EXHIBIT 16(a)
AVIVA PETROLEUM INC.
8235 Douglas Avenue, Suite 400
Dallas, Texas 75225
Notice of Special Meeting of Shareholders
To Be Held on May , 2003
To the Shareholders:
NOTICE IS HEREBY GIVEN that a special meeting of shareholders of Aviva Petroleum Inc. (the “Company”) will be held at the offices of Vinson & Elkins L.L.P., 2001 Ross Ave., Suite 3800, Dallas, Texas 75201, on May , 2003, at 10:00 a.m. (local time) for the following purposes:
| 1. | To amend the articles of incorporation of the Company to effect a share consolidation of 5,000 common shares to one common share for the purpose of reducing the number of shareholders to fewer than 500 and enabling the Company to go private; and |
| 2. | to transact such other business as may properly come before the meeting or any adjournment thereof. |
The Board of Directors has fixed April , 2003, as the record date for the determination of the shareholders entitled to notice of and to vote at the meeting or any adjournment thereof, and only shareholders of record at the close of business on that date are entitled to notice of and to vote at the meeting.
A copy of the Company’s 2002 Annual Report on Form 10-K is available free of charge on the SEC’s website at www.sec.gov or by contacting us at (214) 691-3464.
You are cordially invited to attend the special meeting. Regardless of whether you plan to attend the special meeting, it is important that your shares be represented. Accordingly, please complete, date and sign the enclosed proxy and return it promptly.
By Order of the Board of Directors,
Ronald Suttill
President
YOUR VOTE IS IMPORTANT
TO ENSURE A QUORUM, PLEASE COMPLETE AND RETURN THE PROXY WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED KINGDOM OR THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING IN PERSON, YOUR PROXY WILL BE RETURNED TO YOU UPON REQUEST MADE TO THE SECRETARY OF THE SPECIAL MEETING.
THE PROPOSALS INCLUDED IN THE ATTACHED PROXY STATEMENT ARE IMPORTANT. IF YOU ARE IN ANY DOUBT AS TO WHAT ACTION TO TAKE YOU SHOULD CONSULT APPROPRIATE INDEPENDENT ADVISORS.
PROXY STATEMENT
Special Meeting of Shareholders
To Be Held on May , 2003
This proxy statement and accompanying form of proxy are furnished in connection with the solicitation of proxies by the board of directors of Aviva Petroleum Inc., a Texas corporation (the “Company”), to be voted at a special meeting of shareholders to be held on May , 2003, at 10:00 a.m. (local time) at the offices of Vinson & Elkins L.L.P., 2001 Ross Ave., Suite 3800, Dallas, Texas, 75201, or any adjournment or postponement thereof, for the following purposes:
| 1. | To amend the articles of incorporation of the Company to effect a share consolidation of 5,000 common shares to one common share for the purpose of reducing the number of shareholders to fewer than 500 and enabling the Company to go private; and |
| 2. | to transact such other business as may properly come before the meeting or any adjournment thereof. |
A proxy in the accompanying form, that is properly executed, duly returned to the Company and not revoked, will be voted in accordance with the instructions contained in the proxy. If no instructions are given with respect to any matter specified in the Notice of Special Meeting to be acted upon at the special meeting, the person or persons named in the proxy will vote the shares represented thereby:
| • | In favor of Item 1 as set forth under “Share Consolidation Proposal” below; and |
| • | if any other business is brought before the meeting, in accordance with the judgment of the persons voting those shares. |
Each shareholder who has executed a proxy and returned it to the board of directors may revoke the proxy by notice in writing to the Secretary of the Company or by attending the special meeting in person and requesting the return of the proxy, in either case at any time prior to the voting of the proxy. Presence at the special meeting does not in itself revoke the proxy. The cost of the solicitation of proxies will be paid by the Company. In addition to the solicitation of proxies by the use of the mails, management and regularly engaged employees of the Company may, without additional compensation therefor, solicit proxies on behalf of the Company by personal interviews, telephone, telefax or other appropriate means.
This proxy statement and the accompanying proxy are being sent on or about , 2003, to shareholders of record as of the close of business on the record date.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the transaction proposed herein or determined whether this proxy statement is truthful or complete. The SEC has not passed upon the fairness or merits of the transaction contemplated hereby or upon the accuracy or adequacy of the information contained in this proxy statement. Any representation to the contrary is a criminal offense.
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Summary Term Sheet
This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. We structured this section in a question-and-answer format so that it will be easier to understand. For a more complete description of the terms and conditions of the amendment to our articles of incorporation resulting in the share consolidation, you should carefully read this entire document, the attachments and any other documents to which we refer.
Why is the Company proposing a share consolidation?
The market capitalization of our Company is approximately $ 0.9 million, based on the closing market price per share of our stock on the OTC Bulletin Board® of $0.02 on April 9, 2003. The board of directors of the Company has estimated that the out-of-pocket expenses of complying with the Company’s reporting obligations under the Securities Exchange Act (the “Exchange Act”) for the current calendar year will exceed $ 100,000, exclusive of management and other indirect costs. The board has concluded that those expenses are excessive in comparison to the benefits of public ownership available to a company with a market capitalization as small as ours.
The objective of the board is to eliminate our Exchange Act compliance costs by terminating our Exchange Act reporting obligations. We are not now eligible to do so, but we will become eligible if the number of our shareholders is reduced to fewer than 500. The board has approved an amendment to our charter (the “Charter Amendment”) that will:
| • | effect a consolidation of the outstanding common stock on the basis of 5,000 existing shares for one new share; and |
| • | provide for the purchase of fractional shares resulting from the share consolidation for cash. |
(We refer to the combination of the consolidation of outstanding common shares and the payments for fractional shares in this proxy statement as the “Share Consolidation.”)
The board anticipates that, after paying cash for the fractional interests of those holders who previously held less than 5,000 existing shares, the number of our shareholders of record will be reduced to fewer than 500. That fact will render the Company eligible to “go private” by terminating its reporting obligations under the Exchange Act. The board has authorized the officers of the Company under those circumstances to effect the filing under the Exchange Act that will terminate our reporting obligations thereunder. For more information on the reasons for and the effects of the Charter Amendment, see “Share Consolidation Proposal—Purpose and Reasons for the Share Consolidation” below.
What does “going private” mean?
Under the Exchange Act, a company with less than $10 million in assets for the past three fiscal years and fewer than 500 shareholders of record may terminate its reporting obligations under the Exchange Act. The Company has had $3.5 million or less in assets for the last three fiscal years. After the Share Consolidation is completed, we expect to have fewer than 500 shareholders of record and to be able to terminate registration of our stock under the Exchange Act. As a private company:
| • | We will no longer be required to file annual, quarterly and other reports with the SEC. |
| • | Our stock will no longer be eligible for listing on the OTC Bulletin Board® or other stock exchanges, and there will be no public market for our stock. At present, our stock is traded thinly, if at all, on the OTC Bulletin Board® under the symbol “AVVP.” |
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The impact, including the effect on you, of taking the Company private is discussed below under the captions “Share Consolidation Proposal—Purpose and Reasons for the Share Consolidation” and “—The Impact of the Share Consolidation on the Shareholders.”
What will I receive if the Share Consolidation is approved?
If the Charter Amendment is approved by the shareholders and implemented:
| • | Each share of existing common stock will be exchanged for 1/5,000 of a share of new common stock. |
| • | No fractional shares will be issued. Instead, after aggregating the number of full new shares of each shareholder of record, we will purchase that shareholder’s fractional shares for $0. per share of stock now outstanding. The closing market price per share of our stock on the OTC Bulletin Board® was $0. on April , 2003. This transaction will not involve commissions or other transaction fees that would be charged if you sold your shares on the open market. We estimate that we will pay an aggregate of approximately $65,000 to the Company’s shareholders for their fractional shares. We estimate that approximately 91% of our shareholders will only have fractional shares after the Share Consolidation, and therefore those shareholders will receive only cash and no longer own any of our stock. |
The issuance of new shares and purchase of fractional shares is described below under the captions “Share Consolidation Proposal—Structure of Share Consolidation” and “—Exchange of Stock Certificates and Payment for Fractional Shares.”
Does the board of directors believe that the Share Consolidation is fair?
Yes, our board believes that the Charter Amendment, including the Share Consolidation, is fair to and in the best interests of the Company and all of our shareholders. In reaching this conclusion, the board considered, among other things:
| • | the matters discussed under “Share Consolidation Proposal—Purpose and Reasons for the Share Consolidation;” |
| • | the current financial position of the Company and its available sources of liquidity; |
| • | the business and financial prospects for the Company; |
| • | the continuing costs of compliance with the Company’s reporting obligations under the Exchange Act; |
| • | the current and historical market prices for our common stock and the liquidity of the market for that common stock; |
| • | the available financial and corporate alternatives to share consolidation, including liquidation and dissolution and bankruptcy; and |
| • | the effects of the Share Consolidation on those shareholders who will receive only a cash payment, on those shareholders who will receive new shares and on all unaffiliated shareholders as a group. |
The reasons that the board believes the Share Consolidation to be fair, and the methodology the board used to determine the purchase price for fractional shares, are described below under the caption “Share Consolidation Proposal—Fairness of the Share Consolidation.”
Who is entitled to vote?
Shareholders as of the close of business on April , 2003, the record date, are entitled to vote at the special meeting. Each share of common stock is entitled to one vote. Shareholder voting is discussed below under the caption “The Special Meeting—Voting at the Meeting.”
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How do I vote?
Each shareholder should sign and date the enclosed proxy card and return it to us in the prepaid envelope. Unless contrary instructions are indicated on the proxy, all shares represented by valid proxies received pursuant to this solicitation will be voted in favor of the Charter Amendment. Of course, if you specify a different choice by means of the enclosed proxy, your shares will be voted in accordance with your specifications. The voting process is described below under the caption “The Special Meeting—Voting at the Meeting.”
What vote is required to amend the articles of incorporation?
The affirmative vote of the holders of at least a majority of the outstanding shares of our common stock is required to approve the Charter Amendment that would effect the Share Consolidation. The representation in person or by proxy of one-third of the outstanding shares of stock entitled to vote is necessary to provide a quorum at the meeting. The required vote is further discussed below under the caption “The Special Meeting—Voting at the Meeting.”
What should I do if I hold my shares in “street name”?
If you do not own your stock in your name but instead hold shares through a nominee, such as a bank or broker, you should contact your nominee to determine how the Share Consolidation will affect you. The treatment of shares held in “street name” is discussed below under the captions “Share Consolidation Proposal—Exchange of Stock Certificates and Payment for Fractional Shares.”
Do I have appraisal or dissenter’s rights?
There are no appraisal rights for any shareholder who dissents from approval of the proposed Share Consolidation under applicable Texas law or our governing documents. The lack of appraisal rights is discussed below under the caption “Share Consolidation Proposal—Appraisal Rights.”
What are the tax implications of the Share Consolidation?
The receipt of a cash payment instead of a fractional share of our common stock will result in a taxable gain or loss to the holder for federal income tax purposes. Other than the cash payments for fractional shares, no gain or loss should be recognized by a shareholder upon the exchange of existing shares for post-consolidation shares. For more information, see “Share Consolidation Proposal—Important Federal Income Tax Consequences of the Share Consolidation.”
Forward-Looking Statements
This proxy statement contains forward-looking statements. The words “believe,” “expect,” “anticipate,” “estimate,” “project,” and similar expressions identify forward-looking statements that speak only as of the date of this proxy statement. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. Future events and actual results could differ materially from those made in, contemplated by, or underlying the forward-looking statements. For these reasons, do not place undue reliance on any forward-looking statements included in this proxy statement.
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The Special Meeting
General
This proxy statement is furnished to shareholders of Aviva Petroleum Inc. in connection with the solicitation of proxies for use at a special meeting of shareholders and at any postponement or adjournment thereof. The special meeting will be held at the offices of Vinson & Elkins LLP, 2001 Ross Avenue, Suite 3800, Dallas, Texas 75201 on May , 2003 at 10:00 a.m., local time.
The special meeting is being held for the purposes set forth in the accompanying notice of special meeting of shareholders. The close of business on April , 2003 is the record date for the determination of shareholders entitled to notice of, and to vote at, the special meeting. This proxy statement and the notice of special meeting of shareholders are being provided to shareholders beginning on or about , 2003. The Company, a Texas corporation, has its principal executive offices at 8235 Douglas Avenue, Suite 400, Dallas, Texas 75225.
Solicitation of Proxies and Revocability
The Company’s board of directors is soliciting proxies for use at the special meeting. The cost of printing and distributing this proxy statement and the notice of special meeting of shareholders will be borne by the Company. Brokerage houses and nominees will be requested to supply lists of or forward the information materials to beneficial owners.
If you properly sign, return and do not revoke your proxy, the person named as proxy will vote your shares of common stock according to the instructions you have specified on the proxy card. If you sign and return your proxy card but do not specify how the person appointed as proxy is to vote your shares, your proxy will be voted FOR proxy Proposal 1: The approval of an amendment to the Company’s articles of incorporation to consolidate the outstanding common stock on the basis of 5,000 existing shares for one new share and in accordance with the best judgment of the person appointed as proxy as to all other matters properly brought before the special meeting. You may revoke your proxy by delivering to the Secretary of the Company, at the Company’s address shown above, either a written revocation of your proxy or a duly executed proxy bearing a later date or by attending the special meeting and voting in person.
Voting at the Meeting
As of the record date, there were 46,900,132 shares of the Company’s common stock outstanding. Each share of our common stock is entitled to one vote. The shareholders present in person or by proxy at the meeting will constitute a quorum if they hold an aggregate of at least one-third of the outstanding shares of our stock. A shareholder who submits a properly executed proxy card will be considered part of the quorum. In order to approve the Charter Amendment, the holders of a majority of the outstanding shares or our stock must vote in favor of its adoption. As a consequence of the difference between these quorum and approval requirements, if more than one-third but less than a majority of the outstanding shares attend the meeting in person or by proxy, the Charter Amendment will not be approved. Shareholders as of the close of business on April , 2003, the record date set by the board, are entitled to notice of, and to vote at, the meeting and any adjournments or postponements of the meeting.
In order to be represented at the meeting, you should sign and date the enclosed proxy card and return it to us in the prepaid envelope. Unless contrary instructions are indicated on the proxy, all shares represented by valid proxies received pursuant to this solicitation will be voted in favor of the Charter Amendment. Of course, if you specify a different choice by means of the enclosed proxy, your shares will be voted in accordance with your specifications. You may also attend the meeting and vote in person, even if you have already returned a proxy.
Both abstentions and broker non-votes are treated as shares present at the meeting for quorum purposes but otherwise as shares as to which voting power has been withheld. Accordingly, both abstentions and broker non-votes will have the effect of votes against the Charter Amendment. (A broker non-vote occurs when a broker holding stock in “street name” indicates on the proxy that the broker does not have discretionary authority to vote on a matter and has not received instructions from the beneficial owner of the stock.)
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By approving this proposal, the shareholders authorize the board to implement the Charter Amendment by filing an amendment to our articles with the Texas Secretary of State’s office within ten business days following the proposal’s approval at the meeting. Based on the Share Consolidation ratio and the record ownership of our stock on the record date, we estimate that the Share Consolidation would reduce the number of outstanding shares from 46,900,132 shares to approximately 9,000 shares.
Shareholder Proposals
Any shareholder may submit a proposal to be considered for inclusion in the proxy statement for our next annual meeting of shareholders. We must, however, receive the proposal in writing at our principal executive offices at 8235 Douglas Avenue, Suite 400, Dallas, Texas 75225 at least 30 days before we begin to print and mail our proxy materials for the annual meeting.
According to our bylaws, the anticipated date of our annual meeting of shareholders for the current year would be July ,2003. If the proposal to be considered at the special meeting is adopted, we expect to terminate our reporting obligations under the Exchange Act prior to that date. Accordingly, the proxy solicitation rules under the Exchange Act would not apply to any solicitation of proxies for that annual meeting. We have not yet set a date for our next annual meeting, and we will not do so until after the special meeting of shareholders.
Share Consolidation Proposal
Summary
In late 2002, members of our board (consisting solely of Ronald Suttill and Robert J. Cresci) began to consider seriously the advantages of taking the Company private. Beginning in March 2003, our management initiated discussions with our legal counsel regarding the mechanics and anticipated effects of a possible share consolidation. Having reviewed the matter in several informal telephone conferences during the first quarter of 2003, the directors, at a formal meeting of the board on April 11, 2003, adopted a resolution, subject to shareholder approval, that our charter should be amended to effect a 5,000-to-one share consolidation of our common stock, with the result that each share of existing common stock would be exchanged for 1/5,000 of a share of “new” common stock. Other than the effect of the proposed amendment on the number of shares outstanding and held by each shareholder, there would be no differences between the respective rights, preferences or limitations of the existing stock and the new stock.
Nature of the Charter Amendment
General. At a meeting of the board held on April 11, 2003, the board adopted resolutions approving the Charter Amendment, directing that it be submitted to the shareholders for their consideration at a special meeting called for that purpose and directing that the amendment, if approved by the shareholders, be filed with the Texas Secretary of State in accordance with applicable Texas law. The Charter Amendment provides for the Share Consolidation.
Share Consolidation. If implemented, the Charter Amendment will effect the Share Consolidation by consolidating the outstanding shares of common stock held by each holder of record on the effective date of the Charter Amendment on the basis of one new share for every 5,000 currently existing shares. The Charter Amendment provides that no fractional shares will be issued. In lieu thereof, the Company will purchase the fractional shares for cash on the basis of $0. for each existing share of common stock. Our board has determined that the fair value of our stock is $0. per share. Please see “—Fairness of the Share Consolidation” below for a discussion of how the board reached this conclusion.
Issuance of new certificates evidencing post-consolidation shares of common stock and payment for fractional new shares will be made promptly after receipt of properly completed letters of transmittal and stock certificates. Please see “—Exchange of Stock Certificates and Payment for Fractional Shares” below for additional information about the exchange process. You will not be required to pay a service charge in connection with the exchange of your certificates or in connection with the payment of cash for your fractional shares.
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The following table presents a summary of the effect of the Share Consolidation on our shareholders. Please note that shareholders whose shares are registered in their own names are referred to as “registered shareholders.” Please see “ – Structure of Share Consolidation” below for additional details.
