-----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, AV8W35kWNAQRpr3G84UVYozsyEDn53VouKRRBviCASNBFzyi9PGFunsveo1wVGmq CrSDM1UgmzYTQOvB3cFgBA== 0000930661-00-000789.txt : 20000331 0000930661-00-000789.hdr.sgml : 20000331 ACCESSION NUMBER: 0000930661-00-000789 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 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: SEC FILE NUMBER: 001-13440 FILM NUMBER: 585121 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-K 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, 1999 ------------------------ 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 *The Company's Depositary Shares were delisted by the American Stock Exchange effective as of April 9, 1999. 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 and non-voting securities held by non- affiliates of the Registrant on February 29, 2000 was approximately $545,000. As of such date, the last sale price of a Depositary Share representing five shares of Common Stock, without par value ("Common Stock"), was U.S. $0.0625, as quoted on the OTC Bulletin Board. As of February 29, 2000, 46,900,132 shares of Registrant's Common Stock were outstanding, of which 25,483,690 shares of Common Stock were represented by Depositary Shares. DOCUMENTS INCORPORATED BY REFERENCE None. TABLE OF CONTENTS TO FORM 10-K Page ---- Part I Important Information - Going Concern Risk.............................. 1 Item 1. Business General.................................................... 1 Garnet Merger.............................................. 1 Current Operations......................................... 1 Risks Associated with the Company's Business............... 2 Products, Markets and Methods of Distribution.............. 3 Regulation................................................. 4 Competition................................................ 8 Employees.................................................. 8 Item 2. Properties Productive Wells and Drilling Activity..................... 8 Undeveloped Acreage........................................ 9 Title to Properties........................................ 9 Federal Leases............................................. 10 Reserves and Future Net Cash Flows......................... 10 Production, Sales Prices and Costs......................... 10 Significant Properties Colombia................................................... 11 United States.............................................. 12 Papua New Guinea........................................... 12 Item 3. Legal Proceedings.............................................. 13 Item 4. Submission of Matters to a Vote of Security Holders............ 13 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Price Range of Depositary Shares and Common Stock.......... 14 Dividend History and Restrictions.......................... 15 Item 6. Selected Financial Data........................................ 16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations...................................... 17 Year 2000.................................................. 19 New Accounting Pronouncements.............................. 19 Liquidity and Capital Resources............................ 19 Item 7A. Quantitative and Qualitative Disclosure about Market Risk...... 21 Item 8. Financial Statements and Supplementary Data.................... 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................... 21 Part III Item 10. Directors and Executive Officers of the Registrant Directors of the Company...................................... 22 Executive Officers of the Company............................. 22 Meetings and Committees of the Board of Directors............. 23 Compliance with Section 16(a) of the Securities Exchange Act of 1934....................................... 23 Item 11. Executive Compensation Summary Compensation Table................................. 24 Directors' Fees............................................ 24 Option Grants During 1999.................................. 24 Option Exercises During 1999 and Year End Option Values.............................................. 24 (i) TABLE OF CONTENTS TO FORM 10-K (Continued) Page ---- Compensation Committee Interlocks and Insider Participation in Compensation Decisions............................... 25 Employment Contracts....................................... 25 Compensation Committee Report on Executive Compensation.... 25 Performance Graph.......................................... 26 Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners............ 27 Security Ownership of Management........................... 28 Item 13. Certain Relationships and Related Transactions................. 28 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................................... 29 Signatures................................................................ 31 (ii) PART I IMPORTANT INFORMATION GOING CONCERN RISK If the Company is unable to consummate the debt restructuring discussed herein, then, in the absence of another business transaction or debt restructuring, the Company cannot achieve compliance with or make principal payments required by its bank credit facilities and, accordingly, the lenders could declare a default, accelerate all amounts outstanding and attempt to realize upon the collateral securing the debt (which comprises substantially all the Company's assets). As a result of this uncertainty, management believes there is substantial doubt about the Company's ability to continue as a going concern. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - - Liquidity and Capital Resources" and Note 2 of the Notes to Consolidated Financial Statements contained elsewhere herein. 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, offshore in the United States, and in Papua New Guinea. The Company was incorporated in 1973 and the common stock, without par value ("Common Stock"), of the Company was traded on the London Stock Exchange Limited (the "London Stock Exchange") from 1982 to 1999. On May 6, 1999, trading of the Common Stock was suspended on the London Stock Exchange due to the Company's financial difficulties. Depositary shares ("Depositary Shares"), each representing the beneficial ownership of five shares of Common Stock, trade on the OTC Bulletin Board under the symbol "AVVPP.OB." The Company's principal executive offices are located in Dallas, Texas, and the Company maintains a regional office in Bogota, Colombia. Garnet Merger On October 28, 1998, the Company acquired Garnet Resources Corporation ("Garnet") in exchange for the issuance, in the aggregate, of approximately 14 million shares of the Company's Common Stock. Pursuant to the Agreement and Plan of Merger dated as of June 24, 1998, an indirect, wholly owned subsidiary of the Company was merged with and into Garnet. Garnet's $15 million of 9 1/2% Convertible Subordinated Debentures were acquired and canceled, and the outstanding bank debt of Garnet and the Company was refinanced under a $15 million credit facility. As a result of the merger, the Company has been able to effect cost savings, particularly in Colombia where each company had an interest in the same properties. Current Operations Colombia. The Company is the owner of interests in, and is engaged in -------- exploration for, and development and production of oil from, two contracts granted by Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The Company's Colombian activities have been carried out by the Company's wholly owned subsidiary, Neo Energy, Inc. ("Neo"), and Argosy Energy International ("Argosy"), which operates the Colombian properties and is a subsidiary of Garnet. Prior to December 31, 1998, Neo had a 45% interest and Argosy had the remaining 55% interest in the contracts. Effective December 31, 1998, the net assets of Neo were transferred into Argosy. Argosy is currently party to two contracts with Ecopetrol called Santana and Aporte Putumayo. Both contract areas are located in the Putumayo Basin of southwestern Colombia. The Company's exploration and development activities are currently concentrated in the Santana contract area. Twenty-one wells have been drilled on the Santana concession. Of 13 exploratory wells, seven have been productive and six were dry holes. Of eight development wells, seven have been productive. Four fields have been discovered and have been declared commercial by Ecopetrol. Gross production from the Santana concession has 1 totaled approximately 15.5 million barrels during the period from April 1992, when production commenced, through December 1999. The Aporte Putumayo block produced from 1976 until March 1995, when declining production caused the block to be unprofitable under the terms of the contract. Ecopetrol has accepted the Company's request for relinquishment, which is pending abandonment and restoration operations on certain old wells in the block. 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. Both 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, Argosy has the right to proceed with development and production at its own expense until such time as it has 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 contracts) incurred by Argosy prior to the declaration of commerciality are recovered by means of retention by Argosy 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 17 wells located in the Gulf of Mexico offshore Louisiana, at Main Pass 41 and Breton Sound 31 fields. AAI is the operator of Breton Sound 31 field. Effective January 1, 1999, the Company relinquished operatorship of Main Pass 41 field. The Company acquired its interests in these fields through the acquisition of Charterhall Oil North America PLC in 1990. Papua New Guinea. In Papua New Guinea the Company, through its wholly ---------------- owned subsidiary, Garnet PNG Corporation ("Garnet PNG"), is engaged in the exploration for oil and gas attributable to its 2% carried working interest in Petroleum Prospecting License No. 206 ("PPL-206"). The Company acquired Garnet PNG as part of the merger with Garnet. See "-- Garnet Merger. " 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 may expend additional capital for further exploration and development of such properties. Even if the results of such activities are favorable, further drilling at significant costs may be required to determine the extent of and to produce the recoverable reserves. Failure to fund certain 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." 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 2 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 the leftist guerrillas who have operated within Colombia for many years. The guerrillas in the Putumayo area, where the Company's property is located, have as recently as August 3, 1998, significantly damaged the Company's assets. Although the Company's losses were recovered through insurance, there can be no assurance that such coverage will remain available or affordable. The Colombian army guards the Company's operations, however, there can be no assurance that the Company's operations will not be the target of significant guerrilla 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 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 12 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 a sales contract with -------- Ecopetrol. The contract provides 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, 1999, the Company received the majority of its revenue from Ecopetrol. Sales to Ecopetrol accounted for $5,683,000, or 84% of oil and gas revenue for 1999, $2,632,000, or 79.0% of oil and gas revenue for 1998 and $7,405,000, or 76.1% of oil and gas revenue for 1997. The foregoing amounts represent 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 1998 and 1997, the Company received more than 10% of its revenue from one domestic purchaser. Such revenue accounted for $479,000, or 14.4% of oil and gas revenue for 1998 and $1,516,000, or 15.6% of oil and gas revenue for 1997. During 1999, the Company did not receive more than 10% of its revenue from any one domestic purchaser. 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, 3 which the Company may discover or purchase. It is possible that under market conditions prevailing in the future, the production and sale of oil or gas, if any, from the Company's properties in Papua New Guinea may not be commercially feasible. 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. 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 revision or reinterpretation of existing laws and regulations or adoption of new laws and regulations that result in more stringent and costly waste handling, disposal, remedial, drilling, permitting, or operational requirements could have a material adverse 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 adverse 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, including administrative, civil and criminal penalties for violations of environmental laws and regulations, 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 for a period of approximately 10 months in 1994 pending review and approval of additional environmental studies submitted by the Company. Since the lifting of the above referenced suspension, the Company has received subsequent permits, without substantial delay. 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 its domestic operations are ------------- currently in substantial compliance with U.S. federal, state, and local environmental laws and regulations. Over the past few years, the Company has incurred significant costs to make capital improvements, including the drilling and completion of a salt water injection well at Breton Sound 31 field and the upgrading and modification of production and water treatment facilities at Main Pass 41 field, in order to maintain compliance with these U.S. environmental laws or regulations. There can be no assurance that the Company will not expend additional significant amounts in the future to maintain such compliance. The Oil Pollution Act of 1990, as amended ("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 4 such spills in waters of the United States. A "responsible party" includes the owner or operator of a vessel, pipeline, or onshore facility, 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. 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. Under OPA '90 and a final rule adopted by the U.S. Minerals Management Service ("MMS") in August 1998, owners and operators of covered offshore facilities that have a worst case oil spill of more than 1,000 barrels must demonstrate financial responsibility in amounts ranging from $10 million in specified state waters to $35 million in federal outer continental shelf waters, with higher amounts of up to $150 million in certain limited circumstances where the MMS believes such a level is justified by the risks posed by operations at such covered offshore facilities or if the worst case oil-spill discharge volumes possible at such facilities may exceed the applicable threshold volumes specified under the MMS final rule. The Company believes that it currently has established adequate proof of financial responsibility for its covered offshore facilities. However, the Company cannot predict whether these financial responsibility requirements under the OPA '90 amendments or the final rule will result in the imposition of significant additional annual costs to the Company in the future or otherwise have a material adverse effect on the Company. The impact of financial responsibility requirements is not expected to be any more burdensome to the Company than it will be to other similarly or less capitalized owners or operators in the Gulf of Mexico. 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. 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. In connection with the issuance of these regulations by the EPA, and following various extensions granted by the LDEQ, the Company drilled and completed a saltwater injection well at the Breton Sound Block 31 facilities in October 1998. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, and analogous state laws impose 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, property damage and recovery of response costs 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. 5 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. The heavy and increasing regulatory burdens on the oil and gas industry increase the costs of doing business and, consequently, affect profitability. Historically, the transportation and sale for resale of natural gas in interstate commerce have been regulated pursuant to the Natural Gas Act of 1938 ("NGA"), the Natural Gas Policy Act of 1978 ("NGPA") and the regulations promulgated thereunder by the Federal Energy Regulatory Commission ("FERC"). In the past, the federal government has regulated the prices at which gas could be sold. In 1989, Congress enacted the Natural Gas Wellhead Decontrol Act, which removed all NGA and NGPA price and non-price controls affecting wellhead sales of natural gas effective January 1, 1993. Congress could, however, reenact price controls in the future. The Company's sales of natural gas are affected by the availability, terms and cost of transportation. The price and terms for access to pipeline transportation remain subject to extensive federal and state regulation. Several major regulatory changes have been implemented by Congress and the FERC from 1985 to the present that affect the economics of natural gas production, transportation and sales. In addition, the FERC is continually proposing and implementing new rules and regulations affecting those segments of the natural gas industry, most notably interstate natural gas transmission companies, that remain subject to the FERC's jurisdiction. These initiatives may also affect the intrastate transportation of gas under certain circumstances. The stated purpose of many of these regulatory changes is to promote competition among the various sectors of the natural gas industry and these initiatives generally reflect more light-handed regulation of the natural gas industry. The ultimate impact of the complex rules and regulations issued by the FERC since 1985 cannot be predicted. In addition, many aspects of these regulatory developments have not become final but are still pending judicial and FERC final decisions. For example, the FERC recently issued Order No. 637, which, among other things, (i) lifts the cost-based cap on pipeline transportation rates in the capacity release market until September 30, 2002, for releases of pipeline capacity of less than one year, (ii) permits pipelines to charge different maximum cost-based rates for peak and off-peak times, (iii) encourages auctions for pipeline capacity, (iv) requires pipelines to implement imbalance management services, (v) restricts the ability of pipelines to impose penalties for imbalances, overruns, and non-compliance with operational flow orders, and (vi) implements a number of new pipeline reporting requirements. Order No. 637 also requires the FERC Staff to analyze whether the FERC should implement additional fundamental policy changes, including, among other things, whether to pursue performance-based ratemaking or other non-cost based ratemaking techniques and whether the FERC should mandate greater standardization in terms and conditions of service across the interstate pipeline grid. In addition, the FERC recently implemented new regulations governing the procedure for obtaining authorization to construct new pipeline facilities and has issued a policy statement, which it largely affirmed in a recent order on rehearing, establishing a presumption in favor of requiring owners of new pipeline facilities to charge rates based solely on the costs associated with such new pipeline facilities. 6 The Company cannot predict what further action the FERC will take on these matters. However, some of the FERC's more recent proposals may adversely affect the availability and reliability of interruptible transportation service on interstate pipelines. The Company does not believe that it will be affected by any action taken materially differently than other natural gas producers, gatherers and marketers with which it competes. The natural gas industry historically has been very heavily regulated; therefore, there is no assurance that the less stringent regulatory approach recently pursued by the FERC and Congress will continue. A portion of the Company's operations are located on federal oil and gas leases, which are administered by the 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 (which are subject to change by the MMS). For offshore operations, lessees must obtain MMS approval for exploration plans and development and production plans prior to the commencement of such operations. In addition to permits required from other agencies, lessees must obtain a permit from the MMS prior to commencement of drilling. The MMS has promulgated regulations requiring offshore production facilities located on the OCS to meet stringent engineering and construction specifications. The MMS also has regulations restricting the flaring or venting of natural gas and has proposed to amend such regulations to prohibit the flaring of liquid hydrocarbons and oil without prior authorization. Similarly, the MMS has promulgated other regulations governing the plugging and abandonment of wells located offshore and the removal of all production facilities. To cover the various obligations of lessees on the OCS, the MMS generally requires that lessees 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. Under certain circumstances, the MMS may require Company operations on federal leases to be suspended or terminated. Any such suspension or termination could materially and adversely affect the Company's financial condition and operations. The MMS has issued a proposal to amend its regulations governing the calculation of royalties and the valuation of crude oil produced from federal leases. This proposed rule would modify the valuation procedures for non-arm's length crude oil transactions to decrease reliance on oil posted prices and assign a value to crude oil that better reflects its market value, establish a new MMS form for collecting differential data, and amend the valuation procedure for the sale of federal royalty oil. The Company cannot predict what action the MMS will take on this matter, nor can it predict how the Company will be affected by any change to this regulation. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at market prices. In a number of instances, however, the ability to transport and sell such products is dependent on pipelines whose rates, terms and conditions of service are subject to FERC jurisdiction under the Interstate Commerce Act. Certain regulations implemented by the FERC in recent years could result in an increase in the cost of transportation service on certain pipelines. However, the Company does not believe that these regulations affect it any differently than others. 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. The Company cannot accurately predict when or whether any such proposals or proceedings may become effective. 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. Such regulations include requiring permits for the drilling of wells, maintaining bonding requirements in order to drill or operate wells, and regulating the location of wells, the method of drilling and casing wells, the surface use and restoration of properties upon which wells are drilled, the plugging and abandoning of wells, and the disposal of fluids used in connection with operations. The Company's operations are also subject to various conservation laws and regulations including the regulation of the size of drilling and spacing units or proration units, the density of wells that may be drilled, and the unitization or pooling of oil and gas properties. In addition, state conservation laws establish maximum rates of production from oil and natural gas wells, generally prohibit the venting or flaring of natural gas, and impose certain requirements regarding the ratability of production. The effect of these regulations may limit the amount of oil and natural gas 7 that the Company can produce from its wells and may limit the number of wells or the locations at which the Company can drill. Inasmuch as such laws and regulations are periodically expanded, amended and reinterpreted, the Company is unable to predict the future cost or impact of complying with such regulations; however, the Company does not believe it will be affected by these laws and regulations materially differently than the other oil and natural gas producers with which it competes. Other Regulations - Papua New Guinea. The Company's operations in Papua ------------------------------------ New Guinea are currently governed by the Department of Petroleum and Energy, which has jurisdiction over all petroleum exploration in that country. In the event the Company develops and operates a petroleum business in Papua New Guinea, the Company will be subject to regulation by the Investment Promotion Authority, which regulates almost all business operations with significant foreign equity or with foreign management control. 