<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, 1998
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----- -----
Commission File Number 0-22258
AVIVA PETROLEUM INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-1432205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8235 DOUGLAS AVENUE, 75225
SUITE 400, DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
(214) 691-3464
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Number of shares of Common Stock, no par value, outstanding at June 30, 1998,
was 31,482,716 of which 10,336,835 shares of Common Stock were represented by
Depositary Shares. Each Depositary Share represents five shares of Common Stock
held by a Depositary.
<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,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 197 $ 690
Accounts receivable 1,466 1,803
Inventories 599 602
Prepaid expenses and other 46 203
-------- --------
Total current assets 2,308 3,298
-------- --------
Property and equipment, at cost (note 3):
Oil and gas properties
and equipment (full cost method) 61,442 61,036
Other 612 606
-------- --------
62,054 61,642
Less accumulated depreciation, depletion
and amortization (55,740) (49,873)
-------- --------
6,314 11,769
Other assets 1,509 1,378
-------- --------
$ 10,131 $ 16,445
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long term debt (note 4) $ 37 $ 480
Accounts payable 2,752 3,091
Accrued liabilities 352 356
-------- --------
Total current liabilities 3,141 3,927
-------- --------
Long term debt, excluding
current portion (note 4) 7,403 7,210
Gas balancing obligations and other 1,568 1,560
Stockholders' equity (deficit):
Common stock, no par value, authorized
348,500,000 shares;
issued 31,482,716 shares 1,574 1,574
Additional paid-in capital 33,376 33,376
Accumulated deficit/*/ (36,931) (31,202)
-------- --------
Total stockholders' equity (deficit) (1,981) 3,748
Commitments and contingencies (note 6)
-------- --------
$ 10,131 $ 16,445
======== ========
</TABLE>
/*/Accumulated deficit of $70,057 was eliminated at December 31, 1992 in
connection with a quasi-reorganization.
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Operations
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------- -------- ------- --------
<S> <C> <C> <C> <C>
Oil and gas sales $ 914 $ 2,339 $ 2,060 $ 5,553
------- -------- ------- --------
Expense:
Production 716 1,096 1,515 2,198
Depreciation, depletion and amortization 503 1,490 1,174 3,285
Write-down of oil and gas properties (note 3) 1,961 11,413 4,725 13,399
General and administrative 300 402 660 752
------- -------- ------- --------
Total expense 3,480 14,401 8,074 19,634
------- -------- ------- --------
Other income (expense):
Interest and other income (expense), net (note 5) 26 67 771 91
Interest expense (155) (162) (320) (328)
------- -------- ------- --------
Total other income (expense) (129) (95) 451 (237)
------- -------- ------- --------
Loss before income taxes (2,695) (12,157) (5,563) (14,318)
Income taxes (benefits) 69 (547) 166 (282)
------- -------- ------- --------
Net loss $(2,764) $(11,610) $(5,729) $(14,036)
======= ======== ======= ========
Weighted average common shares outstanding -
basic and diluted 31,483 31,483 31,483 31,483
======= ======== ======= ========
Basic and diluted net loss per common share $(.09) $(.37) $(.18) $(.45)
======= ======== ======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1998 1997
---- ----
<S> <C> <C>
Net loss $(5,729) $(14,036)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 1,174 3,285
Write-down of oil and gas properties 4,725 13,399
Deferred foreign income taxes (benefits) - (692)
Changes in working capital and other 95 (729)
------- --------
Net cash provided by operating activities 265 1,227
------- --------
Cash flows from investing activities:
Property and equipment expenditures (411) (1,959)
Proceeds from sale of assets - 19
Other (95) -
------- --------
Net cash used in investing activities (506) (1,940)
------- --------
Cash flows from financing activities -
Principal payments on long term debt (250) (150)
------- --------
Effect of exchange rate changes on cash and
cash equivalents (2) (23)
------- --------
Net decrease in cash and cash equivalents (493) (886)
Cash and cash equivalents at beginning of the period 690 2,041
------- --------
Cash and cash equivalents at end of the period $ 197 $ 1,155
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(in thousands, except number of shares)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------
Additional Total
Number Paid-in Accumulated Stockholders'
of Shares Amount Capital Deficit Equity (Deficit)
------------ ------ ---------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1997 31,482,716 $1,574 $ 33,376 $ (31,202) $ 3,748
Net loss - - - (5,729) (5,729)
------------ ------ ---------- ----------- ---------------
Balances at June 30, 1998 31,482,716 $1,574 $ 33,376 $ (36,931) $ (1,981)
============ ====== ========== =========== ===============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. General
The condensed consolidated financial statements of Aviva Petroleum Inc. and
subsidiaries (the "Company" or "Aviva") included herein have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that
the disclosures contained herein are adequate to make the information
presented not misleading. These condensed financial statements should be read
in conjunction with the Company's prior audited yearly financial statements
and the notes thereto, included in the Company's latest annual report on Form
10-K.
In the opinion of the Company, all adjustments, consisting of normal
recurring accruals, necessary to present fairly the information in the
accompanying financial statements have been included. The results of
operations for such interim periods are not necessarily indicative of the
results for the full year.
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS
No. 130 establishes standards for reporting and display of comprehensive
income in a full set of general-purpose financial statements. Comprehensive
income includes net income and other comprehensive income which is generally
comprised of changes in the fair value of available-for-sale marketable
securities, foreign currency translation adjustments and adjustments to
recognize additional minimum pension liabilities. The Company had no
accumulated other comprehensive income at December 31, 1997, and no other
comprehensive income for the six months ended June 30, 1998 and 1997.
2. MERGER PLANS
On June 24, 1998, the Company entered into a definitive agreement to merge
with Garnet Resources Corporation ("Garnet"), a publicly traded international
oil and gas exploration and production company. Garnet, through its 99.24%-
owned subsidiary, Argosy Energy International ("Argosy"), is the co-owner
(55%) and operator of the Colombian joint operations in which the Company has
the remaining working interest (45%). Garnet also holds a carried working
interest in an oil and gas Production Prospecting License in Papua New
Guinea.
