FORM 10-Q/A
AMENDMENT NO. 1
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 September 30, 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 October 30, 1997
Common Stock, $.01 Par Value 17,321,804
<PAGE>
ARCH PETROLEUM INC.
INDEX
Page
Part I. FINANCIAL INFORMATION Number
Item 1.
CONSOLIDATED BALANCE SHEETS -
September 30, 1997 and December 31, 1996 .............. 4
CONSOLIDATED STATEMENTS OF OPERATIONS -
Three months and nine months ended
September 30, 1997 and 1996............................ 6
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Nine months ended September 30, 1997 and 1996 ......... 7
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.......... 8
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 ........................................ None
b. Reports on Form 8-K ............................. 11
SIGNATURES .................................................. 12
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
ASSETS September 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 1,270,000 $ 3,192,000
Accounts receivable - trade 3,534,000 15,948,000
Accounts receivable - related parties - 275,000
Prepaid expenses and other 919,000 968,000
----------- ------------
Total current assets 5,723,000 20,383,000
Property and Equipment, at cost:
Oil and gas properties accounted
for by the successful efforts method 91,793,000 81,620,000
Natural gas pipelines 5,603,000 12,361,000
Furniture, fixtures and other equipment 1,018,000 1,038,000
----------- ------------
98,414,000 95,019,000
Less accumulated depletion and
depreciation 23,612,000 19,617,000
----------- ------------
Net property and equipment 74,802,000 75,402,000
Accounts receivable - related parties 1,978,000 1,551,000
Notes receivable - related parties 1,845,000 1,759,000
Deferred income taxes 1,144,000 705,000
Other 968,000 1,239,000
----------- ------------
$86,460,000 $101,039,000
=========== ============
The accompanying condensed notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited) (Audited)
LIABILITIES AND SHAREHOLDERS' EQUITY September 30, December 31,
1997 1996
----------- ------------
<S> <C> <C>
Current Liabilities:
Accounts payable $ 4,616,000 $ 16,253,000
Accounts payable - related parties - 1,911,000
Current maturities of long-term debt - 1,119,000
Preferred stock dividends payable 711,000 311,000
----------- ------------
Total current liabilities 5,327,000 19,594,000
Long-term debt, less current maturities 27,200,000 30,134,000
Deferred revenue 11,231,000 12,528,000
Convertible subordinated notes 5,000,000 5,000,000
Deferred federal income taxes 5,679,000 3,450,000
Other liabilities 259,000 186,000
Minority interest in consolidated
subsidiaries - 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, 17,321,804 and
17,271,804 shares issued and
outstanding, respectively 173,000 172,000
Additional paid-in capital 6,137,000 6,012,000
Employee notes for stock purchases (1,070,000) (1,022,000)
Treasury stock, 100,000 shares (206,000) (206,000)
Cumulative translation adjustment (17,000) 37,000
Retained earnings 6,747,000 4,072,000
----------- ------------
11,764,000 9,065,000
----------- ------------
$86,460,000 $101,039,000
=========== ============
The accompanying condensed notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 5,599,000 $ 5,964,000 $17,063,000 $16,806,000
Pipeline sales 1,451,000 16,941,000 49,598,000 47,607,000
Gain on sale of assets 5,043,000 - 5,043,000 1,037,000
Interest and other 268,000 166,000 651,000 642,000
----------- ----------- ----------- -----------
12,361,000 23,071,000 72,355,000 66,092,000
Costs and Expenses:
Lease operations 2,253,000 1,906,000 6,242,000 5,951,000
Natural gas purchases and
pipeline operations 1,335,000 16,160,000 47,542,000 45,183,000
Exploration 649,000 312,000 851,000 490,000
Depletion, depreciation
and amortization 1,843,000 1,829,000 5,278,000 5,094,000
General and administrative 1,158,000 1,166,000 3,825,000 3,830,000
Interest 710,000 717,000 2,293,000 2,077,000
Foreign currency
transaction (gain) loss 45,000 (19,000) 87,000 (47,000)
Minority interest in net
income of consolidated
subsidiaries - 149,000 448,000 560,000
----------- ----------- ----------- -----------
7,993,000 22,220,000 66,566,000 63,138,000
----------- ----------- ----------- -----------
Net income before income
taxes and dividends 4,368,000 851,000 5,789,000 2,954,000
Deferred federal income
tax expense 1,449,000 256,000 1,914,000 886,000
----------- ----------- ----------- -----------
Net income before dividends 2,919,000 595,000 3,875,000 2,068,000
Dividends on preferred stock 400,000 400,000 1,200,000 1,200,000
----------- ----------- ----------- -----------
Net income $ 2,519,000 $ 195,000 $ 2,675,000 $ 868,000
=========== =========== =========== ===========
Net income per common share $ 0.14 $ 0.01 $ 0.15 $ 0.05
=========== =========== =========== ===========
Weighted average common
and common equivalent
shares outstanding 17,449,000 17,196,000 17,408,000 17,232,000
========== ========== ========== ==========
The accompanying condensed notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,875,000 $ 2,068,000
Adjustments to reconcile to net
cash from operations:
Depletion, depreciation and amortization 5,278,000 5,094,000
Deferred revenue (993,000) (1,772,000)
Deferred income taxes 1,914,000 886,000
Dry hole costs 558,000 375,000
Interest on notes receivable and other (134,000) (144,000)
Minority interest in net income of
consolidated subsidiaries 448,000 560,000
Gain on sale of assets (5,043,000) (1,037,000)
Issue common shares as compensation 57,000 42,000
Foreign currency transaction (gain) loss 87,000 (47,000)
----------- -----------
6,047,000 6,025,000
Change in accounts receivable 4,113,000 (1,237,000)
Change in other current assets (20,000) (217,000)
Change in accounts receivable - related parties (427,000) (471,000)
Change in accounts payable and other
current liabilities (4,819,000) 318,000
Production payment remedy adjustment (308,000) (1,084,000)
----------- -----------
Net operating cash flows 4,586,000 3,334,000
Cash flows from investing activities:
Capital expenditures, net of retirements (11,217,000) (7,256,000)
Proceeds from sale of properties 7,820,000 1,585,000
Notes receivable and other assets (243,000) (45,000)
Investment in subsidiary - (7,645,000)
----------- -----------
Net investing cash flows (3,640,000) (13,361,000)
Cash flows from financing activities:
Proceeds from bank borrowing 9,500,000 23,004,000
Payments of bank debt (10,864,000) (13,589,000)
Payment of preferred stock dividends (800,000) (800,000)
Note payable - minority interest holder (744,000) 694,000
Proceeds from exercise of stock options 40,000 -
----------- -----------
Net financing cash flows (2,868,000) 9,309,000
----------- -----------
Change in cash and cash equivalents (1,922,000) (718,000)
Cash and cash equivalents at beginning of period 3,192,000 2,574,000
----------- -----------
Cash and cash equivalents at end of period $ 1,270,000 $ 1,856,000
=========== ===========
The accompanying condensed notes are an integral part of these
consolidated financial statements.
</TABLE>
<PAGE>
ARCH PETROLEUM INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Arch Petroleum Inc. (the "Company") is amending the Consolidated
Balance Sheets, Consolidated Statements of Operations, Consolidated
Statements of Cash Flows and Condensed Notes to Consolidated
Financial Statements appearing in Item 1 and Management's Discussion
and Analysis of Financial Condition and Results of Operations
appearing in Item 2 of its Form 10-Q for the quarter ended September
30, 1997. The Company has revised the pre-tax gain it recognized
during the third quarter from the sale of a pipeline subsidiary. The
revised information appears herein.
In the opinion of 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 results of operations for the three months and nine months ended
September 30, 1997 and 1996 are not necessarily indicative of the
results to be expected for a full year.
On July 10, 1997, the Company entered into an agreement to sell
it's entire 50% membership interest in Onyx Pipeline Company, L.C.
and its affiliates (together "Onyx"). The transaction was closed on
July 31, 1997, and was effective June 30, 1997. The proceeds consist
of a $6.0 million sales price plus a $1.8 million repayment to the
Company for advances formerly made to Onyx for pipeline construction
and other costs. The Company reduced its domestic long-term debt by
$7.8 million, concurrently, and recognized a pre-tax book gain of
approximately $5.0 million in the third quarter. The Company had
formerly reported this gain as approximately $6.0 million in its
original filing. The inadvertent miscalculation of the gain resulted
from mistreatment of the Company's investment in Onyx The adjustment
to the gain from sale of Onyx, which increases retained earnings by
approximately $600,000, has no impact on cashflows or cash received
in the sale transaction.
On September 18, 1997, the Company filed Form 8-K pursuant to
changing its independent accountants.
<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
-------------------------------
In 1997 the Company's principal sources of funds were $4.6
million from net operations after changes in working capital and $7.8
million from sale of subsidiary. These funds were primarily consumed
by funding $9.7 million of development in existing U.S. properties,
primarily in New Mexico and North Texas, and $1.5 million for the
drilling of wells in Canada, including construction of supporting
facilities and pipelines. The Company also reduced its Revolver debt
by $1.4 million, net of borrowings.
On July 31, 1997, the Company closed the sale of its interest in
Onyx and realized approximately $7.8 million in cash. The $7.8
million proceeds were used to pay down the Domestic Revolver as of
July 31, 1997.
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 $15.2 million and $12.0
million against the Domestic and Canadian Revolvers at September 30,
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. The borrowing
base was redetermined and amended effective August 1, 1997, and the
borrowing base is currently Domestic $23.0 million and Canadian $14.0
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; however, the Company
expects the maturity date to be advanced for another year as is
customary in the first redetermination amendment each year.
