-----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, JqcV6MG2Dh+8Ksqd47Rv4g/loTQeMpEGswFc+dq3h8ZzeMbmmSNswB7bRy+N1PTq x1xZV+Pf1wh9eizmjQLqRQ== 0000930661-99-001912.txt : 19990816 0000930661-99-001912.hdr.sgml : 19990816 ACCESSION NUMBER: 0000930661-99-001912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 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: 99687935 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 JUNE 30, 1999 ---------------------- 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 June 30, 1999, was 46,900,132 of which 25,383,690 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)
June 30, December 31, 1999 1998 ------------ ----------- ASSETS Current assets: Cash and cash equivalents $ 253 $ 1,712 Restricted cash 4 417 Accounts receivable 1,511 1,503 Inventories 794 836 Prepaid expenses and other 122 627 -------- -------- Total current assets 2,684 5,095 -------- -------- Property and equipment, at cost (note 4): Oil and gas properties and equipment (full cost method) 68,576 68,636 Other 545 612 -------- -------- 69,121 69,248 Less accumulated depreciation, depletion and amortization (64,780) (64,440) -------- -------- 4,341 4,808 Other assets 1,538 1,519 -------- -------- $ 8,563 $ 11,422 ======== ======== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current portion of long term debt (note 5) $ 14,495 $ 14,805 Accounts payable 3,836 5,526 Accrued liabilities 255 308 -------- -------- Total current liabilities 18,586 20,639 -------- -------- Gas balancing obligations and other 1,870 1,866 Stockholders' deficit: Common stock, no par value, authorized 348,500,000 shares; issued 46,900,132 shares at June 30, 1999 and 46,700,132 shares at December 31, 1998 2,345 2,335 Additional paid-in capital 34,855 34,862 Accumulated deficit/*/ (49,093) (48,280) -------- -------- Total stockholders' deficit (11,893) (11,083) Commitments and contingencies (note 7) -------- -------- $ 8,563 $ 11,422 ======== ======== /*/ 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 Six Months Ended June 30, June 30, -------------------- -------------------- 1999 1998 1999 1998 -------- -------- -------- -------- Oil and gas sales $ 1,575 $ 914 $ 2,759 $ 2,060 -------- -------- -------- -------- Expense: Production 879 716 1,779 1,515 Depreciation, depletion and amortization 284 503 620 1,174 Write-down of oil and gas properties (note 4) - 1,961 - 4,725 General and administrative 320 300 679 660 Provision for (recovery of) losses on accounts receivable 13 - (92) - Severance 62 - 62 - -------- -------- -------- -------- Total expense 1,558 3,480 3,048 8,074 -------- -------- -------- -------- Other income (expense): Interest and other income (expense), net (note 6) 248 26 177 771 Interest expense (283) (155) (574) (320) -------- -------- -------- -------- Total other income (expense) (35) (129) (397) 451 -------- -------- -------- -------- Loss before income taxes (18) (2,695) (686) (5,563) Income taxes 64 69 127 166 -------- -------- -------- -------- Net loss $ (82) $ (2,764) $ (813) $ (5,729) ======== ======== ======== ======== Weighted average common shares outstanding -- basic and diluted 46,748 31,483 46,724 31,483 ======== ======== ======== ======== Basic and diluted net loss per common share $ (.00) $ (.09) $ (.02) $ (.18) ======== ======== ======== ========
See accompanying notes to condensed consolidated financial statements. 3 AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows (in thousands) (unaudited)
Six Months Ended June 30, --------------------- 1999 1998 -------- -------- Net loss $ (813) $ (5,729) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation, depletion and amortization 620 1,174 Write-down of oil and gas properties - 4,725 Changes in working capital and other (1,000) 95 -------- -------- Net cash provided by (used in) operating activities (1,193) 265 -------- -------- Cash flows from investing activities: Property and equipment expenditures (111) (411) Other 32 (95) -------- -------- Net cash used in investing activities (79) (506) -------- -------- Cash flows from financing activities -- Principal payments on long term debt (300) (250) -------- -------- Effect of exchange rate changes on cash and cash equivalents 113 (2) -------- -------- Net decrease in cash and cash equivalents (1,459) (493) Cash and cash equivalents at beginning of the period 1,712 690 -------- -------- Cash and cash equivalents at end of the period $ 253 $ 197 ======== ========
See accompanying notes to condensed consolidated financial statements. 4 AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders' Deficit (in thousands, except number of shares) (unaudited)
Common Stock -------------------------- Additional Total Number Paid-in Accumulated Stockholders' of Shares Amount Capital Deficit Deficit ------------ ---------- ---------- ------------ ------------- Balances at December 31, 1998 46,700,132 $ 2,335 $ 34,862 $ (48,280) $ (11,083) Issuance of common stock pursuant to investment banking agreement 200,000 10 (7) - 3 Net loss - - - (813) (813) ------------ ---------- ---------- ------------ ------------- Balances at June 30, 1999 46,900,132 $ 2,345 $ 34,855 $ (49,093) $ (11,893) ============ ========== ========== ============ =============
