-----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, EaesyL4VpKKiOGEn6Sw8y1VQPa5+lVqlyR4Jxv2WpShNtvlO2kp01sgA7BH25Ok5 4D82OmqdH352J1WlL38JeA== 0000930661-98-000577.txt : 19980325 0000930661-98-000577.hdr.sgml : 19980325 ACCESSION NUMBER: 0000930661-98-000577 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIVA PETROLEUM INC /TX/ CENTRAL INDEX KEY: 0000910659 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751432205 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-13440 FILM NUMBER: 98571860 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 ANNUAL REPORT 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, 1997 ----------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to _______ Commission File Number 0-22258 AVIVA PETROLEUM INC. (Exact name of registrant as specified in its charter) TEXAS 75-1432205 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8235 DOUGLAS AVENUE, 75225 SUITE 400, DALLAS, TEXAS (Zip Code) (Address of principal executive offices) (214) 691-3464 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Names of each exchange ---------------------- Title of each class on which registered ------------------- ------------------- Depositary Receipts, American Stock Exchange each representing five shares of Common Stock, without par value Securities registered pursuant to Section 12(g) of the Act: Common Stock, without par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No . ----- ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x . ------- The aggregate market value of voting and non-voting securities held by non- affiliates of the Registrant on February 27, 1998 was approximately $6,545,000. As of such date, the last sale price on the American Stock Exchange of a Depositary Share representing five shares of Common Stock, without par value ("Common Stock"), was U.S. $1.13, and the middle market price of Common Stock on the London Stock Exchange Limited was U.K. 20 pence. As of February 27, 1998, 31,482,716 shares of Registrant's Common Stock were outstanding, of which 10,336,835 shares of Common Stock were represented by Depositary Shares. DOCUMENTS INCORPORATED BY REFERENCE None. TABLE OF CONTENTS TO FORM 10-K Page ---- Part I Item 1. Business General....................................................... 1 Current Operations............................................ 1 Risks Associated with the Company's Business.................. 2 Products, Markets and Methods of Distribution................. 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.............................................. 13 Item 3. Legal Proceedings................................................ 14 Item 4. Submission of Matters to a Vote of Security Holders.............. 14 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Price Range of Depositary Shares and Common Stock............. 15 Dividend History and Restrictions............................. 16 Item 6. Selected Financial Data.......................................... 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations......................................... 18 Year 2000..................................................... 20 Liquidity and Capital Resources............................... 20 Item 8. Financial Statements and Supplementary Data...................... 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........................... 22 Part III Item 10. Directors and Executive Officers of the Registrant Directors of the Company...................................... 23 Executive Officers of the Company............................. 24 Meetings and Committees of the Board of Directors............. 24 Compliance with Section 16(a) of the Securities Exchange Act of 1934.......................................... 24 Item 11. Executive Compensation Summary Compensation Table.................................... 25 Directors' Fees............................................... 25 Option Grants During 1997..................................... 25 Option Exercises During 1997 and Year End Option Values....... 25 (i) TABLE OF CONTENTS TO FORM 10-K (CONTINUED) Page ---- Compensation Committee Interlocks and Insider Participation in Compensation Decisions................................... 25 Employment Contracts.......................................... 26 Compensation Committee Report on Executive Compensation....... 26 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.................................................................. 34 (ii) PART I ITEM 1. BUSINESS General Aviva Petroleum Inc. (referred to collectively with its consolidated subsidiaries as the "Company"), a Texas corporation, through its subsidiaries, is engaged in the exploration for and production and development of oil and gas in Colombia and offshore in the United States. The Company was incorporated in 1973 and the common stock, without par value ("Common Stock"), of the Company has been traded on the London Stock Exchange Limited (the "London Stock Exchange") since 1982. Depositary shares ("Depositary Shares"), each representing the beneficial ownership of five shares of Common Stock, have traded on the Primary List of the American Stock Exchange since May 31, 1995, and prior to that on the Emerging Company Marketplace of the American Stock Exchange since November 14, 1994. The Company's principal executive offices are located in Dallas, Texas, and the Company maintains a field office in Venice, Louisiana. Current Operations Colombia. Through a wholly owned subsidiary, the Company is the owner of -------- interests in, and is engaged in exploration for, and development and production of oil from, four concessions granted by Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The Company's Colombian activities are carried out pursuant to four joint operating agreements between the Company's wholly owned subsidiary, Neo Energy, Inc. ("Neo"), and co-owner Argosy Energy International ("Argosy"), which operates the Colombian properties and is an affiliate of Garnet Resources Corporation ("Garnet"). Neither Garnet nor Argosy is affiliated with the Company. Neo has a 45% interest and Argosy has the remaining 55% interest in properties covered by the four joint operating agreements. Neo and Argosy are parties to four concession agreements with Ecopetrol called Santana, La Fragua, Yuruyaco and Aporte Putumayo. All four concessions are located in the Putumayo Basin of southwestern Colombia. The Company's exploration and development activities are currently concentrated in the Santana concession. Twenty-one wells have been drilled on the Santana concession. Of the thirteen exploratory wells, seven have been productive and six were dry holes. Of the 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 totaled approximately 12.2 million barrels during the period from April 1992, when production commenced, through December 1997. The Company's share of this production totaled approximately 1.9 million barrels. The contracts for the La Fragua concession, which adjoins Santana to the north, and the Yuruyaco concession, which adjoins Santana and La Fragua to the east, were approved by Ecopetrol in June 1992 and September 1995, respectively. The acquisition of all seismic data required under these contracts has been completed. The Company has determined, however, that further exploration on these concessions is not technically justified. Accordingly, the Company has filed with Ecopetrol applications for formal relinquishment, acceptance of which are expected in due course. 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. The Company has filed with Ecopetrol an application for formal relinquishment, which is expected to occur following 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. All of the contracts provide that Ecopetrol shall receive, on behalf of the Colombian Ministry of Mines, royalty payments in the amount of 20% of the gross proceeds of the oil produced pursuant to the respective contract, less certain costs of transporting the oil to the point of sale. Under each of the contracts, application must be made to Ecopetrol for a declaration of commerciality for each discovery. If Ecopetrol declares the discovery commercial, it has the right to a 50% reversionary interest in the field and is required to pay 50% of all future costs. If, alternatively, Ecopetrol declines to declare the discovery commercial, 1 Neo and Argosy have the right to proceed with development and production at their own expense until such time as they have recovered 200% of the costs incurred, at which time Ecopetrol is entitled to back in for a 50% working interest in the field without payment or reimbursement of any historical costs. Exploration costs (as defined in the concession agreements) incurred by the co- owners prior to the declaration of commerciality are recovered by means of retention by the co-owners of all of the non-royalty proceeds of production from each well until costs relating to that well are recovered. United States. In the United States the Company, through its wholly owned ------------- subsidiary, Aviva America, Inc. ("AAI"), is engaged in the production of oil and gas attributable to its working interests in 17 wells located in the Gulf of Mexico offshore Louisiana, at Main Pass 41 and Breton Sound 31 fields. AAI is the operator of these fields. The Company acquired its interests in these fields through the acquisition of Charterhall Oil North America PLC in 1990. Risks Associated with the Company's Business General. The Company's operations are subject to oil field operating hazards ------- such as fires, explosions, blowouts, cratering and oil spills, any of which can cause loss of hydrocarbons, personal injury and loss of life, and can severely damage or destroy equipment, suspend drilling operations and cause substantial damage to subsurface structures, surrounding areas or property of others. As protection against operating hazards, the Company maintains broad insurance coverage, including indemnity insurance covering well control, redrilling and cleanup and containment expenses, Outer Continental Shelf Lands Act coverage, physical damage on certain risks, employers' liability, comprehensive general liability, appropriate auto and marine liability and workers' compensation insurance. The Company believes that such insurance coverage is customary for companies engaged in similar operations, but the Company may not be fully insured against various of the foregoing risks, because such risks are either not fully insurable or the cost of insurance is prohibitive. The Company does not carry business interruption insurance because of the prohibitively high cost. The occurrence of an uninsured hazardous event could have a material adverse effect on the financial condition of the Company. Colombia. The Company has expended significant amounts of capital for the -------- acquisition, exploration and development of its Colombian properties and plans to expend additional capital for 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 capital expenditures could result in forfeiture of all or part of the Company's interests in the applicable property. For additional information on the Company's concession obligations, see "-- Current Operations," and regarding its cash requirements, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." In addition, the Company's ability to continue its Colombian exploration and development programs is dependent upon the ability of its co-owner to finance its portion of such costs and expenses. There can be no assurance that the Company's co-owner will be in a position to pay, or provide for the payment of, its costs and expenses of joint projects. If the Company's co-owner cannot fund its obligations, the Company may be required to accept an assignment of the co- owner's interest therein and assume those funding obligations. If, thereafter, the Company were to be unable to raise sufficient funds to meet such obligations, the Company's interests in the affected properties may be forfeited. Moreover, even if the Company were to be able to raise sufficient funds, there could be no assurance that the Company would be able to discover, develop and produce sufficient reserves to recover the costs and expenses incurred in connection with the exploration and development thereof. In reports filed with the Securities and Exchange Commission, which are publicly available, Garnet has expressed its intent to use its existing working capital and cash flow from production in Colombia, to the extent available, to finance its planned exploration and development activities. Garnet has indicated, however, that it does not expect its working capital and cash flow from operations to be sufficient to repay the principal amount ($15 million) of its subordinated debentures at maturity in December 1998, and that it must consummate a restructuring transaction prior to their maturity in order to avoid non- compliance with its obligations under the debentures. If no restructuring transaction is consummated, Garnet will be required to renegotiate the terms of the debentures to extend the maturity date so that the debentures may be repaid out of cash flow from operations over time. There can be no assurance that Garnet will be successful in consummating a restructuring transaction or renegotiating the terms of the debentures. The Company is subject to the other risks inherent in the ownership and development of foreign properties including, without limitation, cancellation or renegotiation of contracts, royalty and tax increases, retroactive tax claims, expropriation, adverse changes in currency values, foreign exchange controls, import and export regulations, 2 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 damaged the Company's assets in the past. Although the Company's losses on those occasions have been substantially 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 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 11 of the Notes to Consolidated Financial Statements contained elsewhere herein. Products, Markets and Methods of Distribution Colombia. The Company's oil is sold pursuant to sales contracts with -------- Ecopetrol. The contracts generally provide for cancellation by either party with notice. In the event of cancellation by Ecopetrol, the Company may export its oil production. Ecopetrol has historically purchased the Company's production, but there can be no assurance that it will continue to do so, nor can there be any assurance of ready markets for the Colombian production if Ecopetrol does not elect to purchase the production. The Company currently produces no natural gas in Colombia. See "Item 2. Properties." During each of the three years ended December 31, 1997, the Company received the majority of its revenue from Ecopetrol. Sales to Ecopetrol accounted for $7,405,000, or 76.1% of oil and gas revenue for 1997, $9,437,000, or 68.6% of oil and gas revenue for 1996 and $7,132,000, or 65.3% of oil and gas revenue for 1995, representing the Company's entire Colombian oil revenue. If Ecopetrol were to elect not to purchase the Company's Colombian oil production, the Company believes that other purchasers could be found for such production. United States. The Company does not refine or otherwise process domestic ------------- crude oil and condensate production. The domestic oil and condensate it produces are sold to refineries and oil transmission companies at posted field prices in the area where production occurs. The Company does not have long term contracts with purchasers of its domestic oil and condensate production. The Company's domestic gas production is primarily sold under short term arrangements at or close to spot prices. Some gas is committed to be processed through certain plants. The Company has not historically hedged any of its domestic production. During 1997, 1996 and 1995, the Company received more than 10% of its revenue from one domestic purchaser. Such revenue accounted for $1,516,000, or 15.6% of oil and gas revenue for 1997, $1,609,000, or 11.7% of oil and gas revenue for 1996 and $1,422,000, or 13.0% of oil and gas revenue for 1995. If this purchaser were to elect not to purchase the Company's oil and gas production, the Company believes that other purchasers could be found for such production. General. Oil and gas are the Company's only products. There is substantial ------- uncertainty as to the prices that the Company may receive for production from its existing oil and gas reserves or from oil and gas reserves, if any, 3 which the Company may discover or purchase. The availability of a ready market and the prices received for oil and gas produced depend upon numerous factors beyond the control of the Company including, without limitation, adequate transportation facilities (such as pipelines), marketing of competitive fuels, fluctuating market demand, governmental regulation and world political and economic developments. World oil and gas markets are highly volatile and shortage or surplus conditions substantially affect prices. As a result, there have been dramatic swings in both oil and gas prices in recent years. From time to time there may exist a surplus of oil or natural gas supplies, the effect of which may be to reduce the amount or price of hydrocarbons that the Company may produce and sell while such surplus exists. Regulation Environmental Regulation. The Company's operations are subject to foreign, ------------------------ federal, state, and local laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. These laws and regulations may require the acquisition of a permit by operators before drilling commences; restrict the types, quantities, and concentration of various substances that can be released into the environment in connection with drilling and production activities; limit or prohibit drilling activities on certain lands lying within wilderness areas, wetlands, and other protected areas; require remedial measures to mitigate pollution from former operations, such as plugging and abandoning wells; and impose substantial liabilities for pollution resulting from the Company's operations. The regulatory burden on the oil and gas industry increases the cost of doing business and consequently affects its profitability. Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly waste handling, disposal, remedial, drilling, or operational requirements could have a 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 civil fines and even 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 pending review and approval of additional environmental studies submitted by the Company in January 1994 and the issuance of environmental licenses by the Ministry of the Environment. In May 1994, the suspension was lifted and certain of the required environmental licenses were issued, including a permit allowing the co-owners of the concession to conduct a seismic program in that area. Since the lifting of the above referenced suspension, the co- owners have received subsequent permits, without substantial delay, to drill development and exploratory wells, construct related production facilities and construct a 10-mile pipeline. There can be, however, no assurance that the Company will not experience future delays in obtaining necessary environmental licenses. See also "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources" and "Item 2. Properties -- Significant Properties -- Colombia." United States. The Company believes that its domestic operations are ------------- currently in substantial compliance with U.S. federal, state, and local environmental laws and regulations. The Company has experienced no material financial effects to date from compliance with these U.S. environmental laws or regulations. The Oil Pollution Act of 1990 ("OPA '90") and regulations thereunder impose a variety of requirements on "responsible parties" related to the prevention of oil spills and liability for damages resulting from such spills in waters of the United States. A "responsible party" includes the owner or operator of an onshore facility, vessel or pipeline, 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 4 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. With amendments to OPA '90 signed into law by President Clinton on October 19, 1996, OPA '90 now requires owners and operators of offshore facilities that have a worst case oil spill of more than 1,000 barrels to demonstrate financial responsibility in amounts ranging from $10 million in specified state waters to $35 million in federal outer continental shelf water, with higher amounts of up to $150 million in certain limited circumstances where the U.S. Minerals Management Service ("MMS") believes such a level is justified by the risks posed by the quantity or quality of oil that is handled by the facility. The Company's two U.S. properties, Main Pass Block 41 field, a federal lease on the outer continental shelf ("OCS") offshore Louisiana, and Breton Sound Block 31 field, on state leases offshore Louisiana, are subject to OPA '90 as amended. On March 25, 1997, the MMS promulgated a proposed rule implementing these OPA '90 financial responsibility requirements. The Company believes that it currently has established adequate proof of financial responsibility for its offshore facilities. However, the Company cannot predict whether these financial responsibility requirements under the OPA '90 amendments or the proposed 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. In connection with these regulations, however, the EPA also issued an administrative order that effectively delayed compliance with the no discharge requirement for produced water until January 1, 1997. Effective August 27, 1996, the Louisiana Department of Environmental Quality ("LDEQ") officially assumed responsibility for compliance and enforcement issues for produced water as they relate to the Company's Breton Sound Block 31 facilities with the EPA operating in an oversight capacity. On December 30, 1996, the LDEQ adopted an emergency rule which, among other things, provided an extension of time, to July 1, 1997, to achieve compliance with the prohibitions against produced water discharges. In July 1997, in response to an earlier request made by the Company, the LDEQ authorized in writing an extension of the produced water deadline until December 1, 1997. The LDEQ has since authorized an extension of this deadline beyond December 1, 1997, while the Company and agency work on a produced water termination plan involving the installation of a reinjection well at the Breton Sound Block 31 facilities on or before April 1, 1998. In the event that the Company and the LDEQ fail to reach agreement on a produced water termination plan or the Company otherwise fails to timely install and commence operation of the reinjection well, the Company may be forced to immediately cease discharges of produced waters which could involve limiting or even ceasing operations temporarily or permanently at the Breton Sound Block 31 facilities. The Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA"), also known as the "Superfund" law, imposes liability, without regard to fault or the legality of the original conduct, on certain classes of persons that are considered responsible for the release of a "hazardous substance" into the environment. These persons include the owner or operator of the disposal site or sites where the release occurred and companies that disposed or arranged for the disposal of hazardous substances found at the site. Persons who are or were responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances that have been released into the environment and for damages to natural 5 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. The federal Resource Conservation and Recovery Act ("RCRA") and comparable state statutes regulate the storage, treatment and disposal of wastes, including hazardous wastes. The EPA and various state agencies have limited the approved methods of disposal for certain hazardous and nonhazardous wastes, thereby making such disposal more costly. Furthermore, certain wastes generated by the Company's oil and natural gas operations that are currently exempt from treatment as hazardous wastes may in the future be designated as hazardous wastes and therefore be subject to more rigorous and costly operating and disposal requirements. Other Regulation - Colombia. The Company's Colombian operations are regulated --------------------------- by Ecopetrol, the Ministry of Mines and Energy, and the Ministry of the Environment, among others. The review of current environmental laws, regulations and the administration and enforcement thereof, or the passage of new environmental laws or regulations in Colombia, could result in substantial costs and liabilities in the future or in delays in obtaining the necessary permits to conduct the Company's operations in that country. These operations may also be affected from time to time in varying degrees by political developments in Colombia. Such political developments could result in cancellation or significant modification of the Company's contract rights with respect to such properties, or could result in tax increases and/or retroactive tax claims being assessed against the Company. Other Regulation - United States. Domestic exploration for and production and -------------------------------- sale of oil and gas are extensively regulated at both the national and local levels. