stock. As of February 28, 1997, the Company had approximately 5,800 shareholders of record, including nominees for an undetermined number of beneficial holders. Dividend History and Restrictions No dividends have been paid since June 1983, nor is there any current intention on the part of the directors of the Company to pay dividends in the future. Furthermore, in July 1993, the Company entered into a credit agreement pursuant to which the Company is prohibited from paying dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 19 ITEM 6. SELECTED FINANCIAL DATA The following table summarizes certain selected financial data with respect to the Company for, and as of the end of, each of the five years ended December 31, 1996, which should be read in conjunction with the Consolidated Financial Statements included elsewhere herein.
For the Years Ended December 31, ------------------------------------------------ 1996 1995 1994 1993 1992 ------- ------- ------- ------- -------- (in thousands, except per share, per barrel and per MCF data) For the period Revenues $13,750 $10,928 $ 8,546 $10,682 $ 10,418 Loss before extraordinary item and cumulative effect of accounting change $ (937) $(2,689) $(2,460) $(1,963) $(10,226) Extraordinary item - debt extinguishment $ - $ - $ - $ (341) $ - Cumulative effect to January 1, 1993 of change in accounting for taxes $ - $ - $ - $ (330) $ - Net loss $ (937) $(2,689) $(2,460) $(2,634) $(10,226) Loss before extraordinary item and cumulative effect of accounting change per common share $ (0.03) $ (0.09) $ (0.08) $ (0.08) $ (1.24) Net loss per common share $ (0.03) $ (0.09) $ (0.08) $ (0.11) $ (1.24) Weighted average shares outstanding 31,483 31,483 31,483 24,756 8,277 Cash dividends per common share $ - $ - $ - $ - $ - Total annual net oil production (barrels) Colombia 476 435 250 279 181 United States 94 106 99 109 130 Canada - - - - 17 ------- ------- ------- ------- -------- Total 570 541 349 388 328 ------- ------- ------- ------- -------- Total annual net gas production (MCF) United States 1,146 1,184 1,839 2,324 2,469 Canada - - - - 82 ------- ------- ------- ------- -------- Total 1,146 1,184 1,839 2,324 2,551 ------- ------- ------- ------- -------- Average price per barrel of oil Colombia $ 19.82 $ 16.39 $ 13.60 $ 14.02 $ 14.88 United States $ 20.68 $ 16.78 $ 15.40 $ 16.90 $ 19.44 Canada $ - $ - $ - $ - $ 19.45 Average price per MCF of gas United States $ 2.07 $ 1.70 $ 1.97 $ 2.12 $ 1.92 Canada $ - $ - $ - $ - $ 1.56 At period end Total assets $42,944 $45,460 $42,383 $45,017 $ 45,688 Long term debt, including current portion $ 7,990 $13,067 $ 6,640 $ 5,476 $ 17,217 Stockholders' equity $26,230 $27,167 $29,856 $32,316 $ 23,805
20 Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("Statement 109"), without restatement of prior periods. Statement 109 requires recognition of deferred tax assets in certain circumstances and deferred tax liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. In connection with the application of the full cost method, the Company recorded a ceiling test write-down of oil and gas properties of $6,471,000 in 1992 (see Note 1 of Notes to Consolidated Financial Statements). The Company's Canadian operations were sold in 1991 and 1992. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included elsewhere herein. Results of Operations 1996 versus 1995 - ----------------
United States Colombia Oil Gas Oil Total ------ ------ -------- ------- (Thousands) Revenue - 1995 $1,781 $2,015 $7,132 $10,928 Volume variance (206) (99) 671 366 Price variance 365 422 1,634 2,421 Other - 35 - 35 ------ ------ ------ ------- Revenue - 1996 $1,940 $2,373 $9,437 $13,750 ====== ====== ====== =======
Colombian oil volumes were 476,000 barrels in 1996, an increase of 41,000 barrels over 1995. Of such increase, approximately 110,000 barrels resulted from a fracture stimulation program involving eight wells that was completed in February 1996, net of normal production declines, and approximately 20,000 barrels resulted from the completion of two development wells in the latter part of 1996, offset by a decrease of approximately 90,000 barrels resulting from the Company's net revenue interest declining from 18% to 12.6% in mid-June 1996 when cumulative production from the concession reached the 7 million barrel threshold specified in the Santana risk-sharing contract. U.S. oil volumes were 94,000 barrels in 1996, down approximately 12,000 barrels from 1995. This decrease resulted primarily from normal production declines. U.S. gas volumes before gas balancing adjustments were 1,136,000 thousand cubic feet ("MCF") in 1996, a decrease of 62,000 MCF from 1995, resulting primarily from normal production declines, partially offset by new production from a development well completed at Main Pass 41 during October 1996. Included in 1996 results of operations are revenue and operating costs of $1,998,000 and $845,000, respectively, relating to the Company's U.S. onshore properties which were sold on December 23, 1996. During 1996, oil and gas volumes for such properties were approximately 17,000 barrels and 864,000 MCF, respectively, net to the Company. 21 Colombian oil prices averaged $19.82 per barrel during 1996. The average for the same period in 1995 was $16.39. The Company's average U.S. oil price increased to $20.68 per barrel in 1996, up from $16.78 in 1995. U.S. gas prices averaged $2.07 per MCF in 1996 compared to $1.70 in 1995. Operating costs decreased $238,000, or 5%, mainly due to cost reductions in the Colombian operations. Depletion, depreciation and amortization ("DD&A") increased by 28%, or $1,584,000, primarily due to higher Colombian and U.S. DD&A rates per barrel and higher Colombian production. U.S. DD&A expenses increased on a per barrel basis to $5.93 in 1996 from $4.12 in 1995, primarily due to an increase in costs subject to amortization resulting from development costs incurred in 1996. Colombian DD&A expenses increased on a per barrel basis to $11.49 in 1996 from $9.79 in 1995, primarily due to an increase in costs subject to amortization resulting from development and exploratory costs incurred in 1996 and the transfer of unevaluated costs into the amortization base during 1996. General and administrative ("G&A") expense decreased $762,000, or 33%, as a result of a cost reduction program implemented by the Company during the first quarter of 1996. This program has targeted all categories of G&A. The Company incurred $196,000 of severance expense during 1996 relating to the termination of the employment of the Executive Vice President and Chief Operating Officer of the Company and certain other employees. For more information regarding such terminations, see Note 6 of Notes to Consolidated Financial Statements. Interest and other income (expense) increased $566,000 mainly due to a gain of $641,000 on the sale of the U.S. onshore oil and gas properties on December 23, 1996. Interest expense was $256,000 higher, primarily as a result of higher average balances outstanding in 1996. Debt refinancing expense of $100,000 represents a fee paid to ING (U.S.) Capital Corporation in consideration for certain modifications to the Company's credit agreement in March 1996. Income taxes were $500,000 higher in 1996 primarily as a result of an increase in Colombian taxable income and an increase in the valuation allowance for deferred Colombian tax assets. 1995 versus 1994 - ----------------
United States Colombia Oil Gas Oil Total ------ ------ -------- ------- (Thousands) Revenue - 1994 $1,521 $3,621 $3,404 $ 8,546 Volume variance 113 (1,118) 2,514 1,509 Price variance 147 (375) 1,214 986 Other - (113) - (113) ------ ------ -------- ------- Revenue - 1995 $1,781 $2,015 $7,132 $10,928 ====== ====== ======== =======
Colombian oil volumes were 435,000 barrels in 1995, an increase of 185,000 barrels over 1994. Of such increase, approximately 210,000 barrels resulted from production from three wells in the Mary field and one well in the Miraflor field that did not produce during 1994 and one well in the Mary field that produced during only part of 1994, and approximately 28,000 barrels resulted from the hydraulic fractionation of the Toroyaco #3 well, offset by a decrease of approximately 35,000 barrels from the Aporte Putumayo concession and a decrease of approximately 18,000 barrels from the remaining wells in the Toroyaco and 22 Linda fields due to normal production declines. Production from the Aporte Putumayo concession was shutin effective March 31, 1995, pending abandonment of the concession. U.S. oil volumes were 106,000 barrels in 1995, an increase of 7,000 barrels from 1994. This increase resulted primarily from an increase of approximately 13,000 barrels due to the installation of a larger gas lift compressor at Breton Sound 31, partially offset by a decrease of approximately 5,000 barrels related to the sale of Ewing Bank 947, effective July 1, 1994. U.S. gas volumes before gas balancing adjustments were 1,198,000 MCF in 1995, a decrease of 585,000 MCF from 1994. Of such decrease, 217,000 MCF resulted from the sale of Ewing Bank 947 and 128,000 MCF resulted from decreased production from Main Pass 41 that was primarily due to the loss of one well, which ceased production in July 1994. The remaining decrease in gas volumes was primarily due to normal production declines. Colombian oil prices averaged $16.39 per barrel during 1995. The average price for the same period in 1994 was $13.60 per barrel. 1994 oil sales were subject to a sales contract with Ecopetrol, and the sales were based on a "netback" price as specified in the sales contract. During 1995 a new sales contract with Ecopetrol was in effect pursuant to which the crude was either exported or sold to a Colombian refinery. In 1995, the crude was generally exported and prices were higher due to a general increase in world oil prices. In addition to the above-mentioned variances, U.S. gas revenue decreased approximately $113,000 as a result of gas balancing adjustments. Operating costs increased by $552,000, or 12%, due primarily to an increase in Colombian production expense associated with the Mary and Miraflor fields. Such fields had minimal production during 1994. DD&A increased $1.8 million, or 44%, primarily due to higher Colombian volumes and to a higher Colombian DD&A rate per barrel. Colombian DD&A expenses increased on a per barrel basis to $9.79 in 1995 from $7.90 in 1994, as a result of a downward revision in Colombian reserve volumes and an increase in costs subject to amortization. G&A expense increased $233,000 due primarily to an increase in public ownership costs of $221,000 principally associated with being listed on the American Stock Exchange during 1995. In addition, $125,000 of fees were paid to an investment banking firm during 1995 to investigate and evaluate existing alternatives to enhance shareholder value. These costs were partially offset by a decrease in legal fees of $145,000. Interest and other income (expense) during 1995 increased primarily due to a $167,000 increase in foreign exchange gains from 1994 to 1995 and the absence in 1995 of a $156,000 charge incurred in 1994 relating to the settlement of litigation regarding the validity of a lease for vacated office space in London. Interest expense was $283,000 higher, primarily as a result of higher average balances outstanding. Income taxes increased $125,000 primarily due to the threshold for "commercial income" being reached in Colombia during 1995 resulting in the 12% remittance tax thereon. In 1994 the Company did not achieve commercial income in Colombia. Liquidity and Capital Resources During the period 1994 through 1996, costs incurred in oil and gas property acquisition, exploration and development activities by the Company totaled approximately $23.6 million. Of this figure, approximately $23.5 million was for exploration and development costs and $0.1 million pertained to acquisitions of proved properties in the United States. Approximately 83% of the exploration and development expenditures were incurred in Colombia, while the remainder was primarily development costs incurred in the United States. The Company's sources of funds during this period were: (i) cash 23 provided by operating activities - 1996 - $8.9 million; 1995 - $2.9 million; and 1994 - $3.1 million; (ii) net cash provided by investing activities (before property and equipment expenditures) - 1996 - $2.7 million; 1995 - $0.1 million; and 1994 - $2.5 million; and (iii) net cash provided by (used in) financing activities - 1996 - $(5.1) million; 1995 - $6.4 million; and 1994 - $1.2 million. The Company is engaged in the drilling of certain development wells and the recompletion of certain existing wells in Colombia. See "Item 2. Properties -- Significant Properties." The Company's share of the estimated future costs of these development activities is approximately $2.9 million at December 31, 1996. In addition, the Company is currently completing a 3-D seismic program on the Santana concession and a 2-D seismic program on the Yuruyaco concession. The Company's estimated share of these future seismic and certain other miscellaneous costs is approximately $1.0 million. Failure to fund certain capital expenditures could result in the forfeiture of all or part of the Company's interest in the concessions. The aggregate remaining estimated exploratory and development expenditures for 1997 and 1998 were $3.9 million at December 31, 1996. The Company plans to fund these obligations through cash provided from operations. Any substantial decreases in the borrowing base as hereinafter defined or increases in the amounts of these required expenditures could adversely affect the Company's ability to meet the obligations. Delays in obtaining the required environmental approvals and permits on a timely basis, as described above under "Item 1. Business -- Regulation," and construction delays could both, through the impact of inflation, increase the required expenditures. Cost overruns resulting from factors other than inflation could also increase the required expenditures. Historically, the inflation rate of the Colombian peso has been in the range of 20-30% per year. Devaluation of the peso against the U.S. dollar has historically been slightly less than the inflation rate in Colombia. The Company has historically funded capital expenditures in Colombia by converting U.S. dollars to pesos at such time as the expenditures have been made. As a result of the interaction between peso inflation and devaluation of the peso against the U.S. dollar, inflation, from the Company's perspective, had not been a significant factor. During 1994, the first half of 1995 and 1996, however, devaluation of the peso was substantially lower than the rate of inflation of the peso, resulting in an effective inflation rate in excess of that of the U.S. dollar. There can be no assurance that this trend will not continue or that, in such event, there will not be substantial increases in future capital expenditures as a result. Due to Colombian exchange controls and restrictions and the lack of an effective market, it is not feasible to hedge against the risk of net peso inflation against the U.S. dollar and the Company has not done so. Depending on the results of the exploration and development activities, substantial expenditures which have not been included in the Company's cash flow projections may be required. Although the ultimate outcome of these matters cannot be projected with certainty, management believes that its existing capital resources are adequate to fund its present obligations or that sufficient capital can be obtained by means of sales of assets or revision of current debt repayment terms to meet those obligations. The Company is a party to a credit agreement with ING (U.S.) Capital Corporation ("ING Capital") pursuant to which the borrower thereunder may borrow up to $25 million, subject to a borrowing base the determination of which is predicated on the Company's U.S. and Colombian reserves and which is redetermined annually. As of December 31, 1996, the borrowing base permitted, and the outstanding loan balance was, $7,990,000. Borrowings under the credit agreement bear interest at the prime commercial rate of the lender in effect from time to time for its most creditworthy customers plus 1% per annum or, at the Company's option, a fixed rate based on the London Interbank Offered Rate for a portion or portions of the outstanding indebtedness. The borrower under the credit agreement is Neo Energy, Inc., a wholly owned subsidiary of the Company and the owner of the Company's interests in the Colombian concessions. The indebtedness under the credit agreement is guaranteed by the parent company and certain other subsidiaries, including the wholly owned subsidiary that is the owner of all the Company's domestic oil and gas properties. The loan prohibits the payment of dividends by the Company and requires the maintenance of certain financial ratios. In December 1996, the Company entered into an agreement with ING Capital pursuant to which the outstanding loan balance was paid down to $7,990,000 from 24 $10,790,000 and the repayment schedule was amended to require monthly payments of $25,000 for the first seven months of 1997 and $521,000 for the last five months of 1997 and the first ten months of 1998. The Company's internal projections of its consolidated cash flow through December 31, 1998 indicate that the Company's consolidated cash flow and working capital will be adequate to fund both the estimated exploratory and development expenditures for 1997 and 1998 and the debt service relating to the ING Capital credit agreement as rescheduled through October 1998. These internal cash flow projections assume (i) crude oil sales prices of $20.66 per barrel for Colombian production and $21.52 per barrel for United States production and natural gas sales prices of $2.10 per MCF for United States production, (ii) successful completion of three development wells on the Santana Concession in Colombia, (iii) production decline curves commensurate with those assumed by the Company's independent petroleum engineers, (iv) certain reductions in general and administrative costs and (v) interest rates and operating costs at current levels. Any significant inaccuracy in any of these assumptions, as well as interruptions of production, increases in required expenditures as a result of inflation or cost overruns or delays in the Company's development program, may adversely affect the Company's ability to fund such exploratory and development expenditures or to meet its existing debt service obligations. Depending on the results of the Company's exploration and development activities, substantial expenditures that have not been included in such cash flow projections may be required. For information regarding the risks relating to the Company's business, see "Item 1. Business -- Risks Associated with the Company's Business". During late 1995, the Company engaged in discussions with Garnet Resources Corporation, the parent of the co-owner of the Company's Colombian concessions, regarding a possible merger of the Company and Garnet Resources Corporation. In December 1995, these discussions were terminated as a result of the inability of the parties to reach agreement on terms and conditions of the proposed merger. At that time, the Board of Directors of the Company empowered a committee of directors to investigate and evaluate other strategic alternatives for the Company. That committee was dissolved on July 25, 1996 and its function was assumed by the entire Board of Directors. With the exception of historical information, the matters discussed in this annual report to shareholders contain forward-looking statements that involve risks and uncertainties. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include the timing and extent of changes in commodity prices for oil and gas, the extent of the Company's success in discovering, developing and producing reserves, political conditions in Colombia and conditions of the capital markets and equity markets during the periods covered by the forward-looking statements, as well as other factors described in "Item 1. Business - Risks Associated with the Company's Business." 25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the Financial Statements of Aviva Petroleum Inc. attached hereto and listed in Item 14 herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 26 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required with respect to directors is set forth under the caption "Election of Directors" and "Beneficial Ownership of Securities" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required is set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required is set forth under the caption "Beneficial Ownership of Securities" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required is set forth under the caption "Certain Relationships and Related Transactions" in the Company's definitive Proxy Statement to be filed pursuant to Regulation 14A and is incorporated herein by reference. 27 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K a. The following documents are filed as part of this report: (1) Financial Statements: The Financial Statements of Aviva Petroleum Inc. filed as part of this report are listed in the "Index to Financial Statements" included elsewhere herein. (2) Financial Statement Schedules: All schedules called for under Regulation S-X have been omitted because they are not applicable, the required information is not material or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits: *3.1 Restated Articles of Incorporation of the Company dated July 25, 1995 (filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *3.2 Amended and Restated Bylaws of the Company, as amended as of January 23, 1995 (filed as exhibit 3.2 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.1 Risk Sharing Contract between Empresa Colombiana de Petroleos ("Ecopetrol"), Argosy Energy International ("Argosy") and Neo Energy, Inc. ("Neo") (filed as exhibit 10.1 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.2 Contract for Exploration and Exploitation of Sector Number 1 of the Aporte Putumayo Area ("Putumayo") between Ecopetrol and Cayman Corporation of Colombia dated July 24, 1972 (filed as exhibit 10.2 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.3 Operating Agreement for Putumayo between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989 and February 23, 1990 (filed as exhibit 10.3 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.4 Operating Agreement for the Santana Area ("Santana") between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989, February 23, 1990 and September 28, 1992 (filed as exhibit 10.4 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.5 Agreement of Withdrawal from Argosy dated September 16, 1987 by and among Argosy, Neo, and Argosy Energy Incorporated, as general partners; and Parkside Investments, Richard Shaner McKnight, Douglas W. Fry, P-5 Ltd., GO-DEO, Inc., Dale E. Armstrong, Richard Shane McKnight, The Yvonne McKnight Trust, and William Gaskin, as limited partners (filed as exhibit 10.5 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.6 Option Agreement dated September 16, 1987 between the general and limited partners of Argosy and Neo (filed as exhibit 10.6 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.7 Escrow Agreement between Argosy, Neo, Overseas Private Investment Corporation and The Chase Manhattan Bank dated March 15, 1988 and amended on May 31, 1990 (filed as exhibit 10.7 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.8 Santana Block A Relinquishment dated March 6, 1990 between Ecopetrol, Argosy and Neo (filed as exhibit 10.8 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). 28 *10.9 Purchase Sale - Transportation and Commercialization of the Santana Crude between Ecopetrol, Argosy and Neo (filed as exhibit 10.9 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.10 La Fragua Association Contract dated June 1, 1992 between Ecopetrol, Argosy and Neo (filed as exhibit 10.10 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.11 Operating Agreement for the La Fragua Area between Argosy and Neo dated April 15, 1992 (filed as exhibit 10.11 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.12 Employment Agreement between the Company and Ronald Suttill dated November 29, 1991 (filed as exhibit 10.12 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.13 Employee Stock Option Plan of the Company (filed as exhibit 10.13 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.14 Letter agreement dated January 6, 1993 between NationsBank Investment Banking and the Company (filed as exhibit 10.14 to the Company's Registration Statement on Form 10, File No. 0- 22258, and incorporated herein by reference). *10.15 Letter agreement dated March 3, 1993 between EnCap Investments L.C. and the Company (filed as exhibit 10.15 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.16 Credit Agreement dated August 6, 1993 between the Company, Aviva America, Inc. ("Aviva America"), Neo and Internationale Nederlanden Bank N.V., New York Branch ("ING Capital") (filed as exhibit 10.16 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.17 Subordination Agreement dated August 6, 1993 between the Company, Aviva America, Aviva Operating Company ("Aviva Operating"), Neo and ING Capital (filed as exhibit 10.17 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.18 Stock Pledge Agreement dated August 6, 1993 between the Company and ING Capital (filed as exhibit 10.18 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.19 Stock Pledge Agreement dated August 6, 1993 between Aviva America and ING Capital (filed as exhibit 10.19 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.20 Guaranty dated August 6, 1993 made by the Company in favor of ING Capital (filed as exhibit 10.20 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.21 Guaranty dated August 6, 1993 made by Aviva America in favor of ING Capital (filed as exhibit 10.21 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.22 Guaranty dated August 6, 1993 made by Aviva Operating in favor of ING Capital (filed as exhibit 10.22 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.23 Form of Subscription Agreement dated June 18, 1993 between the Company and purchasers of 12,884,207 shares of common stock ("Purchasers") (filed as exhibit 10.23 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.24 Option Agreement between RBS and Aviva Energy Inc. ("Aviva Energy") dated July 1, 1993 (filed as exhibit 10.24 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). 29 *10.25 Option Agreement between Aviva Energy and Purchasers dated July 1, 1993 (filed as exhibit 10.25 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.26 Santana Block B 50% relinquishment dated September 13, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.26 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.27 Amendment to La Fragua Association contract dated December 2, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.27 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.28 Letter from Ecopetrol dated February 24, 1994 and Resolution dated February 18, 1994 revising pipeline tariff (filed as exhibit 10.28 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.29 Aviva Petroleum Inc. 401(k) Retirement Plan effective March 1, 1992 (filed as exhibit 10.29 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.30 Relinquishment of Putumayo dated December 1, 1993 (filed as exhibit 10.30 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.31 Amendment to ING Capital agreement dated March 28, 1994 (filed as exhibit 10.31 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0- 22258, and incorporated herein by reference). *10.32 Deposit Agreement dated September 15, 1994 between the Company and Chemical Shareholder Services Group, Inc. (filed as exhibit 10.29 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.33 Form of Registration Agreement dated as of September 15, 1994 between the Company and Shearson Lehman Brothers Inc. (filed as exhibit 10.30 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.34 Form of Registration Agreement and Limited Power of Attorney dated as of September 15, 1994 between the Company and all other Selling Shareholders (filed as exhibit 10.31 to the Company's Registration Statement on Form S-1, File No. 33- 82072, and incorporated herein by reference). *10.35 Form of Broker-Dealer Agreement dated as of October 19, 1994 between the Company and Petrie Parkman & Co. (filed as exhibit 10.32 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.36 Purchase and Sale Agreement dated July 22, 1994 by and between Newfield Exploration Company and Aviva America (filed as exhibit 10.33 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.37 Letter from ING Capital dated October 27, 1994, amending Section 5.2(n) of the Credit Agreement (filed as exhibit 10.37 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.38 Letter from Ecopetrol dated December 28, 1994, accepting relinquishment of Putumayo (filed as exhibit 10.38 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). 30 *10.39 Letter from Ecopetrol dated February 28, 1995, accepting modifications to the La Fragua Association Contract (filed as exhibit 10.39 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.40 Amendment to ING Capital Credit Agreement dated March 7, 1995 (filed as exhibit 10.40 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.41 Santana Crude Oil Sale Contract dated March 19, 1995 (filed as exhibit 10.41 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.42 Employment Agreement between the Company and Ronald Suttill effective January 1, 1995 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.43 Employment Agreement between the Company and Robert C. Boyd effective January 1, 1995 (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.44 Amendment to ING Capital Credit Agreement dated June 9, 1995 (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.45 Amendment to the Incentive and Nonstatutory Stock Option Plan of the Company (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.46 Aviva Petroleum Inc. 1995 Stock Option Plan (filed as exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.47 Yuruyaco Association Contract dated September 20, 1995 between Ecopetrol, Argosy and Neo (filed as exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.48 Letter from ING Capital dated November 3, 1995, amending Section 5.2 (n) of the Credit Agreement (filed as exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.49 Amendment to the Santana Crude Oil Sale Contract (filed as exhibit 10.49 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.50 Amendment to the La Fragua Association Contract dated April 27, 1995 (filed as exhibit 10.50 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *10.51 Santana Block B 25% relinquishment dated October 2, 1995 (filed as exhibit 10.51 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.52 Amendment to the La Fragua Association Contract dated August 1, 1995 (filed as exhibit 10.52 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference) *10.53 Operating Agreement for the Yuruyaco Area between Argosy and Neo dated November 7, 1995 (filed as exhibit 10.53 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). 31 *10.54 Letter from ING Capital dated March 19, 1996, amending the borrowing base, schedule of principal repayments and Section 5.2 (m) of the Credit Agreement (filed as exhibit 10.54 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.55 Amendment to the ING Capital Credit Agreement dated March 29, 1996 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.56 Aviva Petroleum Inc. Severance Benefit Plan (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). **10.57 Amendment to the ING Capital Credit Agreement dated November 22, 1996. **10.58 Purchase and Sale Agreement dated November 22, 1996 between BWAB Incorporated and Aviva America. **10.59 Purchase and Sale Agreement dated December 6, 1996 between Lomak Petroleum Inc. and Aviva America. **10.60 Santana Crude Sale and Purchase Agreement dated February 10, 1997. *21.1 List of subsidiaries of Aviva Petroleum Inc. **27.1 Financial Data Schedule --------------------- * Previously Filed ** Filed Herewith 32 b. Reports on Form 8-K ------------------- The Company filed the following Current Reports on Form 8-K during and subsequent to the end of the fourth quarter: Date of 8-K Description of 8-K ----------- ------------------ October 2, 1996 Submitted a copy of the Company's Press Release dated October 2, 1996 reporting on the Company's progress on U.S. operations. November 12, 1996 Submitted a copy of the Company's Press Release dated November 12, 1996 announcing production increases in the Gulf of Mexico. November 20, 1996 Submitted a copy of the Company's Press Release dated November 20, 1996 reporting industry discussions on Breton Sound in the Gulf of Mexico. November 26, 1996 Submitted a copy of the Company's Press release dated November 26, 1996 reporting agreement to sell U.S. onshore properties. December 3, 1996 Submitted a copy of the Company's Press release dated December 3, 1996 reporting on the Company's Colombian development program. January 7, 1997 Submitted a copy of the Company's Press release dated January 7, 1997 reporting on the closing of the U.S. onshore properties sale. January 8, 1997 Submitted a copy of the Company's Press release dated January 8, 1997 reporting on the Company's Colombian exploration and development operations. 33 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. AVIVA PETROLEUM INC. By: /s/ Ronald Suttill ------------------------------------ Ronald Suttill Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Ronald Suttill President, Chief Executive Officer March 17, 1997 - -------------------------- and Director (principal executive -------------- Ronald Suttill officer) /s/ James L. Busby Treasurer and Secretary March 17, 1997 - -------------------------- (principal financial and accounting -------------- James L. Busby officer) /s/ John J. Lee Director March 13, 1997 - -------------------------- -------------- John J. Lee /s/ Elliott Roosevelt, Jr. Director March 17, 1997 - -------------------------- -------------- Elliott Roosevelt, Jr. /s/ James E. Tracey Director March 17, 1997 - -------------------------- -------------- James E. Tracey 34 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page ---- Independent Auditors' Report.................................. 36 Consolidated Balance Sheet as of December 31, 1996 and 1995... 37 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994................... 38 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994................... 39 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994................... 40 Notes to Consolidated Financial Statements.................... 41 Supplementary Information Related to Oil and Gas Producing Activities (Unaudited)................................... 54 All schedules called for under Regulation S-X have been omitted because they are not applicable, the required information is not material or the required information is included in the consolidated financial statements or notes thereto. 35 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Aviva Petroleum Inc.: We have audited the accompanying consolidated balance sheet of Aviva Petroleum Inc. and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aviva Petroleum Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Dallas, Texas February 28, 1997 36 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1996 AND 1995 (in thousands, except number of shares)
1996 1995 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 2,041 $ 4,200 Accounts and notes receivable (notes 2 and 8): Oil and gas revenue 1,699 1,881 Trade 1,674 388 Other 377 487 Inventories 721 809 Prepaid expenses and other 282 667 -------- -------- Total current assets 6,794 8,432 -------- -------- Property and equipment, at cost (note 3): Oil and gas properties and equipment (full cost method) 58,324 80,544 Other 613 626 -------- -------- 58,937 81,170 Less accumulated depreciation, depletion and amortization (23,991) (45,663) -------- -------- 34,946 35,507 Other assets (note 2) 1,204 1,521 -------- -------- $ 42,944 $ 45,460 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long term debt (note 3) $ 2,780 $ 2,397 Accounts payable 6,271 2,783 Accrued liabilities 357 217 -------- -------- Total current liabilities 9,408 5,397 -------- -------- Long term debt, excluding current portion (note 3) 5,210 10,670 Gas balancing obligations and other (note 10) 1,404 1,729 Deferred foreign income taxes (note 7) 692 497 Stockholders' equity (notes 3 and 5): Common stock, no par value, authorized 348,500,000 shares; issued 31,482,716 shares 1,574 1,574 Additional paid-in capital 33,376 33,376 Accumulated deficit* (8,720) (7,783) -------- -------- Total stockholders' equity 26,230 27,167 Commitments and contingencies (note 9) -------- -------- $ 42,944 $ 45,460 ======== ========
*Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a quasi-reorganization. See note 5. See accompanying notes to consolidated financial statements. 37 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands, except per share data)
1996 1995 1994 -------- -------- -------- Oil and gas sales (note 8) $13,750 $10,928 $ 8,546 ------- ------- ------- Expense: Production 4,834 5,072 4,520 Depreciation, depletion and amortization 7,339 5,755 3,984 General and administrative 1,554 2,316 2,083 Severance (note 6) 196 - - ------- ------- ------- Total expense 13,923 13,143 10,587 ------- ------- ------- Other income (expense): Interest and other income (expense), net (note 4) 1,061 495 142 Interest expense (814) (558) (275) Debt refinancing expense (note 3) (100) - - ------- ------- ------- Total other income (expense) 147 (63) (133) ------- ------- ------- Loss before income taxes (26) (2,278) (2,174) Income taxes (note 7) (911) (411) (286) ------- ------- ------- Net loss $ (937) $(2,689) $(2,460) ======= ======= ======= Weighted average common shares outstanding 31,483 31,483 31,483 ======= ======= ======= Net loss per common share $ (0.03) $ (0.09) $ (0.08) ======= ======= =======
