<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 MARCH 31, 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 March 31, 1999,
was 46,700,132 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>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,501 $ 1,712
Restricted cash 428 417
Accounts receivable 1,479 1,503
Inventories 836 836
Prepaid expenses and other 268 627
------------ ------------
Total current assets 4,512 5,095
------------ ------------
Property and equipment, at cost (note 4):
Oil and gas properties and equipment (full cost method) 68,557 68,636
Other 583 612
------------ ------------
69,140 69,248
Less accumulated depreciation, depletion
and amortization (64,569) (64,440)
------------ ------------
4,571 4,808
Other assets 1,536 1,519
------------ ------------
$ 10,619 $ 11,422
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long term debt (note 5) $ 14,644 $ 14,805
Accounts payable 5,499 5,526
Accrued liabilities 409 308
------------ ------------
Total current liabilities 20,552 20,639
------------ ------------
Long term debt, excluding current portion (note 5) - -
Gas balancing obligations and other 1,881 1,866
Stockholders' deficit:
Common stock, no par value, authorized 348,500,000 shares;
issued 46,700,132 shares 2,335 2,335
Additional paid-in capital 34,862 34,862
Accumulated deficit* (49,011) (48,280)
------------ ------------
Total stockholders' deficit (11,814) (11,083)
Commitments and contingencies (note 7)
------------ ------------
$ 10,619 $ 11,422
============ ============
</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
March 31,
1999 1998
------ -------
<S> <C> <C>
Oil and gas sales $1,184 $ 1,146
------ -------
Expense:
Production 900 799
Depreciation, depletion and amortization 336 671
Write-down of oil and gas properties (note 4) - 2,764
General and administrative 359 360
------ -------
Total expense 1,595 4,594
------ -------
Other income (expense):
Interest and other income (expense), net (note 6) 34 745
Interest expense (291) (165)
------ -------
Total other income (expense) (257) 580
------ -------
Loss before income taxes (668) (2,868)
Income taxes 63 97
------ -------
Net loss $ (731) $(2,965)
====== =======
Weighted average common shares outstanding 46,700 31,483
====== ======
Basic and diluted net loss per common share $(0.02) $(0.09)
====== ======
</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>
Three Months Ended
March 31,
1999 1998
----- ----
<S> <C> <C>
Net loss $ (731) $(2,965)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation, depletion and amortization 336 671
Write-down of oil and gas properties - 2,764
Changes in working capital and other 423 (141)
------ -------
Net cash provided by operating activities 28 329
------ -------
Cash flows from investing activities:
Property and equipment expenditures (74) (215)
Other - (6)
------ -------
Net cash used in investing activities (74) (221)
------ -------
Cash flows from financing activities -
principal payments on long term debt (150) (250)
------ -------
Effect of exchange rate changes on cash and
cash equivalents (15) (5)
------ -------
Net decrease in cash and cash equivalents (211) (147)
Cash and cash equivalents at beginning of the period 1,712 690
------ -------
Cash and cash equivalents at end of the period $1,501 $ 543
====== =======
</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)
Net loss - - - (731) (731)
---------- ------ ------- -------- --------
Balances at March 31, 1999 46,700,132 $2,335 $34,862 $(49,011) $(11,814)
========== ====== ========== =========== =============
</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.
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 $9.18 per barrel
during the first quarter 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 $0.7 million for the three-month period ended
March 31, 1999. The Company's stockholders' deficit was approximately $11.8
million as of March 31, 1999.
The Company is highly leveraged with $14.6 million in current debt as of
March 31, 1999, pursuant to bank credit facilities with ING (U.S.) Capital
Corporation ("ING Capital") 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. Furthermore, the Company was unable to pay the
principal payment of $5.7 million due on April 30, 1999, and assuming no
change in its capital structure, the Company will not have the financial
resources to pay the minimum monthly principal payments of $281,250 each
month thereafter until 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, Chase
and the Overseas Private Investment Corporation) 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.
Management of the Company is currently negotiating with the Company's
lenders alternative methods of dealing with the Company's outstanding debt,
which currently is $14.6 million. Management believes that a debt
restructuring can be achieved and will provide the Company with the
liquidity necessary to continue operations and the ability to raise
additional capital to proceed with certain development and exploration
activities that management believes are essential to the survival of the
Company.
While management of the Company is pursuing the debt restructuring
assiduously, its ability to effect such a restructuring is dependent upon
the Company's lenders and its ability to raise the necessary capital, if
required, to restructure or refinance the debt, matters that are 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 a definitive
debt restructuring agreement. The Company's lenders have not yet and may
not ever agree to a restructuring of the Company's debt. If the Company is
unable to consummate a debt restructuring, 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.
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.
