<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 1995
--------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
Commission File No. 0-9976
ARCH PETROLEUM INC.
(Exact name of registrant as specified in its charter)
Delaware 83-0248900
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 Taylor Street, Suite II, Fort Worth, Texas 76102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (817) 332-9209
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
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 ____
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1995
Common Stock, $.01 Par Value 17,086,404
---------------------------- ----------
<PAGE>
ARCH PETROLEUM INC.
INDEX
<TABLE>
<CAPTION>
Page
Part I. FINANCIAL INFORMATION Number
<S> <C>
Item 1.
CONSOLIDATED BALANCE SHEETS (Unaudited) -
June 30, 1995 and December 31, 1994............................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -
Three months and six months ended June 30, 1995 and 1994....... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
Six months ended June 30, 1995 and 1994........................ 6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited).................................................... 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................ 8
Part II. OTHER INFORMATION
Item 1.
Legal Proceedings............................................... N/A
Item 2.
Changes in Securities........................................... N/A
Item 3.
Defaults upon Senior Securities................................. N/A
Item 4.
Submission of Matters to a Vote of Security Holders............. N/A
Item 5.
Other Information............................................... N/A
Item 6.
Exhibits and Reports on Form 8-K
a. Exhibits................................................ None
b. Reports on Form 8-K..................................... None
SIGNATURES...................................................... 11
</TABLE>
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,119,000 $ 1,553,000
Accounts receivable - trade 7,610,000 6,429,000
Accounts receivable - related parties 2,365,000 1,815,000
Prepaid expenses and other 543,000 635,000
----------- -----------
Total current assets 11,637,000 10,432,000
Property and Equipment, at cost:
Oil and gas properties accounted for by
the successful efforts method 64,248,000 61,145,000
Natural gas pipelines 11,283,000 11,184,000
Furniture, fixtures and other equipment 887,000 899,000
----------- -----------
76,418,000 73,228,000
Less accumulated depletion,
depreciation and amortization 10,446,000 8,371,000
----------- -----------
Net property and equipment 65,972,000 64,857,000
Notes receivable - related parties 1,545,000 1,412,000
Other 1,157,000 1,324,000
----------- -----------
$80,311,000 $78,025,000
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
3
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 7,342,000 $ 8,604,000
Accounts payable - related parties 1,730,000 1,375,000
Current maturities of long-term debt 1,111,000 1,111,000
Preferred stock dividends payable 311,000 311,000
----------- -----------
Total current liabilities 10,494,000 11,401,000
Deferred revenue 18,889,000 20,690,000
Long-term debt, less current maturities 15,376,000 9,632,000
Convertible subordinated notes 5,000,000 5,000,000
Deferred federal income taxes 1,876,000 1,797,000
Minority interest in consolidated
subsidiaries 75,000 15,000
Exchangeable convertible preferred stock,
$.01 par value, 727,273 shares
authorized, issued and outstanding 20,000,000 20,000,000
Shareholders' Equity:
Preferred stock, $.01 par value,
1,000,000 shares authorized, 727,273
issued as exchangeable convertible
preferred stock - -
Common stock, $.01 par value,
50,000,000 shares authorized,
17,086,404 and 17,186,404 shares
issued and outstanding, net of
100,000 and no treasury shares,
respectively 171,000 172,000
Additional paid-in capital 5,809,000 5,809,000
Employee notes for stock purchases (941,000) (905,000)
Treasury stock (205,000) -
Retained earnings 3,767,000 4,414,000
----------- ----------
8,601,000 9,490,000
----------- -----------
$80,311,000 $78,025,000
=========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
4
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- --------------------------
1995 1994 1995 1994
----------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Oil and gas sales $ 4,666,000 $ 2,558,000 $ 7,870,000 $ 3,820,000
Pipeline sales 11,973,000 22,867,000 22,645,000 38,953,000
Drilling and production
overhead fees 54,000 47,000 104,000 114,000
Interest and other 120,000 38,000 241,000 74,000
----------- ----------- ----------- -----------
16,813,000 25,510,000 30,860,000 42,961,000
COSTS AND EXPENSES:
Lease operations 1,888,000 977,000 3,501,000 1,735,000
Natural gas purchases 11,365,000 22,877,000 21,666,000 38,503,000
Exploration 19,000 12,000 323,000 143,000
Depletion, depreciation and
amortization 1,266,000 784,000 2,197,000 1,214,000
General and administrative 1,073,000 947,000 2,018,000 1,779,000
Interest 470,000 538,000 860,000 668,000
Minority interest in income (loss)
