<PAGE>
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, 1996
----------------------
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, 1996,
was 31,482,716 of which 12,136,200 shares of Common Stock were represented by
Depositary Shares. Each Depositary Share represents five shares of Common Stock
held by a Depositary.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
- -----------------------------
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands, except number of shares)
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,325 $ 4,200
Accounts receivable 3,123 2,756
Inventories 1,070 809
Prepaid expenses and other 1,035 667
--------- ---------
Total current assets 7,553 8,432
--------- ---------
Property and equipment, at cost (note 2):
Oil and gas properties and equipment
(full cost method) 83,658 80,544
Other 604 626
--------- ---------
84,262 81,170
Less accumulated depreciation, depletion
and amortization (49,150) (45,663)
--------- ---------
35,112 35,507
Other assets 1,683 1,521
--------- ---------
$ 44,348 $ 45,460
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt (note 3) $ 1,932 $ 2,397
Accounts payable 3,641 2,783
Accrued liabilities 444 217
--------- ---------
Total current liabilities 6,017 5,397
--------- ---------
Long term debt, excluding current portion (note 3) 9,470 10,670
Gas balancing obligations and other 1,809 1,729
Deferred foreign income taxes 340 497
Stockholders' equity (note 4):
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* (8,238) (7,783)
--------- ---------
Total stockholders' equity 26,712 27,167
Commitments and contingencies (note 6)
--------- ---------
$ 44,348 $ 45,460
========= =========
</TABLE>
* Accumulated deficit of $70,057 was eliminated at December 31, 1992 in
connection with a quasi-reorganization.
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
Oil and gas sales $3,876 $3,032 $7,409 $5,402
------ ------ ------ ------
Expense:
Production 1,284 1,312 2,514 2,544
Depreciation, depletion and amortization 1,796 1,405 3,579 2,482
General and administrative 487 640 1,016 1,252
Severance (note 5) - - 172 -
------ ------ ------ ------
Total expense 3,567 3,357 7,281 6,278
------ ------ ------ ------
Other income (expense):
Interest and other income (expense), net 66 408 139 436
Interest expense (201) (152) (406) (240)
Debt refinancing expense (note 3) - - (100) -
------ ------ ------ ------
Total other income (expense) (135) 256 (367) 196
------ ------ ------ ------
Earnings (loss) before income taxes 174 (69) (239) (680)
Income taxes 177 85 216 48
------ ------ ------ ------
Net loss $ (3) $ (154) $ (455) $ (728)
====== ====== ====== ======
Weighted average common shares outstanding 31,483 31,483 31,483 31,483
====== ====== ====== ======
Net loss per common share $ (.00) $ (.00) $ (.01) $ (.02)
====== ====== ====== ======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1996 1995
-------- --------
<S> <C> <C>
Net loss $ (455) $ (728)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 3,579 2,482
Deferred foreign income taxes (157) (147)
Changes in working capital and other (36) 77
------- -------
Net cash provided by operating activities 2,931 1,684
------- -------
Cash flows from investing activities:
Property and equipment expenditures (3,138) (4,553)
Proceeds from sale of assets 27 1
------- -------
Net cash used in investing activities (3,111) (4,552)
------- -------
Cash flows from financing activities:
Proceeds from long term debt - 3,200
Principal payments on long term debt (1,665) (75)
------- -------
Net cash provided by (used in) financing activities (1,665) 3,125
------- -------
Effect of exchange rate changes on cash and
cash equivalents (30) 213
------- -------
Net increase (decrease) in cash and cash equivalents (1,875) 470
Cash and cash equivalents at beginning of the period 4,200 1,982
------- -------
Cash and cash equivalents at end of the period $ 2,325 $ 2,452
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands, except number of shares)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------
Additional Total
Number Paid-in Accumulated Stockholders'
of Shares Amount Capital Deficit Equity
------------ ------ ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1995 31,482,716 $1,574 $33,376 $ (7,783) $27,167
Net loss - - - (455) (455)
------------ ------ ---------- -------- -------
Balances at June 30, 1996 31,482,716 $1,574 $33,376 $ (8,238) $26,712
============ ====== ========== ======== =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The condensed consolidated financial statements of Aviva Petroleum Inc. and
subsidiaries (the "Company") 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.