The proposed arrangements include Aviva refinancing Argosy's outstanding debt
to Chase Bank of Texas (approximately $6 million, net, at June 30, 1998)
which is guaranteed by the U.S. Overseas Private Investment Corporation
("OPIC"), issuing approximately 1.1 million and 12.9 million new Aviva common
shares to Garnet shareholders and Garnet debenture holders, respectively, and
canceling Garnet's $15 million of 9.5% subordinated debentures due December
21, 1998.
The merger will be accounted for as a "purchase" of Garnet for financial
accounting purposes. Accordingly, Aviva will be the surviving entity
following the merger, which remains subject to various contingencies
including approvals by ING (U.S.) Capital Corporation ("ING Capital"), OPIC,
and shareholders of Aviva and Garnet. The proposed merger is also subject to
execution and delivery of agreements for the proposed credit facility
discussed in Note 6.
6
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
3. PROPERTY AND EQUIPMENT
Internal general and administrative costs directly associated with oil and
gas property acquisition, exploration and development activities have been
capitalized in accordance with the accounting policies of the Company. Such
costs totaled $19,000 for the six months ended June 30, 1998 and $70,000 for
the six months ended June 30, 1997.
Unevaluated oil and gas properties totaling $282,000 and $251,000 at June
30, 1998 and December 31, 1997, respectively, have been excluded from costs
subject to depletion. The Company capitalized interest costs of $12,000 and
$45,000 for the six-month periods ended June 30, 1998 and 1997,
respectively, on these properties.
The following table summarizes the write-down of the carrying amounts of the
Company's oil and gas properties as a result of ceiling limitations on
capitalized costs:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(thousands) (thousands)
1998 1997 1998 1997
------ ------- ------ -------
<S> <C> <C> <C> <C>
Colombia $1,053 $11,413 $3,355 $11,413
United States 908 - 1,370 1,986
------ ------- ------ -------
$1,961 $11,413 $4,725 $13,399
====== ======= ====== =======
</TABLE>
The 1998 write-downs were primarily due to lower oil and gas prices. A
future decrease in the prices the Company receives for its oil and gas
production or downward reserve adjustments could result in a further ceiling
test write-down that is significant to the Company's operating results.
4. LONG TERM DEBT
On August 6, 1993, the Company entered into a credit agreement with ING
Capital, secured by a mortgage on substantially all U.S. oil and gas assets,
a pledge of Colombian assets and the stock of three subsidiaries, pursuant
to which ING Capital agreed to loan to the Company up to $25 million,
subject to an annually redetermined borrowing base which is predicated on
the Company's U.S. and Colombian reserves. As of December 31, 1997, the
borrowing base permitted, and the outstanding loan balance was, $7,690,000.
The outstanding loan balance has been subject to interest at the prime rate,
as defined (8.5% at June 30, 1998) plus 1% or, at the option of the Company,
a fixed rate, based on the London Interbank Offered Rate, for a portion or
portions of the outstanding debt from time to time. The terms of the loan,
among other things, prohibit the Company from merging with another company
or paying dividends, limit additional indebtedness, general and
administrative expense, sales of assets and investments and require the
maintenance of certain minimum financial ratios.
7
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
In February 1998, the Company entered into an agreement with ING Capital
pursuant to which the outstanding loan balance was paid down to $7,440,000
from $7,690,000, the interest rate was increased to the prime rate, as
defined, plus 1.5%, or at the option of the Company, a fixed rate based on
LIBOR plus 3%, and the repayment schedule was amended to require monthly
payments of 80% of defined monthly cash flows until October 1, 1999, at
which time the remaining balance is due and payable. Additionally, ING
Capital reduced to $2 million the minimum amount of consolidated tangible
net worth that the Company is required to maintain.
As of June 30, 1998, the borrowing base permitted, and the outstanding loan
balance was, $7,440,000, but the Company was not in compliance with the
above-referenced tangible net worth covenant. Accordingly, on August 6,
1998, the Company entered into an agreement with ING Capital to further
amend the credit facility in order to: (i) waive the Company's non-
compliance with the tangible net worth covenant through July 1, 1999; (ii)
require the Company to consummate the merger with Garnet on or before
October 31, 1998; and (iii) provide to the Company a cash advance of
$760,000 in order to supplement the Company's existing working capital. As
compensation for making the new advance and entering into the new agreement,
the Company will issue to ING Capital 400,000 new shares of the Company's
common stock.
5. INTEREST AND OTHER INCOME (EXPENSE)
A summary of interest and other income (expense) follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(thousands) (thousands)
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Gain on settlement of litigation $ - $ - $ 720 $ -
Interest income 20 39 45 82
Foreign currency exchange loss - (8) (2) (29)
Gain (loss) on sale of assets, net - - - (13)
Other, net 6 36 8 51
------ ------ ------ ------
$ 26 $ 67 $ 771 $ 91
====== ====== ====== ======
</TABLE>
In January 1998, the Company realized a $720,000 gain on the settlement of
litigation involving the administration of a take or pay contract
settlement.
6. COMMITMENTS AND CONTINGENCIES
In the U.S., the Company is currently committed to the drilling of a
saltwater disposal well at its Breton Sound 31 field facilities in order to
comply with a state-wide prohibition against discharges of produced water to
coastal waters offshore Louisiana. The cost to drill and equip such a well
is estimated at $0.3 million, net to the Company's interest. Pursuant to a
revised produced water termination schedule approved by the Louisiana
Department of Environmental Quality, the Company has until September 1,
1998, to cease discharges of produced water. If the Company is unable to
complete the project and reinject the produced water by September 1, 1998,
the Company will be required to curtail or even cease production from its
Breton Sound leases. Additionally, the Company has recently completed
upgrades to certain equipment at its
8
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
Main Pass 41 field facilities, the remaining cost of which is expected to
aggregate $0.2 million, net to the Company's interest.
