-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DZJzgKlf+ZQ1g0tetCHisYTBNwj0qZvM/k+w8CTKpGOr/UN4RIhBDjOGuF2ZpWkQ d7kxkK/OzBlUpkSaxAVOfA== 0000930661-98-001186.txt : 19980518 0000930661-98-001186.hdr.sgml : 19980518 ACCESSION NUMBER: 0000930661-98-001186 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: AVIVA PETROLEUM INC /TX/ CENTRAL INDEX KEY: 0000910659 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 751432205 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13440 FILM NUMBER: 98622864 BUSINESS ADDRESS: STREET 1: 8235 DOUGLAS AVE STREET 2: STE 400 CITY: DALLAS STATE: TX ZIP: 75225 BUSINESS PHONE: 2146913464 MAIL ADDRESS: STREET 1: 8235 DOUGLAS AVE STREET 2: STE 400 CITY: DALLAS STATE: TX ZIP: 75225 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 31, 1998 ----------------------- OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from________________to_____________ Commission File Number 0-22258 AVIVA PETROLEUM INC. (Exact name of registrant as specified in its charter) TEXAS 75-1432205 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 8235 DOUGLAS AVENUE, 75225 SUITE 400, DALLAS, TEXAS (Zip Code) (Address of principal executive offices) (214) 691-3464 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO _______ --- Number of shares of Common Stock, no par value, outstanding at March 31, 1998, was 31,482,716 of which 10,336,835 shares of Common Stock were represented by Depositary Shares. Each Depositary Share represents five shares of Common Stock held by a Depositary. PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. - ----------------------------- AVIVA PETROLEUM INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEET (in thousands, except number of shares) (unaudited)
March 31, December 31, 1998 1997 --------- ------------ ASSETS Current assets: Cash and cash equivalents $ 543 $ 690 Accounts receivable 1,396 1,803 Inventories 576 602 Prepaid expenses and other 106 203 --------- ------------ Total current assets 2,621 3,298 --------- ------------ Property and equipment, at cost (note 3): Oil and gas properties and equipment (full cost method) 61,251 61,036 Other 606 606 --------- ------------ 61,857 61,642 Less accumulated depreciation, depletion and amortization (53,289) (49,873) --------- ------------ 8,568 11,769 Other assets 1,409 1,378 --------- ------------ $ 12,598 $ 16,445 ========= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long term debt (note 4) $ 230 $ 480 Accounts payable 2,341 3,091 Accrued liabilities 449 356 --------- ------------ Total current liabilities 3,020 3,927 --------- ------------ Long term debt, excluding current portion (note 4) 7,210 7,210 Gas balancing obligations and other 1,585 1,560 Deferred income taxes - - Stockholders' equity: Common stock, no par value, authorized 348,500,000 shares; issued 31,482,716 shares 1,574 1,574 Additional paid-in capital 33,376 33,376 Accumulated deficit/*/ (34,167) (31,202) --------- ------------ Total stockholders' equity 783 3,748 Commitments and contingencies (note 6) --------- ------------ $ 12,598 $ 16,445 ========= ============
/*/ Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a quasi-reorganization. See accompanying notes to condensed consolidated financial statements. 2 AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Statement of Operations (in thousands, except per share data) (unaudited)
Three Months Ended March 31, 1998 1997 ------- ------- Oil and gas sales $ 1,146 $ 3,214 ------- ------- Expense: Production 799 1,102 Depreciation, depletion and amortization 671 1,795 Write-down of oil and gas properties (note 3) 2,764 1,986 General and administrative 360 349 ------- ------- Total expense 4,594 5,232 ------- ------- Other income (expense): Interest and other income (expense), net (note 5) 745 24 Interest expense (165) (166) ------- ------- Total other income (expense) 580 (142) ------- ------- Loss before income taxes (2,868) (2,160) Income taxes 97 265 ------- ------- Net loss $(2,965) $(2,425) ======= ======= Weighted average common shares outstanding 31,483 31,483 ======= ======= Basic and diluted net loss per common share $ (0.09) $ (0.08) ======= =======
See accompanying notes to condensed consolidated financial statements. 3 AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows (in thousands) (unaudited)
