<PAGE>
As filed with the Securities and Exchange Commission on August 20, 1998
Registration No. 333-58061
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
_______________
AVIVA PETROLEUM INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1311 75-1432205
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
JAMES L. BUSBY
SECRETARY AND TREASURER
AVIVA PETROLEUM INC.
8235 DOUGLAS AVENUE 8235 DOUGLAS AVENUE
SUITE 400 SUITE 400
DALLAS, TEXAS 75225 DALLAS, TEXAS 75225
(214) 691-3464 (214) 691-3464
(Address, including zip code, and telephone (Name, address, including zip code, and
number, including area code, of telephone number, including area
registrant's principal executive offices) code, of agent for service)
</TABLE>
Copies to:
VINSON & ELKINS L.L.P. PARSONS BEHLE & LATIMER
FIRST CITY TOWER ONE UTAH CENTER
1001 FANNIN STREET 201 SOUTH MAIN STREET
HOUSTON, TEXAS 77002-6760 SUITE 1800
ATTENTION: WILLIAM E. JOOR III SALT LAKE CITY, UTAH 84145-0898
(713) 758-2222 ATTENTION: STUART A. FREDMAN
(801) 532-1234
___________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
_______________
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
GARNET RESOURCES CORPORATION
RR2 BOX 4400
NACOGDOCHES, TEXAS 75961
Dear Stockholder:
A Special Meeting of Stockholders (the "Garnet Special Meeting") of Garnet
Resources Corporation ("Garnet") will be held at 201 South Main, Suite 1800,
Salt Lake City, Utah, on September 29, 1998 at 10:00 a.m. local time.
At the Garnet Special Meeting you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger dated as of June
24, 1998 (the "Merger Agreement") providing for the merger (the "Merger") of an
indirect, wholly owned subsidiary ("Merger Sub") of Aviva Petroleum Inc.
("Aviva") with and into Garnet, pursuant to which (a) Garnet will be the
corporation surviving the Merger (the "Surviving Corporation"), (b) subject to
the next sentence, each share of Garnet Common Stock outstanding immediately
prior to the consummation of the Merger will be converted into 0.10 of one share
of Aviva Common Stock (the "Exchange Ratio") and (c) Garnet will become a wholly
owned subsidiary of Aviva. If any record holder of Garnet Common Stock would
not be entitled to at least 100 shares of Aviva Common Stock upon consummation
of the Merger, the shares of Garnet Common Stock so held will be converted into
the right to receive cash at the rate of $0.02 per share. In the materials
accompanying this letter, you will find a Notice of Special Meeting of
Stockholders, a Joint Proxy Statement/Prospectus relating to the actions to be
taken by Garnet stockholders at the Garnet Special Meeting and a proxy card.
The Joint Proxy Statement/Prospectus more fully describes the proposed Merger
and includes information about Garnet and Aviva.
THE GARNET BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE TRANSACTIONS RELATED THERETO AND HAS DETERMINED THAT THEY ARE FAIR TO
AND IN THE BEST INTERESTS OF GARNET AND ITS STOCKHOLDERS. AFTER CAREFUL
CONSIDERATION, YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR ADOPTION OF THE MERGER AGREEMENT.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE GARNET SPECIAL MEETING IN
PERSON. WHETHER OR NOT YOU PLAN TO ATTEND THE GARNET SPECIAL MEETING, HOWEVER,
PLEASE COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF
YOU ATTEND THE GARNET SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN
THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR
SHARES BE REPRESENTED AND VOTED AT THE GARNET SPECIAL MEETING.
Sincerely,
Douglas W. Fry
President, Chief Executive Officer and Director
<PAGE>
GARNET RESOURCES CORPORATION
RR2 BOX 4400
NACOGDOCHES, TEXAS 75961
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on September 29, 1998
To the Stockholders of Garnet Resources Corporation:
A Special Meeting of Stockholders (the "Garnet Special Meeting") of Garnet
Resources Corporation, a Delaware corporation ("Garnet"), will be held on
Tuesday, September 29, 1998 at 10:00 a.m., local time, at 201 South Main, Suite
1800, Salt Lake City, Utah, for the following purposes:
1. To consider and vote upon a proposal to adopt the Agreement and
Plan of Merger dated as of June 24, 1998 (the "Merger Agreement"), among
Aviva Petroleum Inc., a Texas corporation ("Aviva"), Aviva Merger Inc., a
Delaware corporation and an indirect, wholly owned subsidiary of Aviva
("Merger Sub"), and Garnet. Pursuant to the Merger Agreement, Merger Sub
would be merged with and into Garnet (the "Merger") and, among other things
but subject to the following proviso, each share of common stock, par value
$.01 per share, of Garnet ("Garnet Common Stock") outstanding at the
effective time of the Merger would be converted into 0.10 of one share of
common stock, without par value, of Aviva, all as more fully set forth in
the accompanying Joint Proxy Statement/Prospectus and in the Merger
Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part;
provided, however, that, if any record holder of Garnet Common Stock would
not be entitled to at least 100 shares of Aviva Common Stock upon
consummation of the Merger, the shares of Garnet Common Stock so held will
be converted into the right to receive cash at the rate of $0.02 per share;
and
2. to transact such other business as may properly come before the
Garnet Special Meeting or any adjournment thereof.
The Board of Directors of Garnet has fixed the close of business on August
10, 1998 as the record date for the determination of stockholders entitled to
notice of, and to vote at, the Garnet Special Meeting and any adjournment
thereof. Only holders of record of shares of Garnet Common Stock at the close of
business on the record date are entitled to notice of, and to vote at, the
Garnet Special Meeting. A complete list of such stockholders will be available
for examination at the offices of Garnet in Salt Lake City, Utah during normal
business hours by any Garnet stockholder, for any purpose germane to the Garnet
Special Meeting, for a period of 10 days prior to the meeting. Stockholders of
Garnet are not entitled to appraisal rights under the General Corporation Law of
the State of Delaware in respect of the Merger.
YOUR VOTE IS IMPORTANT. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY
OF THE OUTSTANDING SHARES OF GARNET COMMON STOCK ENTITLED TO VOTE IS REQUIRED
FOR ADOPTION OF THE MERGER AGREEMENT. EVEN IF YOU PLAN TO ATTEND THE GARNET
SPECIAL MEETING IN PERSON, WE REQUEST THAT YOU SIGN AND RETURN THE ENCLOSED
PROXY OR VOTING INSTRUCTION CARD AND THUS ENSURE THAT YOUR SHARES WILL BE
REPRESENTED AT THE GARNET SPECIAL MEETING IF YOU ARE UNABLE TO ATTEND. IF YOU DO
ATTEND THE GARNET SPECIAL MEETING AND WISH TO VOTE IN PERSON, YOU MAY WITHDRAW
YOUR PROXY AND VOTE IN PERSON.
By Order of the Board of Directors
Edgar L. Dyes
Secretary
Nacogdoches, Texas
______________, 1998
<PAGE>
AVIVA PETROLEUM INC.
SUITE 400, 8235 DOUGLAS AVENUE
DALLAS, TEXAS 75225
Dear Stockholder:
A Special Meeting in lieu of the 1998 Annual Meeting of Stockholders (the
"Aviva Special Meeting") of Aviva Petroleum Inc. ("Aviva") will be held at
Vinson & Elkins L.L.P., 2001 Ross Avenue, Suite 3800, Dallas, Texas, on
September 29, 1998 at 10:00 a.m. local time.
At the Aviva Special Meeting you will be asked to consider and vote upon a
proposal to approve the issuance by Aviva of an aggregate of up to 14,036,987
shares of common stock, without par value ("Aviva Common Stock"), of Aviva, of
which (i) up to 1,149,216 shares would be issued pursuant to an Agreement and
Plan of Merger dated as of June 24, 1998 (the "Merger Agreement") providing for
the merger (the "Merger") of an indirect, wholly owned subsidiary of Aviva
Petroleum Inc. ("Aviva") with and into Garnet Resources Corporation ("Garnet"),
as a result of which (a) Garnet will be the corporation surviving the Merger,
(b) subject to the next sentence, each share of common stock, par value $0.01
per share, of Garnet ("Garnet Common Stock") outstanding immediately prior to
the consummation of the Merger will be converted into 0.10 of one share of
"Aviva Common Stock" and (c) Garnet will become a wholly owned subsidiary of
Aviva, and (ii) 12,887,771 shares would be issued pursuant to a Debenture
Purchase Agreement (the "Debenture Purchase Agreement") dated as of June 24,
1998 between Aviva and the holders of $15,000,000 in aggregate principal amount
of Garnet's outstanding 9 1/2% Convertible Subordinated Debentures due December
21, 1998 (the "Debentures"). If any record holder of Garnet Common Stock would
not be entitled to at least 100 shares of Aviva Common Stock upon consummation
of the Merger, the shares of Garnet Common Stock so held will be converted into
the right to receive cash at the rate of $0.02 per share. Consummation of the
purchase of the Debentures by Aviva is a condition to Aviva's obligation to
consummate the Merger pursuant to the Merger Agreement.
In the materials accompanying this letter, you will find a Notice of
Special Meeting of Stockholders, a Joint Proxy Statement/Prospectus relating to
the actions to be taken by the Aviva stockholders at the Aviva Special Meeting
and by the Garnet stockholders at the Garnet Special Meeting and a proxy card.
The Joint Proxy Statement/Prospectus more fully describes the proposed Merger,
the Merger Agreement and the Debenture Purchase Agreement and includes
information about Garnet and Aviva.
THE AVIVA BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT
AND THE DEBENTURE PURCHASE AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY
AND HAS DETERMINED THAT THEY ARE FAIR TO AND IN THE BEST INTERESTS OF AVIVA AND
ITS STOCKHOLDERS. AFTER CAREFUL CONSIDERATION, YOUR BOARD OF DIRECTORS
UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE FOR THE ISSUANCE OF AVIVA COMMON
STOCK PURSUANT TO THE MERGER AGREEMENT AND THE DEBENTURE PURCHASE AGREEMENT.
ALL STOCKHOLDERS ARE INVITED TO ATTEND THE AVIVA SPECIAL MEETING IN PERSON.
WHETHER OR NOT YOU PLAN TO ATTEND THE AVIVA SPECIAL MEETING, HOWEVER, PLEASE
COMPLETE, SIGN, DATE AND RETURN YOUR PROXY IN THE ENCLOSED ENVELOPE. IF YOU
ATTEND THE AVIVA SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN
THOUGH YOU HAVE PREVIOUSLY RETURNED YOUR PROXY. IT IS IMPORTANT THAT YOUR
SHARES BE REPRESENTED AND VOTED AT THE AVIVA SPECIAL MEETING.
Sincerely,
Ronald Suttill
President, Chief Executive Officer and Director
<PAGE>
AVIVA PETROLEUM INC.
SUITE 400, 8235 DOUGLAS AVENUE
DALLAS, TEXAS 75225
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To be held on September 29, 1998
To the Stockholders of Aviva Petroleum Inc.:
A Special Meeting in lieu of the 1998 Annual Meeting of Stockholders (the
"Aviva Special Meeting") of Aviva Petroleum Inc., a Texas corporation ("Aviva"),
will be held on Tuesday, September 29, 1998 at 10:00 a.m., local time, at Vinson
& Elkins L.L.P., 2001 Ross Avenue, Suite 3800, Dallas Texas, for the following
purposes:
1. To consider and vote upon the proposed issuance by Aviva of an
aggregate of up to 14,036,987 shares of common stock, without par value
("Aviva Common Stock"), of Aviva (the "Share Issuance"), of which (i) up
to 1,149,216 shares would be issued pursuant to an Agreement and Plan of
Merger dated as of June 24, 1998 (the "Merger Agreement") providing for the
merger (the "Merger") of an indirect, wholly owned subsidiary ("Merger
Sub") of Aviva Petroleum Inc. ("Aviva") with and into Garnet Resources
Corporation, a Delaware corporation ("Garnet"), as a result of which (a)
Garnet will be the corporation surviving the Merger, (b) subject to the
following proviso, each share of common stock, par value $0.01 per share,
of Garnet ("Garnet Common Stock") outstanding immediately prior to the
consummation of the Merger would be converted into 0.10 of one share of
Aviva Common Stock and (c) Garnet would become a wholly owned subsidiary of
Aviva and (ii) 12,887,771 shares would be issued pursuant to a Debenture
Purchase Agreement (the "Debenture Purchase Agreement") dated as of June
24, 1998 between Aviva and the holders of $15,000,000 in aggregate
principal amount of Garnet's outstanding 9 1/2% Convertible Subordinated
Debentures due December 21, 1998 (the "Debentures") in exchange for the
Debentures, all as more fully set forth in the accompanying Joint Proxy
Statement/Prospectus and in the Merger Agreement and the Debenture Purchase
Agreement, copies of which are filed as exhibits to the Registration
Statement of which this Joint Proxy Statement/Prospectus is a part;
provided, however, that, if any record holder of Garnet Common Stock would
not be entitled to at least 100 shares of Aviva Common Stock upon
consummation of the Merger, the shares of Garnet Common Stock so held will
be converted into the right to receive cash at the rate of $0.02 per share;
and
2. to elect a board of directors consisting of two directors; and
3. to approve KPMG Peat Marwick LLP as Aviva's independent auditors
for fiscal year 1998; and
4. to transact such other business as may properly come before the
Aviva Special Meeting or any adjournment thereof.
The Board of Directors of Aviva has fixed the close of business on August
10, 1998 as the record date for the determination of stockholders entitled to
notice of, and to vote at, the Aviva Special Meeting and any adjournment
thereof. Only holders of record of shares of Aviva Common Stock at the close of
business on the record date are entitled to notice of, and to vote at, the Aviva
Special Meeting. A complete list of such stockholders will be available for
examination at the offices of Aviva in Dallas, Texas during normal business
hours by any Aviva stockholder, for any purpose germane to the Aviva Special
Meeting, for a period of 10 days prior to the meeting. Stockholders of Aviva are
not entitled to appraisal rights under the Texas Business Corporation Act in
respect of the Share Issuance.
YOUR VOTE IS IMPORTANT. THE AFFIRMATIVE VOTE OF THE HOLDERS OF A MAJORITY
OF THE SHARES OF AVIVA COMMON STOCK ENTITLED TO VOTE WITH RESPECT TO THE SHARE
ISSUANCE AND PRESENT AT THE AVIVA SPECIAL MEETING IN PERSON OR BY PROXY IS
REQUIRED TO APPROVE THE SHARE ISSUANCE. EVEN IF YOU PLAN TO ATTEND THE AVIVA
SPECIAL MEETING IN PERSON, WE REQUEST THAT YOU SIGN AND RETURN THE ENCLOSED
PROXY OR VOTING INSTRUCTION CARD AND THUS ENSURE THAT YOUR SHARES WILL BE
REPRESENTED AT THE AVIVA SPECIAL MEETING IF YOU ARE UNABLE TO ATTEND. IF YOU DO
ATTEND THE AVIVA SPECIAL MEETING AND WISH TO VOTE IN PERSON, YOU MAY WITHDRAW
YOUR PROXY AND VOTE IN PERSON.
By Order of the Board of Directors
James L. Busby
Secretary
Dallas, Texas
______________, 1998
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
state.
SUBJECT TO COMPLETION, DATED AUGUST 20, 1998
AVIVA PETROLEUM INC.
GARNET RESOURCES CORPORATION
JOINT PROXY STATEMENT/PROSPECTUS
This Joint Proxy Statement/Prospectus relates to the proposed merger of Aviva
Merger, Inc. a Delaware corporation ("Merger Sub") and an indirect, wholly owned
subsidiary of Aviva Petroleum Inc., a Texas corporation ("Aviva"), with and into
Garnet Resources Corporation, a Delaware corporation ("Garnet"), pursuant to the
Agreement and Plan of Merger dated as of June 24, 1998 among Aviva, Merger Sub
and Garnet (the "Merger Agreement"). The merger contemplated by the Merger
Agreement is referred to herein as the "Merger."
This Joint Proxy Statement/Prospectus also relates to the issuance by Aviva of
an aggregate of up to 14,036,987 shares of Aviva Common Stock (the "Share
Issuance"), of which (i) up to 1,149,216 shares would be issued in the Merger
pursuant to the Merger Agreement and (ii) 12,887,771 shares would be issued in
exchange for $15,000,000 in aggregate principal amount of Garnet's outstanding 9
1/2% Convertible Subordinated Debentures due December 21, 1998 (the
"Debentures") pursuant to the Debenture Purchase Agreement dated as of June 24,
1998 between Aviva and the holders of the Debentures (the "Debenture Purchase
Agreement"). Consummation of the purchases of the Debentures by Aviva is a
condition to Aviva's obligation to consummate the Merger.
As a result of the Merger, (i) Garnet would become a wholly owned subsidiary
of Aviva and (ii) each share of common stock, par value $.01 per share, of
Garnet ("Garnet Common Stock") outstanding immediately prior to the effective
time of the Merger (the "Effective Time"), other than Garnet Common Stock held
directly or indirectly by Aviva or Garnet, would be converted into 0.10 of one
share of common stock, without par value, of Aviva ("Aviva Common Stock");
provided, however, that any record holder of Garnet Common Stock who would not
be entitled to at least 100 shares of Aviva Common Stock upon consummation of
the Merger will receive cash at the rate of $0.02 per share for each of the
shares of Garnet Common Stock held by such holder.
This Joint Proxy Statement/Prospectus is being furnished to holders of Garnet
Common Stock in connection with the solicitation of proxies by the Board of
Directors of Garnet for use at the special meeting of stockholders of Garnet to
be held on September 29, 1998 (the "Garnet Special Meeting"). At the Garnet
Special Meeting, holders of Garnet Common Stock will be asked to adopt the
Merger Agreement.
This Joint Proxy Statement/Prospectus is also being furnished to holders of
Aviva Common Stock in connection with the solicitation of proxies by the Board
of Directors of Aviva for use at the special meeting in lieu of the 1998 annual
meeting of stockholders of Aviva to be held on September 29, 1998 (the "Aviva
Special Meeting"). At the Aviva Special Meeting, holders of Aviva Common Stock
will be asked to approve the Share Issuance, to elect two directors and to
approve the selection of KPMG Peat Marwick LLP as Aviva's independent auditors
for fiscal year 1998.
This Joint Proxy Statement/Prospectus also constitutes a prospectus of Aviva
with respect to up to 1,149,216 shares of Aviva Common Stock to be issued
pursuant to the Merger Agreement.
The shares of Aviva Common Stock issued pursuant to the Merger and in
connection with the purchase of the Debentures will be deposited with
ChaseMellon Shareholder Services L.L.C., as Depositary pursuant to a Depositary
Agreement with Aviva, and the Depositary will issue and deliver to the holders
of Garnet Common Stock and the Debentures Depositary Shares evidenced by
Depositary Receipts on the basis of one Depositary Share for each five shares of
Aviva Common Stock. The Aviva Depositary Shares will be listed on the American
Stock Exchange ("ASE").
On August 18, 1998, the middle market price of Aviva Common Stock on the
London Stock Exchange Limited was 6.50 pence and the closing price of Aviva
Depositary Shares (each of which represents five shares of Aviva Common Stock)
on the ASE was $0.50. On the same day, the closing price of Garnet Common
Stock, as reported on the OTC Bulletin Board ("OTCBB"), was $0.01.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY OTHER STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS JOINT PROXY STATEMENT/PROSPECTUS IS _____________, 1998. THIS
JOINT PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING FORM OF PROXY ARE FIRST
BEING MAILED TO STOCKHOLDERS OF GARNET AND AVIVA ON OR ABOUT _____________,
1998.
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS IN CONNECTION WITH THE SOLICITATION OF PROXIES OR THE
OFFERING OF SECURITIES MADE HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY AVIVA OR
GARNET. NEITHER THE DELIVERY OF THIS JOINT PROXY STATEMENT/PROSPECTUS NOR ANY
DISTRIBUTION OF THE SECURITIES OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES
CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF AVIVA OR
GARNET SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH HEREIN IS CORRECT
AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS JOINT PROXY STATEMENT/PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO PURCHASE,
ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH, OR
TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION OF AN
OFFER OR PROXY SOLICITATION.
AVAILABLE INFORMATION
AVIVA AND GARNET ARE SUBJECT TO THE INFORMATIONAL REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT") (FILE NOS. 1-
13440 AND 0-16621, RESPECTIVELY), AND, IN ACCORDANCE THEREWITH, FILE PERIODIC
REPORTS, PROXY STATEMENTS AND OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE "COMMISSION") RELATING TO THEIR RESPECTIVE BUSINESSES, FINANCIAL
STATEMENTS AND OTHER MATTERS. REPORTS, PROXY STATEMENTS AND OTHER INFORMATION
FILED BY AVIVA AND GARNET CAN BE INSPECTED AND COPIED AT THE PUBLIC REFERENCE
FACILITIES MAINTAINED BY THE COMMISSION AT ROOM 1024, 450 FIFTH STREET, N.W.,
JUDICIARY PLAZA, WASHINGTON, D.C. 20549, AND AT THE COMMISSION'S REGIONAL
OFFICES AT SEVEN WORLD TRADE CENTER, 13TH FLOOR, NEW YORK, NEW YORK 10048 AND
CITICORP CENTER, 500 WEST MADISON STREET, SUITE 1400, CHICAGO, ILLINOIS 60661-
2511. COPIES OF SUCH MATERIAL CAN BE OBTAINED BY MAIL FROM THE PUBLIC REFERENCE
SECTION OF THE COMMISSION AT 450 WEST FIFTH STREET, N.W., WASHINGTON, D.C.
20549, AT PRESCRIBED RATES. THE COMMISSION ALSO MAINTAINS A WEB SITE THAT
CONTAINS REPORTS, PROXY AND INFORMATION STATEMENTS AND OTHER INFORMATION
REGARDING AVIVA AND GARNET. THE ADDRESS OF THAT WEB SITE IS HTTP://WWW.SEC.GOV.
IN ADDITION, REPORTS, PROXY STATEMENTS AND OTHER INFORMATION CONCERNING AVIVA
MAY BE INSPECTED AT THE OFFICES OF THE ASE, 86 TRINITY PLACE, NEW YORK, NEW YORK
10006.
AVIVA HAS FILED WITH THE COMMISSION A REGISTRATION STATEMENT ON FORM S-4
(TOGETHER WITH ALL AMENDMENTS, SUPPLEMENTS AND EXHIBITS THERETO, THE
"REGISTRATION STATEMENT") UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), WITH RESPECT TO THE OFFERING, SALE AND DELIVERY OF THE AVIVA
COMMON STOCK TO BE ISSUED PURSUANT TO THE MERGER AGREEMENT. THE INFORMATION
CONTAINED HEREIN WITH RESPECT TO AVIVA AND ITS AFFILIATES, INCLUDING MERGER SUB,
HAS BEEN PROVIDED BY AVIVA, AND THE INFORMATION CONTAINED HEREIN WITH RESPECT TO
GARNET AND ITS AFFILIATES HAS BEEN PROVIDED BY GARNET, CERTAIN PARTS OF WHICH
WERE OMITTED IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE COMMISSION. FOR
FURTHER INFORMATION, REFERENCE IS HEREBY MADE TO THE REGISTRATION STATEMENT. ANY
STATEMENTS CONTAINED HEREIN CONCERNING THE PROVISIONS OF ANY DOCUMENT FILED AS
AN EXHIBIT TO THE REGISTRATION STATEMENT OR OTHERWISE FILED WITH THE COMMISSION
ARE NOT NECESSARILY COMPLETE, AND IN EACH INSTANCE REFERENCE IS MADE TO THE COPY
OF SUCH DOCUMENT SO FILED. EACH SUCH STATEMENT IS QUALIFIED IN ITS ENTIRETY BY
SUCH REFERENCE.
ALL INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS WITH
RESPECT TO AVIVA WAS SUPPLIED BY AVIVA, AND ALL INFORMATION CONTAINED IN THIS
JOINT PROXY STATEMENT/PROSPECTUS WITH RESPECT TO GARNET WAS SUPPLIED BY GARNET.
2
<PAGE>
FORWARD LOOKING STATEMENTS
STATEMENTS RELATING TO AVIVA CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS THAT ARE NOT HISTORICAL FACTS ARE FORWARD-LOOKING
STATEMENTS. IN ADDITION, AVIVA, THROUGH ITS MANAGEMENT, FROM TIME TO TIME MAKES
FORWARD-LOOKING PUBLIC STATEMENTS CONCERNING ITS EXPECTED FUTURE OPERATIONS AND
PERFORMANCE AND OTHER DEVELOPMENTS. SUCH FORWARD-LOOKING STATEMENTS ARE
NECESSARILY ESTIMATES REFLECTING AVIVA'S BEST JUDGMENT BASED ON CURRENT
INFORMATION AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES, AND THERE CAN BE NO
ASSURANCE THAT OTHER FACTORS WILL NOT AFFECT THE ACCURACY OF SUCH FORWARD-
LOOKING STATEMENTS. WHILE IT IS IMPOSSIBLE TO IDENTIFY ALL SUCH FACTORS,
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
ESTIMATED BY AVIVA 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 AND WORSENING FINANCIAL
DIFFICULTIES AFFECTING AVIVA'S CO-OWNER OF OIL AND GAS PROPERTIES IN COLOMBIA,
AS WELL AS OTHER FACTORS DESCRIBED IN THIS JOINT PROXY STATEMENT/PROSPECTUS.
CERTAIN OF THE MATTERS DISCUSSED IN THIS JOINT PROXY STATEMENT/PROSPECTUS
RELATING TO GARNET ARE FORWARD-LOOKING STATEMENTS, AND SUCH STATEMENTS INVOLVE
RISKS AND UNCERTAINTIES. THE FORWARD-LOOKING STATEMENTS WERE PREPARED ON THE
BASIS OF CERTAIN ASSUMPTIONS THAT RELATE, AMONG OTHER THINGS, TO COSTS EXPECTED
TO BE INCURRED IN THE DEVELOPMENT OF GARNET'S PROPERTIES, THE RECEIPT OF
ENVIRONMENTAL AND OTHER NECESSARY ADMINISTRATIVE PERMITS REQUIRED FOR SUCH
DEVELOPMENT, FUTURE OIL PRICES, FUTURE PRODUCTION RATES AND THE ABILITY TO
CONCLUDE A BUSINESS COMBINATION OR A DEBT RESTRUCTURING TRANSACTION. EVEN IF
THE ASSUMPTIONS ON WHICH THE PROJECTIONS ARE BASED PROVE ACCURATE AND
APPROPRIATE, THE ACTUAL RESULTS OF GARNET'S OPERATIONS IN THE FUTURE MAY VARY
WIDELY FROM THE FINANCIAL PROJECTIONS DUE TO UNFORESEEN ENGINEERING, MECHANICAL
OR TECHNOLOGICAL DIFFICULTIES IN DRILLING OR WORKING OVER WELLS, REGIONAL
POLITICAL ISSUES, GENERAL ECONOMIC CONDITIONS, INCREASED COMPETITION, CHANGES IN
GOVERNMENT REGULATION OR INTERVENTION IN THE OIL AND GAS INDUSTRY, AND OTHER
RISKS DESCRIBED HEREIN. ACCORDINGLY, THE ACTUAL RESULTS OF GARNET'S OPERATIONS
IN THE FUTURE MAY VARY WIDELY FROM THE FORWARD-LOOKING STATEMENTS INCLUDED
HEREIN.
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TABLE OF CONTENTS
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Page
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AVAILABLE INFORMATION............................................................................ 2
Forward Looking Statements.................................................................. 3
QUESTIONS AND ANSWERS ABOUT
THE AVIVA/GARNET MERGER..................................................................... 9
SUMMARY.......................................................................................... 12
The Companies............................................................................... 12
Our Reasons for the Merger.................................................................. 12
The Stockholder Meetings.................................................................... 12
Our Recommendations to Stockholders......................................................... 13
The Record Date for Voting at the Special Meetings.......................................... 13
Votes Required.............................................................................. 13
Voting...................................................................................... 13
Security Ownership of Management............................................................ 13
The Merger and the Merger Agreement......................................................... 14
Related Transactions........................................................................ 14
Ownership of Aviva Following the Merger..................................................... 14
Interests of Certain Persons in the Merger.................................................. 14
Directors of Aviva Following the Merger..................................................... 14
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Conditions to the Merger................................................................... 15
No Solicitation............................................................................ 15
Termination of the Merger Agreement........................................................ 15
Termination Fees........................................................................... 16
Material Federal Income Tax Consequences................................................... 16
Anticipated Accounting Treatment........................................................... 16
No Appraisal Rights........................................................................ 16
Comparative Rights of Garnet and Aviva Stockholders........................................ 16
RISK FACTORS.................................................................................... 17
Fixed Merger Consideration for Garnet Stockholders......................................... 17
Effect of Volatile Product Prices and Markets.............................................. 17
Reliance on Estimates of Proved Reserves and Future Net Cash Flows......................... 17
Replacement of Reserves.................................................................... 18
Substantial Capital Requirements........................................................... 18
Leverage................................................................................... 18
Drilling Risks............................................................................. 19
Title to Properties........................................................................ 19
Operating Hazards; Limited Insurance Coverage.............................................. 19
Year 2000 Compliance....................................................................... 19
Governmental Regulation and Environmental Matters.......................................... 20
Competition................................................................................ 20
Restrictions on Dividends.................................................................. 20
Risks Relating to Low-Priced Stock; Possible Effect of "Penny Stock" Rules on Liquidity for
Aviva's Securities..................................................................... 20
Possible Volatility of Stock Price......................................................... 21
Recent Losses.............................................................................. 21
MARKET PRICE AND DIVIDEND DATA.................................................................. 22
Market Prices.............................................................................. 22
Dividends.................................................................................. 23
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION.......................................... 24
Aviva Petroleum Inc........................................................................ 24
Garnet Resources Corporation............................................................... 26
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION..................................... 28
COMPARATIVE PER SHARE DATA...................................................................... 29
THE COMPANIES................................................................................... 30
Aviva...................................................................................... 30
Merger Sub................................................................................. 30
Garnet..................................................................................... 30
THE SPECIAL MEETINGS............................................................................ 30
Garnet..................................................................................... 30
Aviva...................................................................................... 31
REASONS FOR THE MERGER.......................................................................... 33
General Background......................................................................... 33
Aviva...................................................................................... 34
Garnet..................................................................................... 34
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Pro Forma Financial Condition.............................................................. 35
Aviva Board of Directors................................................................... 36
Garnet Board of Directors.................................................................. 38
THE MERGER...................................................................................... 39
General Description of the Merger.......................................................... 39
Interests of Certain Persons in the Merger................................................. 39
Federal Income Tax Consequences............................................................ 40
Accounting Treatment....................................................................... 40
Governmental and Regulatory Approvals...................................................... 40
Restrictions on Resales by Affiliates...................................................... 41
Rights of Dissenting Stockholders.......................................................... 41
CERTAIN TERMS OF THE MERGER AGREEMENT........................................................... 41
Effective Time of the Merger............................................................... 41
Manner and Basis of Converting Shares...................................................... 41
Garnet Options............................................................................. 42
Conditions to the Merger................................................................... 42
Representations and Warranties............................................................. 43
Certain Covenants; Conduct of Business Prior to the Merger................................. 43
No Solicitation............................................................................ 44
Certain Post-Merger Matters................................................................ 45
Termination or Amendment of the Merger Agreement........................................... 45
Expenses and Termination Fee............................................................... 46
Indemnification............................................................................ 46
THE DEBENTURE PURCHASE AGREEMENT................................................................ 46
General.................................................................................... 46
Representations and Warranties............................................................. 47
Conditions................................................................................. 47
Termination................................................................................ 47
THE BANK CREDIT FACILITY........................................................................ 48
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION............................................. 49
Unaudited Pro Forma Condensed Statement of Operations
Year Ended December 31, 1997....................................................... 49
Unaudited Pro Forma Condensed Statement of Operations
Six Months Ended June 30, 1998..................................................... 50
Unaudited Pro Forma Condensed Balance Sheet
June 30, 1998...................................................................... 51
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements................... 52
SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS ACTIVITIES...................................... 54
Quantities of Oil and Gas Reserves (unaudited)............................................. 54
Standardized Measure of Oil and Gas Reserves (unaudited)................................... 54
PRO FORMA PRODUCTION, SALES PRICES AND COSTS.................................................... 56
Pro Forma Productive Wells and Acreage..................................................... 57
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF AVIVA....................................................... 59
Results of Operations...................................................................... 59
Year 2000.................................................................................. 62
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Liquidity and Capital Resources............................................................ 62
New Accounting Pronouncements.............................................................. 63
BUSINESS AND PROPERTIES OF AVIVA................................................................ 64
General.................................................................................... 64
Current Operations......................................................................... 64
Risks Associated with Aviva's Business..................................................... 65
Products, Markets and Methods of Distribution.............................................. 66
Regulation................................................................................. 67
Competition................................................................................ 71
Employees.................................................................................. 72
Properties................................................................................. 72
Legal Proceedings.......................................................................... 77
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GARNET....................................................... 79
Liquidity and Capital Resources............................................................ 79
Year 2000.................................................................................. 80
New Accounting Pronouncements.............................................................. 80
Results of Operations...................................................................... 82
BUSINESS AND PROPERTIES OF GARNET............................................................... 84
General.................................................................................... 84
Risks Associated with Garnet's Business.................................................... 85
Competition................................................................................ 86
Markets.................................................................................... 86
Regulation................................................................................. 87
Employees.................................................................................. 87
Financial Information about Foreign and Domestic Operations and Export Sales............... 87
Properties................................................................................. 87
Supplementary Information in Respect of Oil and Gas Properties............................. 89
Legal Proceedings.......................................................................... 90
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.................................. 91
Aviva...................................................................................... 91
Garnet..................................................................................... 91
DESCRIPTION OF AVIVA CAPITAL STOCK.............................................................. 93
General.................................................................................... 93
Aviva Common Stock......................................................................... 93
Certain Provisions of Aviva Charter and Bylaws............................................. 93
Transfer Agent and Registrar............................................................... 93
DESCRIPTION OF DEPOSITARY SHARES................................................................ 94
Deposit and Withdrawal of Aviva Common Stock............................................... 94
Dividends, Other Distributions and Rights.................................................. 94
Record Dates............................................................................... 95
Voting of the Aviva Common Stock........................................................... 95
Inspection of Transfer Books............................................................... 95
Reports and Notices........................................................................ 96
Changes Affecting Aviva Common Stock....................................................... 96
Amendment and Termination of the Deposit Agreement......................................... 96
Charges of Depositary...................................................................... 97
General.................................................................................... 97
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COMPARATIVE RIGHTS OF AVIVA AND GARNET STOCKHOLDERS............................................. 97
Amendments to the Charter.................................................................. 97
Amendments to Bylaws....................................................................... 98
Board of Directors......................................................................... 98
Removal of Directors....................................................................... 98
Newly Created Directorships and Vacancies.................................................. 98
Special Meetings of Stockholders........................................................... 99
Action by Written Consent.................................................................. 99
Voting..................................................................................... 99
Mergers and Other Fundamental Transactions................................................. 99
Limitations on Directors' Liability........................................................ 100
Indemnification............................................................................ 100
THE AVIVA SPECIAL MEETING; ADDITIONAL MATTERS................................................... 101
Election of Aviva Directors................................................................ 101
Information Regarding Current Directors.................................................... 101
Information Regarding Nominees for Director................................................ 101
Executive Officers of Aviva................................................................ 102
Meetings and Committees of the Board of Directors.......................................... 102
Compliance with Section 16(a) of the Securities Exchange Act of 1934....................... 102
Summary Compensation Table................................................................. 103
Directors' Fees............................................................................ 103
Option Grants During 1997.................................................................. 103
Option Exercises During 1997 and Year End Option Values.................................... 103
Compensation Committee Interlocks and Insider Participation in Compensation Decisions...... 103
Employment Contracts....................................................................... 104
Compensation Committee Report on Executive Compensation.................................... 104
Performance Graph.......................................................................... 104
Security Ownership of Certain Beneficial Owners............................................ 106
Security Ownership of Management........................................................... 108
INDEPENDENT PUBLIC ACCOUNTANTS.................................................................. 110
LEGAL MATTERS................................................................................... 110
EXPERTS......................................................................................... 110
STOCKHOLDER PROPOSALS........................................................................... 110
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.............................. F - 1
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QUESTIONS AND ANSWERS ABOUT
THE AVIVA/GARNET MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? HOW WILL I BENEFIT?
A: Garnet is engaged in the oil and gas exploration and production business
through the ownership and operation of certain properties in Colombia.
Aviva is similarly engaged and is the co-owner of the Colombian oil and gas
properties operated by Garnet. Aviva also owns oil and gas properties
located in the offshore waters of the Gulf of Mexico. For various reasons,
including depressed oil and gas prices, Garnet is experiencing serious
financial difficulties. If Garnet were unable to continue to pay its share
of the costs of operating the Colombian properties, the financial burden of
doing so would fall on Aviva and both companies would risk forfeiture of
their interests in the properties. Aviva is experiencing similar financial
difficulties and is unlikely to be able to bear the additional financial
burden of operating the properties. The managements of the two companies
believe that a merger of the two companies, together with the debt relief
to be provided in conjunction with the merger, will enable the combined
company to withstand the current financial crisis.
Q: WHAT ARE POSSIBLE DISADVANTAGES TO ME IF THE TWO COMPANIES MERGE?
A: Although consummation of the merger will result in reduced leverage of the
combined company as a result of the conversion of outstanding debentures
into common stock and refinancing of current bank debt, there can be no
assurance that the combined company will be successful in pursuing its oil
and gas business. In addition, with respect to holders of Garnet common
stock, their position in the combined company will be heavily diluted,
particularly by holders of outstanding debentures whose interests will be
converted into shares of common stock of the combined company. Finally,
there is a risk that integration of the two companies will not be
successful, although such risk is minimized by the fact that Aviva and
Garnet are currently joint operating partners with respect to their
Colombian properties and that ongoing management by Garnet personnel will
be severely reduced.
Q: WHAT WILL GARNET STOCKHOLDERS RECEIVE FOR THEIR GARNET SHARES?
A: Depending on the number of shares of Garnet common stock you own, you will
receive either cash or depositary shares representing Aviva common stock.
Q: HOW DO I DETERMINE WHICH I WILL RECEIVE?
A: If you own less than 1,000 shares of Garnet common stock, you will receive
cash in the amount of $0.02 per share. If you own 1,000 or more shares
(i.e., enough to entitle you to receive at least 100 shares of Aviva common
stock), you will receive Aviva common stock.
Q: IF I AM ENTITLED TO AVIVA COMMON STOCK, WHAT WILL I RECEIVE?
A: You will receive one-tenth of one share of Aviva common stock in exchange
for each of your shares of Garnet common stock. This exchange ratio will
not change, even if the market price of Aviva's common stock or Garnet's
common stock increases or decreases between now and the date that the
merger is completed. Aviva will not issue fractional shares, but will pay
cash in lieu thereof.
Q: WILL I BE ABLE TO SELL THE AVIVA COMMON STOCK?
A: No, but you will be able to sell the depositary shares you receive in lieu
of Aviva common stock. In the U. S., the only market for Aviva securities
is the American Stock Exchange. The securities listed on that exchange are
depositary shares representing shares of Aviva common stock. Consequently,
the shares of Aviva common stock to be issued pursuant to the merger will
be deposited with an institutional depositary for the benefit of the former
Garnet stockholders. The depositary will issue depositary shares on the
basis of one depositary share for each five shares of Aviva common stock.
The depositary receipts representing the depositary shares will be
delivered to the former Garnet stockholders.
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Q: WILL AVIVA STOCKHOLDERS RECEIVE ANY SHARES AS A RESULT OF THE MERGER?
A: No. The merger will not have any effect on the number of shares of Aviva
common stock that you own.
Q: WHAT DO I NEED TO DO NOW?
A: Just mail your signed proxy card in the enclosed return envelope as soon as
possible so that your shares can be voted at the September 29, 1998 Aviva
special stockholder meeting (if you are an Aviva stockholder) or at the
September 29, 1998 Garnet special stockholder meeting (if you are a Garnet
stockholder).
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: If you are a Garnet stockholder, your broker will not be able to vote your
shares without instructions from you. If you are an Aviva stockholder,
your broker will not be able to vote your shares without instructions from
you, except with respect to the election of directors and ratification of
Aviva's independent accountants. You should instruct your broker to vote
your shares, following the directions by your broker. If you are a Garnet
stockholder and wish to revoke your proxy, you may do so (i) by writing to
Garnet Resources Corporation, 1214 Wilmington Avenue, Suite 303, Salt Lake
City, Utah 84106, Attention: President, or (ii) by attending the Garnet
Special Meeting and voting your shares in person. If you are an Aviva
stockholder and wish to revoke your proxy, you may do so (i) by writing to
Aviva Petroleum Inc., Suite 400, 8235 Douglas Avenue, Dallas, Texas 75225,
Attention: Secretary, or (ii) by attending the Aviva Special Meeting and
voting your shares in person.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD?
A: Yes. You can change your vote at any time before your proxy card is voted
at the applicable stockholder meeting. You can do this in one of three
ways. First, you can send a written notice stating that you would like to
revoke your proxy. Second, you can complete and submit a new proxy card.
Third, you can attend the appropriate meeting and vote in person. Your
attendance alone will not, however, revoke your proxy. If you have
instructed a broker to vote your shares, you must follow directions
received from your broker to change those instructions.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If you are a Garnet stockholder, after the merger is completed you
will receive written instructions for exchanging your shares of Garnet
common stock for depositary shares representing shares of Aviva common
stock (and your cash payment in lieu of any fractional share of Aviva
common stock). If you are an Aviva stockholder, you will keep your
certificates.
Q: WHAT HAPPENS TO MY FUTURE DIVIDENDS?
A: Neither Aviva nor Garnet has, during the last fifteen years, paid any
dividends with respect to its outstanding common stock. The board of
directors does not now intend to pay any such dividends in the foreseeable
future.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO STOCKHOLDERS?
A: The Merger will not constitute a tax-free reorganization for federal income
tax purposes. Accordingly, a holder of Garnet common stock that exchanges
such stock for Aviva common stock in the Merger will recognize gain or loss
equal to the difference between the fair market value of the Aviva common
stock, plus any cash received in lieu of fractional shares, received by
such holders in the Merger and the adjusted basis of the Garnet common
stock surrendered in the Merger. Thus, the Merger could result in a
federal income tax liability.
The merger will not have any effect on Aviva stockholders for federal
income tax purposes.
Neither Aviva nor Garnet will recognize gain or loss solely as a result of
the Merger.
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Q: ARE ANY REGULATORY APPROVALS NEEDED TO COMPLETE THE MERGER?
A: No, other than certain filings under the securities or blue sky laws of
certain states.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We hope to complete the merger in the third quarter of 1998. We are
working toward completing the merger as quickly as possible.
Q: WHERE CAN I FIND MORE INFORMATION ABOUT THE COMPANIES?
A: Both of our companies file periodic reports and other information with the
Securities and Exchange Commission. You may read and copy this information
at the Commission's public reference facilities. Please call the
Commission at 1-800-SEC-0330 for information about these facilities. This
information is also available at the Internet site maintained by the
Commission at http://www.sec.gov and, in the case of Aviva, at the offices
of the American Stock Exchange. For a more detailed description of the
information available, please see pages 2 and 3.
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you are an Aviva stockholder and you have more questions about the
merger, you should contact:
AVIVA PETROLEUM INC.
8235 Douglas Avenue
Suite 400
Dallas, Texas 75225
Telephone: (214) 691-3464
Attn.: Mr. Ronald Suttill
If you are a Garnet stockholder and you have more questions about the
merger, you should contact:
GARNET RESOURCES CORPORATION
1214 Wilmington Avenue
Suite 303
Salt Lake City, Utah 84106
Telephone: (801) 484-3088
Attn.: Mr. Douglas W. Fry
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SUMMARY
This summary primarily highlights selected information from this document
and may not contain all of the information that is important to you. To
understand the merger fully and for a more complete description of the legal
terms of the merger, you should read carefully this entire document and the
other available information referred to in "Where Can I Find More Information
about the Companies?" (page 11). The merger agreement is filed as an exhibit to
the Registration Statement of which this Joint Proxy Statement/Prospectus is a
part. Aviva and Garnet will furnish copies of the merger agreement to any
stockholder of such corporation upon request. We have included page references
parenthetically to direct you to a more complete description of the topics
presented in this summary.
THE COMPANIES (PAGE 30)
AVIVA PETROLEUM INC. (PAGE 30)
8235 Douglas Avenue
Suite 400
Dallas, Texas 75225
Aviva is engaged in the exploration for and development and production of
oil and gas in Colombia and offshore in the United States. At June 30, 1998,
Aviva had consolidated total assets of approximately $10.131 million and
consolidated stockholders' deficit of approximately $1.981 million and employed
8 persons. For the year ended December 31, 1997, and the six months ended June
30, 1998, Aviva reported net losses of $22.482 million and $5.729 million,
respectively. Non-cash write-downs of oil and gas properties included in these
figures were $19.953 million (1997) and $4.725 million (1998), respectively,
resulting primarily from substantial reductions in oil and gas prices in these
periods.
GARNET RESOURCES CORPORATION (PAGE 30)
RR 2 Box 4400
Nacogdoches, Texas 75961
Garnet is engaged primarily in the exploration, development and production
of oil and gas properties located outside the United States. Garnet currently
holds interests in oil and gas properties in Colombia and in Papua New Guinea.
At June 30, 1998, Garnet had consolidated total assets of approximately $8.880
million and consolidated stockholders' deficit of approximately $14.462 million
and employed approximately 75 persons. Garnet reported net losses of $27.790
million and $6.879 million for the year ended December 31, 1997 and the six
months ended June 30, 1998, respectively. The non-cash write-downs of oil and
gas properties for such periods were $25.752 million and $5.127 million,
respectively. These write-downs resulted primarily from substantial reductions
in oil and gas prices.
The report of Garnet's independent public accountants with respect to
Garnet's financial statements as of and for the year ended December 31, 1997 was
qualified by a discussion of the substantial uncertainty that exists regarding
Garnet's ability to continue as a going concern. You should review the
discussion contained in this Joint Proxy Statement/Prospectus under the caption
"Reasons for the Merger -- Garnet."
OUR REASONS FOR THE MERGER (PAGE 33)
Subsidiaries of Garnet and Aviva are co-owners of oil and gas properties
located in Colombia. For various reasons, including depressed oil and gas
prices, Garnet is experiencing serious financial difficulties. If Garnet were
unable to continue to pay its share of the costs of operating the Colombian
properties, the financial burden of doing so would fall on Aviva and both
companies would risk forfeiture of their interests in the properties. Aviva is
experiencing similar financial difficulties and is unlikely to be able to bear
the additional financial burden of operating the properties. The managements of
the two companies believe that a merger of the two companies, together with the
debt relief to be provided in conjunction with the merger, will enable the
combined company to withstand the current financial crisis.
THE STOCKHOLDER MEETINGS (PAGE 30)
AVIVA. A special meeting of the stockholders of Aviva in lieu of its
annual meeting will be held on Tuesday, September 29, 1998, at Vinson & Elkins
L.L.P., 2001 Ross Avenue, Suite 3800, Dallas, Texas 75201 at 10:00 a.m. local
time. At the meeting, Aviva stockholders will be asked to:
. approve the issuance of shares of Aviva common stock to Garnet
stockholders in the merger and to the holders of the Garnet debentures
pursuant to the debenture purchase agreement,
. elect two directors; and
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. ratify the appointment of KPMG Peat Marwick LLP as Aviva's independent
auditors.
GARNET. A special meeting of the stockholders of Garnet will be held on
Tuesday, September 29, 1998, at 201 South Main, Suite 1800, Salt Lake City, Utah
at 10:00 a.m. local time. At the meeting, Garnet stockholders will be asked to
approve the merger agreement.
OUR RECOMMENDATIONS TO STOCKHOLDERS (PAGE 36)
TO AVIVA STOCKHOLDERS:
The Aviva Board believes that the merger is fair to you and in your best
interest and unanimously recommends that you vote "FOR" the issuance of the
Aviva shares (i) in the merger and (ii) to the holders of the Garnet debentures
in exchange for the debentures. The Aviva Board also unanimously recommends that
you vote "FOR" the election of the Board's nominees to the Aviva Board of
Directors and "FOR" the ratification of the Board's selection of KPMG Peat
Marwick LLP as Aviva's independent accountants.
TO GARNET STOCKHOLDERS:
The Garnet Board believes that the merger is fair to you and in your best
interest and unanimously recommends that you vote "FOR" the approval of the
merger agreement.
THE RECORD DATE FOR VOTING AT THE SPECIAL MEETINGS (PAGE 31)
AVIVA. The close of business on August 10, 1998 was the record date for
determining the holders of common stock of Aviva that are entitled to vote at
the Aviva special meeting. There are 31,482,716 shares of common stock of Aviva
entitled to be voted at the Aviva special meeting.
GARNET. The close of business on August 10, 1998 was the record date for
determining the holders of common stock of Garnet that are entitled to vote at
the Garnet special meeting. There are 11,492,162 shares of common stock of
Garnet entitled to be voted at the Garnet special meeting.
VOTES REQUIRED (PAGE 31)
AVIVA. The transaction of business at the Aviva special meeting requires
the presence in person or by proxy of the holders of one-third of the shares of
common stock of Aviva entitled to vote in order to constitute a quorum. If a
quorum is present, (i) approval of the Share Issuance requires the affirmative
vote of a majority of the shares of common stock of Aviva entitled to vote with
respect thereto present in person or by proxy at the Aviva special meeting, (ii)
the election of each director requires a plurality of the votes cast and (iii)
ratification of the selection of independent accountants requires the
affirmative vote of the holders of a majority of the shares of common stock of
Aviva present in person or by proxy at the meeting and entitled to vote thereon.
GARNET. The transaction of business at the Garnet special meeting requires
the presence in person or by proxy of the holders of a majority of the shares of
Garnet common stock entitled to vote in order to constitute a quorum. If a
quorum is present, the approval and adoption of the merger agreement requires
the affirmative vote of the holders of a majority of the shares of Garnet common
stock entitled to vote.
VOTING (PAGE 31)
AVIVA. Aviva stockholders will have one vote at the Aviva Special Meeting
for each share of Aviva Common stock held of record on August 10, 1998 for each
of the matters to be considered at the meeting. If you are a holder of Aviva
depositary shares, you should instruct the depositary to vote the Aviva common
stock represented by your depositary shares in accordance with your wishes,
following directions provided by the depositary.
GARNET. Garnet stockholders will have one vote at the Garnet special
meeting for each share of Garnet common stock held of record on August 10, 1998
for each of the matters to be considered at the meeting.
SECURITY OWNERSHIP OF MANAGEMENT (PAGES 91 AND 108)
AVIVA. As of the Aviva record date, the directors and executive officers
of Aviva owned approximately 8.7% of the outstanding shares of Aviva common
stock entitled to vote at the Aviva special meeting. Each of such directors and
executive officers has advised Aviva that he or she plans to vote or to direct
the vote of all such shares of Aviva common stock in favor of the Share
Issuance, the election of the
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proposed nominees for director and the ratification of Aviva's independent
auditors.