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 consolidated 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. Previously reported amounts have been reclassified to conform to current period presentation. The Company's condensed consolidated financial statements have been presented on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As discussed in note 2 below, there is substantial doubt about the Company's ability to continue as a going concern. The condensed 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. 2. Liquidity During the last quarter of calendar year 1997 and throughout calendar year 1998, world oil prices declined dramatically. This decline in oil prices was particularly severe in Colombia. Colombian oil prices, during the twenty-four month period ended December 31, 1998, fell from a high of $22.71 per barrel in January 1997 to $7.50 per barrel in December 1998. Whereas the sale price for crude oil from the Santana contract averaged $19.82 per barrel in 1996 and $17.39 per barrel in 1997, the sale price averaged $10.31 per barrel during calendar year 1998 and $11.76 per barrel during the first half of 1999. These price declines have materially and adversely affected the results of operations and the financial position of the Company. During the years ended December 31, 1998, 1997 and 1996, the Company reported net losses of $17.1 million, $22.5 million and $0.9 million, respectively, and declining amounts of net cash provided by (used in) operating activities of $(0.05) million, $1.7 million and $8.9 million, respectively. The Company recorded an additional net loss of $0.8 million for the six-month period ended June 30, 1999. The Company's stockholders' deficit was approximately $11.9 million as of June 30, 1999. The Company is highly leveraged with $14.5 million in current debt as of June 30, 1999, pursuant to bank credit facilities with ING (U.S.) Capital Corporation ("ING Capital"), the U.S. Overseas Private Investment Corporation ("OPIC") and Chase Bank of Texas, N.A. ("Chase"), as more fully described in note 5. 6 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) The Company is not in compliance with various covenants under the bank credit facilities nor is it in compliance with the minimum escrow balance required thereunder. As a result, the lender has the right to accelerate payment on the debt and, therefore, the Company has classified all long-term debt as current in the June 30, 1999 consolidated balance sheet. Furthermore, the Company was unable to pay the principal payment of $5.7 million due on April 30, 1999, and subsequent monthly principal payments of $281,250. The Company has paid the related interest through June 30, 1999; however, the interest due July 30, 1999 has not been paid. Assuming no change in its capital structure, the Company will not have the financial resources to pay the future minimum monthly principal payments of $281,250 due through December 31, 2001. On February 22, 1999, the Company signed a letter of intent to merge with Sharpe Resources Corporation ("Sharpe"), a publicly traded oil and gas exploration and production company incorporated in Ontario, Canada. As part of the merger arrangements, the Company's lenders (i.e., ING Capital, OPIC and Chase) had agreed in principle to cancel the Company's $14.6 million of then outstanding debt in exchange for a cash payment of $5 million, plus $3 million of preferred stock in the merged entity and 25% of the common shares to be issued to the Aviva shareholders. On April 27, 1999, however, the merger discussions with Sharpe were terminated as a result of the inability of the parties to reach agreement on terms and conditions of the proposed merger. On May 19, 1999, the Company engaged Triumph Securities Corporation as an investment banker to assist in recapitalizing the Company with up to $10 million for the purchase of the Company's outstanding bank debt, drilling, and acquisitions. A recapitalization pursuant to this engagement has not been achieved. On July 23, 1999, the Company terminated Triumph's engagement as the Company's investment banker. Management of the Company is currently in discussions with the Company's lenders concerning the conversion of the Company's outstanding bank debt, which currently is $14.5 million, into common stock of the Company. Under management's proposal, the outstanding debt and accrued interest thereon would be exchanged for 200 million newly issued common shares of the Company. Following such an exchange, the lenders would own approximately 81% of the then outstanding shares of the Company and the Company's future cash flows would be available for working capital, drilling and acquisitions. Management believes this debt conversion can be achieved and will provide the Company with the liquidity necessary to continue operations and reposition the Company in order to take advantage of a rebounding petroleum industry. While management of the Company is pursuing the debt conversion assiduously, its ability to effect such a conversion is dependent upon the Company's lenders, a matter that is beyond the control of the Company. In particular, the Company's lenders must consent to waive the defaults of the Company under its bank credit facilities pending preparation, negotiation, execution and delivery of definitive debt conversion agreements. The Company's lenders have not yet and may not ever agree to a conversion of the Company's debt. If the Company is unable to consummate the debt conversion, then, in the absence of another business transaction, the Company cannot achieve compliance with nor make principal payments required by the bank credit facilities and, accordingly, the lenders could declare a default, accelerate all amounts outstanding, and attempt to realize upon the collateral securing the debt. As a result of this uncertainty, management believes there is substantial doubt about the Company's ability to continue as a going concern. 