<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, 1996
----------------
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, 1996
Common Stock, $.01 Par Value 17,141,404
----------
<PAGE>
ARCH PETROLEUM INC.
INDEX
Page
Part I. FINANCIAL INFORMATION Number
Item 1.
CONSOLIDATED BALANCE SHEETS (Unaudited) -
March 31, 1996 and December 31, 1995..................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -
Three months ended March 31, 1996 and 1995............... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
Three months ended March 31, 1996 and 1995............... 6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited).............................................. 7
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................... 9
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................................ 11
SIGNATURES................................................... 12
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 2,183,000 $ 2,574,000
Accounts receivable - trade 8,655,000 6,986,000
Prepaid expenses and other 716,000 542,000
----------- -----------
Total current assets 11,554,000 10,102,000
Property and Equipment, at cost:
Oil and gas properties accounted for by the
successful efforts method 76,703,000 66,375,000
Natural gas pipelines 11,521,000 11,448,000
Furniture, fixtures and other equipment 1,025,000 957,000
----------- -----------
89,249,000 78,780,000
Less accumulated depletion, depreciation
and amortization 14,420,000 12,968,000
----------- -----------
Net property and equipment 74,829,000 65,812,000
Accounts receivable - related parties 1,053,000 939,000
Notes receivable - related parties 1,674,000 1,645,000
Other 1,081,000 1,174,000
----------- -----------
$90,191,000 $79,672,000
=========== ===========
</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,
1996 1995
------------ -------------
<S> <C> <C>
Current Liabilities:
Accounts payable $10,945,000 $ 9,552,000
Accounts payable - related parties 49,000 75,000
Current maturities of long-term debt 1,111,000 1,111,000
Preferred stock dividends payable 711,000 311,000
----------- -----------
Total current liabilities 12,816,000 11,049,000
Deferred revenue 14,794,000 16,037,000
Long-term debt, less current maturities 27,045,000 17,821,000
Convertible subordinated notes 5,000,000 5,000,000
Deferred federal income taxes 1,920,000 1,711,000
Other liabilities 369,000 -
Minority interest in consolidated subsidiaries 498,000 459,000
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, 17,141,404 shares issued and outstanding 172,000 172,000
Additional paid-in capital 5,944,000 5,944,000
Employee notes for stock purchases (978,000) (965,000)
Treasury stock, 100,000 shares (206,000) (206,000)
Cumulative translation adjustment 82,000 -
Retained earnings 2,735,000 2,650,000
----------- -----------
7,749,000 7,595,000
----------- -----------
$90,191,000 $79,672,000
=========== ===========
</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,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 5,642,000 $ 3,204,000
Natural gas transportation and distribution 13,798,000 10,672,000
Drilling and production overhead fees 43,000 50,000
Interest and other 282,000 121,000
----------- -----------
19,765,000 14,047,000
COSTS AND EXPENSES:
Lease operations 2,096,000 1,613,000
Natural gas purchases and pipeline operations 13,420,000 10,301,000
Exploration 51,000 304,000
Depletion, depreciation and amortization 1,675,000 931,000
General and administrative 1,151,000 945,000
Interest 676,000 390,000
Foreign currency transaction gain (39,000) -
Minority interest in net income (loss)
of consolidated subsidiaries 38,000 (13,000)
----------- -----------
19,068,000 14,471,000
----------- -----------
Net income (loss) before income taxes and dividends 697,000 (424,000)
Deferred federal income tax expense (benefit) 209,000 (145,000)
----------- -----------
Net income (loss) before dividends 488,000 (279,000)
Dividends on preferred stock 400,000 400,000
----------- -----------
Net income (loss) $ 88,000 $ (679,000)
=========== ===========
Net income (loss) per common share $ 0.01 $(0.04)
=========== ===========
Weighted average common and common
equivalent shares outstanding 17,237,000 17,205,000
=========== ===========
</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,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 488,000 $ (279,000)
Adjustments to reconcile to net cash provided