GARNET. At the Garnet record date, the directors and executive officers of
Garnet did not own any of the outstanding shares of Garnet common stock
entitled to vote at the Garnet special meeting.
THE MERGER AND THE MERGER AGREEMENT
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 39)
AVIVA STOCKHOLDERS:
After the Merger, each share of Aviva common stock will remain outstanding
and will represent one share of the combined companies, which will continue
under the name "Aviva Petroleum Inc."
GARNET STOCKHOLDERS:
At the effective time of the merger, (i) Merger Sub will be merged with and
into Garnet, and Garnet will be the surviving corporation in the merger, (ii)
Garnet will become a wholly owned subsidiary of Aviva and (iii) subject to
certain provisions with respect to fractional shares, each issued and
outstanding share of Garnet common stock will, depending on the number of shares
of Garnet common stock you hold, be converted into the right to receive $0.02 in
cash or be converted into Aviva common stock at the exchange ratio of one-tenth
of one share of Aviva common stock for each share of Garnet common stock.
If you hold less than 1,000 shares of Garnet common stock (which at such
exchange ratio would entitle you to receive less than 100 shares of Aviva common
stock), you will receive cash at the rate of $0.02 per share. If you hold 1,000
shares of Garnet common stock, you will receive shares of Aviva common stock at
the rate of one-tenth of one Aviva share for each Garnet share.
RELATED TRANSACTIONS (PAGE 46)
GARNET DEBENTURES. Aviva has entered into an agreement to purchase
$15,000,000 in aggregate principal amount of Garnet's outstanding 9 1/2%
Convertible Subordinated Debentures in exchange for 12,887,771 shares of Aviva
common stock. Consummation of this transaction is a condition to the merger.
BANK CREDIT FACILITY. Aviva and its bank lender have amended Aviva's bank
credit facility to allow Aviva to borrow $15,000,000 at the effective time of
the Merger. Aviva will use these funds to pay $7.44 million owed to its bank
lender and approximately $6.3 million owed by Garnet to another bank, which
borrowings were guaranteed by the Overseas Private Investment Corporation.
Consummation of this transaction is a condition to the merger.
OWNERSHIP OF AVIVA FOLLOWING THE MERGER (PAGE 39)
Assuming that, following the record dates, there are no changes in the
numbers of shares of Aviva common stock or Garnet common stock outstanding and
the numbers of shares of Garnet common stock held by the holders thereof do not
change prior to the effective date of the merger, Aviva would issue 1,124,714
shares of its common stock and pay $5,000 in cash pursuant to the merger. No
shares of Aviva common stock will be issued on exercise of Garnet stock options
after the merger because the holders of such options will be required to
surrender the options as a condition of the merger. Consequently, current
holders of Garnet common stock would own approximately 2% of the outstanding
Aviva common stock after the merger. The holders of the Garnet debentures will
acquire Aviva common stock representing approximately 28% of the shares
outstanding after the merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 39)
In considering the Garnet Board's recommendation that Garnet stockholders
vote in favor of approval and adoption of the merger agreement and the
transactions related thereto, Garnet stockholders should be aware that the
President and Chief Executive Officer and the Vice President -- Finance and
Secretary of Garnet have change in control severance agreements with Garnet that
give them interests in the merger that are different from other Garnet
stockholders.
DIRECTORS OF AVIVA FOLLOWING THE MERGER (PAGE 101)
Pursuant to the merger agreement, Aviva and Garnet have agreed that the
Board of Directors of Aviva immediately following the merger will be reduced to
three and will consist of two members of Aviva's Board of Directors and, in
addition, Robert J. Cresci, a director of Garnet.
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<PAGE>
CONDITIONS TO THE MERGER (PAGE 42)
Aviva and Garnet will not complete the merger unless a number of conditions
are satisfied or, if permitted, waived by them. These include:
. the approval and adoption of the merger agreement by the stockholders
of Garnet;
. the approval of the Share Issuance by the stockholders of Aviva;
. the absence of any law, regulation or order making the merger illegal
or otherwise prohibiting consummation of the merger;
. the depositary shares representing the Aviva common stock shall have
been listed on the American Stock Exchange; and
. the accuracy in all material respects of the representations and
warranties of each party and compliance in all material respects with
all agreements and covenants by each party.
In addition, Aviva will not complete the merger unless a number of conditions
are satisfied or, if permitted, waived by it. These include:
. The Garnet debentures shall have been acquired by Aviva in exchange
for 12,887,771 shares of Aviva common stock;
. The bank credit agreement shall have been amended and the bank shall
have made available to Aviva credit of $15,000,000 against which Aviva
shall have refinanced the indebtedness theretofore outstanding under
the bank credit agreement and shall have paid and discharged the
Garnet bank debt;
. The aggregate obligation of Garnet with respect to the principal of
the Garnet bank debt shall not, on the closing date, exceed $6,000,000
(net of escrow amounts);
. The aggregate amount of consolidated current assets of Garnet, less
the aggregate amount of its consolidated liabilities, absolute and
contingent, whether or not accrued (exclusive of indebtedness
represented by the Garnet bank debt and the Garnet debentures), shall
not be less than $100,000; and
. Each holder of outstanding Garnet stock options shall have surrendered
all such options to Garnet for cancellation.
NO SOLICITATION (PAGE 44)
Garnet has agreed, subject to certain exceptions, not to initiate or engage
in any discussions with another party regarding a business combination with such
other party while the merger is pending.
TERMINATION OF THE MERGER AGREEMENT (PAGE 45)
BY EITHER PARTY. Aviva and Garnet mutually can agree to terminate the
merger agreement at any time, whether before or after the receipt of stockholder
approval, without completing the merger. In addition, either one of them can
terminate the merger agreement if:
. the merger is not completed before September 30, 1998;
. a governmental authority prohibits the merger;
. the stockholders of Garnet do not approve and adopt the merger
agreement; or
. the stockholders of Aviva do not approve the Share Issuance.
BY AVIVA. Aviva may terminate the merger agreement:
. upon a breach of any representation, warranty, covenant or agreement
on the part of Garnet set forth in the merger agreement or if any
representation or warranty of Garnet shall have become untrue, in
either case such that Aviva's conditions to effecting the merger would
not be satisfied and such breach or untruth
15
<PAGE>
would result in a material adverse effect on Garnet;
. if (A) a third party acquires securities representing more than 30% of
the outstanding voting securities of Garnet or (B) individuals who as
of the date of the merger agreement constitute the Board of Directors
of Garnet shall cease for any reason to constitute a majority of the
Board of Directors of Garnet; or
. if the Board of Directors of Garnet withdraws or modifies its
recommendation of the merger agreement or the merger in a manner
adverse to Aviva or recommends any superior proposal, or resolves to
do so.
BY GARNET. Garnet may terminate the merger agreement:
. upon a breach of any representation, warranty, covenant or agreement
on the part of Aviva set forth in the merger agreement or if any
representation or warranty of Aviva shall have become untrue, in
either case such that Garnet's conditions to effecting the merger
would not be satisfied, and such breach or untruth would result in a
material adverse effect on Aviva; or
. at any time prior to approval and adoption of the merger agreement and
the merger by the stockholders of Garnet, upon 72 hours prior written
notice to Aviva, if the Board of Directors of Garnet shall have
concluded in good faith based on advice of outside counsel that such
action is necessary to act in a manner consistent with its fiduciary
duties under applicable law and subject to certain other conditions.
TERMINATION FEES (PAGE 46)
TERMINATION FEES PAYABLE TO AVIVA. If the merger agreement is terminated
by Aviva because the Board of Directors of Garnet shall have withdrawn or
modified its recommendation of the merger in a manner adverse to Aviva or shall
have approved or recommended any superior proposal or because Garnet shall have
breached the merger agreement or because of an acquisition of voting power or
change of board of Garnet, Garnet will be required to pay to Aviva $50,000.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
(PAGE 40)
The merger will not constitute a tax-free reorganization for federal income
tax purposes. Accordingly, even though no cash is received in the transaction, a
holder of Garnet common stock that exchanges such stock for Aviva common stock
in the merger will recognize gain or loss equal to the difference between the
fair market value of the Aviva common stock received by such holder in the
merger and the adjusted basis of the Garnet common stock surrendered in the
merger. Thus, the merger could result in a federal income tax liability even
though no cash is received in the transaction.
TAX MATTERS CAN BE COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER TO
YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT YOUR OWN
TAX ADVISORS TO UNDERSTAND FULLY THE TAX CONSEQUENCES OF THE MERGER TO YOU
ANTICIPATED ACCOUNTING TREATMENT (PAGE 40)
The merger will be accounted for as a "purchase" of Garnet for financial
accounting purposes.
NO APPRAISAL RIGHTS (PAGE 41)
Neither Aviva's nor Garnet's stockholders are entitled to any appraisal or
dissenter's rights in connection with the merger.
COMPARATIVE RIGHTS OF GARNET AND AVIVA STOCKHOLDERS (PAGE 97)
In the merger, if you are a Garnet stockholder, you will receive depositary
shares, each of which represents five shares of Aviva common stock and you will
thereby become an Aviva stockholder. There are various differences between the
rights of Garnet stockholders and the rights of Aviva stockholders. If you are
an Aviva stockholder, there will be no change in your rights as an Aviva
stockholder after the merger.
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<PAGE>
RISK FACTORS
Stockholders of Aviva and Garnet should carefully review the following
factors together with the other information contained in this Joint Proxy
Statement/Prospectus prior to voting on the proposals herein.
FIXED MERGER CONSIDERATION FOR GARNET STOCKHOLDERS
Stockholders of Garnet should consider that the merger consideration will
not be adjusted in the event of an increase or decrease in the market price of
Garnet Common Stock or an increase or decrease in the market price of Aviva
Common Stock. Holders of Garnet Common Stock will receive 0.10 of one
share of Aviva Common Stock for each share of Garnet Common Stock held. If any
holder of Garnet Common Stock would not be entitled to at least 100 shares of
Aviva Common Stock upon consummation of the Merger, the shares of Garnet Common
Stock so held will be converted into the right to receive cash at the rate of
$0.02 per share. Stockholders of Garnet are urged to obtain current stock market
quotations for Garnet Common Stock.
EFFECT OF VOLATILE PRODUCT PRICES AND MARKETS
The future financial condition and results of operations of Aviva will
depend upon the prices received for oil and gas production and the costs of
acquiring, finding, developing and producing reserves. Prices for oil and gas
are subject to fluctuations in response to relatively minor changes in supply,
demand, market uncertainty and a variety of additional factors that are beyond
the control of Aviva. These factors include worldwide political instability
(especially in the Middle East and other oil-producing regions), the foreign
supply of oil and gas, the price of foreign imports, the level of consumer
product demand, government regulations and taxes, the price and availability of
alternative fuels and the overall economic environment. A substantial or
extended decline in oil or gas prices would have a material adverse effect on
Aviva's financial position, results of operations, quantities of oil and gas
that may be economically produced and access to capital.
The sale of oil and gas production of Aviva depends upon a number of
factors beyond its control, including the availability and capacity of
transportation and processing facilities. A substantial portion of Aviva's oil
and a significant portion of its gas is transported through gathering systems
and pipelines that are not owned by Aviva. Transportation space on such
gathering systems and pipelines is occasionally limited and at times unavailable
due to repairs or improvements being made to such facilities or due to such
space being utilized by other oil and gas shippers that may or may not have
priority transportation agreements. Aviva has not experienced any material
inability to market its proved reserves of oil or gas as a result of limited
access to transportation space. If transportation space is materially
restricted or is unavailable in the future, Aviva's ability to market its oil or
gas could be impaired and cash flow from the affected properties could be
reduced, which could have a material adverse effect on Aviva's financial
condition or results of operations. See "-- Governmental Regulation and
Environmental Matters."
Oil and gas prices have historically been volatile and are likely to
continue to be volatile in the future. Such volatility makes it difficult to
estimate the value of producing properties for acquisition and to budget and
project the financial return on exploration and development projects involving
producing properties. In addition, unusually volatile prices often disrupt the
market for oil and gas properties, as buyers and sellers have more difficulty
agreeing on the purchase price of properties. In particular, from January 2,
1997 to August 14, 1998, the prices of crude oil have ranged from a high of
$26.62 per Bbl to a low of $11.56 per Bbl and gas prices have ranged from a high
of $3.78 per MMbtu to a low of $1.78 per MMbtu, in each case as the reported
NYMEX Daily Prompt Month Closing Price.
RELIANCE ON ESTIMATES OF PROVED RESERVES AND FUTURE NET CASH FLOWS
Information relating to Aviva's and Garnet's proved oil and gas reserves
set forth in this Joint Proxy Statement/Prospectus is based upon engineering
estimates. Reserve engineering is a subjective process of estimating the
recovery from underground accumulations of oil and gas that cannot be measured
in an exact manner, and the accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Estimates of economically recoverable oil and gas reserves and of
future net cash flows necessarily depend upon a number of variable factors and
assumptions, such as historical
17
<PAGE>
production from the area compared with production from other producing areas,
the assumed effects of regulations by governmental agencies and assumptions
concerning future oil and gas prices, future operating costs, severance and
excise taxes, development costs and workover and remedial costs, all of which
may in fact vary considerably from actual results. Because all reserve estimates
are to some degree speculative, the quantities of oil and gas that are
ultimately recovered, production and operation costs, the amount and timing of
future development expenditures, and future oil and gas sales prices may all
vary from those assumed in these estimates. Those variances may be material. In
addition, different reserve engineers may make different estimates of reserve
quantities and cash flows based upon the same available data.
The present value of estimated future net cash flows should not be
construed as the current market value of the estimated proved oil and gas
reserves attributable to Aviva's and Garnet's properties. In accordance with
applicable requirements of the Commission, the estimated discounted future net
cash flows from proved reserves are generally based on prices and costs as of
the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as the amount and timing of actual production, supply and demand
for oil and gas, curtailments or increases in consumption by gas purchasers and
changes in governmental regulations or taxation. The timing of actual future
net cash flows from proved reserves, and thus their actual present value, will
be affected by the timing of both the production and the incurrence of expenses
in connection with development and production of oil and gas properties. In
addition, the 10% discount factor, which is required by the Commission to be
used to calculate discounted future net cash flows for reporting purposes, is
not necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with Aviva's or Garnet's business
or the oil and gas industry in general.
REPLACEMENT OF RESERVES
Aviva's future success will depend on its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable. The
proved reserves of Aviva will generally decline as reserves are depleted, except
to the extent that Aviva conducts successful exploration or development
activities or acquires properties containing proved reserves, or both. There
can be no assurance that Aviva's planned development and exploration projects
and acquisition activities will result in significant additional reserves or
that Aviva will have success drilling productive wells at low finding and
development costs. Furthermore, while Aviva's revenues may increase if
prevailing oil and gas prices increase significantly, Aviva's finding costs for
additional reserves could also increase.
SUBSTANTIAL CAPITAL REQUIREMENTS
Aviva and Garnet have made, and Aviva will continue to make, substantial
capital expenditures for the development, exploration, acquisition and
production of oil and gas reserves. Historically, Aviva and Garnet have
financed these expenditures primarily with proceeds from bank borrowings,
operational cash flow and private placements of equity and debt. Aviva and
Garnet respectively made capital expenditures (including expenditures for
acquisitions) of $8.7 million and $6.1 million during 1996, $2.8 million and
$2.9 million during 1997 and $0.4 million and $0.3 million for the six months
ended June 30, 1998. If following the consummation of the Merger, revenues
decrease as a result of lower oil and gas prices or operating difficulties,
Aviva may be limited in its ability to expend the capital necessary to undertake
or complete its drilling program in future years. There can be no assurance that
additional debt or equity financing on terms which are acceptable to Aviva or
cash generated by operations will be available to meet these requirements.
LEVERAGE
Upon consummation of the Merger, Aviva will have long-term indebtedness of
approximately $15 million under its credit facility with ING (U.S.) Capital
Corporation and Chase Bank of Texas, N.A. (the "Credit Facility"). It is
anticipated that Aviva will incur additional indebtedness in the future to
assist in financing its growth. Any delay in repayment or default on such debt
could have an adverse effect on Aviva and its stockholders.
Aviva's degree of leverage could have important consequences to the holders
of the Aviva Common Stock, including the following: (i) Aviva's ability to
obtain additional financing for working capital, capital
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<PAGE>
expenditures, acquisitions, general corporate purposes or other purposes may be
impaired in the future; (ii) a substantial portion of Aviva's cash flow from
operations must be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to Aviva for other purposes;
(iii) Aviva's borrowings under the Credit Facility will be at variable rates of
interest, which will expose Aviva to the risk of increased interest rates; (iv)
Aviva may be substantially more leveraged than certain of its competitors, which
may place Aviva at a competitive disadvantage; and (v) Aviva's degree of
leverage may limit its flexibility to adjust to changing market conditions,
reduce its ability to withstand competitive pressures and make it more
vulnerable to a downturn in general economic conditions or its business.
DRILLING RISKS
Drilling for oil and gas involves a high degree of risk. For any given
well, there is no assurance that a reservoir will be encountered or, if
encountered, will produce in commercial quantities. The cost of drilling,
completing and operating wells is often uncertain, and drilling operations may
be curtailed, delayed or canceled as a result of a variety of factors,
including, without limitation, unexpected drilling conditions, pressure or
irregularities in formations, equipment failures or accidents, adverse weather
conditions and shortages or delays in the delivery of equipment. Aviva's future
drilling activities may not be successful and, if unsuccessful, such failure
will have an adverse effect on Aviva's future results of operations and
financial condition. While all drilling, whether development or exploratory,
involves these risks, exploratory drilling involves greater risks of dry holes
or failure to find commercial quantities of hydrocarbons. Because of the
percentage of Aviva's capital budget devoted to exploratory projects, it is
likely that Aviva will continue to experience exploration and abandonment
expenses.
TITLE TO PROPERTIES
Substantially all of Aviva's oil and gas properties will be mortgaged to
secure borrowings under the Credit Facility. In the event of Aviva's default
under certain provisions of the Credit Facility, Aviva's ownership interest in
these properties may be subject to foreclosure by the lender.
OPERATING HAZARDS; LIMITED INSURANCE COVERAGE
Aviva's operations will be 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, Aviva 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, employer's liability, comprehensive general liability,
appropriate auto and marine liability and workers' compensation insurance.
Aviva believes that such insurance coverage is customary for companies engaged
in similar operations, but Aviva 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. Aviva 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 Aviva.
On August 3, 1998, Colombian leftist guerilla groups launched a nationwide
series of attacks. As a result of one attack, Aviva's oil production and storage
facilities at the Mary field were damaged and minor damage was inflicted on the
Linda facilities. While it is too early to accurately assess the cost of
repairs, Aviva does not believe the property damage will exceed property
insurance limits. As of August 10, 1998, Aviva's oil production from the Linda
and Toroyaco fields had been restored, however, production from the Mary and
Miraflor fields may be suspended or significantly curtailed for at least several
weeks and possibly longer depending on the extent of damage and availability of
repair crews.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish the 21st
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<PAGE>
century dates from 20th century dates. As a result, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. Based on a preliminary study, Aviva 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. Aviva continues to evaluate appropriate courses of
corrective action, including replacement of certain systems whose associated
costs would be recorded as assets and amortized. Although Aviva 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, there can be no
assurance that Aviva's upgraded system will contain all necessary software
routines and programs necessary for the accurate calculation, display, storage
and manipulation of data involving dates. Moreover, Aviva cannot determine what
effect, if any, the Year 2000 requirements will have on its vendors, customers,
other businesses with which it conducts business and the numerous local, state,
federal and other U.S. and foreign governmental entities by which it is
regulated, governed or taxed. No assurance can be given that the computer
systems and software of such entities will be Year 2000 compliant or that
compliance costs or the impact of Aviva's failure to achieve substantial Year
2000 compliance will not have a material adverse effect on Aviva's financial
position and results of operations.
GOVERNMENTAL REGULATION AND ENVIRONMENTAL MATTERS
Aviva's business will be regulated by certain local, state and federal laws
and regulations relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and gas.
Aviva's business will also be subject to extensive and changing environmental
and safety laws and regulations governing plugging and abandonment, the
discharge of materials into the environment or otherwise relating to
environmental protection. As with any owner of property, Aviva will also be
subject to cleanup costs and liability for hazardous materials, asbestos or any
other toxic or hazardous substance that may exist on or under any of its
properties. The implementation of new, or the modification of existing, laws or
regulations, including amendments to the Oil Pollution Act of 1990, as amended,
or regulations which may be promulgated thereunder, could have a material
adverse effect on Aviva. The imposition of any such liabilities on Aviva could
have a material adverse effect on Aviva's financial condition and results of
operations.
COMPETITION
The oil and gas industry is highly competitive. Aviva will encounter
competition from other oil and gas companies in all areas of its operations,
including the acquisition of producing properties. Aviva's competitors include
major integrated oil and gas companies and numerous independent oil and gas
companies, individuals and drilling and income programs. Many of its
competitors are large, well-established companies with substantially larger
operating staffs and greater capital resources than Aviva and which, in many
instances, have been engaged in the energy business for a much longer time than
Aviva. Such companies may be able to pay more for productive oil and gas
properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than Aviva's financial or
human resources will permit. Aviva's ability to acquire additional properties
and to discover reserves in the future will be dependent upon its ability to
evaluate and select suitable properties and to consummate transactions in a
highly competitive environment.
RESTRICTIONS ON DIVIDENDS
Dividends will be paid on Aviva Common Stock only if, as and when declared
by the Board of Directors of Aviva. Aviva's ability to pay dividends is limited
by the terms of the Credit Facility and may be limited by terms of any future
debt indentures and preferred stock. It is Aviva's current intention to retain
earnings to fund future growth and, therefore, Aviva will not pay dividends.
RISKS RELATING TO LOW-PRICED STOCK; POSSIBLE EFFECT OF "PENNY STOCK" RULES ON
LIQUIDITY FOR AVIVA'S SECURITIES
If the Aviva Depositary Shares cease to be listed on the ASE, the Aviva
Depositary Shares would become subject to Rule 15g-9 under the Exchange Act.
This Rule (the "Penny Stock Rule") imposes additional sales practice
requirements on broker-dealers that sell such securities to persons other than
established customers and "accredited investors" (generally, individuals with a
net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or
$300,000 together with their spouses). For transactions covered by Rule 15g-9,
a
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<PAGE>
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, such rule may affect the ability of broker-dealers to sell
Aviva's securities and may affect the ability of purchasers to sell any of
Aviva's securities in the secondary market.
The Commission has adopted regulations that define a "penny stock" to be
any equity security that has a market price (as therein defined) of less than
$5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless
exempt, the rules require delivery, prior to any transaction in a penny stock,
of a disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about sales commissions payable
to both the broker-dealer and the registered representative and current
quotations for the securities. Finally, monthly statements are required to be
sent disclosing recent price information for the penny stock held in the account
and information on the limited market in penny stock.
The foregoing required penny stock restrictions will not apply to Aviva
Depositary Shares if Aviva satisfies ASE requirements regarding continued
listing. There can be no assurance that Aviva Depositary Shares will qualify
for exemption from the penny stock restrictions. In any event, even if Aviva
Depositary Shares were exempt from such restrictions, Aviva would remain subject
to Section 15(b)(6) of the Exchange Act, which gives the Commission the
authority to restrict any person from participating in a distribution of penny
stock, if the Commission finds that such a restriction would be in the public
interest.
If Aviva securities were subject to the rules on penny stocks, the market
liquidity for Aviva could be materially adversely affected.
POSSIBLE VOLATILITY OF STOCK PRICE
Following the Merger, the market price for Aviva capital stock may be
highly volatile depending on various factors, including the general economy,
stock market conditions, announcements by Aviva, its competitors and
fluctuations in Aviva's overall operating results. In addition, the stock
market historically has experienced volatility which has affected the market
price of securities of many companies and which has sometimes been unrelated to
the operating performance of such companies. The trading price of Aviva capital
stock could also be subject to significant fluctuations in response to
variations in quarterly results of operations, governmental regulatory action,
general trends in the industry and overall market conditions, and other factors.
No assurance can be given or prediction made as to the relationship between
trading prices of Garnet Common Stock and Aviva Common Stock prior to completion
of the Merger and future trading prices for Aviva Common Stock following the
Merger.
RECENT LOSSES
Aviva has incurred net losses in the last five years of its operations.
There can be no assurance that Aviva will be profitable in the future. See
"Selected Historical Consolidated Financial Information -- Aviva Petroleum Inc."
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MARKET PRICE AND DIVIDEND DATA
MARKET PRICES
Aviva Depositary Shares (each representing five shares of Aviva Common
Stock) are traded on the ASE under the symbol "AVV" and Garnet Common Stock is
traded on the OTC Bulletin Board (the "OTCBB") under the symbol "GARN." The
following table sets forth, for the periods indicated, the range of high and low
per share sales prices for Aviva Depositary Shares and Garnet Common Stock as
reported on the ASE and the OTCBB.
<TABLE>
<CAPTION>
Aviva Garnet
-------------- -------------
High Low High Low
------ ----- ----- -----
<S> <C> <C> <C> <C>
1995*
First Quarter................................ $ 6.13 $5.13 $3.50 $2.13
Second Quarter............................... 7.38 5.13 3.13 1.75
Third Quarter................................ 5.38 4.00 2.38 1.63
Fourth Quarter............................... 4.88 4.25 2.38 1.00
1996*
First Quarter................................ 4.38 3.88 2.00 0.94
Second Quarter............................... 11.38 3.50 1.00 0.44
Third Quarter................................ 6.25 3.00 0.63 0.25
Fourth Quarter............................... 5.75 3.00 0.56 0.25
1997*
First Quarter................................ 4.13 2.88 1.00 0.38
Second Quarter............................... 3.00 1.63 0.50 0.31
Third Quarter................................ 4.13 1.63 0.50 0.25
Fourth Quarter............................... 2.06 0.98 0.38 0.03
1998*
First Quarter................................ 1.75 1.00 0.10 0.03
Second Quarter............................... 1.19 0.69 0.14 0.01
Third Quarter (through August 10, 1998)...... 0.88 0.50 0.02 0.01
</TABLE>
* Calendar quarters. The fiscal years of both Aviva and Garnet end on
December 31.
The Aviva Common Stock (rather than Aviva Depositary Shares) is traded on the
London Stock Exchange Limited (the "LSE"). The following table sets forth, for
the periods indicated, the middle market prices for the Aviva Common Stock as
published in the Daily Official List and do not represent actual transactions.
Prices on the LSE are expressed in British pounds sterling and, accordingly, the
prices for the Common Stock traded on the LSE 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.
<TABLE>
<CAPTION>
Pounds Dollars
------ -------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
1995
First Quarter............................. (Pounds)0.55 (Pounds)0.47 $0.87 $0.73
Second Quarter............................ 0.58 0.53 0.93 0.84
Third Quarter............................. 0.53 0.45 0.85 0.71
Fourth Quarter............................ 0.55 0.38 0.85 0.59
1996
First Quarter............................. 0.46 0.34 0.71 0.52
Second Quarter............................ 0.41 0.25 0.63 0.38
Third Quarter............................. 0.34 0.25 0.53 0.38
Fourth Quarter............................ 0.41 0.28 0.67 0.43
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Pounds Dollars
------ -------
High Low High Low
---- ---- ---- ---
<S> <C> <C> <C> <C>
1997
First Quarter............................. (Pounds)0.42 (Pounds)0.28 $0.69 $0.45
Second Quarter............................ 0.32 0.27 0.51 0.44
Third Quarter............................. 0.30 0.21 0.50 0.34
Fourth Quarter............................ 0.25 0.17 0.40 0.28
1998
First Quarter............................. 0.28 0.12 0.45 0.20
Second Quarter............................ 0.14 0.10 0.22 0.16
Third Quarter (through August 10, 1998)... 0.10 0.07 0.17 0.12
</TABLE>
- -----------
On April 15, 1998, the last trading day prior to the date of the joint
announcement by Aviva and Garnet that they had entered into an agreement in
principle contemplating the Merger, the closing per share sales prices of Aviva
Depositary Shares (each representing five shares of Aviva Common Stock) and
Garnet Common Stock, as reported on the ASE and the OTCBB, were $1.00 and
$0.0625, respectively. See the cover page of this Joint Proxy
Statement/Prospectus for recent closing prices of Aviva Depositary Shares and
Garnet Common Stock.
Following the Merger, Aviva Common Stock will continue to be traded on the
LSE and Aviva Depositary Shares will continue to be traded on the ASE. Following
the Merger, Garnet Common Stock will cease to be traded on the OTCBB and there
will be no further market for the Garnet Common Stock.
DIVIDENDS
No cash dividends were declared or paid on Aviva Common Stock or Garnet
Common Stock during any of the calendar quarters indicated in the table above.
The Board of Directors of Aviva does not intend for the foreseeable future
to declare any dividends on the outstanding shares of Aviva Common Stock. The
declaration and payment of future dividends, however, will be at the discretion
of the Board of Directors of Aviva and will depend upon, among other things,
future earnings of Aviva, its general financial condition, the success of its
business activities, its capital requirements and general business conditions.
23
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
AVIVA PETROLEUM INC.
The following selected historical financial information for each of the
years ended December 31, 1993 through 1997 have been derived from Aviva's
Consolidated Financial Statements, which have been audited by KPMG Peat Marwick
LLP, independent public accountants. The selected consolidated financial data as
of June 30, 1997 and 1998 and for the six month periods ended June 30, 1997 and
1998 have been derived from the unaudited consolidated financial statements of
Aviva, have been prepared on the same basis as the other financial statements of
Aviva and, in the opinion of Aviva, reflect and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of Aviva for
such periods. The information set forth below is qualified by reference to and
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere herein. The oil and gas price declines
discussed under "Reasons for the Merger -- General Background" have materially
and adversely affected the financial results of operations of Aviva and Garnet
for the year ended December 31, 1997 and the six months ended June 30, 1998 and
may continue to materially and adversely affect their financial results of
operations for the third and fourth quarters of fiscal year 1998 through further
write-downs of the carrying costs of oil and gas properties and otherwise.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
CONSOLIDATED INCOME (in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT DATA FOR
THE PERIOD:
Revenues $ 9,726 $13,750 $10,928 $ 8,546 $10,682 $ 2,060 $ 5,553
Loss before extraordinary item
and cumulative effect
of accounting change $(22,482) $ (937) $(2,689) $(2,460) $(1,963) $(5,729) $(14,036)
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) $(5,729) $(14,036)
Loss before extraordinary
item and cumulative
effect of accounting
change per common share $ (0.71) $ (0.03) $ (0.09) $ (0.08) $ (0.08) $ (0.18) $ (0.45)
Basic and diluted net loss
per common share $ (0.71) $ (0.03) $ (0.09) $ (0.08) $ (0.11) $ (0.18) $ (0.45)
Weighted average
shares outstanding 31,483 31,483 31,483 31,483 24,756 31,483 31,483
Cash dividends per
common share $ - $ - $ - $ - $ - $ - $ -
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEET
DATA AT PERIOD END:
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $ 16,445 $42,944 $45,460 $42,383 $45,017 $10,131 $ 25,844
Long term debt, including
current portion $ 7,690 $ 7,990 $13,067 $ 6,640 $ 5,476 $ 7,440 $ 7,840
Stockholders' equity (deficit) $ 3,748 $26,230 $27,167 $29,856 $32,316 $(1,981) $ 12,194
</TABLE>
Effective January 1, 1993, Aviva 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, Aviva recorded ceiling test write-downs of oil and gas
properties of $19,953,000 in 1997 and $4,725,000 in the first half of 1998.
25
<PAGE>
GARNET RESOURCES CORPORATION
The following selected historical financial information for each of the years
ended December 31, 1993 through 1997 have been derived from Garnet's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent public accountants. The report of Arthur Andersen LLP with
respect to Garnet's financial statements as of and for the year ended December
31, 1997 was qualified by a discussion of the substantial uncertainty that
exists regarding Garnet's ability to continue as a going concern. See "Reasons
for the Merger -- Garnet." The selected consolidated financial data as of June
30, 1997 and 1998 and for the six month periods ended June 30, 1997 and 1998
have been derived from the unaudited consolidated financial statements of
Garnet, have been prepared on the same basis as the other financial statements
of Garnet and, in the opinion of Garnet, reflect and include all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of Garnet for
such periods. The information set forth below is qualified by reference to and
should be read in conjunction with the consolidated financial statements and
related notes thereto included elsewhere herein. The oil and gas price declines
discussed under "Reasons for the Merger -- General Background" have materially
and adversely affected the financial results of operations of Aviva and Garnet
for the year ended December 31, 1997 and the six months ended June 30, 1998 and
may continue to materially and adversely affect their financial results of
operations for the third and fourth quarters of fiscal year 1998 through further
write-downs of the carrying costs of oil and gas properties and otherwise.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED SIX MONTHS
ENDED
DECEMBER 31, JUNE 30
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1998 1997
---- ---- ---- ---- ---- ---- ----
CONSOLIDATED INCOME (in thousands, except per share data)
STATEMENT DATA FOR
THE PERIOD:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 9,182 $11,709 $ 8,881 $ 4,355 $ 4,597 $ 2,095 $ 5,322
Loss before
cumulative effect
of accounting change $(27,790) $(2,060) $(4,623) $(7,426) $(3,275) $ (6,879) $(16,074)
Cumulative effect to
January 1, 1993 of change in
accounting for taxes $ - $ - $ - $ - $ (172) $ - $ -
Net loss $(27,790) $(2,060) $(4,623) $(7,426) $(3,447) $ (6,879) $(16,074)
Loss before cumulative
effect of accounting change
per common share $ (2.42) $ (0.18) $ (0.40) $ (0.67) $ (0.29) $ (0.60) $ (1.40)
Basic and diluted net loss
per common share $ (2.42) $ (0.18) $ (0.40) $ (0.67) $ (0.31) $ (0.60) $ (1.40)
Weighted average
shares outstanding 11,492 11,492 11,417 11,126 11,125 11,492 11,492
Cash dividends per
common share $ - $ - $ - $ - $ - $ - $ -
CONSOLIDATED BALANCE SHEET
DATA AT PERIOD END:
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $ 16,460 $48,522 $48,959 $49,300 $52,151 $ 8,880 $ 29,804
Long term debt, including
current portion $ 22,641 $23,634 $24,195 $19,438 $15,436 $ 21,302 $ 23,138
Stockholders' equity $ (7,583) $20,207 $22,267 $25,790 $33,216 $(14,462) $ 4,133
(deficit)
</TABLE>
Effective January 1, 1993, Garnet 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.
27
<PAGE>
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following selected unaudited pro forma combined financial information
has been derived from and should be read in conjunction with the Unaudited Pro
Forma Condensed Combined Financial Statements and notes thereto included
elsewhere in this Joint Proxy Statement/Prospectus. The following selected
unaudited pro forma combined financial information is based on the historical
consolidated balance sheets and related historical consolidated statements of
operations of Aviva and Garnet as adjusted to give effect to the Merger using
the purchase method of accounting for business combinations. In addition, the
following selected unaudited pro forma combined financial information gives
effect to the purchase of the Garnet Debentures by Aviva pursuant to the
Debenture Purchase Agreement, the borrowing by Aviva of $15 million pursuant to
the Bank Credit Facility and the application of such funds to pay Aviva's
indebtedness to the bank and Garnet's Chase Loan (as defined herein). The
following selected unaudited pro forma combined financial information may not
necessarily reflect the financial condition or results of operations of Aviva
that would actually have resulted had the Merger occurred as of the date and for
the periods indicated or reflect the future results of operations of Aviva.
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, 1997 June 30, 1998
----------------- ----------------
(In thousands, except per share data)
COMBINED OPERATING STATEMENT
DATA FOR THE PERIOD:
<S> <C> <C>
Revenues $ 18,708 $ 3,988
======== ========
Net loss (48,242) (12,272)
======== ========
Basic and diluted net loss per common share (1.04) (0.26)
======== ========
Cash dividends per common share -- --
======== ========
<CAPTION>
As of
June 30, 1998
-------------
COMBINED BALANCE SHEET
DATA AT PERIOD END:
Total assets $ 21,239
========
Long-term debt, including current portion 15,000
========
Stockholders' equity 169
========
</TABLE>
28
<PAGE>
COMPARATIVE PER SHARE DATA
Set forth below are the net income and book value per common share data for
Aviva and Garnet on an historical basis, a pro forma basis for Aviva and an
equivalent pro forma basis for Garnet. The Aviva pro forma data was derived by
combining historical consolidated financial information of Aviva and Garnet
using the purchase method of accounting for business combinations, all on the
basis described under "Selected Unaudited Pro Forma Combined Financial
Information" herein. The equivalent pro forma data for Garnet was calculated by
multiplying the Aviva pro forma per common share data by the Exchange Ratio of
0.10. No dividends were paid by either Aviva or Garnet during the periods
presented.
The information set forth below should be read in conjunction with the
respective audited and unaudited consolidated financial statements and related
notes thereto of Aviva and Garnet and the unaudited pro forma condensed
financial information and notes thereto included elsewhere in this Joint Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, 1997 Ended June 30, 1998
----------------- -------------------
<S> <C> <C>
AVIVA HISTORICAL PER COMMON SHARE DATA:
Loss from continuing operations (basic and diluted)................ $(0.71) $ (0.18)
Cash dividends..................................................... -- --
Book value......................................................... 0.12 (0.06)
AVIVA PRO FORMA PER COMMON SHARE DATA:
Loss from continuing operations (basic and diluted)................ $(1.04) $ (0.26)
Cash dividends..................................................... -- --
Book value......................................................... 0.13 0.004
GARNET HISTORICAL PER COMMON SHARE DATA:
Loss from continuing operations (basic and diluted)................ $(2.42) $ (0.60)
Cash dividends..................................................... -- --
Book value......................................................... (0.66) (1.26)
GARNET EQUIVALENT PRO FORMA PER COMMON SHARE DATA:
Loss from continuing operations (basic and diluted)................ $(0.10) $ (0.03)
Cash dividends..................................................... -- --
Book value......................................................... 0.01 0.0004
</TABLE>
29
<PAGE>
THE COMPANIES
AVIVA
Aviva Petroleum Inc. is a Texas corporation that, 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. Aviva was incorporated in 1973
and the Aviva Common Stock has been traded on the London Stock Exchange Limited
(the "LSE") since 1982. Depositary shares ("Depositary Shares"), each
representing the beneficial ownership of five shares of Aviva Common Stock, have
traded on the Primary List of the American Stock Exchange (the "ASE") since May
31, 1995, and, prior to that, on the Emerging Company Marketplace of the ASE
since November 14, 1994. Aviva's principal executive offices are located in
Dallas, Texas and Aviva maintains a field office in Venice, Louisiana.
Through a wholly owned subsidiary, Aviva is the owner of interests in, and
is engaged in exploration for, and development and production of oil from, four
Colombian concessions granted by Empresa Colombiana de Petroleos, the Colombian
national oil company ("Ecopetrol"). Aviva's Colombian activities are carried
out pursuant to four joint operating agreements between Neo Energy, Inc., a
wholly owned subsidiary ("Neo"), and Aviva's co-owner Argosy Energy
International ("Argosy" or the "Partnership"), a subsidiary of Garnet. Neo has
a 45% interest and Argosy has the remaining 55% interest in the properties
covered by the four joint operating agreements. Argosy is the operator of all
the properties subject to those agreements.
For the year ended December 31, 1997, Aviva had consolidated revenues of
$9.726 million and a consolidated net loss of $22.482 million or $0.71 per
share. For the six months ended June 30, 1998, Aviva had consolidated revenues
of $2.060 million and a consolidated net loss of $5.729 million or $0.18 per
share. Aviva's consolidated total stockholders' deficit at June 30, 1998 was
$1.981 million.
MERGER SUB
Merger Sub is a wholly-owned subsidiary of Aviva incorporated on June 24,
1998 in the State of Delaware.
GARNET
Garnet Resources Corporation is a Delaware corporation that is engaged
primarily in the exploration, development and production of oil and gas
properties located outside the United States. Garnet currently holds interests
in oil and gas properties in the Republic of Colombia and the Independent State
of Papua New Guinea.
Garnet's only revenue producing properties are its oil and gas properties
located in Colombia. These properties are co-owned by Argosy and Neo, a wholly
owned subsidiary of Aviva. Argosy Energy Incorporated, a wholly owned
subsidiary of Garnet, is the general partner of Argosy and owns an 89.11%
interest in Argosy. Garnet owns an additional 10.13% interest in Argosy as a
limited partner. Argosy is the operator of all the properties subject to the
four joint operating agreements described above among Argosy, Neo and Ecopetrol.
For the year ended December 31, 1997, Garnet had consolidated revenues of
$9.182 million and a consolidated net loss of $27.790 million or $2.42 per
share. For the six months ended June 30, 1998, Garnet had consolidated revenues
of $2.095 million and a consolidated net loss of $6.879 million or $0.60 per
share. Garnet's consolidated total stockholders' deficit at June 30, 1998 was
$14.462 million. The report of Garnet's independent public accountants with
respect to Garnet's financial statements as of and for the year ended December
31, 1997 was qualified by a discussion of the substantial uncertainty that
exists regarding Garnet's ability to continue as a going concern.
THE SPECIAL MEETINGS
GARNET
DATE, TIME AND PLACE. The Special Meeting of stockholders of Garnet will
be held on Tuesday, September 29, 1998, at 201 South Main, Suite 1800, Salt Lake
City, Utah, commencing at 10:00 a.m. local time.
30
<PAGE>
PURPOSE OF THE SPECIAL MEETING. The purposes of the Garnet Special Meeting
are to consider and vote upon (i) a proposal to adopt the Merger Agreement and
(ii) such other matters as may properly be brought before the Garnet Special
Meeting.
RECORD DATE AND OUTSTANDING SHARES. Only holders of record of Garnet
Common Stock at the close of business on the Record Date (August 10, 1998) are
entitled to notice of, and to vote at, the Garnet Special Meeting. There were
approximately 1,600 holders of record of Garnet Common Stock on the Record Date,
with 11,492,162 shares of Garnet Common Stock issued and outstanding. Each share
of Garnet Common Stock entitles the holder thereof to one vote on each matter
submitted for stockholder approval. See "Security Ownership by Certain
Beneficial Owners and Management" for information regarding persons known to the
management of Garnet to be the beneficial owners of more than 5% of the
outstanding Garnet Common Stock.
VOTING AND REVOCATION OF PROXIES. All properly executed proxies that are
not revoked will be voted at the Special Meeting in accordance with the
instructions contained therein. If a holder of Garnet Common Stock executes and
returns a proxy and does not specify otherwise, the shares represented by such
proxy will be voted "for" adoption of the Merger Agreement in accordance with
the recommendation of the Board of Directors of Garnet. A stockholder of Garnet
who has executed and returned a proxy may revoke it at any time before it is
voted at the Garnet Special Meeting by (i) executing and returning a proxy
bearing a later date, (ii) filing written notice of such revocation with the
President of Garnet at Garnet Resources Corporation, 1214 Wilmington Ave., Suite
303, Salt Lake City, Utah 84106, stating that the proxy is revoked or (iii)
attending the Garnet Special Meeting and voting in person.
VOTE REQUIRED. The presence at the Garnet Special Meeting, in person or by
proxy, of the holders of a majority of the outstanding shares of Garnet Common
Stock entitled to vote at the meeting will constitute a quorum for the
transaction of business, and adoption of the Merger Agreement requires the
affirmative vote of a majority of the issued and outstanding Garnet Common Stock
entitled to vote thereon. On the Record Date, there were 11,492,162 shares of
Garnet Common Stock outstanding and entitled to vote at the Garnet Special
Meeting. In determining whether the Merger Agreement has received the requisite
number of affirmative votes, abstentions and broker non-votes will have the same
effect as a vote against the Merger Agreement.
Directors and officers of Garnet do not own any shares of Garnet Common
Stock that were issued and outstanding on the Record Date.
SOLICITATION OF PROXIES. In addition to solicitation by mail, the
directors, officers, employees and agents of Garnet may solicit proxies from its
stockholders by personal interview, telephone, telegram or otherwise. Garnet
will bear the costs of the solicitation of proxies from its stockholders, except
that Aviva and Garnet will each pay one-half of the cost of printing this Joint
Proxy Statement/Prospectus, Commission and other regulatory filing fees incurred
in connection with this Joint Proxy Statement/Prospectus. Arrangements will
also be made with brokerage firms and other custodians, nominees and fiduciaries
who hold of record voting securities of Garnet for the forwarding of
solicitation materials to the beneficial owners thereof. Garnet will reimburse
such brokers, custodians, nominees and fiduciaries for the reasonable out-of-
pocket expenses incurred by them in connection therewith.
OTHER MATTERS. At the date of this Joint Proxy Statement/Prospectus, the
Board of Directors of Garnet does not know of any business to be presented at
the Garnet Special Meeting other than as set forth in the notice accompanying
this Joint Proxy Statement/Prospectus. If any other matters should properly come
before the Garnet Special Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies. The persons voting such proxies
will not use discretionary authority granted from proxies voting against the
Merger to adjourn the Garnet Special Meeting in order to solicit additional
votes.
AVIVA
DATE, TIME AND PLACE. The Special Meeting of stockholders of Aviva will be
held on September 29, 1998, at Vinson & Elkins L.L.P., 2001 Ross Avenue, Suite
3800, Dallas, Texas commencing at 10:00 a.m. local time.
31
<PAGE>
PURPOSE OF THE SPECIAL MEETING. The purposes of the Aviva Special Meeting
are to consider and vote upon (i) the Share Issuance, (ii) the election of a
board of directors consisting of two directors (iii) the selection of KPMG Peat
Marwick LLP as Aviva's independent auditors for fiscal year 1998 and (iv) such
other matters as may properly be brought before the Aviva Special Meeting.
RECORD DATE AND OUTSTANDING SHARES. Only holders of record of Aviva Common
Stock at the close of business on the Record Date (August 10, 1998) are entitled
to notice of, and to vote at, the Aviva Special Meeting. There were
approximately 5,663 holders of record of Aviva Common Stock on the Record Date,
with 31,482,716 shares of Aviva Common Stock issued and outstanding. Each share
of Aviva Common Stock entitles the holder thereof to one vote on each matter
submitted for stockholder approval. See "Security Ownership by Certain
Beneficial Owners and Management" for information regarding persons known to the
management of Aviva to be the beneficial owners of more than 5% of the
outstanding Aviva Common Stock.
VOTING AND REVOCATION OF PROXIES. All properly executed proxies that are
not revoked will be voted at the Aviva Special Meeting in accordance with the
instructions contained therein. If a holder of Aviva Common Stock executes and
returns a proxy and does not specify otherwise, the shares represented by such
proxy will be voted "for" approval of the Share Issuance, "for" the election of
the Board's nominees for directors and "for" the selection of KPMG Peat Marwick
LLP as Aviva's independent auditors for fiscal year 1998, all in accordance with
the recommendation of the Board of Directors of Aviva. A stockholder of Aviva
who has executed and returned a proxy may revoke it at any time before it is
voted at the Aviva Special Meeting by (i) executing and returning a proxy
bearing a later date, (ii) filing written notice of such revocation with the
Secretary of Aviva at Aviva Petroleum Inc., Suite 400, 8235 Douglas Avenue,
Dallas, Texas 75225, stating that the proxy is revoked or (iii) attending the
Aviva Special Meeting and voting in person.
VOTE REQUIRED. Quorum. The presence at the Aviva Special Meeting, in
person or by proxy, of the holders of a third of the outstanding shares of Aviva
Common Stock entitled to vote at the meeting will constitute a quorum for the
transaction of business. On the Record Date, there were 31,482,716 shares of
Aviva Common Stock outstanding and entitled to vote at the Aviva Special
Meeting.
SHARE ISSUANCE. The Share Issuance does not, under the Texas Business
Corporation Act (the "TBCA"), require stockholder approval. The rules of the
American Stock Exchange (the "ASE") require, however, that the Share Issuance be
submitted to the stockholders of Aviva and be approved by a majority of the
shares of Aviva Common Stock entitled to vote thereon and present in person or
by proxy at the Aviva Special Meeting. In determining whether the proposal has
received the affirmative vote of a majority of the shares of Aviva Common Stock
present and entitled to vote thereon, abstentions and broker non-votes will not
be counted.
ELECTION OF DIRECTORS. A plurality of the votes cast is required to elect
a nominee to the Aviva Board of Directors. Accordingly, abstentions and broker
non-votes will have no effect on the outcome of the election of directors
assuming a quorum is present or represented at the meeting.
RATIFICATION OF AUDITORS' SELECTION. The affirmative vote of the holders
of a majority of the shares of Aviva Common Stock represented at the Aviva
Special Meeting and entitled to vote on the matter is required to approve the
proposal to ratify the selection of KPMG Peat Marwick LLP as Aviva's independent
auditors for fiscal year 1998. If the stockholders do not ratify the selection
of KPMG Peat Marwick LLP, the selection of independent auditors will be
reconsidered by the Aviva Board of Directors.
Directors and officers of Aviva own beneficially an aggregate of 2,880,291
shares of Aviva Common Stock that were issued and outstanding on the Record Date
(representing approximately 9.04% of the outstanding Aviva Common Stock on the
Record Date). Each of such directors and officers has advised Aviva that he
intends to vote or direct the vote of all such shares of Aviva Common Stock in
favor of the Share Issuance, the election of the Board's nominees for directors
and ratification of the selection of KPMG Peat Marwick LLP as Aviva's
independent auditors for fiscal year 1998.
SOLICITATION OF PROXIES. In addition to solicitation by mail, the
directors, officers, employees and agents of Aviva may solicit proxies from its
stockholders by personal interview, telephone, telegram or otherwise. Aviva
will bear the costs of the solicitation of proxies from its stockholders, except
that Aviva and Garnet will each pay one-half of the cost of printing this Joint
Proxy Statement/Prospectus, the Commission and other regulatory filing fees
incurred in connection with this Joint Proxy Statement/Prospectus and the
solicitation fee of $7,500 described below. Arrangements will also be made with
brokerage firms and other custodians, nominees and fiduciaries who hold of
record voting securities of Aviva for the forwarding of solicitation materials
to the beneficial owners thereof. Aviva will reimburse such brokers,
custodians, nominees and fiduciaries for the reasonable out-of-pocket expenses
incurred by them in
32
<PAGE>
connection therewith. Aviva has engaged the services of ChaseMellon Shareholder
Services, L.L.C. to distribute proxy solicitation materials to brokers, banks
and other nominees and to assist in the solicitation of proxies from Aviva
stockholders for a fee of $7,500 plus payment of certain transaction costs and
additional out-of-pocket expenses.
OTHER MATTERS. At the date of this Joint Proxy Statement/Prospectus, the
Board of Directors of Aviva does not know of any business to be presented at the
Aviva Special Meeting other than as set forth in the notice accompanying this
Joint Proxy Statement/Prospectus. If any other matters should properly come
before the Aviva Special Meeting, it is intended that the shares represented by
proxies will be voted with respect to such matters in accordance with the
judgment of the persons voting such proxies. The persons voting such proxies
will not use discretionary authority granted from proxies voting against the
Merger to adjourn the Aviva Special Meeting in order to solicit additional
votes.