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, 1999, Aviva had 61 full-time employees including 7 in the United States and 54 in Colombia. ITEM 2. PROPERTIES Productive Wells and Drilling Activity The following table summarizes the Company's developed acreage and productive wells at December 31, 1999. "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 3,880 1,565 Colombia(2) 3,706 1,296 ----- ----- 7,586 2,861 ===== ===== Productive Wells (3) Oil Gas ----------------------- ---------------------- Gross Net Gross Net --------- -------- --------- ------- United States (4) 10 5.29 7 2.87 Colombia 14 4.90 - - --------- -------- --------- ------- 24 10.19 7 2.87 ========= ======== ========= ======= (1) Developed acreage is acreage assignable to productive wells. (2) Excludes Aporte Putumayo acreage pending relinquishment. (3) Productive wells represent producing wells and wells capable of producing. (4) Two of the oil wells and one of the gas wells are dually completed. 8 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 ---------- ----------- ---------- ---------- 1999 United States - - - - Colombia - - - - ---------- ----------- ---------- ---------- Total - - - - ========== =========== ========== ========== 1998 United States - - - - Colombia - - - - ---------- ----------- ---------- ---------- Total - - - - ========== =========== ========== ========== 1997 United States - - - - Colombia 0.5 - - - ---------- ----------- ---------- ---------- Total 0.5 - - - ========== =========== ========== ========== 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 the Santana contract with the Colombian government. The Company relinquished all undeveloped acreage associated with the La Fragua and Yuruyaco contracts in December 1998. No further relinquishments are required for the Santana contract until the expiration of the contract in 2015. See "-- Significant Properties." The Company's undeveloped acreage in Papua New Guinea is held pursuant to PPL- 206. 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 at December 31, 1999. 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 48,636 48,636 Papua New Guinea 1,228,187 24,564 --------- ------ 1,276,823 73,200 ========= ====== 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 9 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." 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, 1999, that is not the same as that included in the estimate of proved oil and gas reserves as of December 31, 1999, 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, ----------------------- 1999 1998 1997 ---- ---- ---- Oil (1) United States 57 44 76 Colombia 365 255 426 Gas United States 53 68 316 Colombia - - - (1) Includes crude oil and condensate. 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) ------------------------------------- 1999 1998 1997 ------ ------ ------ Average sales price per barrel of oil (2) United States $17.13 $12.03 $19.17 Colombia $15.57 $10.31 $17.39 Average sales price per MCF of gas United States $ 2.42 $ 2.42 $ 2.73 Colombia $ - $ - $ - Average production cost per dollar of oil and gas revenue United States $ 1.05 $ 1.80 $ 0.54 Colombia $ 0.42 $ 0.86 $ 0.40
10 Average production cost per barrel of oil equivalent United States $17.69 $22.54 $ 9.81 Colombia $ 6.58 $ 8.88 $ 6.98
(1) All amounts are stated in United States dollars. (2) Includes crude oil and condensate. Significant Properties Colombia. -------- The Company's Colombian properties currently consist of two contracts, both 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's interest in each of the contracts is subject to certain reversionary interests in favor of Ecopetrol as described below. Argosy, as operator of the properties, carries out the program of operations for the two concessions. The program is determined by Argosy and approved by Ecopetrol. The Santana contract, which now consists of approximately 52,000 acres and contains 14 productive wells, has been in effect since 1987 and is the focus of the Company's exploration and development activities. The Aporte Putumayo contract, which consists of approximately 77,000 acres and contains three shut-in wells, has been in effect since 1972. The Company has filed with Ecopetrol an application for formal relinquishment of the Aporte Putumayo contract. Such formal relinquishment is expected to occur during 2000. Production from the Santana concession is sold pursuant to a sales contract with Ecopetrol. The contract provides 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. The Company's pretax income from Colombian sources, as defined under Colombian law, is subject to Colombian income taxes at a statutory rate of 35%, 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. The Company's income after Colombian income taxes is subject to a Colombian remittance tax that accrues at a rate of 7% (10% prior to 1998). Payment of the remittance tax may be deferred under certain circumstances if the Company reinvests such income in Colombia. See Note 8 of the Notes to Consolidated Financial Statements contained elsewhere herein. The Colombian government also imposed a production tax which was equal to 7% of the oil price in effect through December 1997. The production tax was, however, eliminated for 1998 and thereafter. Santana Contract. The Santana block is held pursuant to a "risk-sharing" ---------------- contract for which Ecopetrol has the option to participate on the basis of a 30% working interest in exploration activities in the contract area. 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 Company 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 June 1996, the 7 million barrel threshold was reached. At that time, Argosy's and Neo's aggregate revenue interest in the contract declined from 40% to 28% and their share of operating expenses declined from 50% to 35%. 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 four 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 well was drilled in the Linda field in 1997. No further drilling is anticipated for these fields. The Company 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. 11 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 shut-in until the first quarter of 1995 when construction of a pipeline was completed and commercial production began. Completion of this pipeline provided the Company with direct pipeline access from all of its 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 was completed over the Mary and Miraflor fields during early 1997. This survey confirms the presence of several prospects and leads previously identified from two-dimensional seismic data. The most promising prospect, Mary West, appears to be an extension of the Mary field. The drilling of an exploratory well on this prospect has been deferred pending environmental permits and appropriate financing. The survey also confirmed that additional development drilling is not required for the Miraflor field. The Company has fulfilled all the exploration obligations required by the Santana risk-sharing contract. The Company's current work program contemplates the recompletion of certain existing wells to increase production therefrom. The Santana contract has a term of 28 years and expires in 2015. In 1993, the Company relinquished 50% of the original Santana 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 was made in 1997 such that all remaining contract areas except for those areas within five kilometers of a commercial field were relinquished. Under the terms of a contract with Ecopetrol, all oil produced from the Santana contract area is sold to Ecopetrol. If Ecopetrol exports the oil, the price paid is the export price received by Ecopetrol, adjusted for quality differences, less a marketing fee of $0.165 per barrel. If Ecopetrol does not export the oil, the price paid is based on the price received from Ecopetrol's Cartagena refinery, adjusted for quality differences, less Ecopetrol's cost to transport the crude to Cartagena and a marketing fee of $0.165 per barrel. In 1999, Ecopetrol exported the crude each month and the sales price averaged $15.57 per barrel. Aporte Putumayo Contract. The discoveries on the Aporte Putumayo contract ------------------------ were not declared commercial by Ecopetrol and the properties were operated by Argosy without participation by Ecopetrol. There are no remaining exploration obligations under this contract. Ecopetrol has accepted the Company's request for relinquishment, which is pending 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. The Breton Sound 31 field is operated by the Company. The Company relinquished operatorship of the Main Pass 41 field effective January 1, 1999. Main Pass Block 41 is a federal lease located approximately 25 miles east of Venice, Louisiana, in 50 feet of water. There are currently four productive wells in the field. The field's 1999 production averaged 57 barrels of oil per day and 79 MCF per day, net to the Company's interest, from four completions in three sands between 6,000 and 7,500 feet. The Company owns a 35% interest in this field. 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 1999, five wells averaged 101 barrels of oil per day and 65 MCF of gas per day, net to the Company's interest, from three sands completed between 3,850 feet and 6,500 feet. The Company's interests in the leases comprising the field vary from 41% to 67%. The interpretation of 3-D seismic data in 1996 identified two deep and several shallow prospects in the Breton Sound Block 31 field. The Company is continuing its efforts to secure an industry partner 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, following consummation of the proposed debt restructuring. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." Papua New Guinea. ---------------- The area covered by PPL-206 is located in the Western, Gulf and Southern Highland Provinces of Papua New Guinea. The northern section of the area is in a mountainous tropical rain forest while the southern section of the 12 area is predominantly lowlands, jungle and coastal swamps. In 1986 oil was discovered approximately 20 kilometers from the northern border of PPL-206 in an adjoining license area and in 1999 gas was discovered approximately 20 kilometers southwest of the western border. In accordance with the terms of the agreement governing PPL-206, the parties have performed surface geological work and completed a seismic program during late 1997 and early 1998. The parties have submitted to the Department of Petroleum and Energy a request to carry out a second seismic program in 2000 and to defer the drilling of an exploratory well until 2001. A decision regarding the drilling of an exploratory well will be made following evaluation of the second seismic program. The Company is not obligated to pay any of the costs relative to the work presently underway. Should the parties decide to drill an exploratory well, the Company will have no obligation to pay its share of the drilling, testing and completion costs of this well pursuant to its 2% carried working interest. Under the provisions of PPL-206 the terms of any oil and gas development are set forth in a Petroleum Agreement with the Government of Papua New Guinea. The Petroleum Agreement provides that the operator must carry out an appraisal program after a discovery to determine whether the discovery is of commercial interest. If the appraisal is not carried out or the discovery is not of commercial interest, the license may be forfeited. If the discovery is of commercial interest, the operator must apply for a Petroleum Development License. The Government retains a royalty on production equal to 1.25% of the wellhead value of the petroleum and, at its election, may acquire up to a 22.5% interest in the petroleum development after recoupment by the operator of the project costs attributable thereto out of production. In addition, income from petroleum operations is subject to a Petroleum Income Tax at the rate of 50% of net income, which is defined as gross revenue less royalties, allowances for depreciation, interest deductions, operating costs and previous tax losses carried forward. An Additional Profits Tax of 50% of cash flow (after deducting ordinary income tax payments) is also payable when the accumulated value of net cash flows becomes positive. For annual periods in which net cash flows are negative, the cumulative amount is carried forward and increased at an annual accumulation of 27%. The Additional Profits Tax is calculated separately for each Petroleum Development License. In calculating the applicable tax, interest expenses paid by Garnet PNG prior to the issuance of a Petroleum Development License and, thereafter, to the extent that Garnet PNG's debt to equity ratio exceeds two-to-one, are not deductible. The Company leases corporate office space in Dallas, Texas containing approximately 5,100 square feet pursuant to a lease which expires in January 2002. The annual lease payments for these offices are approximately $102,000. 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, 1999. 13 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, traded on the American Stock Exchange (the "ASE") from November 14, 1994 through April 8, 1999. On April 9, 1999, the Depositary Shares were delisted from the ASE due to the Company's financial difficulties. On May 13, 1999, the Depositary Shares began trading on the OTC Bulletin Board (the "OTCBB") under the symbol "AVVPP.OB". During 1999, an aggregate of 1,589,000 and 465,000 Depositary Shares were traded on the ASE and the OTCBB, respectively. 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. In the United Kingdom, the average daily trading volume of the Common Stock on the London Stock Exchange during 1999 was approximately 58,000 shares until May 6, 1999, when trading of the Common Stock was suspended due to the Company's financial difficulties. 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 OTCBB and the high and low prices for the Common Stock on the London Stock Exchange. 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. 14
- ------------- 1999 1998 1997 ---------------------- ---------------------- ---------------------- High Low High Low High Low ----- ----- ----- ----- ----- ----- Depositary Shares (1): - --------------------- ASE --- First Quarter $0.41 $0.09 $1.75 $1.00 $4.13 $2.88 Second Quarter $0.22 $0.09 $1.19 $0.69 $3.00 $1.63 Third Quarter $ n/a $ n/a $1.00 $0.13 $4.13 $1.63 Fourth Quarter $ n/a $ n/a $0.31 $0.06 $2.06 $0.98 OTC Bulletin Board ------------------ First Quarter $ n/a $ n/a $ n/a $ n/a $ n/a $ n/a Second Quarter $0.31 $0.06 $ n/a $ n/a $ n/a $ n/a Third Quarter $0.22 $0.06 $ n/a $ n/a $ n/a $ n/a Fourth Quarter $0.22 $0.03 $ n/a $ n/a $ n/a $ n/a Common Stock - ------------ London Stock Exchange --------------------- First Quarter (Pounds) (Pounds) 0.06 (Pounds) 0.03 (Pounds) 0.28 (Pounds) 0.12 (Pounds) 0.42 (Pounds) 0.28 US$ $0.10 $0.05 $0.45 $0.20 $0.69 $0.45 Second Quarter (Pounds) (Pounds) 0.06 (Pounds) 0.05 (Pounds) 0.14 (Pounds) 0.10 (Pounds) 0.32 (Pounds) 0.27 US$ $0.10 $0.08 $0.22 $0.16 $0.51 $0.44 Third Quarter (Pounds) (Pounds) n/a (Pounds) n/a (Pounds) 0.10 (Pounds) 0.05 (Pounds) 0.30 (Pounds) 0.21 US$ $ n/a $ n/a $0.17 $0.08 $0.50 $0.34 Fourth Quarter (Pounds) (Pounds) n/a (Pounds) n/a (Pounds) 0.06 (Pounds) 0.04 (Pounds) 0.25 (Pounds) 0.17 US$ $ n/a $ n/a $0.10 $0.07 $0.40 $0.28
(1) Representing five shares of Common Stock. As of February 29, 2000, the Company had approximately 6,000 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 October 1998, the Company entered into a restated 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." 15 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, 1999, which should be read in conjunction with the Consolidated Financial Statements included elsewhere herein.
For the Years Ended December 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 --------- --------- --------- --------- -------- (in thousands, except per share, per barrel and per MCF data) For the period Revenues $ 6,797 $ 3,332 $ 9,726 $13,750 $10,928 Loss before extraordinary item $ (403) $(16,881) $(22,482) $ (937) $(2,689) Extraordinary item - debt extinguishment $ - $ (197) $- $- $- Net loss $ (403) $(17,078) $(22,482) $ (937) $(2,689) Loss before extraordinary item per common share $ (0.01) $ (0.49) $ (0.71) $ (0.03) $ (0.09) Basic and diluted net loss per common share $ (0.01) $ (0.50) $ (0.71) $ (0.03) $ (0.09) Weighted average shares outstanding 46,813 34,279 31,483 31,483 31,483 Cash dividends per common share $ - $ - $ - $ - $ - Total annual net oil production (barrels) Colombia 365 255 426 476 435 United States 57 44 76 94 106 -------- -------- -------- ------- ------- Total 422 299 502 570 541 -------- -------- -------- ------- ------- Total annual net gas production (MCF) United States 53 68 316 1,146 1,184 Average price per barrel of oil Colombia $ 15.57 $ 10.31 $ 17.39 $ 19.82 $ 16.39 United States $ 17.13 $ 12.03 $ 19.17 $ 20.68 $ 16.78 Average price per MCF of Gas - United States $ 2.42 $ 2.42 $ 2.73 $ 2.07 $ 1.70 At period end Total assets $ 8,986 $ 11,422 $ 16,445 $42,944 $45,460 Long term debt, including current portion $ 14,495 $ 14,805 $ 7,690 $ 7,990 $13,067 Stockholders' equity (deficit) $(11,483) $(11,083) $ 3,748 $26,230 $27,167
In connection with the application of the full cost method, the Company recorded ceiling test write-downs of oil and gas properties of $12,343,000 in 1998 and $19,953,000 in 1997 (see Note 1 of Notes to Consolidated Financial Statements). 16 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 1999 versus 1998 - ---------------- United States Colombia Oil Gas Oil Total --------- ----- -------- ------- (Thousands) Revenue - 1998 $ 535 $ 165 $ 2,632 $ 3,332 Volume variance 158 (29) 1,130 1,259 Price variance 294 10 1,921 2,225 Other - (19) - (19) --------- ----- -------- ------- Revenue - 1999 $ 987 $ 127 $ 5,683 $ 6,797 ========= ===== ======== ======= Colombian oil volumes were 365,000 barrels in 1999, an increase of 110,000 barrels from 1998. Such increase is due to a 148,000 barrel increase resulting from the acquisition of Garnet effective October 28, 1998, and an increase of 23,000 barrels due to continuous production in 1999 (1998 production was interrupted by guerrilla attacks that damaged oil processing and storage facilities), partially offset by a 61,000 barrel decrease resulting from production declines. U.S. oil volumes were 57,000 barrels in 1999, an increase of 13,000 barrels as compared to 1998. An increase of approximately 15,000 barrels was due to continuous production from the Company's Main Pass 41 field (shut in for approximately 187 days during 1998 due to upgrading and modification of production and water treatment facilities and adverse weather), and an increase of approximately 9,000 barrels was due to continuous production from the Company's Breton Sound 31 field (shut-in during the months of September and October and a portion of November 1998 due to the drilling and completion of a saltwater disposal well and adverse weather), partially offset by a 11,000 barrel decrease resulting from normal production declines. U.S. gas volumes before gas balancing adjustments were 51,000 MCF in 1999, down 3,000 MCF from 1998. Of such decrease, approximately 122,000 MCF was due to production declines, partially offset by 119,000 MCF due to the aforementioned continuous production of the Main Pass 41 field. Colombian oil prices averaged $15.57 per barrel during 1999. The average price for the same period of 1998 was $10.31 per barrel. The Company's average U.S. oil price increased to $17.13 per barrel in 1999, up from $12.03 per barrel in 1998. In 1999 prices have been higher than in 1998 due to a dramatic increase in world oil prices. U.S. gas prices averaged $2.42 per MCF in 1999 and 1998. In addition to the above-mentioned variances, U.S. gas revenue decreased approximately $19,000 as a result of gas balancing adjustments. Operating costs increased approximately 1.5%, or $50,000, primarily due to the increase in ownership of the Colombian properties following the Garnet Merger, almost entirely offset by cost reductions in Colombia achieved after the Company merged with Garnet and took over operatorship of the Colombian properties. Depreciation, depletion and amortization ("DD&A") decreased by 68%, or $2,152,000, primarily due to a decrease in costs subject to amortization resulting from property write-downs during 1998. The Company recorded write-downs of $10,556,000 and $1,787,000 to the carrying amounts of its Colombian and U.S. oil and gas properties, respectively, as a result of ceiling test limitations on capitalized costs during 1998. No such write-downs were required during 1999. 17 General and administrative ("G&A") expenses increased $171,000 mainly due to a $193,000 decrease in administrative overhead fees recovered from joint interest partners in properties where the Company serves as the operator. This decrease in administrative overhead fees resulted primarily because the Company relinquished operatorship of the Main Pass 41 field effective January 1, 1999. The Company incurred severance expense of $62,000 during 1999 related to Colombian operations. The Company has taken significant cost cutting measures in Colombia since it merged with Garnet and took over operatorship of the Colombian properties. Interest and other income decreased $786,000 from 1998. During 1998 the Company realized a $720,000 gain on the settlement of litigation involving the administration of a take or pay contract settlement. No such gain was recorded in 1999. Interest expense increased $648,000 from 1998 as a result of higher outstanding balances of long-term debt and higher interest rates. Income taxes were $286,000 higher in 1999 principally due to higher Colombian presumptive income taxes resulting from the increased ownership of the Colombian properties for a full year in 1999 compared to only two months of full ownership in 1998. 