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue, and have issued, rules and regulations applicable to the oil and gas industry that are often difficult and costly to comply with and that may carry substantial penalties for failure to comply. The regulations also generally specify, among other things, the extent to which acreage may be acquired or relinquished, permits necessary for drilling of wells, spacing of wells, measures required for preventing waste of oil and gas resources and, in some cases, rates of production and sales prices to be charged to purchasers. The heavy and increasing regulatory burdens on the oil and gas industry increase the costs of doing business and, consequently, affect profitability. Prior to January 1, 1993, the sale of certain categories of domestic natural gas by the Company was subject to regulation under the Natural Gas Act ("NGA"), as amended, and the Natural Gas Policy Act of 1978 ("NGPA"), as amended. In 1989, the Natural Gas Wellhead Decontrol Act was enacted. This act amended the NGPA to remove both price and non-price controls from natural gas sold in "first sales" as of January 1, 1993. While sales by producers of natural gas, such as the Company, can currently be made at uncontrolled market prices, Congress could 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 Federal Energy Regulatory Commission ("FERC") from 1985 to the present that affect the economics of natural gas production, transportation and sales. In addition, the FERC continues to promulgate revisions to various aspects of the 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. The Company cannot predict what further action the FERC will take on these matters; however, 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. 6 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 recently 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 notice of proposed rulemaking in which it proposes to amend its regulations governing the calculation of royalties and the valuation of crude oil produced from federal leases. This proposed rule would modify the valuation procedures for both arm's length and non-arm's length crude oil transactions to decrease reliance on 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. In April 1997, after two years of study, the MMS withdrew proposed changes to the way it values natural gas for royalty payments. These proposed changes would have established an alternative market-based method to calculate royalties on certain natural gas sold to affiliates or pursuant to non-arm's length sales contracts. Informal discussions among the MMS and industry officials are continuing, although it is uncertain whether, and what changes may be proposed regarding gas royalty valuation. In addition, MMS has recently approved its intention to issue a proposed rule that would require all but the smallest producers to be capable of reporting production information electronically by the end of 1998. Sales of crude oil, condensate and gas liquids by the Company are not currently regulated and are made at market prices. The FERC has issued a series of rules (Order Nos. 561 and 561-A) establishing an indexing system under which oil pipelines will be able to change their transportation rates, subject to prescribed ceiling levels. The indexing system, which allows or may require pipelines to make rate changes to track changes in the Producer Price Index for Finished Goods, minus one percent, became effective January 1, 1995. The FERC's decision in this matter was recently affirmed by the Court. The Company is not able at this time to predict the effects of Order Nos. 561 and 561-A, if any, on the transportation costs associated with oil production from the Company's oil producing operations; however, the Company does not believe it will be affected by these orders materially differently than other oil producers with which it competes. The Company cannot accurately predict the effect that any of the aforementioned orders or the challenges to the orders will have on the Company's operations. Additional proposals and proceedings that might affect the oil and natural gas industries are pending before Congress, the FERC and the courts. These include Congressional energy bills and executive branch energy initiatives which have as their goal the decreased reliance by the United States on foreign energy supplies. The Company cannot accurately predict when or whether any such proposals or proceedings may become effective. 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. 7 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 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. 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, 1997, Aviva had 10 full-time employees, all in the United States. ITEM 2. PROPERTIES Productive Wells and Drilling Activity The following table summarizes the Company's developed acreage and productive wells at December 31, 1997. "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)/ 3,706 585 ------- ------- 7,586 2,150 ======= ======= Productive Wells /(3)/ Oil Gas ------------------ ----------------- Gross Net Gross Net ------- ------- ------- ------ United States /(4)/ 10 5.29 7 2.87 Colombia 14 2.21 - - ------- ------- ------- ------ 24 7.50 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 ---------- ---- ---------- ---- 1997 United States - - - - Colombia 0.5 - - - ---- ---- ---- ---- Total 0.5 - - - ==== ==== ==== ==== 1996 United States 0.4 - - - Colombia 0.3 - - 0.3 ---- ---- ---- ---- Total 0.7 - - 0.3 ==== ==== ==== ==== 1995 United States 0.1 - - - Colombia 0.5 0.2 - 0.3 ---- ---- ---- ---- Total 0.6 0.2 - 0.3 ==== ==== ==== ==== In the above table, a productive well is an exploratory or development well that is not a dry well. A dry well is an exploratory or a development well found to be incapable of producing either oil or gas in commercial quantities. A development well is a well drilled within the proved area of an oil and gas reservoir to the depth of a stratigraphic horizon known to be productive. An exploratory well is any well that is not a development well. Undeveloped Acreage The Company's undeveloped acreage in Colombia is held pursuant to concession agreements with the Colombian government. The Company expects to relinquish all undeveloped acreage associated with the La Fragua and Yuruyaco concessions during 1998. No further relinquishments are required for the Santana concession until the expiration of the concession agreement in 2015. See "-- Significant Properties." The Company does not have an undeveloped acreage position in the United States because of the costs of maintaining such a position. Oil and gas leases in the United States generally can be acquired by the Company for specific prospects on reasonable terms either directly or through farmout arrangements. The following table shows the undeveloped acreage held by the Company in Colombia at December 31, 1997. 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 -------- -------- Santana 48,636 21,887 La Fragua 32,377 14,570 Yuruyaco 38,663 17,398 -------- -------- 119,676 53,855 ======== ======== 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, 1997, that is not the same as that included in the estimate of proved oil and gas reserves as of December 31, 1997, 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, ------------------------------ 1997 1996 1995 ------- ------- ------- Oil /(1)/ United States 76 94 106 Colombia 426 476 435 Gas United States 316 1,146 1,184 Colombia - - - (1) Includes crude oil and condensate. 10 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)/ --------------------------------- 1997 1996 1995 -------- -------- -------- Average sales price per barrel of oil /(2)/ United States $ 19.17 $ 20.68 $ 16.78 Colombia $ 17.39 $ 19.82 $ 16.39 Average sales price per MCF of gas United States $ 2.73 $ 2.07 $ 1.70 Colombia $ - $ - $ - Average production cost per dollar of oil and gas revenue United States $ 0.54 $ 0.45 $ 0.52 Colombia $ 0.40 $ 0.31 $ 0.44 Average production cost per barrel of oil equivalent United States $ 9.81 $ 6.76 $ 6.46 Colombia $ 6.98 $ 6.11 $ 7.15
(1) All amounts are stated in United States dollars. (2) Includes crude oil and condensate. Significant Properties Colombia. -------- The Company's Colombian properties consist of four concessions, all of which are located in the Putumayo Basin in southwestern Colombia along the eastern front of the eastern cordillera of the Andes Mountains. The Company has a 45% working interest in each of the concessions, which is subject to various reversionary interests in favor of Ecopetrol as described below. Argosy, as operator of the properties, carries out the program of operations for the four concessions. The program is determined, with consideration of the obligations contained in the concession agreements, by an operating committee comprised of two representatives from each of Argosy and Neo. The Santana concession, which now consists of approximately 52,000 acres and contains 14 producing wells, has been in effect since 1987 and is the focus of the Company's exploration and development activities. The Aporte Putumayo concession, which consists of approximately 77,000 acres and contains three shut-in wells, has been in effect since 1972. The La Fragua concession consists of approximately 32,000 acres and has been in effect since 1992. The Yuruyaco concession was acquired in 1995 and consists of approximately 39,000 acres. The Company has filed with Ecopetrol applications for formal relinquishment of the Aporte Putumayo, La Fragua and Yuruyaco concessions. Such formal relinquishments are expected to occur during 1998. The Santana, La Fragua and Yuruyaco concessions are contiguous, while the Aporte Putumayo concession is approximately 50 kilometers to the southwest of the Santana concession. Production from the concessions is sold pursuant to sales contracts with Ecopetrol. Although sales prices vary between concessions, the contracts generally provide that 25% of the sales proceeds will be paid in Colombian pesos. As a result of certain currency restrictions, pesos resulting from these payments must generally remain in Colombia and are used by the Company to pay local expenses. Neo's pretax income from Colombian sources, as defined under Colombian law, is subject to Colombian income taxes at a statutory rate of 35% (37.5% prior to 1996), although a "presumptive" minimum income tax based on net assets, as defined under Colombian law, may apply in years of little or no net income. Neo's income after Colombian income taxes is subject to a Colombian remittance tax that accrues at a rate of 10% (7% for 1998 and thereafter). Payment of the remittance tax may be deferred under certain circumstances if Neo reinvests such income in Colombia. See Note 7 of the Notes to Consolidated Financial Statements contained elsewhere herein. 11 The Colombian government also imposes a production tax which averaged approximately $1.29 per barrel during 1997 and was equal to 7% of the oil price in effect through December 1997 for three of the four fields in the Santana concession. For these three fields the production tax has been eliminated for 1998 and thereafter. For the remaining field, the Miraflor field, the production tax is effective through 2000 at 7%, 5.5%, 4% and 2.5% of the oil price for 1997, 1998, 1999 and 2000, respectively. Any new discoveries declared commercial by Ecopetrol will be exempt from the production tax. Santana Concession. The Santana concession is subject to a "risk-sharing" ------------------ contract pursuant to which Ecopetrol has the option to participate on the basis of a 30% working interest in exploration activities in the concession. If a commercial field is discovered, Ecopetrol's working interest increases to 50% and the costs theretofore incurred and attributable to the 20% working interest differential will be recouped by the co-owners from Ecopetrol's share of production on a well by well basis. The risk-sharing contract provides that, when 7 million barrels of cumulative production from the concession have been attained, Ecopetrol's revenue interest and share of operating costs increases to 65% but it remains obligated for only 50% of capital expenditures. In June 1996, the 7 million barrel threshold was reached. At that time, the Company's revenue interest in the concession declined from 18% to 12.6% and its share of operating expenses declined from 22.5% to 15.75%. The Santana concession is divided by the Caqueta River. Two fields located south of the river, the Toroyaco and Linda fields, were declared commercial by Ecopetrol and commenced production in 1992. There are currently four producing wells in the Toroyaco field and five 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 and its co-owner ("Co-owners") constructed a 42-kilometer pipeline (the "Uchupayaco Pipeline") which was completed and commenced operations during 1994 to transport oil production from the Toroyaco and Linda fields to the Trans-Andean Pipeline owned by Ecopetrol, through which the Company's production is transported to the port of Tumaco on the Pacific coast of Colombia. Two additional fields, the Mary and Miraflor fields, were discovered north of the Caqueta River and were declared commercial by Ecopetrol during 1993. Except for oil produced during production tests of wells located in these fields, the production was shutin until the first quarter of 1995 when construction of a pipeline was completed and commercial production began. With the completion of this pipeline, the Co-owners have direct pipeline access from all four fields to the Pacific coast port of Tumaco. There are currently four producing wells in the Mary field and one producing well in the Miraflor field. A 3-D seismic survey 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 Co-owners have fulfilled all the initial exploration obligations required by the Santana risk-sharing contract. The contract requires that the Co-owners submit a work program for approval by Ecopetrol for one additional contract year. The current work program contemplates the recompletion of certain existing wells and the construction of a micro-refinery to produce diesel fuel for the Company's operations. In 1993, the Co-owners relinquished 50% of the original Santana concession area in accordance with the terms of the contract. In July 1995, an additional 25% of the original contract area was relinquished. A final relinquishment was made in 1997 such that all remaining contract areas except for those areas within five kilometers of a commercial field were relinquished. Production from the Santana concession has been sold to Ecopetrol pursuant to a sales contract that became effective February 1, 1997, and was extended through December 31, 1998. Prices under the contract are determined differently depending on whether (in the discretion of Ecopetrol) the produced crude is exported. If the crude is exported, the price received by the Company is the export price less specified handling and commercialization charges and subject to an adjustment (specified in the contract) for the quality of the produced crude as compared with the overall pipeline blend at the point of export (the "Pipeline Blend Adjustment"). If the crude is not exported, the price received by the Company is the previous month's average posted price for Cano Limon crude less specified handling and transportation charges and subject to (i) the Pipeline Blend Adjustment and (ii) a deduction of $0.56 per barrel for the quality of the overall pipeline 12 blend at the point of sale as compared with the quality of Cano Limon crude (the "Cano Limon Adjustment"). In 1997, Ecopetrol exported the crude each month and the sales price averaged $17.39 per barrel. At December 31, 1997, the date as of which the standardized measure of discounted future net cash flows applicable to the Company's proved oil and gas reserves was prepared, Ecopetrol was exporting the crude oil. Accordingly, for purposes of determining the standardized measure applicable to the Company's Colombian reserves, the Company used the export price of $14.30 per barrel (which does not include the Cano Limon adjustment). If Ecopetrol had not been exporting the crude oil at December 31, 1997, the price used for determining the standardized measure applicable to the Company's Colombian reserves at December 31, 1997, would have been approximately $14.80 per barrel. La Fragua Concession. The La Fragua concession is subject to an "association" -------------------- contract whereunder the Co-owners fulfill all exploration obligations without Ecopetrol's participation until a field is declared commercial, as described above. The association contract also provides that Ecopetrol's working interest increases on a sliding scale from 50% to 70% as cumulative production from the concession increases from 60 million barrels to 150 million barrels. The Co-owners have completed their seismic obligations for the first two years of the La Fragua concession and were obligated to acquire additional seismic data for the third year. The Co-owners determined, however, that it was not technically justified to explore this concession further and, accordingly, requested and received from Ecopetrol a change of commitment that would allow the Co-owners to substitute certain exploratory expenditures within the Santana concession for the remaining seismic commitment on the La Fragua concession. The indigenous people of the new commitment area, however, objected to the proposed exploratory work and the Co-owners were not able to comply with the new commitment. The Co-owners requested and Ecopetrol has agreed to allow the Co- owners to surrender the concession without further expenditure. Formal relinquishment is expected in 1998. Yuruyaco Concession. The Yuruyaco concession, acquired by the Company in -------------------- September 1995, is an "association" contract whereunder the Company and its co- owner fulfill all exploration obligations without Ecopetrol's participation until a field is declared commercial by Ecopetrol. At such time, Ecopetrol will earn a 50% share in the commercial field and must reimburse its 50% share of successful exploratory wells, seismic and stratigraphic wells, dry step-out exploratory wells and development wells and facilities through its 50% share of production. The contract also provides that Ecopetrol's working interest will be 50% up to 60 million barrels. For production in excess of 60 million barrels, Ecopetrol's interest would increase from 50% to 75%, based on a measure of profitability as defined in the contract. Seismic obligations for the first two years of the Yuruyaco concession have also been satisfied with the completion of a 2-D seismic program in January 1997. The interpretation of this seismic data failed to establish any significant prospects and, accordingly, the Co-owners decided to surrender the concession rather than proceeding into the third contract year. The Co-owners have filed an application for formal relinquishment which is expected in 1998. Aporte Putumayo Concession. The discoveries on the Aporte Putumayo concession -------------------------- were not declared commercial by Ecopetrol and the properties were operated by Argosy and Neo without participation by Ecopetrol. There are no remaining exploration obligations under this contract. Ecopetrol has accepted the Co- owner's request for relinquishment, which is pending the completion of abandonment and restoration operations. United States. ------------- The Company's oil and gas properties in the United States are located in the Gulf of Mexico offshore Louisiana at Main Pass 41 and Breton Sound 31 fields. Both of these properties are operated by the Company. Main Pass Block 41 is a federal lease located approximately 25 miles east of Venice, Louisiana, in 50 feet of water. There are currently five productive wells in the field. The field's 1997 production averaged 79 barrels of oil per day and 799 MCF per day, net to the Company's interest, from six completions in four sands between 6,000 and 7,500 feet. The Company owns a 35% interest in this field. Main Pass Block 41 represents approximately 71% of the Company's total net U.S. proved reserves at January 1, 1998. 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 1997, seven wells averaged 130 barrels of oil per day and 66 MCF of gas per day, net to the Company's interest, from two sands completed between 5,500 feet and 6,500 feet. The 13 Company's interests in the leases comprising the field vary from 41% to 67%. Breton Sound Block 31 field represents approximately 29% of the Company's total net proved U.S. reserves at January 1, 1998. 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 once suitable financing has been secured. The Company leases corporate office space in Dallas, Texas containing approximately 5,100 square feet pursuant to a lease which expires in January 1999. The annual lease payments for these offices are $77,000. 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, 1997. 14 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Price Range of Depositary Shares and Common Stock The Company's Depositary Shares, each representing the beneficial ownership of five shares of Common Stock, have traded on the Primary List of the American Stock Exchange since May 31, 1995 and prior to that on the Emerging Company Marketplace of the American Stock Exchange since November 14, 1994 (collectively the "ASE"). In addition, the Company's Common Stock has been traded on the London Stock Exchange since 1982 and has been quoted in the National Quotation Bureau's Daily Quotation Sheets (known as the "pink sheets") since December 1993. The following table sets forth, for the periods indicated and subject to the following qualifications, the high and low prices for the Depositary Shares on the ASE and the high and low prices for the Common Stock on the London Stock Exchange. In the United States, trading of Depositary Shares on the ASE and of Common Stock through the pink sheets has been limited. During 1997, only an aggregate of 1,132,000 Depositary Shares were traded on the ASE. In the United Kingdom, the average daily trading volume of the Common Stock on the London Stock Exchange during 1997 was approximately 45,000 shares. The London Stock Exchange prices indicated in the table are the middle market prices for the Common Stock as published in the Daily Official List and do not represent actual transactions. Prices on the London Stock Exchange are expressed in British pounds sterling, and, accordingly, the prices for the Common Stock traded on the London Stock Exchange included in the following table are similarly expressed. For ease of reference, these prices are also expressed in U.S. dollars, having been converted using the exchange rate in effect on the first day on which the stock price attained the high or low price indicated. 15
1997 1996 1995 ---------------------- ------------------------- ------------------------ High Low High Low High Low ------- ------- -------- ------- ------- ------- ASE - --- Depositary Shares /(1)/ - ----------------------- First Quarter $ 4.13 $ 2.88 $ 4.38 $ 3.88 $ 6.13 $ 5.13 Second Quarter $ 3.00 $ 1.63 $ 11.38 $ 3.50 $ 7.38 $ 5.13 Third Quarter $ 4.13 $ 1.63 $ 6.25 $ 3.00 $ 5.38 $ 4.00 Fourth Quarter $ 2.06 $ 0.98 $ 5.75 $ 3.00 $ 4.88 $ 4.25 London Stock Exchange - --------------------- Common Stock - ------------ First Quarter (Pounds) (Pounds) 0.42 (Pounds) 0.28 (Pounds) 0.46 (Pounds) 0.34 (Pounds) 0.55 (Pounds) 0.47 US$ $ 0.69 $ 0.45 $ 0.71 $ 0.52 $ 0.87 $ 0.73 Second Quarter (Pounds) (Pounds) 0.32 (Pounds) 0.27 (Pounds) 0.41 (Pounds) 0.25 (Pounds) 0.58 (Pounds) 0.53 US$ $ 0.51 $ 0.44 $ 0.63 $ 0.38 $ 0.93 $ 0.84 Third Quarter (Pounds) (Pounds) 0.30 (Pounds) 0.21 (Pounds) 0.34 (Pounds) 0.25 (Pounds) 0.53 (Pounds) 0.45 US$ $ 0.50 $ 0.34 $ 0.53 $ 0.38 $ 0.85 $ 0.71 Fourth Quarter (Pounds) (Pounds) 0.25 (Pounds) 0.17 (Pounds) 0.41 (Pounds) 0.28 (Pounds) 0.55 (Pounds) 0.38 US$ $ 0.40 $ 0.28 $ 0.67 $ 0.43 $ 0.85 $ 0.59
(1) Representing five shares of Common Stock. As of February 27, 1998, the Company had approximately 5,700 shareholders of record, including nominees for an undetermined number of beneficial holders. Dividend History and Restrictions No dividends have been paid since June 1983, nor is there any current intention on the part of the directors of the Company to pay dividends in the future. Furthermore, in July 1993, the Company entered into a credit agreement pursuant to which the Company is prohibited from paying dividends. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 16 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, 1997, which should be read in conjunction with the Consolidated Financial Statements included elsewhere herein.