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
was 7.91% at September 30, 1997.
The Revolvers 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 is currently not in default with the loan
agreements. The Company has no other unused lines of credit.
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.
Since December 31, 1996 through the date of this report, the
Company successfully completed forty-eight wells in Texas, New Mexico
and Alberta as part of its 1997 drilling program. In the United
States, forty-two new wells have been drilled and completed. In
Canada, six wells have been completed successfully. The Company also
drilled two wells (one each in the U.S. and Canada) which did not
find economic quantities of hydrocarbons.
<PAGE>
Results of Operations
---------------------
Nine months ended September 30, 1997 compared to
------------------------------------------------
nine months ended September 30, 1996
------------------------------------
The Company recorded net income before dividends of $3,875,000
in 1997 as compared to net income of $2,068,000 before dividends in
1996. Net income was increased primarily by the gain on sale of
subsidiary.
Revenues from oil and gas sales increased $257,000 in 1997 as
compared to 1996. Oil production increased to 482,000 barrels in
1997 as compared to 432,000 barrels in 1996, resulting in a
$1,007,000 increase in sales. The Company has begun realizing
production from the new wells drilled during 1997. The average price
received for oil was $19.71 in 1997 as compared to $20.03 in 1996,
resulting in a $154,000 decrease in sales. Gas production in 1997
decreased to 3,992,000 Mcf as compared to 5,072,000 Mcf in 1996,
resulting in a $1,736,000 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 $1.90 in 1997 as compared
to $1.61 in 1996, resulting in a $1,146,000 increase in sales. The
average price received for gas excluding certain production payment
volumes was $2.04 in 1997 as compared to $2.13 in 1996.
Lease operating expenses ("LOE") related to oil and gas
properties remained level in 1997 compared to 1996. Lifting costs
per equivalent barrel increased in 1997 to $5.44 from $4.76 in 1996,
primarily as a result of decreased gas production from Keystone. The
Company drilled two uneconomic exploratory wells during 1997, which
increased exploration expense.
<PAGE>
Three months ended September 30, 1997 compared to
-------------------------------------------------
three months ended September 30, 1996
-------------------------------------
The Company recorded net income before dividends of $2,919,000
in 1997 as compared to net income of $595,000 before dividends in
1996. Total revenues and expenses decreased as a result of the sale
of Onyx effective June 30, 1997. Net income was increased primarily
by the gain on sale of subsidiary.
Pipeline sales and expenses decreased in 1997 as a result of the
sale of Onyx.
Revenues from oil and gas sales decreased $365,000 in 1997 as
compared to 1996. Oil production increased to 175,000 barrels in
1997 as compared to 150,000 barrels in 1996, resulting in a $531,000
increase in sales. The Company has begun realizing production from
the new wells drilled during 1997. The average price received for
oil was $18.18 in 1997 as compared to $21.67 in 1996, resulting in a
$609,000 decrease in sales. Gas production in 1997 decreased to
1,308,000 Mcf as compared to 1,653,000 Mcf in 1996, resulting in a
$565,000 decrease in sales. The decrease in gas production is
attributable primarily to the reduced allowable production from
Keystone. The average price received for gas increased to $1.85 in
1997 as compared to $1.64 in 1996, resulting in a $276,000 increase
in sales. The average price received for gas excluding certain
production payment volumes was $2.28 in 1997 as compared to $2.15 in
1996.
LOE related to oil and gas properties increased $347,000 as a
result of the new wells drilled during 1997 and general increases in
the cost of services. Lifting costs per equivalent barrel increased
in 1997 to $5.73 from $4.61 in 1996, primarily as a result of
decreased gas production from Keystone. The Company drilled two
uneconomic exploratory wells during 1997, which increased exploration
expense.
<PAGE>
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
On September 18, 1997, the Company filed Form 8-K pursuant to
changing its independent accountants.
<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: February 4, 1998 /s/ Fred Cantu
-----------------------
Fred Cantu
Treasurer and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,270,000
<SECURITIES> 0
<RECEIVABLES> 3,534,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,723,000
<PP&E> 98,414,000
<DEPRECIATION> 23,612,000
<TOTAL-ASSETS> 86,460,000
<CURRENT-LIABILITIES> 5,327,000
<BONDS> 0
20,000,000
0
<COMMON> 173,000
<OTHER-SE> 11,591,000
<TOTAL-LIABILITY-AND-EQUITY> 86,460,000
<SALES> 66,661,000
<TOTAL-REVENUES> 72,355,000
<CGS> 53,784,000
<TOTAL-COSTS> 53,784,000
<OTHER-EXPENSES> 6,129,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,293,000
<INCOME-PRETAX> 5,789,000
<INCOME-TAX> 1,914,000
<INCOME-CONTINUING> 3,875,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,875,000
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0
</TABLE>