of consolidated subsidiaries 73,000 (363,000) 60,000 (440,000)
----------- ----------- ----------- -----------
16,154,000 25,772,000 30,625,000 43,602,000
----------- ----------- ----------- -----------
Income (loss) before income taxes
and dividends 659,000 (262,000) 235,000 (641,000)
Income tax expense (benefit) 224,000 (92,000) 79,000 (221,000)
----------- ----------- ----------- -----------
Net income (loss) before dividends 435,000 (170,000) 156,000 (420,000)
Dividends on preferred stock 400,000 - 800,000 -
----------- ----------- ----------- -----------
Net income (loss) $ 35,000 $ (170,000) $ (644,000) $ (420,000)
=========== =========== =========== ===========
Net income (loss) per
common share - $(0.01) $(0.04) $(0.02)
=========== =========== =========== ===========
Weighted average common and
common equivalent shares
outstanding 17,167,000 17,257,000 17,176,000 17,255,000
=========== =========== =========== ===========
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
5
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1995 1994
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 156,000 $ (420,000)
Adjustments to reconcile to net cash used by operations:
Depletion, depreciation and amortization 2,197,000 1,214,000
Deferred revenue (1,670,000) (406,000)
Deferred income taxes 79,000 (221,000)
Other (98,000) (63,000)
Minority interest in net income (loss)
of consolidated subsidiaries 60,000 (440,000)
Change in accounts receivable (1,731,000) (7,966,000)
Change in other current assets 92,000 (389,000)
Change in accounts payable and other current liabilities (907,000) 7,692,000
----------- ------------
Net operating cash flows (1,822,000) (999,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (3,152,000) (23,189,000)
Notes receivable and other assets (80,000) (64,000)
----------- ------------
Net investing cash flows (3,232,000) (23,253,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing 7,200,000 26,921,000
Payments of bank debt (1,456,000) (3,400,000)
Payment of preferred stock dividends (800,000) -
Purchase of treasury shares (205,000) -
Cash distributions to minority interests in subsidiaries - (74,000)
Other (119,000) (59,000)
----------- ------------
Net financing cash flows 4,620,000 23,388,000
----------- ------------
Change in cash and cash equivalents (434,000) (864,000)
Cash and cash equivalents at beginning of period 1,553,000 1,579,000
----------- ------------
Cash and cash equivalents at end of period $ 1,119,000 $ 715,000
=========== ============
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
6
<PAGE>
ARCH PETROLEUM INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the opinion of Arch Petroleum Inc. (the "Company"), the accompanying
consolidated financial statements, which have not been audited by independent
public accountants, contain all adjustments necessary to present fairly the
Company's consolidated financial position, the results of its operations and its
cash flows for the periods reported. The consolidated financial statements
include the accounts of the Company and its subsidiaries: Arch Production
Company, wholly-owned; Saginaw Pipeline Company, L.C. ("Saginaw") and Industrial
Natural Gas, L.C. ("ING"), 75% membership interest; and Onyx Pipeline Company,
L.C., Onyx Gathering Company, L.C. and Onyx Gas Marketing Company, L.C.
("Onyx"), 50% membership interest. All significant intercompany balances and
transactions are eliminated. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. It is suggested
that these consolidated financial statements be read in conjunction with the
consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K as of December 31, 1994. The results of
operations for the three months and six months ended June 30, 1995 and 1994 are
not necessarily indicative of the results to be expected for a full year.
Effective February 1, 1995 the Railroad Commission of Texas ("RRC") amended
its interim order issued in August 1992 (previously amended in May 1993) and
established a system of field-wide allowables which allows the Company to
produce and sell approximately 20.2 million cubic feet (16.0 million, net) of
natural gas per day from its operated leases and 2.6 million cubic feet (2.1
million, net) of natural gas per day from its nonoperated interest in the
Keystone Ellenburger field ("Keystone"). As of February 1, 1995 the Company
resumed full scheduled natural gas volume deliveries under the existing
production payment agreement. The Company continues to produce approximately
15,000 barrels of formation water per day, less than 40% of the water which
would have been previously required by the RRC to produce the new accelerated
gas allowables. Concurrent with the implementation of the new field rules, the
Company has ceased to capitalize water lifting program costs and will amortize
the deferred water production costs as the bonus production allowable is
produced. At June 30, 1995 and December 31, 1994, the Company had deferred $5.8
million and $5.6 million, respectively, of water production costs. These costs
have been included in proved oil and gas properties.
