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, 1998
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, 1998
Common Stock, $.01 Par Value 17,321,804
<PAGE>
ARCH PETROLEUM INC.
INDEX
Page
Part I. FINANCIAL INFORMATION Number
Item 1.
CONSOLIDATED BALANCE SHEETS -
March 31, 1998 and December 31, 1997................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS -
Three months ended March 31, 1998 and 1997............. 5
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Three months ended March 31, 1998 and 1997............. 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
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
ASSETS March 31,
December 31,
1998 1997
<S> <C> <C>
Current Assets:
Cash and cash equivalents $1,382,000 $2,160,000
Accounts receivable - trade 2,881,000 3,585,000
Accounts receivable - related parties 613,000 729,000
Prepaid expenses and other 399,000 544,000
Total current assets 5,275,000 7,018,000
Property and Equipment, at cost:
Oil and gas properties accounted for
by the successful efforts method 102,464,000 99,178,000
Natural gas pipelines 5,940,000 5,657,000
Furniture, fixtures and other equipment 1,043,000 1,033,000
109,447,000 105,868,000
Less accumulated depletion, depreciation
and amortization 26,870,000 25,320,000
Net property and equipment 82,577,000 80,548,000
Accounts receivable - related parties 1,458,000 1,406,000
Notes receivable - related parties 1,905,000 1,874,000
Deferred income taxes 1,640,000 1,511,000
Other 882,000 814,000
$93,737,000 $93,171,000
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY March 31, December 31,
1998 1997
<S> <C> <C>
Current Liabilities:
Accounts payable $5,563,000 $6,239,000
Preferred stock dividends payable 711,000 311,000
Total current liabilities 6,274,000 6,550,000
Long-term debt 32,000,000 30,000,000
Non-recourse production payment
obligation 14,545,000 13,317,000
Deferred revenue 1,222,000 2,123,000
Convertible subordinated notes 5,000,000 5,000,000
Deferred federal income taxes 5,431,000 5,770,000
Other liabilities 299,000 273,000
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 shares issued and
outstanding 173,000 173,000
Additional paid-in capital 6,137,000 6,137,000
Employee notes for stock purchases (1,064,000) (1,047,000)
Treasury stock, 100,000 shares (206,000) (206,000)
Cumulative translation adjustment (171,000) (219,000)
Retained earnings 4,097,000 5,300,000
8,966,000 10,138,000
$93,737,000 $93,171,000
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Revenues:
Oil and gas sales $ 4,538,000 $ 6,520,000
Pipeline sales 1,227,000 26,441,000
Interest and other 126,000 181,000
5,891,000 33,142,000
Costs and Expenses:
Oil and gas lease operations 2,330,000 2,102,000
Natural gas purchases and
pipeline operations 1,160,000 25,323,000
Exploration 88,000 75,000
Depletion, depreciation and
amortization 1,582,000 1,667,000
General and administrative 1,014,000 1,238,000
Interest _ banks and other 748,000 766,000
Interest _ production payment
obligation 339,000 224,000
Foreign currency transaction
(gain) loss (112,000) 107,000
Minority interest in net income of
consolidated subsidiaries - 306,000
7,149,000 31,808,000
Income (loss) before income taxes
and dividends (1,258,000) 1,334,000
Income tax expense (benefit) (455,000) 434,000
Net income (loss) before dividends (803,000) 900,000
Dividends on preferred stock 400,000 400,000
Net income (loss) available to
common shareholders $ (1,203,000) $ 500,000
Net income (loss) available
per common share -
basic and diluted $ (0.07) $ 0.03
Weighted average common
shares outstanding - basic 17,322,000 17,289,000
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
<PAGE>
<TABLE>
ARCH PETROLEUM INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (803,000) $ 900,000
Adjustments to reconcile to net cash
provided (used) by operations:
Depletion, depreciation and
amortization 1,582,000 1,667,000
Deferred revenue (386,000) (684,000)
Income taxes (455,000) 434,000
Dryhole costs and other 33,000 -
Interest on production payment
obligation 339,000 224,000
Interest on notes receivable and
other (78,000) (44,000)
Foreign currency transaction (gain)
loss (112,000) 107,000
Minority interest in income of
consolidated subsidiaries - 306,000
120,000 2,910,000
Change in accounts receivable 781,000 7,176,000
Change in other current assets 145,000 (155,000)
Change in accounts payable and
other current liabilities (695,000) (7,049,000)
Change in accounts receivable -
related parties 94,000 (72,000)
Production payment remedy adjustment (55,000) (59,000)
Net operating cash flows 390,000 2,751,000
Cash flows from investing activities:
Capital expenditures (3,038,000) (2,525,000)
Notes receivable and other assets (130,000) (153,000)
Net investing cash flows (3,168,000) (2,678,000)
Cash flows from financing activities:
Proceeds from bank borrowing 3,000,000 2,000,000
Payments of bank debt (1,000,000) (2,279,000)
Proceeds from note payable -
minority interestholder - 82,000
Net financing cash flows 2,000,000 (197,000)
Change in cash and cash equivalents (778,000) (124,000)
Cash and cash equivalents at beginning
of period 2,160,000 3,192,000
Cash and cash equivalents at end of
period $1,382,000 $3,068,000
<PAGE>
</TABLE>
The accompanying condensed notes are an integral part of these consolidated
financial statements.