If you are a… | then you will receive… | |
registered shareholder who owns 5,000 shares of stock | one whole share of new common stock. | |
registered shareholder who owns more than 5,000 shares of stock | one or more shares of new stock on a 5,000-for-one basis, with a cash payment of $0.0 for each of your existing shares that would otherwise result in fractional new shares. | |
registered shareholder who owns fewer than 5,000 shares of stock | a cash payment of $0.0 for each of your existing shares. | |
shareholder who holds stock in “street name” through a nominee, such as a bank or broker, then | you should contact your nominee before the meeting to determine how the Share Consolidation will affect you. |
Background
The Company 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. The Company was incorporated in 1973 and the common stock, without par value, of the Company currently trades on the OTC Bulletin Board®, or the OTCBB, under the symbol “AVVP”. The Company’s principal executive offices are located in Dallas, Texas.
The Company is the owner of a 29.6196% interest in Argosy Energy International (“Argosy”), a Utah limited partnership that holds and operates the Company’s Colombian properties. The general partner rights and a 70% partnership interest in Argosy are held by Crosby Capital, LLC pursuant to a transaction effected in connection with a June 2000 debt restructuring. The remaining limited partnership interests are held by individual investors.
Argosy is contractually required to drill an exploratory well by October 2003. In order to have funds available to drill the proposed well, beginning in June 2002 Argosy, pursuant to a decision of its general partner, elected to accumulate all excess cash in Colombia from current sales revenues. Accordingly, we will likely not receive any cash distributions from Argosy until after the proposed well has been drilled. Even if such an exploratory well is successful, we may be required to contribute additional funds to equip and complete such a well prior to the resumption of cash distributions.
Our only source of net cash from operating activities, other than Argosy, is our U.S. operations, which recorded a loss of approximately $1,629,000 for 2002, and may continue to incur net losses in the foreseeable future. Moreover, the U.S. properties are experiencing operational difficulties that could result in the surrender of the leases and the requirement to abandon the property at a cost of approximately $0.9 million to the Company.
Accordingly, if distributions from Argosy do not resume and the Company is not able to generate additional cash from investing or financing activities, the Company’s liquidity will continue to deteriorate. These factors raise substantial doubt concerning our ability to continue operating as a going concern. For more details regarding these liquidity concerns, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”
Last summer, NASDAQ announced that the OTCBB will be phased out and replaced by a new, more rigorous market, the BBXSM (Bulletin Board Exchange). The BBX will bring listing standards more in line with the NASDAQ National and SmallCap Markets, but it will not require the financial or minimum share price standards of these markets. Although the new BBX rules have not been finalized, we do not currently meet the proposed BBX requirements in several respects. We do not have the required market maker, nor do we meet the audit committee, code of conduct or shareholder meeting requirements. Although we cannot estimate the cost to qualify for listing on the BBX, we believe it would be significant.
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On July 30, 2002, President Bush signed the far-reaching Sarbanes-Oxley Act. This new law makes significant changes in corporate governance and disclosure requirements for public companies. The Sarbanes-Oxley Act imposes strict disclosure requirements regarding internal controls, audit oversight and audit procedures. We do not believe that we have adequate full-time financial personnel to meet our SEC disclosure requirements on an ongoing timely basis. We also do not currently comply with suggested audit committee, independence and code of conduct standards. The SEC is currently in the process of promulgating final rules relating to additional new standards for publicly-listed companies. We believe it would be difficult for us to meet all of the new Sarbanes-Oxley requirements without hiring additional personnel and obtaining legal and accounting assistance. Although we cannot accurately determine the costs of implementing controls to timely meet these new requirements, we believe they would be significant.
Since the beginning of the year, in light of the Company’s weak financial position and the limited public market for our stock, our directors have on several occasions discussed various means of enhancing shareholder value. Among the matters discussed were a merger or consolidation of the Company with another, a sale of all or substantially all of the Company’s assets and a sale of all the outstanding capital stock of the Company. The directors concluded that none of those prospects was likely and thus focused on other alternatives, including the possibility of a “going private” transaction. During those discussions, the directors discussed the Company’s alternatives to going private, primarily liquidation and bankruptcy, and determined that neither of these options would be in the best interest of the shareholders of the Company. In this regard, see “—Fairness of the Share Consolidation.” Management expressed its view that neither the Company nor its shareholders derive significant benefit from our being a public company. We would incur considerable cost to maintain our status as a public company and, as discussed above, we may be unable to comply fully with the recently enacted Sarbanes-Oxley Act. Our directors considered the advantages and disadvantages of being a public company and directed management to conduct a cost and feasibility study of going private.
Our CFO consulted with legal counsel and learned that taking the Company private could be accomplished by a share consolidation, with cash being paid for fractional shares that result from the share consolidation. Management reviewed the Company’s stock records and determined that a 5,000-for-one share consolidation would have the probable effect of reducing the number of registered shareholders below 500, which would allow us to terminate the Exchange Act registration of our stock. In addition, the directors recognized that too large a number of shareholders can be awkward for a private company and entail many of the costs (in connection with distributing annual financial statements, for example) that the board wished to avoid. Our board determined that the Share Consolidation would be the most effective manner by which to become eligible to terminate our public company reporting obligations under the Exchange Act. Consequently, the board approved the Charter Amendment as a means of implementation of the Share Consolidation.
As of April , 2003, we had approximately 4,300 registered shareholders. Approximately 4,100 of these shareholders hold fewer than 5,000 shares. In the aggregate, these shareholders hold less than 4% of our stock.
Purpose and Reasons for the Share Consolidation
The purpose of the Share Consolidation is to reduce the number of our registered shareholders to allow us to terminate registration of our stock under the Exchange Act. A company with less than $10 million in assets over the past three fiscal years and fewer than 500 shareholders may terminate its reporting obligations under the Exchange Act. We estimate that the purchase of fractional shares following the share consolidation will reduce the number of our registered shareholders to approximately .
Our board recommends that you approve the Share Consolidation proposal to achieve this goal for the reasons described below.
| • | We have sustained substantial losses, including losses in cash flow from operations, over the past year and may continue to do so in the foreseeable future. These losses, both in the results of operations and in cash flow, together with the suspension of distributions by Argosy, have adversely affected our liquidity. Our weak financial condition is reflected in the market price of our stock and the lack of a liquid market for our stock. Under these circumstances, we can no longer justify the considerable expenses that we incur as a publicly reporting company. Compliance with the periodic reporting and proxy solicitation requirements under the Exchange Act entails significant direct and indirect costs. Examples of direct costs relating to those requirements include: attorney’s and auditor’s fees; printing and mailing costs; miscellaneous clerical and other expenses (e.g., word processing, EDGARizing and telephone and fax charges associated with SEC filings); and the charges of brokers and transfer agents in forwarding materials to shareholders. Examples of indirect compliance costs include executive time expended to prepare and review required SEC filings. We estimate that our direct compliance costs for 2003 would exceed $100,000, broken down as follows: independent auditor’s fees - $50,000; legal counsel’s fees - $20,000; transfer agent costs - $45,000; printing and EDGARization expenses - $15,000; and miscellaneous costs and expenses - $10,000. Our indirect compliance costs are difficult to estimate but are likely to increase because of the additional requirements of the Sarbanes-Oxley Act. We believe these costs are material for a small company like ours and that going private will allow us to avoid these additional costs. |
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| • | The principal advantage to the Company of its status as a publicly reporting company is access to the capital markets for the purposes of raising equity capital and making acquisitions for stock. When we were a larger company and our stock traded at substantially higher prices, the additional costs associated with being a publicly-reporting company were acceptable in light of the benefits thereby conferred. With the substantial decline in our stock price and in its liquidity, we are effectively denied access to the public capital markets, thereby eliminating our principal benefit of public ownership. Given our current financial condition and the present regulatory environment, the costs of remaining a public company, in the board’s judgment, far outweigh any potential future benefit from remaining subject to the reporting obligations of the Exchange Act. |
| • | The Share Consolidation will also allow our small shareholders to liquidate their holdings of our stock at a fair value without typical transaction costs. Transaction costs for the public sale of small blocks of stock (assuming a buyer is available) significantly reduce the liquidity of the shares, since in most cases these transaction costs represent a large percentage of the value of the shares, particularly for a stock, such as ours, priced at less than ten cents. |
| • | For our shareholders who own more than 5,000 shares, reducing a large number of small shareholders (approximately 91% of the existing shareholders) will result in savings to the Company by reducing the administrative costs of providing annual reports, proxy information and other shareholder services. |
After taking into account all of the benefits and disadvantages of the Company’s registration under the Exchange Act at present, the board has concluded that the continued monetary and human resource expense of such registration is unjustified given our inability to take effective advantage of the principal benefit of public registration, which is access to the public debt and equity capital markets.
Specific Charter Amendment Proposal
Our board of directors adopted the following resolution at a meeting of the directors held on April 11, 2003:
Resolved, that, upon approval thereof by the holders of the Company’s outstanding shares of common stock, without par value, in accordance with the applicable provisions of the Texas Business Corporation Act and the amended and restated articles of incorporation of the Company, the president and the secretary of the Company be and they hereby are authorized and directed, subject to the reservation of the right and power of the board of directors of the Company to rescind this resolution if so required, in its sole determination, by the fiduciary duties of the board of directors, to cause the amended and restated articles of incorporation of the Company to be further amended by amending Article Four thereof so as to be and read in its entirety as follows:
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ARTICLE FOUR
The aggregate number of shares that the corporation shall have authority to issue is 348,500,000, all of which shares shall be without par value (the “Common Stock”).
Effective upon the filing of articles of amendment to the corporation’s articles of incorporation in accordance with the Texas Business Corporation Act, each five thousand (5,000) issued and outstanding shares of previously authorized common stock of the corporation (the “prior shares”) shall thereby and thereupon be consolidated into one (1) validly issued, fully paid and nonassessable share of Common Stock (a “resulting share”). Each certificate that theretofore represented prior shares shall thereafter represent the number of resulting shares into which such number of the prior shares as was evenly divisible by five thousand (5,000) represented by such certificate shall be consolidated;provided, however,that each person holding of record a stock certificate or certificates that represented prior shares shall receive, upon surrender of such certificate or certificates, a new certificate or certificates evidencing and representing the number of resulting shares to which such person is entitled, and provided, further, that the Corporation shall not issue fractional shares with respect to the consolidation. To the extent that a shareholder holds a number of prior shares not evenly divisible by five thousand (5,000), such shareholder shall be entitled to receive cash for each fractional share interest resulting from the consolidation on the basis of an amount equal to the average of the Market Prices for each of the 20 trading days immediately preceding the record date for determination of shareholders of the Company entitled to vote on this amendment for each pre-consolidation share of common stock. For this purpose, Market Price means, for each such trading day, the closing sale price, if any, per share of common stock of the Company on the OTC Bulletin Board®.
The board subsequently adopted other resolutions calling the special meeting of shareholders and directing that the Charter Amendment be submitted to our shareholders for their consideration at the special meeting.
If the Charter Amendment is approved by the shareholders at the special meeting, the board may nevertheless, in the exercise of its fiduciary duties, rescind its authorizing resolution with the result that the Charter Amendment will not be implemented. While the board regards the likelihood of the exercise of this right and power as remote, it reserved that right and power in either of the following circumstances:
| • | Because of the possibility of trading in our stock pending effectuation of the Share Consolidation, there is no assurance that effectuation of the Charter Amendment will result in our having fewer than 500 shareholders. Although we believe it to be only a remote possibility, if as a result of trading more than 500 shareholders would remain after effectuation of the Charter Amendment, we would have expended the cash necessary to purchase the fractional shares resulting from the Share Consolidation but nevertheless be unable to terminate the registration of our stock under the Exchange Act. |
| • | Any other circumstances that would cause the directors to determine, in the exercise of their fiduciary duties, that going private is not then in the best interests of the Company and its shareholders. We do not currently foresee any such circumstances. |
If we are unable or choose not to terminate our registration, we will continue to be subject to the Exchange Act, with all of the attendant costs.
Action of the Board
Our board of directors (consisting solely of Ronald Suttill, our President and Chief Executive Officer, and Robert J. Cresci) considered and evaluated a number of matters prior to determining to approve the proposed Charter Amendment. In reaching the above determinations, the board considered the following matters:
| • | the matters discussed under “Purpose and Reasons for the Share Consolidation;” |
| • | the current financial position of the Company and its available sources of liquidity; |
| • | the business and financial prospects of the Company; |
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| • | the continuing costs of compliance with the Company’s reporting obligations under the Exchange Act; |
| • | the current and historical market prices for our common stock and the liquidity of the market for that common stock; |
| • | the available financial and corporate alternatives to share consolidation, including liquidation and dissolution and bankruptcy; and |
| • | the effects of the share consolidation on those shareholders who will receive only a cash payment, on those shareholders who will receive new shares and on all unaffiliated shareholders as a group. |
While each of these considerations was evaluated carefully by the board, the most important factors in its decision to approve the share consolidation were: the current financial position of the Company and its available sources of liquidity, the continuing costs of compliance with the Company’s reporting obligations under the Exchange Act and the effects of the share consolidation on each group of our shareholders.
After considering the above matters, the board has unanimously approved the share consolidation and recommends that you vote for its approval and adoption.
Fairness of the Share Consolidation
General. The board of directors (consisting solely of Ronald Suttill, our President and Chief Executive Officer, and Robert J. Cresci) unanimously believe that
Ÿ the Share Consolidation proposal is procedurally and substantively fair to and in the best interests of the Company and its shareholders;
Ÿ the Share Consolidation proposal is, specifically, procedurally and substantively fair to those shareholders who will receive only a cash payment, to those shareholders who will receive new shares and to all unaffiliated shareholders as a group; and
Ÿ the process by which the Share Consolidation was proposed and approved by the board is fair.
Specific Fairness Issues. In its deliberations, the board evaluated each of the following specific issues of fairness with respect to the Charter Amendment and, in particular, the Share Consolidation:
Cashed-Out Shareholders. The board believed that the principal substantive fairness issue relating to those shareholders who hold less than 5,000 pre-consolidation shares and will receive only cash in the Share Consolidation is adequacy of price.
The Charter Amendment provides that the price to be paid for fractional shares of post-consolidation shares of common stock is equal to $0.0 times the number of pre-consolidation shares of common stock represented by such post-consolidation fractional share. That price equals the average daily Market Price per share of pre-consolidation common stock over the 20 trading days immediately preceding the record date (April , 2003) for determining shareholders entitled to vote at the special meeting. The daily Market Price has been determined in the manner provided in the Charter Amendment.
After reviewing other criteria that are frequently used in determining stock values and that are discussed below, the board concluded that current market price represented the most realistic criterion of value of the common stock under the Company’s circumstances. The board also considered other valuation methods and factors in making its determination, as follows:
Ÿ Historical Market Prices. Our common stock has traded within a range of $0.11 to $0.02 over the past year. The general trend has, however, been downward, and the stock price has remained at $0.02 since we announced our 2002 earnings and our auditor’s doubts regarding our ability to continue as a going concern. Moreover, our stock is thinly traded, at best. For these reasons, the board believed that historical market price would not be an appropriate valuation measure.
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Ÿ Net Book Value. As of December 31, 2002, the Company’s net book value per share was $ 0.02. In the board’s judgment, however, net book value per share is an accounting measure that is based on the historical cost of the Company’s assets and so may not reflect the fair market value of the Company’s shares. Accordingly, the board elected not to use this criterion to establish the purchase price.
Ÿ Going Concern Value. A going concern valuation is an attempt to establish the present value of a future stream of earnings of a company as a means of measuring return on invested capital over that period. Effective use of this valuation methodology requires the establishment of a credible forecast of earnings and the identification of an appropriate discount rate to establish the present value of those future earnings. We have been advised by our independent auditors that our current financial situation raises serious doubt concerning the Company’s ability to continue as a going concern. Therefore, the board decided that no credible earnings forecast could be established and therefore that use of this valuation method was unwarranted.
Ÿ Liquidation Value. For the reasons set forth under “—Alternatives Examined—Liquidation and Dissolution,” the board determined that the liquidation value of the Company, were it to adopt a plan of liquidation and dissolution, could be less than the Company’s net book value per share which approximates the purchase price per pre-consolidation share for fractional shares resulting from the Share Consolidation. Consequently, the board concluded that liquidation value would not be an appropriate valuation measure.
Ÿ Comparative Company Analysis. The exploration and production business is highly competitive. We compete with a number of substantially larger companies with greater financial and other resources than we have. The board did not believe that another public company, much less several such companies, could be identified having characteristics that are sufficiently similar to those of the Company to allow its use in this methodology to establish the fair value of the Company’s common stock. Consequently, the board decided that the use of this valuation method was unwarranted.
Ÿ Third Party Offers/Merger Plans. We have not engaged in a merger or consolidation with another company in the last two years. In February 2003, discussions regarding the possible sale of part of the Company’s U.S. properties were discontinued as a result of operational problems discussed in Note 10 to the attached financial statements. Despite efforts by the management of the Company to locate a prospective candidate for a business combination with the Company, we have not during the past two years engaged in any serious negotiations with, much less received any firm offers from, any unaffiliated person to purchase the Company or to engage in any other business combination transaction with the Company. Consequently, the board did not have available any information from such a source to assist it in establishing the purchase price of the fractional new shares.
Ÿ Acquisition of Control Shares. There have not been any purchases of the Company’s stock that would constitute a control block of shares of common stock. Since May 17, 2001, the date of the acquisition by Ramat Securities Ltd. of about 5 million shares of our common stock from Pecks Management Partners Ltd., of which Robert J. Cresci is a managing director, there has been no transaction of which management is aware involving more than 1% of the Company’s outstanding stock. For this reason, the board did not consider this factor in establishing the fair value of the stock.
Ÿ Price/Earnings Ratio.In 2002, the Company reported a net loss of $(0.02) per share, compared to net earnings of less than one cent per share for 2001. During the period from January 1, 2001 through December 31, 2002, the market price of the common stock ranged from a high in the second quarter of 2001 of $0.17 per share to a low in the fourth quarter of 2002 of $0.02 per share. The board considered the attribution of a price/earnings ratio to the Company’s shares under these circumstances essentially meaningless and, therefore, did not consider a price/earnings ratio as indicative of the fair value of our shares.