7
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
The merger arrangements included Aviva refinancing Garnet's 99.24% owned
subsidiary's net outstanding debt to Chase 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. (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 three-month period ended March 31,
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 $ 2,270
=======
Net loss $(7,062)
=======
Basic and diluted net loss per common share $ (0.15)
=======
</TABLE>
The above pro forma net loss for the three-month period ended March 31,
1998, includes combined historical charges for ceiling write-downs of oil
and gas producing properties of $6,246,000.
8
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
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 $9,000 for the three months ended March 31, 1999 and $7,000
for the three months ended March 31, 1998.
Unevaluated oil and gas properties totaling $545,000 and $532,000 at March
31, 1999 and December 31, 1998, respectively, have been excluded from costs
subject to depletion. The Company capitalized interest costs of $12,000 and
$3,000 for the three-month periods ended March 31, 1999 and 1998,
respectively, on these properties.
The Company recorded write-downs of $2,302,000 and $462,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as
a result of ceiling test limitations on capitalized costs at March 31,
1998. No such write-downs were required as of March 31, 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. ING Capital and Chase now share on a 60/40
basis, respectively, all collateral.
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
administrative expense, sales of assets and investments and require the
maintenance of certain minimum financial ratios. As of March 31, 1999, the
Company is not in compliance with various covenants under the Bank Credit
Facilities. Moreover, the Company did not pay the
9
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
$5,700,000 principal payment that was due April 30, 1999. The Company has,
therefore, classified all long-term debt as current in the March 31, 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 restructure the debt in note 2.
6. Interest and Other Income (Expense)
A summary of interest and other income (expense) follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----- -----
<S> <C> <C>
Gain on settlement of litigation $ - $ 720
Interest income 26 25
Foreign currency exchange gain (loss) 11 (2)
Other, net (3) 2
----- -----
$ 34 $ 745
===== =====
</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 March 31, 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, a
decrease in the Company's borrowing base, delays in obtaining the required
environmental approvals and permits, cost overruns, failure to produce the
reserves as projected or a decline in the sales price of oil. Depending on
the results of future exploration and development activities, substantial
expenditures which have not been included in the Company's cash flow
projections may be required.
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
10
<PAGE>
AVIVA PETROLEUM INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
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, 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 three-month periods ended March 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
United
States Colombia Total
------- --------- --------
<S> <C> <C> <C>
1999
- ----
Oil and gas sales $ 237 $ 947 $ 1,184
------ ------- -------
Expense:
Production 292 608 900
Depreciation, depletion and amortization 45 291 336
General and administrative 342 17 359
------ ------- -------
679 916 1,595
------ ------- -------
Interest and other income (expense), net 132 (98) 34
Interest expense (80) (211) (291)
------ ------- -------
Loss before income taxes (390) (278) (668)
Income taxes - 63 63
------ ------- -------
Net loss $ (390) $ (341) $ (731)
====== ======= =======
Total assets $1,763 $ 8,856 $10,619
====== ======= =======
1998
- ----
Oil and gas sales $ 219 $ 927 $ 1,146
------ ------- -------
Expense:
Production 315 484 799
Depreciation, depletion and amortization 105 566 671
Write-down of oil and gas properties 462 2,302 2,764
General and administrative 356 4 360
------ ------- -------
1,238 3,356 4,594
------ ------- -------
Interest and other income (expense), net 741 4 745
Interest expense (91) (74) (165)
------ ------- -------
Loss before income taxes (369) (2,499) (2,868)
Income taxes - 97 97
------ ------- -------
Net loss $ (369) $(2,596) $(2,965)
====== ======= =======
Total assets $3,707 $ 8,891 $12,598
====== ======= =======
</TABLE>
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations.
- --------------
Results of Operations
- ---------------------
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
United States Colombia
Oil Gas Oil Total
----- ----- ----- -------
<S> <C> <C> <C> <C>
(Thousands)
Revenue - 1998 $174 $45 $ 927 $1,146
Volume variance 48 24 342 414
Price variance (54) 2 (322) (374)
Other - (2) - (2)
---- --- ----- ------
Revenue - 1999 $168 $69 $ 947 $1,184
==== === ===== ======
</TABLE>
Colombian oil volumes were 103,000 barrels in the first quarter of 1999, an
increase of 28,000 barrels as compared to the first quarter of 1998. Such
increase is due to a 57,000 barrel increase resulting from the acquisition of
Garnet effective October 28, 1998 partially offset by a 29,000 barrel decrease
resulting from production declines.
U.S. oil volumes were 16,000 barrels in 1999, up approximately 3,000 barrels
from 1998. Of such increase, approximately 5,000 barrels was due to continuous
production from the Company's Main Pass 41 field (shut-in for approximately 60
days during the first quarter of 1998 due to equipment failures), partially
offset by a 2,000 barrel decline resulting from normal production declines.