On April 11, 1995 the Company purchased 100,000 shares of common stock from
Threshold Development Company, a related party, valued at $206,000 at the then
current market price.
7
<PAGE>
ARCH PETROLEUM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At June 30, 1995 the Company's working capital ratio increased to 1.1 compared
to .9 at December 31, 1994. In 1995 the Company's principal sources of cash
were $5.8 million (net) from its revolving debt facilities and $0.7 million from
direct operations. This cash was consumed by: funding $3.2 million of
development in existing properties in New Mexico and Texas; providing $1.0
million to financing activities; and decreasing current liabilities by $2.5
million.
The Company's revolving credit facility (the "Revolver"), which the Company
entered into on April 6, 1990 (last amended on May 1, 1995, the second amendment
to Second Restated Revolving Credit Loan Agreement) is in place for use by the
Company at its discretion including drilling, development and acquisition of oil
and gas properties. The Company has borrowed $12.3 million against the Revolver
at June 30, 1995. The Revolver's borrowing base is the amount that the bank
commits to loan to the Company based on the designated loan value established by
the bank at its sole discretion and assigned to certain of the Company's oil and
gas properties which serve as collateral for any loan which may be outstanding
under the Revolver. The Revolver facility is $50.0 million and the borrowing
base is currently $30.0 million. The borrowing base is reviewed semiannually by
the bank at its discretion. A commitment fee of one half of one percent of the
unused borrowing base accrues and is payable quarterly. Borrowings under the
Revolver bear interest at the bank's Base Rate (national prime rate, 9.00% at
June 30, 1995).
The Onyx Term Loan Agreement (the "Onyx Note"), which Onyx entered into with
the Bank of Scotland on March 30, 1994 (last amended September 30, 1994, the
first amendment), is a separate facility and provided Onyx with $5.0 million.
The Onyx Note bears interest at national prime rate plus one-half of one percent
(9.50% at June 30, 1995). Interest on the unpaid principal amount of the note is
payable quarterly and commenced on June 30, 1994. The unpaid principal will be
repaid by eighteen quarterly installments and commenced December 31, 1994.
Current maturities of the Onyx Note total $1.1 million at June 30, 1995. The
Onyx Note is guaranteed by the Company.
Both the Revolver and Onyx Note contain normal and standard covenants
generally found in lending agreements. Among other things, these covenants
prohibit the declaration and payment of cash dividends on the Company's common
stock. In addition, the covenants stipulate the maintenance of financial
criteria including: a minimum level of net worth, a certain current ratio, a
certain debt to worth ratio and a defined net income in excess of scheduled
interest and principal payments. The Company and Onyx currently are not in
default with the loan agreements. Neither the Company nor Onyx has any other
unused lines of credit.
The Company has sufficient cash and unused borrowing base in the Revolver to
fund its anticipated drilling, development and acquisition programs for 1995 as
well as its debt service and preferred stock dividend requirements.
Additionally, the Company expects to meet its current operating cash
requirements from cash flows provided by current operations. The Company
operates in an industry that is subject to volatile prices for its products.
Cash flows from operations may be affected to a significant degree by
fluctuations in prices that are brought on by factors beyond the Company's
control.
8
<PAGE>
RESULTS OF OPERATIONS
---------------------
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO
------------------------------------------
SIX MONTHS ENDED JUNE 30, 1994
------------------------------
The Company recorded net income before dividends of $156,000 in 1995 as
compared to a net loss before dividends of $420,000 in 1994. Net income before
dividends increased $576,000 resulting from improved margins on pipeline sales
and increased oil and gas sales.
Pipeline sales decreased $16,308,000 in 1995 as compared to 1994, but were
offset by a decrease in natural gas purchases of $16,846,000. The decrease in
sales and purchases is due primarily to the decrease in the cost of gas which
averaged $1.49 in 1995 as compared to $1.93 in 1994. Gross margin increased to
5.6% in 1995 as compared to 1.9% in 1994 reflecting higher spreads in 1995.
Revenues from oil and gas sales increased $4,050,000 in 1995 as compared to
1994, primarily as a result of the revenues attributable to the New Mexico
properties (acquired effective April 1, 1994) and the increased gas production
from Keystone. Gas production in 1995 increased to 3,420,000 Mcf as compared to
1,123,000 Mcf in 1994, resulting in a $4,048,000 increase in sales. The average
price received for gas was $1.34 in 1995 as compared to $1.76 in 1994, resulting
in a $1,449,000 decrease in sales. The average price received for gas excluding
certain production payment volumes was $1.45 in 1995. Oil production increased
to 177,000 barrels in 1995 as compared to 122,000 in 1994, resulting in a
$848,000 increase in sales. The increase in oil production is primarily
attributable to the New Mexico properties. The average price received for oil
was $18.19 in 1995 as compared to $15.25 in 1994, resulting in a $521,000
increase in sales.