For the Years Ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- ------- ------- ------- ------- (in thousands, except per share, per barrel and per MCF data) For the period Revenues $ 9,726 $13,750 $10,928 $ 8,546 $10,682 Loss before extraordinary item and cumulative effect of accounting change $(22,482) $ (937) $(2,689) $(2,460) $(1,963) Extraordinary item - debt extinguishment $ - $ - $ - $ - $ (341) Cumulative effect to January 1, 1993 of change in accounting for taxes $ - $ - $ - $ - $ (330) Net loss $(22,482) $ (937) $(2,689) $(2,460) $(2,634) Loss before extraordinary item and cumulative effect of accounting change per common share $ (0.71) $ (0.03) $ (0.09) $ (0.08) $ (0.08) Basic and diluted net loss per common share $ (0.71) $ (0.03) $ (0.09) $ (0.08) $ (0.11) Weighted average shares outstanding 31,483 31,483 31,483 31,483 24,756 Cash dividends per common share $ - $ - $ - $ - $ - Total annual net oil production (barrels) Colombia 426 476 435 250 279 United States 76 94 106 99 109 -------- ------- ------- ------- ------- Total 502 570 541 349 388 -------- ------- ------- ------- ------- Total annual net gas production (MCF) United States 316 1,146 1,184 1,839 2,324 Average price per barrel of oil Colombia $ 17.39 $ 19.82 $ 16.39 $ 13.60 $ 14.02 United States $ 19.17 $ 20.68 $ 16.78 $ 15.40 $ 16.90 Average price per MCF of Gas - United States $ 2.73 $ 2.07 $ 1.70 $ 1.97 $ 2.12 At period end Total assets $ 16,445 $42,944 $45,460 $42,383 $45,017 Long term debt, including current portion $ 7,690 $ 7,990 $13,067 $ 6,640 $ 5,476 Stockholders' equity $ 3,748 $26,230 $27,167 $29,856 $32,316
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 ("Statement 109"), without restatement of prior periods. Statement 109 requires recognition of deferred tax assets in certain circumstances and deferred tax liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. In connection with the application of the full cost method, the Company recorded ceiling test write-downs of oil and gas properties of $19,953,000 in 1997 (see Note 1 of Notes to Consolidated Financial Statements). 17 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 1997 versus 1996 - ---------------- United States Colombia Oil Gas Oil Total ------ ------- ------- ------- (Thousands) Revenue - 1996 $1,940 $ 2,373 $ 9,437 $13,750 Volume variance (366) (1,782) (995) (3,143) Price variance (115) 223 (1,037) (929) Other - 48 - 48 ------ ------- ------- ------- Revenue - 1997 $1,459 $ 862 $ 7,405 $ 9,726 ====== ======= ======= ======= Colombian oil volumes were 426,000 barrels in 1997, a decrease of 50,000 barrels from 1996. Such decrease is the result of a 68,000 barrel decrease due to the Company's net revenue interest declining from 18% to 12.6% in June 1996 when cumulative production from the Santana concession reached the 7 million barrel threshold specified in the risk-sharing contract, and a 119,000 barrel decrease resulting from normal production declines, partially offset by a 136,000 barrel increase primarily due to the completion of two development wells in the latter part of 1996 and one development well completed in June 1997. U.S. oil volumes were 76,000 barrels in 1997, down 18,000 barrels from 1996. This decrease resulted primarily from the sale of the Company's U.S. onshore properties on December 23, 1996. U.S. gas volumes before gas balancing adjustments were 274,000 thousand cubic feet ("MCF") in 1997, down 862,000 MCF from 1996. Such decrease is the result of an 896,000 MCF decrease resulting from the U.S. onshore property sale, and normal production declines partially offset by new production from a development well completed at Main Pass 41 during October 1996. Colombian oil prices averaged $17.39 per barrel during 1997. The average price for the same period in 1996 was $19.82 per barrel. The Company's average U.S. oil price decreased to $19.17 per barrel in 1997, down from $20.68 in 1996. U.S. gas prices averaged $2.73 per MCF in 1997 compared to $2.07 per MCF in 1996. In addition to the above-mentioned variances, U.S. gas revenue increased approximately $48,000 as a result of gas balancing adjustments. Operating costs decreased by $599,000, or 12%. Of such decrease, approximately $845,000 resulted from the sale of the U.S. onshore properties, offset by a $181,000 increase for the U.S. offshore properties and a $65,000 increase for the Colombian properties. Depreciation, depletion and amortization ("DD&A") decreased $1.3 million, or 17%, mainly due to lower production levels. The Company recorded write-downs to the carrying amounts of its U.S. and Colombian oil and gas properties of $2,124,000 and $17,829,000, respectively, during 1997. The U.S. write-down was primarily due to lower prices. The Colombian write-down resulted primarily from lower prices and, to a somewhat lesser extent, downward revisions of proved oil reserves. 18 General and administrative ("G&A") expense decreased $44,000 mainly due to reductions in the number of employees, officers, directors and related fees and expenses which resulted in cost savings of approximately $262,000 during 1997. These savings were partially offset by increases in legal and consulting fees aggregating $201,000. Such increases were primarily related to the Company's restructuring plan. See "- -Liquidity and Capital Resources." Interest and other income (expense) decreased mainly due to the absence in 1997 of a $641,000 gain recorded in 1996 relating to the sale of the U.S. onshore oil and gas properties. Interest expense was $156,000 lower, primarily as a result of lower average balances outstanding. Income taxes were lower in 1997 primarily due to Colombian deferred tax benefits resulting from the write-down of the carrying amount of the Company's Colombian oil and gas properties. 1996 versus 1995 - ---------------- United States Colombia Oil Gas Oil Total ------ ------ ------ ------- (Thousands) Revenue - 1995 $1,781 $2,015 $7,132 $10,928 Volume variance (206) (99) 671 366 Price variance 365 422 1,634 2,421 Other - 35 - 35 ------ ------ ------ ------- Revenue - 1996 $1,940 $2,373 $9,437 $13,750 ====== ====== ====== ======= Colombian oil volumes were 476,000 barrels in 1996, an increase of 41,000 barrels over 1995. Of such increase, approximately 110,000 barrels resulted from a fracture stimulation program involving eight wells that was completed in February 1996, net of normal production declines, and approximately 20,000 barrels resulted from the completion of two development wells in the latter part of 1996, offset by a decrease of approximately 90,000 barrels resulting from the Company's net revenue interest declining from 18% to 12.6% in June 1996 when cumulative production from the concession reached the 7 million barrel threshold specified in the Santana risk-sharing contract. U.S. oil volumes were 94,000 barrels in 1996, down approximately 12,000 barrels from 1995. This decrease resulted primarily from normal production declines. U.S. gas volumes before gas balancing adjustments were 1,136,000 MCF in 1996, a decrease of 62,000 MCF from 1995, resulting primarily from normal production declines, partially offset by new production from a development well completed at Main Pass 41 during October 1996. Included in 1996 results of operations are revenue and operating costs of $1,998,000 and $845,000, respectively, relating to the Company's U.S. onshore properties which were sold on December 23, 1996. During 1996, oil and gas volumes for such properties were approximately 17,000 barrels and 864,000 MCF, respectively, net to the Company. Colombian oil prices averaged $19.82 per barrel during 1996. The average for the same period in 1995 was $16.39. The Company's average U.S. oil price increased to $20.68 per barrel in 1996, up from $16.78 in 1995. U.S. gas prices averaged $2.07 per MCF in 1996 compared to $1.70 in 1995. Operating costs decreased $238,000, or 5%, mainly due to cost reductions in the Colombian operations. DD&A increased by 28%, or $1,584,000, primarily due to higher Colombian and U.S. DD&A rates per barrel and higher Colombian production. U.S. DD&A expenses increased on a per barrel basis to $5.93 in 1996 from $4.12 in 1995, primarily due to an increase in costs subject to amortization resulting from development costs incurred in 1996. Colombian DD&A expenses increased on a per barrel basis to $11.49 in 1996 from $9.79 in 1995, primarily due to an increase in costs subject to amortization resulting from development and exploratory costs incurred in 1996 and the transfer of unevaluated costs into the amortization base during 1996. 19 G&A expense decreased $762,000, or 33%, as a result of a cost reduction program implemented by the Company during the first quarter of 1996. This program targeted all categories of G&A. The Company incurred $196,000 of severance expense during 1996 relating to the termination of the employment of the Executive Vice President and Chief Operating Officer of the Company and certain other employees. For more information regarding such terminations, see Note 6 of Notes to Consolidated Financial Statements. Interest and other income (expense) increased $566,000 mainly due to a gain of $641,000 on the sale of the U.S. onshore oil and gas properties on December 23, 1996. Interest expense was $256,000 higher, primarily as a result of higher average balances outstanding in 1996. Debt refinancing expense of $100,000 represents a fee paid to ING (U.S.) Capital Corporation in consideration for certain modifications to the Company's credit agreement in March 1996. Income taxes were $500,000 higher in 1996 primarily as a result of an increase in Colombian taxable income and an increase in the valuation allowance for deferred Colombian tax assets. Year 2000 Based on a preliminary study, the Company expects to spend approximately $0.1 million from 1998 through 1999 to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The Company continues to evaluate appropriate courses of corrective action, including replacement of certain systems whose associated costs would be recorded as assets and amortized. Accordingly, the Company does not expect the amounts required to be expensed over the next two years to have a material effect on its financial position or results of operations. Liquidity and Capital Resources During the period 1995 through 1997, costs incurred in oil and gas property acquisition, exploration and development activities by the Company totaled approximately $18.8 million. Of this figure, approximately $3.3 million was for exploration predominantly in Colombia and $15.5 million pertained to development costs in the United States (23%) and Colombia (77%). The Company's sources of funds during this period were: (i) cash provided by operating activities - 1997 - - $1.7 million; 1996 - $8.9 million; and 1995 - $2.9 million; (ii) net cash provided by investing activities (before property and equipment expenditures) - 1997 - $0.02 million; 1996 - $2.7 million; and 1995 - $0.1 million; and (iii) net cash provided by (used in) financing activities - 1997 - $(0.3) million; 1996 - $(5.1) million; and 1995 - $6.4 million. In the U.S., the Company is currently engaged in the conversion of a shutin well into a saltwater disposal well at its Breton Sound 31 field facilities. The cost to convert and equip such a well is estimated at $0.3 million, net to the Company's interest. Additionally, the Company is upgrading certain equipment at its Main Pass 41 field facilities, the cost of which is expected to aggregate $0.1 million, net to the Company's interest. The Company is also engaged in the recompletion of certain existing wells, the construction of a micro-refinery for production of diesel fuel, and various miscellaneous projects in Colombia. The Company's share of the estimated future costs of these development activities is approximately $0.8 million at December 31, 1997. Failure to fund certain capital expenditures could result in the forfeiture of all or part of the Company's interest in the concessions. The Company plans to fund these development activities through cash provided from operations. Any substantial decreases in the borrowing base as hereinafter defined or increases in the amounts of these required expenditures could adversely affect the Company's ability to fund these development activities. Delays in obtaining the required environmental approvals and permits on a timely basis, as described above under "Item 1. Business -- Regulation," and construction delays could both, through the impact of inflation, increase the required expenditures. Cost overruns resulting from factors other than inflation could also increase the required expenditures. Historically, the inflation rate of the Colombian peso has been in the range of 20-30% per year. Devaluation of the peso against the U.S. dollar has historically been slightly less than the inflation rate in Colombia. The Company has historically funded capital expenditures in Colombia by converting U.S. dollars to pesos at such time as the expenditures have been made. As a result of the interaction between peso inflation and devaluation of the peso against the U.S. dollar, inflation, from the Company's perspective, had not been a significant factor. During 1994, the first half of 1995 and 20 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. Although the ultimate outcome of these matters cannot be projected with certainty, management believes that its existing capital resources are adequate to fund its present development activities. The Company is a party to a credit agreement with ING (U.S.) Capital Corporation ("ING Capital") pursuant to which the borrower thereunder may borrow up to $25 million, subject to a borrowing base the determination of which is predicated on the Company's U.S. and Colombian reserves and which is redetermined annually. As of December 31, 1997, the borrowing base permitted, and the outstanding loan balance was, $7,690,000. The borrower under the credit agreement is Neo Energy, Inc., a wholly owned subsidiary of the Company and the owner of the Company's interests in the Colombian concessions. The indebtedness under the credit agreement is guaranteed by the parent company and certain other subsidiaries, including the wholly owned subsidiary that is the owner of all the Company's domestic oil and gas properties. The loan prohibits the payment of dividends by the Company and requires the maintenance of certain financial ratios. In February 1998, the Company entered into an agreement with ING Capital pursuant to which the outstanding loan balance was paid down to $7,440,000 from $7,690,000, the interest rate was increased to the prime rate, as defined, plus 1.5%, or at the option of the Company, a fixed rate based on the London Interbank Offered Rate plus 3%, and the repayment schedule was amended to require monthly payments of 80% of defined monthly cash flows until October 1, 1999, at which time the remaining balance is due and payable. Additionally, ING Capital reduced to $2 million the minimum amount of consolidated tangible net worth that the Company is required to maintain. The Company's internal projections of its consolidated cash flow indicate that the Company's consolidated cash flow and working capital will be adequate to fund both the estimated development expenditures for 1998 and 1999 and the monthly debt service relating to the ING Capital credit agreement as amended in February 1998. The Company does not, however project that, at current levels, its cash flows will be sufficient to repay the remaining balance under the ING Capital credit agreement that will be due and payable on October 1, 1999. Accordingly, the Company may be required to further extend the maturity of the debt or raise additional capital through equity issues or by sales of assets to retire the debt. The ultimate outcome of these matters cannot be projected with certainty. The above referenced internal cash flow projections assume (i) crude oil sales prices of $11.56 per barrel for Colombian production and $13.89 per barrel for United States production and natural gas sales prices of $2.25 per MCF for United States production, (ii) successful recompletion of four existing wells on the Santana Concession in Colombia, (iii) production decline curves commensurate with those assumed by the Company's independent petroleum engineers, (iv) certain reductions in general and administrative costs and (v) interest rates and operating costs at current levels. Any significant inaccuracy in any of these assumptions, as well as interruptions of production, increases in required expenditures as a result of inflation or cost overruns or delays in the Company's development activities, may adversely affect the Company's ability to fund such development expenditures or to meet its existing debt service obligations. Depending on the results of the Company's future exploration and development activities, substantial expenditures that have not been included in such cash flow projections may be required. For information regarding the risks relating to the Company's business, see "Item 1. Business -- Risks Associated with the Company's Business." The aforementioned oil and gas prices used in the Company's internal cash flow projections are indicative of the prices the Company expects to receive for its production in March 1998. These prices are substantially lower than the prices prevailing at December 31, 1997, which were used in the Company's yearend ceiling limitation test for capitalized costs. If prices remain at current levels and do not recover substantially prior to the issuance of the Company's financial statements for the first quarter of 1998, the Company expects that it will incur additional ceiling test write-downs for both its U.S. and Colombian cost centers that, in the aggregate, will have a significant adverse effect on the Company's results of operations and could result in the elimination of the Company's net equity. Moreover, such write-downs could result in the Company's failure to maintain the minimum consolidated tangible net worth of $2 million required by the latest amendment to the Company's credit agreement with ING Capital. In the past, ING Capital has amended or waived compliance with the Company's minimum consolidated tangible net worth 21 covenant when the Company has been unable to meet such requirements. There can be no assurance, however, that ING Capital will continue to make similar concessions in the future. On July 8, 1997, the Company engaged Merrick Capital Corporation ("Merrick") to act as its financial advisor in order to identify and accomplish certain strategic corporate objectives (the "Restructuring Plan"). Such objectives included the private placement of $5 million of common stock, the procurement of $15 million of mezzanine financing and the negotiation of a $25 million oil and gas reserve based credit facility. The Restructuring Plan could not be completed in the current climate of depressed oil prices and other uncertainties. Accordingly, on February 13, 1998, the Company terminated Merrick's engagement as the Company's financial advisor and the Board of Directors of the Company is pursuing other alternatives to enhance shareholder value. 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 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. 22 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. On July 30, 1997, the Board of Directors, by resolution, increased the number of directors from four to five. 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 66 President, Chief Executive Officer 1985 and Director Eugene C. Fiedorek 66 Director 1997 John J. Lee 61 Director 1993 Elliott Roosevelt, Jr. 61 Director 1994 James E. Tracey 49 Director 1992 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 is a Managing Director of EnCap Investments, L.C., a company he co- founded in 1988. 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 Energy Capital Investment Company PLC, Apache Corporation and privately held Matador Petroleum Corporation. JOHN J. LEE has been a director of the Company since August 1993, and is Chairman, President and Chief Executive Officer of Hexcel Corporation, an advanced materials manufacturer. Mr. Lee joined the Board of Hexcel Corporation in May 1993 as an outside independent director. In August 1993, Mr. Lee was asked to become the Chairman and Co-Chief Executive Officer of Hexcel Corporation, which was experiencing financial difficulties, in order to effect a consensual reorganization. In December 1993, having concluded that a consensual reorganization could not be accomplished, Hexcel Corporation filed for protection under Chapter 11 of the Federal Bankruptcy Code and appointed Mr. Lee sole Chief Executive Officer to effect a Plan of Reorganization. The reorganization was completed in February 1995 and Hexcel emerged from Chapter 11. Mr. Lee has been Chairman, President and Chief Executive Officer of Lee Development Corporation, a corporation providing investment and merchant banking services, since 1987 and was a director of XTRA Corporation, a Massachusetts- based transportation and equipment leasing company, from 1990 through January 1995. Mr. Lee also served as Chairman and Chief Executive Officer of Seminole Corporation, a fertilizer manufacturer, from July 1989 through April 1993 and director of Tosco Corporation, a refiner, from April 1988 through April 1993 and was President and Chief Operating Officer of Tosco Corporation from April 1990 through April 1993. Mr. Lee is an advisor to the Clipper Group, a New York Merchant Banking group and is a trustee of Yale University. 23 ELLIOTT ROOSEVELT, JR. has been a director of the Company since January 1994 and has been President of E.R. Operating Co., a private oil and gas company, since 1989. Mr. Roosevelt has more than 30 years of experience in the oil business with several public and private companies. JAMES E. TRACEY has been a director of the Company since June 1992. Mr. Tracey was a senior executive with The Royal Bank of Scotland plc ("RBS") until 1996, when he retired. Mr. Tracey was employed by RBS for 31 years. 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, 66 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. James L. Busby, 37 Treasurer since May 1994, Secretary since June 1996, Controller since November 1993 and a Senior Manager with the accounting firm of KPMG Peat Marwick LLP prior to that. Meetings and Committees of the Board of Directors The Board of Directors of the Company held nine meetings during 1997. 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, which is comprised of Messrs. Roosevelt and Tracey, 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 two meetings during 1997. The Compensation Committee, which is comprised of Messrs. Lee, Roosevelt and Tracey, 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 1997. 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, 1997, all of the Reporting Persons complied with their Section 16(a) filing requirements. 24 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 1997 185,000 - - - - - 4,750 President and CEO 1996 200,000 - - - - - 4,750 President and CEO 1995 200,000 - - - - - 4,620
/(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 Messrs. Fiedorek, Lee, Roosevelt and Tracey each receive $20,000 per year for their services as directors and are reimbursed for travel and lodging expenses. Mr. Suttill receives no compensation as a director but is reimbursed for travel and lodging expenses incurred to attend meetings. Option Grants During 1997 There were no options granted to the Named Executive Officer during 1997. No stock appreciation rights have been issued by the Company. Option Exercises During 1997 and Year End Option Values The following table provides information related to options exercised by the Named Executive Officers during 1997 and the number and value of options held at year-end. No stock appreciation rights have been issued by the Company.
