<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, 1999
----------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to _________.
Commission File Number 0-22258
AVIVA PETROLEUM INC.
(Exact name of registrant as specified in its charter)
Texas 75-1432205
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
8235 Douglas Avenue, 75225
Suite 400, Dallas, Texas (Zip Code)
(Address of principal executive offices)
(214) 691-3464
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Number of shares of Common Stock, no par value, outstanding at June 30, 1999,
was 46,900,132 of which 25,383,690 shares of Common Stock were represented by
Depositary Shares. Each Depositary Share represents five shares of Common Stock
held by a Depositary.
<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,
1999 1998
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 253 $ 1,712
Restricted cash 4 417
Accounts receivable 1,511 1,503
Inventories 794 836
Prepaid expenses and other 122 627
-------- --------
Total current assets 2,684 5,095
-------- --------
Property and equipment, at cost (note 4):
Oil and gas properties and equipment (full cost method) 68,576 68,636
Other 545 612
-------- --------
69,121 69,248
Less accumulated depreciation, depletion and amortization (64,780) (64,440)
-------- --------
4,341 4,808
Other assets 1,538 1,519
-------- --------
$ 8,563 $ 11,422
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long term debt (note 5) $ 14,495 $ 14,805
Accounts payable 3,836 5,526
Accrued liabilities 255 308
-------- --------
Total current liabilities 18,586 20,639
-------- --------
Gas balancing obligations and other 1,870 1,866
Stockholders' deficit:
Common stock, no par value, authorized 348,500,000 shares;
issued 46,900,132 shares at June 30, 1999 and
46,700,132 shares at December 31, 1998 2,345 2,335
Additional paid-in capital 34,855 34,862
Accumulated deficit/*/ (49,093) (48,280)
-------- --------
Total stockholders' deficit (11,893) (11,083)
Commitments and contingencies (note 7)
-------- --------
$ 8,563 $ 11,422
======== ========
/*/ Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a
quasi-reorganization.
</TABLE>
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,
-------------------- --------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
-------- -------- -------- --------
Oil and gas sales $ 1,575 $ 914 $ 2,759 $ 2,060
-------- -------- -------- --------
Expense:
Production 879 716 1,779 1,515
Depreciation, depletion and amortization 284 503 620 1,174
Write-down of oil and gas properties (note 4) - 1,961 - 4,725
General and administrative 320 300 679 660
Provision for (recovery of) losses on accounts receivable 13 - (92) -
Severance 62 - 62 -
-------- -------- -------- --------
Total expense 1,558 3,480 3,048 8,074
-------- -------- -------- --------
Other income (expense):
Interest and other income (expense), net (note 6) 248 26 177 771
Interest expense (283) (155) (574) (320)
-------- -------- -------- --------
Total other income (expense) (35) (129) (397) 451
-------- -------- -------- --------
Loss before income taxes (18) (2,695) (686) (5,563)
Income taxes 64 69 127 166
-------- -------- -------- --------
Net loss $ (82) $ (2,764) $ (813) $ (5,729)
======== ======== ======== ========
Weighted average common shares outstanding --
basic and diluted 46,748 31,483 46,724 31,483
======== ======== ======== ========
Basic and diluted net loss per common share $ (.00) $ (.09) $ (.02) $ (.18)
======== ======== ======== ========
</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,
---------------------
1999 1998
-------- --------
<S> <C> <C>
Net loss $ (813) $ (5,729)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 620 1,174
Write-down of oil and gas properties - 4,725
Changes in working capital and other (1,000) 95
-------- --------
Net cash provided by (used in) operating activities (1,193) 265
-------- --------
Cash flows from investing activities:
Property and equipment expenditures (111) (411)
Other 32 (95)
-------- --------
Net cash used in investing activities (79) (506)
-------- --------
Cash flows from financing activities --
Principal payments on long term debt (300) (250)
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 113 (2)
-------- --------
Net decrease in cash and cash equivalents (1,459) (493)
Cash and cash equivalents at beginning of the period 1,712 690
-------- --------
Cash and cash equivalents at end of the period $ 253 $ 197
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Deficit
(in thousands, except number of shares)
(unaudited)
<TABLE>
<CAPTION>
Common Stock
--------------------------
Additional Total
Number Paid-in Accumulated Stockholders'
of Shares Amount Capital Deficit Deficit
------------ ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1998 46,700,132 $ 2,335 $ 34,862 $ (48,280) $ (11,083)
Issuance of common stock
pursuant to investment
banking agreement 200,000 10 (7) - 3
Net loss - - - (813) (813)
------------ ---------- ---------- ------------ -------------
Balances at June 30, 1999 46,900,132 $ 2,345 $ 34,855 $ (49,093) $ (11,893)
============ ========== ========== ============ =============
</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 consolidated financial statements should be
read in conjunction with the Company's prior audited yearly financial
statements and the notes thereto, included in the Company's latest annual
report on Form 10-K.