7 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) 3. Garnet Merger On October 28, 1998, the Company completed the merger of Garnet Resources Corporation ("Garnet") with one of the Company's subsidiaries. As a result of the merger, the Company now owns over 99% of the Colombian joint operations. Additionally, the Company now holds a 2% carried working interest in an oil and gas Petroleum Prospecting License in Papua New Guinea. The merger arrangements included Aviva refinancing Garnet's 99.24% owned subsidiary's net outstanding debt to Chase which is guaranteed by OPIC, issuing approximately 1.1 million and 12.9 million new Aviva common shares to Garnet shareholders and Garnet debenture holders, respectively, and canceling Garnet's $15 million of 9.5% subordinated debentures due December 21, 1998. (See note 5 for further details.) The merger was accounted for as a "purchase" of Garnet for financial accounting purposes with Aviva's subsidiary as the surviving entity. The purchase price of Garnet, approximately $9.9 million, consists of $2.4 million related to the issuance of 14 million shares of Aviva's common stock at $0.167 per share plus merger costs and the assumption of approximately $6.0 million of net debt and $1.5 million of current and other liabilities. A summary of the assets acquired and liabilities assumed as of October 28, 1998 follows (in thousands): Current assets $ 1,659 Oil and gas properties 8,250 Current liabilities (1,169) Long term debt (5,954) Other liabilities (346) --------- Fair value of net assets acquired $ 2,440 =========
The following sets forth selected consolidated financial information for the Company on a pro forma basis for the six-month period ended June 30, 1998, assuming the Garnet merger had occurred on January 1, 1997. The following selected pro forma combined financial information is based on the historical consolidated statements of operations of Aviva and Garnet as adjusted to give effect to the merger using the purchase method of accounting for business combinations. In addition, the following selected pro forma combined financial information gives effect to the purchase of Garnet debentures by Aviva pursuant to the Debenture Purchase Agreement, the borrowing by Aviva of $15 million pursuant to the bank loans (as discussed in note 5) and the application of such funds to refinance Aviva's outstanding debt and the debt to Chase of a Garnet subsidiary (as discussed above). The following selected pro forma combined financial information may not necessarily reflect the financial condition or results of operations of Aviva that would actually have resulted had the merger occurred as of the date and for the period indicated or reflect the future results of operations of Aviva (in thousands, except per share amounts). Revenues $ 3,988 ========= Net loss $ (12,256) ========= Basic and diluted net loss per common share $ (0.26) =========
8 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) The above pro forma net loss for the six-month period ended June 30, 1998 includes combined historical charges for ceiling write-downs of oil and gas producing properties of $9,852,000. 4. 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 $18,000 for the six months ended June 30, 1999 and $19,000 for the six months ended June 30, 1998. Unevaluated oil and gas properties totaling $548,000 and $532,000 at June 30, 1999 and December 31, 1998, respectively, have been excluded from costs subject to depletion. The Company capitalized interest costs of $24,000 and $12,000 for the six-month periods ended June 30, 1999 and 1998, respectively, on these properties. The Company recorded write-downs of $3,355,000 and $1,370,000 to the carrying amounts of its Colombian and U.S. oil and gas properties, respectively, as a result of ceiling test limitations on capitalized costs through June 30, 1998. No such write-downs were required as of June 30, 1999. 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. 5. Long Term Debt On October 28, 1998, concurrently with the consummation of the Garnet merger, Neo Energy, Inc., an indirect subsidiary of the Company, and the Company entered into a Restated Credit Agreement with ING Capital. ING Capital, Chase and OPIC also entered into a Joint Finance and Intercreditor Agreement (the "Intercreditor Agreement") with the Company. ING Capital agreed to loan Neo Energy, Inc. an additional $800,000, bringing the total outstanding balance due ING Capital to $9,000,000. The outstanding balance due to Chase was paid down to $6,000,000 from the $6,350,000 balance owed by Garnet prior to the merger. The ING Capital loan and the Chase loan (the "Bank Credit Facilities") are guaranteed by the Company and its material domestic subsidiaries. Both loans are also secured by the Company's consolidated interest in the Santana contract and related assets in Colombia, a first mortgage on the United States oil and gas properties of the Company and its subsidiaries, a lien on accounts receivable of the Company and its subsidiaries, and a pledge of the capital stock of the Company's subsidiaries. The Chase loan is unconditionally guaranteed by OPIC. Borrowings under the ING Capital loan bear interest at the London Interbank Offered Rate ("LIBOR") plus 3.0% per annum. Borrowings under the Chase loan bear interest at the LIBOR rate plus 0.6% per annum. In addition, a guarantee fee of 2.4% per annum on the borrowings under the Chase loan guaranteed by OPIC are payable to OPIC. Borrowings under the Bank Credit Facilities are payable as follows: $5,700,000 in April 1999, and thereafter $281,250 per month until final maturity on December 31, 2001. The terms of the Bank Credit Facilities, among other things, prohibit the Company from merging with another company or paying dividends, limit additional indebtedness, general and 9 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) administrative expense, sales of assets and investments and require the maintenance of certain minimum financial ratios. As of June 30, 1999, the Company is not in compliance with various covenants under the Bank Credit Facilities. Moreover, the Company did not pay the $5,700,000 principal payment that was due April 30, 1999, and subsequent monthly principal payments of $281,250. As a result, the lender has the right to accelerate payment on the debt and, therefore, the Company has classified all long-term debt as current in the June 30, 1999 consolidated balance sheet. The Company is also required to maintain an escrow account pursuant to the Bank Credit Facilities. On March 31, 1999 and thereafter, the escrow account must contain the total of the following for the next succeeding three-month period: (i) the amount of the minimum monthly principal payments (as defined in the loan documents), plus (ii) the interest payments due on the combined loans, plus (iii) the amount of all fees due under the loan documents and under the Intercreditor Agreement. The Company is not in compliance with the requirements of the escrow account. See management's plans to convert the debt in note 2. 6. Interest and Other Income (Expense) A summary of interest and other income (expense) follows (in thousands):
Six Months Ended June 30, ------------------ 1999 1998 ------- ------- Gain on settlement of litigation $ - $ 720 Interest income 48 45 Foreign currency exchange gain (loss) 118 (2) Other, net 11 8 ------- ------- $ 177 $ 771 ======= =======
7. Commitments and Contingencies The Company is engaged in ongoing operations on the Santana contract in Colombia. The contract obligations have been met, however, the Company may recomplete certain existing wells and engage in various other projects. The Company's share of the estimated future costs of these activities is approximately $0.6 million at June 30, 1999. Failure to fund certain expenditures could result in the forfeiture of all or part of the Company's interest in this contract. Any substantial increases in the amounts of the above referenced expenditures could adversely affect the Company's ability to meet these obligations. The Company will most likely fund the recompletion of certain wells through arrangements with service companies whereby the services are paid for with proceeds from the sale of incremental oil production. Any miscellaneous projects will be funded using cash provided from operations. Risks that could adversely affect funding of such activities include, among others, delays in obtaining any required environmental approvals and permits, cost overruns, failure to produce the reserves as projected or a decline in the sales price of oil. Depending on the results of future exploration and development activities, substantial expenditures which have not been included in the Company's cash flow projections may be required. 10 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) On August 3, 1998, leftist Colombian guerrillas inflicted significant damage on the Company's oil processing and storage facilities at the Mary field, and to a lesser extent, at the Linda facilities. Since that time the Company has been subject to lesser attacks on its pipelines and equipment resulting in only minor interruptions of oil sales. The Colombian army guards the Company's operations; however, there can be no assurance that the Company's operations will not be the target of additional guerrilla attacks in the future. The damages resulting from the above referenced attacks were covered by insurance. There can be no assurance that such coverage will remain available or affordable. Under the terms of the contracts with Ecopetrol, a minimum of 25% of all revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only be utilized in Colombia. To date, the Company has experienced no difficulty in repatriating the remaining 75% of such payments, which are payable in U.S. dollars. Activities of the Company with respect to the exploration, development and production of oil and natural gas are subject to stringent foreign, federal, state and local environmental laws and regulations, including but not limited to the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the Federal Water Pollution Control Act, the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act. Such laws and regulations have increased the cost of planning, designing, drilling, operating and abandoning wells. In most instances, the statutory and regulatory requirements relate to air and water pollution control procedures and the handling and disposal of drilling and production wastes. Although the Company believes that compliance with environmental laws and regulations will not have a material adverse effect on the Company's future operations or earnings, risks of substantial costs and liabilities are inherent in oil and gas operations and there can be no assurance that significant costs and liabilities, including civil or criminal penalties for violations of environmental laws and regulations, will not be incurred. Moreover, it is possible that other developments, such as stricter environmental laws and regulations or claims for damages to property or persons resulting from the Company's operations, could result in substantial costs and liabilities. 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. 11 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) 8. Segment Information The following is a summary of segment information of the Company as of and for the six-month periods ended June 30, 1999 and 1998 (in thousands):
