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, 2002 -------------- 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, 2002, was 46,900,132. 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 accounting principles generally accepted in the United States of America 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. Transfer of Partnership Interest Pursuant to the June 8, 2000 agreements with Crosby Capital L.L.C. ("Crosby"), an additional 7.5% limited partnership interest was transferred from Crosby to Aviva effective August 14, 2001, when Crosby received in distributions from Argosy Energy International ("Argosy") an amount equal to $3,500,000 plus interest at the prime rate plus 1%. Argosy is the Utah limited partnership that holds the Company's Colombian properties. The Company's interest in Argosy is 29.6196% after the transfer. The Company proportionately consolidates its interest in Argosy. The excess of net assets over the net liabilities of Argosy attributable to the additional 7.5% partnership interest transferred to the Company effective August 14, 2001 equaled approximately $340,000. Such amount has been credited to the Company's Colombian cost center in accordance with the full cost method of accounting. 3. Property and Equipment Internal general and administrative costs directly associated with oil and gas property acquisition, exploration and development activities have been capitalized in accordance with the accounting policies of the Company. Such costs totaled $48,000 for the six months ended June 30, 2002 and $31,000 for the six months ended June 30, 2001. Unevaluated oil and gas properties totaling $313,000 and $303,000 at June 30, 2002 and December 31, 2001, respectively, have been excluded from costs subject to depletion. 4. Commitments and Contingencies During the latter part of 2001, an offset operator drilled a successful exploratory well approximately 4,000 feet from the eastern boundary of the Company's Breton Sound acreage. Although such operator decided not to participate in prospects located on Aviva's acreage, 6 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) management of the Company is continuing its efforts with other interested parties, with a view towards negotiating an arrangement to explore the Company's Breton Sound prospects. At this time it is not possible to predict the cost, if any, net to the Company, that may arise should management successfully negotiate such an arrangement. The Company is also engaged in ongoing operations in Colombia. The obligations under the Santana contract have been met; however, Argosy plans to recomplete certain existing wells and engage in various other projects. The first of these recompletions is scheduled during 2003, and the majority of the remaining recompletions are scheduled during 2004. The Company's share of the estimated future costs of these activities is approximately $0.2 million at June 30, 2002. The contract obligations of the Rio Magdalena contract require Argosy and its co-owner to perform 40 kilometers of 2D seismic during the initial 18-month exploration phase of the contract. The Company's current share of the estimated future costs of this phase is approximately $74,000 at June 30, 2002. Additional expenditures will be required should Argosy decide to enter into the second phase of the contract. The Company expects to fund its share of the cost of the recompletions on the Santana contract and the seismic commitments on the Rio Magdalena contract using existing cash in Colombia and cash provided from Colombian operations. Any substantial increase in the amount of the above referenced expenditures could adversely affect the Company's ability to fund these activities. Risks that could adversely affect funding of such activities include, among others, delays in obtaining any required environmental 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 projections may be required. The contract obligations of the Guayuyaco contract (signed August 2, 2002) require Argosy to drill one exploratory well during the initial 12-month exploration phase of the contract. Upon completion of the initial exploration phase, Argosy may relinquish the contract or proceed to the following 18-month exploration phase, whereunder Argosy will be obligated to drill a second exploratory well. Argosy plans to involve industry and service company partners to reduce the cost exposure of the first exploratory well. A letter of intent has already been signed with Schlumberger Surenco, S.A. to participate, through provision of services and materials, in the drilling of an exploratory well on our Inchiyaco prospect (formerly Mary East). This well, the Inchiyaco #1, is expected to be an 8,100 foot exploration test of the Villeta U, T, N and Caballos sands in the Inchiyaco structure approximately 500 meters east of the Mary field. Depending on definitive service agreements, rig availability and other contingencies, drilling could commence as early as the fourth quarter of 2002. Failure by Argosy to meet the obligations under the Guayuyaco contract will result in the loss of the proposed contract terms. The existing Santana production will not be affected. Failure by the Company to fund its share of Argosy's obligations, assuming Argosy funds the obligation, could result in a decrease in the Company's ownership interest in Argosy. In order to accumulate the funds necessary to drill the Inchiyaco #1, management of Argosy has decided to suspend cash distributions from Argosy to its partners (including Aviva) beginning in June 2002. Accordingly, Aviva cannot expect to receive cash distributions from Argosy during 7 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) the