In the opinion of the Company, all adjustments, consisting of normal recurring
accruals, necessary to present fairly the information in the accompanying
financial statements have been included. The results of operations for such
interim periods are not necessarily indicative of the results for the full
year. Previously reported amounts have been reclassified to conform to
current period presentation.
The Company's condensed consolidated financial statements have been presented
on a going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As discussed in
note 2 below, there is substantial doubt about the Company's ability to
continue as a going concern. The condensed consolidated financial statements
do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
2. Liquidity
During the last quarter of calendar year 1997 and throughout calendar year
1998, world oil prices declined dramatically. This decline in oil prices was
particularly severe in Colombia. Colombian oil prices, during the twenty-four
month period ended December 31, 1998, fell from a high of $22.71 per barrel in
January 1997 to $7.50 per barrel in December 1998. Whereas the sale price for
crude oil from the Santana contract averaged $19.82 per barrel in 1996 and
$17.39 per barrel in 1997, the sale price averaged $10.31 per barrel during
calendar year 1998 and $11.76 per barrel during the first half of 1999.
These price declines have materially and adversely affected the results of
operations and the financial position of the Company. During the years ended
December 31, 1998, 1997 and 1996, the Company reported net losses of $17.1
million, $22.5 million and $0.9 million, respectively, and declining amounts
of net cash provided by (used in) operating activities of $(0.05) million,
$1.7 million and $8.9 million, respectively. The Company recorded an
additional net loss of $0.8 million for the six-month period ended June 30,
1999. The Company's stockholders' deficit was approximately $11.9 million as
of June 30, 1999.
The Company is highly leveraged with $14.5 million in current debt as of June
30, 1999, pursuant to bank credit facilities with ING (U.S.) Capital
Corporation ("ING Capital"), the U.S. Overseas Private Investment Corporation
("OPIC") and Chase Bank of Texas, N.A. ("Chase"), as more fully described in
note 5.
6
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
The Company is not in compliance with various covenants under the bank credit
facilities nor is it in compliance with the minimum escrow balance required
thereunder. As a result, the lender has the right to accelerate payment on
the debt and, therefore, the Company has classified all long-term debt as
current in the June 30, 1999 consolidated balance sheet. Furthermore, the
Company was unable to pay the principal payment of $5.7 million due on April
30, 1999, and subsequent monthly principal payments of $281,250. The Company
has paid the related interest through June 30, 1999; however, the interest due
July 30, 1999 has not been paid. Assuming no change in its capital structure,
the Company will not have the financial resources to pay the future minimum
monthly principal payments of $281,250 due through December 31, 2001.
On February 22, 1999, the Company signed a letter of intent to merge with
Sharpe Resources Corporation ("Sharpe"), a publicly traded oil and gas
exploration and production company incorporated in Ontario, Canada. As part
of the merger arrangements, the Company's lenders (i.e., ING Capital, OPIC and
Chase) had agreed in principle to cancel the Company's $14.6 million of then
outstanding debt in exchange for a cash payment of $5 million, plus $3 million
of preferred stock in the merged entity and 25% of the common shares to be
issued to the Aviva shareholders. On April 27, 1999, however, the merger
discussions with Sharpe were terminated as a result of the inability of the
parties to reach agreement on terms and conditions of the proposed merger.
On May 19, 1999, the Company engaged Triumph Securities Corporation as an
investment banker to assist in recapitalizing the Company with up to $10
million for the purchase of the Company's outstanding bank debt, drilling, and
acquisitions. A recapitalization pursuant to this engagement has not been
achieved. On July 23, 1999, the Company terminated Triumph's engagement as
the Company's investment banker.
Management of the Company is currently in discussions with the Company's
lenders concerning the conversion of the Company's outstanding bank debt,
which currently is $14.5 million, into common stock of the Company. Under
management's proposal, the outstanding debt and accrued interest thereon would
be exchanged for 200 million newly issued common shares of the Company.
Following such an exchange, the lenders would own approximately 81% of the
then outstanding shares of the Company and the Company's future cash flows
would be available for working capital, drilling and acquisitions. Management
believes this debt conversion can be achieved and will provide the Company
with the liquidity necessary to continue operations and reposition the Company
in order to take advantage of a rebounding petroleum industry.
While management of the Company is pursuing the debt conversion assiduously,
its ability to effect such a conversion is dependent upon the Company's
lenders, a matter that is beyond the control of the Company. In particular,
the Company's lenders must consent to waive the defaults of the Company under
its bank credit facilities pending preparation, negotiation, execution and
delivery of definitive debt conversion agreements. The Company's lenders have
not yet and may not ever agree to a conversion of the Company's debt. If the
Company is unable to consummate the debt conversion, then, in the absence of
another business transaction, the Company cannot achieve compliance with nor
make principal payments required by the bank credit facilities and,
accordingly, the lenders could declare a default, accelerate all amounts
outstanding, and attempt to realize upon the collateral securing the debt. As
a result of this uncertainty, management believes there is substantial doubt
about the Company's ability to continue as a going concern.