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options Options at FY-End (#) at FY-End ($) (1) Shares Acquired Value ---------------------------------- -------------------------- Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---- --------------- ------------ ----------- --------------------- ----------- ------------- Ronald Suttill none none 270,000 - - -
/(1)/ No values are ascribed to unexercised options of the Named Executive Officer at December 31, 1997 because the fair market value of a share of the Company's Common Stock at December 31, 1997 ($0.33) 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, 25 including salary, bonuses, stock options and other compensation. There are no Compensation Committee interlocks. Until this committee was originally appointed in 1993, the compensation of the executive officers was established by the Board of Directors as a whole, including Mr. Suttill. Employment Contracts Each executive officer serves at the discretion of the Board of Directors, except that, effective in January 1995, the Company entered into an employment contract with Mr. Suttill. Mr. Suttill's contract provides for annual compensation of not less than $200,000 if his employment is terminated for any reason other than death, disability or cause, as defined in the contract. Mr. Suttill's contract was automatically renewed for one-year periods on January 1, 1996, 1997 and 1998. Compensation Committee Report on Executive Compensation The Company currently employs only two executive officers, the names of whom are set forth above under "Election of Directors - 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 1997 was comprised of salary and matching employer contributions made pursuant to the Company's 401(k) Plan. There were no bonuses paid to the executive officers during or for 1997. The Company's 401(k) Plan is generally available to all employees after one year of service. The Company makes matching contributions of 50% of the amount deferred by the employee, up to 3% of an employee's annual salary. Compensation Committee J.J. Lee E. Roosevelt, Jr. J.E. Tracey 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. 26 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN OF THE COMPANY, INDUSTRY INDEX AND BROAD MARKET - ----------------------------- FISCAL YEAR ENDING ------------------------------- COMPANY 1992 1993 1994 1995 1996 1997 AVIVA PETROLEUM INC. 100 215.38 264.10 225.64 200.00 84.62 INDUSTRY INDEX 100 119.15 124.87 137.33 182.60 185.09 BROAD MARKET 100 118.81 104.95 135.28 142.74 171.76 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 27, 1998. NAME AND ADDRESS OF AMOUNT AND NATURE OF BENEFICIAL OWNER OR GROUP BENEFICIAL OWNERSHIP /(1)/ PERCENT OF CLASS /(2)/ - ------------------------- -------------------------- ---------------------- Lehman Brothers Inc./(3)/ 2,966,876 9.42% 3 World Financial Center 11th Floor New York, NY 10285 Fidelity International Limited 2,780,000 8.83% and Edward C. Johnson III/(4)/ P.O. Box HM670 Hamilton, HMCX, Bermuda Yale University/(5)/ 2,551,886 8.11% 230 Prospect Street New Haven, CT 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 31,482,716 shares of the Common Stock issued and outstanding on February 27, 1998. /(3)/ Information regarding Lehman Brothers Inc. is based on information received from Lehman Brothers Inc. on March 16, 1998. /(4)/ Information regarding Fidelity International Limited is based on an amended notification of disclosable interests, dated July 25, 1996, pursuant to the U.K. Companies Act. Fidelity International Limited is the parent holding company for various direct and indirect subsidiaries that hold these interests. Mr. Edward C. Johnson III is a principal shareholder and chairman of Fidelity International Limited. /(5)/ Information regarding Yale University is based on a Schedule 13G dated March 11, 1994 filed by Yale University with the Securities and Exchange Commission ("SEC"). 27 Security Ownership of Management The following table sets forth certain information as of February 27, 1998, 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 1,275,050 /(3)(4)/ 4.00% 8235 Douglas Avenue, Suite 400 Dallas, TX 75225 Eugene C. Fiedorek 262,153 * 3811 Turtle Creek Blvd., Suite 1080 Dallas, TX 75219 John J. Lee 1,124,428 /(5)(6)/ 3.53% Two Stamford Plaza 281 Tresser Blvd., 16th Floor Stamford, CT 06901 Elliott Roosevelt, Jr. 60,000 /(5)/ * 2626 Cole Avenue, Suite 600 Dallas, TX 75204 James E Tracey 965,550 /(4)(5)/ 3.03% 3, Grey Close Hampstead Garden Suburb London, NW11 3QG All directors and executive officers as a group (6 persons) 2,782,791 /(7)/ 8.73% /(1)/ Except as noted below, each beneficial owner has sole voting power and sole investment power. /(2)/ Based on 31,482,716 shares of Common Stock issued and outstanding on February 27, 1998. 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. /(3)/ Included are options for 270,000 shares exercisable on or within 60 days of February 27, 1998. /(4)/ Includes the entire ownership of AMG Limited, a limited liability company of which Messrs. Suttill and Tracey are members, as of February 27, 1998, of 935,550 shares of Common Stock. /(5)/ Included are options for 30,000 shares exercisable on or within 60 days of February 27, 1998. /(6)/ Included are 1,094,428 shares owned by Lee Development Corporation, which Mr. Lee controls. /(7)/ Included are 935,550 shares beneficially owned through AMG Limited and options for 388,000 shares exercisable on or within 60 days of February 27, 1998. * Less than 1% of the outstanding 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: *3.1 Restated Articles of Incorporation of the Company dated July 25, 1995 (filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *3.2 Amended and Restated Bylaws of the Company, as amended as of January 23, 1995 (filed as exhibit 3.2 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.1 Risk Sharing Contract between Empresa Colombiana de Petroleos ("Ecopetrol"), Argosy Energy International ("Argosy") and Neo Energy, Inc. ("Neo") (filed as exhibit 10.1 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.2 Contract for Exploration and Exploitation of Sector Number 1 of the Aporte Putumayo Area ("Putumayo") between Ecopetrol and Cayman Corporation of Colombia dated July 24, 1972 (filed as exhibit 10.2 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.3 Operating Agreement for Putumayo between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989 and February 23, 1990 (filed as exhibit 10.3 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.4 Operating Agreement for the Santana Area ("Santana") between Argosy and Neo dated September 16, 1987 and amended on January 4, 1989, February 23, 1990 and September 28, 1992 (filed as exhibit 10.4 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.5 Agreement of Withdrawal from Argosy dated September 16, 1987 by and among Argosy, Neo, and Argosy Energy Incorporated, as general partners; and Parkside Investments, Richard Shane McKnight, Douglas W. Fry, P-5 Ltd., GO-DEO, Inc., Dale E. Armstrong, Richard Shane McKnight, The Yvonne McKnight Trust, and William Gaskin, as limited partners (filed as exhibit 10.5 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.6 Option Agreement dated September 16, 1987 between the general and limited partners of Argosy and Neo (filed as exhibit 10.6 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.7 Escrow Agreement between Argosy, Neo, Overseas Private Investment Corporation and The Chase Manhattan Bank dated March 15, 1988 and amended on May 31, 1990 (filed as exhibit 10.7 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.8 Santana Block A Relinquishment dated March 6, 1990 between Ecopetrol, Argosy and Neo (filed as exhibit 10.8 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.9 Purchase Sale - Transportation and Commercialization of the Santana Crude between Ecopetrol, Argosy and Neo (filed as exhibit 10.9 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). 29 *10.10 La Fragua Association Contract dated June 1, 1992 between Ecopetrol, Argosy and Neo (filed as exhibit 10.10 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.11 Operating Agreement for the La Fragua Area between Argosy and Neo dated April 15, 1992 (filed as exhibit 10.11 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.12 Employment Agreement between the Company and Ronald Suttill dated November 29, 1991 (filed as exhibit 10.12 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.13 Employee Stock Option Plan of the Company (filed as exhibit 10.13 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.14 Letter agreement dated January 6, 1993 between NationsBank Investment Banking and the Company (filed as exhibit 10.14 to the Company's Registration Statement on Form10, File No. 0- 22258, and incorporated herein by reference). *10.15 Letter agreement dated March 3, 1993 between EnCap Investments L.C. and the Company (filed as exhibit 10.15 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.16 Credit Agreement dated August 6, 1993 between the Company, Aviva America, Inc. ("Aviva America"), Neo and Internationale Nederlanden Bank N.V., New York Branch ("ING Capital") (filed as exhibit 10.16 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.17 Subordination Agreement dated August 6, 1993 between the Company, Aviva America, Aviva Operating Company ("Aviva Operating"), Neo and ING Capital (filed as exhibit 10.17 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.18 Stock Pledge Agreement dated August 6, 1993 between the Company and ING Capital (filed as exhibit 10.18 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.19 Stock Pledge Agreement dated August 6, 1993 between Aviva America and ING Capital (filed as exhibit 10.19 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.20 Guaranty dated August 6, 1993 made by the Company in favor of ING Capital (filed as exhibit 10.20 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.21 Guaranty dated August 6, 1993 made by Aviva America in favor of ING Capital (filed as exhibit 10.21 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.22 Guaranty dated August 6, 1993 made by Aviva Operating in favor of ING Capital (filed as exhibit 10.22 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.23 Form of Subscription Agreement dated June 18, 1993 between the Company and purchasers of 12,884,207 shares of common stock ("Purchasers") (filed as exhibit 10.23 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.24 Option Agreement between RBS and Aviva Energy Inc. ("Aviva Energy") dated July 1, 1993 (filed as exhibit 10.24 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.25 Option Agreement between Aviva Energy and Purchasers dated July 1, 1993 (filed as exhibit 10.25 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.26 Santana Block B 50% relinquishment dated September 13, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.26 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.27 Amendment to La Fragua Association contract dated December 2, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.27 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). 30 *10.28 Letter from Ecopetrol dated February 24, 1994 and Resolution dated February 18, 1994 revising pipeline tariff (filed as exhibit 10.28 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.29 Aviva Petroleum Inc. 401(k) Retirement Plan effective March 1, 1992 (filed as exhibit 10.29 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0- 22258, and incorporated herein by reference). *10.30 Relinquishment of Putumayo dated December 1, 1993 (filed as exhibit 10.30 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.31 Amendment to ING Capital agreement dated March 28, 1994 (filed as exhibit 10.31 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.32 Deposit Agreement dated September 15, 1994 between the Company and Chemical Shareholder Services Group, Inc. (filed as exhibit 10.29 to the Company's Registration Statement on Form S- 1, File No. 33-82072, and incorporated herein by reference). *10.33 Form of Registration Agreement dated as of September 15, 1994 between the Company and Shearson Lehman Brothers Inc. (filed as exhibit 10.30 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.34 Form of Registration Agreement and Limited Power of Attorney dated as of September 15, 1994 between the Company and all other Selling Shareholders (filed as exhibit 10.31 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.35 Form of Broker-Dealer Agreement dated as of October 19, 1994 between the Company and Petrie Parkman & Co. (filed as exhibit 10.32 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.36 Purchase and Sale Agreement dated July 22, 1994 by and between Newfield Exploration Company and Aviva America (filed as exhibit 10.33 to the Company's Registration Statement on Form S- 1, File No. 33-82072, and incorporated herein by reference). *10.37 Letter from ING Capital dated October 27, 1994, amending Section 5.2(n) of the Credit Agreement (filed as exhibit 10.37 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.38 Letter from Ecopetrol dated December 28, 1994, accepting relinquishment of Putumayo (filed as exhibit 10.38 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.39 Letter from Ecopetrol dated February 28, 1995, accepting modifications to the La Fragua Association Contract (filed as exhibit 10.39 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.40 Amendment to ING Capital Credit Agreement dated March 7, 1995 (filed as exhibit 10.40 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0- 22258, and incorporated herein by reference). *10.41 Santana Crude Oil Sale Contract dated March 19, 1995 (filed as exhibit 10.41 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.42 Employment Agreement between the Company and Ronald Suttill effective January 1, 1995 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.43 Employment Agreement between the Company and Robert C. Boyd effective January 1, 1995 (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.44 Amendment to ING Capital Credit Agreement dated June 9, 1995 (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.45 Amendment to the Incentive and Nonstatutory Stock Option Plan of the Company (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). 31 *10.46 Aviva Petroleum Inc. 1995 Stock Option Plan (filed as exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.47 Yuruyaco Association Contract dated September 20, 1995 between Ecopetrol, Argosy and Neo (filed as exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.48 Letter from ING Capital dated November 3, 1995, amending Section 5.2 (n) of the Credit Agreement (filed as exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.49 Amendment to the Santana Crude Oil Sale Contract (filed as exhibit 10.49 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.50 Amendment to the La Fragua Association Contract dated April 27, 1995 (filed as exhibit 10.50 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *10.51 Santana Block B 25% relinquishment dated October 2, 1995 (filed as exhibit 10.51 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.52 Amendment to the La Fragua Association Contract dated August 1, 1995 (filed as exhibit 10.52 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *10.53 Operating Agreement for the Yuruyaco Area between Argosy and Neo dated November 7, 1995 (filed as exhibit 10.53 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.54 Letter from ING Capital dated March 19, 1996, amending the borrowing base, schedule of principal repayments and Section 5.2 (m) of the Credit Agreement (filed as exhibit 10.54 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.55 Amendment to the ING Capital Credit Agreement dated March 29, 1996 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.56 Aviva Petroleum Inc. Severance Benefit Plan (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.57 Amendment to the ING Capital Credit Agreement dated November 22, 1996 (filed as exhibit 10.57 to the Company's annual report on Form 10-K for the year ended December 31, 1996, File No. 0- 22258, and incorporated herein by reference). *10.58 Purchase and Sale Agreement dated November 22, 1996 between BWAB Incorporated and Aviva America (filed as exhibit 10.58 to the Company's annual report on Form 10-K for the year ended December 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.59 Purchase and Sale Agreement dated December 6, 1996 between Lomak Petroleum Inc. and Aviva America (filed as exhibit 10.59 to the Company's annual report on Form 10-K for the year ended December 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.60 Santana Crude Sale and Purchase Agreement dated February 10, 1997 (filed as exhibit 10.60 to the Company's annual report on Form 10-K for the year ended December 31, 1996, File No. 0- 22258, and incorporated herein by reference). *10.61 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). *10.62 Amendment to the ING Capital Credit Agreement dated August 12, 1997 (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-22258, and incorporated herein by reference). *10.63 Amended and Restated Aviva Petroleum Inc. Severance Benefit Plan dated September 30, 1997 (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-22258, and incorporated herein by reference). **10.64 Amendment to the ING Capital Credit Agreement dated December 29, 1997. **10.65 Amendment to the Santana Crude Sale and Purchase Agreement dated January 5, 1998. **10.66 Amendment to the ING Capital Credit Agreement dated February 13, 1998. 32 *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 filed the following Current Reports on Form 8-K during and subsequent to the end of the fourth quarter: Date of 8-K Description of 8-K ----------- ------------------ December 31, 1997 Submitted a copy of the Company's Press Release dated December 31, 1997, reporting on the Company's Restructuring Plan. February 16, 1998 Submitted a copy of the Company's Press Release dated February 16, 1998, reporting on the Company's Restructuring Plan. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AVIVA PETROLEUM INC. By: /s/ Ronald Suttill ----------------------------------- Ronald Suttill Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE /s/ Ronald Suttill President, Chief Executive Officer March 23, 1998 - -------------------------- and Director (principal executive Ronald Suttill officer) /s/ James L. Busby Treasurer and Secretary March 23, 1998 - -------------------------- (principal financial and accounting James L. Busby officer) /s/ Eugene C. Fiedorek Director March 23, 1998 - -------------------------- Eugene C. Fiedorek /s/ John J. Lee Director March 23, 1998 - -------------------------- John J. Lee /s/ Elliott Roosevelt, Jr. Director March 23, 1998 - -------------------------- Elliott Roosevelt, Jr. /s/ James E. Tracey Director March 23, 1998 - -------------------------- James E. Tracey 34 INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Page ---- Independent Auditors' Report.................................. 36 Consolidated Balance Sheet as of December 31, 1997 and 1996... 37 Consolidated Statement of Operations for the years ended December 31, 1997, 1996 and 1995................... 38 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995................... 39 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995................... 40 Notes to Consolidated Financial Statements.................... 41 Supplementary Information Related to Oil and Gas Producing Activities (Unaudited)................................... 52 All schedules called for under Regulation S-X have been omitted because they are not applicable, the required information is not material or the required information is included in the consolidated financial statements or notes thereto. 35 INDEPENDENT AUDITORS' REPORT ---------------------------- The Board of Directors Aviva Petroleum Inc.: We have audited the accompanying consolidated 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Dallas, Texas February 27, 1998 36 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET DECEMBER 31, 1997 AND 1996 (in thousands, except number of shares) 1997 1996 -------- --------- ASSETS Current assets: Cash and cash equivalents $ 690 $ 2,041 Accounts and notes receivable (note 8): Oil and gas revenue 1,108 1,699 Trade 518 1,674 Other 177 377 Inventories 602 721 Prepaid expenses and other 203 282 -------- -------- Total current assets 3,298 6,794 -------- -------- Property and equipment, at cost (note 3): Oil and gas properties and equipment (full cost method) 61,036 58,324 Other 606 613 -------- -------- 61,642 58,937 Less accumulated depreciation, depletion and amortization (49,873) (23,991) -------- -------- 11,769 34,946 Other assets (note 2) 1,378 1,204 -------- -------- $ 16,445 $ 42,944 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long term debt (note 3) $ 480 $ 2,780 Accounts payable 3,091 6,271 Accrued liabilities 356 357 -------- -------- Total current liabilities 3,927 9,408 -------- -------- Long term debt, excluding current portion (note 3) 7,210 5,210 Gas balancing obligations and other (note 10) 1,560 1,404 Deferred foreign income taxes (note 7) - 692 Stockholders' equity (notes 3 and 5): Common stock, no par value, authorized 348,500,000 shares; issued 31,482,716 shares 1,574 1,574 Additional paid-in capital 33,376 33,376 Accumulated deficit* (31,202) (8,720) -------- -------- Total stockholders' equity 3,748 26,230 Commitments and contingencies (note 9) -------- -------- $ 16,445 $ 42,944 ======== ======== *Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a quasi-reorganization. See note 5. See accompanying notes to consolidated financial statements. 