foreseeable future. Even if such an exploratory well were successful, additional funds may be required to equip and complete such a well prior to the resumption of cash distributions. As of June 30, 2002, approximately $261,000 of cash and cash equivalents included in the Company's consolidated cash and cash equivalents balance was held by Argosy and is not available to the Company for use outside of Colombia. The remaining balance of $368,000 is under the direct control of Aviva and is available for its U.S. operations. As indicated in note 5 to the condensed consolidated financial statements, the U.S. operations have suffered a net operating loss of approximately $423,000 for the six-month period ended June 30, 2002, and are expected to continue to have operating losses in the foreseeable future. Although the Company is currently receiving a higher price ($25.02 per barrel) for its Breton Sound oil production ($22.36 per barrel during the first six months of 2002), it is unlikely that such improvement in price will result in a significant improvement in the results of operations for the U.S. Accordingly, if management is unable to successfully implement its plans as set forth below or if distributions from Argosy do not resume, the Company's liquidity will continue to deteriorate and at some point, possibly as early as mid-2003, the Company may be unable to continue as a going concern. In order to improve the Company's liquidity, management of the Company is working to raise additional capital through equity issues, incurring debt or by sales of assets. Although the ultimate outcome of these matters cannot be projected with certainty, management believes that the Company's existing capital resources plus the capital that management expects to raise, will be adequate to fund the Company's current obligations. There can be no assurance, however, that such attempts to raise additional capital will be successful. 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 the Company'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. During 2001 the cost of such insurance became prohibitively high and, accordingly, Argosy has elected to no longer maintain terrorism insurance. 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 8 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) 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. 9 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) 5. Segment Information The following is a summary of segment information of the Company as of and for the six-month periods ended June 30, 2002 and 2001 (in thousands): United States Colombia Total ------ -------- ----- 2002 ---- Revenue: Oil and gas sales $ 339 $ 558 $ 897 Service fees 97 -- 97 ------- ------- ------- 436 558 994 ------- ------- ------- Expense: Production 355 243 598 Depreciation, depletion and amortization 99 49 148 General and administrative 428 57 485 ------- ------- ------- 882 349 1,231 ------- ------- ------- Interest and other income (expense), net 25 65 90 Interest expense (2) -- (2) ------- ------- ------- Net earnings (loss) before income taxes (423) 274 (149) Income taxes -- (39) (39) ------- ------- ------- Net earnings (loss) $ (423) $ 235 $ (188) ======= ======= ======= Total assets $ 1,351 $ 1,401 $ 2,752 ======= ======= ======= 10 AVIVA PETROLEUM INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) (continued) United States Colombia Total ------ -------- ----- 2001 ---- Revenue: Oil and gas sales $ 546 $ 629 $ 1,175 Service fees 273 -- 273 ------- ------- ------- 819 629 1,448 ------- ------- ------- Expense: Production 432 283 715 Depreciation, depletion and amortization 73 58 131 General and administrative 527 53 580 Recovery of losses on accounts receivable (29) -- (29) ------- ------- ------- 1,003 394 1,397 ------- ------- ------- Interest and other income (expense), net 36 137 173 Interest expense (2) -- (2) ------- ------- ------- Earnings (loss) before income taxes (150) 372 222 Income taxes -- (36) (36) ------- ------- ------- Net earnings (loss) $ (150) $ 336 $ 186 ======= ======= ======= Total assets $ 1,724 $ 1,417 $ 3,141 ======= ======= ======= 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------------- of Operations. ------------- Results of Operations --------------------- Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001 -----------------------------------------------------------------------------

Colombian oil volumes were 15,000 barrels in the second quarter of 2002, an increase of 2,000 barrels as compared to the second quarter of 2001. Such increase is due to a 4,000 barrel increase resulting from the transfer of a 7.5% partnership interest to Aviva from Crosby Capital L.L.C. ("Crosby") (see note 2 to the condensed consolidated financial statements) offset partially by a 2,000 barrel decrease resulting from normal production declines. U.S. oil volumes were 9,000 barrels in 2002, approximately the same as 2001. U.S. gas volumes were 6,000 thousand cubic feet (MCF) in 2002, down 1,000 MCF from 2001. Colombian oil prices averaged $19.88 per barrel during the second quarter of 2002. The average price for the same period of 2001 was $23.38 per barrel. The Company's average U.S. oil price decreased to $24.19 per barrel in 2002, down from $25.12 per barrel in 2001. U.S. gas prices averaged $3.45 per MCF in 2002 compared to $4.85 per MCF in 2001. Service fees of $107,000 for administering the Colombian assets were received in 2001. The 2001 amount covers three months at a monthly rate of $46,000, net of Aviva Overseas' 22.1196% (29.6196% after August 14, 2001) share of the fees. No service fees were recorded in the second quarter of 2002 because the service contract was cancelled effective March 31, 2002. Operating costs decreased approximately 7%, or $26,000, primarily as a result of the absence of Colombian crude oil transportation charges in 2002. Such transportation charges (approximately $1.82 per barrel in 2001) are included as a deduction to the oil sales price in 2002 pursuant to the latest oil sales agreement with Ecopetrol. Depreciation, depletion and amortization ("DD&A") increased by 32%, or $21,000, due to an increase in the U.S. DD&A rate per barrel that resulted from a decrease in the U.S. proved reserves. General and administrative ("G&A") expense decreased $72,000 or 25% primarily due to lower public ownership costs, lower insurance costs, and an increase in the amount of G&A expense capitalized for Colombian activities. 