REASONS FOR THE MERGER
GENERAL BACKGROUND
Aviva owns interests in oil and gas properties in both Colombia and
offshore in the United States. The Colombian properties are, however, Aviva's
primary source of oil and gas reserves. Aviva's total standardized measure of
discounted (at 10% per annum) net future cash flows applicable to proved oil and
gas reserves at December 31, 1997 was $11.420 million. Of this amount, $9.967
million was attributable to its interests in the Colombian properties.
These properties are co-owned by subsidiaries of Aviva and Garnet. Neo, a
wholly owned subsidiary of Aviva, owns a 45% interest and Argosy, a subsidiary
of Garnet, owns the remaining 55% interest in the properties covered by four
joint operating agreements among Neo and Argosy and Ecopetrol. Neo and Argosy
are parties to four contracts with Ecopetrol, being called Santana, La Fragua,
Yuruyaco and Aporte Putumayo. All four contracts relate to properties located
in the Putumayo Basin of southwestern Colombia. Argosy is the operator under
all four joint operating agreements.
Argosy has, on behalf of both co-owners, filed with Ecopetrol applications
for formal relinquishment of the Yuruyaco and Aporte Putumayo contracts, and the
relinquishment of the La Fragua contract has been formally accepted by
Ecopetrol. The operations of the co-owners in Colombia are concentrated in the
Santana contract area.
Twenty-one wells have been drilled on the properties covered by the Santana
contract. Of thirteen exploratory wells, seven have been productive and six
were dry holes. Of eight development wells, seven have been productive. Four
fields have been discovered and have been declared commercial by Ecopetrol.
Gross production from the Santana contract has totaled approximately 13.4
million barrels during the period from April 1992, when production commenced,
through December 1997. Aviva's share of this production was approximately 2.0
million barrels and Garnet's share was approximately 2.5 million barrels.
The Santana contract covers a 28-year period and required certain
exploration expenditures in the early years of the contract (all of such
obligations have been fulfilled by the co-owners) and, in the later years of the
contract, allows exploitation of reserves that have been found. The Santana
contract provides 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 contract, less certain costs of transporting
the oil to the point of sale. Under the contract, 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 65% reversionary
interest in the field and is required to pay 65% of future operating costs and
50% of future capital costs. If, alternatively, Ecopetrol declines to declare
the discovery commercial, Neo and Argosy have the right to proceed with
development and production at their own expense until such time as they have
recovered 200% of the costs incurred, at which time Ecopetrol is entitled to
back in for a 50% working interest in the field without payment or reimbursement
of any historical costs. Exploration costs (as defined in the agreement)
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.
The co-owners may initiate the recompletion of certain existing wells and
various miscellaneous projects. Aviva's share of the estimated future costs of
these development activities is approximately $0.3 million and Garnet's share is
approximately $0.4 million, in each case as of June 30, 1998. Depending on the
results of future exploration and development activities, substantial
expenditures that have not been anticipated may be required. Failure by the
co-owners to fund certain of these capital expenditures could, under either the
contract or the joint operating agreement between the co-owners, result in the
forfeiture of all or part of the co-owners' interests in this contract.
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Production from the Santana contract has been sold to Ecopetrol pursuant to
various sales contracts, the most recent of which became effective on 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 crude oil is exported. If the crude oil is exported, the price received by
the co-owners 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 oil is not exported,
the price received by the co-owners 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 blend at the point of sale as
compared with the quality of Cano Limon crude (the "Cano Limon Adjustment").
During 1997, Ecopetrol exported the crude each month and the net sales price
averaged $17.39 per barrel after the handling and commercialization charges and
the Pipeline Blend Adjustment.
During the last quarter of calendar year 1997 and in the first half of
calendar year 1998, world oil prices have declined dramatically. This decline
in oil prices has been pronounced in Colombia. Colombian oil prices have,
during the eighteen month period ended June 30, 1998, fallen from a high of
$22.71 in January 1997 to $8.05 in June 1998. Whereas the sale price for crude
oil from the Santana contract averaged $18.58 per barrel during the first half
of calendar year 1997 and $17.39 per barrel for the year, the sale price
averaged $11.53 per barrel during the first half of calendar year 1998.
These price declines have materially and adversely affected the financial
results of operations of Aviva and Garnet for the year ended December 31, 1997
and the six months ended June 30, 1998 and may continue to materially and
adversely affect their financial results of operations for the third and fourth
quarters of fiscal year 1998 through further write-downs of the carrying costs
of oil and gas properties and otherwise.
Aviva recorded write-downs of its carrying amounts of its Colombian oil and
gas properties of $17.829 million and $3.355 million for the year ended December
31, 1997 and the six months ended June 30, 1998, respectively. Together with
comparable write-downs of its carrying amounts of its United States oil and gas
properties of $2.124 million and $1.370 million, respectively, these were the
dominant causes of Aviva's reported consolidated net losses of $22.482 million
for the year ended December 31, 1997 and $5.729 million for the six months ended
June 30, 1998.
The effect of these price declines on Garnet was comparable. Garnet
recorded write-downs of its carrying amounts of its Colombian oil and gas
properties of $25.752 million and $5.127 million for the year ended December 31,
1997 and the six months ended June 30, 1998, respectively. These were the
dominant causes of Garnet's reported consolidated net losses of $27.790 million
for the year ended December 31, 1997 and $6.879 million for the six months ended
June 30, 1998.
AVIVA
The effect on both Aviva and Garnet of the decline in Colombian oil prices
has been dramatically adverse. As indicated below, the effect on Garnet may be
sufficient to force it to declare bankruptcy if the Merger is not effected and
its debt is not reduced as required by the Merger Agreement. While, as the
following discussion indicates, Aviva's financial condition has been adversely
affected by the decline in Colombian oil prices, the management of Aviva
believes that a bankruptcy of Garnet, which owns Argosy, the operator of the
Colombian oil and gas properties co-owned by Aviva, would be even more damaging
to Aviva's financial condition. If Argosy cannot fund its obligations under the
joint operating agreement, Aviva may be required to accept an assignment of
Argosy's interest therein and assume those funding obligations. If thereafter,
Aviva were to be unable to raise sufficient funds to meet such obligations,
Aviva's interests in the properties may be forfeited. In light of the reduction
of Aviva's cash flow resulting from the decline in oil prices, management of
Aviva believes that Aviva's cash flow would not, at such prices, be sufficient
to permit Aviva to bear, in addition to its own costs of operating the Colombian
oil and gas properties, the burden of Garnet's operating costs.
GARNET
Garnet is highly leveraged with $21,302,000 in current debt as of June 30,
1998 consisting of (i) $15,000,000 in principal amount of outstanding Debentures
and (ii) $6,350,000 ($6,302,000 net to Garnet) in principal outstanding under
indebtedness of Argosy (the "Chase Loan") to the Chase Bank of Texas ("Chase")
guaranteed by the Overseas Private Investment Corporation ("OPIC"). The report
of Garnet's independent public accountants with respect to Garnet's financial
statements as of and for the year ended December 31, 1997 was qualified by a
discussion of the substantial uncertainty that exists regarding Garnet's ability
to continue as a going concern. Based on Argosy's year-end financial
statements, Argosy determined that it is no longer in
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compliance with certain covenants required by the financial agreement governing
the Chase Loan. In the absence of a waiver of such covenants, either OPIC, Chase
or both has the right to declare a default under the Chase Loan, accelerate
payment of all outstanding amounts due thereunder and realize upon the
collateral securing the Chase Loan. Although Argosy may apply for a waiver,
given Garnet's financial position and negative working capital balance at June
30, 1998, no assurance can be given that such waiver will be granted or
continued. Under the terms of the Chase Loan 75% of the proceeds from Argosy's
oil sales that are paid in U.S. dollars are deposited in an escrow account with
Chase to secure payment of the Chase Loan. Argosy is required to maintain a
minimum balance in such escrow account equal to six months of interest,
principal and other fees due under the Chase Loan. The escrow account minimum
required balance at June 15, 1998 was $1,700,000 and the total account balance
was $2,100,000. Argosy was unable to pay the scheduled Chase Loan principal,
interest and fees due June 15, 1998 from its operating account. Chase and OPIC
therefore, exercised their right to withdraw such amounts totaling $1,600,000
from the escrow account and released $200,000 to Argosy, leaving a balance of
$300,000 in the account. U.S. dollar revenues continue to be deposited into the
escrow account in an effort to bring the balance up to the required minimum as
soon as possible. Release of additional funds to Argosy will be at the sole
discretion of OPIC and Chase. No assurance can be given that OPIC will release
additional amounts sufficient to fund the Company's operations.
Garnet was unable to pay the interest due on the Debentures on March 31 and
June 30, 1998. Garnet's financial forecasts indicate that, assuming no changes
in its capital structure, working capital and cash flow from operations, Garnet
will not be able to pay Debenture interest due September 30, 1998 or pay
principal and interest due under the Chase Loan on December 15, 1998 and
maintain the minimum balance in the escrow account. Garnet also does not expect
working capital and cash flow from operations to be sufficient to repay the
principal amount of the Debentures at maturity or earlier if the Debenture
holders call a default as a result of the non-payment of interest. Garnet must
complete a restructuring transaction or renegotiate the terms of the Debentures
in order to avoid non-compliance with its obligations to pay the Debentures. As
a result, management believes there is substantial doubt about Garnet's ability
to continue as a going concern. In the absence of a business transaction or a
restructuring of Garnet's indebtedness, Garnet may seek protection from its
creditors under the Federal Bankruptcy Code.
In view of its operating losses and financial condition, Garnet initiated
further cost containment programs in 1997 and 1998 including a 28% reduction in
its Colombian personnel and the termination of all U.S. personnel other than
Douglas W. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief
Financial Officer and the closing of the Garnet executive office in Houston.
Garnet also engaged Rauscher Pierce Refsnes, Inc. (now Dain Rauscher) as a
financial advisor to provide assistance in negotiating a business combination or
a debt restructuring transaction to address Garnet's liquidity issues. Although
Garnet engaged in comprehensive efforts, including extensive negotiations with
two separate candidates, Garnet was not successful in concluding a transaction.
It is anticipated that any future foreign exploration and development
activities will require substantial amounts of capital. If Garnet is unable to
conclude a business combination or a debt restructuring transaction, Garnet will
not have the resources to finance any further exploration or development
activity. Accordingly, there can be no assurance that any additional
exploration or development activities will be conducted, other than those
activities required to deplete Garnet's existing proved reserves. The present
environment for financing the ongoing obligations of an oil and gas business is
uncertain due, in part, to the substantial instability in oil and gas prices and
to the volatility of financial markets. In addition, Garnet's ability to
continue its exploration and development programs may be dependent upon the
ability of its co-owner to finance its portion of such costs and expenses.
There can be no assurance that Garnet's co-owner will contribute, or be in a
position to contribute, its portion of the costs and expenses of the development
of the Santana contract.
PRO FORMA FINANCIAL CONDITION
The conditions to consummation of the Merger include the following: (i)
The exchange of $15 million in aggregate principal amount of the outstanding
Garnet Debentures for Aviva Common Stock and cancellation of the Debentures;
(ii) the funding of an amended Bank Credit Facility for Aviva in the amount of
$15 million; and (iii) the use of the proceeds from the Bank Credit Facility to
pay $7.4 million owed by Aviva to the bank and $6.3 million owed by Garnet to
Chase and guaranteed by OPIC. After utilization of the proceeds for such
purposes, the combined company would have $1.3 million in such proceeds that it
may use to supplement working capital and, to the extent not funded by cash flow
from operations, fund the combined company's remaining estimated capital
expenditures for 1998.
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Following the Merger, the only debt service requirements of the combined
company would relate to $15 million of indebtedness of the combined company
incurred pursuant to the Bank Credit Facility. The terms of the Bank Credit
Facility require payments of principal of $50,000 per month until April 1, 1999,
at which time a payment of principal sufficient to reduce the principal amount
of the indebtedness to $9.1 million is required. Thereafter, monthly payments
of principal of $275,758 are required until final maturity at December 31, 2001.
Borrowings under the Bank Credit Facility will bear interest at the London
Interbank Offered Rate ("LIBOR") plus 2.125% per annum. In addition, a
guarantee fee of 2.4% per annum on the portion of the borrowings guaranteed by
OPIC will be payable to OPIC. For further information regarding the terms of
the Bank Credit Facility, see "Bank Credit Facility."
Management of Aviva has prepared an internal projection of the cash flow of
the combined company that assumes (i) a continuation of the prices at which oil
is being sold from its Colombian association contract and the prices at which
oil and gas are being sold from its United States offshore properties, (ii) a
continuation of current interest rates and operating costs, (iii) production
decline curves commensurate with those assumed by the independent engineers with
respect to the oil and gas properties of the combined company, (iv) no other
significant deviations from anticipated volumes of oil and gas production from
its properties and (v) no significant interruptions in production of oil and gas
from its properties. This cash flow projection indicates that the combined
company would be able to meet its debt service obligations under the Bank Credit
Facility (as well as its other normal operating expenditures) by application of
internally generated funds through March 1999. Management of Aviva does not,
however, project that, under such assumptions, the internal cash flow of the
combined company will be sufficient to meet the principal payment due on April
1, 1999 under the Bank Credit Facility. In the past, the Bank has amended or
waived compliance with certain covenants and scheduled payments when Aviva has
been unable to comply with them. There can be no assurance, however, that the
Bank will continue to make similar concessions in the future. In such
circumstances, it will be necessary for the combined company to raise additional
capital through equity issues or by sales of assets to retire the debt. Based
on the same assumptions used in connection with the internal projection of cash
flow of the combined company and the further assumption that no reserves are
added to those of the combined company, management of Aviva has projected that
the standardized measure of the discounted (at 10% per annum) net future cash
flows applicable to proved oil and gas reserves of the combined company will be
approximately $12 million at April 1, 1999. There can be no assurance that the
combined company will be able, through sales of equity or assets, to raise
capital necessary to meet its debt service requirements under the Bank Credit
Facility on April 1, 1999 or at any time thereafter.
AVIVA BOARD OF DIRECTORS
Aviva and Garnet have had a close working relationship since mid-1987
because of the joint ownership of Colombian assets commencing in that year.
Merger discussions between the respective boards of directors of Aviva and
Garnet commenced in August 1995 and continued until December 1995, at which
point discussions ceased due to the inability of the respective boards to agree
on an appropriate exchange ratio. In 1996 and 1997, each company on its own
behalf discussed with other industry entities the possibilities of merging or
being acquired as a stand-along entity, without success, but no further merger
discussions between the two companies took place. In December 1997, Garnet
announced a merger/combination transaction with another U.S. public company, but
a closing deadline of December 31, 1997 required by such company could not be
met, and the transaction was cancelled in late December 1997. In March 1998,
Aviva management resumed discussions with Garnet management and its debenture
holders, which resulted in the currently proposed merger arrangements.
At December 31, 1997, Garnet asset values, less total outstanding debt,
were such that shares of Garnet Common Stock had a negative value. In
negotiations between Aviva management and Garnet debenture holders, it was
agreed that Garnet's 9.5% Convertible Subordinated Debentures, face value $15
million, should be valued (at then prevailing oil and gas prices) at $2.8
million, equivalent to 14 million shares of Aviva Common Stock (at the then
prevailing Aviva share price of 20 cents per share). In order to provide some
possible future value for existing Garnet stockholders, debenture holders agreed
to allot 1.1 million of their 14 million shares (approximately 1 share of Aviva
Common Stock for every 10 shares of Garnet Common Stock outstanding) to Garnet
stockholders. The Aviva and Garnet boards of directors considered these
"values" fair to Aviva and Garnet stockholders, compared with the likely
alternative of possible forfeiture of Colombian assets resulting from potential
bankruptcy proceedings of Garnet as disclosed in its year-end filings with the
Commission.
Based on an understanding of the circumstances discussed above, the Board
of Directors of Aviva has determined that the Share Issuance, including the
shares of Aviva Common Stock to be issued pursuant to the Merger Agreement and
the Debenture Purchase Agreement, is in the best interests of Aviva and its
stockholders. The determination of the Aviva Board of Directors to approve and
adopt the Merger Agreement and the Debenture Purchase Agreement and the
transactions contemplated thereby was based on consideration of a number of
factors. The following list includes the material factors considered by the
Aviva Board of Directors in its evaluation of the Merger, the Merger Agreement,
the Debenture Purchase Agreement and the transactions contemplated thereby:
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(i) the judgment, advice and analyses of management of Aviva, including
its favorable recommendation of the Merger;
(ii) the businesses conducted by Garnet, including the compatibility of
such business with the operations of Aviva;
(iii) the ability to combine the operations and support functions of the
two companies;
(iv) the substantial likelihood that, if Garnet seeks protection from its
creditors under the United States Bankruptcy Code, Aviva will be
unable to finance the continued operation of the Santana contract and
will be forced to forfeit the contract;
(v) the combination of the two companies will effect a combination of
their interests in the Santana contract and will improve the
saleability thereof if the combined company should determine that a
sale is necessary or desirable;
(vi) the conversion of the Garnet Debentures into Aviva equity will
substantially reduce the leverage of the combined company and its
attendant debt service requirements;
(vii) the refinancing of Aviva's bank debt and Garnet's Chase Loan through
the Bank Credit Facility, which is viewed as improving the chances
that the combined company will be able to raise additional capital
through an equity financing;
(viii) the improvement represented by pro forma financial condition of the
combined company over that of Aviva currently;
(ix) the terms and conditions of the Merger Agreement and related
agreements, including the Exchange Ratio and structure, which were
considered by both management and the Board of Directors to provide an
equitable basis for the Merger; and
(x) the long standing competitive but amicable relationship between the
two companies.
The Aviva Board of Directors evaluated the risks, inherent in any business
combination, that currently unanticipated difficulties could arise in the
process of integrating the operations of the combining companies. The following
list includes the material risks considered by the Aviva Board of Directors in
its evaluation of the Merger, the Merger Agreement, the Debenture Purchase
Agreement and the transactions contemplated thereby:
(a) there can be no assurance that the combined company resulting from
consummation of the Merger will be successful in pursuing its oil and
gas interests in spite of its reduced leverage as a result of the
conversion of outstanding debentures into common stock and refinancing
its bank debt;
(b) the position of holders of shares of Garnet Common Stock in the
combined company will be heavily diluted, particularly by holders of
outstanding debentures whose interests will be converted into shares of
Aviva Common Stock;
(c) there can be no assurance that integration of the two companies will be
successful, although such risk is minimized by the fact that Aviva and
Garnet are currently joint operating partners with respect to their
Colombian properties and that ongoing management by Garnet personnel
will be severely reduced; and
(d) the necessity of obtaining additional financing prior to the date
(April 1, 1999) when a substantial payment of principal on the Bank
Credit Facility will be due.
In its evaluation of the Merger, the Board of Directors did not quantify or
assign any particular weight to any of the factors it considered, but the
factors enumerated as (iv), (v), (vi) and (vii) above, if not determinative,
significantly affected its decision. The Aviva Board of Directors made its
determination based on the total mix of the information available to it, and the
judgments of individual directors may have been influenced to a greater or
lesser degree by different factors.
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THE AVIVA BOARD OF DIRECTORS HAS BY THE UNANIMOUS VOTE OF THE DIRECTORS
APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE DEBENTURE PURCHASE AGREEMENT
AND DETERMINED TO RECOMMEND BOTH AGREEMENTS TO HOLDERS OF AVIVA COMMON STOCK.
THE AVIVA BOARD RECOMMENDS THAT THE HOLDERS OF AVIVA COMMON STOCK VOTE FOR
APPROVAL OF THE SHARE ISSUANCE.
GARNET BOARD OF DIRECTORS
THE GARNET BOARD OF DIRECTORS HAS BY THE UNANIMOUS VOTE OF THE DIRECTORS
APPROVED AND ADOPTED THE MERGER AGREEMENT AND DETERMINED TO RECOMMEND THE MERGER
AGREEMENT TO HOLDERS OF GARNET COMMON STOCK. THE GARNET BOARD RECOMMENDS THAT
THE HOLDERS OF GARNET COMMON STOCK VOTE FOR APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
In reaching its determination that the Merger Agreement and the Merger are
fair to and in the best interests of Garnet and its stockholders, the Garnet
Board of Directors considered a number of factors, including, without
limitation, the following:
(i) The judgment, advice and analyses of management of Garnet, including
its favorable recommendation of the Merger;
(ii) the businesses conducted by Aviva, including the compatibility of such
business with the operations of Garnet;
(iii) the ability to combine the operations and support functions of the
two companies;
(iv) Garnet is in default under the Debentures and the Chase Loan.
(v) the substantial likelihood that, if Garnet is not able to restructure
its indebtedness, it will be forced to seek protection from its
creditors under the United States Bankruptcy Code;
(vi) the substantial likelihood that, if Garnet seeks protection from its
creditors under the United States Bankruptcy Code, it will be forced
to assign its interest in the Santana contract to Aviva or will be
forced to forfeit the contract;
(vii) the combination of the two companies will effect a combination of
their interests in the Santana contract and will improve the
saleability thereof if the combined company should determine that a
sale is necessary or desirable;
(viii) the conversion of the Garnet Debentures into Aviva equity will
substantially reduce the leverage of the combined company and its
attendant debt service requirements;
(ix) the refinancing of Aviva's bank debt and Garnet's Chase Loan through
the Bank Credit Facility, which is viewed as improving the chances
that the combined company will be able to raise additional capital
through an equity financing;
(x) the improvement represented by pro forma financial condition of the
combined company over that of Garnet currently;
(xi) the terms and conditions of the Merger Agreement and related
agreements, including the Exchange Ratio and structure, which were
considered by both management and the Board of Directors to provide an
equitable basis for the Merger; and
(xii) the long standing competitive but amicable relationship between the
two companies.
Because Garnet's liabilities far exceed its assets, it is extremely
doubtful that the stockholders of Garnet would receive any distribution upon an
immediate liquidation of Garnet's assets. The stockholders of Garnet shall
receive upon the consummation of the Merger 0.10 shares of Aviva Common Stock
for each share of Garnet Common Stock held by such stockholder. Accordingly, the
board of directors of Garnet believes that the consideration to be received by
Garnet's stockholders in connection with the Merger is financially and
structurally fair.
The foregoing discussion of the information and factors considered by the
Garnet Board of Directors is not meant to be exhaustive but includes all
material factors considered by it. Although the Board of Directors did not
quantify or attach any particular weight to the various factors that it
considered in reaching its determination that the Merger Agreement and the
Merger are fair to and in the best interests of Garnet and its stockholders, the
Board of Directors did view the factors enumerated as (iv), (v), (vi), (vii),
(viii) and (ix) above as very important. As a result of its consideration of the
foregoing and other relevant considerations, the Board of Directors determined
that the Merger Agreement and the Merger are fair to and in the best interests
of Garnet and its stockholders and approved and adopted the Merger
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Agreement. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT.
THE MERGER
GENERAL DESCRIPTION OF THE MERGER
The Merger Agreement provides that, at the Effective Time, Merger Sub will
be merged with and into Garnet with Garnet becoming the Surviving Corporation.
Also at the Effective Time, each outstanding share of Garnet Common Stock (other
than shares of Garnet Common Stock held in the treasury of Garnet or owned by
Aviva or by any direct or indirect wholly owned subsidiary of Aviva or of Garnet
and other than Odd Lot Shares) will be converted into 0.10 of one share of Aviva
Common Stock. The shares of Garnet Common Stock held by holders who would
otherwise be entitled to receive less than 100 shares of Aviva Common Stock
pursuant to the Merger (the "Odd Lot Shares") will be converted into the right
to receive cash at the rate of $0.02 per share. Any fractional shares of Aviva
Common Stock resulting from the conversion of Garnet Common Stock in the Merger
will be settled in cash in the manner described under "Certain Terms of the
Merger Agreement - Manner and Basis of Converting Shares."
Based on the number of shares of Aviva Common Stock and Garnet Common Stock
outstanding as of the Record Date and on the holdings of Garnet Common Stock on
the Record Date, 1,124,714 shares of Aviva Common Stock will be issuable
pursuant to the Merger Agreement, representing approximately 2% of the total
Aviva Common Stock to be outstanding after such issuance, and $5,000 in cash
will be payable to those holders entitled to receive cash pursuant to the Merger
Agreement. The holders of the Garnet debentures will acquire 12,887,771 shares
of Aviva Common Stock, representing approximately 28% of the shares outstanding
after the Merger.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Garnet's Board of Directors with
respect to the Merger, Garnet's stockholders should be aware that certain
members of Garnet's Board of Directors and officers have certain interests
respecting the Merger separate from their interests as holders of Garnet Common
Stock, including those referred to below.
CHANGE IN CONTROL AGREEMENTS. Douglas Fry, President and Chief Executive
Officer of Garnet, and Edgar Dyes, Vice President--Finance and Secretary of
Garnet, are parties to Change in Control Agreements with Garnet. Under the terms
of such agreements, Messrs. Fry and Dyes would be entitled to receive the
following severance benefits upon consummation of the Merger:
. in the case of Mr. Fry, a severance benefit, payable in cash, equal to
one month's base salary for each year, or part thereof, of his
employment by Garnet or its predecessors, which amount was $268,000 as
of June 30, 1998;
. in the case of Mr. Dyes, a severance benefit, payable in cash, equal to
twelve months' base salary, which amount was $135,000 as of June 30,
1998;
. medical insurance coverage for a period of 18 months following
termination of employment;
. life and disability insurance coverage for a period of two years and
one year, respectively, following termination of employment; and
. all stock options would vest and remain exercisable for a period of
two years.
It is a condition to Aviva's obligation to consummate the Merger, however,
that the Change in Control Agreements shall have been amended to reduce the
severance payments thereunder to $65,000 in the case of Mr. Fry and $35,000 in
the case of Mr. Dyes, to limit the medical, life and disability insurance
coverage requirements to five months, five months and five months in the case of
Mr. Fry and three months, three months and three months, in the case of Mr.
Dyes, and to delete the provisions thereof relating to stock options.
The only Garnet officer who will continue to provide services to the
combined company after consummation of the Merger is Mr. Dyes, who is expected
to continue his employment following the Merger as Executive Vice President of
Argosy in Colombia. Mr. Dyes' compensation will include an annual salary of
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$100,000 and medical, life and disability insurance coverage, and he will forego
the severance payment described above.
STOCK OPTIONS. There are currently eight holders of outstanding options to
purchase 773,000 shares of Garnet Common Stock. The exercise prices under such
options range from $0.38 to $2.50 per share of Garnet Common Stock. It is a
condition to Aviva's obligation to consummate the Merger that each holder of
such stock options shall have surrendered all such stock options to Garnet for
cancellation. Management of Garnet expects that the options will be surrendered
without any compensation paid to optionholders.
INDEMNIFICATION. The Merger Agreement provides that, for a period of three
years after the Effective Time, the indemnification provisions of the
certificate of incorporation and bylaws of the Surviving Corporation will not be
amended in a manner that would reduce or limit the rights of indemnity
thereunder of present or former directors and officers of Garnet, to reduce or
limit the ability of the Surviving Corporation to indemnify such persons or to
hinder or delay the exercise of such rights by such persons. In addition, the
Merger Agreement requires Aviva to cause to be maintained in effect for a
comparable period the current Garnet directors' and officers' liability
insurance or policies that are substantially equivalent thereto, subject to the
proviso that neither the Acquiror nor the Surviving Corporation shall be
required to maintain any such policies to the extent the coverage thereunder
exceeds $3,000,000 or to expend more than 100 percent of the current annual
premiums paid by Garnet for such insurance. See "Certain Terms of the Merger
Agreement - Indemnification."
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material federal income tax
consequences of the Merger to the holders of Garnet Common Stock and is based
upon current provisions of the Code, existing regulations thereunder, current
administrative rulings of the Internal Revenue Service (the "IRS") and court
decisions, all of which are subject to change. No attempt has been made to
comment on all federal income tax consequences of the Merger that may be
relevant to particular holders, including holders that are subject to special
tax rules which may modify or alter the following discussion, such as dealers in
securities, foreign persons, mutual funds, insurance companies, tax-exempt
entities and holders who do not hold their shares as capital assets. Holders of
Garnet Common Stock are advised and expected to consult their own tax advisers
regarding the federal income tax consequences of the Merger in light of their
personal circumstances and the consequences under state, local and foreign tax
laws.
The Merger will not constitute a tax-free reorganization for federal income
tax purposes. Accordingly, a holder of Garnet Common Stock that exchanges such
stock for Aviva Common Stock in the Merger will recognize gain or loss equal to
the difference between the fair market value of the Aviva Common Stock (plus any
cash in lieu of fractional shares) received by such holder in the Merger and the
adjusted basis of the Garnet Common Stock surrendered in the Merger. Such gain
or loss will be capital gain or loss if the Garnet Common Stock surrendered in
the Merger is held as a capital asset at the Effective Time, and will be long-
term capital gain or loss if such Garnet Common Stock has been held for more
than one year. For individuals, the maximum federal income tax rate for long-
term capital gain generally is 28% (20% for capital assets held more than 18
months). There are substantial restrictions on the ability of both individuals
and corporations to deduct capital losses. The basis of a holder's shares of
Aviva Common Stock received in the Merger will be equal to the fair market value
of those shares at the Effective Time.
ACCOUNTING TREATMENT
The Merger will be accounted for using the "purchase" method of accounting
for business combinations pursuant to Opinion No. 16 of the Accounting
Principles Board. See "Unaudited Pro Forma Condensed Financial Information."
GOVERNMENTAL AND REGULATORY APPROVALS
Aviva and Garnet are not aware of any governmental or regulatory approvals
required for consummation of the Merger, other than compliance with applicable
federal and state securities laws.
No filing by Aviva or Garnet is required under the Hart-Scott-Rodino
Antitrust Amendments Act of 1977. Nonetheless, the Department of Justice, the
FTC or a private person or entity could, at any time before or after the
Effective Time, seek under the antitrust laws, among other things, to enjoin the
Merger or to cause Aviva to divest itself, in whole or in part, of Garnet or of
other businesses conducted by Aviva. There can be no assurance that a challenge
to the Merger will not be made or that, if such a challenge is made, Aviva and
Garnet will prevail.
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RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Aviva Common Stock to be received by Garnet stockholders in
connection with the Merger have been registered under the Securities Act and,
except as set forth in this paragraph, may be traded without restriction. The
shares of Aviva Common Stock to be issued in connection with the Merger and
received by persons who are deemed to be "affiliates" (as that term is defined
in Rule 144 under the Securities Act) of Garnet prior to the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 under the Securities Act or as otherwise permitted under the Securities Act.
Accordingly, the Merger Agreement provides that Garnet will use all reasonable
efforts to cause its affiliates to execute an agreement (an "Affiliates'
Agreement"), in the form thereof attached to the Merger Agreement as Annex B, to
the effect that such persons will not sell, transfer or otherwise dispose of any
shares of Aviva Common Stock at any time in violation of the Securities Act or
the rules and regulations promulgated thereunder, including Rule 145.
RIGHTS OF DISSENTING STOCKHOLDERS
Neither holders of Garnet Common Stock nor holders of Aviva Common Stock
will be entitled to dissenters' rights of appraisal under the Delaware General
Corporation Law (the "DGCL") or the TBCA, respectively.
CERTAIN TERMS OF THE MERGER AGREEMENT
The following description does not purport to be complete and is qualified
in its entirety by reference to the Merger Agreement, a copy of which has been
filed as an exhibit to the Registration Statement of which this Joint Proxy
Statement/Prospectus constitutes a part and is incorporated herein by reference.
EFFECTIVE TIME OF THE MERGER
The Merger Agreement provides that, promptly after the satisfaction or, if
permissible, the waiver of the conditions to effecting the Merger or at such
other time as the parties to the Merger Agreement may agree, the parties shall
cause the Merger to be consummated by filing a Certificate of Merger with the
Secretary of State of the State of Delaware, in such form as required by, and
executed in accordance with, the relevant provisions of the DGCL. It is
anticipated that, if the Merger Agreement is approved and adopted at the Garnet
Special Meeting, the Share Issuance is approved at the Aviva Special Meeting and
all other conditions to the Merger have been satisfied or waived, the effective
time (the "Effective Time") will occur on the date of the Special Meetings or as
soon thereafter as practicable.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, except for shares of Garnet Common Stock held in the
treasury of Garnet or owned by Aviva or any direct or indirect wholly-owned
subsidiary of either Aviva or Garnet, which shares will be canceled at the
Effective Time, and except for Odd Lot Shares, each outstanding share of Garnet
Common Stock will be converted into 0.10 of one share of Aviva Common Stock (the
"Exchange Ratio"). The shares of Garnet Common Stock held by holders who would
otherwise be entitled to receive less than 100 shares of Aviva Common Stock
pursuant to the Merger (being the Odd Lot Shares) will be converted into the
right to receive cash at the rate of $0.02 per share. Any fractional shares of
Aviva Common Stock resulting from the conversion of Garnet Common Stock in the
Merger will be settled in cash in the manner described below.
If between the date of the Merger Agreement and the Effective Time the
outstanding shares of Aviva Common Stock shall have been changed, or if the
outstanding shares of Garnet Common Stock shall have been changed, into a
different number of shares or a different class, by reason of any stock
dividend, any subdivision, combination or exchange of shares or any
reclassification or recapitalization, the Exchange Ratio will be correspondingly
adjusted to reflect such stock dividend, subdivision, combination or exchange of
shares or any reclassification or recapitalization.
ChaseMellon Shareholder Services, L.L.C. is the transfer agent in the
United States for the Aviva Common Stock and is the Depositary under that
certain Deposit Agreement dated September 15, 1994 between Aviva and the
Depositary (the "Deposit Agreement"). ChaseMellon Shareholder Services, L.L.C.
will also act as Exchange Agent in connection with the Merger.
As soon as practicable following the Effective Time, Aviva will cause the
Exchange Agent to mail to each record holder of Garnet Common Stock at the
Effective Time information advising such holder of the consummation of the
Merger and a letter of transmittal for use in exchanging Garnet Common Stock
certificates for Depositary Receipts evidencing Depositary Shares (each of which
represents five shares of Aviva Common Stock) or, in the case of Odd Lot Shares,
cash. Letters of transmittal will also be available following the Effective Time
at the offices of the Exchange
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Agent at 120 Broadway, 13th Floor, New York, New York 10271, and holders of
certificates that previously evidenced Garnet Common Stock may, at their option
after the Effective Time, surrender such certificates for Depositary Receipts or
cash at the offices of the Exchange Agent in person. After the Effective Time,
there will be no further registration of transfers on the stock transfer books
of Garnet of shares of Garnet Common Stock that were outstanding immediately
prior to the Effective Time. Share certificates should not be surrendered for
exchange by stockholders of Garnet prior to the Effective Time.
Promptly after the Effective Time, Aviva will cause the transfer agent for
the Aviva Common Stock to issue and deliver to the Exchange Agent a certificate
registered in the name of the Exchange Agent evidencing the maximum number of
shares of Aviva Common Stock issuable pursuant to the Merger Agreement that can
be deposited under the Deposit Agreement and Aviva will deliver to the Exchange
Agent cash in an amount sufficient to pay for the Odd Lot Shares. The number of
shares to be evidenced by such certificate will be determined by the Exchange
Agent based on the holdings of Garnet Common Stock of record at the Effective
Time. The Exchange Agent will deposit such number of shares of Aviva Common
Stock with the Depositary and the Depositary will issue Depositary Receipts
evidencing Depositary Shares registered in the names of the record holders on
the basis of one Depositary Share for each five shares of Aviva Common Stock.
The Exchange Agent will then distribute the Depositary Receipts to the record
holders. In the case of holders entitled to a number of shares of Aviva Common
Stock not evenly divisible by five, the Exchange Agent will obtain certificates
from the transfer agent evidencing the remaining shares of Aviva Common Stock
and will deliver such certificates to the holders entitled thereto.
No fractional shares of Aviva Common Stock will be issued in the Merger.
Each holder of Garnet Common Stock entitled to a fractional share will receive
an amount in cash, without interest thereon, determined as follows: Pursuant to
instructions from Aviva, the Exchange Agent will determine the number of
fractional shares allocable to all holders of Garnet Common Stock pursuant to
the Merger Agreement, will aggregate all such fractional shares into whole
shares, will sell such whole shares of Aviva Common Stock in the open market at
then prevailing prices on behalf of the holders who would otherwise be entitled
thereto and will distribute to each such holder, at the time of surrender of
such holder's Garnet Common Stock certificates, such holder's ratable share of
such proceeds, after withholding federal income taxes and any applicable
transfer taxes. All brokers' fees and commissions and fees of the Exchange
Agent incurred in connection with such sales will be paid by Aviva.
Until so surrendered and exchanged, each certificate previously evidencing
Garnet Common Stock will be deemed, for all purposes other than the payment of
dividends and other distributions, to evidence whole shares of Aviva Common
Stock and the right to receive cash in lieu of fractional shares of Aviva Common
Stock or, in the case of Odd Lot Shares, the right to receive cash. Unless and
until any such certificates that previously evidenced Garnet Common Stock are so
surrendered and exchanged, no dividends or other distributions payable to the
holders of record of Aviva Common Stock as of any time on or after the Effective
Time will be paid to the holders of such certificates previously evidencing
Garnet Common Stock. While the Board of Directors of Aviva does not currently
intend to pay any dividends or make any distributions with respect to the Aviva
Common Stock, upon any such surrender and exchange of such certificates there
will be paid to the record holders of the certificates issued and exchanged
therefor (i), at the time of such surrender and exchange, the amount, without
interest thereon, of dividends and other distributions, if any, with a record
date on or after the Effective Time theretofore paid with respect to such whole
shares of Aviva Common Stock and (ii), at the appropriate payment date, the
amount of dividends or other distributions, if any, with a record date on or
after the Effective Time but prior to surrender and a payment date occurring
after surrender, payable with respect to such whole shares of Aviva Common
Stock.
GARNET OPTIONS
There are currently eight holders of outstanding options to purchase Garnet
Common Stock. The exercise prices under such options range from $0.38 to $2.50
per share of Garnet Common Stock. It is a condition to Aviva's obligation to
consummate the Merger that each holder of such stock options shall have
surrendered all such stock options to Garnet for cancellation.
CONDITIONS TO THE MERGER
The respective obligations of Aviva and Garnet to consummate the Merger are
subject to the satisfaction of the following conditions: (a) the Registration
Statement shall have been declared effective by the Commission under the
Securities Act, no stop order suspending the effectiveness of the Registration
Statement shall have been issued by the Commission and no proceedings for that
purpose shall have been initiated by the Commission; (b) the Merger Agreement
shall have been approved and adopted by the requisite vote of the stockholders
of Garnet; (c) the Share Issuance shall have been approved by the stockholders
of Aviva; (d) no Court or Governmental Authority (as such terms are defined in
the Merger Agreement) shall have enacted, issued, promulgated, enforced or
entered any Law, Regulation, or Order
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(all as defined in the Merger Agreement) (whether temporary, preliminary or
permanent) which is in effect and which has the effect of making the Merger
illegal or otherwise prohibiting consummation of the Merger; (e) the Depositary
Shares representing the Aviva Common Stock issuable in the Merger shall have
been listed on the ASE subject to official notice of issuance. The condition
specified in clause (e) may be waived by Aviva and Garnet; neither Aviva nor
Garnet, however, intends to waive such condition without resoliciting the votes
of the stockholders of Garnet.
The obligation of each of Aviva and Garnet to effect the Merger is also
subject to the satisfaction at or prior to the Effective Time of the following
conditions, any or all of which may be waived in writing by the party entitled
to satisfaction thereof, in whole or in part, to the extent permitted by
applicable law: (a) each of the representations and warranties of the other
party contained in the Merger Agreement shall be true and correct in all
material respects as of the date of the Merger Agreement and as of the Effective
Time as though made again as of the Effective Time; and (b) the other party
shall have performed or complied in all material respects with all agreements
and covenants required by the Merger Agreement to be performed or complied with
by it on or prior to the Effective Time.
In addition, the obligation of Aviva to consummate the Merger is subject to
the following conditions: (i) ING Bank (the "Bank") shall have made available
to Aviva a bank credit facility of $15,000,000 in order for Aviva to refinance
its outstanding debt to the Bank of $7,440,000 and to refinance Garnet's bank
indebtedness guaranteed by the Overseas Petroleum Investment Corporation (the
"Chase Loan"), which shall not exceed $6,000,000 (net of escrow amounts); (ii)
Aviva shall have acquired the Debentures pursuant to the Debenture Purchase
Agreement in exchange for Aviva Common Stock; (iii) the consolidated current
assets of Garnet less liabilities (other than the Chase Loan) shall not be less
than $100,000; and (iv) the holders of the outstanding stock options relating to
Garnet Common Stock shall have surrendered all such stock options to Garnet for
cancellation.
There can be no assurance that all of the conditions to the Merger will be
satisfied. All the conditions referenced in the two preceding paragraphs may be
waived by the party entitled to satisfaction thereof. Neither Aviva nor Garnet,
however, intends to waive satisfaction of any such condition if such waiver
would be material to the consideration and vote of the stockholders of Garnet
upon the proposal to adopt the Merger Agreement or to the consideration and vote
of the stockholders of Aviva upon the proposal to approve the Share Issuance
without resoliciting the votes of such stockholders.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of Garnet and Aviva relating to, among other things, (i) its organization
and similar corporate matters, (ii) its capitalization, (iii) the authorization,
execution, delivery, performance and enforceability of the Merger Agreement and
the absence of conflicts, violations and defaults under its charter and bylaws
and certain other agreements and documents, (iv) the documents and reports filed
by it with the Commission and the accuracy of the information contained therein,
(v) the absence of certain changes and events, (vi) the title to its assets and
properties, including the condition of its oil and gas properties, (vii) its
material contracts and agreements, (viii) the material permits and orders from
Governmental Authorities required to conduct its business, (ix) its litigation
and compliance with laws, (x) its employee benefit plans, (xi) its taxes, (xii)
certain environmental matters, (xiii) its insurance policies, (xiv) its
affiliates, (xv) its brokers or investment bankers involved in the transaction
and (xvi) certain business practices. The representations and warranties of
Garnet and Aviva also extend in many respects to their respective subsidiaries
and, in the case of Aviva, Merger Sub joins in the representations and
warranties. The representations and warranties expire at the Effective Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
BUSINESS MAINTENANCE. Each of Garnet and Aviva has agreed that, prior to
the Effective Time, unless expressly contemplated by the Merger Agreement or
otherwise consented to in writing by the other party, it will do and will cause
its subsidiaries to do the following: (a) operate its business in the usual and
ordinary course consistent with past practices; (b) use all reasonable efforts
to preserve substantially intact its business organization, maintain its
material rights and franchises, retain the services of its respective key
employees and maintain its relationships with its respective customers and
suppliers; (c) maintain and keep its properties and assets in as good repair and
condition as at present, ordinary wear and tear excepted, and maintain supplies
and inventories in quantities consistent with its customary business practice;
and (d) use all reasonable efforts to keep in full force and effect insurance
and bonds comparable in amount and scope of coverage to that currently
maintained.
NEGATIVE COVENANTS. Each of Garnet and Aviva has agreed that, prior to the
Effective Time, subject to certain exceptions and unless expressly contemplated
by the Merger Agreement or otherwise consented to in writing by the other party,
it will not do, and will not permit any of its subsidiaries to do, any of the
following: (a)(i) increase the compensation payable to or to become payable to
any director or executive officer; (ii) grant any severance or
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termination pay to, or enter into or amend in any material respect any
employment or severance agreement with, any director, officer or employee; (iii)
establish, adopt or enter into any employee benefit plan; or (iv) amend, or take
any other actions with respect to, any employee benefit plans of such party; (b)
declare or pay any dividend on, or make any other distribution in respect of,
outstanding shares of capital stock; (c)(i) redeem, purchase or acquire, or
offer to purchase or acquire, any outstanding shares of capital stock of, or
other equity interests in, or any outstanding options, warrants or rights of any
kind to acquire any shares of capital stock of, or other equity interests in,
such party or any of its subsidiaries; (ii) effect any reorganization or
recapitalization; or (iii) split, combine or reclassify any of the capital
stock, or other equity interests in, or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for, shares of capital stock, or such equity interests, of such party or any of
its subsidiaries; (d)(i) offer, sell, issue or grant, or authorize the offering,
sale, issuance or grant, of any shares of capital stock of, or other equity
interests in, any securities convertible into or exchangeable for any shares of
capital stock of, or other equity interest in, or any options, warrants or
rights of any kind to acquire any shares of capital stock of, or other equity
interest in, such party or any of its subsidiaries; (ii) amend or otherwise
modify the terms of any such rights, warrants or options the effect of which
shall be to make such terms more favorable to the holders thereof; (iii) take
any action to accelerate the vesting of any stock options; or (iv) grant any
lien with respect to any shares of capital stock of, or other equity interest
in, any subsidiary of such party; (e) acquire or agree to acquire any business
or other entity, or otherwise acquire or agree to acquire any assets of any
other person; (f) sell or otherwise dispose of, or grant any lien with respect
to, any of its material assets or any material assets of any of its
subsidiaries; (g) adopt certain amendments to its charter or bylaws; (h) change
any of its significant accounting policies or take certain actions with respect
to taxes; (i) incur any obligation for borrowed money or purchase money
indebtedness; (j), in the case of Garnet, release any third party from its
obligations under any existing standstill provision relating to a Competing
Transaction (as defined) or otherwise under any confidentiality or similar
agreement; (k) enter into certain material contracts; or (l) agree in writing or
otherwise to do any of the foregoing.
ACCESS TO BUSINESS OF OTHER PARTY. During the pendency of the Merger
Agreement, Aviva and Garnet have each agreed to afford, and to cause its
subsidiaries to afford, to the other party and its representatives access at
reasonable times to the officers, employees, agents, properties, offices and
other facilities of such party and its subsidiaries and to their books and
records. Each of them has also agreed to furnish, and to cause its subsidiaries
to furnish, to the other party and its representatives such information
concerning the business, properties, contracts, records and personnel of such
party and its subsidiaries as may be reasonably requested. If the Merger
Agreement is terminated in accordance with its terms, a party that has received
information pursuant to the Merger Agreement is obligated to return or destroy
such information within ten days after a request therefor by the other party.
NO SOLICITATION
Under the Merger Agreement, Garnet has agreed (i) that it will not (a)
initiate, solicit or encourage (including by way of furnishing nonpublic
information or assistance) or take any other action knowingly to facilitate any
inquiries from any other person or entity or the making of any proposal that
constitutes, or may reasonably be expected to lead to, any Acquisition Proposal
(as defined below), (b) enter into discussions or negotiations with any person
or entity in furtherance of such inquiries or to obtain an Acquisition Proposal,
(c) agree to, or endorse, an Acquisition Proposal or (d) authorize or permit any
of its directors, officers, employees or other representatives to take any such
action, (ii) that it will promptly notify Aviva of all relevant terms of any
such inquiries and proposals received by Garnet or any of its directors,
officers, employees or other representatives and (iii), if such inquiry or
proposal is in writing, it will deliver a copy thereof promptly to Aviva;
provided, however, that this provision of the Merger Agreement will not prevent
the Board of Directors of Garnet from (A) complying, to the extent applicable,
with regard to an Acquisition Proposal, with Rule 14e-2(a) promulgated under the
Exchange Act, (B) in response to an unsolicited bona fide written Acquisition
Proposal from any Person, recommending such Acquisition Proposal to Garnet's
stockholders or withdrawing or modifying in any adverse manner its approval or
recommendation of this Agreement, or both, or (C) engaging in any discussions or
negotiations with, or providing any information to, any Person in response to an
unsolicited bona fide written Acquisition Proposal by any such Person, if and
only to the extent that, in any such case described in clause (B) or (C), if (i)
the Required Garnet Vote shall not have been theretofore obtained, (ii) the
Board of Directors of Garnet shall have concluded in good faith that such
Acquisition Proposal (x) in the case of that described in clause (B) above
would, if consummated, constitute a Superior Proposal (as defined below) or (y),
in the case described in clause (C) above could reasonably be expected to
constitute a Superior Proposal, (iii) the Board of Directors of Garnet shall
have determined in good faith on the basis of written advice of outside legal
counsel that such action is necessary for such Board of Directors to act in a
manner consistent with its fiduciary duties under applicable law, (iv) prior to
providing any information or data to any person in connection with an
Acquisition Proposal by any such person, the Board of Directors shall have
received from such person an executed confidentiality agreement containing
customary terms and provisions and (v) prior to providing any information or
data to any person or entering into discussions or negotiations with any person,
the Board of Directors of Garnet shall have notified Aviva immediately of such
inquiries, proposals or offers received by, any such information requested from,
or any such discussions or negotiations sought to be initiated or
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continued with, any of its representatives indicating, in connection with such
notice, the name of such person and the material terms and conditions of any
proposals or offers. Garnet has agreed that it will keep Aviva informed, on a
current basis, of the status of any such discussions or negotiations. Garnet has
agreed that it will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore
with respect to any Acquisition Proposal. An "Acquisition Proposal" means any
proposal or offer with respect to a merger, consolidation, share exchange,
business combination, reorganization, recapitalization, liquidation, dissolution
or similar transaction involving, or any purchase or sale of all or any
significant portion of the assets or 10% or more of the Equity Securities (as
defined in the Merger Agreement) of, Garnet or any of its subsidiaries that, in
any case, could be reasonably expected to interfere with the consummation of the
Merger or the other transactions contemplated by this Agreement. A "Superior
Proposal" means a bona fide Acquisition Proposal that the Board of Directors of
Garnet determines in its good faith judgment (after consultation with its
financial advisers and legal counsel), taking into account all legal, financial,
regulatory and other aspects of the proposal or offer and the person making the
proposal or offer, (i) would, if consummated, result in a transaction that is
more favorable to Garnet's stockholders, from a strategic and financial point of
view, than the transactions contemplated by the Merger Agreement and (ii) is
reasonably capable of being completed; provided, however, that, for the purposes
of this definition, the term "Acquisition Proposal" shall have the meaning
ascribed to it in the Merger Agreement except that the reference therein to 10%
shall be deemed to be a reference to 50% and the proposal or offer therein
described shall be deemed only to refer to a transaction involving Garnet or the
assets of Garnet (including the shares of its subsidiaries), taken as a whole,
rather than any transaction relating to any of the Subsidiaries of Garnet alone.
CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and Garnet, as the Surviving Corporation, will succeed to all of
the assets, rights and obligations of Garnet and Merger Sub.
Pursuant to the Merger Agreement, the certificate of incorporation and the
bylaws of Garnet, as in effect immediately prior to the Effective Time, will be
the certificate of incorporation and bylaws of the Surviving Corporation until
amended as provided therein and pursuant to the DGCL.