The Company, along with Argosy (referred to collectively as the "Co-
owners"), is also engaged in ongoing operations on the Santana concession in
Colombia. The contract obligations of the Santana concession have been met.
The Co-owners may, however, initiate the recompletion of certain existing
wells and various miscellaneous projects. The Company's share of the
estimated future costs of these activities is approximately $0.3 million at
June 30, 1998. Depending on the results of future exploration and
development activities, substantial expenditures that have not been
anticipated may be required. Failure by the Company to fund certain of these
capital expenditures could, under either the concession agreement or joint
operating agreement with Argosy, or both, result in the forfeiture of all or
part of the Company's interest in this concession.
In addition, the Company's ability to continue its Colombian development
program is dependent upon the ability of Argosy to finance its portion of
such costs and expenses. If Argosy cannot fund its obligations, the Company
may be required to accept an assignment of Argosy's interest therein and
assume those funding obligations. If, thereafter, the Company were to be
unable to raise sufficient funds to meet such obligations, the Company's
interests in the properties may be forfeited.
In reports filed with the U.S. Securities and Exchange Commission, which are
publicly available, Garnet has disclosed, among other things, that: (i)
Argosy is no longer in compliance with certain covenants required by its
finance agreement with Chase Bank of Texas which is guaranteed by the
Overseas Private Investment Corporation and secured by Argosy's assets in
Colombia; (ii) its management believes that Garnet's available working
capital and cash flows from operations will not be sufficient to make its
required debt principal and interest payments as they become due beginning
March 31, 1998; and (iii) in the absence of a business transaction or a
restructuring of Garnet's indebtedness, Garnet may seek protection from its
creditors under the Federal Bankruptcy Code.
As discussed in Note 2, the Company has entered into a definitive agreement
to merge with Garnet. Pursuant to the merger plan, Garnet's $15 million of
subordinated debentures will be canceled and Argosy's bank debt, along with
Aviva's existing bank debt, will be refinanced through a proposed $15
million credit facility that the Company has requested ING Capital to
provide to the Company. In addition to refinancing the existing bank debt of
Argosy and Aviva, this proposed new credit facility is expected to
supplement the Company's working capital and, to the extent not funded by
cash flow from operations, fund the Company's remaining estimated capital
expenditures for 1998.
Management of the Company is currently finalizing efforts to effectuate the
merger, which efforts now require only execution and delivery of the
proposed new credit facility with ING Capital. Additionally approval by the
shareholders of Aviva and Garnet is required to consummate the merger. A
Joint Proxy Statement will be provided to Shareholders for their review and
voting at Shareholder Meetings expected to be held in late September.
9
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
While management believes that the merger will be consummated substantially
as planned, there can be no assurance that this will be the case. If the
Company is unable to consummate the merger, then, in the absence of another
business transaction or debt restructuring, Garnet may seek bankruptcy
protection or other alternatives, any of which may have a material adverse
effect on Aviva's consolidated financial condition. As indicated above, if
Argosy cannot fund its obligations, the Company may be required to accept an
assignment of Argosy's interest therein and assume those funding
obligations. Aviva itself has experienced significant losses which have
resulted in recurring noncompliance with the minimum consolidated tangible
net worth covenant and its debt repayment schedule under its credit
agreement with ING Capital. Moreover, failure to consummate the merger with
Garnet on or before October 31, 1998, would be an event of default under the
recently amended credit agreement (see note 4). Without the Garnet merger
and the proposed new credit facility, management's current cash flow
analysis does not indicate that the Company would be able to make the
October 1, 1999 scheduled debt repayment under the existing ING Capital
Credit Agreement. In the past, ING Capital has amended or waived compliance
with these covenants when the Company has been unable to comply with them.
There can be no assurance, however, that ING Capital will continue to make
similar concessions in the future.
Activities of the Company with respect to the exploration, development and
production of oil and natural gas are subject to stringent foreign, federal,
state and local environmental laws and regulations including the Oil
Pollution Act of 1990 ("OPA 90"), the Outer Continental Shelf Lands Act, the
Federal Water Pollution Control Act, the Resource Conservation and Recovery
Act, and the Comprehensive Environmental Response, Compensation, and
Liability Act. Such laws and regulations have increased the cost of
planning, designing, drilling, operating and abandoning wells. In most
instances, the statutory and regulatory requirements relate to air and water
pollution control procedures and the handling and disposal of drilling and
production wastes. Risks of substantial costs and liabilities are inherent
in oil and gas operations and there can be no assurance that significant
costs and liabilities, including civil or criminal penalties for violations
of environmental laws and regulations, will not be incurred. Moreover, it is
possible that other developments, such as stricter environmental laws and
regulations or claims for damages to property or persons resulting from the
Company's operations, could result in substantial costs and liabilities. For
additional discussions on the applicability of environmental laws and
regulations and other risks that may affect the Company's operations, see
the Company's latest annual report on Form 10-K.
The Company is involved in certain litigation involving its oil and gas
activities, but unrelated to environmental contamination issues. Management
of the Company believes that these litigation matters will not have any
material adverse effect on the Company's financial condition or results of
operations.
7. SUBSEQUENT EVENT
On August 3, 1998, leftist Colombian guerrillas launched a wave of bombing
attacks across Colombia. These attacks coincide with the change of Colombian
presidents and could be a show of force prior to the beginning of formal
peace negotiations with the new president.
10
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
As a result of one such attack, the Company's oil processing and storage
facilities at the Mary field were damaged, along with minor damage incurred
at the Linda facilities. While it is still too early to accurately assess
the cost of repairs, the Company does not believe that the property damage
will exceed insurance limits.
As of August 7, 1998, the Company's Colombian oil production has been
suspended for approximately five days. The Company estimates that production
from the Linda and Toroyaco fields will resume within two to three days.
Production from the Mary and Miraflor fields, however, may be suspended or
significantly curtailed for at least a few weeks, and possibly longer
depending on the extent of the damage.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS.
