10-Q 1 d10q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 2001 ---------------------- 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, 2001, was 46,900,132. On April 30, 2001, the Company discontinued trading of the Depositary Shares, each of which represented five shares of Common Stock. On May 16, 2001, the Common Stock resumed trading on the OTC Bulletin Board under the symbol AVVP. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. ----------------------------- AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheet (in thousands, except number of shares) (unaudited)

* Accumulated deficit of $70,057 was eliminated at December 31, 1992 in connection with a quasi-reorganization. See accompanying notes to condensed consolidated financial statements. 2 AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Statement of Operations (in thousands, except per share data) (unaudited)

See accompanying notes to condensed consolidated financial statements. 3 AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Statement of Cash Flows (in thousands) (unaudited)

See accompanying notes to condensed consolidated financial statements. 4 AVIVA PETROLEUM INC. AND SUBSIDIARIES Condensed Consolidated Statement of Stockholders' Equity (in thousands, except number of shares) (unaudited)

See accompanying notes to condensed consolidated financial statements. 5 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) 1. General The condensed consolidated financial statements of Aviva Petroleum Inc. and subsidiaries (the "Company" or "Aviva") included herein have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the Company's prior audited yearly financial statements and the notes thereto, included in the Company's latest annual report on Form 10-K. In the opinion of the Company, all adjustments, consisting of normal recurring accruals, necessary to present fairly the information in the accompanying financial statements have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year. 2. Property and Equipment Internal general and administrative costs directly associated with oil and gas property acquisition, exploration and development activities have been capitalized in accordance with the accounting policies of the Company. Such costs totaled $31,000 for the six months ended June 30, 2001 and $29,000 for the six months ended June 30, 2000. Unevaluated oil and gas properties totaling $273,000 and $272,000 at June 30, 2001 and December 31, 2000, respectively, have been excluded from costs subject to depletion. The Company capitalized interest costs of $30,000 for the six-month period ended June 30, 2000 on these properties. 3. 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 plans to recomplete certain existing wells and engage in various other projects. The Company's current share of the estimated future costs of these activities is approximately $0.3 million at June 30, 2001. Any substantial increase in the amount of the above referenced expenditures could adversely affect the Company's ability to meet these obligations. The Company expects to fund these activities using existing cash and 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. Failure to fund certain expenditures could result in a decrease in the Company's ownership interest in Argosy Energy International ("Argosy"), a Utah limited partnership which holds the Colombian assets. 6 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) During 1998, leftist Colombian guerrillas inflicted significant damage on Argosy's oil processing and storage facilities. Since that time Argosy has been subject to lesser attacks on its pipelines and equipment resulting in only minor interruptions of oil sales. The Colombian army guards Argosy's operations; however, there can be no assurance that such 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. Management of the Company believes that these litigation matters will not have any material adverse effect on the Company's financial condition or results of operations. 7 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) 4. Segment Information The following is a summary of segment information of the Company as of and for the six-month periods ended June 30, 2001 and 2000 (in thousands):

8 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued)

9 Item 2. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------------- of Operations. -------------- Results of Operations --------------------- Three Months Ended June 30, 2001 compared to Three Months Ended June 30, 2000 -----------------------------------------------------------------------------

Colombian oil volumes were 13,000 barrels in the second quarter of 2001, a decrease of 41,000 barrels as compared to the second quarter of 2000. Such decrease is due to a 33,000 barrel decrease resulting from the transfer of partnership interests to Crosby Capital L.L.C. ("Crosby") and an 8,000 barrel decrease resulting from normal production declines. The transfer of partnership interests to Crosby on June 8, 2000, was part of an overall restructuring plan which eliminated all of the Company's long-term debt. U.S. oil volumes were 9,000 barrels in 2001, down approximately 4,000 barrels from 2000. Such decrease is primarily due to the relinquishment of Main Pass 41 effective November 7, 2000. U.S. gas volumes were 7,000 thousand cubic feet (MCF) in 2001, up 1,000 MCF from 2000. Colombian oil prices averaged $23.38 per barrel during the second quarter of 2001. The average price for the same period of 2000 was $25.42 per barrel. The Company's average U.S. oil price decreased to $25.12 per barrel in 2001, down from $27.49 per barrel in 2000. U.S. gas prices averaged $4.85 per MCF in 2001 compared to $3.56 per MCF in 2000. Service fees of $107,000 for administering the Colombian assets were received in 2001 compared to $55,000 in 2000. The 2001 amount covers three months at a monthly rate of $46,000. The 2000 amount covers only the month of June at a monthly rate of $71,000. The recorded amounts are net of Aviva Overseas' 22.1196% share of the fees. Operating costs decreased approximately 52%, or $387,000, primarily as a result of the transfer of partnership interests to Crosby. Depreciation, depletion and amortization ("DD&A") decreased by 60%, or $97,000, as a result of the transfer of partnership interests to Crosby and a decrease in the amount of oil produced. During 2000, in connection with the restructuring of the Company's long term debt, the Company realized a $3,452,000 gain on the transfer of partnership interests to Crosby and an extraordinary gain of $3,089,000, net of income taxes of $1,591,000, on the extinguishment of a portion of the debt. No similar gains were recorded in 2001. 10 Interest expense decreased $288,000 in 2001 due to the extinguishment of the Company's long-term debt in 2000. Income taxes were $55,000 lower in 2001 principally as a result of the transfer of partnership interests to Crosby. Six Months Ended June 30, 2001 compared to Six Months Ended June 30, 2000 -------------------------------------------------------------------------