2. 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 $54,000 for the six months ended June 30, 1996 and $88,000 for
the six months ended June 30, 1995.
Unevaluated oil and gas properties totaling $1,975,000 and $3,012,000 at
June 30, 1996 and December 31, 1995, respectively, have been excluded from
costs subject to depletion. The Company capitalized interest costs of
$123,000 and $151,000 for the six-month periods ended June 30, 1996 and 1995,
respectively, on these properties.
3. LONG TERM DEBT
On August 6, 1993, the Company entered into a credit agreement with
Internationale Nederlanden (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. The borrowing base, as redetermined in March
1996, is currently $11,750,000. At June 30, 1996, $11,390,000 was
outstanding under the loan of which $1,920,000 was classified as current.
The outstanding loan balance bears interest at the ING Capital prime rate
(8.25% at June 30, 1996) 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. Commitment fees of .5% on the
unused credit were payable quarterly until December 31, 1995, at which time
the credit facility converted from a revolving credit facility to a term
loan. The terms of the loan, among other things, prohibit the Company from
merging with another company or paying dividends, limit additional
indebtedness, general and administrative expense, sales of assets and
investments and require the maintenance of certain minimum financial ratios.
The agreement also requires the Company to maintain a minimum consolidated
tangible net worth of $22,000,000.
6
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
In March 1996, the Company entered into an agreement with ING Capital
pursuant to which the borrowing base was reduced to $11,750,000, the
outstanding loan balance was paid down to $11,750,000 from $13,000,000 on
April 1, 1996, and the repayment schedule was extended by six months. The
latter, as rescheduled, requires monthly payments of $120,000 for the
remainder of 1996, $200,000 for the first six months of 1997, $526,000 for
the last six months of 1997, and $526,167 for each month in 1998. In
consideration for this refinancing, the Company paid a fee of $100,000 to ING
Capital.
4. STOCKHOLDERS' EQUITY
The following is a summary of the activities under the Company's stock
option plans since December 31, 1995:
<TABLE>
<CAPTION>
Number of
Shares Covered
by Options Price
-------------- --------------------------
<S> <C> <C>
Outstanding at December 31, 1995 716,000 $ 0.78 - (Pounds) 6.00
Granted pursuant to the 1995 Stock Option Plan 20,000 $ 0.74
Expired or canceled (63,334) $ 1.08
------- --------------------------
Outstanding at June 30, 1996 672,666 $ 0.74 - (Pounds) 6.00
======= ==========================
</TABLE>
As of June 30, 1996, approximately 467,000 shares were represented by
options which were exercisable under the plans.
5. SEVERANCE EXPENSE
The Board of Directors has charged a committee of the Board with the task of
reviewing the Company's general and administrative expenses and making
recommendations as to the reduction of such expenses. On March 18, 1996, the
Board, acting on one of such committee's recommendations, determined to
terminate the employment of the Executive Vice President and Chief Operating
Officer of the Company (the "Officer") effective on June 1, 1996. In
connection with the severance arrangements between the Company and the
Officer, the Company incurred costs of $172,000.
6. COMMITMENTS AND CONTINGENCIES
The Company has reached total depth and has set casing on one development
well in the U.S. at Main Pass Block 41 field. Testing of this well is
expected to commence once a completion rig has moved onto location, which is
expected to occur by mid-August. As of June 30, 1996, future costs are
estimated at approximately $1.4 million, net to the Company's interest, for
the completion of this well.
The Company, along with its co-owner (referred to collectively as the "Co-
owners"), is also engaged in an ongoing development and exploration program
on several concessions in Colombia.