See accompanying notes to consolidated financial statements. 38 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands)
1996 1995 1994 ------- ------- ------- Net loss $ (937) $(2,689) $(2,460) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 7,339 5,755 3,984 Deferred foreign income taxes 195 (5) 37 Loss (gain) on sale of assets, net (651) 2 - Foreign currency exchange loss (gain), net 16 (164) 3 Other (253) (168) (57) Changes in assets and liabilities: Accounts and notes receivable (916) 767 2,843 Inventories 88 212 231 Prepaid expenses and other 406 (6) (291) Accounts payable and accrued liabilities 3,656 (843) (1,230) ------- ------- ------- Net cash provided by operating activities 8,943 2,861 3,060 ------- ------- ------- Cash flows from investing activities: Property and equipment expenditures (8,667) (7,457) (7,503) Proceeds from sale of assets 2,729 73 2,198 Other (46) - 313 ------- ------- ------- Net cash used in investing activities (5,984) (7,384) (4,992) ------- ------- ------- Cash flows from financing activities: Proceeds from long term debt - 7,100 4,801 Principal payments on long term debt (5,077) (673) (3,637) ------- ------- ------- Net cash provided by (used in) financing activities (5,077) 6,427 1,164 ------- ------- ------- Effect of exchange rate changes on cash and cash equivalents (41) 314 (4) ------- ------- ------- Net increase (decrease) in cash and cash equivalents (2,159) 2,218 (772) Cash and cash equivalents at beginning of year 4,200 1,982 2,754 ------- ------- ------- Cash and cash equivalents at end of year $ 2,041 $ 4,200 $ 1,982 ======= ======= =======
See accompanying notes to consolidated financial statements. 39 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (in thousands, except number of shares)
Common Stock ------------------ Additional Total Number of Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity ---------- ------- ----------- ----------- ------------- Balances at December 31,1993 31,482,716 $1,574 $33,376 $(2,634) $32,316 Net loss - - - (2,460) (2,460) ---------- ------ ------- ------- ------- Balances at December 31, 1994 31,482,716 1,574 33,376 (5,094) 29,856 Net loss - - - (2,689) (2,689) ---------- ------ ------- ------- ------- Balances at December 31, 1995 31,482,716 1,574 33,376 (7,783) 27,167 Net loss - - - (937) (937) ---------- ------ ------- ------- ------- Balances at December 31, 1996 31,482,716 $1,574 $33,376 $(8,720) $26,230 ========== ====== ======= ======= =======
See accompanying notes to consolidated financial statements. 40 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Aviva Petroleum Inc. and its subsidiaries (the "Company") are engaged in the business of exploring for, developing and producing oil and gas in Colombia and in the United States. The Company's Colombian oil production is sold to Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"), while the Company's U.S. oil and gas production is sold to numerous U.S. purchasers. (See notes 8 and 11.) Oil and gas are the Company's only products and there is substantial uncertainty as to the prices that the Company may receive for its production. A decrease in these prices would affect operating results adversely. Principles of Consolidation The consolidated financial statements include the accounts of Aviva Petroleum Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Inventories Inventories consist primarily of tubular goods, oilfield equipment and spares and are stated at the lower of average cost or market. Property and Equipment Under the full cost method of accounting for oil and gas properties, all productive and nonproductive property acquisition, exploration and development costs are capitalized in separate cost centers for each country. Such capitalized costs include lease acquisition costs, delay rentals, geophysical, geological and other costs, drilling, completion and other related costs and direct general and administrative expenses associated with property acquisition, exploration and development activities. Capitalized general and administrative costs include internal costs such as salaries and related benefits paid to employees to the extent that they are directly engaged in such activities, as well as all other directly identifiable general and administrative costs associated with such activities, including rent, utilities and insurance and do not include any costs related to production, general corporate overhead, or similar activities. Capitalized internal general and administrative costs were $129,000 in 1996, $156,000 in 1995 and $142,000 in 1994. Evaluated capitalized costs of oil and gas properties and the estimated future development, site restoration, dismantlement and abandonment costs are amortized by cost center, using the units-of-production method. Total net future site restoration, dismantlement and abandonment costs are estimated to be $1,140,000 of which $723,000 has been provided through December 31, 1996. Depreciation, depletion and amortization expense per equivalent barrel of production was as follows:
1996 1995 1994 ------ ----- ----- United States $ 5.93 $4.12 $4.05 Colombia $11.49 $9.79 $7.90
41 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In accordance with the full cost method of accounting, the net capitalized costs of oil and gas properties less related deferred income taxes for each cost center are limited to the sum of the estimated future net revenues from the properties at current prices less estimated future expenditures, discounted at 10%, and unevaluated costs not being amortized, less income tax effects related to differences between the financial and tax bases of the properties, computed on a quarterly basis. Depletion expense and limits to capitalized costs are based on estimates of oil and gas reserves which are inherently imprecise and assume current prices for future net revenues. Accordingly, it is reasonably possible that the estimates of reserves quantities and future net revenues could differ materially in the near term from amounts currently estimated. Moreover, a future decrease in the prices the Company receives for its oil and gas production or downward reserve adjustments could, for either the U.S. or Colombian cost centers, result in a ceiling test write-down that is significant to the Company's operating results. Gains and losses on sales of oil and gas properties are not recognized in income unless the sale involves a significant portion of the reserves associated with a particular cost center. Capitalized costs associated with unevaluated 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. Unevaluated costs of $1,066,000 and $3,012,000 were excluded from amortization at December 31, 1996 and 1995, respectively. Unevaluated properties are assessed quarterly to determine whether any impairment has occurred. The unevaluated costs at December 31, 1996 represent exploration costs and were incurred primarily during the four-year period ended December 31, 1996. Such costs are expected to be evaluated and included in the amortization computation within the next three years. The Company sold, on December 23, 1996, all of its remaining U.S. onshore oil and gas properties for $2,702,000 in cash, net of closing adjustments. The sale involved a significant portion of the reserves associated with the U.S. cost center and, accordingly, the resultant gain on the sale has been recognized in the accompanying Consolidated Statement of Operations for 1996. (See note 4.) In July 1994, the Company sold its entire interest in one of its offshore properties, Ewing Bank 947, for $2,325,000 in cash. The sale proceeds reduced the carrying value of the Company's oil and gas properties. Other property and equipment is depreciated using the straight line method over the estimated useful lives of the assets. Gas Balancing The Company uses the entitlements method of accounting for gas sales. Gas production taken by the Company in excess of amounts entitled is recorded as a liability to the other joint owners. Excess gas production taken by others is recognized as income to the extent of the Company's proportionate share of the gas sold and a related receivable is recorded from the other joint owners. 42 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Interest Expense The Company capitalizes interest costs on qualifying assets, principally unevaluated oil and gas properties. During 1996, 1995 and 1994, the Company capitalized $189,000, $295,000 and $238,000 of interest, respectively. Loss Per Common Share Loss per common share is based on the weighted average common shares outstanding. The effects of common stock equivalents (note 5) are antidilutive. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("Statement 109") which requires recognition of deferred tax assets in certain circumstances and deferred tax liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Statement of Cash Flows The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company paid interest, net of amounts capitalized, of $834,000 in 1996, $591,000 in 1995 and $183,000 in 1994 and paid income taxes of $111,000 in 1996, $178,000 in 1995 and $163,000 in 1994. Fair Value of Financial Instruments The reported values of cash, cash equivalents, accounts receivable and accounts payable approximate fair value due to their short maturities. The reported value of long-term debt approximates its fair value since the applicable interest rate approximates market rates. Foreign Currency Translation The accounts of the Company's foreign operations are translated into United States dollars in accordance with Statement of Financial Accounting Standards No. 52. The United States dollar is used as the functional currency. Exchange adjustments resulting from foreign currency transactions are recognized in expense or income in the current period. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 43 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) OTHER ASSETS A summary of other assets follows:
December 31 -------------------- (thousands) 1996 1995 ------ ------ Deferred financing charges $ 225 $ 344 Gas balancing (note 10) 4 624 Ecopetrol receivable, excluding current portion 76 180 Abandonment funds for U.S. offshore properties 853 373 Other 46 - ------ ------ $1,204 $1,521 ====== ======
Amounts due from Ecopetrol represent estimated costs which the Company is entitled to recover from Ecopetrol's share of oil production in Colombia. Accounts receivable - other include $85,000 and $341,000 for 1996 and 1995, respectively, representing the current portion of such costs. (3) LONG TERM DEBT A summary of long term debt follows:
December 31 ----------------- (thousands) 1996 1995 ------- ------- Note payable to ING Capital $ 7,990 $13,000 Other obligation - 67 ------- ------- 7,990 13,067 Less current portion 2,780 2,397 ------- ------- $ 5,210 $10,670 ======= =======
On August 6, 1993, the Company entered into a credit agreement with ING (U.S.) Capital Corporation ("ING Capital"), secured by a mortgage on substantially all U.S. oil and gas assets, a pledge of Colombian assets and the stock of three subsidiaries, pursuant to which ING Capital agreed to loan to the Company up to $25 million, subject to an annually redetermined borrowing base which is predicated on the Company's U.S. and Colombian reserves. As of December 31, 1996, the borrowing base permitted, and the outstanding loan balance was, $7,990,000. The outstanding loan balance bears interest at the ING Capital prime rate (8.25% at December 31, 1996) plus 1% or, at the option of the Company, a fixed rate, based on the London Interbank Offered Rate, for a portion or portions of the outstanding debt from time to time. Commitment fees of .5% on the unused credit were payable quarterly until December 31, 1995, at which time the credit facility converted from a revolving credit facility to a term loan. The terms of the loan, among other things, prohibit the Company from merging with another company or paying dividends, limit additional indebtedness, general and administrative expense, sales of assets and investments and require the maintenance of certain minimum financial ratios. The agreement also requires the Company to maintain a minimum consolidated tangible net worth of $22,000,000. 44 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In December 1996, the Company entered into an agreement with ING Capital pursuant to which the outstanding loan balance was paid down to $7,990,000 from $10,790,000 concurrent with the sale of the U.S. onshore properties and the repayment schedule was amended to require monthly payments of $25,000 for the first seven months of 1997 and $521,000 for the last five months of 1997 and the first ten months in 1998. The aggregate maturities of long term debt at December 31, 1996 are: 1997 - $2,780,000 and 1998 - $5,210,000. In consideration of certain modifications to the above referenced credit agreement in March 1996 the Company paid a fee of $100,000 to ING Capital. (4) INTEREST AND OTHER INCOME (EXPENSE) A summary of interest and other income (expense) follows:
(thousands) 1996 1995 1994 ------ ----------- ------ Gain (loss) on sale of assets, net $ 651 $ (2) $ - Interest income 231 157 166 Foreign currency exchange gain (loss) (16) 164 (3) Other, net 195 176 (21) ------ ---- ---- $1,061 $495 $142 ====== ==== ====
(5) STOCKHOLDERS' EQUITY Quasi-Reorganization Effective December 31, 1992, the Board of Directors of the Company approved a quasi-reorganization which resulted in a reclassification of the accumulated deficit of $70,057,000 at that date to paid-in capital. No adjustments were made to the Company's assets and liabilities since the historical carrying values approximated or did not exceed the estimated fair values. Stock Option Plans At December 31, 1996, the Company has two stock option plans, which are described below. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock option plans been determined consistent with FASB Statement No. 123, the Company's net loss and loss per share would have been increased to the pro forma amounts indicated below (in thousands, except per share data):
1996 1995 ------ ------- Net loss As reported $ (937) $(2,689) Pro forma $ (947) $(2,805) Loss per share As reported $(0.03) $ (0.09) Pro forma $(0.03) $ (0.09)
45 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At the Annual Meeting of Shareholders held on June 6, 1995, the Company's shareholders approved the adoption of the Aviva Petroleum Inc. 1995 Stock Option Plan (the "Current Plan"). The Current Plan is administered by a committee (the "Committee") composed of two or more outside directors of the Company, who are disinterested within the meaning of Rule 16b-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Except as indicated below and except for non-discretionary grants to non- employee directors, the Committee has authority to determine all terms and provisions under which options are granted pursuant to the Current Plan, including (i) the determination of which employees shall be eligible to receive options, (ii) the number of shares for which an option shall be granted and (iii) the terms and conditions upon which options may be granted. Options will vest at such times and under such conditions as determined by the Committee, as permitted under the Current Plan. An aggregate of up to 1,000,000 shares of the Company's common stock may be issued upon exercise of stock options or in connection with restricted stock awards that may be granted under the Current Plan. The aggregate fair market value (determined at the time of grant) of shares issuable pursuant to incentive stock options which first become exercisable in any calendar year by a participant in the Current Plan may not exceed $100,000. The maximum number of shares of common stock which may be subject to an option or restricted stock grant awarded to a participant in a calendar year cannot exceed 100,000. Incentive stock options granted under the Current Plan may not be granted at a price less than 100% of the fair market value of the common stock on the date of grant (or 110% of the fair market value in the case of incentive stock options granted to participants in the Current Plan holding 10% or more of the voting stock of the Company). Non-qualified stock options may not be granted at a price less than 50% of the fair market value of the common stock on the date of grant. In 1995, upon adoption of the Current Plan, each of the non-employee directors of the Company was granted non-qualified stock options to purchase 30,000 shares of the Company's common stock. These non- discretionary options are for a term of 10 years and become exercisable as to 10,000 shares of common stock on each of the first three anniversaries of the date of grant. Non-discretionary options representing no more than 200,000 shares of common stock may be granted under the Current Plan. As a result of the adoption of the Current Plan, the Company's former Incentive and Non-Statutory Stock Option Plan (the "1987 Plan") has been terminated as to the grant of new options, but options then outstanding for 360,000 shares of the Company's common stock remain in effect. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: no dividend yield for either year; expected volatility of 77%; a risk-free interest rate of 7.0%; and expected lives of 5.0 and 7.3 years, respectively. 46 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the status of the Company's two fixed stock option plans as of December 31, 1996, 1995, and 1994, and changes during the years ended on those dates is presented below:
1996 1995 1994 ------------------- ------------------ ---------------- Weighted- Weighted- Weighted- Average Average Average Shares Exercise Shares Exercise Shares Exercise Fixed Options (000) Price (000) Price (000) Price ------------- -------- --------- ------ --------- ------ --------- Outstanding at beginning of year 716 $1.60 543 $1.82 831 $1.62 Granted 20 .74 173 .95 - - Exercised - - - - - - Forfeited (206) 1.25 - - (288) 1.24 ----- ---- ----- Outstanding at end of year 530 1.80 716 1.60 543 1.82 ===== ==== ===== Options exercisable at year-end 401 403 263 Weighted-average fair value of options granted during the year $.50 $.72 $ -
The following table summarizes information about fixed stock options outstanding at December 31, 1996:
Options Outstanding Options Exercisable ----------------------------------------------- --------------------------- Range Number Weighted-Avg. Number of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price - --------------- ----------- ---------------- -------------- ----------- -------------- $ .74 to 1.08 423,000 6.8 years $ 1.01 294,333 $ 1.05 2.88 to 5.99 85,000 4.0 3.61 85,000 3.61 9.42 to 10.28 21,500 1.4 10.22 21,500 10.22 - -------------- ------- ------- $ .74 to 10.28 529,500 6.2 1.80 400,833 2.08 ============== ======= =======
(6) SEVERANCE EXPENSE The Board of Directors had charged a committee of the Board with the task of reviewing the Company's general and administrative expenses and making recommendations as to the reduction of such expenses. On March 18, 1996, the Board, acting on one of such committee's recommendations, determined to terminate the employment of the Executive Vice President and Chief Operating Officer of the Company (the "Officer") effective on June 1, 1996. In connection with the severance arrangements between the Company and the Officer, the Company incurred costs of $172,000. 47 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) On July 25, 1996, the above mentioned committee was dissolved and its function was assumed by the entire Board of Directors. In the third quarter of 1996, the Company incurred an additional $24,000 of severance expense relating to the termination of certain employees affected by the program. (7) INCOME TAXES Income tax expense includes current Colombian income taxes of $709,000 in 1996, $398,000 in 1995 and $249,000 in 1994 and deferred Colombian income taxes (benefit) of $195,000 in 1996, $(5,000) in 1995 and $37,000 in 1994. Income tax expense also includes $7,000 and $18,000 of state income taxes in 1996 and 1995, respectively. The Company's effective tax rate differs from the U.S. statutory rate each year principally due to losses without tax benefit. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 follow:
(thousands) 1996 1995 ------- ------- Deferred tax assets - principally net operating loss carryforwards $41,604 $44,116 Less valuation allowance 36,126 39,124 ------- ------- Net deferred tax assets 5,478 4,992 Deferred tax liabilities - property and equipment 6,170 5,489 ------- ------- Net deferred tax liability $ 692 $ 497 ======= =======
The Company believes that the net deferred tax assets at December 31, 1996 are realizable primarily through future reversals of existing taxable temporary differences. The valuation allowance for deferred tax assets at January 1, 1994 was $33,983,000. The net change in the valuation allowance was a $2,998,000 decrease in 1996, a $3,581,000 increase in 1995, and a $1,560,000 increase in 1994. Subsequently recognized tax benefits relating to the valuation allowance of $33,318,000 for deferred tax assets at January 1, 1993 will be credited to additional paid in capital. At December 31, 1996, the Company and its subsidiaries have aggregate net operating loss carryforwards for U.S. federal income tax purposes of approximately $117,000,000, expiring from 1997 through 2011, which are available to offset future federal taxable income. The utilization of a portion of these net operating losses is subject to an annual limitation of approximately $2,400,000 and a portion may only be utilized by certain subsidiaries of the Company. (8) FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS Financial instruments which are subject to risks due to concentrations of credit consist principally of cash and cash equivalents and receivables. Cash and cash equivalents are placed with high credit quality financial institutions to minimize risk. Receivables are typically unsecured. Historically, the Company has not experienced any material collection difficulties from its customers. 48 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Ecopetrol has an option to purchase all of the Company's production in Colombia. For the years ended December 31, 1996, 1995 and 1994, Ecopetrol exercised that option and sales to Ecopetrol accounted for $9,437,000 (68.6%), $7,132,000 (65.3%) and $3,404,000 (39.8%), respectively, of the Company's aggregate oil and gas sales. For the years ended December 31, 1996, 1995 and 1994, sales to one U.S. purchaser accounted for $1,609,000 (11.7%), $1,422,000 (13.0%) and $1,144,000 (13.4%), respectively, of oil and gas sales. (9) COMMITMENTS AND CONTINGENCIES The Company, along with its co-owner (referred to collectively as the "Co- owners"), is engaged in an ongoing development and exploration program on concessions in Colombia. The contract obligations of the Santana concession have been met. The Co- owners currently anticipate, however, completing one development well that is currently drilling, drilling two additional development wells and recompleting certain existing wells on the Santana concession. As of December 31, 1996, future development costs included in the supplementary information related to oil and gas producing activities pursuant to SFAS 69 include approximately $2.9 million, net to the Company's interest, for these expenditures. The Co-owners have completed a 3-D seismic survey over the Mary and Miraflor fields in the Santana concession and such data is currently being interpreted. Additionally, a 2-D seismic program was initiated on the Yuruyaco concession in late December 1996. As of December 31, 1996, the aggregate remaining future expenditures for these and certain other miscellaneous projects were approximately $1.0 million, net to the Company's interest. The Co-owners have completed their seismic obligations for the first two years of the La Fragua concession and were obligated to acquire additional seismic data for the third year. The Co-owners determined, however, that it was not technically justified to explore this concession further and, accordingly, requested and received from Ecopetrol a change of commitment that would allow the Co-owners to substitute certain exploratory expenditures within the Santana concession for the remaining seismic commitment on the La Fragua concession. The indigenous people of the new commitment area, however, have objected to the proposed exploratory work and it appears unlikely that the Co-owners will be able to comply with the new commitment. Management of the Company believes that the Co-owners have no further obligation with respect to the La Fragua concession and, accordingly, have requested that Ecopetrol allow the Co-owners to surrender the concession without further expenditure. Management of the Company believes that Ecopetrol will agree to such request, although there can be no assurance that this will be the case. All unevaluated costs relating to the La Fragua concession have been transferred into the Colombian amortization base. The Company's aggregate remaining estimated exploratory and development expenditures for 1997 and 1998 were $3.9 million at December 31, 1996. Any substantial increases in the amounts of the above referenced expenditures could adversely affect the Company's ability to meet these obligations. Failure to fund certain of these capital expenditures could, under either the concession agreements or joint operating agreements with the Company's co-owner, or both, result in the forfeiture of all or part of the Company's interest in these Colombian concessions. 49 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company plans to fund these obligations using cash provided from operations. Risks that could adversely affect funding of the Company's obligations include, among others, a decrease in the Company's borrowing base, delays in obtaining the required environmental approvals and permits, cost overruns, failure to produce the reserves as projected or a decline in the sales price of oil. Depending on the results of the exploration and development activities, substantial expenditures which have not been included in the Company's cash flow projections may be required. Although the ultimate outcome of these matters cannot be projected with certainty, management believes that its existing capital resources are adequate to fund its present obligations or that sufficient capital can be obtained by means of sales of assets or revision of current debt repayment terms to meet those obligations. Under the terms of the contracts with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, the Company has experienced no difficulty in repatriating the remaining 75% of such payments, which are payable in U.S. dollars. Activities of the Company with respect to the exploration, development and production of oil and natural gas are subject to stringent environmental regulation by state and federal authorities, including the U.S. Environmental Protection Agency. Such regulation has increased the cost of planning, designing, drilling, operating and abandoning wells. In most instances, the regulatory requirements relate to air and water pollution control procedures and the handling and disposal of drilling and production wastes. Although the Company believes that compliance with environmental regulations will not have a material adverse effect on operations or earnings, risks of substantial costs and liabilities are inherent in oil and gas operations and there can be no assurance that significant costs and liabilities, including civil or criminal penalties for violations of environmental regulations, will not be incurred. Moreover, it is possible that other developments, such as stricter environmental laws and regulations or claims for damages to property or persons resulting from the Company's operations, could result in substantial costs and liabilities. The Company's policy is to accrue environmental and restoration related costs once it is probable that a liability has been incurred and the amount can be reasonably estimated. The Oil Pollution Act of 1990 ("OPA '90") and regulations thereunder impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. A "responsible party" includes the owner or operator of a facility or vessel, or the lessee or permittee of the area in which an offshore facility is located. OPA '90 assigns liability to each responsible party for oil spill removal costs and a variety of public and private damages from oil spills. While liability limits apply in some circumstances, a party cannot take advantage of liability limits if the spill is caused by gross negligence or willful misconduct, the spill resulted from violation of a federal safety, construction, or operating regulation, or a party fails to report a spill or to cooperate fully in the cleanup. Few defenses exist to the liability imposed under OPA '90 for oil spills. The failure to comply with these requirements or inadequate cooperation in a spill event may subject a responsible party to civil or criminal enforcement actions. Management of the Company is currently unaware of any oil spills for which the Company has been designated as a responsible party under OPA '90 and that will have a material adverse impact on the Company or its operations. OPA '90 also imposes ongoing requirements on facility operators, such as the preparation of an oil spill contingency plan. The Company has such plans in place. 50 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) With recent amendments to OPA '90 signed into law by President Clinton on October 19, 1996, OPA '90 now requires responsible parties to establish and maintain $35 million in financial responsibility to cover environmental cleanup and restoration costs that might be incurred in connection with an oil spill in waters of the United States, including the waters of the Gulf of Mexico where the Company has its operations, unless a formal risk assessment indicates that increased financial responsibility coverage is warranted. The Company's two U.S. properties, Main Pass Block 41 field, a federal lease on the outer continental shelf ("OCS") offshore Louisiana, and Breton Sound Block 31 field, on state leases offshore Louisiana, are subject to OPA '90 as amended. Management of the Company believes that these two properties comply in all material respects with the amended OPA '90 requirements. The Outer Continental Shelf Lands Act ("OCSLA") imposes a variety of requirements relating to safety and environmental protection on lessees and permittees operating in the OCS. Specific design and operational standards may apply to OCS vessels, rigs, platforms, vehicles and structures. Violation of lease conditions or regulations issued pursuant to OCSLA can result in substantial civil and criminal penalties, as well as potential court injunctions curtailing operations and the cancellation of leases. Such enforcement liabilities can result from either governmental or private prosecution. The Company believes it is in material compliance with applicable OCSLA requirements. The Company is involved in certain litigation involving its oil and gas activities, but unrelated to environmental contamination issues. Management of the Company believes that these litigation matters will not have any material adverse effect on the Company's financial condition or results of operations. The Company has one lease for office space in Dallas, Texas, which expires in January 1999. Rent expense relating to the lease was $84,000, $90,000 and $88,000 for 1996, 1995 and 1994, respectively. The lease is cancelable in January of 1998. Future minimum payments under the lease are $109,000, primarily due in 1997. (10) GAS BALANCING As of December 31, 1996 and 1995, other joint owners had sold net gas with a volume equivalent of approximately 2,000 thousand cubic feet ("MCF") and 416,000 MCF (with an estimated value of $4,000 and $624,000 included in other assets), respectively, for which the Company is generally entitled to be repaid in volumes ("underproduced"). As of December 31, 1996 and 1995, the Company had sold net gas with a volume equivalent of approximately 353,000 MCF and 741,000 MCF (with an estimated value of $724,000 and $1,300,000 included in gas balancing obligations and other), respectively, for which the other joint owners are entitled generally to be repaid in volumes ("overproduced"). In certain instances the parties have the option of requesting payment in cash. In connection with the sale of the Company's U.S. onshore properties, approximately 384,000 MCF for which the Company was underproduced and approximately 337,000 MCF for which the Company was overproduced were assumed by the buyer of such properties. 51 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) GEOGRAPHIC AREA INFORMATION The Company is engaged in the business of exploring for, developing and producing oil and gas in the United States and Colombia. Information about the Company's operations in different geographic areas as of and for the years ended December 31, 1996, 1995 and 1994 follows:
(Thousands) United States Colombia Total ------ -------- ------- 1996 ---- Oil and gas sales $4,313 $ 9,437 $13,750 ------ ------- ------- Expense: Production 1,926 2,908 4,834 Depreciation, depletion and amortization 1,750 5,589 7,339 General and administrative 1,539 15 1,554 Severance 196 - 196 ------ ------- ------- 5,411 8,512 13,923 ------ ------- ------- Interest and other income (expense), net 894 167 1,061 Interest expense (355) (459) (814) Debt refinancing expense - (100) (100) ------ ------- ------- Loss before income taxes (559) 533 (26) Income taxes (7) (904) (911) ------ ------- ------- Net loss $ (566) $ (371) $ (937) ====== ======= ======= Identifiable assets $6,838 $34,065 $40,903 ====== ======= Corporate assets-cash and cash equivalents 2,041 ------- Total assets $42,944 =======
52 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Thousands) United States Colombia Total ------- -------- --------- 1995 ---- Oil and gas sales $ 3,796 $7,132 $10,928 ------- ------- ------- Expense: Production 1,960 3,112 5,072 Depreciation, depletion and amortization 1,349 4,406 5,755 General and administrative 2,306 10 2,316 ------- ------- ------- 5,615 7,528 13,143 ------- ------- ------- Interest and other income (expense), net 100 395 495 Interest expense (371) (187) (558) ------- ------- ------- Loss before income taxes (2,090) (188) (2,278) Income taxes (18) (393) (411) ------- ------- ------- Net loss $(2,108) $(581) $(2,689) ======= ======= ======= Identifiable assets $ 7,398 $33,862 $41,260 ======= ======= Corporate assets-cash and cash equivalents 4,200 ------- Total assets $45,460 ======= 1994 ---- Oil and gas sales $ 5,142 $ 3,404 $ 8,546 ------- ------- ------- Expense: Production 2,230 2,290 4,520 Depreciation, depletion and amortization 1,839 2,145 3,984 General and administrative 2,072 11 2,083 ------- ------- ------- 6,141 4,446 10,587 ------- ------- ------- Interest and other income (expense), net (11) 153 142 Interest expense (275) - (275) ------- ------- ------- Loss before income taxes (1,285) (889) (2,174) Income taxes - (286) (286) ------- ------- ------- Net loss $(1,285) $(1,175) $(2,460) ======= ======= ======= Identifiable assets $ 8,366 $32,035 $40,401 ======= ======= Corporate assets-cash and cash equivalents 1,982 ------- Total assets $42,383 =======
53 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) The following information relating to the Company's oil and gas activities is presented in accordance with Statement of Financial Accounting Standards No. 69. The Financial Accounting Standards Board has determined the information is necessary to supplement, although not required to be a part of, the basic financial statements. Capitalized costs and accumulated depreciation, depletion and amortization relating to oil and gas producing activities were as follows:
(Thousands) United States Colombia Total ------ -------- ------- December 31, 1996 - ----------------- Unevaluated oil and gas properties $ 182 $ 884 $ 1,066 Proved oil and gas properties 11,835 45,423 57,258 ------- ------- ------- Total capitalized costs 12,017 46,307 58,324 Less accumulated depreciation, depletion and amortization 7,508 15,971 23,479 ------- ------- ------- Capitalized costs, net $ 4,509 $30,336 $34,845 ======= ======= ======= December 31, 1995 - ----------------- Unevaluated oil and gas properties $ - $ 3,012 $ 3,012 Proved oil and gas properties 39,649 37,883 77,532 ------- ------- ------- Total capitalized costs 39,649 40,895 80,544 Less accumulated depreciation, depletion and amortization 34,646 10,501 45,147 ------- ------- ------- Capitalized costs, net $ 5,003 $30,394 $35,397 ======= ======= =======
54 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) Costs incurred in oil and gas property acquisition, exploration and development activities were as follows:
(Thousands) United States Colombia Total ------ -------- ------ 1996 - ---- Exploration $ - $1,382 $1,382 Development 3,239 4,030 7,269 ------ ------ ------ Total costs incurred $3,239 $5,412 $8,651 ====== ====== ====== 1995 - ---- Exploration $ - $1,477 $1,477 Development 172 5,784 5,956 ------ ------ ------ Total costs incurred $ 172 $7,261 $7,433 ====== ====== ====== 1994 - ---- Exploration $ - $2,037 $2,037 Development 535 4,848 5,383 Acquisition of proved properties 51 - 51 ------ ------ ------ Total costs incurred $ 586 $6,885 $7,471 ====== ====== ======
55 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) The following schedule presents the Company's estimate of its proved oil and gas reserves. The proved oil reserves in Colombia and the United States were determined by independent petroleum engineers, Huddleston & Co., Inc. and Netherland, Sewell & Associates, Inc., respectively. The figures presented are estimates of reserves which may be expected to be recovered commercially at current prices and costs. Estimates of proved developed reserves include only those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Estimates of proved undeveloped reserves include only those reserves which are expected to be recovered on undrilled acreage from new wells which are reasonably certain of production when drilled or from presently existing wells which could require relatively major expenditures to effect recompletion.