After consideration of all the foregoing factors, the board, in evaluating the OTC Bulletin Board® market for our shares as an appropriate indicator of value, recognized that the lack of liquidity in that market with respect to our shares reduced the efficiency of that market and may distort the market as an indicator of value. Nonetheless, the board, after considering all the information reasonably available to it, determined that the only realistic valuation tool available to the board with respect to the value of our shares was the market. Accordingly, the board elected to use the 20-trading-day average of the closing sales price for our shares on the market as the basis for determining the purchase price of fractional shares in the Share Consolidation.
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Remaining Shareholders. The board believed that the principal substantive fairness issue relating to those shareholders who hold more than 5,000 pre-consolidation shares and will receive post-consolidation shares of common stock (together with cash for fractional interests) in the Share Consolidation is the relinquishment of the OTC Bulletin Board®, or perhaps NASDAQ’s new Bulletin Board Exchange, as a market for their shares.
Although there may be only a limited market for our shares now, there will likely be no market after the Share Consolidation. Moreover, when the Company terminates its Exchange Act reporting obligation following the Share Consolidation, the rights of our remaining shareholders to obtain information about the Company will be reduced, perhaps significantly. For a more detailed discussion of these issues, please see “The Impact of the Share Consolidation on the Shareholders” below.
The board determined, however, that these disadvantages are outweighed by the undesirable consequences of alternatives such as liquidation and dissolution or bankruptcy. Additionally, the potential cost savings that the Company should realize as a result of going private will benefit all shareholders who remain after the completion of the Share Consolidation. Please see “—Background” and “—Purpose and Reasons for the Share Consolidation” above for further discussion of the expenses of compliance with our Exchange Act reporting obligations.
The Company. Upon completion of the Share Consolidation and termination of the Company’s Exchange Act reporting obligations, the Company will effectively relinquish any remaining access to the public capital markets. The board believes that, for the Company as a whole, this is the principal substantive fairness issue relating to implementation of the Share Consolidation.
The board believes that the Company has, for all intents and purposes, already lost access to the public capital markets as a result of its financial weakness, the decline in its share price and the loss of liquidity in its common stock market. The board further believes that any further reduction in that access resulting from the Share Consolidation and termination of Exchange Act registration would be minimal and that it is outweighed by the consequent savings of the expenses of compliance with Exchange Act reporting obligations. For information regarding the market for our shares, see “Market for Common Stock” below.
Other Issues.
| • | Potential Future Sale. Shareholders who own fewer than 5,000 shares will be cashed out in connection with the Share Consolidation and will not benefit if the Company’s financial condition improves or if it is sold for more than the equivalent of $0.0 per pre-consolidation share in the future. Despite the efforts of management to locate prospective business combination candidates for the Company during the past two years, no such candidates were located. Moreover, during that period we have received no offers to purchase the Company and we have received no indications of interest in that regard. For a more detailed discussion of the board’s determination of the purchase price, please see “—Cashed Out Shareholders” above. |
| • | Financial Information. There is an additional potential detriment to shareholders who remain as holders of our stock after the Share Consolidation and termination of registration under the Exchange Act. We will then no longer be subject to the periodic reporting requirements and the proxy rules of the Exchange Act. This will reduce the rights of our remaining shareholders to obtain information about the Company. While management currently intends to furnish these remaining shareholders with periodic financial and other information regarding the Company, if it should not do so, those shareholders will be able to rely on only their rights as shareholders under the Texas Business Corporation Act to obtain information. For a more detailed discussion of these issues, please see “The Impact of the Share Consolidation on the Company’s Shareholders” below. |
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The board determined, however, that these disadvantages are outweighed by the undesirable consequences of alternatives such as liquidation or bankruptcy. See “—Alternatives Examined” below. Additionally, the potential cost savings that the Company should realize as a result of going private will benefit all shareholders who remain after the completion of the Share Consolidation. Please see “Background” and “Purpose and Reasons for the Share Consolidation” above for further discussion of the expenses of compliance with our Exchange Act reporting obligation.
| • | In addition, shareholders should be aware that we are not distributing all of our available cash in connection with the Share Consolidation. As discussed above, the board believes that $0.0 per pre-consolidation share is a fair price for the fractional shares and also that it is appropriate for the Company to retain cash to fund ongoing operations. We estimate that the cash payment for fractional shares will be $65,000 and that the other costs of the going-private transaction will be approximately $45,000. The shareholders who are being cashed out now hold approximately 5% of our outstanding stock. We intend to retain cash in excess of these amounts for the purpose of continuing the operations of the Company. Any benefit derived from those operations will accrue to the remaining shareholders who now own approximately 95% of the Company. Please see “The Impact of the Share Consolidation on the Company’s Shareholders—Financial Effect” below for a more detailed discussion of these issues. |
Both Mr. Suttill, who beneficially owns 8.32% of our stock, and Mr. Cresci, who beneficially owns less than 1% of our stock, have indicated that they will vote in favor of the Charter Amendment and, thereby in effect for the Share Consolidation. See “—Interests of Management in the Transaction.”
Alternatives Examined. Management has been in constant contact with potential industry partners, suppliers and traditional sources of finance in seeking to enhance the Company’s asset base. Vendor finance, farmouts and bank and equity sources are generally the means in the Company’s industry of achieving growth. Market conditions, plus the age (Breton Sound) and location (Colombia) of the Company’s properties, and the small size of the Company have, however, generally precluded the Company from accessing these sources.
Liquidation and Dissolution. The Company’s principal properties are its interest in the Breton Sound field off the coast of Louisiana and its limited partnership interest in Argosy Energy International, which owns interests in Colombian oil and gas properties.
Breton Sound. The standardized measure of the discounted net future cash flows applicable to the Company’s interest in the proved oil and gas reserves at Breton Sound was, at December 31, 2002, ($167,000). The measure is negative because of the inclusion of future development costs, principally accrued abandonment costs, of $908,000. See the Supplementary Information Related to Oil and Gas Producing Activities included in the Notes to Consolidated Financial Statements. This determination antedates the cessation of production of the gas well that supplies fuel gas for the Breton Sound field resulting in suspension of production from Breton Sound. See the discussion in note 10 of the Notes to Consolidated Financial Statements below. Even if a source of fuel gas is achieved prior to May 1, 2003 and the Company is able to maintain these leases, it is the board’s judgment that, if the Company were to adopt a plan of liquidation, the Company would not be able to liquidate its Breton Sound interests on any reasonable basis.
Argosy. The standardized measure of the discounted net future cash flows applicable to the Company’s interest in the proved oil and gas reserves of Argosy was, at December 31, 2002, $4,542,000. The general partner of Argosy has suspended distributions to its limited partners, including the Company, in order to accumulate cash for the purpose of drilling an exploratory well required under the applicable contract with the national oil company of Colombia. The drilling of that exploratory well is expected to begin during the current quarter. See note 2 to Notes to Consolidated Financial Statements below. If the Company were to adopt a plan of liquidation, its ability to liquidate its limited partnership interest in Argosy on any reasonable basis would be adversely affected by (i) the suspension of distributions by the partnership to the limited partners, (ii) the political conditions in Colombia, including the possibility of effectively uninsurable personal and property damage inflicted by guerrillas, (iii) the substantial discounts to the standardized measure of the discounted future net cash flows from oil and gas properties that others have experienced in the sale of Colombian oil and gas properties, (iv) the inability of the limited partner to control Argosy and (v) the various obstacles imposed on the production, sale and transportation of oil and gas from Argosy’s properties by their location.
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As a result of the foregoing factors, the board does not believe that the Company would, on liquidation of the Company, be able to realize an amount from the sale of its properties that, after payment and discharge of its obligations, would allow the Company to make a liquidation distribution to its shareholders in excess of $0. , the purchase price per pre-consolidated share for fractional shares resulting from the Share Consolidation.
Bankruptcy. The board has considered, in weighing the Company’s options, that the Company is eligible (which is not an admission of insolvency) to file a petition for relief pursuant to the bankruptcy law of the United States (the “Bankruptcy Code”). For an entity such as the Company, the Bankruptcy Code offers two basic forms of relief: reorganization and liquidation. In a reorganization, which would be conducted pursuant to Chapter 11 of the Bankruptcy Code, the Company could be financially restructured and could emerge as a reorganized entity. Alternatively, the Company could be liquidated, either through Chapter 11 or Chapter 7 of the Bankruptcy Code.
Chapter 11 offers an eligible debtor certain advantages, including: (i) the automatic stay that precludes creditors from taking actions to collect claims against the Company; (ii) the ability to reject unfavorable leases and executory contracts, to sell assets on a “free and clear” basis, and to borrow money with special protections for the lender; (iii) the ability to “avoid” (or nullify) and to recover transfers of property and payments of funds that are preferential as to certain creditors or actually or constructively fraudulent as to all creditors and (iv), most importantly, the ability to adjust and modify existing debts and equity interests pursuant to a Court-approved plan of reorganization.
The board has concluded that Chapter 11, at least at present, would not solve the financial problems of the Company. Creditors are not pressing for collection, so the automatic stay is unnecessary, and, with the exception of current accounts payable, the Company has no substantial indebtednesses that could be the subject of adjustment under Chapter 11. Moreover, application of the avoiding powers available to a Chapter 11 debtor would not provide any material benefit to the Company. Most significantly, Chapter 11 would not address the fundamental problem of the lack of productivity of the Company’s assets.
Furthermore, the corporation could be liquidated pursuant to Chapter 11, in which case the Company would remain in possession of its assets and its management would generally control the liquidation process. Alternatively, the Company could be liquidated through Chapter 7, in which case a trustee would be appointed to displace the board and management and to take possession of and to liquidate the assets of the Company and to pay the proceeds to creditors, so far as they may go, according to the creditors’ respective entitlements and priorities. Liquidation of the Company’s assets in bankruptcy would be subject to the same vicissitudes described above as if the Company adopted a plan of liquidation and dissolution.
As a consequence of the foregoing, the board concluded that bankruptcy, either through Chapter 11 or Chapter 7, is not a suitable course of action for the Company and would not allow the Company to make a liquidation distribution to its shareholders in excess of the purchase price per pre-consolidated share for fractional shares resulting from the Share Consolidation.
Others. Once having determined that it is necessary to terminate the Company’s Exchange Act reporting obligations, the board directors reviewed an odd-lot tender offer as a means other than a share consolidation of effecting that result. The board determined, however, that a share consolidation would be a surer and more cost-effective method of taking the Company private.
The board concluded that a distribution-in-kind of assets to the shareholders as an alternative to liquidation was essentially unworkable because of the nature of the assets. The board noted that management evinced no interest in proposing a management buy-out transaction.
Future Operations. It is the current intention of the board, if the shareholders approve the Charter Amendment, to continue to operate the Company consistent with past practice except for the reduction in administrative expenses occasioned by the termination of the Company’s Exchange Act reporting obligations. Neither the board nor the executive officers of the Company have any current intention to liquidate and dissolve the Company, to file a petition in bankruptcy, to distribute any of its assets to the shareholders or, except in connection with the Share Consolidation, to purchase any of the Company’s outstanding common stock. While both the board and management would entertain a proposal to merge or consolidate the Company, or to enter into a share exchange, with another company or to sell all or substantially all its assets to another company, we have no such current proposal and neither the board nor management is aware of any prospects for such a proposal. While the board and management would also entertain a proposal to sell a principal asset of the Company, we have no such proposal and neither the board nor management is aware of any prospects for such a proposal.
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Procedural Considerations. In considering the approval of a transaction such as the proposed Share Consolidation, various procedural safeguards are available to a board of directors to guard against bias of the directors. These include obtaining a fairness opinion from an independent investment banker, forming a special committee of unaffiliated directors to review and approve the transaction or requiring the approval of unaffiliated shareholders for implementation of the transaction. For the reasons described below, our board did not avail itself of any of these procedures.
Fairness Opinion. The board did not retain an investment bank or other financial adviser to render a report or opinion with respect to the fairness of the Charter Amendment and the Share Consolidation to the Company or its shareholders. Although management did not solicit bids with respect to such an engagement from any investment banker, management estimated, based on its experience and that of its counsel, that the cost of obtaining a fairness report or opinion would likely exceed $50,000. That amount would represent a very large percentage of the total anticipated purchase price for all fractional interests resulting from the Share Consolidation. The board determined that it could not justify that expense in light of
• the financial condition of the Company;
• the board’s belief, given the knowledge and experience of the Company’s management and directors in the areas of the Company’s business, that the incremental value of such a fairness opinion to the deliberations of the board would be minimal; and
• the comfort of the board that the establishment of the purchase price for fractional shares in the Share Consolidation based on an average of the closing sales price of the Company’s shares on the market for the 20 days preceding the record date for the special meeting provided a fair and realistic price to our shareholders.
Based on the foregoing considerations, the board concluded that the expense of obtaining a fairness opinion was unwarranted.
Special Committee. The board did not establish a special committee of independent directors for the purposes of reviewing the terms of the Share Consolidation, negotiating those terms and approving the transaction on behalf of the board.
Our board consists of only two directors. Ronald Suttill is the president and chief executive officer and holds 8.32% of our common stock. Robert J. Cresci is a non-employee director who owns less than 1% of our common stock. Although management was and is not convinced that Mr. Suttill’s employment by the Company and his stock ownership prevent him from being considered to be independent for this purpose, management affirmatively believes that Mr. Cresci would so qualify. Mr. Cresci was, however, reluctant to undertake by himself the task of performing the responsibilities of a special committee. Moreover, the board was reluctant to commit the Company’s funds that would be required to discharge the fees and expenses of independent counsel customarily engaged by special committees of directors to guide them in the discharge of their duties.
For similar reasons, the board did not establish an independent representative for the shareholders of the Company in determining the terms of the Share Consolidation. Mr. Cresci was reluctant to undertake that role. To engage an independent professional was viewed by the board as likely to be too expensive to justify the marginal benefit that the shareholders might realize. Finally, the board did not believe that Mr. Suttill’s employment with the Company and his stock ownership position created a bias at the board level that would prevent the board from ensuring that the Charter Amendment and the Share Consolidation would be procedurally and substantively fair to our shareholders.
Approval by Unaffiliated Shareholders. A review of the largest holders of our securities reveals that the largest holders are
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• Ramat Securities, Inc. (holding 22.67% of the outstanding);
• Ronald Suttill (holding 8.32% of the outstanding);
• Lehman Brothers, Inc. (holding 6.33% of the outstanding); and
• Yale University (holding 5.44% of the outstanding).
To the knowledge of management, these are the only shareholders holding 5% or more of our stock. It is clear that Mr. Suttill, being the chief executive officer and a director of the Company, is an affiliate of the Company. While it is also clear that Ramat Securities, Inc. could, if it wished to do so, influence the management and policies of the Company, it has never attempted to do so. Moreover, it did not initiate or motivate the development of the transactions inherent in the Charter Amendment and the Share Consolidation. Other than with respect to the relative sizes of their holdings of our stock, both Lehman Brothers, Inc. and Yale University may be similarly characterized regarding their relationship to the Company. Thus, of our largest shareholders, only Mr. Suttill has actually exerted a controlling influence over the management and policies of the Company.
Under the Charter Amendment and the Share Consolidation, the only difference in the effect of the transaction on individual shareholders is determined by the sizes of their holdings of our stock. There are no contracts, agreements or understandings under which one or more shareholders will be compensated or receive some benefit not accorded to every other shareholder with a similar share holding. The only shareholders who may be deemed to have an interest in the transaction different from the other shareholders are the two officers of the Company, Ronald Suttill, the President and Chief Executive Officer, and James L. Busby, Secretary, Treasurer and Chief Financial Officer, whose employment with the Company will continue after effectuation of the Share Consolidation. See “—Interests of Management in the Transaction.”
Given the foregoing considerations, the board anticipates that all the shareholders of the Company, with the possible exceptions of Messrs. Suttill and Busby, would vote for or against the Charter Amendment solely in accordance with their interests as shareholders of the Company, uninfluenced by any other financial relationship with the Company. Consequently, the board concluded that it would be unwarranted to require for approval of the Charter Amendment, in addition to the vote of shareholders otherwise necessitated by law, the affirmative vote of a majority of a putative class of shareholders consisting of all shareholders other than Messrs. Suttill and Busby.
Interests of Management in the Transaction
Following implementation of the Share Consolidation, Messrs. Suttill and Cresci currently intend to remain as directors of the Company. In addition, Messrs. Suttill and Busby currently intend to remain as officers of the Company. Mr. Suttill is President and Chief Executive Officer and Mr. Busby is Secretary, Treasurer and Chief Financial Officer.
During the year ended December 31, 2002, Mr. Suttill’s aggregate annual and long-term compensation from the Company was $159,000, of which $150,000 was salary and the remainder represented matching contributions made under the Aviva Petroleum Inc. 401(k) Retirement Plan (the “401(k) Plan”). During the same period, Mr. Busby’s aggregate annual salary and bonus from the Company was less than $100,000. Messrs. Suttill and Busby are currently being compensated at the same rates as in the prior year. Each of them has, however, effective April 1, 2003, elected to accept one-third of their current salary in the form of promissory notes from the Company in an effort to conserve the Company’s cash.
Mr. Cresci is paid $10,000 per annum as compensation for his services as a director. To the extent that he is required to travel for that purpose, the Company reimburses his travel expenses.
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The following table sets forth the ownership of our shares by Messrs. Suttill, Cresci and Busby, both before and after the Share Consolidation, and the amount of cash each is expected to receive as payment for his fractional shares:
Name | Shares Owned Before Share Consolidation(1) | Shares Owned After Share Consolidation | Cash in Lieu of | ||||
Ronald Suttill | 4,070,106 | 814 | $ |
| |||
Robert J. Cresci | 237,500 | 47 | $ |
| |||
James L. Busby | 1,306,085 | 261 | $ |
| |||
| (1) | Includes warrants and stock options. |
None of our executive officers or directors was convicted in a criminal proceeding during the past five years. In addition, none of our executive officers or directors was a party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. All of our executive officers and directors are citizens of the United States of America.