by operations:
Depletion, depreciation and amortization 1,675,000 931,000
Deferred revenue (654,000) (334,000)
Deferred income taxes 209,000 (145,000)
Interest on notes receivable and other (49,000) (48,000)
Foreign currency transaction gain (39,000) -
Minority interest in income (loss)
of consolidated subsidiaries 38,000 (13,000)
Change in accounts receivable (698,000) (381,000)
Change in other current assets (154,000) 28,000
Change in accounts payable and other current liabilities 373,000 (1,506,000)
Production payment remedy adjustment (589,000) (103,000)
----------- -----------
Net operating cash flows 600,000 (1,850,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net of retirements (2,078,000) (1,564,000)
Notes receivable and other assets (50,000) -
Acquisition of subsidiary (7,645,000) -
----------- -----------
Net investing cash flows (9,773,000) (1,564,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing 17,504,000 2,800,000
Payments of bank debt (8,722,000) (278,000)
----------- -----------
Net financing cash flows 8,782,000 2,522,000
----------- -----------
Change in cash and cash equivalents (391,000) (892,000)
Cash and cash equivalents at beginning of period 2,574,000 1,553,000
----------- -----------
Cash and cash equivalents at end of period $ 2,183,000 $ 661,000
=========== ===========
</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. 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, 1995.
The results of operations for the three months ended March 31, 1996 and 1995 are
not necessarily indicative of the results to be expected for a full year.
Effective January 31, 1996, the Company acquired Trax Petroleums Limited
("Trax"), a Canadian oil and gas exploration and development company
headquartered in Calgary, Alberta, Canada. The Company's January 9, 1996, cash
offer of Cdn. $0.71 for each of Trax's approximately 14,100,000 shares was
accepted by more than 91% of Trax shareholders. Effective February 12, 1996,
the Company completed the statutory compulsory acquisition of the remaining
shares of Trax through the depository, Montreal Trust Company of Canada. The
net assets of Trax have been accounted for by the Company at their estimated
"fair values" as required by the purchase method of accounting. The results of
Trax have been consolidated with the Company beginning February 1, 1996. The
current Trax staff of employees and its headquarters will remain in Calgary. The
acquisition purchase price was approximately Cdn. $10.0 million (approximately
U.S. $7.4 million at January 31, 1996). The following unaudited pro forma
information has been prepared as if the acquisition had occurred at the
beginning of each period presented, and is provided for comparative purposes
only. The pro forma information presented is not necessarily indicative of the
combined financial results as they may be in the future or as they might have
been for the period had the acquisition been consummated at the beginning of
such period.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
(In thousands except per share data) 1996 1995
--------- --------
<S> <C> <C>
Revenues $19,977 $14,655
Net income (loss) before dividends 519 (1,044)
Net income (loss) per common share $ 0.01 $ (0.08)
</TABLE>
On February 20, 1996, in conjunction with the Trax acquisition, the Company
entered into two new bank credit facilities: the Third Restated Revolving Credit
Loan Agreement among the Company and Bank One, Texas, N.A., the Agent bank, and
other banks (the "Domestic Revolver") and through its new 100% - owned
subsidiary, Trax, the Credit Agreement among Trax and Bank of Montreal, the
Canadian Agent bank, and other financial institutions (the "Canadian Revolver"
and, together with the Domestic Revolver, the "Revolvers"). The two credit
facilities are separate bank revolvers. The lenders in the Domestic Revolver
(the "U.S. lenders") and the lenders in the Canadian Revolver (the "Canadian
lenders" and, together with the U.S. lenders, the "Lenders") have entered into
an associated Intercreditor Agreement also on February 20, 1996. In this
Intercreditor Agreement the Canadian lenders and the U.S. lenders have agreed
that they shall rank pari passu with one
7
<PAGE>
another in respect of certain payments or recoveries and that certain matters
related to the administration of the Canadian Revolver and the Domestic Revolver
shall be made on the basis of their combined commitments.
