-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UFaQHfRZRvdXp3MSdn5U53hfOYlFqtikmR+/rws360ZIXzewsbmcif+j0bGuSMV/ RF70QLTbavGGQ1cWvyTUwg== 0000320678-98-000012.txt : 19980814 0000320678-98-000012.hdr.sgml : 19980814 ACCESSION NUMBER: 0000320678-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980813 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARCH PETROLEUM INC /NEW/ CENTRAL INDEX KEY: 0000320678 STANDARD INDUSTRIAL CLASSIFICATION: DRILLING OIL & GAS WELLS [1381] IRS NUMBER: 830248900 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-09976 FILM NUMBER: 98684955 BUSINESS ADDRESS: STREET 1: 777 TAYLOR ST STE II-A CITY: FORT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173329209 MAIL ADDRESS: STREET 1: 777 TAYLOR STREET SUITE II-A STREET 2: 777 TAYLOR STREET SUITE II-A CITY: FT WORTH STATE: TX ZIP: 76102 10-Q 1 JUN 98 FILING 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 June 30, 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 July 31, 1998 Common Stock, $.01 Par Value 17,321,804 ARCH PETROLEUM INC. INDEX Page Part I. FINANCIAL INFORMATION Item 1. CONSOLIDATED BALANCE SHEETS - June 30, 1998 and December 31, 1997 ................... 3 CONSOLIDATED STATEMENTS OF OPERATIONS - Three and six months ended June 30, 1998 and 1997 ..... 5 CONSOLIDATED STATEMENTS OF CASH FLOWS - Six months ended June 30, 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 ............................... 10 SIGNATURES .................................................. 11 ARCH PETROLEUM INC. CONSOLIDATED BALANCE SHEETS (Unaudited) ASSETS June 30, December 31, 1998 1997 Current Assets: Cash and cash equivalents $ 924,000 $ 2,160,000 Accounts receivable - trade 3,295,000 3,585,000 Accounts receivable - related parties 430,000 729,000 Prepaid expenses and other 643,000 544,000 Total current assets 5,292,000 7,018,000 Property and Equipment, at cost: Oil and gas properties accounted for by the successful efforts method 106,764,000 99,178,000 Natural gas pipelines 5,976,000 5,657,000 Furniture, fixtures and other equipment 1,053,000 1,033,000 113,793,000 105,868,000 Less accumulated depletion, depreciation and amortization 28,506,000 25,320,000 Net property and equipment 85,287,000 80,548,000 Accounts receivable - related parties 1,405,000 1,406,000 Notes receivable - related parties 1,950,000 1,874,000 Deferred income taxes 1,808,000 1,511,000 Other 881,000 814,000 $ 96,623,000 $ 93,171,000 The accompanying condensed notes are an integral part of these consolidated financial statements.
ARCH PETROLEUM INC. CONSOLIDATED BALANCE SHEETS (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31, 1998 1997 Current Liabilities: Accounts payable $ 6,767,000 $ 6,239,000 Current maturities of long-term debt 36,500,000 - Preferred stock dividends payable 311,000 311,000 Total current liabilities 43,578,000 6,550,000 Long-term debt, less current maturities - 30,000,000 Non-recourse production payment obligation 15,824,000 13,317,000 Deferred revenue 310,000 2,123,000 Convertible subordinated notes 5,000,000 5,000,000 Deferred federal income taxes 4,870,000 5,770,000 Other liabilities 312,000 273,000 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 issued and outstanding 173,000 173,000 Additional paid-in capital 6,137,000 6,137,000 Employee notes for stock purchases (1,091,000) (1,047,000) Treasury stock, 100,000 shares (206,000) (206,000) Cumulative translation adjustment (357,000) (219,000) Retained earnings 2,073,000 5,300,000 6,729,000 10,138,000 $ 96,623,000 $ 93,171,000 The accompanying condensed notes are an integral part of these consolidated financial statements.
ARCH PETROLEUM INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Revenues: Oil and gas sales $ 4,841,000 $ 5,403,000 $ 9,379,000 $ 11,921,000 Pipeline sales 1,351,000 21,705,000 2,578,000 48,147,000 Interest and other 143,000 199,000 269,000 382,000 6,335,000 27,307,000 12,226,000 60,450,000 Costs and Expenses: Oil and gas lease operations 2,786,000 1,887,000 5,116,000 3,989,000 Natural gas purchases and pipeline operations 1,189,000 20,883,000 2,349,000 46,207,000 Exploration 55,000 127,000 144,000 202,000 Depletion, depreciation and amortization 1,799,000 1,766,000 3,380,000 3,434,000 General and administrative 1,663,000 1,430,000 2,677,000 2,667,000 Interest 1,191,000 1,052,000 2,279,000 2,040,000 Foreign currency transaction (gain) loss 63,000 (66,000) (49,000) 41,000 Minority interest in income of consolidated subsidiaries - 141,000 - 448,000 8,746,000 27,220,000 15,896,000 59,028,000 Income (loss) before income taxes and dividends (2,411,000) 87,000 (3,670,000) 1,422,000 Income tax expense (benefit) (788,000) 32,000 (1,243,000) 466,000 Net income (loss) before dividends (1,623,000) 55,000 (2,427,000) 956,000 Dividends on preferred stock 400,000 400,000 800,000 800,000 Net income (loss) available to common shareholders $(2,023,000) $ (345,000) $(3,227,000) $ 156,000 Net income (loss) per common share - basic and diluted $ (0.12) $ (0.02) $ (0.19) $ 0.01 Weighted average common shares outstanding - basic 17,322,000 17,285,000 17,322,000 17,287,000 The accompanying condensed notes are an integral part of these consolidated financial statements.