Three Months Ended March 31, 1998 1997 ------- ------- Net loss $(2,965) $(2,425) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 671 1,795 Write-down of oil and gas properties 2,764 1,986 Deferred foreign income taxes - 22 Changes in working capital and other (141) (1,422) ------- ------- Net cash provided by (used in) operating activities 329 (44) ------- ------- Cash flows from investing activities: Property and equipment expenditures (215) (754) Proceeds from sale of assets - 19 Other (6) (5) ------- ------- Net cash used in investing activities (221) (740) ------- ------- Cash flows from financing activities - principal payments on long term debt (250) (75) ------- ------- Effect of exchange rate changes on cash and cash equivalents (5) (19) ------- ------- Net decrease in cash and cash equivalents (147) (878) Cash and cash equivalents at beginning of the period 690 2,041 ------- ------- Cash and cash equivalents at end of the period $ 543 $ 1,163 ======= =======
See accompanying notes to condensed consolidated financial statements. 4 AVIVA PETROLEUM INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands, except number of shares) (unaudited)
Common Stock ------------------------- Additional Total Number Paid-in Accumulated Stockholders' of Shares Amount Capital Deficit Equity ------------ ----------- ---------- ------------ -------------- Balances at December 31, 1997 31,482,716 $ 1,574 $ 33,376 $ (31,202) $ 3,748 Net loss - - - (2,965) (2,965) ----------- ----------- ---------- ------------ -------------- Balances at March 31, 1998 31,482,716 $ 1,574 $ 33,376 $ (34,167) $ 783 =========== ============ ========== ============ ==============
See accompanying notes to condensed consolidated financial statements. 5 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL The condensed consolidated financial statements of Aviva Petroleum Inc. and subsidiaries (the "Company" or "Aviva") included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These condensed financial statements should be read in conjunction with the Company's prior audited yearly financial statements and the notes thereto, included in the Company's latest annual report on Form 10-K. In the opinion of the Company, all adjustments, consisting of normal recurring accruals, necessary to present fairly the information in the accompanying financial statements have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income in a full set of general-purpose financial statements. Comprehensive income includes net income and other comprehensive income which is generally comprised of changes in the fair value of available-for- sale marketable securities, foreign currency translation adjustments and adjustments to recognize additional minimum pension liabilities. The Company had no accumulated other comprehensive income at December 31, 1997, and no other comprehensive income for the three months ended March 31, 1998 and 1997. 2. MERGER PLANS On April 16, 1998, the Company signed a letter of intent to merge with Garnet Resources Corporation ("Garnet"), a publicly traded international oil and gas exploration and production company. Garnet, through its 99.24%- owned subsidiary, Argosy Energy International ("Argosy"), is the co-owner (55%) and operator of the Colombian joint operations in which the Company has the remaining working interest (45%). Garnet also holds a carried working interest in an oil and gas Production Prospecting License in Papua New Guinea. The proposed arrangements include Aviva refinancing Argosy's outstanding debt to Chase Bank of Texas (approximately $6 million, net, at March 31, 1998) which is guaranteed by the U.S. Overseas Private Investment Corporation ("OPIC"), issuing approximately 1.1 million, 12.9 million and 0.1 million new Aviva common shares to Garnet shareholders, Garnet debenture holders and the minority interest owners of Argosy, respectively, and canceling Garnet's $15 million of 9.5% subordinated debentures due December 21, 1998. Aviva will be the surviving entity following the merger, which is subject to various contingencies including completion of negotiations, execution and delivery of the definitive Agreement and Plan of Merger, Debenture Purchase Agreement and Limited Partnership Interest Purchase Agreement, approvals thereof by ING Capital, OPIC, Colombian agencies, 6 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) and shareholders of Aviva and Garnet. The proposed merger is also subject to execution and delivery of agreements for the proposed credit facility discussed in Note 6. 3. PROPERTY AND EQUIPMENT Internal general and administrative costs directly associated with oil and gas property acquisition, exploration and development activities have been capitalized in accordance with the accounting policies of the Company. Such costs totaled $7,000 for the three months ended March 31, 1998 and $36,000 for the three months ended March 31, 1997. Unevaluated oil and gas properties totaling $263,000 and $251,000 at March 31, 1998 and December 31, 1997, respectively, have been excluded from costs subject to depletion. The Company capitalized interest costs of $3,000 and $22,000 for the three-month periods ended March 31, 1998 and 1997, respectively, on these properties. The following table summarizes the write-down of the carrying amounts of the Company's oil and gas properties as a result of ceiling limitations on capitalized costs:
Three Months Ended March 31, (thousands) 1998 1997 ------ ------ Colombia $2,302 $ - United States 462 1,986 ------ ------ $2,764 $1,986 ====== ======
The aforementioned write-downs were primarily due to lower oil and gas prices. A future decrease in the prices the Company receives for its oil and gas production or downward reserve adjustments could, for either the U.S. or Colombian cost centers, result in a ceiling test write-down that is significant to the Company's operating results. 4. LONG TERM DEBT On August 6, 1993, the Company entered into a credit agreement with ING (U.S.) Capital Corporation ("ING Capital"), secured by a mortgage on substantially all U.S. oil and gas assets, a pledge of Colombian assets and the stock of three subsidiaries, pursuant to which ING Capital agreed to loan to the Company up to $25 million, subject to an annually redetermined borrowing base which is predicated on the Company's U.S. and Colombian reserves. As of December 31, 1997, the borrowing base permitted and the outstanding loan balance was, $7,690,000. The outstanding loan balance has been subject to interest at the prime rate, as defined (8.5% at March 31, 1998) plus 1% or, at the option of the Company, a fixed rate, based on the London Interbank Offered Rate, for a portion or portions of the outstanding debt from time to time. The terms of the loan, among other things, prohibit the Company from merging with another company or paying dividends, limit additional indebtedness, general and administrative expense, sales of assets and investments and require the maintenance of certain minimum financial ratios. 7 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) In February 1998, the Company entered into an agreement with ING Capital pursuant to which the outstanding loan balance was paid down to $7,440,000 from $7,690,000, the interest rate was increased to the prime rate, as defined, plus 1.5%, or at the option of the Company, a fixed rate based on LIBOR plus 3%, and the repayment schedule was amended to require monthly payments of 80% of defined monthly cash flows until October 1, 1999, at which time the remaining balance is due and payable. Additionally, ING Capital reduced to $2 million the minimum amount of consolidated tangible net worth that the Company is required to maintain. As of March 31, 1998, the borrowing base permitted, and the outstanding loan balance was, $7,440,000, but the Company was not in compliance with the above-referenced tangible net worth covenant. The Company has requested, and ING Capital has agreed to, a waiver of the Company's non- compliance with this covenant through April 1, 1999. 5. INTEREST AND OTHER INCOME (EXPENSE) A summary of interest and other income (expense) follows:
Three Months Ended March 31, (thousands) 1998 1997 ------- -------- Gain on settlement of litigation $ 720 $ - Interest income 25 43 Foreign currency exchange loss (2) (21) Gain (loss) on sale of assets, net - (13) Other, net 2 15 ------- -------- $ 745 $ 24 ======= ========
In January 1998, the Company realized a $720,000 gain on the settlement of litigation involving the administration of a take or pay contract settlement. 6. COMMITMENTS AND CONTINGENCIES In the U.S., the Company is currently committed to the drilling of a saltwater disposal well at its Breton Sound 31 field facilities in order to comply with a state-wide prohibition against discharges of produced water to coastal waters offshore Louisiana. The cost to drill and equip such a well is estimated at $0.3 million, net to the Company's interest. Pursuant to a revised produced water termination schedule approved by the Louisiana Department of Environmental Quality, the Company has until September 1, 1998, to cease discharges of produced water. If the Company is unable to complete the project and reinject the produced water by September 1, 1998, the Company will be required to curtail or even cease production from its Breton Sound leases. Additionally, the Company is upgrading certain equipment at its Main Pass 41 field facilities, the cost of which is expected to aggregate $0.3 million, net to the Company's interest. The Company, along with Argosy (referred to collectively as the "Co- owners"), is also engaged in an ongoing development program on the Santana concession in Colombia. The contract obligations of the Santana concession have been met. The Co-owners currently