- -------------
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
United States Colombia
Oil Gas Oil Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
(Thousands)
Revenue - 1997 $ 376 $174 $1,789 $2,339
Volume variance (111) (80) (754) (945)
Price variance (87) (18) (372) (477)
Other - (3) - (3)
-------- -------- -------- --------
Revenue - 1998 $ 178 $ 73 $ 663 $ 914
======== ======== ======== ========
</TABLE>
Colombian oil volumes were 62,000 barrels in the second quarter of 1998, a
decrease of 46,000 barrels as compared to the second quarter of 1997. Such
decrease is due to a 51,000 barrel decrease resulting from production declines,
partially offset by a 5,000 barrel increase resulting from the completion of a
development well in June 1997.
U.S. oil volumes were 15,000 barrels in 1998, down approximately 6,000 barrels
from 1997. Of such decrease, approximately 2,000 barrels was due to the
Company's Main Pass 41 field being shut-in for approximately 22 days during the
second quarter of 1998 due to equipment failures and 4,000 barrels resulted from
normal production declines. U.S. gas volumes before gas balancing adjustments
were 22,000 thousand cubic feet (MCF) in 1998, down 43,000 MCF from 1997. Of
such decrease, approximately 14,000 MCF was due to the aforementioned shut-in of
the Main Pass 41 field and 13,000 MCF was due to the suspension of production of
one of the wells at Main Pass 41 beginning in the first quarter of 1998. The
remaining 16,000 MCF was due to normal production declines.
The above-referenced equipment failures at the Company's Main Pass 41 field
necessitated upgrading and additional modification of production and water
treatment facilities. As of August 7, 1998, this field had been shut-in an
additional 23 days since July 1, 1998, in order to complete the project.
Colombian oil prices averaged $10.61 per barrel during the second quarter of
1998. The average price for the same period of 1997 was $16.56 per barrel. The
Company's average U.S. oil price decreased to $12.25 per barrel in 1998, down
from $18.24 per barrel in 1997. In 1998 prices have been lower than in the
second quarter of 1997 due to a dramatic decrease in world oil prices. U.S. gas
prices averaged $1.93 per MCF in 1998 compared to $1.97 per MCF in 1997.
In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $3,000 as a result of gas balancing adjustments.
Operating costs decreased approximately 35%, or $380,000, primarily due to lower
operating costs in Colombia. Such decreases have resulted mainly from the
elimination of the production tax on the
12
<PAGE>
majority of the Company's Colombian production and lower pipeline tariffs
resulting from lower volumes.
Depreciation, depletion and amortization decreased by 66%, or $987,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs and lower levels of production.
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 at June 30, 1998.
General and administrative ("G & A") expenses declined $102,000 during the
second quarter of 1998 mainly due to a $72,000 decrease in legal and consulting
fees and a $53,000 reduction in payroll. These savings were partially offset by
lower amounts of capitalized G & A.
Income taxes were $616,000 higher in 1998 principally as a result of Colombian
deferred tax benefits recorded in the second quarter of 1997. Such deferred tax
benefits in 1997 resulted from the write-down of the carrying amount of the
Company's Colombian oil properties.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
United States Colombia
Oil Gas Oil Total
----- ----- ------- -------
<S> <C> <C> <C> <C>
(Thousands)
Revenue - 1997 $ 835 $ 420 $ 4,298 $ 5,553
Volume variance (294) (243) (1,736) (2,273)
Price variance (189) (42) (972) (1,203)
Other - (17) - (17)
----- ----- ------- -------
Revenue - 1998 $ 352 $ 118 $ 1,590 $ 2,060
===== ===== ======= =======
</TABLE>
Colombian oil volumes were 138,000 barrels in the first half of 1998, a decrease
of 93,000 barrels as compared to the first half of 1997. Such decrease is due to
a 106,000 barrel decrease resulting from production declines, partially offset
by a 13,000 barrel increase resulting from the completion of a development well
in June 1997.
U.S. oil volumes were 27,000 barrels in 1998, down approximately 15,000 barrels
from 1997. Of such decrease, approximately 7,000 barrels was due to the
Company's Main Pass 41 field being shut-in for approximately 85 days during the
first half of 1998 due to equipment failures and 8,000 barrels resulted from
normal production declines. U.S. gas volumes before gas balancing adjustments
were 36,000 MCF in 1998, down 103,000 MCF from 1997. Of such decrease,
approximately 54,000 MCF was due to the aforementioned shut-in of the Main Pass
41 field and 25,000 MCF was due to the suspension of production of one of the
wells at Main Pass 41 beginning in the first quarter of 1998. The remaining
24,000 MCF was due to production declines.
The above-referenced equipment failures at the Company's Main Pass 41 field
necessitated upgrading and additional modification of production and water
treatment facilities. As of August 7, 1998, this field had been shut-in an
additional 23 days since July 1, 1998, in order to complete the project.
13
<PAGE>
Colombian oil prices averaged $11.53 per barrel during the first half of 1998.
The average price for the same period of 1997 was $18.58 per barrel. The
Company's average U.S. oil price decreased to $13.00 per barrel in 1998, down
from $19.97 per barrel in 1997. In 1998 prices have been lower than in the
first half of 1997 due to a dramatic decrease in world oil prices. U.S. gas
prices averaged $2.10 per MCF in 1998 compared to $2.23 per MCF in 1997.
In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $17,000 as a result of gas balancing adjustments.
Operating costs decreased approximately 31%, or $683,000, primarily due to lower
operating costs in Colombia. Such decreases have resulted mainly from the
elimination of the production tax on the majority of the Company's Colombian
production and lower pipeline tariffs resulting from lower volumes.
Depreciation, depletion and amortization decreased by 64%, or $2,111,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs and lower levels of production.
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.
G & A expenses declined $92,000 mainly due to a $73,000 decrease in legal and
consulting fees and an $86,000 reduction in payroll. These savings were
partially offset by lower amounts of capitalized G & A.