Changes in the Estimated Quantities of Reserves -------------------------------------------- United States Colombia Total ---------- -------- ------- Year ended December 31, 1996 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 564 3,255 3,819 Revisions of previous estimates (74) 38 (36) Discoveries and extensions 6 - 6 Sales of reserves (97) - (97) Production (94) (476) (570) ------ ----- ------ End of period 305 2,817 3,122 ====== ===== ====== Proved developed reserves, end of period 305 2,008 2,313 ====== ===== ====== Gas (Millions of cubic feet) Proved reserves: Beginning of period 7,037 - 7,037 Revisions of previous estimates (770) - (770) Discoveries and extensions 23 - 23 Sales of reserves (3,462) - (3,462) Production (1,146) - (1,146) ------ ----- ------ End of period 1,682 - 1,682 ====== ===== ====== Proved developed reserves, end of period 1,682 - 1,682 ====== ===== ======
56 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Changes in the Estimated Quantities of Reserves -------------------------------------- United States Colombia Total ---------- -------- ------- Year ended December 31, 1995 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 678 4,003 4,681 Revisions of previous estimates (3) (743) (746) Discoveries and extensions - 430 430 Sales of reserves (5) - (5) Production (106) (435) (541) ------ ----- ------ End of period 564 3,255 3,819 ====== ===== ====== Proved developed reserves, end of period 460 1,601 2,061 ====== ===== ====== Gas (Millions of cubic feet) Proved reserves: Beginning of period 8,552 - 8,552 Revisions of previous estimates (257) - (257) Sales of reserves (74) - (74) Production (1,184) - (1,184) ------ ----- ------ End of period 7,037 - 7,037 ====== ===== ====== Proved developed reserves, end of period 6,779 - 6,779 ====== ===== ======
57 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Changes in the Estimated Quantities of Reserves -------------------------------------- United States Colombia Total ---------- -------- ------- Year ended December 31, 1994 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 548 4,612 5,160 Revisions of previous estimates 253 (359) (106) Sales of reserves (24) - (24) Production (99) (250) (349) ------ ----- ------ End of period 678 4,003 4,681 ====== ===== ====== Proved developed reserves, end of period 426 1,797 2,223 ====== ===== ====== Gas (Millions of cubic feet) Proved reserves: Beginning of period 11,946 - 11,946 Revisions of previous estimates (359) - (359) Sales of reserves (1,196) - (1,196) Production (1,839) - (1,839) ------ ----- ------ End of period 8,552 - 8,552 ====== ===== ====== Proved developed reserves, end of period 6,741 - 6,741 ====== ===== ======
58 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) The following schedule is a standardized measure of the discounted net future cash flows applicable to proved oil and gas reserves. The future cash flows are based on estimated oil and gas reserves utilizing prices and costs in effect as of the applicable year end, discounted at ten percent per year and assuming continuation of existing economic conditions. The standardized measure of discounted future net cash flows, in the Company's opinion, should be examined with caution. The schedule is based on estimates of the Company's proved oil and gas reserves prepared by independent petroleum engineers. Reserve estimates are, however, inherently imprecise and estimates of new discoveries are more imprecise than those of producing oil and gas properties. Accordingly, the estimates are expected to change as future information becomes available. Therefore, the standardized measure of discounted future net cash flows does not necessarily reflect the fair value of the Company's proved oil and gas properties.
(Thousands) United States Colombia Total ------- -------- -------- At December 31, 1996: - --------------------- Future gross revenues $14,070 $ 63,666 $ 77,736 Future production costs (6,128) (11,362) (17,490) Future development costs (970) (3,067) (4,037) ------- -------- -------- Future net cash flows before income taxes 6,972 49,237 56,209 Future income taxes (51) (1,052) (1,103) ------- -------- -------- Future net cash flows after income taxes 6,921 48,185 55,106 Discount at 10% per annum (993) (9,513) (10,506) ------- -------- -------- Standardized measure of discounted future net cash flows $ 5,928 $ 38,672 $ 44,600 ======= ======== ========
59 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
(Thousands) United States Colombia Total ---------- -------- -------- At December 31, 1995: - --------------------- Future gross revenues $ 24,720 $ 57,258 $ 81,978 Future production costs (11,371) (14,881) (26,252) Future development costs (2,153) (4,529) (6,682) -------- -------- -------- Future net cash flows before income taxes 11,196 37,848 49,044 Future income taxes (121) (376) (497) -------- -------- -------- Future net cash flows after income taxes 11,075 37,472 48,547 Discount at 10% per annum (2,930) (10,182) (13,112) -------- -------- -------- Standardized measure of discounted future net cash flows $ 8,145 $ 27,290 $ 35,435 ======== ======== ======== At December 31, 1994: - --------------------- Future gross revenues $ 25,996 $ 62,194 $ 88,190 Future production costs (12,348) (13,446) (25,794) Future development costs (2,323) (7,131) (9,454) -------- -------- -------- Future net cash flows before income taxes 11,325 41,617 52,942 Future income taxes (104) (3,320) (3,424) -------- -------- -------- Future net cash flows after income taxes 11,221 38,297 49,518 Discount at 10% per annum (3,011) (8,998) (12,009) -------- -------- -------- Standardized measure of discounted future net cash flows $ 8,210 $ 29,299 $ 37,509 ======== ======== ========
60 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) The following schedule summarizes the changes in the standardized measure of discounted future net cash flows.
(Thousands) 1996 1995 1994 -------- -------- -------- Sales of oil and gas, net of production costs $(8,916) $(5,856) $(4,026) Sales of reserves in place (3,924) (44) (3,045) Development costs incurred that reduced future development costs 3,043 3,713 4,127 Accretion of discount 3,577 4,009 3,438 Discoveries and extensions 87 4,521 - Revisions of previous estimates: Changes in price 13,468 2,263 9,395 Changes in quantities 153 (7,582) (2,184) Changes in future development costs (86) (723) (581) Changes in timing and other changes 2,303 (4,623) (1,414) Changes in estimated income taxes (540) 2,248 (2,084) ------- ------- ------- Net increase (decrease) 9,165 (2,074) 3,626 Balances at beginning of year 35,435 37,509 33,883 ------- ------- ------- Balances at end of year $44,600 $35,435 $37,509 ======= ======= =======
61 INDEX TO EXHIBITS Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *3.1 Restated Articles of Incorporation of the Company dated July 25, 1995 (filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *3.2 Amended and Restated Bylaws of the Company, as amended as of January 23, 1995 (filed as exhibit 3.2 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.1 Risk Sharing Contract between Empresa Colombiana de Petroleos ("Ecopetrol"), Argosy Energy International ("Argosy") and Neo Energy, Inc. ("Neo") (filed as exhibit 10.1 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.2 Contract for Exploration and Exploitation of Sector Number 1 of the Aporte Putumayo Area ("Putumayo") between Ecopetrol and Cayman Corporation of Colombia dated July 24, 1972 (filed as exhibit 10.2 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.3 Operating Agreement for Putumayo between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989 and February 23, 1990 (filed as exhibit 10.3 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.4 Operating Agreement for the Santana Area ("Santana") between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989, February 23, 1990 and September 28, 1992 (filed as exhibit 10.4 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.5 Agreement of Withdrawal from Argosy dated September 16, 1987 by and among Argosy, Neo, and Argosy Energy Incorporated, as general partners; and Parkside Investments, Richard Shaner McKnight, Douglas W. Fry, P-5 Ltd., GO-DEO, Inc., Dale E. Armstrong, Richard Shane McKnight, The Yvonne McKnight Trust, and William Gaskin, as limited partners (filed as exhibit 10.5 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.6 Option Agreement dated September 16, 1987 between the general and limited partners of Argosy and Neo (filed as exhibit 10.6 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.7 Escrow Agreement between Argosy, Neo, Overseas Private Investment Corporation and The Chase Manhattan Bank dated March 15, 1988 and amended on May 31, 1990 (filed as exhibit 10.7 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.8 Santana Block A Relinquishment dated March 6, 1990 between Ecopetrol, Argosy and Neo (filed as exhibit 10.8 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.9 Purchase Sale - Transportation and Commercialization of the Santana Crude between Ecopetrol, Argosy and Neo (filed as exhibit 10.9 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.10 La Fragua Association Contract dated June 1, 1992 between Ecopetrol, Argosy and Neo (filed as exhibit 10.10 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). 62 Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.11 Operating Agreement for the La Fragua Area between Argosy and Neo dated April 15, 1992 (filed as exhibit 10.11 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.12 Employment Agreement between the Company and Ronald Suttill dated November 29, 1991 (filed as exhibit 10.12 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.13 Employee Stock Option Plan of the Company (filed as exhibit 10.13 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.14 Letter agreement dated January 6, 1993 between NationsBank Investment Banking and the Company (filed as exhibit 10.14 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.15 Letter agreement dated March 3, 1993 between EnCap Investments L.C. and the Company (filed as exhibit 10.15 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.16 Credit Agreement dated August 6, 1993 between the Company, Aviva America, Inc. ("Aviva America"), Neo and Internationale Nederlanden Bank N.V., New York Branch ("ING Capital") (filed as exhibit 10.16 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.17 Subordination Agreement dated August 6, 1993 between the Company, Aviva America, Aviva Operating Company ("Aviva Operating"), Neo and ING Capital (filed as exhibit 10.17 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.18 Stock Pledge Agreement dated August 6, 1993 between the Company and ING Capital (filed as exhibit 10.18 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.19 Stock Pledge Agreement dated August 6, 1993 between Aviva America and ING Capital (filed as exhibit 10.19 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.20 Guaranty dated August 6, 1993 made by the Company in favor of ING Capital (filed as exhibit 10.20 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.21 Guaranty dated August 6, 1993 made by Aviva America in favor of ING Capital (filed as exhibit 10.21 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.22 Guaranty dated August 6, 1993 made by Aviva Operating in favor of ING Capital (filed as exhibit 10.22 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.23 Form of Subscription Agreement dated June 18, 1993 between the Company and purchasers of 12,884,207 shares of common stock ("Purchasers") (filed as exhibit 10.23 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.24 Option Agreement between RBS and Aviva Energy Inc. ("Aviva Energy") dated July 1, 1993 (filed as exhibit 10.24 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). 63 Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.25 Option Agreement between Aviva Energy and Purchasers dated July 1, 1993 (filed as exhibit 10.25 to the Company's Registration Statement on Form 10, File No. 0-22258, and incorporated herein by reference). *10.26 Santana Block B 50% relinquishment dated September 13, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.26 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.27 Amendment to La Fragua Association contract dated December 2, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.27 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.28 Letter from Ecopetrol dated February 24, 1994 and Resolution dated February 18, 1994 revising pipeline tariff (filed as exhibit 10.28 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.29 Aviva Petroleum Inc. 401(k) Retirement Plan effective March 1, 1992 (filed as exhibit 10.29 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.30 Relinquishment of Putumayo dated December 1, 1993 (filed as exhibit 10.30 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.31 Amendment to ING Capital agreement dated March 28, 1994 (filed as exhibit 10.31 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.32 Deposit Agreement dated September 15, 1994 between the Company and Chemical Shareholder Services Group, Inc. (filed as exhibit 10.29 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.33 Form of Registration Agreement dated as of September 15, 1994 between the Company and Shearson Lehman Brothers Inc. (filed as exhibit 10.30 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.34 Form of Registration Agreement and Limited Power of Attorney dated as of September 15, 1994 between the Company and all other Selling Shareholders (filed as exhibit 10.31 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.35 Form of Broker-Dealer Agreement dated as of October 19, 1994 between the Company and Petrie Parkman & Co. (filed as exhibit 10.32 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.36 Purchase and Sale Agreement dated July 22, 1994 by and between Newfield Exploration Company and Aviva America (filed as exhibit 10.33 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.37 Letter from ING Capital dated October 27, 1994, amending Section 5.2(n) of the Credit Agreement (filed as exhibit 10.37 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). 64 Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.38 Letter from Ecopetrol dated December 28, 1994, accepting relinquishment of Putumayo (filed as exhibit 10.38 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.39 Letter from Ecopetrol dated February 28, 1995, accepting modifications to the La Fragua Association Contract (filed as exhibit 10.39 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.40 Amendment to ING Capital Credit Agreement dated March 7, 1995 (filed as exhibit 10.40 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.41 Santana Crude Oil Sale Contract dated March 19, 1995 (filed as exhibit 10.41 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.42 Employment Agreement between the Company and Ronald Suttill effective January 1, 1995 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.43 Employment Agreement between the Company and Robert C. Boyd effective January 1, 1995 (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.44 Amendment to ING Capital Credit Agreement dated June 9, 1995 (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.45 Amendment to the Incentive and Nonstatutory Stock Option Plan of the Company (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.46 Aviva Petroleum Inc. 1995 Stock Option Plan (filed as exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.47 Yuruyaco Association Contract dated September 20, 1995 between Ecopetrol, Argosy and Neo (filed as exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.48 Letter from ING Capital dated November 3, 1995, amending Section 5.2(n) of the Credit Agreement (filed as exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.49 Amendment to the Santana Crude Oil Sale Contract (filed as exhibit 10.49 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.50 Amendment to the La Fragua Association Contract dated April 27, 1995 (filed as exhibit 10.50 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.51 Santana Block B 25% relinquishment dated October 2, 1995 (filed as exhibit 10.51 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). 65 Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.52 Amendment to the La Fragua Association Contract dated August 1, 1995 (filed as exhibit 10.52 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.53 Operating Agreement for the Yuruyaco Area between Argosy and Neo dated November 7, 1995 (filed as exhibit 10.53 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.54 Letter from ING Capital dated March 19, 1996, revising the borrowing base and schedule of principal repayments and Section 5.2 (m) of the Credit Agreement (filed as exhibit 10.54 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.55 Amendment to the ING Capital Credit Agreement dated March 29, 1996 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.56 Aviva Petroleum Inc. Severance Benefit Plan (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). **10.57 Amendment to the ING Capital Credit Agreement dated November 22, 1996. **10.58 Purchase and Sale Agreement dated November 22, 1996 between BWAB Incorporated and Aviva America. **10.59 Purchase and Sale Agreement dated December 6, 1996 between Lomak Petroleum Inc. and Aviva America. **10.60 Santana Crude Sale and Purchase Agreement dated February 10, 1997. *21.1 List of subsidiaries of Aviva Petroleum Inc. **27.1 Financial Data Schedule - ----------------------- * Previously Filed **Filed Herewith 66 EX-10.57 2 6TH AMEND. TO CREDIT AGREEMENT & PROMISSORY NOTE EXHIBIT 10.57 SIXTH AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE THIS SIXTH AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE (herein called this "Amendment") is made as of the 22nd day of November, 1996 by and between Neo Energy, Inc., a Texas corporation ("Borrower"), Aviva Petroleum Inc., a Texas corporation ("Aviva Petroleum"), Aviva America, Inc., a Delaware corporation ("Aviva America"), and ING (U.S.) Capital Corporation (formerly named Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation ("Lender"). RECITALS: 1. Borrower, Aviva Petroleum, Aviva America and Internationale Nederlanden Bank N.V., New York Branch (the "Bank") entered into that certain Credit Agreement dated as of August 6, 1993. 2. Pursuant to such Credit Agreement, Borrower executed and delivered to Bank that certain Promissory Note dated as of August 6, 1993 made payable to the order of Bank in the stated principal amount of $25,000,000 (as heretofore amended, the "Original Note"). 3. To secure repayment of the Original Note, Aviva America executed and delivered to Bank that certain Deed of Trust, Open-End Mortgage, Assignment, Security Agreement and Financing Statement dated August 6, 1993 (as from time to time modified or restated, the "Mortgage"), which granted Bank a Lien on certain of Aviva America's oil and gas properties, including without limitation all of Aviva America's oil and gas properties (the "Subject Properties") described on Exhibits A and B to that certain Purchase and Sale Agreement dated of even date herewith by and between Aviva America and BWAB Incorporated (the "Purchase and Sale Agreement"). 4. Pursuant to that certain Assignment and Assumption dated as of September 8, 1993, between Lender and Bank, Bank assigned to Lender all of Bank's rights, interests and obligations in and to such Credit Agreement, the Original Note, the Mortgage and the other Loan Documents (as such term is defined in such Credit Agreement). 5. Such Credit Agreement has been amended by (a) that certain First Amendment to Credit Agreement and Promissory Note dated March 31, 1994; (b) a letter amendment concerning Permitted Investments dated December 31, 1994; (c) a letter amendment concerning Consolidated Tangible Net Worth dated March 7, 1995; (d) that certain Fourth Amendment to Credit Agreement and Promissory Note dated June 9, 1995; and (e) that certain Fifth Amendment to Credit Agreement and Promissory Note dated March 29, 1996. (As so amended, such Credit Agreement is herein called the "Original Agreement".) 6. Aviva America intends to sell the Subject Properties to BWAB Incorporated on the terms and conditions set forth in the Purchase and Sale Agreement (the "Sale"). 7. Borrower and Aviva America have asked Lender (i) to consent to the Sale and (ii) to release its Liens against the Subject Properties, and Lender has agreed to do so, provided that the Original Agreement and Original Note are amended as set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. Definitions and References -------------------------- (S) 1.1 Terms Defined in the Original Agreement. Unless the context --------------------------------------- otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. (S) 1.2. Other Defined Terms. Unless the context otherwise requires, ------------------- the following terms when used in this Amendment shall have the meanings assigned to them in this (S) 1.2. "Amendment" means this Sixth Amendment to Credit Agreement and --------- Promissory Note. "Credit Agreement" means the Original Agreement as heretofore ---------------- amended and as amended hereby. "Note" means the Original Note as heretofore amended and as ---- amended hereby. ARTICLE II. Amendments to the Original Agreement and the Original Note ---------------------------------------------------------- (S) 2.1. Mandatory prepayments. Section 2.7 of the Original Agreement --------------------- is hereby amended by adding a new subsection (c) to read as follows: "(c) Borrower shall make a $2,800,000 prepayment on the principal of the Loan on the date which is the earlier of (i) the date on which Borrower receives the proceeds from the Sale or (ii) December 31, 1996." -2- (S) 2.2. Regular Payments. Section 2.8 of the Original Agreement is ---------------- hereby amended in its entirety to read as follows: "Section 2.8 Regular Payments. Beginning November 29, 1996 ---------------- and continuing on the last Business Day of each calendar month thereafter, Borrower will, in addition to paying any interest then due on the Loan, repay the principal balance of the Loan in accordance with the following schedule:
Payment Dates Monthly Principal Payment ------------- ------------------------- November, 1996 $ 120,000 December, 1996 0 January, 1997 $ 25,000 February, 1997 25,000 March, 1997 25,000 April, 1997 25,000 May, 1997 25,000 June, 1997 25,000 July, 1997 25,000 August, 1997 521,000 September, 1997 521,000 October, 1997 521,000 November, 1997 521,000 December, 1997 521,000 January, 1998 $ 521,000 February, 1998 521,000 March, 1998 521,000 April, 1998 521,000 May, 1998 521,000 June, 1998 521,000 July, 1998 521,000 August, 1998 521,000 September, 1998 521,000 October, 1998 521,000"
(S) 2.3. Amendments to Original Note. The sixth paragraph of the --------------------------- Original Note is hereby amended in its entirety to read as follows: "On October 31, 1998 the unpaid principal balance of this Note and all interest accrued hereon shall be due and payable in full." -3- ARTICLE III. Agreements and Consents ----------------------- (S) 3.1. Limitations on Investments in Colombian Operations. -------------------------------------------------- (a) During the Fiscal Year beginning January 1, 1997, the aggregate value of all Related Persons' expenditures for and investments in the development of Borrower's Colombian properties shall not exceed $2,165,000 (calculated on a accrual basis). (b) During the Fiscal Year beginning January 1, 1997, the aggregate value of all Related Persons' expenditures for and investments in the exploration of Borrower's Colombian properties shall not exceed $1,780,000 (calculated on a accrual basis). (S) 3.2. Consent re: Sale of Subject Properties. Lender hereby -------------------------------------- consents to the Sale and agrees to waive any Default or Event of Default arising therefrom under Section 5.2(e) of the Credit Agreement. ARTICLE IV. Representations and Warranties ------------------------------ (S) 4.1. Representations and Warranties of Borrower. In order to ------------------------------------------ induce Lender to enter into this Amendment, each Obligor represents and warrants to Lender that: (a) The representations and warranties contained in Section 4.1 of the Original Agreement are true and correct at and as of the time of the effectiveness hereof. (b) Each Obligor is duly authorized to execute and deliver this Amendment and Borrower is and will continue to be duly authorized to borrow and to perform its obligations under the Credit Agreement. Each Obligor has duly taken all corporate action necessary to authorize the execution and delivery of this Amendment and to authorize the performance of the obligations of Borrower hereunder. (c) The execution and delivery by each Obligor of this Amendment, the performance by each Obligor of its obligations hereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or regulation or of the articles or certificate, as appropriate, of incorporation and bylaws of each Obligor, or of any material agreement, judgment, license, order or permit applicable to or binding upon each Obligor, or result in the creation of any lien, charge or encumbrance upon any -4- assets or properties of any Obligor. Except for those which have been duly obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by each Obligor of this Amendment or to consummate the transactions contemplated hereby. (d) When duly executed and delivered, each of this Amendment, the Note and the Credit Agreement will be a legal and binding instrument and agreement of each Obligor, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency and similar laws applying to creditors' rights generally and by principles of equity applying to creditors' rights generally. (e) The audited annual Consolidated financial statements of Aviva Petroleum dated as of December 31, 1995 fairly present its Consolidated financial position at such date and its Consolidated results of operations and Consolidated cash flows for the period ending on such date. Since December 31, 1995, no material adverse change has occurred in the financial condition or businesses or in the Consolidated financial condition or businesses of the Obligors. ARTICLE V. Miscellaneous ------------- (S) 5.1. Effective Date. This Amendment shall become effective as of -------------- the date first above written when and only when Lender shall have received, at Lender's office: (i) a counterpart of this Amendment executed and delivered by Borrower; and (ii) verification that the Sale has been consummated. (S) 5.2. Ratification of Agreements. The Original Agreement and the -------------------------- Original Note as hereby amended are hereby ratified and confirmed in all respects. The Loan Documents, as they may be amended or affected by this Amendment, are hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Loan Document shall be deemed to refer to this Amendment also, and any reference in any Loan Document to the Note and any other document or instrument amended, renewed, extended or otherwise affected by this Amendment shall also refer to such document as amended hereby. Any reference to the Note in any other Loan Document shall be deemed to be a reference to the Original Note as amended by this Amendment. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under the Credit Agreement or any other -5- Loan Document nor constitute a waiver of any provision of the Credit Agreement or any other Loan Document. (S) 5.3. Ratification of Security Documents. Each of the Obligors ---------------------------------- hereby consents to the provisions of this Amendment and the transactions contemplated herein (including without limitation the amendment to the Original Note), and hereby ratifies and confirms each Loan Document executed and delivered by it to and for the benefit of Lender, and each hereby agrees that its respective obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. (S) 5.4. Survival of Agreements. All representations, warranties, ---------------------- covenants and agreements of each Obligor herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Loan, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by any Obligor hereunder or under the Credit Agreement to Lender shall be deemed to constitute representations and warranties by, or agreements and covenants of, such Obligor under this Amendment and under the Credit Agreement. (S) 5.5. Loan Documents. This Amendment is a Loan Document, and all -------------- provisions in the Credit Agreement pertaining to Loan Documents apply hereto. (S) 5.6. Governing Law. This Amendment shall be governed by and ------------- construed in accordance with the laws of the State of New York and any applicable laws of the United States of America in all respects, including construction, validity and performance. (S) 5.7. Counterparts. This Amendment may be separately executed in ------------ counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. [the balance of this page intentionally left blank] -6- IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. AVIVA PETROLEUM INC. NEO ENERGY, INC. AVIVA AMERICA, INC. By: /s/ James L. Busby -------------------------------- James L. Busby Treasurer ING (U.S) CAPITAL CORPORATION By: /s/ Christopher R. Wagner -------------------------------- Christopher R. Wagner Vice President -7- CONSENT AND AGREEMENT --------------------- Aviva Operating Company, a Nevada corporation, hereby consents to (i) the provisions of that certain Sixth Amendment to Credit Agreement and Promissory Note (the "Amendment") made as of the 22nd day of November, 1996 by and between Neo Energy, Inc., a Texas corporation, Aviva Petroleum Inc., a Texas corporation, Aviva America, Inc., a Delaware corporation, and ING (U.S.) Capital Corporation (formerly named Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation ("Lender") and (ii) the transactions contemplated in the Amendment (including without limitation the amendment to the Original Note), and hereby ratifies and confirms the Guaranty (the "Guaranty") dated as of August 6, 1993 made by it for the benefit of Internationale Nederlanden Bank N.V., New York Branch (which has since assigned all its rights, interests, and obligations under the Guaranty to Lender), and agrees that its obligations and covenants under the Guaranty are unimpaired by the Amendment and shall remain in full force and effect. AVIVA OPERATING COMPANY By: /s/ James L. Busby -------------------------------- James L. Busby Treasurer -8- EX-10.58 3 PURCHASE AND SALE AGREEMENT EXHIBIT 10.58 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement (this "Agreement") is made and entered into on this the 22nd day of November, 1996, between AVIVA AMERICA, INC., a Delaware corporation (Seller), and BWAB Incorporated, a Colorado corporation and/or its permitted affiliates (Buyer). 