1998 versus 1997 - ---------------- United States Colombia Oil Gas Oil Total ---------- ------ --------- -------- (Thousands) Revenue - 1997 $ 1,459 $ 862 $ 7,405 $ 9,726 Volume variance (606) (572) (3,613) (4,791) Price variance (318) (74) (1,427) (1,819) Garnet revenue - - 267 267 Other - (51) - (51) ---------- ------ --------- -------- Revenue - 1998 $ 535 $ 165 $ 2,632 $ 3,332 ========== ====== ========= ======== Colombian oil volumes were 255,000 barrels in 1998, a decrease of 171,000 barrels from 1997. Such decrease is due to a 185,000 barrel decrease resulting from production declines and a 23,000 barrel decrease due to lost production caused by guerilla attacks in August that damaged oil processing and storage facilities and caused production from various wells to be shut-in for periods ranging from 6 to 57 days, partially offset by a 37,000 barrel increase due to the acquisition of Garnet effective October 28, 1998. U.S. oil volumes were 44,000 barrels in 1998, down approximately 32,000 barrels from 1997. Of such decrease, approximately 9,000 barrels was due to the Company's Breton Sound 31 field being shut-in during the months of September and October and a portion of November due to the drilling and completion of a saltwater disposal well and adverse weather, approximately 15,000 barrels was due to the Company's Main Pass 41 field being shut-in for approximately 187 days during 1998 due to upgrading and modification of production and water treatment facilities and adverse weather, and 8,000 barrels resulted from normal production declines. U.S. gas volumes before gas balancing adjustments were 54,000 MCF in 1998, down 219,000 MCF from 1997. Of such decrease, approximately 119,000 MCF was due to the aforementioned shut-in of the Main Pass 41 field and 38,000 MCF was due to the suspension of production of one of the wells at Main Pass 41 from January 9 to August 27, 1998. The remaining 62,000 MCF was due to production declines. Colombian oil prices averaged $10.31 per barrel during 1998. The average price for the same period of 1997 was $17.39 per barrel. The Company's average U.S. oil price decreased to $12.03 per barrel in 1998, down from $19.17 per 18 barrel in 1997. In 1998 prices were lower than in 1997 due to a dramatic decrease in world oil prices. U.S. gas prices averaged $2.42 per MCF in 1998 compared to $2.73 per MCF in 1997. In addition to the above-mentioned variances, U.S. gas revenue decreased approximately $51,000 as a result of gas balancing adjustments. Operating costs decreased approximately 17%, or $710,000, primarily due to lower operating costs in Colombia. Such decreases have resulted mainly from the elimination of the production tax on the majority of the Company's Colombian production and lower pipeline tariffs resulting from lower volumes. DD&A decreased by 48%, or $2,915,000, primarily due to a decrease in costs subject to amortization resulting from property write-downs and lower levels of production. The Company recorded write-downs of $10,556,000 and $1,787,000 to the carrying amounts of its Colombian and U.S. oil and gas properties, respectively, as a result of ceiling test limitations on capitalized costs during 1998. G&A expenses declined $436,000 mainly due to a $159,000 decrease in legal fees, a $127,000 decrease in directors' fees and expenses, and a $191,000 reduction in payroll. These savings were partially offset by lower amounts of capitalized G&A. In December 1998 the Company recorded a $420,000 provision for doubtful accounts receivable due from joint-venture partners. Interest and other income increased $923,000 from 1997 as the Company realized a $720,000 gain on the settlement of litigation involving the administration of a take or pay contract settlement. Income taxes were $89,000 higher in 1998 principally as a result of Colombian deferred tax benefits recorded in the second quarter of 1997, partially offset by lower presumptive income taxes in 1998. The deferred tax benefits in 1997 resulted from the write-down of the carrying amount of the Company's Colombian oil properties. Year 2000 The conversion from calendar year 1999 to calendar year 2000 occurred without any disruption to the Company's critical business systems. Since early 1999, the Company has been upgrading its information systems with Year 2000 ("Y2K") compliant software and hardware. These actions have minimized Y2K related capital costs and expenses, which is estimated at less than $200,000. The Company will continue to monitor Y2K related exposures both internally and with its suppliers, customers and other business partners. Such monitoring will be ongoing and encompassed in normal operations and associated costs are not expected to be significant. New Accounting Pronouncements The Company is assessing the reporting and disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 2000. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2001. Liquidity and Capital Resources During the last quarter of calendar year 1997 and throughout calendar year 1998, world oil prices declined dramatically. This decline in oil prices was particularly severe in Colombia. Colombian oil prices, during the twenty-four month period ended December 31, 1998, fell from a high of $22.71 per barrel in January 1997 to $7.50 per barrel in December 1998. Whereas the sale price for crude oil from the Santana contract averaged $19.82 per barrel in 1996 and $17.39 per barrel in 1997, the sale price averaged $10.31 per barrel during calendar year 1998 and $15.57 per barrel during calendar year 1999. These price declines have materially and adversely affected the results of operations and the financial position of the Company. During the years ended December 31, 1999, 1998 and 1997, the Company reported net losses of $0.4 19 million, $17.1 million and $22.5 million, respectively, and declining amounts of net cash provided by (used in) operating activities of $(0.5) million, $(0.05) million and $1.7 million, respectively. The Company's stockholders' deficit was approximately $11.5 million as of December 31, 1999. Although world oil prices have recovered during the latter part of 1999, the Company remains highly leveraged with $14.5 million in current debt as of December 31, 1999, pursuant to bank credit facilities with ING (U.S.) Capital Corporation ("ING Capital") and the U.S. Overseas Private Investment Corporation ("OPIC"), as more fully described in Note 5 of the Notes to Consolidated Financial Statements contained elsewhere herein. The Company is not in compliance with various covenants under the bank credit facilities nor is it in compliance with the minimum escrow balance required thereunder. As a result, the lender has the right to accelerate payment on the debt and, therefore, the Company has classified all long-term debt as current in the December 31, 1999 consolidated balance sheet. Furthermore, the Company was unable to pay the principal payment of $5.7 million due on April 30, 1999, and subsequent monthly principal payments of $281,250 (an aggregate of $7,950,000 through December 31, 1999). The Company did pay $150,000 of principal during the second quarter of 1999 and all of the interest through June 30, 1999; however, interest due subsequent to this date in the amount of $864,000 has not been paid. Assuming no change in its capital structure, the Company will not have the financial resources to pay the $8,664,000 of principal and interest which is in arrears and future minimum monthly principal payments of $281,250 due through December 31, 2001. The Company's management has been in more or less continuous discussions with the Company's lenders regarding a restructuring of its debt for more than two years. During that period, the Company has attempted to negotiate several transactions and has engaged financial advisers to locate equity investors to participate in recapitalization and debt restructuring transactions. Except for the Garnet merger in October 1998, none of such proposals has come to fruition, primarily because of the inability of equity participants, lenders and the Company to agree on financial terms. Management of the Company is again in discussions with the Company's lenders and a group of investors concerning a restructuring of the Company. Such a restructuring may involve the sale of a substantial portion of the Company's oil and gas assets and a significant reduction of the Company's outstanding debt. While management is optimistic that a restructuring can be achieved that will provide the Company with the liquidity necessary to continue operations, there can be no assurance that this will be the case. Although management of the Company is pursuing the restructuring assiduously, its ability to effect such a restructuring is dependent upon the Company being able to reach an agreement between the Company, the Company's lenders and the potential investors, matters that are beyond the control of the Company. The Company's lenders have not yet and may not ever agree to a restructuring of the Company's debt. In addition, the potential investors may insist on financial terms that are viewed by the Company's board of directors as inconsistent with continued operations. If the Company is unable to consummate a restructuring, then, in the absence of another business transaction, the Company cannot achieve compliance with or make payments required by the bank credit facilities. Accordingly, the lenders could declare a default, accelerate all amounts outstanding, and attempt to realize upon the collateral securing the debt. As a result of this uncertainty, management believes there is substantial doubt about the Company's ability to continue as a going concern. During the period 1997 through 1999, costs incurred in oil and gas property acquisition, exploration and development activities by the Company totaled approximately $12.6 million. Of this figure, approximately $0.7 million was for exploration predominantly in Colombia, $3.7 million pertained to development costs in the United States (35%) and Colombia (65%), and $8.3 million relates to the acquisition of Garnet. The Company's sources of funds during this period were: (i) cash provided by (used in) operating activities - 1999 - $(0.5) million; 1998 - $(0.05) million; and 1997 - $1.7 million; (ii) net cash provided by investing activities (before property and equipment expenditures) - 1999 - $0.04 million; 1998 - $1.4 million; and 1997 - $0.02 million; and (iii) net cash provided by (used in) financing activities - 1999 - $(0.3) million; 1998 - $1.1 million; and 1997 - $(0.3) million. The Company plans to recomplete certain existing wells and engage in various other projects in Colombia. The Company's current share of the estimated future costs of these development activities is approximately $0.6 million at December 31, 1999. Failure to fund certain expenditures could result in the forfeiture of all or part of the Company's interest in the concessions. 20 The Company expects to fund these activities using cash provided from operations. Any substantial increases in the amounts of these required expenditures could adversely affect the Company's ability to fund these activities. Delays in obtaining the required environmental approvals and permits on a timely basis, as described above under "Item 1. Business -- Regulation," and other delays could, 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 15-30% 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 condition will not occur again 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 future exploration and development activities, substantial expenditures which have not been included in the Company's cash flow projections may be required. The outcome of these matters cannot be projected with certainty. 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, among other things, general economic conditions, volatility of oil and gas prices, the impact of possible geopolitical occurrences world-wide and in Colombia, imprecision of reserve estimates, changes in laws and regulations, unforeseen engineering and mechanical or technological difficulties in drilling, working- over and operating wells 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." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to market risk from changes in interest rates on debt and changes in commodity prices. The Company's exposure to interest rate risk relates to variable rate loans that are benchmarked to LIBOR interest rates. The Company does not use derivative financial instruments to manage overall borrowing costs or reduce exposure to adverse fluctuations in interest rates. The impact on the Company's results of operations of a one-point interest rate change on the outstanding balance of the variable rate debt as of December 31, 1999 would be $145,000 per year. The Company produces and sells crude oil and natural gas. These commodities are sold based on market prices established with the buyers. The Company does not use financial instruments to hedge commodity prices. 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. 21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors of the Company The by-laws of the Company provide that the number of directors may be fixed by the Board of Directors at a number between one and seven, except that a decrease in the number of directors shall not have the effect of reducing the term of any incumbent director. Effective October 28, 1998, the Board of Directors, by resolution, decreased the number of directors from five to three. The information set forth below, furnished to the Company by the respective individuals, shows as to each individual his name, age and principal positions with the Company. Name Age Positions Director Since ---- --- --------- -------------- Ronald Suttill 68 President, Chief Executive Officer 1985 and Director Eugene C. Fiedorek 68 Director 1997 Robert J. Cresci 56 Director 1998 The following sets forth the periods during which directors have served as such and a brief account of the business experience of such persons during at least the past five years. Ronald Suttill has been a director of the Company since August 1985 and has been President and Chief Executive Officer of the Company since January 1992. In December 1991, Mr. Suttill was appointed President and Chief Operating Officer and prior to that served as Executive Vice President of the Company. Eugene C. Fiedorek has been a director of the Company since July 1997. Mr. Fiedorek was a Managing Director of EnCap Investments, L.C., a company he co- founded in 1988, until its sale in March 1999 to El Paso Energy Corporation. He was previously associated with RepublicBank Dallas for more than 20 years, most recently as the Managing Director in the Energy Department in charge of all energy-related commercial lending and corporate finance activities. Prior to joining RepublicBank, Mr. Fiedorek was with Shell Oil Company as an Exploitation Engineer. Mr. Fiedorek currently serves on the boards of Apache Corporation and privately held Matador Petroleum Corporation. Robert J. Cresci has been a director of the Company since October 1998. Mr. Cresci has been a Managing Director of Pecks Management Partners, Ltd., an investment management firm, since September 1990. Mr. Cresci currently serves on the boards of Sepracor, Inc., Film Roman, Inc., Quest Education Corporation, Castle Dental Centers, Inc., JFax.Com, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc., E-Stamp Corporation and several private companies. Executive Officers of the Company The following table lists the names and ages of each of the executive officers of the Company and their principal occupations for the past five years. Name and Age Positions - ------------ --------- Ronald Suttill, 68 President and Chief Executive Officer since January 1992, President and Chief Operating Officer from December 1991 to January 1992 and Executive Vice President prior to that. 22 James L. Busby, 39 Treasurer since May 1994, Secretary since June 1996, Controller since November 1993 and a Senior Manager with the accounting firm of KPMG LLP prior to that. Meetings and Committees of the Board of Directors The Board of Directors of the Company held no formal meetings during 1999, however, business was conducted via telephone conferences and written unanimous consents. Each director attended at least 75% of the aggregate of (i) the total number of meetings of the Board of Directors held during the period in which he was a director and (ii) the total number of meetings held by all committees on which he served. The Audit Committee and the Compensation Committee are the only standing committees of the Board of Directors, and the members of such committees are appointed at the initial meeting of the Board of Directors each year. The Company does not have a formal nominating committee; the Board of Directors performs this function. The Audit Committee, of which Mr. Fiedorek is the sole member, consults with the independent accountants of the Company and such other persons as the committee deems appropriate, reviews the preparations for and scope of the audit of the Company's annual financial statements, makes recommendations as to the engagement and fees of the independent accountants and performs such other duties relating to the financial statements of the Company as the Board of Directors may assign from time to time. The Audit Committee held one meeting during 1999. The Compensation Committee, which is comprised of Messrs. Fiedorek and Cresci, makes recommendations to the Board of Directors regarding the compensation of executive officers of the Company, including salary, bonuses, stock options and other compensation. The Compensation Committee held no meetings during 1999. Compliance with Section 16(a) of the Securities Exchange Act of 1934 Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires officers, directors and holders of more than 10% of the Common Stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership of the Common Stock with the SEC within certain time periods and to furnish the Company with copies of all such reports. Based solely on its review of the copies of such reports furnished to the Company by such Reporting Persons or on the written representations of such Reporting Persons, the Company believes that, during the year ended December 31, 1999, all of the Reporting Persons complied with their Section 16(a) filing requirements. 23 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following table sets forth certain information regarding compensation earned in each of the last three fiscal years by the President and Chief Executive Officer of the Company (the "Named Executive Officer").
Summary Compensation Table -------------------------- Long Term Compensation ---------------------------------- Annual Compensation Awards Payouts ---------------------------------- ---------------------------------- Other Annual Restricted Securities Name and Compen- Stock Underlying LTIP All Other Principal Salary sation Award(s) Options/ Payouts Compensa- Position Year ($) Bonus ($) ($) ($) SARs (#) ($) tion ($) - -------------------- ---- ------- -------- ------- ---------- ------------ ------- --------- Ronald Suttill(1) President and CEO 1999 150,000 - - - - - 4,500 President and CEO 1998 157,500 - - - - - 4,750 President and CEO 1997 185,000 - - - - - 4,750
(1) The amounts reported for all other compensation for Mr. Suttill represent matching contributions made under the Aviva Petroleum Inc. 401(k) Retirement Plan (the "401(k) Plan"). Directors' Fees The directors of the Company are no longer paid a cash fee. Directors are, however, reimbursed for travel and lodging expenses. Mr. Suttill receives no compensation as a director but is reimbursed for travel and lodging expenses incurred to attend meetings. On July 1 each year, non-employee directors who have served in such capacity for at least the entire proceeding calendar year each receives an option to purchase 5,000 shares of the Company's Common Stock pursuant to the Aviva Petroleum Inc. 1995 Stock Option Plan, as amended. Option Grants During 1999 There were no options granted to the Named Executive Officer during 1999. No stock appreciation rights have been issued by the Company. Option Exercises During 1999 and Year End Option Values The following table provides information related to options exercised by the Named Executive Officer during 1999 and the number and value of options held at year-end. No stock appreciation rights have been issued by the Company.
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($) (1) Shares Acquired Value ---------------------------------- -------------------------- Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------------ --------------- ------------ ----------- --------------------- ----------- ------------- Ronald Suttill none none 250,000 - - -
24 (1) No values are ascribed to unexercised options of the Named Executive Officer at December 31, 1999 because the fair market value of a share of the Company's Common Stock at December 31, 1999 ($0.01) did not exceed the exercise price of any such options. Compensation Committee Interlocks and Insider Participation in Compensation Decisions As indicated above, the Compensation Committee, none of the members of which is an employee of the Company, makes recommendations to the Board of Directors regarding the compensation of the executive officers of the Company, including salary, bonuses, stock options and other compensation. There are no Compensation Committee interlocks. Employment Contracts The Named Executive Officer serves at the discretion of the Board of Directors, except that, effective February 1, 2000, the Company entered into an employment contract with Mr. Suttill. Mr. Suttill's contract provides for annual compensation of not less than $200,000 and a severance amount of $300,000 if his employment is terminated for any reason other than death, disability or cause, as defined in the contract. Compensation Committee Report on Executive Compensation The Company currently employs only two executive officers, the names of whom are set forth above under "Item 10. Directors and Executive Officers of the Registrant--Executive Officers of the Company." Decisions regarding compensation of the executive officers are made by the Board of Directors, after giving consideration to recommendations made by the Compensation Committee. The Company's compensation policies are designed to provide a reasonably competitive level of compensation within the industry in order to attract, motivate, reward and retain experienced, qualified personnel with the talent necessary to achieve the Company's performance objectives. These objectives are to increase oil and gas reserves and to control costs, both objectives selected to increase shareholder value. These policies were implemented originally by the entire Board of Directors, and, following its establishment, were endorsed by the Compensation Committee. It is the intention of the Compensation Committee and the Board of Directors to balance compensation levels of the Company's executive officers, including the Chief Executive Officer, with shareholder interests. The incentive provided by stock options and bonuses, in particular, is intended to promote congruency of interests between the executive officers and the shareholders. Neither the Compensation Committee nor the Board of Directors, however, believes that it is appropriate to rely on a formulaic approach, such as profitability, revenue growth or return on equity, in determining executive officer compensation because of the nature of the Company's business. The Company's business objectives include overseeing a significant exploration and development effort in Colombia and the maintenance of oil and gas production levels and offshore operations in the United States. Success in one such area is not measurable by the same factors as those used in the other. Accordingly, the Compensation Committee and the Board of Directors rely primarily on their assessment of the success of the executive officers, including the Chief Executive Officer, in fulfilling the Company's performance objectives. The Board of Directors also considers the fact that the Company competes with other oil and gas companies for qualified executives and therefore it considers available information regarding compensation levels for executives of companies similar in size to the Company. Compensation for the Company's executive officers during 1999 was comprised of salary, bonus and matching employer contributions made pursuant to the Company's 401(k) Plan. The Company's 401(k) Plan is generally available to all employees after one year of service. The Company makes matching contributions of 100% of the amount deferred by the employee, up to 6% of an employee's annual salary. Compensation Committee E. C. Fiedorek R. J. Cresci 25 Performance Graph The following line-graph presentation compares five-year cumulative shareholder returns on an indexed basis with a broad equity market index and a published industry index. The Company has selected the American Stock Exchange Market Value Index as a broad equity market index, and the SIC Index "Crude Petroleum and Natural Gas" as a published industry index. Comparison of 5 Year Cumulative Total Return of the Company, Industry Index and Broad Market FISCAL YEAR ENDING COMPANY/INDEX/MARKET 1994 1995 1996 1997 1998 1999 AVIVA PETROLEUM INC. 100 85.44 75.73 32.04 1.94 .97 INDUSTRY INDEX 100 109.98 146.24 148.22 118.73 145.03 BROAD MARKET 100 128.90 136.01 163.66 161.44 201.27 26 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Security Ownership of Certain Beneficial Owners The following table sets forth certain information as to each person who, to the knowledge of the Company, is the beneficial owner of more than five percent of the outstanding Common Stock of the Company. Unless otherwise noted, the information is furnished as of February 29, 2000.