12 Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001 -------------------------------------------------------------------------

Colombian oil volumes were 31,000 barrels in the first half of 2002, an increase of 3,000 barrels as compared to the first half of 2001. Such increase is due to an 8,000 barrel increase resulting from the transfer of a 7.5% partnership interest to Aviva from Crosby (see note 2 to the condensed consolidated financial statements) offset partially by a 5,000 barrel decrease resulting from production declines. U.S. oil volumes were 14,000 barrels in 2002, down approximately 4,000 barrels from 2001. Such decrease is primarily due to the Company's Breton Sound 31 field, and certain wells therein, being shut-in for various periods during the first half of 2002 as a result of equipment failures. U.S. gas volumes were 10,000 MCF in 2002, down 2,000 MCF from 2001 as a result of the aforementioned equipment failures. Colombian oil prices averaged $18.10 per barrel during the first half of 2002. The average price for the same period of 2001 was $22.58 per barrel. The Company's average U.S. oil price decreased to $22.36 per barrel in 2002, down from $25.97 per barrel in 2001. U.S. gas prices averaged $2.96 per MCF in 2002 compared to $5.70 per MCF in 2001. Service fees of $97,000 for administering the Colombian assets were received in 2002 compared to $273,000 in 2001. The 2002 amount covered three months at an average monthly rate of $46,000, whereas the 2001 amount covered six months, three months at a monthly rate of $71,000 and three months at a monthly rate of $46,000. These amounts are net of Aviva Overseas' 22.1196% (29.6196% after August 14, 2001) share of the fees. The service contract was cancelled effective March 31, 2002. Operating costs decreased approximately 16%, or $117,000, primarily as a result of a decrease in the cost of lease fuel in the U.S. due to lower gas prices and the absence of Colombian crude oil transportation charges in 2002. Such transportation charges (approximately $1.82 per barrel in 2001) are included as a deduction to the oil sales price in 2002 pursuant to the latest oil sales agreement with Ecopetrol. DD&A increased by 13%, or $17,000, due to an increase in the U.S. DD&A rate per barrel that resulted from a decrease in the U.S. proved reserves. G&A expenses decreased $95,000, or 16%, primarily due to lower public ownership costs, lower insurance costs, and an increase in the amount of G&A expense capitalized for Colombian activities. 13 New Accounting Pronouncements ----------------------------- In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. On October 3, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. The Company adopted SFAS No. 144 in the first quarter of 2002. The adoption had no material impact on the Company's financial statements. Liquidity and Capital Resources ------------------------------- Cash and cash equivalents totaled $629,000 and $1,010,000 at June 30, 2002 and December 31, 2001, respectively, a portion of which is only available for Colombian operations as discussed below. The decrease in cash and cash equivalents resulted primarily from net cash used in operating activities ($330,000) and property additions ($55,000). Net cash used in operating activities was ($330,000) in 2002, compared to ($152,000) net cash used in operating activities for 2001. This decrease resulted primarily from lower oil and gas prices received for the Company's production and lower U.S. oil volumes resulting from equipment failures during the first half of 2002. These decreases were partially offset by a smaller change in working capital. During the latter part of 2001, an offset operator drilled a successful exploratory well approximately 4,000 feet from the eastern boundary of the Company's Breton Sound acreage. Although such operator decided not to participate in prospects located on Aviva's acreage, management of the Company is continuing its efforts with other interested parties with a view towards negotiating an arrangement to explore the Company's Breton Sound prospects. At this time it is not possible to predict the cost, if any, net to the Company, that may arise should management successfully negotiate such an arrangement. The Company is also engaged in ongoing operations in Colombia. The obligations under the Santana contract have been met; however, Argosy plans to recomplete certain existing wells and engage in various other projects. The first of these recompletions is scheduled during 2003, and the majority of the remaining recompletions are scheduled during 2004. The Company's share of the estimated future costs of these activities is approximately $0.2 million at June 30, 2002. The contract obligations of the Rio Magdalena contract require Argosy and its co-owner to perform 40 kilometers of 2D seismic during the initial 18-month exploration