Interest and other income increased during the first half of 1998 as the Company
realized a $720,000 gain on the settlement of litigation involving the
administration of a take or pay contract settlement.
Income taxes were $448,000 higher in 1998 principally as a result of Colombian
deferred tax benefits recorded in the second quarter of 1997. Such deferred tax
benefits in 1997 resulted from the write-down of the carrying amount of the
Company's Colombian oil properties.
YEAR 2000
- ---------
Based on a preliminary study, the Company expects to spend an aggregate of
approximately $100,000 in 1998 and 1999 to modify its computer information
systems enabling proper processing of transactions relating to the year 2000 and
beyond. The Company continues to evaluate appropriate courses of corrective
action, including replacement of certain systems whose associated costs would be
recorded as assets and amortized. Accordingly, the Company does not expect that
amounts required to be expensed over the next two years will have a material
effect on its financial position or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Since December 31, 1997, costs incurred in oil and gas property acquisition,
exploration and development activities by the Company totaled $411,000. Of such
amount, $242,000 was incurred in Colombia and $169,000 was incurred in the U.S.
These activities were funded primarily by cash provided by operating activities.
14
<PAGE>
In the U.S., the Company is currently committed to the drilling of a saltwater
disposal well at its Breton Sound 31 field facilities in order to comply with a
state-wide prohibition against discharges of produced water to coastal waters
offshore Louisiana. The cost to drill and equip such a well is estimated at
$0.3 million, net to the Company's interest. Pursuant to a revised produced
water termination schedule approved by the Louisiana Department of Environmental
Quality, the Company has until September 1, 1998, to cease discharges of
produced water. If the Company is unable to complete the project and reinject
the produced water by September 1, 1998, the Company will be required to curtail
or even cease production from its Breton Sound leases. Additionally, the
Company has recently completed upgrades to certain equipment at its Main Pass 41
field facilities, the remaining cost of which is expected to aggregate $0.2
million, net to the Company's interest.
The Company, along with Argosy (referred to collectively as the "Co-owners"), is
also engaged in ongoing operations on the Santana concession in Colombia. The
contract obligations of the Santana concession have been met. The Co-owners
may, however, initiate the recompletion of certain existing wells and various
miscellaneous projects. The Company's share of the estimated future costs of
these development activities is approximately $0.3 million at June 30, 1998.
Depending on the results of future exploration and development activities,
substantial expenditures that have not been anticipated may be required.
Failure by the Company to fund certain of these capital expenditures could,
under either the concession agreement or joint operating agreement with Argosy,
or both, result in the forfeiture of all or part of the Company's interest in
this concession.
In addition, the Company's ability to continue its Colombian development program
is dependent upon the ability of Argosy to finance its portion of such costs and
expenses. If Argosy cannot fund its obligations, the Company may be required to
accept an assignment of Argosy's interest therein and assume those funding
obligations. If, thereafter, the Company were to be unable to raise sufficient
funds to meet such obligations, the Company's interests in the properties may be
forfeited.
In reports filed with the U.S. Securities and Exchange Commission, which are
publicly available, Garnet has disclosed, among other things, that: (i) Argosy
is no longer in compliance with certain covenants required by its finance
agreement with Chase Bank of Texas which is guaranteed by the Overseas Private
Investment Corporation and secured by Argosy's assets in Colombia; (ii) its
management believes that Garnet's available working capital and cash flows from
operations will not be sufficient to make its required debt principal and
interest payments as they become due beginning March 31, 1998; and (iii) in the
absence of a business transaction or a restructuring of Garnet's indebtedness,
Garnet may seek protection from its creditors under the Federal Bankruptcy Code.
As discussed in Note 2 of the condensed consolidated financial statements, the
Company has entered into a definitive agreement to merge with Garnet. Pursuant
to the merger plan, Garnet's $15 million of subordinated debentures will be
canceled and Argosy's bank debt, along with Aviva's existing bank debt, will be
refinanced through a proposed $15 million credit facility that the Company has
requested ING Capital to provide to the Company. In addition to refinancing the
existing bank debt of Argosy and Aviva, this proposed new credit facility is
expected to supplement the Company's working capital and, to the extent not
funded by cash flow from operations, fund the Company's remaining estimated
capital expenditures for 1998.
Management of the Company is currently finalizing efforts to effectuate the
merger, which efforts now require only execution and delivery of the proposed
new credit facility with ING Capital. Additionally, approval by the
shareholders of Aviva and Garnet is required to consummate the merger. A Joint
Proxy Statement will be provided to Shareholders for their review and voting at
Shareholder Meetings expected to be held in late September.
15
<PAGE>
While management believes that the merger will be consummated substantially as
planned, there can be no assurance that this will be the case. If the Company
is unable to consummate the merger, then, in the absence of another business
transaction or debt restructuring, Garnet may seek bankruptcy protection or
other alternatives, any of which may have a material adverse effect on Aviva's
consolidated financial condition. As indicated above, if Argosy cannot fund its
obligations, the Company may be required to accept an assignment of Argosy's
interest therein and assume those funding obligations. Aviva itself has
experienced significant losses which have resulted in recurring noncompliance
with the minimum consolidated tangible net worth covenant and its debt repayment
schedule under its credit agreement with ING Capital. Moreover, failure to
consummate the merger with Garnet on or before October 31, 1998, would be an
event of default under the recently amended credit agreement (see note 4).
Without the Garnet merger and the proposed new credit facility, management's
current cash flow analysis does not indicate that the Company would be able to
make the October 1, 1999 scheduled debt repayment under the existing ING Capital
Credit Agreement. In the past, ING Capital has amended or waived compliance
with these covenants when the Company has been unable to comply with them.
There can be no assurance, however, that ING Capital will continue to make
similar concessions in the future.