TERMINATION OR AMENDMENT OF THE MERGER AGREEMENT
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the Merger Agreement by the
stockholders of Garnet: (a) by mutual consent of Aviva and Garnet; (b) by Aviva,
upon a material breach of any covenant or agreement on the part of Garnet set
forth in the Merger Agreement or if any representation or warranty of Garnet
shall have become untrue in any material respect, in either case such that the
conditions to the obligation of Aviva to consummate the Merger would not be
satisfied, subject to a cure period under certain circumstances (a "Terminating
Garnet Breach"); (c) by Garnet, upon a material breach of any covenant or
agreement on the part of Aviva or Merger Sub set forth in the Merger Agreement
or if any representation or warranty of Aviva or Merger Sub shall have become
untrue in any material respect, in either case such that the conditions to the
obligation of Garnet to consummate the Merger would not be satisfied, subject to
a cure period under certain circumstances (a "Terminating Aviva Breach"); (d) by
either Aviva or Garnet, if there shall be any order of any court or governmental
authority that is final and nonappealable preventing the consummation of the
Merger, subject to a limited exception; (e) by either Aviva or Garnet, if the
Merger shall not have been consummated before September 30, 1998; provided,
however, that the Merger Agreement may be extended by written notice given by
either Aviva or Garnet to a date not later than October 31, 1998 if the Merger
shall not have been consummated as a direct result of Garnet, Aviva or Merger
Sub having failed by September 30, 1998 to receive all required regulatory
approvals or consents with respect to the Merger or as the result of the
entering of an order by a court or governmental authority; (f) by either Aviva
or Garnet, if the Merger Agreement shall fail to receive the requisite vote for
adoption by the stockholders of Garnet at the Garnet Special Meeting; (g) by
either Aviva or Garnet, if the Share Issuance shall fail to receive the
requisite vote for approval by the stockholders of Aviva at the Aviva Special
Meeting; (h) by Garnet, if the Board of Directors of Garnet shall, at any time
prior to the Garnet Special Meeting but subject to certain restrictions, approve
a Superior Proposal (as defined); (i) by Aviva, if the Board of Directors of
Garnet shall withdraw or modify in any manner adverse to Aviva the Board's
approval or recommendation of the Merger Agreement, shall fail to reaffirm such
approval or recommendation upon Aviva's request or shall approve or recommend
any Superior Proposal; (j) by Aviva, if (1) any person (other than Aviva or any
of its Affiliates) shall have acquired 30% or more of the outstanding Garnet
Common Stock or (2) individuals who as of the date of this Agreement constitute
the Board of Directors of Garnet shall cease for any reason to constitute a
majority of the Board of Directors of Garnet.
Subject to limited exceptions, including the survival of Garnet's agreement
to pay a termination fee to Aviva under certain circumstances, as discussed
below, in the event of the termination of the Merger Agreement, the Merger
Agreement shall become void, there shall be no liability on the part of Aviva,
Merger Sub or Garnet to the other, and
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all rights and obligations of the parties thereto shall cease, except that no
party will be relieved from its obligations with respect to any breach of the
Merger Agreement.
The Merger Agreement may be amended by the parties thereto by action taken
by or on behalf of their respective Boards of Directors at any time prior to the
Effective Time; provided, however, that, after approval of the Merger by the
stockholders of Garnet, no amendment may be made that would reduce the amount or
change the type of consideration into which each share of Garnet Common Stock
will be converted pursuant to the Merger Agreement upon consummation of the
Merger. At any time prior to the Effective Time, any party to the Merger
Agreement may (a) extend the time for the performance of any of the obligations
or other acts of the other party thereto, (b) waive any inaccuracies in the
representations and warranties of the other party contained therein or in any
document delivered pursuant thereto and (c) waive compliance by the other party
with any of the agreements or conditions contained therein. Any such extension
or waiver shall be valid only if set forth in a writing signed by the party or
parties to be bound thereby. Neither Aviva nor Garnet, however, intends to
enter into any amendment to the Merger Agreement or to waive compliance by the
other with the terms of the Merger Agreement if such amendment or waiver would
be material to the consideration and vote of the stockholders of Garnet upon the
proposal to adopt the Merger Agreement or to the consideration and vote of the
stockholders of Aviva upon the proposal to approve the Share Issuance without
resoliciting the votes of such stockholders.
EXPENSES AND TERMINATION FEE
All expenses incurred by Aviva, Merger Sub, and Garnet will be borne by the
party incurring such expenses; provided, however, that the allocable share of
Aviva and Merger Sub, as a group, and Garnet for all expenses related to
printing, filing and mailing this Joint Proxy Statement/Prospectus and all
Commission and other regulatory filing fees incurred in connection with the
Registration Statement or this Joint Proxy Statement/Prospectus shall be one-
half each; and provided further, however, that Aviva may, at its option, pay any
expenses of Garnet that are solely and directly related to the Merger.
Garnet has agreed that, if the Merger Agreement is terminated for any of
the reasons specified in clause (b), (h), (i) or (j) in the first paragraph
under "-- Termination or Amendment of the Merger Agreement," Garnet will pay to
Aviva, as liquidated damages and expense reimbursement, an amount in cash equal
to $50,000.
INDEMNIFICATION
The Merger Agreement provides that, for a period of six years after the
Effective Time, (i) the certificate of incorporation and bylaws of the Surviving
Corporation as in effect immediately following the Effective Time shall not be
amended to reduce or limit the rights of indemnity afforded to the present and
former directors and officers of Garnet thereunder or as to the ability of the
Surviving Corporation to indemnify such persons or to hinder, delay or make more
difficult the exercise of such rights of indemnity or the ability to indemnify
with respect to any claims made against such persons arising from their service
in such capacities; and (ii) Aviva shall cause to be maintained in effect the
current policies of directors' and officers' liability insurance maintained by
Garnet (or substitute policies under certain circumstances) with respect to
claims arising from facts or events that occurred before the Effective Time,
subject to the proviso that neither Aviva nor the Surviving Corporation shall be
required to maintain any such policies to the extent the coverage thereunder
exceeds $3,000,000 or to expend more than 100 percent of the current annual
premiums paid by Garnet for such insurance.
THE DEBENTURE PURCHASE AGREEMENT
GENERAL
Consummation of the Debenture Purchase Agreement is a condition precedent
to the obligation of Aviva to consummate the Merger under the Merger Agreement.
Garnet has outstanding $15,000,000 in aggregate principal amount of its 9
1/2% Convertible Subordinated Debentures due December 21, 1998 (the
"Debentures"). Aviva has entered into a Debenture Purchase Agreement dated as
of June 24, 1998 with each of the holders of the Debentures (the "Debenture
Purchase Agreement") pursuant to which the holders (the "Sellers") have agreed
to sell to Aviva, and Aviva has agreed to purchase, the Debentures in exchange
for the issuance by Aviva to the Sellers of an aggregate of 12,887,771 shares of
Aviva Common Stock.
46
<PAGE>
REPRESENTATIONS AND WARRANTIES
Each of the Sellers has represented and warranted, severally and not
jointly, to Aviva that such Seller has full authority to enter into the
Debenture Purchase Agreement and to sell the Debentures owned by such Seller;
that, with the exception of certain filings pursuant to federal and state
securities laws, no order of, or filing or registration with, any governmental
authority is required in order to permit the Seller to enter into the Debenture
Purchase Agreement or to sell the Debentures owned by such Seller; that the
execution and delivery of the Debenture Purchase Agreement by such Seller and
the sale of the Debentures thereunder will not violate any law, regulation or
order applicable to such Seller, any organizational document pursuant to which
such Seller is organized or any contract to which it is a party; that such
Seller has good title to the Debentures owned by it and that Aviva will acquire
good title thereto upon consummation of the Agreement, in each case free and
clear of any liens and encumbrances; that such Seller engaged no broker in
connection with such sale; and that such Seller is qualified to purchase the
Debentures under a specified exemption from the registration provisions of the
Securities Act.
Aviva has made similar representations and warranties to each of the
Sellers (other than the representation relating to the exemption from the
registration provisions of the Securities Act).
The representations and warranties of each of the parties to the Debenture
Purchase Agreement terminate at the closing.
CONDITIONS
Conditions to the obligations of Aviva and each of the Sellers to
consummate the purchase and sale of the Debentures include (i) the satisfaction
of any statutory requirements with respect to the transaction (including the
requisite filings pursuant to federal and state securities laws); (ii) no
governmental authority or court shall have enacted or issued any law, regulation
or order the effect of which is to declare such transaction illegal or to
prohibit consummation of such transaction; and each such party shall have
received any third party consents to the transaction that are material to such
party.
The obligation of Aviva to consummate the transaction is subject to the
additional conditions that all of the Sellers' representations and warranties
shall be true, in all material respects, at closing as if made again on the date
of closing; each of the Sellers shall have performed in all material respects
each covenant required to be performed by it prior to the closing date; and each
and every condition to Aviva's obligation to consummate the Merger Agreement
shall have been fulfilled or waived.
The obligation of each Seller to consummate the transaction is subject to
the additional conditions that all of Aviva's representations and warranties
shall be true, in all material respects, at closing as if made again on the date
of closing and Aviva shall have performed in all material respects each covenant
required to be performed by it prior to the closing date.
TERMINATION
The Debenture Purchase Agreement may be terminated at any time prior to the
closing: (a) by mutual consent of Aviva and a Majority of the Sellers (as
defined in the agreement); (b) by Aviva, upon a material breach of any covenant
or agreement on the part of any Seller set forth in the Debenture Purchase
Agreement or if any representation or warranty of any Seller shall have become
untrue in any material respect, in either case such that the conditions to the
obligation of Aviva to consummate the transaction would not be satisfied,
subject to a cure period under certain circumstances; (c) by a Majority of the
Sellers, upon a material breach of any covenant or agreement on the part of
Aviva set forth in the Debenture Purchase Agreement or if any representation or
warranty of Aviva shall have become untrue in any material respect, in either
case such that the conditions to the obligation of any Seller to consummate the
transaction would not be satisfied, subject to a cure period under certain
circumstances; (d) by either Aviva or a Majority of the Sellers, if there shall
be any order of any court or governmental authority that is final and
nonappealable preventing the consummation of the transaction, subject to a
limited exception; (e) by either Aviva or a Majority of the Sellers, if the
transaction shall not have been consummated before September 30, 1998; provided,
however, that the Debenture Purchase Agreement may be extended by written notice
given by either Aviva or a Majority of the Sellers to a date not later than
October 31, 1998 if the Merger Agreement shall have been so extended in
accordance with the terms thereof; (f) by either Aviva or a Majority of the
Sellers, if the Merger Agreement shall fail to receive the approval of the
stockholders of Garnet at the Garnet Special Meeting or if the Share Issuance
shall fail to receive the approval of the stockholders of Aviva at the Aviva
Special Meeting; or (g) by either Aviva or a Majority of the Sellers, if the
Merger Agreement is terminated in accordance with its terms.
47
<PAGE>
THE BANK CREDIT FACILITY
Aviva will enter into a new credit facility (the "Bank Credit Facility")
with ING (U.S.) Capital Corporation and one or more other lenders (collectively,
the "Bank") that provides a $15,000,000 senior secured revolving line of credit
to Aviva. The purpose of the Bank Credit Facility is to consolidate the bank
indebtedness of both Aviva and Garnet. The proceeds of borrowings will be used
to renew and extend Garnet's Chase Loan (estimated to be approximately $6.3
million) and Aviva's indebtedness to ING (U.S.) Capital Corporation (estimated
to be approximately $7.4 million). The balance of the proceeds (estimated to be
approximately $1.3 million) is to be used to supplement working capital and, to
the extent not funded by cash flow from operations, fund the combined company's
remaining estimated capital expenditures for 1998.
The borrower under the Bank Credit Facility is Neo Energy, Inc. ("Neo"), a
wholly owned subsidiary of Aviva that is the owner of Aviva's Colombian oil and
gas properties. By virtue of the Merger, Aviva will assume Garnet's Chase Loan.
Borrowings under the Bank Credit Facility are to be guaranteed by Aviva and
Aviva America, Inc. ("Aviva America"), a wholly owned subsidiary of Aviva that
is the owner of Aviva's United States oil and gas properties. Borrowings under
the Bank Credit Facility are to be secured by a first mortgage on all of Aviva's
oil and gas properties (including the oil and gas properties owned by Garnet), a
lien on Aviva's accounts receivable (including those of Garnet) and any other
assets deemed appropriate by the Bank and an unrestricted pledge of all the
outstanding capital stock of Neo and Aviva America. The portion of the credit
(estimated to be approximately $6.0 million) under the Bank Credit Facility that
renews and extends Garnet's Chase Loan will be guaranteed by OPIC.
Borrowings under the Bank Credit Facility, which are not guaranteed by
OPIC, will bear interest at the London Interbank Offered Rate ("LIBOR") plus
3.0% per annum. Borrowings under the Bank Credit Facility which are guaranteed
by OPIC will bear interest at the LIBOR rate plus 0.5% per annum. In addition,
a guarantee fee of 2.4% per annum on the portion of the borrowings guaranteed by
OPIC will be payable to OPIC.
Aviva has agreed to issue to the Bank 800,000 shares of Aviva Common Stock
and warrants to purchase 1,500,000 shares of Aviva Common Stock at an exercise
price of $0.50 per share in payment of financial advisory fees at the time of
the first borrowing thereunder. In addition, an arrangement fee of $150,000 is
payable at the closing of the Bank Credit Facility.
Borrowings under the Bank Credit Facility will be payable as follows:
$50,000 per month through February 1999; on April 1, 1999 an amount sufficient
to reduce the indebtedness thereunder to $9,100,000; and thereafter $275,758 per
month until final maturity on December 31, 2001.
Conditions precedent under the Bank Credit Facility include consummation of
the Merger pursuant to the Merger Agreement, consummation of a merger of the
Partnership with Neo, termination of Garnet's bank credit facility and receipt
of a guaranty from OPIC with respect to approximately $6.0 million of the
borrowings.
Aviva's affirmative covenants under the Bank Credit Facility include (i)
provision to the Bank of annual and quarterly financial statements, annual
reviews of Aviva's insurance policies and monthly production and cash flow
reports, (ii) compliance by Aviva with applicable laws and regulation, including
environmental laws, (iii) notices to the Bank of material litigation and claims,
(iv) maintenance of a consolidated current ratio of not less than 1.0 to 1.0
(excluding the current portion of indebtedness under the Bank Credit Facility)
and (v) for periods subsequent to March 31, 1999, maintenance of consolidated
net worth of not less than $2,500,000 plus 50% of consolidated net income (if
positive) and 50% of the proceeds of future equity sales and maintenance of a
ratio of consolidated EBITDA (earnings before interest, taxes, depreciation,
depletion and amortization) to interest expense of not less than 2.75 to 1.0.
Its negative covenants include (a) no incurrence of additional indebtedness
other than permitted indebtedness which includes capitalized leases if the
annual payment obligations thereunder does not exceed $500,000, (b) no
incurrence of additional liens except in the ordinary course of business, (c) no
sales of assets except in the ordinary course of business and (d) the avoidance
of consolidated general and administrative expense of more than $2,000,000 in
any 12-month period.
Events of default under the Bank Credit Facility include, in addition to
nonpayment of principal, interest and fees and breach of representations and
covenants thereunder, breach of other agreements that are material to Aviva, the
incurrence of a material legal judgment against Aviva, the occurrence of certain
ERISA events and a Change of Control of Aviva (as therein defined).
Based on its internal projections of cash flow, Aviva does not believe
that Aviva will be able to make the principal payment due under the Bank Credit
Facility on April 1, 1999 out of its internally generated funds. See the
discussion under "Reasons for the Merger -- Pro Forma Financial Condition."
Moreover, without an infusion of additional equity capital prior to April 1,
1999, management of Aviva believes that Aviva will be in default of the
consolidated net worth covenant described above which comes into effect on that
date.
48
<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information is
presented to illustrate the effect on the historical financial statements of
Aviva of the Merger and related transactions including (i) the acquisition of
Garnet by Aviva in a stock for stock exchange to be accounted for using the
purchase method of accounting, (ii) the purchase by Aviva of $15 million in
aggregate principal amount of Garnet's outstanding 9 1/2% Convertible
Subordinated Debentures in exchange for 12,887,771 shares of Aviva common stock,
and (iii) additional borrowings by Aviva of $15 million and the use of those
funds to refinance $7.44 million of existing indebtedness of Aviva and $6.3
million of indebtedness of Garnet. The unaudited pro forma condensed statements
of operations give effect to these transactions as if they had occurred on
January 1, 1997. The unaudited pro forma condensed balance sheet gives effect
to these transactions as if they had occurred on June 30, 1998.
The unaudited pro forma adjustments are based on available information and
certain assumptions Aviva believes are reasonable, and in the opinion of
management, include all adjustments necessary to present fairly the pro forma
financial information. The pro forma financial statements and accompanying
notes should be read in conjunction with the historical consolidated financial
statements and notes thereto of Aviva and Garnet, included elsewhere in this
Joint Proxy Statement/Prospectus. The unaudited pro forma condensed statements
of operations are not necessarily indicative of the results that would have
occurred had the Merger and related transactions occurred on January 1, 1997,
nor are they necessarily indicative of future operating results of the combined
companies.
AVIVA PETROLEUM INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
AVIVA GARNET
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
AMOUNTS AMOUNTS ADJUSTMENTS ADJUSTED AMOUNTS
---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Oil and gas sales............................... $ 9,726 $ 8,982 $ -- $ 18,708
-------- ------- --------- ---------
Expense:
Production..................................... 4,235 3,677 -- 7,912
Depreciation, depletion and
amortization................................. 6,067 4,764 (389)(h) 10,442
Write-down of oil and gas properties........... 19,953 25,761 -- 45,714
General and administrative..................... 1,510 941 -- 2,451
-------- ------- ------- ---------
Total expense.............................. 31,765 35,143 (389) 66,519
-------- -------- ------- ---------
Other income (expense):
Interest and other income (expense), net....... 122 381 -- 503
Interest expense............................... (658) (2,295) 1,641(i) (1,312)
-------- ------- ------ ---------
Total other income (expense)............... (536) (1,914) 1,641 (809)
-------- ------- ------ ---------
Loss before income taxes........................ (22,575) (28,075) 2,030 (48,620)
Income tax benefits............................. 93 285 -- 378
-------- -------- ------ ---------
Net loss................................... $(22,482) $(27,790) $2,030 $(48,242)
======== ======== ====== =========
Weighted average common shares outstanding...... 31,483 46,320
======== =========
Basic and diluted net loss per common share..... $(0.71) $(1.04)
======== =========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
49
<PAGE>
AVIVA PETROLEUM INC.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
AVIVA GARNET
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
AMOUNTS AMOUNTS ADJUSTMENTS ADJUSTED AMOUNTS
---------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Oil and gas sales.............................. $ 2,060 $ 1,928 $ -- $ 3,988
------- ------- --------- --------
Expense:
Production.................................... 1,515 1,081 -- 2,596
Depreciation, depletion and amortization...... 1,174 877 449(h) 2,500
Write-down of oil and gas properties.......... 4,725 5,127 -- 9,852
General and administrative.................... 660 561 -- 1,221
------ ------- --------- --------
Total expense.............................. 8,074 7,646 449 16,169
------ ------- --------- --------
Other income (expense):
Interest and other income (expense), net...... 771 184 -- 955
Interest expense.............................. (320) (1,118) 785(i) (653)
------ ------- --------- --------
Total other income (expense)................ 451 (934) 785 302
------ ------- --------- --------
Loss before income taxes....................... (5,563) (6,652) 336 (11,879)
Income taxes................................... (166) (227) -- (393)
------- ------- --------- --------
Net loss.................................. $(5,729) $(6,879) $ 336 $(12,272)
======= ======= ========= ========
Weighted average common shares outstanding -
basic and diluted............................. 31,483 46,320
======= =======
Basic and diluted net loss per common share.... $ (0.18) $ (0.26)
======= =======
</TABLE>
See accompanying notes to pro forma condensed financial statements.
50
<PAGE>
AVIVA PETROLEUM INC.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
JUNE 30, 1998
(in thousands, except number of shares)
(unaudited)
<TABLE>
<CAPTION>
AVIVA GARNET PRO FORMA
HISTORICAL HISTORICAL PRO FORMA ADJUSTED
AMOUNTS AMOUNTS ADJUSTMENTS AMOUNTS
---------- ---------- ----------- ---------
ASSETS
Current Assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 197 $ 466 $ 808 (c) $ 1,753
282 (d)
Restricted cash -- 282 (282) (d) --
Accounts receivable 1,466 775 -- 2,241
Inventories 599 435 -- 1,034
Prepaid expenses and other 46 89 -- 135
-------- -------- --------- --------
Total current assets 2,308 2,047 808 5,163
-------- -------- --------- --------
Property and equipment, at cost:
Oil and gas properties and equipment (full cost
method) 61,442 60,552 (52,555) (a) 69,439
Other 612 62 (62) (a) 612
-------- -------- --------- --------
62,054 60,614 (52,617) 70,051
Less accumulated depreciation, depletion and
amortization (55,740) (54,167) 54,167 (a) (55,740)
-------- --------- --------- --------
6,314 6,447 1,550 14,311
Other assets 1,509 386 (130) (b) 1,765
-------- -------- -------- --------
$ 10,131 $ 8,880 $ 2,228 $ 21,239
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Current portion of long term debt $ 37 $ 21,302 $(14,612) (e) $ 6,727
Accounts payable and accrued liabilities 3,104 1,766 (642) (f) 4,228
-------- -------- --------- --------
Total current liabilities 3,141 23,068 (15,254) 10,955
-------- -------- --------- --------
Long term debt, excluding current portion 7,403 -- 870 (e) 8,273
Gas balancing obligations and other 1,568 274 -- 1,842
Stockholders' equity (deficit):
Common stock, no par value 1,574 115 (115) (g) 1,574
Additional paid-in capital 33,376 52,491 (50,341) (g) 35,526
Accumulated deficit (36,931) (67,068) 67,068 (g) (36,931)
-------- -------- --------- ---------
Total stockholders' equity (deficit) (1,981) (14,462) 16,612 169
-------- -------- --------- --------
$ 10,131 $ 8,880 $ 2,228 $ 21,239
======== ======== ========= ========
</TABLE>
See accompanying notes to pro forma condensed financial statements.
51
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The purchase price of Garnet, approximately $9.7 million, consists of $2.3
million related to the issuance of 14,036,987 shares of Aviva's common stock at
$0.167 per share and the assumption of approximately $6.3 million of debt and
$1.4 million of other liabilities.
A summary of the assets acquired and liabilities assumed as of June 30,
1998 follows (in thousands):
<TABLE>
<S> <C>
Current assets........................................ $ 2,047
Oil and gas properties................................ 7,997
Current liabilities................................... (1,054)
Long term debt........................................ (6,302)
Other liabilities..................................... (344)
-------
Fair value of net assets acquired... $ 2,344
=======
</TABLE>
The unaudited pro forma condensed consolidated financial statements reflect
the following pro forma adjustments:
Balance Sheet
(a) To adjust oil and gas properties and fixed assets to their allocated
purchase price amount of $8.0 million.
(b) To record debt issue costs resulting from additional borrowings of
Aviva and remove debt issue costs associated with extinguished debt
agreements of Aviva and Garnet.
(c) To adjust cash for net proceeds of debt refinancing as follows (in
thousands):
<TABLE>
<S> <C>
Proceeds from new debt........................ $15,000
Extinguishment of old Aviva debt.............. (7,440)
Extinguishment of old Garnet debt............. (6,302)
Estimated costs to issue Aviva Common Stock... (300)
Deferred loan costs........................... (150)
-------
$ 808
=======
</TABLE>
(d) To reclassify restricted cash associated with old Garnet debt for
which restrictions will no longer apply.
(e) To adjust for financing activity including: (i) the retirement of $15
million of Garnet's 9 1/2% Convertible Subordinated Debentures in
exchange for 12,887,771 shares of Aviva common stock, (ii) additional
borrowings by Aviva of $15 million and the use of those funds to
refinance $7.44 million of existing indebtedness of Aviva and $6.3
million of indebtedness of Garnet and (iii) the reclassification of
certain portions of long term debt from current to noncurrent.
(f) To remove the accrued interest payable ($712,000) on Garnet's 9 1/2%
Convertible Subordinated Debentures and record anticipated severance
benefits for the Chief Executive Officer of Garnet consisting of
$65,000 in cash and $5,000 of estimated insurance premiums. The Vice
President--Finance and Secretary of Garnet is expected to continue
employment with Aviva.
(g) To eliminate Garnet stockholders' equity and record the value of
12,887,771 shares of Aviva common stock issued at $0.167 per share in
exchange for $15 million of Garnet's 9 1/2% Convertible Subordinated
Debentures and 1,149,216 shares of Aviva common stock issued at $0.167
per share in exchange for 11,492,162 shares of Garnet common stock,
net of estimated issue costs of $300,000.
52
<PAGE>
Statement of Operations
(h) To adjust depletion, depreciation and amortization of oil and gas
properties determined by the unit-of-production method based upon the
allocated purchase price of the Garnet oil and gas properties of $8.0
million at January 1, 1997. The pro forma statements of operations
for the year ended December 31, 1997, and the six months ended June
30, 1998, include combined historical charges for ceiling write-downs
of oil and gas producing properties of $45,714,000 and $9,853,000,
respectively. Had the effects of the purchase allocation to oil and
gas producing properties been considered in the application of the
ceiling tests, the write-downs would have been approximately
$9,400,000 for the year ended December 31, 1997, and $7,100,000 for
the six months ended June 30, 1998.
(i) To adjust interest expense for the effect of refinancing the $7.44
million of Aviva debt and $6.3 million of Garnet debt with $15 million
of new debt; and the removal of interest associated with Garnet's $15
million of 9 1/2% Convertible Subordinated Debentures that are being
extinguished upon the issuance of Aviva common stock. A 1/8th percent
change in the effective interest rate of the new debt would have an
$18,750 effect on the combined company's annual results of
operations.
53
<PAGE>
SUPPLEMENTAL INFORMATION RELATED TO OIL AND GAS ACTIVITIES
QUANTITIES OF OIL AND GAS RESERVES (UNAUDITED)
The following pro forma historical data presents estimates of the Company's
proved reserves giving effect to the purchase of Garnet proved reserves. The
proved reserves in Colombia and the United States were determined by independent
petroleum engineers, Huddleston & Co., Inc. and Netherland, Sewell & Associates,
Inc., respectively.
<TABLE>
<CAPTION>
Aviva Garnet
----- ------
United
States Colombia Colombia Pro Forma
------ -------- -------- ---------
Oil
- ---
<S> <C> <C> <C> <C>
Estimated reserves at December 31, 1996 305 2,817 3,416 6,538
Revisions of previous estimates (34) (915) (1,109) (2,058)
Production (76) (426) (517) (1,019)
----- ----- ------ ------
Estimated reserves at December 31, 1997 195 1,476 1,790 3,461
===== ===== ====== ======
Proved developed reserves at
December 31, 1997 195 1,476 1,790 3,461
===== ===== ===== ======
Gas
- ----
Estimated reserves at December 31, 1996 1,682 -- -- 1,682
Revisions of previous estimates (247) -- -- (247)
Production (316) -- -- (316)
----- ----- ------ ------
Estimated reserves at December 31, 1997 1,119 -- -- 1,119
===== ===== ====== ======
Proved developed reserves at
December 31, 1997 1,119 -- -- 1,119
===== ===== ====== ======
</TABLE>
STANDARDIZED MEASURE OF OIL AND GAS RESERVES (UNAUDITED)
The following schedule is a pro forma standardized measure of the
discounted net future cash flows applicable to proved oil and gas reserves as of
December 31, 1997. 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 pro forma 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 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 pro forma
standardized measure of discounted future net cash flows does not necessarily
reflect the fair value of the proved oil and gas properties.
The following pro forma tabulation reflects the Company's estimated
discounted future cash flows from oil and gas production giving effect to the
purchase of Garnet:
<TABLE>
<CAPTION>
Pro
Forma
---------
<S> <C>
Future gross revenues $ 52,751
Future production costs (20,605)
Future development costs (1,921)
--------
Future net cash flows before income taxes 30,225
Future income taxes (962)
--------
Future net cash flows after income taxes 29,263
Discount at 10% per annum (6,362)
</TABLE>
54
<PAGE>
<TABLE>
<S> <C>
--------
Standardized measure of discounted future net cash flows $ 22,901
========
The following are the significant sources of change in discounted future net cash flows relating to proved
reserves:
Pro
Forma
-----
Sales of oil and gas, net of production costs $(10,796)
Development costs incurred that reduced
future development costs 2,553
Accretion of discount 9,356
Revision of previous estimates:
Change in price (49,432)
Change in quantities (16,366)
Change in future development costs 2,521
Change in timing and other changes (7,677)
Change in estimated income taxes 4,992
--------
Net decrease (64,849)
Balance at beginning of year 87,750
--------
Balance at end of year $ 22,901
========
</TABLE>
55
<PAGE>
PRO FORMA PRODUCTION, SALES PRICES AND COSTS
The following pro forma tabulation summarizes Aviva's oil production in
thousands of barrels and natural gas production in millions of cubic feet for
the year ended December 31, 1997 giving effect to the purchase of Garnet.
<TABLE>
<CAPTION>
Pro
Forma
-----
Oil (1)
<S> <C>
United States 76
Colombia 942
Gas
United States 316
Colombia --
</TABLE>
__________________
(1) Includes crude oil and condensate.
The pro forma average sales price per barrel of oil and per thousand cubic
feet ("MCF") of gas produced and the pro forma average production cost per
dollar of oil and gas revenue and per barrel of oil equivalent (6 MCF: 1 barrel)
for the year ended December 31, 1997 were, giving effect to the purchase of
Garnet, as follows:
<TABLE>
<CAPTION>
Pro Forma(1)
------------
<S> <C> <C>
Average sales price per barrel of oil (2) United States $19.17
Colombia $17.39
Average sales price per MCF of gas United States $ 2.73
Colombia $ --
Average production cost per dollar of
oil and gas revenue United States $ 0.54
Colombia $ 0.41
Average production cost per barrel of
oil equivalent United States $ 9.81
Colombia $ 7.06
</TABLE>
__________________
(1) All amounts are stated in United States dollars.
(2) Includes crude oil and condensate.
56
<PAGE>
PRO FORMA PRODUCTIVE WELLS AND ACREAGE
The following table summarizes the pro forma developed acreage and
productive wells at December 31, 1997 giving effect to the purchase of Garnet.
"Gross" refers to the total acres or wells in which Aviva or Garnet has a
working interest, and "net" refers to gross acres or wells multiplied by the
percentage working interest owned.
<TABLE>
<CAPTION>
Developed Acreage (1)
GROSS NET
----- -----
<S> <C> <C>
United States 3,880 1,565
Colombia (2) 3,706 1,296
----- -----
7,586 2,861
===== =====
</TABLE>
<TABLE>
<CAPTION>
Productive Wells (3)
OIL GAS
--------------- -------------
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
United States (4) 10 5.29 7 2.87
Colombia 14 4.90 -- --
----- 24 10.19 7 2.87
== ===== == ====
</TABLE>
_____________________
(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.
The following table shows the pro forma undeveloped acreage held at
December 31, 1997 giving effect to the purchase of Garnet. 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.
<TABLE>
<CAPTION>
PRO FORMA ACRES
---------------
GROSS NET
----- ---
<S> <C> <C>
Colombia (1) 48,636 48,636
Papua New Guinea 952,000 57,120
--------- -------
1,000,636 105,756
========= =======
</TABLE>
________________
(1) Excludes undeveloped acreage associated with the Fragua concession that has
been relinquished and the Yuruyaco concession which is pending
relinquishment.
57
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF AVIVA
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements included elsewhere herein.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1998 compared to Six Months Ended June 30, 1997
<TABLE>
<CAPTION>
UNITED STATES
--------------- --------------------
COLOMBIA
OIL GAS OIL TOTAL
------ ------ --------- --------
<S> <C> <C> <C> <C>
(THOUSANDS)
Revenue -- 1997 $ 835 $ 420 $ 4,298 $ 5,553
Volume variance (294) (243) (1,736) (2,273)
Price variance (189) (42) (972) (1,203)
Other -- (17) -- (17)
----- ----- ------- -------
Revenue -- 1998 $ 352 $ 118 $ 1,590 $ 2,060
===== ===== ======= =======
</TABLE>
Colombian oil volumes were 138,000 barrels in the first half of 1998, a
decrease of 93,000 barrels as compared to the first half of 1997. Such decrease
is due to a 106,000 barrel decrease resulting from production declines,
partially offset by a 13,000 barrel increase resulting from the completion of a
development well in June 1997.
U.S. oil volumes were 27,000 barrels in 1998, down approximately 15,000
barrels from 1997. Of such decrease, approximately 7,000 barrels was due to
Aviva's Main Pass 41 field being shut-in for approximately 85 days during the
first half of 1998 due to equipment failures and 8,000 barrels resulted from
normal production declines. U.S. gas volumes before gas balancing adjustments
were 36,000 MCF in 1998, down 103,000 MCF from 1997. Of such decrease,
approximately 54,000 MCF was due to the aforementioned shut-in of the Main Pass
41 field and 25,000 MCF was due to the suspension of production of one of the
wells at Main Pass 41 beginning in the first quarter of 1998. The remaining
24,000 MCF was due to production declines.
The above-referenced equipment failures at Aviva's Main Pass 41 field
necessitated upgrading and additional modification of production and water
treatment facilities. As of August 7, 1998, this field had been shut-in an
additional 23 days since July 1, 1998, in order to complete the project.
Colombian oil prices averaged $11.53 per barrel during the first half of
1998. The average price for the same period of 1997 was $18.58 per barrel.
Aviva's average U.S. oil price decreased to $13.00 per barrel in 1998, down from
$19.97 per barrel in 1997. In 1998 prices have been lower than in the first
half of 1997 due to a dramatic decrease in world oil prices. U.S. gas prices
averaged $2.10 per MCF in 1998 compared to $2.23 per MCF in 1997.
In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $17,000 as a result of gas balancing adjustments.
Operating costs decreased approximately 31%, or $683,000, primarily due to
lower operating costs in Colombia. Such decreases have resulted mainly from the
elimination of the production tax on the majority of Aviva's Colombian
production and lower pipeline tariffs resulting from lower volumes.
Depreciation, depletion and amortization decreased by 64%, or $2,111,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs and lower levels of production.
Aviva recorded write-downs of $3,355,000 and $1,370,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as a
result of ceiling test limitations on capitalized costs during 1998.
59
<PAGE>
G & A expenses declined $92,000 mainly due to a $73,000 decrease in legal
and consulting fees and an $86,000 reduction in payroll. These savings were
partially offset by lower amounts of capitalized G & A.
Interest and other income increased during the first half of 1998 as Aviva
realized a $720,000 gain on the settlement of litigation involving the
administration of a take or pay contract settlement.
Income taxes were $448,000 higher in 1998 principally as a result of
Colombian deferred tax benefits recorded in the second quarter of 1997. Such
deferred tax benefits in 1997 resulted from the write-down of the carrying
amount of Aviva's Colombian oil properties.
1997 versus 1996
<TABLE>
<CAPTION>
UNITED STATES COLOMBIA
------------------- ---------
OIL GAS OIL TOTAL
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
(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
====== ======= ======= =======
</TABLE>
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 Aviva'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 Aviva'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. Aviva'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.
Aviva 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.
60
<PAGE>
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 Aviva'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 Aviva's
Colombian oil and gas properties.
1996 versus 1995
<TABLE>
<CAPTION>
UNITED STATES COLOMBIA
------------------- --------
OIL GAS OIL TOTAL
-------- -------- ------- --------
<S> <C> <C> <C> <C>
(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
====== ====== ====== =======
</TABLE>
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
Aviva'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 Aviva'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 Aviva.
Colombian oil prices averaged $19.82 per barrel during 1996. The average
for the same period in 1995 was $16.39. Aviva'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
61
<PAGE>
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.
G&A expense decreased $762,000, or 33%, as a result of a cost reduction
program implemented by Aviva during the first quarter of 1996. This program
targeted all categories of G&A.
Aviva 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 Aviva 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 Aviva'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, Aviva 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.
Aviva continues to evaluate appropriate courses of corrective action, including
replacement of certain systems whose associated costs would be recorded as
assets and amortized. Accordingly, Aviva 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
Since December 31, 1997, costs incurred in oil and gas property
acquisition, exploration and development activities by Aviva totaled $411,000.
Of such amount, $242,000 was incurred in Colombia and $169,000 was incurred in
the U.S. These activities were funded primarily by cash provided by operating
activities.
In the U.S., Aviva is currently committed to the drilling of a saltwater
disposal well at its Breton Sound 31 field facilities in order to comply with a
state-wide prohibition against discharges of produced water to coastal waters
offshore Louisiana. The cost to drill and equip such a well is estimated at
$0.3 million, net to Aviva's interest. Pursuant to a revised produced water
termination schedule approved by the Louisiana Department of Environmental
Quality, Aviva has until September 1, 1998, to cease discharges of produced
water. If Aviva is unable to complete the project and reinject the produced
water by September 1, 1998, Aviva will be required to curtail or even cease
production from its Breton Sound leases. Additionally, Aviva has recently
completed upgrades to certain equipment at its Main Pass 41 field facilities,
the remaining cost of which is expected to aggregate $0.2 million, net to
Aviva's interest.
Aviva, along with Argosy (referred to collectively as the "Co-owners"), is
also engaged in ongoing operations on the Santana concession in Colombia. The
contract obligations of the Santana concession have been met. The Co-owners
may, however, initiate the recompletion of certain existing wells and various
miscellaneous projects. Aviva's share of the estimated future costs of these
development activities is approximately $0.3 million at June 30, 1998. Depending
on the results of future exploration and development activities, substantial
expenditures that have not been anticipated may be required. Failure by Aviva
to fund certain of these capital expenditures could, under either the concession
agreement or joint operating agreement with Argosy, or both, result in the
forfeiture of all or part of Aviva's interest in this concession.
In addition, Aviva's ability to continue its Colombian development program
is dependent upon the ability of Argosy to finance its portion of such costs and
expenses. If Argosy cannot fund its obligations, Aviva may be
62
<PAGE>
required to accept an assignment of Argosy's interest therein and assume those
funding obligations. If, thereafter, Aviva were to be unable to raise sufficient
funds to meet such obligations, Aviva's interests in the properties may be
forfeited.
In reports filed with the U.S. Securities and Exchange Commission, which
are publicly available, Garnet has disclosed, among other things, that: (i)
Argosy is no longer in compliance with certain covenants required by its finance
agreement with Chase Bank of Texas which is guaranteed by the Overseas Private
Investment Corporation and secured by Argosy's assets in Colombia; (ii) its
management believes that Garnet's available working capital and cash flows from
operations will not be sufficient to make its required debt principal and
interest payments as they become due beginning March 31, 1998; and (iii) in
the absence of a business transaction or a restructuring of Garnet's
indebtedness, Garnet may seek protection from its creditors under the Federal
Bankruptcy Code.
As discussed in Note 2 of the condensed consolidated financial statements,
Aviva has entered into a definitive agreement to merge with Garnet. Pursuant to
the merger plan, Garnet's $15 million of subordinated debentures will be
canceled and Argosy's bank debt, along with Aviva's existing bank debt, will be
refinanced through a proposed $15 million credit facility that Aviva has
requested ING Capital to provide to Aviva. In addition to refinancing the
existing bank debt of Argosy and Aviva, this proposed new credit facility is
expected to supplement Aviva's working capital and, to the extent not funded by
cash flow from operations, fund Aviva's remaining estimated capital expenditures
for 1998.
Management of Aviva is currently finalizing efforts to effectuate the
merger, which efforts now require only execution and delivery of the proposed
new credit facility with ING Capital. Additionally, approval by the
shareholders of Aviva and Garnet is required to consummate the merger. A Joint
Proxy Statement will be provided to Shareholders for their review and voting at
Shareholder Meetings expected to be held in late September.
While management believes that the merger will be consummated substantially
as planned, there can be no assurance that this will be the case. If Aviva is
unable to consummate the merger, then, in the absence of another business
transaction or debt restructuring, Garnet may seek bankruptcy protection or
other alternatives, any of which may have a material adverse effect on Aviva's
consolidated financial condition. As indicated above, if Argosy cannot fund its
obligations, Aviva may be required to accept an assignment of Argosy's interest
therein and assume those funding obligations. Aviva itself has experienced
significant losses which have resulted in recurring noncompliance with the
minimum consolidated tangible net worth covenant and its debt repayment schedule
under its credit agreement with ING Capital. Moreover, failure to consummate
the merger with Garnet on or before October 31, 1998, would be an event of
default under the recently amended credit agreement (see note 4). Without the
Garnet merger and the proposed new credit facility, management's current cash
flow analysis does not indicate that Aviva would be able to make the October 1,
1999 scheduled debt repayment under the existing ING Capital Credit Agreement.
In the past, ING Capital has amended or waived compliance with these covenants
when Aviva has been unable to comply with them. There can be no assurance,
however, that ING Capital will continue to make similar concessions in the
future.
On August 3, 1998, leftist Colombian guerrillas inflicted damage on Aviva's
oil processing and storage facilities at the Mary field, and to a lesser extent,
at the Linda facilities. While it is still too early to accurately assess the
cost of repairs, Aviva does not believe that the property damage will exceed
insurance limits. As more fully discussed in Note 7 of the condensed
consolidated financial statements, Aviva's Colombian production has been
temporarily suspended.
With the exception of historical information, the matters discussed in this
quarterly report contain forward-looking statements that involve risks and
uncertainties. Although Aviva 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 Aviva's annual report on Form
10-K.
NEW ACCOUNTING PRONOUNCEMENTS
63
<PAGE>
Aviva is assessing the reporting and disclosure requirements of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. The statement
is effective for financial statements for periods beginning after December 15,
1997, but is not required for interim financial statements in the initial year
of its application. Aviva will adopt the provisions of SFAS No. 131 in its
December 31, 1998 consolidated financial statements.
Aviva is also assessing the reporting and disclosure requirements of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 1999. Aviva believes SFAS
No. 133 will not have a material impact on its financial statements or
accounting policies. Aviva will adopt the provisions of SFAS No. 133 in the
first quarter of 2000.
BUSINESS AND PROPERTIES OF AVIVA
GENERAL
Aviva is engaged in the exploration for and production and development of
oil and gas in Colombia and offshore in the United States. Aviva was
incorporated in 1973 and the Aviva Common Stock has been traded on the LSE since
1982. Depositary Shares, each representing the beneficial ownership of five
shares of Aviva 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. Aviva's
principal executive offices are located in Dallas, Texas, and Aviva maintains a
field office in Venice, Louisiana.
CURRENT OPERATIONS
Colombia. Through a wholly owned subsidiary, Aviva is the owner of
interests in, and is engaged in exploration for, and development and production
of oil from, four concessions granted by Ecopetrol.
Aviva's Colombian activities are carried out pursuant to four joint
operating agreements between Neo and Argosy. Neither Garnet nor Argosy is
affiliated with Aviva. 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. Aviva's exploration and
development activities are currently concentrated in the Santana
concession.
Twenty-one wells have been drilled on the Santana concession. Of the 13
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 13.4 million barrels
during the period from April 1992, when production commenced, through June 30,
1998. Aviva's share of this production totaled approximately 2.0 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. Aviva has determined, however, that further exploration on these
concessions is not technically justified. Accordingly, Aviva filed with
Ecopetrol applications for formal relinquishment, which in the case of La
Fragua, occurred in August 1998. Formal relinquishment of the Yuruyaco
Concession is expected in the latter part of 1998.
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. Argosy and Neo notified Ecopetrol in 1994 that they intend to abandon
the remaining wells and relinquish the Aporte Putumayo Concession because
declining production rates made continued operation of the wells economically
unattractive. Ecopetrol is presently in discussion with another company
desirous of contracting with Ecopetrol for a new contract area that will include
the Aporte Putumayo Concession. Depending on the terms of this new contract,
Aviva may still be obligated to pay its share of the abandonment costs estimated
to be approximately $180,000.
64
<PAGE>
Each concession is governed by a separate contract with Ecopetrol.
Generally, the contracts cover a 28-year period and require certain exploration
expenditures in the early years of the contract and, in the later years of the
contract, permit exploitation of reserves that have been found. All of the
contracts provide that Ecopetrol shall receive, on behalf of the Colombian
Ministry of Mines, royalty payments in the amount of 20% of the gross proceeds
of the oil produced pursuant to the respective contract, less certain costs of
transporting the oil to the point of sale. Under each of the contracts,
application must be made to Ecopetrol for a declaration of commerciality for
each discovery. If Ecopetrol declares the discovery commercial, it has the right
to a 50% reversionary interest in the field and is required to pay 50% of all
future costs. If, alternatively, Ecopetrol declines to declare the discovery
commercial, Neo and Argosy have the right to proceed with development and
production at their own expense until such time as they have recovered 200% of
the costs incurred, at which time Ecopetrol is entitled to back in for a 50%
working interest in the field without payment or reimbursement of any historical
costs. Exploration costs (as defined in the concession agreements) incurred by
the co-owners prior to the declaration of commerciality are recovered by means
of retention by the co-owners of all of the non-royalty proceeds of production
from each well until costs relating to that well are recovered.
United States. In the United States Aviva, 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. Aviva acquired its interests in these fields
through the acquisition of Charterhall Oil North America PLC in 1990.
RISKS ASSOCIATED WITH AVIVA'S BUSINESS
General. Aviva'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, Aviva 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.
Aviva believes that such insurance coverage is customary for companies engaged
in similar operations, but Aviva 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. Aviva 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 Aviva.
Colombia. Aviva 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 Aviva's interests in the applicable
property. For additional information on Aviva's concession obligations, see "--
Current Operations," and regarding its cash requirements, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
Aviva -- Liquidity and Capital Resources."
In addition, Aviva'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 Aviva's
co-owner will be in a position to pay, or provide for the payment of, its costs
and expenses of joint projects. If Aviva's co-owner cannot fund its
obligations, Aviva may be required to accept an assignment of the co-owner's
interest therein and assume those funding obligations. If, thereafter, Aviva
were to be unable to raise sufficient funds to meet such obligations, Aviva's
interests in the affected properties may be forfeited. Moreover, even if Aviva
were to be able to raise sufficient funds, there could be no assurance that
Aviva 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 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.
65
<PAGE>
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.
Aviva is subject to the other risks inherent in the ownership and
development of foreign properties including, without limitation, cancellation or
renegotiation of contracts, royalty and tax increases, retroactive tax claims,
expropriation, adverse changes in currency values, foreign exchange controls,
import and export regulations, environmental controls and other laws,
regulations or international developments that may adversely affect Aviva's
properties. Aviva does not maintain political risk insurance.
Exploration and development of Aviva's Colombian properties are dependent
upon obtaining appropriate governmental approvals and permits. See "--
Regulation." Aviva'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. Aviva'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 Aviva's property is located, have damaged the Company's
assets in the past. On August 3, 1998, Colombian leftist guerrilla groups
launched a nationwide series of attacks. As a result of one attack, Aviva's oil
production and storage facilities at the Mary field were damaged and minor
damage was inflicted on the Linda facilities. While it is too early to
accurately assess the cost of repairs, Aviva does not believe the property
damage will exceed insurance limits. As of August 10, 1998, Aviva's oil
production from the Linda and Toroyaco fields had been restored, however,
production from the Mary and Miraflor fields may be suspended or significantly
curtailed for at least several weeks and possibly longer depending on the extent
of damage and availability of repair crews. Although Aviva'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 Aviva's operations, however, there can be no assurance that Aviva's
operations will not be the target of guerrilla attacks in the future.
United States. Aviva'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, Aviva's interest. Aviva'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, Aviva could be required to pay its proportionate share or
forego further development of such properties. Aviva'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 Aviva'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. Aviva'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, Aviva may export its oil production.
Ecopetrol has historically purchased Aviva'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. Aviva currently produces no natural gas in Colombia.
See "-- Properties."
66
<PAGE>
During each of the three years ended December 31, 1997 and the six months
ended June 30, 1998, Aviva received the majority of its revenue from Ecopetrol.
Sales to Ecopetrol accounted for $1.6 million or 77% of oil and gas revenue for
the six months ended June 30, 1998, $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 Aviva's entire Colombian
oil revenue. If Ecopetrol were to elect not to purchase Aviva's Colombian oil
production, Aviva believes that other purchasers could be found for such
production.
United States. Aviva 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. Aviva does not have long term contracts with
purchasers of its domestic oil and condensate production. Aviva'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. Aviva
has not historically hedged any of its domestic production.
During 1997, 1996 and 1995, Aviva 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 Aviva's oil and gas production, Aviva
believes that other purchasers could be found for such production.
General. Oil and gas are Aviva's only products. There is substantial
uncertainty as to the prices that Aviva may receive for production from its
existing oil and gas reserves or from oil and gas reserves, if any, which Aviva
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 Aviva 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 Aviva may produce and
sell while such surplus exists.
REGULATION
Environmental Regulation. Aviva'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 Aviva'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 Aviva, as well as
significantly impair Aviva's ability to compete with larger, more highly
capitalized companies. Management believes that Aviva 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 Aviva'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 Aviva'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
67
<PAGE>
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 Aviva's area of
operations north of the Caqueta River. See "-- Properties -- Significant
Properties -- Colombia -- Santana Concession." As a result of the review and
requests for additional environmental studies, Aviva's operations north of the
Caqueta River were suspended pending review and approval of additional
environmental studies submitted by Aviva 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 Aviva will not experience future delays in obtaining necessary
environmental licenses. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations of Aviva -- Liquidity and Capital
Resources" and "-- Properties -- Significant Properties --Colombia."
United States. Aviva believes that its domestic operations are
-------------
currently in substantial compliance with U.S. federal, state, and local
environmental laws and regulations. Aviva 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 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 Aviva
is currently unaware of any oil spills for which Aviva has been designated as a
responsible party under OPA '90 and that will have a material adverse impact on
Aviva or its operations. OPA '90 also imposes ongoing requirements on facility
operators, such as the preparation of an oil spill contingency plan. Aviva 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. Aviva'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. Aviva believes that it currently has
established adequate proof of financial responsibility for its offshore
facilities. However, Aviva 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 Aviva in
the future or otherwise have a material adverse effect on Aviva. The impact of
financial responsibility requirements is not expected to be any more burdensome
to Aviva 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.
68
<PAGE>
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 Aviva'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 Aviva, 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 Aviva
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 Aviva and the LDEQ fail to reach agreement on a
produced water termination plan or Aviva otherwise fails to timely install and
commence operation of the reinjection well, Aviva 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 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. Aviva 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
Aviva'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. Aviva'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 Aviva'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 Aviva's contract rights with respect to such
properties, or could result in tax increases and/or retroactive tax claims being
assessed against Aviva.
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
69
<PAGE>
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 Aviva 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 Aviva, can currently be made at uncontrolled market prices,
Congress could reenact price controls in the future.
Aviva'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.
Aviva cannot predict what further action the FERC will take on these
matters; however, Aviva does not believe that it will be affected by any action
taken materially differently than other natural gas producers, gatherers and
marketers with which it competes. The natural gas industry historically has
been very heavily regulated; therefore, there is no assurance that the less
stringent regulatory approach recently pursued by the FERC and Congress will
continue.