37 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands, except per share data) 1997 1996 1995 -------- ------- ------- Oil and gas sales (note 8) $ 9,726 $13,750 $10,928 -------- ------- ------- Expense: Production 4,235 4,834 5,072 Depreciation, depletion and amortization 6,067 7,339 5,755 Write-down of oil and gas properties (note 1) 19,953 - - General and administrative 1,510 1,554 2,316 Severance (note 6) - 196 - -------- ------- ------- Total expense 31,765 13,923 13,143 -------- ------- ------- Other income (expense): Interest and other income (expense), net (note 4) 122 1,061 495 Interest expense (658) (814) (558) Debt refinancing expense (note 3) - (100) - -------- ------- ------- Total other income (expense) (536) 147 (63) -------- ------- ------- Loss before income taxes (22,575) (26) (2,278) Income (taxes) benefits (note 7) 93 (911) (411) -------- ------- ------- Net loss $(22,482) $ (937) $(2,689) ======== ======= ======= Weighted average common shares outstanding 31,483 31,483 31,483 ======== ======= ======= Basic and diluted net loss per common share $ (0.71) $ (0.03) $ (0.09) ======== ======= ======= See accompanying notes to consolidated financial statements. 38 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands) 1997 1996 1995 -------- ------- -------- Net loss $(22,482) $ (937) $ (2,689) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 6,067 7,339 5,755 Write-down of oil and gas properties 19,953 - - Deferred foreign income taxes (692) 195 (5) Loss (gain) on sale of assets, net 15 (651) 2 Foreign currency exchange loss (gain), net 75 16 (164) Other (217) (253) (168) Changes in assets and liabilities: Accounts and notes receivable 1,934 (916) 767 Inventories 118 88 212 Prepaid expenses and other 79 406 (6) Accounts payable and accrued liabilities (3,119) 3,656 (843) ------- ------- -------- Net cash provided by operating activities 1,731 8,943 2,861 ------- ------- -------- Cash flows from investing activities: Property and equipment expenditures (2,757) (8,667) (7,457) Proceeds from sale of assets 19 2,729 73 Other - (46) - ------- ------- -------- Net cash used in investing activities (2,738) (5,984) (7,384) ------- ------- -------- Cash flows from financing activities: Proceeds from long term debt - - 7,100 Principal payments on long term debt (300) (5,077) (673) ------- ------- -------- Net cash provided by (used in) financing activities (300) (5,077) 6,427 ------- ------- -------- Effect of exchange rate changes on cash and cash equivalents (44) (41) 314 ------- ------- -------- Net increase (decrease) in cash and cash equivalents (1,351) (2,159) 2,218 Cash and cash equivalents at beginning of year 2,041 4,200 1,982 ------- ------- -------- Cash and cash equivalents at end of year $ 690 $ 2,041 $ 4,200 ======= ======= ======== See accompanying notes to consolidated financial statements. 39 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (in thousands, except number of shares) Common Stock ------------------- Additional Total Number of Paid-in Accumulated Stockholders' Shares Amount Capital Deficit Equity ---------- ------- ----------- ------------- -------- Balances at December 31, 1994 31,482,716 $1,574 $33,376 $ (5,094) $ 29,856 Net loss - - - (2,689) (2,689) ---------- ------- ----------- -------- -------- Balances at December 31, 1995 31,482,716 1,574 33,376 (7,783) 27,167 Net loss - - - (937) (937) ---------- ------- ----------- -------- -------- Balances at December 31, 1996 31,482,716 1,574 33,376 (8,720) 26,230 Net loss - - - (22,482) (22,482) ---------- ------- ----------- -------- -------- Balances at December 31, 1997 31,482,716 $1,574 $33,376 $(31,202) $ 3,748 ========== ======= =========== ======== ======== See accompanying notes to consolidated financial statements. 40 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES General Aviva Petroleum Inc. and its subsidiaries (the "Company") are engaged in the business of exploring for, developing and producing oil and gas in Colombia and in the United States. The Company's Colombian oil production is sold to Empresa Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"), while the Company's U.S. oil and gas production is sold to numerous U.S. purchasers (See notes 8 and 11). Oil and gas are the Company's only products and there is substantial uncertainty as to the prices that the Company may receive for its production. A decrease in these prices would affect operating results adversely. Principles of Consolidation The consolidated financial statements include the accounts of Aviva Petroleum Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Inventories Inventories consist primarily of tubular goods, oilfield equipment and spares and are stated at the lower of average cost or market. Property and Equipment Under the full cost method of accounting for oil and gas properties, all productive and nonproductive property acquisition, exploration and development costs are capitalized in separate cost centers for each country. Such capitalized costs include lease acquisition costs, delay rentals, geophysical, geological and other costs, drilling, completion and other related costs and direct general and administrative expenses associated with property acquisition, exploration and development activities. Capitalized general and administrative costs include internal costs such as salaries and related benefits paid to employees to the extent that they are directly engaged in such activities, as well as all other directly identifiable general and administrative costs associated with such activities, including rent, utilities and insurance and do not include any costs related to production, general corporate overhead, or similar activities. Capitalized internal general and administrative costs were $127,000 in 1997, $129,000 in 1996 and $156,000 in 1995. 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 $1,199,000 of which $814,000 has been provided through December 31, 1997. Depreciation, depletion and amortization expense per equivalent barrel of production was as follows: 1997 1996 1995 ------ ------ ----- United States $ 7.32 $ 5.93 $4.12 Colombia $11.59 $11.49 $9.79 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. During 1997 the Company wrote down the carrying amount of its U.S. and Colombian oil and gas properties by $2,124,000 and $17,829,000, respectively, as a result of ceiling limitations on capitalized costs. 41 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Depletion expense and limits to capitalized costs are based on estimates of oil and gas reserves which are inherently imprecise and assume current prices for future net revenues. Accordingly, it is reasonably possible that the estimates of reserves quantities and future net revenues could differ materially in the near term from amounts currently estimated. Moreover, a future decrease in the prices the Company receives for its oil and gas production or downward reserve adjustments could, for either the U.S. or Colombian cost centers, result in a ceiling test write-down that is significant to the Company's operating results. Gains and losses on sales of oil and gas properties are not recognized in income unless the sale involves a significant portion of the reserves associated with a particular cost center. Capitalized costs associated with unevaluated properties are excluded from amortization until it is determined whether proved reserves can be assigned to such properties or until the value of the properties is impaired. Unevaluated costs of $251,000 and $1,066,000 were excluded from amortization at December 31, 1997 and 1996, respectively. Unevaluated properties are assessed quarterly to determine whether any impairment has occurred. The unevaluated costs at December 31, 1997 represent exploration costs and were incurred primarily during the two-year period ended December 31, 1997. Such costs are expected to be evaluated and included in the amortization computation within the next two years. In December 1996, the Company sold its remaining U.S. onshore oil and gas properties for $2,702,000 in cash, net of closing adjustments. The sale involved a significant portion of the reserves associated with the U.S. cost center and, accordingly, the resultant gain on the sale was recognized in the accompanying Consolidated Statement of Operations for 1996 (See note 4). 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 1997, 1996 and 1995, the Company capitalized $91,000, $189,000 and $295,000 of interest, respectively. Loss Per Common Share The Company adopted Statement of Financial Accounting Standards No. 128 ("SFAS 128") during the fourth quarter of 1997. Under SFAS 128, 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 (note 5) are antidilutive. Income Taxes The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 ("Statement 109") which requires recognition of deferred tax assets in certain circumstances and deferred tax liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. 42 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 $641,000 in 1997, $834,000 in 1996 and $591,000 in 1995 and paid income taxes of $212,000 in 1997, $111,000 in 1996 and $178,000 in 1995. 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. (2) OTHER ASSETS A summary of other assets follows: December 31 --------------- (thousands) 1997 1996 ------ ------ Abandonment funds for U.S. offshore properties $1,272 $ 853 Deferred financing charges 102 225 Other 4 126 ------ ------ $1,378 $1,204 ====== ====== (3) LONG TERM DEBT On August 6, 1993, the Company entered into a credit agreement with ING (U.S.) Capital Corporation ("ING Capital"), secured by a mortgage on substantially all U.S. oil and gas assets, a pledge of Colombian assets and the stock of three subsidiaries, pursuant to which ING Capital agreed to loan to the Company up to $25 million, subject to an annually redetermined borrowing base which is predicated on the Company's U.S. and Colombian reserves. As of December 31, 1997, the borrowing base permitted, and the outstanding loan balance was, $7,690,000. The outstanding loan balance has been subject to interest at the prime rate, as defined, (8.50% at December 31, 1997) plus 1% or, at the option of the Company, a fixed rate, based on the London Interbank Offered Rate ("LIBOR") plus 2.75%, for a portion or portions of the outstanding debt from time to time. Commitment fees of .5% on the unused credit were payable quarterly until December 31, 1995, at which time the credit facility converted from a revolving credit facility to a term loan. The terms of the loan, among other things, prohibit the Company from merging with another company or paying dividends, limit additional indebtedness, general and administrative expense, sales of assets and investments and require the maintenance of certain minimum financial ratios. 43 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In February 1998, the Company entered into an agreement with ING Capital pursuant to which the outstanding loan balance was paid down to $7,440,000 from $7,690,000, the interest rate was increased to the prime rate, as defined, plus 1.5%, or at the option of the Company, a fixed rate based on LIBOR plus 3%, and the repayment schedule was amended to require monthly payments of 80% of defined monthly cash flows until October 1, 1999, at which time the remaining balance is due and payable. Additionally, ING Capital reduced to $2 million the minimum amount of consolidated tangible net worth that the Company is required to maintain. The aggregate maturities of long term debt at December 31, 1997 are: 1998 - $480,000 and 1999 - $7,210,000. In consideration of certain modifications to the above referenced credit agreement in March 1996 the Company paid a fee of $100,000 to ING Capital. (4) INTEREST AND OTHER INCOME (EXPENSE) A summary of interest and other income (expense) follows: (thousands) 1997 1996 1995 ------ ------ ------ Interest income $ 138 $ 231 $ 157 Foreign currency exchange gain (loss) (75) (16) 164 Gain (loss) on sale of assets, net (15) 651 (2) Other, net 74 195 176 ------ ------ ------ $ 122 $1,061 $ 495 ====== ====== ====== (5) STOCKHOLDERS' EQUITY Quasi-Reorganization Effective December 31, 1992, the Board of Directors of the Company approved a quasi-reorganization which resulted in a reclassification of the accumulated deficit of $70,057,000 at that date to paid-in capital. No adjustments were made to the Company's assets and liabilities since the historical carrying values approximated or did not exceed the estimated fair values. Stock Option Plans At December 31, 1997, 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): 1997 1996 1995 --------- -------- -------- Net loss As reported $(22,482) $ (937) $(2,689) Pro forma $(22,506) $ (947) $(2,805) Loss per share As reported $ (0.71) $ (0.03) $ (0.09) Pro forma $ (0.71) $ (0.03) $ (0.09) 44 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) At the Annual Meeting of Shareholders held on June 6, 1995, the Company's shareholders approved the adoption of the Aviva Petroleum Inc. 1995 Stock Option Plan (the "Current Plan"). The Current Plan is administered by a committee (the "Committee") composed of two or more outside directors of the Company, who are disinterested within the meaning of Rule 16b-3(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Except as indicated below and except for non-discretionary grants to non- employee directors, the Committee has authority to determine all terms and provisions under which options are granted pursuant to the Current Plan, including (i) the determination of which employees shall be eligible to receive options, (ii) the number of shares for which an option shall be granted and (iii) the terms and conditions upon which options may be granted. Options will vest at such times and under such conditions as determined by the Committee, as permitted under the Current Plan. An aggregate of up to 1,000,000 shares of the Company's common stock may be issued upon exercise of stock options or in connection with restricted stock awards that may be granted under the Current Plan. The aggregate fair market value (determined at the time of grant) of shares issuable pursuant to incentive stock options which first become exercisable in any calendar year by a participant in the Current Plan may not exceed $100,000. The maximum number of shares of common stock which may be subject to an option or restricted stock grant awarded to a participant in a calendar year cannot exceed 100,000. Incentive stock options granted under the Current Plan may not be granted at a price less than 100% of the fair market value of the common stock on the date of grant (or 110% of the fair market value in the case of incentive stock options granted to participants in the Current Plan holding 10% or more of the voting stock of the Company). Non-qualified stock options may not be granted at a price less than 50% of the fair market value of the common stock on the date of grant. At the Annual Meeting of Shareholders held on June 10, 1997, the Company's shareholders approved the amendment of the Current Plan. The amendment increased the 200,000 shares reserved for options to be awarded to non- employee directors to 400,000 shares. In addition, the amendment provides for the grant, on July 1, 1997, and on each subsequent July 1, 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. Except for the vesting provisions relating to the Annual Options Awards, the provisions of the Plan relating to vesting of such options, the determination of the exercise prices thereof and other terms of such options remain unchanged. 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 335,000 shares of the Company's common stock remain in effect as of December 31, 1997. 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: 1997 1996 1995 ------ ------ ------ Expected life (years) 10.0 5.0 7.3 Risk-free interest rate 6.6% 7.0% 7.0% Volatility 71.0% 77.0% 77.0% Dividend yield 0.0% 0.0% 0.0% 45 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) A summary of the status of the Company's two fixed stock option plans as of December 31, 1997, 1996, and 1995, and changes during the years ended on those dates is presented below:
1997 1996 1995 ------------------ ------------------ ------------------ 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 530 $ 1.80 716 $ 1.60 543 $ 1.82 Granted 45 .52 20 .74 173 .95 Exercised - - - - - - Forfeited (25) 4.95 (206) 1.25 - - ------- ------- ------- Outstanding at end of year 550 1.53 530 1.80 716 1.60 ======= ======= ======= Options exercisable at year-end 445 401 403 Weighted-average fair value of options granted during the year $ .42 $ .50 $ .72
The following table summarizes information about fixed stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable -------------------------------------------- ------------------------------ Range Number Weighted-Avg. Number of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg. Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price - ---------------- ----------- ---------------- -------------- ----------- -------------- $ .51 to .98 233,000 5.4 years $ 0.85 128,667 $ 0.93 1.08 to 2.77 295,000 4.5 1.45 295,000 1.45 9.08 to 9.90 21,500 0.2 9.85 21,500 9.85 - ---------------- ----------- ----------- $ .51 to 9.90 549,500 4.7 1.53 445,167 1.71 ================ =========== ===========
(6) SEVERANCE EXPENSE The Board of Directors had charged a committee of the Board with the task of reviewing the Company's general and administrative expenses and making recommendations as to the reduction of such expenses. On March 18, 1996, the Board, acting on one of such committee's recommendations, determined to terminate the employment of the Executive Vice President and Chief Operating Officer of the Company (the "Officer") effective on June 1, 1996. In connection with the severance arrangements between the Company and the Officer, the Company incurred costs of $172,000. On July 25, 1996, the above mentioned committee was dissolved and its function was assumed by the entire Board of Directors. In the third quarter of 1996, the Company incurred an additional $24,000 of severance expense relating to the termination of certain employees affected by the program. (7) INCOME TAXES Income tax expense includes current Colombian income taxes of $587,000 in 1997, $709,000 in 1996 and $398,000 in 1995 and deferred Colombian income taxes (benefit) of $(692,000) in 1997, $195,000 in 1996 and $(5,000) in 1995. Income tax expense also includes $12,000, $7,000 and $18,000 of state income taxes in 1997, 1996 and 1995, respectively. 46 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's effective tax rate differs from the U.S. statutory rate each year principally due to losses without tax benefit. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 follow:
(thousands) 1997 1996 ----------- ----------- Deferred tax assets - principally net operating loss carryforwards $ 42,053 $ 41,604 Less valuation allowance 42,053 36,126 ----------- ----------- Net deferred tax assets - 5,478 Deferred tax liabilities - property and equipment - 6,170 ----------- ----------- Net deferred tax liability $ - $ 692 =========== ===========
The valuation allowance for deferred tax assets at January 1, 1995 was $35,543,000. The net change in the valuation allowance was a $5,927,000 increase in 1997, a $2,998,000 decrease in 1996 and a $3,581,000 increase in 1995. 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, 1997, the Company and its subsidiaries have aggregate net operating loss carryforwards for U.S. federal income tax purposes of approximately $116,000,000, expiring from 1998 through 2012, which are available to offset future federal taxable income. The utilization of a portion of these net operating losses is subject to an annual limitation of approximately $2,400,000 and a portion may only be utilized by certain subsidiaries of the Company. (8) FINANCIAL INSTRUMENTS AND CREDIT RISK CONCENTRATIONS Financial instruments which are subject to risks due to concentrations of credit consist principally of cash and cash equivalents and receivables. Cash and cash equivalents are placed with high credit quality financial institutions to minimize risk. Receivables are typically unsecured. Historically, the Company has not experienced any material collection difficulties from its customers. Ecopetrol has an option to purchase all of the Company's production in Colombia. For the years ended December 31, 1997, 1996 and 1995, Ecopetrol exercised that option and sales to Ecopetrol accounted for $7,405,000 (76.1%), $9,437,000 (68.6%) and $7,132,000 (65.3%), respectively, of the Company's aggregate oil and gas sales. For the years ended December 31, 1997, 1996 and 1995, sales to one U.S. purchaser accounted for $1,516,000 (15.6%), $1,609,000 (11.7%) and $1,422,000 (13.0%), respectively, of oil and gas sales. (9) COMMITMENTS AND CONTINGENCIES In the U.S., the Company is currently engaged in the conversion of a shutin well into a saltwater disposal well at its Breton Sound 31 field facilities. The cost to convert and equip such a well is estimated at $0.3 million, net to the Company's interest. Additionally, the Company is upgrading certain equipment at its Main Pass 41 field facilities, the cost of which is expected to aggregate $0.1 million, net to the Company's interest. 