anticipate, however, the recompletion of certain existing wells and various miscellaneous projects. The 8 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) Company's share of the estimated future costs of these development activities is approximately $0.7 million at March 31, 1998. Depending on the results of future exploration and development activities, substantial expenditures that have not been anticipated may be required. Failure by the Company to fund certain of these capital expenditures could, under either the concession agreement or joint operating agreement with Argosy, or both, result in the forfeiture of all or part of the Company's interest in this concession. In addition, the Company's ability to continue its Colombian development program is dependent upon the ability of Argosy to finance its portion of such costs and expenses. If Argosy cannot fund its obligations, the Company may be required to accept an assignment of Argosy's interest therein and assume those funding obligations. If, thereafter, the Company were to be unable to raise sufficient funds to meet such obligations, the Company's interests in the properties may be forfeited. In reports filed with the U.S. Securities and Exchange Commission, which are publicly available, Garnet has disclosed, among other things, that: (i) Argosy is no longer in compliance with certain covenants required by its finance agreement with Chase Bank of Texas which is guaranteed by the Overseas Private Investment Corporation and secured by Argosy's assets in Colombia; (ii) its management believes that Garnet's available working capital and cash flows from operations will not be sufficient to make its required debt principal and interest payments as they become due beginning March 31, 1998; and (iii) in the absence of a business transaction or a restructuring of Garnet's indebtedness, Garnet may seek protection from its creditors under the Federal Bankruptcy Code. As discussed in Note 2, the Company has signed a letter of intent to merge with Garnet. Pursuant to the merger plan, Garnet's $15 million of subordinated debentures will be canceled and Argosy's bank debt, along with Aviva's existing bank debt, will be refinanced through a proposed $15 million credit facility that the Company has requested ING Capital to provide to the Company. In addition to refinancing the existing bank debt of Argosy and Aviva, this proposed new credit facility is expected to supplement the Company's working capital and, to the extent not funded by cash flow from operations, fund the Company's remaining estimated capital expenditures for 1998. Management of the Company is currently involved in efforts to effectuate the merger. Such efforts include the completion of negotiations, execution and delivery of the definitive Agreement and Plan of Merger, Debenture Purchase Agreement, Limited Partnership Interest Purchase Agreement and the proposed new credit facility with ING Capital. Additionally, approval by the shareholders of Aviva and Garnet will be required to consummate the merger. While management believes that the merger will be consummated substantially as planned, there can be no assurance that this will be the case. If the Company is unable to consummate the merger, then, in the absence of another business transaction or debt restructuring, Garnet may seek bankruptcy protection or other alternatives, any of which may have a material adverse effect on Aviva's consolidated financial condition. As indicated above, if Argosy cannot fund its obligations, the Company may be required to accept an assignment of Argosy's interest therein and assume those funding obligations. Aviva itself has experienced significant losses which have resulted in recurring noncompliance with the minimum consolidated tangible net 9 AVIVA PETROLEUM INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (continued) worth covenant and its debt repayment schedule under its credit agreement with ING Capital. Without the Garnet merger and the proposed new credit facility, management's current cash flow analysis does not indicate that the Company would be able to make the October 1, 1999 scheduled debt repayment under the existing ING Capital Credit Agreement. In the past, ING Capital has amended or waived compliance with these covenants when the Company has been unable to comply with them. There can be no assurance, however, that ING Capital will continue to make similar concessions in the future. Activities of the Company with respect to the exploration, development and production of oil and natural gas are subject to stringent foreign, federal, state and local environmental laws and regulations including the Oil Pollution Act of 