7
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
3. Garnet Merger
On October 28, 1998, the Company completed the merger of Garnet Resources
Corporation ("Garnet") with one of the Company's subsidiaries. As a result of
the merger, the Company now
owns over 99% of the Colombian joint operations. Additionally, the Company
now holds a 2% carried working interest in an oil and gas Petroleum
Prospecting License in Papua New Guinea.
The merger arrangements included Aviva refinancing Garnet's 99.24% owned
subsidiary's net outstanding debt to Chase which is guaranteed by OPIC,
issuing approximately 1.1 million and 12.9 million new Aviva common shares to
Garnet shareholders and Garnet debenture holders, respectively, and canceling
Garnet's $15 million of 9.5% subordinated debentures due December 21, 1998.
(See note 5 for further details.)
The merger was accounted for as a "purchase" of Garnet for financial
accounting purposes with Aviva's subsidiary as the surviving entity. The
purchase price of Garnet, approximately $9.9 million, consists of $2.4 million
related to the issuance of 14 million shares of Aviva's common stock at $0.167
per share plus merger costs and the assumption of approximately $6.0 million
of net debt and $1.5 million of current and other liabilities.
A summary of the assets acquired and liabilities assumed as of October 28,
1998 follows (in thousands):
<TABLE>
<S> <C>
Current assets $ 1,659
Oil and gas properties 8,250
Current liabilities (1,169)
Long term debt (5,954)
Other liabilities (346)
---------
Fair value of net assets acquired $ 2,440
=========
</TABLE>
The following sets forth selected consolidated financial information for the
Company on a pro forma basis for the six-month period ended June 30, 1998,
assuming the Garnet merger had occurred on January 1, 1997. The following
selected pro forma combined financial information is based on the historical
consolidated statements of operations of Aviva and Garnet as adjusted to give
effect to the merger using the purchase method of accounting for business
combinations. In addition, the following selected pro forma combined
financial information gives effect to the purchase of Garnet debentures by
Aviva pursuant to the Debenture Purchase Agreement, the borrowing by Aviva of
$15 million pursuant to the bank loans (as discussed in note 5) and the
application of such funds to refinance Aviva's outstanding debt and the debt
to Chase of a Garnet subsidiary (as discussed above). The following selected
pro forma combined financial information may not necessarily reflect the
financial condition or results of operations of Aviva that would actually have
resulted had the merger occurred as of the date and for the period indicated
or reflect the future results of operations of Aviva (in thousands, except per
share amounts).
<TABLE>
<S> <C>
Revenues $ 3,988
=========
Net loss $ (12,256)
=========
Basic and diluted net loss per common share $ (0.26)
=========
</TABLE>
8
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
The above pro forma net loss for the six-month period ended June 30, 1998
includes combined historical charges for ceiling write-downs of oil and gas
producing properties of $9,852,000.
4. Property and Equipment
Internal general and administrative costs directly associated with oil and gas
property acquisition, exploration and development activities have been
capitalized in accordance with the accounting policies of the Company. Such
costs totaled $18,000 for the six months ended June 30, 1999 and $19,000 for
the six months ended June 30, 1998.
Unevaluated oil and gas properties totaling $548,000 and $532,000 at June 30,
1999 and December 31, 1998, respectively, have been excluded from costs
subject to depletion. The Company capitalized interest costs of $24,000 and
$12,000 for the six-month periods ended June 30, 1999 and 1998, respectively,
on these properties.
The Company recorded write-downs of $3,355,000 and $1,370,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as a
result of ceiling test limitations on capitalized costs through June 30, 1998.
No such write-downs were required as of June 30, 1999. A future decrease in
the prices the Company receives for its oil and gas production or downward
reserve adjustments could result in a ceiling test write-down that is
significant to the Company's operating results.
5. Long Term Debt
On October 28, 1998, concurrently with the consummation of the Garnet merger,
Neo Energy, Inc., an indirect subsidiary of the Company, and the Company
entered into a Restated Credit Agreement with ING Capital. ING Capital, Chase
and OPIC also entered into a Joint Finance and Intercreditor Agreement (the
"Intercreditor Agreement") with the Company. ING Capital agreed to loan Neo
Energy, Inc. an additional $800,000, bringing the total outstanding balance
due ING Capital to $9,000,000. The outstanding balance due to Chase was paid
down to $6,000,000 from the $6,350,000 balance owed by Garnet prior to the
merger.
The ING Capital loan and the Chase loan (the "Bank Credit Facilities") are
guaranteed by the Company and its material domestic subsidiaries. Both loans
are also secured by the Company's consolidated interest in the Santana
contract and related assets in Colombia, a first mortgage on the United States
oil and gas properties of the Company and its subsidiaries, a lien on accounts
receivable of the Company and its subsidiaries, and a pledge of the capital
stock of the Company's subsidiaries. The Chase loan is unconditionally
guaranteed by OPIC.
