<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
XX EXCHANGE OF 1934
----
For the quarterly period ended June 30, 2000
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: 000-28463
AROC Inc.
---------
(Exact name of registrant as specified in its charter)
England and Wales 73-2932492
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (918) 491-1100
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 Act of 1934 during the
preceding 12 months (or for such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of October 15, 2000, there were 55,278,837 shares of the Registrant's
common stock outstanding and 10,000,000 convertible restricted voting shares
outstanding of the Registrant.
<PAGE>
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Financial Statements Page
Consolidated Condensed Balance Sheets as of
June 30, 2000 and December 31, 1999 3
Consolidated Condensed Statements of Operations
for the three and six months ended June 30, 2000 and 1999 4
Consolidated Condensed Statement of Stockholders' Equity (Deficit) and
Comprehensive Income (Loss) - Six months ended June 30, 2000 5
Consolidated Condensed Statements of Cash Flows -
Six months ended June 30, 2000 and 1999 6
Notes to Consolidated Condensed Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II - OTHER INFORMATION
The information called for by Item 1. Legal Proceedings, Item 2.
Changes in Securities, Item 3. Default Upon Senior Securities, Item 4.
Submission of Matters to a Vote of Security Holders, Item 5. Other
Information has been omitted as either inapplicable or because the
answer thereto is negative or has been described in the Form 8-K/A filed
October 27, 2000.
Item 6. Exhibit and Reports on Form 8-K 20
SIGNATURES 21
</TABLE>
Cautionary Statement Regarding Forward Looking Statements
In the interest of providing the Company's stockholders and potential
investors with certain information regarding the Company's future plans and
operations, certain statements set forth in this Form 10-Q relate to
management's future plans and objectives. Such statements are "forward-
looking statements" within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Although any forward-looking statements contained in this
Form 10-Q or otherwise expressed by or on behalf of the Company are, to the
knowledge and in the judgment of the officers and directors of the Company,
expected to prove true and to come to pass, management is not able to
predict the future with absolute certainty. Forward looking statements
involve known and unknown risks and uncertainties which may cause the
Company's actual performance and financial results in future periods to
differ materially from any projection, estimate or forecasted result. These
risks and uncertainties include, among other things, volatility of oil and
gas prices, competition, risks inherent in the Company's oil and gas
operations, the inexact nature of interpretation of seismic and other
geological and geophysical data, imprecision of reserve estimates, the
Company's ability to replace and expand oil and gas reserves, and such
other risks and uncertainties described from time to time in the Company's
periodic reports and filings with the Securities and Exchange Commission.
Accordingly, stockholders and potential investors are cautioned that
certain events or circumstances could cause actual results to differ
materially from those projected, estimated, or predicted.
2
<PAGE>
AROC INC. AND SUBSIDIARIES
(Formerly EnCap 1996 LP)
Consolidated Condensed Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
-------------- -----------------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 1,037,324 $ 901,546
Accounts receivable - trade 4,403,536 923,813
Other current assets 921,708 -
Marketable equity securities - available for sale - 322,166
------------ ------------
Total current assets 6,362,568 2,147,525
------------ ------------
Property, plant, and equipment, at cost:
Oil and gas properties (using full cost method)
US properties 98,052,230 16,656,780
UK properties 16,910,865 -
Other depreciable assets 484,748 -
------------ ------------
115,447,843 16,656,780
Less accumulated depreciation, depletion and impairments (4,339,186) (3,094,393)
------------ ------------
Net property, plant and equipment 111,108,657 13,562,387
------------ ------------
Other assets:
Deposits and other assets 206,598 -
Deferred loan costs, less accumulated amortization 1,980,408 -
------------ ------------
Total other assets 2,187,006 -
------------ ------------
TOTAL ASSETS $119,658,231 $ 15,709,912
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,476,911 $ 486,676
Accrued expenses payable 1,200,919 -
Preferred dividend payable 1,483,585
Payable to affiliates - 78,872
------------ ------------
Total current liabilities 10,161,415 565,548
Long-term Liabilities:
Long-term debt (net of discount of $4,631,973
at June 30, 2000) 30,868,027 -
------------ ------------
Total Liabilities 41,029,442 565,548
------------ ------------
Redeemable preferred shares - par value $0.001; 2,200,000 authorized;
1,780,292 issued and outstanding at June 30, 2000 89,014,600 -
Stockholders' equity (deficit):
Common shares - par value $0.001; 100,000,000
authorized; 55,278,837 and 48,678,837 issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 55,279 48,679
Convertible shares - par value $0.001; 10,000,000
authorized; 10,000,000 issued and outstanding 10,000 10,000
Additional paid-in-capital 2,088,738 25,741,395
Unearned compensation - restricted stock (808,000) -
Accumulated other comprehensive loss - (213,123)
Accumulated deficit (11,731,828) (10,442,587)
------------ ------------
Total stockholders' equity (deficit) (10,385,811) 15,144,364
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $119,658,231 $ 15,709,912
============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Three Six Six
Months Ended Months Ended Months Ended Months Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Oil and gas revenues $ 4,465,346 $ 822,840 $ 5,544,506 $ 1,378,243
Operating expenses:
Lease operating expense 1,762,792 544,812 2,407,384 1,046,810