phase of the contract. The Company's current share of the estimated future costs of this phase is approximately $74,000 at June 30, 2002. Additional expenditures will be required should Argosy decide to enter into the second phase of the contract. The Company expects to fund its share of the cost of the recompletions on the Santana contract and the seismic commitments on the Rio Magdalena contract using existing cash in Colombia and cash provided from Colombian operations. Any substantial increase in the amount of the above referenced expenditures could adversely affect the Company's ability to fund these activities. Risks that could 14 adversely affect funding of such activities include, among others, delays in obtaining any required environmental 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 projections may be required. The contract obligations of the Guayuyaco contract (signed August 2, 2002) require Argosy to drill one exploratory well during the initial 12-month exploration phase of the contract. Upon completion of the initial exploration phase, Argosy may relinquish the contract or proceed to the following 18-month exploration phase, whereunder Argosy will be obligated to drill a second exploratory well. Argosy plans to involve industry and service company partners to reduce the cost exposure of the first exploratory well. A letter of intent has already been signed with Schlumberger Surenco, S.A. to participate, through provision of services and materials, in the drilling of an exploratory well on our Inchiyaco prospect (formerly Mary East). This well, the Inchiyaco #1, is expected to be an 8,100 foot exploration test of the Villeta U, T, N and Caballos sands in the Inchiyaco structure approximately 500 meters east of the Mary field. Depending on definitive service agreements, rig availability and other contingencies, drilling could commence as early as the fourth quarter of 2002. Failure by Argosy to meet the obligations under the Guayuyaco contract will result in the loss of the proposed contract terms. The existing Santana production will not be affected. Failure by the Company to fund its share of Argosy's obligations, assuming Argosy funds the obligation, could result in a decrease in the Company's ownership interest in Argosy. In order to accumulate the funds necessary to drill the Inchiyaco #1, management of Argosy has decided to suspend cash distributions from Argosy to its partners (including Aviva) beginning in June 2002. Accordingly, Aviva cannot expect to receive cash distributions from Argosy during the foreseeable future. Even if such an exploratory well were successful, additional funds may be required to equip and complete such a well prior to the resumption of cash distributions. As of June 30, 2002, approximately $261,000 of cash and cash equivalents included in the Company's consolidated cash and cash equivalents balance was held by Argosy and is not available to the Company for use outside of Colombia. The remaining balance of $368,000 is under the direct control of Aviva and is available for its U.S. operations. As indicated in note 5 to the condensed consolidated financial statements, the U.S. operations have suffered a net operating loss of approximately $423,000 for the six-month period ended June 30, 2002, and are expected to continue to have operating losses in the foreseeable future. Although the Company is currently receiving a higher price ($25.02 per barrel) for its Breton Sound oil production ($22.36 per barrel during the first six months of 2002), it is unlikely that such improvement in price will result in a significant improvement in the results of operations for the U.S. Accordingly, if management is unable to successfully implement its plans as set forth below or if distributions from Argosy do not resume, the Company's liquidity will continue to deteriorate and at some point, possibly as early as mid-2003, the Company may be unable to continue as a going concern. In order to improve the Company's liquidity, management of the Company is working to raise additional capital through equity issues, incurring debt or by sales of assets. Although the ultimate outcome of these matters cannot be projected with certainty, management believes that the Company's existing capital resources plus the capital that management expects to raise, will be adequate to fund the Company's current obligations. There can be no assurance, however, that such attempts to raise additional capital will be successful. 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 15 equipment resulting in only minor interruptions of oil sales. The Colombian army guards the Company'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. During 2001 the cost of such insurance became prohibitively high and, accordingly, Argosy has elected to no longer maintain terrorism insurance. 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. 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 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. 16 PART II - OTHER INFORMATION --------------------------- Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- a) Exhibits ------------ **99.1 Certification of Chief Executive Officer. **99.2 Certification of Chief Financial Officer. ---------- ** 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 2002. 17 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 9, 2002 /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) 18 INDEX TO EXHIBITS Exhibit Number Description of Exhibit ------ ---------------------- **99.1 Certification of Chief Executive Officer. **99.2 Certification of Chief Financial Officer. ---------- ** Filed herewith 19

AVIVA PETROLEUM INC /TX/ 10-Q