Borrowings under the ING Capital loan bear interest at the London Interbank
Offered Rate ("LIBOR") plus 3.0% per annum. Borrowings under the Chase loan
bear interest at the LIBOR rate plus 0.6% per annum. In addition, a guarantee
fee of 2.4% per annum on the borrowings under the Chase loan guaranteed by
OPIC are payable to OPIC.
Borrowings under the Bank Credit Facilities are payable as follows: $5,700,000
in April 1999, and thereafter $281,250 per month until final maturity on
December 31, 2001. The terms of the Bank Credit Facilities, among other
things, prohibit the Company from merging with another company or paying
dividends, limit additional indebtedness, general and
9
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
administrative expense, sales of assets and investments and require the
maintenance of certain minimum financial ratios. As of June 30, 1999, the
Company is not in compliance with various covenants under the Bank Credit
Facilities. Moreover, the Company did not pay the $5,700,000 principal payment
that was due April 30, 1999, and subsequent monthly principal payments of
$281,250. As a result, the lender has the right to accelerate payment on the
debt and, therefore, the Company has classified all long-term debt as current
in the June 30, 1999 consolidated balance sheet.
The Company is also required to maintain an escrow account pursuant to the
Bank Credit Facilities. On March 31, 1999 and thereafter, the escrow account
must contain the total of the following for the next succeeding three-month
period: (i) the amount of the minimum monthly principal payments (as defined
in the loan documents), plus (ii) the interest payments due on the combined
loans, plus (iii) the amount of all fees due under the loan documents and
under the Intercreditor Agreement. The Company is not in compliance with the
requirements of the escrow account. See management's plans to convert the
debt in note 2.
6. Interest and Other Income (Expense)
A summary of interest and other income (expense) follows (in thousands):
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------
1999 1998
------- -------
<S> <C> <C>
Gain on settlement of litigation $ - $ 720
Interest income 48 45
Foreign currency exchange gain (loss) 118 (2)
Other, net 11 8
------- -------
$ 177 $ 771
======= =======
</TABLE>
7. Commitments and Contingencies
The Company is engaged in ongoing operations on the Santana contract in
Colombia. The contract obligations have been met, however, the Company may
recomplete certain existing wells and engage in various other projects. The
Company's share of the estimated future costs of these activities is
approximately $0.6 million at June 30, 1999. Failure to fund certain
expenditures could result in the forfeiture of all or part of the Company's
interest in this contract. Any substantial increases in the amounts of the
above referenced expenditures could adversely affect the Company's ability to
meet these obligations.
The Company will most likely fund the recompletion of certain wells through
arrangements with service companies whereby the services are paid for with
proceeds from the sale of incremental oil production. Any miscellaneous
projects will be funded using cash provided from operations. Risks that could
adversely affect funding of such activities include, among others, delays in
obtaining any required environmental approvals and permits, cost overruns,
failure to produce the reserves as projected or a decline in the sales price
of oil. Depending on the results of future exploration and development
activities, substantial expenditures which have not been included in the
Company's cash flow projections may be required.
10
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
On August 3, 1998, leftist Colombian guerrillas inflicted significant damage
on the Company's oil processing and storage facilities at the Mary field, and
to a lesser extent, at the Linda facilities. Since that time the Company has
been subject to lesser attacks on its pipelines and equipment resulting in
only minor interruptions of oil sales. The Colombian army guards the Company's
operations; however, there can be no assurance that the Company's operations
will not be the target of additional guerrilla attacks in the future. The
damages resulting from the above referenced attacks were covered by insurance.
There can be no assurance that such coverage will remain available or
affordable.
Under the terms of the contracts with Ecopetrol, a minimum of 25% of all
revenues from oil sold to Ecopetrol is paid in Colombian pesos which may only
be utilized in Colombia. To date, the Company has experienced no difficulty
in repatriating the remaining 75% of such payments, which are payable in U.S.
dollars.
Activities of the Company with respect to the exploration, development and
production of oil and natural gas are subject to stringent foreign, federal,
state and local environmental laws and regulations, including but not limited
to the Oil Pollution Act of 1990, the Outer Continental Shelf Lands Act, the
Federal Water Pollution Control Act, the Resource Conservation and Recovery
Act and the Comprehensive Environmental Response, Compensation, and Liability
Act. Such laws and regulations have increased the cost of planning,
designing, drilling, operating and abandoning wells. In most instances, the
statutory and regulatory requirements relate to air and water pollution
control procedures and the handling and disposal of drilling and production
wastes. Although the Company believes that compliance with environmental laws
and regulations will not have a material adverse effect on the Company's
future operations or earnings, risks of substantial costs and liabilities are
inherent in oil and gas operations and there can be no assurance that
significant costs and liabilities, including civil or criminal penalties for
violations of environmental laws and regulations, will not be incurred.
Moreover, it is possible that other developments, such as stricter
environmental laws and regulations or claims for damages to property or
persons resulting from the Company's operations, could result in substantial
costs and liabilities. For additional discussions on the applicability of
environmental laws and regulations and other risks that may affect the
Company's operations, see the Company's latest annual report on Form 10-K.