Colombian oil volumes were 28,000 barrels in the first half of 2001, a decrease of 102,000 barrels as compared to the first half of 2000. Such decrease is due to an 84,000 barrel decrease resulting from the transfer of partnership interests to Crosby and an 18,000 barrel decrease resulting from production declines. U.S. oil volumes were 18,000 barrels in 2001, down approximately 9,000 barrels from 2000. Such decrease is primarily due to the relinquishment of Main Pass 41 effective November 7, 2000. U.S. gas volumes were 12,000 MCF in 2001, down 1,000 MCF from 2000. Such decrease is due to the relinquishment of Main Pass 41 effective November 7, 2000. Colombian oil prices averaged $22.58 per barrel during the first half of 2001. The average price for the same period of 2000 was $27.00 per barrel. The Company's average U.S. oil price decreased to $25.97 per barrel in 2001, down from $27.56 per barrel in 2000. U.S. gas prices averaged $5.70 per MCF in 2001 compared to $3.07 per MCF in 2000. Service fees of $273,000 for administering the Colombian assets were received in 2001 compared to $55,000 in 2000. The 2001 amount covers six months, whereas the 2000 amount covers only the month of June. These amounts are net of Aviva Overseas' 22.1196% share of the fees. Operating costs decreased approximately 54%, or $839,000, primarily as a result of the transfer of partnership interests to Crosby. DD&A decreased by 67%, or $266,000, primarily as a result of the transfer of partnership interests to Crosby and a decrease in the amount of oil produced. During 2000, in connection with the restructuring of the Company's long term debt, the Company realized a $3,452,000 gain on the transfer of partnership interests to Crosby and an extraordinary gain of $3,089,000, net of income taxes of $1,591,000, on the extinguishment of a portion of the debt. There were no similar gains during 2001. Interest expense decreased $682,000 in 2001 due to the extinguishment of the Company's long-term debt in 2000. 11 Income taxes were $157,000 lower in 2001 principally as a result of the transfer of partnership interests to Crosby. New Accounting Pronouncements ----------------------------- The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended. This statement establishes accounting and reporting standards for derivative instruments and hedging activities and requires the Company to recognize all derivatives on its balance sheet at fair value. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in fair value of the hedged item through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. As of January 1, 2001, the date of adoption, and as of June 30, 2001 and the six-month period then ended, the Company was not a party to any derivative financial instruments. In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method, and SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. As of June 30, 2001 there is no impact on the Company's financial statements as we have not entered into any business combinations and have not acquired goodwill. Also, the FASB has voted to issue SFAS No. 143 "Accounting for Asset Retirement Obligations" which establishes requirements for the accounting of removal-type costs associated with asset retirements. The standard is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company is currently assessing the impact on its financial statements. Liquidity and Capital Resources ------------------------------- Cash and cash equivalents totaled $587,000 and $820,000 at June 30, 2001 and December 31, 2000, respectively. The decrease in cash and cash equivalents resulted primarily from net cash used in operating activities ($152,000) and property additions ($97,000). Net cash used in operating activities was $(152,000) in 2001, compared to $1,313,000 net cash provided by operating activities for 2000. This decrease resulted primarily from the transfer of partnership interests to Crosby, effective June 8, 2000, resulting in lower levels of net cash flow from operations. Additionally, production declines and lower oil prices contributed to the decrease. The Company plans to recomplete certain existing wells and engage in various other projects in Colombia. The Company's current share of the estimated future costs of these development activities is approximately $0.3 million at June 30, 2001. Any substantial increase in the amount of the above referenced expenditures could adversely affect the Company's ability to meet these obligations. The Company expects to fund these activities using existing cash and cash provided from operations. Risks that could adversely affect funding of such activities include, among others, delays in obtaining any required environmental permits, failure to produce the reserves as projected or a decline in the sales price of oil. Any substantial increases in the amounts of these required expenditures could adversely affect the Company's ability to fund these activities. 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. Failure to fund certain expenditures could 12 result in a decrease in the Company's ownership interest in Argosy. The outcome of these matters cannot be projected with certainty. 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, the assessment of geological and geophysical data, 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 commodity prices. 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 ------------ **10.1 Santana Crude Sale and Purchase Agreement dated January 3, 2001. --------------------------------- ** Filed herewith b) Reports on Form 8-K ---------------------- The Company did not file any Current Reports on Form 8-K during or subsequent to the end of the second quarter of 2001. 13 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 13, 2001 /s/ Ronald Suttill ------------------------------------------------ Ronald Suttill President and Chief Executive Officer /s/ James L. Busby ------------------------------------------------ James L. Busby Secretary, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer) 14 INDEX TO EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- **10.1 Santana Crude Sale and Purchase Agreement dated January 3, 2001. ---------------------------- ** Filed herewith 15

AVIVA PETROLEUM INC /TX/ 10-Q