A portion of Aviva'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
Aviva operations on federal leases to be suspended or terminated. Any such
suspension or termination could materially and adversely affect Aviva'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. Aviva cannot predict what action the MMS will take on this
matter, nor can it predict how Aviva 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
70
<PAGE>
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 Aviva 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. Aviva 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 Aviva's oil producing
operations; however, Aviva does not believe it will be affected by these orders
materially differently than other oil producers with which it competes.
Aviva cannot accurately predict the effect that any of the aforementioned
orders or the challenges to the orders will have on Aviva'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. Aviva cannot accurately predict when or whether any such proposals or
proceedings may become effective.
State Regulation. Production of any domestic oil and gas by Aviva is
affected by state regulations. Many states in which Aviva 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.
Aviva'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 Aviva can
produce from its wells and may limit the number of wells or the locations at
which Aviva can drill. Inasmuch as such laws and regulations are periodically
expanded, amended and reinterpreted, Aviva is unable to predict the future cost
or impact of complying with such regulations; however, Aviva 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
Aviva 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 Aviva.
Aviva's ability to discover reserves in the future depends on its ability
to select, generate and acquire suitable prospects for future exploration.
Aviva does not currently generate its own prospects and depends exclusively upon
external sources for the generation of oil and gas prospects.
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<PAGE>
EMPLOYEES
As of July 31, 1998, Aviva had 8 full-time employees, all in the United
States.
PROPERTIES
Productive Wells and Drilling Activity
The following table summarizes Aviva's developed acreage and productive
wells at December 31, 1997. "Gross" refers to the total acres or wells in which
Aviva has a working interest, and "net" refers to gross acres or wells
multiplied by the percentage working interest owned by Aviva.
<TABLE>
<CAPTION>
Developed Acreage /(1)/
Gross Net
----- -----
<S> <C> <C>
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
== ===== ===== ====
</TABLE>
(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.
During the periods indicated, Aviva drilled or participated in the drilling
of the following development and exploratory wells.
<TABLE>
<CAPTION>
Net Wells Drilled
-----------------
Development Exploratory
----------- -----------
Productive Dry Productive Dry
---------- ----------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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
=== ================= ========== ===========
</TABLE>
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
72
<PAGE>
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
Aviva's undeveloped acreage in Colombia is held pursuant to concession
agreements with the Colombian government. Aviva 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."
Aviva 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 Aviva for specific prospects on
reasonable terms either directly or through farmout arrangements.
The following table shows the undeveloped acreage held by Aviva 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.
<TABLE>
<CAPTION>
Undeveloped Acres
-------------------
Gross Net
--------- ---------
<S> <C> <C>
Santana 48,636 21,887
La Fragua 32,377 14,570
Yuruyaco 38,663 17,398
------- ------
119,676 53,855
======= ======
</TABLE>
Title to Properties
Aviva 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. Aviva believes that it generally has satisfactory
title to all of its oil and gas properties. Aviva'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. Aviva believes that none of such burdens materially
detracts from the value of such properties or its interest therein or will
materially interfere with the use of the properties in the operation of Aviva's
business.
Federal Leases
Aviva 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 Aviva'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 "-- Regulation."
Reserves and Future Net Cash Flows
See Supplementary Information Related to Oil and Gas Producing Activities
in "Financial Statements and Supplementary Data" for information with respect to
Aviva's reserves and future net cash flows.
Aviva will file with the Department of Energy (the "DOE") a statement with
respect to Aviva'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 "Financial Statements and
Supplementary
73
<PAGE>
Data" elsewhere herein. The information filed with the DOE includes the
estimated proved reserves of the properties of which Aviva is the operator,
whereas the estimated proved reserves contained in "Financial Statements and
Supplementary Data" herein include only Aviva's percentage share of the
estimated proved reserves of all properties in which Aviva has an interest.
Production, Sales Prices and Costs
The following table summarizes Aviva's oil production in thousands of
barrels and natural gas production in millions of cubic feet for the years
indicated:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C> <C>
Oil /(1)/ United States 76 94 106
Colombia 426 476 435
Gas United States 316 1,146 1,184
Colombia - - -
</TABLE>
(1) Includes crude oil and condensate.
The average sales price per barrel of oil and per thousand cubic feet
("MCF") of gas produced by Aviva 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:
<TABLE>
<CAPTION>
Year ended December 31, /(1)/
-----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C> <C>>
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
</TABLE>
(1) All amounts are stated in United States dollars.
(2) Includes crude oil and condensate.
Significant Properties
Colombia. Aviva'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. Aviva 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
74
<PAGE>
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 Aviva'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. Aviva 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 Aviva 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.
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, Aviva'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.
Aviva and its co-owner ("Co-owners") constructed a 42-kilometer 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 Aviva's production is transported to the port of
Tumaco on the Pacific coast of Colombia.
75
<PAGE>
Two additional fields, the Mary and Miraflor fields, were discovered north
of the Caqueta River and were declared commercial by Ecopetrol during 1993.
Except for oil produced during production tests of wells located in these
fields, the production was shut-in until the first quarter of 1995 when
construction of a pipeline was completed and commercial production began. 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 Aviva'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 Aviva 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 Aviva
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 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 Aviva's proved oil and gas
reserves was prepared, Ecopetrol was exporting the crude oil. Accordingly, for
purposes of determining the standardized measure applicable to Aviva's Colombian
reserves, Aviva 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 Aviva'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
76
<PAGE>
Ecopetrol agreed to allow the Co-owners to surrender the concession without
further expenditure. Formal relinquishment occurred in August 1998.
Yuruyaco Concession. The Yuruyaco concession, acquired by Aviva in
-------------------
September 1995, is an "association" contract whereunder Aviva 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 the
latter part of 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. Argosy and Neo notified
Ecopetrol in 1994 that they intend to abandon the remaining wells and relinquish
the Aporte Putumayo Concession because declining production rates made continued
operation of the wells economically unattractive. Ecopetrol is presently in
discussion with another company desirous of contracting with Ecopetrol for a new
contract area that will include the Aporte Putumayo Concession. Depending on the
terms of this new contract, the Company may still be obligated to pay its share
of the abandonment costs estimated to be approximately $180,000.
United States. Aviva'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 Aviva.
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 Aviva's interest, from six completions in four
sands between 6,000 and 7,500 feet. Aviva owns a 35% interest in this field.
Main Pass Block 41 represents approximately 71% of Aviva'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 Aviva's interest, from two sands completed between 5,500
feet and 6,500 feet. Aviva's interests in the leases comprising the field vary
from 41% to 67%. Breton Sound Block 31 field represents approximately 29% of
Aviva'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. Aviva is
continuing its efforts to secure an industry partner to farm-in to Aviva's
acreage by drilling one or more exploratory wells that would test the deep
prospects. As for the shallow prospects, Aviva anticipates that it will drill
at least one exploratory well once suitable financing has been secured.
Aviva 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.
LEGAL PROCEEDINGS
77
<PAGE>
There are no legal proceedings to which Aviva 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 Aviva's results of operations or financial
condition.
78
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF GARNET
LIQUIDITY AND CAPITAL RESOURCES
Garnet is highly leveraged with $21,301,740 in current debt consisting of
(i) the Debentures ($15,000,000) due December 21, 1998 and (ii) $6,350,000
($6,301,740 net to Garnet) in principal outstanding under the Chase Loan to
Argosy. Based on Argosy's year-end financial statements, Argosy has determined
that it is no longer in compliance with certain covenants required by the
finance agreement governing the Chase Loan. In the absence of a waiver of such
covenants, either OPIC or Chase would have the right to call a default under the
Chase Loan, accelerate payment of all outstanding amounts due thereunder and
realize upon the collateral securing the Chase Loan. Although Argosy may apply
for a waiver, given Garnet's financial position and negative working capital
balance at June 30, 1998, no assurance can be given that such waiver will be
granted or continued. Under the terms of the Chase Loan, the 75% of proceeds
from Argosy's oil sales, which are paid in U.S. dollars are deposited into an
escrow account with Chase to secure payment of the Chase Loan. Argosy is
required to maintain a minimum balance in such escrow account equal to six
months of interest, principal and other fees due under the Chase Loan. The
escrow account minimum required balance at June 15, 1998 was $1,700,000 and the
total account balance was $2,100,000. As previously stated, Argosy was unable
to pay the scheduled Chase Loan principal, interest and fees due June 15, 1998
from its operating accounts. Chase and OPIC therefore, exercised their right to
withdraw such amounts totaling $1,600,000 from the escrow account and released
$200,000 to Argosy, leaving a balance of $300,000 in the account. Revenues in
U. S. dollars continue to be deposited into the escrow account to bring the
balance up to the required minimum as soon as possible. Release of additional
funds to Argosy will be at the sole discretion of OPIC and Chase. No assurance
can be given that OPIC and Chase will release additional amounts sufficient to
fund Garnet's operations.
Garnet was unable to pay the interest to the debenture holders due March 31
and June 30, 1998 and Garnet's financial forecasts indicate that, assuming no
changes in its capital structure, working capital and cash flow from operations,
Garnet will not be able to pay Debenture interest due September 30, 1998 or pay
principal and interest due under the Chase Loan on December 15, 1998 and
maintain the minimum balance in the escrow account. Garnet also does not
expect working capital and cash flow from operations to be sufficient to repay
the principal amount of the Debentures at maturity or earlier if the debenture
holders call a default as a result of the non-payment of interest. Garnet must
complete a restructuring transaction or renegotiate the terms of the Debentures
in order to avoid non-compliance with its obligations to pay the Debentures. As
a result, management believes there is substantial doubt about Garnet's ability
to continue as a going concern. In the absence of a business transaction or a
restructuring of Garnet's indebtedness, Garnet may seek protection from its
creditors under the Federal Bankruptcy Code.
In view of its operating losses and financial condition, Garnet initiated
further cost containment programs in 1997 and 1998 including a 28% reduction in
its Colombian personnel and the termination of all U.S. personnel other than
Douglas W. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief
Financial Officer and the closing of Garnet's executive office in Houston.
Garnet also engaged Rauscher Pierce Refsnes, Inc. (now Dain Rauscher) as a
financial advisor to provide assistance in negotiating a business combination or
a debt restructuring transaction to address Garnet's liquidity issues. Although
Garnet engaged in comprehensive efforts, including extensive negotiations with
two separate candidates, Garnet was not successful in concluding a transaction.
Garnet, on June 24, 1998, executed a definitive merger agreement with Aviva.
It is anticipated that any future foreign exploration and development
activities will require substantial amounts of capital. If Garnet is unable to
conclude a business combination or a debt restructuring transaction, Garnet will
not have the resources to finance any further exploration or development
activity. Accordingly, there can be no assurance that any additional exploration
or development activities will be conducted, other than those activities
required to deplete Garnet's existing proved reserves. The present environment
for financing the ongoing obligations of an oil and gas business is uncertain
due, in part, to the substantial instability in oil and gas prices in recent
years and to the volatility of financial markets. In addition, Garnet's ability
to continue its exploration and development programs may be dependent upon its
joint venture partners' financing their portion
79
<PAGE>
of such costs and expenses. There can be no assurance that Garnet's partners
will contribute, or be in a position to contribute, their costs and expenses of
the joint venture programs. If Garnet's partners cannot finance their
obligations to the joint ventures, Garnet may be required to accept an
assignment of the partners' interests therein and assume their financing
obligations. If sufficient funds cannot be raised to meet Garnet's obligations
in connection with its properties, the interests in such properties might be
sold or forfeited.
On August 3, 1998, Colombian leftist guerrilla groups launched a nationwide
series of attacks. As a result of one attack, Garnet's oil production and
storage facilities at the Mary field were damaged and minor damage was inflicted
on the Linda facilities. While it is too early to accurately assess the cost of
repairs, Garnet does not believe the property damage will exceed insurance
limits. As of August 10, 1998, Garnet's oil production from the Linda and
Toroyaco fields had been restored, however, production from the Mary and
Miraflor fields may be suspended or significantly curtailed for at least several
weeks and possibly longer depending on the extent of damage and availability of
repair crews.
As described herein, Garnet's operations are primarily located outside the
United States. Although certain of such operations are conducted in foreign
currencies, Garnet considers the U.S. dollar to be the functional currency in
most of the countries in which it operates. In addition, Garnet has no
significant operations in countries with highly inflationary economies. As a
result, Garnet's foreign currency transaction gains and losses have not been
significant. Exchange controls exist for the repatriation of funds from Colombia
and Papua New Guinea. Garnet believes that the continuing viability of its
operations in these countries will not be affected by such restrictions.
The foregoing discussion contains, in addition to historical information,
forward-looking statements. The forward-looking statements were prepared on the
basis of certain assumptions which relate, among other things, to costs expected
to be incurred in the development of Garnet's properties, the receipt of
environmental and other necessary administrative permits required for such
development, future oil prices, future production rates, and the ability to
conclude a business combination or a debt restructuring transaction. Even if the
assumptions on which the projections are based prove accurate and appropriate,
the actual results of Garnet's operations in the future may vary widely from the
financial projections due to unforeseen engineering, mechanical or technological
difficulties in drilling or working over wells, regional political issues,
general economic conditions, increased competition, changes in government
regulation or intervention in the oil and gas industry, and other risks
described herein. Accordingly, the actual results of Garnet's operations in the
future may vary widely from the forward-looking statements included herein.
YEAR 2000
Garnet is currently utilizing accounting software in the United States that
is year 2000 compliant, however, Argosy Energy International, Garnet's
subsidiary in Colombia, must upgrade its systems. An evaluation of alternative
solutions to the year 2000 problem is complete and a new management information
and accounting software package will be selected to upgrade the system in the
near future. Garnet does not currently have any information concerning year 2000
compliance of its suppliers and customers. In the event that any of Garnet's
significant suppliers or customers do not successfully and timely achieve year
2000 compliance, Garnet does not believe its business or operations would be
adversely affected.
NEW ACCOUNTING PRONOUNCEMENTS
Garnet is assessing the reporting and disclosure requirements of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. The statement
is effective for financial statements for periods beginning after December 15,
1997, but is not required for interim financial statements in the initial year
of its application. Garnet will adopt the provisions of SFAS No. 131 in its
December 1998 consolidated financial statements.
Garnet is also assessing the reporting and disclosure requirements of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal
80
<PAGE>
years beginning after June 15, 1999. Garnet believes SFAS No. 133 will not have
a material impact on its financial statements or accounting policies. Garnet
will adopt the provisions of SFAS No. 133 in the first quarter of the year
2000.
81
<PAGE>
RESULTS OF OPERATIONS
Three Months and Six Months Ended June 30, 1998 compared to Three Months
and Six Months Ended June 30, 1997
Garnet reported net losses of $2,503,176 ($.22 per share) and $12,181,418
($1.06 per share) for the three months ended June 30, 1998 and 1997,
respectively and $6,878,810 ($.60 per share) and $16,073,690 ($1.40 per share)
for the six months ended June 30, 1998 and 1997 respectively.
Oil and gas revenues continued to decline due to dramatically lower oil
prices and declining production rates. Lost revenues were partially offset by
decreased production expenses related to the expiration of Colombian production
taxes and lower transportation, handling and commercialization costs. Also
Garnet instituted major cost reduction programs at all levels of operations and
administration. Garnet's comparative average daily sales volumes in barrels of
oil per day ("BOPD"), average sales prices and costs per barrel in Colombia for
such periods were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------- --------------------------
JUNE 30, JUNE 30,
--------------------------- --------------------------
1998 1997 1998 1997
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Average oil sales (BOPD) 833 1,439 924 1,550
Average oil price per barrel $10.61 $16.56 $11.53 $18.58
Production costs per barrel $ 6.26 $ 7.54 $ 6.46 $ 6.88
Depreciation, depletion and
amortization per barrel $ 4.58 $16.06 $ 5.22 $14.94
</TABLE>
Net operating losses for the three month period ending June 30, 1998
increased from $858,000 to $2,503,000 as a result of a $1,645,000 non-cash write
down of oil and gas properties attributable to lower oil prices used in the
calculation of future net revenues. Garnet's exploration and production
activities are accounted for under the full cost method. Under this method, all
acquisition, exploration and development costs, including certain related
employee costs, incurred for the purpose of finding oil and gas are capitalized.
Capitalized costs are limited to the sum of the present value of future net
revenues discounted at 10% related to estimated production of proved reserves
and the lower of cost or estimated fair value of unevaluated properties. If the
net capitalized costs of oil and gas properties in a cost center, exceed an
amount equal to the sum of the present value of estimated future net revenues
from proved oil and gas reserves in the cost center plus the costs of properties
not being amortized, both adjusted for income tax effects, such excess is
charged to expense. Corporate general and administrative expenses decreased by
23 % compared to the same period in 1997 due to personnel reductions and
austerity measures taken in the last quarter of 1997 and the first half of 1998.
Interest expenses declined because of scheduled repayments of debt. The
provision for income taxes, all of which relates to Colombian operations,
remained low due to revisions in Colombian presumptive income calculations for
tax purposes. The corporate tax rate in Colombia is currently 35 % and is
applied to the greater of taxable or presumptive income.
1997 compared to 1996 and 1995
Garnet incurred net losses of $26,970,114 ($ 2.35 per share), $2,059,897
($.18 per share) and $4,623,322 ($.40 per share) for the years ended December
31, 1997, 1996 and 1995, respectively.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Average oil sales (BOPD) 1,415 1,578 1,443
Average oil price per barrel $17.39 $19.82 $16.39
Production costs per barrel $ 7.12 $ 5.91 $ 6.71
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C> <C>
Depreciation, depletion and
amortization per barrel
(excluding write down of
oil and gas properties) $ 9.20 $10.94 $ 9.37
</TABLE>
A decline in the price of oil in 1997 and a decline in the rate of
production commencing in the third quarter of 1997 resulted in a 73% decrease in
Garnet's estimate of discounted future net cash flows from proved reserves at
December 31, 1997 and a 22% decrease in revenues from oil sales during 1997
compared to 1996. As a result, Garnet recorded $25.8 million of write downs of
oil and gas properties during 1997, resulting in a significant net loss during
1997 and negative stockholders' equity at December 31, 1997.
During 1995 Garnet charged to expense its remaining investments in Papua
New Guinea ($609,700) and France ($672,592), costs pertaining to oil and gas
exploration in other countries ($74,461), and interest previously capitalized in
connection with these activities ($190,525). During 1996 Garnet recorded a
loss of $42,748 on the final disposition of the royalty and mineral assets, and
charged to expense $40,112 pertaining to ongoing costs in countries other than
Colombia.
Garnet's exploration and production activities are accounted for under the
full cost method. Under this method, all acquisition, exploration and
development costs, including certain related employee costs, incurred for the
purpose of finding oil and gas are capitalized. Capitalized costs are limited
to the sum of the present value of future net revenues discounted at 10% related
to estimated production of proved reserves and the lower of cost or estimated
fair value of unevaluated properties. If the net capitalized costs of oil and
gas properties in a cost center exceed an amount equal to the sum of the present
value of estimated future net revenues from proved oil and gas reserves in the
cost center plus the costs of properties not being amortized, both adjusted for
income tax effects, such excess is charged to expense. This process resulted in
a $25.8 million write down of oil and gas properties during 1997.
Interest income in 1997 declined from 1996 as a consequence of the
expenditure of cash balances. General and administrative expenses increased in
1997 as a result of personnel changes and increased legal, travel and consulting
fees related to efforts to effect a business combination. The increases in
interest expense, net of amounts capitalized, resulted from decreases in costs
attributable to assets eligible for interest capitalization. Garnet has a
benefit for current income taxes, all of which relates to Colombian operations,
in 1997 because of write downs of oil and gas properties which eliminated the
deferred tax liability. No net deferred tax asset was established for this
benefit. The foreign currency translation gain recorded in 1995 resulted from
an approximate 19% devaluation in the Colombian peso during 1995 and the
settlement of a liability. The gains in 1996 and 1997 also relate to continued
devaluation of the Colombian peso for those periods.
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<PAGE>
BUSINESS AND PROPERTIES OF GARNET
GENERAL
Garnet is engaged primarily in the exploration, development and production
of oil and gas properties located outside the United States. Garnet currently
holds interests in oil and gas properties in the Republic of Colombia
("Colombia") and the Independent State of Papua New Guinea ("Papua New Guinea").
Garnet's activities in Colombia are conducted through Argosy. Since inception,
Garnet has conducted and concluded exploration activities in five additional
countries, and also owned a small number of working interests in producing oil
and gas properties in the United States, which were sold in 1992.
A decline in the price of oil in 1997 and a decline in the rate of
production commencing in the third quarter of 1997 resulted in a 73% decrease in
Garnet's estimate of discounted future net cash flows from proved reserves at
December 31, 1997 and a 22% decrease in revenues from oil sales during 1997
compared to 1996. As a result, Garnet recorded $25.8 million of write downs of
oil and gas properties during 1997, resulting in a significant net loss during
1997 and negative stockholders' equity at December 31, 1997.
In view of its operating losses and financial condition, Garnet initiated
further cost containment programs in 1997 including a 28% reduction in its
Colombian personnel and the termination of all U.S. personnel other than Douglas
W. Fry, the Chief Executive Officer, and Edgar L. Dyes, the Chief Financial
Officer. Garnet also engaged Rauscher Pierce Refsnes, Inc. (now, Dain Rauscher
Incorporated) as a financial advisor to provide assistance in negotiating a
business combination or a debt restructuring transaction to address Garnet's
liquidity issues. Although Garnet engaged in comprehensive efforts, including
extensive negotiations with two separate candidates, Garnet was not successful
in concluding a transaction. Subsequently, Garnet entered into the Merger
Agreement with Aviva. In connection with the consummation of the Merger, Garnet
shall pay G. Clyde Buck, a financial advisor to Garnet, $10,000.
Garnet is highly leveraged with $21,302,000 in current debt as of June 30,
1998 consisting of (i) $15,000,000 in principal amount of outstanding Debentures
and (ii) $6,350,000 ($6,302,000 net to Garnet) under the Chase Loan guaranteed
by OPIC. The report of Garnet's independent public accountants with respect to
Garnet's financial statements as of and for the year ended December 31, 1997 was
qualified by a discussion of the substantial uncertainty that exists regarding
Garnet's ability to continue as a going concern. Based on Argosy's year-end
financial statements, Argosy determined that it is no longer in compliance with
certain covenants required by the financial agreement governing the Chase Loan.
In the absence of a waiver of such covenants, either OPIC, Chase or both has the
right to declare a default under the Chase Loan, accelerate payment of all
outstanding amounts due thereunder and realize upon the collateral securing the
Chase Loan. Although Argosy may apply for a waiver, given Garnet's financial
position and negative working capital balance at June 30, 1998, no assurance can
be given that such waiver will be granted or continued. Under the terms of the
Chase Loan 75% of the proceeds from Argosy's oil sales that are paid in U.S.
dollars are deposited in an escrow account with Chase to secure payment of the
Chase Loan. Argosy is required to maintain a minimum balance in such escrow
account equal to six months of interest, principal and other fees due under the
Chase Loan. The escrow account minimum required balance at June 15, 1998 was
$1,700,000 and the total account balance was $2,100,000. Argosy was unable to
pay the scheduled Chase Loan principal, interest and fees due June 15, 1998 from
its operating account. Chase and OPIC therefore, exercised their right to
withdraw such amounts totaling $1,600,000 from the escrow account and released
$200,000 to Argosy, leaving a balance of $300,000 in the account. U.S. dollar
revenues continue to be deposited into the escrow account in an effort to bring
the balance up to the required minimum as soon as possible. Release of
additional funds to Argosy will be at the sole discretion of OPIC and Chase. No
assurance can be given that OPIC will release additional amounts sufficient to
fund the Company's operations.
Garnet was unable to pay the interest due on the Debentures on March 31 and
June 30, 1998. Garnet's financial forecasts indicate that, assuming no changes
in its capital structure, working capital and cash flow from operations, Garnet
will not be able to pay Debenture interest due September 30, 1998 or pay
principal and interest due under the Chase Loan on December 15, 1998 and
maintain the minimum balance in the escrow account. Garnet also does not expect
working capital and cash flow from operations to be sufficient to repay the
principal amount of the Debentures at maturity or earlier if the debenture
holders call a default as a result of the non-payment of interest. Garnet must
complete a restructuring transaction or renegotiate the terms of the
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<PAGE>
Debentures in order to avoid non-compliance with its obligations to pay the
Debentures. As a result, management believes there is substantial doubt about
Garnet's ability to continue as a going concern. In the absence of a business
transaction or a restructuring of Garnet's indebtedness, Garnet may seek
protection from its creditors under the Federal Bankruptcy Code.
Argosy has an interest in the Santana concession with Ecopetrol, involving
exploration, development and production activities in 52,000 acres (the "Santana
Block"), in the Putumayo Basin of southwestern Colombia. Argosy participates in
these contracts through a 55% interest in a joint venture with Neo. Argosy also
holds an interest, through its joint venture with Neo, in the following three
additional oil and gas exploration contracts with Ecopetrol: (i) an association
contract signed in 1992 (the "Fragua Contract") covering approximately 32,000
acres contiguous to the northern boundary of the Santana Block (the "Fragua
Block"), (ii) an association contract signed in 1995 (the "Yuruyaco Contract")
covering approximately 39,000 acres contiguous to the eastern boundaries of the
Santana Block and the Fragua Block (the "Yuruyaco Block"), and (iii) Association
Agreements signed in 1972, as amended (the "Aporte Putumayo Contracts"),
covering approximately 77,000 acres 20 miles south of the Santana Block (the
"Aporte Putumayo Block"). The relinquishment of the Fragua Contract has been
formally accepted by Ecopetrol. The other two contract areas have been
submitted to Ecopetrol for relinquishment. Work commitments in all of the
blocks have been met and approval of formal relinquishment is not expected to be
withheld. Argosy and Neo remain liable for the costs of abandonment of five
wells on the Aporte Putumayo Block.
The Santana Block has been the focus of Garnet's exploration and
development activities in Colombia in recent years. Garnet has discovered four
oil fields on the Santana Block, which produced a total of approximately
13,400,000 barrels of oil during the period from commencement of production in
April 1992 through June 30, 1998. Garnet's share of production since 1992 was
approximately 2,497,000 barrels in the aggregate; Garnet's share of 1997
production was 516,543 barrels, and Garnet's share of 1998 production through
June 30, 1998 was 167,268 barrels. In 1997, one gross (.3 net) productive
development well was drilled on the Santana Block. Garnet also completed its
evaluation of data from a 3-D seismic survey over its Mary and Miraflor fields
completed in 1996 to define the limits of the fields, identify possible
locations for additional development wells, and ascertain the exploration
potential of areas west of the Mary field. Additionally the joint venture
approved the construction of a small refinery to produce diesel fuel for
consumption in operations which began operations in April 1998.
In an agreement dated November 24, 1997, among Occidental Kanau Ltd,
("Kanau"), Occidental of Papua New Guinea Ltd. ("Occidental PNG"), Santos
Niugini Exploration Pty. Limited ("Santos"), Niugini Energy, Inc ("Nuigini") and
Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of Garnet,
Garnet PNG agreed to exchange its 6% interest (the "PPL-181 Interest") in
Petroleum Prospecting License No. 181 ("PPL-181"), a license to explore for oil
and gas on approximately 952,000 acres (the "PPL-181 Area"),for a 4% interest in
a newly applied for but not yet issued petroleum prospecting license ("New PPL")
covering the PPL-181 Area and Petroleum Prospecting License No. 158 ("PPL-158")
held by Occidental PNG and Santos. Garnet PNG also held a 7.73% interest in an
adjoining license, Petroleum Prospecting License No. 174 ("PPL-174"), on which
an exploratory dry hole was drilled in the first quarter of 1996. On April 28,
1998, the Minister for Petroleum and Energy for the Government of Papua New
Guinea agreed in writing to the relinquishment of PPL-181 and PPL-158 and to the
issuance of the New PPL to be designated Petroleum Prospecting License No. 206
("PPL-206"). It is anticipated that PPL-206 will be formally issued during the
third quarter of this year. For more information regarding PPL-181, PPL-158,
PPL-174 and New PPL, see "-- Properties -- Papua New Guinea."
Garnet was incorporated in the state of Delaware in June 1986. Garnet's
principal executive office is located at RR2 Box 4400, Nacogdoches, Texas 75961
and its telephone number is (409) 559-9959.
RISKS ASSOCIATED WITH GARNET'S BUSINESS
Garnet has expended significant amounts of capital on the acquisition,
exploration and development of its properties. If Garnet is unable to conclude
a business combination or a debt restructuring transaction, it is unlikely that
Garnet will have the resources to finance any further exploration or development
activity. Accordingly, there can be no assurance that any additional
exploration or development activities will be
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conducted, other than those activities required to deplete Garnet's existing
reserves. The present environment for financing the ongoing obligations of an
oil and gas business is uncertain due, in part, to the substantial instability
in oil and gas prices in recent years and to the volatility of financial
markets. For additional information on Garnet's cash requirements, see "--
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources of Garnet."
In addition, Garnet's ability to continue its exploration and development
programs may be dependent upon the ability of its joint venture partners to
finance their portion of such costs and expenses. There can be no assurance
that Garnet's partners will contribute, or be in a position to contribute, their
costs and expenses of the joint venture programs. If Garnet's partners do not
finance their obligations to the joint ventures, Garnet may be required to
accept an assignment of the partners' interests therein and assume their
financing obligations. If sufficient funds cannot be raised to meet Garnet's
obligations in connection with its properties, the interests in the affected
properties might be sold or forfeited. In addition, if sufficient funds are
raised, there can be no assurance that Garnet will be able to discover, develop
and produce sufficient reserves in Colombia, Papua New Guinea or elsewhere to
recover the costs and expenses incurred in connection with the acquisition,
exploration and development thereof and achieve profitability.
Garnet has invested and may continue to invest primarily in properties
located outside the United States, in certain countries which may be considered
politically and economically unstable. Accordingly, Garnet is subject to risks
inherent in the ownership and development of foreign properties including,
without limitation, cancellation or renegotiation of contracts, royalty and tax
increases, retroactive tax claims, expropriation, adverse changes in currency
values, foreign exchange controls, import and export regulations, environmental
controls, and other laws, regulations or international developments which may
adversely affect Garnet's properties. In addition, there are usually
significant logistical problems, costs and risks in conducting oil and gas
activities in remote, rugged and primitive regions such as Papua New Guinea, or
in Colombia where Argosy's operations are exposed to potentially detrimental
activities by the leftist guerrillas that have operated there for many years.
In 1997, Argosy's assets were damaged as a result of guerrilla activities,
although the losses have been substantially recovered through insurance. On
August 3, 1998, Colombian leftist guerrilla groups launched a nationwide series
of attacks. As a result of one attack, Garnet's oil production and storage
facilities at the Mary field were damaged and minor damage was inflicted on the
Linda facilities. While it is too early to accurately assess the cost of
repairs, Garnet does not believe the property damage will exceed insurance
limits. As of August 10, 1998, Garnet's oil production from the Linda and
Toroyaco fields had been restored, however, production from the Mary and
Miraflor fields may be suspended or significantly curtailed for at least several
weeks and possibly longer depending on the extent of damage and availability of
repair crews. There can be no assurance that Argosy's operations in Colombia
will not be the target of similar attacks in the future, or that Argosy will be
able to continue to insure its assets against similar losses.
Garnet is subject to all the risks normally incident to drilling for and
producing oil and gas, including blowouts, cratering and fires, any of which
could result in damage to or loss of life or property. In accordance with
industry practice, Garnet is not fully insured against these risks, nor are all
such risks insurable.
COMPETITION
The oil and gas business is extremely competitive in all of its phases and
particularly in exploration for and development of new sources of crude oil and
natural gas. Garnet must compete with other companies that are larger and
financially stronger in acquiring properties suitable for exploration, in
contracting for drilling equipment, and in securing trained personnel. Garnet
is not a significant participant in the oil and gas industry.
MARKETS
There is substantial uncertainty as to the prices which Garnet may receive
for production from its existing oil reserves or from oil and gas reserves, if
any, which Garnet may discover. The availability of a ready market and the
prices received for oil and gas produced depend upon numerous factors beyond the
control of Garnet including, but not limited to, adequate transportation
facilities (such as pipelines), the 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
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affect prices. As a result, there have been dramatic swings in both oil and gas
prices in recent years. The sale of oil from the Santana Block in Colombia is
governed by contracts with Ecopetrol. There is no market for natural gas from
the Putumayo Region of Colombia. See "-- Properties -- Colombia." It is possible
that, under market conditions prevailing in the future, the production and sale
of oil or gas, if any, from Garnet's properties in Papua New Guinea may not be
commercially feasible.
REGULATION
Garnet's foreign operations are subject to regulations imposed by the local
regulatory authorities including, without limitation, currency regulation,
import and export regulation, taxation and environmental controls. 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.
Specifically, Colombian operations are governed by a number of ministries
and agencies including Ecopetrol, the Ministry of Mines and Energy, and the
Ministry of the Environment. In 1993, Inderena began reviewing the
environmental standards and permitting processes for the oil industry and in
1994 the Ministry of the Environment was organized. Accordingly, it is possible
that 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 Garnet's
operations in that country.
Garnet's operations in Papua New Guinea are currently governed by the
Department of Mining and Petroleum, which has jurisdiction over all petroleum
exploration in that country. In the event Garnet develops and operates a
petroleum business in Papua New Guinea, Garnet will be subject to regulation by
the Investment Promotion Authority, which regulates almost all business
operations with significant foreign equity or with foreign management
control.
EMPLOYEES
Garnet's operations are managed from its Nacogdoches, Texas office.
Garnet's staff consists of two employees, who utilize professional consulting
services as needed. Garnet also maintains a temporary executive office in Salt
Lake City, Utah.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT
SALES
Financial information about foreign and domestic operations may be found in
Note 10 of the Notes to Consolidated Financial Statements contained elsewhere
herein.
PROPERTIES
Colombia
Through its interests in Argosy, Garnet presently has a 54.6% indirect
interest in the Santana Contract. Argosy has 76 employees in Colombia and
serves as the operator of the Santana Block and the Yuruyaco Block under
operating agreements with Ecopetrol and with Neo.
The Colombian properties are located in the Putumayo Region of southern
Colombia which is bounded by the Andes mountains on the west and northwest and
the Upper Amazon Platform on the east which lies within the northern portion of
a larger regional basin extending nearly 800 miles southward through Ecuador
into eastern Peru and western Brazil.
Argosy's responsibilities as operator of the joint venture with Neo are
governed by the terms of operating agreements by and between Argosy and Neo,
which provide for the establishment of operating committees which consist of two
representatives from each of Argosy and Neo. Argosy has exclusive charge of
carrying out the program of operations within the budgets approved by the
operating committees and may demand payment in advance from each party of its
respective share of estimated monthly expenditures.
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The Santana Contract has a term of 28 years, including an exploration
period of 10 years, which ended in July 1997. At the end of the exploration
period, all acreage was relinquished except acreage contained within productive
fields plus a three-mile reserve zone around each field. Under the terms of the
Santana Contract, Ecopetrol is required to pay 30% of exploration costs, 50% of
development costs, and 65% of operating expenses. They receive a royalty equal
to 20% of production on behalf of the Colombian Government and, in the event a
discovery is deemed commercially feasible, Ecopetrol will acquire a 65%
interest in the remaining production from the field, bear 50% of the development
costs, and reimburse the joint venture, from Ecopetrol's share of future
production from each well, for an additional 20% of the direct costs of drilling
the discovery well.
Garnet's net participation in revenues and costs for the Santana
Contract is as follows:
<TABLE>
<CAPTION>
PRODUCTION OPERATING EXPLORATION DEVELOPMENT
REVENUES COSTS COSTS COSTS
--------------------------------------------------------
<S> <C> <C> <C> <C>
After seven million barrels 15.3% 19.1% 38.2% 27.3%
of accumulated production
</TABLE>
The joint venture has completed its seismic acquisition and drilling
obligations for the Santana Contract, resulting in the discovery of four oil
fields, all of which have been declared commercial by Ecopetrol.
Oil production from the Santana Block moves through the 25-mile Uchupayaco-
Santana pipeline built and completed by the joint venture in 1994 to Ecopetrol's
Trans-Andean pipeline, where it is transported an additional 230 miles to the
Pacific coast export terminal at Tumaco. Under the terms of a contract with
Ecopetrol, all oil produced from the Santana Block is sold to Ecopetrol. If
Ecopetrol exports the oil, the price paid is the export price received by
Ecopetrol, adjusted for quality differences, less a handling and
commercialization fee of $.515 per barrel. If Ecopetrol does not export the
oil, the price paid is based on the price received from Ecopetrol's Cartagena
refinery, adjusted for quality differences, less Ecopetrol's cost to transport
the crude to Cartagena and a handling and commercialization fee of $.415 per
barrel. The average sales price per barrel of oil produced from the Santana
Block during 1997 was $17.39. The contract also requires Argosy to pay a tariff
to transport its oil through the Trans-Andean pipeline, the amount of which is
presently $1.27 per barrel. Under the terms of its contract with Ecopetrol, 25%
of all revenues from oil sold to Ecopetrol is paid in Colombian pesos, which may
only be utilized in Colombia.
In 1994 Argosy entered into a finance agreement with OPIC, pursuant to
which OPIC agreed to guarantee up to $9,200,000 in bank loans to Argosy. The
loans were funded in two stages of $4,400,000 in August 1994 and $4,800,000 in
October 1995. Garnet used these funds to drill development wells and construct
pipelines and production facilities in Colombia. OPIC's guaranty is secured by
Argosy's interest in the Santana Contract and related assets, as well as the
pledge of Garnet's direct and indirect interests in Argosy. The maximum term of
the loans is not to exceed seven years, and the principal amortization schedule
is based on projected cash flows from wells on the Santana Block. The loans bear
interest at the lender's eurodollar deposit rate plus .25% per annum for periods
of two, three or six months as selected by Argosy. In consideration for OPIC's
guaranty, Argosy pays OPIC a guaranty fee of 2.4% per annum on the outstanding
balance of the loans guaranteed.
Argosy's net income, as defined under Colombian law, from Colombian sources
is subject to Colombian taxation at a rate of 35%, although a "presumptive"
minimum income tax based on net assets may apply under certain circumstances.
Unless Argosy transfers such net income to its assigned capital account, an
additional remittance tax accrues at the rate of 12% in 1996, 10% in 1997 and 7%
in future years. Payment of the additional remittance tax, if any, may be
deferred under certain circumstances if Argosy has reinvested such income in
Colombia. For oil fields discovered before 1995, the Colombian Government also
imposes a production tax equal to 7% of the crude oil price through 1997 if the
field began producing before 1995, or 5.5%, 4% and 2.5%, respectively, of the
crude oil prices in 1998, 1999 and 2000 if the field began producing after 1994.
The production tax now only applies to production from the Miraflor field.
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Papua New Guinea
The PPL-181 Area is located in the Western, Gulf and Southern Highland
Provinces of Papua New Guinea. The northern section of the PPL-181 Area is in a
mountainous tropical rain forest while the southern section of PPL-181 is
predominantly lowlands jungle and coastal swamps. In 1986 oil was discovered
approximately 10 miles from the northern border of PPL-181 in an adjoining
license area. The PPL-158 area is located to the northwest and adjoining the
PPL-181 Area.
Under the terms of an agreement pertaining to PPL-181, Occidental
International Exploration and Production Company ("Occidental") agreed to drill
and complete at its cost a test well on the PPL-181 Area by September 1997. The
well was commenced in March 1997 and plugged and abandoned as a dry hole on
April 17, 1997. PPL-181 is owned by Occidental (88%), Garnet PNG (6%) and
Niugini (6%).
According to the terms of the agreement governing the New PPL, the parties
agreed to perform surface geological work and complete a seismic program during
late 1997 and early 1998. These activities are presently underway and a
decision regarding the drilling of an exploratory well in late 1998 or early
1999 will be made once the results of the geological work and seismic program
have been evaluated. Garnet PNG is not obligated to pay any of the costs
relative to the work presently underway. Should the parties decide to drill an
exploratory well, Garnet will have the option to pay its share of the cost of
this well (estimated to be $224,000) and maintain its interest at 4% or reduce
its interest to 2% and have no obligation to pay its share of the drilling,
testing and completion costs of the well.
In the first quarter of 1996, an exploratory dry hole was drilled on the
PPL-174 area. Garnet PNG contributed approximately $238,000 to the costs of the
well. PPL-174 was surrendered on April 25, 1997.
Under the provisions of PPL 158 and PPL -181 the terms of any oil and gas
development are set forth in a Petroleum Agreement with the Government of Papua
New Guinea. The Petroleum Agreement provides that the operator must carry out
an appraisal program after a discovery to determine whether the discovery is of
commercial interest. If the appraisal is not carried out or the discovery is
not of commercial interest, the license may be forfeited. If the discovery is
of commercial interest, the operator must apply for a Petroleum Development
License. The Government retains a royalty on production equal to 1.25% of the
wellhead value of the petroleum and, at its election, may acquire up to a 22.5%
interest in the petroleum development after recoupment by the operator of the
project costs attributable thereto out of production. In addition, income from
petroleum operations is subject to a Petroleum Income Tax at the rate of 50% of
net income, which is defined as gross revenue less royalties, allowances for
depreciation, interest deductions, operating costs and previous tax losses
carried forward. An Additional Profits Tax of 50% of cash flow (after deducting
ordinary income tax payments) is also payable when the accumulated value of net
cash flows becomes positive. For annual periods in which net cash flows are
negative, the cumulative amount is carried forward and increased at an annual
accumulation rate of 27%. The Additional Profits Tax is calculated separately
for each Petroleum Development License. In calculating the applicable tax,
interest expenses paid by Garnet PNG prior to the issuance of a Petroleum
Development License and, thereafter, to the extent that Garnet PNG's debt to
equity ratio exceeds two-to-one, are not deductible.
SUPPLEMENTARY INFORMATION IN RESPECT OF OIL AND GAS PROPERTIES
Reserves Reported to Other Agencies. No estimates of Garnet's total proved
net oil and gas reserves have been filed with or included in reports to any
federal authority or agency other than the Commission and OPIC.
Productive Wells and Acreage. As of December 31, 1997, Garnet owned 13
gross (2.0 net) productive oil wells and 3,706 gross (923 net) developed acres
in Colombia.
Undeveloped Acreage. The following table sets forth estimates of the
undeveloped acreage for which oil and gas leases or concessions were held by
Garnet as of December 31, 1997:
<TABLE>
<CAPTION>
GROSS ACRES NET ACRES
----------- ---------
<S> <C> <C>
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
Colombia 48,636 26,750
Papua New Guinea 952,000 57,120
--------- ------
Total 1,000,636 83,870
========= ======
</TABLE>
Drilling Activity. The following table sets forth the number of wells
drilled by Garnet during the three years ended December 31, 1997.
<TABLE>
<CAPTION>
EXPLORATORY DEVELOPMENT
------------------------- --------------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
----------- --------- ------------ ---------------
Year ended GROSS NET GROSS NET GROSS NET GROSS NET
December 31, 1997: ----- --- ----- --- ------- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Colombia - - - - 1 .3 - -
===== === = == == == === ==
Year ended
December 31, 1996:
Colombia - - 1 .4 2 .5 - -
===== === = == = == == ==
Year ended
December 31, 1995:
Colombia - - 1 .4 1 .3 1 .3
----- --- - -- - -- -- --
Turkey - - 1 .3 - - - -
----- --- - -- - -- -- --
- - 2 1 1 .3 1 .3
===== === = == = == == ==
</TABLE>
Present Activities. As of December 31, 1997, no wells were in progress.
Additional Information. Reference is made to the Supplemental Oil and Gas
Information included in the consolidated financial statements contained
elsewhere herein for additional information regarding Garnet's oil and gas
producing activities prepared in accordance with the requirements of Statement
of Financial Accounting Standards No. 69 "Disclosures About Oil and Gas
Producing Activities."
LEGAL PROCEEDINGS
There are no material legal proceedings to which Garnet is a party or to which
any of its property is subject.
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SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
AVIVA
For information regarding the security ownership of certain beneficial owners
and management of Aviva, see "The Aviva Special Meeting; Additional Matters --
Security Ownership by Certain Beneficial Owners" and "The Aviva Special Meeting;
Additional Matters -- Security Ownership by Management."
GARNET
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following
table sets forth, as of the close of business on August 10, 1998, certain
information with respect to the beneficial share holdings of each director and
each of the five most highly compensated executive officers of Garnet and all
executive officers and directors as a group, as well as the holdings of each
stockholder who was known to Garnet to be the beneficial owner, as defined in
Rule 13d-3 under the Exchange Act of more than 5% of the Common Shares, based
upon Garnet records or Commission records. Each of the persons listed below has
sole voting and investment power with respect to such shares, unless otherwise
indicated.
<TABLE>
<CAPTION>
COMMON SHARES
BENEFICIALLY PERCENT
NAME OF BENEFICIAL OWNER(1) OWNED OF CLASS(2)
- ----------------------------------------------------------- ------------- ------------
<S> <C> <C>
Wexford Management LLC 1,150,909(3) 9.1%
411 West Putnam Avenue
Greenwich, Connecticut 06830
Pecks Management Partners Ltd. 1,090,910(4) 8.7
One Rockefeller Plaza
New York, New York 10020
Robert J. Cresci 62,950(5) *
Edgar L. Dyes 43,046(6) *
Douglas W. Fry 141,989(6) 1.0
Montague H. Hackett, Jr. 159,190(6) 1.1
All directors and executive officers as a group (4 persons) 407,175(7) 2.8
_______________
</TABLE>
* Less than 1% of the outstanding Common Shares of Garnet.
(1) Except as otherwise indicated, (i) the persons named in the above table
have sole voting and investment power with respect to all shares of Garnet
Common Stock shown as beneficially owned by them, and (ii) none of the
shares shown in such table or referred to in the footnotes thereto are
shares of which the persons named in the table have the right to acquire
beneficial ownership as specified in Rule 13d-3(d)(1) under the Exchange
Act.
(2) Based on 11,492,162 shares of Garnet's Common Stock issued and outstanding
on August 10, 1998 plus 2,727,273 shares issuable to such owner or group
upon conversion of the outstanding Garnet Debentures ("Conversion Shares")
and shares issuable upon exercise of vested stock options issued pursuant
to Garnet's stock option plans.
(3) According to a Schedule 13D dated April 23, 1997, the indicated number of
shares consists of Conversion Shares issuable on conversion of Debentures
held by four investment funds. Wexford Management LLC ("Wexford
Management") serves as investment advisor to three of the funds and as sub-
investment advisor to the fourth fund which is organized as a corporation.
Wexford Advisors, LLC ("Wexford Advisors") serves as the investment advisor
to the corporate fund and as general partner to the remaining funds which
are organized as limited partnerships. Wexford Management shares voting
and dispositive power with respect to the Conversion Shares
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<PAGE>
with each of the funds, with Wexford Advisors, and with Charles E. Davidson
and Joseph M. Jacob, each of whom is a controlling person of Wexford
Management and Wexford Advisors.
(4) According to a Schedule 13G dated February 9, 1995 filed by Pecks
Management Partners Ltd. ("Pecks"), as a registered investment advisor, the
indicated number of shares consists of Conversion Shares issuable to three
investment advisory clients of Pecks upon conversion of Debentures owned by
such clients. One such client, Delaware State Employees' Retirement Fund,
would acquire more than 5% of Garnet's Common Stock if all its Debentures
were converted. Pecks has sole investment and dispositive power with
respect to the Conversion Shares issuable to its clients and the discretion
to convert the Debentures owned by them.
(5) Consists solely of shares issuable upon exercise of vested stock options
issued pursuant to Garnet's stock option plans. Does not include
Conversion Shares issuable to clients of Pecks, of which Mr. Cresci is a
managing director. For information with respect to such shares, see note
(4) above.
(6) Consists solely of shares issuable upon exercise of vested stock options
issued pursuant to Garnet's stock option plans.
(7) Includes 407,175 shares issuable upon exercise of vested stock options
issued pursuant to Garnet's stock option plans.
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DESCRIPTION OF AVIVA CAPITAL STOCK
GENERAL
The following descriptions of certain of the provisions of the certificate of
incorporation and bylaws of Aviva are necessarily general and do not purport to
be complete and are qualified in their entirety by reference to such documents,
which are included as exhibits to the Registration Statement of which this Joint
Proxy Statement/Prospectus is a part.
AVIVA COMMON STOCK
Aviva is authorized to issue 348,500,000 shares of Aviva Common Stock, without
par value. As of the Aviva Record Date, there were 31,482,716 shares of Aviva
Common Stock issued and outstanding and approximately 5,663 holders of record of
Aviva Common Stock. The holders of Aviva Common Stock are entitled to one vote
for each share on all matters submitted to a vote of stockholders. The holders
of Aviva Common Stock do not have cumulative voting rights in the election of
directors. The holders of Aviva Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors of Aviva
out of legally available funds. In the event of liquidation, dissolution or
winding up of Aviva, the holders of Aviva Common Stock are entitled to share
ratably in all assets of Aviva remaining after discharge of all indebtedness of
Aviva. The holders of Aviva Common Stock have no preemptive, subscription,
redemptive or conversion rights. The outstanding shares are fully paid and
nonassessable.
CERTAIN PROVISIONS OF AVIVA CHARTER AND BYLAWS
The Aviva Charter contains provisions authorizing the indemnification of
persons who become parties to any threatened, pending or completed action, suit
or proceeding by reason of the fact that such person is or was a director,
officer, employee or agent of Aviva or is or was serving at the request of Aviva
as a director, officer, employee or agent of another corporation, partnership or
other enterprise against expenses and damages incurred thereby under the
circumstances set forth therein. The Aviva Charter also contains provisions
that, in accordance with the TBCA, limit the liability of directors of Aviva for
monetary damage for acts or omissions by directors acting in such capacity.
Pursuant to these provisions, directors of Aviva may only be liable for (i) a
breach of the duty of loyalty to Aviva, (ii) acts or omissions not in good faith
that constitute a breach of duty of the director to the corporation or that
involves intentional misconduct or a knowing violation of law, (iii) any
transaction from which the director received an improper benefit, whether or not
the benefit resulted from an act taken within the scope of the director's office
and (iv) acts or omissions for which the liability of a director is expressly
provided by statute.
The provisions of the Aviva Charter may be amended or repealed by the vote of
holders of a majority of the outstanding capital stock of Aviva entitled to vote
thereon.
Except in the case of nominations by or at the direction of the Aviva Board of
Directors, written notice must be given of any nomination of a director not
later than the close of business on the tenth day following the day of notice of
a stockholders' meeting.
All actions taken by the Aviva Board of Directors, including the appointment
and removal of officers of Aviva, require the affirmative vote of a majority of
the directors. The Aviva Bylaws provide that the number of directors on the
Aviva Board of Directors may be increased or decreased with the approval of a
majority of the then-authorized number of directors. Also, newly created
directorships resulting from any increase in the authorized number of directors
and any vacant directorships may be filled by the affirmative vote of a majority
of the directors then in office.
The Aviva Bylaws may be adopted, amended or rescinded by the vote of a
majority of the Aviva Board of Directors or by the majority of the outstanding
shares of capital stock entitled to vote.
TRANSFER AGENT AND REGISTRAR
The U. S. transfer agent and registrar for the Aviva Common Stock is
ChaseMellon Stockholders Services, L.L.C.