47 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company, along with its co-owner (referred to collectively as the "Co- owners"), is also engaged in an ongoing development program on the Santana concession in Colombia. The contract obligations of the Santana concession have been met. The Co-owners currently anticipate, however, the recompletion of four existing wells, the construction of a micro-refinery for production of diesel fuel for the Company's operations and various miscellaneous projects. The Company's share of the estimated future costs of these development activities is approximately $0.8 million at December 31, 1997. Failure to fund certain of these capital expenditures could, under either the concession agreement or joint operating agreement with the Company's co-owner, or both, result in the forfeiture of all or part of the Company's interest in this concession. The Company's aggregate remaining estimated development expenditures for 1998 and 1999 were $1.2 million at December 31, 1997. Any substantial increases in the amounts of the above referenced expenditures could adversely affect the Company's ability to meet these obligations. The Company plans to fund these development activities using cash provided from operations. Risks that could adversely affect funding of such activities include, among others, a decrease in the Company's borrowing base, delays in obtaining the required environmental approvals and permits, cost overruns, failure to produce the reserves as projected or a further 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. The Company's internal projections of its consolidated cash flow indicate that the Company's consolidated cash flow and working capital will be adequate to fund both the estimated development expenditures for 1998 and 1999 and the monthly debt service relating to the ING Capital credit agreement as amended in February 1998. The Company does not, however project that, at current levels, its cash flows will be sufficient to repay the remaining balance under the ING Capital credit agreement that will be due and payable on October 1, 1999. Accordingly, the Company may be required to further extend the maturity of the debt or raise additional capital through equity issues or by sales of assets to retire the debt. The ultimate outcome of these matters cannot be projected with certainty. The aforementioned internal cash flow projections assume crude oil prices of $11.56 per barrel for Colombian production and $13.89 per barrel for U.S. production and natural gas sales prices of $2.25 per MCF for U.S. production. These prices are indicative of the prices the Company expects to receive for its production in March 1998. These prices are substantially lower than the prices prevailing at December 31, 1997, which were used in the Company's yearend ceiling limitation test for capitalized costs. If prices remain at current levels and do not recover substantially prior to the issuance of the Company's financial statements for the first quarter of 1998, the Company expects that it will incur additional ceiling test write- downs for both its U.S. and Colombian cost centers that, in the aggregate, will have a significant adverse effect on the Company's results of operations and could result in the elimination of the Company's net equity. Moreover, such write-downs could result in the Company's failure to maintain the minimum consolidated tangible net worth of $2 million required by the latest amendment to the Company's credit agreement with ING Capital. In the past, ING Capital has amended or waived compliance with the Company's minimum consolidated tangible net worth covenant when the Company has been unable to meet such requirements. There can be no assurance, however, that ING Capital will continue to make similar concessions in the future. Under the terms of the contracts with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, the Company has experienced no difficulty in repatriating the remaining 75% of such payments, which are payable in U.S. dollars. Activities of the Company with respect to the exploration, development and production of oil and natural gas are subject to stringent 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. 48 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Although the Company believes that compliance with environmental laws and regulations will not have a material adverse effect on the Company's 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 1999. Rent expense relating to the lease was $83,000, $84,000 and $90,000 for 1997, 1996 and 1995, respectively. Future minimum payments under the lease are $83,000, primarily due in 1998. (10) GAS BALANCING As of December 31, 1997 and 1996, 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, 1997 and 1996, the Company had sold net gas with a volume equivalent of approximately 458,000 MCF and 353,000 MCF (with an estimated value of $748,000 and $724,000 included in gas balancing obligations and other), respectively, for which the other joint owners are entitled generally to be repaid in volumes ("overproduced"). In certain instances the parties have the option of requesting payment in cash. In connection with the sale of the Company's U.S. onshore properties in December 1996, approximately 384,000 MCF for which the Company was underproduced and approximately 337,000 MCF for which the Company was overproduced were assumed by the buyer of such properties. In 1997, the Company reacquired from the aforementioned buyer approximately 196,000 MCF for which the Company was overproduced for $98,000 in cash. 49 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) GEOGRAPHIC AREA INFORMATION The Company is engaged in the business of exploring for, developing and producing oil and gas in the United States and Colombia. Information about the Company's operations in different geographic areas as of and for the years ended December 31, 1997, 1996 and 1995 follows:
(Thousands) United States Colombia Total -------- ---------- -------- 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) ======== ========== ======== Identifiable assets $ 3,789 $ 11,966 $ 15,755 ======== ========== Corporate assets-cash and cash equivalents 690 -------- Total assets $ 16,445 ========
50 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Thousands) United States Colombia Total -------- ---------- -------- 1996 ---- Oil and gas sales $ 4,313 $ 9,437 $ 13,750 -------- ---------- -------- Expense: Production 1,926 2,908 4,834 Depreciation, depletion and amortization 1,750 5,589 7,339 General and administrative 1,539 15 1,554 Severance 196 - 196 -------- ---------- -------- 5,411 8,512 13,923 -------- ---------- -------- Interest and other income (expense), net 894 167 1,061 Interest expense (355) (459) (814) Debt refinancing expense - (100) (100) -------- ---------- -------- Income (loss) before income taxes (559) 533 (26) Income taxes (7) (904) (911) -------- ---------- -------- Net loss $ (566) $ (371) $ (937) ======== ========== ======== Identifiable assets $ 6,838 $ 34,065 $ 40,903 ======== ========== Corporate assets-cash and cash equivalents 2,041 -------- Total assets $ 42,944 ======== 1995 ---- Oil and gas sales $ 3,796 $ 7,132 $ 10,928 -------- ---------- -------- Expense: Production 1,960 3,112 5,072 Depreciation, depletion and amortization 1,349 4,406 5,755 General and administrative 2,306 10 2,316 -------- ---------- -------- 5,615 7,528 13,143 -------- ---------- -------- Interest and other income (expense), net 100 395 495 Interest expense (371) (187) (558) -------- ---------- -------- Loss before income taxes (2,090) (188) (2,278) Income taxes (18) (393) (411) -------- ---------- -------- Net loss $ (2,108) $ (581) $ (2,689) ======== ========== ======== Identifiable assets $ 7,398 $ 33,862 $ 41,260 ======== ========== Corporate assets-cash and cash equivalents 4,200 -------- Total assets $ 45,460 ========
51 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, 1997 - ----------------- Unevaluated oil and gas properties $ 142 $ 109 $ 251 Proved oil and gas properties 12,075 48,710 60,785 -------- -------- ------- Total capitalized costs 12,217 48,819 61,036 Less accumulated depreciation depletion and amortization 10,622 38,725 49,347 -------- -------- ------- Capitalized costs, net $ 1,595 $ 10,094 $11,689 ======== ======== ======= December 31, 1996 - ----------------- Unevaluated oil and gas properties $ 182 $ 884 $ 1,066 Proved oil and gas properties 11,835 45,423 57,258 -------- -------- ------- Total capitalized costs 12,017 46,307 58,324 Less accumulated depreciation, depletion and amortization 7,508 15,971 23,479 -------- -------- ------- Capitalized costs, net $ 4,509 $ 30,336 $34,845 ======== ======== ======= 52 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 ------- --------- ------ 1997 - ---- Exploration $ 25 $ 470 $ 495 Development 176 2,085 2,261 ------- --------- ------ Total costs incurred $ 201 $ 2,555 $2,756 ======= ========= ====== 1996 - ---- Exploration $ - $ 1,382 $1,382 Development 3,239 4,030 7,269 ------- --------- ------ Total costs incurred $ 3,239 $ 5,412 $8,651 ======= ========= ====== 1995 - ---- Exploration $ - $ 1,477 $1,477 Development 172 5,784 5,956 ------- --------- ------ Total costs incurred $ 172 $ 7,261 $7,433 ======= ========= ====== 53 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED) The following schedule presents the Company's estimate of its proved oil and gas reserves. The proved oil reserves in Colombia and the United States were determined by independent petroleum engineers, Huddleston & Co., Inc. and Netherland, Sewell & Associates, Inc., respectively. The figures presented are estimates of reserves which may be expected to be recovered commercially at current prices and costs. Estimates of proved developed reserves include only those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Estimates of proved undeveloped reserves include only those reserves which are expected to be recovered on undrilled acreage from new wells which are reasonably certain of production when drilled or from presently existing wells which could require relatively major expenditures to effect recompletion.
Changes in the Estimated Quantities of Reserves ------------------------------------------------ United States Colombia Total ----------- ------------ ---------- Year ended December 31, 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 =========== ============ ==========
54 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, 1996 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 564 3,255 3,819 Revisions of previous estimates (74) 38 (36) Discoveries and extensions 6 - 6 Sales of reserves (97) - (97) Production (94) (476) (570) ----------- ------------ ---------- End of period 305 2,817 3,122 =========== ============ ========== Proved developed reserves, end of period 305 2,008 2,313 =========== ============ ========== Gas (Millions of cubic feet) Proved reserves: Beginning of period 7,037 - 7,037 Revisions of previous estimates (770) - (770) Discoveries and extensions 23 - 23 Sales of reserves (3,462) - (3,462) Production (1,146) - (1,146) ----------- ------------ ---------- End of period 1,682 - 1,682 =========== ============ ========== Proved developed reserves, end of period 1,682 - 1,682 =========== ============ ==========
55 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
Changes in the Estimated Quantities of Reserves ------------------------------------------------ United States Colombia Total ----------- ------------ ---------- Year ended December 31, 1995 - ---------------------------- Oil (Thousands of barrels) Proved reserves: Beginning of period 678 4,003 4,681 Revisions of previous estimates (3) (743) (746) Discoveries and extensions - 430 430 Sales of reserves (5) - (5) Production (106) (435) (541) ----------- ------------ ---------- End of period 564 3,255 3,819 =========== ============ ========== Proved developed reserves, end of period 460 1,601 2,061 =========== ============ ========== Gas (Millions of cubic feet) Proved reserves: Beginning of period 8,552 - 8,552 Revisions of previous estimates (257) - (257) Sales of reserves (74) - (74) Production (1,184) - (1,184) ----------- ------------ ---------- End of period 7,037 - 7,037 =========== ============ ========== Proved developed reserves, end of period 6,779 - 6,779 =========== ============ ==========
56 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, 1997: - -------------------- Future gross revenues $ 6,009 $21,124 $ 27,133 Future production costs (3,548) (7,709) (11,257) Future development costs (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 ======= ======= ========
57 AVIVA PETROLEUM INC. AND SUBSIDIARIES SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
(Thousands) United States Colombia Total ----------- --------- --------- At December 31, 1996: - -------------------- Future gross revenues $ 14,070 $ 63,666 $ 77,736 Future production costs (6,128) (11,362) (17,490) Future development costs (970) (3,067) (4,037) -------- -------- -------- Future net cash flows before income taxes 6,972 49,237 56,209 Future income taxes (51) (1,052) (1,103) -------- -------- -------- Future net cash flows after income taxes 6,921 48,185 55,106 Discount at 10% per annum (993) (9,513) (10,506) -------- -------- -------- Standardized measure of discounted future net cash flows $ 5,928 $ 38,672 $ 44,600 ======== ======== ======== At December 31, 1995: - -------------------- Future gross revenues $ 24,720 $ 57,258 $ 81,978 Future production costs (11,371) (14,881) (26,252) Future development costs (2,153) (4,529) (6,682) -------- -------- -------- Future net cash flows before income taxes 11,196 37,848 49,044 Future income taxes (121) (376) (497) -------- -------- -------- Future net cash flows after income taxes 11,075 37,472 48,547 Discount at 10% per annum (2,930) (10,182) (13,112) -------- -------- -------- Standardized measure of discounted future net cash flows $ 8,145 $ 27,290 $ 35,435 ======== ======== ========
58 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) 1997 1996 1995 -------- -------- -------- Sales of oil and gas, net of production costs $ (5,491) $(8,916) $(5,856) Sales of reserves in place - (3,924) (44) Development costs incurred that reduced future development costs 801 3,043 3,713 Accretion of discount 4,547 3,577 4,009 Discoveries and extensions - 87 4,521 Revisions of previous estimates: Changes in price (24,154) 13,468 2,263 Changes in quantities (7,054) 153 (7,582) Changes in future development costs 1,175 (86) (723) Changes in timing and other changes (3,878) 2,303 (4,623) Changes in estimated income taxes 874 (540) 2,248 -------- ------- ------- Net increase (decrease) (33,180) 9,165 (2,074) Balances at beginning of year 44,600 35,435 37,509 -------- ------- ------- Balances at end of year $ 11,420 $44,600 $35,435 ======== ======= =======
59 INDEX TO EXHIBITS
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *3.1 Restated Articles of Incorporation of the Company dated July 25, 1995 (filed as exhibit 3.1 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *3.2 Amended and Restated Bylaws of the Company, as amended as of January 23, 1995 (filed as exhibit 3.2 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.1 Risk Sharing Contract between Empresa Colombiana de Petroleos ("Ecopetrol"), Argosy Energy International ("Argosy") and Neo Energy, Inc. ("Neo") (filed as exhibit 10.1 to the Company's Registration Statement on 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 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 Form10, File No. 0-22258, and incorporated herein by reference). *10.5 Agreement of Withdrawal from Argosy dated September 16, 1987 by and among Argosy, Neo, and Argosy Energy Incorporated, as general partners; and Parkside Investments, Richard Shane McKnight, Douglas W. Fry, P-5 Ltd., GO-DEO, Inc., Dale E. Armstrong, Richard Shane McKnight, The Yvonne McKnight Trust, and William Gaskin, as limited partners (filed as exhibit 10.5 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.6 Option Agreement dated September 16, 1987 between the general and limited partners of Argosy and Neo (filed as exhibit 10.6 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.7 Escrow Agreement between Argosy, Neo, Overseas Private Investment Corporation and The Chase Manhattan Bank dated March 15, 1988 and amended on May 31, 1990 (filed as exhibit 10.7 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.8 Santana Block A Relinquishment dated March 6, 1990 between Ecopetrol, Argosy and Neo (filed as exhibit 10.8 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.9 Purchase Sale - Transportation and Commercialization of the Santana Crude between Ecopetrol, Argosy and Neo (filed as exhibit 10.9 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.10 La Fragua Association Contract dated June 1, 1992 between Ecopetrol, Argosy and Neo (filed as exhibit 10.10 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.11 Operating Agreement for the La Fragua Area between Argosy and Neo dated April 15, 1992 (filed as exhibit 10.11 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.12 Employment Agreement between the Company and Ronald Suttill dated November 29, 1991 (filed as exhibit 10.12 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.13 Employee Stock Option Plan of the Company (filed as exhibit 10.13 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference).
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.14 Letter agreement dated January 6, 1993 between NationsBank Investment Banking and the Company (filed as exhibit 10.14 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.15 Letter agreement dated March 3, 1993 between EnCap Investments L.C. and the Company (filed as exhibit 10.15 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.16 Credit Agreement dated August 6, 1993 between the Company, Aviva America, Inc. ("Aviva America"), Neo and Internationale Nederlanden Bank N.V., New York Branch ("ING Capital") (filed as exhibit 10.16 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.17 Subordination Agreement dated August 6, 1993 between the Company, Aviva America, Aviva Operating Company ("Aviva Operating"), Neo and ING Capital (filed as exhibit 10.17 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.18 Stock Pledge Agreement dated August 6, 1993 between the Company and ING Capital (filed as exhibit 10.18 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.19 Stock Pledge Agreement dated August 6, 1993 between Aviva America and ING Capital (filed as exhibit 10.19 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.20 Guaranty dated August 6, 1993 made by the Company in favor of ING Capital (filed as exhibit 10.20 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.21 Guaranty dated August 6, 1993 made by Aviva America in favor of ING Capital (filed as exhibit 10.21 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.22 Guaranty dated August 6, 1993 made by Aviva Operating in favor of ING Capital (filed as exhibit 10.22 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.23 Form of Subscription Agreement dated June 18, 1993 between the Company and purchasers of 12,884,207 shares of common stock ("Purchasers") (filed as exhibit 10.23 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.24 Option Agreement between RBS and Aviva Energy Inc. ("Aviva Energy") dated July 1, 1993 (filed as exhibit 10.24 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.25 Option Agreement between Aviva Energy and Purchasers dated July 1, 1993 (filed as exhibit 10.25 to the Company's Registration Statement on Form10, File No. 0-22258, and incorporated herein by reference). *10.26 Santana Block B 50% relinquishment dated September 13, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.26 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.27 Amendment to La Fragua Association contract dated December 2, 1993 between Ecopetrol, Argosy and Neo (filed as exhibit 10.27 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.28 Letter from Ecopetrol dated February 24, 1994 and Resolution dated February 18, 1994 revising pipeline tariff (filed as exhibit 10.28 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.29 Aviva Petroleum Inc. 401(k) Retirement Plan effective March 1, 1992 (filed as exhibit 10.29 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference).
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.30 Relinquishment of Putumayo dated December 1, 1993 (filed as exhibit 10.30 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.31 Amendment to ING Capital agreement dated March 28, 1994 (filed as exhibit 10.31 to the Company's annual report on Form 10-K for the year ended December 31, 1993, File No. 0-22258, and incorporated herein by reference). *10.32 Deposit Agreement dated September 15, 1994 between the Company and Chemical Shareholder Services Group, Inc. (filed as exhibit 10.29 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.33 Form of Registration Agreement dated as of September 15, 1994 between the Company and Shearson Lehman Brothers Inc. (filed as exhibit 10.30 to the Company's Registration Statement on Form S-1, File No. 33- 82072, and incorporated herein by reference). *10.34 Form of Registration Agreement and Limited Power of Attorney dated as of September 15, 1994 between the Company and all other Selling Shareholders (filed as exhibit 10.31 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.35 Form of Broker-Dealer Agreement dated as of October 19, 1994 between the Company and Petrie Parkman & Co. (filed as exhibit 10.32 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.36 Purchase and Sale Agreement dated July 22, 1994 by and between Newfield Exploration Company and Aviva America (filed as exhibit 10.33 to the Company's Registration Statement on Form S-1, File No. 33-82072, and incorporated herein by reference). *10.37 Letter from ING Capital dated October 27, 1994, amending Section 5.2(n) of the Credit Agreement (filed as exhibit 10.37 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.38 Letter from Ecopetrol dated December 28, 1994, accepting relinquishment of Putumayo (filed as exhibit 10.38 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.39 Letter from Ecopetrol dated February 28, 1995, accepting modifications to the La Fragua Association Contract (filed as exhibit 10.39 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.40 Amendment to ING Capital Credit Agreement dated March 7, 1995 (filed as exhibit 10.40 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.41 Santana Crude Oil Sale Contract dated March 19, 1995 (filed as exhibit 10.41 to the Company's annual report on Form 10-K for the year ended December 31, 1994, File No. 0-22258, and incorporated herein by reference). *10.42 Employment Agreement between the Company and Ronald Suttill effective January 1, 1995 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.43 Employment Agreement between the Company and Robert C. Boyd effective January 1, 1995 (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.44 Amendment to ING Capital Credit Agreement dated June 9, 1995 (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.45 Amendment to the Incentive and Nonstatutory Stock Option Plan of the Company (filed as exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.46 Aviva Petroleum Inc. 1995 Stock Option Plan (filed as exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference).