United States Colombia Total --------- --------- --------- 1999 ---- Oil and gas sales $ 427 $ 2,332 $ 2,759 --------- --------- --------- Expense: Production 603 1,176 1,779 Depreciation, depletion and amortization 73 547 620 General and administrative 638 41 679 Recovery of losses on accounts receivable (92) - (92) Severance - 62 62 --------- --------- --------- 1,222 1,826 3,048 --------- --------- --------- Interest and other income (expense), net 117 60 177 Interest expense (158) (416) (574) --------- --------- --------- Earnings (loss) before income taxes (836) 150 (686) Income taxes - 127 127 --------- --------- --------- Net earnings (loss) $ (836) $ 23 $ (813) ========= ========= ========= Total assets $ 1,497 $ 7,066 $ 8,563 ========= ========= ========= 1998 ---- Oil and gas sales $ 470 $ 1,590 $ 2,060 --------- --------- --------- Expense: Production 593 922 1,515 Depreciation, depletion and amortization 243 931 1,174 Write-down of oil and gas properties 1,370 3,355 4,725 General and administrative 650 10 660 --------- --------- --------- 2,856 5,218 8,074 --------- --------- --------- Interest and other income (expense), net 758 13 771 Interest expense (175) (145) (320) --------- --------- --------- Loss before income taxes (1,803) (3,760) (5,563) Income taxes - 166 166 --------- --------- --------- Net loss $ (1,803) $ (3,926) $ (5,729) ========= ========= ========= Total assets $ 2,812 $ 7,319 $ 10,131 ========= ========= =========
12 Item 2. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations. - -------------- Results of Operations - --------------------- Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998 - -----------------------------------------------------------------------------
United States Colombia --------------------- -------- Oil Gas Oil Total -------- -------- -------- -------- (Thousands) Revenue -- 1998 $ 178 $ 73 $ 663 $ 914 Volume variance (43) (39) 346 264 Price variance 32 2 376 410 Other - (13) - (13) -------- -------- -------- -------- Revenue -- 1999 $ 167 $ 23 $ 1,385 $ 1,575 ======== ======== ======== ========
Colombian oil volumes were 95,000 barrels in the second quarter of 1999, an increase of 33,000 barrels as compared to the second quarter of 1998. Such increase is due to a 52,000 barrel increase resulting from the acquisition of Garnet effective October 28, 1998, partially offset by a 20,000 barrel decrease resulting from production declines. U.S. oil volumes were 11,000 barrels in 1999, down approximately 4,000 barrels from 1998. U.S. gas volumes before gas balancing adjustments were 6,000 thousand cubic feet (MCF) in 1999, down 16,000 MCF from 1998. Such decreases resulted primarily from normal production declines. Colombian oil prices averaged $14.56 per barrel during the second quarter of 1999. The average price for the same period of 1998 was $10.61 per barrel. The Company's average U.S. oil price increased to $15.19 per barrel in 1999, up from $12.25 per barrel in 1998. In 1999 prices have been higher than in the second quarter of 1998 due to an increase in world oil prices. U.S. gas prices averaged $2.41 per MCF in 1999 compared to $1.93 per MCF in 1998. In addition to the above-mentioned variances, U.S. gas revenue decreased approximately $13,000 as a result of gas balancing adjustments. Operating costs increased approximately 23%, or $163,000, primarily due to the Garnet merger. Depreciation, depletion and amortization decreased by 44%, or $219,000, primarily due to a decrease in costs subject to amortization resulting from property write-downs. The Company recorded write-downs of $1,053,000 and $908,000 to the carrying amounts of its Colombian and U.S. oil and gas properties, respectively, as a result of ceiling test limitations on capitalized costs during the second quarter of 1998. No such write-downs were required during 1999. The Company incurred severance expense of $62,000 during the second quarter of 1999 related to Colombian operations. The Company has taken significant cost cutting measures in Colombia since it merged with Garnet Resources Corporation, thereby acquiring operatorship of the Colombian properties. 13 Interest and other income increased $222,000 primarily due to a foreign currency exchange gain of $107,000 and the reversal of approximately $79,000 of accruals for loss contingencies which are no longer considered necessary. No similar amounts were recorded in 1998. Interest expense increased $128,000 in the second quarter of 1999, primarily as a result of higher outstanding balances of long term debt. Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998 - -------------------------------------------------------------------------
United States Colombia --------------------- -------- Oil Gas Oil Total (Thousands) -------- -------- -------- -------- Revenue -- 1998 $ 352 $ 118 $ 1,590 $ 2,060 Volume variance (1) (23) 696 672 Price variance (16) 12 46 42 Other - (15) - (15) -------- -------- -------- -------- Revenue -- 1999 $ 335 $ 92 $ 2,332 $ 2,759 ======== ======== ======== ========