On August 3, 1998, leftist Colombian guerrillas inflicted damage on the
Company's oil processing and storage facilities at the Mary field, and to a
lesser extent, at the Linda facilities. While it is still too early to
accurately assess the cost of repairs, the Company does not believe that the
property damage will exceed insurance limits. As more fully discussed in Note 7
of the condensed consolidated financial statements, the Company's Colombian
production has been temporarily suspended.
With the exception of historical information, the matters discussed in this
quarterly report contain forward-looking statements that involve risks and
uncertainties. Although 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.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
The Company is assessing the reporting and disclosure requirements of SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. This
statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. The statement
is effective for financial statements for periods beginning after December 15,
1997, but is not required for interim financial statements in the initial year
of its application. The Company will adopt the provisions of SFAS No. 131 in
its December 31, 1998 consolidated financial statements.
The Company is also assessing the reporting and disclosure requirements of SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 1999. 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 2000.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
a) Exhibits
- -----------
2.1 Agreement and Plan of Merger dated as of June 24, 1998, by and among Aviva
Petroleum Inc., Aviva Merger Inc. and Garnet Resources Corporation (filed
as exhibit 2.1 to the Registration Statement on Form S-4, File No. 333-
58061, and incorporated herein by reference).
2.2 Debenture Purchase Agreement dated as of June 24, 1998, between Aviva
Petroleum Inc. and the Holders of the Debentures named therein (filed as
exhibit 2.2 to the Registration Statement on Form S-4, File No. 333-58061,
and incorporated herein by reference).
10.1 Amendment to the ING Capital Credit Agreement dated August 6, 1998.
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 17, 1998 Submitted a copy of the Company's Press Release dated April
17, 1998 announcing the merger plans between Aviva Petroleum
Inc. and Garnet Resources Corporation.
June 24, 1998 Submitted a copy of the Company's Press Release dated June
24, 1998, announcing the signing of the merger agreement
between Aviva Petroleum Inc. and Garnet Resources
Corporation.
17
<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 11, 1998 /s/ Ronald Suttill
-------------------------------------
Ronald Suttill
President and Chief Executive Officer
/s/ James L. Busby
-------------------------------------
James L. Busby
Treasurer and Secretary
(Chief Accounting Officer)
18
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
*2.1 Agreement and Plan of Merger dated as of June 24, 1998, by and among
Aviva Petroleum Inc., Aviva Merger Inc. and Garnet Resources
Corporation (filed as exhibit 2.1 to the Registration Statement on
Form S-4, File No. 333-58061, and incorporated herein by reference).
*2.2 Debenture Purchase Agreement dated as of June 24, 1998, between Aviva
Petroleum Inc. and the Holders of the Debentures named therein (filed
as exhibit 2.2 to the Registration Statement on Form S-4, File No.
333-58061, and incorporated herein by reference).
**10.1 Amendment to the ING Capital Credit Agreement dated August 6, 1998.
**27.1 Financial Data Schedule.
- ---------------
* Previously Filed
** Filed Herewith
19
<PAGE>
EXHIBIT 10.1
TENTH AMENDMENT TO CREDIT AGREEMENT
THIS TENTH AMENDMENT TO CREDIT AGREEMENT (herein called this "Amendment")
is made as of the 6th day of August, 1998 by and among Neo Energy, Inc., a Texas
corporation ("Borrower"), Aviva Petroleum Inc., a Texas corporation ("Aviva
Petroleum"), Aviva America, Inc., a Delaware corporation ("Aviva America"), and
ING (U.S.) Capital Corporation (formerly named Internationale Nederlanden (U.S.)
Capital Corporation), a Delaware corporation ("Lender").
RECITALS:
1. Borrower, Aviva Petroleum, Aviva America and Lender are parties to that
certain Credit Agreement dated as of August 6, 1993, as amended by (a) that
certain First Amendment to Credit Agreement and Promissory Note dated March 31,
1994; (b) a letter amendment concerning Permitted Investments dated December 31,
1994; (c) a letter amendment concerning Consolidated Tangible Net Worth dated
March 7, 1995; (d) that certain Fourth Amendment to Credit Agreement and
Promissory Note dated June 9, 1995; (e) that certain Fifth Amendment to Credit
Agreement and Promissory Note dated March 29, 1996; (f) that certain Sixth
Amendment to Credit Agreement and Promissory Note dated November 22, 1996; (g)
that certain Seventh Amendment dated August 12, 1997; (h) that certain Eighth
Amendment dated as of December 29, 1997; and (i) that certain Ninth Amendment to
Credit Agreement dated as of February 13, 1998 (as so amended, such Credit
Agreement is herein called the "Original Agreement".)
2. Borrower and Aviva America have asked Lender to provide an Advance to
Borrower, and notwithstanding that the Commitment Period has expired, Lender has
agreed to do so, pursuant to the terms set forth herein.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements contained herein and in the Original Agreement, and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree as follows:
ARTICLE I. -- Definitions and References
--------------------------
(S) 1.1 Terms Defined in the Original Agreement. Unless the context
---------------------------------------
otherwise requires or unless otherwise expressly defined herein, the terms
defined in the Original Agreement shall have the same meanings whenever used in
this Amendment.
(S) 1.2. Other Defined Terms. Unless the context otherwise requires, the
-------------------
following terms when used in this Amendment shall have the meanings assigned to
them in this (S) 1.2.
"Amendment" means this Tenth Amendment to Credit Agreement.
---------
1
<PAGE>
"Amendment Documents" means this Amendment and the First
-------------------
Amendment to Deed of Trust, Mortgage, Assignment, Security Agreement and
Financing Statement.
"Credit Agreement" means the Original Agreement as heretofore
----------------
amended and as amended hereby.
ARTICLE II. -- New Advance; Amendment and Waivers
----------------------------------
(S) 2.1. New Advance. Notwithstanding the termination of the Commitment
-----------
Period, subject to the terms and conditions of this Amendment and the Original
Agreement, Lender agrees to make a single new Advance to Borrower in the amount
of $760,000 on August 10, 1998. Such Advance shall constitute an "Advance" as
defined by the Credit Agreement for all purposes and all provisions in the
Credit Agreement and the other Loan Documents pertaining to "Advances" shall
apply to such Advance.