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.47 Yuruyaco Association Contract dated September 20, 1995 between Ecopetrol, Argosy and Neo (filed as exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.48 Letter from ING Capital dated November 3, 1995, amending Section 5.2(n) of the Credit Agreement (filed as exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1995, File No. 0-22258, and incorporated herein by reference). *10.49 Amendment to the Santana Crude Oil Sale Contract (filed as exhibit 10.49 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.50 Amendment to the La Fragua Association Contract dated April 27, 1995 (filed as exhibit 10.50 to the Company's annual report on Form 10- K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.51 Santana Block B 25% relinquishment dated October 2, 1995 (file as exhibit 10.51 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.52 Amendment to the La Fragua Association Contract dated August 1, 1995 (filed as exhibit 10.52 to the Company's annual report on Form 10- K for the year ended December 31, 1995, File No. 0-22258, and incorporated herein by reference). *10.53 Operating Agreement for the Yuruyaco Area between Argosy and Neo dated November 7, 1995 (filed as exhibit 10.53 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *10.54 Letter from ING Capital dated March 19, 1996, revising the borrowing base and schedule of principal repayments and Section 5.2 (m) of the Credit Agreement (filed as exhibit 10.54 to the Company's annual report on Form 10-K for the year ended December 31, 1995, File No. 0- 22258, and incorporated herein by reference). *10.55 Amendment to the ING Capital Credit Agreement dated March 29, 1996 (filed as exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.56 Aviva Petroleum Inc. Severance Benefit Plan (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended March 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.57 Amendment to the ING Capital Credit Agreement dated November 22, 1996 (filed as exhibit 10.57 to the Company's annual report on Form 10- K for the year ended December 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.58 Purchase and Sale Agreement dated November 22, 1996 between BWAB Incorporated and Aviva America (filed as exhibit 10.58 to the Company's annual report on Form 10-K for the year ended December 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.59 Purchase and Sale Agreement dated December 6, 1996 between Lomak Petroleum Inc. and Aviva America (filed as exhibit 10.59 to the Company's annual report on Form 10-K for the year ended December 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.60 Santana Crude Sale and Purchase Agreement dated February 10, 1997 (filed as exhibit 10.60 to the Company's annual report on Form 10-K for the year ended December 31, 1996, File No. 0-22258, and incorporated herein by reference). *10.61 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). *10.62 Amendment to the ING Capital Credit Agreement dated August 12, 1997 (filed as exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarter ended June 30, 1997, File No. 0-22258, and incorporated herein by reference).
Sequentially Numbered Number Description of Exhibit Page - ------ ---------------------- ------------ *10.63 Amended and Restated Aviva Petroleum Inc. Severance Benefit Plan dated September 30, 1997 (filed as exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarter ended September 30, 1997, File No. 0-22258, and incorporated herein by reference). **10.64 Amendment to the ING Capital Credit Agreement dated December 29, 1997. **10.65 Amendment to the Santana Crude Sale and Purchase Agreement dated January 5, 1998. **10.66 Amendment to the ING Capital Credit Agreement dated February 13, 1998. *21.1 List of subsidiaries of Aviva Petroleum Inc. **27.1 Financial Data Schedule.
- -------------------------------------- * Previously Filed ** Filed Herewith EX-10.64 2 8TH AMENDMENT TO THE ING CAPITAL CREDIT AGREEMENT EXHIBIT 10.64 EIGHTH AMENDMENT TO CREDIT AGREEMENT THIS EIGHTH AMENDMENT TO CREDIT AGREEMENT (herein called this "Amendment") is made as of the 29th day of December, 1997 by and between Neo Energy, Inc., a Texas corporation ("Borrower"), Aviva Petroleum Inc., a Texas corporation ("Aviva Petroleum"), Aviva America, Inc., a Delaware corporation ("Aviva America"), and ING (U.S.) Capital Corporation (formerly named Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation ("Lender"). RECITALS: 1. Borrower, Aviva Petroleum, Aviva America and Lender are parties to that certain Credit Agreement dated as of August 6, 1993, as amended by (a) that certain First Amendment to Credit Agreement and Promissory Note dated March 31, 1994; (b) a letter amendment concerning Permitted Investments dated December 31, 1994; (c) a letter amendment concerning Consolidated Tangible Net Worth dated March 7, 1995; (d) that certain Fourth Amendment to Credit Agreement and Promissory Note dated June 9, 1995; (e) that certain Fifth Amendment to Credit Agreement and Promissory Note dated March 29, 1996; (f) that certain Sixth Amendment to Credit Agreement and Promissory Note dated November 22, 1996; and (g) that certain Seventh Amendment dated August 12, 1997. (As so amended, such Credit Agreement is herein called the "Original Agreement", and such Seventh Amendment is herein called the "Seventh Amendment".) 2. Borrower and Aviva America have asked Lender to consent to a revised principal amortization schedule, and Lender has agreed to do so, provided that the Original Agreement is amended as set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. -- Definitions and References -------------------------- (S) 1.1 Terms Defined in the Original Agreement. Unless the context --------------------------------------- otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. (S) 1.2. Other Defined Terms. Unless the context otherwise requires, the ------------------- following terms when used in this Amendment shall have the meanings assigned to them in this (S) 1.2. "Amendment" means this Eighth Amendment to Credit Agreement. --------- "Credit Agreement" means the Original Agreement as heretofore ---------------- amended and as amended hereby. 1 ARTICLE II. -- Amendments to the Original Agreement ------------------------------------ (S) 2.1. Regular Payments. The schedule in Section 2.8 of the Original ---------------- Agreement is hereby amended by changing the entries: December, 1997 $ 575,000 January, 1998 $ 575,000 to read as follows: December, 1997 $ 25,000 January, 1998 $1,125,000 ARTICLE III. -- Agreements and Consents ----------------------- (S) 3.1. Reorganization and Regular Payments. Borrower and Aviva ----------------------------------- Petroleum hereby represent and warrant that Aviva Petroleum is continuing to negotiate with Merrick Capital Corporation ("Merrick") regarding Aviva ------- Petroleum's proposed reorganization and recapitalization (the "Reorganization"), -------------- as described in the Seventh Amendment. Borrower and Aviva Petroleum hereby confirm their agreement in clause (i) of (S)3.1 of the Seventh Amendment that, in the event Borrower and Aviva Petroleum fail to continue to actively pursue the Reorganization (a "Termination"), Borrower and Aviva Petroleum shall within ----------- thirty days after such Termination notify Lender of such Termination, but their agreement in clause (ii) of the last sentence of (S)3.1 of the Seventh Amendment is hereby terminated and such clause (ii) shall hereafter have no further effect. ARTICLE IV. -- Representations and Warranties ------------------------------ (S) 4.1. Representations and Warranties of Obligors. In order to induce ------------------------------------------ Lender to enter into this Amendment, each Obligor represents and warrants to Lender that: (a) Except as previously disclosed to Lender, the representations and warranties contained in Section 4.1 of the Original Agreement are true and correct at and as of the time of the effectiveness hereof. (b) Each Obligor is duly authorized to execute and deliver this Amendment and Borrower is and will continue to be duly authorized to borrow and to perform its obligations under the Credit Agreement. Each Obligor has duly taken all corporate action necessary to authorize the execution and delivery of this Amendment and to authorize the performance of the obligations of Borrower hereunder. (c) The execution and delivery by each Obligor of this Amendment, the performance by each Obligor of its obligations hereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or regulation or of the articles or certificate, as appropriate, of incorporation and bylaws of each Obligor, or of any material agreement, judgment, 2 license, order or permit applicable to or binding upon each Obligor, or result in the creation of any lien, charge or encumbrance upon any assets or properties of any Obligor. Except for those which have been duly obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by each Obligor of this Amendment or to consummate the transactions contemplated hereby. (d) When duly executed and delivered, each of this Amendment and the Credit Agreement will be a legal and binding instrument and agreement of each Obligor, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency and similar laws applying to creditors' rights generally and by principles of equity applying to creditors' rights generally. (e) The audited annual Consolidated financial statements of Aviva Petroleum dated as of December 31, 1996 fairly present its Consolidated financial position at such date and its Consolidated results of operations and Consolidated cash flows for the period ending on such date. ARTICLE V. -- Miscellaneous ------------- (S) 5.1. Effective Date. This Amendment shall become effective as of the -------------- date first above written when and only when Lender shall have received, at Lender's office, a counterpart of this Amendment (which may be delivered by telecopy) executed and delivered by Borrower and Lender. (S) 5.2. Ratification of Agreements. The Original Agreement as hereby -------------------------- amended is hereby ratified and confirmed in all respects. The Loan Documents, as they may be amended or affected by this Amendment, are hereby ratified and confirmed in all respects. Any reference to the Credit Agreement in any Loan Document shall be deemed to refer to this Amendment also, and any reference in any Loan Document to any other document or instrument amended, renewed, extended or otherwise affected by this Amendment shall also refer to such document as amended hereby. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under the Credit Agreement or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement or any other Loan Document. Without limitation of the foregoing, this Amendment does not constitute, and shall not be construed as, any consent to the Reorganization. (S) 5.3. Ratification of Security Documents. Each of the Obligors hereby ---------------------------------- consents to the provisions of this Amendment and the transactions contemplated herein, and hereby ratifies and confirms each Loan Document executed and delivered by it to and for the benefit of Lender, and each hereby agrees that its respective obligations and covenants thereunder are unimpaired hereby and shall remain in full force and effect. (S) 5.4. Survival of Agreements. All representations, warranties, ---------------------- covenants and agreements of each Obligor herein shall survive the execution and delivery of this Amendment 3 and the performance hereof, including without limitation the making or granting of the Loan, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by any Obligor hereunder or under the Credit Agreement to Lender shall be deemed to constitute representations and warranties by, or agreements and covenants of, such Obligor under this Amendment and under the Credit Agreement. (S) 5.5. Loan Documents. This Amendment is a Loan Document, and all -------------- provisions in the Credit Agreement pertaining to Loan Documents apply hereto. (S) 5.6. Governing Law. This Amendment shall be governed by and construed ------------- in accordance with the laws of the State of New York and any applicable laws of the United States of America in all respects, including construction, validity and performance. (S) 5.7. Counterparts. This Amendment may be separately executed in ------------ counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 4 IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. AVIVA PETROLEUM INC. NEO ENERGY, INC. AVIVA AMERICA, INC. By: /s/ R. SUTTILL ----------------------------------------------- Name: R. Suttill Title: President ING (U.S) CAPITAL CORPORATION By: /s/ CHRISTOPHER R. WAGNER ----------------------------------------------- Christopher R. Wagner, Vice President 5 CONSENT AND AGREEMENT --------------------- Aviva Operating Company, a Nevada corporation, hereby consents to (i) the provisions of that certain Eighth Amendment to Credit Agreement (the "Amendment") made as of the 29th day of December, 1997 by and between Neo Energy, Inc., a Texas corporation, Aviva Petroleum Inc., a Texas corporation, Aviva America, Inc., a Delaware corporation, and ING (U.S.) Capital Corporation (formerly named Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation ("Lender") and (ii) the transactions contemplated in the Amendment, and hereby ratifies and confirms the Guaranty (the "Guaranty") dated as of August 6, 1993 made by it for the benefit of Internationale Nederlanden Bank N.V., New York Branch (which has since assigned all its rights, interests, and obligations under the Guaranty to Lender), and agrees that its obligations and covenants under the Guaranty are unimpaired by the Amendment and shall remain in full force and effect. AVIVA OPERATING COMPANY By: /s/ R. SUTTILL ----------------------------------------------- Name: R. Suttill Title: President 6 EX-10.65 3 AMENDMENT TO THE SANTANA CRUDE SALE AND PURCHASE EXHIBIT 10.65 ADDITIONAL CONTRACT NUMBER 1 TO CONTRACT DIJ-1207 SELLER : ARGOSY ENERGY INTERNATIONAL AND NEO ENERGY INC. OBJECT : CONTRACT OF PURCHASE AND SALE OF SANTANA CRUDE PERIOD : JANUARY 1, 1998 TO DECEMBER 31, 1998 VALUE : UNDETERMINED AMOUNT The contracting parties, on the one hand the COLOMBIAN OIL COMPANY "ECOPETROL", which will from now on be called ECOPETROL, a Commercial and Industrial Company of the State, duly authorized by Law 165 of 1948 and ruled by its statues, approved by Decree 1209 of 1994, with main domicile in the city of Santafe de Bogota, D.C., represented by LUIS AUGUSTO YEPES G., of legal age, identified with citizenship I.D. No. 19.125.070 issued in Bogota, with domicile in Bogota, who manifests that, in his condition of Vicepresident of International Commerce and Gas of ECOPETROL and duly faculted by the internal regulations of ECOPETROL, in particular by the Administrative Control Manual in its Second Chapter, acts in name and representation of this Company. On the other hand ARGOSY ENERGY INTERNATIONAL, company organized and existing according to the laws of Utah, United States of America, domiciled in Salt Lake City, Utah, with branch established in Colombia, constituted by means of Public Deed number 5323 issued by Notary Seventh of Bogota on October 25, 1993 and inscribed in the Chamber of Commerce of Bogota on November 23, 1983 with registration No. 2008848, represented by SANTIAGO GONZALEZ ANGULO, of legal age, identified with citizenship I.D. No. 5.584.373 2. of Barrancabermeja and NEO ENERGY INC., a company organized and existing in accordance with the laws of the State of Texas, United States of America, domiciled in Dallas, Texas, whose branch is established in Colombia, constituted by means of Public Deed number 6.179, issued by Notary Fourth of Bogota on October 23, 1986 and inscribed in the Chamber of Commerce of Bogota, represented by WALDO E. CASAS, of legal age and identified with citizenship I.D. Number 126.688 of Bogota, these companies will from now on be designated as THE SELLER, who together with ECOPETROL have agreed to celebrate the additional contract by means of which the duration of the purchase and sale contract DIJ-1207 is extended, with the following considerations a) That ECOPETROL subscribed the purchase and sale contract DIJ-1207 with companies ARGOSY ENERGY INTERNATIONAL and NEO ENERGY INC. for a period beginning on February 1, 1997 and ending on December 31, 1997; b) That both parties by common consent decided in due time to extend the duration of the contract for twelve (12) additional months; c) That by means of this additional contract the agreement that determined the extension of contract DIJ-1207 is formalized. In accordance with the above mentioned considerations, the parties agree to: CLAUSE ONE-Extend the duration of contract DIJ-1207 for the period included between January first (1), 1998 and December 31, 1998, under the same terms and conditions stipulated in the original contract. CLAUSE TWO-The present document does not constitute a novation of contract DIJ-1207, which continues fully in force in all that has not been modified by this additional contract. Duly signed in Santafe de Bogota, D.C., on January 5, nineteen ninety eight (1998). COLOMBIAN OIL COMPANY ARGOSY ENERGY INTERNATIONAL LUIS AUGUSTO YEPES G. SANTIAGO GONZALEZ ANGULO Vicepresident of Legal Representative International Commerce and Gas NEO ENERGY, INC. WALDO E. CASAS Legal Representative This is a fair and accurate English translation of the original document which is in the Colombian language. /s/ James L. Busby ------------------- James L. Busby Secretary and Treasurer of Aviva Petroleum Inc. EX-10.66 4 9TH AMENDMENT TO THE ING CAPITAL CREDIT AGREEMENT EXHIBIT 10.66 NINTH AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE THIS NINTH AMENDMENT TO CREDIT AGREEMENT AND PROMISSORY NOTE (herein called this "Amendment") is made as of the 13th day of February, 1998 by and between Neo Energy, Inc., a Texas corporation ("Borrower"), Aviva Petroleum Inc., a Texas corporation ("Aviva Petroleum"), Aviva America, Inc., a Delaware corporation ("Aviva America"), and ING (U.S.) Capital Corporation (formerly named Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation ("Lender"). RECITALS: 1. Borrower, Aviva Petroleum, Aviva America and Lender are parties to that certain Credit Agreement dated as of August 6, 1993, as amended by (a) that certain First Amendment to Credit Agreement and Promissory Note dated March 31, 1994; (b) a letter amendment concerning Permitted Investments dated December 31, 1994; (c) a letter amendment concerning Consolidated Tangible Net Worth dated March 7, 1995; (d) that certain Fourth Amendment to Credit Agreement and Promissory Note dated June 9, 1995; (e) that certain Fifth Amendment to Credit Agreement and Promissory Note dated March 29, 1996; (f) that certain Sixth Amendment to Credit Agreement and Promissory Note dated November 22, 1996; (g) that certain Seventh Amendment to Credit Agreement dated August 12, 1997, and (h) that certain Eighth Amendment to Credit Agreement dated December 29, 1997 (as so amended, such Credit Agreement is herein called the "Original Agreement"). 2. Pursuant to the Original Agreement, Borrower executed and delivered to Lender that certain Promissory Note dated as of August 6, 1993 made payable to the order of Lender in the stated principal amount of $25,000,000 (as amended, the "Original Note"). Borrower has failed to make a payment of $1,125,000 (the "Defaulted Payment") that became due and owing under the Original Agreement and the Original Note on January 30, 1998, which failure constitutes an Event of Default under the Original Agreement. As Guarantors, Aviva Petroleum and Aviva America are also liable for the Defaulted Payment. 3. Borrower has asked Lender to agree, as provided herein, to a waiver of Borrower's obligation to make the Defaulted Payment on January 30, 1998 and to restructure the required amortization of the loan evidenced by the Note. Lender is willing to do so on the terms hereof. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and in the Original Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby agree as follows: ARTICLE I. -- Definitions and References -------------------------- (S) 1.1 Terms Defined in the Original Agreement. Unless the context --------------------------------------- otherwise requires or unless otherwise expressly defined herein, the terms defined in the Original Agreement shall have the same meanings whenever used in this Amendment. (S) 1.2. Other Defined Terms. Unless the context otherwise requires, the ------------------- following terms when used in this Amendment shall have the meanings assigned to them in this (S) 1.2. "Amendment" means this Ninth Amendment to Credit Agreement and --------- Promissory Note. "Credit Agreement" means the Original Agreement as heretofore ---------------- amended and as amended hereby. "Note" means the Original Note as heretofore amended and as ---- amended hereby. ARTICLE II. -- Amendments to the Original Agreement ------------------------------------ (S) 2.1. Amendments to Original Note. The sixth paragraph of the Original --------------------------- Note is hereby amended in its entirety to read as follows: "On October 1, 1999 the unpaid principal balance of this Note and all interest accrued hereon shall be due and payable in full." (S) 2.2. Amendments to Original Agreement. -------------------------------- (a) New Definitions. The following definitions and references are hereby --------------- added to Section 1.1. of the Original Agreement: "'Additional Approved Capital Expenditures' means capital ---------------------------------------- expenditures by the Related Persons, other than ANCF Capital Expenditures as follows: (i) emergency and miscellaneous capital expenditures up to $50,000 in 1998 and up to $75,000 in 1999; and (ii) any other capital expenditures which have been approved by Lender at the time in question in writing. 