The Revolvers' borrowing base is the amount that the Lenders commit to loan to
the Company based on the designated loan value established by the Lenders at
their 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 Revolvers. The Domestic Revolver facility is $50.0 million and the
borrowing base is currently $30.0 million. The Canadian Revolver's initial
commitment is U.S. $11.0 million. The Revolvers' borrowing base is reviewed
semiannually by the Lenders at their discretion. A commitment fee of one half
of one percent of the unused borrowing base accrues and is payable quarterly.
The Revolvers mature on May 1, 1997. Borrowings under the Revolvers will, at
the Company's option, bear interest either at the Lender's Base Rate or a rate
based on the London Interbank Offered Rate (LIBOR). The average actual interest
rate was 8.025% at March 31, 1996.
8
<PAGE>
ARCH PETROLEUM INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
With the exception of historical information, the matters discussed herein are
forward looking statements that involve risks and uncertainties including, but
not limited to, oil and gas price fluctuations, economic conditions, interest
rate fluctuations, the regulatory and political environments and other risks
indicated in filings with the Securities and Exchange Commission.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At March 31, 1996, the Company's total assets increased to $90.1 million from
$79.7 million at December 31, 1995. The assets of Trax (acquired January 31,
1996) accounted for $8.9 million of the increase. In addition, oil and gas
properties (excluding Trax) increased $1.8 million as a result of successful
development drilling and recompletion of existing wells in New Mexico.
In 1996 the Company's principal sources of funds were $8.8 million from its
Revolvers and $1.2 million from operations (excluding production payment remedy
adjustment). These funds were primarily consumed by funding $7.6 million for the
acquisition of Trax and funding $2.1 million of development in existing
properties in New Mexico.
The Company's Revolvers are in place for use by the Company at its discretion
including drilling, development and acquisition of oil and gas properties. The
Company has borrowed $16.8 million and $8.0 million against the Domestic and
Canadian Revolvers at March 31, 1996, respectively. The Revolvers' borrowing
base is the amount that the Lenders commit to loan to the Company based on the
designated loan value established by the Lenders at their 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 Revolvers. The
Domestic Revolver facility is $50.0 million and the borrowing base is currently
$30.0 million. The Canadian Revolver's initial commitment is U.S. $11.0
million. The Revolvers' borrowing base is reviewed semiannually by the Lenders
at their discretion. A commitment fee of one half of one percent of the unused
borrowing base accrues and is payable quarterly. The Revolvers mature on May 1,
1997. Borrowings under the Revolvers will, at the Company's option, bear
interest either at the Lenders' Base Rate or a rate based on the London
Interbank Offered Rate (LIBOR). The average actual interest rate was 8.025% at
March 31, 1996.
The Onyx Term Loan Agreement (the "Onyx Note"), which Onyx entered into with
the Bank of Scotland on March 30, 1994, as amended, 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 (8.75% at March 31, 1996). Interest on the
unpaid principal amount of the note is payable quarterly and commenced on June
30, 1994. The unpaid principal ($3.3 million at March 31, 1996), is payable in
eighteen quarterly installments ending on March 31, 1999. Current maturities of
the Onyx Note total $1.1 million at March 31, 1996. The Onyx Note is
collateralized by certain of Onyx's pipelines, gathering facilities and related
transportation contracts. In addition, the Onyx Note is guaranteed by the
Company.
Both the Revolvers 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 Revolvers to
fund its anticipated drilling, development and acquisition programs for 1996 as
well as its debt service and preferred stock dividend
9
<PAGE>
requirements. Additionally, the Company expects to meet its current operating
cash requirements from cash flows provided by current operations. Management
believes that the Company can continue to generate, or obtain through other
alternatives, resources sufficient to meet cash requirements for future
acquisition opportunities. The Company operates in an industry that is subject
to volatile prices for its products. Cash flow from operations may be affected
to a significant degree by fluctuations in prices that are brought on by factors
beyond the Company's control.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO
---------------------------------------------
THREE MONTHS ENDED MARCH 31, 1995
---------------------------------
The Company recorded net income before dividends of $488,000 in 1996 as
compared to a net loss before dividends of $279,000 in 1995. Net income
increased $767,000 resulting from increased oil and gas sales and improved
margins on pipeline sales.