Depreciation, depletion, and amortization 1,048,897 163,568 1,244,792 346,790
General and administrative expense 547,277 140,729 647,653 205,854
------------ ------------ ------------ ------------
Total operating expenses 3,358,966 849,109 4,299,829 1,599,454
------------ ------------ ------------ ------------
Income (loss) from operations 1,106,380 (26,269) 1,244,677 (221,211)
Other income (expense):
Impairment write-down and loss on sale of
marketable equity securities (262,687) (3,661,329) (262,688) (4,148,814)
Interest expense (755,733) - (755,733) -
Miscellaneous income/(expense) (21,644) 884 (31,912) 418
Equity in net losses of affiliate - - - (4,251,961)
------------ ------------ ------------ ------------
Net income (loss) 66,316 (3,686,714) 194,344 (8,621,568)
Preferred stock dividend requirements 1,483,585 - 1,483,585 -
------------ ------------ ------------ ------------
Net income (loss) attributable to common stockholders $ (1,417,269) $ (3,686,714) $ (1,289,241) $ (8,621,568)
============ ============ ============ ============
Basic (loss) per share $ (0.03) $ (0.07) $ (0.02) $ (0.16)
============ ============ ============ ============
Weighted average number of common shares outstanding 53,678,837 53,678,837 53,678,837 53,678,837
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Condensed Statement of Stockholders' Equity (Deficit)
and Comprehensive Income/(Loss)
Six Months Ended June 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
Unearned Accumulated
Additional Compensation Other
Common Convertible Paid-in Restricted Comprehensive Accumulated
Shares Shares Capital Stock Loss Deficit Total
-------- ----------- ------------ ----------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, $ 48,679 $ 10,000 $ 25,741,395 $ - $ (213,123) $ (10,442,587) $ 15,144,364
1999
Contributions - - 88,366 - - - 88,366
Distributions - - (1,093,663) - - - (1,093,663)
Issuance of preferred stock - - (28,243,708) - - - (28,243,708)
Warrants issued to lender - - 4,744,948 - - - 4,744,948
Issuance of restricted stock 6,600 - 851,400 (858,000) - - -
Preferred stock dividends - - - - - (1,483,585) (1,483,585)
Vesting of restricted stock -
compensation expense - - - 50,000 - - 50,000
Comprehensive income:
Net income - - - - - 194,344 194,344
Change in net unrealized
loss of investments - - - - 213,123 - 213,123
------------
Total comprehensive
income 407,467
-------- -------- ------------ ---------- ---------- ------------- ------------
Balance at June 30, 2000 $ 55,279 $ 10,000 $ 2,088,738 $ (808,000) $ - $ (11,731,828) $(10,385,811)
======== ======== ============ ========== ========== ============= ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
AROC INC. AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended Ended
June 30, 2000 June 30, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activites:
Net income (loss) $ 194,344 $(8,621,568)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activites:
Depreciation, depletion and amortization 1,244,792 346,790
Impairment writedown and loss on sale of marketable securities 262,688 4,148,814
Compensation expense 50,000 -
Other asset amortization 177,850 -
Equity in net losses in affiliate - 4,251,961
Changes in assets and liabilities, net effects from acquisitions
Accounts receivable (933,225) 463,463
Other assets (813,432) -
Accounts payable and accrued expenses (2,039,048) (128,309)
----------- -----------
Net cash provided by (used in) operating activities (1,856,031) 461,151
----------- -----------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties 139,541 -
Additions of property and equipment (1,706,183) (1,005,457)
Proceeds from sale of marketable securities available for sale - 2,657,223
Acquisition of AROC 578,839 -
----------- -----------
Net cash provided by (used in) investing activities (987,803) 1,651,766
----------- -----------
Cash flows from financing activities:
Deferred loan costs (1,144,891) -
Payments of long-term debt (40,345,951) -
Proceeds from issuance of preferred stock 2,703,150 -
Proceeds from issuance of long-term debt 42,500,000 -
Contributions 88,366 1,046,803
Distributions (821,062) (2,758,560)
----------- -----------
Net cash provided by (used in) financing activities 2,979,612 (1,711,757)
----------- -----------
Net increase (decrease) in cash 135,778 401,160
Cash and cash equivalents at beginning of period 901,546 396,822
----------- -----------
Cash and cash equivalents at end of period $ 1,037,324 $ 797,982
=========== ===========
Supplemental disclosures of cash flow information -
Cash paid during the period for interest $ 21,000 $ -
=========== ===========
Supplemental disclosures of noncash investing and financing activities:
Distribution of stock $ 272,601 $ -
Preferred shares issued for banking fees 962,000 -
Preferred shares issued to refinance debt 35,299,439 -
Preferred shares to purchase oil and gas properties
and acquisition of old AROC 21,805,304 -
Change to stockholders' equity for issuance of preferred stock 28,243,708 -
</TABLE>
See accompanying notes to consolidated condensed financial statements
6
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
A. Summary of Significant Accounting Policies
Basis of Presentation
---------------------
These financial statements have been prepared by AROC Inc. (AROC or the Company)
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission, and reflect all adjustments which are, in the opinion of
management, necessary for a fair statement of the results for the interim
periods, on a basis consistent with the annual audited financial statements. All
such adjustments are of a normal, recurring nature. Certain information,
accounting policies, and footnote disclosure normally included in financial
statements prepared in accordance with generally accepted principles have been
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. These financial statements should be read in conjunction with the
AROC, EnCap Acquisition and Pro Forma financial statements and the notes thereto
included in the Company's most recent Form 8-K.
