<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 March 31, 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 April 30, 1995
Common Stock, $.01 Par Value 17,186,404
----------
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ARCH PETROLEUM INC.
INDEX
<TABLE>
<CAPTION>
Page
Part I. FINANCIAL INFORMATION Number
<S> <C> <C>
Item 1.
CONSOLIDATED BALANCE SHEETS (Unaudited) -
March 31, 1995 and December 31, 1994......................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -
Three months ended March 31, 1995 and 1994................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
Three months ended March 31, 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................................................. N/A
b. Reports on Form 8-K...................................... N/A
SIGNATURES...................................................... 10
</TABLE>
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1995 1994
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 661,000 $ 1,553,000
Accounts receivable - trade 6,592,000 6,429,000
Accounts receivable - related parties 2,033,000 1,815,000
Prepaid expenses and other 607,000 635,000
----------- -----------
Total current assets 9,893,000 10,432,000
Property and Equipment, at cost:
Oil and gas properties accounted for by the
successful efforts method 62,643,000 61,145,000
Natural gas pipelines 11,209,000 11,184,000
Furniture, fixtures and other equipment 908,000 899,000
----------- -----------
74,760,000 73,228,000
Less accumulated depletion, depreciation
and amortization 9,239,000 8,371,000
----------- -----------
Net property and equipment 65,521,000 64,857,000
Notes receivable - related parties 1,440,000 1,412,000
Other 1,295,000 1,324,000
----------- -----------
$78,149,000 $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 March 31, December 31,
1995 1994
------------ -------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 6,877,000 $ 8,604,000
Accounts payable - related parties 1,596,000 1,375,000
Current maturities of long-term debt 1,111,000 1,111,000
Preferred stock dividends payable 711,000 311,000
----------- -----------
Total current liabilities 10,295,000 11,401,000
Deferred revenue 20,253,000 20,690,000
Long-term debt, less current maturities 12,154,000 9,632,000
Convertible subordinated notes 5,000,000 5,000,000
Deferred federal income taxes 1,652,000 1,797,000
Minority interest in consolidated subsidiaries 2,000 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, none issued or outstanding - -
Common stock, $.01 par value, 25,000,000 shares
authorized, 17,186,404 and 17,186,404 shares
issued and outstanding, respectively 172,000 172,000
Additional paid-in capital 5,809,000 5,809,000
Employee notes for stock purchases (923,000) (905,000)
Retained earnings 3,735,000 4,414,000
----------- -----------
8,793,000 9,490,000
----------- -----------
$78,149,000 $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
March 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
Revenues:
Oil and gas sales $ 3,204,000 $ 1,262,000
Natural gas transportation and distribution 10,672,000 16,086,000
Drilling and production overhead fees 50,000 67,000
Interest and other 121,000 36,000
----------- -----------
14,047,000 17,451,000
Costs and Expenses:
Lease operations 1,613,000 613,000
Natural gas purchases and pipeline operations 10,301,000 15,772,000
Exploration 304,000 132,000
Depletion, depreciation and amortization 931,000 430,000
General and administrative 945,000 831,000
Interest 390,000 129,000
Minority interest in loss
of consolidated subsidiaries (13,000) (77,000)
----------- -----------
14,471,000 17,830,000
----------- -----------
Loss before income taxes and dividends (424,000) (379,000)
Income tax benefit (145,000) (129,000)
----------- -----------
Net loss before dividends (279,000) (250,000)
Dividends on preferred stock 400,000 -
----------- -----------
Net loss $ (679,000) $ (250,000)
=========== ===========
Net loss per common share $(0.04) $(0.01)
=========== ===========
Weighted average common and
common equivalent shares
outstanding 17,205,000 17,252,000
=========== ===========
</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>
Three Months Ended
March 31,
-----------------------------
1995 1994
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (279,000) $ (250,000)
Adjustments to reconcile to net cash provided
by operations:
Depletion, depreciation and amortization 931,000 430,000
Deferred revenue (437,000) (248,000)
Deferred income taxes (145,000) (129,000)
Other (48,000) (36,000)
Minority interest in loss of consolidated
subsidiaries (13,000) (77,000)
Change in accounts receivable (381,000) (866,000)
Change in other current assets 28,000 (278,000)
Change in accounts payable and other current
liabilities (1,506,000) 491,000
----------- ------------
Net operating cash flows (1,850,000) (963,000)
----------- ------------
Cash flows from investing activities:
Capital expenditures, net of retirements (1,564,000) (19,983,000)
Other assets - (33,000)
----------- ------------
Net investing cash flows (1,564,000) (20,016,000)
----------- ------------
Cash flows from financing activities:
Proceeds from bank borrowing 2,800,000 24,820,000
Payments of bank debt (278,000) (3,400,000)
Cash distributions to minority interests in
subsidiary - (147,000)
Other - 21,000
----------- ------------
Net financing cash flows 2,522,000 21,294,000
----------- ------------
Change in cash and cash equivalents (892,000) 315,000
Cash and cash equivalents at beginning of period 1,553,000 1,579,000
----------- ------------
Cash and cash equivalents at end of period $ 661,000 $ 1,894,000
=========== ============
</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 ended March 31, 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 millon 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 March 31, 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.