Name and Address of Amount and Nature of Beneficial Owner or Group Beneficial Ownership (1) Percent of Class (2) - ------------------------- ------------------------ -------------------- Wexford Management LLC(3) 5,438,639 11.24% 411 West Putnam Avenue Greenwich, Connecticut 06830 Pecks Management Partners Ltd. (4) 5,155,108 10.65% One Rockefeller Plaza New York, New York 10020 Lehman Brothers Inc.(5) 2,966,876 6.13% 3 World Financial Center 11th Floor New York, New York 10285 ING (U.S.) Capital Corporation(6) 2,700,000 5.58% 135 East 57th Street New York, New York 10022 Yale University(7) 2,551,886 5.27% 230 Prospect Street New Haven, Connecticut 06511
(1) Except as set forth below, to the knowledge of the Company, each beneficial owner has sole voting and sole investment power. (2) Based on 46,900,132 shares of the Common Stock issued and outstanding on February 29, 2000, plus warrants for 1,500,000 shares held by ING (U.S.) Capital Corporation. (3) Information regarding Wexford Management LLC ("Wexford Management") is based on a Schedule 13D dated November 12, 1998 filed by Wexford Management with the SEC. The shares are held by four investment funds. Wexford Management serves as investment advisor to three of the funds and as sub- investment advisor to the fourth fund which is organized as a corporation. Wexford Advisors, LLC ("Wexford Advisors") serves as the investment advisor to the corporate fund and as general partner to the remaining funds which are organized as limited partnerships. One of the limited partnerships, Wexford Special Situations 1996 L.P., holds more than 5% of Aviva Common Stock. Wexford Management shares voting and dispositive power with respect to these shares with each of the funds, with Wexford Advisors, and with Charles E. Davidson and Joseph M. Jacob, each of whom is a controlling person of Wexford Management and Wexford Advisors. (4) Based on the number of shares issued on October 28, 1998, in connection with the acquisition of Garnet Resources Corporation. The shares are held by three investment advisory clients of Pecks Management Partners Ltd. ("Pecks"). One such client, Delaware State Employees' Retirement Fund, holds more than 5% of Aviva's Common Stock. Pecks has sole investment and dispositive power with respect to these shares. (5) Information regarding Lehman Brothers Inc. is based on information received from Lehman Brothers Inc. on March 16, 1998. (6) Based on 1,200,000 shares held by ING, plus warrants to acquire an additional 1,500,000 shares. (7) Information regarding Yale University is based on a Schedule 13G dated March 11, 1994 filed by Yale University with the SEC. 27 Security Ownership of Management The following table sets forth certain information as of February 29, 2000, concerning the Common Stock of the Company owned beneficially by each director, by the Named Executive Officer listed in the Summary Compensation Table above, and by directors and executive officers of the Company as a group:
Name and Address of Amount and Nature Beneficial Owner of Beneficial Ownership(1) Percent of Class(2) - ---------------- -------------------------- ------------------- Ronald Suttill 2,129,939(3)(4) 4.33% 8235 Douglas Avenue, Suite 400 Dallas, TX 75225 Eugene C. Fiedorek 926,542 1.88% 5407 Creek Arbor Court Dallas, TX 75287 Robert J. Cresci 10,000(5) * Pecks Management Partners Ltd. One Rockefeller Plaza New York, NY 10020 All directors and executive officers as a group (4 persons) 3,713,900(6) 7.54%
(1) Except as noted below, each beneficial owner has sole voting power and sole investment power. (2) Based on 46,900,132 shares of Common Stock issued and outstanding on February 29, 2000. Treated as outstanding for purposes of computing the percentage ownership of each director, the Named Executive Officer and all directors and executive officers as a group are shares issuable upon exercise of vested stock options granted pursuant to the Company's stock option plans and 1,500,000 shares represented by warrants issued to ING Capital. (3) Included are options for 250,000 shares exercisable on or within 60 days of February 29, 2000. (4) Includes the entire ownership of AMG Limited, a limited liability company of which Mr. Suttill is a member, as of February 29, 2000, of 935,550 shares of Common Stock. (5) Does not include shares owned by Pecks, of which Mr. Cresci is a managing director. For information with respect to such shares, see note (4) under "Security Ownership of Certain Beneficial Owners." (6) Included are 935,550 shares beneficially owned through AMG Limited and options for 414,667 shares exercisable on or within 60 days of February 29, 2000. * Less than 1% of the outstanding Aviva Common Stock. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. 28 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: *2.1 Agreement and Plan of Merger dated as of June 24, 1998, by and among Aviva Petroleum Inc., Aviva Merger Inc. and Garnet Resources Corporation (filed as exhibit 2.1 to the Registration Statement on Form S-4, File No. 333-58061, and incorporated herein by reference). *2.2 Debenture Purchase Agreement dated as of June 24, 1998, between Aviva Petroleum Inc. and the Holders of the Debentures named therein (filed as exhibit 2.2 to the Registration Statement on Form S-4, file No. 333-58061, and incorporated herein by reference). *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 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). *10.6 Employee Stock Option Plan of the Company (filed as exhibit 10.13 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.7 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). *10.8 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). *10.9 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). 29 *10.10 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). *10.11 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). *10.12 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). *10.13 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). *10.14 Aviva Petroleum Inc. 1995 Stock Option Plan, as amended (filed as Appendix A to the Company's definitive Proxy Statement for the Annual Meeting of Shareholders dated June 10, 1997, and incorporated herein by reference). *10.15 Restated Credit Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc. and ING (U.S.) Capital Corporation (filed as exhibit 99.1 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.16 Joint Finance and Intercreditor Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc., ING (U.S.) Capital Corporation, Aviva America, Inc., Aviva Operating Company, Aviva Delaware Inc., Garnet Resources Corporation, Argosy Energy Incorporated, Argosy Energy International, Garnet PNG Corporation, the Overseas Private Investment Corporation, Chase Bank of Texas, N.A. and ING (U.S.) Capital Corporation as collateral agent for the creditors (filed as exhibit 99.2 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.17 Amendment to the Santana Crude Sale and Purchase Agreement dated February 16, 1999 (filed as exhibit 10.70 to the Company's annual report on Form 10-K for the year ended December 31, 1998, File No. 0-22258, and incorporated herein by reference). **10.18 Amended and Restated Aviva Petroleum Inc. Severance Benefit Plan dated December 31, 1999. **10.19 Santana Crude Sale and Purchase Agreement dated January 3, 2000. **10.20 Employment Agreement between the Company and Ronald Suttill dated February 1, 2000. **10.21 Employment Agreement between the Company and James L. Busby dated February 1, 2000. **21.1 List of subsidiaries of Aviva Petroleum Inc. **27.1 Financial Data Schedule. ---------------------------------------- * Previously Filed ** Filed Herewith b. Reports on Form 8-K ------------------- The Company did not file any Current Reports on Form 8-K during and subsequent to the end of the fourth quarter. 30 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 March 29, 2000 - ------------------------- Officer and Director -------------- Ronald Suttill (principal executive officer) /s/ James L. Busby Treasurer and Secretary March 29, 2000 - ------------------------- (principal financial and -------------- James L. Busby accounting officer) /s/ Eugene C. Fiedorek Director March 29, 2000 - ------------------------- -------------- Eugene C. Fiedorek /s/ Robert J. Cresci Director March 29, 2000 - ------------------------- -------------- Robert J. Cresci 31 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page ---- Independent Auditors' Report......................................... 33 Consolidated Balance Sheet as of December 31, 1999 and 1998.......... 34 Consolidated Statement of Operations for the years ended December 31, 1999, 1998 and 1997.......................... 35 Consolidated Statement of Cash Flows for the years ended December 31, 1999, 1998 and 1997.......................... 36 Consolidated Statement of Stockholders' Equity (Deficit) for the years ended December 31, 1999, 1998 and 1997................ 37 Notes to Consolidated Financial Statements........................... 38 Supplementary Information Related to Oil and Gas Producing Activities (Unaudited).......................................... 49 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. 32 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Aviva Petroleum Inc.: We have audited the accompanying consolidated financial statements of Aviva Petroleum Inc. and subsidiaries as listed in the accompanying index. 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency, which conditions raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP Dallas, Texas March 10, 2000 33 AVIVA PETROLEUM INC. AND SUBSIDIARIES Consolidated Balance Sheet December 31, 1999 and 1998 (in thousands, except number of shares)
1999 1998 -------- -------- ASSETS Current assets: Cash and cash equivalents $ 846 $ 1,712 Restricted cash (note 5) 4 417 Accounts receivable (note 9): Oil and gas revenue 716 363 Trade 633 554 Other 301 586 Inventories 724 836 Prepaid expenses and other 236 627 -------- -------- Total current assets 3,460 5,095 -------- -------- Property and equipment, at cost (note 5): Oil and gas properties and equipment (full cost method) 68,462 68,636 Other 584 612 -------- -------- 69,046 69,248 Less accumulated depreciation, depletion and amortization (65,081) (64,440) -------- -------- 3,965 4,808 Other assets (note 4) 1,561 1,519 -------- -------- $ 8,986 $ 11,422 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long term debt (note 5) $ 14,495 $ 14,805 Accounts payable 3,081 5,526 Accrued liabilities 1,024 308 -------- -------- Total current liabilities 18,600 20,639 -------- -------- Gas balancing obligations and other (note 11) 1,869 1,866 Stockholders' deficit (notes 5 and 7): Common stock, no par value, authorized 348,500,000 shares; issued 46,900,132 in 1999 and 46,700,132 shares in 1998 2,345 2,335 Additional paid-in capital 34,855 34,862 Accumulated deficit* (48,683) (48,280) -------- -------- Total stockholders' deficit (11,483) (11,083) Commitments and contingencies (note 10) -------- -------- $ 8,986 $ 11,422 ======== ========
*Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a quasi-reorganization. See note 7. See accompanying notes to consolidated financial statements. 34 AVIVA PETROLEUM INC. AND SUBSIDIARIES Consolidated Statement of Operations Years Ended December 31, 1999, 1998 and 1997 (in thousands, except per share data)
1999 1998 1997 ------- -------- -------- Oil and gas sales (note 9) $ 6,797 $ 3,332 $ 9,726 ------- -------- -------- Expense: Production 3,575 3,525 4,235 Depreciation, depletion and amortization 1,000 3,152 6,067 Write-down of oil and gas properties (note 1) - 12,343 19,953 General and administrative 1,245 1,074 1,510 Provision for (recovery of) losses on accounts receivable (101) 420 - Severance 62 - - ------- -------- -------- Total expense 5,781 20,514 31,765 ------- -------- -------- Other income (expense): Interest and other income (expense), net (note 6) 259 1,045 122 Interest expense (1,396) (748) (658) ------- -------- -------- Total other income (expense) (1,137) 297 (536) ------- -------- -------- Loss before income taxes and extraordinary item (121) (16,885) (22,575) Income (taxes) benefits (note 8) (282) 4 93 ------- -------- -------- Loss before extraordinary item (403) (16,881) (22,482) Extraordinary item - debt extinguishment - (197) - ------- -------- -------- Net loss $ (403) $(17,078) $(22,482) ======= ======== ======== Weighted average common shares outstanding 46,813 34,279 31,483 ======= ======== ======== Basic and diluted net loss per common share $ (0.01) $ (0.50) $ (0.71) ======= ======== ========
See accompanying notes to consolidated financial statements. 35 AVIVA PETROLEUM INC. AND SUBSIDIARIES Consolidated Statement of Cash Flows Years Ended December 31, 1999, 1998 and 1997 (in thousands)
1999 1998 1997 ------- -------- -------- Net loss $ (403) $(17,078) $(22,482) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 1,000 3,152 6,067 Write-down of oil and gas properties - 12,343 19,953 Provision for (recovery of) losses on accounts receivable (101) 420 - Deferred foreign income taxes - - (692) Loss (gain) on sale of assets, net (11) - 15 Foreign currency exchange loss (gain), net (193) (1) 75 Other 247 (275) (217) Changes in assets and liabilities: Escrow account 413 (417) - Accounts receivable 120 825 1,934 Inventories 112 195 118 Prepaid expenses and other 38 (196) 79 Accounts payable and accrued liabilities (1,703) 983 (3,119) ------- -------- -------- Net cash provided by (used in) operating activities (481) (49) 1,731 ------- -------- -------- Cash flows from investing activities: Property and equipment expenditures (285) (1,405) (2,757) Proceeds from sale of assets 37 - 19 Other - 1,421 - ------- -------- -------- Net cash provided by (used in) investing activities (248) 16 (2,738) ------- -------- -------- Cash flows from financing activities: Proceeds from long term debt - 1,560 - Principal payments on long term debt (300) (400) (300) Other - (97) - ------- -------- -------- Net cash provided by (used in) financing activities (300) 1,063 (300) ------- -------- -------- Effect of exchange rate changes on cash and cash equivalents 163 (8) (44) ------- -------- -------- Net increase (decrease) in cash and cash equivalents (866) 1,022 (1,351) Cash and cash equivalents at beginning of year 1,712 690 2,041 ------- -------- -------- Cash and cash equivalents at end of year $ 846 $ 1,712 $ 690 ======= ======== ========
See accompanying notes to consolidated financial statements. 36 AVIVA PETROLEUM INC. AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity (Deficit) Years Ended December 31, 1999, 1998 and 1997 (in thousands, except number of shares)
Common Stock ------------------ Additional Total Number of Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity (Deficit) ---------- ------ ---------- ----------- ---------------- Balances at December 31, 1996 31,482,716 $1,574 $ 33,376 $ (8,720) $ 26,230 Net loss - - - (22,482) (22,482) ---------- ------ ---------- ----------- ------------ Balances at December 31, 1997 31,482,716 1,574 33,376 (31,202) 3,748 Issuance of common stock pursuant to amendments of credit agreement (note 5) 1,200,000 60 49 - 109 Issuance of common stock pursuant to the acquisition of Garnet Resources Corporation (note 3) 14,017,416 701 1,437 - 2,138 Net loss - - - (17,078) (17,078) ---------- ------ ---------- ----------- ------------ Balances at December 31, 1998 46,700,132 2,335 34,862 (48,280) (11,083) Issuance of common stock pursuant to investment banking agreement 200,000 10 (7) - 3 Net loss - - - (403) (403) ---------- ------ ---------- ----------- -------- Balances at December 31, 1999 46,900,132 $2,345 $ 34,855 $ (48,683) $ (11,483) ========== ====== ========== =========== ============
See accompanying notes to consolidated financial statements. 37 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 principally one U.S. purchaser (See notes 9 and 12). 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. Basis of Presentation The Company's consolidated financial statements have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in note 2 below there is substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern. 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 $46,000 in 1999, $60,000 in 1998 and $127,000 in 1997. 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 $1,479,000. Depreciation, depletion and amortization expense per equivalent barrel of production was as follows: 1999 1998 1997 ------- -------- ------- United States $ 1.10 $ 27.00 $ 7.32 Colombia $ 2.40 $ 5.98 $ 11.59 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. The Company recorded write- downs of $10,556,000 and 38 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) $1,787,000 to the carrying amounts of its Colombian and U.S. oil and gas properties, respectively, as a result of ceiling limitations on capitalized costs during 1998. In 1997, the Company recorded write-downs of $17,829,000 and $2,124,000, respectively, to its Colombian and U.S. oil and gas properties. No such write-downs were required during 1999. Depletion expense and limits on 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 the Colombian cost center, 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 $553,000 and $532,000 were excluded from amortization at December 31, 1999 and 1998, respectively. Unevaluated properties are assessed quarterly to determine whether any impairment has occurred. The unevaluated costs at December 31, 1999 represent exploration costs and were incurred primarily during the four-year period ended December 31, 1999. Such costs are expected to be evaluated and included in the amortization computation within the next three years. 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. Interest Expense The Company capitalizes interest costs on qualifying assets, principally unevaluated oil and gas properties. During 1999, 1998 and 1997, the Company capitalized $59,000, $29,000 and $91,000 of interest, respectively. Loss Per Common Share Basic earnings per share ("EPS") is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the years presented herein, basic and diluted EPS are the same since the effects of potential common shares (notes 5 and 7) 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 $547,000 in 1999, $860,000 in 1998 and $641,000 in 1997 and paid income taxes of $201,000 in 1999, $117,000 in 1998 and $212,000 in 1997. 39 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. Comprehensive Income Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes standards for reporting and display of comprehensive income in a full set of general-purpose financial statements. Comprehensive income includes net income and other comprehensive income which is generally comprised of changes in the fair value of available-for-sale marketable securities, foreign currency translation adjustments and adjustments to recognize additional minimum pension liabilities. For each period presented in the accompanying consolidated statement of operations, comprehensive income and net income are the same amount. (2) Liquidity During the last quarter of calendar year 1997 and throughout calendar year 1998, world oil prices declined dramatically. This decline in oil prices was particularly severe in Colombia. Colombian oil prices, during the twenty-four month period ended December 31, 1998, fell from a high of $22.71 per barrel in January 1997 to $7.50 per barrel in December 1998. Whereas the sale price for crude oil from the Santana contract averaged $19.82 per barrel in 1996 and $17.39 per barrel in 1997, the sale price averaged $10.31 per barrel during calendar year 1998 and $15.57 per barrel during calendar year 1999. These price declines have materially and adversely affected the results of operations and the financial position of the Company. During the years ended December 31, 1999, 1998 and 1997, the Company reported net losses of $0.4 million, $17.1 million and $22.5 million, respectively, and declining amounts of net cash provided by (used in) operating activities of $(0.5) million, $(0.05) million and $1.7 million, respectively. The Company's stockholders' deficit was approximately $11.5 million as of December 31, 1999. Although world oil prices have recovered during the latter part of 1999, the Company remains highly leveraged with $14.5 million in current debt as of December 31, 1999, pursuant to bank credit facilities with ING (U.S.) Capital Corporation ("ING Capital") and the U.S. Overseas Private Investment Corporation ("OPIC"), as more fully described in note 5. The Company is not in compliance with various covenants under the bank credit facilities nor is it in compliance with the minimum escrow balance required thereunder. As a result, the lender has the right to accelerate payment on the debt and, therefore, the Company has classified all long- term debt as current in the December 31, 1999 consolidated balance sheet. Furthermore, the Company was unable to pay the principal payment of $5.7 million due on April 30, 1999, and subsequent monthly principal payments of $281,250 (an aggregate of $7,950,000 through December 31, 1999). The Company did pay $150,000 of principal during the second quarter of 1999 and all of the interest through June 30, 1999; however, interest due subsequent to this date in the amount of $864,000 has not been paid. Assuming no change in its capital structure, the Company 40 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) will not have the financial resources to pay the $8,664,000 of principal and interest which is in arrears and future minimum monthly principal payments of $281,250 due through December 31, 2001. The Company's management has been in more or less continuous discussions with the Company's lenders regarding a restructuring of its debt for more than two years. During that period, the Company has attempted to negotiate several transactions and has engaged financial advisers to locate equity investors to participate in recapitalization and debt restructuring transactions. Except for the Garnet merger in October 1998, none of such proposals has come to fruition, primarily because of the inability of equity participants, lenders and the Company to agree on financial terms. Management of the Company is again in discussions with the Company's lenders and a group of investors concerning a restructuring of the Company. Such a restructuring may involve the sale of a substantial portion of the Company's oil and gas assets and a significant reduction of the Company's outstanding debt. While management is optimistic that a restructuring can be achieved that will provide the Company with the liquidity necessary to continue operations, there can be no assurance that this will be the case. Although management of the Company is pursuing the restructuring assiduously, its ability to effect such a restructuring is dependent upon the Company being able to reach an agreement between the Company, the Company's lenders and the potential investors, matters that are beyond the control of the Company. The Company's lenders have not yet and may not ever agree to a restructuring of the Company's debt. In addition, the potential investors may insist on financial terms that are viewed by the Company's board of directors as inconsistent with continued operations. If the Company is unable to consummate a restructuring, then, in the absence of another business transaction, the Company cannot achieve compliance with or make payments required by the bank credit facilities. Accordingly, the lenders could declare a default, accelerate all amounts outstanding, and attempt to realize upon the collateral securing the debt. As a result of this uncertainty, management believes there is substantial doubt about the Company's ability to continue as a going concern. (3) Garnet Merger On October 28, 1998, the Company completed the merger of Garnet Resources Corporation ("Garnet") with one of the Company's subsidiaries. As a result of the merger, the Company now owns over 99% of the Colombian joint operations. Additionally, the Company now holds a 2% carried working interest in an oil and gas Petroleum Prospecting License in Papua New Guinea. The merger arrangements included Aviva refinancing Garnet's 99.24% owned subsidiary's net outstanding debt to Chase Bank of Texas, N.A. ("Chase") which is guaranteed by the U.S. Overseas Private Investment Corporation ("OPIC"), issuing approximately 1.1 million and 12.9 million new Aviva common shares to Garnet shareholders and Garnet debenture holders, respectively, and canceling Garnet's $15 million of 9.5% subordinated debentures due December 21, 1998. (See note 5 for further details.) The merger was accounted for as a "purchase" of Garnet for financial accounting purposes with Aviva's subsidiary as the surviving entity. The purchase price of Garnet, approximately $9.9 million, consists of $2.4 million related to the issuance of 14 million shares of Aviva's common stock at $0.167 per share plus merger costs and the assumption of approximately $6.0 million of net debt and $1.5 million of current and other liabilities. A summary of the assets acquired and liabilities assumed as of October 28, 1998 follows (in thousands): Current assets $ 1,659 Oil and gas properties 8,250 Current liabilities (1,169) Long term debt (5,954) Other liabilities (346) --------- Fair value of net assets acquired $ 2,440 ========= 41 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (4) Other Assets A summary of other assets follows: December 31 ------------------ (thousands) 1999 1998 -------- -------- Abandonment funds for U.S. offshore properties $ 1,502 $ 1,402 Deferred financing charges 55 113 Other 4 4 -------- -------- $ 1,561 $ 1,519 ======== ======== (5) Long Term Debt On October 28, 1998, concurrently with the consummation of the Garnet merger, Neo Energy, Inc., an indirect subsidiary of the Company, and the Company entered into a Restated Credit Agreement with ING Capital. ING Capital, Chase and OPIC also entered into a Joint Finance and Intercreditor Agreement (the "Intercreditor Agreement") with the Company. ING Capital agreed to loan Neo Energy, Inc. an additional $800,000, bringing the total outstanding balance due ING Capital to $9,000,000. The outstanding balance due to Chase was paid down to $6,000,000 from the $6,350,000 balance owed by Garnet prior to the merger. The Chase loan was unconditionally guaranteed by OPIC. On September 1, 1999, the Chase loan was assigned and transferred to OPIC pursuant to this guarantee. The ING Capital loan and the OPIC loan (the "Bank Credit Facilities") are guaranteed by the Company and its material domestic subsidiaries. Both loans are also secured by the Company's consolidated interest in the Santana contract and related assets in Colombia, a first mortgage on the United States oil and gas properties of the Company and its subsidiaries, a lien on accounts receivable of the Company and its subsidiaries, and a pledge of the capital stock of the Company's subsidiaries. Borrowings under the ING Capital loan bear interest at the prime rate (as defined in the Restated Credit Agreement) plus 3% per annum. Borrowings under the OPIC loan bear interest at 10.27% per annum. Borrowings under the Bank Credit Facilities are payable as follows: $5,700,000 in April 1999, and thereafter $281,250 per month until final maturity on December 31, 2001. The terms of the Bank Credit Facilities, 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. As of December 31, 1999, the Company is not in compliance with various covenants under the Bank Credit Facilities. Moreover, the Company did not pay the $5,700,000 principal payment that was due April 30, 1999, and subsequent monthly principal payments of $281,250. As a result, the lender has the right to accelerate payment on the debt and, therefore, the Company has classified all long-term debt as current in the December 31, 1999 consolidated balance sheet. The Company is also required to maintain an escrow account pursuant to the Bank Credit Facilities. On March 31, 1999 and thereafter, the escrow account must contain the total of the following for the next succeeding three-month period: (i) the amount of the minimum monthly principal payments (as defined in the loan documents), plus (ii) the interest payments due on the combined loans, plus (iii) the amount of all fees due under the loan documents and under the Intercreditor Agreement. The Company is not in compliance with the requirements of the escrow account. See management's plans to restructure the debt in note 2. Subsequent to consummation of the Garnet merger, Aviva issued to ING Capital 800,000 shares of Aviva common stock and warrants to purchase 1,500,000 shares of Aviva common stock at an exercise price of $0.50 per share in payment of financial advisory fees. The 800,000 shares were valued at their quoted market value on October 28, 1998, the date on which the Bank Credit Facilities were consummated. The warrants were 42 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) valued using the Black-Scholes option-pricing model. Both amounts are included in debt extinguishment costs in the 1998 consolidated statement of operations. (6) Interest and Other Income (Expense) A summary of interest and other income (expense) follows:
(thousands) 1999 1998 1997 ---------- ---------- ---------- Gain on settlement of litigation $ - $ 720 $ - Interest income 94 70 138 Foreign currency exchange gain (loss) 193 1 (75) Gain (loss) on sale of assets, net 11 - (15) Other, net (39) 254 74 ---------- ---------- ---------- $ 259 $ 1,045 $ 122 ========== ========== ==========
In January 1998, the Company realized a $720,000 gain on the settlement of litigation involving the administration of a take or pay contract settlement. (7) 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, 1999, 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):
1999 1998 1997 ---- ---- ---- Net loss As reported $ (403) $(17,078) $(22,482) Pro forma $ (413) $(17,095) $(22,506) Loss per share As reported $(0.01) $ (0.50) $ (0.71) Pro forma $(0.01) $ (0.50) $ (0.71)
The Aviva Petroleum Inc. 1995 Stock Option Plan, as amended (the "Current Plan") is administered by a committee (the "Committee") composed of two or more outside directors of the Company. 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. 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 Current Plan also provides for the grant, on July 1, each year, to each non-employee director who has served in such capacity for at least the entire preceding calendar year of an option to purchase 5,000 shares of the Company's common stock (the "Annual Option Awards"), exercisable as to 2,500 shares on the first anniversary of the date of grant and as to the remaining shares on the second anniversary thereof. 43 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) 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. As a result of the adoption of the Current Plan, during 1995 the Company's former Incentive and Non-Statutory Stock Option Plan was terminated as to the grant of new options, but options then outstanding for 258,000 shares of the Company's common stock remain in effect as of December 31, 1999. 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:
1999 1998 1997 ----- ----- ----- Expected life (years) 10.0 10.0 10.0 Risk-free interest rate 5.8% 4.8% 6.6% Volatility 87.0% 77.0% 71.0% Dividend yield 0.0% 0.0% 0.0%
A summary of the status of the Company's two fixed stock option plans as of December 31, 1999, 1998 and 1997, and changes during the years ended on those dates is presented below:
1999 1998 1997 ----------------- ----------------- ----------------- 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 1,148 $ .53 550 $ 1.53 530 $ 1.80 Granted 5 .01 675 .06 45 .52 Forfeited (81) .74 (77) 3.60 (25) 4.95 ------ ------ ------ Outstanding at end of year 1,072 .51 1,148 .53 550 1.53 ====== ====== ====== Options exercisable at year-end 825 655 445 Weighted-average fair value of options granted during the year $ .01 $ .05 $ .42
The following table summarizes information about fixed stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable -------------------------------------------------- ------------------------------ Range Number Weighted-Avg. Number of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 12/31/99 Contractual Life Exercise Price at 12/31/99 Exercise Price - -------------------- ----------- ----------------- -------------- ----------- -------------- $ .01 to .17 659,000 8.84 years $ .06 422,167 $ .06 .51 to .98 163,000 5.12 .81 153,000 .83 1.08 to 2.71 250,000 3.24 1.47 250,000 1.47 - -------------------- ---------- ----------- $ .01 to 2.71 1,072,000 6.97 .51 825,167 .63 ==================== ========== ===========
44 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (8) Income Taxes Income tax expense includes current Colombian income taxes (benefit) of $282,000 in 1999, $(4,000) in 1998 and $587,000 in 1997 and deferred Colombian income taxes (benefit) of $-0- in 1999 and 1998 and $(692,000) in 1997. Income tax expense also includes state income taxes of $-0- in 1999 and 1998 and $12,000 in 1997. The Company's effective tax rate differs from the U.S. statutory rate each year principally due to losses without tax benefit. The Company has deferred tax assets of $44,332,000 and $46,028,000 at December 31, 1999 and 1998, respectively, consisting principally of net operating loss carryforwards. The valuation allowance for deferred tax assets at January 1, 1997 was $36,126,000. The net change in the valuation allowance was a $1,696,000 decrease in 1999, a $3,975,000 increase in 1998 and a $5,927,000 increase in 1997. 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, 1999, the Company and its subsidiaries have aggregate net operating loss carryforwards for U.S. federal income tax purposes of approximately $109,000,000, expiring from 2000 through 2019, 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. (9) 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. The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to the current maturities of these financial instruments. The fair value of the Company's debt cannot be reasonably determined due to uncertainties surrounding the Company's ability to repay (see note 2). Ecopetrol has an option to purchase all of the Company's production in Colombia. For the years ended December 31, 1999, 1998 and 1997, Ecopetrol exercised that option and sales to Ecopetrol accounted for $5,683,000 (83.6%), $2,632,000 (79.0%) and $7,405,000 (76.1%), respectively, of the Company's aggregate oil and gas sales. For the years ended December 31, 1998 and 1997, sales to one U.S. purchaser accounted for $479,000 (14.4%) and $1,516,000 (15.6%), respectively, of oil and gas sales. (10) Commitments and Contingencies The Company is engaged in ongoing operations on the Santana contract in Colombia. The contract obligations have been met; however, the Company plans to recomplete certain existing wells and engage in various other projects. The Company's current share of the estimated future costs of these activities is approximately $0.6 million at December 31, 1999. Any substantial increase in the amount of the above referenced expenditures could adversely affect the Company's ability to meet these obligations. The Company expects to fund these activities using cash provided from operations. Risks that could adversely affect funding of such activities include, among others, 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 future exploration and development activities, substantial expenditures which have not been included in the Company's cash flow projections may be required. Failure 45 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) to fund certain expenditures could result in the forfeiture of all or part of the Company's interest in this contract. On August 3, 1998, leftist Colombian guerrillas inflicted significant damage on the Company's oil processing and storage facilities at the Mary field, and to a lesser extent, at the Linda facilities. Since that time the Company has been subject to lesser attacks on its pipelines and equipment resulting in only minor interruptions of oil sales. The Colombian army guards the Company's operations; however, there can be no assurance that the Company's operations will not be the target of additional guerrilla attacks in the future. The damages resulting from the above referenced attacks were covered by insurance. There can be no assurance that such coverage will remain available or affordable. Under the terms of the contracts with Ecopetrol, a minimum of 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 foreign, federal, state and local environmental laws and regulations, including but not limited to the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the Federal Water Pollution Control Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act. Such laws and regulations have increased the cost of planning, designing, drilling, operating and abandoning wells. In most instances, the statutory and 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 laws and regulations will not have a material adverse effect on the Company's future 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 laws and 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 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 2002. Rent expense relating to the lease was $94,000, $90,000 and $83,000 for 1999, 1998 and 1997, respectively. Future minimum payments under the lease are: 2000 - $102,000; 2001 - $102,000; and 2002 - $9,000. (11) Gas Balancing As of December 31, 1999 and 1998, other joint owners had sold net gas with a volume equivalent of approximately 2,000 thousand cubic feet ("MCF") (with an estimated value of $4,000 included in other assets), for which the Company is generally entitled to be repaid in volumes ("underproduced"). As of December 31, 1999 and 1998, the Company had sold net gas with a volume equivalent of approximately 441,000 MCF and 444,000 MCF (with an estimated value of $708,000 and $725,000 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. 46 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) (12) 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, 1999, 1998 and 1997 follows:
(Thousands) United States Colombia Total ------- -------- ------- 1999 ---- Oil and gas sales $ 1,114 $ 5,683 $ 6,797 ------- -------- ------- Expense: Production 1,173 2,402 3,575 Depreciation, depletion and amortization 59 941 1,000 General and administrative 1,148 97 1,245 Recovery of losses on accounts receivable (101) - (101) Severance - 62 62 ------- -------- ------- 2,279 3,502 5,781 ------- -------- ------- Interest and other income (expense), net 154 105 259 Interest expense (397) (999) (1,396) ------- -------- ------- Income (loss) before income taxes (1,408) 1,287 (121) Income taxes - (282) (282) ------- -------- ------- Net earnings (loss) $(1,408) $ 1,005 $ (403) ======= ======== ======= Total assets $ 1,908 $ 7,078 $ 8,986 ======= ======== =======
47 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued)
(Thousands) United States Colombia Total ------- -------- -------- 1998 - ---- Oil and gas sales $ 700 $ 2,632 $ 3,332 ------- -------- -------- Expense: Production 1,259 2,266 3,525 Depreciation, depletion and amortization 1,556 1,596 3,152 Write-down of oil and gas properties 1,787 10,556 12,343 General and administrative 1,042 32 1,074 Provision for losses on accounts receivable 420 - 420 ------- -------- -------- 6,064 14,450 20,514 ------- -------- -------- Interest and other income (expense), net 768 277 1,045 Interest expense (346) (402) (748) ------- -------- -------- Loss before income taxes and extraordinary item (4,942) (11,943) (16,885) Income tax benefit - 4 4 ------- -------- -------- Loss before extraordinary item (4,942) (11,939) (16,881) Extraordinary item - debt extinguishment - (197) (197) ------- -------- -------- Net loss $(4,942) $(12,136) $(17,078) ======= ======== ======== Total assets $ 3,002 $ 8,420 $ 11,422 ======= ======== ======== 1997 - ---- Oil and gas sales $ 2,321 $ 7,405 $ 9,726 ------- -------- -------- Expense: Production 1,262 2,973 4,235 Depreciation, depletion and amortization 1,009 5,058 6,067 Write-down of oil and gas properties 2,124 17,829 19,953 General and administrative 1,499 11 1,510 ------- -------- -------- 5,894 25,871 31,765 ------- -------- -------- Interest and other income (expense), net 92 30 122 Interest expense (399) (259) (658) ------- -------- -------- Loss before income taxes (3,880) (18,695) (22,575) Income (taxes) benefit (12) 105 93 ------- -------- -------- Net loss $(3,892) $(18,590) $(22,482) ======= ======== ======== Total assets $ 4,110 $ 12,335 $ 16,445 ======= ======== ========
48 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, 1999 - ----------------- Unevaluated oil and gas properties $ 175 $ 379 $ 554 Proved oil and gas properties 13,199 54,709 67,908 --------- ---------- --------- Total capitalized costs 13,374 55,088 68,462 Less accumulated depreciation depletion and amortization 13,992 50,600 64,592 --------- ---------- --------- Capitalized costs, net $ (618) $ 4,488 $ 3,870 ========= ========== ========= December 31, 1998 - ----------------- Unevaluated oil and gas properties $ 158 $ 374 $ 532 Proved oil and gas properties 13,114 54,990 68,104 --------- ---------- --------- Total capitalized costs 13,272 55,364 68,636 Less accumulated depreciation, depletion and amortization 13,947 49,947 63,894 --------- ---------- --------- Capitalized costs, net $ (675) $ 5,417 $ 4,742 ========= ========== =========
49 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 -------- -------- -------- 1999 - ---- Exploration $ 17 $ 41 $ 58 Development 85 81 166 -------- -------- -------- Total costs incurred $ 102 $ 122 $ 224 ======== ======== ======== 1998 - ---- Exploration $ 15 $ 136 $ 151 Development 1,039 209 1,248 Acquisition of Garnet properties - 8,250 8,250 -------- -------- -------- Total costs incurred $ 1,054 $ 8,595 $ 9,649 ======== ======== ======== 1997 - ---- Exploration $ 25 $ 470 $ 495 Development 176 2,085 2,261 -------- -------- -------- Total costs incurred $ 201 $ 2,555 $ 2,756 ======== ======== ========
50 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 and gas 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, 1999 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 8 2,352 2,360 Revisions of previous estimates 193 221 414 Discoveries and extensions - - - Sales of reserves - - - Production (57) (365) (422) ------------ ------------ ------------ End of period 144 2,208 2,352 ============ ============ ============ Proved developed reserves, end of period 144 2,208 2,352 ============ ============ ============ Gas (Millions of cubic feet) Proved reserves: Beginning of period 4 - 4 Revisions of previous estimates 150 - 150 Discoveries and extensions - - - Sales of reserves - - - Production (53) - (53) ------------ ------------ ------------ End of period 101 - 101 ============ ============ ============ Proved developed reserves, end of period 101 - 101 ============ ============ ============
51 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, 1998 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 195 1,476 1,671 Revisions of previous estimates (143) (200) (343) Acquisition of Garnet - 1,331 1,331 Production (44) (255) (299) ------------ ------------ ------------ End of period 8 2,352 2,360 ============ ============ ============ Proved developed reserves, end of period 8 2,352 2,360 ============ ============ ============ Gas (Millions of cubic feet) Proved reserves: Beginning of period 1,119 - 1,119 Revisions of previous estimates (1,047) - (1,047) Production (68) - (68) ------------ ------------ ------------ End of period 4 - 4 ============ ============ ============ Proved developed reserves, end of period 4 - 4 ============ ============ ============
52 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, 1997 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 305 2,817 3,122 Revisions of previous estimates (34) (915) (949) Production (76) (426) (502) ------------ ------------ ----------- End of period 195 1,476 1,671 ============ ============ ============ Proved developed reserves, end of period 195 1,476 1,671 ============ ============ ============ Gas (Millions of cubic feet) Proved reserves: Beginning of period 1,682 - 1,682 Revisions of previous estimates (247) - (247) Production (316) - (316) ------------ ------------ ----------- End of period 1,119 - 1,119 ============ ============ ============ Proved developed reserves, end of period 1,119 - 1,119 ============ ============ ============
53 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, 1999: - --------------------- Future gross revenues $ 3,708 $ 53,112 $ 56,820 Future production costs (2,792) (15,195) (17,987) Future development costs, including abandonment of U.S. offshore platforms (970) (1,075) (2,045) ------------ ------------ ------------ Future net cash flows before income taxes (54) 36,842 36,788 Future income taxes - - - ------------ ------------ ------------ Future net cash flows after income taxes (54) 36,842 36,788 Discount at 10% per annum 171 (8,699) (8,528) ------------ ------------ ------------ Standardized measure of discounted future net cash flows $ 117 $ 28,143 $ 28,260 ============ ============ ============ At December 31, 1998: - --------------------- Future gross revenues $ 78 $ 17,645 $ 17,723 Future production costs (77) (10,242) (10,319) Future development costs, including abandonment of U.S. offshore platforms (969) (570) (1,539) ------------ ------------ ------------ Future net cash flows before income taxes (968) 6,833 5,865 Future income taxes - - - ------------ ------------ ------------ Future net cash flows after income taxes (968) 6,833 5,865 Discount at 10% per annum 136 (1,382) (1,246) ------------ ------------ ------------ Standardized measure of discounted future net cash flows $ (832) $ 5,451 $ 4,619 ============ ============ ============
54 AVIVA PETROLEUM INC. AND SUBSIDIARIES Supplementary Information Related to Oil and Gas Producing Activities (Unaudited) (Continued)
(Thousands) United States Colombia Total ------------ ------------ ------------ At December 31, 1997: - --------------------- Future gross revenues $ 6,009 $ 21,124 $ 27,133 Future production costs (3,548) (7,709) (11,257) Future development costs, including abandonment of U.S. offshore platforms (970) (555) (1,525) ------------ ------------ ------------ Future net cash flows before income taxes 1,491 12,860 14,351 Future income taxes - - - ------------ ------------ ------------ Future net cash flows after income taxes 1,491 12,860 14,351 Discount at 10% per annum (38) (2,893) (2,931) ------------ ------------ ------------ Standardized measure of discounted future net cash flows $ 1,453 $ 9,967 $ 11,420 ============ ============ ============
55 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) 1999 1998 1997 ------------ ------------ ------------ Sales of oil and gas, net of production costs $ (3,222) $ 192 $ (5,491) Sales of reserves in place - - - Development costs incurred that reduced future development costs - - 801 Accretion of discount 462 1,142 4,547 Discoveries and extensions - - - Purchase of reserves in place - 2,998 - Revisions of previous estimates: Changes in price 24,161 (9,585) (24,154) Changes in quantities 4,103 (539) (7,054) Changes in future development costs 297 (448) 1,175 Changes in timing and other changes (2,160) (561) (3,878) Changes in estimated income taxes - - 874 ------------ ------------ ------------ Net increase (decrease) 23,641 (6,801) (33,180) Balances at beginning of year 4,619 11,420 44,600 ------------ ------------ ------------ Balances at end of year $ 28,260 $ 4,619 $ 11,420 ============ ============ ============
56 INDEX TO EXHIBITS Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *2.1 Agreement and Plan of Merger dated as of June 24, 1998, by and among Aviva Petroleum Inc., Aviva Merger Inc. and Garnet Resources Corporation (filed as exhibit 2.1 to the Registration Statement on Form S-4, File No. 333- 58061, and incorporated herein by reference). *2.2 Debenture Purchase Agreement dated as of June 24, 1998, between Aviva Petroleum Inc. and the Holders of the Debentures named therein (filed as exhibit 2.2 to the Registration Statement on Form S-4, file No. 333-58061, and incorporated herein by reference). *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 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). *10.6 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). *10.7 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). *10.8 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). *10.9 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). *10.10 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). *10.11 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). INDEX TO EXHIBITS Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.12 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). *10.13 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). *10.14 Aviva Petroleum Inc. 1995 Stock Option Plan, as amended (filed as Appendix A to the Company's definitive Proxy Statement for the Annual Meeting of Shareholders dated June 10, 1997, and incorporated herein by reference). *10.15 Restated Credit Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc. and ING (U.S.) Capital Corporation (filed as exhibit 99.1 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.16 Joint Finance and Intercreditor Agreement dated as of October 28, 1998, between Neo Energy, Inc., Aviva Petroleum Inc., ING (U.S.) Capital Corporation, Aviva America, Inc., Aviva Operating Company, Aviva Delaware Inc., Garnet Resources Corporation, Argosy Energy Incorporated, Argosy Energy International, Garnet PNG Corporation, the Overseas Private Investment Corporation, Chase Bank of Texas, N.A. and ING (U.S.) Capital Corporation as collateral agent for the creditors (filed as exhibit 99.2 to the Company's Form 8-K dated October 28, 1998, File No. 0-22258, and incorporated herein by reference). *10.17 Amendment to the Santana Crude Sale and Purchase Agreement dated February 16, 1999 (filed as exhibit 10.70 to the Company's annual report on Form 10-K for the year ended December 31, 1998, File No. 0-22258, and incorporated herein by reference). **10.18 Amended and Restated Aviva Petroleum Inc. Severance Benefit Plan dated December 31, 1999. **10.19 Santana Crude Sale and Purchase Agreement dated January 3, 2000. **10.20 Employment Agreement between the Company and Ronald Suttill dated February 1, 2000. **10.21 Employment Agreement between the Company and James L. Busby dated February 1, 2000. **21.1 List of subsidiaries of Aviva Petroleum Inc. **27.1 Financial Data Schedule. - ------------------------- *Previously Filed **Filed Herewith EX-10.18 2 AMENDED AND RESTATED SEVERANCE EXHIBIT 10.18 AVIVA PETROLEUM INC. SEVERANCE BENEFIT PLAN Amended and Restated Effective as of December 31, 1999 AVIVA PETROLEUM INC. SEVERANCE BENEFIT PLAN WITNESSETH: WHEREAS, Aviva Petroleum Inc. previously adopted the Aviva Petroleum Inc. Severance Benefit Plan and now desires to amend and restate the Plan; NOW, THEREFORE, the Aviva Petroleum Inc. Severance Benefit Plan is hereby amended and restated effective as of December 31, 1999, to read as follows: ARTICLE I DEFINITIONS ----------- 1.1. "Cause" means, in the context of an Employee's termination or separation from employment with the Company, an Employee's (i) neglect, refusal or failure (other than by reason of illness, accident or other physical or mental incapacity), in any material respect, to attend to his duties as assigned by the Company; (ii) failure in any material respect to comply with any of his terms of employment; (iii) failure to follow the established, reasonable and material policies, standards, and regulations of the Company; (iv) willful engagement in gross misconduct injurious to the Company or to any of its subsidiaries or affiliates; or (v) conviction in a court of law of, or pleading of guilty or nolo contendere to, any crime that constitutes a felony in the jurisdiction involved. 