(S) 2.2. Event of Default. The following subsection (i) is hereby added
----------------
to Section 7.1 of the Original Agreement, immediately following subsection (h)
thereof.
"(i) Aviva Petroleum and Garnet Resources Corporation fail to merge
upon terms satisfactory to Lender on or before October 31, 1998."
(S) 2.3. Waivers. (a) Borrower has notified Lender that the trade
-------
payables listed on Schedule 1 attached hereto have been outstanding for more
than 90 days after the same became due and payable (the "Delinquent Trade
Payables"). Lender hereby waives any violation of Section 5.1(g)(iii) of the
Original Agreement, and any Event of Default arising as a result of such
violation, caused by the failure of the Related Persons to pay the Delinquent
Trade Payables in accordance with Section 5.1(g)(iii); provided that such waiver
is conditioned on Borrower using the proceeds from the new Advance to pay the
Delinquent Trade Payables in full.
(b) Lender hereby waives the Related Persons' violation of Section 5.2(m)
of the Original Agreement, and any Event of Default arising therefrom, until
July 1, 1999.
ARTICLE III. -- Representations and Warranties
------------------------------
(S) 3.1. Representations and Warranties of Obligors. In order to induce
------------------------------------------
Lender to enter into this Amendment, each Obligor represents and warrants to
Lender that:
(a) Except as previously disclosed to Lender, the
representations and warranties contained in Section 4.1 of the Original
Agreement are true and correct at and as of the time of the effectiveness
hereof.
(b) Each Obligor is duly authorized to execute and deliver this
Amendment and the other Amendment Documents to which it is a party.
Borrower is and will continue to be duly authorized to borrow and to
perform its obligations under the Credit
2
<PAGE>
Agreement. Each Obligor has duly taken all corporate action necessary to
authorize the execution and delivery of this Amendment, and the other
Amendment Documents to which it is a party and to authorize the performance
of the obligations of such Obligor hereunder and thereunder.
(c) The execution and delivery by each Obligor of this Amendment and
the other Amendment Documents, the performance by each Obligor of its
obligations hereunder and thereunder and the consummation of the
transactions contemplated hereby and thereby do not and will not conflict
with any provision of law, statute, rule or regulation or of the articles
or certificate, as appropriate, of incorporation and bylaws of each
Obligor, or of any material agreement, judgment, license, order or permit
applicable to or binding upon each Obligor, or result in the creation of
any lien, charge or encumbrance upon any assets or properties of any
Obligor. Except for those which have been duly obtained, no consent,
approval, authorization or order of any court or governmental authority or
third party is required in connection with the execution and delivery by
each Obligor of this Amendment and the other Amendment Documents to which
it is a party or to consummate the transactions contemplated hereby.
(d) When duly executed and delivered, each of this Amendment, the
Credit Agreement and the other Amendment Documents will be a legal and
binding instrument and agreement of each Obligor, enforceable in accordance
with its terms, except as limited by bankruptcy, insolvency and similar
laws applying to creditors' rights generally and by principles of equity
applying to creditors' rights generally.
(e) The audited annual Consolidated financial statements of Aviva
Petroleum dated as of December 31, 1997 fairly present its Consolidated
financial position at such date and its Consolidated results of operations
and Consolidated cash flows for the period ending on such date.
(f) Prior to giving effect to the new Advance, the unpaid principal
balance which is due and owing on the Note is $7,440,000. No Obligor has
any defense, counterclaim or setoff with respect to the Obligations or the
Loan Documents (any such setoffs, defenses or counterclaims being hereby
waived and released by each Obligor).
ARTICLE IV. -- Miscellaneous
-------------
(S) 4.1. Effective Date. This Amendment shall become effective as of the
--------------
date first above written when and only when (i) Lender shall have received, at
Lender's office, a counterpart of this Amendment (which may be delivered by
telecopy) executed and delivered by each Obligor and Lender, (ii) the other
Amendment Documents duly executed on behalf of Aviva America have been filed of
record, (iii) Chase Bank of Texas, N.A. shall have issued a commitment letter in
form and substance satisfactory to Lender in its sole discretion regarding the
proposed restructure of the Garnet Resources Corporation indebtedness, (iv)
Lender shall have received confirmation from OPIC of its intention to continue
its guaranty of the debt
3
<PAGE>
owed to Chase Bank of Texas, N.A., and (v) Lender shall have received, as
compensation for making the new Advance and entering into this Amendment,
400,000 shares of common stock of Aviva Petroleum.
(S) 4.2. Ratification of Agreements. The Original Agreement as hereby
--------------------------
amended is hereby ratified and confirmed in all respects. The Loan Documents,
as they may be amended or affected by this Amendment, are hereby ratified and
confirmed in all respects. Any reference to the Credit Agreement in any Loan
Document shall be deemed to refer to this Amendment also, and any reference in
any Loan Document to any other document or instrument amended, renewed, extended
or otherwise affected by this Amendment shall also refer to such document as
amended hereby. The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of Lender under the Credit Agreement or any other Loan
Document nor constitute a waiver of any provision of the Credit Agreement or any
other Loan Document.
(S) 4.3. Ratification of Security Documents. Each of the Obligors hereby
----------------------------------
consents to the provisions of this Amendment and the transactions contemplated
herein, and hereby ratifies and confirms each Loan Document executed and
delivered by it to and for the benefit of Lender, and each hereby agrees that
its respective obligations and covenants thereunder are unimpaired hereby and
shall remain in full force and effect.