Consolidation
-------------
The consolidated financial statements include the financial statements of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Loss Per Share
--------------
Basic loss per share has been computed by dividing the net loss attributable to
common stockholders by the weighted average number of common shares and
convertible shares (convertible at any time into a minimum of 5,000,000 common
shares) outstanding during the periods presented.
The effect of potential common shares (options, warrants and restricted stock)
is anti-dilutive. Accordingly, diluted loss per share is not presented.
Foreign Currency Translation
----------------------------
The financial statements of subsidiaries of the Company whose functional
currency is not U.S. dollars are translated for consolidation purposes at the
rate of exchange at the balance sheet date. Exchange differences arising on the
retranslation of net assets are reported as a component of stockholders' equity
(deficit) in accumulated other comprehensive loss. In the underlying financial
statements, transactions with third parties are translated into the functional
currency at the exchange rate prevailing at the date of each transaction.
Monetary assets and liabilities denominated in currencies other than the
functional currency are translated into U.S. dollars at the exchange rate
prevailing at the balance sheet date. Any exchange gain or loss is recorded in
the consolidated statements of operations. Translation and exchange gains or
losses for the periods presented were immaterial.
7
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Depreciation of Other Fixed Assets
----------------------------------
Other tangible fixed assets are stated at cost less accumulated depreciation.
Depreciation is provided on a straight line basis to write off the cost of
assets, net of estimated residual values, over their estimated useful lives as
follows:
Fixtures and equipment - 3 to 7 years
Buildings - 30 years
Deferred Taxation
-----------------
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in the consolidated statement of operations in
the period that includes the enactment date.
For the periods presented and at June 30, 2000, the Company had net deferred tax
assets reduced by a valuation allowance to zero because it was not more likely
than not such deferred tax assets will be realized.
Debt Issuance Costs
-------------------
Debt issuance costs are initially capitalized and are amortized (interest
method) over the term of the debt to which they relate.
Stock Option Plan
-----------------
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations, in accounting for its fixed plan
stock options. As such, compensation expense would be recorded on the date of
grant only if the current market price of the underlying stock exceeded the
exercise price. Financial Accounting Standards Board Statement (FAS) 123,
"Accounting for Stock-Based Compensation," established accounting and disclosure
requirements using a fair value-based method of accounting for stock-based
employee compensation plans. As allowed by FAS 123, the Company has elected to
continue to apply the intrinsic value-based method of accounting described
above, and has adopted the disclosure requirement of FAS 123.
Business Segments
-----------------
The Company considers itself to be involved in one business activity and does
not meet the criteria established by Financial Accounting Standards Board
Statement FAS 131, "Segment Disclosures and Related Information".
8
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Revenues and loss from operations from United Kingdom (UK) production was
$474,421 and $12,729 for the three and six months ended June 30, 2000,
respectively. Capital expenditures for the same periods were $369,000. The UK
oil and gas properties were acquired in May 2, 2000 in connection with the old
AROC reverse acquisition (see note B).
B. Significant Events
As a result of the May 2, 2000 transactions described below, EnCap Equity 1996
Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for accounting
purposes. Accordingly, the transactions have been accounted for as a reverse
acquisition and EnCap 1996 LP is now referred to as AROC or the Company. The
historical financial statements are those of EnCap 1996 LP, which have been
restated for the equivalent number of shares received in the merger. The results
of operations of AROC (legal acquirer) will be included in the financial
statements of the combined AROC and EnCap 1996 LP financial statements from May
2, 2000 (acquisition date).