Lease operating expenses ("LOE") increased $1,766,000 in 1995 as compared to
1994, primarily as a result of the New Mexico properties and the amended RRC
order affecting Keystone. As a result of the RRC's amended order effective
February 1, 1995, the Company has ceased capitalizing the water lifting program
costs and is charging these costs to LOE as incurred. Lifting costs per
equivalent barrel increased slightly in 1995 to $3.83 from $3.69 in 1994, as a
result of the increased oil and gas production. The $180,000 increase in
exploration expense is due to 3-D seismic programs that the Company is
undertaking in Stonewall County and the Panhandle of Texas. Depletion,
depreciation and amortization increased $983,000 in 1995 as a result of the New
Mexico operations and the increased gas production from Keystone.
General and administrative expenses increased $239,000 in 1995 as compared to
1994, reflecting personnel additions. Interest expense increased $192,000 as a
result of the increased outstanding bank debt during 1995.
9
<PAGE>
THREE MONTHS ENDED JUNE 30, 1995 COMPARED TO
--------------------------------------------
THREE MONTHS ENDED JUNE 30, 1994
--------------------------------
The Company recorded net income before dividends of $435,000 in 1995 as
compared to a net loss before dividends of $170,000 in 1994. Net income before
dividends increased $605,000 resulting from improved margins on pipeline sales
and increased oil and gas sales.
Pipeline sales decreased $10,894,000 in 1995 as compared to 1994, but were
offset by a decrease in natural gas purchases of $11,573,000. The decrease in
sales and purchases is due primarily to the decrease in the cost of gas which
averaged $1.54 in 1995 as compared to $1.85 in 1994. Gross margin increased to
6.2% in 1995. Gross margin was break even in 1994.
Revenues from oil and gas sales increased $2,108,000 in 1995 as compared to
1994, primarily as a result of the increased gas production from Keystone. Gas
production in 1995 increased to 2,136,000 Mcf as compared to 720,000 Mcf in
1994, resulting in a $2,391,000 increase in sales. The average price received
for gas was $1.34 in 1995 as compared to $1.69 in 1994, resulting in a $741,000
decrease in sales. The average price received for gas excluding certain
production payment volumes was $1.45 in 1995. Oil production increased to
90,000 barrels in 1995 as compared to 81,000 in 1994, resulting in a $140,000
increase in sales. The increase in oil production is primarily attributable to
the recompletion work in the New Mexico properties. The average price received
for oil was $19.06 in 1995 as compared to $16.42 in 1994, resulting in a
$238,000 increase in sales.
Lease operating expenses ("LOE") increased $911,000 in 1995 as compared to
1994, primarily as a result of the amended RRC order affecting Keystone. As a
result of the RRC's amended order effective February 1, 1995, the Company has
ceased capitalizing the water lifting program costs and is charging these costs
to LOE as incurred. Lifting costs per equivalent barrel increased in 1995 to
$3.41 from $3.19 in 1994, as a result of the increased gas production.
Depletion, depreciation and amortization increased $482,000 in 1995 as a result
of the increased gas production from Keystone.
10
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARCH PETROLEUM INC.
-------------------
(Registrant)
Date: August 11, 1995 Fred Cantu
--------------- ----------------------------
Fred Cantu
Treasurer and
Chief Financial Officer
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 1,119,000
<SECURITIES> 0
<RECEIVABLES> 9,975,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,637,000
<PP&E> 76,418,000
<DEPRECIATION> 10,446,000
<TOTAL-ASSETS> 80,311,000
<CURRENT-LIABILITIES> 10,494,000
<BONDS> 0
<COMMON> 171,000
20,000,000
0
<OTHER-SE> 8,430,000
<TOTAL-LIABILITY-AND-EQUITY> 80,311,000
<SALES> 30,515,000
<TOTAL-REVENUES> 30,860,000
<CGS> 25,167,000
<TOTAL-COSTS> 25,167,000
<OTHER-EXPENSES> 2,520,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 860,000
<INCOME-PRETAX> 235,000
<INCOME-TAX> 79,000
<INCOME-CONTINUING> 156,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 156,000
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