(S) 4.4. Waivers. Each of Borrower, Aviva America and Aviva Petroleum
-------
hereby waives and affirmatively agrees not to allege or otherwise pursue any or
all defenses, affirmative defenses, counterclaims, claims, causes of action,
setoffs or other rights that it may have to contest (a) any provision of the
Loan Documents or this Amendment; (b) any lien or security interest of Lender in
any property, whether real or personal, tangible or intangible, or any right or
other interest, now or hereafter arising in connection with the Collateral; (c)
the actions and inactions of Lender in administering the Loan Documents and the
financing arrangements between Borrower and Lender since the original execution
of the Credit Agreement; or (d) the rights of Lender to all of the profits,
proceeds and other benefits from the Collateral.
(S) 4.5. Release. Each of Borrower, Aviva America and Aviva Petroleum
-------
hereby releases, remises, acquits and forever discharges Lender and Lender's
employees, agents, representatives, consultants, attorneys, fiduciaries,
officers, directors, partners, predecessors, successors and assigns, subsidiary
corporations, parent corporations, and related corporate divisions (all of the
foregoing hereinafter called the "Released Parties"), from any and all actions
and causes of action, judgments, executions, suits, debts, claims, demands,
liabilities, obligations, damages and expenses of any and every character, known
or unknown, direct and/or indirect, at law or in equity, of whatsoever kind or
nature, for or because of any matter or things done, omitted or suffered to be
done by any of the Released Parties prior to and including the date of execution
hereof, and in any way directly or indirectly arising out of or in any way
connected to this Amendment, the Credit Agreement or the other Loan Documents
(all of the foregoing hereinafter called the "Released Matters"). Each of
Borrower, Aviva America and Aviva Petroleum acknowledges that the making of a
new Advance by Lender,
4
<PAGE>
notwithstanding the termination of the Commitment Period, pursuant to the terms
hereof, is in full satisfaction of all or any alleged injuries or damages
arising in connection with the Released Matters.
(S) 4.6. Survival of Agreements. All representations, warranties,
----------------------
covenants and agreements of each Obligor herein shall survive the execution and
delivery of this Amendment and the performance hereof, including without
limitation the making or granting of the Advance contemplated herein, and shall
further survive until all of the Obligations are paid in full. All statements
and agreements contained in any certificate or instrument delivered by any
Obligor hereunder or under the Credit Agreement to Lender shall be deemed to
constitute representations and warranties by, or agreements and covenants of,
such Obligor under this Amendment and under the Credit Agreement.
(S) 4.7. Presumptions. Each of Borrower, Aviva Petroleum and Aviva
------------
America acknowledges that it has consulted with and been advised by its counsel
and such other experts and advisors as it has deemed necessary in connection
with the negotiation, execution and delivery of this Amendment and has
participated in the drafting hereof. Therefore, this Amendment shall be
construed without regard to any presumption or rule requiring that it be
construed against any one party causing this Amendment or any part hereof to be
drafted.
(S) 4.8. Loan Documents. This Amendment is a Loan Document, and all
--------------
provisions in the Credit Agreement pertaining to Loan Documents apply hereto.
(S) 4.9. Governing Law. This Amendment shall be governed by and construed
-------------
in accordance with the laws of the State of New York and any applicable laws of
the United States of America in all respects, including construction, validity
and performance.
(S) 4.10. Counterparts. This Amendment may be separately executed in
------------
counterparts and by the different parties hereto in separate counterparts, each
of which when so executed shall be deemed to constitute one and the same
Amendment.
5
<PAGE>
IN WITNESS WHEREOF, this Amendment is executed as of the date first above
written.
AVIVA PETROLEUM INC.
NEO ENERGY, INC.
AVIVA AMERICA, INC.
By: /s/ R. SUTTILL
----------------------------------
Name: R. Suttill
Title: President
ING (U.S.) CAPITAL CORPORATION
By: /s/ CHRISTOPHER R. WAGNER
----------------------------------
Christopher R. Wagner, Vice President
6
<PAGE>
CONSENT AND AGREEMENT
---------------------
Aviva Operating Company, a Nevada corporation, hereby consents to (i) the
provisions of that certain Tenth Amendment to Credit Agreement (the "Amendment")
made as of the 6th day of August, 1998 by and between Neo Energy, Inc., a Texas
corporation, Aviva Petroleum Inc., a Texas corporation, Aviva America, Inc., a
Delaware corporation, and ING (U.S.) Capital Corporation (formerly named
Internationale Nederlanden (U.S.) Capital Corporation), a Delaware corporation
("Lender"), (ii) the transactions contemplated in the Amendment, and hereby
ratifies and confirms the Guaranty (the "Guaranty") dated as of August 6, 1993
made by it for the benefit of Internationale Nederlanden Bank N.V., New York
Branch (which has since assigned all its rights, interests, and obligations
under the Guaranty to Lender), and agrees that its obligations and covenants
under the Guaranty are unimpaired by the Amendment and shall remain in full
force and effect, and (iii) releases, remises, acquits and forever discharges
all of the Released Parties referred to above from any and all of the Released
Matters referred to above and acknowledges that the new Advance by Lender
pursuant to the Amendment is in full satisfaction of all or any alleged injuries
or damages arising in connection with the Released Matters.
AVIVA OPERATING COMPANY
By: /s/ R. SUTTILL
----------------------------------
Name: R. Suttill
Title: President
7
<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, 1998 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 197
<SECURITIES> 0
<RECEIVABLES> 1,466
<ALLOWANCES> 0
<INVENTORY> 599
<CURRENT-ASSETS> 2,308
<PP&E> 62,054
<DEPRECIATION> 55,740
<TOTAL-ASSETS> 10,131
<CURRENT-LIABILITIES> 3,141
<BONDS> 7,403
0
0
<COMMON> 1,574
<OTHER-SE> (3,555)
<TOTAL-LIABILITY-AND-EQUITY> 10,131
<SALES> 2,060
<TOTAL-REVENUES> 2,060
<CGS> 2,689
<TOTAL-COSTS> 2,689
<OTHER-EXPENSES> 4,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320
<INCOME-PRETAX> (5,563)
<INCOME-TAX> 166
<INCOME-CONTINUING> (5,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,729)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