7
<PAGE>
ARCH PETROLEUM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
In 1995 the Company's principal source of cash was $2.8 million from its
revolver debt facility. This cash was utilized to fund $1.4 million of
development in existing properties in New Mexico and Texas, including Keystone
and to fund $0.4 million of 3-D seismic activities in Stonewall County and the
Panhandle of Texas.
The Company's revolving credit facility (the "Revolver"), which the Company
entered into on April 6, 1990 (last amended on December 30, 1994, the second
amendment) 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 $8.8 million against the Revolver at March 31, 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 $26.0
million. The Borrowing base is reviewed semiannually by the bank at their
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 March 31, 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 March 31, 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 March 31, 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 are currently 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
- ---------------------
Three months ended March 31, 1995 compared to
---------------------------------------------
three months ended March 31, 1994
----------------------------------
The Company recorded a net loss before dividends of $279,000 in 1995 as
compared to a net loss before dividends of $250,000 in 1994. The net loss
increased $29,000 resulting from a $3,404,000 decrease in revenues offset by a
$3,359,000 decrease in costs and expenses and a $16,000 increase in income tax
benefit.
Pipeline sales decreased $5,414,000 in 1995 as compared to 1994, but were
offset by a decrease in natural gas purchases of $5,480,000. The decrease in
sales and purchases is due primarily to the decrease in the cost of gas which
averaged $1.48 in 1995 as compared to $2.18 in 1994. Gross margin increased to
4.9% in 1995 as compared to 2.9% in 1994 reflecting higher spreads in 1995.
Revenues from oil and gas sales increased $1,942,000 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 1,284,000 Mcf as compared to
402,000 Mcf in 1994, resulting in a $1,666,000 increase in sales. The average
price received for gas was $1.33 in 1995 as compared to $1.90 in 1994, resulting
in a $716,000 decrease in sales. The average price received for gas excluding
certain production payment volumes was $1.53 in 1995. Oil production increased
to 87,000 barrels in 1995 as compared to 40,000 in 1994, resulting in a $622,000
increase in sales. The increase in oil production is primarily attributable to
the New Mexico properties. The average price received for oil was $17.30 in
1995 as compared to $13.23 in 1994, resulting in a $370,000 increase in sales.
Total operating expenses increased $1,009,000 in 1995 as compared to 1994.
Lease operating expenses ("LOE") related to oil and gas properties increased
$1,000,000, 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 decreased in 1995 to $4.47 from $4.65 in 1994, as a result of
the increased oil and gas production. The $172,000 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 $501,000 in 1995 as a result of the New Mexico operations
and the increased gas production from Keystone.
General and administrative expenses increased $114,000 in 1995 as compared to
1994, reflecting personnel additions. Interest expense increased $261,000 as a
result of the increased outstanding bank debt during 1995.
9
<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: May 11, 1995 /s/ Fred Cantu
------------ -------------------------------
Fred Cantu
Treasurer and
Chief Financial Officer
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 661,000
<SECURITIES> 0
<RECEIVABLES> 8,625,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 9,893,000
<PP&E> 74,760,000
<DEPRECIATION> 9,239,000
<TOTAL-ASSETS> 78,149,000
<CURRENT-LIABILITIES> 10,295,000
<BONDS> 0
<COMMON> 172,000
20,000,000
0
<OTHER-SE> 8,621,000
<TOTAL-LIABILITY-AND-EQUITY> 78,149,000
<SALES> 13,876,000
<TOTAL-REVENUES> 14,047,000
<CGS> 11,914,000
<TOTAL-COSTS> 11,914,000
<OTHER-EXPENSES> 1,235,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 390,000
<INCOME-PRETAX> (424,000)
<INCOME-TAX> (145,000)
<INCOME-CONTINUING> (279,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (279,000)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
</TABLE>