Structure of Share Consolidation
We propose to consolidate the shares of our outstanding common stock on the basis of 5,000 shares of currently outstanding shares to one new share. The result of the Share Consolidation for each group of shareholders, determined by size of holdings, is as follows:
| • | Registered Shareholders With Fewer Than 5,000 Shares. |
If you are a registered shareholder (meaning you own shares in your own name) of fewer than 5,000 shares on the effective date of the Share Consolidation, you will receive a cash payment instead of a fractional share of new stock. After the Share Consolidation, you will have no further interest in our stock. You will not have to pay any service charges or brokerage commissions in connection with the Share Consolidation or your cash payment.
| • | Registered Holder With 5,000 or More Shares. |
If you are a registered holder of 5,000 or more shares as of the effective date of the Share Consolidation, we will convert your shares into 1/5,000 of the number of shares you held immediately prior to the Share Consolidation, with a cash payment for any shares that would otherwise result in fractional new shares. For example, if you are a registered holder of 15,500 shares of common stock immediately prior to the date of the Share Consolidation, your shares will be converted to three shares of new common stock and you will receive a cash payment for 500 shares equal to $ .
| • | Beneficial Owners of Shares. |
Nominees (such as a bank or broker) may have procedures applicable to share consolidations that they require be utilized. If you hold stock in street name, you should contact your nominee to determine how you will be affected by the Share Consolidation. See “Exchange of Stock Certificates and Payment for Fractional Shares.”
If any certificate representing shares of our stock is not presented for exchange or cash payment, the new shares or the cash payment, as applicable, will be administered in accordance with the relevant abandoned property laws. Until new shares or cash payments have been delivered to a public official pursuant to the abandoned property laws, the cash payments or certificates will be paid to the shareholder or his or her designee, without interest, when the stock certificate has been properly presented for exchange or cash payment.
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Exchange of Stock Certificates and Payment for Fractional Shares
At the time of filing of the Charter Amendment with the Secretary of State of Texas (the effective date of the Charter Amendment), we will close our stock transfer books for the purpose of establishing a record of our shareholders as of the effective date. Each shareholder of record will then be entitled to receive a new certificate evidencing one share of our common stock for every 5,000 pre-consolidation shares owned of record by that shareholder. In addition, each such shareholder will be entitled to receive cash in the amount of $0. per pre-consolidation share evidenced by any fractional share to which such shareholder would otherwise be entitled. At that time, each registered shareholder who holds fewer than 5,000 shares immediately prior to the Share Consolidation will cease to have any rights with respect to his or her shares and will only have the right to receive the cash payment in lieu of the fractional share to which he or she would otherwise be entitled.
We will effect the exchange of certificates evidencing pre-consolidation shares for certificates evidencing post-consolidation shares. As soon as reasonably practicable after the effective date of the Charter Amendment, we will send to each registered holder a letter of transmittal. The letter of transmittal will contain instructions with respect to the surrender of your stock certificate evidencing pre-consolidation shares. Please complete and sign the letter of transmittal and return it with your stock certificate(s) to us so that you can receive new certificates or the cash payment for your shares or both. No service charges will be payable by shareholders in connection with the exchange of certificates or the issuance of new stock or cash payments. We will bear these expenses. Until your stock certificates are surrendered to us, you will not receive any payment for the fractional shares to which you are entitled. Stock certificates evidencing pre-consolidation shares that are subsequently presented for transfer to a third party will not be transferred on the Company’s stock transfer books until the certificates representing the shares have been exchanged for the cash payment or new stock certificates. PLEASE DO NOT RETURN YOUR STOCK CERTIFICATE WITH THE ENCLOSED PROXY.
Following the effective date of the Charter Amendment, the Company will arrange to obtain information as to the numbers of pre-consolidation shares held by beneficial owners in “street” or nominee name. Upon receipt of that information, the Company will compute the numbers of post-consolidation shares to which those beneficial owners are entitled and will cause those shares to be credited to the accounts of the beneficial owners by their nominees. The Company will also compute the amounts of cash to which these beneficial owners are entitled in lieu of fractional shares and will cause those amounts of cash to be paid to the nominees for further payment to the beneficial owners. Following the effective date of the Charter Amendment, there will no longer be any public market for the Company’s shares. Accordingly, it may be in the best interests of the beneficial owners to become registered owners of our shares. Upon request by a beneficial owner, together with appropriate evidence of share ownership, the Company will issue a physical certificate for the shares owned by the beneficial owner against cancellation of the beneficial owner’s nominee ownership.
Shareholders whose shares are eliminated and whose addresses are unknown to us, or who do not return their stock certificates and request payment, generally have a certain number of years from the date of the share consolidation to claim their cash payment. If no claim is made within this period, state law generally provides that these payments are deemed abandoned and forfeit to the state. The state law of the state of the last known residence of the shareholder, as shown on company records, usually governs. In Texas, this holding period is three years, but the number of years may vary from state to state.
The Company will make efforts to locate missing shareholders by checking addresses with internal resources such as phone books and publicly available resources on the internet. Any unclaimed funds payable to the shareholders who cannot be located by the Company will be tendered to the State of Texas pursuant to the applicable escheat laws.
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The Impact of the Share Consolidation on the Shareholders
Rights, Preferences and Limitations. There are no material differences between the respective rights, preferences or limitations of our existing (pre-consolidation) shares and the shares to be issued in connection with the Share Consolidation. Those shareholders who hold more than 5,000 pre-consolidation shares will receive an increase in the percentage of the Company’s shares that they own following the Share Consolidation. This percentage increase will approximate the percentage of the outstanding shares of the Company owned by those shareholders holding less than 5,000 pre-consolidation shares who will be cashed out (being approximately % of the outstanding), together with the fractional shares otherwise issuable to the shareholders who hold more than 5,000 pre-consolidation shares. This percentage increase will apply equally to affiliated and unaffiliated shareholders.
The percentage increase described in the preceding paragraph will be reduced, for any shareholder whose holdings are not in even multiples of 5,000 shares, by a slight decrease in his or her ownership percentage after the Share Consolidation. This decrease will result from the purchase of the fractional shares otherwise issuable to that shareholder. The maximum number of pre-consolidation shares held by a shareholder that could be affected would be 4,999.
The following is an example of the interaction of the factors described above: Assume a shareholder owns 1,002,500 pre-consolidation shares representing 2.138% of the currently outstanding shares. As a result of the Share Consolidation, that shareholder would receive 200 new (post-consolidation) shares and a cash payment of $ in lieu of the fractional shares representing 2,500 pre-consolidation shares. The post-consolidation shares would represent approximately % of the then outstanding shares. The difference between the shareholder’s pre and post-consolidation percentages represents the net of an estimated increase of % resulting from the purchases of all fractional shares and a decrease of % resulting from the purchase of that shareholder’s own fractional shares. (These percentages are only estimates, because share holdings of shareholders may change prior to the Share Consolidation as a result of trading in our shares.)
We have no current plans to issue additional shares of stock, but we reserve the right to do so at any time and from time to time at prices and on terms that the board determines to be in the best interests of the Company and its shareholders. Persons who continue as shareholders following implementation of the Share Consolidation will not have any preemptive or other preferential rights to purchase any of the Company’s stock that may be issued in the future.
Conduct of the Company’s Business. We expect our business and operations to continue as they are currently being conducted, and the Share Consolidation is not anticipated to have any effect upon our business. After the Share Consolidation, Mr. Suttill will remain as the Company’s president and chief executive officer, and he and Mr. Cresci currently intend to continue to serve on the board as directors. Other than going private as described in this proxy statement, we have no current plans or proposals to effect any extraordinary corporate transaction, such as a merger, reorganization or liquidation; to sell or transfer any material amount of our assets; to change our board or management; to change materially our indebtedness or capitalization; or otherwise to effect any material change in our corporate structure or business.
Financial Effect. The share consolidation and the expenditures for professional fees and other expenses related to the transaction will not have a material effect on the Company’s balance sheet, statement of income, earnings per share, ratio of earnings to fixed charges or book value per share. As of December 31, 2002, our working capital was $103,000 and cash and cash equivalents were $1,708,000. The cash payment for fractional shares is estimated to be $65,000. In order to estimate the cash payment for the fractional shares, we obtained a record list of shareholders and also a non-objecting beneficial owner, or NOBO, list from our transfer agent. Based on those lists, we determined the number of shareholders who own fewer than 5,000 shares as well as those shareholders who hold more than 5,000 shares of stock but not in even multiples of 5,000. Using this information, we estimated the total number of shares that would be cashed out in the Share Consolidation (approximately 3.3 million) and multiplied this figure by $0. , the fractional share purchase price. The only consideration to be paid will be the cash payments for shares that would otherwise be converted into fractional shares. We estimate that other expenses of the going private transaction will be: fees and expenses of legal counsel—$20,000; fees and expenses of accountants—$5,000; printing and postage—$15,000; and miscellaneous—$5,000. We will use cash on hand as the sole source of funds for all transactional expenditures related to the Share Consolidation.
21
Effect on Market for Shares. If the Share Consolidation is completed, we will have approximately 9,000 shares outstanding and believe that approximately registered shareholders will remain (based on our most recent shareholder records).
If the board terminates registration of our stock under the Exchange Act, which is its intention, there will be no public market for the new common stock. Please see also the information contained above in the subsection captioned “Purpose and Reasons for the Share Consolidation.”
Securities Laws Relating to the New Shares. The new shares to be exchanged pursuant to the Share Consolidation are expected to be freely transferable under the Securities Act by those shareholders not considered “affiliates” of the Company.
Termination of Exchange Act Registration. After the Share Consolidation is completed, we intend to terminate the public registration of the Company’s stock with the SEC under the Exchange Act. Termination of our registration will end our obligation to file reports and proxy statements with the SEC and will substantially reduce the information we are required to furnish to our shareholders. We will then no longer be required to provide an annual report to shareholders as we are now obligated by the provisions of the Exchange Act. In addition, our executive officers, directors and other affiliates will no longer be subject to many of the reporting requirements and restrictions of the Exchange Act, including the reporting and short-swing profit provisions of Section 16 of the Exchange Act. Upon termination of Exchange Act registration, we will, however, continue to be subject to the general anti-fraud provisions of federal and applicable state securities laws.
Important Federal Income Tax Consequences of the Share Consolidation
The significant federal income tax consequences to the Company and shareholders resulting from the Share Consolidation are discussed below. This discussion is based on existing U.S. federal income tax law, which may change, even retroactively. Our analysis is not binding on the IRS and we cannot guarantee that the IRS or the courts will not adopt a position that is contrary to the statements contained in this proxy. This disclosure does not discuss all aspects of federal income taxation which may be important to you in light of your individual circumstances, and many shareholders may be subject to special tax rules. In addition, this proxy does not discuss any state, local, foreign or other tax considerations. You should consult your tax advisor as to the particular federal, state, local, foreign and other tax consequences, in light of your specific circumstances.
Our analysis also assumes that you are one of the following: (i) a citizen or resident of the United States; (ii) a corporation or other entity taxable as a corporation created or organized under U.S. law (federal or state); (iii) an estate the income of which is subject to U.S. federal income taxation, regardless of its sources; (iv) a trust, if a U.S. court is able to exercise primary supervision over administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust; or (v) any other person whose worldwide income and gain is otherwise subject to U.S. federal income taxation. Our conclusions also assume that you have held and will continue to hold your shares as capital assets for investment purposes under the tax code.
We believe that the Share Consolidation should be treated as a tax-free “recapitalization” for federal income tax purposes. This should result in no material federal income tax consequences to the Company. If you continue to hold new shares after the share consolidation, you should not recognize any gain or loss in the Share Consolidation except in respect of cash received in lieu of fractional new shares, and you should have the same adjusted tax basis and holding period in your new stock as you had in your stock immediately prior to the Share Consolidation, as adjusted to reflect the redemption of fractional shares.
Your receipt of a cash payment in lieu of a fractional new share pursuant to the Share Consolidation will be a taxable transaction for federal income tax purposes. The Company believes that it has no current or accumulated earnings and profits. Accordingly, a shareholder who receives cash in lieu of a fractional new share should recognize gain or loss equal to the difference between the amount of cash received and the portion of the aggregate tax basis in his or her shares allocable to the fractional new share interest for which he or she received cash. If the shares of your stock were held as a capital asset on the date of the share consolidation, then your gain or loss will be a capital gain or loss. This capital gain or loss will be a long-term capital gain or loss if your holding period for the shares is longer than one year.
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Payments in respect of fractional new shares will be subject to applicable U.S. federal tax withholding. Materials furnished to the shareholders in connection with the Share Consolidation will contain forms pursuant to which any applicable exemptions from withholding may be claimed.
Appraisal Rights
There are no appraisal rights for any shareholder who dissents from approval of the Share Consolidation proposal under our governing documents or under applicable Texas law.
Recommendation of the Board
Our board recommends that you vote FOR the Share Consolidation proposal. Proxies will be voted for the Share Consolidation unless you specify otherwise in your proxy.
Where You Can Find More Information
The Share Consolidation is structured to be a “going private” transaction as defined in Rule 13e-3 under the Exchange Act because it is intended to, and, if completed, will likely terminate our reporting requirements under the Exchange Act. In connection with the Share Consolidation proposal, we have filed with the SEC a Schedule 13E-3 pursuant to Rule 13e-3 under the Exchange Act.
We file annual, quarterly and other reports and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at 1-800-732-0330 for further information on their public reference room. Our SEC filings are also available at the SEC’s web site at http://www.sec.gov.
If you have questions about the amendment or would like additional copies of this proxy statement, please contact James L. Busby at Aviva Petroleum Inc., 8235 Douglas Avenue, Suite 400, Dallas, Texas 75225, telephone: (214) 691-3464.
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BENEFICIAL OWNERSHIP OF SECURITIES
Security Ownership of Certain Beneficial Owners
The following table sets forth certain information as to each person who, to the knowledge of the Company, is the beneficial owner of more than five percent of the outstanding Common Stock of the Company. Unless otherwise noted, the information is furnished as of February 28, 2003.
Name and Address of Beneficial Owner or Group | Amount and Nature of Beneficial Ownership(1) | Percent of Class(2) | |||
Ramat Securities Ltd.(3) Chagrin Plaza East 23811 Chagrin Blvd., Suite 200 Beachwood, Ohio 44122 | 10,632,470 | 22.67 | % | ||
Ronald Suttill(4,5) 8235 Douglas Avenue, Suite 400 Dallas, Texas 75225 | 4,070,106 | 8.32 | %(6) | ||
Lehman Brothers, Inc.(7) 745 Seventh Avenue New York, New York 10019 | 2,968,576 | 6.33 | % | ||
Yale University(8) 230 Prospect Street New Haven, Connecticut 06511 | 2,551,886 | 5.44 | % |
(1) Except as set forth below, to the knowledge of the Company, each beneficial owner has sole voting and sole investment power.
(2) Based on 46,900,132 shares of the Common Stock issued and outstanding on February 28, 2003.
(3) Information regarding Ramat Securities Ltd. ("Ramat") is based on a Schedule 13D/A filed on May 17, 2001, as a joint filing for Ramat, David Zlatin, Howard Amster, Amster Trading Company Charitable Remainder Unitrusts ("Amster Unitrusts"), and Amster Trading Company. Ramat owns 6,577,370 shares (14.02% of the outstanding) and has shared voting and dispositive power as to those shares. Through his ownership in Ramat, David Zlatin beneficially owns an aggregate of 6,577,370 shares and has shared voting and dispositive power over those shares. The Amster Unitrusts own 4,055,100 shares (8.65% of the outstanding) and have shared voting and dispositive power as to those shares. Howard Amster is the trustee of the Amster Unitrusts. Howard Amster beneficially owns an aggregate of 6,577,370 shares and has shared voting and dispositive power as to 4,055,100 shares. The Amster Unitrusts have been funded 100% by Amster Trading Company. Howard Amster is the 100% owner of Amster Trading Company. Because Amster Trading Company has the right to change the trustee of the trusts, it can be deemed to have the right to shared voting and dispositive power as to the 4,055,100 shares owned by the Amster Unitrusts. Amster Trading Company disclaims beneficial ownership of the securities owned by the Amster Unitrusts.
(4) Included are warrants for 1,000,000 shares and options for 256,667 shares exercisable on or within 60 days of February 28, 2003.
(5) Includes the entire ownership of AMG Limited, a limited liability company of which Mr. Suttill is a member, as of February 28, 2003, of 935,550 shares of Common Stock.
(6) Treated as outstanding for purposes of computing the percentage ownership of Mr. Suttill are 1,000,000 shares pursuant to outstanding warrants and 1,026,500 shares issuable to all participants upon exercise of vested stock options granted pursuant to the Company’s stock option plans.
(7) Information regarding Lehman Brothers Inc. is based on a Schedule 13G dated February 14, 2003 filed by Lehman Brothers Inc. with the SEC.
(8) Information regarding Yale University is based on a Schedule 13G dated March 11, 1994 filed by Yale University with the SEC.
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Security Ownership of Management
The following table sets forth certain information as of February 28, 2003, concerning the Common Stock of the Company owned beneficially by each director and executive officer of the Company, and by directors and executive officers of the Company as a group. Unless otherwise stated below, the business address and telephone number of each individual listed below is c/o Aviva Petroleum Inc., 8235 Douglas Avenue, Suite 400, Dallas, Texas 75225, (214) 691-3464:
Name and Address of Beneficial Owner or Group | Amount and Nature of Beneficial Ownership(1) | Percent of Class(2) | ||||
Ronald Suttill President, Chief Executive Officer and Director | 4,070,106 | (3,4) | 8.32 | % | ||
James L. Busby Secretary, Treasurer and Chief Financial Officer | 1,306,085 | (5) | 2.67 | % | ||
Robert J. Cresci Director Pecks Management Partners Ltd. One Rockefeller Plaza New York, New York 10020 | 237,500 | (6) | * |
| ||
All directors and executive officers as a group (3 persons) | 5,613,691 | (7) | 11.47 | % |
| * | Less than 1% of the outstanding Aviva Common Stock. |
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires officers, directors and holders of more than 10% of the Common Stock (collectively, “Reporting Persons” to file reports of ownership and changes in ownership of the Common Stock with the SEC within certain time periods and to furnish the Company with copies of all such reports. Based solely on its review of the copies of such reports furnished to the Company by such Reporting Persons or on the written representations of such Reporting Persons, the Company believes that, during the year ended December 31, 2002, all of the Reporting Persons complied with their Section 16(a) filing requirements.
(1) Except as noted below, each beneficial owner has sole voting power and sole investment power.
(2) Based on 46,900,132 shares of Common Stock issued and outstanding on February 28, 2003. 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 1,026,500 shares issuable upon exercise of vested stock options granted pursuant to the Company’s stock option plans and 1,000,000 shares represented by warrants issued to Ronald Suttill.
(3) Included are warrants for 1,000,000 shares and options for 256,667 shares exercisable on or within 60 days of February 28, 2003.