On May 2, 2000, pursuant to four separate Purchase and Sale agreements by and
between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP), (ii) Energy
Capital Investment Company PLC (ECIC) and ECIC Corporation, (iii) EnCap 1996 LP,
and (iv) Mountaineer Limited Partnership (together the Sellers) and old AROC,
old AROC acquired direct or indirect ownership of oil and gas properties located
in Texas, Louisiana, New Mexico and Wyoming (EnCap Acquisition). The properties
were acquired in exchange for the issuance to the Sellers of an aggregate of
930,140 shares of the Company's Series A Redeemable Preferred Stock.
Also, on May 2, 2000, old AROC sold to Bank of America, EnCap 1996 LP, ECIC, El
Paso Capital Investments, L.L.C. (El Paso), EF-II Holdings, LLC (EF-II), Picosa
Creek Limited Partnership (Picosa) and EnCap Investments, L.L.C. (EnCap
Investments) 850,163 shares of the Company's newly created Series A Redeemable
Preferred Stock for a total consideration of approximately $42.5 million,
received in satisfaction of outstanding obligations to those parties and in
consideration of cash (approximately $2,700,000) and the purchase of an oil and
gas property interest (valued at approximately $2,000,000).
The Series A Redeemable Preferred Stock accrues cumulative dividends at the rate
of $5.00 per share per year, payable semiannually. Until May 1, 2002, dividends
are payable in kind through the issuance of additional shares of preferred stock
at a price equal to the fair market value of the preferred stock at the time of
the payment. The preferred stock has a liquidation preference of $50.00 per
share and may be redeemable at $50.00 per share at either AROC's or the holder's
option upon the occurrence of certain events. Each share of preferred stock is
convertible at any time into 384.6 shares of AROC's common stock and has the
right to vote in all matters on the same basis as if the preferred stock had
been converted into common stock. The terms of the preferred stock prohibit AROC
from taking certain actions without the consent of the holders of the preferred
stock. Upon the first to occur of (1) an event of default, as defined, or (2)
May 1, 2005, each holder of a share of Series A Redeemable Preferred Stock shall
be entitled to require that AROC redeem all of the Series A Redeemable Preferred
Stock held by such holder by
9
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
paying in cash the redemption price ($50.00 per share plus unpaid dividends).
The charge to stockholders' equity of $28,243,708 for the issuance of redeemable
preferred stock represents the difference between fair value ($50 per share) of
Series A Redeemable Preferred Stock issued by old AROC to acquire oil and gas
properties from EnCap 1996 LP and the historical cost of those oil and gas
properties as EnCap 1996 LP is the accounting acquirer.
Pursuant to a Credit Agreement dated as of May 2, 2000, among AROC, Toronto
Dominion (Texas), Inc., individually and as Agent, and the lenders named in that
agreement (the "Credit Agreement"), the Company obtained a new $35,000,000
credit facility. The credit facility is secured by a first lien on substantially
all of the Company's assets. The credit facility imposes certain restrictions on
the Company's activities, including the payment of dividends and purchases of
stock. The credit facility provides for a revolving line of credit for three
years. Borrowings under the credit facility bear interest at either the LIBOR
rate plus from 1.75% to 2.5% or the agent's prime rate plus from .25% to 1.0%,
at the Company's election. Interest is payable quarterly beginning July 31,
2000. Principal is payable in full on the third anniversary of the closing of
the credit facility. The borrowing base for the credit facility will typically
be redetermined semiannually, although the lenders and borrowers have the right
to make a redetermination at any time.
In addition, on May 2, 2000, old AROC entered into a purchase agreement
providing for the sale to EnCap 1996 LP, ECIC and El Paso of a total of
$17,000,000 in subordinated notes in exchange for cash in that amount. The
subordinated notes bear interest at the rate of 12% per year, payable
semiannually. Principal is due May 1, 2007. Until May 1, 2002, interest is
payable in kind by increasing the principal amount of the debt. Additionally,
old AROC also issued to EnCap 1996 LP, ECIC and El Paso warrants to purchase a
total of 39,541,233 shares of AROC's common stock at a price of $0.01 per share
at any time until April 30, 2007 pursuant to such purchase agreement. The fair
value of the warrants ($4,744,948) relating to the subordinated notes has been
treated as a discount.
After these transactions, AROC has outstanding 55,278,837 shares of common
stock, 10,000,000 convertible restricted voting shares, warrants to purchase
45,813,963 shares of common stock, and 1,780,303 shares of Series A Redeemable
Preferred Stock that are convertible into an aggregate of 684,731,923 shares of
common stock.
Old AROC had a fiscal year-end of April 30 while EnCap 1996 LP has a December 31
year-end. As a result of these transactions, the combined entity has adopted a
December 31 year-end.