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DESCRIPTION OF DEPOSITARY SHARES
The following is a description of certain provisions of the Deposit Agreement
dated as of September 15, 1994, between Aviva and ChaseMellon Shareholder
Services, L.L.C., as Depositary for the benefit of all registered holders from
time to time of the Depositary Shares issued hereunder (the "Holders"). Such
description does not purport to be complete and is qualified in its entirety by
reference to the Deposit Agreement, which has been filed as an exhibit to the
Registration Statement. Terms used herein and not otherwise defined have the
meanings ascribed thereto in the Deposit Agreement. A copy of the Deposit
Agreement has been filed as an exhibit to the Registration Statement of which
this Joint Proxy Statement/Prospectus is a part and is available for inspection
at the principal office of the Depositary, currently located at 2323 Bryan
Street, Suite 2300, Dallas, Texas 75201 (the "Principal Office").
Depositary Receipts evidencing Depositary Shares have been and will be issued
from time to time by the Depositary in exchange for shares of Aviva Common Stock
deposited pursuant to the Deposit Agreement on the basis of one Depositary Share
for five shares of Aviva Common Stock.
DEPOSIT AND WITHDRAWAL OF AVIVA COMMON STOCK
Registered holders of Aviva Common Stock may from time to time and at any time
surrender certificates evidencing shares of Aviva Common Stock to the Depositary
for deposit pursuant to the Deposit Agreement by executing and delivering such
documents as the Depositary may require, including endorsements of stock
certificates or execution of stock powers in blank. Upon satisfaction of the
Depositary's requirements, the Depositary will issue to the former registered
holder of Aviva Common Stock Depositary Shares registered in the name of the
former registered holder of Aviva Common Stock on the basis of one Depositary
Share for each five shares of Aviva Common Stock so deposited. Depositary Shares
issued pursuant to the Deposit Agreement will be evidenced by Depositary
Receipts.
Upon surrender of Depositary Receipts evidencing Depositary Shares at the
Corporate Trust Office of the Depositary and upon payment of the charges
provided for in the Deposit Agreement, Holders are entitled to withdraw the
shares of Aviva Common Stock and any other securities or other property then
represented by the Depositary Shares. Any Holder requesting withdrawal of Aviva
Common Stock must deliver to the Depositary a written order containing delivery
instructions. The forwarding of certificates evidencing Aviva Common Stock and
any other securities or property by the Depositary to the withdrawing Holder
will be at the risk and expense of the Holder.
The owners of Depositary Shares are, by virtue thereof, beneficial owners of
the Aviva Common Stock represented by the Depositary Shares. By their
acceptance of Depositary Receipts evidencing Depositary Shares, the Holders
thereof have agreed to comply with all laws, such as Section 13(d) of the
Exchange Act, relating to ownership of the Aviva Common Stock.
DIVIDENDS, OTHER DISTRIBUTIONS AND RIGHTS
To the extent that the Depositary receives cash dividends paid by Aviva on the
Aviva Common Stock, the Depositary is required by the terms of the Deposit
Agreement to distribute such amounts to the Holders of Depositary Shares in
proportion to the number of Depositary Shares held by each such Holder, after
deducting any expenses of the Depositary. The amounts distributed will be
reduced by any amounts required to be withheld by Aviva or the Depositary on
account of taxes or other governmental charges.
If the Depositary receives any distribution upon any deposited Aviva Common
Stock in securities or other property (other than cash, Aviva Common Stock or
rights), the Depositary shall cause such securities or property to be
distributed to the Holders of Depositary Shares entitled thereto, after
deduction or upon payment of any expenses of the Depositary, in proportion to
their holdings, in any manner that the Depositary deems equitable and
practicable. If in the opinion of the Depositary, however, the distribution of
such securities or property cannot be made proportionately among such Holders,
or if for any other reason (including any requirement that Aviva or the
Depositary withhold an amount on account of taxes or other governmental charges
or that such securities must be registered under the Securities Act in order to
be distributed to Holders) the Depositary deems such distribution not to be
feasible, the Depositary may adopt, with Aviva's approval, such method as it may
deem equitable and practicable for the purpose of effecting such distribution,
including the sale (public or private) of the securities or property thus
received, or any part thereof, and the distribution to Holders of the net
proceeds of any such sale.
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If Aviva declares and pays a dividend payable in the form of Aviva Common
Stock on the outstanding Aviva Common Stock, the Depositary may, with the
approval of Aviva, and shall, if Aviva so requests, either (i) distribute to the
Holders, in proportion to their holdings, additional Depositary Receipts
evidencing additional Depositary Shares on the basis of one Depositary Share for
each five shares of Aviva Common Stock paid as a dividend or (ii) reflect on the
records of the Depositary a change in the ratio of Depositary Shares to the
number of shares of Aviva Common Stock represented thereby as necessary to take
into account such Aviva Common Stock dividend. In lieu of issuing fractional
Depositary Shares, the Depositary will sell the number of whole Depositary
Shares represented by the aggregate of such fractions and distribute the net
proceeds in cash, all in the manner and subject to the conditions set forth in
the Deposit Agreement.
If Aviva offers to the holders of Aviva Common Stock any rights to subscribe
for additional Aviva Common Stock or any other rights, the Depositary will, if
Aviva so directs and in such manner as Aviva shall instruct, make such rights
available to the Holders of the Depositary Shares (through the issuance of
warrants representing such rights or otherwise). If, at the time of issuance of
such rights, Aviva shall determine that it is not lawful or feasible to make
such rights available to some or all Holders or if and to the extent that the
Depositary is instructed by Holders of Depositary Shares who do not desire to
exercise such rights, the Depositary shall, if so instructed by Aviva and if
applicable laws and the terms of the rights permit, sell such rights at public
or private sale and distribute the net proceeds to the Holders of Depositary
Shares entitled thereto as in the case of a cash dividend. If the Depositary is
precluded by applicable law, the terms of the rights or otherwise from making
such rights available to the Holders and from selling the rights and
distributing the net proceeds of such sale to the Holders, the Depositary shall
allow the rights to lapse.
The Depositary will not and is not required to offer such rights to Holders
unless and until a registration statement under the Securities Act is in effect
with respect thereto or unless the offering, sale and delivery of such
securities to Holders are exempt from the registration requirements of the
Securities Act. Aviva has agreed in the Deposit Agreement that, if registration
under the Securities Act is required in connection with the offering to the
Holders of the securities to which any such rights relate, Aviva will timely
file a registration statement with respect to such offering and will use its
best efforts to cause it to become effective under the Securities Act.
RECORD DATES
Whenever any cash dividend or other cash distribution becomes payable or any
distribution other than cash is made, or whenever rights are issued or whenever
the Depositary shall receive notice of any meeting of holders of Aviva Common
Stock or of any solicitation of consents with respect thereto, the Depository
will fix a record date, which record date shall be the same record date fixed by
Aviva, or as near as practicable to the record date set by Aviva, for the
determination of the Holders who will be entitled to receive such dividend,
distribution or rights or the net proceeds of the sale thereof, or to receive
notice of, and to give instructions for the exercise of voting rights at, or the
delivery of consents with respect to, any such meeting or consent solicitation,
subject, in each case, to the provisions of the Deposit Agreement.
VOTING OF THE AVIVA COMMON STOCK
At the same time that Aviva mails to its shareholders notice of any meeting or
solicitation of consents or proxies of holders of Aviva Common Stock, Aviva will
provide to the Depositary and the Depositary will mail the information contained
in such notice of meeting to Holders. Holders will be entitled to instruct the
Depositary as to the manner of voting the Aviva Common Stock evidenced by the
Depositary Receipts at any meeting of shareholders. The Depositary will not
itself exercise any voting discretion with respect to any Aviva Common Stock
deposited under the Deposit Agreement.
INSPECTION OF TRANSFER BOOKS
The Depositary will keep books at its Corporate Trust Office for the
registration and transfer of Depositary Receipts, which at all reasonable times
will be open for inspection and copying by Holders and Aviva, provided that, in
the case of a Holder, such right to inspect and copy is limited to the same
extent as the right of a holder of Aviva Common Stock is limited by applicable
law.
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REPORTS AND NOTICES
Aviva will make available for inspection by Holders at its corporate
headquarters any notices, reports and communications that are made generally
available to the holders of Aviva Common Stock by Aviva. Aviva will also send
to the Depositary and Holders copies of such notices, reports and communications
as provided in the Deposit Agreement.
CHANGES AFFECTING AVIVA COMMON STOCK
Upon any change in par value, split-up, consolidation or any other
reclassification of the Aviva Common Stock, or upon any recapitalization,
reorganization, merger or consolidation or sale of assets affecting Aviva or to
which it is a party, any securities that are received by the Depositary in
exchange for or in conversion of or in respect of such Aviva Common Stock will
be held by the Depositary under the Deposit Agreement, and the Depositary
Receipts evidencing outstanding Depositary Shares will thenceforth represent the
new securities so received, unless additional or new Depositary Receipts are
delivered as described in the following sentence. In any such case the
Depositary may, and will, if Aviva so requests, execute and deliver additional
Depositary Receipts or call for the surrender of outstanding Depositary Receipts
to be exchanged for new Depositary Receipts.
Each Holder of Depositary Shares, by acceptance of the Depositary Receipt
evidencing such Depositary Shares, acknowledges that the Depositary Shares
represent beneficial ownership of the Aviva Common Stock in exchange for which
the Depositary Shares were issued and that, to the extent such Holder is subject
to the laws of the United States or the United Kingdom, such Holder will comply
with the laws of such jurisdiction relating to beneficial ownership of the Aviva
Common Stock, including, in the United States, Section 13(d) of the Securities
Exchange Act of 1934, as amended.
AMENDMENT AND TERMINATION OF THE DEPOSIT AGREEMENT
The form of the Depositary Receipts and the Deposit Agreement may at any time
and from time to time be amended by agreement between Aviva and the Depositary
and, except as provided in the next sentence, such amendment requires no consent
from the Holders. Any amendment that imposes or increases any fees or charges
(other than taxes and other governmental charges) payable by Holders, or that
otherwise prejudices any substantial existing right of the Holders, will not
take effect as to outstanding Depositary Shares until the expiration of three
months after notice of such amendment has been given to the Holders. Every
Holder at the time any such amendment becomes effective will be deemed, by
continuing to hold a Depositary Receipt, to consent and agree to such amendment
and to be bound by the Deposit Agreement as amended thereby.
Whenever so directed by Aviva, the Depositary will terminate the Deposit
Agreement by mailing notice of such termination to the Holders at least 30 days
prior to the date fixed in such notice for such termination. The Depositary may
likewise terminate the Deposit Agreement upon 30 days' notice to the Holders if
at any time 90 days shall have expired after the Depositary shall have delivered
to Aviva a written notice of its election to resign and a successor depositary
shall not have been appointed and accepted its appointment, as provided in the
Deposit Agreement. If any Depositary Shares remain outstanding after the date
of termination, the Depositary thereafter will discontinue the registration of
transfers of Depositary Receipts, will suspend the distribution of dividends to
the Holders and will not give any further notices or perform any further acts
under the Deposit Agreement, except that the Depositary will continue to collect
dividends and other distributions pertaining to the deposited Aviva Common
Stock, will sell rights as provided in the Deposit Agreement and will deliver
deposited Aviva Common Stock, together with any dividends or other distributions
received with respect thereto and the net proceeds of the sale of any rights or
other property, in exchange for Depositary Receipts surrendered to the
Depositary.
At any time after the expiration of one year from the date of termination, the
Depositary may sell the deposited Aviva Common Stock then held and hold the net
proceeds of any such sale, together with any cash then held, unsegregated from
its other funds and without liability for interest, for the pro rata benefit of
the Holders who have not theretofore surrendered their Depositary Receipts.
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CHARGES OF DEPOSITARY
Aviva will pay all charges of the Depositary and those of the registrar, if
any, under the Deposit Agreement, except for taxes and other governmental
charges and certain cable, telex, facsimile transmission and delivery charges,
which charges shall be paid by the Holders to the Depositary. As a condition to
effecting any delivery, registration, transfer, split-up, combination, surrender
or exchange of any Depositary Receipt evidencing Depositary Shares or any
transfer or withdrawal of Aviva Common Stock deposited under the Deposit
Agreement, the Depositary may require payment of a sum sufficient to reimburse
it for, or evidence satisfactory to the Depositary of the payment of, any tax,
duty or other governmental charge with respect thereto.
GENERAL
Neither the Depositary nor Aviva will be liable to the Holders if prevented or
delayed by law, governmental authority, any provision of the corporate charter
of Aviva or any circumstances beyond its control in performing its obligations
under the Deposit Agreement. The obligations of Aviva and the Depositary under
the Deposit Agreement are expressly limited to using their reasonable efforts
and performing in good faith their respective duties specified therein.
The Depositary Receipts are transferable on the books of the Depositary;
provided however, that the Depositary may close the transfer books at any time
or from time to time when deemed expedient by it in connection with the
performance of its duties under the Deposit Agreement or at the request of
Aviva. The delivery, transfer and surrender of Depositary Receipts generally
may be suspended during any period when the transfer books of the Depositary or
Aviva are closed, or if any such action is deemed necessary or advisable by the
Depositary or Aviva, in good faith, at any time or from time to time in
accordance with the Deposit Agreement.
The Depositary may refuse to deliver Depositary Receipts, register the
transfer of any Depositary Receipt or make any distribution of, or related to,
Aviva Common Stock until it has received such proof of citizenship, residence,
exchange control approval, legal or beneficial ownership or other information as
it may deem necessary or proper.
Aviva has also appointed the Depositary to act as registrar, and the
Depositary may, with the approval of Aviva, appoint one or more co-registrars
for registration of the Depositary Receipts in accordance with the requirements
of any stock exchange on which such Depositary Receipts are listed. Such
registrars or co-registrars shall, upon Aviva's request, and may, with the
approval of Aviva, be removed and a substitute or substitutes appointed by the
Depositary.
COMPARATIVE RIGHTS OF AVIVA AND GARNET STOCKHOLDERS
As a result of the Merger, Garnet shareholders will receive Aviva Common Stock
in exchange for their shares of Garnet Common Stock. The rights of all former
Garnet stockholders will thereafter be governed by the articles of incorporation
of Aviva (the "Aviva Charter"), the Aviva bylaws (the "Aviva Bylaws"), and the
TBCA. The rights of holders of Garnet are currently governed by the certificate
of incorporation of Garnet (the "Garnet Charter"), the bylaws of Garnet (the
"Garnet Bylaws"), and the DGCL. The following summary, which does not purport
to be a complete statement of the general differences between the rights of the
stockholders of Aviva and Garnet, sets forth certain differences between the
relevant provisions of the Aviva Charter and the Garnet Charter, the Aviva
Bylaws and the Garnet Bylaws, and the TBCA and the DGCL.
Since Aviva is a Texas corporation and Garnet is a Delaware corporation, the
differences between the rights of the Aviva stockholders and the Garnet
stockholders will arise from the various differences between the TBCA and the
DGCL, as well as from the differences between the various provisions of the
Aviva Charter and Aviva Bylaws and the Garnet Charter and Garnet Bylaws. The
following summary is qualified in its entirety by reference to the TBCA, the
DGCL, the complete text of the Aviva Charter and Aviva Bylaws and the Garnet
Charter and Garnet Bylaws.
AMENDMENTS TO THE CHARTER
Aviva. Article 4.02 of the TBCA provides that an amendment to a corporation's
articles of incorporation must be approved by the holders of at least two-thirds
of the outstanding shares entitled to vote thereon, unless the corporation's
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articles of incorporation provide otherwise. Under the Aviva Charter,
provisions of the Charter may be amended or repealed by the vote of holders of a
majority of the outstanding capital stock entitled to vote thereon.
Garnet. Section 242 of the DGCL provides that an amendment to a corporation's
certificate of incorporation must be approved by a resolution of the board of
directors declaring the advisability of the amendment and by the affirmative
vote of a majority of the outstanding shares entitled to vote thereon. The DGCL
also permits a corporation to make provision in its certificate of incorporation
requiring a greater proportion of voting power to approve a specified amendment.
AMENDMENTS TO BYLAWS
Aviva. The Aviva Bylaws may be adopted, amended or rescinded either by the
vote of a majority of the Board of Directors or by the holders of a majority of
the outstanding shares of the capital stock present and entitled to vote at a
meeting.
Garnet. The Garnet Bylaws may be amended either by the Board of Directors or
by the holders of a majority of the outstanding shares of the capital stock
present and entitled to vote at a meeting.
BOARD OF DIRECTORS
Both the TBCA and the DGCL provide that a majority of the total number of
directors shall constitute a quorum for the transaction of business, unless the
charter or bylaws require a greater number.
Aviva. The TBCA provides that the board of directors of a Texas corporation
shall consist of one or more members as fixed by the articles of incorporation
or bylaws. The Aviva Bylaws grant the Board of Directors the power to set the
number of directors. This number, which is presently set at five, may be
increased or decreased with the approval of a majority of the then authorized
number of directors. All actions taken by the Aviva Board of Directors,
including the appointment and removal of officers of Aviva, require the
affirmative vote of a majority of the directors.
Garnet. The DGCL provides that the board of directors of a Delaware
corporation shall consist of one or more directors as fixed by the certificate
of incorporation or bylaws. The Garnet Bylaws authorize no fewer than three and
no more than seven persons to serve on its Board of Directors at one time.
Garnet presently has three directors. The number of directors may be increased
or decreased by resolution approved by the unanimous vote of the then authorized
directors.
REMOVAL OF DIRECTORS
Aviva. Under the TBCA, a corporation's bylaws or articles of incorporation
may provide that, at any meeting of shareholders called expressly for that
purpose, one or more directors or the entire board may be removed with or
without cause by a vote of the holders of a specified portion, but not less than
a majority, of the shares then entitled to vote in an election of directors.
Garnet. Both the DGCL and the Garnet Bylaws provide that a director or the
entire board of directors of a Delaware corporation may be removed, with or
without cause, by the affirmative vote of the holders of a majority of the
outstanding shares then entitled to vote at an election of directors.
NEWLY CREATED DIRECTORSHIPS AND VACANCIES
Aviva. Under the TBCA, any vacancy occurring on a board of directors shall be
filled by the affirmative vote of a majority of the remaining members of the
board of directors then in office, even though less than a quorum, provided that
any director so elected shall hold office only for the remainder of the term of
the director whose departure caused the vacancy. Under the TBCA, a directorship
created by reason of an increase in the number of directors may be filled by the
board of directors for a term of office continuing only until the next election
of directors (whether at an annual or special shareholders meeting). The TBCA
further provides that the board of directors shall not fill more than two such
directorships during the period between two successive annual meetings of
shareholders. According to the Aviva Bylaws, newly created directorships
resulting from any increase in the authorized number of directors and any vacant
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directorships may be filled by the affirmative vote of a majority of the
directors then in office. This provision of the Aviva Bylaws may be altered,
amended or repealed by the affirmative vote of the majority of either the Aviva
Board of Directors or the outstanding shares of capital stock of Aviva entitled
to vote.
Garnet. The DGCL provides that, unless otherwise provided in the certificate
of incorporation or bylaws, vacancies and newly created directorships may be
filled by a majority vote of the directors then in office, even if the number of
directors then in office is less than a quorum. The Garnet Bylaws provide that
vacancies and newly created directorships resulting from any such increase may
be filled by a majority of the directors then in office. This provision of the
Garnet Bylaws may be altered, amended, or repealed by the affirmative vote of
the majority of either the Garnet Board of Directors or the outstanding shares
of capital stock of Garnet entitled to vote.
SPECIAL MEETINGS OF STOCKHOLDERS
Aviva. Under the TBCA, special meetings of the shareholders may be called at
any time by the board of directors, the chairman of the board, the president, or
holders of at least 10% of the shares entitled to vote at the special meeting.
The Aviva Bylaws, however, provide that a special meeting of stockholders may be
called by the Aviva Board of Directors, the Chairman of the Board, the
President, or by the holders of a majority of the issued and outstanding shares
of the capital stock of Aviva entitled to vote. Written notice of a special
meeting must be mailed out not fewer than ten or more than sixty days before the
meeting to each stockholder of record entitled to vote.
Garnet. The DGCL provides that special meetings of shareholders may be called
by the board of directors or by such person or persons as may be authorized by
the certificate of incorporation or bylaws. The Garnet Bylaws provide that a
special meeting of the stockholders may be called by the Chairman of the Board,
the President, or by the Garnet Board of Directors pursuant to a resolution
approved by the majority of the entire Board. The DGCL and the Garnet Bylaws
provide that written notice of a special meeting must be delivered not less than
ten or more than sixty days before the date of such meeting to each stockholder
of record entitled to vote.
ACTION BY WRITTEN CONSENT
Aviva. The TBCA provides that any action required to be taken at any annual
or special meeting of shareholders may be taken without a meeting and without
prior notice if a consent in writing setting forth the action to be taken shall
be signed by the holders of shares having not less than the minimum number of
votes necessary to take such action at a meeting of shareholders.
Garnet. The DGCL provides that, unless otherwise provided in the
corporation's charter or bylaws, any action required or permitted to be taken at
any annual or special meeting of shareholders may be taken without a meeting,
without prior notice, and without a vote if a consent or consents in writing,
setting forth the action to be so taken, shall be signed by the holders of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. The Garnet Bylaws permit
action to be taken by the Garnet stockholders without a meeting.
VOTING
Neither the Aviva nor the Garnet Charter provides for cumulative voting rights
for the election of directors.
MERGERS AND OTHER FUNDAMENTAL TRANSACTIONS
Aviva. The TBCA generally requires that a merger, consolidation, sale of all
or substantially all of the assets, or dissolution of a corporation be approved
by the holders of at least two-thirds of the outstanding shares of stock
entitled to vote, unless such corporation's articles of incorporation provide
otherwise. The Aviva Charter does not contain any provisions that would require
greater than a majority of stockholders to approve such transactions involving
Aviva.
Garnet. Under the DGCL, mergers, consolidations, sales of substantially all
of the assets or dissolution of a corporation generally must be approved by the
board of directors and the affirmative vote of a majority of the outstanding
stock entitled to vote thereon, unless the certificate of incorporation requires
approval by a greater number of shares of stock.
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The Garnet Charter does not contain any provisions that would require greater
than a majority of stockholders to approve mergers, consolidations, sales of a
substantial amount of assets or other similar transactions involving Garnet.
Unless required by its certificate of incorporation, no stockholder vote is
required of a corporation surviving a merger if (i) such corporation's
certificate of incorporation is not amended by the merger; (ii) each share of
stock of such corporation will be an identical share of the surviving
corporation after the merger; and (iii) either no shares are to be issued by the
surviving corporation or the number of shares to be issued in the merger does
not exceed 20% of such corporation's outstanding common stock immediately prior
to the effective date of the merger.
LIMITATIONS ON DIRECTORS' LIABILITY
Aviva. Under the TBCA, a director shall not be liable to the corporation
or to shareholders as a director if that director exercised ordinary care and
acted in good faith. Additionally, the director shall not be personally liable
for damages that may result from his acts in the discharge of any duty imposed
or power conferred upon him by the corporation if, in the exercise of ordinary
care, he acted in good faith and in reliance upon the written opinion of an
attorney for the corporation. The Aviva Charter contains provisions that limit
the liability of directors of Aviva for breach of fiduciary duty by directors
acting in such capacity. Pursuant to these provisions, directors of Aviva may
be liable for breach of fiduciary duty only (a) in relation to the payment of
unlawful dividends, the unlawful purchases of stock of the corporation or (b)
if, in addition to any and all other requirements for such liability, any such
director (i) shall have breached the duty of loyalty to Aviva, (ii) in acting or
failing to act, shall not have acted in good faith or shall have acted in a
manner involving intentional misconduct or a knowing violation of law or (iii)
shall have derived an improper personal benefit.
Garnet. Under the DGCL and the Garnet Charter, directors shall not be
personally liable to the corporation or any stockholder for monetary damages for
breach of fiduciary duty as a director, except (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for intentional or negligent payment of unlawful
dividends or stock redemptions; or (iv) for any transaction from which the
director derived an improper personal benefit.
INDEMNIFICATION
Aviva. Under Article 2.02-1 of the TBCA and the Aviva Charter, each
current and former director and officer of a Texas corporation, or each person
who served at request as a director or officer of a subsidiary of the
corporation, shall be indemnified by the corporation for liabilities imposed
upon him, expense reasonably incurred by him in connection with any claim made
against him, or any action, suit or proceeding to which he may be a party by
reason of being or having been a director or an officer, and for any reasonable
settlement of any such claim, action, suit or proceeding. The TBCA provides
that a corporation may undertake any indemnification of a director or officer
only if it is determined that such person (i) conducted himself in good faith,
(ii) reasonably believed that, in the case of conduct in his official capacity
as a director, that his conduct was in the corporation's best interests, and in
all other cases, that his conduct was at least not opposed to the corporation's
best interests, and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful, and that a corporation
must indemnify a director against reasonable expenses incurred by him in
connection with a proceeding in which he is a named defendant because he is or
was a director if he has been wholly successful in the defense of the
proceeding. The TBCA further provides that Texas corporations may purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of such corporation for any liability asserted against him,
whether or not the corporation would have the power to indemnify him against
liability under the TBCA.
The Aviva Charter authorizes the indemnification of persons who become
parties to any threatened, pending or completed action, suit or proceeding by
reason of the fact that such person is or was a director, officer, employee or
agent of Aviva or is or was serving at the request of Aviva as a director,
officer, employee or agent of another corporation, partnership, or other
enterprise against expenses and damages incurred thereby.
Garnet. Under Section 145 of the DGCL and the Garnet Charter, Garnet shall
indemnify any person made a party or threatened to be made a party to any type
of proceeding (other than an action by or in the right of the corporation)
because he or she is or was an officer, director or employee of Garnet, or was
serving at the request of Garnet as a director, officer, employee or agent of
another corporation or entity, against expenses, judgments, fines and amounts
paid in settlement actually and reasonably incurred in connection with such
proceeding (i) if such person acted in good faith
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and in a manner he or she reasonably believed to be in or not opposed to the
best interests of the corporation; or (ii) in the case of a criminal proceeding,
such person had no reasonable cause to believe that his or her conduct was
unlawful. Additionally, the DGCL provides that a corporation must indemnify a
director or officer against expenses (including attorneys' fees) actually and
reasonably incurred if such person successfully defends himself or herself in a
proceeding to which such person was a party because he or she was a director or
officer of the corporation. The DGCL further provides that the corporation may
purchase and maintain insurance on behalf of any director, officer, employee or
agent of the corporation against any liability asserted against such person and
incurred by such person in any such capacity, whether or not the corporation
would have the power to indemnify such person against liability.
THE AVIVA SPECIAL MEETING;
ADDITIONAL MATTERS
ELECTION OF AVIVA DIRECTORS
The by-laws of Aviva grant the Board of Directors the power to set the
number of directors, 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. At that time, Eugene C. Fiedorek was elected a director at a
regular meeting of the Board of Directors.
The Merger Agreement contemplates that the Board of Directors of Aviva
following the Merger will consist of three directors who shall be, if they
continue to be able and willing to serve as such, Ronald Suttill, Eugene C.
Fiedorek and Robert J. Cresci. Messrs. Suttill and Fiedorek currently serve as
directors of Aviva and Mr. Cresci is currently a director of Garnet.
In contemplation of consummation of the Merger, the Board of Directors has,
effective as of the date of the Special Meeting, reduced the number of directors
to three and has nominated two individuals to serve as directors for the ensuing
year and until their successors are elected and qualify: Ronald Suttill and
Eugene C. Fiedorek. If the Merger is consummated, it is the intention of the
Board of Directors that Robert J. Cresci, who has consented to serve, shall be
elected to fill the vacancy on the Board of Directors. If the Merger is not
consummated, the Board of Directors has no current plan to fill such vacancy.
INFORMATION REGARDING CURRENT DIRECTORS
The information set forth below, furnished to Aviva by the respective
individuals, shows as to each individual who is currently serving as a director
of Aviva his name, age and principal positions with Aviva.
<TABLE>
<CAPTION>
NAME AGE POSITIONS DIRECTOR SINCE
---- ---- --------- --------------
<S> <C> <C> <C>
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. 62 Director 1994
James E. Tracey 50 Director 1992
</TABLE>
INFORMATION REGARDING NOMINEES FOR DIRECTOR
Ronald Suttill has been a director of Aviva since August 1985 and has been
President and Chief Executive Officer of Aviva 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 Aviva.
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<PAGE>
Eugene C. Fiedorek has been a director of Aviva 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.
Robert J. Cresci has been a Managing Director of Pecks Management Partners,
Ltd., an investment management firm, since September 1990. Mr. Cresci currently
serves on the boards of Bridgeport Machines, Inc., EIS International, Inc.,
Sepracor, Inc., Arcadia Financial, Ltd., Hitox, Inc., Meris Laboratories, Inc.,
Film Roman, Inc., Educational Medical, Inc., Source Media, Inc., Castle Dental
Centers, Inc., Candlewood Hotel Co., Inc., SeraCare, Inc. and several private
companies.
EXECUTIVE OFFICERS OF AVIVA
The following table lists the names and ages of each of the executive
officers of Aviva 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, 38 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 Aviva 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. Aviva does
not have a 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 Aviva and such other persons as the
committee deems appropriate, reviews the preparations for and scope of the audit
of Aviva'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 Aviva 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 Aviva, 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 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 Aviva with copies of all such
reports. Based solely on its review of
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<PAGE>
the copies of such reports furnished to Aviva by such Reporting Persons or on
the written representations of such Reporting Persons, Aviva believes that,
during the year ended December 31, 1997, all of the Reporting Persons complied
with their Section 16(a) filing requirements.
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 Aviva (the "Named Executive Officer").
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------- -------------------------- ---------
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING LTIP ALL OTHER
PRINCIPAL COMPEN- AWARD(S) OPTIONS/ PAYOUTS COMPENSA-
POSITION YEAR SALARY($) BONUS($) SATION($) ($) SARS(#) ($) TION($)
-------- ---- --------- -------- --------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
</TABLE>
/(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 $20,000 per
year for their services as directors and are reimbursed for travel and lodging
expenses. Mr. Suttill receives no compensation as a director but is reimbursed
for travel and lodging expenses incurred to attend meetings.
OPTION GRANTS DURING 1997
There were no options granted to the Named Executive Officer during
1997. No stock appreciation rights have been issued by Aviva.
OPTION EXERCISES DURING 1997 AND YEAR END OPTION VALUES
The following table provides information related to options exercised
by the Named Executive Officers during 1997 and the number and value of options
held at year-end. No stock appreciation rights have been issued by Aviva.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FY-END (#) AT FY-END($)(1)
SHARES ACQUIRED VALUE --------------------------- ------------------------------
NAME ON EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- --------------- ---------- ----------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Ronald Suttill None None 270,000 -- -- --
</TABLE>
/(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 Aviva'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 Aviva, makes recommendations to the Board of Directors
regarding the compensation of the executive officers of Aviva, including salary,
bonuses, stock options and other compensation. There are no Compensation
Committee interlocks.
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<PAGE>
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, Aviva 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
Aviva currently employs only two executive officers, the names of whom are
set forth above under "Election of Directors - Executive Officers of Aviva."
Decisions regarding compensation of the executive officers are made by the Board
of Directors, after giving consideration to recommendations made by the
Compensation Committee.
Aviva'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 Aviva'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 Aviva'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 Aviva's business. Aviva'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 Aviva's performance objectives. The Board of
Directors also considers the fact that Aviva 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 Aviva.
Compensation for Aviva's executive officers during 1997 was comprised of
salary and matching employer contributions made pursuant to Aviva's 401(k) Plan.
There were no bonuses paid to the executive officers during or for 1997. Aviva's
401(k) Plan is generally available to all employees after one year of service.
Aviva 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. Aviva has selected the American Stock Exchange
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<PAGE>
Market Value Index as a broad equity market index, and the SIC Index "Crude
Petroleum and Natural Gas" as a published industry index.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN OF THE
COMPANY, INDUSTRY INDEX AND BROAD MARKET
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
- --------------------------------------------------------------------------------
COMPANY 1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as to each person who,
to the knowledge of Aviva, is, or will be upon consummation of the Merger, the
beneficial owner of more than five percent of the outstanding Common Stock of
Aviva. Unless otherwise noted, the information is furnished as of July 31, 1998.
<TABLE>
<CAPTION>
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF PERCENT OF PERCENT OF CLASS OWNED
OWNER OR GROUP BENEFICIAL OWNERSHIP /(1)/ CLASS /(2)/ AFTER THE MERGER /(3)/
- ------------------------------ -------------------------- ----------- ----------------------
<S> <C> <C> <C>
Lehman Brothers Inc. /(4)/ 2,966,876 9.42% 6.15%
3 World Financial Center
11th Floor
New York, NY 10285
Fidelity International Limited 2,780,000 8.83% 5.77%
and Edward C. Johnson III /(5)/
P.O. Box HM670
Hamilton, HMCX, Bermuda
Yale University /(6)/ 2,551,886 8.11% 5.29%
230 Prospect Street
New Haven, CT 06511
Wexford Management LLC /(7)/ 5,438,639 -- 11.28%
411 West Putnam Avenue
Greenwich, Connecticut 06830
Pecks Management Partners Ltd./(8)/ 5,155,108 -- 10.69%
One Rockefeller Plaza
New York, New York 10020
ING (U.S.) Capital Corporation /(9)/ 2,700,000 -- 5.60%
135 East 57th Street
New York, New York 10022
</TABLE>
/(1)/ Except as set forth below, to the knowledge of Aviva, each beneficial
owner has, or will have upon consummation of the Merger, sole voting and
sole investment power.
/(2)/ Based on 31,482,716 shares of the Common Stock issued and outstanding on
July 31, 1998.
/(3)/ Based on the total of the following: (a) 31,482,716 shares of Aviva Common
Stock issued and outstanding on July 31, 1998, (b) the 1,149,216 maximum
shares of Aviva Common Stock that may be issued in connection with the
acquisition of Garnet to Garnet stockholders, (c) 12,887,771 shares of
Aviva Common Stock to be issued in connection with the acquisition of
Garnet under the Debenture Purchase Agreement, (d) 400,000 shares issued
to ING Bank in August 1998, (e) 800,000 shares to be issued to ING Bank
upon the consummation of the Merger and (f) warrants for 1,500,000 shares
to be issued to ING Bank upon the consummation of the Merger.
/(4)/ Information regarding Lehman Brothers Inc. is based on information
received from Lehman Brothers Inc. on March 16, 1998.
/(5)/ 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.
/(6)/ Information regarding Yale University is based on a Schedule 13G dated
March 11, 1994 filed by Yale University with the Commission.
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<PAGE>
/(7)/ According to the Debenture Purchase Agreement, the indicated number of
shares are issuable upon consummation of the Merger. A Schedule 13D dated
April 23, 1997 indicated the debentures are held by four investment funds.
Wexford Management LLC ("Wexford Management") serves as investment advisor
to three of the funds and as sub-investment advisor to the fourth fund
which is organized as a corporation. Wexford Advisors, LLC ("Wexford
Advisors") serves as the investment advisor to the corporate fund and as
general partner to the remaining funds which are organized as limited
partnerships. One of the limited partnerships, Wexford Special Situations
1996 L.P., would acquire more than 5% of Aviva Common Stock. Wexford
Management shares voting and dispositive power with respect to these
shares with each of the funds, with Wexford Advisors, and with Charles E.
Davidson and Joseph M. Jacob, each of whom is a controlling person of
Wexford Management and Wexford Advisors.
/(8)/ According to the Debenture Purchase Agreement, the indicated number of
shares are issuable upon consummation of the Merger. A Schedule 13G dated
February 9, 1995 filed by Pecks Management Partners Ltd. ("Pecks"), as a
registered investment advisor, indicated the debentures are held by three
investment advisory clients of Pecks. One such client, Delaware State
Employees' Retirement Fund, would acquire more than 5% of Aviva's Common
Stock under the Debenture Purchase Agreement. Pecks has sole investment
and dispositive power with respect to these shares issuable to its
clients.
/(9)/ Based on the total of (3)(d), (3)(e) and 3(f) above.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of July 31, 1998,
concerning the Aviva Common Stock owned beneficially by each director, by the
Named Executive Officer listed in the Summary Compensation Table above, and by
directors and executive officers of Aviva as a group:
<TABLE>
<CAPTION>
PERCENT OF
CLASS OWNED
NAME AND ADDRESS OF BENEFICIAL AMOUNT AND NATURE OF BENEFICIAL PERCENT OF AFTER THE
OWNER OWNERSHIP /(1)/ CLASS /(2)/ MERGER (3)
- ------------------------------- -------------------------------- ----------- ------------
<S> <C> <C> <C>
Ronald Suttill 1,355,050 /(4)/(5)/ 4.25% 2.79%
8235 Douglas Avenue, Suite 400
Dallas, TX 75225
Eugene C. Fiedorek 272,153 /(6)/ * *
3811 Turtle Creek Blvd., Suite 1080
Dallas, TX 75219
John J. Lee 1,126,928 /(7)/(8)/ 3.54% 2.32%
Two Stamford Plaza
281 Tresser Blvd., 16th Floor
Stamford, CT 06901
Elliott Roosevelt, Jr. 62,500 /(7)/ * *
2626 Cole Avenue, Suite 600
Dallas, TX 75204
James E. Tracey 968,050 /(5)/(7)/ 3.04% 1.99%
3, Grey Close
Hampstead Garden Suburb
London, NW11 3QG
Robert J. Cresci /(9)/ 0 /(10)/ * *
Pecks Management Partners Ltd.
One Rockefeller Plaza
New York, New York 10020
All directors and executive officers as a 2,880,291 /(11)/ 9.04% 5.93%
group (7 persons)
</TABLE>
/(1)/ Except as noted below, each beneficial owner has sole voting power and
sole investment power.
/(2)/ Based on 31,482,716 shares of Aviva Common Stock issued and outstanding
on July 31, 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 Aviva's stock option
plans.
/(3)/ Based on the total of the following: (a) 31,482,716 shares of Aviva
Common Stock issued and outstanding on July 31, 1998, (b) the 1,149,216
maximum shares of Aviva Common Stock that may be issued in connection
with the acquisition of Garnet to Garnet stockholders, (c) 12,887,771
shares of Aviva Common Stock to be issued in connection with the
acquisition of Garnet under the Debenture Purchase Agreement, (d) 400,000
shares issued to ING Bank in August 1998, (e) 800,000 shares to be issued
to ING Bank upon the consummation of the Merger and (f) warrants for
1,500,000 shares to be issued to ING Bank upon the consummation of the
Merger. Also treated as outstanding for purposes of computing the
percentage ownership of each director, the Named Executive Officer and
all directors and executive
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<PAGE>
officers as a group are shares issuable upon exercise of vested stock
options granted pursuant to Aviva's stock option plans.
/(4)/ Included are options for 250,000 shares exercisable on or within 60 days
of July 31, 1998.
/(5)/ Includes the entire ownership of AMG Limited, a limited liability company
of which Messrs. Suttill and Tracey are members, as of July 31, 1998, of
935,550 shares of Aviva Common Stock.
/(6)/ Included are options for 10,000 shares exercisable on or within 60 days
of July 31, 1998.
/(7)/ Included are options for 32,500 shares exercisable on or within 60 days
of July 31, 1998.
/(8)/ Included are 1,094,428 shares owned by Lee Development Corporation, which
Mr. Lee controls.
/(9)/ Not currently a director of Aviva but will be upon consummation of the
Merger.
/(10)/ Does not include shares issuable upon consummation of the Merger to
clients of Pecks, of which Mr. Cresci is a managing director. For
information with respect to such shares, see note (8) under "Security
Ownership of Certain Beneficial Owners."
/(11)/ Included are 935,550 shares beneficially owned through AMG Limited and
options for 385,500 shares exercisable on or within 60 days of July 31,
1998.
/*/ Less than 1% of the outstanding Aviva Common Stock.
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<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
It is expected that representatives of KPMG Peat Marwick LLP will be
present at the Aviva Special Meeting and representatives of Arthur Andersen LLP
will be present at the Garnet Special Meeting, in each case to respond to
appropriate questions of stockholders and to make a statement if they so desire.
LEGAL MATTERS
The validity of the Aviva Common Stock to be issued in the Merger has been
passed upon for Aviva by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Aviva as of December 31, 1997 and
1996, and for each of the years in the three-year period ended December 31,
1997, have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, included herein, and upon the authority of said firm as experts in
accounting and auditing.
The audited consolidated financial statements of Garnet included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports. The report of Garnet's independent public accountants on Garnet's 1997
financial statements included a fourth paragraph discussing the substantial
uncertainty that exists about the company's ability to continue as a going
concern.
The evaluation of Netherland, Sewell & Associates, Inc., independent
consulting petroleum engineers, of Aviva's proved U.S. reserves of oil and
natural gas and related information set forth herein and based on such
evaluation are included herein in reliance upon the authority of such firm as an
expert with respect to such matters.
The evaluation of Huddleston & Co., Inc., independent consulting engineers,
of Aviva's proved Colombian oil reserves and related information set forth
herein and based on such evaluation are included herein in reliance upon the
authority of such firm as experts with respect to such matters.
STOCKHOLDER PROPOSALS
Any proposals of holders of Aviva Common Stock intended to be presented at
the Annual Meeting of Stockholders of Aviva to be held in 1999 must be received
by Aviva, addressed to the Secretary of Aviva at 8235 Douglas Avenue, Suite 400,
Dallas, Texas 75225, no later than December 29, 1998, to be considered for
inclusion in the proxy statement and form of proxy relating to that meeting.
Aviva's management will have discretionary authority with respect to proxies
submitted to the 1999 Annual Meeting of Stockholders on any matter which Aviva
does not receive notice of within 10 days following the day on which notice of
the date of the annual meeting is mailed or public disclosure of the date of the
meeting is made.
If the Merger is not consummated, any proposals of stockholders of Garnet
intended to be presented at the Annual Meeting of Stockholders of Garnet to be
held in 1999 must be received by Garnet, addressed to the President of Garnet at
1214 Wilmington Avenue, Suite 303, Salt Lake City, Utah 84106, no later than
December 31, 1998, to be considered for inclusion in the proxy statement and
form of proxy relating to that meeting. Garnet's management will have
discretionary authority with respect to proxies submitted to the 1999 Annual
Meeting of Stockholders on any matter which Garnet does not receive notice of by
March 16, 1999.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Page
----
<S> <C>
AVIVA PETROLEUM INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
Financial Statements:
Condensed Consolidated Balance Sheet (unaudited) at June 30, 1998 and December 31, 1997... F-2
Condensed Consolidated Statement of Operations (unaudited)
for the Three and Six Months Ended June 30, 1998 and June 30, 1997...................... F-3
Condensed Consolidated Statement of Cash Flows (unaudited) for the
Six Months Ended June 30, 1998 and June 30, 1997........................................ F-4
Condensed Consolidated Statement of Stockholders' Equity (Deficit)
(unaudited) for the Six Months Ended June 30, 1998...................................... F-5
Notes to Condensed Consolidated Financial Statements (unaudited).......................... F-6
Independent Auditors' Report................................................................ F-11
Consolidated Balance Sheet as of December 31, 1997 and 1996............................... F-12
Consolidated Statement of Operations for the years
ended December 31, 1997, 1996 and 1995.................................................. F-13
Consolidated Statement of Cash Flows for the years
ended December 31, 1997, 1996 and 1995.................................................. F-14
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995.................................................. F-15
Notes to Consolidated Financial Statements................................................ F-16
Supplementary Information Related to Oil and Gas Producing
Activities (Unaudited).................................................................. F-27
</TABLE>
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.
GARNET RESOURCES CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Financial Statements:
Consolidated Balance Sheet (unaudited) at June 30, 1998 and December 31, 1997............. F-35
Consolidated Statements of Operations (unaudited) for the Three and Six Months Ended
June 30, 1998 and June 30, 1997......................................................... F-37
Condensed Consolidated Statements of Cash Flows (unaudited) for the Six Months
Ended June 30, 1998 and June 30, 1997................................................... F-38
Notes to Condensed Consolidated Financial Statements (unaudited).......................... F-39
Report of Independent Public Accountants.................................................... F-46
Consolidated Balance Sheets at December 31, 1997 and 1996................................. F-47
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995 F-48
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997,
1996 and 1995........................................................................... F-49
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-50
Notes to Consolidated Financial Statements................................................ F-51
Supplemental Oil and Gas Information (unaudited).......................................... F-61
Garnet Resources Corporation Financial Statement Schedule:
Schedule I -- Condensed Financial Information of Registrant Balance Sheets at
December 31, 1997 and 1996.............................................................. F-64
Statements of Operations for the years ended December 31, 1997, 1996 and 1995............. F-65
Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............. F-66
</TABLE>
F-1
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except number of shares)
(unaudited)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................................... $ 197 $ 690
Accounts receivable............................................. 1,466 1,803
Inventories..................................................... 599 602
Prepaid expenses and other...................................... 46 203
-------- --------
Total current assets........................................ 2,308 3,298
-------- --------
Property and equipment, at cost (note 3):
Oil and gas properties and equipment (full cost method)......... 61,442 61,036
Other........................................................... 612 606
-------- --------
62,054 61,642
Less accumulated depreciation, depletion and amortization... (55,740) (49,873)
-------- --------
6,314 11,769
Other assets....................................................... 1,509 1,378
-------- --------
$ 10,131 $ 16,445
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long term debt (note 4)...................... $ 37 $ 480
Accounts payable................................................ 2,752 3,091
Accrued liabilities............................................. 352 356
-------- --------
Total current liabilities................................... 3,141 3,927
-------- --------
Long term debt, excluding current portion (note 4)................. 7,403 7,210
Gas balancing obligations and other................................ 1,568 1,560
Stockholders' equity (deficit):
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*............................................ (36,931) (31,202)
-------- --------
Total stockholders' equity (deficit)........................ (1,981) 3,748
Commitments and contingencies (note 6)
-------- --------
$ 10,131 $ 16,445
======== ========
</TABLE>
*Accumulated deficit of $70,057 was eliminated at December 31, 1992 in
connection with a quasi-reorganization.
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Oil and gas sales.................................... $ 914 $ 2,339 $ 2,060 $ 5,553
------- -------- ------- --------
Expense:
Production.......................................... 716 1,096 1,515 2,198
Depreciation, depletion and amortization............ 503 1,490 1,174 3,285
Write-down of oil and gas properties (note 3)....... 1,961 11,413 4,725 13,399
General and administrative.......................... 300 402 660 752
------- -------- ------- --------
Total expense..................................... 3,480 14,401 8,074 19,634
------- -------- ------- --------
Other income (expense):
Interest and other income (expense), net (note 5)... 26 67 771 91
Interest expense.................................... (155) (162) (320) (328)
------- -------- ------- --------
Total other income (expense)...................... (129) (95) 451 (237)
------- -------- ------- --------
Loss before income taxes............................. (2,695) (12,157) (5,563) (14,318)
Income taxes (benefits).............................. 69 (547) 166 (282)
------- -------- ------- --------
Net loss.......................................... $(2,764) $(11,610) $(5,729) $(14,036)
======= ======== ======= ========
Weighted average common shares outstanding --
basic and diluted................................... 31,483 31,483 31,483 31,483
======= ======== ======= ========
Basic and diluted net loss per common share.......... $(.09) $(.37) $(.18) $(.45)
======= ======== ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------
1998 1997
--------- ----------
<S> <C> <C>
Net loss.......................................................................... $(5,729) $(14,036)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, depletion and amortization....................................... 1,174 3,285
Write-down of oil and gas properties........................................... 4,725 13,399
Deferred foreign income taxes (benefits)....................................... -- (692)
Changes in working capital and other........................................... 95 (729)
------- --------
Net cash provided by operating activities.................................. 265 1,227
------- --------
Cash flows from investing activities:
Property and equipment expenditures............................................ (411) (1,959)
Proceeds from sale of assets................................................... -- 19
Other.......................................................................... (95) --
------- --------
Net cash used in investing activities...................................... (506) (1,940)
------- --------
Cash flows from financing activities --
Principal payments on long term debt........................................... (250) (150)
------- --------
Effect of exchange rate changes on cash and cash equivalents...................... (2) (23)
------- --------
Net decrease in cash and cash equivalents......................................... (493) (886)
Cash and cash equivalents at beginning of the period.............................. 690 2,041
------- --------
Cash and cash equivalents at end of the period.................................... $ 197 $ 1,155
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT NUMBER OF SHARES)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
-------------------- ADDITIONAL STOCKHOLDERS'
NUMBER PAID-IN ACCUMULATED EQUITY
OF SHARES AMOUNT CAPITAL DEFICIT (DEFICIT)
---------- ------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997... 31,482,716 $1,574 $33,376 $(31,202) $ 3,748
Net loss........................ -- -- -- (5,729) (5,729)
---------- ------ ------- -------- -------
Balances at June 30, 1998..... 31,482,716 $1,574 $33,376 $(36,931) $(1,981)
========== ====== ======= ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements of Aviva Petroleum Inc. and
subsidiaries (the "Company" or "Aviva") included herein have been prepared
by the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures contained herein are adequate to make
the information presented not misleading. These condensed financial
statements should be read in conjunction with the Company's prior audited
yearly financial statements and the notes thereto, included in the
Company's latest annual report on Form 10-K.
In the opinion of the Company, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of
comprehensive income in a full set of general-purpose financial statements.
Comprehensive income includes net income and other comprehensive income
which is generally comprised of changes in the fair value of available-for-
sale marketable securities, foreign currency translation adjustments and
adjustments to recognize additional minimum pension liabilities. The
Company had no accumulated other comprehensive income at December 31, 1997,
and no other comprehensive income for the six months ended June 30, 1998
and 1997.
2. MERGER PLANS
On June 24, 1998, the Company entered into a definitive agreement to merge
with Garnet Resources Corporation ("Garnet"), a publicly traded
international oil and gas exploration and production company. Garnet,
through its 99.24%-owned subsidiary, Argosy Energy International
("Argosy"), is the co-owner (55%) and operator of the Colombian joint
operations in which the Company has the remaining working interest (45%).
Garnet also holds a carried working interest in an oil and gas Production
Prospecting License in Papua New Guinea.
The proposed arrangements include Aviva refinancing Argosy's outstanding
debt to Chase Bank of Texas (approximately $6 million, net, at June 30,
1998) which is guaranteed by the U.S. Overseas Private Investment
Corporation ("OPIC"), issuing approximately 1.1 million and 12.9 million
new Aviva common shares to Garnet shareholders and Garnet debenture
holders, respectively, and canceling Garnet's $15 million of 9.5%
subordinated debentures due December 21, 1998.
The merger will be accounted for as a "purchase" of Garnet for financial
accounting purposes. Accordingly, Aviva will be the surviving entity
following the merger, which remains subject to various contingencies
including approvals by ING (U.S.) Capital Corporation ("ING Capital"),
OPIC, and shareholders of Aviva and Garnet. The proposed merger is also
subject to execution and delivery of agreements for the proposed credit
facility discussed in Note 6.