(4) Includes the entire ownership of AMG Limited, a limited liability company of which Mr. Suttill is a member, as of February 28, 2003, of 935,550 shares of Common Stock.
(5) Included are options for 193,333 shares exercisable on or within 60 days of February 28, 2003.
(6) Included are options for 37,500 shares exercisable on or within 60 days of February 28, 2003.
(7) Included are 935,550 shares beneficially owned through AMG Limited, warrants for 1,000,000 shares and options for 487,500 shares exercisable on or within 60 days of February 28, 2003.
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Transactions between the Company and Management
See Note 5 to the Notes to Consolidated Financial Statements.
Market for Common Stock
Price Range of Depositary Shares and Common Stock
The Company’s depositary shares, each representing the beneficial ownership of five shares of our common stock, traded on the OTC Bulletin Board (the “OTCBB”) from May 13, 1999 until April 30, 2001, when the Company discontinued trading of the depositary shares. On May 16, 2001, our common stock began trading on the OTCBB under the symbol “AVVP”.
The following table sets forth, for the periods indicated, the high and low sales prices for the depositary shares and our common stock on the OTCBB for each calendar quarter (or portion thereof) indicated:
2001 | 2002 | 2003 | ||||||||||||||||
High | Low | High | Low | High | Low | |||||||||||||
OTC Bulletin Board: | ||||||||||||||||||
Common Stock | ||||||||||||||||||
First Quarter | $ | n/a | $ | n/a | $ | 0.11 | $ | 0.05 | $ | 0.09 | $ | 0.02 | ||||||
Second Quarter(1) | $ | 0.17 | $ | 0.06 | $ | 0.10 | $ | 0.04 | $ | 0.025 | $ | 0.02 | ||||||
Third Quarter | $ | 0.10 | $ | 0.05 | $ | 0.12 | $ | 0.04 | $ | — | $ | — | ||||||
Fourth Quarter | $ | 0.11 | $ | 0.05 | $ | 0.10 | $ | 0.02 | $ | — | $ | — | ||||||
Depositary Shares(2) | ||||||||||||||||||
First Quarter | $ | 0.38 | $ | 0.15 | $ | n/a | $ | n/a | $ | n/a | $ | n/a | ||||||
Second Quarter | $ | 0.40 | $ | 0.20 | $ | n/a | $ | n/a | $ | n/a | $ | n/a | ||||||
Third Quarter | $ | n/a | $ | n/a | $ | n/a | $ | n/a | $ | n/a | $ | n/a | ||||||
Fourth Quarter | $ | n/a | $ | n/a | $ | n/a | $ | n/a | $ | n/a | $ | n/a | ||||||
(1) Represents trading through April 9, 2003.
(2) Representing five shares of Common Stock.
As of February 28, 2003, the Company had approximately 4,300 shareholders of record, including nominees for an undetermined number of beneficial holders.
Liquidity of the Market
During the year ended December 31, 2002, an aggregate of 2,657,000 shares of our common stock (representing approximately 5.7% of the outstanding) were traded on the OTCBB.
During the quarter ended March 31, 2003, an aggregate of 998,200 shares of our common stock (representing approximately 2.1% of the outstanding) were traded on the OTCBB. During this quarter, the average volume of shares of our common stock that were traded per trading day was 16,364. During that period of 61 trading days, however, there were 30 trading days on which no shares of our common stock were traded.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis should be read in conjunction with the Consolidated Financial Statements included elsewhere herein.
Critical Accounting Policies
The Company’s significant accounting policies are included in Note 1 to the Consolidated Financial Statements. These policies, along with the underlying assumptions and judgments made by the Company’s management in their application, have a significant impact on the Company’s consolidated financial statements. The Company identifies its most critical accounting policies as those that are the most pervasive and important to the portrayal of the Company’s financial position and results of operations, and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. The Company’s most critical policies are those related to property and equipment and impairment of assets.
Results of Operations
2002 versus 2001
United States | Colombia | |||||||||||||||
Oil | Gas | Oil | Total | |||||||||||||
(Thousands) | ||||||||||||||||
Oil and gas sales – 2001 | $ | 782 |
| $ | 101 |
| $ | 1,253 |
| $ | 2,136 |
| ||||
Volume variance |
| (144 | ) |
| (16 | ) |
| (11 | ) |
| (171 | ) | ||||
Price variance |
| 4 |
|
| (20 | ) |
| (78 | ) |
| (94 | ) | ||||
Oil and gas sales – 2002 | $ | 642 |
| $ | 65 |
| $ | 1,164 |
| $ | 1,871 |
| ||||
Colombian oil volumes were 59,000 barrels in 2002, a decrease of 2,000 barrels from 2001. Such decrease is due to a 12,000 barrel decrease resulting from normal production declines offset partially by a 5,000 barrel increase resulting from the transfer of a 7.5% partnership interest in Argosy to Aviva from its former lender (see note 3 to the consolidated financial statements included elsewhere herein).
U.S. oil volumes were 27,000 barrels in 2002, down approximately 6,000 barrels from 2001. U.S. gas volumes were 20,000 MCF in 2002, down 4,000 MCF from 2001. Such decreases resulted from weather related production interruptions and normal production declines.
Colombian oil prices averaged $19.65 per barrel during 2002. The average price for the same period of 2001 was $20.67 per barrel. The Company’s average U.S. oil price increased to $24.09 per barrel in 2002, up from $23.93 per barrel in 2001. U.S. gas prices averaged $3.25 per MCF in 2002 compared to $4.27 per MCF in 2001.
Service fees of $97,000 for administering the Colombian assets were received in 2002 compared to $473,000 in 2001. The 2002 amount covered three months at a monthly rate of $46,000. The 2001 amount covered three months at a monthly rate of $71,000 and nine months at a monthly rate of $46,000. The recorded amounts are net of Aviva Overseas’ 22.1196% (29.6196% after August 14, 2001) share of the fees. The service contract was cancelled effective March 31, 2002.
Operating costs decreased approximately 15%, or $209,000, primarily as a result of a decrease in the cost of lease fuel in the U.S. due to lower gas prices and the absence of Colombian crude oil transportation charges in 2002. Such transportation charges (approximately $1.82 per barrel in 2001) are included as a deduction to the oil sales price in 2002 pursuant to the latest oil sales agreement with Ecopetrol.
Depreciation, depletion and amortization (“DD&A”) decreased by 35%, or $111,000, primarily due to a decrease in U.S. DD&A. Such decease resulted from an increase in the U.S. reserve life resulting from higher oil prices.
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A provision of $592,000 was recorded in 2002 for abandonment and impairment of the U.S. properties (see note 10 to the consolidated financial statements included elsewhere herein). No similar accrual was recorded in 2001.
Interest and other income decreased $60,000 from 2001 mainly due to a gain on settlement of a disputed payable of $99,000 in 2001. There was no similar gain during 2002.
Income taxes decreased $45,000 primarily as a result of the expiration of $41,000 in deferred Colombian remittance tax that is no longer payable.
2001 versus 2000
United States | Colombia | |||||||||||||||
Oil | Gas | Oil | Total | |||||||||||||
(Thousands) | ||||||||||||||||
Oil and gas sales – 2000 | $ | 1,428 |
| $ | 100 |
| $ | 4,268 |
| $ | 5,796 |
| ||||
Volume variance |
| (482 | ) |
| (28 | ) |
| (2,584 | ) |
| (3,094 | ) | ||||
Price variance |
| (164 | ) |
| 29 |
|
| (431 | ) |
| (566 | ) | ||||
Oil and gas sales – 2001 | $ | 782 |
| $ | 101 |
| $ | 1,253 |
| $ | 2,136 |
| ||||
Colombian oil volumes were 61,000 barrels in 2001, a decrease of 96,000 barrels from 2000. Such decrease is due to an 84,000 barrel decrease resulting from the transfer of partnership interests to the Company’s former lender on June 8, 2000 and a 19,000 barrel decrease resulting from production declines, partially offset by a 7,000 barrel increase due to the transfer of a 7.5% partnership interest to Aviva from the lender on August 14, 2001 (see note 3 of the consolidated financial statements included elsewhere herein).
U.S. oil volumes were 33,000 barrels in 2001, down approximately 16,000 barrels from 2000. Such decrease is primarily due to the relinquishment of Main Pass 41 effective November 7, 2000. U.S. gas volumes were 24,000 MCF in 2001, down 1,000 MCF from 2000. Such decrease is due to the relinquishment of Main Pass 41 as discussed above.
Colombian oil prices averaged $20.67 per barrel during 2001. The average price for the same period in 2000 was $27.18 per barrel. The Company’s average U.S. oil price decreased to $23.93 per barrel in 2001, down from $28.94 per barrel in 2000. In 2001 prices were lower than in 2000 due to an overall decrease in world oil prices. U.S. gas prices averaged $4.27 per MCF in 2001 compared to $4.11 per MCF in 2000.
Service fees of $473,000 for administering the Colombian assets were received in 2001 compared to $387,000 in 2000. The 2001 amount covered three months at a monthly rate of $71,000 and nine months at a monthly rate of $46,000. The 2000 amount covered seven months at a monthly rate of $71,000. The recorded amounts are net of Aviva Overseas’ 22.1196% (29.6196% after August 14, 2001) share of the fees.
Operating costs decreased approximately 42%, or $1,005,000, primarily as a result of the transfer of partnership interests to the Company’s former lender.
DD&A decreased by 38%, or $195,000, primarily as a result of the transfer of partnership interests to the Company’s former lender and a decrease in the amount of oil produced.
G&A expenses decreased $151,000 or 13% primarily as a result of the reversal of over accrued public ownership costs, lower state franchise taxes, lower legal fees and lower stock-based compensation.
During 2000, in connection with the restructuring of the Company’s long-term debt, the Company realized a $3,452,000 gain on the transfer of partnership interests to the Company’s former lender and an extraordinary gain of $5,543,000, net of income taxes of $2,855,000, on the extinguishment of a portion of the debt. There were no similar gains during 2001.
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Interest expense decreased $802,000 in 2001 due to the extinguishment of the Company’s long-term debt in 2000.
Income taxes were $169,000 lower in 2001 principally as a result of the net transfer of partnership interests to the Company’s former lender.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 requires the Company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or normal use of the assets. The Company also records a corresponding asset that is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The Company is currently assessing the impact of adoption of SFAS No. 143.
In April 2002, the FASB issued SFAS No. 145,Rescission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No. 13, andTechnical Corrections. SFAS No. 145 amends existing guidance on reporting gains and losses on the extinguishment of debt to prohibit the classification of the gain or loss as extraordinary, as the use of such extinguishments have become part of the risk management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to require sale-leaseback accounting for certain lease modifications that have economic effects similar to sale-leaseback transactions. The provisions of the Statement related to the rescission of Statement No. 4 is applied in fiscal years beginning after May 15, 2002. Earlier application of these provisions is encouraged. The provisions of the Statement related to Statement No. 13 were effective for transactions occurring after May 15, 2002, with early application encouraged. The adoption of SFAS No. 145 is not expected to have a material effect on the Company’s financial statements.
In June 2002, the FASB issued SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 is not expected to have a material effect on the Company’s financial statements.
In November 2002, the FASB issued Interpretation No. 45,Guarantor’s Accounting and Disclosure Requirements for Guarantees,Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This Interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The Interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the Interpretation are applicable to guarantees issued or modified after December 31, 2002 and are not expected to have a material effect on the Company’s financial statements. The disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements. Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.
In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities, an interpretation of ARB No. 51. This Interpretation addresses the consolidation by business enterprises of variable
29
interest entities as defined in the Interpretation. The Interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The application of this Interpretation is not expected to have a material effect on the Company’s financial statements. The Interpretation requires certain disclosures in financial statements issued after January 31, 2003 if it is reasonably possible that the Company will consolidate or disclose information about variable interest entities when the Interpretation becomes effective. Based on its initial review, the Company does not believe it has any interests in variable interest entities.
Liquidity and Capital Resources
Argosy Energy International (“Argosy”), a Utah limited partnership, that holds the Company’s Colombian properties, is required by the Guayuyaco contract to drill an exploratory well by October 2003. Drilling of the proposed well, the Inchiyaco #1, is expected to commence during the second quarter of 2003.
In order to have funds available to drill the Inchiyaco #1, beginning in June 2002 Argosy elected to accumulate all excess cash in Colombia from current sales revenues. Accordingly, Aviva will likely not receive any cash distributions from Colombia until after the Inchiyaco well has been drilled. Even if such an exploratory well was successful, additional funds may be required to equip and complete such a well prior to the resumption of cash distributions.
As of December 31, 2002, approximately $824,000 of cash and cash equivalents included in the Company’s consolidated cash and cash equivalents balance has been accumulated in Colombia principally for Aviva’s share of the drilling cost of the Inchiyaco well. The remaining balance of $884,000 is held in the U.S. and is available for U.S. operations.
The Company’s only source of net cash from operating activities, other than Argosy, is its U.S. Operations. As indicated in note 12 to the consolidated financial statements, the U.S. operations have suffered a net loss of approximately $1,629,000 for the year ended December 31, 2002, and may continue to have net losses in the foreseeable future. Moreover, as described in note 10, the U.S. properties are experiencing operational difficulties that could result in the surrender of the leases and the requirement to abandon the property at a cost of approximately $0.9 million to the Company.
Accordingly, if distributions from Argosy do not resume and the Company is not able to generate additional cash from investing or financing activities, the Company’s liquidity will continue to deteriorate. These factors raise substantial doubt concerning the ability of the Company to continue operating as a going concern.
In order to improve the Company’s liquidity, management of the Company is continuing its efforts to raise additional capital through equity issues, issuance of debt, sales of assets and farmout of prospects. The Company’s ability to raise additional capital will be dependent upon the drilling results of the Inchiyaco well, a matter that is beyond the control of management. Accordingly, there can be no assurance that such attempts to raise additional capital will be successful.
In Colombia, the obligations under the Santana contract have been met; however, Argosy plans to recomplete certain existing wells and engage in various other projects. The first of these recompletions is scheduled during 2004, and the majority of the remaining recompletions are scheduled during 2005. The Company’s share of the estimated future costs of these activities is approximately $0.2 million at December 31, 2002.
The contract obligations of the Rio Magdalena contract require Argosy and its co-owner to perform 40 kilometers of 2D seismic during the initial 18-month exploration phase of the contract. The Company’s current share of the estimated future costs of this phase is approximately $0.1 million at December 31, 2002. Additional expenditures will be required should Argosy decide to enter into the second phase of the contract.
As mentioned above, the obligations of the Guayuyaco contract (signed August 2, 2002) require Argosy to drill one exploratory well during the initial 12-month exploration phase of the contract. Upon completion of the initial exploration phase, Argosy may relinquish the contract or proceed to the following 18-month exploration phase,
30
under which Argosy will be obligated to drill a second exploratory well. Argosy plans to involve industry and service company partners to reduce the cost exposure of the first exploratory well. Depending on definitive service agreements, rig availability and other contingencies, drilling could commence as early as the second quarter of 2003.
Failure by Argosy to meet the obligations under the proposed Guayuyaco contract will result in the loss of the proposed contract terms. The existing Santana production and acreage will not be affected. Failure by the Company to fund its share of Argosy’s obligations, assuming Argosy funds the obligation, could result in a decrease in the Company’s ownership interest in Argosy.
The Company expects to fund its share of the cost of the recompletions on the Santana contract and the seismic commitments on the Rio Magdalena contract using existing cash in Colombia and cash provided from Colombian operations. Risks that could adversely affect funding of such activities include, among others, delays in obtaining any required environmental permits, failure to produce the reserves as projected or a decline in the sales price of oil. Any substantial increases in the amounts of these required expenditures could adversely affect the Company’s ability to fund these activities. Any substantial delays could, through the impact of inflation, increase the required expenditures. Cost overruns resulting from factors other than inflation could also increase the required expenditures. Historically, the inflation rate of the Colombian peso has been in the range of 15-30% per year. Devaluation of the peso against the U.S. dollar has historically been slightly less than the inflation rate in Colombia. The Company has historically funded capital expenditures in Colombia by converting U.S. dollars to pesos at such time as the expenditures have been made. As a result of the interaction between peso inflation and devaluation of the peso against the U.S. dollar, inflation, from the Company’s perspective, had not been a significant factor. During 1994, the first half of 1995 and 1996, however, devaluation of the peso was substantially lower than the rate of inflation of the peso, resulting in an effective inflation rate in excess of that of the U.S. dollar. There can be no assurance that this condition will not occur again or that, in such event, there will not be substantial increases in future capital expenditures as a result. Due to Colombian exchange controls and restrictions and the lack of an effective market, it is not feasible to hedge against the risk of net peso inflation against the U.S. dollar and the Company has not done so. Depending on the results of future exploration and development activities, substantial expenditures that have not been included in the Company’s cash flow projections may be required.
With the exception of historical information, the matters discussed in this annual report to shareholders contain forward-looking statements that involve risks and uncertainties. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, among other things, general economic conditions, volatility of oil and gas prices, the impact of possible geopolitical occurrences world-wide and in Colombia, imprecision of reserve estimates, the assessment of geological and geophysical data, 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 above.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk from changes in commodity prices. The Company produces and sells crude oil and natural gas. These commodities are sold based on market prices established with the buyers. The Company does not use financial instruments to hedge commodity prices.
The Company is also exposed to foreign currency exchange rate risk as a result of its international business in Colombia. The Company does not use financial instruments to hedge foreign currency exchange rates.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the Financial Statements of Aviva Petroleum Inc. attached hereto.
31
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PRESENCE OF ACCOUNTANT’S REPRESENTATIVES AT THE SPECIAL MEETING
Representatives of the Company’s principal accountants are expected to be present at the special meeting. The accountant’s representatives will have the opportunity to make a statement if they desire to do so and are expected to be available to respond to appropriate questions.
32
FINANCIAL AND OTHER INFORMATION
Page | ||
Independent Auditors’ Report | 34 | |
Consolidated Balance Sheet as of December 31, 2002 and 2001 | 35 | |
Consolidated Statement of Operations for the years ended December 31, 2002, 2001 and 2000 | 36 | |
Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000 | 37 | |
Consolidated Statement of Stockholders’ Equity (Deficit) for the years ended December 31, 2002, 2001 and 2000 | 38 | |
Notes to Consolidated Financial Statements | 39 | |
Supplementary Information Related to Oil and Gas Producing Activities (Unaudited) | 52 |
All schedules called for under Regulation S-X have been omitted because they are not applicable, the required information is not material or the required information is included in the consolidated financial statements or notes thereto.