The Company is engaged in the exploration, development, production and
operations of oil and gas properties. Operations are primarily conducted in
Texas, Louisiana, New Mexico and Wyoming and as a result of the May 2, 2000
reverse AROC acquisition, Oklahoma, Mississippi, Alabama, Arkansas and the
United Kingdom.
10
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
The fair value of the assets and liabilities of the acquired businesses (EnCap
Acquisition and AROC) at May 2, 2000 is as follows (in thousands):
<TABLE>
<S> <C>
Cash $ 578
Other current assets 2,654
Other assets 145
Property, plant and equipment 97,224
Long-term debt (68,645)
Current liabilities (10,151)
--------
Net purchase price $ 21,805
========
</TABLE>
The net purchase price includes $21,097,000 for EnCap Acquisition (interests in
certain oil and gas properties) and $708,000 for old AROC. The EnCap Acquisition
properties were acquired in exchange for preferred stock as described above. The
old AROC acquisition represents the purchase step-up resulting from the reverse
acquisition (discussed in note A) of the remaining 80% of old AROC common stock
not already owned by EnCap Equity 1996 LP. The purchase price (step-up) was
based on the equivalent common stock value ($0.13 per share) of the Series A
Redeemable Preferred Stock discussed above. The net purchase price was allocated
to the acquired assets and liabilities based on their relative fair values.
The following summarized unaudited pro forma results of operations for the six
months ended June 30, 2000 and 1999, assumes that the May 2, 2000: (i) reverse
acquisition of AROC Inc. (legal acquirer) by EnCap 1996 LP (accounting
acquirer), (ii) the acquisition of interests in oil and gas properties (EnCap
Acquisition) and (iii) the refinancing of AROC debt, all occurred as of January
1, 1999. The information is presented in thousands with the exception of the per
share information.
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 2000 June 30, 1999
---------------- ----------------
<S> <C> <C>
Total oil and gas revenues $ 12,262 $ 4,848
======== ========
Net loss $ (2,059) $(33,162)
======== ========
Net loss available for common shareholders $ (6,509) $(37,613)
======== ========
Net loss per common share $ (0.12) $ (0.72)
======== ========
</TABLE>
11
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
C. Stock Incentive Plan
In April, 2000, the Company adopted the 2000 Omnibus Stock and Incentive Plan
(the Stock Plan). This plan is intended to provide additional incentives through
the award of options, stock appreciation rights, shares of restricted stock, and
performance awards to directors, officers, key employees and consultants.
In April, 2000, the Company granted 6,600,000 shares of restricted stock to the
directors, officers and certain key employees. Under the Stock Plan, the shares
vest in equal increments in April 2001, 2002, and 2003 or upon a change in
control of the Company as defined in the Stock Plan. The estimated market value
of shares awarded was $858,000. This amount was recorded as unearned
compensation-restricted stock and is shown as a separate component of
stockholders' equity. Unearned compensation will be amortized to expense over
the three year vesting period.
D. Warrants
The following is a summary of warrants outstanding as of June 30, 2000:
<TABLE>
<CAPTION>
Warrant series Strike price Last date for exercise Shares
<S> <C> <C> <C>
Series "D" $0.86 March 31, 2001 287,119
Series "E" $0.86 October 31, 2001 30,953
Series "F" $1.38 December 16, 2002 275,139
Series "G" $1.60 April 30, 2007 1,210,938
Series "H" $0.01 October 30, 2008 3,275,000
Series "I" $0.01 April 30, 2007 1,193,581
Series "J" $0.01 April 30, 2007 39,541,233
-----------
Total Warrants 45,813,963
===========
</TABLE>
E. Contingencies and Commitments
The Company is a named defendant in lawsuits, and is subject to claims of third
parties from time to time arising in the ordinary course of business. While the
outcome of lawsuits or other proceedings and claims against the Company cannot
be predicted with certainty, management does not believe the outcome of these
lawsuits will have material adverse effect on the financial position, results of
operations or liquidity of the Company.
12
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------
Results of Operations
---------------------
AROC reported a 2000 second quarter net loss attributable to common shareholders
of $1.417 million compared to a loss of $3.687 million in the prior year. The
significant reduction in net loss was due to the May 2, 2000 transactions
discussed earlier. As a result, oil and gas revenues substantially increased but
were partially offset by higher DD&A expense, lease operating costs and G&A
costs.
For the first half of 2000, loss attributable to common shareholders was $1.289
million or $0.02 per share, compared to a loss of $8.622 million, or $0.16 per
share, in the comparable year-earlier period. The increase resulted primarily
from increased oil and gas production revenues associated with the May 2, 2000
transactions described earlier partially offset by higher DD&A expense, lease
operating costs and G&A costs.