1.2. "Change of Control" means an event which shall be deemed to have occurred when either (i) any "person" (as that term is used in sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes a "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities, (ii) individuals who, as of the effective date of the Plan, constitute the Directors cease for any reason to constitute at least a majority of the Directors, unless such cessation is approved by a majority vote of the Directors in office immediately prior to such cessation, (iii) the Company is merged into a previously unrelated entity, or (iv) a transaction converting all or a part of the debt of the Company and its subsidiaries to equity in the Company is consummated with the Company's lenders or their successors. 1.3. "Code" means the Internal Revenue Code of 1986, as amended. 1.4. "Company" means Aviva Petroleum Inc. 1.5. "Directors" means the Board of Directors of the Company. 1 1.6. "Eligible Employee" means each Employee other than (a) an Employee whose terms and conditions of employment are governed by a collective bargaining agreement, unless such agreement provides for his coverage under the Plan, (b) a nonresident alien who has no United States source income, (c) an Employee who is a party to a separate severance agreement with the Company, or (d) an Employee who is a party to an individual employment agreement with the Company providing for severance benefits. 1.7. "Employee" means any individual who is employed full-time by the Company (or any of its wholly-owned subsidiaries), and who is not a temporary employee. Full-time employees are those employees who, on average, work at least 35 hours per week for the Company. Temporary employees are those employees whose anticipated duration of employment at the time of hire is no more than six months. 1.8. "Plan" means the Aviva Petroleum Inc. Severance Benefit Plan, as amended from time to time. 1.9. "Plan Administrator" means the Company. 1.10. "Plan Year" means the twelve-consecutive-month period commencing January 1 of each year. ARTICLE II GENERAL SEVERANCE BENEFIT ------------------------- 2.1. Severance Benefit. The Company shall provide severance benefits as set forth in Article III to Eligible Employees, pursuant to the terms, conditions and limitations set forth in the Plan. No benefits shall be provided to an Eligible Employee unless such Eligible Employee executes documents required by the Plan Administrator relieving the Company from any employment- related liability. ARTICLE III SEVERANCE BENEFITS ------------------ 3.1. Severance Benefits. Each Eligible Employee shall be entitled to severance benefits under the Plan if, within two (2) years after a Change of Control, the Company (or any of its wholly-owned subsidiaries) terminates his employment, reduces his salary, removes him as an officer of the Company or transfers the Eligible Employee to a location that is at least 50 miles from his current employment location, or in any other circumstances in which the Plan Administrator within its discretion deems severance benefits appropriate. The amount of an Eligible Employee's severance benefits shall be determined by the Plan Administrator as follows: Each Eligible Employee shall receive the greater of (A) three (3) months' of his base salary or (B) one-half ( 1/2) month of his base salary times his years of employment with the Company (or a predecessor entity), plus one month's base salary multiplied by his annual base salary divided by $10,000. For purposes of this calculation, years of employment shall be calculated to the nearest month. Notwithstanding the 2 immediately preceding two sentences, the severance benefits for an Eligible Employee who is an officer of the Company shall be one year's base salary. In addition to eligibility to receive benefits following a Change of Control, each Eligible Employee whose employment is terminated as a result of the recommendations of management or the Directors, in connection with a reduction of Company general and administrative expenses, shall be eligible to receive the benefits provided under the first paragraph of this Section 3.1. 3.2. Voluntary Termination. An Eligible Employee who voluntarily terminates employment with the Company shall receive no severance benefits under the Plan, unless the Plan Administrator deems severance benefits appropriate pursuant to Section 3.1. 3.3. Termination for Cause. Notwithstanding any other provision in the Plan to the contrary, an Eligible Employee who is terminated for Cause shall receive no severance benefits under the Plan. 3.4. Maximum Benefit. The maximum benefit under the Plan for any Eligible Employee shall be one-half ( 1/2) of the Eligible Employee's annual base salary, except for officers of the Company. 3.5. Form of Benefit. Benefits shall be paid in a lump sum. 3.6. Medical Benefits. If an Eligible Employee becomes entitled to severance benefits under Section 3.1, the Company shall also pay premiums for medical insurance coverage for such Eligible Employee for a number of months equal to the number of months of base salary the Eligible Employee receives as severance benefits under Section 3.1, up to a maximum of three (3) months, provided the Company is able to provide such medical insurance coverage under the terms of its medical insurance policy. The medical benefits provided under such medical insurance coverage shall be substantially identical to the medical benefits provided under the medical plan in effect on the date of the Change of Control or, in the case of a termination in connection with a general reduction of Company general and administrative costs, on the date of the termination of employment. If the Company is unable to provide such coverage under its medical insurance policy, the Company shall pay the Eligible Employee the net dollar amount that the Company had been paying toward the medical insurance premiums for the Eligible Employee prior to the termination of employment. Nothing in the Plan shall be construed to limit the right of any Eligible Employee to any benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). ARTICLE IV GENERAL PROVISIONS ------------------ 4.1. Funding and Cost of Plan. The benefits provided herein shall be unfunded and shall be provided from the Company's general assets. 4.2. Named Fiduciary. The Plan Administrator shall be the named fiduciary for purposes of the Employee Retirement Income Security Act of 1974, as amended. 3 4.3. Administration. The Plan Administrator shall be responsible for the management and control of the operation and the administration of the Plan, including without limitation interpretation of the Plan, decisions pertaining to eligibility to participate in the Plan, computation of Plan benefits, granting or denial of benefit claims, and review of claims denials. The Plan Administrator has absolute discretion in the exercise of its powers and responsibilities. The Company may, by action of its President, delegate any or all of its powers and responsibilities as Plan Administrator to an individual, a committee, or both. To the extent the Company delegates its responsibilities and powers as Plan Administrator, the Company shall indemnify and hold harmless each such delegate (and any other individual acting on such delegate's behalf) against any and all expenses and liabilities arising out of such person's administrative functions or fiduciary responsibilities, excepting only expenses and liabilities arising out of the person's own willful misconduct; expenses against which such person shall be indemnified hereunder include without limitation the amounts of any settlement, judgment, attorneys' fees, costs of court, and any other related charges reasonably incurred in connection with a claim, proceeding, settlement, or other action under the Plan. 4.4. Amendment and Termination. The Directors have the authority to amend or terminate the Plan at any time, by means of a written instrument executed by either the Directors or a duly authorized officer of the Company. Notwithstanding the previous sentence, if the Company terminates an Eligible Employee's employment, reduces his salary, removes him as an officer of the Company, or transfers him to a location that is at least 50 miles from his current employment location prior to December 31, 2001, no such amendment or termination shall reduce the benefits to which the Eligible Employee would otherwise be entitled, unless the Eligible Employee consents in writing to the amendment or termination. 4.5. Claims Procedure and Review. Claims for benefits under the Plan shall be made in writing to the Plan Administrator. If a claim for benefits is wholly or partially denied, the Plan Administrator shall, within a reasonable period of time but no later than ninety days after receipt of the claim (or 180 days after receipt of the claim if special circumstances require an extension of time for processing the claim), notify the claimant of the denial. Such notice shall (i) be in writing, (ii) be written in a manner calculated to be understood by the claimant, (iii) contain the specific reason or reasons for denial of the claim, (iv) refer specifically to the pertinent Plan provisions upon which the denial is based, (v) describe any additional material or information necessary for the claimant to perfect the claim (and explain why such material or information is necessary), and (vi) explain the Plan's claim review procedure. Within sixty days of the receipt by the claimant of this notice, the claimant may file a written appeal with the Plan Administrator. In connection with the appeal, the claimant may review pertinent documents and may submit written issues and comments. The Plan Administrator shall deliver to the claimant a written decision on the appeal promptly, but not later than sixty days after the receipt of the claimant's appeal (or 120 days after receipt of the claimant's appeal if there are special circumstances which require an extension of time for processing). Such decision shall (i) be written in a manner calculated to be understood by the claimant, (ii) include specific reasons for the decision, and (iii) refer specifically to the Plan provisions upon which the decision is based. If special circumstances require an extension, up to 180 or 120 days, whichever applies, the Plan Administrator shall send written notice of the 4 extension. This notice shall indicate the special circumstances requiring the extension and state when the Plan Administrator expects to render the decision. 4.6. Not Contract of Employment. The adoption and maintenance of the Plan shall not be deemed to be a contract of employment between the Company and any person, to be consideration for the employment of any person, or to have any effect whatsoever on the at-will employment relationship. Nothing in the Plan shall be deemed to give any person the right to be retained in the employ of the Company or to restrict the right of the Company to discharge any person at any time. Nothing in the Plan shall be deemed to give the Company the right to require any person to remain in the employ of such Company or to restrict any person's right to terminate his employment at any time. 4.7. Governing Law. This Plan shall be interpreted under the laws of the State of Texas except to the extent preempted by federal law. 4.8. Gender; Number. Wherever appropriate herein, the masculine, neuter, and feminine genders shall be deemed to include each other, and the plural shall be deemed to include the singular and vice versa. 4.9. No Benefits. Notwithstanding any Plan provisions to the contrary, in connection with the disposition of substantial stock or assets of the Company or any affiliate, if the Eligible Employee commences employment with the entity or any affiliate that acquired such stock or assets, no termination will be deemed to have occurred and no benefits will be payable under the Plan. 4.10. Independent Contractors. Notwithstanding any provision of the Plan to the contrary, no individual who is designated, compensated, or otherwise classified as an independent contractor shall be eligible for benefits under the Plan. 4.11. Headings. The headings of the Articles and Sections are included solely for convenience. If the headings and the text of the Plan conflict, the text shall control. All references to Articles and Sections are to the Plan unless otherwise indicated. 4.12. Severability. If any provision of the Plan is held to be illegal or invalid for any reason, that holding shall not affect the remaining provisions of the Plan. Instead, the Plan shall be construed and enforced as if such illegal or invalid provision had not been contained herein. 4.13. Successors and Assigns. The provisions of this Plan shall be binding on any successors to or assigns of the Company. 5 IN WITNESS WHEREOF, Aviva Petroleum Inc., executed this amended and restated Aviva Petroleum Inc. Severance Benefit Plan, effective as of December 31, 1999, this 13th day of January 2000. AVIVA PETROLEUM INC. By: /s/ R. Suttill ------------------------- Name: R. Suttill ---------------------- Title: President & CEO --------------------- WITNESS: By: /s/ Mary Jane Baker ----------------------- Title: Admin. Assistant -------------------- 6 EX-10.19 3 SANTANA CRUDE SALE EXHIBIT 10.19 ECOPETROL CONTRACT NO. GCI - 001 - 00 SELLER: ARGOSY ENERGY INTERNATIONAL PURPOSE: PURCHASE AND SALES OF THE SANTANA CRUDE OIL TERM: JANUARY 1/ST/, 2000 TO DECEMBER 31/ST/, 2000 VALUE: UNDETERMINED AMOUNT The Contracting Parties on one hand, EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL, hereinafter referred to as ECOPETROL, a Government-owned Industrial and Commercial Corporation, authorized by Law 165 of 1948, and ruled by the by- laws set forth by Decree 1209 of 1994, with its main office in Santafe de Bogota, D.C., represented by DARIO FERNANDO LOPEZ MARTINEZ, of legal age, bearer of citizenship card No. 19.076.354 issued in Bogota, resident in Bogota, who hereby states: A. That he acts in his capacity as International Trade and Gas Vice President (in charge) and according to the legal standards and internal provisions of ECOPETROL; and B. On the other hand ARGOSY ENERGY INTERNATIONAL, a corporation duly organized under the laws of the State of Utah, United States of America, with its main place of business in Salt Lake City, Utah and a Colombian branch incorporated by Public Deed No. 5323 of October 25/th/, 1983 and registered at the Chamber of Commerce of Bogota under Registry No. 200848 of November 23/rd/, 1983, represented by ALVARO JOSE CAMACHO R., of legal age, bearer of citizenship card No. 79.142.747 of Bogota, hereinafter referred to as SELLER, enter into a Purchase and Sale Contract of the Santana Crude Oil, ruled by the following clauses: CLAUSE ONE: PURPOSE AND AMOUNTS: SELLER agrees to sell and deliver to ECOPETROL, under conditions set forth hereunder, the crude oil produced under the Santana Shares Risk Contract, corresponding to SELLER, with the quality set forth in Clause Two hereunder and ECOPETROL agrees to receive and pay for this crude oil. PARAGRAPH 1: The Santana Shared Risk Contract was entered into on May 27/th/, 1987 with affective date May 27/th/,1987 among ECOPETROL, ARGOSY ENERGY INTERNATIONAL AND NEO ENERGY INC. It was amended by Public Deed No. 00064 dated January 19/th/, 1999, filed at Notary Public's Office 50 of Santafe de Bogota. PARAGRAPH 2: All purchase shall be made by ECOPETROL, under the preliminary crude oil purchase schedule agreed by the parties for six (6) months, which ECOPETROL can modify upon written notice to SELLER given at least thirty (30) days in advance. CLAUSE TWO: QUALITY. The quality of the crude oil under this contract shall include the following specifications: A) The crude oil gravity shall be that with which such crude oil is obtained within production operations. B) The crude oil water and sediment contents cannot exceed 0.5% in volume and their determination shall be made through the methods ASTM-D4377 "Karl Fisher Method", last revision and ASTM-D473 method "Sediment in Crude Oil and Fuel Oil Extraction", last revision. C) Crude oil sulfur contents shall be that with which such crude oil is obtained, within production operations: sulfur determination 1 shall be made through the ASTM-D2622 method, last revision "X Ray Sulfur Analysis". D) Salt contents cannot exceed 20 pounds per 1.000 barrels of crude oil and it shall be determined through AST-D3230 method "Salts in Crude Oil (Electrometric Method)", last revision. When any of the preceding parameters or specifications is not met or is not within the required parameters, ECOPETROL has the right to reject such crude oil. However, if ECOPETROL should decide to accept crude oil with a higher salinity level, the crude oil price shall be penalized according to the following table: Salt Contents in Penalty in US To be covered by Pounds per Thousand Barrels Dollars/Barrel 20.1 30.0 0.160 SELLER 30.1 40.0 0.180 SELLER 40.1 60.0 0.200 SELLER 60.1 80.0 0.220 SELLER 80.1 100.0 0.240 SELLER It is understood that SELLER shall do its best to deliver the contracted crude oil, with a salt contents of less than twenty (20) pounds per thousand (1000) barrels of crude oil. E. Any change concerning the aforementioned quality specifications accepted by both parties must be recorded in a minutes signed by the representatives of ECOPETROL and SELLER. CLAUSE THREE: PLACE OF DELIVERY AND OWNERSHIP. The Crude Oil hereunder, shall be transported by SELLER to the Santana Terminal, where it shall be measured and analyzed. Later, from the outlet to the pipeline of the Santana Terminal it shall be transported by ECOPETROL to the Tumaco Terminal. Delivery, ownership and risk shall be conveyed from SELLER to ECOPETROL when crude oil passes the outlet flange of the measurement system located at the Santana Terminal. PARAGRAPH 1: Should the SANTANA ASSOCIATION build the Santana-Orito Pipeline, measurement and conveyance of ownership shall be effective in Orito. In addition, as of that date purchase and sale value shall be amended, since transport rate from Santana to Orito shall be disregarded, pursuant to Resolution 6031 of May 8/th/, 1998 of the Ministry of Mines and Energy. PARAGRAPH 2: The Reception Capacity of the Santana Crude shall be limited to the existing capacity of the Santana-Orito Pipeline. CLAUSE FOUR: TERM. The initial term of this Agreement shall be twelve months from January 1/st/, 2000 to December 31/st/, 2000 and can be extended by mutual consent of the parties, prior to its expiration. Any extension shall be made in writing. CLAUSE FIVE: PRICE. The price which ECOPETROL will pay to SELLER for the crude oil delivered at the Santana Terminal, is defined as follows: Price = Base Price plus or less quality adjustment, less transport, less transport tax, less marketing value. PARAGRAPH 1: Base Price shall be the weighted average of the export loads invoiced by ECOPETROL during that month. PARAGRAPH 2: Quality adjustment applied hereunder shall be for API Gravity and Sulfur contents and shall be estimated on a monthly basis according to the procedure described in Attachment No. 1. PARAGRAPH 3: For estimation purposes of the transport variable and of the transport tax, the basis to apply the rate set forth by the Ministry of Mines and Energy shall be the number of gross barrels transported. The Pipeline Transport Rules shall be considered part to this Contract once approved by the 2 parties and after being subject to the official approvals which could be required. PARAGRAPH 4: The Santana - Tumaco transport cost, as well as the respective transport tax shall be subject to any change made in this connection during contract term. Santana - Tumaco transport rate corresponds to the rate set forth in Resolution number 6031 of May 8/th/, 1998 of the Ministry of Mines and Energy. Transport tax shall be 2% (two per cent) of the rate, pursuant to Article 17 of Decree 2140 of 1955 adopted permanently by Law 10, 1961. These rates shall be readjusted on a yearly basis pursuant to the aforementioned Resolution No. 6031. PARAGRAPH 5: The Marketing cost shall be of 0.165 USD/BL. PARAGRAPH 6: If during one month or several consecutive months (Month M) there is no crude export, price shall be the price of the previous month (Month M-1). This price shall be adjusted on the following month (Month M+1) according to the new price estimated in crude quotations of such month M+1. Taking the Santana crude oil volume received on month M, the quality adjustment shall be estimated with the average of crude oil quotations in the market corresponding of the three previous months to the month being adjusted (month M). PARAGRAPH 7: In case of coastwise shipping of Tumaco's oil (South Blend) to the Refinery of Cartagena, sale and price ECOPETROL will pay to SELLER shall be the same obtained by the International Trade Management for the South Blend of Tumaco (FOB Tumaco) received by the Refinery of Cartagena as a result of a bid plus or less the quality adjustment, less the Santana - Tumaco transport cost and the respective tax, less marketing (USD 0.165 per barrel). In case the Cartagena Refinery purchases South Blend Crude Oil without a bid, the parties shall agree on the mechanism to be used to estimate the crude oil's price. PARAGRAPH 8: Notwithstanding the provisions set forth in Paragraph 2 concerning the quality adjustment procedure, the parties can agree on a review of the crude oil market and of the present method, and for this purpose they can resort to a mutual consent on the crude oils to eliminate or add to the present market. In addition, the parties can also hire an external consultant to determine whether they should continue with the present method or should they use a new method. In case parties do not reach an agreement in this connection, the present method will continue to be applied. If it is necessary to apply a new method, it shall be effective as of the deliveries made during the month when the agreement was reached. CLAUSE SIX: INVOICING AND FORM OF PAYMENT: SELLER shall invoice to ECOPETROL in its Bogota Office, within the first 10 days of each month, the crude oil delivered to ECOPETROL during the previous month after deducting the value corresponding to royalties, contributions, and participations. Within 7 days of the aforementioned term, ECOPETROL shall give SELLER the information it may require to make the corresponding invoicing. Payment shall be made on a monthly basis 30 days after receipt of invoice by ECOPETROL, after making the lawful withholdings, if any. SELLER will inform ECOPETROL in writing at the time of submission of the invoices about the percentages to apply on the net deliveries of SELLER in order to determine the value to be paid in pesos and the value to be paid in dollars. The percentages which can be applied on net deliveries are: 25% in pesos and 75% in dollars or 50% in pesos and 50% in dollars or 75% in pesos and 25% in dollars. Invoicing shall be made based on the net volume, free of water and sediment, adjusted at 60(degrees) F. For the portion in Colombian pesos the market's representative exchange rate shall be used according to certification by the Banking Superintendency, estimated as the arithmetic average corresponding to the month when deliveries were made. PARAGRAPH 1: In Case of delay in payment of the dollars portion on invoices not timely rejected by ECOPETROL, ECOPETROL shall pay to SELLER as interest in dollars, the "Libor" interest rate during the days of delay plus 1.0%. 