33
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 auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has incurred a net loss of $1,005,000 for the year ended December 31, 2002, has limited available financial resources to support its ongoing operations and is dependent upon distributions from its Colombia operations. These factors raise substantial doubt concerning the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. 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.
KPMG LLP
Dallas, Texas
March 7, 2003
34
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 2002 and 2001
(in thousands, except number of shares)
2002 | 2001 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,708 |
| $ | 1,010 |
| ||
Accounts receivable (note 9): | ||||||||
Oil and gas revenue |
| 61 |
|
| 42 |
| ||
Trade |
| 42 |
|
| 66 |
| ||
Other |
| 20 |
|
| 79 |
| ||
Inventories |
| 193 |
|
| 209 |
| ||
Prepaid expenses and other |
| 116 |
|
| 140 |
| ||
Total current assets |
| 2,140 |
|
| 1,546 |
| ||
Property and equipment, at cost: | ||||||||
Oil and gas properties and equipment (full cost method) |
| 20,370 |
|
| 20,244 |
| ||
Other |
| 337 |
|
| 334 |
| ||
| 20,707 |
|
| 20,578 |
| |||
Less accumulated depreciation, depletion and amortization |
| (19,874 | ) |
| (19,981 | ) | ||
| 833 |
|
| 597 |
| |||
Other assets (note 4) |
| 105 |
|
| 991 |
| ||
$ | 3,078 |
| $ | 3,134 |
| |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 916 |
| $ | 776 |
| ||
Accrued liabilities |
| 163 |
|
| 37 |
| ||
Accrued abandonment liability (note 10) |
| 908 |
|
| — |
| ||
Short-term debt (note 5) |
| 50 |
|
| — |
| ||
Total current liabilities |
| 2,037 |
|
| 813 |
| ||
Other liabilities |
| 93 |
|
| 368 |
| ||
Stockholders’ equity (note 7): | ||||||||
Common stock, no par value, authorized 348,500,000 shares; issued 46,900,132 shares |
| 2,345 |
|
| 2,345 |
| ||
Additional paid-in capital |
| 37,710 |
|
| 37,710 |
| ||
Accumulated deficit* |
| (39,107 | ) |
| (38,102 | ) | ||
Total stockholders’ equity |
| 948 |
|
| 1,953 |
| ||
Commitments and contingencies (note 10) | ||||||||
$ | 3,078 |
| $ | 3,134 |
| |||
| * | Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a quasi-reorganization. See note 7. |
See accompanying notes to consolidated financial statements.
35
AVIVA PETROLEUM INC. AND SUBSIDIAIRIES
Consolidated Statement of Operations
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except per share data)
2002 | 2001 | 2000 | ||||||||||
Revenue: | ||||||||||||
Oil and gas sales (note 9) | $ | 1,871 |
| $ | 2,136 |
| $ | 5,796 |
| |||
Service fees (note 3) |
| 97 |
|
| 473 |
|
| 387 |
| |||
Total revenue |
| 1,968 |
|
| 2,609 |
|
| 6,183 |
| |||
Expense: | ||||||||||||
Production |
| 1,193 |
|
| 1,402 |
|
| 2,407 |
| |||
Depreciation, depletion and amortization | �� |
| 209 |
|
| 320 |
|
| 515 |
| ||
Provision for abandonment and impairment (note 10) |
| 592 |
|
| — |
|
| — |
| |||
General and administrative |
| 1,086 |
|
| 1,006 |
|
| 1,157 |
| |||
Recovery of losses on accounts receivable |
| (4 | ) |
| (48 | ) |
| (256 | ) | |||
Total expense |
| 3,076 |
|
| 2,680 |
|
| 3,823 |
| |||
Other income (expense): | ||||||||||||
Gain on transfer of partnership interests (note 3) |
| — |
|
| — |
|
| 3,452 |
| |||
Interest and other income (expense), net (note 6) |
| 175 |
|
| 235 |
|
| 207 |
| |||
Interest expense |
| (33 | ) |
| (3 | ) |
| (805 | ) | |||
Total other income (expense) |
| 142 |
|
| 232 |
|
| 2,854 |
| |||
Earnings (loss) before income taxes and extraordinary item |
| (966 | ) |
| 161 |
|
| 5,214 |
| |||
Income taxes (note 8) |
| (39 | ) |
| (84 | ) |
| (253 | ) | |||
Earnings (loss) before extraordinary item |
| (1,005 | ) |
| 77 |
|
| 4,961 |
| |||
Extraordinary item—debt extinguishment, net of income taxes of $2,855 (notes 3 and 11) |
| — |
|
| — |
|
| 5,543 |
| |||
Net earnings (loss) | $ | (1,005 | ) | $ | $77 |
| $ | 10,504 |
| |||
Weighted average common shares outstanding— basic and diluted |
| 46,900 |
|
| 46,900 |
|
| 46,900 |
| |||
Basic and diluted net earnings (loss) per common share: | ||||||||||||
Before extraordinary item | $ | (0.02 | ) | $ | 0.00 |
| $ | 0.10 |
| |||
Extraordinary item |
| — |
|
| — |
|
| 0.12 |
| |||
Net earnings (loss) | $ | (0.02 | ) | $ | 0.00 |
| $ | 0.22 |
| |||
See accompanying notes to consolidated financial statements.
36
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
(in thousands)
2002 | 2001 | 2000 | ||||||||||
Net earnings (loss) | $ | (1,005 | ) | $ | 77 |
| $ | 10,504 |
| |||
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: | ||||||||||||
Depreciation, depletion and amortization |
| 209 |
|
| 320 |
|
| 515 |
| |||
Provision for abandonment and impairment |
| 592 |
|
| — |
|
| — |
| |||
Recovery of losses on accounts receivable |
| (4 | ) |
| (48 | ) |
| (256 | ) | |||
Gain on transfer of partnership interests |
| — |
|
| — |
|
| (3,452 | ) | |||
Gain on debt extinguishment |
| — |
|
| — |
|
| (5,543 | ) | |||
Loss (gain) on sale of assets, net |
| — |
|
| (4 | ) |
| 4 |
| |||
Foreign currency exchange gain, net |
| (29 | ) |
| (11 | ) |
| (44 | ) | |||
Other |
| (94 | ) |
| (127 | ) |
| (357 | ) | |||
Changes in assets and liabilities, net of effects of transfer of partnership interests: | ||||||||||||
Escrow account |
| — |
|
| — |
|
| 4 |
| |||
Accounts receivable |
| 5 |
|
| 155 |
|
| 204 |
| |||
Inventories |
| 17 |
|
| 8 |
|
| 10 |
| |||
Prepaid expenses and other |
| 25 |
|
| 51 |
|
| 27 |
| |||
Accounts payable and accrued liabilities |
| 216 |
|
| (231 | ) |
| 106 |
| |||
Net cash provided by (used in) operating activities |
| (68 | ) |
| 190 |
|
| 1,722 |
| |||
Cash flows from investing activities: | ||||||||||||
Transfer from abandonment fund |
| 902 |
|
| — |
|
| — |
| |||
Costs of and cash balances acquired (surrendered) in connection with the transfer of partnership interests from (to) former lender |
| — |
|
| 41 |
|
| (1,414 | ) | |||
Property and equipment expenditures |
| (230 | ) |
| (135 | ) |
| (382 | ) | |||
Proceeds from sale of assets |
| — |
|
| 4 |
|
| — |
| |||
Other |
| — |
|
| 80 |
|
| — |
| |||
Net cash provided by (used in) investing activities |
| 672 |
|
| (10 | ) |
| (1,796 | ) | |||
Cash flows from financing activities- | ||||||||||||
Proceeds from issuance of short term debt |
| 50 |
|
| — |
|
| — |
| |||
Effect of exchange rate changes on cash and cash equivalents |
| 44 |
|
| 10 |
|
| 48 |
| |||
Net increase (decrease) in cash and cash equivalents |
| 698 |
|
| 190 |
|
| (26 | ) | |||
Cash and cash equivalents at beginning of year |
| 1,010 |
|
| 820 |
|
| 846 |
| |||
Cash and cash equivalents at end of year | $ | 1,708 |
| $ | 1,010 |
| $ | 820 |
| |||
See accompanying notes to consolidated financial statements.
37
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Consolidated Statement of Stockholders’ Equity (Deficit)
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except number of shares)
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Equity (Deficit) | |||||||||||||
Number of Shares | Amount | |||||||||||||||
Balances at December 31, 1999 | 46,900,132 | $ | 2,345 | $ | 34,855 | $ | (48,683 | ) | $ | (11,483 | ) | |||||
Tax benefits relating to January 1, 1993 valuation allowance | — |
| — |
| 2,855 |
| — |
|
| 2,855 |
| |||||
Net earnings | — |
| — |
| — |
| 10,504 |
|
| 10,504 |
| |||||
Balances at December 31, 2000 | 46,900,132 |
| 2,345 |
| 37,710 |
| (38,179 | ) |
| 1,876 |
| |||||
Net earnings | — |
| — |
| — |
| 77 |
|
| 77 |
| |||||
Balances at December 31, 2001 | 46,900,132 |
| 2,345 |
| 37,710 |
| (38,102 | ) |
| 1,953 |
| |||||
Net loss | — |
| — |
| — |
| (1,005 | ) |
| (1,005 | ) | |||||
Balances at December 31, 2002 | 46,900,132 | $ | 2,345 | $ | 37,710 | $ | (39,107 | ) | $ | 948 |
| |||||
See accompanying notes to consolidated financial statements.
38
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
| (1) | Summary of Significant Accounting Policies |
General
Aviva Petroleum Inc. and its subsidiaries (the “Company”) are engaged in the business of exploring for, developing and producing oil and gas in Colombia and in the United States. The Company’s Colombian oil production is sold to Empresa Colombiana de Petroleos, the Colombian national oil company (“Ecopetrol”), while the Company’s U.S. oil and gas production is sold to principally one U.S. purchaser (See notes 9 and 12).
Oil and gas are the Company’s only products, and there is substantial uncertainty as to the prices that the Company may receive for its production. A decrease in these prices would affect operating results adversely.
Basis of Presentation
The Company’s consolidated financial statements have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in note 2 below, there is substantial doubt concerning the Company’s ability to continue operating as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.
Principles of Consolidation
The consolidated financial statements include the accounts of Aviva Petroleum Inc. and its subsidiaries. The Company proportionately consolidates less than 100% owned oil and gas partnerships in accordance with industry practice. 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 $101,000 in 2002, $66,000 in 2001 and $57,000 in 2000.
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 $1,052,000.
39
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
Depreciation, depletion and amortization expense per equivalent barrel of production was as follows:
2002 | 2001 | 2000 | |||||||
United States | $ | 3.26 | $ | 5.24 | $ | 2.62 | |||
Colombia | $ | 1.49 | $ | 1.66 | $ | 2.29 | |||
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. An excess of the capitalized costs relating to the U.S. cost center over the limitation at December 31, 2001 was not charged against earnings because of a price increase subsequent to year-end. As discussed more fully in Note 10, during the fourth quarter of 2002 the Company recorded a charge of $592,000 to fully accrue for the abandonment of the Breton Sound field and to write off the remaining undeveloped leasehold costs associated with this field.
Depletion expense and limits on capitalized costs are based on estimates of oil and gas reserves which are inherently imprecise and assume current prices for future net revenues. Accordingly, it is reasonably possible that the estimates of reserves quantities and future net revenues could differ materially in the near term from amounts currently estimated. Moreover, a future decrease in the prices the Company receives for its oil and gas production or downward reserve adjustments could 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 $246,000 and $303,000 were excluded from amortization at December 31, 2002 and 2001, respectively. Unevaluated properties are assessed quarterly to determine whether any impairment has occurred. The unevaluated costs at December 31, 2002 represent exploration costs and were incurred primarily during the six-year period ended December 31, 2002. Such costs are expected to be evaluated and included in the amortization computation within the next three years.
Other property and equipment is depreciated using the straight-line method over the estimated useful lives of the assets.
Gas Balancing
The Company uses the entitlements method of accounting for gas sales. Gas production taken by the Company in excess of amounts entitled is recorded as a liability to the other joint owners. Excess gas production taken by others is recognized as income to the extent of the Company’s proportionate share of the gas sold and a related receivable is recorded from the other joint owners. At December 31, 2002, the Company had gas imbalance receivables of $2,000.
Interest Expense
The Company capitalizes interest costs on qualifying assets, principally unevaluated oil and gas properties. During 2000 the Company capitalized $43,000 of interest. No interest was capitalized in 2002 and 2001.
Earnings Per Common Share
Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. For the years presented herein, basic and diluted EPS are the same since the effects of potential common shares (note 7) are either antidilutive or insignificant. For fiscal year 2001, options for 599,000
40
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
common shares were not included in the computation of diluted earnings per share, because their exercise price approximated the average market price of the common shares and the effect would be insignificant. For fiscal year 2000, options for 1,024,000 common shares were not included in the computation of diluted earnings per share because their exercise price was greater than the average market price of the common shares and, therefore, the effect would be antidilutive.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 (“Statement 109”) which requires recognition of deferred tax assets in certain circumstances and deferred tax liabilities for the future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities.
Statement of Cash Flows
The Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. The Company paid interest, net of amounts capitalized, of $1,000 in 2002, $3,000 in 2001 and $(37,000) in 2000 and paid income taxes of $4,000 in 2002, $107,000 in 2001 and $267,000 in 2000.
Stock Option Plan
The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44,Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123,Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.
2002 | 2001 | ||||||
(In thousands, except | |||||||
Net earnings (loss), as reported | $ | (1,005 | ) | $ | 77 | ||
Add stock-based employee compensation expense included in reported net income, net of tax |
| — |
|
| — | ||
Deduct total stock-based employee compensation expense determined under fair-value-based method for all rewards, net of tax |
| (14 | ) |
| 0 | ||
Pro forma net earnings (loss) | $ | (1,019 | ) | $ | 77 | ||
As reported and pro forma net earnings (loss) per common share | $ | (0.02 | ) | $ | 0.00 | ||
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.
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
41
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
functional currency. Exchange adjustments resulting from foreign currency transactions are recognized in expense or income in the current period.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Comprehensive Income
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, derivative instruments accounted for as hedges, foreign currency translation adjustments and adjustments to recognize additional minimum pension liabilities. For each period presented in the accompanying consolidated statement of operations, comprehensive income and net income are the same amount.
| (2) | Liquidity |
As discussed in note 10, Argosy Energy International (“Argosy”), a Utah limited partnership that holds the Company’s Colombian properties, is required by the Guayuyaco contract to drill an exploratory well by October 2003. Drilling of the proposed well, the Inchiyaco #1, is expected to commence during the second quarter of 2003.
In order to have funds available to drill the Inchiyaco #1, beginning in June 2002 Argosy elected to accumulate all excess cash in Colombia from current sales revenues. Accordingly, Aviva will likely not receive any cash distributions from Colombia until after the Inchiyaco well has been drilled. Even if such an exploratory well was successful, additional funds may be required to equip and complete such a well prior to the resumption of cash distributions.
As of December 31, 2002, approximately $824,000 of cash and cash equivalents included in the Company’s consolidated cash and cash equivalents balance has been accumulated in Colombia principally for Aviva’s share of the drilling cost of the Inchiyaco well. The remaining balance of $884,000 is held in the U.S. and is available for U.S. operations.
The Company’s only source of net cash from operating activities, other than Argosy, is its U.S. Operations. As indicated in note 12, the U.S. operations have suffered a net loss of approximately $1,629,000 for the year ended December 31, 2002, and may continue to have net losses in the foreseeable future. Moreover, as described in note 10, the U.S. properties are experiencing operational difficulties that could result in the surrender of the leases and the requirement to abandon the property at a cost of approximately $0.9 million to the Company.
Accordingly, if distributions from Argosy do not resume and the Company is not able to generate additional cash from investing or financing activities, the Company’s liquidity will continue to deteriorate. These factors raise substantial doubt concerning the ability of the Company to continue operating as a going concern.
In order to improve the Company’s liquidity, management of the Company is continuing its efforts to raise additional capital through equity issues, issuance of debt, sales of assets and farmout of prospects. The Company’s ability to raise additional capital will be dependent upon the drilling results of the Inchiyaco well, a matter that is beyond the control of management. Accordingly, there can be no assurance that such attempts to raise additional capital will be successful.
42
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| (3) | Debt Restructuring and Transfer of Partnership Interests |
On June 8, 2000, the Company entered into agreements with the Company’s senior secured lender in order to restructure the Company’s senior debt which, including unpaid interest, aggregated $16,103,064 as of May 31, 2000. Pursuant to the agreements, the lender canceled $13,353,064 of such debt and transferred to the Company warrants for 1,500,000 shares of the Company’s common stock in exchange for the general partner rights and an initial 77.5% partnership interest in Argosy. Following the transaction, Aviva Overseas Inc. (“Aviva Overseas”), a wholly owned subsidiary of the Company, owned a 22.1196% limited partnership interest in Argosy. An additional 7.5% limited partnership interest was transferred from the lender to Aviva Overseas when the lender had received in distributions from Argosy an amount equal to $3,500,000 plus interest at the prime rate plus 1% on the outstanding balance thereof.
The Company’s remaining debt of $2,750,000 was reacquired from the lender on December 21, 2000, in exchange for a 15% net profits interest in any new production at Breton Sound Block 31 field. This transaction substantially completed the restructuring of the Company and the reorganization of the Company’s wholly owned subsidiary Aviva America, Inc. (“AAI”) (see note 11).
In order to assist the lender in maximizing the value of its interest in Argosy, the lender entered into a Service Agreement with Aviva Overseas pursuant to which Aviva Overseas would provide certain services in administering the Colombian assets in exchange for a monthly fee. The fee was $71,000 per month for the period June 1, 2000 through March 31, 2001, $46,000 per month for the period April 1, 2001 through March 31, 2002, and $21,000 per month thereafter if the contract continued in effect. The Service Agreement provided for a term of 22 months and allowed termination with a 30-day written notice by either party. The Service Agreement was cancelled by the lender effective March 31, 2002.
The Company recognized a gain of $3,452,000 on the transfer of the partnership interests to the lender, representing the excess of the fair value over the book value of the interests transferred. The Company recognized an extraordinary gain of $4,888,000 on the extinguishment of the debt due to the lender, net of income taxes of $2,517,000.