1. SALE AND PURCHASE OF THE PROPERTIES. Subject to the terms and conditions herein set forth, Seller agrees to sell, assign, convey and deliver to Buyer and Buyer agrees to purchase and acquire from Seller at the Closing, but effective as of 7:00 a.m. on October 1, 1996 (the Effective Date), the Properties. The term "Properties" shall mean: (a) All of Seller's right, title and interest in the oil and gas leases described in Exhibit B (the "Leases") and in the wells described in --------- Exhibit A (the "Wells"); --------- (b) All of Seller's right, title and interest in all wells, equipment, fixtures, production facilities, personal property and improvements (including, without limitation, materials, plants, pipelines, gathering and processing systems and salt water disposal systems) which are located on, appurtenant to or used in connection with the Leases and Wells now, as of the Effective Time or as of the Closing Date (the "Equipment"); (c) All of Seller's right, title and interests in all contracts, instruments, payout balances, commitments, licenses, servitudes, permits, easements, rights-of-way and other rights of Seller relating to the items described in this Paragraph 1, together with all of Seller's rights, claims and causes of action under such items arising after the Effective Time (the "Contracts"), but specifically excluding all of Seller's rights, claims and causes of action under such items arising before the Effective Time, including, but not, limited to Seller's rights under the Williams Gas Contract Settlement (as described in the Offering Memorandum provided by Seller to Buyer); (d) All of Seller's right, title and interest in oil, gas, condensate, related hydrocarbons and other minerals produced from the Leases after the Effective Time (the "Substances"): (e) All accounts, instruments, general intangibles, liens and security interests arising from the sale or other disposition of the items described in this Paragraph 1 on or after the Effective Time (the "Accounts"); and (f) All of Seller's information relating to the Leases and the Wells, including geological, engineering, and proprietary geophysical and seismic data (both "2-D" and "3-D"), navigation tapes, logs, core analysis, formation tests, production records, land, title, accounting and contract files; but excluding materials which are subject to confidentiality agreements with third parties that prohibit sale or disclosure. 1 2. PURCHASE PRICE. The purchase price for the Properties shall be $3,000,000 (the "Purchase Price"), subject to any applicable adjustments as are hereinafter provided. 3. DEPOSIT. Contemporaneously with the execution of this Agreement, Buyer will deposit into an escrow account (to be established at a mutually acceptable bank with assets in excess of $100 million), an amount equal to ten percent (10%) of the Purchase Price (hereinafter called the "Deposit"). Buyer and Seller agree that the escrow instructions shall specify that if Buyer and Seller close the transaction contemplated by this Agreement, the Deposit shall be applied to the Purchase Price and the amount due from Buyer at Closing will be reduced, in addition to any other deductions provided for herein, by the amount of the Deposit. The Deposit shall be refunded to Buyer in the event that this Agreement is terminated (a) because Buyer's conditions to Closing set out in Paragraph 9 hereof are not satisfied and Buyer is not then in default under this - ----------- Agreement or (b) pursuant to the provisions of Sections 8.3, 9.3, 17 or 19.6(d) ------------ --- -- ------- hereof. Otherwise, should Buyer fail or refuse to consummate the purchase of the Properties hereunder, Seller shall be entitled to retain the Deposit as liquidated damages as its sole and exclusive remedy (it being agreed that damages in such event would be extremely difficult to determine and that the Deposit represents a fair and reasonable estimate of damages under such circumstances and does not constitute a penalty). In the event that this Agreement is terminated under conditions which entitle Buyer to a return of the Deposit, the Deposit shall be returned to Buyer within ten (10) days of such termination. 4. ADJUSTMENTS TO PURCHASE PRICE; FINAL PURCHASE PRICE. The Purchase Price shall be adjusted as follows and the resulting amount shall be referred to herein as the Final Purchase Price: 4.1 INCREASES IN PURCHASE PRICE. The Purchase Price shall be increased by an amount equal to the sum of the following amounts: 4.1.1 The amount of costs and expenses, including, without limitation, such capital expenditures as are permitted by Section 7.1.1. below incurred -------------- by Seller in the ordinary course of Seller's business and customary overhead charges related to the Properties from the Effective Date to the Closing Date; provided, however, Seller has agreed to bear and pay all costs associated with the workover of the Miami Corp. A-3 Well in Cameron Parish, Louisiana and such costs shall not result in an adjustment to the Purchase Price under this Section 4.1. ----------- 4.1.2 The amount of all prepaid expenses, including, without limitation. ad valorem, property and similar taxes and assessments based upon or measured by ownership of the Properties and attributable to periods of time after the Effective Date. 4.1.3 In the event that there is a cumulative net underproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date, an amount equal to the product of (a) the Imbalance Unit Value (as hereinafter defined) and (b) the volume (stated in Mcf's) of such cumulative net underproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date. The "Imbalance Unit Value" shall mean a per Mcf value for imbalances to be agreed upon between Seller and 2 Buyer prior to Closing (or determined pursuant to Paragraph 33 hereof if ------------ Seller and Buyer are unable to reach an agreement). 4.1.4 As to Wells in which Seller's Net Revenue Interest (as defined in Section 10 below) is determined to be greater than the decimal interest ---------- noted in Exhibit A, an amount determined by multiplying the Allocated Value --------- (as hereinafter defined) for Seller's interest in the Well in question by a fraction, the numerator of which shall be the decimal increase in Seller's Net Revenue Interest in such Well from the interest shown for such Well in Exhibit A and the denominator of which shall be the Net Revenue Interest --------- shown for such Well on such Exhibit. 4.1.5 The value of all merchantable oil and other products in tanks above the pipeline sales connection at the Effective Date that is credited to the Properties, such value to be the market or, if applicable, the contract price in effect as of the Effective Date, less any applicable severance taxes and royalties. 4.2 DECREASES IN PURCHASE PRICE. The Purchase Price shall be decreased by an amount equal to the sum of the following amounts: 4.2.1 The amount of all proceeds received by Seller, net of all applicable taxes and royalties attributable to production from the Properties for periods of time after the Effective Date. 4.2.2 In the event that there is a cumulative net overproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date, an amount equal to the product of (a) the Imbalance Unit Value and (b) the volume (stated in Mcf's) of such cumulative net overproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date. 4.2.3 An amount equal to all ad valorem, property, and similar taxes and assessments based upon or measured by Seller's ownership of the Properties that are unpaid as of the Closing Date and attributable to periods of time prior to the Effective Date (for which Buyer agrees to assume liability hereunder), which amounts shall be computed based upon such taxes and assessments for the calendar year 1996; provided that if such taxes or assessments are assessed on other than a calendar year basis, for the tax related year last ended. 4.2.4 Any amount determined in connection with uncured Title Defects as provided for in Section 10.4 below. ------------ 4.2.5 Any amount determined in connection with any Casualty Loss as provided for in Section 17 below. ---------- 3 4.2.6 Any amount determined in connection with Adverse Environmental Conditions as provided for in Section 19.6(b) and/or (c) below. --------------- --- 4.2.7 Any amount determined in connection with an Accounting Defect as provided for in Section 10.8 below. ------------ 4.3. GAS IMBALANCES. The adjustments to be made to the Purchase Price at Closing based upon the net cumulative gas imbalances attributable to Seller's working interest in the Properties shall be made based upon the gas imbalance schedule attached hereto as Schedule 4.3. Buyer and Seller shall have a period ------------ of six (6) months following the date of Closing to verify the accuracy of Schedule 4.3. Buyer and Seller agree to cooperate with each other following - ------------ Closing to determine the accuracy of Schedule 4.3 and to determine what ------------ adjustments, if any, are required to make to Schedule 4.3 in order to make ------------ Schedule 4.3 accurate. Within ten (10) days following the end of such six (6) - ------------ month time period, Buyer shall deliver to Seller a written statement (Buyer's Gas Balancing Statement) setting out any adjustments Buyer proposes to be made to Schedule 4.3 along with such supporting documentation as may be required to ------------ verify any changes Buyer is proposing be made. Within five (5) days of Seller's receipt of Buyer's Gas Balancing Statement, Seller shall advise Buyer in writing whether Seller agrees with Buyer's Gas Balancing Statement and, if not, what changes Seller proposes be made to Buyer's Gas Balancing Statement. The parties shall thereafter undertake to agree with respect to the adjustments, if any, which are required to be made to Schedule 4.3 at the earliest practical date. ------------ Any final amounts owed by either party to the other as a result of any changes to Schedule 4.3 shall be paid in immediately available funds within five (5) ------------ days of the date the parties reach a final agreement with respect to Schedule -------- 4.3. - --- 5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Buyer that: 5.1 ORGANIZATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified to do business in and in good standing under the laws of the state(s) where the Properties are located. 5.2 AUTHORITY. Seller has full power and authority and has taken all requisite action, corporate or otherwise, to authorize it to carry on its business as currently conducted, to enter into this Agreement and to perform its obligations under this Agreement. 5.3 ENFORCEABILITY. This Agreement has been duly executed and delivered on behalf of Seller and constitutes the legal, valid and binding obligation of Seller enforceable in accordance with its terms. At the Closing, all documents required hereunder to be executed and delivered by Seller shall be duly authorized, executed and delivered and shall constitute legal, valid and binding obligations of Seller enforceable in accordance with their respective terms. 5.4 CONTRACTS. All material leases, operating agreements, production sales contracts, farmout agreements and other material contracts or agreements respecting the Properties can be found either of record in the counties in which the Properties are located or are reflected or referenced in Seller's files. 4 5.5 PREFERENTIAL PURCHASE RIGHTS/CONSENTS. Schedule 5.5 sets forth all ------------ consents and approvals required to be obtained for, and all preferential purchase rights exercisable in connection with, the assignment of the Properties to Buyer, except for those constituting Permitted Encumbrances. 5.6 LITIGATION AND CLAIMS. Except as set forth in Schedule 5.6, no ------------ claim, filing, cause of action, administrative proceeding, lawsuit or other litigation is pending or threatened in writing that could reasonably be expected to now or hereafter materially and adversely affect Buyer's ownership, operation or value of any of the Properties. 5.7 NO MATERIAL DEFAULT. Seller is not in material default under any of the contracts or agreements referred to in Section 5.4. 5.8 PROPERTY OBLIGATIONS. To the best of Seller's knowledge, all rentals, royalties, shut-in royalties, overriding royalties and other payments due pursuant to ro with respect to the Leases have been properly paid. 5.9 PROPERTY OPERATION. To the best of Seller's knowledge: (i) the Properties have been drilled, completed, operated, developed and produced in material compliance with all applicable judgments, orders, laws, rules and regulations; and (ii) all necessary certificates, consents, permits, licenses and other governmental authorizations affecting the Properties have been obtained and are in force. 5.10 TAKE-OR PAY. Seller is not obligated, under a take-or-pay or similar arrangement, or by virtue of an election to non-consent, or not participate in a past or current operation on the Properties pursuant to the applicable operating agreements, to produce hydrocarbons, or allow hydrocarbons to be produced, without receiving full payment at the time of delivery in an amount that corresponds to the net revenue interest in the hydrocarbons described on Exhibit A. - --------- 5.11 TAXES. All taxes based on or measured by the ownership of property, the production or removal of hydrocarbons and the receipt of proceeds which are due and relating to the Properties have been properly paid, subject to possible adjustment for volume or price corrections. 5.12 TIMELY PAYMENT. Seller is timely receiving its share of proceeds from the sale of hydrocarbons produced from the Properties without suspense, counterclaim or set-off, except for immaterial amounts. To the best of Seller's knowledge, there has been no production of hydrocarbons from the Properties in excess of the allowable production established pursuant to applicable state or federal law or regulation that would result in a restriction on production from the Leases subsequent to the Effective Time. 5.13 PROPERTY CONDITION. To the best of Seller's knowledge, there has been no material adverse change in the condition of any of the Properties or Equipment after the Effective Date except depletion through normal production within authorized allowables, changes in rates of production that 5 occur in the ordinary course of operation and depreciation of Equipment through ordinary wear and tear. 5.14 BROKERS' FEES. Seller has incurred no liability for brokers' fees or finders' fees, including the fees of Wellspring Partners, related to the transactions contemplated by this Agreement for which Buyer shall be liable. 5.15 OUTSTANDING OBLIGATIONS. Except as otherwise described in Schedule -------- 5.15 hereof, to the best of Seller's knowledge there are no outstanding - ---- authorizations for expenditures or any written commitments or proposals to conduct operations on the Properties which are required to be approved by non- operators under the terms of the applicable operating agreement. 5.16 COMPLIANCE. To the best of Seller's knowledge, the Properties have been operated in material compliance with all applicable laws, regulations, orders, judgments, licenses and permits concerning the prevention, abatement or elimination of pollution and the protection of the environment and there is no circumstance which could reasonably be expected to (i) materially interfere with continued compliance, (ii) give rise to material liability, (iii) form the basis for any material claim, suit, relief or investigation, or (iv) require a material change in the present condition or operation of the Properties. 6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to Seller that: 6.1 ORGANIZATION. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the State of Colorado and is qualified (or will be qualified at the time of Closing) to do business in and in good standing under the laws of the state(s) where the Properties are located. 6.2 AUTHORITY. Buyer has full power and authority and has taken all requisite action, corporate or otherwise, to enter into this Agreement, to purchase the Properties on the terms described in this Agreement and to perform its other obligations under this Agreement. 6.3 ENFORCEABILITY. This Agreement has been duly executed and delivered on behalf of Buyer, and constitutes the legal, valid and binding obligation of Buyer enforceable in accordance with its terms. At the Closing, all documents required hereunder to be executed and delivered by Buyer shall be duly authorized, executed and delivered and shall constitute legal, valid and binding obligations of Buyer enforceable in accordance with their respective terms. 6.4 DUE DILIGENCE. Buyer represents that it has performed, or will perform before Closing, necessary evaluations and assessments relating to the Properties to enable it to make an independent determination with respect to its acquisition of the Properties under the terms of this Agreement. 6.5 INVESTMENT INTENT. Buyer is a knowledgeable purchaser, owner, and operator of oil and gas properties, has the ability to evaluate (and in fact has evaluated) the Properties for purchase 6 and is acquiring the Properties for its own account and not with the intent to make a distribution thereof in violation of the Securities Act of 1933 as amended (and the rules and regulations pertaining thereto), or in violation of any other applicable securities laws. 6.6 FUNDS AVAILABLE. Buyer has, or will have (based upon its current creditworthiness) prior to the Closing Date, sufficient cash, available lines of credit or other sources of immediately available funds to enable it to make payment of the Purchase Price. 6.7 BROKERS FEES. Buyer has incurred no liability for brokers' fees or finders' fees related to the transactions contemplated by this Agreement for which Seller shall be liable. 7. COVENANTS OF SELLER. 7.1 CONDUCT OF BUSINESS PENDING CLOSING. Seller covenants that from the date hereof to the Closing Date, except (a) as provided herein, (b) as required by any existing obligation, agreement, lease, contract, or instrument to which the Properties are subject, or (c) as otherwise consented to in writing by Buyer, Seller will: 7.1.1 Not (a) act in any manner with respect to the Properties other than in the normal, usual and customary manner, consistent with prior practice; (b) dispose of, encumber or relinquish any of the Properties (other than relinquishments resulting from the expiration of leases that Seller has no contractual right or option to renew); (c) waive, compromise or settle any material right or claim with respect to any of the Properties; or (d) conduct capital or workover projects with respect to the Properties in excess of $10,000.00, except when required by an emergency when there shall have been insufficient time to obtain advance consent. 7.1.2 Use its best efforts to preserve relationships with all third parties having business dealings with respect to the Properties. 7.1.3 Cooperate with Buyer in connection with any required notification of applicable governmental regulatory authorities of the transactions contemplated hereby and cooperate with Buyer in obtaining the issuance by each such authority of such permits, licenses and authorizations as may be necessary for Buyer to own and operate the Properties following the consummation of the transactions contemplated by this Agreement. 7.1.4 Notify Buyer of the discovery by Seller that any Representation or Warranty of Seller contained in this Agreement is or becomes materially untrue or will be materially untrue on the Closing Date. 7.2 ACCESS. Seller shall afford to Buyer and its authorized representatives reasonable access, at Buyer's sole risk and expense, from the date hereof until the Closing Date during normal business hours, to (a) the Properties operated by Seller, provided, however, that Buyer shall indemnify and hold harmless Seller and its co-owners, and their respective officers, directors and 7 employees from and against any and all losses, costs, damages, obligations, claims, liabilities, expenses and causes of action arising from Buyer's inspection of the Properties. including, without limitation, claims for personal injuries, property damage and reasonable attorneys' fees, and (b) Seller's operating, accounting, contract, legal files, and records, regarding the Properties ("Data"); provided, however, that Data shall not include (a) any attorney work product or attorney client communications which Seller reasonably believes to be privileged or (b) information, the disclosure of which would violate any confidentiality agreement to which Seller is bound; provided that Seller agrees to disclose sufficient information about any such confidentiality agreements to enable Buyer to request waivers of the same to enable it to conduct its due diligence reviews. Until Closing, Buyer shall exercise reasonable care in safeguarding and maintaining the confidentiality of all data or information regarding the Properties provided by Seller to Buyer. In the event this Agreement is terminated prior to Closing, Buyer will immediately return to Seller all copies of such data or information and shall continue to maintain the confidentiality of all information regarding the Properties provided by Seller to Buyer for a period of twelve (12) months from the date of such termination. 7.3 CONSENTS; APPROVALS. Seller will cooperate with Buyer and take all action reasonably necessary to attempt to obtain all permissions, approvals and consents as may be required to consummate the transactions contemplated in this Agreement, including, but not limited to, obtaining waivers of any required consents to transfer and preferential rights to purchase set out in Schedule 5.5 ------------ hereto. 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. The obligations of Seller to be performed at Closing are subject to the fulfillment (or waiver by Seller in its sole discretion) before or at Closing, of each of the following conditions: 8.1 REPRESENTATIONS AND WARRANTIES. The Representations and Warranties by Buyer set forth in this Agreement shall be true and correct in all material respects at and as of the Closing as though made at and as of the Closing; and Buyer shall have performed and complied with, in all material respects, all covenants and agreements required to be performed and satisfied by Buyer at or prior to the Closing. 8.2 NO LITIGATION. No suit, action or other proceedings shall, on the date of Closing, be pending or threatened before any court or governmental agency seeking to restrain, prohibit, or obtain substantial damages or other material adverse relief in connection with the consummation of the transactions contemplated by this Agreement. 8.3 TITLE DEFECTS/ACCOUNTING DEFECTS/CASUALTY LOSSES/ADVERSE ENVIRONMENTAL CONDITIONS. The total of the Purchase Price reductions (if any) which result from the application of Section 10.4, Section 10.8, Section 17 or Section 19.6 ------------ ------------ ---------- ------------ hereof do not exceed ten percent (10%) of the Purchase Price. 8 If any such condition to the obligations of Seller to be performed at Closing under this Agreement is not met as of the Closing Date, this Agreement may, at the option of Seller, be terminated. 9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The obligations of Buyer to be performed at Closing are subject to the fulfillment (or waiver by Buyer in its sole discretion) before or at Closing, of each of the following conditions: 9.1 REPRESENTATIONS AND WARRANTIES. The Representations and Warranties by Seller set forth in this Agreement shall be true and correct in all material respects at and as of the Closing as though made at and as of the Closing; and Seller shall have performed and complied with, in all material respects, all covenants and agreements required to be performed and satisfied by Seller at or prior to the Closing. 9.2 NO LITIGATION. No suit, action or other proceedings shall, on the date of Closing, be pending or threatened before any court or governmental agency seeking to restrain, prohibit, or obtain substantial damages or other material adverse relief in connection with the consummation of the transactions contemplated by this Agreement. 9.3 TITLE DEFECTS/ACCOUNTING DEFECTS/CASUALTY LOSSES/ADVERSE ENVIRONMENTAL CONDITIONS. The total of the Purchase Price reductions (if any) which result from the application of Section 10.4, Section 10.8, Section 17 or Section 19.6 ------------ ------------ ---------- ------------ hereof do not exceed ten percent (10%) of the Purchase Price. If any such condition to the obligations of Buyer under this Agreement is not met as of the Closing Date, this Agreement may, at the option of Buyer, be terminated. 10. TITLE MATTERS/ACCOUNTING DEFECTS. 10.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms have the following meanings: 10.1.1 "Good and Defensible Title" means such title to the Properties that (a) entitles Seller to receive not less than the Net Revenue Interests in all oil, gas, condensate and related hydrocarbons produced from the Wells described in Exhibit A, and (b) obligates Seller to bear not more --------- than the Working Interests in the Wells as set forth in Exhibit A (unless --------- there is a corresponding increase in the Net Revenue Interests) and (ii) is free and clear of all liens and encumbrances, except for Permitted Encumbrances. 10.1.2 "Title Defect" shall mean, with respect to Seller's title to the Properties, any lien, mortgage, claim, charge, defect, or other encumbrance which renders Seller's title to such Properties less than Good and Defensible Title. 9 10.1.3 "Net Revenue Interest" shall mean Seller's interest in and to all production of oil, gas and other minerals saved, produced and sold from any Well after giving effect to all valid lessor's royalties, overriding royalties, production payments, carried interests, and other burdens on production therefrom. 10.1.4 "Working Interest" shall mean, with respect to the Wells, Seller's share of the cost of exploring, drilling, developing and operating the Wells, and producing oil, gas and other minerals. 10.1.5 "Permitted Encumbrances" shall mean: (a) Lessors' royalties, overriding royalties, reversionary interests and similar burdens if the net cumulative effect of the burdens does not operate to reduce Seller's Net Revenue Interest in a Well to less than the Net Revenue Interest for such Well set forth in Exhibit A or operate to increase Seller's Working Interest in such --------- Well to more than the Working Interest for such Well set forth in Exhibit A; --------- (b) Division orders and sales contracts terminable without penalty upon no more than 90 days notice to the purchaser; (c) Preferential rights to purchase and required third party consents to assignment and similar agreements with respect to which waivers or consents are obtained from the appropriate parties, or the appropriate time period for asserting any such right has expired without an exercise of the right; (d) Materialman's, mechanic's, repairman's, employee's, contractor's, operator's, tax, and other similar liens or charges arising in the ordinary course of business for obligations that are not delinquent or that will be paid and discharged in the ordinary course of business or if delinquent, that are being contested in good faith by appropriate action of which Buyer is notified in writing before Closing; (e) All rights to consent by, required notices to, filings with, or other actions by governmental entities in connection with the sale or conveyance of oil and gas leases or interests therein if they are routinely obtained subsequent to the sale or conveyance; (f) Easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations that do not materially interfere with the oil and gas operations to be conducted on any Well or Lease; (g) All operating agreements, unit agreements, unit operating agreements, pooling agreements and pooling designations affecting the Properties that are either of record in Seller's chain of title or reflected or referenced in Seller's files and which do not reduce the interest of Seller with respect to oil and gas produced from any 10 Well below the Net Revenue Interest set forth in Exhibit "A" for such Well; or increase Seller's Working Interest in such Well to more than the Working Interest set forth in Exhibit "A" for such Well (unless there is a corresponding increase in the Net Revenue Interest); (h) Conventional rights of reassignment prior to release or surrender requiring notice to the holders of the rights; (i) All rights reserved to or vested in any governmental, statutory or public authority to control or regulate any of the Properties in any manner, and all applicable laws, rules and orders of governmental authority; (j) The terms and conditions of the Leases, and of all agreements that are of record in Seller's chain of title or reflected or referenced in Seller's files. (k) All other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects and irregularities affecting the Properties which individually or in the aggregate are not such as to interfere materially with the operation, value or use of any of the Properties, do not prevent Buyer from receiving the proceeds of production from any of the Wells, do not reduce the interest of Seller with respect to all oil and gas produced from any Well below the Net Revenue Interest set forth in Exhibit A for such ---------- Well or increase Seller's Working Interest in any such Well to more than the Working Interest set forth in Exhibit A for such well; and --------- (l) Any Title Defects Buyer may have expressly waived in writing or which are deemed to have become Permitted Encumbrances under Section 10.2. ------------- 10.1.6 "Defect Property" shall mean any Property which is subject to a Title Defect. 10.1.7 "Defect Value" shall mean the amount by which the Allocated Value of any Well is reduced as a result of a Title Defect. 10.1.8 The "Allocated Value" of a Well shall be determined first by reference to the portion of the Purchase Price which is allocated to the Properties in the State in which said Well is located as set out in Exhibit C hereto, and second, by the relative value of said Well in --------- relation to the aggregate value of all Wells located in said State, as determined reservoir engineering reports. 10.1.9 "Required Consent" means any approvals, consents or waiver of preferential rights to purchase, other than Permitted Encumbrances, required to be obtained in connection with the conveyance of the Properties to Buyer at Closing. 11 10.1.10 An "Accounting Defect" shall be deemed to have occurred if Seller's joint interest billings and/or revenue check details for the Properties for the twelve (12) months prior to the Effective Date or any gas contracts or processing agreements covering the Properties reflect that the actual costs of operating the Properties or the revenues generated from the sale of oil or gas from the Properties are different in any material respect from those set out in the reserve report delivered by Seller to Buyer, and such differences, if incorporated in the reserve report would result in reducing the future net revenues from the Properties. 10.2 NOTICE OF TITLE DEFECTS. In the event that Buyer shall identify any Title Defect, as soon as possible after discovery, but in no event later than ten (10) days prior to the Closing Date, Buyer shall notify Seller in writing of any Title Defect. Buyer's notice (a "Defect Notice") shall include (i) a description of the Property affected by the Title Defect; (ii) a reasonably adequate explanation of the basis for the Title Defect; and (iii) the amount by which Buyer believes the value of the affected Property has been reduced by the Title Defect. Buyer's failure to give notice of a Title Defect within the time required by this Section 10.2 shall be a waiver by Buyer of such Title Defect ------------ and such Title Defect shall be treated as a Permitted Encumbrance. 10.3 REMEDIES FOR TITLE DEFECT. Upon notice of a Title Defect, Seller shall have the right, but not the obligation, until Closing, to cure the Title Defect. If Seller is unable or elects not to cure the Title Defect prior to Closing, the Purchase Price shall be reduced pursuant to Section 10.4. 