3 In case of delay in payment of the pesos portion, ECOPETROL shall pay the maximum monthly interest rate certified by the Banking Superintendency. Invoices collecting interests in pesos or dollars shall be paid within the ten (10) days following receipt by ECOPETROL. PARAGRAPH 2: If ECOPETROL should not have United States of America dollars available or should it be unable to get them from the Colombian government or its authorized agencies, in order to cover the crude oil purchases hereunder, it shall give notice, as soon as possible, and in writing to SELLER, without prejudice as to the conditions set forth in paragraph 1 above, and the parities shall have a maximum 30 calendar days term as of such notice of ECOPETROL, to reach a mutual agreement and an adequate solution. PARAGRAPH 3: ECOPETROL shall have a 15 working days term to check, correct or reject invoices filed by SELLER. Invoices not rejected within this term shall be deemed final and correct. Any adjustment or correction required shall change the valid date of the invoice to the date when the adjustment or correction is made effective before ECOPETROL. ECOPETROL shall inform SELLER within the term set forth about any rejected invoice in order for it to be adjusted and corrected, clearly specifying the items which need to be adjusted or corrected and the reason for such objection or correction. CLAUSE SEVEN: INSPECTION AND MEASUREMENT. For the purpose of Clause Two, quality will be determined pursuant to operational procedures set forth by common consent between the parties in writing. Costs of these procedures shall be shared by the parties at a pro rate of their ownership of the crude oil. In addition to these operational procedures, any of the parties can appoint when so desired an Independent Inspector to certify the amount and quality, to measure the capacity of the tanks and to gauge volume measurement instruments. In this latter case, the party requesting measurement shall bear with costs. CLAUSE EIGHT: TERMINATION: Either SELLER or ECOPETROL can terminate this purchase and sale contract by a written notice given 60 days in advance. If SELLER decides to export directly its Santana crude oil, it shall give notice in this connection to ECOPETROL 60 days in advance, and within this term ECOPETROL and SELLER can terminate this contract. CLAUSE NINE: DESTINATION: ECOPETROL can do as it pleases with the purchased crude oil, provided that such destination is approved by applicable legal provisions at this time. CLAUSE TEN: ASSIGNMENT. Neither party can assign, sell or transfer all or part of its rights and obligations hereunder to any third party without the prior and written consent of the other party. CLAUSE ELEVEN: FORCE MAJEURE. Neither ECOPETROL nor SELLER shall be liable for the failure to comply with all or each of their obligations hereunder, if such failure is due to force majeure or acts of God duly verified. Force majeure or acts of God are those events which cannot be prevented and cannot be imputed to the obliged party and which cannot be blamed upon that party and which place such party in an absolute impossibility to meet its obligations such as: natural phenomena (earthquakes, floods, land slides) or public order events (strike, mutiny, terrorism, sabotage, breakage of the pipeline). Force majeure will not relieve ECOPETROL from its obligation to pay SELLER those invoices 4 filed for the sale of crude oil delivered by SELLER pursuant to the terms of Clause Three hereunder. CLAUSE TWELVE: APPLICATION OF COLOMBIA LAW. For all purposes hereunder, the parties hereby appoint as contract domicile the city of Santafe de Bogota D.C., Republic of Colombia. This contract shall be ruled by the Colombian law and the parties shall be subject to the jurisdiction of Colombian courts and waive to attempt any diplomatic claim concerning all aspects related to rights and obligations arising hereunder, except for cases of denial of justice. For all purposes hereunder, provisions of Article 25 of Law 40 of 1993 and of Chapter Two, Title Three of Law 104 of 1993 and any additional or amending provision shall be deemed to be part of this contract. CLAUSE THIRTEEN: DISAGREEMENTS. A) Disagreements between the parties on legal aspects regarding interpretation and execution of the contract which cannot be amicably settled shall be put to the consideration and decision of the judicial branch of Colombia. B) All factual or technical differences arising between the parties which cannot be amicably settled, shall be submitted to the final decision of experts appointed as follows: one by each party and a third one appointed by common consent of the two main experts appointed by the parties. If the two experts appointed are unable to reach an agreement concerning the appointment of the third expert, this person shall be appointed, upon request of any of the parties, by the Board of Directors of the Colombian Engineers Association, with its office in Santafe de Bogota D.C. Any accounting difference which may arise between the parties regarding the interpretation and execution of the contract and which cannot be amicably settled shall be submitted to the decision of experts who must be public accountants appointed as follows: one by each party and a third one appointed by common consent of the two main experts appointed by the parties. If the two experts appointed are unable to reach an agreement concerning the appointment of the third expert, this person shall be appointed, upon request of any of the parties, by the Central Board of Accountants of Bogota, and if it does not exist, by the Colombian Engineers Association. D) Both parties hereby declare that the decision of the experts shall have all settlement effects and be final and binding. E) In case of a disagreement between the parties on the technical, accounting and/or legal qualification of the difference, its shall be deemed legal and item A) hereunder shall apply. All aspects agreed in this Clause shall apply without prejudice, as to the special procedures set forth hereunder. CLAUSE FOURTEEN: TAXES AND EXPENSES. All taxes and expenses arising from the signature and execution of this contract and its extensions or amendments shall be exclusively covered by SELLER. CLAUSE FIFTEEN: ADMINISTRATION CLAUSE. Administration of the contract shall be carried out by the International Trade Management. CLAUSE SIXTEEN: NOTICES. All notices hereunder shall refer to this clause and to the pertinent clause. Notices shall be sent by certified mail, fax or delivered to the addresses stated ahead and shall be deemed received at the respective address on the date indicated at the receipt seal or on the date when the fax is sent: EMPRESA COLOMBIANA DE PETROLEOS - ECOPETROL Calle 37 No. 7 - 43, Fax No. 3382585 and 3382583, Attention: International Trade and Gas Vice Presidency. SELLER: ARGOSY ENERGY INTERNATIONAL. Diagonal 108 No. 7-54. Fax No. 6192098, Santafe de Bogota D.C., Att: 5 Alvaro Jose Camacho R., President. Any address change must be notified in writing in advance. In witness whereof this contract is signed in Santafe de Bogota, D.C., on January 3/rd/, 2000 in Ecopetrol's Paper. EMPRESA COLOMBIANA DE PETROLEOS Signed: /s/ DARIO FERNANDO LOPEZ MARTINEZ Vice President (in Charge) International Trade and Gas ARGOSY ENERGY INTERNATIONAL Signed: /s/ ALVARO JOSE CAMACHO R. Legal Representative Seal: Ecopetrol Reviewed R 99761 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. 6 EX-10.20 4 EMPLOYMENT AGREEMENT - RONALD SUTTILL EXHIBIT 10.20 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into between Aviva Petroleum Inc., a Texas corporation (the "Company"), and Ronald Suttill, a resident of Dallas, Texas (the "Executive"), effective February 1, 2000. 1. Introduction. ------------ The Executive is currently the President and Chief Executive Officer of the Company. The Executive is a senior executive whose services are critical to the success of the Company and its business. The Company believes that retaining the Executive's services as an employee of the Company and the benefit of his business experience are of material importance. The Company desires to encourage the Executive to continue in the employ of the Company for the benefit of the Company and its stockholders. Therefore, the Company and the Executive intend by this Agreement to specify the terms and conditions of the Executive's employment relationship with the Company. 2. Employment. ---------- The Company hereby employs the Executive and the Executive hereby accepts employment with the Company upon the terms and subject to the conditions set forth in this Agreement. 3. Duties and Responsibilities. --------------------------- (a) Subject to the power of the Board of Directors of the Company to elect and remove officers, the Executive shall serve the Company as the President and Chief Executive Officer (or in such other executive office as the Board of Directors of the Company may determine) and shall perform, faithfully and diligently, the services and functions relating to such office or otherwise reasonably incident to such office as may be designated from time to time by the Board of Directors of the Company; provided, however, that all such services and functions shall be reasonable and within the Executive's area of expertise. (b) The Executive shall, during the term of this Agreement (or any extension thereof), devote such of his entire time, attention, energies and business efforts to his duties as an executive 1 of the Company as are reasonably necessary to carry out his duties specified in Section 3(a). The Executive shall not, during the term of this Agreement (or any extension thereof), engage in any other business activity (regardless of whether such business activity is pursued for gain, profit or other pecuniary advantage) if such business activity would impair the Executive's ability to carry out his duties under this Agreement. This Section 3(b), however, shall not be construed to prevent the Executive from (i) investing his personal assets as a passive investor in such form or manner as will not contravene the best interests of the Company, (ii) participating in various charitable efforts, or (iii) serving as a director or member of a committee of any organization when such position has previously been approved in writing by the Board of Directors of the Company. 4. Compensation and Other Employee Benefits. ---------------------------------------- (a) As compensation for his services under the terms of this Agreement: (i) the Executive shall be paid an annual salary of not less than $200,000, payable in accordance with the then current payroll policies of the Company. Such annual salary is referred to in this Agreement as the "Base Salary." The Compensation Committee of the Board of Directors (the "Committee") shall review the Base Salary at least annually, and the Base Salary shall be subject to increase (but not to decrease) at the sole discretion of the Committee or the Board. (ii) subject to the right of the Company to amend or terminate any senior executive, group or employee benefit plan, the Executive shall be entitled to receive the following employee benefits: (A) The Executive shall have the right to participate in all current or future group or employee benefit plans of the Company that are available to its exempt salaried employees generally (including, without limitation, disability, accident, medical, life insurance and hospitalization plan); (B) The Executive shall have the right to participate in all current or future senior executive benefit plans of the Company, all in accordance with the Company's regular practices with respect to its senior executive officers; 2 (C) The Executive shall be entitled to reimbursement from the Company for reasonable out-of-pocket expenses incurred by him in the course of the performance of his duties hereunder; (D) In order to promote the interests of the Company, the Executive shall also be entitled to reimbursement from the Company, or an allowance in respect of, all annual dues incurred by him in connection with his membership in such luncheon clubs and country clubs as may be agreed upon by the Committee; (E) The Executive shall be entitled to such vacation (in no event less than four weeks per year), holidays and, subject to the provisions of Section 7(c), other paid or unpaid leave of absence as are consistent with the Company's normal policies or as are otherwise approved by the Committee; and (F) The Executive shall have continued use of a Company vehicle, currently a 1991 Cadillac Fleetwood Brougham, or such other vehicle as the Company shall provide. 5. Term. ---- (a) Subject to the provisions of Section 7, the term of this Agreement shall commence on February 1, 2000 and shall end on January 31, 2001. The term of this Agreement is referred to herein as the "Employment Term." (b) The term of this Agreement shall automatically be extended for additional one-year periods, unless the Executive or the Company provides notice to the other at least sixty (60) days prior to the end of the then current year that the Agreement will not be extended for an additional year. 6. Competition and Confidentiality. ------------------------------- (a) If, during the Employment Term (or any extension thereof), the employment of the Executive is terminated pursuant to Section 7(a) or the Executive voluntarily terminates his employment pursuant to Section 7(d), for a period of six months from the date of such termination, the Executive shall not, without the prior written consent of a majority of the Board of Directors of 3 the Company (which consent shall not be unreasonably withheld), within the geographical borders of the State of Texas, (i) accept employment or render service to any person, firm or corporation that is engaged in a business directly competitive with the business then engaged in by the Company or (ii) directly or indirectly enter into or in any manner take part in or lend his name, counsel or assistance to any venture, enterprise, business or endeavor, either as proprietor, principal, investor, partner, director, officer, employee, consultant, advisor, agent, independent contractor, or in any other capacity whatsoever, for any purpose that would be competitive with the business of the Company. (b) It is the desire and intent of the parties that the provisions of Section 6(a) shall be enforced to the fullest extent permissible under the laws and public policies applied in the State of Texas. Accordingly, if any particular portion of Section 6(a) shall be adjudicated to be invalid or unenforceable, Section 6(a) shall be deemed amended to (i) reform the particular portion to provide for such maximum restrictions as will be valid and enforceable, or if that is not possible, then (ii) delete therefrom the portion thus adjudicated to be invalid or unenforceable. (c) During and after the Employment Term, the Executive will not divulge or appropriate to his own use or to the use of others any secret or confidential information or secret or confidential knowledge pertaining to the business of the Company obtained by the Executive in any way while he was employed by the Company. (d) The Executive acknowledges that Sections 6(a) and (c) are expressly for the benefit of the Company, that the Company would be irreparably injured by a violation of Section 6(a) or (c), and that the Company would have no adequate remedy at law in the event of such violation. Therefore, the Executive acknowledges and agrees that injunctive relief, specific performance or any other equitable remedy (without any bond or other security being required) are appropriate remedies to enforce compliance by the Company with Sections 6(a) and (c). 4 7. Termination of Employment. ------------------------- (a) For Due Cause. Nothing herein shall prevent the Company from ------------- terminating, without prior notice, the Executive for "Due Cause" (as hereinafter defined), in which event the Executive shall be entitled to receive his Base Salary on a pro rata basis to the date of termination. In the event of such termination for Due Cause, all other rights and benefits the Executive may have under the senior executive, group or employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and programs. The term "Due Cause" shall mean (i) the Executive has committed a willful serious act, such as embezzlement, against the Company intending to enrich himself at the expense of the Company or been convicted of a felony, (ii) the Executive has engaged in conduct which has caused demonstrable and serious injury, monetary or otherwise, to the Company as evidenced by a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction in effect after exhaustion of all rights of appeal of the action, suit or proceeding, whether civil, criminal, administrative or investigative, (iii) the Executive, in carrying out his duties hereunder, has been guilty of willful gross neglect or willful gross misconduct, resulting in either case in material harm to the Company, or (iv) the Executive has refused to carry out his duties in gross dereliction of duty and, after receiving notice to such effect from the Board of Directors of the Company, the Executive fails to cure the existing problem within 30 days. (b) Due to Death. In the event of the death of the Executive, this ------------ Agreement shall terminate on the date of death and the estate of the Executive shall be entitled to (i) the Executive's Base Salary paid over a period of twelve months, commencing the first of the month following the month in which he died, and (ii) a cash payment equal to the pro rata portion (calculated through the end of the month in which he died) of the annual bonus, if any, received by the Executive in respect of the full calendar year next preceding his death. In the event of such termination due to death, all other rights and benefits the Executive (or his estate) may have under the senior executive, group 5 or employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and programs. (c) Disability. In the event the Executive suffers a "Disability" (as ---------- hereinafter defined), this Agreement shall terminate on "the date on which the Disability occurs" (as hereinafter defined) and the Executive shall be entitled to (i) his Base Salary paid over a period of twelve months commencing six months prior to "the date on which the Disability occurs," and (ii) a cash payment equal to the pro rata portion (calculated through the end of the month in which his employment is terminated due to Disability) of the annual bonus, if any, received by the Executive in respect of the full calendar year next preceding his Disability. In the event of such termination due to Disability, all other rights and benefits the Executive may have under the employee and/or group or senior executive benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and programs. For purposes of this Agreement, "Disability" shall mean the inability or incapacity of the Employee for six months to perform the duties and responsibilities related to the job or position with the Company described in Section 3(a), and "the date on which the Disability occurs" shall mean the first day following such sic month period. Such inability or incapacity shall be documented to the reasonable satisfaction of the Committee by appropriate correspondence from registered physicians reasonably satisfactory to Committee. (d) Voluntary Termination. The Executive may voluntarily terminate his --------------------- employment under this Agreement at any time by providing at least 30 days' prior written notice to the Company. In such event, the Executive shall be entitled to receive his Base Salary until the date his employment terminates, and all other benefits the Executive may have under the senior executive, group or employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and program. 6 (e) Constructive Termination. ------------------------ (i) If the Company (A) terminates the employment of the Executive other than for Due Cause or because of a Disability, (B) demotes the Executive to a lesser position than as provided in Section 3(a), or (C) decreases the Executive's Base Salary below the level provided for by the terms of Section 4(a)(i) or reduces the employee benefits and perquisites below the level provided for by the terms of Section 4(a)(ii) (other than as a result of any amendment or termination of any senior executive, group or employee benefit plan, which amendment or termination is applicable to all executives of the Company), then such action by the Company, unless consented to in writing by the Executive, shall be deemed to be a constructive termination by the Company of the Executive's employment ("Constructive Termination"). (ii) Notwithstanding Section 7(e)(i), a Constructive Termination shall not occur unless, within 60 days of learning of the action described herein as the basis for a Constructive Termination, the Executive shall advise the Company in writing that he intends to terminate his employment pursuant to this Section 7(e)(ii), and the Company shall not, within 10 days of receipt of such written notice, correct such action and provide the Executive with a written notice of such correction. (iii) In the event of a Constructive Termination, the Executive shall be entitled to receive, at the date of Constructive Termination, a lump sum cash payment equal to one and one-half times his Base Salary (as provided in Section 4(a)), less applicable withholding of taxes. In the event of such Constructive Termination, all other rights and benefits the Executive may have under the senior executive, group or employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and programs. (iv) In the event of the death of the Executive, the amounts set forth in Section 7(e)(iii) shall be paid to the estate of Executive. 7 (f) Change in Control. ----------------- (i) If a Change in Control of the Company occurs and either: (A) the Executive is subject to Constructive Termination, or (B) the Executive elects, within 18 months following a Change of Control, to terminate his employment at his sole discretion, the Executive shall be entitled to receive, at the date of his Constructive Termination or election to terminate employment, a lump sum cash payment equal to one and one-half times his Base Salary (as provided in Section 4(a)), less applicable withholding of taxes. The Company shall also provide the Executive for a period of 18 months following the date of Constructive Termination with health insurance, long-term and short-term disability insurance and supplemental life insurance with a death benefit of two times the Executive's Base Salary. Upon a Change in Control, the Committee in its discretion may, with respect to any option, at the time the option is awarded or at any time thereafter, take one or more of the following actions with respect to any such Change in Control: (1) provide for the acceleration of any time period relating to the exercise or vesting of the option; (2) purchase any option for an amount in cash that would have been received by a Participant as a result of (x) the exercise of the option if the option had then been currently exercisable in full followed by (y) the sale of the shares of the Company's common stock, without par value ("Common Stock"), so acquired for the fair market value (as defined in the applicable stock option plan) thereof on the date of such Change in Control (without giving effect to any applicable income or other tax); (3) adjust the terms of the option in such manner as may be determined by the Committee; (4) cause the option to be assumed, or new rights substituted therefor, by another entity; or (5) make such other provision as the Committee may consider equitable and in the best interests of the Company. (ii) For purposes of this Agreement, a "Change in Control" means an event which shall be deemed to have occurred when either (A) any "person" (as that term is used in sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes a "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly of securities of the Company representing 35% or more of the combined voting power of the 8 Company's then outstanding securities, (B) individuals who, as of the effective date of the Plan, constitute the Directors cease for any reason to constitute at least a majority of the Directors, unless such cessation is approved by a majority vote of the Directors in office immediately prior to such cessation, (C) the Company is merged into a previously unrelated entity, (D) all or substantially all of the assets of the Company are sold to an unrelated entity, or (E) a transaction converting all or a part of the debt of the Company and its subsidiaries to equity in the Company is consummated with the Company's lenders or their successors. 8. Preservation of Business; Fiduciary Responsibility. -------------------------------------------------- The Executive shall use his best efforts to preserve the business and organization of the Company, to keep available, to the Company the services of present employees and to preserve the business relations of the Company with suppliers, distributors, customers and others. The Executive shall not commit any act, or in any way assist others to commit any act, that would injure the Company. So long as the Executive is employed by the Company, the Executive shall observe and fulfill proper standards of fiduciary responsibility attendant upon his service and office. 9. Notice. ------ All notices, requests, demands and other communications given under or by reason of this Agreement shall be in writing and shall be deemed given when delivered in person or when mailed, by certified mail (return receipt requested), postage prepaid, addressed as follows (or to such other address as a party may specify by notice pursuant to this provision): (a) To the Company: Aviva Petroleum Inc. Suite 400 8235 Douglas Avenue Dallas, Texas 75225 Attention: Secretary 9 (b) To the Executive: Ron Suttill 4146 La Place Dallas, Texas 75220 10. Controlling Law and Performability. ---------------------------------- The execution, validity, interpretation and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 11. Arbitration. ----------- Any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration in Dallas, Texas. In the proceeding, the Executive shall select one arbitrator, the Company shall select one arbitrator and the two arbitrators so selected shall select a third arbitrator. The decision of a majority of the arbitrators shall be binding on the Executive and the Company. Should one party fail to select an arbitrator within five days after notice of the appointment of an arbitrator by the other party or should the two arbitrators selected by the Executive and the Company fail to select an arbitrator within ten days after the date of the appointment of the last of such two arbitrators, any person sitting as a Judge of the United States District Court for the District of Texas in which the City of Dallas is then situated, upon application of the Executive or the Company, shall appoint an arbitrator to fill such space with the same force and effect as though such arbitrator had been appointed in accordance with the first sentence of this Section 11. Any arbitration proceeding pursuant to this Section 11 shall be conducted in accordance with the rules of the American Arbitration Association. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 12. Expenses. -------- The Company shall pay or reimburse the Executive for all costs and expenses (including arbitration and court costs and attorneys' fees) incurred by the Executive following a Change in 10 Control, as a result of any claim, action or proceeding arising out of, or challenging the validity, advisability or enforceability of, this Agreement or any provision hereof. 13. Additional Instruments. ---------------------- The Executive and the Company shall execute and deliver any and all additional instruments and agreement that may be necessary or proper to carry out the purposes of this Agreement. 14. Entire Agreement and Amendments. ------------------------------- This Agreement contains the entire agreement of the Executive and the Company relating to the matters contained herein and supersedes all prior agreements and understandings, oral or written, between the Executive and the Company with respect to the subject matter hereof. This Agreement may be changed only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 15. Separability. ------------ If any provision of this Agreement is rendered or declared illegal or unenforceable by reason of any existing or subsequently enacted legislation or by the decision of any arbitrator or by decree of a court of last resort, the Executive and the Company shall promptly meet and negotiate substitute provisions for those rendered or declared illegal or unenforceable to preserve the original intent of this Agreement to the extent legally possible, but all other provisions of this Agreement shall remain in full force and effect. 