<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, 1997
------------------
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, 1997
Common Stock, $.01 Par Value 17,171,804
----------
<PAGE>
ARCH PETROLEUM INC.
INDEX
<TABLE>
<CAPTION>
Page
Part I. FINANCIAL INFORMATION Number
<S> <C>
Item 1.
CONSOLIDATED BALANCE SHEETS -
March 31, 1997 and December 31, 1996............................................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS -
Three months ended March 31, 1997 and 1996...................................... 5
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Three months ended March 31, 1997 and 1996...................................... 6
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ............................. 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
<TABLE>
<CAPTION>
(UNAUDITED)
ASSETS March 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 3,068,000 $ 3,192,000
Accounts receivable - trade 8,793,000 15,948,000
Accounts receivable - related parties 253,000 275,000
Prepaid expenses and other 1,517,000 968,000
----------- ------------
Total current assets 13,631,000 20,383,000
Property and Equipment, at cost:
Oil and gas properties accounted for by the
successful efforts method 83,526,000 81,620,000
Natural gas pipelines 12,570,000 12,361,000
Furniture, fixtures and other equipment 1,134,000 1,038,000
----------- ------------
97,230,000 95,019,000
Less accumulated depletion, depreciation
and amortization 21,085,000 19,617,000
----------- ------------
Net property and equipment 76,145,000 75,402,000
Accounts receivable - related parties 1,623,000 1,551,000
Notes receivable - related parties 1,787,000 1,759,000
Deferred income taxes 813,000 705,000
Other 1,362,000 1,239,000
----------- ------------
$95,361,000 $101,039,000
=========== ============
</TABLE>
The accompanying notes condensed notes are an integral part of these
consolidated financial statements.
3
<PAGE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31,
1997 1996
--------------------- ---------------------
<S> <C> <C>
Current Liabilities:
Accounts payable $10,202,000 $ 16,253,000
Accounts payable - related parties 1,414,000 1,911,000
Current maturities of long-term debt 1,119,000 1,119,000
Preferred stock dividends payable 711,000 311,000
----------- ------------
Total current liabilities 13,446,000 19,594,000
Long-term debt, less current maturities 29,937,000 30,134,000
Deferred revenue 12,009,000 12,528,000
Convertible subordinated notes 5,000,000 5,000,000
Deferred federal income taxes 3,894,000 3,450,000
Other liabilities 210,000 186,000
Minority interest in consolidated subsidiaries 1,388,000 1,082,000
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, 17,271,804 shares issued and
outstanding 172,000 172,000
Additional paid-in capital 6,012,000 6,012,000
Employee notes for stock purchases (1,038,000) (1,022,000)
Treasury stock, 100,000 shares (206,000) (206,000)
Cumulative translation adjustment (35,000) 37,000
Retained earnings 4,572,000 4,072,000
----------- ------------
9,477,000 9,065,000
----------- ------------
$95,361,000 $101,039,000
=========== ============
</TABLE>
The accompanying notes 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,
---------------------------------------
1997 1996
------------ -------------
<S> <C> <C>
REVENUES:
Oil and gas sales $ 6,296,000 $ 5,642,000
Pipeline sales 26,441,000 13,798,000
Interest and other 181,000 325,000
----------- -----------
32,918,000 19,765,000
COSTS AND EXPENSES:
Oil and gas lease operations 2,102,000 2,096,000
Natural gas purchases and pipeline operations 25,323,000 13,420,000
Exploration 75,000 51,000
Depletion, depreciation and amortization 1,667,000 1,675,000
General and administrative 1,238,000 1,151,000
Interest 766,000 676,000
Foreign currency transaction (gain) loss 107,000 (39,000)
Minority interest in net income of consolidated subsidiaries 306,000 38,000
----------- -----------
31,584,000 19,068,000
----------- -----------
Income before income taxes and dividends 1,334,000 697,000
Income tax expense 434,000 209,000
----------- -----------
Net income before dividends 900,000 488,000
Dividends on preferred stock 400,000 400,000
----------- -----------
Net income $ 500,000 $ 88,000
=========== ===========
Net income per common share $0.03 $0.01
=========== ===========
Weighted average common and
common equivalent shares outstanding 17,288,000 17,237,000
=========== ===========
</TABLE>
The accompanying notes 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,
---------------------------------------
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 900,000 $ 488,000
Adjustments to reconcile to net cash provided
(used) by operations:
Depletion, depreciation and amortization 1,667,000 1,675,000
Deferred revenue (460,000) (654,000)
Income taxes 434,000 209,000
Interest on notes receivable and other (44,000) (49,000)
Foreign currency transaction (gain) loss 107,000 (39,000)
Minority interest in income of consolidated subsidiaries 306,000 38,000
----------- -----------
2,910,000 1,668,000
Change in accounts receivable 7,176,000 (669,000)
Change in other current assets (155,000) (154,000)
Change in accounts payable and other current liabilities (7,049,000) 373,000
Change in accounts receivable - related parties (72,000) (29,000)
Production payment remedy adjustment (59,000) (589,000)
----------- -----------
Net operating cash flows 2,751,000 600,000
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,525,000) (2,078,000)
Notes receivable and other assets (153,000) (50,000)
Acquisition of Arch Petroleum Ltd. - (7,645,000)
----------- -----------
Net investing cash flows (2,678,000) (9,773,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank borrowing 2,000,000 17,504,000
Payments of bank debt (2,279,000) (8,722,000)
Proceeds from note payable - minority interestholder 82,000 -
----------- -----------
Net financing cash flows (197,000) 8,782,000
----------- -----------
Change in cash and cash equivalents (124,000) (391,000)
Cash and cash equivalents at beginning of period 3,192,000 2,574,000
----------- -----------
Cash and cash equivalents at end of period $ 3,068,000 $ 2,183,000
=========== ===========
</TABLE>
The accompanying notes 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. Certain prior amounts have been reclassified to conform with 1997
presentation. 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,
1996. The Company extended the maturity date of notes receivable from certain
key employees to May 13, 1999. The results of operations for the three months
ended March 31, 1997 and 1996 are not necessarily indicative of the results to
be expected for a full year.