The Company is involved in certain litigation involving its oil and gas
activities, but unrelated to environmental contamination issues. Management
of the Company believes that these litigation matters will not have any
material adverse effect on the Company's financial condition or results of
operations.
11
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
8. Segment Information
The following is a summary of segment information of the Company as of and
for the six-month periods ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
United
States Colombia Total
--------- --------- ---------
<S> <C> <C> <C>
1999
----
Oil and gas sales $ 427 $ 2,332 $ 2,759
--------- --------- ---------
Expense:
Production 603 1,176 1,779
Depreciation, depletion and amortization 73 547 620
General and administrative 638 41 679
Recovery of losses on accounts receivable (92) - (92)
Severance - 62 62
--------- --------- ---------
1,222 1,826 3,048
--------- --------- ---------
Interest and other income (expense), net 117 60 177
Interest expense (158) (416) (574)
--------- --------- ---------
Earnings (loss) before income taxes (836) 150 (686)
Income taxes - 127 127
--------- --------- ---------
Net earnings (loss) $ (836) $ 23 $ (813)
========= ========= =========
Total assets $ 1,497 $ 7,066 $ 8,563
========= ========= =========
1998
----
Oil and gas sales $ 470 $ 1,590 $ 2,060
--------- --------- ---------
Expense:
Production 593 922 1,515
Depreciation, depletion and amortization 243 931 1,174
Write-down of oil and gas properties 1,370 3,355 4,725
General and administrative 650 10 660
--------- --------- ---------
2,856 5,218 8,074
--------- --------- ---------
Interest and other income (expense), net 758 13 771
Interest expense (175) (145) (320)
--------- --------- ---------
Loss before income taxes (1,803) (3,760) (5,563)
Income taxes - 166 166
--------- --------- ---------
Net loss $ (1,803) $ (3,926) $ (5,729)
========= ========= =========
Total assets $ 2,812 $ 7,319 $ 10,131
========= ========= =========
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- --------------
Results of Operations
- ---------------------
Three Months Ended June 30, 1999 compared to Three Months Ended June 30, 1998
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
United States Colombia
--------------------- --------
Oil Gas Oil Total
-------- -------- -------- --------
(Thousands)
<S> <C> <C> <C> <C>
Revenue -- 1998 $ 178 $ 73 $ 663 $ 914
Volume variance (43) (39) 346 264
Price variance 32 2 376 410
Other - (13) - (13)
-------- -------- -------- --------
Revenue -- 1999 $ 167 $ 23 $ 1,385 $ 1,575
======== ======== ======== ========
</TABLE>
Colombian oil volumes were 95,000 barrels in the second quarter of 1999, an
increase of 33,000 barrels as compared to the second quarter of 1998. Such
increase is due to a 52,000 barrel increase resulting from the acquisition of
Garnet effective October 28, 1998, partially offset by a 20,000 barrel decrease
resulting from production declines.
U.S. oil volumes were 11,000 barrels in 1999, down approximately 4,000 barrels
from 1998. U.S. gas volumes before gas balancing adjustments were 6,000
thousand cubic feet (MCF) in 1999, down 16,000 MCF from 1998. Such decreases
resulted primarily from normal production declines.
Colombian oil prices averaged $14.56 per barrel during the second quarter of
1999. The average price for the same period of 1998 was $10.61 per barrel. The
Company's average U.S. oil price increased to $15.19 per barrel in 1999, up from
$12.25 per barrel in 1998. In 1999 prices have been higher than in the second
quarter of 1998 due to an increase in world oil prices. U.S. gas prices
averaged $2.41 per MCF in 1999 compared to $1.93 per MCF in 1998.
In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $13,000 as a result of gas balancing adjustments.
Operating costs increased approximately 23%, or $163,000, primarily due to the
Garnet merger.
Depreciation, depletion and amortization decreased by 44%, or $219,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs.
The Company recorded write-downs of $1,053,000 and $908,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as a
result of ceiling test limitations on capitalized costs during the second
quarter of 1998. No such write-downs were required during 1999.
The Company incurred severance expense of $62,000 during the second quarter of
1999 related to Colombian operations. The Company has taken significant cost
cutting measures in Colombia since it merged with Garnet Resources Corporation,
thereby acquiring operatorship of the Colombian properties.
13
<PAGE>
Interest and other income increased $222,000 primarily due to a foreign currency
exchange gain of $107,000 and the reversal of approximately $79,000 of accruals
for loss contingencies which are no longer considered necessary. No similar
amounts were recorded in 1998.
Interest expense increased $128,000 in the second quarter of 1999, primarily as
a result of higher outstanding balances of long term debt.