1990 ("OPA 90"), the Outer Continental Shelf Lands Act, the Federal Water Pollution Control Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act. Such laws and regulations have increased the cost of planning, designing, drilling, operating and abandoning wells. In most instances, the statutory and regulatory requirements relate to air and water pollution control procedures and the handling and disposal of drilling and production wastes. Risks of substantial costs and liabilities are inherent in oil and gas operations and there can be no assurance that significant costs and liabilities, including civil or criminal penalties for violations of environmental laws and regulations, will not be incurred. Moreover, it is possible that other developments, such as stricter environmental laws and regulations or claims for damages to property or persons resulting from the Company's operations, could result in substantial costs and liabilities. For additional discussions on the applicability of environmental laws and regulations and other risks that may affect the Company's operations, see the Company's latest annual report on Form 10-K. The Company is involved in certain litigation involving its oil and gas activities, but unrelated to environmental contamination issues. Management of the Company believes that these litigation matters will not have any material adverse effect on the Company's financial condition or results of operations. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------------------------------------------------------------------------------- OF OPERATIONS. - -------------- RESULTS OF OPERATIONS - --------------------- THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997 - -------------------------------------------------------------------------------
United States Colombia Oil Gas Oil Total ------ ------ -------- -------- (Thousands) Revenue - 1997 $ 459 $ 245 $2,510 $ 3,214 Volume variance (187) (170) (975) (1,332) Price variance (98) (16) (608) (722) Other - (14) - (14) ------ ------ ------ -------- Revenue - 1998 $ 174 $ 45 $ 927 $ 1,146 ====== ====== ====== ========
Colombian oil volumes were 75,000 barrels in the first quarter of 1998, a decrease of 48,000 barrels as compared to the first quarter of 1997. Such decrease is due to a 57,000 barrel decrease resulting from production declines, partially offset by a 9,000 barrel increase resulting from the completion of a development well in June 1997. U.S. oil volumes were 13,000 barrels in 1998, down approximately 8,000 barrels from 1997. Of such decrease, approximately 5,000 barrels was due to the Company's Main Pass 41 field being shut-in for approximately 60 days during the first quarter of 1998 due to equipment failures and 3,000 barrels resulted from normal production declines. U.S. gas volumes before gas balancing adjustments were 14,000 thousand cubic feet (MCF) in 1998, down 60,000 MCF from 1997. Of such decrease, approximately 40,000 MCF was due to the aforementioned shut-in of the Main Pass 41 field and 20,000 MCF was due to normal production declines. The above-referenced equipment failures at the Company's Main Pass 41 field necessitate upgrading and additional modification of production and water treatment facilities. As of May 14, 1998, this field had been shut-in an additional 25 days since April 1, 1998, and there can be no assurance that further shut-in periods will not occur prior to the completion of the project. Colombian oil prices averaged $12.29 per barrel during the first quarter of 1998. The average price for the same period of 1997 was $20.35 per barrel. The Company's average U.S. oil price decreased to $13.86 per barrel in 1998, down from $21.66 per barrel in 1997. In 1998 prices have been lower than in the first quarter of 1997 due to a dramatic decrease in world oil prices. U.S. gas prices averaged $2.43 per MCF in 1998 compared to $2.48 per MCF in 1997. In addition to the above-mentioned variances, U.S. gas revenue decreased approximately $14,000 as a result of gas balancing adjustments. Operating costs decreased approximately 28%, or $303,000, primarily due to lower operating costs in Colombia. Such decreases have resulted mainly from the elimination of the production tax on the majority of the Company's Colombian production and lower pipeline tariffs resulting from lower volumes. Depreciation, depletion and amortization decreased by 63%, or $1,124,000, primarily due to a decrease in costs subject to amortization resulting from property write-downs and lower levels of production. 