All contract obligations of the Santana concession have been met. The Co-
owners, however, are currently testing one development well and anticipate
drilling certain additional development wells
7
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
on the Santana concession as well as completing certain production
facilities. As of June 30, 1996, future development costs are estimated at
approximately $3.9 million, net to the Company's interest, for these
expenditures.
The Co-owners drilled an exploratory well, the Palmera #1, on the Santana
concession during the first quarter of 1996 which was non-productive and was
plugged and abandoned. The Co-owners currently plan to perform a 3D seismic
program on the Santana concession during the last half of 1996. Additionally,
2D seismic programs are anticipated for the Fragua and Yuruyaco concessions
during the first half of 1997. As of June 30, 1996, these future exploratory
expenditures aggregated approximately $1.0 million, net to the Company's
interest.
The Co-owners have completed their seismic obligations for the first two
years of the La Fragua concession. The deadline for the acquisition of
seismic data in the third year was March 31, 1996. Due to delays in
obtaining the requisite environmental approvals, the Co-owners have requested
an extension of the deadline from Ecopetrol. The Co-owners expect that
Ecopetrol will grant the request for extension after receipt of the
environmental approvals. Failure to receive the extension would result in
the Co-owners' forfeiture of the concession, but in all prior situations of
this nature, Ecopetrol has granted requested extensions.
Assuming the receipt of the above mentioned extension, the Co-owners intend
to acquire the additional seismic data and, based on such data, then to
determine whether to proceed into the fourth contract year. If the Co-owners
decide to proceed into the fourth year, the drilling of a test well would be
required. The Co-owners have the option of dropping the concession in lieu
of drilling the test well. Unevaluated costs at June 30, 1996 include
approximately $1.2 million relating to the La Fragua concession.
Failure to fund certain of these capital expenditures could, under either the
concession agreements or joint operating agreements with the Company's co-
owner, or both, result in the forfeiture of all or part of the Company's
interest in these Colombian concessions.
The Company's aggregate remaining estimated exploratory and development
expenditures for 1996, 1997 and early 1998 were $6.3 million at June 30,
1996. Any substantial increases in the amounts of the above referenced
expenditures could adversely affect the Company's ability to meet these
obligations.
The Company plans to fund these exploration and development activities using
cash provided from operations and working capital ($1.5 million at June 30,
1996). Risks that could adversely affect funding include, among others, a
decrease in the Company's borrowing base, delays in obtaining the required
environmental approvals and permits, cost overruns, failure to produce the
reserves as projected or a decline in the sales price of oil. Depending on
the results of the exploration and development activities, substantial
expenditures which have not been included in the Company's cash flow
projections may be required. Although the ultimate outcome of these matters
cannot be projected with certainty, management believes that its existing
capital resources are adequate to fund its present obligations or that
sufficient capital can be obtained by means of sales of assets.
Under the terms of the contracts with Ecopetrol, 25% of all revenues from oil
sold to Ecopetrol is paid in Colombian pesos which may only be utilized in
Colombia. To date, the Company has experienced no difficulty in repatriating
the remaining 75% of such payments, which are payable in U.S. dollars.
8
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Activities of the Company with respect to the exploration, development and
production of oil and natural gas are subject to stringent environmental
regulation by state and federal authorities, including the U.S. Environmental
Protection Agency. Such regulation has increased the cost of planning,
designing, drilling, operating and abandoning wells. In most instances, the
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 regulations will not have
a material adverse effect on 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 regulations, will not be
incurred. Moreover, it is possible that other developments, such as stricter
environmental laws and regulations or claims for damages to property or
persons resulting from the Company's operations, could result in substantial
costs and liabilities. The Company's policy is to accrue environmental and
restoration related costs once it is probable that a liability has been
incurred and the amount can be reasonably estimated.