In connection with the above-referenced transaction, 1,000,000 shares of the Company’s common stock which were held by the lender prior to the transaction, were transferred to members of management and the Board of Directors of the Company, effective June 8, 2000. As of such date, the aggregate market value of the common stock transferred to members of management and the Board of Directors was approximately $25,000 based on the last sale price on the OTC Bulletin Board of a depositary share representing five shares of the Company’s common stock. Additionally, 200,000 shares of the Company’s common stock which were held by the lender prior to the transaction were transferred to a consultant of the Company effective on the same date.
| (4) | Other Assets |
Other assets consist principally of abandonment funds for U.S. offshore properties of $100,000 and $989,000 as of December 31, 2002 and 2001, respectively.
| (5) | Short-Term Debt |
On December 12, 2002, the Company borrowed $50,000 in cash from Ronald Suttill, President and Chief Executive Officer of Aviva. Pursuant to such borrowing, the Company issued to Mr. Suttill a promissory note in the amount of $50,000, bearing interest at 10% per year, due May 31, 2003. Additionally, in order to induce Mr. Suttill to provide the Company with such loan, warrants to purchase 1 million shares of Aviva common stock were issued to Mr. Suttill effective December 12, 2002. Such warrants have an exercise price of $0.07 per share and expire on December 12, 2004. On the date of issuance, the warrants had a value of approximately $5,000 using the Black-Scholes option-pricing model.
| (6) | Interest and Other Income (Expense) |
A summary of interest and other income (expense) follows:
43
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2002 | 2001 | 2000 | ||||||||
(thousands) | ||||||||||
Interest income | $ | 26 | $ | 56 | $ | 97 |
| |||
Gain on settlement of disputed payable |
| — |
| 99 |
| — |
| |||
Foreign currency exchange gain (loss) |
| 29 |
| 11 |
| 44 |
| |||
Gain (loss) on sale of assets, net |
| — |
| 4 |
| (4 | ) | |||
Other, net |
| 120 |
| 65 |
| 70 |
| |||
$ | 175 | $ | 235 | $ | 207 |
| ||||
| (7) | Stockholders’ Equity |
Quasi-Reorganization
Effective December 31, 1992, the Board of Directors of the Company approved a quasi-reorganization which resulted in a reclassification of the accumulated deficit of $70,057,000 at that date to paid-in capital. No adjustments were made to the Company’s assets and liabilities since the historical carrying values approximated or did not exceed the estimated fair values.
Stock Option Plans
At December 31, 2002, 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.
The Aviva Petroleum Inc. 1995 Stock Option Plan, as amended (the “Current Plan”) is administered by a committee (the “Committee”) composed of outside directors of the Company. Except as indicated below and except for non-discretionary grants to non-employee directors, the Committee has authority to determine all terms and provisions under which options are granted pursuant to the Current Plan. An aggregate of up to 1,000,000 shares of the Company’s common stock may be issued upon exercise of stock options or in connection with restricted stock awards that may be granted under the Current Plan. The Current Plan also provides for the grant, on July 1, each year, to each non-employee director who has served in such capacity for at least the entire preceding calendar year of an option to purchase 5,000 shares of the Company’s common stock (the “Annual Option Awards”), exercisable as to 2,500 shares on the first anniversary of the date of grant and as to the remaining shares on the second anniversary thereof.
The aggregate fair market value (determined at the time of grant) of shares issuable pursuant to incentive stock options which first become exercisable in any calendar year by a participant in the Current Plan may not exceed $100,000. The maximum number of shares of common stock which may be subject to an option or restricted stock grant awarded to a participant in a calendar year cannot exceed 100,000. Incentive stock options granted under the Current Plan may not be granted at a price less than 100% of the fair market value of the common stock on the date of grant (or 110% of the fair market value in the case of incentive stock options granted to participants in the Current Plan holding 10% or more of the voting stock of the Company). Non-qualified stock options may not be granted at a price less than 50% of the fair market value of the common stock on the date of grant.
As a result of the adoption of the Current Plan, during 1995 the Company’s former Incentive and Non-Statutory Stock Option Plan was terminated as to the grant of new options, but options then outstanding for 190,000 shares of the Company’s common stock remain in effect as of December 31, 2002.
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:
44
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2002 | 2001 | 2000 | |||||||
Expected life (years) | 10.0 |
| 10.0 |
| 10.0 |
| |||
Risk-free interest rate | 4.92 | % | 5.42 | % | 6.03 | % | |||
Volatility | 100.4 | % | 103.0 | % | 124.0 | % | |||
Dividend yield | 0.0 | % | 0.0 | % | 0.0 | % |
A summary of the status of the Company’s two fixed stock option plans as of December 31, 2002, 2001 and 2000, and changes during the years ended on those dates is presented below:
2002 | 2001 | 2000 | |||||||||||||||||||
Fixed Options | Shares | Weighted-Average Exercise Price | Shares (000) | Weighted- | Shares (000) | Weighted- | |||||||||||||||
Outstanding at beginning of year |
| 889 |
| $ | 45 |
| 1,024 |
| $ | .51 |
| 1,072 |
| $ | .51 | ||||||
Granted |
| 305 |
|
| .08 |
| 5 |
|
| .07 |
| 5 |
|
| .08 | ||||||
Forfeited |
| (60 | ) |
| 2.41 |
| (140 | ) |
| .81 |
| (53 | ) |
| .17 | ||||||
Outstanding at end of year |
| 1,134 |
|
| .25 |
| 889 |
|
| .45 |
| 1,024 |
|
| .51 | ||||||
Options exercisable at year-end |
| 927 |
|
| 882 |
|
| 1,007 |
| ||||||||||||
Weighted-average fair value of options granted during the year | $ | .07 |
| $ | .06 |
| $ | .07 |
| ||||||||||||
The following table summarizes information about fixed stock options outstanding at December 31, 2002:
Options Outstanding | Options Exercisable | |||||||||||||
Range of Exercise Prices | Number Outstanding at 12/31/02 | Weighted-Avg. Remaining | Weighted- | Number Exercisable at 12/31/02 | Weighted- | |||||||||
$ 01 to .06 | 604,000 | 5.83 | years | $ | .06 | $ | 599,000 | $ | .06 | |||||
.07 to .08 | 310,000 | 9.02 |
|
| .08 |
| 107,500 |
| .08 | |||||
.52 to 1.08 | 220,000 | 0.54 |
|
| 1.00 |
| 220,000 |
| 1.00 | |||||
$ .01 to 1.08 | 1,134,000 | 5.67 |
|
| .25 |
| 926,500 |
| .29 | |||||
| (8) | Income Taxes |
Income tax expense includes current Colombian income taxes of $39,000 in 2002, $74,000 in 2001 and $241,000 in 2000. Income tax expense also includes state income taxes of $5,000 in 2001 and $12,000 in 2000.
Income tax expense for the years ended December 31, 2002, 2001 and 2000, differed from the amount computed by applying the statutory U.S. federal income tax rate (34%) to income before income taxes as a result of the following (in thousands):
2002 | 2001 | 2000 | ||||||||||
Computed expected tax expense (benefit) | $ | (342 | ) | $ | 55 |
| $ | 1,773 |
| |||
Decrease in valuation allowance |
| (676 | ) |
| (5,362 | ) |
| (17,856 | ) | |||
Expiration of net operating loss carryforwards |
| 1,085 |
|
| 3,555 |
|
| 15,467 |
| |||
Foreign income taxes and other |
| (28 | ) |
| 1,836 |
|
| 869 |
| |||
$ | 39 |
| $ | 84 |
| $ | 253 |
| ||||
45
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The Company has deferred tax assets of $17,342,000 and $18,259,000 at December 31, 2002 and 2001, respectively, consisting principally of net operating loss carryforwards. The valuation allowance for deferred tax assets at January 1, 2000 was $44,332,000. The net change in the valuation allowance was a $917,000 decrease in 2002, a $5,362,000 decrease in 2001 and a $20,711,000 decrease in 2000. Subsequently recognized tax benefits relating to the valuation allowance of $9,327,000 for deferred tax assets at January 1, 1993 will be credited to additional paid in capital. Such benefits were $2,855,000 during the year ended December 31, 2000.
At December 31, 2002, the Company and its subsidiaries have aggregate net operating loss carryforwards for U.S. federal income tax purposes of approximately $46,000,000, expiring from 2003 through 2022, which are available to offset future federal taxable income. The utilization of a portion of these net operating losses is subject to an annual limitation of approximately $2,400,000 and a portion may only be utilized by certain subsidiaries of the Company.
| (9) | Financial Instruments and Credit Risk Concentrations |
Financial instruments which are subject to risks due to concentrations of credit consist principally of cash and cash equivalents and receivables. Cash and cash equivalents are placed with high credit quality financial institutions to minimize risk. Receivables are typically unsecured. Historically, the Company has not experienced any material collection difficulties from its customers.
The carrying values of cash equivalents, accounts receivable and accounts payable approximate fair value due to the current maturities of these financial instruments.
Ecopetrol has an option to purchase all of the Company’s production in Colombia. For the years ended December 31, 2002, 2001 and 2000, Ecopetrol exercised that option and sales to Ecopetrol accounted for $1,164,000 (62%), $1,253,000 (59%), and $4,267,000 (74%) respectively, of the Company’s aggregate oil and gas sales.
For the years ended December 31, 2002, 2001 and 2000, sales to one U.S. purchaser accounted for $643,000 (34%), $782,000 (37%) and $968,000 (17%), respectively, of oil and gas sales.
| (10) | Commitments and Contingencies |
On January 30, 2003, the Company’s gas well that supplies fuel gas for the Breton Sound field ceased producing and production from the field was suspended. The Company has reviewed the possibility of recompleting an existing oil well into a gas zone capable of producing the necessary gas required to bring the field back onto production. This option, however, was determined to be economically unjustified. Accordingly, the Company is attempting to secure a gas supply from a gas distribution company that has a gas outlet at the Company’s gas platform. This plan would require the Company to install a sales meter and make other improvements to the Company’s gas platform at a cost estimated at $150,000. There can be no assurance, however, that the gas distribution company will agree to sell the requisite gas to the Company. If the Company is unable to bring the field back onto production before May 1, 2003, the Company could be required to surrender the leases to the State of Louisiana and abandon the property at a cost of approximately $0.9 million. The 2002 financial statements include an abandonment provision of $45,000 to fully accrue for this contingency, and an impairment provision of $182,000 related to the contingency.
At December 31, 2002, the Company had $908,000 recorded as an abandonment liability to fully provide for the estimated costs to abandon the property.
The Company is also engaged in ongoing operations in Colombia. The obligations under the Santana contract have been met; however, Argosy plans to recomplete certain existing wells and engage in various other projects. The first of these recompletions is scheduled during 2004, and the majority of the remaining recompletions are scheduled during 2005. The Company’s share of the estimated future costs of these activities is approximately $0.2 million at December 31, 2002.
46
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
The contract obligations of the Rio Magdalena contract require Argosy and its co-owner to perform 40 kilometers of 2D seismic during the initial 18-month exploration phase of the contract. The Company’s current share of the estimated future costs of this phase is approximately $0.1 million at December 31, 2002. Additional expenditures will be required should Argosy decide to enter into the second phase of the contract.
The Company expects to fund its share of the cost of the recompletions on the Santana contract and the seismic commitments on the Rio Magdalena contract using existing cash in Colombia and cash provided from Colombian operations. Any substantial increase in the amount of the above referenced expenditures could adversely affect the Company’s ability to fund these activities. Risks that could adversely affect funding of such activities include, among others, delays in obtaining any required environmental permits, cost overruns, failure to produce the reserves as projected or a decline in the sales price of oil. Depending on the results of future exploration and development activities, substantial expenditures that have not been included in the Company’s projections may be required.
The obligations of the Guayuyaco contract (signed August 2, 2002) require Argosy to drill one exploratory well during the initial 12-month exploration phase of the contract. Upon completion of the initial exploration phase, Argosy may relinquish the contract or proceed to the following 18-month exploration phase, under which Argosy will be obligated to drill a second exploratory well. Argosy plans to involve industry and service company partners to reduce the cost exposure of the first exploratory well. This well, the Inchiyaco #1, is expected to be a 7,800 foot exploration test of the Villeta U, T, N and Caballos sands in the Inchiyaco structure approximately 500 meters east of the Mary field. Depending on definitive service agreements, rig availability and other contingencies, drilling could commence as early as the second quarter of 2003.
Failure by Argosy to meet the obligations under the Guayuyaco contract will result in the loss of the proposed contract terms. The existing Santana production will not be affected. Failure by the Company to fund its share of Argosy’s obligations, assuming Argosy funds the obligation, could result in a decrease in the Company’s ownership interest in Argosy.
During 1998, leftist Colombian guerrillas inflicted significant damage on Argosy’s oil processing and storage facilities. Since that time Argosy has been subject to lesser attacks on its pipelines and equipment resulting in only minor interruptions of oil sales. The Colombian army guards the Company’s operations; however, there can be no assurance that such operations will not be the target of additional guerrilla attacks in the future. The damages resulting from the 1998 attack were covered by insurance. During 2001 the cost of such insurance became prohibitively high and, accordingly, Argosy has elected to no longer maintain terrorism insurance.
Under the terms of the contracts with Ecopetrol, a minimum of 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, the Company has experienced no difficulty in repatriating the remaining 75% of such payments, which are payable in U.S. dollars.
Activities of the Company with respect to the exploration, development and production of oil and natural gas are subject to stringent foreign, federal, state and local environmental laws and regulations, including but not limited to the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the Federal Water Pollution Control Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act. Such laws and regulations have increased the cost of planning, designing, drilling, operating and abandoning wells. In most instances, the statutory and regulatory requirements relate to air and water pollution control procedures and the handling and disposal of drilling and production wastes. Although the Company believes that compliance with environmental laws and regulations will not have a material adverse effect on the Company’s future operations or earnings, risks of substantial costs and liabilities are inherent in oil and gas operations and there can be no assurance that significant costs and liabilities, including administrative, 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
47
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
accrue environmental and restoration related costs once it is probable that a liability has been incurred and the amount can be reasonably estimated.
In “Terrebonne Parish School Board v. Quintana Petroleum Corporation, et al.,” Case No. 00-0443, Sect. T (2) in the United States District Court for the Eastern District of Louisiana, the Terrebonne Parish School Board, also referred to as the “Board,” has sued various oil and gas companies, including the Company, alleging that they dredged canals and moved equipment across Board property for the purpose of developing the minerals thereunder, but subsequently failed to restore the surface of the property, thus causing erosion to Louisiana coastal wetlands. The Company’s involvement, as a successor to Jackson Exploration, Inc., with respect to any such Board property was brief, and records from the period are scarce. This lawsuit was stayed by this District Court pending resolution of an appeal made to the United States Court of Appeals for the Fifth Circuit of an unrelated case in which this same District Court granted summary judgment to the defendants for the same type of claims being made in this lawsuit because such claims were barred by Louisiana’s limitation doctrine. On November 13, 2002, the United States Court of Appeals for the Fifth Circuit upheld that ruling made in the unrelated case, finding that the limitations period was not tolled, and that the plaintiff’s failure to take action after knowing of the erosion as early as 1995 was “tantamount to willful neglect.” The appellate court also rejected the theory made by the plaintiffs that the alleged tort was a “continuing tort.” In the current lawsuit involving Aviva, the plaintiff recently moved the court to place the proceedings back on the court’s active docket. Given the Fifth Circuit’s rejection of the plaintiff’s claims in the unrelated case, however, management of Aviva believes there is a reasonable possibility that this lawsuit may be dismissed on limitations grounds. Accordingly, management does not expect this lawsuit to have a materially adverse effect on the Company’s results of operations or financial condition.
There are no other legal proceedings to which the Company is a party or to which its properties are subject which are, in the opinion of management, likely to have a material adverse effect on the Company’s results of operations or financial condition.
The Company has one lease for office space in Dallas, Texas, which expires in January 2007. Rent expense relating to the lease was $84,000, $90,000, and $88,000 for 2002, 2001 and 2000, respectively. Future minimum payments under the lease are approximately $94,000 for each year through 2006 and $8,000 for 2007.
| (11) | Subsidiary’s Reorganization under Chapter 11 |
On July 21, 2000, AAI, a wholly-owned subsidiary of the Company, filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy code. AAI is a Delaware corporation which holds the Company’s interests in oil and gas properties located offshore Louisiana. The filing, in the Northern District of Texas, was initiated in order to achieve a comprehensive restructuring of AAI’s debts.
Following approval by the court and creditors, the voluntary petition for reorganization became effective on November 17, 2000. In connection with the reorganization, the Company recognized an extraordinary gain of $655,000 on the extinguishment of certain AAI debts, net of income taxes of $338,000.