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 to 1998 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, 1997. The results of operations for the three months
ended March 31, 1998 and 1997 are not necessarily indicative of the
results to be expected for a full year.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income". Comprehensive income as defined by SFAS No.
130 is net income plus direct adjustments to shareholders' equity.
The cumulative translation adjustment of the Company's Canadian
subsidiary, Arch Petroleum Ltd. ("APL"), is the only such direct
adjustment recorded by the Company.
<TABLE>
Three Months Ended March 31,
1998 1997
<S> <C> <C>
Comprehensive income:
Net income (loss) $(803,000) $ 900,000
Cumulative translation
adjustment, net of tax 48,000 (72,000)
Total comprehensive income
(loss) $(755,000) $ 828,000
</TABLE>
<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, reserve estimates, interest rate
fluctuations, the regulatory and political environments, estimated
volumes of gas to be delivered pursuant to the volumetric production
payment and other risks indicated in filings with the Securities and
Exchange Commission.
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.
Liquidity and Capital Resources
In 1998 the Company's chief sources of funds were $2.0 million
(net) from its bank credit facilities and $0.4 million from
operations. Cash flows from operations were decreased by
approximately $2.1 million in 1998 as compared to 1997 as a result of
lower than normal oil and gas prices. These funds were primarily
used to fund $2.5 million of domestic drilling, primarily in New
Mexico and North Texas and $0.6 million for the drilling of new wells
in Canada, including construction of supporting facilities and
pipelines.
The Company participates in two bank credit facilities: the
Third Restated Revolving Credit Loan Agreement among the Company and
Bank One, Texas, NA, the Agent bank and other banks (the "Domestic
Revolver"), and the Credit Agreement among APL and Bank of Montreal,
the Canadian Agent bank (the "Canadian Revolver"). The Agent bank
and the Canadian Agent bank together are (the "Lenders"). The two
credit facilities are separate bank revolvers.
The Company's Revolvers are in place for use by the Company at
its discretion for certain activities including drilling, development
and acquisition of oil and gas properties. The Company has borrowed
$18.0 million and $14.0 million against the Domestic and Canadian
Revolvers at March 31, 1998, 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 allocated $23.0 million
Domestic and $14.0 million Canadian. 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, 1999. 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 8.30% at March 31, 1998.
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 net worth ratio and
a defined net income in excess of scheduled interest and principal
payments. The Company is currently not in default with the covenants
in the loan agreements. The Company has no other unused lines of
credit.
The Company believes that it has sufficient cash flows and
available borrowing base in the Revolvers to fund its anticipated
drilling, development and acquisition programs for 1998 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.
<PAGE>
Results of Operations
Three months ended March 31, 1998 compared to
three months ended March 31, 1997
The Company recorded a net loss before dividends of $803,000 in
1998 as compared to net income of $900,000 before dividends in 1997.
Total revenues and expenses decreased as a result of diminished
natural gas pipeline segment operations after the sale of a pipeline
subsidiary effective June 30, 1997. Net income was decreased
primarily as a result of lower oil and gas prices during 1998.
Revenues from oil and gas sales decreased $1,982,000 in 1998 as
compared to 1997. Oil production increased to 161,000 barrels in
1998 as compared to 142,000 barrels in 1997, resulting in a $414,000
sales increase. The Company has begun realizing production from the
new wells drilled during 1997. The average price received for oil
was $14.50 in 1998 as compared to $22.03 in 1997, resulting in a
$1,210,000 sales decrease. Gas production in 1998 decreased to
1,376,000 Mcf as compared to 1,513,000 Mcf in 1997, resulting in a
$307,000 sales decrease. 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 decreased to $1.60 in 1998 as compared to $2.24 in 1997,
resulting in a $879,000 sales decrease. The average price received
for gas excluding certain production payment volumes was $1.82 in
1998 as compared to $3.12 in 1997.
Lease operating expenses ("LOE") related to oil and gas
properties increased $228,000 as a result of the new wells drilled
during 1998 and general increases in the cost of field services.
Lifting costs per equivalent barrel increased in 1998 to $5.97 from
$5.33 in 1997 as a result of increases in the cost of services as
well as decreased gas production from Keystone.
Interest expense increased $97,000 in 1998 due entirely to
interest associated with the accounting treatment of volume
deficiencies related to the production payment obligation. Interest
related to the production payment obligation of $339,000 and $224,000
in 1998 and 1997, respectively, is a non-cash item that is added back
to cash flows in the Consolidated Statements of Cash Flows.
<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, 1998 /s/ Fred Cantu
Fred Cantu
Treasurer and
Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,382
<SECURITIES> 0
<RECEIVABLES> 3,494
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,275
<PP&E> 109,447
<DEPRECIATION> 26,870
<TOTAL-ASSETS> 93,737
<CURRENT-LIABILITIES> 6,274
<BONDS> 0
20,000
0
<COMMON> 173
<OTHER-SE> 8,793
<TOTAL-LIABILITY-AND-EQUITY> 93,737
<SALES> 5,765
<TOTAL-REVENUES> 5,891
<CGS> 3,490
<TOTAL-COSTS> 3,490
<OTHER-EXPENSES> 1,670
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,087
<INCOME-PRETAX> (1,258)
<INCOME-TAX> (455)
<INCOME-CONTINUING> (803)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (803)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> 0
</TABLE>