The Oil Pollution Act of 1990 ("OPA '90") and regulations thereunder impose a
variety of requirements on "responsible parties" related to the prevention of
oil spills and liability for damages resulting from such spills in waters of
the United States. A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an
offshore facility is located. OPA '90 assigns liability to each responsible
party for oil spill removal costs and a variety of public and private damages
from oil spills. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill is caused by gross
negligence or willful misconduct, if the spill resulted from violation of a
federal safety, construction, or operating regulation, or if a party fails to
report a spill or to cooperate fully in the cleanup. Few defenses exist to
the liability imposed under OPA '90 for oil spills. The failure to comply
with these requirements or inadequate cooperation in a spill event may
subject a responsible party to civil or criminal enforcement actions.
Management of the Company is currently unaware of any oil spills for which
the Company has been designated as a responsible party under OPA '90 and that
will have a material adverse impact on the Company or its operations. OPA '90
also imposes ongoing requirements on facility operators, such as the
preparation of an oil spill contingency plan. The Company has such plans in
place.
OPA '90 also requires responsible parties to establish and maintain $150
million in financial responsibility to cover environmental cleanup and
restoration costs likely to be incurred in connection with an oil spill. In
August of 1993, the U.S. Minerals Management Service published an advance
notice of its intention to adopt a rule that would provide a mechanism for
enforcing the financial responsibility requirement. Adverse reaction of the
oil and gas industry to the proposed rule prompted the U.S. House of
Representatives to pass a bill in May of 1995 that would reduce the level of
financial responsibility required under OPA '90 to $35 million (the amount
prescribed under the Outer Continental Shelf Lands Act ("OCSLA") and
currently maintained by the Company).
The House bill would allow the limit to be increased to $150 million if a
formal risk assessment indicated the increase to be warranted. In November
of 1995, the U.S. Senate adopted similar but slightly different legislation
that must be reconciled with the House of Representatives bill before either
bill can be submitted to President Clinton for approval. Like the House
bill, the Senate bill would reduce the level of financial responsibility
required under OPA '90 to $35 million and would
9
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
also allow the financial responsibility limit to be increased to $150 million
if the higher level was justified. The U.S. Senate and House of
Representatives have completed selection of conferees to reconcile
differences between the two bills. The Company cannot predict the final form
of any financial responsibility rule that may be imposed under OPA '90, but
any rule that requires the Company to establish $150 million in financial
responsibility for oil spills has the potential to make it financially
impossible for operators the size of the Company to comply. The Clinton
Administration has indicated moderate support for changes to the OPA '90
financial responsibility requirements. Whether these legislative efforts
will reduce the OPA '90 financial responsibility requirements applicable to
the Company cannot be determined at this time.
Two of the Company's properties, Main Pass Block 41 field, a federal lease on
the outer continental shelf ("OCS") offshore Louisiana, and Breton Sound
Block 31 field, on state leases offshore Louisiana, would be subject to OPA
'90. Failure to comply with the regulations as currently proposed would,
in the case of Main Pass Block 41, require the Company to resign as operator
in favor of a qualified party (two of the Company's working interest partners
at Main Pass Block 41 would likely be qualified parties), sell or abandon the
property. In the case of Breton Sound Block 31, where none of the Company's
co-owners would likely qualify, the Company would be required to sell or
abandon the property. Nevertheless, the impact of any rule regarding
financial responsibility requirements is not expected to be any more
burdensome to the Company than it will be to other similarly situated
companies involved in oil and gas exploration and production in the Gulf of
Mexico.
Main Pass Block 41 and Breton Sound Block 31 have in the past provided
substantial cash flow and together, at December 31, 1995, represented more
than half of the Company's U.S. oil and gas reserves, having pre-tax 10%
discounted future net cash flows, determined by independent engineers, of
$3.6 million and $.7 million, respectively (unaudited). The Company does not
have the benefit of a report with respect to its oil and gas reserves by
independent petroleum engineers as of June 30, 1996. The Company estimates,
however, that the pre-tax 10% discounted future net cash flows attributable
to Main Pass Block 41 and Breton Sound Block 31 at June 30, 1996, after
giving effect to production subsequent to December 31, 1995 and to changes in
production rates and oil and gas prices, are not materially different from
the $3.6 million and $.7 million, respectively, at December 31, 1995. The
after tax 10% discounted future net cash flow attributable to each property
approximates the pre-tax amount.