'ANCF' (or 'Adjusted Net Cash Flow') means for any month, ----- ---------------------- beginning with February 1998, the remainder of: (i) the sum of all revenues and receipts of all Related Persons during such month from any source or activity (whether from operations, or sales of assets, or sales of equity, or collections of debts, or otherwise, excluding only funds belonging to third parties which are received by the Related Persons to be held in trust for, and promptly transferred to or spent on behalf of, such third parties), minus 2 (ii) the sum of all expenses and expenditures paid during such month, net to the Related Persons' interests, for: (a) severance, ad valorem, and production taxes on their properties or production, (b) royalty payments, (c) interest on the Loan, (d) expenses and other amounts (excluding interest and principal) then due and owing under Sections 5.1(i) or 7.3 of the Credit Agreement or under any similar sections of any other Loan Documents, (e) ANCF Capital Expenditures, (f) ANCF LOE, (g) ANCF Overhead Costs, and (h) ANCF Transportation Costs. 'ANCF Capital Expenditures' means capital expenditures made or to be ------------------------- made by the Related Persons that are described on Schedule I hereto. 'ANCF LOE' means the following leasehold operating expenses and other -------- field level or lease level charges ("LOE") of the Related Persons for operations on properties which are Collateral: (i) LOE for Aviva America's Main Pass and Breton Sound properties, not to exceed in any year Aviva America's LOE for 1997; and (ii) the actual costs of the Related Persons for LOE with respect to properties that are Collateral and that are operated by unaffiliated third parties, provided that all such costs are negotiated with, and paid to, such third parties in arms-length transactions on terms which are reasonable in the area of operations at the time such prices are agreed to. 'ANCF Overhead Costs' means general and administrative costs and other ------------------- costs of the Related Persons, to the extent the same either (a) have been approved by Lender at the time in question in writing or (b) are described on Schedule J hereto. 'ANCF Transportation Costs' means (a) the actual costs of the Related ------------------------- Persons for gathering and transporting production from properties which are Collateral from the wellhead to the point of sale, provided that all such costs are negotiated with, and paid to, third parties in arms-length transactions on terms which are reasonable in the area of operations at the time such prices are agreed to, or (b) other transportation or marketing costs, to the extent the same have been approved by Lender at the time in question in writing. 3 'Federal Funds Rate' shall mean, for any day, the rate per annum ------------------- (rounded upwards, if necessary, to the nearest 1/100th of one percent) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if the day for which such rate is to be determined is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if such rate is not so published for any day, the Federal Funds Rate for such day shall be the average rate quoted to Lender on such day on such transactions as determined by Lender." (b) Amended Definitions. ------------------- (i) The definition of "Base Rate" in Section 1.1. of the Original Agreement is hereby amended in its entirety to read as follows: "'Base Rate' means one and one-half percent (1.5%) per annum plus the --------- higher of (a) the Reference Rate and (b) the Federal Funds Rate plus one- half percent (0.5%) per annum. For purposes of this definition, "Reference Rate" means the arithmetic average of the rates of interest publicly announced by The Chase Manhattan Bank, Citibank, N.A. and Morgan Guaranty Trust Company of New York (or their respective successors) as their respective prime commercial lending rates (or, as to any such bank that does not announce such a rate, such bank's 'base' or other rate determined by Lender to be the equivalent rate announced by such bank), except that, if any such bank shall, for any period, cease to announce publicly its prime commercial lending (or equivalent) rate, Lender shall, during such period, determine the 'Base Rate' based upon the prime commercial lending (or equivalent) rates announced publicly by the other such banks. The Base Rate shall in no event, however, exceed the Highest Lawful Rate." (ii) The definition of "Fixed Rate" in Section 1.1. of the Original Agreement is hereby amended in its entirety to read as follows: "'Fixed Rate' means, with respect to each particular Fixed Rate ----------- Portion and the associated Eurodollar Rate and Reserve Percentage, the rate per annum calculated by Lender (rounded upwards, if necessary, to the next higher 0.01%) determined on a daily basis pursuant to the following formula: Fixed Rate = Eurodollar Rate + A --------------------------- 100.0% - Reserve Percentage where A means three percent (3.00%). If the Reserve Percentage changes during the Interest Period for a Fixed Rate Portion, Lender may, at its option, either change the 4 Fixed Rate for such Fixed Rate Portion or leave it unchanged for the duration of such Interest Period. The Fixed Rate shall in no event, however, exceed the Highest Lawful Rate." (iii) The definition of "Interest Period" in Section 1.1. of the Original Agreement is hereby amended in its entirety to read as follows: "'Interest Period' means, with respect to each particular Fixed Rate ---------------- Portion, a period of one month, beginning on and including the date specified in such Rate Election (which must be a Business Day), and ending on but not including the numerically corresponding day of the following month as the day on which it began (e.g., a period beginning on the third day of one month shall end on but not include the third day of the following month), provided that if there is no numerically corresponding day such Interest Period shall end on the last Business Day of the following month and that each Interest Period which would otherwise end on a day which is not a Business Day shall end on the next succeeding Business Day (unless such next succeeding Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the immediately preceding Business Day). No Interest Period may be elected which would extend past the date on which the Note is due and payable in full." (c) Required Prepayments. Section 2.8 of the Original Agreement is hereby -------------------- amended to read it in its entirety as follows: "Section 2.8. Principal Payments from ANCF. By the last Business Day ---------------------------- of each month, beginning with March 31, 1998 and continuing until all Obligations under the Loan Documents are paid in full, Borrower shall make payments of principal on the Loan equal to eighty percent (80%) of the ANCF for the immediately preceding month. Together with each payment made pursuant to this Section 2.8, Borrower shall deliver to Lender a report in detail acceptable to Lender setting out a detailed calculation of the ANCF for such month. If any Event of Default has occurred and is continuing, Borrower shall make payments of principal on the Loan equal to one hundred percent (100%) of the ANCF for the immediately preceding month." (d) Tangible Net Worth. The first sentence of Section 5.2(m) of the ------------------ Original Agreement is hereby amended to read as follows: "Aviva Petroleum's Consolidated Tangible Net Worth will never be less than $2,000,000." (e) Additional Negative Covenant. Borrower, Aviva Petroleum, and Aviva ---------------------------- America hereby agree that no Related Person will hereafter make any capital expenditure other than ANCF Capital Expenditures and Additional Approved Capital Expenditures. 5 ARTICLE III. -- Waivers and Releases -------------------- (S) 3.1. Waivers. (a) Each of Borrower, Aviva America and Aviva ------- Petroleum hereby waives and affirmatively agrees not to allege or otherwise pursue any and all defenses, affirmative defenses, counterclaims, claims, causes of action, setoffs or other rights that it may have to contest (i) any provision of the Loan Documents or this Amendment; (ii) any lien or security interest of Lender in any property, whether real or personal, tangible or intangible, or any right or other interest of Lender, now or hereafter arising in connection with the Collateral; (iii) the actions and inactions of Lender in administering the Loan Documents and the financing arrangements among Borrower, Aviva Petroleum, Aviva America and Lender on or prior to the date on which this Amendment becomes effective; and (iv) the rights of Lender to all of the profits, proceeds and other benefits from the Collateral and the Loan Documents as set forth therein or as provided under applicable laws. (b) Effective as of January 30, 1998, Lender hereby waives the Event of Default caused by Borrower's failure to make the Defaulted Payment on that day as required by Section 2.8 of the Original Agreement. (Such waiver does not constitute any forgiveness of any part of the Loan, and Borrower remains liable to pay the full amount of the Loan as provided in the Credit Agreement and the Note.) (S) 3.2. Release. Each of Borrower, Aviva America and Aviva Petroleum ------- hereby releases, remises, acquits and forever discharges Lender and Lender's employees, agents, representatives, consultants, attorneys, fiduciaries, officers, directors, partners, predecessors, successors and assigns, subsidiary corporations, parent corporations, and related corporate divisions (all of the foregoing hereinafter called the "Released Parties"), from any and all actions and causes of action, judgments, executions, suits, debts, claims, demands, liabilities, obligations, damages and expenses of any and every character, known or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or nature, for or because of any matter or things done, omitted or suffered to be done by any of the Released Parties prior to and including the date on which this Amendment becomes effective, and in any way directly or indirectly arising out of or in any way connected to this Amendment or any of the Loan Documents (all of the foregoing hereinafter called the "Released Matters"). Each of Borrower, Aviva America and Aviva Petroleum acknowledges that the waiver by Lender pursuant to (S) 3.1(b) above is in full satisfaction of all or any alleged injuries or damages arising in connection with the Released Matters. ARTICLE IV. -- Representations and Warranties ------------------------------ (S) 4.1. Representations and Warranties of Obligors. In order to induce ------------------------------------------ Lender to enter into this Amendment, each Obligor represents and warrants to Lender that: (a) Except as previously disclosed to Lender, the representations and warranties contained in Section 4.1 of the Original Agreement are true and correct at and as of the time of the effectiveness hereof. 6 (b) Each Obligor is duly authorized to execute and deliver this Amendment and Borrower is and will continue to be duly authorized to borrow and to perform its obligations under the Credit Agreement. Each Obligor has duly taken all corporate action necessary to authorize the execution and delivery of this Amendment and to authorize the performance of the obligations of Borrower hereunder. (c) The execution and delivery by each Obligor of this Amendment, the performance by each Obligor of its obligations hereunder and the consummation of the transactions contemplated hereby do not and will not conflict with any provision of law, statute, rule or regulation or of the articles or certificate, as appropriate, of incorporation and bylaws of each Obligor, or of any material agreement, judgment, license, order or permit applicable to or binding upon each Obligor, or result in the creation of any lien, charge or encumbrance upon any assets or properties of any Obligor. Except for those which have been duly obtained, no consent, approval, authorization or order of any court or governmental authority or third party is required in connection with the execution and delivery by each Obligor of this Amendment or to consummate the transactions contemplated hereby. (d) When duly executed and delivered, each of this Amendment and the Credit Agreement will be a legal and binding instrument and agreement of each Obligor, enforceable in accordance with its terms, except as limited by bankruptcy, insolvency and similar laws applying to creditors' rights generally and by principles of equity applying to creditors' rights generally. (e) The audited annual Consolidated financial statements of Aviva Petroleum dated as of December 31, 1996 fairly present its Consolidated financial position at such date and its Consolidated results of operations and Consolidated cash flows for the period ending on such date. (f) Neither Aviva Petroleum, nor Borrower, nor Aviva America has any defense, counterclaim or setoff with respect to the Obligations or the Loan Documents (any such setoffs, defenses or counterclaims being hereby waived and released by each of them). (g) The recitals set forth above are true and accurate and are an operative part of this Amendment. (h) Lender has and will continue to have a valid first priority lien and security interest in all Collateral in which such any lien or security interest has been granted (or has purportedly been granted) to Lender by any Related Person, and Aviva Petroleum, Borrower and Aviva America hereby expressly reaffirm all such security interests and liens and all Loan Documents containing any grant thereof. In particular and without limitation: (1) Aviva Petroleum hereby ratifies and confirms its pledge to Lender of all of the issued and outstanding shares of Aviva America and Aviva Operating 7 (all presently outstanding shares in each such company being evidenced by the share certificate listed opposite such company): Aviva America Certificate #10, evidencing 1271 shares Aviva Operating Certificate #1, evidencing 1000 shares Aviva Petroleum hereby confirms and acknowledges that all share certificates issued by such companies are listed above and have been delivered in pledge to Lender. (2) Aviva America hereby ratifies and confirms its pledge to Lender of all of the issued and outstanding shares of Borrower (all presently outstanding shares in Borrower being evidenced by the share certificate listed opposite such company): Borrower Certificate #31, evidencing 16,824,998 shares Aviva America hereby confirms and acknowledges that all share certificates issued by Borrower are listed above and have been delivered in pledge to Lender. (S) 4.2. Agreement to Pledge. Borrower, Aviva America and Aviva Petroleum ------------------- acknowledge and affirm their obligations under Article VI of the Credit Agreement to deliver additional Security Documents, whenever requested by Lender in its sole and absolute discretion, granting, confirming and perfecting liens and security interests in any real or personal property now owned or hereafter acquired by any of the Related Persons. (S) 4.3. Agreement to Deliver Amended Loan Documents. Within 30 days ------------------------------------------- after the effective date hereof, Borrower will execute and deliver to Lender a renewal Note reflecting the amendments made in (S) 2.1 hereof, and the various Related Persons will execute and deliver to Lender amendments to the Security Documents describing such renewal Note. All such documents will be satisfactory to Lender in form and substance. ARTICLE V. -- Miscellaneous ------------- (S) 5.1. Effective Date. This Amendment shall become effective as of the -------------- date first above written when and only when Lender shall have received the following: (a) a counterpart of this Amendment (which may be delivered by telecopy) executed and delivered by Borrower and Lender, and (b) a payment on the Note of $250,000 in immediately available funds. (S) 5.2. Ratification of Agreements. The Original Agreement and the -------------------------- Original Note, as each is hereby amended, are hereby ratified and confirmed in all respects. The Loan Documents, as they may be amended or affected by this Amendment, are hereby ratified and 8 confirmed in all respects. Any reference to the Credit Agreement in any Loan Document shall be deemed to refer to this Amendment also, and any reference in any Loan Document to any other document or instrument amended, renewed, extended or otherwise affected by this Amendment shall also refer to such document as amended hereby. The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of Lender under the Credit Agreement or any other Loan Document nor constitute a waiver of any provision of the Credit Agreement or any other Loan Document. (S) 5.3. Survival of Agreements. All representations, warranties, ---------------------- covenants and agreements of each Obligor herein shall survive the execution and delivery of this Amendment and the performance hereof, including without limitation the making or granting of the Loan, and shall further survive until all of the Obligations are paid in full. All statements and agreements contained in any certificate or instrument delivered by any Obligor hereunder or under the Credit Agreement to Lender shall be deemed to constitute representations and warranties by, or agreements and covenants of, such Obligor under this Amendment and under the Credit Agreement. (S) 5.4. Loan Documents. This Amendment is a Loan Document, and all -------------- provisions in the Credit Agreement pertaining to Loan Documents apply hereto. (S) 5.5. Presumptions. Borrower acknowledges that it has consulted with ------------ and been advised by its counsel and such other experts and advisors as it has deemed necessary in connection with the negotiation, execution and delivery of this Amendment and has participated in the drafting hereof. Therefore, this Amendment shall be construed without regard to any presumption or rule requiring that it be construed against any one party causing this Amendment or any part hereof to be drafted. (S) 5.6. Entire Agreement. This Amendment sets forth the entire agreement ---------------- among the parties hereto with respect to the subject matter hereof, and this Amendment and the other Loan Documents collectively set forth the entire agreement of the parties hereto. Neither Borrower nor Aviva America nor Aviva Petroleum has received or relied on any agreements, representations, or warranties of Lender, except as specifically set forth herein. Each of Borrower, Aviva America and Aviva Petroleum acknowledges that it is not relying upon oral representations or statements inconsistent with the terms and provisions of this Amendment or the other Loan Documents. (S) 5.7. Governing Law. This Amendment shall be governed by and construed ------------- in accordance with the laws of the State of New York and any applicable laws of the United States of America in all respects, including construction, validity and performance. (S) 5.8. Counterparts. This Amendment may be separately executed in ------------ counterparts and by the different parties hereto in separate counterparts, each of which when so executed shall be deemed to constitute one and the same Amendment. 9 IN WITNESS WHEREOF, this Amendment is executed as of the date first above written. AVIVA PETROLEUM INC. NEO ENERGY, INC. AVIVA AMERICA, INC. By: /s/ R. SUTTILL ------------------------------------- Name: R. Suttill Title: ING (U.S.) CAPITAL CORPORATION By: /s/ CHRISTOPHER R. WAGNER ------------------------------------- Christopher R. Wagner, Vice President 10 CONSENT AND AGREEMENT --------------------- The undersigned hereby (a) consents to the provisions of the foregoing Amendment and the transactions contemplated therein, (b) hereby ratifies and confirms its Guaranty dated as of August 6, 1993 made by it for the benefit of Internationale Nederlanden Bank N.V., New York Branch (which has since assigned all its rights, interests, and obligations under such Guaranty to Lender) and all other Loan Documents heretofore made by it, (c) agrees that its obligations and covenants under such Guaranty and Loan Documents are unimpaired by such Amendment and are and shall remain in full force and effect, and (d) releases, remises, acquits and forever discharges all of the Released Parties referred to above from any and all of the Released Matters referred to above that have arisen on or prior to the date on which such Amendment becomes effective and acknowledges that the waiver by Lender pursuant to (S)3.1(b) above is in full satisfaction of all or any alleged injuries or damages arising in connection with such Released Matters. Date: February 12, 1998 AVIVA OPERATING COMPANY By: /s/ R. SUTTILL ---------------------------------- Name: R. Suttill Title: 11 SCHEDULE I ANCF CAPITAL EXPENDITURES (thousands of dollars) Gross to Net to Related All Owners Persons Timing ---------- ------- ------ Colombia: Linda #1 -- recompletion to Caballos 450 88 July 1998 Mary #3 -- recompletion to Villeta "T" 200 32 Aug. 1998 Mary #5 -- recompletion to Caballos 500 96 Jan. 1999 Miraflor #1 -- recompletion to Caballos 600 111 Oct. 1998 and Villeta "T" TOTAL COLOMBIA 1,750 327 Breton Sound (Conversion of 4065 #2 Well to salt water disposal well) 469 279 Mar. 1998 Main Pass Upgrades (Equipment upgrades required by the 418 147 Mar. 1998 Minerals Management Service) TOTAL UNITED STATES 887 426 GRAND TOTAL 2,637 753 SCHEDULE J ANCF OVERHEAD COSTS Each Calendar Each Calendar Quarter in Quarter in 1999 1998 ------------- ------------- Total US 197,500 296,000 Total Neo Dallas 2,500 4,250 Bogota Office & O/H 50,000 119,750 TOTAL 250,000 420,000 Note -- The above figures are prior to capitalization or reclassification of certain amounts and, accordingly, do not agree with reported general and administrative expense reported in the consolidated income statement. EX-27 5 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, 1997 AND THE RELATED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 690 0 1,803 0 602 3,298 61,642 49,873 16,445 3,927 7,210 0 0 1,574 2,174 16,445 9,726 9,726 10,302 10,302 19,953 0 658 (22,575) (93) (22,482) 0 0 0 (22,482) (0.71) (0.71)
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