Six Months Ended June 30, 1999 compared to Six Months Ended June 30, 1998
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
United States Colombia
--------------------- --------
Oil Gas Oil Total
(Thousands) -------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue -- 1998 $ 352 $ 118 $ 1,590 $ 2,060
Volume variance (1) (23) 696 672
Price variance (16) 12 46 42
Other - (15) - (15)
-------- -------- -------- --------
Revenue -- 1999 $ 335 $ 92 $ 2,332 $ 2,759
======== ======== ======== ========
</TABLE>
Colombian oil volumes were 198,000 barrels in the first half of 1999, an
increase of 60,000 barrels as compared to the first half of 1998. Such increase
is due to a 109,000 barrel increase resulting from the acquisition of Garnet
effective October 28, 1998, partially offset by a 49,000 barrel decrease
resulting from production declines.
U.S. oil volumes were 27,000 barrels in 1999, approximately the same as 1998.
An increase of approximately 7,000 barrels was due to continuous production from
the Company's Main Pass 41 field (shut-in for approximately 85 days during the
first half of 1998 due to equipment failures), offset by a 7,000 barrel
decrease resulting from normal production declines. U.S. gas volumes before gas
balancing adjustments were 42,000 MCF in 1999, up 6,000 MCF from 1998. Of such
increase, approximately 54,000 MCF was due to the aforementioned continuous
production from the Main Pass 41 field, partially offset by a 48,000 MCF decline
due to normal production declines.
Colombian oil prices averaged $11.76 per barrel during the first half of 1999.
The average price for the same period of 1998 was $11.53 per barrel. The
Company's average U.S. oil price decreased to $12.40 per barrel in 1999, down
from $13.00 per barrel in 1998. U.S. gas prices averaged $1.86 per MCF in 1999
compared to $2.10 per MCF in 1998.
In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $15,000 as a result of gas balancing adjustments.
Operating costs increased approximately 17%, or $264,000, primarily due to the
Garnet merger.
Depreciation, depletion and amortization decreased by 47%, or $554,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs.
The Company recorded write-downs of $3,355,000 and $1,370,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as a
result of ceiling test limitations on capitalized costs during 1998. No such
write-downs were required as of June 30, 1999.
The Company incurred severance expense of $62,000 during the first half of 1999
related to Colombian operations. The Company has taken significant cost cutting
measures in Colombia since it merged with Garnet Resources Corporation, thereby
acquiring operatorship of the Colombian properties.
14
<PAGE>
Interest and other income decreased $594,000. During the first quarter of 1998
the Company realized a $720,000 gain on the settlement of litigation involving
the administration of a take or pay contract settlement. No such gain was
recorded in 1999; however, in 1999 a foreign currency exchange gain related to
Colombian activity of $118,000 was recorded.
Interest expense increased $254,000 in the first half of 1999, primarily as a
result of higher outstanding balances of long term debt.
Income taxes were $39,000 lower in 1999 principally as a result of lower
Colombian "presumptive" income tax.
Year 2000
- ---------
The Year 2000 problem is the inability of a meaningful proportion of the world's
computers, software applications and embedded semiconductor chips to cope with
the change of the year from 1999 to 2000. This issue can be traced to the
infancy of computing, when computer data and programs were designed to save
memory space by truncating the date field to just six digits (two for the day,
two for the month and two for the year). Such information applications
automatically assume that the two-digit year field represents a year within the
20th century. As a result of this, systems could fail to operate or fail to
produce correct results.
The Year 2000 problem affects computers, software applications, and related
equipment used, operated or maintained by the Company. Accordingly, the Company
is currently assessing the potential impact of, and the costs of remediating,
the Year 2000 problem for its internal systems and on facilities and equipment.
The Company's business is substantially dependent upon the operations of
computer systems, and as such, the Company has established a committee made up
of leaders from the operational areas of the Company. The committee has the
involvement of senior management and its objectives are high priority.
The Company is continuing the process of identifying the computers, software
applications, and related equipment used in connection with its operations that
must be modified, upgraded or replaced to minimize the possibility of a material
disruption of its business. The Company has commenced the process of modifying,
upgrading and replacing systems which have already been assessed as adversely
affected by the Year 2000 problem, and expects to complete this process by the
end of 1999.