In addition to the forgoing, OCSLA imposes a variety of requirements relating
to safety and environmental protection on lessees and permittees operating in
the OCS. Specific design and operational standards may apply to OCS vessels,
rigs, platforms, vehicles and structures. Violation of lease conditions or
regulations issued pursuant to OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions curtailing
operations and the cancellation of leases. Such enforcement liabilities can
result from either governmental or private prosecution. The Company believes
it is in material compliance with applicable OCSLA requirements.
In addition, 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
result in any material adverse effect on the Company's financial condition or
results of operations.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- -------------------------------------------------------------------------------
OF OPERATIONS.
- --------------
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
United States Colombia
Oil Gas Oil Total
------- ----- -------- -------
<S> <C> <C> <C> <C>
(Thousands)
Revenue - 1995 $459 $451 $2,122 $3,032
Volume variance 8 (33) 152 127
Price variance 66 119 462 647
Other - 70 - 70
---- ---- ------ ------
Revenue - 1996 $533 $607 $2,736 $3,876
==== ==== ====== ======
</TABLE>
Colombian oil volumes were 134,000 barrels in the second quarter of 1996, an
increase of 9,000 barrels as compared to the second quarter of 1995. Such
increase resulted from a fracture stimulation program involving eight wells that
was completed in February 1996.
U.S. oil volumes were 27,000 barrels in 1996, almost unchanged from 1995. U.S.
gas volumes before gas balancing adjustments were 283,000 thousand cubic feet
(MCF) in 1996, a decrease of 19,000 MCF from 1995, resulting primarily from
normal production declines.
Colombian oil prices averaged $20.43 per barrel during the second quarter of
1996. The average price for the same period during 1995 was $16.98 per barrel.
The Company's average U.S. oil price increased to $19.97 per barrel in 1996, up
from $17.50 per barrel in 1995. U.S. gas prices averaged $2.12 per MCF in 1996
compared to $1.71 per MCF in 1995.
In addition to the above-mentioned variances, U.S. gas revenue increased
approximately $70,000 as a result of gas balancing adjustments.
Operating costs decreased only slightly, while depreciation, depletion and
amortization (DD&A) increased by 28%, or $391,000, primarily due to a higher
Colombian DD&A rate per barrel and higher Colombian production. Colombian DD&A
expenses increased on a per barrel basis due to lower reserve volumes and an
increase in costs subject to amortization.
General and administrative (G&A) expenses declined $153,000 as a result of a
cost reduction program implemented by the Company during the first quarter of
1996. This program has targeted all categories of G&A.
Interest and other income (expense) decreased $342,000 mainly due to foreign
exchange gains recorded in 1995 that did not recur in 1996.
Interest expense was $49,000 higher, primarily as a result of higher average
balances outstanding in 1996.
11
<PAGE>
Income taxes were $92,000 higher in 1996 as a result of an increase in Colombian
taxable income and due to the threshold for "commercial income" being reached in
Colombia resulting in the 12% remittance tax thereon. In 1995 the Company did
not achieve the commercial income threshold in Colombia.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
United States Colombia
Oil Gas Oil Total
------- ------- -------- -------
<S> <C> <C> <C> <C>
(Thousands)
Revenue - 1995 $ 909 $1,017 $3,476 $5,402
Volume variance (36) (35) 951 880
Price variance 117 209 702 1,028
Other - 99 - 99
----- ------ ------ ------
Revenue - 1996 $ 990 $1,290 $5,129 $7,409
===== ====== ====== ======
</TABLE>
Colombian oil volumes were 268,000 barrels in the first half of 1996, an
increase of 58,000 barrels as compared to the first half of 1995. Such increase
resulted primarily from a fracture stimulation program involving eight wells
that was completed in February 1996.