Volume, sales price and expense information for the Company's oil and gas
production is summarized in the following table:
<TABLE>
<CAPTION>
Six Months Ended June 30
2000 1999
US UK US UK
-------------- ------------
<S> <C> <C> <C> <C>
Net Sales Volumes:
Oil (Mbbls) 160 - 80 -
Natural Gas (Mmcf) 477 231 191 -
Oil Equivalent (MBOE) 239 39 111 -
Average Sales Prices:
Oil (per Bbl) $23.33 - $12.69 -
Gas (per Mcf) $ 3.07 $2.05 $ 1.93 -
Operating Expenses per
BOE of Net Sales:
Lease operating $ 4.61 $6.56 $ 8.77 -
Severance tax $ 0.83 $ - $ 0.66 -
Depreciation, depletion,
and amortization $ 4.44 $4.72 $ 3.12 -
General and administrative $ 1.75 $1.35 $ 1.85 -
</TABLE>
13
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Three Months Ended June 30, 2000 compared to the
------------------------------------------------
Three Months Ended June 30,1999
-------------------------------
Total revenues from the Company's operations for the quarter ended June 30, 2000
were $4,465,346 compared to $822,840 for the quarter ended June 30, 1999.
Revenues increased significantly over the comparable period a year earlier due
principally to higher oil and gas prices and production from oil and gas
properties acquired in the May 2, 2000 transactions described earlier.
Total operating expenses increased to $3,358,966 for the quarter ended June 30,
2000 compared to $849,109 for the same period in 1999. This increase was
primarily due to increases in lease operating expense and depletion,
depreciation and amortization costs. Lease operating expenses were higher at
$1,762,792 for the three-month period ended June 30, 2000 compared to $544,812
for the same period in 1999. This was due to increases in expenses associated
with properties acquired in the May 2, 2000 transaction described earlier.
Depletion, depreciation and amortization of oil and gas properties amounted to
$1,048,897 for the quarter ended June 30, 2000 compared to $163,568 for the same
period in 1999 due to a higher depletable base and production from properties
acquired in the May 2, 2000 transaction described earlier.
As a result of the May 2, 2000 transactions, income from operations of
$1,106,380 was realized for the quarter ended June 30, 2000 compared to a loss
from operations of $26,269 for the same period in 1999.
Impairment write-down and loss on sale of marketable securities decreased to
$262,687 for the quarter ended June 30, 2000 compared to $3,661,329 for the
quarter ended June 30, 1999. This was a result of a significant amount of shares
sold during the 1999 period at losses.
Interest expense increased from $0 for the quarter ended June 30, 1999, to
$755,733 for the quarter ended June 30, 2000 as a result of the assumption of
old AROC debt from the May 2, 2000 transactions.
Preferred stock dividends were $1,483,585 for the quarter ended June 30, 2000.
These dividends are associated with the preferred series of stock issued in
connection with the May 2, 2000 transactions described earlier in the document.
In summary, due to the above factors, the net loss for the common stockholders
for the quarter ended June 30, 2000 decreased to $1,417,269 ($0.03 per share)
compared to a net loss of $3,686,714 ($0.07 per share) for the same period in
1999.
14
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Six Months Ended June 30, 2000 compared to the Six Months Ended
---------------------------------------------------------------
June 30, 1999
-------------
Total revenue from the Company's operations for the six months ended June 30,
2000, was $5,544,506 compared to $1,378,243 for the six months ended June 30,
1999. Revenue increased significantly over the comparable period a year earlier
due principally to higher oil and gas prices and production from oil and gas
properties acquired in the May 2, 2000 transactions.
Total operating expenses increased to $4,299,829 for the six months ended June
30, 2000, compared to $1,599,454 for the same period in 1999. This increase was
primarily due to the increases in lease operating expense, and depletion,
depreciation and amortization costs. Lease operating expenses increased to
$2,407,384 in the 2000 period compared to $1,046,810 for the six-month period
ended June 30, 1999. This was due to increases in expenses associated with the
properties acquired in the May 2, 2000 transaction described earlier. Depletion,
depreciation and amortization of oil and gas properties amounted to $1,244,792
for the six-month period ended June 30, 2000, compared to $346,790 for the six-
month period ended June 30, 1999, due to a higher depletable base and production
from properties acquired in the May 2, 2000 transaction described earlier. As a
result of the preceding, the income from operations of $1,244,677 for the six-
month period ended June 30, 2000, reflects an increase over the loss from
operations of $221,211 for the six-month period ended June 30, 1999.
Net income of $194,344 for the six-month period ended June 30, 2000, improved
from a loss of $8,621,568 for the corresponding 1999 period, due primarily to
the factors mentioned above, the increase in interest expense, the write-down
and losses from sale of marketable securities and the $4,251,961 equity in net
losses of old AROC.