10.4 VALUE OF TITLE DEFECTS. If Seller is unable or elects not to cure a Title Defect prior to Closing, the parties shall promptly meet and negotiate in good faith to reach an agreement as to the value of each such Title Defect. If the parties reach an agreement as to the value of a Title Defect, then the amount agreed upon shall be the Defect Value for such Title Defect. If the parties' negotiations fail to result in an agreement as to the value of any Title Defect prior to Closing (or thereafter as the parties may agree), then the question as to the value of the Title Defect shall be submitted to arbitration in accordance with Section 33 of this Agreement; provided, however, that for ---------- purposes of Closing and Sections 8.3 and 9.3 hereof, an amount equal to the ------------ --- average of Seller's and Buyer's estimate of the value of the Title Defect shall apply unless Seller has failed to provide an estimate, in which event Buyer's estimate of the value of the Title Defect shall apply; provided further, that the value of a Title Defect affecting a Well shall never be in excess of the Allocated Value of such Well. Accordingly, at Closing the Purchase Price shall be adjusted based on an estimate (determined as aforesaid) and the difference between the estimated value of such Title Defect used for Closing and the final value of the Title Defect, as decided by arbitration, shall be a post-Closing adjustment item to be made pursuant to Section 13.1 hereof. ------------ 10.5 CONVEYANCE OF DEFECT PROPERTIES. If, at Closing, Title Defects with respect to any Defect Properties have not been corrected by Seller or waived by Buyer, then subject to the provisions of Sections 8.3 and 9.3 hereof, the ------------ --- Purchase Price shall be reduced by the value of such Title Defects and Seller shall convey to Buyer those Defect Properties subject to partial title failures, but Seller shall not be obligated to convey to Buyer any Defect Properties with respect to which there has been complete title failure. 12 10.6 ADDITIONAL DEFECT PROPERTIES. If any Required Consent is not obtained prior to Closing, Buyer may elect to treat that portion of the Properties subject to such Required Consent as a Defect Property by giving Seller notice thereof in accordance with the provisions of Section 10.2. ------------ 10.7 NOTICE OF ACCOUNTING DEFECTS. In the event that Buyer shall identify any Accounting Defects, as soon as possible after discovery, but in no event later than ten (10) days prior to the Closing Date, Buyer shall notify Seller in writing of any Accounting Defect. Buyer's notice shall include (i) a description of the costs or revenues which Buyer believes were not properly reflected in the reserve report, (ii) a reasonably adequate explanation of the basis for the Accounting Defect, and (iii) the amount by which Buyer believes the value of the Properties have been reduced by the Accounting Defect. Buyer's failure to give notice of an Accounting Defect within the time required by this Section 10.7 shall be a waiver by Buyer of such Accounting Defect. - ------------ 10.8 VALUE OF ACCOUNTING DEFECT. The parties shall promptly meet and negotiate in good faith to reach an agreement as to the value of each Accounting Defect. If the parties reach an agreement as to the value of an Accounting Defect, then the Purchase Price shall be reduced by the amount agreed upon. If the parties negotiations fail to result in an agreement as to the value of any Accounting Defect prior to Closing (or thereafter as the parties may agree), then the value of the Accounting Defect shall be submitted to arbitration in accordance with Section 33 of this Agreement; provided, however, that for ---------- purposes of Closing and Sections 8.3 and 9.3 hereof, an amount equal to the ------------ --- average of Seller's and Buyer's estimate of the value of the Accounting Defect shall apply unless Seller has failed to provide an estimate, in which event Buyer's estimate of the value of the Accounting Defect shall apply. Accordingly, at Closing the Purchase Price shall be adjusted based on an estimate (determined as aforesaid) and the difference between the estimated value of such Accounting Defect used for Closing and the final value of the Accounting Defect, as decided by arbitration, shall be a post-Closing adjustment item to be made pursuant of Section 13.1 hereof. ------------ 11. SUSPENSE FUNDS HELD BY SELLER. Seller agrees to convey and Buyer agrees to receive all suspense funds held by Seller as of the Effective Date for the benefit of royalty, overriding royalty interest and working interest owners attributable to the Properties, the amount of such funds to be adjusted with respect to suspense funds received and disbursed by Seller from and after the Effective Date, and Buyer shall assume all past, present and future liability associated with such funds, but only as to the suspense funds actually transferred, and not to any liability resulting from Seller's failure to pay or retain any amounts prior to the Effective Date. All past, present and future liability associated with such funds shall be assumed by Buyer and Buyer agrees to protect, defend, indemnify and hold Seller and its employees harmless from and against any and all costs, expenses, claims, demands, and causes of action of every kind and character (including attorneys' fees and court costs) arising out of, incident to, or in connection therewith. 12. CLOSING. 12.1 THE CLOSING. The sale and purchase of the Properties pursuant to this Agreement shall be consummated (the "Closing") in the offices of Seller on or before December 23, 1996 (the "Closing Date"). 13 12.2 CLOSING OBLIGATIONS. At the Closing, the following events shall occur: 12.2.1 Seller shall execute and deliver to Buyer one or more instruments of assignment, in substantially the form of the Assignment, Bill of Sale and Conveyance set forth as Exhibit D hereto. --------- 12.2.2 Buyer shall deliver to Seller in immediately available funds (wire transfer), the Preliminary Amount. The "Preliminary Amount" shall be that amount to be determined by Seller prior to the Closing Date as an estimate of the final computation of the Final Purchase Price. Seller shall provide Buyer a closing statement reflecting the Preliminary Amount at least two (2) business days prior to the Closing. 12.2.3 Seller and Buyer shall execute, acknowledge and deliver division orders, transfer orders or letters in lieu thereof directing all purchasers of production from the Properties to make payment of proceeds attributable to such production occurring on or after the Effective Date to Buyer. 12.2.4 Seller shall deliver to the Buyer possession of the Properties at the Closing. 13. POST-CLOSING ADJUSTMENTS. 13.1 FINAL SETTLEMENT STATEMENT. After the Closing Date, Seller shall prepare, in accordance with this Agreement and with generally accepted accounting principles consistently applied, a Final Settlement Statement, a copy of which shall be delivered by Seller to Buyer no later than ninety (90) days after the Closing Date. The "Final Settlement Statement" shall set forth each adjustment to the Purchase Price necessary to determine the Final Purchase Price (except those adjustments to be made pursuant to the provisions of Section 4.3 ----------- hereof) and show the calculation of such adjustments in accordance with Section ------- 4. The parties shall undertake to agree on the Final Settlement Statement and - - the Final Purchase Price no later than one hundred twenty (120) days after the Closing Date. 13.2 ARBITRATION. If Seller and Buyer cannot agree upon the Final Settlement Statement, then the disputed matters shall be submitted to arbitration pursuant to the provisions of Section 33 hereof. ---------- 13.3 PAYMENT OF FINAL PURCHASE PRICE. If the Final Purchase Price is more than the Preliminary Amount, Buyer shall pay such difference to Seller in immediately available funds within five (5) days after the parties have agreed upon the Final Settlement Statement. If the Final Purchase Price is less than the Preliminary Amount, Seller shall pay such difference to Buyer in immediately available funds within five (5) days after the parties have agreed upon the Final Settlement Statement. 14. ASSUMPTION OF CERTAIN OBLIGATIONS. Except as provided for in Section ------- 19.6(a), at Closing, Buyer shall assume all costs and liabilities and discharge - ------- all obligations of Seller (a) under all leases, operating agreements, production sales contracts, farmout agreements and other contracts or 14 agreements respecting the Properties or relating the ownership or operation of the Properties from and after the Effective Date, and (b) with respect to all imbalances associated with the Properties, regardless of their nature or of the time at which they accrued. 15. LIMITATION OF WARRANTIES. Anything in this Agreement to the contrary notwithstanding, the Properties are being sold by Seller to Buyer without recourse, covenant, or warranty of any kind; express, implied, or statutory, with the sole exception that Seller will warrant title to the Properties subject to the Permitted Encumbrances, against every person whomsoever lawfully claiming or to claim the same or any part thereof by, through, or under Seller, but not otherwise. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER WILL CONVEY THE PROPERTIES AS-IS, WHERE-IS AND WITH ALL FAULTS, AND EXPRESSLY DISCLAIMS AND NEGATES (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, AND (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS. The representations and warranties made by Seller and Buyer in Sections 5 and 6 shall survive Closing for a period of six (6) months ---------- - and shall thereafter be of no further force and effect, excepting only matters as to which a written claim has been made prior to the end of such six (6) month time period. 16. CROSS-INDEMNIFICATION. Except as expressly limited elsewhere in this Agreement, in the event that Closing occurs hereunder: (a) Buyer agrees to indemnify and hold Seller harmless from and against any and all liability, loss, cost and expense (including, without limitation, court costs and reasonable attorneys' fees) that are attributable to the Properties conveyed to Buyer and are attributable to periods of time on or after the Effective Date; and (b) Subject to the provisions of Section 19 hereof, Seller agrees to ---------- indemnify and hold Buyer harmless from and against any and all liability, loss, cost and expense (including, without limitation, court costs and reasonable attorneys' fees) that are attributable to the Properties conveyed to Buyer and are attributable to periods of time before the Effective Date; (c) The respective indemnity and hold harmless obligations of the parties hereto shall not apply to: (i) any amount that was taken into account as an upward or downward adjustment to the Final Purchase Price pursuant to the provisions hereof, but only to the extent of such adjustments, (ii) any liability of one Party hereto to any other Party under the provisions of this Agreement, or 15 (iii) each Party's costs and expenses with respect to the negotiation and consummation of this Agreement and the purchase and sale of the Properties. 17. CASUALTY LOSS. Prior to Closing, Seller shall promptly notify Buyer of any Casualty Loss of which Seller becomes aware. "Casualty Loss" shall mean, with respect to all or any material portion of a Property, any destruction by fire, blowout or other casualty (above or below the ground) or any taking, or pending or threatened taking, in condemnation or under the right to eminent domain of any Property or portion thereof. If any Casualty Loss occurs, Buyer may elect to (a) cause Seller to retain the Property affected by the Casualty Loss, and to reduce the Purchase Price by the Allocated Value of the Property, in which case Seller shall retain all insurance proceeds relating to the Casualty Loss, or (b) require Seller to (i) transfer to Buyer such Property notwithstanding such Casualty Loss and (ii) transfer to Buyer such Property insurance proceeds, claims, awards and other payments arising out of such Casualty Loss. In the event the aggregate of any such payments or reductions in Purchase Price exceed ten percent (10%) of the Purchase Price, then either Seller or Buyer shall have the option to terminate this Agreement. Seller shall not voluntarily compromise, sell or adjust any amounts payable by reason of any Casualty Loss without first obtaining the written consent of Buyer. 18. SOLE REMEDY OF BUYER PRIOR TO CLOSING. If at any time prior to Closing, any of the representations and warranties made herein by Seller are materially incorrect or if Seller fails to fully and timely comply in any material respect with any of Seller's obligations as set forth herein or as required by applicable law, Buyer may elect to terminate this Agreement and in such event Buyer's remedy against Seller shall be to obtain a return of the Deposit (unless an alternative remedy shall be mutually agreed upon between Buyer and Seller); provided, however, if Seller shall fail or refuse to comply with any of its obligations under this Agreement, Buyer shall be entitled to enforce this Agreement through the remedy of specific performance. 19. ENVIRONMENTAL MATTERS 19.1 PRESENCE OF WASTES, NORM, HAZARDOUS SUBSTANCES, AND ASBESTOS. Buyer acknowledges that the Properties have been used to explore for, develop and produce oil and gas, and that spills of wastes, crude oil, produced water, hazardous substances, and other materials may have occurred thereon. Additionally, the Properties, including production equipment, may contain asbestos, hazardous substances, or Naturally Occurring Radioactive Material ("NORM"). NORM may affix or attach itself to the inside of wells, materials, and equipment as scale or in other forms, and NORM-containing material may have been buried or otherwise disposed of on the Properties. Special procedures may be required for remediating, removing, transporting, and disposing of asbestos, NORM, hazardous substances, and other materials from the Property, and Buyer assumes all liability for the assessment, remediation, removal, transportation, and disposal of these materials and associated activities in accordance with the applicable rules, regulations, and requirements of governmental agencies, unless otherwise provided in this Section 19. ---------- 19.2 ADVERSE ENVIRONMENTAL CONDITION. "Adverse Environmental Condition" means (a) any contamination or condition exceeding allowed regulatory limits and not otherwise 16 permanently authorized by permit or law, resulting from any discharge, release, disposal, production, storage, treatment, or any other activities on, in or from any Property prior to the Effective Date, or the migration or transportation from other lands to any Property, prior to the Effective Date, of any wastes, pollutants, contaminants, hazardous materials or other materials or substances subject to regulation relating to the protection of the environment, including, but not limited to, the Clean Air Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Water Pollution Control Act, the Safe Drinking Water Act, the Toxic Substance Control Act, the Hazardous and Solid Waste Amendments Act of 1984, the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act, the Clean Water Act, the National Environmental Policy Act, the Endangered Species Act, the Fish and Wildlife Coordination Act, the National Historic Preservation Act, and the Oil Pollution Act of 1990, as well as any state and local regulation or law governing the same, similar or related matters, and (b) any such contamination or condition in existence prior to the Effective Date temporarily authorized by permit, fee agreement or other arrangement. 19.3 ENVIRONMENTAL ASSESSMENT. After the execution of this Agreement, Buyer shall have the opportunity to conduct at its sole risk and expense an environmental assessment of the Properties. Seller will provide reasonable access for this purpose to Properties operated by Seller; for any Property not operated by Seller, however, Buyer must contact the operator of any such non- operated Property directly. Buyer or any of its representations and agents must comply with Seller's environmental and safety rules and policies while performing any environmental assessment on Seller-operated Properties. Buyer agrees it will not disclose any information obtained in its environmental assessment to third parties unless agreed to in writing by Seller or unless such disclosure is expressly required by applicable law or regulation or is compelled pursuant to legal process of any court or governmental authority. Buyer will notify Seller in advance of any such disclosure and will furnish Seller copies of all materials to be disclosed prior to any disclosure thereof to third parties. As soon as possible after Buyer's receipt thereof, Buyer shall forward to Seller copies of all reports, data, analysis, test results, remediation cost estimates, and recommended remediation procedures or other information concerning or derived from Buyer's environmental assessment. 19.4 NOTICE OF ADVERSE ENVIRONMENTAL CONDITIONS. Buyer shall notify Seller in writing of any claimed Adverse Environmental Condition not less than ten (10) days prior to the Closing Date (Environmental Defects Notice). The Environmental Defects Notice shall (a) set forth in reasonable detail the Well and/or Lease with respect to which a claimed Adverse Environmental Condition is made, (b) the nature of such claimed Adverse Environmental Condition, and (c) Buyer's proposed calculation of the cost to remediate each claimed Adverse Environmental Condition (Remediation Value). Except as provided for in Section ------- 19.7 hereof, Buyer shall waive its right to assert any claim or liability - ---- against Seller arising out of or in any way related to any Adverse Environmental Condition not set forth in an Environmental Defects Notice delivered to Seller not less than ten (10) days prior to the Closing Date. 19.5 DETERMINATION OF ADVERSE ENVIRONMENTAL CONDITIONS AND REMEDIATION VALUES. Within five (5) days after Seller's receipt of the Environmental Defects Notice, Seller shall notify Buyer whether Seller agrees with Buyer's claimed Adverse Environmental Conditions and/or the 17 Remediation Value (Seller's Environmental Response). If Seller does not agree with any claimed Adverse Environmental Condition and/or the Remediation Value, then the parties shall enter into good faith negotiations and shall attempt to agree on such matters. If the parties cannot reach agreement concerning either the existence of an Adverse Environmental Condition or the Remediation Value within ten (10) days after Buyer's receipt of Seller's Environmental Response, then the matter shall be submitted to arbitration pursuant to the provisions of Section 33 hereof and for purposes of Closing and Sections 8.3, 9.3 and 19.6 - ---------- ------------ --- ---- hereof, an amount equal to Buyer's good faith estimate of the Remediation Value shall control. Accordingly, at Closing, the Purchase Price shall be adjusted based upon an estimate (as aforesaid) and the final value of the Remediation Value, as decided by arbitration shall be a post Closing adjustment item to be made pursuant to Section 13.1 hereof. ------------ 19.6 REMEDIES FOR ADVERSE ENVIRONMENTAL CONDITIONS. As to any Adverse Environmental Condition, Seller (and Buyer with respect to subparagraphs (c) and (d) below) shall have the election to: (a) remediate such Adverse Environmental Condition at Seller's sole cost in accordance with applicable environmental laws, and there shall be no adjustment to the Purchase Price in respect of such Adverse Environmental Condition and the provisions of Section 19.8 below shall ------------ thereafter apply in all respects; (b) reduce the Purchase Price by the applicable Remediation Value, which in no event shall exceed the Allocated Value of the Leases and/or Well affected by such Adverse Environmental Condition, in which event Seller shall have no other or further obligation or liability in respect of such Adverse Environmental Condition and the provisions of Section 19.8 ------------ below shall thereafter apply in all respects; (c) delete from this Agreement the Property which contains the Adverse Environmental Condition and adjust the Purchase Price by the Allocated Value of such Property; or (d) in the event the aggregate sum of the Remediation Values exceeds ten percent (10%) of the Purchase Price, terminate this Agreement, in which case neither party shall have any further liability or obligation to the other hereunder except as regards obligations imposed by any confidentiality agreement, which shall survive such termination and be enforceable in accordance with the terms thereof. If Seller elects (a) above, it will exercise all reasonable efforts and diligence to complete remediation within six (6) months of the Closing Date, but any failure to complete its efforts by such time shall not relieve Seller of its duty to satisfy its obligation hereunder. Buyer shall allow Seller and its agents and representatives such access to the Properties as is reasonably necessary for performance of remediation work. Seller will conduct such work so as not to unreasonably interfere with Buyer's or any designated operator's operations. 18 19.7 POST-CLOSING ADJUSTMENTS. In addition to the rights granted to Buyer above, Buyer shall have the right for a period of six (6) months following Closing to provide Seller with written notice of any Adverse Environmental Conditions with respect to the Properties which Buyer discovers subsequent to the Closing. The notice provided by Buyer to Seller of any such Adverse Environmental Conditions shall contain the same information as is required to be included in the Environmental Defects Notice as set out in Section 19.4 above. ------------ The Remediation Value of any such Adverse Environmental Conditions shall be determined in the manner set out in Section 19.5 above. Within five (5) days of ------------ the final determination of the Remediation Value of any such Adverse Environmental Condition, Seller shall advise Buyer in writing of whether Seller elects to (a) remediate such Adverse Environmental Condition at its sole cost and expense in the manner set out in Section 19.6(a) above or (b) pay to Buyer --------------- an amount equal to the Remediation Value of such Adverse Environmental Defect; provided, however, in no event shall Seller ever be liable to Buyer for Adverse Environmental Conditions under this Section 19.7 in an aggregate amount in ------------ excess of $750,000. If Seller elects to pay Buyer for the Remediation Value of an Adverse Environmental Condition, such payment shall be made to Buyer within five (5) days of said election. Buyer shall absolutely and forever waive its right to assert any claim or liability against Seller arising out of or in any way related to any Adverse Environmental Condition as to which Buyer has not provided written notice to Seller within six (6) months of Closing. 19.8 BUYER'S INDEMNIFICATION OF ADVERSE ENVIRONMENTAL CONDITIONS. Except for the costs associated with Seller's remediation of any Adverse Environmental Conditions pursuant to Section 19.6(a) above (which shall be completed to --------------- Buyer's reasonable satisfaction at Seller's sole cost and expense as soon as reasonably practical, but in no event later than one (1) year after the Closing) and Sellers obligations under Section 19.7 hereof, in the event that Closing ------------ occurs hereunder, Buyer shall indemnify, defend and hold Seller harmless from and against any and all claims, demands, causes of action, liabilities and obligations, and all costs and expenses (including, without limitation, reasonable attorneys' fees and court costs) associated with all Adverse Environmental Conditions arising before or after the Effective Date, including, without limitation, any such conditions arising out of or relating to any discharge, release, disposal, production, storage, treatment or any activities on, in or from the Properties, or the migration or transportation from any other lands to the Properties, whether before or after the Effective Date, of materials or substances that are at present, or become in the future, subject to regulation under federal, state or local laws or regulations, whether such laws or regulations now exist or are hereafter enacted, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS, DEMANDS, CAUSES OF ACTION, LIABILITIES, OR OBLIGATIONS ARISING IN WHOLE OR IN PART FROM THE SOLE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF SELLER. BUYER HEREBY RELEASES SELLER FROM AND AGAINST ANY AND ALL CLAIMS FOR CONTRIBUTION UNDER CERCLA AND/OR ANY OTHER ENVIRONMENTAL LAW OR REGULATION. 20. DTPA WAIVER. To the extent applicable to the transaction contemplated hereby or any portion thereof, Buyer waives the provisions of the Texas Deceptive Trade Practices Act, Chapter 17, Subchapter E, Sections 17.41 through 17.63, inclusive (other than Section 17.555 which is not waived) of the Texas Business and Commerce Code. In connection with such waiver, Buyer hereby represents and warrants to Seller that Buyer (a) is in the business of seeking or acquiring by purchase 19 or lease, goods or services, for commercial or business use, (b) has assets of $5,000,000 or more according to its most recent financial statement, (c) has knowledge and experience in financial and business matters that enable it to evaluate the merits and risks of the transaction contemplated hereby, and (d) is not in a significantly disparate bargaining position. 21. FURTHER ASSURANCES. After the Closing, Seller and Buyer shall execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such instruments and take such other action as may be reasonably necessary or advisable to carry out their obligations under this Agreement and under any exhibit, document, certificate or other instrument delivered pursuant hereto. Seller shall use its best efforts to obtain all approvals and consents required by or necessary for the transactions contemplated by this Agreement that are customarily obtained after Closing, provided that Seller shall not be required to expend any funds to obtain such approvals and consents. 22. ACCESS TO RECORDS. As soon as practicable after Closing, Seller shall deliver to Buyer, at Seller's address, or at such other place as any of same may be kept, the originals of all Data, except that Seller may retain the originals of all Data which relates to properties other than the Properties being sold herein, in which case Seller shall deliver duplicate copies of any such retained originals to Buyer. For a period of six (6) years after the date of Closing, Buyer will retain the Data delivered to it pursuant hereto and will make such Data available to Seller upon reasonable notice at Buyer's headquarters at reasonable times and during office hours. Buyer shall notify Seller in writing within thirty (30) days of the sale to a third party of all or any part of the Properties which involves the transfer of any of the Data of the name and address of the buyer(s) in any such sale. Buyer shall require as part of any such sales transaction that such third party assume the obligations imposed on Buyer in this Section 22. ---------- 23. USE OF BUYER'S NAME. Buyer agrees that, as soon as practicable after the Closing, Buyer will remove or cause to be removed the names and marks "AVIVA", "Aviva America, Inc.", and all variations and derivatives thereof and logos relating thereto from the Properties of which it has assumed operations and will not thereafter make any use whatsoever of such names, marks, and logos. 24. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be delivered personally or by telecopier as follows: Seller: AVIVA AMERICA, INC. Suite 400 LB 84 8235 Douglas Avenue Dallas, TX 75225 Telephone: (214) 691-3464 Fax/Telecopier: (214) 361-0010 Attention: Mr. Ron Suttill, President 20 Buyer: BWAB INCORPORATED 475 Seventeenth Street, Suite 1600 Denver, Colorado 80202 Telephone: (303) 295-7444 Fax/Telecopier: (303) 294-9878 Attention: Mr. Steven A. Roitman, Principal or to such other place within the United States of America as either Seller or Buyer may designate as to themselves by written notice to the other. All notices given by personal delivery or mail shall be effective on the date of actual receipt at the appropriate address. Notice given by telecopier shall be effective upon actual receipt if received during recipient's normal business hours or at the beginning of the next business day after receipt if received after the recipient's normal business hours. All notices by telecopier shall be confirmed promptly after transmission, by mail or personal delivery. 25. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 26. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto; it shall not, however, be assignable by Buyer without Seller's prior written consent, which consent shall not be unreasonably withheld in the event of a proposed assignment to an affiliate which is financially capable of performing Buyer's obligations under this Agreement. 27. ENTIRE AGREEMENT; AMENDMENTS; WAIVERS. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, superseding all prior negotiations, discussions, agreements and understandings, whether oral or written, relating to such subject matter. This Agreement may not be amended and no rights hereunder may be waived except by a written document signed by the party to be charged with such amendment or waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereto (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 28. HEADINGS. The headings of the articles and sections of this Agreement and any listing of its contents are for guidance and convenience of reference only and shall not limit or otherwise affect any of the terms or provisions of this Agreement. 29. COUNTERPARTS. This Agreement may be executed by Buyer and Seller in any number of counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same instrument. 30. EXPENSES, FEES AND TAXES. Each of the parties hereto shall pay its own fees and expenses incident to the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby, including broker fees. Buyer shall be responsible for the cost of all fees for the recording of transfer documents. All other costs shall be borne by the party incurring them. Notwithstanding anything to the contrary herein, it is acknowledged and agreed by and between 21 Seller and Buyer that the Purchase Price excludes any sales taxes or other taxes in connection with the sale of property pursuant to this Agreement. If a determination is ever made that a sales tax or other transfer tax applies, Buyer shall be liable for such tax as well as any applicable conveyance, transfer and recording fees, and real estate transfer stamps or taxes imposed on any transfer of property pursuant to this Agreement. Buyer shall indemnify and hold Seller harmless with respect to the payment of any of such taxes, including any interest or penalties assessed thereon. 31. LAWS AND REGULATIONS. From and after the Closing, (a) Buyer shall comply with all applicable laws, ordinances, rules and regulations and shall properly obtain and maintain all permits required by public authorities with regard to the Properties, and shall provide and maintain with the applicable regulatory agency(ies) all required bonds, and (b) Buyer shall assume all of Seller's obligations with regard to abandonment of all existing unplugged wells, whether producing or nonproducing, and abandonment of the leasehold property including, where applicable, the plugging of wells and the restoration of the surface as completely as practicable and/or in compliance with all applicable laws, rules, regulations and in compliance with all leases and other agreements affecting the Properties, and shall indemnify and hold Seller harmless with respect to any and all of those obligations. Such obligations shall survive the Closing and Buyer shall remain liable therefor as regards Seller even if Buyer shall assign, sell or transfer the Properties to a third party. 32. CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS. The terms of this Agreement are considered confidential to the parties hereto, and neither party may disclose any of the terms of this Agreement to any third person prior to the Closing without the prior written consent of the other party (which consent will not be unreasonably withheld); provided that each party may disclose the terms of this Agreement as required by applicable laws or the applicable rules and regulations of any governmental agency or securities exchange, and the parties hereto may disclose the terms of this Agreement to those of its and its affiliates' employees, directors, attorneys, accountants, engineers and other consultants as may be required in connection with the negotiation, evaluation and implementation of this Agreement. Except as may be required by applicable laws or the applicable rules and regulations of any governmental agency or securities exchange, neither Buyer nor Seller shall issue any such press release or other publicity without the prior written consent of the other party, which consent shall not be unreasonably withheld. 33. ARBITRATION. Except as otherwise specifically provided herein, any controversy under this Agreement shall be submitted to arbitration in Dallas, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Upon written demand of either party, the parties shall meet and attempt to appoint a single arbitrator. If the parties fail to name an arbitrator within ten (10) days from such demand, then the arbitrator(s) shall be selected by the American Arbitration Association from the panels of arbitrators of the American Arbitration Association. The arbitrator(s) selected to act hereunder shall be qualified by education and training to pass upon the particular question in dispute and shall make a decision on the dispute within thirty (30) days after his or their appointment, subject to any reasonable delay due to unforeseen circumstances. The compensation and expenses of the arbitrator(s) shall be borne equally by the parties. Arbitration may proceed in the absence of any party if notice of the proceedings has been given to such party. The parties agree to abide by all awards rendered in such proceedings. 22 34. EXHIBITS. The following Exhibits and Schedules are incorporated herein and are a part hereof: EXHIBITS -------- Exhibit A - Wells Exhibit B - Leases Exhibit C - Allocated Values Exhibit D - Form of Assignment, Bill of Sale and Conveyance SCHEDULES --------- Schedule 4.3 - Gas Imbalances Schedule 5.5 - Preferential Purchase Rights/Consents Schedule 5.6 - Litigation and Claims Schedule 5.15 - Outstanding Obligations Executed as of the date set forth above. SELLER AVIVA AMERICA, INC. By: /s/ Ronald Suttill -------------------------------- Its: President ------------------------------- BUYER BWAB INCORPORATED By: /s/ Randall C. Roulier -------------------------------- Its: President ------------------------------- 23 EX-10.59 4 PURCHASE AND SALE AGREEMENT BETWEEN LOMAK AND AVIVA EXHIBIT 10.59 PURCHASE AND SALE AGREEMENT This Purchase and Sale Agreement (this "Agreement") is made and entered into on this the 6th day of December, 1996, between AVIVA AMERICA, INC., a Delaware corporation (Seller), and Lomak Petroleum Inc., a Delaware corporation and/or its permitted affiliates (Buyer). 1. SALE AND PURCHASE OF THE PROPERTIES. Subject to the terms and conditions herein set forth, Seller agrees to sell, assign, convey and deliver to Buyer and Buyer agrees to purchase and acquire from Seller at the Closing, but effective as of 7:00 a.m. on October 1, 1996 (the Effective Date), the Properties. The term "Properties" shall mean: (a) All of Seller's right, title and interest in the oil and gas leases described in Exhibit B (the "Leases") and in the wells described in --------- Exhibit A (the "Wells"); --------- (b) All of Seller's right, title and interest in all wells, equipment, fixtures, production facilities, personal property and improvements (including, without limitation, materials, plants, pipelines, gathering and processing systems and salt water disposal systems) which are located on, appurtenant to or used in connection with the Leases and Wells now, as of the Effective Time or as of the Closing Date (the "Equipment"); (c) All of Seller's right, title and interests in all contracts, instruments, payout balances, commitments, licenses, servitudes, permits, easements, rights-of-way and other rights of Seller relating to the items described in this Paragraph 1, together with all of Seller's rights, claims and causes of action under such items arising after the Effective Time (the "Contracts"), but specifically excluding all of Seller's rights, claims and causes of action under such items arising before the Effective Time; (d) All of Seller's right, title and interest in oil, gas, condensate, related hydrocarbons and other minerals produced from the Leases after the Effective Time (the "Substances"): (e) All accounts, instruments, general intangibles, liens and security interests arising from the sale or other disposition of the items described in this Paragraph 1 on or after the Effective Time (the "Accounts"); and (f) All of Seller's information relating to the Leases and the Wells, including geological, engineering, and proprietary geophysical and seismic data (both "2-D" and "3-D"), navigation tapes, logs, core analysis, formation tests, production records, land, title, accounting and contract files; but excluding materials which are subject to confidentiality agreements with third parties that prohibit sale or disclosure. 2. PURCHASE PRICE. The purchase price for the Properties shall be $955,000 (the "Purchase Price"), subject to any applicable adjustments as are hereinafter provided. 1 3. DEPOSIT. Contemporaneously with the execution of this Agreement, Buyer will deposit into an escrow account (to be established at a mutually acceptable bank with assets in excess of $100 million), an amount equal to ten percent (10%) of the Purchase Price (hereinafter called the "Deposit"). Buyer and Seller agree that the escrow instructions shall specify that if Buyer and Seller close the transaction contemplated by this Agreement, the Deposit shall be applied to the Purchase Price and the amount due from Buyer at Closing will be reduced, in addition to any other deductions provided for herein, by the amount of the Deposit. The Deposit shall be refunded to Buyer in the event that this Agreement is terminated (a) because Buyer's conditions to Closing set out in Paragraph 9 hereof are not satisfied and Buyer is not then in default under this - ----------- Agreement or (b) pursuant to the provisions of Sections 8.3, 9.3, 17 or 19.6(d) ------------ --- -- ------- hereof. Otherwise, should Buyer fail or refuse to consummate the purchase of the Properties hereunder, Seller shall be entitled to retain the Deposit as liquidated damages as its sole and exclusive remedy (it being agreed that damages in such event would be extremely difficult to determine and that the Deposit represents a fair and reasonable estimate of damages under such circumstances and does not constitute a penalty). In the event that this Agreement is terminated under conditions which entitle Buyer to a return of the Deposit, the Deposit shall be returned to Buyer within ten (10) days of such termination. 4. ADJUSTMENTS TO PURCHASE PRICE; FINAL PURCHASE PRICE. The Purchase Price shall be adjusted as follows and the resulting amount shall be referred to herein as the Final Purchase Price: 4.1 INCREASES IN PURCHASE PRICE. The Purchase Price shall be increased by an amount equal to the sum of the following amounts: 4.1.1 The amount of costs and expenses, including, without limitation, such capital expenditures as are permitted by Section 7.1.1. below incurred -------------- by Seller in the ordinary course of Seller's business and customary overhead charges related to the Properties from the Effective Date to the Closing Date. 4.1.2 The amount of all prepaid expenses, including, without limitation. ad valorem, property and similar taxes and assessments based upon or measured by ownership of the Properties and attributable to periods of time after the Effective Date. 4.1.3 In the event that there is a cumulative net underproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date, an amount equal to the product of (a) the Imbalance Unit Value (as hereinafter defined) and (b) the volume (stated in Mcf's) of such cumulative net underproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date. The "Imbalance Unit Value" shall mean a per Mcf value for imbalances to be agreed upon between Seller and Buyer prior to Closing (or determined pursuant to Paragraph 33 hereof if Seller and Buyer are unable to reach an agreement). ------------ 4.1.4 As to Wells in which Seller's Net Revenue Interest (as defined in Section 10 below) is determined to be greater than the decimal interest ---------- noted in Exhibit A, an amount determined by multiplying the Allocated Value --------- (as hereinafter defined) for Seller's interest in 2 the Well in question by a fraction, the numerator of which shall be the decimal increase in Seller's Net Revenue Interest in such Well from the interest shown for such Well in Exhibit A and the denominator of which --------- shall be the Net Revenue Interest shown for such Well on such Exhibit. 4.1.5 The value of all merchantable oil and other products in tanks above the pipeline sales connection at the Effective Date that is credited to the Properties, such value to be the market or, if applicable, the contract price in effect as of the Effective Date, less any applicable severance taxes and royalties. 4.2 DECREASES IN PURCHASE PRICE. The Purchase Price shall be decreased by an amount equal to the sum of the following amounts: 4.2.1 The amount of all proceeds received by Seller, net of all applicable taxes and royalties attributable to production from the Properties for periods of time after the Effective Date. 4.2.2 In the event that there is a cumulative net overproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date, an amount equal to the product of (a) the Imbalance Unit Value and (b) the volume (stated in Mcf's) of such cumulative net overproduction imbalance attributable to Seller's working interest in the Properties as of the Effective Date. 4.2.3 An amount equal to all ad valorem, property, and similar taxes and assessments based upon or measured by Seller's ownership of the Properties that are unpaid as of the Closing Date and attributable to periods of time prior to the Effective Date (for which Buyer agrees to assume liability hereunder), which amounts shall be computed based upon such taxes and assessments for the calendar year 1996; provided that if such taxes or assessments are assessed on other than a calendar year basis, for the tax related year last ended. 4.2.4 Any amount determined in connection with uncured Title Defects as provided for in Section 10.4 below. ------------ 4.2.5 Any amount determined in connection with any Casualty Loss as provided for in Section 17 below. ---------- 4.2.6 Any amount determined in connection with Adverse Environmental Conditions as provided for in Section 19.6(b) and/or (c) below. --------------- --- 4.2.7 Any amount determined in connection with an Accounting Defect as provided for in Section 10.8 below. ------------ 3 4.3. GAS IMBALANCES. The adjustments to be made to the Purchase Price at Closing based upon the net cumulative gas imbalances attributable to Seller's working interest in the Properties shall be made based upon the gas imbalance schedule attached hereto as Schedule 4.3. Buyer and Seller shall have a period ------------ of six (6) months following the date of Closing to verify the accuracy of Schedule 4.3. Buyer and Seller agree to cooperate with each other following - ------------ Closing to determine the accuracy of Schedule 4.3 and to determine what ------------ adjustments, if any, are required to make to Schedule 4.3 in order to make ------------ Schedule 4.3 accurate. Within ten (10) days following the end of such six (6) - ------------ month time period, Buyer shall deliver to Seller a written statement (Buyer's Gas Balancing Statement) setting out any adjustments Buyer proposes to be made to Schedule 4.3 along with such supporting documentation as may be required to ------------ verify any changes Buyer is proposing be made. Within five (5) days of Seller's receipt of Buyer's Gas Balancing Statement, Seller shall advise Buyer in writing whether Seller agrees with Buyer's Gas Balancing Statement and, if not, what changes Seller proposes be made to Buyer's Gas Balancing Statement. The parties shall thereafter undertake to agree with respect to the adjustments, if any, which are required to be made to Schedule 4.3 at the earliest practical date. ------------ Any final amounts owed by either party to the other as a result of any changes to Schedule 4.3 shall be paid in immediately available funds within five (5) ------------ days of the date the parties reach a final agreement with respect to Schedule 4.3. - ------------ 5. REPRESENTATIONS AND WARRANTIES OF SELLER. Seller represents and warrants to Buyer that: 5.1 ORGANIZATION. Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is qualified to do business in and in good standing under the laws of the state(s) where the Properties are located. 5.2 AUTHORITY. Seller has full power and authority and has taken all requisite action, corporate or otherwise, to authorize it to carry on its business as currently conducted, to enter into this Agreement and to perform its obligations under this Agreement. 5.3 ENFORCEABILITY. This Agreement has been duly executed and delivered on behalf of Seller and constitutes the legal, valid and binding obligation of Seller enforceable in accordance with its terms. At the Closing, all documents required hereunder to be executed and delivered by Seller shall be duly authorized, executed and delivered and shall constitute legal, valid and binding obligations of Seller enforceable in accordance with their respective terms. 5.4 CONTRACTS. All material leases, operating agreements, production sales contracts, farmout agreements and other material contracts or agreements respecting the Properties can be found either of record in the counties in which the Properties are located or are reflected or referenced in Seller's files. 5.5 PREFERENTIAL PURCHASE RIGHTS/CONSENTS. Schedule 5.5 sets forth all ------------ consents and approvals required to be obtained for, and all preferential purchase rights exercisable in connection with, the assignment of the Properties to Buyer, except for those constituting Permitted Encumbrances. 4 5.6 LITIGATION AND CLAIMS. Except as set forth in Schedule 5.6, no claim, ------------ filing, cause of action, administrative proceeding, lawsuit or other litigation is pending or threatened in writing that could reasonably be expected to now or hereafter materially and adversely affect Buyer's ownership, operation or value of any of the Properties. 5.7 NO MATERIAL DEFAULT. Seller is not in material default under any of the contracts or agreements referred to in Section 5.4. 5.8 PROPERTY OBLIGATIONS. To the best of Seller's knowledge, all rentals, royalties, shut-in royalties, overriding royalties and other payments due pursuant to ro with respect to the Leases have been properly paid. 5.9 PROPERTY OPERATION. To the best of Seller's knowledge: (i) the Properties have been drilled, completed, operated, developed and produced in material compliance with all applicable judgments, orders, laws, rules and regulations; and (ii) all necessary certificates, consents, permits, licenses and other governmental authorizations affecting the Properties have been obtained and are in force. 5.10 TAKE-OR PAY. Seller is not obligated, under a take-or-pay or similar arrangement, or by virtue of an election to non-consent, or not participate in a past or current operation on the Properties pursuant to the applicable operating agreements, to produce hydrocarbons, or allow hydrocarbons to be produced, without receiving full payment at the time of delivery in an amount that corresponds to the net revenue interest in the hydrocarbons described on Exhibit A. - --------- 5.11 TAXES. All taxes based on or measured by the ownership of property, the production or removal of hydrocarbons and the receipt of proceeds which are due and relating to the Properties have been properly paid, subject to possible adjustment for volume or price corrections. 5.12 TIMELY PAYMENT. Seller is timely receiving its share of proceeds from the sale of hydrocarbons produced from the Properties without suspense, counterclaim or set-off, except for immaterial amounts. To the best of Seller's knowledge, there has been no production of hydrocarbons from the Properties in excess of the allowable production established pursuant to applicable state or federal law or regulation that would result in a restriction on production from the Leases subsequent to the Effective Time. 5.13 PROPERTY CONDITION. To the best of Seller's knowledge, there has been no material adverse change in the condition of any of the Properties or Equipment after the Effective Date except depletion through normal production within authorized allowables, changes in rates of production that occur in the ordinary course of operation and depreciation of Equipment through ordinary wear and tear. 5.14 BROKERS' FEES. Seller has incurred no liability for brokers' fees or finders' fees, including the fees of Wellspring Partners, related to the transactions contemplated by this Agreement for which Buyer shall be liable. 5 5.15 OUTSTANDING OBLIGATIONS. Except as otherwise described in Schedule -------- 5.15 hereof, to the best of Seller's knowledge there are no outstanding - ---- authorizations for expenditures or any written commitments or proposals to conduct operations on the Properties which are required to be approved by non- operators under the terms of the applicable operating agreement. 5.16 COMPLIANCE. To the best of Seller's knowledge, the Properties have been operated in material compliance with all applicable laws, regulations, orders, judgments, licenses and permits concerning the prevention, abatement or elimination of pollution and the protection of the environment and there is no circumstance which could reasonably be expected to (i) materially interfere with continued compliance, (ii) give rise to material liability, (iii) form the basis for any material claim, suit, relief or investigation, or (iv) require a material change in the present condition or operation of the Properties. 6. REPRESENTATIONS AND WARRANTIES OF BUYER. Buyer represents and warrants to Seller that: 6.1 ORGANIZATION. Buyer is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is qualified (or will be qualified at the time of Closing) to do business in and in good standing under the laws of the state(s) where the Properties are located. 6.2 AUTHORITY. Buyer has full power and authority and has taken all requisite action, corporate or otherwise, to enter into this Agreement, to purchase the Properties on the terms described in this Agreement and to perform its other obligations under this Agreement. 6.3 ENFORCEABILITY. This Agreement has been duly executed and delivered on behalf of Buyer, and constitutes the legal, valid and binding obligation of Buyer enforceable in accordance with its terms. At the Closing, all documents required hereunder to be executed and delivered by Buyer shall be duly authorized, executed and delivered and shall constitute legal, valid and binding obligations of Buyer enforceable in accordance with their respective terms. 6.4 DUE DILIGENCE. Buyer represents that it has performed, or will perform before Closing, necessary evaluations and assessments relating to the Properties to enable it to make an independent determination with respect to its acquisition of the Properties under the terms of this Agreement. 6.5 INVESTMENT INTENT. Buyer is a knowledgeable purchaser, owner, and operator of oil and gas properties, has the ability to evaluate (and in fact has evaluated) the Properties for purchase and is acquiring the Properties for its own account and not with the intent to make a distribution thereof in violation of the Securities Act of 1933 as amended (and the rules and regulations pertaining thereto), or in violation of any other applicable securities laws. 6.6 FUNDS AVAILABLE. Buyer has, or will have (based upon its current creditworthiness) prior to the Closing Date, sufficient cash, available lines of credit or other sources of immediately available funds to enable it to make payment of the Purchase Price. 6 6.7 BROKERS FEES. Buyer has incurred no liability for brokers' fees or finders' fees related to the transactions contemplated by this Agreement for which Seller shall be liable. 7. COVENANTS OF SELLER. 7.1 CONDUCT OF BUSINESS PENDING CLOSING. Seller covenants that from the date hereof to the Closing Date, except (a) as provided herein, (b) as required by any existing obligation, agreement, lease, contract, or instrument to which the Properties are subject, or (c) as otherwise consented to in writing by Buyer, Seller will: 7.1.1 Not (a) act in any manner with respect to the Properties other than in the normal, usual and customary manner, consistent with prior practice; (b) dispose of, encumber or relinquish any of the Properties (other than relinquishments resulting from the expiration of leases that Seller has no contractual right or option to renew); (c) waive, compromise or settle any material right or claim with respect to any of the Properties; or (d) conduct capital or workover projects with respect to the Properties in excess of $10,000.00, except when required by an emergency when there shall have been insufficient time to obtain advance consent. 7.1.2 Use its best efforts to preserve relationships with all third parties having business dealings with respect to the Properties. 7.1.3 Cooperate with Buyer in connection with any required notification of applicable governmental regulatory authorities of the transactions contemplated hereby and cooperate with Buyer in obtaining the issuance by each such authority of such permits, licenses and authorizations as may be necessary for Buyer to own and operate the Properties following the consummation of the transactions contemplated by this Agreement. 7.1.4 Notify Buyer of the discovery by Seller that any Representation or Warranty of Seller contained in this Agreement is or becomes materially untrue or will be materially untrue on the Closing Date. 7.2 ACCESS. Seller shall afford to Buyer and its authorized representatives reasonable access, at Buyer's sole risk and expense, from the date hereof until the Closing Date during normal business hours, to (a) the Properties operated by Seller, provided, however, that Buyer shall indemnify and hold harmless Seller and its co-owners, and their respective officers, directors and employees from and against any and all losses, costs, damages, obligations, claims, liabilities, expenses and causes of action arising from Buyer's inspection of the Properties. including, without limitation, claims for personal injuries, property damage and reasonable attorneys' fees, and (b) Seller's operating, accounting, contract, legal files, and records, regarding the Properties ("Data"); provided, however, that Data shall not include (a) any attorney work product or attorney client communications which Seller reasonably believes to be privileged or (b) information, the disclosure of which would violate any confidentiality agreement to which Seller is bound; provided that Seller agrees to disclose sufficient information about any such confidentiality agreements to enable Buyer 7 to request waivers of the same to enable it to conduct its due diligence reviews. Until Closing, Buyer shall exercise reasonable care in safeguarding and maintaining the confidentiality of all data or information regarding the Properties provided by Seller to Buyer. In the event this Agreement is terminated prior to Closing, Buyer will immediately return to Seller all copies of such data or information and shall continue to maintain the confidentiality of all information regarding the Properties provided by Seller to Buyer for a period of twelve (12) months from the date of such termination. 7.3 CONSENTS; APPROVALS. Seller will cooperate with Buyer and take all action reasonably necessary to attempt to obtain all permissions, approvals and consents as may be required to consummate the transactions contemplated in this Agreement, including, but not limited to, obtaining waivers of any required consents to transfer and preferential rights to purchase set out in Schedule 5.5 ------------ hereto. 8. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF SELLER. The obligations of Seller to be performed at Closing are subject to the fulfillment (or waiver by Seller in its sole discretion) before or at Closing, of each of the following conditions: 8.1 REPRESENTATIONS AND WARRANTIES. The Representations and Warranties by Buyer set forth in this Agreement shall be true and correct in all material respects at and as of the Closing as though made at and as of the Closing; and Buyer shall have performed and complied with, in all material respects, all covenants and agreements required to be performed and satisfied by Buyer at or prior to the Closing. 8.2 NO LITIGATION. No suit, action or other proceedings shall, on the date of Closing, be pending or threatened before any court or governmental agency seeking to restrain, prohibit, or obtain substantial damages or other material adverse relief in connection with the consummation of the transactions contemplated by this Agreement. 8.3 TITLE DEFECTS/ACCOUNTING DEFECTS/CASUALTY LOSSES/ADVERSE ENVIRONMENTAL CONDITIONS. The total of the Purchase Price reductions (if any) which result from the application of Section 10.4, Section 10.8, Section 17 or Section 19.6 ------------ ------------ ---------- ------------ hereof do not exceed ten percent (10%) of the Purchase Price. If any such condition to the obligations of Seller to be performed at Closing under this Agreement is not met as of the Closing Date, this Agreement may, at the option of Seller, be terminated. 9. CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER. The obligations of Buyer to be performed at Closing are subject to the fulfillment (or waiver by Buyer in its sole discretion) before or at Closing, of each of the following conditions: 9.1 REPRESENTATIONS AND WARRANTIES. The Representations and Warranties by Seller set forth in this Agreement shall be true and correct in all material respects at and as of the Closing 8 as though made at and as of the Closing; and Seller shall have performed and complied with, in all material respects, all covenants and agreements required to be performed and satisfied by Seller at or prior to the Closing. 9.2 NO LITIGATION. No suit, action or other proceedings shall, on the date of Closing, be pending or threatened before any court or governmental agency seeking to restrain, prohibit, or obtain substantial damages or other material adverse relief in connection with the consummation of the transactions contemplated by this Agreement. 9.3 TITLE DEFECTS/ACCOUNTING DEFECTS/CASUALTY LOSSES/ADVERSE ENVIRONMENTAL CONDITIONS. The total of the Purchase Price reductions (if any) which result from the application of Section 10.4, Section 10.8, Section 17 or Section 19.6 ------------ ------------ ---------- ------------ hereof do not exceed ten percent (10%) of the Purchase Price. If any such condition to the obligations of Buyer under this Agreement is not met as of the Closing Date, this Agreement may, at the option of Buyer, be terminated. 10. TITLE MATTERS/ACCOUNTING DEFECTS. 10.1 CERTAIN DEFINED TERMS. As used in this Agreement, the following terms have the following meanings: 10.1.1 "Good and Defensible Title" means such title to the Properties that (a) entitles Seller to receive not less than the Net Revenue Interests in all oil, gas, condensate and related hydrocarbons produced from the Wells described in Exhibit A, and (b) obligates Seller to bear not more --------- than the Working Interests in the Wells as set forth in Exhibit A (unless --------- there is a corresponding increase in the Net Revenue Interests) and (ii) is free and clear of all liens and encumbrances, except for Permitted Encumbrances. 10.1.2 "Title Defect" shall mean, with respect to Seller's title to the Properties, any lien, mortgage, claim, charge, defect, or other encumbrance which renders Seller's title to such Properties less than Good and Defensible Title. 10.1.3 "Net Revenue Interest" shall mean Seller's interest in and to all production of oil, gas and other minerals saved, produced and sold from any Well after giving effect to all valid lessor's royalties, overriding royalties, production payments, carried interests, and other burdens on production therefrom. 10.1.4 "Working Interest" shall mean, with respect to the Wells, Seller's share of the cost of exploring, drilling, developing and operating the Wells, and producing oil, gas and other minerals. 10.1.5 "Permitted Encumbrances" shall mean: 9 (a) Lessors' royalties, overriding royalties, reversionary interests and similar burdens if the net cumulative effect of the burdens does not operate to reduce Seller's Net Revenue Interest in a Well to less than the Net Revenue Interest for such Well set forth in Exhibit A or operate to increase Seller's Working Interest in such --------- Well to more than the Working Interest for such Well set forth in Exhibit A; --------- (b) Division orders and sales contracts terminable without penalty upon no more than 90 days notice to the purchaser; (c) Preferential rights to purchase and required third party consents to assignment and similar agreements with respect to which waivers or consents are obtained from the appropriate parties, or the appropriate time period for asserting any such right has expired without an exercise of the right; (d) Materialman's, mechanic's, repairman's, employee's, contractor's, operator's, tax, and other similar liens or charges arising in the ordinary course of business for obligations that are not delinquent or that will be paid and discharged in the ordinary course of business or if delinquent, that are being contested in good faith by appropriate action of which Buyer is notified in writing before Closing; (e) All rights to consent by, required notices to, filings with, or other actions by governmental entities in connection with the sale or conveyance of oil and gas leases or interests therein if they are routinely obtained subsequent to the sale or conveyance; (f) Easements, rights-of-way, servitudes, permits, surface leases and other rights in respect of surface operations that do not materially interfere with the oil and gas operations to be conducted on any Well or Lease; (g) All operating agreements, unit agreements, unit operating agreements, pooling agreements and pooling designations affecting the Properties that are either of record in Seller's chain of title or reflected or referenced in Seller's files and which do not reduce the interest of Seller with respect to oil and gas produced from any Well below the Net Revenue Interest set forth in Exhibit "A" for such Well; or increase Seller's Working Interest in such Well to more than the Working Interest set forth in Exhibit "A" for such Well (unless there is a corresponding increase in the Net Revenue Interest); (h) Conventional rights of reassignment prior to release or surrender requiring notice to the holders of the rights; (i) All rights reserved to or vested in any governmental, statutory or public authority to control or regulate any of the Properties in any manner, and all applicable laws, rules and orders of governmental authority; 10 (j) The terms and conditions of the Leases, and of all agreements that are of record in Seller's chain of title or reflected or referenced in Seller's files. (k) All other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects and irregularities affecting the Properties which individually or in the aggregate are not such as to interfere materially with the operation, value or use of any of the Properties, do not prevent Buyer from receiving the proceeds of production from any of the Wells, do not reduce the interest of Seller with respect to all oil and gas produced from any Well below the Net Revenue Interest set forth in Exhibit A for such --------- Well or increase Seller's Working Interest in any such Well to more than the Working Interest set forth in Exhibit A for such well; and --------- (l) Any Title Defects Buyer may have expressly waived in writing or which are deemed to have become Permitted Encumbrances under Section 10.2. ------------- 10.1.6 "Defect Property" shall mean any Property which is subject to a Title Defect. 