7
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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
- -------------------------------
In 1997 the Company's principal sources of funds were $2.8 million from
operations. These funds were primarily consumed by funding $2.5 million of
development in existing properties, primarily in New Mexico and the drilling of
prospects in Alberta, Canada. Discretionary cash flows (net income adjusted for
non-cash charges) increased to $2.9 million in 1997, compared to $1.7 million in
1996, reflecting increased oil and gas sales and improved margins on pipeline
sales. Discretionary cash flows are available for capital expenditures, debt
service and dividend payments.
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 $17.5 million and $10.5 million against the Domestic and
Canadian Revolvers at March 31, 1997, 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
Revolver facility is $50.0 million and the borrowing base is currently U.S.
$24.0 million and Canadian $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, 1998. 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 effective
interest rate realized was 7.99% at March 31, 1997.
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, 1997). Interest on the
unpaid principal amount of the note is payable quarterly. The unpaid principal
($2.2 million at March 31, 1997), is payable in quarterly installments ending on
March 31, 1999. Current maturities of the Onyx Note total $1.1 million at March
31, 1997. The Onyx Note is collaterlized by certain of Onyx's pipelines,
gathering facilities and related transportation contracts. In addition, the
Onyx Note is guaranteed by the Company. Onyx also has a note payable of
$835,000 including interest of $18,000 as of March 31, 1997, payable to Sejita
Natural Gas, L.C., a 50% interest holder in Onyx. This note is subordinated to
the Company's bank debt and is due on August 31, 1999.
The Domestic Revolver, Canadian 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 net 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.
Since December 31, 1996 through the date of this report, the Company
successfully completed nineteen wells in Texas, New Mexico and Alberta as part
of its 1997 drilling program. In the United States, seventeen new wells have
been drilled and completed. In Canada, two wells have been completed
successfully. Current plans call for drilling more than fifty new wells and
recompleting more than twenty-five existing wells in the United States and as
many as twenty new wells in Canada. Total annual planned expenditures are
approximately $15.0 million.
The Company believes it has sufficient cash and unused borrowing base in the
Revolvers to fund its anticipated drilling, development and acquisition programs
for 1997 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. 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.
8
<PAGE>
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("SFAS 128"), "Earnings Per Share". This Statement is effective for
financial statements issued for periods ending after December 15, 1997. Earlier
adoption is not permitted. SFAS 128 requires dual presentation of basic and
diluted earnings per share for entities with complex capital structures. The
impact of adopting this statement would not have a material effect on the
Company's earnings per share calculated based on its current structure.
RESULTS OF OPERATIONS
- ---------------------
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO
---------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996
---------------------------------
The Company recorded net income before dividends of $900,000 in 1997 as
compared to net income of $488,000 before dividends in 1996. Net income
increased due to higher oil and gas sales and improved margins on pipeline
sales. There was also a corresponding increase in almost all categories of
costs and expenses.
Pipeline sales increased $12,643,000 in 1997 as compared to 1996, but were
offset by an increase in natural gas purchases of $11,903,000. The increase in
sales and purchases is due primarily to the increase in volumes delivered to a
major customer of Onyx. Gross margin increased to $1,295,000 in 1996 as compared
to $563,000 in 1996.
Revenues from oil and gas sales increased $654,000 in 1997 as compared to
1996. Oil production increased to 142,000 barrels in 1997 as compared to
138,000 barrels in 1996, resulting in a $83,000 increase in sales. The Company
will begin realizing production from the newly drilled wells in the second
quarter of 1997. The average price received for oil was $22.03 in 1997 as
compared to $18.92 in 1996, resulting in a $441,000 increase in sales. Gas
production in 1997 decreased to 1,513,000 Mcf as compared to 1,944,000 Mcf in
1996, resulting in a $673,000 decrease in sales. The decrease in gas production
is attributable primarily to the reduced allowable production from the Keystone
Ellenburger field ("Keystone"). The average price received for gas increased to
$2.09 in 1997 as compared to $1.60 in 1996, resulting in a $806,000 increase in
sales. The average price received for gas excluding certain production payment
volumes was $3.12 in 1997.
Lease operating expenses related to oil and gas properties remained level in
1997 compared to 1996. Lifting costs per equivalent barrel increased in 1997 to
$5.33 from $4.53 in 1996, as a result of decreased gas production from Keystone.
Interest expense increased $90,000 as a result of higher outstanding bank debt
in 1997 compared to 1996.
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 14, 1997 /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-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,068,000
<SECURITIES> 0
<RECEIVABLES> 9,046,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 13,631,000
<PP&E> 97,230,000
<DEPRECIATION> 21,085,000
<TOTAL-ASSETS> 95,361,000
<CURRENT-LIABILITIES> 13,446,000
<BONDS> 0
20,000,000
0
<COMMON> 172,000
<OTHER-SE> 9,305,000
<TOTAL-LIABILITY-AND-EQUITY> 95,361,000
<SALES> 32,737,000
<TOTAL-REVENUES> 32,918,000
<CGS> 27,425,000
<TOTAL-COSTS> 27,425,000
<OTHER-EXPENSES> 1,742,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 766,000
<INCOME-PRETAX> 1,334,000
<INCOME-TAX> 434,000
<INCOME-CONTINUING> 900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 900,000
<EPS-PRIMARY> 0.03
<EPS-DILUTED> 0
</TABLE>