Capital Resources and Liquidity
-------------------------------
Net Cash Provided by (Used in) Operating Activities - AROC's net cash used in
operating activities during the first half of 2000 totaled ($1,856,031),
primarily due to payment of a portion of the old AROC liabilities assumed in the
May 2, 2000 reverse acquisition described earlier.
Credit Facility - On May 2, 2000, old AROC entered into a purchase agreement
providing for the sale to EnCap 1996 LP, ECIC and El Paso (together EnCap) of a
total of $17,000,000 in subordinated notes in exchange for cash in that amount.
The subordinated notes bear interest at the rate of 12% per year, payable
semiannually. Principal is due May 1, 2007. Until May 1, 2002, interest is
payable in kind by increasing the principal amount of the debt. Additionally,
old AROC also issued to EnCap warrants to purchase a total of 39,451,233 shares
of AROC's common stock at a price of $0.01 per share at any time until April 30,
2007 pursuant to such purchase agreement.
Pursuant to a Credit Agreement dated as of May 1, 2000, among AROC, Toronto
Dominion (Texas), Inc. individually and as Agent, and the lenders named in that
agreement (the TD Credit Agreement), AROC obtained a new $35,000,000 credit
facility. The credit facility provides for a revolving line of credit for three
years. Borrowings ($25,000,000 initial borrowing) under the
15
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
credit facility bear interest at either the LIBOR rate plus from 1.75% to 3.0%
or the agent's prime rate plus from .25% to 1.5%, at AROC's election. Interest
is payable quarterly beginning July 31, 2000. Principal is payable in full on
the third anniversary of the closing of the credit facility.
The new facility was used along with the subordinated notes, purchased by EnCap,
to retire the previous credit facility with Bank of America and to support
AROC's capital expenditure requirements.
Liquidity - AROC believes that cash on hand, net cash generated from operations,
and unused borrowing capacity under its credit facility will be adequate to
satisfy the Company's financial obligations and to meet future liquidity needs
for at least the next two fiscal years. As of June 30, 2000, AROC's available
borrowing capacity under its credit facility was $9.5 million.
Capital Expenditures. The timing of most of the Company's capital expenditures
--------------------
is discretionary. Currently, there are no material long-term commitments
associated with the Company's U.S. capital expenditure plans. Consequently, the
Company has a significant degree of flexibility to adjust the level of such
expenditures as circumstances warrant. The Company primarily uses internally
generated cash flow to fund U.S. capital expenditures, other than significant
acquisitions, and to fund its working capital deficit. If the Company's
internally generated cash flows should be insufficient to meet its banking or
other obligations, the Company may reduce the level of discretionary U.S.
capital expenditures or increase the sale of non-strategic oil and gas
properties in order to meet such obligations.
The timing of the Company's U.K. capital expenditures is determined annually by
a budget prepared by Burlington Resources and approved by the Company. Any
commitments will be met by funds available under the Company's credit facility
and internally generated cash flow. The level of the Company's capital
expenditures will vary in future periods depending on energy market conditions
and other related economic factors. (This is a forward-looking statement; refer
to the Cautionary Statement Regarding Forward Looking Statements).
16
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Inflation and Prices. In recent years, inflation has not had a significant
--------------------
impact on the operations or financial condition of the Company.
The Company engages in oil and gas hedging activities and intends to consider
various hedging arrangements to realize commodity prices which it considers
favorable. Currently, oil hedges (costless collars) for the last two quarters of
2000 cover 117.5 MBbls at an average NYMEX reference price of $19.00/bbl for the
floor and $27.91/bbl for the collar. Currently, gas hedges (costless collars)
for the last two quarters of 2000 cover 600 MMcf at an average NYMEX reference
price of $2.45/Mcf for the floor and $3.48/Mcf for the collar. The following
table reflects the barrels and Mcf hedged and the corresponding weighted average
NYMEX reference prices by quarter for the remainder of the year:
<TABLE>
<CAPTION>
NYMEX Reference
Quarter Ending Barrels Price Per BBl
---------------------- -------------------- -------------------------------
(in thousands)
<S> <C> <C>
September 30, 2000 51.5 $19.00 Floor, $25.30 Collar
December 31, 2000 66.0 $19.00 Floor, $28.16 Collar
NYMEX Reference
Quarter Ending Mcf Price per Mcf
---------------------- -------------------- -------------------------------
(in thousands)
September 30, 2000 300.0 $2.43 Floor, $3.28 Collar
December 31, 2000 300.0 $2.48 Floor, $3.69 Collar
</TABLE>
Average oil and gas prices received by the Company fluctuate generally with
changes in spot market prices, which may vary significantly by region. The
Company's U.S. average gas price for the first six months of 2000 was 59% higher
than 1999's first six months. The Company's U.S. average oil price for the first
six months of 2000 was 84% higher than 1999's first six months.