In addition to computers and related systems, the operation of office equipment,
such as fax machines, copiers, telephone switches, security systems and other
common devices may be affected by the Year 2000 problem. The Company is
currently assessing the potential effect of, and costs of remediating, the Year
2000 problem on its office systems and equipment. The Company has initiated
communications with third party suppliers of computers, software, and other
equipment used, operated or maintained by the Company to identify and, to the
extent possible, to resolve issues involving the Year 2000 problem. However,
the Company has limited or no control over the actions of these third party
suppliers. Thus, while the Company expects that it will be able to resolve any
significant Year 2000 problems with these systems, there can be no assurance
that these suppliers will resolve any or all Year 2000 problems with these
systems before the occurrence of a material disruption to the business of the
Company. Any failure of these third parties to timely resolve Year 2000
problems with their systems could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Because the Company's assessment is not complete, it is unable to accurately
predict the total cost to the Company of completing any required modifications,
upgrades, or replacements of its systems or equipment. The Company does not,
however, believe that such total cost will exceed $200,000. The
15
<PAGE>
Company expects to identify and resolve all Year 2000 problems that could
materially adversely affect its business operations. However, management
believes that it is not possible to determine with complete certainty that all
Year 2000 problems affecting the Company, its purchasers or its suppliers have
been identified or corrected. The number of devices that could be affected and
the interactions among these devices are simply too numerous. In addition, no
one can accurately predict how many Year 2000 problem-related failures will
occur or the severity, duration, or financial consequences of these perhaps
inevitable failures. As a result, management expects that the Company will
likely suffer the following consequences: (i) a significant number of
operational inconveniences and inefficiencies for the Company, its purchasers
and its suppliers will divert management's time and attention and financial and
human resources from its ordinary business activities; (ii) a few serious system
failures that will require significant effort by the Company, its purchasers or
its suppliers to prevent or alleviate material business disruptions; (iii)
several routine business disputes and claims due to Year 2000 problems that will
be resolved in the ordinary course of business; and (iv) possible business
disputes alleging that the Company failed to comply with the terms of its
contracts or industry standards of performance, some of which could result in
litigation.
The Company will develop contingency plans to be implemented if its efforts to
identify and correct Year 2000 problems affecting its operational systems and
equipment are not effective. The Company plans to complete its contingency
plans by the end of the third quarter of 1999. Depending on the systems
affected, any contingency plans developed by the Company, if implemented, could
have a material adverse effect on the Company's financial condition and results
of operations.
The discussion of the Company's efforts, and management's expectations, relating
to Year 2000 compliance are forward-looking statements. The Company's ability
to achieve Year 2000 compliance and the level of incremental costs associated
therewith, could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, vendors' ability to modify
proprietary software, and unanticipated problems identified in the ongoing
compliance review.
New Accounting Pronouncements
- -----------------------------
The Company is assessing the reporting and disclosure requirements of SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments and hedging activities. The statement is effective for financial
statements for fiscal years beginning after June 15, 2000. The Company believes
SFAS No. 133 will not have a material impact on its financial statements or
accounting policies. The Company will adopt the provisions of SFAS No. 133 in
the first quarter of 2001.
Liquidity and Capital Resources
- -------------------------------
During the last quarter of calendar year 1997 and throughout calendar year 1998,
world oil prices declined dramatically. This decline in oil prices was
particularly severe in Colombia. Colombian oil prices, during the twenty-four
month period ended December 31, 1998, fell from a high of $22.71 per barrel in
January 1997 to $7.50 per barrel in December 1998. Whereas the sale price for
crude oil from the Santana contract averaged $19.82 per barrel in 1996 and
$17.39 per barrel in 1997, the sale price averaged $10.31 per barrel during
calendar year 1998 and $11.76 per barrel during the first half of 1999.
These price declines have materially and adversely affected the results of
operations and the financial position of the Company. During the years ended
December 31, 1998, 1997 and 1996, the Company reported net losses of $17.1
million, $22.5 million and $0.9 million, respectively, and declining amounts of
net cash provided by (used in) operating activities of $(0.05) million, $1.7
million and $8.9 million, respectively. The Company recorded an additional net
loss of $0.8 million
16
<PAGE>
for the six-month period ended June 30, 1999. The Company's stockholders'
deficit was approximately $11.9 million as of June 30, 1999.
The Company is highly leveraged with $14.5 million in current debt as of June
30, 1999, pursuant to bank credit facilities with ING (U.S.) Capital Corporation
("ING Capital"), the U.S. Overseas Private Investment Corporation ("OPIC") and
Chase Bank of Texas, N.A. ("Chase"), as more fully described in note 5 to the
condensed consolidated financial statements.
The Company is not in compliance with various covenants under the bank credit
facilities nor is it in compliance with the minimum escrow balance required
thereunder. As a result, the lender has the right to accelerate payment on the
debt and, therefore, the Company has classified all long-term debt as current in
the June 30, 1999 consolidated balance sheet. Furthermore, the Company was
unable to pay the principal payment of $5.7 million due on April 30, 1999, and
subsequent monthly principal payments of $281,250. The Company has paid the
related interest through June 30, 1999; however, the interest due July 30, 1999,
has not been paid. Assuming no change in its capital structure, the Company
will not have the financial resources to pay the future minimum monthly
principal payments of $281,250 through December 31, 2001.
On February 22, 1999, the Company signed a letter of intent to merge with Sharpe
Resources Corporation ("Sharpe"), a publicly traded oil and gas exploration and
production company incorporated in Ontario, Canada. As part of the merger
arrangements, the Company's lenders (i.e., ING Capital, OPIC and Chase) had
agreed in principle to cancel the Company's $14.6 million of outstanding debt in
exchange for a cash payment of $5 million, plus $3 million of preferred stock in
the merged entity and 25% of the common shares to be issued to the Aviva
shareholders. On April 27, 1999, however, the merger discussions with Sharpe
were terminated as a result of the inability of the parties to reach agreement
on terms and conditions of the proposed merger.