Colombian oil volumes were 198,000 barrels in the first half of 1999, an increase of 60,000 barrels as compared to the first half of 1998. Such increase is due to a 109,000 barrel increase resulting from the acquisition of Garnet effective October 28, 1998, partially offset by a 49,000 barrel decrease resulting from production declines. U.S. oil volumes were 27,000 barrels in 1999, approximately the same as 1998. An increase of approximately 7,000 barrels was due to continuous production from the Company's Main Pass 41 field (shut-in for approximately 85 days during the first half of 1998 due to equipment failures), offset by a 7,000 barrel decrease resulting from normal production declines. U.S. gas volumes before gas balancing adjustments were 42,000 MCF in 1999, up 6,000 MCF from 1998. Of such increase, approximately 54,000 MCF was due to the aforementioned continuous production from the Main Pass 41 field, partially offset by a 48,000 MCF decline due to normal production declines. Colombian oil prices averaged $11.76 per barrel during the first half of 1999. The average price for the same period of 1998 was $11.53 per barrel. The Company's average U.S. oil price decreased to $12.40 per barrel in 1999, down from $13.00 per barrel in 1998. U.S. gas prices averaged $1.86 per MCF in 1999 compared to $2.10 per MCF in 1998. In addition to the above-mentioned variances, U.S. gas revenue decreased approximately $15,000 as a result of gas balancing adjustments. Operating costs increased approximately 17%, or $264,000, primarily due to the Garnet merger. Depreciation, depletion and amortization decreased by 47%, or $554,000, primarily due to a decrease in costs subject to amortization resulting from property write-downs. The Company recorded write-downs of $3,355,000 and $1,370,000 to the carrying amounts of its Colombian and U.S. oil and gas properties, respectively, as a result of ceiling test limitations on capitalized costs during 1998. No such write-downs were required as of June 30, 1999. The Company incurred severance expense of $62,000 during the first half of 1999 related to Colombian operations. The Company has taken significant cost cutting measures in Colombia since it merged with Garnet Resources Corporation, thereby acquiring operatorship of the Colombian properties. 14 Interest and other income decreased $594,000. During the first quarter of 1998 the Company realized a $720,000 gain on the settlement of litigation involving the administration of a take or pay contract settlement. No such gain was recorded in 1999; however, in 1999 a foreign currency exchange gain related to Colombian activity of $118,000 was recorded. Interest expense increased $254,000 in the first half of 1999, primarily as a result of higher outstanding balances of long term debt. Income taxes were $39,000 lower in 1999 principally as a result of lower Colombian "presumptive" income tax. Year 2000 - --------- The Year 2000 problem is the inability of a meaningful proportion of the world's computers, software applications and embedded semiconductor chips to cope with the change of the year from 1999 to 2000. This issue can be traced to the infancy of computing, when computer data and programs were designed to save memory space by truncating the date field to just six digits (two for the day, two for the month and two for the year). Such information applications automatically assume that the two-digit year field represents a year within the 20th century. As a result of this, systems could fail to operate or fail to produce correct results. The Year 2000 problem affects computers, software applications, and related equipment used, operated or maintained by the Company. Accordingly, the Company is currently assessing the potential impact of, and the costs of remediating, the Year 2000 problem for its internal systems and on facilities and equipment. The Company's business is substantially dependent upon the operations of computer systems, and as such, the Company has established a committee made up of leaders from the operational areas of the Company. The committee has the involvement of senior management and its objectives are high priority. The Company is continuing the process of identifying the computers, software applications, and related equipment used in connection with its operations that must be modified, upgraded or replaced to minimize the possibility of a material disruption of its business. The Company has commenced the process of modifying, upgrading and replacing systems which have already been assessed as adversely affected by the Year 2000 problem, and expects to complete this process by the end of 1999. In addition to computers and related systems, the operation of office equipment, such as fax machines, copiers, telephone switches, security systems and other common devices may be affected by the Year 2000 problem. The Company is currently assessing the potential effect of, and costs of remediating, the Year 2000 problem on its office systems and equipment. The Company has initiated communications with third party suppliers of computers, software, and other equipment used, operated or maintained by the Company to identify and, to the extent possible, to resolve issues involving the Year 2000 problem. However, the Company has limited or no control over the actions of these third party suppliers. Thus, while the Company expects that it will be able to resolve any significant Year 2000 problems with these systems, there can be no assurance that these suppliers will resolve any or all Year 2000 problems with these systems before the occurrence of a material disruption to the business of the Company. Any failure of these third parties to timely resolve Year 2000 problems with their systems could have a material adverse effect on the Company's business, financial condition, and results of operations. Because