U.S. gas volumes before gas balancing adjustments were 36,000 thousand cubic
feet (MCF) in 1999, up 21,000 MCF from 1998. Of such increase, approximately
40,000 MCF was due to the aforementioned continuous production from the Main
Pass 41 field, partially offset by a 19,000 MCF decline due to normal production
declines.
Colombian oil prices averaged $9.18 per barrel during the first quarter of 1999.
The average price for the same period of 1998 was $12.29 per barrel. The
Company's average U.S. oil price decreased to $10.49 per barrel in 1999, down
from $13.86 per barrel in 1998. In 1999 prices have been lower than in the
first quarter of 1998 due to a decrease in world oil prices. U.S. gas prices
averaged $1.91 per MCF in 1999 compared to $2.43 per MCF in 1998.
In addition to the above-mentioned variances, U.S. gas revenue decreased
approximately $2,000 as a result of gas balancing adjustments.
Operating costs increased approximately 13%, or $101,000, primarily due to the
Garnet merger.
Depreciation, depletion and amortization decreased by 50%, or $335,000,
primarily due to a decrease in costs subject to amortization resulting from
property write-downs.
The Company recorded write-downs of $2,302,000 and $462,000 to the carrying
amounts of its Colombian and U.S. oil and gas properties, respectively, as a
result of ceiling test limitations on capitalized costs at March 31, 1998. No
such write-downs were required as of March 31, 1999.
Interest and other income decreased $711,000. 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 gains were
recorded in 1999.
13
<PAGE>
Interest expense increased $126,000 in the first quarter of 1999, primarily as a
result of higher outstanding balances of long term debt.
Income taxes were $34,000 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 in 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 the third quarter 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 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
14
<PAGE>
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, 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.
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 $9.18 per barrel during the first quarter 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 $0.7 million for the three-month period ended March 31, 1999. The
Company's stockholders' deficit was approximately $11.8 million as of March 31,
1999.
The Company is highly leveraged with $14.6 million in current debt as of March
31, 1999, pursuant to bank credit facilities with ING (U.S.) Capital Corporation
("ING Capital") and Chase Bank of Texas, N.A. ("Chase"), as more fully described
in note 5 to the condensed consolidated financial statements.
15
<PAGE>
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. Furthermore, the Company was unable to pay the principal payment of
$5.7 million due on April 30, 1999, and assuming no change in its capital
structure, the Company will not have the financial resources to pay the minimum
monthly principal payments of $281,250 each month thereafter until 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, Chase and the Overseas
Private Investment Corporation) 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.
Management of the Company is currently negotiating with the Company's lenders
alternative methods of dealing with the Company's outstanding debt, which
currently is $14.6 million. Management believes that a debt restructuring can
be achieved and will provide the Company with the liquidity necessary to
continue operations and the ability to raise additional capital to proceed with
certain development and exploration activities that management believes are
essential to the survival of the Company.
While management of the Company is pursuing the debt restructuring assiduously,
its ability to effect such a restructuring is dependent upon the Company's
lenders and its ability to raise the necessary capital, if required, to
restructure or refinance the debt, matters that are 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 a definitive debt restructuring
agreement. The Company's lenders have not yet and may not ever agree to a
restructuring of the Company's debt. If the Company is unable to consummate a
debt restructuring, 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.
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.
16
<PAGE>
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 March 31, 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.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
a) Exhibits
- -----------
27.1 Financial Data Schedule.
b) Reports on Form 8-K
- ----------------------
The Company filed the following Current Reports on Form 8-K during and
subsequent to the end of the first quarter:
Date of 8-K Description of 8-K
- ----------- ------------------
March 4, 1999 Submitted a copy of the Company's Press Release dated March
4, 1999, announcing the merger plans between Aviva America,
Inc., a wholly owned subsidiary of Aviva Petroleum Inc., and
Sharpe Resources Corporation.
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.
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: May 11, 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)
18
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
- ------ ----------------------
27.1 Financial Data Schedule.
19
<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 MARCH 31, 1999 AND THE RELATED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,929
<SECURITIES> 0
<RECEIVABLES> 1,794
<ALLOWANCES> 315
<INVENTORY> 836
<CURRENT-ASSETS> 4,512
<PP&E> 69,140
<DEPRECIATION> 64,569
<TOTAL-ASSETS> 10,619
<CURRENT-LIABILITIES> 20,552
<BONDS> 0
0
0
<COMMON> 2,335
<OTHER-SE> (14,149)
<TOTAL-LIABILITY-AND-EQUITY> 10,619
<SALES> 1,184
<TOTAL-REVENUES> 1,184
<CGS> 1,236
<TOTAL-COSTS> 1,236
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 291
<INCOME-PRETAX> (668)
<INCOME-TAX> 63
<INCOME-CONTINUING> (731)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (731)
<EPS-PRIMARY> (0.02)
<EPS-DILUTED> (0.02)
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