U.S. oil volumes were 51,000 barrels in 1996, down approximately 2,000 barrels
from 1995. Such decrease was mainly due to normal production declines. U.S.
gas volumes before gas balancing adjustments were 593,000 MCF in 1996, a
decrease of 19,000 MCF from 1995, resulting primarily from normal production
declines.
Colombian oil prices averaged $19.13 per barrel during the first half of 1996.
The average price for the same period during 1995 was $16.51 per barrel. The
Company's average U.S. oil price increased to $19.31 per barrel in 1996, up from
$17.03 per barrel in 1995. U.S. gas prices averaged $2.01 per MCF in 1996
compared to $1.70 per MCF in 1995.
In addition to the above-mentioned variances, U.S. gas revenue increased
approximately $99,000 as a result of gas balancing adjustments.
Operating costs decreased slightly ($30,000), while DD&A increased by 44%, or
$1,097,000, primarily due to a higher Colombian DD&A rate per barrel and higher
Colombian production. Colombian DD&A expenses increased on a per barrel basis
to $10.72 in the first half of 1996 from $8.46 in the first half of 1995, due to
lower reserve volumes and an increase in costs subject to amortization.
G&A expenses declined $236,000 as a result of a cost reduction program
implemented by the Company during the first quarter of 1996. This program has
targeted all categories of G&A.
The Company incurred $172,000 of severance expense in the first six months of
1996 relating to the termination of the Executive Vice President and Chief
Operating Officer of the Company. For more information regarding such
termination see Note 5 of Notes to Condensed Consolidated Financial Statements.
Interest and other income (expense) decreased $297,000 mainly due to foreign
exchange gains recorded in 1995 that did not recur in 1996.
12
<PAGE>
Interest expense was $166,000 higher, primarily as a result of higher average
balances outstanding in 1996.
Debt refinancing expense of $100,000 in 1996 represents a fee paid to ING
Capital in consideration for certain modifications to the Company's credit
agreement. See Note 3 of Notes to Condensed Consolidated Financial Statements.
Income taxes were $168,000 higher in 1996 as a result of an increase in
Colombian taxable income and due to the threshold for "commercial income" being
reached in Colombia resulting in the 12% remittance tax thereon. In 1995 the
Company did not achieve the commercial income threshold in Colombia.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Since December 31, 1995, costs incurred in oil and gas property acquisition,
exploration and development activities by the Company totaled approximately $3.1
million, of which approximately $2.6 million was incurred in Colombia and
approximately $.5 million was incurred in the U.S. These activities were funded
by available working capital and cash provided by operating activities.
As described in Note 6 of Notes to Condensed Consolidated Financial Statements,
the Company has aggregate remaining estimated exploratory and development
expenditures for 1996, 1997 and early 1998 of $6.3 million at June 30, 1996.
The Company plans to fund these exploration and development activities through
cash provided from operations and working capital. Any substantial decreases in
the borrowing base as hereinafter defined or increases in the amounts of these
expenditures could adversely affect the Company's ability to meet these
obligations. Delays in obtaining the required environmental approvals and
permits on a timely basis and construction delays could both, through the impact
of inflation, increase the required expenditures. Cost overruns resulting from
factors other than inflation could also increase the required expenditures.
Historically, the inflation rate of the Colombian peso has been in the range of
20-30% per year. Devaluation of the peso against the U.S. dollar has
historically been slightly less than the inflation rate in Colombia. The
Company has historically funded capital expenditures in Colombia by converting
U.S. dollars to pesos at such time as the expenditures have been made. As a
result of the interaction between peso inflation and devaluation of the peso
against the U.S. dollar, inflation, from the Company's perspective, has not been
a significant factor. During 1994, the first half of 1995, and the first half
of 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.