3. PROPERTY AND EQUIPMENT
Internal general and administrative costs directly associated with oil and
gas property acquisition, exploration and development activities have been
capitalized in accordance with the accounting policies
F-6
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
of the Company. Such costs totaled $19,000 for the six months ended June
30, 1998 and $70,000 for the six months ended June 30, 1997.
Unevaluated oil and gas properties totaling $282,000 and $251,000 at June
30, 1998 and December 31, 1997, respectively, have been excluded from costs
subject to depletion. The Company capitalized interest costs of $12,000
and $45,000 for the six-month periods ended June 30, 1998 and 1997,
respectively, on these properties.
The following table summarizes the write-down of the carrying amounts of
the Company's oil and gas properties as a result of ceiling limitations on
capitalized costs:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
(THOUSANDS)
Colombia........ $1,053 $11,413 $3,355 $11,413
United States... 908 -- 1,370 1,986
------ ------- ------ -------
$1,961 $11,413 $4,725 $13,399
====== ======= ====== =======
</TABLE>
The 1998 write-downs were primarily due to lower oil and gas prices. A
future decrease in the prices the Company receives for its oil and gas
production or downward reserve adjustments could result in a further
ceiling test write-down that is significant to the Company's operating
results.
4. LONG TERM DEBT
On August 6, 1993, the Company entered into a credit agreement with 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 (8.5% at June 30, 1998) plus 1% or, at the
option of the Company, a fixed rate, based on the London Interbank Offered
Rate, for a portion or portions of the outstanding debt from time to time.
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.
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.
As of June 30, 1998, the borrowing base permitted, and the outstanding loan
balance was, $7,440,000, but the Company was not in compliance with the
above-referenced tangible net worth covenant. Accordingly, on August 6,
1998, the Company entered into an agreement with ING Capital to further
amend the credit facility in order to: (i) waive the Company's non-
compliance with the tangible net worth covenant through July 1, 1999; (ii)
require the Company to consummate the merger with Garnet on or before
October 31, 1998; and (iii) provide to the Company a cash advance of
$760,000 in order to supplement the Company's existing working capital. As
compensation for making the new advance and
F-7
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
entering into the new agreement, the Company will issue to ING Capital
400,000 new shares of the Company's common stock.
5. INTEREST AND OTHER INCOME (EXPENSE)
A summary of interest and other income (expense) follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1998 1997 1998 1997
----- ------ ------ ---------
(THOUSANDS)
<S> <C> <C> <C> <C>
Gain on settlement of litigation..... $ -- $ -- $ 720 $ --
Interest income...................... 20 39 45 82
Foreign currency exchange loss....... -- (8) (2) (29)
Gain (loss) on sale of assets, net... -- -- -- (13)
Other, net........................... 6 36 8 51
----- ----- ----- -----
$ 26 $ 67 $ 771 $ 91
===== ===== ===== =====
</TABLE>
In January 1998, the Company realized a $720,000 gain on the settlement of
litigation involving the administration of a take or pay contract
settlement.
6. COMMITMENTS AND CONTINGENCIES
In the U.S., the Company is currently committed to the drilling of a
saltwater disposal well at its Breton Sound 31 field facilities in order to
comply with a state-wide prohibition against discharges of produced water
to coastal waters offshore Louisiana. The cost to drill and equip such a
well is estimated at $0.3 million, net to the Company's interest. Pursuant
to a revised produced water termination schedule approved by the Louisiana
Department of Environmental Quality, the Company has until September 1,
1998, to cease discharges of produced water. If the Company is unable to
complete the project and reinject the produced water by September 1, 1998,
the Company will be required to curtail or even cease production from its
Breton Sound leases. Additionally, the Company has recently completed
upgrades to certain equipment at its Main Pass 41 field facilities, the
remaining cost of which is expected to aggregate $0.2 million, net to the
Company's interest.
The Company, along with Argosy (referred to collectively as the "Co-
owners"), is also engaged in ongoing operations on the Santana concession
in Colombia. The contract obligations of the Santana concession have been
met. The Co-owners may, however, initiate the recompletion of certain
existing wells and various miscellaneous projects. The Company's share of
the estimated future costs of these activities is approximately $0.3
million at June 30, 1998. Depending on the results of future exploration
and development activities, substantial expenditures that have not been
anticipated may be required. Failure by the Company to fund certain of
these capital expenditures could, under either the concession agreement or
joint operating agreement with Argosy, or both, result in the forfeiture of
all or part of the Company's interest in this concession.
In addition, the Company's ability to continue its Colombian development
program is dependent upon the ability of Argosy to finance its portion of
such costs and expenses. If Argosy cannot fund its obligations, the
Company may be required to accept an assignment of Argosy'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 properties may be forfeited.
In reports filed with the U.S. Securities and Exchange Commission, which
are publicly available, Garnet has disclosed, among other things, that: (i)
Argosy is no longer in compliance with certain covenants
F-8
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
required by its finance agreement with Chase Bank of Texas which is
guaranteed by the Overseas Private Investment Corporation and secured by
Argosy's assets in Colombia; (ii) its management believes that Garnet's
available working capital and cash flows from operations will not be
sufficient to make its required debt principal and interest payments as
they become due beginning March 31, 1998; and (iii) in the absence of a
business transaction or a restructuring of Garnet's indebtedness, Garnet
may seek protection from its creditors under the Federal Bankruptcy Code.
As discussed in Note 2, the Company has entered into a definitive agreement
to merge with Garnet. Pursuant to the merger plan, Garnet's $15 million of
subordinated debentures will be canceled and Argosy's bank debt, along with
Aviva's existing bank debt, will be refinanced through a proposed $15
million credit facility that the Company has requested ING Capital to
provide to the Company. In addition to refinancing the existing bank debt
of Argosy and Aviva, this proposed new credit facility is expected to
supplement the Company's working capital and, to the extent not funded by
cash flow from operations, fund the Company's remaining estimated capital
expenditures for 1998.
Management of the Company is currently finalizing efforts to effectuate the
merger, which efforts now require only execution and delivery of the
proposed new credit facility with ING Capital. Additionally approval by
the shareholders of Aviva and Garnet is required to consummate the merger.
A Joint Proxy Statement will be provided to Shareholders for their review
and voting at Shareholder Meetings expected to be held in late September.
While management believes that the merger will be consummated substantially
as planned, there can be no assurance that this will be the case. If the
Company is unable to consummate the merger, then, in the absence of another
business transaction or debt restructuring, Garnet may seek bankruptcy
protection or other alternatives, any of which may have a material adverse
effect on Aviva's consolidated financial condition. As indicated above, if
Argosy cannot fund its obligations, the Company may be required to accept
an assignment of Argosy's interest therein and assume those funding
obligations. Aviva itself has experienced significant losses which have
resulted in recurring noncompliance with the minimum consolidated tangible
net worth covenant and its debt repayment schedule under its credit
agreement with ING Capital. Moreover, failure to consummate the merger
with Garnet on or before October 31, 1998, would be an event of default
under the recently amended credit agreement (see note 4). Without the
Garnet merger and the proposed new credit facility, management's current
cash flow analysis does not indicate that the Company would be able to make
the October 1, 1999 scheduled debt repayment under the existing ING Capital
Credit Agreement. In the past, ING Capital has amended or waived
compliance with these covenants when the Company has been unable to comply
with them. There can be no assurance, however, that ING Capital will
continue to make similar concessions in the future.
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 the
Oil Pollution Act of 1990 ("OPA 90"), 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. 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. For additional discussions on the
applicability of environmental laws and regulations and other risks that
may affect the Company's operations, see the Company's latest annual report
on Form 10-K.
F-9
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
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.
7. SUBSEQUENT EVENT
On August 3, 1998, leftist Colombian guerrillas launched a wave of bombing
attacks across Colombia. These attacks coincide with the change of
Colombian presidents and could be a show of force prior to the beginning of
formal peace negotiations with the new president.
As a result of one such attack, the Company's oil processing and storage
facilities at the Mary field were damaged, along with minor damage incurred
at the Linda facilities. While it is still too early to accurately assess
the cost of repairs, the Company does not believe that the property damage
will exceed insurance limits.
As of August 7, 1998, the Company's Colombian oil production has been
suspended for approximately five days. The Company estimates that
production from the Linda and Toroyaco fields will resume within two to
three days. Production from the Mary and Miraflor fields, however, may be
suspended or significantly curtailed for at least a few weeks, and possibly
longer depending on the extent of the damage.
F-10
<PAGE>
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
F-11
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997 and 1996
(in thousands, except number of shares)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
* 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.
F-12
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except per share data)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
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)
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(in thousands, except number of shares)
<TABLE>
<CAPTION>
Common Stock Additional Total
Number of Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
------------ ---------- ----------- -------------- ---------
<S> <C> <C> <C> <C> <C>
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
========== ====== ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -----
<S> <C> <C> <C>
United States $ 7.32 $ 5.93 $4.12
Colombia $11.59 $11.49 $9.79
</TABLE>
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
F-16
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
F-17
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
circumstances and deferred tax liabilities for the future tax consequences
of temporary differences between the financial statement carrying amounts
and the tax bases of assets and liabilities.
STATEMENT OF CASH FLOWS
The Company considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents. The Company
paid interest, net of amounts capitalized, of $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:
<TABLE>
<CAPTION>
December 31
(thousands)
1997 1996
------ -------
<S> <C> <C>
Abandonment funds for U.S. offshore properties $1,272 $ 853
Deferred financing charges 102 225
Other 4 126
------ ------
$1,378 $1,204
====== ======
</TABLE>
(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
F-18
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
(thousands)
1997 1996 1995
----------- ------- ------
<S> <C> <C> <C>
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
===== ====== =====
</TABLE>
(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):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C> <C>
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)
</TABLE>
F-19
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
Pro forma $ (0.71) $(0.03) $ (0.09)
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
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%
</TABLE>
F-20
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ---------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Fixed Options (000) Price (000) Price (000) Price
- ---------------------- ------ --------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
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 grated
during the year $ .42 $ .50 $ .72
</TABLE>
The following table summarizes information about fixed stock
options outstanding at December 31, 1997:
<TABLE>
<CAPTION>
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
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ .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
===== ==== ======= === ======= =====
</TABLE>
(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.
F-21
<PAGE>
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:
<TABLE>
<CAPTION>
(thousands)
1997 1996
----------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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 shut-
in 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, 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
F-22
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
F-23
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
have increased the cost of planning, designing, drilling, operating and
abandoning wells. In most instances, the statutory and regulatory
requirements relate to air and water pollution control procedures and the
handling and disposal of drilling and production wastes.
Although the Company believes that compliance with environmental laws and
regulations will not have a material adverse effect on the Company's
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.
(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:
F-24
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(Thousands)
United
States Colombia Total
------------- --------- -----------
<S> <C> <C> <C>
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
========
</TABLE>
F-25
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
(Thousands)
United
States Colombia Total
-------- --------- ---------
<S> <C> <C> <C>
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
=======
</TABLE>
F-26
<PAGE>
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:
<TABLE>
<CAPTION>
(Thousands)
United
States Colombia Total
------- -------- -----------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
F-27
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Costs incurred in oil and gas property acquisition, exploration and development
activities were as follows:
<TABLE>
<CAPTION>
(Thousands)
United
States Colombia Total
------ -------- -----------
<S> <C> <C> <C>
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
====== ====== ======
</TABLE>
F-28
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
SUPPLEMENTARY INFORMATION RELATED TO OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
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.
<TABLE>
<CAPTION>
Change in Estimated Quantities of Reserves
---------------------------------------------
United
States Colombia Total
------------- --------------- -----------
<S> <C> <C> <C>
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
===== ============== =====
</TABLE>
F-29
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas producing Activities
(Unauditied)(Continued)
<TABLE>
<CAPTION>
Change in Estimated Quantities of Reserves
---------------------------------------------
United
States Colombia Total
------------- -------------- ------------
<S> <C> <C> <C>
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
====== ======= ======
</TABLE>
F-30
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas producing Activities
(Unauditied)(Continued)
<TABLE>
<CAPTION>
Change in Estimated Quantities of Reserves
---------------------------------------------
United
States Colombia Total
------------- -------------- ------------
<S> <C> <C> <C>
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
====== ======= ======
</TABLE>
F-31
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas producing Activities
(Unauditied)(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.
<TABLE>
<CAPTION>
(Thousands)
----------------------------------
United
States Colombia Total
-------- --------- -----------
<S> <C> <C> <C>
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
======= ======= ========
</TABLE>
F-32
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas producing Activities
(Unauditied)(Continued)
<TABLE>
<CAPTION>
(Thousands)
-----------------------------------
United
States Colombia Total
--------- --------- -----------
<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
F-33
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas producing Activities
(Unauditied)(Continued)
The following schedule summarizes the changes in the standardized measure of
discounted future net cash flows.
<TABLE>
<CAPTION>
(Thousands)
---------------------------------
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
F-34
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
ASSETS (unaudited)
------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 466,459 $ 425,019
Restricted cash balances 282,382 1,699,231
Accounts receivable 774,573 1,476,485
Inventories 435,311 736,899
Prepaid expenses 88,759 108,577
------------ ------------
Total current assets 2,047,484 4,446,211
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties
(full-cost method)-
Proved 60,265,519 59,317,097
Unproved (excluded from
amortization) 286,279 263,908
------------ ------------
60,551,798 59,581,005
Other equipment 62,155 134,598
------------ ------------
60,613,953 59,715,603
Less - Accumulated depreciation,
depletion and amortization (54,166,983) (48,213,229)
------------ ------------
6,446,970 11,502,374
------------ ------------
OTHER ASSETS 385,873 511,863
------------ ------------
$ 8,880,327 $ 16,460,448
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-35
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Continued
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY (unaudited)
- ------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 21,301,740 $ 22,641,480
Accounts payable and accrued
liabilities 1,766,620 1,123,104
------------ ------------
Total current liabilities 23,068,360 23,764,584
------------ ------------
LONG-TERM DEBT, net of current portion - -
------------ ------------
DEFERRED INCOME TAXES - -
------------ ------------
OTHER LONG-TERM LIABILITIES 274,113 279,200
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 75,000,000
shares authorized, 11,492,162 shares
issued and outstanding as of June 30,
1998 and December 31, 1997 114,922 114,922
Capital in excess of par value 52,491,212 52,491,212
Retained earnings (deficit) (67,068,280) (60,189,470)
------------ ------------
Total stockholders' equity (14,462,146) (7,583,336)
------------ ------------
$ 8,880,327 $ 16,460,448
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-36
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- --------------------------------
1998 1997 1998 1997
------------ ------------- ------------ -----------------
<S> <C> <C> <C> <C>
REVENUES:
Oil sales $ 804,113 $ 2,169,479 $ 1,928,267 $ 5,213,480
Interest and other 109,105 39,037 166,683 108,796
----------- ------------ ----------- ------------
913,218 2,208,516 2,094,950 5,322,276
----------- ------------ ----------- ------------
COSTS AND EXPENSES:
Production 474,211 987,076 1,080,662 1,930,852
Exploration (710) 1,700 50 3,452
General and
administrative 278,768 360,907 561,089 565,815
Interest 545,453 560,086 1,118,329 1,145,217
Depreciation, depletion
and amortization 346,134 2,107,199 876,677 4,199,772
Write down of oil and
Gas properties 1,645,468 10,705,135 5,127,167 14,216,868
Foreign currency
translation gain 12,422 (24,675) (17,015) (104,761)
----------- ------------ ----------- ------------
3,301,746 14,697,428 8,746,959 21,957,215
----------- ------------ ----------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES (2,388,528) (12,488,912) (6,652,009) (16,634,939)
PROVISION FOR
INCOME TAXES 114,648 (307,494) 226,801 (561,249)
----------- ------------ ----------- ------------
NET LOSS $(2,503,176) $(12,181,418) $(6,878,810) $(16,073,690)
=========== ============ =========== ============
LOSS PER SHARE OF COMMON
STOCK (BASIC AND DILUTED) $ (.22) $ (1.06) $ (.60) $ (1.40)
=========== ============ =========== ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 11,492,162 11,492,162 11,492,162 11,492,162
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-37
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1998 1997
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(6,878,810) $(16,073,690)
Exploration costs 50 3,452
Depreciation, depletion and amortization 876,677 4,199,772
Write down of oil and gas properties 5,127,167 14,216,868
Deferred income taxes - (979,499)
Changes in components of working capital 2,089,083 311,987
Other 120,778 119,668
----------- ------------
Net cash provided by operating activities 1,334,945 1,798,558
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,119,254) (3,320,539)
(Increase) decrease in joint venture and
contractor advances (239,891) 795,375
Other 29,414 (54,447)
----------- ------------
Net cash used for investing activities (1,329,731) (2,579,611)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term borrowings 36,226 -
Cost of debt issuances - (18,789)
Repayments of debt - (496,200)
----------- ------------
Net cash (used for) provided by financing activities 36,226 (514,989)
----------- ------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 41,440 (1,296,042)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 425,019 3,058,015
----------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 466,459 $ 1,761,973
=========== ============
Supplemental disclosures of cash flow information:
Cash paid for -
Interest, net of amounts capitalized $ 361,272 $ 1,094,811
Income taxes 82,479 324,726
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
F-38
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(Unaudited)
(1) FINANCIAL STATEMENT PRESENTATION-
- --------------------------------------
The condensed consolidated financial statements include the accounts of
Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its wholly
owned subsidiaries. Garnet and its wholly owned subsidiaries are collectively
referred to as the "Company." These financial statements have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission, and include all adjustments (which consist
solely of normal recurring adjustments) which, in the opinion of management, are
necessary for a fair presentation of financial position and results of
operations. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
Company's audited consolidated financial statements and the notes thereto
included in its Form 10-K for the year ended December 31, 1997.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS
No. 130 establishes standards for reporting and display of comprehensive income
in a full set of general-purpose financial statements. Comprehensive income
includes net income and other comprehensive income which is generally comprised
of changes in the fair value of available-for-sale marketable securities,
foreign currency translation adjustments and adjustments to recognize additional
minimum pension liabilities. The Company had no accumulated other comprehensive
income at December 31, 1997 and no other comprehensive income for the six months
ended June 30, 1998 and 1997.
(2) MERGER PLANS-
- ------------------
The Company and Aviva Petroleum Inc. ("Aviva") signed an Agreement and Plan
of Merger dated June 24, 1998 (the "Merger Agreement"). Under the terms of the
Merger Agreement, Aviva will form a wholly owned subsidiary which will merge
with and into the Company. The Company will become a wholly owned subsidiary of
Aviva upon the consummation of the merger. The Company's stockholders will
receive approximately 1.1 million shares of common stock of Aviva. The Merger
Agreement also provides for the refinancing of Garnet's outstanding debt (the
"Chase Loan") to Chase Bank of Texas ("Chase") which is guaranteed by the
Overseas Private Investment Corporation ("OPIC"), an agency of the United States
Government, and the issuance of approximately 12.9 million shares of Aviva
common stock to the holders of the Company's $15 million dollars of 9 1/2%
subordinated debentures (the "Debentures") in exchange for those debentures.
The Company's stockholders will receive one (1) share of Aviva common stock
for each ten (10) shares of Garnet's common stock that they hold. The Company's
stockholders holding less than 1,000 registrant's shares or who would receive
fractional shares of Aviva common stock after the exchange will receive cash in
the amount of $0.02 for each share of the Company's common stock held. The
Company's stockholders entitled to receive Aviva common stock will be issued one
Aviva depositary share for each five (5) shares of Aviva common stock that they
receive as a result of the merger. The Aviva depositary shares trade on the
American Stock Exchange under the symbol "AVV".
Completion of the merger transaction is planned to take place during the
third quarter of this year and is subject to various contingencies including the
execution of a Definitive Credit Agreement and the approval of the transactions
contemplated by the Merger Agreement by the stockholders of Aviva and Garnet. A
Joint Proxy Statement was filed with the Securities and Exchange Commission on
Form S-4 on June 29, 1998 and will be sent to the stockholders of both companies
when it has been declared effective by the Securities and Exchange Commission.
F-39
<PAGE>
(3) LIQUIDITY AND CAPITAL RESOURCES-
- --------------------------------------
The Company is highly leveraged with $21,301,740 in current debt consisting
of (i) the Debentures due December 21, 1998 and (ii) $6,350,000 ($6,301,740 net
to Garnet) in principal outstanding under the Chase Loan to an indirect
subsidiary of Garnet, Argosy Energy International ("Argosy"), a Utah limited
partnership. Based on Argosy's first quarter 1998 financial statements, Argosy
has determined that it is no longer in compliance with certain covenants
required by the finance agreement governing the Chase Loan. In the absence of a
waiver of such covenants, either OPIC, Chase or both would have the right to
call a default under the Chase Loan, accelerate payment of all outstanding
amounts due thereunder and realize upon the collateral securing the Chase Loan.
Although Argosy may apply for a waiver, given the Company's financial position
and negative working capital balance at June 30, 1998, no assurance can be given
that such waiver will be granted or continued. Under the terms of the Chase
Loan, 75% of the proceeds from Argosy's oil sales, which are paid in U.S.
dollars are deposited into an escrow account with Chase to secure payment of the
Chase Loan. Argosy is required to maintain a minimum balance in such escrow
account equal to six months of interest, principal and other fees due under the
Chase Loan. The escrow account minimum required balance at June 15, 1998 was
$1,700,000 and the total account balance was $2,100,000. As previously stated,
Argosy was unable to pay the scheduled Chase Loan principal, interest and fees
due June 15, 1998 from its operating account. Chase and OPIC therefore,
exercised their right to withdraw such amounts totaling $1,600,000 from the
escrow account and released $200,000 to Argosy, leaving a balance of $300,000 in
the account. U. S. dollar revenues continue to be deposited into the escrow
account in an effort to bring the balance up to the required minimum as soon as
possible. Release of additional funds to Argosy will be at the sole discretion
of OPIC and Chase. No assurance can be given that OPIC will release additional
amounts sufficient to fund the Company's operations.
The Company was unable to pay interest to the debenture holders due March
31 and June 30, 1998. The Company's financial forecasts indicate that, assuming
no changes in its capital structure, working capital and cash flow from
operations, the Company will not be able to pay Debentures interest due
September 30, 1998, or pay principal and interest due under the Chase Loan on
December 15, 1998 and maintain the minimum balance in the escrow account. The
Company also does not expect working capital and cash flow from operations to be
sufficient to repay the principal amount of the Debentures at maturity or
earlier if the debenture holders call a default as a result of the non-payment
of interest. The Company must complete a restructuring transaction or
renegotiate the terms of the Debentures in order to avoid non-compliance with
its obligations to pay the Debentures. As a result, management believes there is
substantial doubt about the Company's ability to continue as a going concern. In
the absence of a business transaction or a restructuring of the Company's
indebtedness, the Company may seek protection from its creditors under the
Federal Bankruptcy Code.
(4) COLOMBIAN OPERATIONS-
- --------------------------
Through its ownership of interests in Argosy , the Company has an indirect
interest in a risk sharing contract in Colombia (the "Santana Contract") with
Empresa Colombiana de Petroleos, the Colombian national oil company
("Ecopetrol"). The Santana Contract currently entitles Argosy and Neo to
explore for oil and gas on approximately 52,000 acres located in the Putumayo
Region of Colombia (the "Santana Block"). The contract provided for a ten-year
exploration period that expired in 1997 and for a production period expiring in
2015. Argosy and Neo also had two association contracts (the "Fragua Contract"
and the "Yuruyaco Contract") with Ecopetrol. The Fragua Contract covers an
area of approximately 32,000 acres contiguous to the northern boundary of the
Santana Block (the "Fragua Block"), while the Yuruyaco Contract covers an area
of approximately 39,000 acres contiguous to the eastern boundaries of the
Santana Block and the Fragua Block (the "Yuruyaco Block"). Work obligations
under these two contracts have been met and applications to relinquish the areas
were filed with Ecopetrol. The relinquishment of the Fragua Contract has been
formally accepted by Ecopetrol and the application to relinquish the Yuruyaco
Contract is under consideration. Argosy and Neo also have the right until 2003
to explore for and produce oil and gas from approximately 77,000 acres located
in the Putumayo Region (the "Aporte Putumayo Block") pursuant to other
agreements with Ecopetrol. Argosy and Neo notified Ecopetrol in 1994 that they
intend to abandon the remaining wells and relinquish the Aporte Putumayo Block
because declining production rates made continued operation of the wells
economically unattractive. Ecopetrol is presently in discussion with another
company desirous of contracting with Ecopetrol for a new
F-40
<PAGE>
contract area that will include the Aporte Putumayo Block. Depending on the
terms of this new contract, the Company may still be obligated to pay its share
of the abandonment costs estimated to be approximately $220,000.
Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana Contract provides that Ecopetrol will receive a
royalty equal to 20% of production on behalf of the Colombian government and, in
the event a discovery is deemed commercially feasible, Ecopetrol will acquire a
50% interest in the remaining production from the field, bear 50% of the
development costs, and reimburse the joint venture, from Ecopetrol's share of
future production from each well, for 50% of the joint venture's costs of
successful exploratory wells in the field. In June 1996, cumulative oil
production from the Santana Contract exceeded seven million barrels. Under the
terms of the Santana Contract, Ecopetrol continued to bear 50% of development
costs, but its interest in production revenues and operating costs applicable to
wells on the Santana Block increased to 65%. If a discovery is made and is not
deemed by Ecopetrol to be commercially feasible, the joint venture may continue
to develop the field at its own expense and will recover 200% of the costs
thereof, at which time Ecopetrol will acquire a 65% interest therein at no cost
to Ecopetrol or further reimbursement by Ecopetrol to Argosy.
The Company's resulting net participation in revenues and costs for the
Santana Contract is as follows:
<TABLE>
<CAPTION>
PRODUCTION OPERATING EXPLORATION DEVELOPMENT
REVENUES COSTS COSTS COSTS
----------- ---------- ------------ ------------
<S> <C> <C> <C> <C>
After seven million barrels
of accumulated production 15.3% 19.1% 38.2% 27.3%
</TABLE>
The joint venture has completed its seismic acquisition and drilling
obligations for the ten-year exploration period of the Santana Contract,
resulting in the discovery of four oil fields, all of which have been declared
commercial by Ecopetrol. The joint venture has the right to continue to explore
for additional oil and gas deposits on the remaining acreage in the block, which
is held under the commercial production provisions of the Santana Contract.
Under the terms of a contract with Ecopetrol, all oil produced from the
Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the price paid
is the export price received by Ecopetrol, adjusted for quality differences,
less a handling and commercialization fee of $.515 per barrel. If Ecopetrol
does not export the oil, the price paid is based on the price received from
Ecopetrol's Cartagena refinery, adjusted for quality differences, less
Ecopetrol's cost to transport the crude to Cartagena and a handling and
commercialization fee of $.415 per barrel. Under the terms of its contract 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, Argosy has experienced
no difficulty in repatriating the remaining 75% of such payments which are
payable in United States dollars.
As general partner, the Company's subsidiary is contingently liable for any
obligations of Argosy and may be contingently liable for claims generally
related to the conduct of Argosy's business.
(5) EXPLORATION LICENSES IN PAPUA NEW GUINEA-
- ----------------------------------------------
Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of Garnet,
owned a 6% interest (the "PPL-181 Interest) in Petroleum Prospecting License No.
181 ("PPL-181") which covered 952,000 acres (the "PPL-181 Area"). Garnet PNG
also held a 7.73% interest in an adjoining license, Petroleum Prospecting
License No. 174, on which an exploratory dry hole was drilled in the first
quarter of 1996. This license was surrendered on April 25, 1997. In 1986, oil
was discovered approximately 10 miles from the northern border of the PPL-181
Area in an adjoining license area.
Under the terms of an agreement pertaining to PPL-181, Occidental
International Exploration and Production Company ("Occidental") agreed to drill
and complete at its cost, a test well on the PPL-181 Area by September 1997.
PPL-181 was owned by Occidental (88%), Garnet PNG (6%) and Niugini Energy Pty.
Limited (6%). The test well, Turama-1, was drilled in the first quarter of
1997, reaching a total depth of 9,652 feet. The
F-41
<PAGE>
well encountered the objective sands in the Jurassic-Cretaceous Imburu
formation, but evaluations of samples and electric logs indicated that the sands
were water bearing; therefore, the well was abandoned as a dry hole.
In an agreement dated November 24, 1997, among Occidental Kanau Ltd. ,
Occidental of Papua New Guinea Ltd. ("Occidental PNG"), Santos Niugini
Exploration Pty. Limited ("Santos"), Niugini Energy, Inc. and Garnet PNG ,
Garnet PNG agreed to exchange its 6% interest (the "PPL-181 Interest") in PPL-
181 for a 4% interest in a newly applied for but not yet issued petroleum
prospecting license (New PPL") covering the PPL-181 Area and Petroleum
Prospecting License No. 158 ("PPL-158") held by Occidental PNG and Santos. On
April 28, 1998, the Minister for Petroleum and Energy for the Government of
Papua New Guinea agreed in writing to the relinquishment of PPL-181and PPL-158
and to the issuance of the New PPL to be designated Petroleum Prospecting
License No. 206 ("PPL-206). It is anticipated that PPL-206 will be formally
issued during the third quarter of this year.
Upon presentation of a tax clearance certificate evidencing Garnet PNG's
compliance with the relevant provisions of Papua New Guinea's income tax laws,
profits, dividends and certain other payments, if any, up to an amount of
500,000 kina (approximately $ 224,000) per year may be fully remitted out of
Papua New Guinea. Amounts in excess of 500,000 kina may also be remitted,
subject to clearance from the Bank of Papua New Guinea.
(6) LONG-TERM DEBT-
- ---------------------
Long-term debt at June 30, 1998 and December 31, 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
9 1/2% convertible subordinated debentures $ 15,000,000 $ 15,000,000
Notes payable by Argosy to a U.S. bank 6,301,740 7,641,480
------------ ------------
21,301,740 22,641,480
Less - Current portion (21,301,740) (22,641,480)
------------ ------------
$ - $ -
============ ============
</TABLE>
In 1993, Garnet issued $15,000,000 of convertible subordinated debentures
(the "Debentures") due December 21, 1998. The Debentures bear interest at 9
1/2% per annum payable quarterly and are convertible at the option of the
holders into Garnet common stock at $5.50 per share. If the Company elects to
prepay the Debentures under certain circumstances, it will issue warrants under
the same economic terms as the Debentures. At the option of a holder, in the
event of a change of control of the Company, the Company will be required to
prepay such holder's Debenture at a 30% premium. The Debentures are secured by
a pledge of all of the common stock of Garnet's wholly owned subsidiary which
serves as the general partner of Argosy. Under the terms of an agreement with
the holders of its Debentures, Garnet has agreed that it will not pay dividends
or make distributions to the holders of its common stock. The Debentures mature
December 21, 1998; therefore, the entire balance has been classified as current
in the accompanying consolidated balance sheet. As of June 30, 1998, Garnet was
not in compliance with the minimum net worth required by the Debentures and did
not pay the quarterly interest payment due March 31 and June 30, 1998.
Additionally, the Company does not expect working capital and cash flow from
operations to be sufficient to repay the principal amount of the debentures at
maturity, therefore the Company must consummate a restructuring transaction
prior to their maturity date in order to avoid non-compliance with its
obligations to pay the Debentures. If no restructuring transaction is
consummated the Company will be required to re-negotiate the terms of the
debentures. In the absence of a business transaction or a restructuring of the
Company's indebtedness, the Company may seek protection from its creditors under
the Federal Bankruptcy Code.
In 1994, Argosy entered into a finance agreement with Overseas Private
Investment Corporation, an agency of the United States government ("OPIC"),
pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans to
Argosy, the loans were funded in two stages of $4,400,000 in August 1994 and
$4,800,000 in October 1995. The Company used these funds to drill development
wells and complete the construction of its
F-42
<PAGE>
production facilities in Colombia.
OPIC's guaranty is secured by Argosy's interest in the Santana Contract and
related assets, as well as the pledge of Garnet's direct and indirect interests
in Argosy. The terms of the guaranty agreement also restrict Argosy's ability
to make distributions to its partners, including the Company, prior to the
repayment of the guaranteed loans. The maximum term of the loans is not to
exceed seven years, and the principal amortization schedule is based on
projected cash flows from wells on the Santana Block. The loans bear interest
at the lender's Eurodollar deposit rate plus .25% per annum for periods of two,
three or six months as selected by Argosy. The interest rate at March 31, 1998
was 6.125%. In consideration for OPIC's guaranty, Argosy pays OPIC a guaranty
fee of 2.4% per annum on the outstanding balance of the loans guaranteed.
Argosy is no longer in compliance with certain covenants required by the finance
agreement governing the Chase Loan.
(7) STOCK OPTION PLANS-
- ------------------------
Garnet has adopted stock option plans (the "Employee Plans") pursuant to
which an aggregate of 1,473,000 shares of Garnet's common stock is authorized to
be issued upon exercise of options granted to officers, employees, and certain
other persons or entities performing substantial services for or on behalf of
Garnet or its subsidiaries.
The Stock Option and Compensation Committee of Garnet's Board of Directors
(the "Committee") is vested with sole and exclusive authority to administer and
interpret the Employees' Plans, to determine the terms upon which options may be
granted, to prescribe, amend and rescind such interpretations and determinations
and to grant options to directors. Current Committee members are not eligible
to receive options under the Employees' Plans.
The employee stock options are generally exercisable for a period of 10
years and 30 days from the date of grant. The purchase price of shares issuable
upon exercise of an option may be paid in cash or by delivery of shares with a
value equal to the exercise price of the option. The Committee has determined
that the right to exercise non-incentive options issued to employees vests over
a period of four years, so that 20% of the option becomes exercisable on each
anniversary of the date of grant.
On May 22, 1997, Garnet adopted the 1997 Directors' Stock Option Plan (the
"1997 Directors' Plan") pursuant to which an aggregate of 470,000 shares of
Garnet's common stock is authorized to be issued upon exercise of options
granted to non-employee directors. An aggregate of 122,950 shares was issuable
as of June 30, 1998 upon exercise of options granted thereunder in exchange,
among other things, for the surrender of 265,000 options previously granted to
such directors under the 1990 Directors' Stock Option Plan that has since been
terminated. Director's stock options are exercisable for a period of 5 years
from the date of grant. The purchase price of shares issuable upon exercise of
a director's stock option must be paid in cash.
The following is a summary of stock option activity in connection with the
Employees' Plans and the Directors' Plan:
<TABLE>
<CAPTION>
Shares Price Range
----------------- ---------------------
<S> <C> <C> <C>
Options outstanding at December 31, 1995 1,329,102 $2.50 - $13.83
Options granted 480,000 4.00 - 11.75
Options expired (630,376) 2.87 - 4.05
--------- ----------- ------
Options outstanding at December 31, 1996 1,178,726 1.19 - 13.83
Options granted 698,956 0.38 - 0.56
Options cancelled (451,080) 4.00 - 11.75
Options expired (85,372) 2.87 - 4.05
--------- ----------- ------
Options outstanding at December 31, 1997 1,341,230 0.38 - 2.50
</TABLE>
F-43
<PAGE>
<TABLE>
<S> <C> <C> <C>
Options expired (568,171) 0.38 - 0.56
--------- ------ ------
Options outstanding at June 30, 1998 773,059 $ 0.38 - $ 0.56
========= ====== ======
</TABLE>
As of June 30, 1998, options for 486,458 shares were exercisable.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 123, a new standard for
accounting for stock-based compensation. This standard established a fair-value
based method of accounting for stock options awarded after December 31, 1995 and
encourages companies to adopt SFAS No. 123 in place of the existing accounting
method, which requires expense recognition only in situations where stock
compensation plans award intrinsic value to recipients at the date of grant.
Companies that do not follow SFAS No. 123 for accounting purposes must make
annual pro forma disclosures of its effects. Adoption of the standard was
required in 1996, although earlier implementation was permitted. The Company
did not adopt SFAS No. 123 for accounting purposes; however it will make annual
pro forma disclosures of its effects.
(8) INCOME TAXES-
- ------------------
The provisions for income taxes and deferred income taxes payable relate to
the Colombian activities of Argosy. No deferred taxes were provided because the
tax bases of the Company's assets exceed the financial statement bases,
resulting in a deferred tax asset, which the Company has determined, is not
presently realizable.
As of December 31, 1997, the Company had a regular U. S. tax net operating
loss carryforward and an alternative minimum tax loss carryforward of
approximately $30,900,000 and $ 30,600,000 respectively. These loss
carryforwards will expire beginning in 2001 if not utilized to reduce U.S.
income taxes otherwise payable in future years, and are limited as to
utilization because of the occurrences of "ownership changes" (as defined in
Section 382 of the Internal Revenue Code of 1986, as amended) in 1991 and
earlier years. Such loss carryforwards also exclude regular tax net operating
loss carryforwards aggregating approximately $4,500,000 attributable to certain
of Garnet's subsidiaries, which can be used in certain circumstances to offset
taxable income generated by such subsidiaries.
(9) SUBSEQUENT EVENT-
- ---------------------
On August 3, 1998, leftist guerrilla groups launched a nation wide
offensive in Colombia. As a result of one attack, the Company's oil production
and storage facilities at the Mary field were damaged and minor damage was
inflicted on the Linda facilities. While it is too early to accurately assess
the cost of repairs, the Company does not believe the property damage will
exceed insurance limits.
As of August 10, 1998, the Company's oil production from the Linda and
Toroyaco fields had been restored. Production from the Mary and Miraflor
fields, however, may be suspended or significantly curtailed for at least
several weeks and possibly longer depending on the extent of damage and
availability of repair crews.
F-44
<PAGE>
(10) CAPITAL STOCK: NET INCOME (LOSS) PER COMMON SHARE-
A reconciliation of the components of basic and diluted net income (loss) per
common share for the three months and six months ended June 30,1998 and 1997 is
presented in the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
BASIC NET INCOME (LOSS) PER SHARE:
Net income (loss) $(2,503) $(12,181) $(6,879) $(16,074)
Less: Preferred stock
Dividends -- -- -- --
------- -------- ------- --------
Earnings (loss) available
To common shareholders $(2,503) $(12,181) $(6,879) $(16,074)
Weighted average shares of
common stock outstanding(1) 11,492 11,492 11,492 11,492
------- -------- ------- --------
Basic net income (loss)
Per share $ (.22) $ (1.06) $ (.60) $ (1.40)
======= ======== ======= ========
DILUTED NET INCOME (LOSS) PER SHARE:
Weighted average shares of
common stock outstanding (1) 11,492 11,492 11,492 11,492
Effect of dilutive securities:
Restricted stock (2) (3) -- -- -- --
Preferred stock, warrants
and stock options (2) (3) -- -- -- --
------- ------- ------- -------
Average shares of common
Stock outstanding including
dilutive securities 11,492 11,492 11,492 11,492
------- ------- ------- -------
Diluted net income (loss)
Per share $ (.22) $ (1.06) $ (.60) $ (1.40)
======= ======= ======= =======
</TABLE>
(1) Includes shares issued and outstanding plus vested restricted stock.
(2) Calculated using the treasury stock method, including unearned compensation
of restricted stock as proceeds.
(3) Amounts are not included in the computation of diluted net income (loss)
per share because to do so would have been antidilutive.
F-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Garnet Resources Corporation:
We have audited the accompanying consolidated balance sheets of Garnet
Resources Corporation (a Delaware corporation) and subsidiaries as of December
31, 1997 and 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements and the schedule referred to
below are the responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and the schedule 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 Garnet
Resources Corporation and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The financial statement schedule listed
in the index to financial statements and financial statement schedule is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic financial statements.
The financial statement schedule has been subjected to the auditing procedures
applied in our audits of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed further in Note 2 to the
consolidated financial statements, the Company incurred substantial losses in
1997 and has negative working capital and stockholders' equity at December 31,
1997. The Company's management believes that available working capital and cash
flows from operations will not be sufficient to make its required debt principal
and interest payments as they become due beginning March 31, 1998. As a result,
there is substantial doubt about the Company's ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 2 to the consolidated financial statements. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
March 20, 1998
F-46
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents.......................................................... $ 425,019 $ 3,058,015
Restricted cash balances........................................................... 1,699,231 1,049,349
Accounts receivable................................................................ 1,476,485 3,541,223
Inventories........................................................................ 736,899 901,216
Prepaid expenses................................................................... 108,577 132,199
------------ ------------
Total current assets........................................................... 4,446,211 8,682,002
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties (full-cost method):
Proved......................................................................... 59,317,097 56,500,390
Unproved (excluded from amortization).......................................... 263,908 227,846
------------ ------------
59,581,005 56,728,236
Other equipment.................................................................... 134,598 132,083
------------ ------------
59,715,603 56,860,319
Less -- Accumulated depreciation, depletion and amortization....................... (48,213,229) (17,698,898)
------------ ------------
11,502,374 39,161,421
OTHER ASSETS.......................................................................... 511,863 678,132
------------ ------------
$ 16,460,448 $ 48,521,555
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt.................................................. $ 22,641,480 $ 2,004,648
Accounts payable and accrued liabilities........................................... 1,123,104 3,323,214
------------ ------------
Total current liabilities...................................................... 23,764,584 5,327,862
LONG-TERM DEBT, net of current portion................................................ -- 21,629,232
------------ ------------
DEFERRED INCOME TAXES................................................................. -- 979,499
------------ ------------
OTHER LONG-TERM LIABILITIES........................................................... 279,200 378,054
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
75,000,000 shares authorized, 11,492,162 shares issued and outstanding as of
December 31, 1997 and 1996................................................... 114,922 114,922
Capital in excess of par value..................................................... 52,491,212 52,491,212
Retained earnings (deficit)........................................................ (60,189,470) (32,399,226)
------------ ------------
Total stockholders' equity......................................................... (7,583,336) 20,206,908
------------ ------------
$ 16,460,448 $ 48,521,555
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
REVENUES:
Oil sales........................................ $ 8,982,008 $11,446,587 $ 8,635,570
Interest......................................... 199,775 262,640 245,563
------------ ----------- -----------
9,181,783 11,709,227 8,881,133
------------ ----------- -----------
COST AND EXPENSES:
Production....................................... 3,677,603 3,410,162 3,533,572
Exploration...................................... 8,792 40,112 1,547,278
Loss (gain) on net assets held for disposition... -- 42,748 --
General and administrative....................... 941,079 652,746 1,672,501
Interest......................................... 2,294,853 2,108,346 1,491,131
Depreciation, depletion and amortization......... 4,764,036 6,334,748 4,949,682
Write down of oil and gas properties............. 25,752,034 -- --
Foreign currency translation (gain) loss......... (181,049) (25,498) (741,557)
------------ ----------- -----------
37,257,348 12,563,364 12,452,607
------------ ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES................. (28,075,565) (854,137) (3,571,474)
PROVISION (BENEFIT) FOR INCOME TAXES.............. (285,321) 1,205,760 1,051,848
------------ ----------- -----------
NET LOSS.......................................... $(27,790,244) $(2,059,897) $(4,623,322)
============ =========== ===========
NET LOSS PER COMMON SHARE-BASIC AND DILUTED....... $(2.42) $(.18) $(.40)
============ =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING............... 11,492,162 11,492,162 11,416,828
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------------- CAPITAL IN RETAINED TOTAL
NUMBER OF EXCESS OF EARNINGS STOCKHOLDERS'
SHARES AMOUNT PAR VALUE (DEFICIT) EQUITY
---------- ---------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994...................... 11,125,537 $111,255 $51,395,004 $(25,716,007) $ 25,790,252
Acquisition of partnership interests in Argosy
Energy International........................... 366,625 3,667 1,096,208 -- 1,099,875
Net loss.......................................... -- -- -- (4,623,322) (4,623,322)
---------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1995...................... 11,492,162 114,922 52,491,212 (30,339,329) 22,266,805
Net loss.......................................... -- -- -- (2,059,897) (2,059,897)
---------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1996...................... 11,492,162 114,922 52,491,212 (32,399,226) 20,206,908
Net loss.......................................... -- -- -- (27,790,244) (27,790,244)
---------- -------- ----------- ------------ ------------
BALANCE AT DECEMBER 31, 1997...................... 11,492,162 $114,922 $52,491,212 $(60,189,470) $ (7,583,336)
========== ======== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.......................................................................... $(27,790,244) $(2,059,897) $(4,623,322)
Adjustments to reconcile net loss to net cash provided by operating activities:
Exploration costs............................................................... 8,792 40,112 1,547,278
(Gain) loss on net assets held for disposition.................................. -- 42,748 --
(Gain) loss on sale of other equipment.......................................... -- 1,918 (4,970)
Depreciation, depletion and amortization........................................ 4,764,036 6,334,748 4,949,682
Write down of oil and gas properties............................................ 25,752,034 -- --
Amortization of other assets.................................................... 240,444 232,148 224,276
Deferred income taxes........................................................... (979,499) 338,580 640,919
Change in assets and liabilities:
Decrease (increase) in accounts receivable.................................... 723,856 (144,757) (673,808)
Decrease in inventories....................................................... 57,728 70,020 24,525
Decrease (increase) in prepaid expenses....................................... (3,205) 1,975 36,162
Increase (decrease) in accounts payable and accrued liabilities............... 569,712 (751,538) (586,645)
Increase (decrease) in other long-term liabilities............................ (44,522) (64,049) 134,013
Decrease (increase) in escrow account......................................... (649,882) 1,789,495 (2,838,844)
------------ ----------- -----------
Net cash provided (used) by operating activities.............................. 2,649,250 5,831,503 (1,170,734)
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil and gas properties............................................... (5,685,717) (4,145,538) (9,331,942)
Additions to other equipment...................................................... (4,254) (21,492) (6,880)
Proceeds from asset dispositions.................................................. -- 292,244 5,000
(Increase) decrease in joint venture and contractor advances...................... 1,365,960 (1,298,843) 621,225
Decrease in inventories........................................................... 106,589 15,296 300,256
Decrease in net assets held for disposition....................................... 1,749 73,798 110,683
(Increase) decrease in other assets............................................... (50,390) 25,277 24,170
Acquisition of partnership interests in Argosy Energy.............................
International, net of cash acquired............................................... -- -- (92,621)
------------ ----------- -----------
Net cash used for investing activities.......................................... (4,266,063) (5,059,258) (8,370,109)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of debt................................................... -- -- 4,754,880
Repayments of debt................................................................ (992,400) (560,998) (208,983)
Costs of debt issuances........................................................... (23,783) (27,579) (121,312)
------------ ----------- -----------
Net cash provided by (used for) financing activities............................ (1,016,183) (588,577) 4,424,585
------------ ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......................................... (2,632,996) 183,668 (5,116,258)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD................................... 3,058,015 2,874,347 7,990,605
------------ ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................................... $ 425,019 $ 3,058,015 $ 2,874,347
============ =========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest, net of amounts capitalized............................................ $ 2,186,208 $ 1,983,043 $ 1,334,676
Income taxes.................................................................... 486,296 582,047 490,624
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
---------------------------------------------------------
Nature of operations
--------------------
Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its
subsidiaries (collectively referred to as the "Company") are engaged in the
exploration, development and production of oil and gas properties located
outside the United States. The Company operates primarily in Colombia and
Papua New Guinea.
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of Garnet and
its majority-owned subsidiaries. Inter-company accounts and transactions
have been eliminated. The Company accounts for its investment in Argosy
Energy International, a limited partnership ("Argosy") in which Garnet is a
limited partner and a wholly owned subsidiary of Garnet is the general
partner (see Note 3), using the proportionate consolidation method.
Cash equivalents
----------------
Cash equivalents include highly liquid debt instruments with an initial
maturity of three months or less at the date of purchase. The Company had
no cash equivalents at December 31, 1997 and 1996.
Inventories
-----------
Inventories consist of oil field equipment, materials and supplies, and
crude oil. For presentation in the accompanying consolidated statements of
cash flows, changes in oil field equipment inventory are included as
investing activities because they relate to the Company's exploration and
development activities, while changes in other types of inventories are
included as operating activities.
Oil and gas properties
----------------------
The Company follows the full-cost method of accounting for oil and gas
properties. Under this method, all productive and nonproductive costs
incurred in connection with the exploration and development of oil and gas
reserves are capitalized in separate cost centers for each country. Such
capitalized costs include contract and concession acquisition, geological,
geophysical and other exploration work, drilling, completing and equipping
oil and gas wells, constructing production facilities and pipelines, and
other related costs. The Company also capitalizes interest costs related to
unevaluated oil and gas properties. The Company incurred total interest
costs of $2,321,613, $2,410,958, and $2,252,483 in 1997, 1996 and 1995,
respectively, of which $26,760, $302,612, and $761,352 were capitalized as
additional costs of oil and gas properties.
The capitalized costs of oil and gas properties in each cost center plus
future development costs are amortized on a composite unit-of-production
method based on future gross revenues from proved reserves. Sales or other
dispositions of oil and gas properties are normally accounted for as
adjustments of capitalized costs. Gain or loss is not recognized in income
unless a significant portion of a cost center's reserves is involved.
Capitalized costs associated with the acquisition and evaluation of
unproved 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. Unproved properties are assessed at
least annually to determine whether any impairment has occurred. If the net
capitalized costs of oil and gas properties in a cost center exceed an
amount equal to the sum of the present value of estimated future net
revenues from proved oil and gas reserves in the cost center and the costs
of properties not being
F-51
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
amortized, both adjusted for income tax effects, such excess is charged to
expense. This process resulted in a $25.8 million write down of oil and gas
properties during 1997.
Revenue recognition
-------------------
Oil and gas revenues from producing wells are recognized when the oil or
gas is sold.
Stock-based compensation
------------------------
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123"), encourages but does not require companies
to record compensation costs for stock-based employee plans at fair value.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the fair market value of Garnet's common
stock at the date of grant over the amount an employee must pay to acquire
the stock.
Net loss per share
------------------
Net loss per common share represents basic earnings per share ("EPS") as
defined in Statement of Financial Accounting Standards No. 128, "Earnings
per Share" ("SFAS No. 128"). Under SFAS No. 128, Basic EPS is calculated by
dividing the net loss, after consideration of preferred stock dividends
paid or accrued, by the weighted average number of common shares
outstanding during each period presented. Diluted EPS, as defined in SFAS
No. 128, is not presented separately as the effect of any potential common
shares on reported losses would be antidilutive. Potential common shares
for the Company include outstanding stock options.
Use of estimates
----------------
The preparation of these financial statements requires the use of certain
estimates by management in determining the Company's assets, liabilities,
revenues and expenses. Actual results may differ from these estimates.
Depreciation, depletion and amortization of oil and gas properties and the
impairment of oil and gas properties are determined using estimates of oil
and gas reserves. There are numerous uncertainties in estimating the
quantity of proved reserves and in projecting the future rates of
production and timing of development expenditures. Reference is made to the
Supplemental Oil and Gas Information for additional information regarding
the process of estimating proved reserve quantities and related cash flows.
(2) RESOURCES AND LIQUIDITY
-----------------------
A decline in the price of oil in 1997 and a decline in the rate of
production commencing in the third quarter of 1997 resulted in a 73%
decrease in the Company's estimate of discounted future net cash flows from
proved reserves at December 31, 1997 and a 22% decrease in revenues from
oil sales during 1997 compared to 1996. As a result, the Company recorded
$25.8 million of write downs of oil and gas properties during 1997,
resulting in a significant net loss during 1997 and negative stockholders'
equity at December 31, 1997.