the Company's assessment is not complete, it is unable to accurately predict the total cost to the Company of completing any required modifications, upgrades, or replacements of its systems or equipment. The Company does not, however, believe that such total cost will exceed $200,000. The 15 Company expects to identify and resolve all Year 2000 problems that could materially adversely affect its business operations. However, management believes that it is not possible to determine with complete certainty that all Year 2000 problems affecting the Company, its purchasers or its suppliers have been identified or corrected. The number of devices that could be affected and the interactions among these devices are simply too numerous. In addition, no one can accurately predict how many Year 2000 problem-related failures will occur or the severity, duration, or financial consequences of these perhaps inevitable failures. As a result, management expects that the Company will likely suffer the following consequences: (i) a significant number of operational inconveniences and inefficiencies for the Company, its purchasers and its suppliers will divert management's time and attention and financial and human resources from its ordinary business activities; (ii) a few serious system failures that will require significant effort by the Company, its purchasers or its suppliers to prevent or alleviate material business disruptions; (iii) several routine business disputes and claims due to Year 2000 problems that will be resolved in the ordinary course of business; and (iv) possible business disputes alleging that the Company failed to comply with the terms of its contracts or industry standards of performance, some of which could result in litigation. The Company will develop contingency plans to be implemented if its efforts to identify and correct Year 2000 problems affecting its operational systems and equipment are not effective. The Company plans to complete its contingency plans by the end of the third quarter of 1999. Depending on the systems affected, any contingency plans developed by the Company, if implemented, could have a material adverse effect on the Company's financial condition and results of operations. The discussion of the Company's efforts, and management's expectations, relating to Year 2000 compliance are forward-looking statements. The Company's ability to achieve Year 2000 compliance and the level of incremental costs associated therewith, could be adversely impacted by, among other things, the availability and cost of programming and testing resources, vendors' ability to modify proprietary software, and unanticipated problems identified in the ongoing compliance review. New Accounting Pronouncements - ----------------------------- The Company is assessing the reporting and disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes accounting and reporting standards for derivative instruments and hedging activities. The statement is effective for financial statements for fiscal years beginning after June 15, 2000. The Company believes SFAS No. 133 will not have a material impact on its financial statements or accounting policies. The Company will adopt the provisions of SFAS No. 133 in the first quarter of 2001. Liquidity and Capital Resources - ------------------------------- During the last quarter of calendar year 1997 and throughout calendar year 1998, world oil prices declined dramatically. This decline in oil prices was particularly severe in Colombia. Colombian oil prices, during the twenty-four month period ended December 31, 1998, fell from a high of $22.71 per barrel in January 1997 to $7.50 per barrel in December 1998. Whereas the sale price for crude oil from the Santana contract averaged $19.82 per barrel in 1996 and $17.39 per barrel in 1997, the sale price averaged $10.31 per barrel during calendar year 1998 and $11.76 per barrel during the first half of 1999. These price declines have materially and adversely affected the results of operations and the financial position of the Company. During the years ended December 31, 1998, 1997 and 1996, the Company reported net losses of $17.1 million, $22.5 million and $0.9 million, respectively, and declining amounts of net cash provided by (used in) operating activities of $(0.05) million, $1.7 million and $8.9 million, respectively. The Company recorded an additional net loss of $0.8 million 16 for the six-month period ended June 30, 1999. The Company's stockholders' deficit was approximately $11.9 million as of June 30, 1999. The Company is highly leveraged with $14.5 million in current debt as of June 30, 1999, pursuant to bank credit facilities with ING (U.S.) Capital Corporation ("ING Capital"), the U.S. Overseas Private Investment Corporation ("OPIC") and Chase Bank of Texas, N.A. ("Chase"), as more fully described in note 5 to the condensed consolidated financial statements. The Company is not in compliance with various covenants under the bank credit facilities nor is it in compliance with the minimum escrow balance required thereunder. As a result, the lender has the right to accelerate payment on the debt and, therefore, the Company has classified all long-term debt as current in the June 30, 1999 consolidated balance sheet. Furthermore, the Company was unable to pay the principal payment of $5.7 million due on April 30, 1999, and subsequent monthly principal payments of $281,250. The Company has paid the related interest through June 30, 1999; however, the interest due July 30, 1999, has not been paid. Assuming no change in its capital structure, the