The Company is a party to a credit agreement with Internationale Nederlanden
(U.S.) Capital Corporation ("ING Capital") pursuant to which the borrower
thereunder may borrow up to $25 million, subject to a borrowing base the
determination of which is predicated on the Company's U.S. and Colombian
reserves and which is redetermined annually. On April 1, 1996, a principal
payment of $1,250,000 was made reducing the then outstanding balance to the
$11,750,000 borrowing base redetermined in March 1996. Borrowings under the
credit agreement bear interest at the prime commercial rate of the lender in
effect from time to time for its most creditworthy customers plus 1% per annum
or, at the Company's option, a fixed rate based on the London Interbank Offered
Rate for a portion or portions of the outstanding indebtedness. The borrower
under the credit agreement is Neo Energy, Inc., a wholly owned subsidiary of the
Company and the owner of the Company's interests in the Colombian concessions.
The indebtedness under the credit agreement is guaranteed by the parent company
and certain other subsidiaries, including the wholly owned subsidiary that is
the owner of substantially all the Company's domestic oil and gas properties.
The loan prohibits the payment of dividends by the Company and requires the
maintenance of certain financial ratios. The repayment schedule requires
monthly payments of $120,000 for the remainder of 1996, $200,000 for the first
six months of 1997, $526,000 for the last six months of 1997 and $526,167 for
each month in 1998.
13
<PAGE>
The Company's internal projections of its consolidated cash flow through
December 31, 1998 indicate that the Company's consolidated cash flow and working
capital will be adequate to fund both the estimated exploratory and development
expenditures for 1996, 1997 and early 1998 and the debt service relating to the
ING Capital credit agreement as rescheduled through the end of calendar year
1998. These internal cash flow projections assume (i) crude oil sales prices of
$17.86 per barrel for Colombian production and $18.16 per barrel for United
States production and natural gas sales prices of $2.05 per MCF for United
States production, (ii) successful completion of one development well at Main
Pass Block 41 and five development wells on the Santana Concession in Colombia,
(iii) production decline curves commensurate with those assumed by the Company's
independent petroleum engineers, (iv) certain reductions in general and
administrative costs and (v) interest rates and operating costs at current
levels. Any significant inaccuracy in any of these assumptions, as well as
interruptions of production, increases in required expenditures as a result of
inflation or cost overruns or delays in the Company's development program, may
adversely affect the Company's ability to fund such exploratory and development
expenditures or to meet its existing debt service obligations. Depending on the
results of the Company's exploration and development activities, substantial
expenditures which have not been included in such cash flow projections may be
required. For information regarding the risks relating to the Company's
business, including the potential adverse effect of OPA '90 on certain of the
Company's domestic offshore properties and with respect to the cash flow from
these properties, see Note 6 of Notes to Condensed Consolidated Financial
Statements.
At December 31, 1995, the Colombian cost center approximated the ceiling test
limitation. During the six months ended June 30, 1996, costs incurred of
approximately $2.6 million were added to the Colombian cost center, in addition
to approximately $1.1 million of unevaluated costs that were transferred into
the amortization base as a result of an exploratory well, the Palmera #1, being
evaluated as non-productive. No ceiling test write-down was recorded at June
30, 1996, however, since an increase of $.71 per barrel in the Colombian oil
price sufficiently raised the ceiling test limitation. A future decrease in
price received for oil or downward reserve adjustments could result in a ceiling
test write-down.
During late 1995, the Company engaged in discussions with Garnet Resources
Corporation, the parent of the co-owner of the Company's Colombian Concessions,
regarding a possible merger of the Company and Garnet Resources Corporation. In
December 1995, these discussions were terminated as a result of the inability of
the parties to reach agreement on terms and conditions of the proposed merger.
At that time, the Company engaged Dillon, Read & Co. Inc. to assist it in an
effort to investigate and evaluate strategic alternatives for the Company. That
undertaking is continuing.