48
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| (12) | Geographic Area Information |
The Company is engaged in the business of exploring for, developing and producing oil and gas in the United States and Colombia. Information about the Company’s operations in different geographic areas as of and for the years ended December 31, 2002, 2001 and 2000 follows:
United States | Colombia | Total | ||||||||||
(Thousands) | ||||||||||||
2002 | ||||||||||||
Revenue: | ||||||||||||
Oil and gas sales | $ | 707 |
| $ | 1,164 |
| $ | 1,871 |
| |||
Service fees |
| 97 |
|
| — |
|
| 97 |
| |||
| 804 |
|
| 1,164 |
|
| 1,968 |
| ||||
Expense: | ||||||||||||
Production |
| 770 |
|
| 423 |
|
| 1,193 |
| |||
Depreciation, depletion and amortization |
| 121 |
|
| 88 |
|
| 209 |
| |||
Provision for abandonment and impairment (see note 10) |
| 592 |
|
| — |
|
| 592 |
| |||
General and administrative |
| 951 |
|
| 135 |
|
| 1,086 |
| |||
Recovery of losses on accounts receivable |
| (4 | ) |
| — |
|
| (4 | ) | |||
| 2,430 |
|
| 646 |
|
| 3,076 |
| ||||
Interest and other income (expense), net |
| 30 |
|
| 145 |
|
| 175 |
| |||
Interest expense |
| (33 | ) |
| — |
|
| (33 | ) | |||
Earnings (loss) before income taxes |
| (1,629 | ) |
| 663 |
|
| (966 | ) | |||
Income taxes |
| — |
|
| (39 | ) |
| (39 | ) | |||
Net earnings (loss) | $ | (1,629 | ) | $ | 624 |
| $ | (1,005 | ) | |||
Total assets | $ | 1,206 |
| $ | 1,872 |
| $ | 3,078 |
| |||
United States | Colombia | Total | ||||||||||
(Thousands) | ||||||||||||
2001 | ||||||||||||
Revenue: | ||||||||||||
Oil and gas sales | $ | 883 |
| $ | 1,253 |
| $ | 2,136 |
| |||
Service fees |
| 473 |
|
| — |
|
| 473 |
| |||
| 1,356 |
|
| 1,253 |
|
| 2,609 |
| ||||
Expense: | ||||||||||||
Production |
| 785 |
|
| 617 |
|
| 1,402 |
| |||
Depreciation, depletion and amortization |
| 219 |
|
| 101 |
|
| 320 |
| |||
General and administrative |
| 904 |
|
| 102 |
|
| 1,006 |
| |||
Recovery of losses on accounts receivable |
| (48 | ) |
| — |
|
| (48 | ) | |||
| 1,860 |
|
| 820 |
|
| 2,680 |
| ||||
Interest and other income (expense), net |
| 56 |
|
| 179 |
|
| 235 |
| |||
Interest expense |
| (3 | ) |
| — |
|
| (3 | ) | |||
Earnings (loss) before income taxes |
| (451 | ) |
| 612 |
|
| 161 |
| |||
Income taxes |
| (10 | ) |
| (74 | ) |
| (84 | ) | |||
Net earnings (loss) | $ | (461 | ) | $ | 538 |
| $ | 77 |
| |||
Total assets | $ | 1,602 |
| $ | 1,532 |
| $ | 3,134 |
| |||
49
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
United States | Colombia | Total | ||||||||||
(Thousands) | ||||||||||||
2000 | ||||||||||||
Revenue: | ||||||||||||
Oil and gas sales | $ | 1,528 |
| $ | 4,268 |
| $ | 5,796 |
| |||
Service fees |
| 387 |
|
| — |
|
| 387 |
| |||
| 1,915 |
|
| 4,268 |
|
| 6,183 |
| ||||
Expense: | ||||||||||||
Production |
| 1,099 |
|
| 1,308 |
|
| 2,407 |
| |||
Depreciation, depletion and amortization |
| 131 |
|
| 384 |
|
| 515 |
| |||
General and administrative |
| 1,077 |
|
| 80 |
|
| 1,157 |
| |||
Recovery of losses on accounts receivable |
| (256 | ) |
| — |
|
| (256 | ) | |||
| 2,051 |
|
| 1,772 |
|
| 3,823 |
| ||||
Gain on transfer of partnership interests |
| — |
|
| 3,452 |
|
| 3,452 |
| |||
Interest and other income (expense), net |
| 39 |
|
| 168 |
|
| 207 |
| |||
Interest expense |
| (183 | ) |
| (622 | ) |
| (805 | ) | |||
Earnings (loss) before income taxes and extraordinary item |
| (280 | ) |
| 5,494 |
|
| 5,214 |
| |||
Income taxes |
| (12 | ) |
| (241 | ) |
| (253 | ) | |||
Earnings (loss) before extraordinary item |
| (292 | ) |
| 5,253 |
|
| 4,961 |
| |||
Extraordinary item – debt extinguishment |
| 655 |
|
| 4,888 |
|
| 5,543 |
| |||
Net earnings | $ | 363 |
| $ | 10,141 |
| $ | 10,504 |
| |||
Total assets | $ | 1,662 |
| $ | 1,649 |
| $ | 3,311 |
| |||
50
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
| (13) | Quarterly Financial Data (Unaudited) |
Quarterly operating results for 2002 and 2001 are summarized as follows (in thousands, except per share data):
Quarter Ended | ||||||||||||||||
March 31 | June 30 | September 30 | December 31 (1) | |||||||||||||
2002 | ||||||||||||||||
Revenues | $ | 460 |
| $ | 534 |
| $ | 507 |
| $ | 467 |
| ||||
Operating earnings |
| (136 | ) |
| (101 | ) |
| (129 | ) |
| (742 | ) | ||||
Net earnings (loss) |
| (100 | ) |
| (88 | ) |
| (84 | ) |
| (733 | ) | ||||
Basic and diluted earnings (loss) per common share | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.02 | ) | ||||
2001 | ||||||||||||||||
Revenues | $ | 766 |
| $ | 682 |
| $ | 654 |
| $ | 507 |
| ||||
Operating earnings |
| 77 |
|
| (26 | ) |
| 35 |
|
| (157 | ) | ||||
Net earnings (loss) |
| 229 |
|
| (44 | ) |
| 40 |
|
| (148 | ) | ||||
Basic and diluted earnings (loss) per common share | $ | 0.00 |
| $ | (0.00 | ) | $ | 0.00 |
| $ | (0.00 | ) | ||||
| (1) | In the fourth quarter, the Company recorded an abandonment provision of $45,000 and an impairment provision of $182,000 related to the Breton Sound field as more fully discussed in Note 10. |
51
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas Producing Activities
(Unaudited)
The following information relating to the Company’s oil and gas activities is presented in accordance with Statement of Financial Accounting Standards No. 69. The Financial Accounting Standards Board has determined the information is necessary to supplement, although not required to be a part of, the basic financial statements.
Capitalized costs and accumulated depreciation, depletion and amortization relating to oil and gas producing activities were as follows:
United States | Colombia | Total | ||||||||
(Thousands) | ||||||||||
December 31, 2002 | ||||||||||
Unevaluated oil and gas properties | $ | — |
| $ | 246 | $ | 246 | |||
Proved oil and gas properties |
| 4,150 |
|
| 15,974 |
| 20,124 | |||
Total capitalized costs |
| 4,150 |
|
| 16,220 |
| 20,370 | |||
Less accumulated depreciation, depletion and amortization |
| 4,150 |
|
| 15,423 |
| 19,573 | |||
Capitalized costs, net, excluding U.S. abandonment liability of $908 | $ | — |
| $ | 797 | $ | 797 | |||
December 31, 2001 | ||||||||||
Unevaluated oil and gas properties | $ | 184 |
| $ | 119 | $ | 303 | |||
Proved oil and gas properties |
| 4,008 |
|
| 15,933 |
| 19,941 | |||
Total capitalized costs |
| 4,192 |
|
| 16,052 |
| 20,244 | |||
Less accumulated depreciation, depletion and amortization |
| 4,368 |
|
| 15,335 |
| 19,703 | |||
Capitalized costs, net | $ | (176 | ) | $ | 717 | $ | 541 | |||
52
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas Producing Activities (Continued)
(Unaudited)
Costs incurred in oil and gas property acquisition, exploration and development activities were as follows:
United | Colombia | Total | |||||||
(Thousands) | |||||||||
2002 | |||||||||
Exploration | $ | — | $ | 124 | $ | 124 | |||
Development |
| 52 |
| 44 |
| 96 | |||
Acquisition of producing properties |
| 6 |
| — |
| 6 | |||
Total costs incurred | $ | 58 | $ | 168 | $ | 226 | |||
2001 | |||||||||
Exploration | $ | — | $ | — | $ | — | |||
Development |
| 72 |
| 19 |
| 91 | |||
Total costs incurred | $ | 72 | $ | 19 | $ | 91 | |||
2000 | |||||||||
Exploration | $ | 10 | $ | 4 | $ | 14 | |||
Development |
| 238 |
| 110 |
| 348 | |||
Total costs incurred | $ | 248 | $ | 114 | $ | 362 | |||
53
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas Producing Activities (Continued)
(Unaudited)
The following schedule presents the Company’s estimate of its proved oil and gas reserves. The proved oil and gas reserves in Colombia and the United States were determined by independent petroleum engineers, Huddleston & Co., Inc. and Netherland, Sewell & Associates, Inc., respectively. The figures presented are estimates of reserves which may be expected to be recovered commercially at current prices and costs. Estimates of proved developed reserves include only those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Estimates of proved undeveloped reserves include only those reserves which are expected to be recovered on undrilled acreage from new wells which are reasonably certain of production when drilled or from presently existing wells which could require relatively major expenditures to effect recompletion.
Changes in the Estimated | |||||||||
United | Colombia | Total | |||||||
(1) | (Thousands) | ||||||||
Year ended December 31, 2002 | |||||||||
Oil (Thousands of barrels) | |||||||||
Proved reserves: | |||||||||
Beginning of period | 80 |
| 638 |
| 718 |
| |||
Revisions of previous estimates | 46 |
| 1 |
| 47 |
| |||
Purchase of reserves | 13 |
| — |
| 13 |
| |||
Production | (27 | ) | (59 | ) | (86 | ) | |||
End of period | 112 |
| 580 |
| 692 |
| |||
Proved developed reserves, end of period | 112 |
| 580 |
| 692 |
| |||
Gas (Millions of cubic feet) | |||||||||
Proved reserves: | |||||||||
Beginning of period | 25 |
| — |
| 25 |
| |||
Revisions of previous estimates | 60 |
| — |
| 60 |
| |||
Purchase of reserves | 9 |
| — |
| 9 |
| |||
Production | (20 | ) | — |
| (20 | ) | |||
End of period | 74 |
| — |
| 74 |
| |||
Proved developed reserves, end of period | 74 |
| — |
| 74 |
| |||
| (1) | The reserve estimates for the United States were prepared as of December 31, 2002, prior to the operational difficulties described in note 10 to the consolidated financial statements. If the operational difficulties are not satisfactorily resolved, then the reserve quantities for the United States would be substantially eliminated. |
54
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas Producing Activities (Continued)
(Unaudited)
Changes in the Estimated | |||||||||
United | Colombia | Total | |||||||
Year ended December 31, 2001 | |||||||||
Oil (Thousands of barrels) | |||||||||
Proved reserves: | |||||||||
Beginning of period | 174 |
| 696 |
| 870 |
| |||
Revisions of previous estimates | (66 | ) | 3 |
| (63 | ) | |||
Purchase of reserves | 5 |
| — |
| 5 |
| |||
Production | (33 | ) | (61 | ) | (94 | ) | |||
End of period | 80 |
| 638 |
| 718 |
| |||
Proved developed reserves, end of period | 80 |
| 638 |
| 718 |
| |||
Gas (Millions of cubic feet) | |||||||||
Proved reserves: | |||||||||
Beginning of period | 114 |
| — |
| 114 |
| |||
Revisions of previous estimates | (67 | ) | — |
| (67 | ) | |||
Purchase of reserves | 2 |
| — |
| 2 |
| |||
Production | (24 | ) | — |
| (24 | ) | |||
End of period | 25 |
| — |
| 25 |
| |||
Proved developed reserves, end of period | 25 |
| — |
| 25 |
| |||
55
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas Producing Activities (Continued)
(Unaudited)
Changes in the Estimated Quantities of Reserves | |||||||||
United States | Colombia | Total | |||||||
Year ended December 31, 2000 | |||||||||
Oil (Thousands of barrels) | |||||||||
Proved reserves: | |||||||||
Beginning of period | 144 |
| 2,208 |
| 2,352 |
| |||
Revisions of previous estimates | 79 |
| 259 |
| 338 |
| |||
Sales of reserves | — |
| (1,614 | ) | (1,614 | ) | |||
Production | (49 | ) | (157 | ) | (206 | ) | |||
End of period | 174 |
| 696 |
| 870 |
| |||
Proved developed reserves, end of period | 174 |
| 696 |
| 870 |
| |||
Gas (Millions of cubic feet) | |||||||||
Proved reserves: | |||||||||
Beginning of period | 101 |
| — |
| 101 |
| |||
Revisions of previous estimates | 38 |
| — |
| 38 |
| |||
Production | (25 | ) | — |
| (25 | ) | |||
End of period | 114 |
| — |
| 114 |
| |||
Proved developed reserves, end of period | 114 |
| — |
| 114 |
| |||
56
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas Producing Activities (Continued)
(Unaudited)
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.
United | Colombia | Total | ||||||||||
(1) | (Thousands) | |||||||||||
At December 31, 2002 | ||||||||||||
Future gross revenues | $ | 3,661 |
| $ | 14,895 |
| $ | 18,556 |
| |||
Future production costs |
| (3,205 | ) |
| (6,972 | ) |
| (10,177 | ) | |||
Future development costs, including abandonment of U.S. offshore platforms |
| (908 | ) |
| (347 | ) |
| (1,255 | ) | |||
Future net cash flows before income taxes |
| (452 | ) |
| 7,576 |
|
| 7,124 |
| |||
Future income taxes |
| — |
|
| (313 | ) |
| (313 | ) | |||
Future net cash flows after income taxes |
| (452 | ) |
| 7,263 |
|
| 6,811 |
| |||
Discount at 10% per annum |
| 285 |
|
| (2,721 | ) |
| (2,436 | ) | |||
Standardized measure of discounted future net cash flows | $ | (167 | ) | $ | 4,542 |
| $ | 4,375 |
| |||
At December 31, 2001 | ||||||||||||
Future gross revenues | $ | 1,436 |
| $ | 10,519 |
| $ | 11,955 |
| |||
Future production costs |
| (1,288 | ) |
| (6,335 | ) |
| (7,623 | ) | |||
Future development costs, including abandonment of U.S. offshore platforms |
| (799 | ) |
| (354 | ) |
| (1,153 | ) | |||
Future net cash flows before income taxes |
| (651 | ) |
| 3,830 |
|
| 3,179 |
| |||
Future income taxes |
| — |
|
| — |
|
| — |
| |||
Future net cash flows after income taxes |
| (651 | ) |
| 3,830 |
|
| 3,179 |
| |||
Discount at 10% per annum |
| 236 |
|
| (1,130 | ) |
| (894 | ) | |||
Standardized measure of discounted future net cash flows | $ | (415 | ) | $ | 2,700 |
| $ | 2,285 |
| |||
| (1) | The standardized measure of the discounted net future cash flows applicable to proved oil and gas reserves for the United States was prepared as of December 31, 2002, prior to the operational difficulties described in note 10 to the consolidated financial statements. If the operational difficulties are not satisfactorily resolved, then the standardized measure of the discounted net future cash flows applicable to proved oil and gas reserves would be approximately $(1.0) million. |
57
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Supplementary Information Related to Oil and Gas Producing Activities (Continued)
(Unaudited)
United | Colombia | Total | ||||||||||
(Thousands) | ||||||||||||
At December 31, 2000 | ||||||||||||
Future gross revenues | $ | 5,520 |
| $ | 12,501 |
| $ | 18,021 |
| |||
Future production costs |
| (3,887 | ) |
| (5,994 | ) |
| (9,881 | ) | |||
Future development costs, including abandonment of U.S. offshore platforms |
| (745 | ) |
| (390 | ) |
| (1,135 | ) | |||
Future net cash flows before income taxes |
| 888 |
|
| 6,117 |
|
| 7,005 |
| |||
Future income taxes |
| — |
|
| — |
|
| — |
| |||
Future net cash flows after income taxes |
| 888 |
|
| 6,117 |
|
| 7,005 |
| |||
Discount at 10% per annum |
| 120 |
|
| (1,942 | ) |
| (1,822 | ) | |||
Standardized measure of discounted future net cash flows | $ | 1,008 |
| $ | 4,175 |
| $ | 5,183 |
| |||
The following schedule summarizes the changes in the standardized measure of discounted future net cash flows.
2002 | 2001 | 2000 | ||||||||||
(Thousands) | ||||||||||||
Sales of oil and gas, net of production costs | $ | (678 | ) | $ | (735 | ) | $ | (3,389 | ) | |||
Sales of reserves in place |
| — |
|
| — |
|
| (20,094 | ) | |||
Development costs incurred that reduced future development costs |
| 8 |
|
| 35 |
|
| 36 |
| |||
Accretion of discount |
| 229 |
|
| 518 |
|
| 2,826 |
| |||
Discoveries and extensions |
| — |
|
| — |
|
| — |
| |||
Purchase of reserves in place |
| (23 | ) |
| (32 | ) |
| — |
| |||
Revisions of previous estimates: | ||||||||||||
Changes in price |
| 3,184 |
|
| (2,561 | ) |
| (1,921 | ) | |||
Changes in quantities |
| 142 |
|
| (146 | ) |
| 1,422 |
| |||
Changes in future development costs |
| 69 |
|
| (78 | ) |
| (236 | ) | |||
Changes in timing and other changes |
| (645 | ) |
| 101 |
|
| (1,721 | ) | |||
Changes in estimated income taxes |
| (196 | ) |
| — |
|
| — |
| |||
Net increase (decrease) |
| 2,090 |
|
| (2,898 | ) |
| (23,077 | ) | |||
Balances at beginning of year |
| 2,285 |
|
| 5,183 |
|
| 28,260 |
| |||
Balances at end of year | $ | 4,375 |
| $ | 2,285 |
| $ | 5,183 |
| |||
58
PROXY
Aviva Petroleum Inc.
Special Meeting of Shareholders
To Be Held at
2001 Ross Avenue, Suite 3800, Dallas, Texas 75201
May , 2003 at 10:00 a.m. local time
This Proxy is Solicited on Behalf of the Board of Directors
The undersigned hereby appoints Ronald Suttill or Robert J. Cresci, or either one of them acting singly with full power of substitution, the proxy or proxies of the undersigned to attend the Special Meeting of the Shareholders of Aviva Petroleum Inc. to be held on May , 2003, at 2001 Ross Avenue, Suite 3800, Dallas, Texas 75201, beginning at 10:00 a.m. local time, and any adjournments, and to vote all shares of stock that the undersigned would be entitled to vote if personally present at the Special Meeting or any adjournments thereof in the manner indicated below, all as set forth in the April , 2003 Proxy Statement. The undersigned hereby acknowledges receipt of the Notice of Special Meeting and Proxy Statement of Aviva Petroleum Inc.
Please mark your choice like this x in blue or black ink. The Board of Directors recommends that you vote FOR the Share Consolidation.
Proposal: Amendment of the Articles of Incorporation to effect a 5,000-to-one share consolidation of common stock.
For the Share Consolidation
Withhold from the Share Consolidation
Abstain from the Share Consolidation
Please date, sign and return promptly. Signature should be exactly as name or names appear on the envelope in which you received this proxy. If stock is held jointly each holder should sign. If signature is by attorney, executor, administrator, trustee or guardian, please give full title.
Dated: , 2003
Signature:
Signature:
(if held jointly)
I plan to attend the meeting: Yes
No
This proxy will be voted FOR the share consolidation unless otherwise indicated.