16. Assignments. ----------- The Company may assign (whether by operation of law or otherwise) this Agreement only with the written consent of the Executive, which consent shall not be unreasonably withheld, and in the event of an assignment of this Agreement, all covenants, conditions and provisions hereunder shall inure to the benefit of and be enforceable against the Company's successors and assigns. The rights and obligations of the Executive under this Agreement are personal to him, and no such rights, benefits or obligations shall be subject to voluntary or involuntary alienation, assignment or transfer. 11 17. Effect of Agreement. ------------------- Subject to the provisions of Section 16 with respect to assignments, this Agreement shall be binding upon the Executive and his heirs, executors, administrators, legal representatives and assigns and upon the Company and its respective successors and assigns. 18. Execution. --------- This Agreement may be executed in multiple counterparts each of which shall be deemed an original and all of which shall constitute one and the same instruments. 19. Waiver of Breach. ---------------- The waiver by either party to this Agreement of a breach of any provision of the Agreement by the other party shall not operate or be construed as a waiver by such party of any subsequent breach by such other party. IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement effective as of the date first above written. AVIVA PETROLEUM INC. By: /s/ James L. Busby ---------------------------- Name: James L. Busby --------------------------- Title: Secretary, Treasurer & CFO -------------------------- /s/ R. Suttill --------------------------------- Ronald Suttill 12 EX-10.21 5 EMPLOYMENT AGREEMENT - JAMES L. BUSBY EXHIBIT 10.21 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement") is entered into between Aviva Petroleum Inc., a Texas corporation (the "Company"), and James L. Busby, a resident of Dallas, Texas (the "Executive"), effective February 1, 2000. 1. Introduction. ------------ The Executive is currently the Secretary, Treasurer and Chief Financial Officer of the Company. The Executive is a senior executive whose services are critical to the success of the Company and its business. The Company believes that retaining the Executive's services as an employee of the Company and the benefit of his business experience are of material importance. The Company desires to encourage the Executive to continue in the employ of the Company for the benefit of the Company and its stockholders. Therefore, the Company and the Executive intend by this Agreement to specify the terms and conditions of the Executive's employment relationship with the Company. 2. Employment. ---------- The Company hereby employs the Executive and the Executive hereby accepts employment with the Company upon the terms and subject to the conditions set forth in this Agreement. 3. Duties and Responsibilities. --------------------------- (a) Subject to the power of the Board of Directors of the Company to elect and remove officers, the Executive shall serve the Company as the Secretary, Treasurer and Chief Financial Officer (or in such other executive office as the Board of Directors of the Company may determine) and shall perform, faithfully and diligently, the services and functions relating to such office or otherwise reasonably incident to such office as may be designated from time to time by the Board of Directors of the Company; provided, however, that all such services and functions shall be reasonable and within the Executive's area of expertise. (b) The Executive shall, during the term of this Agreement (or any extension thereof), devote such of his entire time, attention, energies and business efforts to his duties as an executive 1 of the Company as are reasonably necessary to carry out his duties specified in Section 3(a). The Executive shall not, during the term of this Agreement (or any extension thereof), engage in any other business activity (regardless of whether such business activity is pursued for gain, profit or other pecuniary advantage) if such business activity would impair the Executive's ability to carry out his duties under this Agreement. This Section 3(b), however, shall not be construed to prevent the Executive from (i) investing his personal assets as a passive investor in such form or manner as will not contravene the best interests of the Company, (ii) participating in various charitable efforts, or (iii) serving as a director or member of a committee of any organization when such position has previously been approved in writing by the Board of Directors of the Company. 4. Compensation and Other Employee Benefits. ---------------------------------------- (a) As compensation for his services under the terms of this Agreement: (i) the Executive shall be paid an annual salary of not less than $100,000, payable in accordance with the then current payroll policies of the Company. Such annual salary is referred to in this Agreement as the "Base Salary." The Compensation Committee of the Board of Directors (the "Committee") shall review the Base Salary at least annually, and the Base Salary shall be subject to increase (but not to decrease) at the sole discretion of the Committee or the Board. (ii) subject to the right of the Company to amend or terminate any senior executive, group or employee benefit plan, the Executive shall be entitled to receive the following employee benefits: (A) The Executive shall have the right to participate in all current or future group or employee benefit plans of the Company that are available to its exempt salaried employees generally (including, without limitation, disability, accident, medical, life insurance and hospitalization plan); (B) The Executive shall have the right to participate in all current or future senior executive benefit plans of the Company, all in accordance with the Company's regular practices with respect to its senior executive officers; 2 (C) The Executive shall be entitled to reimbursement from the Company for reasonable out-of-pocket expenses incurred by him in the course of the performance of his duties hereunder; (D) In order to promote the interests of the Company, the Executive shall also be entitled to reimbursement from the Company, or an allowance in respect of, all annual dues incurred by him in connection with his membership in such luncheon clubs and country clubs as may be agreed upon by the Committee; and (E) The Executive shall be entitled to such vacation (in no event less than four weeks per year), holidays and, subject to the provisions of Section 7(c), other paid or unpaid leave of absence as are consistent with the Company's normal policies or as are otherwise approved by the Committee. 5. Term. ---- (a) Subject to the provisions of Section 7, the term of this Agreement shall commence on February 1, 2000 and shall end on January 31, 2001. The term of this Agreement is referred to herein as the "Employment Term." (b) The term of this Agreement shall automatically be extended for additional one-year periods, unless the Executive or the Company provides notice to the other at least sixty (60) days prior to the end of the then current year that the Agreement will not be extended for an additional year. 6. Competition and Confidentiality. ------------------------------- (a) If, during the Employment Term (or any extension thereof), the employment of the Executive is terminated pursuant to Section 7(a) or the Executive voluntarily terminates his employment pursuant to Section 7(d), for a period of six months from the date of such termination, the Executive shall not, without the prior written consent of a majority of the Board of Directors of the Company (which consent shall not be unreasonably withheld), within the geographical borders of the State of Texas, (i) accept employment or render service to any person, firm or corporation that is engaged in a business directly competitive with the business then engaged in by the Company or 3 (ii) directly or indirectly enter into or in any manner take part in or lend his name, counsel or assistance to any venture, enterprise, business or endeavor, either as proprietor, principal, investor, partner, director, officer, employee, consultant, advisor, agent, independent contractor, or in any other capacity whatsoever, for any purpose that would be competitive with the business of the Company. (b) It is the desire and intent of the parties that the provisions of Section 6(a) shall be enforced to the fullest extent permissible under the laws and public policies applied in the State of Texas. Accordingly, if any particular portion of Section 6(a) shall be adjudicated to be invalid or unenforceable, Section 6(a) shall be deemed amended to (i) reform the particular portion to provide for such maximum restrictions as will be valid and enforceable, or if that is not possible, then (ii) delete therefrom the portion thus adjudicated to be invalid or unenforceable. (c) During and after the Employment Term, the Executive will not divulge or appropriate to his own use or to the use of others any secret or confidential information or secret or confidential knowledge pertaining to the business of the Company obtained by the Executive in any way while he was employed by the Company. (d) The Executive acknowledges that Sections 6(a) and (c) are expressly for the benefit of the Company, that the Company would be irreparably injured by a violation of Section 6(a) or (c), and that the Company would have no adequate remedy at law in the event of such violation. Therefore, the Executive acknowledges and agrees that injunctive relief, specific performance or any other equitable remedy (without any bond or other security being required) are appropriate remedies to enforce compliance by the Company with Sections 6(a) and (c). 7. Termination of Employment. ------------------------- (a) For Due Cause. Nothing herein shall prevent the Company from ------------- terminating, without prior notice, the Executive for "Due Cause" (as hereinafter defined), in which event the Executive shall be entitled to receive his Base Salary on a pro rata basis to the date of termination. In the event of such termination for Due Cause, all other rights and benefits the Executive may have under the senior executive, group or employee benefit plans and programs of the Company, generally, shall 4 be determined in accordance with the terms and conditions of such plans and programs. The term "Due Cause" shall mean (i) the Executive has committed a willful serious act, such as embezzlement, against the Company intending to enrich himself at the expense of the Company or been convicted of a felony, (ii) the Executive has engaged in conduct which has caused demonstrable and serious injury, monetary or otherwise, to the Company as evidenced by a binding and final judgment, order or decree of a court or administrative agency of competent jurisdiction in effect after exhaustion of all rights of appeal of the action, suit or proceeding, whether civil, criminal, administrative or investigative, (iii) the Executive, in carrying out his duties hereunder, has been guilty of willful gross neglect or willful gross misconduct, resulting in either case in material harm to the Company, or (iv) the Executive has refused to carry out his duties in gross dereliction of duty and, after receiving notice to such effect from the Board of Directors of the Company, the Executive fails to cure the existing problem within 30 days. (b) Due to Death. In the event of the death of the Executive, this ------------ Agreement shall terminate on the date of death and the estate of the Executive shall be entitled to (i) the Executive's Base Salary paid over a period of twelve months, commencing the first of the month following the month in which he died, and (ii) a cash payment equal to the pro rata portion (calculated through the end of the month in which he died) of the annual bonus, if any, received by the Executive in respect of the full calendar year next preceding his death. In the event of such termination due to death, all other rights and benefits the Executive (or his estate) may have under the senior executive, group or employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and programs. (c) Disability. In the event the Executive suffers a "Disability" (as ---------- hereinafter defined), this Agreement shall terminate on "the date on which the Disability occurs" (as hereinafter defined) and the Executive shall be entitled to (i) his Base Salary paid over a period of twelve months commencing six months prior to "the date on which the Disability occurs," and (ii) a cash payment equal to the pro rata portion (calculated through the end of the month in which his employment is terminated due to Disability) of the annual bonus, if any, received by the Executive in respect of the 5 full calendar year next preceding his Disability. In the event of such termination due to Disability, all other rights and benefits the Executive may have under the employee and/or group or senior executive benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and programs. For purposes of this Agreement, "Disability" shall mean the inability or incapacity of the Employee for six months to perform the duties and responsibilities related to the job or position with the Company described in Section 3(a), and "the date on which the Disability occurs" shall mean the first day following such sic month period. Such inability or incapacity shall be documented to the reasonable satisfaction of the Committee by appropriate correspondence from registered physicians reasonably satisfactory to Committee. (d) Voluntary Termination. The Executive may voluntarily terminate his --------------------- employment under this Agreement at any time by providing at least 30 days' prior written notice to the Company. In such event, the Executive shall be entitled to receive his Base Salary until the date his employment terminates, and all other benefits the Executive may have under the senior executive, group or employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and program. (e) Constructive Termination. ------------------------ (i) If the Company (A) terminates the employment of the Executive other than for Due Cause or because of a Disability, (B) demotes the Executive to a lesser position than as provided in Section 3(a), or (C) decreases the Executive's Base Salary below the level provided for by the terms of Section 4(a)(i) or reduces the employee benefits and perquisites below the level provided for by the terms of Section 4(a)(ii) (other than as a result of any amendment or termination of any senior executive, group or employee benefit plan, which amendment or termination is applicable to all executives of the Company), then such action by the Company, unless consented to in writing by the Executive, shall be deemed to be a constructive termination by the Company of the Executive's employment ("Constructive Termination"). 6 (ii) Notwithstanding Section 7(e)(i), a Constructive Termination shall not occur unless, within 60 days of learning of the action described herein as the basis for a Constructive Termination, the Executive shall advise the Company in writing that he intends to terminate his employment pursuant to this Section 7(e)(ii), and the Company shall not, within 10 days of receipt of such written notice, correct such action and provide the Executive with a written notice of such correction. (iii) In the event of a Constructive Termination, the Executive shall be entitled to receive, at the date of Constructive Termination, a lump sum cash payment equal to one and one-half times his Base Salary (as provided in Section 4(a)), less applicable withholding of taxes. In the event of such Constructive Termination, all other rights and benefits the Executive may have under the senior executive, group or employee benefit plans and programs of the Company, generally, shall be determined in accordance with the terms and conditions of such plans and programs. (iv) In the event of the death of the Executive, the amounts set forth in Section 7(e)(iii) shall be paid to the estate of Executive. (f) Change in Control. ----------------- (i) If a Change in Control of the Company occurs and either: (A) the Executive is subject to Constructive Termination, or (B) the Executive elects, within 18 months following a Change in Control, to terminate his employment at his sole discretion, the Executive shall be entitled to receive, at the date of his Constructive Termination or election to terminate employment, a lump sum cash payment equal to one and one-half times his Base Salary (as provided in Section 4(a)), less applicable withholding of taxes. The Company shall also provide the Executive for a period of 18 months following the date of Constructive Termination with health insurance, long-term and short-term disability insurance and supplemental life insurance with a death benefit of two times the Executive's Base Salary. Upon a Change in Control, the Committee in its discretion may, with respect to any option, at the time the option is awarded or at any time thereafter, take one or more of the following actions with respect to any such Change in Control: (1) provide for the acceleration of any time period relating to the exercise or vesting of the option; (2) purchase any option for an 7 amount in cash that would have been received by a Participant as a result of (x) the exercise of the option if the option had then been currently exercisable in full followed by (y) the sale of the shares of the Company's common stock, without par value ("Common Stock"), so acquired for the fair market value (as defined in the applicable stock option plan) thereof on the date of such Change in Control (without giving effect to any applicable income or other tax); (3) adjust the terms of the option in such manner as may be determined by the Committee; (4) cause the option to be assumed, or new rights substituted therefor, by another entity; or (5) make such other provision as the Committee may consider equitable and in the best interests of the Company. (ii) For purposes of this Agreement, a "Change in Control" means an event which shall be deemed to have occurred when either (A) any "person" (as that term is used in sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) becomes a "beneficial owner" (as defined in Rule 13d-3 of the Exchange Act) directly or indirectly of securities of the Company representing 35% or more of the combined voting power of the Company's then outstanding securities, (B) individuals who, as of the effective date of the Plan, constitute the Directors cease for any reason to constitute at least a majority of the Directors, unless such cessation is approved by a majority vote of the Directors in office immediately prior to such cessation, (C) the Company is merged into a previously unrelated entity, (D) all or substantially all of the assets of the Company are sold to an unrelated entity, or (E) a transaction converting all or a part of the debt of the Company and its subsidiaries to equity in the Company is consummated with the Company's lenders or their successors. 8. Preservation of Business; Fiduciary Responsibility. -------------------------------------------------- The Executive shall use his best efforts to preserve the business and organization of the Company, to keep available, to the Company the services of present employees and to preserve the business relations of the Company with suppliers, distributors, customers and others. The Executive shall not commit any act, or in any way assist others to commit any act, that would injure the Company. So long as the Executive is employed by the Company, the Executive shall observe and fulfill proper standards of fiduciary responsibility attendant upon his service and office. 8 9. Notice. ------ All notices, requests, demands and other communications given under or by reason of this Agreement shall be in writing and shall be deemed given when delivered in person or when mailed, by certified mail (return receipt requested), postage prepaid, addressed as follows (or to such other address as a party may specify by notice pursuant to this provision): (a) To the Company: Aviva Petroleum Inc. Suite 400 8235 Douglas Avenue Dallas, Texas 75225 Attention: President (b) To the Executive: James L. Busby 2018 Portsmouth Drive Richardson, Texas 75082 10. Controlling Law and Performability. ---------------------------------- The execution, validity, interpretation and performance of this Agreement shall be governed by and construed in accordance with the laws of the State of Texas. 11. Arbitration. ----------- Any dispute or controversy arising under or in connection with this Agreement shall be settled by arbitration in Dallas, Texas. In the proceeding, the Executive shall select one arbitrator, the Company shall select one arbitrator and the two arbitrators so selected shall select a third arbitrator. The decision of a majority of the arbitrators shall be binding on the Executive and the Company. Should one party fail to select an arbitrator within five days after notice of the appointment of an arbitrator by the other party or should the two arbitrators selected by the Executive and the Company fail to select an arbitrator within ten days after the date of the appointment of the last of such two arbitrators, any person sitting as a Judge of the United States District Court for the District of Texas in which the City of Dallas is then situated, upon application 9 of the Executive or the Company, shall appoint an arbitrator to fill such space with the same force and effect as though such arbitrator had been appointed in accordance with the first sentence of this Section 11. Any arbitration proceeding pursuant to this Section 11 shall be conducted in accordance with the rules of the American Arbitration Association. Judgment may be entered on the arbitrators' award in any court having jurisdiction. 12. Expenses. -------- The Company shall pay or reimburse the Executive for all costs and expenses (including arbitration and court costs and attorneys' fees) incurred by the Executive following a Change in Control, as a result of any claim, action or proceeding arising out of, or challenging the validity, advisability or enforceability of, this Agreement or any provision hereof. 13. Additional Instruments. ---------------------- The Executive and the Company shall execute and deliver any and all additional instruments and agreement that may be necessary or proper to carry out the purposes of this Agreement. 14. Entire Agreement and Amendments. ------------------------------- This Agreement contains the entire agreement of the Executive and the Company relating to the matters contained herein and supersedes all prior agreements and understandings, oral or written, between the Executive and the Company with respect to the subject matter hereof. This Agreement may be changed only by an agreement in writing signed by the party against whom enforcement of any waiver, change, modification, extension or discharge is sought. 15. Separability. ------------ If any provision of this Agreement is rendered or declared illegal or unenforceable by reason of any existing or subsequently enacted legislation or by the decision of any arbitrator or by decree of a court of last resort, the Executive and the Company shall promptly meet and negotiate substitute provisions for those rendered or declared illegal or unenforceable to preserve the original intent of this Agreement to the extent legally possible, but all other provisions of this Agreement shall remain in full force and effect. 10 16. Assignments. ----------- The Company may assign (whether by operation of law or otherwise) this Agreement only with the written consent of the Executive, which consent shall not be unreasonably withheld, and in the event of an assignment of this Agreement, all covenants, conditions and provisions hereunder shall inure to the benefit of and be enforceable against the Company's successors and assigns. The rights and obligations of the Executive under this Agreement are personal to him, and no such rights, benefits or obligations shall be subject to voluntary or involuntary alienation, assignment or transfer. 17. Effect of Agreement. ------------------- Subject to the provisions of Section 16 with respect to assignments, this Agreement shall be binding upon the Executive and his heirs, executors, administrators, legal representatives and assigns and upon the Company and its respective successors and assigns. 18. Execution. --------- This Agreement may be executed in multiple counterparts each of which shall be deemed an original and all of which shall constitute one and the same instruments. 19. Waiver of Breach. ---------------- The waiver by either party to this Agreement of a breach of any provision of the Agreement by the other party shall not operate or be construed as a waiver by such party of any subsequent breach by such other party. 11 IN WITNESS WHEREOF, the Executive and the Company have executed this Agreement effective as of the date first above written. AVIVA PETROLEUM INC. By: /s/ R. Suttill ------------------ Name: Ronald Suttill ---------------- Title: President & CEO --------------- /s/ James L. Busby ----------------------- James L. Busby 12 EX-21.1 6 LIST OF SUBSIDIARIES EXHIBIT 21.1 Subsidiaries of Aviva Petroleum Inc. Place of Company Incorporation - ------- ------------- Aviva Operating Company Nevada Aviva America, Inc. Delaware Neo Energy, Inc. Texas Aviva Delaware Inc. Delaware Aviva Overseas Inc. Delaware Garnet Resources Corporation Delaware Garnet Pakistan Corporation Delaware Garnet Spain Corporation Delaware Garnet Turkey Corporation Delaware Garnet PNG Corporation Delaware Argosy Energy Incorporated Delaware Argosy Energy International Utah limited partnership Argosy Petroleum Company, SA Colombia, South America Garnet Resources Canada Ltd. British Columbia EX-27.1 7 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, 1999 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 850 0 1,969 319 724 3,460 69,046 65,081 8,986 18,600 0 0 0 2,345 (13,828) 8,986 6,797 6,797 4,575 4,575 0 (101) 1,396 (121) 282 (403) 0 0 0 (403) (0.01) (0.01)
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