With the exception of historical information, the matters discussed in this
quarterly 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 such
expectations will be realized. Important factors that could cause actual
results to differ materially from those in the forward-looking statements herein
include the timing and extent of changes in commodity prices for oil and gas,
the extent of the Company's success in discovering, developing and producing
reserves, political conditions in Colombia and conditions of the capital markets
and equity markets during the periods covered by the forward-looking statements,
as well as other factors.
14
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- --------------------------------------------------------------
The Annual Meeting of Shareholders of Aviva Petroleum Inc. was held on June 11,
1996, pursuant to notice, at which the following persons were elected directors
of the Company to serve until the next annual meeting of the shareholders or
until their successors are elected and qualify:
<TABLE>
<CAPTION>
For Against Abstain
---------- ------- -------
<S> <C> <C> <C>
Ronald Suttill 14,479,455 35,177 2,228
John J. Lee 14,479,233 35,093 2,234
Elliott Roosevelt, Jr. 14,482,532 31,841 2,387
James E. Tracey 14,488,753 25,573 2,586
</TABLE>
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibits
- -----------
10.1 Amendment to ING Capital Credit Agreement dated March 29, 1996 (filed as
exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarter
ended March 31, 1996, File No. 0-22258 and incorporated herein by
reference).
10.2 Aviva Petroleum Inc. Severance Benefit Plan (filed as exhibit 10.2 to the
Company's quarterly report on Form 10-Q for the quarter ended March 31,
1996, File No. 0-22258 and incorporated herein by reference).
27.1 Financial Data Schedule.
b) Reports on Form 8-K
- ----------------------
The Company filed the following Form 8-K, Current Reports during and subsequent
to the end of the second quarter:
Date of 8-K Description of 8-K
- ----------- ------------------
May 1, 1996 Submitted a copy of the Company's Press Release dated May 1,
1996 reporting on U.S. Gulf Coast offshore activity.
June 20, 1996 Submitted a copy of the Company's Press Release dated
June 20, 1996 announcing that drilling has commenced on the
JA-7 well at Main Pass 41, located in the Gulf of Mexico,
offshore Louisiana.
16
<PAGE>
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, 1996 /s/ Ronald Suttill
----------------------------------------------
Ronald Suttill
President and Chief Executive Officer
/s/ James L. Busby
----------------------------------------------
James L. Busby
Treasurer and Secretary
17
<PAGE>
INDEX TO EXHIBITS
Sequentially
Exhibit Numbered
Number Description of Exhibit Page
- ------- ---------------------- ------------
*10.1 Amendment to ING Capital Credit Agreement dated
March 29, 1996 (filed as exhibit 10.1 to the
Company's quarterly report on Form 10-Q for the
quarter ended March 31, 1996, File No. 0-22258
and incorporated herein by reference).
*10.2 Aviva Petroleum Inc. Severance Benefit Plan
(filed as exhibit 10.2 to the Company's quarterly
report on Form 10-Q for the quarter ended
March 31, 1996, File No. 0-22258 and incorporated
herein by reference).
**27.1 Financial Data Schedule.
- ----------
*Previously Filed
**Filed Herewith
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF AVIVA PETROLEUM INC. AND SUBSIDIARIES AS
OF JUNE 30, 1996 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 2,325
<SECURITIES> 0
<RECEIVABLES> 3,123
<ALLOWANCES> 0
<INVENTORY> 1,070
<CURRENT-ASSETS> 7,553
<PP&E> 84,262
<DEPRECIATION> 49,150
<TOTAL-ASSETS> 44,348
<CURRENT-LIABILITIES> 6,017
<BONDS> 9,470
0
0
<COMMON> 1,574
<OTHER-SE> 25,138
<TOTAL-LIABILITY-AND-EQUITY> 44,348
<SALES> 7,409
<TOTAL-REVENUES> 7,409
<CGS> 6,093
<TOTAL-COSTS> 6,093
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 406
<INCOME-PRETAX> (239)
<INCOME-TAX> 216
<INCOME-CONTINUING> (455)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (455)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> 0
</TABLE>