10.1.7 "Defect Value" shall mean the amount by which the Allocated Value of any Well is reduced as a result of a Title Defect. 10.1.8 The "Allocated Value" of a Well shall be determined by reference to the portion of the Purchase Price which is allocated to said Well as set out in Exhibit C hereto. --------- 10.1.9 "Required Consent" means any approvals, consents or waiver of preferential rights to purchase, other than Permitted Encumbrances, required to be obtained in connection with the conveyance of the Properties to Buyer at Closing. 10.1.10 An "Accounting Defect" shall be deemed to have occurred if Seller's joint interest billings and/or revenue check details for the Properties for the twelve (12) months prior to the Effective Date or any gas contracts or processing agreements covering the Properties reflect that the actual costs of operating the Properties or the revenues generated from the sale of oil or gas from the Properties are different in any material respect from those set out in the reserve report delivered by Seller to Buyer, and such differences, if incorporated in the reserve report would result in reducing the future net revenues from the Properties. 10.2 NOTICE OF TITLE DEFECTS. In the event that Buyer shall identify any Title Defect, as soon as possible after discovery, but in no event later than ten (10) days prior to the Closing Date, Buyer shall notify Seller in writing of any Title Defect. Buyer's notice (a "Defect Notice") shall include (i) a description of the Property affected by the Title Defect; (ii) a reasonably adequate explanation of the basis for the Title Defect; and (iii) the amount by which Buyer believes the value of the affected Property has been reduced by the Title Defect. Buyer's failure to give notice of a Title Defect within the time required by this Section 10.2 shall be a waiver by Buyer of such Title Defect ------------ and such Title Defect shall be treated as a Permitted Encumbrance. 11 10.3 REMEDIES FOR TITLE DEFECT. Upon notice of a Title Defect, Seller shall have the right, but not the obligation, until Closing, to cure the Title Defect. If Seller is unable or elects not to cure the Title Defect prior to Closing, the Purchase Price shall be reduced pursuant to Section 10.4. ------------ 10.4 VALUE OF TITLE DEFECTS. If Seller is unable or elects not to cure a Title Defect prior to Closing, the parties shall promptly meet and negotiate in good faith to reach an agreement as to the value of each such Title Defect. If the parties reach an agreement as to the value of a Title Defect, then the amount agreed upon shall be the Defect Value for such Title Defect. If the parties' negotiations fail to result in an agreement as to the value of any Title Defect prior to Closing (or thereafter as the parties may agree), then the question as to the value of the Title Defect shall be submitted to arbitration in accordance with Section 33 of this Agreement; provided, however, that for ---------- purposes of Closing and Sections 8.3 and 9.3 hereof, an amount equal to the ------------ --- average of Seller's and Buyer's estimate of the value of the Title Defect shall apply unless Seller has failed to provide an estimate, in which event Buyer's estimate of the value of the Title Defect shall apply; provided further, that the value of a Title Defect affecting a Well shall never be in excess of the Allocated Value of such Well. Accordingly, at Closing the Purchase Price shall be adjusted based on an estimate (determined as aforesaid) and the difference between the estimated value of such Title Defect used for Closing and the final value of the Title Defect, as decided by arbitration, shall be a post-Closing adjustment item to be made pursuant to Section 13.1 hereof. ------------ 10.5 CONVEYANCE OF DEFECT PROPERTIES. If, at Closing, Title Defects with respect to any Defect Properties have not been corrected by Seller or waived by Buyer, then subject to the provisions of Sections 8.3 and 9.3 hereof, the ------------ --- Purchase Price shall be reduced by the value of such Title Defects and Seller shall convey to Buyer those Defect Properties subject to partial title failures, but Seller shall not be obligated to convey to Buyer any Defect Properties with respect to which there has been complete title failure. 10.6 ADDITIONAL DEFECT PROPERTIES. If any Required Consent is not obtained prior to Closing, Buyer may elect to treat that portion of the Properties subject to such Required Consent as a Defect Property by giving Seller notice thereof in accordance with the provisions of Section 10.2. ------------ 10.7 NOTICE OF ACCOUNTING DEFECTS. In the event that Buyer shall identify any Accounting Defects, as soon as possible after discovery, but in no event later than ten (10) days prior to the Closing Date, Buyer shall notify Seller in writing of any Accounting Defect. Buyer's notice shall include (i) a description of the costs or revenues which Buyer believes were not properly reflected in the reserve report, (ii) a reasonably adequate explanation of the basis for the Accounting Defect, and (iii) the amount by which Buyer believes the value of the Properties have been reduced by the Accounting Defect. Buyer's failure to give notice of an Accounting Defect within the time required by this Section 10.7 shall be a waiver by Buyer of such Accounting Defect. - ------------ 10.8 VALUE OF ACCOUNTING DEFECT. The parties shall promptly meet and negotiate in good faith to reach an agreement as to the value of each Accounting Defect. If the parties reach an agreement as to the value of an Accounting Defect, then the Purchase Price shall be reduced by the amount agreed upon. If the parties negotiations fail to result in an agreement as to the value of any 12 Accounting Defect prior to Closing (or thereafter as the parties may agree), then the value of the Accounting Defect shall be submitted to arbitration in accordance with Section 33 of this Agreement; provided, however, that for ---------- purposes of Closing and Sections 8.3 and 9.3 hereof, an amount equal to the ------------ --- average of Seller's and Buyer's estimate of the value of the Accounting Defect shall apply unless Seller has failed to provide an estimate, in which event Buyer's estimate of the value of the Accounting Defect shall apply. Accordingly, at Closing the Purchase Price shall be adjusted based on an estimate (determined as aforesaid) and the difference between the estimated value of such Accounting Defect used for Closing and the final value of the Accounting Defect, as decided by arbitration, shall be a post-Closing adjustment item to be made pursuant of Section 13.1 hereof. ------------ 11. SUSPENSE FUNDS HELD BY SELLER. Seller agrees to convey and Buyer agrees to receive all suspense funds held by Seller as of the Effective Date for the benefit of royalty, overriding royalty interest and working interest owners attributable to the Properties, the amount of such funds to be adjusted with respect to suspense funds received and disbursed by Seller from and after the Effective Date, and Buyer shall assume all past, present and future liability associated with such funds, but only as to the suspense funds actually transferred, and not to any liability resulting from Seller's failure to pay or retain any amounts prior to the Effective Date. All past, present and future liability associated with such funds shall be assumed by Buyer and Buyer agrees to protect, defend, indemnify and hold Seller and its employees harmless from and against any and all costs, expenses, claims, demands, and causes of action of every kind and character (including attorneys' fees and court costs) arising out of, incident to, or in connection therewith. 12. CLOSING. 12.1 THE CLOSING. The sale and purchase of the Properties pursuant to this Agreement shall be consummated (the "Closing") in the offices of Seller on or before December 23, 1996 (the "Closing Date"). 12.2 CLOSING OBLIGATIONS. At the Closing, the following events shall occur: 12.2.1 Seller shall execute and deliver to Buyer one or more instruments of assignment, in substantially the form of the Assignment, Bill of Sale and Conveyance set forth as Exhibit D hereto. --------- 12.2.2 Buyer shall deliver to Seller in immediately available funds (wire transfer), the Preliminary Amount. The "Preliminary Amount" shall be that amount to be determined by Seller prior to the Closing Date as an estimate of the final computation of the Final Purchase Price. Seller shall provide Buyer a closing statement reflecting the Preliminary Amount at least two (2) business days prior to the Closing. 12.2.3 Seller and Buyer shall execute, acknowledge and deliver division orders, transfer orders or letters in lieu thereof directing all purchasers of production from the Properties to make payment of proceeds attributable to such production occurring on or after the Effective Date to Buyer. 13 12.2.4 Seller shall deliver to the Buyer possession of the Properties at the Closing. 13. POST-CLOSING ADJUSTMENTS. 13.1 FINAL SETTLEMENT STATEMENT. After the Closing Date, Seller shall prepare, in accordance with this Agreement and with generally accepted accounting principles consistently applied, a Final Settlement Statement, a copy of which shall be delivered by Seller to Buyer no later than ninety (90) days after the Closing Date. The "Final Settlement Statement" shall set forth each adjustment to the Purchase Price necessary to determine the Final Purchase Price (except those adjustments to be made pursuant to the provisions of Section 4.3 ----------- hereof) and show the calculation of such adjustments in accordance with Section ------- 4. The parties shall undertake to agree on the Final Settlement Statement and - - the Final Purchase Price no later than one hundred twenty (120) days after the Closing Date. 13.2 ARBITRATION. If Seller and Buyer cannot agree upon the Final Settlement Statement, then the disputed matters shall be submitted to arbitration pursuant to the provisions of Section 33 hereof. ---------- 13.3 PAYMENT OF FINAL PURCHASE PRICE. If the Final Purchase Price is more than the Preliminary Amount, Buyer shall pay such difference to Seller in immediately available funds within five (5) days after the parties have agreed upon the Final Settlement Statement. If the Final Purchase Price is less than the Preliminary Amount, Seller shall pay such difference to Buyer in immediately available funds within five (5) days after the parties have agreed upon the Final Settlement Statement. 14. ASSUMPTION OF CERTAIN OBLIGATIONS. Except as provided for in Section ------- 19.6(a), at Closing, Buyer shall assume all costs and liabilities and discharge - ------- all obligations of Seller (a) under all leases, operating agreements, production sales contracts, farmout agreements and other contracts or agreements respecting the Properties or relating the ownership or operation of the Properties from and after the Effective Date, and (b) with respect to all imbalances associated with the Properties, regardless of their nature or of the time at which they accrued. 15. LIMITATION OF WARRANTIES. Anything in this Agreement to the contrary notwithstanding, the Properties are being sold by Seller to Buyer without recourse, covenant, or warranty of any kind; express, implied, or statutory, with the sole exception that Seller will warrant title to the Properties subject to the Permitted Encumbrances, against every person whomsoever lawfully claiming or to claim the same or any part thereof by, through, or under Seller, but not otherwise. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER WILL CONVEY THE PROPERTIES AS-IS, WHERE-IS AND WITH ALL FAULTS, AND EXPRESSLY DISCLAIMS AND NEGATES (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, AND (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS. The representations and warranties made by Seller and Buyer in Sections 5 and 6 shall survive Closing ---------- - 14 for a period of six (6) months and shall thereafter be of no further force and effect, excepting only matters as to which a written claim has been made prior to the end of such six (6) month time period. 16. CROSS-INDEMNIFICATION. Except as expressly limited elsewhere in this Agreement, in the event that Closing occurs hereunder: (a) Buyer agrees to indemnify and hold Seller harmless from and against any and all liability, loss, cost and expense (including, without limitation, court costs and reasonable attorneys' fees) that are attributable to the Properties conveyed to Buyer and are attributable to periods of time on or after the Effective Date; and (b) Subject to the provisions of Section 19 hereof, Seller agrees to ---------- indemnify and hold Buyer harmless from and against any and all liability, loss, cost and expense (including, without limitation, court costs and reasonable attorneys' fees) that are attributable to the Properties conveyed to Buyer and are attributable to periods of time before the Effective Date; (c) The respective indemnity and hold harmless obligations of the parties hereto shall not apply to: (i) any amount that was taken into account as an upward or downward adjustment to the Final Purchase Price pursuant to the provisions hereof, but only to the extent of such adjustments, (ii) any liability of one Party hereto to any other Party under the provisions of this Agreement, or (iii) each Party's costs and expenses with respect to the negotiation and consummation of this Agreement and the purchase and sale of the Properties. 17. CASUALTY LOSS. Prior to Closing, Seller shall promptly notify Buyer of any Casualty Loss of which Seller becomes aware. "Casualty Loss" shall mean, with respect to all or any material portion of a Property, any destruction by fire, blowout or other casualty (above or below the ground) or any taking, or pending or threatened taking, in condemnation or under the right to eminent domain of any Property or portion thereof. If any Casualty Loss occurs, Buyer may elect to (a) cause Seller to retain the Property affected by the Casualty Loss, and to reduce the Purchase Price by the Allocated Value of the Property, in which case Seller shall retain all insurance proceeds relating to the Casualty Loss, or (b) require Seller to (i) transfer to Buyer such Property notwithstanding such Casualty Loss and (ii) transfer to Buyer such Property insurance proceeds, claims, awards and other payments arising out of such Casualty Loss. In the event the aggregate of any such payments or reductions in Purchase Price exceed ten percent (10%) of the Purchase Price, then either Seller or Buyer shall have the option to terminate this Agreement. Seller shall not voluntarily compromise, sell or adjust any amounts payable by reason of any Casualty Loss without first obtaining the written consent of Buyer. 15 18. SOLE REMEDY OF BUYER PRIOR TO CLOSING. If at any time prior to Closing, any of the representations and warranties made herein by Seller are materially incorrect or if Seller fails to fully and timely comply in any material respect with any of Seller's obligations as set forth herein or as required by applicable law, Buyer may elect to terminate this Agreement and in such event Buyer's remedy against Seller shall be to obtain a return of the Deposit (unless an alternative remedy shall be mutually agreed upon between Buyer and Seller); provided, however, if Seller shall fail or refuse to comply with any of its obligations under this Agreement, Buyer shall be entitled to enforce this Agreement through the remedy of specific performance. 19. ENVIRONMENTAL MATTERS 19.1 PRESENCE OF WASTES, NORM, HAZARDOUS SUBSTANCES, AND ASBESTOS. Buyer acknowledges that the Properties have been used to explore for, develop and produce oil and gas, and that spills of wastes, crude oil, produced water, hazardous substances, and other materials may have occurred thereon. Additionally, the Properties, including production equipment, may contain asbestos, hazardous substances, or Naturally Occurring Radioactive Material ("NORM"). NORM may affix or attach itself to the inside of wells, materials, and equipment as scale or in other forms, and NORM-containing material may have been buried or otherwise disposed of on the Properties. Special procedures may be required for remediating, removing, transporting, and disposing of asbestos, NORM, hazardous substances, and other materials from the Property, and Buyer assumes all liability for the assessment, remediation, removal, transportation, and disposal of these materials and associated activities in accordance with the applicable rules, regulations, and requirements of governmental agencies, unless otherwise provided in this Section 19. ---------- 19.2 ADVERSE ENVIRONMENTAL CONDITION. "Adverse Environmental Condition" means (a) any contamination or condition exceeding allowed regulatory limits and not otherwise permanently authorized by permit or law, resulting from any discharge, release, disposal, production, storage, treatment, or any other activities on, in or from any Property prior to the Effective Date, or the migration or transportation from other lands to any Property, prior to the Effective Date, of any wastes, pollutants, contaminants, hazardous materials or other materials or substances subject to regulation relating to the protection of the environment, including, but not limited to, the Clean Air Act, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the Federal Water Pollution Control Act, the Safe Drinking Water Act, the Toxic Substance Control Act, the Hazardous and Solid Waste Amendments Act of 1984, the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act, the Clean Water Act, the National Environmental Policy Act, the Endangered Species Act, the Fish and Wildlife Coordination Act, the National Historic Preservation Act, and the Oil Pollution Act of 1990, as well as any state and local regulation or law governing the same, similar or related matters, and (b) any such contamination or condition in existence prior to the Effective Date temporarily authorized by permit, fee agreement or other arrangement. 19.3 ENVIRONMENTAL ASSESSMENT. After the execution of this Agreement, Buyer shall have the opportunity to conduct at its sole risk and expense an environmental assessment of the Properties. Seller will provide reasonable access for this purpose to Properties operated by Seller; for 16 any Property not operated by Seller, however, Buyer must contact the operator of any such non-operated Property directly. Buyer or any of its representations and agents must comply with Seller's environmental and safety rules and policies while performing any environmental assessment on Seller-operated Properties. Buyer agrees it will not disclose any information obtained in its environmental assessment to third parties unless agreed to in writing by Seller or unless such disclosure is expressly required by applicable law or regulation or is compelled pursuant to legal process of any court or governmental authority. Buyer will notify Seller in advance of any such disclosure and will furnish Seller copies of all materials to be disclosed prior to any disclosure thereof to third parties. As soon as possible after Buyer's receipt thereof, Buyer shall forward to Seller copies of all reports, data, analysis, test results, remediation cost estimates, and recommended remediation procedures or other information concerning or derived from Buyer's environmental assessment. 19.4 NOTICE OF ADVERSE ENVIRONMENTAL CONDITIONS. Buyer shall notify Seller in writing of any claimed Adverse Environmental Condition not less than ten (10) days prior to the Closing Date (Environmental Defects Notice). The Environmental Defects Notice shall (a) set forth in reasonable detail the Well and/or Lease with respect to which a claimed Adverse Environmental Condition is made, (b) the nature of such claimed Adverse Environmental Condition, and (c) Buyer's proposed calculation of the cost to remediate each claimed Adverse Environmental Condition (Remediation Value). Except as provided for in Section ------- 19.7 hereof, Buyer shall waive its right to assert any claim or liability - ---- against Seller arising out of or in any way related to any Adverse Environmental Condition not set forth in an Environmental Defects Notice delivered to Seller not less than ten (10) days prior to the Closing Date. 19.5 DETERMINATION OF ADVERSE ENVIRONMENTAL CONDITIONS AND REMEDIATION VALUES. Within five (5) days after Seller's receipt of the Environmental Defects Notice, Seller shall notify Buyer whether Seller agrees with Buyer's claimed Adverse Environmental Conditions and/or the Remediation Value (Seller's Environmental Response). If Seller does not agree with any claimed Adverse Environmental Condition and/or the Remediation Value, then the parties shall enter into good faith negotiations and shall attempt to agree on such matters. If the parties cannot reach agreement concerning either the existence of an Adverse Environmental Condition or the Remediation Value within ten (10) days after Buyer's receipt of Seller's Environmental Response, then the matter shall be submitted to arbitration pursuant to the provisions of Section 33 hereof and ---------- for purposes of Closing and Sections 8.3, 9.3 and 19.6 hereof, an amount equal ------------ --- ---- to Buyer's good faith estimate of the Remediation Value shall control. Accordingly, at Closing, the Purchase Price shall be adjusted based upon an estimate (as aforesaid) and the final value of the Remediation Value, as decided by arbitration shall be a post Closing adjustment item to be made pursuant to Section 13.1 hereof. - ------------ 19.6 REMEDIES FOR ADVERSE ENVIRONMENTAL CONDITIONS. As to any Adverse Environmental Condition, Seller (and Buyer with respect to subparagraphs (c) and (d) below) shall have the election to: (a) remediate such Adverse Environmental Condition at Seller's sole cost in accordance with applicable environmental laws, and there shall be no adjustment to the 17 Purchase Price in respect of such Adverse Environmental Condition and the provisions of Section 19.8 below shall thereafter apply in all respects; ------------ (b) reduce the Purchase Price by the applicable Remediation Value, which in no event shall exceed the Allocated Value of the Leases and/or Well affected by such Adverse Environmental Condition, in which event Seller shall have no other or further obligation or liability in respect of such Adverse Environmental Condition and the provisions of Section 19.8 ------------ below shall thereafter apply in all respects; (c) delete from this Agreement the Property which contains the Adverse Environmental Condition and adjust the Purchase Price by the Allocated Value of such Property; or (d) in the event the aggregate sum of the Remediation Values exceeds ten percent (10%) of the Purchase Price, terminate this Agreement, in which case neither party shall have any further liability or obligation to the other hereunder except as regards obligations imposed by any confidentiality agreement, which shall survive such termination and be enforceable in accordance with the terms thereof. If Seller elects (a) above, it will exercise all reasonable efforts and diligence to complete remediation within six (6) months of the Closing Date, but any failure to complete its efforts by such time shall not relieve Seller of its duty to satisfy its obligation hereunder. Buyer shall allow Seller and its agents and representatives such access to the Properties as is reasonably necessary for performance of remediation work. Seller will conduct such work so as not to unreasonably interfere with Buyer's or any designated operator's operations. 19.7 POST-CLOSING ADJUSTMENTS. In addition to the rights granted to Buyer above, Buyer shall have the right for a period of six (6) months following Closing to provide Seller with written notice of any Adverse Environmental Conditions with respect to the Properties which Buyer discovers subsequent to the Closing. The notice provided by Buyer to Seller of any such Adverse Environmental Conditions shall contain the same information as is required to be included in the Environmental Defects Notice as set out in Section 19.4 above. ------------ The Remediation Value of any such Adverse Environmental Conditions shall be determined in the manner set out in Section 19.5 above. Within five (5) days of ------------ the final determination of the Remediation Value of any such Adverse Environmental Condition, Seller shall advise Buyer in writing of whether Seller elects to (a) remediate such Adverse Environmental Condition at its sole cost and expense in the manner set out in Section 19.6(a) above or (b) pay to Buyer --------------- an amount equal to the Remediation Value of such Adverse Environmental Defect; provided, however, in no event shall Seller ever be liable to Buyer for Adverse Environmental Conditions under this Section 19.7 in an aggregate amount in ------------ excess of $750,000. If Seller elects to pay Buyer for the Remediation Value of an Adverse Environmental Condition, such payment shall be made to Buyer within five (5) days of said election. Buyer shall absolutely and forever waive its right to assert any claim or liability against Seller arising out of or in any way related to any Adverse Environmental Condition as to which Buyer has not provided written notice to Seller within six (6) months of Closing. 18 19.8 BUYER'S INDEMNIFICATION OF ADVERSE ENVIRONMENTAL CONDITIONS. Except for the costs associated with Seller's remediation of any Adverse Environmental Conditions pursuant to Section 19.6(a) above (which shall be completed to --------------- Buyer's reasonable satisfaction at Seller's sole cost and expense as soon as reasonably practical, but in no event later than one (1) year after the Closing) and Sellers obligations under Section 19.7 hereof, in the event that Closing ------------ occurs hereunder, Buyer shall indemnify, defend and hold Seller harmless from and against any and all claims, demands, causes of action, liabilities and obligations, and all costs and expenses (including, without limitation, reasonable attorneys' fees and court costs) associated with all Adverse Environmental Conditions arising before or after the Effective Date, including, without limitation, any such conditions arising out of or relating to any discharge, release, disposal, production, storage, treatment or any activities on, in or from the Properties, or the migration or transportation from any other lands to the Properties, whether before or after the Effective Date, of materials or substances that are at present, or become in the future, subject to regulation under federal, state or local laws or regulations, whether such laws or regulations now exist or are hereafter enacted, INCLUDING, WITHOUT LIMITATION, ANY CLAIMS, DEMANDS, CAUSES OF ACTION, LIABILITIES, OR OBLIGATIONS ARISING IN WHOLE OR IN PART FROM THE SOLE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF SELLER. BUYER HEREBY RELEASES SELLER FROM AND AGAINST ANY AND ALL CLAIMS FOR CONTRIBUTION UNDER CERCLA AND/OR ANY OTHER ENVIRONMENTAL LAW OR REGULATION. 20. DTPA WAIVER. To the extent applicable to the transaction contemplated hereby or any portion thereof, Buyer waives the provisions of the Texas Deceptive Trade Practices Act, Chapter 17, Subchapter E, Sections 17.41 through 17.63, inclusive (other than Section 17.555 which is not waived) of the Texas Business and Commerce Code. In connection with such waiver, Buyer hereby represents and warrants to Seller that Buyer (a) is in the business of seeking or acquiring by purchase or lease, goods or services, for commercial or business use, (b) has assets of $5,000,000 or more according to its most recent financial statement, (c) has knowledge and experience in financial and business matters that enable it to evaluate the merits and risks of the transaction contemplated hereby, and (d) is not in a significantly disparate bargaining position. 21. FURTHER ASSURANCES. After the Closing, Seller and Buyer shall execute, acknowledge and deliver, or cause to be executed, acknowledged and delivered, such instruments and take such other action as may be reasonably necessary or advisable to carry out their obligations under this Agreement and under any exhibit, document, certificate or other instrument delivered pursuant hereto. Seller shall use its best efforts to obtain all approvals and consents required by or necessary for the transactions contemplated by this Agreement that are customarily obtained after Closing, provided that Seller shall not be required to expend any funds to obtain such approvals and consents. 22. ACCESS TO RECORDS. As soon as practicable after Closing, Seller shall deliver to Buyer, at Seller's address, or at such other place as any of same may be kept, the originals of all Data, except that Seller may retain the originals of all Data which relates to properties other than the Properties being sold herein, in which case Seller shall deliver duplicate copies of any such retained originals to Buyer. For a period of six (6) years after the date of Closing, Buyer will retain the Data delivered to it pursuant hereto and will make such Data available to Seller upon reasonable notice at Buyer's 19 headquarters at reasonable times and during office hours. Buyer shall notify Seller in writing within thirty (30) days of the sale to a third party of all or any part of the Properties which involves the transfer of any of the Data of the name and address of the buyer(s) in any such sale. Buyer shall require as part of any such sales transaction that such third party assume the obligations imposed on Buyer in this Section 22. ---------- 23. USE OF BUYER'S NAME. Buyer agrees that, as soon as practicable after the Closing, Buyer will remove or cause to be removed the names and marks "AVIVA", "Aviva America, Inc.", and all variations and derivatives thereof and logos relating thereto from the Properties of which it has assumed operations and will not thereafter make any use whatsoever of such names, marks, and logos. 24. NOTICES. All notices required or permitted under this Agreement shall be in writing and shall be delivered personally or by telecopier as follows: Seller: AVIVA AMERICA, INC. Suite 400 LB 84 8235 Douglas Avenue Dallas, TX 75225 Telephone: (214) 691-3464 Fax/Telecopier: (214) 361-0010 Attention: Mr. Ron Suttill, President Buyer: LOMAK PETROLEUM INC. 125 State Route 43 P.O. Box 550 Hartville, Ohio 44632-0550 Telephone: (330) 877-0550 Fax/Telecopier: (330) 877-6129 Attention: Jefferey A. Bynum, Vice President - Land or to such other place within the United States of America as either Seller or Buyer may designate as to themselves by written notice to the other. All notices given by personal delivery or mail shall be effective on the date of actual receipt at the appropriate address. Notice given by telecopier shall be effective upon actual receipt if received during recipient's normal business hours or at the beginning of the next business day after receipt if received after the recipient's normal business hours. All notices by telecopier shall be confirmed promptly after transmission, by mail or personal delivery. 25. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 26. ASSIGNMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto; it shall not, however, be assignable by Buyer without Seller's prior written consent, 20 which consent shall not be unreasonably withheld in the event of a proposed assignment to an affiliate which is financially capable of performing Buyer's obligations under this Agreement. 27. ENTIRE AGREEMENT; AMENDMENTS; WAIVERS. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof, superseding all prior negotiations, discussions, agreements and understandings, whether oral or written, relating to such subject matter. This Agreement may not be amended and no rights hereunder may be waived except by a written document signed by the party to be charged with such amendment or waiver. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereto (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 28. HEADINGS. The headings of the articles and sections of this Agreement and any listing of its contents are for guidance and convenience of reference only and shall not limit or otherwise affect any of the terms or provisions of this Agreement. 29. COUNTERPARTS. This Agreement may be executed by Buyer and Seller in any number of counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same instrument. 30. EXPENSES, FEES AND TAXES. Each of the parties hereto shall pay its own fees and expenses incident to the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby, including broker fees. Buyer shall be responsible for the cost of all fees for the recording of transfer documents. All other costs shall be borne by the party incurring them. Notwithstanding anything to the contrary herein, it is acknowledged and agreed by and between Seller and Buyer that the Purchase Price excludes any sales taxes or other taxes in connection with the sale of property pursuant to this Agreement. If a determination is ever made that a sales tax or other transfer tax applies, Buyer shall be liable for such tax as well as any applicable conveyance, transfer and recording fees, and real estate transfer stamps or taxes imposed on any transfer of property pursuant to this Agreement. Buyer shall indemnify and hold Seller harmless with respect to the payment of any of such taxes, including any interest or penalties assessed thereon. 31. LAWS AND REGULATIONS. From and after the Closing, (a) Buyer shall comply with all applicable laws, ordinances, rules and regulations and shall properly obtain and maintain all permits required by public authorities with regard to the Properties, and shall provide and maintain with the applicable regulatory agency(ies) all required bonds, and (b) Buyer shall assume all of Seller's obligations with regard to abandonment of all existing unplugged wells, whether producing or nonproducing, and abandonment of the leasehold property including, where applicable, the plugging of wells and the restoration of the surface as completely as practicable and/or in compliance with all applicable laws, rules, regulations and in compliance with all leases and other agreements affecting the Properties, and shall indemnify and hold Seller harmless with respect to any and all of those obligations. Such obligations shall survive the Closing and Buyer shall remain liable therefor as regards Seller even if Buyer shall assign, sell or transfer the Properties to a third party. 21 32. CONFIDENTIALITY; PUBLIC ANNOUNCEMENTS. The terms of this Agreement are considered confidential to the parties hereto, and neither party may disclose any of the terms of this Agreement to any third person prior to the Closing without the prior written consent of the other party (which consent will not be unreasonably withheld); provided that each party may disclose the terms of this Agreement as required by applicable laws or the applicable rules and regulations of any governmental agency or securities exchange, and the parties hereto may disclose the terms of this Agreement to those of its and its affiliates' employees, directors, attorneys, accountants, engineers and other consultants as may be required in connection with the negotiation, evaluation and implementation of this Agreement. Except as may be required by applicable laws or the applicable rules and regulations of any governmental agency or securities exchange, neither Buyer nor Seller shall issue any such press release or other publicity without the prior written consent of the other party, which consent shall not be unreasonably withheld. 33. ARBITRATION. Except as otherwise specifically provided herein, any controversy under this Agreement shall be submitted to arbitration in Dallas, Texas, in accordance with the Commercial Arbitration Rules of the American Arbitration Association. Upon written demand of either party, the parties shall meet and attempt to appoint a single arbitrator. If the parties fail to name an arbitrator within ten (10) days from such demand, then the arbitrator(s) shall be selected by the American Arbitration Association from the panels of arbitrators of the American Arbitration Association. The arbitrator(s) selected to act hereunder shall be qualified by education and training to pass upon the particular question in dispute and shall make a decision on the dispute within thirty (30) days after his or their appointment, subject to any reasonable delay due to unforeseen circumstances. The compensation and expenses of the arbitrator(s) shall be borne equally by the parties. Arbitration may proceed in the absence of any party if notice of the proceedings has been given to such party. The parties agree to abide by all awards rendered in such proceedings. 34. EXHIBITS. The following Exhibits and Schedules are incorporated herein and are a part hereof: EXHIBITS -------- Exhibit A - Wells Exhibit B - Leases Exhibit C - Allocated Values Exhibit D - Form of Assignment, Bill of Sale and Conveyance SCHEDULES --------- Schedule 4.3 - Gas Imbalances Schedule 5.5 - Preferential Purchase Rights/Consents Schedule 5.6 - Litigation and Claims Schedule 5.15 - Outstanding Obligations 22 Executed as of the date set forth above. SELLER AVIVA AMERICA, INC. By: /s/ Ronald Suttill ------------------------------- Its: President ------------------------------ BUYER LOMAK PETROLEUM INC. By: /s/ Jeffery A. Bynum ------------------------------- Its: Vice President ------------------------------ 23 EX-10.60 5 SANTANA CRUDE PURCHASE & SALE AGREEMENT EXHIBIT 10.60 1 AGREEMENT No. DIJ-1207 SUPPLIER : ARGOSY ENERGY INTERNATIONAL and NEO ENERGY, INC. SUBJECT MATTER: SALE AND PURCHASE OF SANTANA CRUDE TERM : FEBRUARY 1, 1997 TO DECEMBER 31, 1997 AMOUNT : INDEFINITE The Parties hereto, on one hand EMPRESA COLOMBIANA DE PETROLEOS "ECOPETROL", hereinafter referred to as ECOPETROL, an industrial an commercial State-owned corporation, duly authorized under the Act 165, 1948, and governed by its bay-laws approved by the Decree 1209/94, with headquarters in the city of Santafe de Bogota, D.C., duly represented by LUIS AUGUSTO YEPES G., of age, bearing the Identity Card No. 19.125.070 issued in Bogota, domiciled in Bogota, who herein states and declares: a. That he acts in his capacity as Vice President and duly vested with legal powers and internal Ecopetrol standards.- b. That the execution of this Agreement has been authorized as stated in the Memorandum CGI-0217; an on the other hand, ARGOSY ENERGY INTERNATIONAL, a corporation organized and existing under Utah State, United States of America, domiciled in Salt Lake, Utah State, with branch office in Colombia, incorporated under the Public Indenture No. 5323, executed in the Notary Seven in Bogota on October 2 25, 1983 and filed with the Chamber of Commerce of Bogota, Registry No. 200848, on November 23, 1983, duly represented by SANTIAGO GONZALEZ ANGULO, of age, bearing the ID # 5.584.373 from Barrancabermeja, and NEO ENERGY INC., a corporation organized and existing under Texas State, United States of America, domiciled in Dallas Tx., which branch office is established in Colombia, incorporate under hhe Public Indenture No. 6.179 executed in the Notary Four in Bogota, on October 23, 1986 and filed with the Chamber of Commerce of Bogota, represented by WALDO E. CASAS, of age and bearing the Identity Card No. 126.688 from Bogota; above latter two companies hereinafter referred to as THE VENDOR, who have entered into this Sale and Purchase Agreement of Santana Crude, governed by the clauses below: CLAUSE 1.- SUBJECT MATER AND AMOUNT. THE VENDOR undertakes to sell and delivery ECOPETROL, under the condition hereunder, crude oil produced under "Santana" Joint Venture agreement, corresponding to VENDOR, in the amount and quality determined pursuant to provision in Clause 2 hereunder, which ECOPETROL undertakes to receive it and pay up. PARAGRAPH 1: "Santana" Joint Venture Agreement was entered into on May 27, 1987, with effective 3 date on July 27, 1987, between and by ECOPETROL and ARGOSY ENERGY INTERNATIONAL and NEO ENERGY, INC. PARAGRAPH 2: All and any purchase shall be made by ECOPETROL according to crude purchasing preliminary scheduling agreed upon by the parties hereto for six (6) month periods, which ECOPETROL may change by giving written notice to VENDOR no less than thirty (30) days in advance. PARAGRAPH 3: Crude amounts the VENDOR will sale ECOPETROL shall be invoiced separately by ARGOSY ENERGY INTERNATIONAL and NEO ENERGY, INC., according to their participation in the Joint Venture Agreement, as follows: ARGOSY ENERGY INTERNATIONAL, fifty five percent (55%) and NEO ENERGY, INC. forty five percent (45%). CLAUSE 2: QUALITY.- Crude Quality subject matter of this Agreement shall have the following specifications: a) Crude gravidity shall be that with such crude is obtained through the operations carried out to the production thereof. b) Water and sediment contents in the crude shall not be higher than 0.5% in volume and the determination thereof will be made by using the methods ASTM-D95 "water in bearing-oil products and bituminous materials by distillation", last revision, and ASTM-D473 "sediments in crude and combustoil by 4 extraction", last revision, respectively. c) Sulphur contents in crude shall be that with which such crude is obtained through the operations carried out for the production thereof; its determination will be made by using the ASTM-D2622 method, last revision "Ray-X sulphur analysis". d) Salt contents shall be > 20 - lb/1000 crude oil barrels and the determination thereof will be made by the ASTM-D3230 method, "salts in crude (electrometric method)", last revision. When any of above parameters is not met, or otherwise the specifications above are not within the allowable range, ECOPETROL reserves the right to reject crude oil. And, if ECOPETROL chooses to accept crude with salt contents higher than the specifications hereto, oil price shall be penalized according to table below:
SALT CONTENTS PENALIZATION CHARGE ON lb/1000 BLS. USD/BARREL 20.1 30.0 0.160 VENDOR 30.1 40.0 0.180 VENDOR 40.1 60.0 0.200 VENDOR 60.1 80.0 0.220 VENDOR 80.1 100.0 0.240 VENDOR
It shall be understood that VENDOR shall make its best efforts to deliver crude oil hereunder, bearing a salt contents lower than twenty (20) lb. per 1000 barrels crude 5 oil. e) Any variance related to quality specifications hereinbelow referred to, acceptable for the parties hereto, should be included in a Record signed by ECOPETROL and the VENDOR representatives. CLAUSE 3: DELIVERY SITE AND TITLE.- Crude oil, subject matter of this Agreement shall be delivered by the VENDOR to ECOPETROL in Santana Terminal, where Crude will be subsequently measured and analyzed, from the standpoint above referred to, carried by ECOPETROL up to Tumaco Terminal. The title to property and the risk will pass from the VENDOR to ECOPETROL at the time when crude oil has passed through the outlet flange of the measuring system located at Santana terminal. PARAGRAPH 1: Should Santana Association will construct Santana-Orito Pipeline, measurement and transfer of crude title shall be effective in Orito. Additionally, from such date on, crude sale and purchase price will be changed, inasmuch as transportation rate from Santana-Orito will be not taken into account, pursuant to Resolution 9035 of February 18/94 from the Ministry of Mines and Energy. PARAGRAPH 2: Receipt capacity of Santana Crude will be limited to Santana-Orito pipeline capacity existing in this time. CLAUSE 4: TERM.- The initial term of this Agreement shall 6 be eleven (11) months from February 1, 1997 up to December 31, 1997 and may be extended for one (1) year additional periods by written agreement between the parties hereto, before the expiry date of this Agreement. CLAUSE 5: PRICE.- The price ECOPETROL will pay the VENDOR for the Crude delivered in Santana terminal shall be defined as follows: Price = base price more or less adjustment for quality less transportation, less handling and marketing. PARAGRAPH 1: Base price will the weighted average of export shipments invoiced by ECOPETROL during each month. PARAGRAPH 2: Adjustment for quality to be applied in this Agreement will be for API Gravity and sulphur contents which shall be computed on a monthly basis according to the method described in Exhibit 1 hereto. PARAGRAPH 3: Santana-Tumaco carriage cost, as well as the relevant carriage tax shall adhere the legal provisions then in force and will be subject to any amendment of such provisions during the Agreement term. In line with provisions in Resolution 9035 of February 18, 1994 from the Ministry of Mines and Energy, Santana-Tumaco carriage rate as of Dec. 31, 1996 accounts up to 1.2434 USD/Bl; carriage tax amount shall correspond to two percent (2%) of rate, 7 according provision in Sect. 17, Decree 2140/55, adopted as a permanent rule by the Act. 10/61. Such tax shall be paid pursuant to privisioin in Act 141, 1994, which as of January 31/97 is 0.0249 USE/Bl. Such rates, will be readjusted on a yearly basis according to provisions in Resolution 9035 above referred to. PARAGRAPH 4: Handling and marketing cost will be 0.515 USD/Bl. PARAGRAPH 5: If during any month or consecutive months there is no crude export, the prior month price will be applied. Such price will be adjusted the next month according to new price computed for exports. Santana Crude volume received during the corresponding month will be taken and the adjustment for quality will be computed by using the average of quotations of basket crude corresponding to the three months prior to the adjusted month. PARAGRAPH 6. If crude blend Tumaco cabotages will occur (South Blend) to Cartagena Refinery sale and price conditions ECOPETROL shall recognize to VENDOR, will the same obtained by the International Manager Office, for crude blend received by Cartagena Refinery, plus or minus the adjustment for quality, plus or minus the Santana-Tumaco carriage cost and the relevant tax, less Tumaco-Cartagena carriage (value 8 invoiced by ECOPETROL), less handling and marketing (USD 0.415/Bl). For such case, ECOPETROL shall adivise the VENDOR the mechanism to be used for price reckoning agreed on with Cartagena Refinery. CLAUSE 6: INVOICING AND PAYMENT CONDITIONS. VENDOR shall invoice ECOPETROL at its office in Bogota, within ten (10) first days of each month, the VENDOR-owned crude oil delivered to ECOPETROL during the latter month, after deducing the volume corresponding to royalties, contributions, and participation. Within seven (7) days of the term above referred to, ECOPETROL shall provide the VENDOR with the data required by the VENDOR to make the relevant invoicing. Payment shall be made on a monthly basis thirty (30) days following the date of the invoice receipt by ECOPETROL, after making the appropriate legal withholding, if any. Twenty five percent (25%) of the value shall be paid in Colombian currency and seventy five percent (75%) shall be paid in US Dollars. Invoicing shall be make upon the basis of net volume, water and sediment free, corrected at 60 degrees F. For Colombian currency portion the relevant market exchange rate shall be used, as certificated by Bank Superintendency, computed as the 9 arithmetic average corresponding to Crude deliveries. PARAGRAPH 1: In the event of arrears to pay the portion payable in dollars, over invoices not timely challenged by ECOPETROL, ECOPETROL shall pay VENDOR, as interest payable in USD, the rate equivalent to "Prime Rate" as stated by Chase Manhattan Bank of New York, during the days of the effective arrears plus 2.0%. In the event of arrears to pay the portion payable in Colombian currency, over the respective amount in Col$, ECOPETROL shall pay the maximum interest, according to a certificate from Bank Superintendency. Invoices to collect dollars or pesos interest shall be paid within ten (10) days following the receipt of the invoice by ECOPETROL. PARAGRAPH: Should ECOPETROL has not USD available and of free disposal, or otherwise cannot obtain USD from the Colombian Government or the authorized agencies thereof, to pay oil purchases hereunder, ECOPETROL shall timely notice the VENDOR, without prejudice of the conditions set forth in Paragraph 1, hereinabove, and the parties hereto shall have available thirty (30) calendar days, from ECOPETROL notice, to mutually agree upon to reach to and agreement. PARAGRAPH 3: ECOPETROL shall have fifteen (15) business days to 10 review, amend or otherwise challenge the invoices submitted by the VENDOR. Any invoice which has not been challenged within such term shall be deemed as conclusive and correct. Any adjustment or amendment to be made to the invoice shall become the valid date the effective date of the amendment or adjustment before ECOPETROL. ECOPETROL shall, within the provided term, advise the VENDOR about any invoice challenged, for it to be adjusted and amended, clearly specifying the items to be amended or corrected, and the reasons thereof. CLAUSE 7: INSPECTION AND MEASURING.- For the purposes set forth in Clause 2 hereto, determination of quality shall be made as per operative procedures mutually set forth by the parties hereto according to a written Record. Either party may, from time to time, appoint an independent inspector for him/her to certify both quantity and quality, make tank appraisal or volume instruments gauging. Cost shall be fifty-fifty borne by ECOPETROL and the VENDOR. CLAUSE 8: TERMINATION. VENDOR or ECOPETROL may terminate this Sale and Purchase Agreement by giving notice with sixty (60) days before expiry term of Santana Crude Export Agreement. If VENDOR makes the decision to directly export its Santana Crude, it 11 shall advise in writing the PURCHASER, sixty (60) days in advance, and within such term ECOPETROL and VENDOR may terminate this Agreement. CLAUSE 9: DESTINATION -ECOPETROL may give crude oil purchased the destination as it deems suitable to its interests, provided however such destination will be allowed by the legal in force provisions applicable in that time. CLAUSE 10: ASSIGNMENT.- Neither Party hereto may assign, sell, or otherwise transfer the entire or any portion of their rights or obligations hereunder, to a third party, without prior and written consent of the other party. CLAUSE 11: FORCE MAJEURE.- Neither ECOPETROL nor the VENDOR will be liable of unfulfillment of all or any of the obligations hereunder, if such unfulfillment results from any event of force majeure or casus fortuitus duly documented. Force majeure shall not release ECOPETROL the obligation to pay the VENDOR those invoices on account of crude sale already delivered by VENDOR to ECOPETROL, as provided in Clause 7 hereunder. CLAUSE 12: COLOMBIAN LAWS GOVERNING THIS AGREEMENT.- For any and all purposes of this Agreement, parties hereto assign as domicile the city of Santafe de Bogota, D.C., Republic of Colombia. This Agreement shall 12 be governed by the Colombian laws, and the parties hereto shall subject to Colombian Courts venue and waive to any diplomatic claim concerning their rights and obligations hereunder, with the exception of justice denial. For all and any effects of this Agreement, it shall be understood incorporated in this Agreement, the provisions of Sect. 25, Act 40/93, and Chap. 2, Title III, Act 104/93, as amended. CLAUSE 13.- NOTICES.- Any notice related to, or connected with this Agreement shall make reference to this Clause and to the appropriate Clause. Such notices shall be forwarded via registered mail, telex, or otherwise delivered in the address below, and shall be considered received in the appropriate address in the date appearing in the letter receipt or otherwise in the date the telex was sent: If to Empresa Colombiana de Petroleos -ECOPETROL: Carrera 13 # 36-24, A.A. 59-38, Telex No. 44787 Attn. Vicepresidencia de Comercio Internacional y Gas If to VENDOR: ARGOSY ENERGY INTERNATIONAL Avenida 13 (Autopista Norte) No. 122-56 Piso 4-5 Facsimile: 6195480, Santafe de Bogota, D.C. Attn. Santiago Gonzalez A., President 13 and NEO ENERGY, INC Avenida 13 (Autopista Norte) # 122-56 Piso 4-5 Santafe de Bogota, D.C. Attn.: Waldo E. Casas, Legal Representative. Any address change shall be advised in writing and in advance to the other party. CLAUSE 14.- TAX AND EXPENSES.- Any tax and expenses incurred in for this Agreement execution and extensions/amendments thereof, shall be borne only by the VENDOR. CLAUSE 15: DISCREPANCIES: A) Should any discrepancy between the parties hereto will arise related to construction and performance of this Agreement, which cannot amicably settle, shall be subject to jurisdictional branch of the public Colombian power. B) Any in fact of technical in nature discrepancy which may arise between the parties hereto, by reason of construction or application of this Agreement, which cannot settle by mutual agreement, shall be subject to an arbitration award appointed as follows: One arbiter appointed by each party and the third arbiter appointed by mutual agreement by the two arbiters mutually appointed by the parties hereto. If the two arbiters do not reach to an agreement to appoint the third arbiter, 14 then the third arbiter shall be appointed, at the request of either party, by the Board of Director of the Sociedad Colombiana de Ingenieros, with headquarters in Santafe de Bogota, D.C. C) Any accounting in nature discrepancy which may arise among the parties by reason of construction and performance of this Agreement, which cannot amicably settled, shall be subject to arbiter award, who shall be Registered Accountants, as follows: One (1) appointed by each party, and the third arbiter appointed by the two arbiters appointed by the parties. In default of agreement between the two arbiters, and at the request of either party hereto, such third arbiter shall be appointed by the Junta Central de Contadores de Bogota, and in default thereof, by Sociedad Colombiana de Ingenieros. D) Both parties hereto declare and accept that arbiters' award shall have all and any effect of a transaction between the parties hereto, and hence, such award shall be conclusive. E) If any discrepancy will arise between the parties hereto, concerning technical, accounting, or legal nature of the dispute, such discrepancy shall be considered as legal and literal A) of this Clause shall be applied. The agreement reached by the parties as provided in this Clause 15 shall be understood without prejudice of the special procedures provided in this Agreement. IN WITNESS WHEREOF, this Agreement have been signed up this 10th day of February, 1997, in documentary paper of ECOPETROL, which sheets bear the numbers 0003188 and 0003195 for original and counterparts thereof. EMPRESA COLOMBIANA DE PETROLEOS -ECOPETROL /s/ LUIS AUGUSTO YEPES G. Vice-President ARGOSY ENERGY INTERNATIONAL NEO ENERGY, INC /s/ SANTIAGO GONZALEZ ANGULO /s/ WALDO E. CASAS Legal Representative Legal Representative 16 EXHIBIT 1 COMPUTATION ADJUSTMENT FOR QUALITY COMPENSATION Adjustment procedure for quality shall be applied on a monthly basis for deliveries of the prior month, according to the method below. DATA REQUIRED: . Regression Equation to compute reference prices according to information example furnished at the end of the current month. . Volume and quality (API and %wtS) of crude blend shipment(s) taken out Tumaco Terminal to be exported. . Volume and quality (API and %wtS) of Santana Crude delivered in Santana terminal, as well as the volume of deliveries in Mary, Miraflor, Toroyaco and Linda fields. . Value of base price crude blend delilvered in Tumaco, to be exported. PROCEDURE 1. To reckon reference prices of crude blend taken away from Tumaco and Santana crude delivered in Santana 17 Terminal, by using regression equation according to the relevant quality. 2. With volumes of crude blend taken away in Tumaco and Santana crude delivered in Santana terminal, and the reference prices prior calculated, calculate value in USD of each. 3. Calculate fraction of Santana crude in crude blend dividing USD of Santana crude by USD crude blend. 4. Calculate Santana crude volume compensated, multiplying crude blend volume taken away in Tumaco by the fraction value of Santana crude. 5. Calculate compensation factor of Santana crude dividing compensated value of Santana crude by Santana crude volume delivered in Santana terminal. 6. Calculate compensation value as follows: Compensation value=base price*(compensation factor less 1) Base price shall be export value of crude blend FOB Tumaco. Example: All information given below is by way of example. Information required: 1. Regression equation: Price = Bo + B1* SG + B2* %wtS - ----------------------------------------------- B2 = -0.7995 B1 = -3.8822 Bo = 20.1712 - ----------------------------------------------- 18 Where: Bo = Independent term B1 = Regression coefficient associated to specific gravidity SGR = Crude specific gravity B2 = Regression coefficient associated to percent of sulphur weight %wtS = Percent of crude sulphur weight 2. Crude blend taken away in Tumaco terminal: Volume: 400.000 net barrels Quality: 28.90(degrees)API (0.882 SGR), 0.790 %S Base price of crude blend delivered in Tumaco: 16.0000 USD/barrel 3. Santana Crude delivered in Santana terminal: Volume: 150.000 net barrels Quality: 26.50(degrees)API (0.896 SGR) Sulphur contents is derived as the average of sulphur contents in crude of Mary, Miraflor, Linda, and Toroyaco fields weighted by the volume delivered per field, as follows: 19
- ----------------------------------------------------------------- CRUDE % WEIGHT OF S FIELD DELIVERIES (FIELDS) Barrels - ----------------------------------------------------------------- MARY 0.579 81.661 - ----------------------------------------------------------------- MIRAFLOR 0.644 13.454 - ----------------------------------------------------------------- LINDA 0.481 3.766 - ----------------------------------------------------------------- TOROYACO 0.527 60.164 - ----------------------------------------------------------------- TOTAL DELIVERIES 159.045 - ----------------------------------------------------------------- WEIGHTED SULPHUR CONTENTS 0.550 - -----------------------------------------------------------------
Sulphur quality: 0.550 %S Note: Sulphur contents of the several different fields is that supplied by Ecopetrol Technical Division, which, for such purposes will hire an independent inspection firm and the expenses shall be borne fifty- fifty Ecopetrol and the VENDOR. CALCULATION METHOD: 1. Replacing in the regression equation the quality of each crude. Crude blend price = 20.1712 + (-3.8822)* 0.882 + (-0.7995)* 0.790 = 16.1155 USD/Bl. Santana Crude price = 20.1712 + (-3.8822)* 0.896 + (-0.7995)* 0.550 = 16.2530 USD/Bl. 20 2. Value in USD each crude Crude blend = Volume* Price = 400.000 Bls* 16.1155 USD/Bl = USD6.446.200.00. Santana Crude = Volume* Price = 150.000 Barrels* 16.2530 USD/Bl = USD2.437.950,00. 3. Santana crude fraction in crude blend. 2.437.950,00/6.446.200,00 = 0.3782 4. Santana Crude compensated volume 400.000 Bls* 0.3782 = 151.250 Bls. 5. Santana Crude compensation factor 151.280.00 Bls/150.000,00 Bls = 1.0085 6. Compensation value = 16.00 USD/Bl* (1.0085 -1) = 0.1360 USD/Bl. INFORMATION ON REGRESSION EQUATION To calculate regression equation the table below of 14 international crude is used. Prices of such crude correspond to arithmetic average of the quotation in the three months prior to quality compensation appraisal. Such information, both of price and quality, shall be derived from the public monthly report issued by Platt's, and named as follows: "PLATTs OIL GRAM PRICE REPORT". Table of 14 international crude is as follows: 21
PRICE (USD/Bl - -------------------------------------------------------------- CRUDE API SGR %wts MONTH X YEAR X - -------------------------------------------------------------- FATAH 30.70 0.8724 1.90 21.50 - -------------------------------------------------------------- ARAB LIGHT 33.40 0.8581 0.17 22.53 - -------------------------------------------------------------- ARAB 28.50 0.8844 2.85 21.55 MEDIUM - -------------------------------------------------------------- ARAB HEAVY 27.40 0.8905 2.80 20.79 - -------------------------------------------------------------- BRENT 38.00 0.8348 0.30 24.04 BLEND - -------------------------------------------------------------- BONNY 35.70 0.8463 0.14 24.01 LIGHT - -------------------------------------------------------------- CANO LIMON 29.50 0.8789 0.45 24.45 - -------------------------------------------------------------- FORCADOS 31.00 0.8708 0.20 24.06 - -------------------------------------------------------------- FLOTA 36.00 0.8448 1.20 23.49 BLEND - -------------------------------------------------------------- ISTHMUS 33.00 0.8602 1.30 23.16 - -------------------------------------------------------------- KUWAIT 31.40 0.8686 2.52 21.26 - -------------------------------------------------------------- MANDJI 30.50 0.8735 1.10 22.08 - -------------------------------------------------------------- MAYA 22.00 0.9218 3.40 19.83 - -------------------------------------------------------------- EAST 29.50 0.8789 0.90 22.06 - --------------------------------------------------------------
Above international crude basket can be changed by mutual agreement between the parties hereto. NOTA 1: 22 When crude quality of the basket will vary during any month, the average of the three quality values corresponding to the same months where quotations shall be taken. NOTA 2: When in some month there is no quotation of any crude of the basket, the average of the two prior months shall be taken instead of the three quotations taken for price calculation of that month, and between the parties shall agree on in writing if basket will definitely be reduced or by which other crude will be replaced to calculate the price for the next price. 23 This is a fair and accurate English translation of the original document which is in the Colombian language. /s/ James L. Busby -------------------------------- James L. Busby Secretary and Treasurer of Aviva Petroleum Inc. EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET OF AVIVA PETROLEUM INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1996 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 2,041 0 3,750 0 721 6,794 58,937 23,991 42,944 9,408 5,210 0 0 1,574 24,656 42,944 13,750 13,750 12,173 12,173 0 0 814 (26) 911 (937) 0 0 0 (937) (0.03) 0
-----END PRIVACY-ENHANCED MESSAGE-----