The Company is highly leveraged with $22.6 million in current debt
consisting of (i) $15 million of 9 1/2% Convertible Subordinated Debentures
due December 21, 1998 (the "Debentures") and (ii) $7.7 million ($7.6
million net to Garnet) of an outstanding loan (the "OPIC Loan") to Argosy
from Chase Bank of Texas ("Chase") which is guaranteed by the Overseas
Private Investment Corporation ("OPIC") and secured by Argosy's assets in
Colombia and Garnet's direct and indirect interests in Argosy. Based on
Argosy's year-end financial statements, Argosy has determined that it is no
longer in compliance with
F-52
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIESNOTES TO
CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain covenants required by the finance agreement governing the OPIC
Loan. In the absence of a waiver of such covenants, either OPIC or Chase
would have the right to call a default under the OPIC Loan, accelerate
payment of all outstanding amounts due thereunder and realize upon the
collateral securing the OPIC Loan. Although Argosy intends to apply for a
waiver, and such waivers have been obtained in the past year, given the
Company's financial position and negative working capital balance at
December 31, 1997, no assurance can be given that such waiver will be
granted or continued. Under the terms of the OPIC Loan, the 75% of proceeds
from Argosy's oil sales which are paid in U.S. dollars are deposited into
an escrow account with Chase to secure payment of the OPIC Loan. Argosy is
required to maintain a minimum balance in such escrow account equal to six
months of interest, principal and other fees due under the OPIC Loan. The
escrow account minimum required balance at March 15, 1998 was $1,700,000
and the total account balance was $1,953,000. Any excess in the escrow
account over the minimum balance can be released to Argosy and used to pay
operating expenses and amounts due under the OPIC Loan. Even if OPIC grants
a waiver of the loan covenants with which Argosy is not in compliance, if
the minimum balance required in such escrow account increases, as a result
of a change in the amortization schedule or otherwise, sufficient funds may
not be available to fund the Company's operations.
The Company's financial forecasts indicate that, assuming no changes in its
capital structure, available working capital and cash flows from operations
will not be sufficient to make the interest payment due on the Debentures
on March 31, 1998, to pay principal and interest due under the OPIC Loan on
June 15, 1998 and to maintain the minimum balance in the escrow account.
The Company also does not expect working capital and cash flow from
operations to be sufficient to repay the principal amount of the Debentures
at maturity or earlier if the Debenture holders call a default as a result
of the non-payment of interest. The Company must complete a restructuring
transaction or renegotiate the terms of the Debentures in order to avoid
non-compliance with its obligations to pay the Debentures. As a result,
management believes there is substantial doubt about the Company's ability
to continue as a going concern. In the absence of a business transaction or
a restructuring of the Company's indebtedness, the Company may seek
protection form its creditors under the Federal Bankruptcy Code.
In view of its operating losses and financial condition, the Company
initiated further cost containment programs in 1997 including a 28%
reduction in its Colombian personnel and the termination of all U.S.
personnel other than Douglas W. Fry, the Chief Executive Officer, and Edgar
L. Dyes, the Chief Financial Officer. The Company also engaged Rauscher
Pierce Refsnes, Inc. as a financial advisor to provide assistance in
negotiating a business combination or a debt restructuring transaction to
address the Company's liquidity issues. Although the Company engaged in
comprehensive efforts, including extensive negotiations with two separate
candidates, the Company was not successful in concluding a transaction. The
Company is currently engaged in negotiations to effect a business
combination, although no assurance can be given that such negotiations will
result in a definitive agreement or the consummation of a transaction.
(3) COLOMBIAN OPERATIONS
--------------------
Through its ownership of interests in Argosy, the Company has an indirect
interest in a risk sharing contract in Colombia (the "Santana Contract")
with Empresa Colombiana de Petroleos, the Colombian national oil company
("Ecopetrol"). The Santana Contract currently entitles Argosy and its joint
venture partner to explore for oil and gas on approximately 52,000 acres
located in the Putumayo Region of Colombia (the "Santana Block"). The
contract provided for a ten-year exploration period, which expired in 1997
and for a production period expiring in 2015. Argosy and its joint venture
partner also have two association contracts (the "Fragua Contract" and the
"Yuruyaco Contract") with Ecopetrol. The Fragua Contract covers an area of
approximately 32,000 acres contiguous to the northern boundary of the
Santana Block (the "Fragua Block"), while the Yuruyaco Contract covers an
area of approximately 39,000 acres contiguous to the eastern boundaries of
the Santana Block and the Fragua Block (the "Yuruyaco Block"). Work
obligations under these two contracts have been met and applications to
F-53
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
relinquish the areas have been filed with Ecopetrol. Argosy and its joint
venture partner also have the right until 2003 to explore for and produce
oil and gas from approximately 77,000 acres located in the Putumayo Region
(the "Aporte Putumayo Block") pursuant to other agreements with Ecopetrol.
Argosy and its joint venture partner notified Ecopetrol in 1994 that they
intend to abandon the remaining wells and relinquish the Aporte Putumayo
Block because declining production rates have made continued operation
economically unattractive.
Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana Contract provides that Ecopetrol will
receive a royalty equal to 20% of production on behalf of the Colombian
government and, in the event a discovery is deemed commercially feasible,
Ecopetrol will acquire a 65% interest in the remaining production from the
field, bear 50% of the development costs, and reimburse the joint venture
from Ecopetrol's share of future production from each well, for 50% of the
joint venture's costs of successful exploratory wells in the field. In June
1996, cumulative oil production from the Santana Contract exceeded seven
million barrels. Under the terms of the Santana Contract, Ecopetrol
continued to bear 50% of development costs, but its interest in production
revenues and operating costs applicable to wells on the Santana Block
increased to 65%. If a discovery is made and is not deemed by Ecopetrol to
be commercially feasible, the joint venture may continue to develop the
field at its own expense and will recover 200% of the costs thereof, at
which time Ecopetrol will acquire a 65% interest therein at no cost to
Ecopetrol or further reimbursement by Ecopetrol to Argosy.
In March 1995, the Company increased its ownership in Argosy by exchanging
366,625 shares of Garnet's common stock with a value of $3.00 per share and
cash totaling $142,703 for the partnership interests held by certain of
Argosy's limited partners.
The Company's resulting net participation in revenues and costs for the
Santana Contract is as follows:
<TABLE>
<CAPTION>
PRODUCTION OPERATING EXPLORATION DEVELOPMENT
REVENUES COSTS COSTS COSTS
----------- ---------- ------------ ------------
Santana Contract:
<S> <C> <C> <C> <C>
After seven million barrels of
accumulated production 15.3% 19.1% 38.2% 27.3%
</TABLE>
The joint venture has completed its seismic acquisition and drilling
obligations for the ten-year exploration period of the Santana Contract,
resulting in the discovery of four oil fields, all of which have been declared
commercial by Ecopetrol. The joint venture has the right to continue to
explore for additional oil and gas deposits on the remaining acreage in the
block, which is held under the commercial production provisions of the Santana
Contract.
Under the terms of a contract with Ecopetrol, all oil produced from the
Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the price
paid is the export price received by Ecopetrol, adjusted for quality
differences, less a handling and commercialization fee of $.515 per barrel,
effective February 1, 1997. If Ecopetrol does not export the oil, the price
paid is based on the price received from Ecopetrol's Cartagena refinery,
adjusted for quality differences, plus or minus a sales value differential to
be determined by independent analysis, less Ecopetrol's cost to transport the
crude to Cartagena and a handling and commercialization fee of $.415 per
barrel, effective February 1, 1997. Under the terms of its contract 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, Argosy has experienced
no difficulty in repatriating the remaining 75% of such payments which are
payable in United States dollars.
As general partner, the Company's subsidiary is contingently liable for any
obligations of Argosy and may be contingently liable for claims generally
related to the conduct of Argosy's business.
(4) EXPLORATION LICENSES IN PAPUA NEW GUINEA
----------------------------------------
F-54
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Garnet PNG Corporation, a wholly owned subsidiary of Garnet ("Garnet PNG"),
owned a 6% interest (the "PPL-181 Interest") in Petroleum Prospecting License
No. 181 ("PPL-181") which covered 952,000 acres (the "PPL-181 Area"). Garnet
PNG also held a 7.73% interest in an adjoining license, Petroleum Prospecting
License No. 174, on which an exploratory dry hole was drilled in the first
quarter of 1996. This license was surrendered on April 25, 1997. In 1986, oil
was discovered approximately 10 miles from the northern border of the PPL-181
Area in an adjoining license area.
Under the terms of an agreement pertaining to PPL-181, Occidental
International Exploration and Production Company ("Occidental") agreed to
drill and complete at its cost, a test well on the PPL-181 Area by September
1997. PPL-181 was owned by Occidental (88%), Garnet PNG (6%) and Niugini
Energy Pty. Limited (6%). The test well, Turama-1, was drilled in the first
quarter of 1997, reaching a total depth of 9,652 feet. The well encountered
the objective sands in the Jurassic-Cretaceous Imburu formation, but
evaluations of samples and electric logs indicated that the sands were water
bearing; therefore, the well was abandoned as a dry hole.
In an agreement dated November 24, 1997, among Occidental Kanau Ltd.
("Kanau"), Occidental of Papua New Guinea Ltd. ("Occidental PNG"), Santos
Niugini Exploration Pty. Limited ("Santos"), Niugini Energy, Inc. ("Niugini")
and Garnet PNG Corporation ("Garnet PNG"), a wholly owned subsidiary of
Garnet, Garnet PNG agreed to exchange its 6% interest (the "PPL-181 Interest")
in Petroleum Prospecting License No. 181 ("PPL-181 Area"), for a 4% interest
in a newly applied for but not yet issued, petroleum prospecting license ("New
PPL") covering the PPL-181 Area and Petroleum Prospecting License No. 158
("PPL-158") held by Occidental PNG and Santos.
Upon presentation of a tax clearance certificate evidencing Garnet PNG's
compliance with the relevant provisions of Papua New Guinea's income tax laws,
profits, dividends and certain other payments, if any, up to an amount of
500,000 kina (approximately US$ 290,000) per year may be fully remitted out of
Papua New Guinea. Amounts in excess of 500,000 kina may also be remitted,
subject to clearance from the Bank of Papua New Guinea.
(5) LONG-TERM DEBT
--------------
Long-term debt at December 31, 1997 and 1996 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
9 1/2% convertible subordinated debentures... $ 15,000,000 $15,000,000
Notes payable by Argosy to a U.S. bank....... 7,641,480 8,633,880
------------ -----------
22,641,480 23,633,880
Less -- Current portion...................... (22,641,480) (2,004,648)
------------ -----------
$ -- $21,629,232
============ ===========
</TABLE>
In December 1993, Garnet issued $15,000,000 of Convertible Subordinated
Debentures (the "Debentures") due December 21, 1998. The Debentures bear
interest at 9 1/2% per annum payable quarterly and are convertible at the
option of the holders into Garnet common stock at $5.50 per share. If the
Company elects to prepay the Debentures under certain circumstances, it
will issue warrants under the same economic terms as the Debentures. At the
option of a holder, in the event of a change of control of the Company, the
Company will be required to prepay such holder's Debenture at a 30%
premium. The Debentures are secured by a pledge of all of the common stock
of Garnet's wholly owned subsidiary which serves as the general partner of
Argosy (see Note 3).
Under the terms of an agreement with the holders of its Debentures, Garnet
has agreed that it will not pay dividends or make distributions to the
holders of its common stock. The Debentures mature December 21, 1998;
therefore, the entire balance has been classified as current in the
accompanying consolidated balance sheet. As of December 31, 1997, Garnet
was not in compliance with the minimum net worth covenant required by the
Debentures. Additionally, the Company does not expect working
F-55
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
capital and cash flow from operations to be sufficient to repay the
principal amount of the Debentures at maturity, therefore the Company must
consummate a restructuring transaction prior to their maturity date in
order to avoid non-compliance with its obligation to pay the Debentures. If
no restructuring transaction is consummated the Company will be required to
re-negotiate the terms of the Debentures. In such event, the Company would
explore the advantages and disadvantages in seeking protection from its
creditors under Federal Bankruptcy Code.
In 1994, Argosy entered into a finance agreement with Overseas Private
Investment Corporation, an agency of the United States government ("OPIC"),
pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans
to Argosy. The loans were funded in two stages of $4,400,000 in August 1994
and $4,800,000 in October 1995. The Company used these funds to drill
development wells and construct pipelines and production facilities in
Colombia. OPIC's guaranty is secured by Argosy's interest in the Santana
Contract and related assets, as well as the pledge of Garnet's direct and
indirect interests in Argosy. The terms of the guaranty agreement also
restrict Argosy's ability to make distributions to its partners prior to
the repayment of the guaranteed loans. The maximum term of the loans is not
to exceed seven years, and the principal amortization schedule is based on
projected cash flows from wells on the Santana Block. The loans bear
interest at the lender's Eurodollar deposit rate plus .25% per annum for
periods of two, three or six months as selected by Argosy. The interest
rate at December 31, 1997 was 6.125%. In consideration for OPIC's guaranty,
Argosy pays OPIC a guaranty fee of 2.4% per annum on the outstanding
balance of the loans guaranteed. Argosy is no longer in compliance with
certain covenants required by the finance agreement governing the OPIC
Loan. See Note 2, Resources and Liquidity, for additional information.
(6) STOCK OPTION PLANS
------------------
Garnet has adopted stock option plans (the "Employee Plans") pursuant to
which an aggregate of 1,473,000 shares of Garnet's common stock is
authorized to be issued upon exercise of options granted to officers,
employees and certain other persons or entities performing substantial
services for or on behalf of Garnet or its subsidiaries.
The Stock Option and Compensation Committee of Garnet's Board of Directors
(the "Committee") is vested with authority to administer and interpret the
Employees' Plan, to determine the terms upon which options may be granted,
to prescribe, amend and rescind such interpretations and determinations and
to grant options. Current Committee members are not eligible to receive
options under the Employees' Plan.
The employee stock options are generally exercisable for a period of 10
years and 30 days from the date of grant. The purchase price of shares
issuable upon exercise of an option may be paid in cash or by delivery of
shares with a value equal to the exercise price of the option. The
committee has generally determined that the right to exercise non-incentive
options issued to employees vests over a period of four years, so that 20%
of the options become exercisable on each anniversary from the date of
grant.
On May 22, 1997, Garnet adopted the 1997 Directors' Stock Option Plan (the
"1997 Directors' Plan") pursuant to which an aggregate of 470,000 shares of
Garnet's common stock is authorized to be issued upon exercise of options
granted to non-employee directors. An aggregate of 306,975 shares was
issuable as of December 31, 1997 upon exercise of options granted
thereunder in exchange, among other things, for the surrender of 265,000
options previously granted to such directors under the 1990 Directors'
Stock Option Plan that has since been terminated. Director's stock options
are exercisable for a period of 5 years from the date of grant. The
purchase price of shares issuable upon exercise of a director's stock
option must be paid in cash.
The Company has adopted the disclosure-only provisions of SFAS 123.
Accordingly no compensation cost has been recognized for the Employee Plans
and the Directors' Plan. Had compensation cost for
F-56
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
these plans been determined based on the fair value at the grant date for
awards in 1997, 1996 and 1995 consistent with the provisions of SFAS 123,
the Company's net loss and net loss per share would have been increased to
the pro forma amounts indicated below.
<TABLE>
<CAPTION>
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Pro forma net loss............. $(27,903,082) $(2,101,716) $(5,102,286)
Pro forma net loss per share... $ (2.43) $ (.18) $ (.45)
</TABLE>
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Expected life (years)..... 5.0 5.0 4.3
Risk-free interest rate... 5.89% 6.17% 6.62%
Volatility................ 63.65% 57.00% 44.40%
Dividend.................. 0.00% 0.00% 0.00%
</TABLE>
The following is a summary of stock option activity and related information
for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- --------------------------------- ----------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES
-------------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of
year................................ 1,178,726 $2.86 1,329,102 $4.72 1,369,500
Options granted...................... 698,956 .46 480,000 1.19 618,000
Options forfeited.................... (451,080) 5.09 (336,102) 7.44 --
Options expired...................... (85,372) 1.19 (294,274) 3.31 (658,398)
---------- ----- ---------- ----- ----------
Options outstanding, end of year..... 1,341,230 $ .83 1,178,726 $2.86 1,329,102
========== ===== ========== ===== ==========
Option price range at end of year.... $.38 to $2.50 $1.19 to $13.83 $2.50 to $13.83
Options available for grant at end
of year............................. 448,270 410,774 470,398
========== ========== ==========
Weighted average fair value of
options granted
during the year..................... $.24 $.66 $ 1.19
========== ========== ==========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ------------------------------
NUMBER WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
AT DECEMBER 31, REMAINING EXERCISE AT DECEMBER EXERCISE
RANGE OF EXERCISES PRICES 1997 CONTRACTUAL LIFE PRICE 31, 1997 PRICE
- ----------------------------- ---------------- ---------------- ------------ --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
$0.375--40.438............... 490,956 4.3 years $0.42 391,766 $0.43
$0.5625...................... 630,274 7.0 years $0.56 259,606 $0.56
$2.50........................ 220,000 0.5 years $2.50 220,000 $2.50
--------- ---------------- ----- ------- -----
$0.375--42.50................ 1,341,230 $0.83 871,372
========= ===== =======
</TABLE>
(7) INCOME TAXES
------------
Income (loss) before income taxes and the provision for income taxes
consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
Income (loss) before income taxes:
Domestic.......................... $ (5,613,734) $(1,847,919) $(2,340,158)
Foreign........................... (22,461,831) 993,782 (1,231,316)
------------ ----------- -----------
$(28,075,565) $ (854,137) $(3,571,474)
============ =========== ===========
</TABLE>
Provision (benefit) for income taxes:
Foreign
F-57
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<S> <C> <C> <C>
Current.......................... $ 694,178 $ 868,344 $ 410,929
Deferred......................... (979,499) 337,416 640,919
------------ ----------- -----------
$ (285,231) $ 1,205,760 $ 1,051,848
============ =========== ===========
</TABLE>
The provisions for income taxes and deferred income taxes payable relate to
the Colombian activities of Argosy. No deferred taxes were provided in 1997
because the tax bases of the Company's assets exceed the financial
statement bases, resulting in a deferred tax asset, which the Company has
determined is not presently realizable.
The Company's net deferred income tax liabilities as of December 31, 1997
and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Deferred tax liability............. $ 27,198 $ 2,109,649
Deferred tax asset................. (12,677,641) (11,061,573)
Valuation allowance................ 12,650,443 9,931,423
------------ ------------
Net deferred tax liability... $ -- $ 979,499
============ ============
</TABLE>
Temporary differences included in the deferred tax liabilities related
primarily to property and equipment. Deferred tax assets principally
consisted of net operating loss carryforwards. The Colombian deferred tax
liability was eliminated due to a write down of oil and gas properties
during 1997, totaling $25.8 million.
As of December 31, 1997, the Company had a regular U.S. tax net operating
loss carryforward and an alternative minimum tax loss carryforward of
approximately $30,900,000 and $30,600,000 respectively. These loss
carryforwards will expire beginning in 2001 if not utilized to reduce U.S.
income taxes otherwise payable in future years, and are limited as to
utilization because of the occurrences of "ownership changes" (as defined
in Section 382 of the Internal Revenue Code of 1986, as amended) in 1991
and earlier years. Such loss carryforwards also exclude regular tax net
operating loss carryforwards aggregating approximately $4,500,000
attributable to certain of Garnet's subsidiaries, which can be used in
certain circumstances to offset taxable income generated by such
subsidiaries.
(8) FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The carrying amounts of cash and cash equivalents, accounts receivable, and
accounts payable and accrued liabilities approximate fair value because of
the short maturity of these items. The carrying amounts of notes payable by
Argosy to U.S. banks approximate fair value because the interest rates on
these instruments change with market interest rates. There are no quoted
market prices for the Debentures. Because the Debentures are convertible
into shares of Garnet's common stock, the fair value of the Debentures is
contingent on market prices for the common stock, the value of the
Company's assets, and the results of its operations. In addition the
Debentures contain unique terms, conditions, covenants and restrictions.
Consequently the Company is unable to estimate the fair value of the
Debentures.
(9) CONCENTRATION OF CREDIT RISK
----------------------------
During the years ended December 31, 1997, 1996 and 1995, all of the
Company's oil production was purchased by Ecopetrol. As of December 31,
1997 and 1996, accounts receivable included approximately $1,134,812 and
$2,866,000 respectively, from Ecopetrol. The Company believes that its oil
production could be sold to other purchasers at similar prices in lieu of
sales to Ecopetrol.
F-58
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
(10) OPERATIONS BY GEOGRAPHIC AREA
-----------------------------
The Company operates in one industry segment. Information about the
Company's operations for the years ended December 31, 1997, 1996 and 1995
by different geographic areas is shown below.
<TABLE>
<CAPTION>
OTHER
UNITED STATES COLOMBIA FOREIGN AREAS TOTAL
-------------- -------------- -------------- --------------
1997:
-----
<S> <C> <C> <C> <C>
Oil and gas sales............................ $ -- $ 8,982,008 $ -- $ 8,982,008
============= ============ ============= ============
Operating profit (loss)...................... $ -- $(25,211,665) $ (8,792) $(25,220,457)
============= ============ =============
General corporate income and expenses, net... (2,855,108)
------------
Income (loss) before income taxes............ $(28,075,565)
============
Identifiable assets.......................... $ 349,612 $ 13,985,826 $ 760 $ 14,336,198
============= ============ ============= ------------
Corporate assets:
Cash and cash equivalents............. 2,124,250
------------
Total assets................................. $ 16,460,448
============
</TABLE>
F-59
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
Other
1996: United States Columbia Foreign Areas Total
- ----- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C>
Oil and gas sales $ -- $11,446,587 $ -- $11,446,587
- -------------------------- =========== =========== =========== ===========
Operating profit (loss) $ (42,748) $ 1,701,677 $ (40,112) $ 1,618,817
=========== =========== ===========
General corporate income and expenses, net (2,472,954)
-----------
Income (loss) before income taxes $ (854,137)
===========
Identifiable assets $ 633,606 $43,780,585 $ -- $44,414,191
=========== =========== =========== -----------
Corporate assets:
Cash and cash equivalents 4,107,364
-----------
Total assets $48,521,555
===========
1995:
- -----
Oil and gas sales $ -- $ 8,635,570 $ -- $ 8,635,570
=========== =========== =========== ===========
Operating profit (loss) $ (6,476) $ 158,792 $(1,547,278) $(1,394,962)
=========== =========== ===========
General corporate income and expenses, net (2,176,512)
-----------
Income (loss) before income taxes $(3,571,474)
===========
Identifiable assets $ 937,359 $43,303,637 $ 4,841 $44,245,837
=========== =========== =========== -----------
Corporate assets:
Cash and cash equivalents 5,713,191
-----------
Total assets $49,959,028
===========
</TABLE>
The operating loss in other foreign areas represents oil and gas acquisition and
exploration costs charged to expense, of which $674,554 was in Papua New Guinea,
$798,263 was in France and $74,461 was in other countries.
F-60
<PAGE>
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL OIL AND GAS INFORMATION (UNAUDITED)
The following tables set forth information about the Company's oil and gas
producing activities pursuant to the requirements of SFAS No. 69 "Disclosures
About Oil and Gas Producing Activities."
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
CAPITALIZED COSTS:
- ------------------
Proved properties...................................... $ 59,317,097 $ 56,500,390
Unproved properties.................................... 263,908 227,846
------------ ------------
59,581,005 56,728,236
Accumulated depreciation, depletion and amortization... (48,115,622) (17,610,628)
------------ ------------
Net capitalized costs.................................. $ 11,465,383 $ 39,117,608
============ ============
</TABLE>
As of December 31, 1997 and 1996, all capitalized costs pertained to oil and gas
properties in Colombia.
The Company's investment in oil and gas properties as of December 31, 1997
includes $263,908 in unevaluated properties which have been excluded from
amortization. Such costs will be evaluated in future periods based on
management's assessment of exploration activities, expiration dates of licenses,
permits and concessions, changes in economic conditions and other factors.
<TABLE>
<CAPTION>
Other
-------------
Columbia Foreing Areas Total
------------ ------------- ------------
YEAR ENDED DECEMBER 31, 1997:
- -----------------------------
<S> <C> <C> <C>
Property acquisition:
Proved properties..................................... $ -- $ -- $ --
Unproved properties................................... -- 760 760
Exploration............................................. 308,239 -- 308,239
Development............................................. 2,543,770 -- 2,543,770
------------ ----------- ------------
Total costs incurred.................................... $ 2,852,009 $ 760 $ 2,852,769
============ =========== ============
YEAR ENDED DECEMBER 31, 1996:
- -----------------------------
Property acquisition:...................................
Proved properties..................................... $ -- $ -- $ --
Unproved properties................................... -- 5,258 5,258
Exploration............................................. 1,257,150 34,854 1,292,004
Development............................................. 4,829,074 -- 4,829,074
------------ ----------- ------------
Total costs incurred.................................... $ 6,086,224 $ 40,112 $ 6,126,336
============ =========== ============
YEAR ENDED DECEMBER 31, 1995:...........................
- --------------------------------------------------------
Property acquisition:...................................
Proved properties..................................... $ 1,590,943 $ -- $ 1,590,943
Unproved properties................................... -- 61,361 61,361
Exploration............................................. 1,439,406 502,544 1,941,950
Development............................................. 6,229,286 -- 6,229,286
------------ ----------- ------------
Total costs incurred.................................... $ 9,259,635 $ 563,905 $ 9,823,540
============ =========== ============
</TABLE>
F-61
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------
RESULTS OF OPERATIONS 1997 1996 1995
--------------------- ------------ ----------- ----------
<S> <C> <C> <C>
Revenues................................................ $ 8,982,008 $11,446,587 $8,635,570
Expenses:
Production costs...................................... 3,677,603 3,410,162 3,533,572
Depreciation, depletion and amortization.............. 4,764,036 6,323,999 4,936,955
Write down of oil and gas properties.................. 25,752,034 -- --
------------ ----------- ----------
34,193,673 9,734,161 8,470,527
Results of operations before income taxes............... (25,211,665) 1,712,426 165,043
Provision for income taxes.............................. -- 710,657 70,638
Results of operations from oil and gas
producing activities.................................. $(25,211,665) $1,001,769 $ 94,405
------------ ----------- ----------
Sales price per barrel.................................. $ 17.39 $ 19.82 $ 16.39
Production costs per barrel............................. 7.12 5.91 6.71
Depreciation, depletion and amortization per dollar of
oil and gas revenues (excluding write down of oil
and gas properties)................................... .53 .55 .57
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, all of the Company's
oil and gas producing operations were located in Colombia.
During 1997, 1996 and 1995 the Company also charged to expense a total of
$8,792, $40,112 and $1,547,278 respectively, of acquisition and exploration
costs pertaining to its activities in other foreign areas.
Oil and Gas Reserve Quantities
Proved reserves represent estimated quantities of crude oil and natural gas
which geological and engineering data demonstrate to be reasonably recoverable
in the future from known reservoirs under existing economic and operating
conditions. Proved developed reserves can be expected to be recovered through
existing wells with existing equipment and operating methods.
Estimates of proved and proved developed oil and gas reserves are subject to
numerous uncertainties inherent in the process of developing the estimates
including the estimation of the reserve quantities and estimated future rates of
production and timing of development expenditures. The accuracy of any reserve
estimate is a function of the quantity and quality of available data and of
engineering and geological interpretation and judgment. Results of drilling,
testing and production subsequent to the date of the estimate may justify
revision of such estimate. Additionally, the estimated volumes to be
commercially recoverable may fluctuate with changes in prices of oil and natural
gas.
Estimates of the Company's proved reserves and related valuations, as shown in
the following tables were developed pursuant to SFAS No. 69. Huddleston & Co.,
Inc. provided estimates of future recoverable oil reserves and projected future
net revenues. The Company's proved reserves were comprised entirely of crude oil
in Colombia, and are stated in barrels.
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Proved developed and undeveloped reserves:
Beginning of year..................... 3,415,909 3,942,231 4,626,883
Revisions of previous estimates....... (1,109,268) 51,106 (377,493)
Production............................ (516,543) (577,428) (526,834)
Purchases of reserves in place....... -- -- 219,675
---------- --------- ---------
End of year......................... 1,790,098 3,415,909 3,942,231
========== ========= =========
Proved undeveloped reserves at end of year... -- 980,824 2,002,811
Proved developed reserves at end of year..... 1,790,098 2,435,085 1,939,420
</TABLE>
F-62
<PAGE>
The following tables present the standardized measure of discounted future net
cash flows relating to proved oil and gas reserves and the changes in the
standardized measure of discounted future net cash flows. Future cash inflows
and costs were computed using prices and costs in effect at the end of the
applicable year without escalation. Future income taxes were computed by
applying the appropriate statutory income tax rate to the pretax future net cash
flows reduced by future tax deductions and net operating loss carryforwards.
Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Future cash inflows........................................ $25,617,420 $77,207,720 $69,343,840
Future costs:
Production........................................... 9,348,337 13,778,938 18,021,679
Development.......................................... 395,643 3,513,309 5,264,508
----------- ----------- -----------
Future net cash flows before income taxes.................. 15,873,440 59,915,473 46,057,653
Future income taxes........................................ 961,636 6,010,111 4,232,095
----------- ----------- -----------
Future net cash flows...................................... 14,911,804 53,905,362 41,825,558
10% discount factor........................................ 3,430,104 10,755,572 11,151,677
----------- ----------- -----------
Standardized measure of discounted future net cash flows... $11,481,700 $43,149,790 $30,673,881
=========== =========== ===========
</TABLE>
Changes in Standardized Measure of Discounted Future Net Cash Flows
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Standardized measure, beginning of year.......................... $ 43,149,790 $30,673,881 $32,434,723
Increases (decreases)
Sales, net of production costs............................. (5,304,405) (8,036,425) (5,101,998)
Net change in sales prices, net of production costs........ (25,277,345) 14,139,910 1,578,689
Changes in estimated future development costs.............. 1,346,106 (1,111,112) (1,749,979)
Development costs incurred during the year that reduced future
development costs.......................................... 1,751,409 3,310,248 4,994,019
Revisions of quantity estimates.................................. (9,310,817) 2,540,160 (9,003,192)
Accretion of discount............................................ 4,808,672 3,359,280 3,702,993
Net change in income taxes....................................... 4,116,800 (2,018,011) 1,676,288
Purchases of reserves in place................................... -- -- 1,758,109
Changes in production rates (timing) and other................... (3,798,510) 291,859 384,229
------------ ----------- -----------
Standardized measure of year..................................... $ 11,481,700 $43,149,790 $30,673,881
============ =========== ===========
</TABLE>
The standardized measure of discounted future net cash flows does not purport to
present the fair market value of the Company's proved reserves. An estimate of
fair value would also take into account, among other things, the recovery of
reserves in excess of proved reserves, anticipated future changes in prices and
costs and a discount factor more representative of the time value of money and
the risks inherent in reserve estimates.
63
F-63
<PAGE>
SCHEDULE I
GARNET RESOURCES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
--------
CURRENT ASSETS:
Cash............................................................................... $ 164,092 $ 86,119
Accounts receivable................................................................ 28,116 494,261
Prepaid expenses................................................................... 27,330 24,124
------------ ------------
Total current assets........................................................... 219,538 604,504
------------ ------------
INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES........................................... 6,988,613 34,427,950
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment............................................................ 72,255 69,928
Less -- Accumulated depreciation................................................... (47,116) (41,731)
------------ ------------
25,139 28,197
------------ ------------
OTHER ASSETS.......................................................................... 205,784 309,497
------------ ------------
$ 7,439,074 $ 35,370,148
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current portion of long-term debt.................................................. $ 15,000,000 $ --
Accounts payable and accrued liabilities........................................... 22,410 163,240
------------ ------------
15,022,410 163,240
LONG-TERM DEBT........................................................................ -- 15,000,000
------------ ------------
OTHER LONG-TERM LIABILITIES........................................................... -- --
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
75,000,000 shares authorized, 11,492,162 shares issued and outstanding as of
December 31, 1997 and 1996................................................... 114,922 114,922
Capital in excess of par value..................................................... 52,491,212 52,491,212
Retained earnings (deficit)........................................................ (60,189,470) (32,399,226)
------------ ------------
Total stockholders' equity......................................................... (7,583,336) 20,206,908
------------ ------------
$ 7,439,074 $ 35,370,148
============ ============
</TABLE>
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.
F-64
<PAGE>
SCHEDULE I
GARNET RESOURCE CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
INTEREST INCOME....................................... $ 6,378 $ 140,732 $ 519,630
------------ ----------- -----------
COSTS AND EXPENSES:
Exploration.......................................... -- 1,775 798,263
General and administrative........................... 1,256,948 1,134,107 1,953,436
Interest............................................. 1,712,745 1,243,668 819,134
Depreciation......................................... 7,114 8,273 5,874
------------ ----------- -----------
2,976,807 2,387,823 3,576,707
------------ ----------- -----------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS (LOSSES) OF
SUBSIDIARIES......................................... (2,970,429) (2,247,091) (3,057,077)
EQUITY IN EARNINGS (LOSSES) OF SUBSIDIARIES........... (24,819,815) 187,194 (1,566,245)
------------ ----------- -----------
NET LOSS.............................................. $(27,790,244) $(2,059,897) $(4,623,322)
============ =========== ===========
</TABLE>
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.
F-65
<PAGE>
SCHEDULE I
GARNET RESOURCES CORPORATION
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1996 1995
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,790,244) $ (2,059,897) $ (4,623,322)
Equity in (earnings) loss of subsidiaries 24,819,815 (187,194) 1,566,245
Exploration costs -- 1,775 798,263
Depreciation 7,114 8,273 5,874
Changes in components of working capital 99,923 (378,881) 159,500
Other 154,103 89,927 213,309
------------ ------------ ------------
Net cash used for operating activities (2,709,289) (2,525,997) (1,880,131)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances from (to) subsidiaries 2,619,522 (161,156) (6,131,388)
Capital expenditures (54,446) (25,929) (132,902)
Loans repaid by Argosy Energy International 222,186 1,710,518 2,353,784
------------ ------------ ------------
Net cash provided by (used for) investing activities 2,787,262 1,523,433 (3,910,506)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used for financing activities -- -- --
------------ ------------ ------------
NET (DECREASE) INCREASE CASH 77,973 (1,002,564) (5,790,637)
CASH AT BEGINNING OF PERIOD 86,119 1,088,683 6,879,320
------------ ------------ ------------
CASH AT END OF PERIOD $ 164,092 $ 86,119 $ 1,088,683
============ ============ ============
</TABLE>
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in Item 8 of Part II.
F-66
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Article 2.02-1 of the TBCA and the Aviva Charter, each current and
former director and officer of a Texas corporation, or each person who served at
the request of the corporation as a director or officer of a subsidiary of the
corporation, shall be indemnified by the corporation for liabilities imposed
upon him, expenses reasonably incurred by him in connection with any claim made
against him, or any action, suit or proceeding to which he may be a party by
reason of being or having been a director or an officer, and for any reasonable
settlement of any such claim, action, suit or proceeding. The TBCA provides
that a corporation may undertake any indemnification of a director or officer
only if it is determined that such person (i) conducted himself in good faith,
(ii) reasonably believed that, in the case of conduct in his official capacity
as a director, that his conduct was in the corporation's best interests, and in
all other cases, that his conduct was at least not opposed to the corporation's
best interests, and (iii) in the case of any criminal proceeding, had no
reasonable cause to believe his conduct was unlawful. In addition, a
corporation must indemnify a director against reasonable expenses incurred by
him in connection with a proceeding in which he is a named defendant because he
is or was a director if he has been wholly successful in the defense of the
proceeding. The Aviva Charter authorizes the indemnification of persons who
become parties to any threatened, pending or completed action, suit or
proceeding by reason of the fact that such person is or was a director, officer,
employee or agent of Aviva or is or was serving at the request of Aviva as a
director, officer, employee or agent of another corporation, partnership, or
other enterprise against expenses and damages incurred thereby.
The TBCA further provides that Texas corporations may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of such corporation for any liability asserted against him, whether or not
the corporation would have the power to indemnify him against liability under
the TBCA. Section 39 of the Bylaws provides that Aviva may maintain insurance,
at its own expense, to protect itself and any director, officer, employee or
agent of Aviva or of another entity against any expense, liability or loss,
regardless of whether Aviva would have the power to indemnify such person
against such expense, liability or loss under the TBCA.
Under article 1302-7.06 of the Texas Civil Statutes, the articles of
incorporation may provide that a director of the corporation shall not be
liable, or shall be liable only to the extent provided in the articles of
incorporation, to the corporation or its shareholders for an act or omission in
the director's capacity as director, except that the articles of incorporation
must not eliminate or limit the liability of a director to the extent the
director is found liable for (1) a breach of the director's duty of loyalty to
the corporation or its shareholders; (2) an act or omission not in good faith
that constitutes a breach of duty of the director to the corporation or an act
or omission that involves intentional misconduct or a knowing violation of the
law; (3) a transaction from which the director received an improper benefit,
whether or not the benefit resulted from an action taken within the scope of the
director's office; or (4) an act or omission for which the liability of a
director is expressly provided by an applicable statute. The Aviva Charter
contains provisions that limit the liability of directors of Aviva to the extent
allowable under this law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
2.1* Agreement and Plan of Merger dated as of June 24, 1998 by and among
Aviva Petroleum Inc., Aviva Merger Inc. and Garnet Resources
Corporation.
2.2* Debenture Purchase Agreement dated as of June 24, 1998 between Aviva
Petroleum Inc. and the Holders of the Debentures named therein.
2.3# Form of Bank Credit Facility between ING (U.S.) Capital Corporation
and Neo Energy, Inc.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
3.1* Restated Articles of Incorporation of Aviva Petroleum Inc. dated July
25, 1995 (filed as exhibit 3.1 to the 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 Aviva Petroleum Inc., as amended (filed
as exhibit 3.2 to the Annual Report on Form 10-K for the year ended
December 31, 1994, File No. 0-22258, and incorporated herein by
reference).
4.1* Deposit Agreement dated September 15, 1994 between Aviva Petroleum
Inc. and ChaseMellon Shareholder Services, L.L.C. (filed as exhibit
10.29 to the Registration Statement on Form S-1, File No. 33-82072,
and incorporated herein by reference).
5.1+ Opinion of Vinson & Elkins L.L.P. regarding the legality of the
securities.
23.1+ Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
23.2+ Consent of KPMG Peat Marwick LLP (Aviva).
23.3+ Consent of Arthur Andersen LLP (Garnet).
23.4+ Consent of Netherland, Sewell & Associates, Inc.
23.5+ Consent of Huddleston & Co., Inc.
99.1* Powers of Attorney (set forth on signature page).
99.2+ Form of Aviva Proxy.
99.3+ Form of Garnet Proxy.
99.4+ Consent of Robert Cresci as a Person About to Become a Director.
</TABLE>
__________
+ Filed herewith.
* Previously filed.
# To be filed by Amendment.
Financial Statement Schedules:
The Financial Statement Schedules of Garnet Resources Corporation have been
included as part of this Registration Statement.
ITEM 22. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total
II-2
<PAGE>
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
Provided, however, that paragraphs (i) and (ii) do not apply if the registration
statement is on Form S-3 or Form S-8 and the information required to be included
in a post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in the
registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
(4) That, for the purpose of determining any liability under the Securities
Act of 1933, each filing of the Registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof;
(5) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 20 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. If a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 20th day of August, 1998.
AVIVA PETROLEUM INC.
By: /s/ RONALD SUTTILL
------------------------------
Ronald Suttill
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 20th day of August, 1998.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ RONALD SUTTILL
- ------------------
Ronald Suttill President, Chief Executive
Officer, and Director
/s/ JAMES L. BUSBY* Treasurer, Secretary and
- -------------------
James L. Busby Principal Financial and
Accounting Officer
/s/ EUGENE C. FIEDOREK* Director
- -----------------------
Eugene C. Fiedorek
/s/ JOHN J. LEE* Director
- ----------------
John J. Lee
/s/ ELLIOTT ROOSEVELT, JR.* Director
- ---------------------------
Elliott Roosevelt, Jr.
/s/ JAMES E. TRACEY* Director
- --------------------
James E. Tracey
* By /s/ Ronald Suttill, Attorney-in-fact
-------------------------------------
Ronald Suttill
</TABLE>
II-4
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------ -----------------------
<S> <C>
2.1* Agreement and Plan of Merger dated as of June 24, 1998 by and among
Aviva Petroleum Inc., Aviva Merger Inc. and Garnet Resources
Corporation.
2.2* Debenture Purchase Agreement dated as of June 24, 1998 between Aviva
Petroleum Inc. and the Holders of the Debentures named therein.
2.3# Form of Bank Credit Facility between ING (U.S.) Capital Corporation
and Neo Energy, Inc.
3.1* Restated Articles of Incorporation of Aviva Petroleum Inc. dated
July 25, 1995 (filed as exhibit 3.1 to the 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 Aviva Petroleum Inc., as amended
(filed as exhibit 3.2 to the Annual Report on Form 10-K for the year
ended December 31, 1994, File No. 0-22258, and incorporated herein
by reference).
4.1* Deposit Agreement dated September 15, 1994 between Aviva Petroleum Inc.
and ChaseMellon Shareholder Services, L.L.C. (filed as exhibit 10.29 to
the Registration Statement on Form S-1, File No. 33-82072, and
incorporated herein by reference).
5.1+ Opinion of Vinson & Elkins L.L.P. regarding the legality of the
securities.
23.1+ Consent of Vinson & Elkins L.L.P. (set forth in Exhibit 5.1).
23.2+ Consent of KPMG Peat Marwick LLP (Aviva).
23.3+ Consent of Arthur Andersen LLP (Garnet).
23.4+ Consent of Netherland, Sewell & Associates, Inc.
23.5+ Consent of Huddleston & Co., Inc.
99.1* Powers of Attorney (set forth on signature page).
99.2+ Form of Aviva Proxy.
99.3+ Form of Garnet Proxy.
99.4+ Consent of Robert Cresci as a Person About to Become a Director.
</TABLE>
__________
+ Filed herewith.
* Previously filed.
# To be filed by Amendment.
<PAGE>
EXHIBIT 5.1
[VINSON & ELKINS L.L.P LETTERHEAD]
WRITER'S TELEPHONE WRITER'S FAX NUMBER
(214) 220-7700 (214) 999-7700
August 20, 1998
Aviva Petroleum Inc.
8235 Douglas Avenue
Suite 400
Dallas, Texas 75225
Ladies and Gentlemen:
We have acted as counsel for Aviva Petroleum Inc., a Texas corporation (the
"Company"), in connection with the registration under the Securities Act of 1933
(the "Securities Act"), of up to 1,149,216 shares (the "Shares") of common
stock, without par value (the "Common Stock"), of the Company pursuant to the
Company's Registration Statement on Form S-4 filed with the Securities and
Exchange Commission (the "Commission") on June 30, 1998 (the "Registration
Statement").
In reaching the opinions set forth herein, we have examined and are
familiar with originals or copies, certified or otherwise, of such documents and
records of the Company and such statutes, regulations and other instruments as
we have deemed necessary or advisable for purposes of this opinion, including
(i) the Registration Statement, (ii) the Restated Articles of Incorporation of
the Company, as filed with the Secretary of State of the State of Texas, (iii)
the Bylaws of the Company and (iv) the Agreement and Plan of Merger dated as of
June 24, 1998 among the Company, Aviva Merger Inc., a Delaware corporation, and
Garnet Resources Corporation, a Delaware corporation (the "Merger Agreement").
We have assumed that (i) all information contained in all documents
reviewed by us is true, correct and complete, (ii) all signatures on all
documents reviewed by us are genuine, (iii) all documents submitted to us as
originals are true and complete, (iv) all documents submitted to us as copies
are true and complete copies of the originals thereof, and (v) all persons
executing and delivering originals or copies of documents examined by us were
competent to execute and deliver such documents.
Based on the foregoing and having due regard for the legal considerations
we deem relevant, we are of the opinion that the Shares, when issued in
accordance with the Merger Agreement, will be validly issued by the Company,
fully paid and non-assessable.
This opinion is limited in all respects to the laws of the State of Texas
and the federal laws of the United States of America.
This opinion letter may be filed as an exhibit to the Registration
Statement. Consent is also given to the reference to us under the caption
"Legal Matters" in the Registration Statement, and in the Prospectus included in
the Registration Statement, as having passed on the validity of the Shares. In
giving this consent, we do not thereby admit that it comes within the category
of persons whose consent is required under Section 7 of the Securities Act or
the rules and regulations of the Commission promulgated thereunder.
Very truly yours,
/s/ VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP
The Board of Directors
Aviva Petroleum Inc.
We consent to the use of our reports included herein and to the references to
our firm under the headings "Selected Historical Consolidated Financial
Information" and "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Dallas, Texas
August 20, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
August 17, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the filing of this Consent as an exhibit to the
Registration Statement on Form S-4 of Aviva Petroleum Inc. to be filed with the
Securities and Exchange Commission on or about August 20, 1998. We also consent
to the use of our name therein and the inclusion of or reference to our reports
effective January 1, 1996; January 1, 1997; and January 1, 1998, and the
information contained therein in "Business and Properties of Aviva -- Properties
- -- Reserves and Future Net Cash Flows" in the Registration Statement, and to the
reference to our firm under the heading "Experts" in the prospectus.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
-------------------------
Frederic D. Sewell
President
Dallas, Texas
August 19, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
August 20, 1998
Aviva Petroleum Inc.
8235 Douglas Ave., Suite 400
Dallas, Texas 75225
Dear Sirs:
We hereby consent to the filing of this consent as an exhibit to the
Registration Statement on Form S-4 of Aviva Petroleum Inc. to be filed with the
Securities and Exchange Commission on or about August 20, 1998, to the use of
our name therein, and to the inclusions of or reference to our reports of
estimated future reserves and revenues effective January 1, 1996; January 1,
1997; and January 1, 1998, and the information contained therein in "Business
and Properties of Aviva -- Properties -- Reserves and Future Net Cash Flows" in
the Registration Statement, and to the reference to our firm under the heading
"Experts" in the Registration Statement.
HUDDLESTON & CO., INC.
\s\ Peter D. Huddleston
--------------------------
Peter D. Huddleston, P.E.
President
<PAGE>
EXHIBIT 99.2
PROXY
AVIVA PETROLEUM INC.
PROXY FOR 1998 SPECIAL MEETING, IN LIEU OF ANNUAL MEETING
OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Ronald Suttill and James L. Busby, and
either of them, proxies or proxy with full power of substitution and revocation
as to each of them, to represent the undersigned and to act and vote, with all
powers which the undersigned would possess if personally present, at the Special
Meeting of Stockholders of Aviva Petroleum Inc. to be held at Vinson & Elkins
L.L.P., 2001 Ross Avenue, Suite 3800, Dallas, Texas, at 10:00 a.m. on September
29, 1998, on the following matters and in their discretion on any other matters
which may come before the meeting or any adjournments thereof. Receipt of
Notice-Joint Proxy Statement/Prospectus dated ____________, 1998, is
acknowledged.
(Continued and to be signed on reverse side)
FOLD AND DETACH HERE
<PAGE>
Please mark
your vote as [X]
indicated in
this example
To vote in accordance with the Board of Directors' recommendations just sign
below; no boxes need to be checked.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR ITEMS 1, 2 AND 3.
Item 1--Proposal to issue shares of Common Stock pursuant to the Agreement and
Plan of Merger among the Company, a wholly owned subsidiary of the Company and
Garnet Resources Corporation.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 2--Election of Directors
FOR ALL NOMINEES WITHHOLD NOMINEES:
LISTED TO THE RIGHT AUTHORITY
(EXCEPT AS MARKED TO THE CONTRARY) TO VOTE FOR ALL RONALD SUTTILL AND
NOMINEES EUGENE C. FIEDOREK
LISTED TO THE RIGHT
[ ] [ ]
(Instruction: To withhold authority to vote for an individual nominee write that
nominee's name on the space provided below.)
- -----------------------------
Item 3--Proposal for ratification of selection of independent public accountants
for the Company for 1998.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 4--In their discretion, upon such other business incident to the conduct of
the meeting as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED.
IN THE ABSENCE OF SUCH DIRECTION THE PROXY WILL BE VOTED FOR THE NOMINEES LISTED
IN ITEM 2 AND FOR THE PROPOSALS SET FORTH IN ITEMS 1 AND 3.
I PLAN TO ATTEND THE MEETING [ ]
Signature Signature Date
-------------------- --------------------- ----------------
NOTE: PLEASE SIGN AS NAME APPEARS HEREON. JOINT OWNERS SHOULD EACH SIGN. WHEN
SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE AS SUCH.
FOLD AND DETACH HERE
<PAGE>
EXHIBIT 99.3
PROXY
GARNET RESOURCES CORPORATION
PROXY FOR 1998 SPECIAL MEETING OF STOCKHOLDERS
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints Douglas Fry and Edgar L. Dyes, and either
of them, proxies or proxy with full power of substitution and revocation as to
each of them, to represent the undersigned and to act and vote, with all powers
which the undersigned would possess if personally present, at the Special
Meeting of Stockholders of Garnet Resources Corporation to be held at 201 South
Main, Suite 1800, Salt Lake City, Utah at 10:00 a.m. September 29, 1998, on the
following matter and in their discretion on any other matters incident to the
conduct of the meeting which may come before the meeting or any adjournments
thereof.
(Continued and to be signed on the reverse side)
FOLD AND DETACH HERE
<PAGE>
Please mark
your vote as [X]
indicated in
this example
To vote in accordance with the Board of Directors' recommendations just sign
below; no boxes need to be checked.
The Board of Directors Recommends a Vote FOR item 1.
Item 1--Proposal to adopt the Agreement and Plan of Merger, dated as of June
24, 1998, among the Company, Aviva Petroleum Inc. and a wholly owned subsidiary
of Aviva Petroleum Inc.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Item 2--In their discretion, upon such other business incident to the conduct
of the meeting as may properly come before the meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED.
IN THE ABSENCE OF SUCH DIRECTION THE PROXY WILL BE VOTED FOR THE PROPOSAL SET
FORTH IN ITEM 1.
Signature Signature Date
-------------------- --------------------- ----------------
NOTE: PLEASE SIGN AS NAME APPEARS HEREON. JOINT OWNERS SHOULD EACH SIGN. WHEN
SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE
FULL TITLE AS SUCH.
FOLD AND DETACH HERE
<PAGE>
EXHIBIT 99.4
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I HEREBY CONSENT TO BEING NAMED AS A PERSON ABOUT TO BECOME A DIRECTOR TO
THE BOARD OF DIRECTORS OF AVIVA PETROLEUM INC., A TEXAS CORPORATION, IN ITS
REGISTRATION STATEMENT ON FORM S-4 AND ANY AMENDMENTS THERETO FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION.
\S\ ROBERT CRESCI
-------------------
ROBERT CRESCI
DATED: AUGUST 20, 1998