11 The Company recorded write-downs of $2,302,000 and $462,000 to the carrying amounts of its Colombian and U.S. oil and gas properties, respectively, as a result of ceiling test limitations on capitalized costs at March 31, 1998. Interest and other income increased during the first quarter of 1998 as the Company realized a $720,000 gain on the settlement of litigation involving the administration of a take or pay contract settlement. Income taxes were $168,000 lower in 1998 principally as a result of lower Colombian "presumptive" income tax and due to the fact that the threshold for incurring Colombian remittance tax was not achieved in the first quarter of 1998. YEAR 2000 - --------- Based on a preliminary study, the Company expects to spend an aggregate of approximately $100,000 in 1998 and 1999 to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The Company continues to evaluate appropriate courses of corrective action, including replacement of certain systems whose associated costs would be recorded as assets and amortized. Accordingly, the Company does not expect the amounts required to be expensed over the next two years to have a material effect on its financial position or results of operations. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- Since December 31, 1997, costs incurred in oil and gas property acquisition, exploration and development activities by the Company totaled approximately $0.2 million, almost all of which was incurred in Colombia. These activities were funded by cash provided by operating activities. In the U.S., the Company is currently committed to the drilling of a saltwater disposal well at its Breton Sound 31 field facilities in order to comply with a state-wide prohibition against discharges of produced water to coastal waters offshore Louisiana. The cost to drill and equip such a well is estimated at $0.3 million, net to the Company's interest. Pursuant to a revised produced water termination schedule approved by the Louisiana Department of Environmental Quality, the Company has until September 1, 1998, to cease discharges of produced water. If the Company is unable to complete the project and reinject the produced water by September 1, 1998, the Company will be required to curtail or even cease production from its Breton Sound leases. Additionally, the Company is upgrading certain equipment at its Main Pass 41 field facilities, the cost of which is expected to aggregate $0.3 million, net to the Company's interest. The Company, along with Argosy (referred to collectively as the "Co-owners"), is also engaged in an ongoing development program on the Santana concession in Colombia. The contract obligations of the Santana concession have been met. The Co-owners currently anticipate, however, the recompletion of certain existing wells and various miscellaneous projects. The Company's share of the estimated future costs of these development activities is approximately $0.7 million at March 31, 1998. Depending on the results of future exploration and development activities, substantial expenditures that have not been anticipated may be required. Failure by the Company to fund certain of these capital expenditures could, under either the concession agreement or joint operating agreement with Argosy, or both, result in the forfeiture of all or part of the Company's interest in this concession. In addition, the Company's ability to continue its Colombian development program is dependent upon the ability of Argosy to finance its portion of such costs and expenses. If Argosy cannot fund its obligations, the Company may be required to accept an assignment of Argosy's interest therein and 12 assume those funding obligations. If, thereafter, the Company were to be unable to raise sufficient funds to meet such obligations, the Company's interests in the properties may be forfeited. In reports filed with the U.S. Securities and Exchange Commission, which are publicly available, Garnet has disclosed, among other things, that: (i) Argosy is no longer in compliance with certain covenants required by its finance agreement with Chase Bank of Texas which is guaranteed by the Overseas Private Investment Corporation and secured by Argosy's assets in Colombia; (ii) its management believes that Garnet's available working capital and cash flows from operations will not be sufficient to make its required debt principal and interest payments as they become due beginning March 31, 1998; and (iii) in the absence of a business transaction or a restructuring of Garnet's indebtedness, Garnet may seek protection from its creditors under the Federal Bankruptcy Code. As discussed in Note 2 of the condensed consolidated financial statements, the Company has signed a letter of intent to merge with Garnet. Pursuant to the merger plan, Garnet's $15 million of subordinated debentures will be canceled