Company will not have the financial resources to pay the future minimum monthly principal payments of $281,250 through December 31, 2001. On February 22, 1999, the Company signed a letter of intent to merge with Sharpe Resources Corporation ("Sharpe"), a publicly traded oil and gas exploration and production company incorporated in Ontario, Canada. As part of the merger arrangements, the Company's lenders (i.e., ING Capital, OPIC and Chase) had agreed in principle to cancel the Company's $14.6 million of outstanding debt in exchange for a cash payment of $5 million, plus $3 million of preferred stock in the merged entity and 25% of the common shares to be issued to the Aviva shareholders. On April 27, 1999, however, the merger discussions with Sharpe were terminated as a result of the inability of the parties to reach agreement on terms and conditions of the proposed merger. On May 19, 1999, the Company engaged Triumph Securities Corporation as an investment banker to assist in recapitalizing the Company with up to $10 million for the purchase of the Company's outstanding bank debt, drilling, and acquisitions. A recapitalization pursuant to this engagement has not been achieved. On July 23, 1999, the Company terminated Triumph's engagement as the Company's investment banker. Management of the Company is currently in discussions with the Company's lenders concerning the conversion of the Company's outstanding bank debt, which currently is $14.5 million, into common stock of the Company. Under management's proposal, the outstanding debt and accrued interest thereon would be exchanged for 200 million newly issued common shares of the Company. Following such an exchange, the lenders would own approximately 81% of the then outstanding shares of the Company and the Company's future cash flows would be available for working capital, drilling and acquisitions. Management believes this debt conversion can be achieved and will provide the Company with the liquidity necessary to continue operations and reposition the Company in order to take advantage of a rebounding petroleum industry. While management of the Company is pursuing the debt conversion assiduously, its ability to effect such a conversion is dependent upon the Company's lenders, a matter that is beyond the control of the Company. In particular, the Company's lenders must consent to waive the defaults of the Company under its bank credit facilities pending preparation, negotiation, execution and delivery of definitive debt conversion agreements. The Company's lenders have not yet and may not ever agree to a conversion of the Company's debt. If the Company is unable to consummate the debt conversion, then, in the absence of another business transaction, the Company cannot achieve compliance with nor make principal payments required by the bank credit facilities and, accordingly, the lenders could declare a default, accelerate all amounts outstanding, and attempt to realize upon 17 the collateral securing the debt. As a result of this uncertainty, management believes there is substantial doubt about the Company's ability to continue as a going concern. 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 periods covered by the forward-looking statements, as well as other factors described in the Company's annual report on Form 10-K. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The Company is exposed to market risk from changes in interest rates on debt and changes in commodity prices. The Company's exposure to interest rate risk relates to variable rate loans that are benchmarked to LIBOR interest rates. The Company does not use derivative financial instruments to manage overall borrowing costs or reduce exposure to adverse fluctuations in interest rates. The impact on the Company's results of operations of a one-point interest rate change on the outstanding balance of the variable rate debt as of June 30, 1999 would be immaterial. 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. 18 PART II - OTHER INFORMATION Item 3. Defaults Upon Senior Securities - ---------------------------------------- The Company is in default with respect to its Bank Credit Facilities. For more information see notes 2 and 5 to the condensed consolidated financial statements and Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources, as set forth elsewhere herein. 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 second quarter: Date of 8-K Description of 8-K - -------------- ------------------- April 13, 1999 Submitted a copy of the Company's Press Release dated April 13, 1999, updating the merger plans between Aviva Petroleum Inc. and Sharpe Resources Corporation. April 30, 1999 Submitted a copy of the Company's Press Release dated April 30, 1999, announcing the termination of merger plans between Aviva Petroleum Inc. and Sharpe Resources Corporation. 19 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: August 12, 1999 /s/ Ronald Suttill ------------------ Ronald Suttill President and Chief Executive Officer /s/ James L. Busby ------------------- James L. Busby Treasurer and Secretary (Principal Financial and Accounting Officer) 20 INDEX TO EXHIBITS Exhibit Number Description of Exhibit - ------ ---------------------- 27.1 Financial Data Schedule. 21 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 JUNE 30, 1999 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 257 0 1,839 328 794 2,684 69,121 64,780 8,563 18,586 0 0 0 2,345 (14,238) 8,563 2,759 2,759 2,399 2,399 0 (92) 574 (686) 127 (813) 0 0 0 (813) (0.02) (0.02)
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