On May 19, 1999, the Company engaged Triumph Securities Corporation as an
investment banker to assist in recapitalizing the Company with up to $10 million
for the purchase of the Company's outstanding bank debt, drilling, and
acquisitions. A recapitalization pursuant to this engagement has not been
achieved. On July 23, 1999, the Company terminated Triumph's engagement as the
Company's investment banker.
Management of the Company is currently in discussions with the Company's lenders
concerning the conversion of the Company's outstanding bank debt, which
currently is $14.5 million, into common stock of the Company. Under
management's proposal, the outstanding debt and accrued interest thereon would
be exchanged for 200 million newly issued common shares of the Company.
Following such an exchange, the lenders would own approximately 81% of the then
outstanding shares of the Company and the Company's future cash flows would be
available for working capital, drilling and acquisitions. Management believes
this debt conversion can be achieved and will provide the Company with the
liquidity necessary to continue operations and reposition the Company in order
to take advantage of a rebounding petroleum industry.
While management of the Company is pursuing the debt conversion assiduously, its
ability to effect such a conversion is dependent upon the Company's lenders, a
matter that is beyond the control of the Company. In particular, the Company's
lenders must consent to waive the defaults of the Company under its bank credit
facilities pending preparation, negotiation, execution and delivery of
definitive debt conversion agreements. The Company's lenders have not yet and
may not ever agree to a conversion of the Company's debt. If the Company is
unable to consummate the debt conversion, then, in the absence of another
business transaction, the Company cannot achieve compliance with nor make
principal payments required by the bank credit facilities and, accordingly, the
lenders could declare a default, accelerate all amounts outstanding, and attempt
to realize upon
17
<PAGE>
the collateral securing the debt. As a result of this uncertainty, management
believes there is substantial doubt about the Company's ability to continue as a
going concern.
With the exception of historical information, the matters discussed in this
quarterly report contain forward-looking statements that involve risks and
uncertainties. Although the Company believes that its expectations are based on
reasonable assumptions, it can give no assurance that its goals will be
achieved. Important factors that could cause actual results to differ
materially from those in the forward-looking statements herein include, among
other things, general economic conditions, volatility of oil and gas prices, the
impact of possible geopolitical occurrences world-wide and in Colombia,
imprecision of reserve estimates, changes in laws and regulations, unforeseen
engineering and mechanical or technological difficulties in drilling, working-
over and operating wells during the periods covered by the forward-looking
statements, as well as other factors described in the Company's annual report on
Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates on debt and
changes in commodity prices.
The Company's exposure to interest rate risk relates to variable rate loans that
are benchmarked to LIBOR interest rates. The Company does not use derivative
financial instruments to manage overall borrowing costs or reduce exposure to
adverse fluctuations in interest rates. The impact on the Company's results of
operations of a one-point interest rate change on the outstanding balance of the
variable rate debt as of June 30, 1999 would be immaterial.
The Company produces and sells crude oil and natural gas. These commodities are
sold based on market prices established with the buyers. The Company does not
use financial instruments to hedge commodity prices.
18
<PAGE>
PART II - OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
The Company is in default with respect to its Bank Credit Facilities. For more
information see notes 2 and 5 to the condensed consolidated financial statements
and Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources, as set forth elsewhere
herein.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
a) Exhibits
- -----------
27.1 Financial Data Schedule.
b) Reports on Form 8-K
- ----------------------
The Company filed the following Current Reports on Form 8-K during and
subsequent to the end of the second quarter:
Date of 8-K Description of 8-K
- -------------- -------------------
April 13, 1999 Submitted a copy of the Company's Press Release dated April
13, 1999, updating the merger plans between Aviva Petroleum
Inc. and Sharpe Resources Corporation.
April 30, 1999 Submitted a copy of the Company's Press Release dated April
30, 1999, announcing the termination of merger plans between
Aviva Petroleum Inc. and Sharpe Resources Corporation.
19
<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, 1999 /s/ Ronald Suttill
------------------
Ronald Suttill
President and Chief Executive Officer
/s/ James L. Busby
-------------------
James L. Busby
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
20
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
27.1 Financial Data Schedule.
21
<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, 1999 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 257
<SECURITIES> 0
<RECEIVABLES> 1,839
<ALLOWANCES> 328
<INVENTORY> 794
<CURRENT-ASSETS> 2,684
<PP&E> 69,121
<DEPRECIATION> 64,780
<TOTAL-ASSETS> 8,563
<CURRENT-LIABILITIES> 18,586
<BONDS> 0
0
0
<COMMON> 2,345
<OTHER-SE> (14,238)
<TOTAL-LIABILITY-AND-EQUITY> 8,563
<SALES> 2,759
<TOTAL-REVENUES> 2,759
<CGS> 2,399
<TOTAL-COSTS> 2,399
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (92)
<INTEREST-EXPENSE> 574
<INCOME-PRETAX> (686)
<INCOME-TAX> 127
<INCOME-CONTINUING> (813)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (813)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