and Argosy's bank debt, along with Aviva's existing bank debt, will be refinanced through a proposed $15 million credit facility that the Company has requested ING Capital to provide to the Company. In addition to refinancing the existing bank debt of Argosy and Aviva, this proposed new credit facility is expected to supplement the Company's working capital and, to the extent not funded by cash flow from operations, fund the Company's remaining estimated capital expenditures for 1998. Management of the Company is currently involved in efforts to effectuate the merger. Such efforts include the completion of negotiations, execution and delivery of the definitive Agreement and Plan of Merger, Debenture Purchase Agreement, Limited Partnership Interest Purchase Agreement and the proposed new credit facility with ING Capital. Additionally, approval by the shareholders of Aviva and Garnet will be required to consummate the merger. While management believes that the merger will be consummated substantially as planned, there can be no assurance that this will be the case. If the Company is unable to consummate the merger, then, in the absence of another business transaction or debt restructuring, Garnet may seek bankruptcy protection or other alternatives, any of which may have a material adverse effect on Aviva's consolidated financial condition. As indicated above, if Argosy cannot fund its obligations, the Company may be required to accept an assignment of Argosy's interest therein and assume those funding obligations. Aviva itself has experienced significant losses which have resulted in recurring noncompliance with the minimum consolidated tangible net worth covenant and its debt repayment schedule under its credit agreement with ING Capital. Without the Garnet merger and the proposed new credit facility, management's current cash flow analysis does not indicate that the Company would be able to make the October 1, 1999 scheduled debt repayment under the existing ING Capital Credit Agreement. In the past, ING Capital has amended or waived compliance with these covenants when the Company has been unable to comply with them. There can be no assurance, however, that ING Capital will continue to make similar concessions in the future. With the exception of historical information, the matters discussed in this quarterly report contain forward-looking statements that involve risks and uncertainties. Although the Company believes that its expectations are based on reasonable assumptions, it can give no assurance that its goals will be achieved. Important factors that could cause actual results to differ materially from those in the forward-looking statements herein include, among other things, general economic conditions, volatility of oil and gas prices, the impact of possible geopolitical occurrences world-wide and in Colombia, imprecision of reserve estimates, changes in laws and regulations, unforeseen engineering and mechanical or technological difficulties in drilling, working- over and operating wells during the 13 periods covered by the forward-looking statements, as well as other factors described in the Company's annual report on Form 10-K. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- a) Exhibits - ----------- 27.1 Financial Data Schedule. b) Reports on Form 8-K - ---------------------- The Company filed the following Current Reports on Form 8-K during and subsequent to the end of the first quarter: Date of 8-K Description of 8-K - ----------- ------------------ February 16, 1998 Submitted a copy of the Company's Press Release dated February 16, 1998, reporting on the Company's Restructuring Plan. April 17, 1998 Submitted a copy of the Company's Press Release dated April 17, 1998 announcing the merger plans between Aviva Petroleum Inc. and Garnet Resources Corporation. 14 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AVIVA PETROLEUM INC. Date: May 14, 1998 /s/ Ronald Suttill -------------------------------- Ronald Suttill President and Chief Executive Officer /s/ James L. Busby -------------------------------- James L. Busby Treasurer and Secretary (Chief Accounting Officer) 15 INDEX TO EXHIBITS Exhibit Number Description of Exhibit - ------ ---------------------- 27.1 Financial Data Schedule. 16 EX-27.1 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED BALANCE SHEET OF AVIVA PETROLEUM INC. AND SUBSIDIARIES AS OF MARCH 31, 1998 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-1998 JAN-01-1998 MAR-31-1998 543 0 1,396 0 576 2,621 61,857 53,289 12,598 3,020 7,210 0 0 1,574 (791) 12,598 1,146 1,146 1,470 1,470 2,764 0 165 (2,868) 97 (2,965) 0 0 0 (2,965) (0.09) (0.09)
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