Pipeline sales increased $3,126,000 in 1996 as compared to 1995, but were
offset by an increase in natural gas purchases of $3,088,000. The increase in
sales and purchases is due primarily to the increase in the cost of gas which
averaged $2.08 in 1996 as compared to $1.43 in 1995. During 1996 natural gas
was sold at an average price of $2.11 as compared to $1.48 in 1995. Gross
margin decreased slightly to 4.1% in 1996 as compared to 4.9% in 1995.
Revenues from oil and gas sales increased $2,438,000 in 1996 as compared to
1995, primarily as a result of increased gas production from Keystone and
increased production from the New Mexico properties as a result of the
development and exploitation program in New Mexico. Additionally, revenues were
impacted by an increase in average oil and gas prices. Gas production in 1996
increased to 1,944,000 Mcf as compared to 1,284,000 Mcf in 1995, resulting in a
$880,000 increase in sales. The average price received for gas was $1.60 in
1996 as compared to $1.33 in 1995, resulting in a $511,000 increase in sales.
The average price received for gas excluding certain production payment volumes
was $2.10 in 1996. Oil production increased to 138,000 barrels in 1996 as
compared to 87,000 in 1995, resulting in a $824,000 increase in sales. The
increase in oil production is due to the Company's successful drilling and
development program in New Mexico. The average price received for oil was
$18.92 in 1996 as compared to $17.30 in 1995, resulting in a $223,000 increase
in sales. Trax added $416,000 in revenues and production of 25,000 barrels and
34,000 Mcf.
Lease operating expenses ("LOE") related to oil and gas properties increased
$483,000, primarily as a result of the new wells successfully completed in New
Mexico. Trax LOE was $127,000 during 1996. Lifting costs per equivalent barrel
(excluding Trax operations) decreased in 1996 to $4.57 from $5.36 in 1995, as a
result of the increased oil and gas production. Exploration expense decreased
$253,000 in 1996 as compared to 1995. During 1995 the Company incurred
significant costs related to its 3-D seismic program. Depletion, depreciation
and amortization ("DD&A") increased $744,000 in 1996 as a result of the New
Mexico operations and the increased gas production from Keystone. Trax DD&A was
$224,000 during 1996.
General and administrative expenses increased $206,000 in 1996 as compared to
1995. This increase is due primarily to the addition of Trax which accounted
for $107,000 of the increase. Interest expense increased $286,000 as a result
of the increased outstanding bank debt during 1996.
10
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Form 8-K/A-1 current report dated January 31, 1996, was filed on March 26,
1996. This report was filed pursuant to the Company's acquisition of 100% of
the common stock of Trax Petroleums Limited, a Canadian oil and gas company, for
approximately U.S. $7.4 million (see Condensed Notes to Consolidated Financial
Statements for further information).
11
<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 14 1996 /s/ Fred Cantu
----------- -----------------------
Fred Cantu
Treasurer and
Chief Financial Officer
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 2,183,000
<SECURITIES> 0
<RECEIVABLES> 8,655,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,554,000
<PP&E> 89,249,000
<DEPRECIATION> 14,420,000
<TOTAL-ASSETS> 90,191,000
<CURRENT-LIABILITIES> 12,816,000
<BONDS> 0
20,000,000
0
<COMMON> 172,000
<OTHER-SE> 7,577,000
<TOTAL-LIABILITY-AND-EQUITY> 90,191,000
<SALES> 19,440,000
<TOTAL-REVENUES> 19,765,000
<CGS> 15,516,000
<TOTAL-COSTS> 15,516,000
<OTHER-EXPENSES> 1,726,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 676,000
<INCOME-PRETAX> 697,000
<INCOME-TAX> 209,000
<INCOME-CONTINUING> 488,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 488,000
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0
</TABLE>