Relatively modest changes in either oil or gas prices significantly impact the
Company's results of operations and cash flow. However, the impact of changes in
the market prices for oil and gas on the Company's average realized prices may
be reduced from time to time based on the level of the Company's hedging
activities.
New Accounting Pronouncements
-----------------------------
Statement of Financial Accounting Standards No. 133, Accounting for Derivatives
Instruments and Hedging Activities (Statement 133) was issued by the FASB in
June 1998. Statement 133 standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts. Under the
standard, entities are required to carry all derivative
17
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
instruments in the balance sheet at fair value. The accounting for changes in
the fair value of a derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and, if so, on the
reason for holding it. If certain conditions are met, entities may elect to
designate a derivative instrument as a hedge of exposures to changes in fair
values, cash flows, or foreign currencies. If the hedge exposure is a fair value
exposure, the gain or loss on the derivative instrument is recognized in
earnings in the period of change together with the offsetting loss or gain on
the hedged item attributable to the risk being hedged. If the hedged exposure is
a cash flow exposure, the effective portion of the gain or loss on the
derivative instrument is reported initially as a component of other
comprehensive income (outside earnings) and subsequently reclassified into
earnings when the forecasted transaction affects earnings. Any amounts excluded
from the assessment of hedge effectiveness as well as the ineffective portion of
the gain or loss is reported in earnings immediately. Statement 133 was amended
by Statement No. 137 in June 1999, which delayed implementation until fiscal
years beginning after June 15, 2000, with early adoption permitted. The Company
has not determined the impact of adopting Statement 133.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
The Company's operations are exposed to market risks primarily as a result of
changes in commodity prices, interest rates and foreign currency exchange rates.
The Company does not use derivative financial instruments for speculative or
trading purposes.
Commodity Price Risk
--------------------
The Company produces and sells crude oil, natural gas, condensate and natural
gas liquids. As a result, the Company's financial results can be significantly
impacted as these commodity prices fluctuate widely in response to changing
market forces. The Company engages in oil and gas hedging activities and intends
to continue to consider various hedging arrangements to realize commodity prices
which it considers favorable.
Currently, the Company has entered into various hedging instruments (costless
collars) for a total of 117.5 MBbls at a weighted price of $19.00/Bbl for a
floor and $27.91/Bbl for a collar, and for a total of 600.0 MMcf at a weighted
price of $2.45/Mcf for a floor and $3.48/Mcf for a collar (NYMEX reference
prices), for the last two quarters of 2000. The fair value of the commodity
hedge agreements is the amount at which they could be settled, based on quoted
market prices. At June 30, 2000, the Company would have been required to pay
approximately $1.4 million to terminate its oil and gas hedging agreements then
in place. The Company continues to monitor oil and gas prices and may enter into
additional oil and gas hedges in the future.
18
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Interest Rate Risk
-------------------
The Company's interest rate risk exposure results primarily from short-term
rates, mainly LIBOR based borrowings from its credit facility with Toronto-
Dominion. To reduce the impact of fluctuations in interest rates the Company
maintains a portion of its total debt portfolio in fixed rate debt. At June 30,
2000, the amount of the Company's fixed rate debt was approximately 40% of total
debt. The Company may consider financial instruments such as interest rate swaps
to manage the impact of changes in interest rates based on management's
assessment of future interest rates, volatility of the yield curve and the
Company's ability to access the capital markets in a timely manner.
Foreign Currency and Operations Risk
-------------------------------------
International investments represent a significant portion of the Company's total
assets. The Company has international operations in the United Kingdom. As a
result of the significant foreign operation, the Company's financial results
could be affected by factors such as changes in foreign currency exchange rates,
weak economic conditions or changes in the political climate in the United
Kingdom. The Company believes the United Kingdom offers a relatively stable
political environment and does not anticipate any significant changes in the
near future. To date, the currency risk associated with its foreign operations
has not had a material impact on the Company's financial position or results of
operations. In the past, the Company has entered into a financial instrument to
address this risk; however, there are no current instruments in place. It may
consider these instruments again to manage the impact of changes in exchange
rates based on management's assessment of future exchange rate volatility.
Economic conditions in the United Kingdom are currently in a favorable position
for continued investment and management believes this will continue without any
significant change in the near future.
19
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
SEC
Exhibit
No. Description of Exhibits
------- -----------------------
(27) Financial Data Schedule
-----------------------
*27.1 Financial Data Schedule of AROC Inc.
*Filed Herewith.
(b) Reports on Form 8-K
-------------------
None
20
<PAGE>
AROC Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
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.
AROC Inc.
/s/R. Schulte
------------------------------
Robert Schulte - Chief Financial Officer
Date: October 27, 2000
21