ARCH PETROLEUM INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended June 30, 1998 1997 Cash flows from operating activities: Net income (loss) $(2,427,000) $ 956,000 Adjustments to reconcile to net cash from operations: Depletion, depreciation and amortization 3,380,000 3,434,000 Deferred revenue (746,000) (1,196,000) Deferred income taxes (1,243,000) 357,000 Dry hole costs and other 66,000 - Interest on production payment obligation 712,000 457,000 Interest on notes receivable and other (184,000) (90,000) Minority interest in net income of consolidated subsidiaries - 448,000 Foreign currency transaction (gain) loss (49,000) 41,000 (491,000) 4,407,000 Change in accounts receivable 524,000 4,097,000 Change in other current assets (102,000) 388,000 Change in accounts receivable - related parties 364,000 (92,000) Change in accounts payable and other current liabilities 620,000 (3,135,000) Production payment remedy adjustment (177,000) (245,000) Net operating cash flows 738,000 5,420,000 Cash flows from investing activities: Capital expenditures (7,482,000) (7,865,000) Notes receivable and other assets (192,000) (216,000) Net investing cash flows (7,674,000) (8,081,000) Cash flows from financing activities: Proceeds from bank borrowing 7,500,000 6,000,000 Payments of bank debt (1,000,000) (3,064,000) Payment of preferred stock dividends (800,000) (800,000) Proceeds from note payable - minority interest holder - 73,000 Net financing cash flows 5,700,000 2,209,000 Change in cash and cash equivalents (1,236,000) (452,000) Cash and cash equivalents at beginning of period 2,160,000 3,192,000 Cash and cash equivalents at end of period $ 924,000 $ 2,740,000 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 and six months ended June 30, 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. Three Months Ended Six Months Ended June 30, June 30, 1998 1997 1998 1997 Comprehensive income: Net income (loss) $(1,623,000) $ 55,000 $(2,427,000) $ 956,000 Cumulative translation adjustment, net of tax (186,000) 17,000 (138,000) (55,000) Total comprehensive income (loss) $(1,809,000) $ 72,000 $(2,565,000) $ 901,000
On May 28, 1998, the Company and Pogo Producing Company ("Pogo") entered into a definitive Agreement and Plan of Merger (the "Merger Agreement") that will provide for a tax-free, stock for stock transaction through which the Company will become a wholly owned subsidiary of Pogo. The Merger Agreement provides for a fixed exchange ratio of one share of Pogo common stock for 10.4 shares of the Company's common stock. In addition, holders of the Company's preferred stock will receive one share of Pogo common stock for each 1.04 shares of preferred stock they hold. Former holders of the Company's stock will hold approximately six percent of Pogo common stock after the merger. The total number of outstanding Pogo shares after the merger will be approximately 40,100,000 shares. Based on the Company's closing price of $2.47 on May 28, 1998, and the assumption of approximately $48.5 million of the Company's debt and production payment obligations, the transaction has a total value of approximately $115 million. The Boards of Directors of both Pogo and the Company unanimously approved the merger; however, the merger is also subject to approval by the Company's shareholders and to customary regulatory approvals. Executive officers and directors of the Company, Threshold Development Corporation and all of the holders of the Company's preferred stock, representing approximately 47% of Arch's outstanding stock entitled to vote on the merger at the shareholders meeting, have entered into agreements with Pogo agreeing to vote in favor of the merger. A special meeting of shareholders of the Company will take place on August 14, 1998, wherein the shareholders will be asked to approve and adopt the Merger Agreement. If approved, the Merger Agreement will be closed on or about August 17, 1998. The merger is expected to be accounted for as a pooling of interests and qualify as a tax-free reorganization. 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 $6.5 million (net) from its bank credit facilities and $0.7 million from operations. Cash flows from operations were decreased by approximately $4.7 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 $3.5 million of domestic drilling, primarily in New Mexico and West Texas, $4.0 million for the drilling of new wells in Canada, including construction of supporting facilities and pipelines, and $0.8 million for preferred stock dividends. 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 $22.5 million and $14.0 million against the Domestic and Canadian Revolvers at June 30, 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 8.19% at June 30, 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 entire $36.5 million due under the Revolvers has been classified as current on the June 30, 1998 Consolidated Balance Sheets because the Revolvers mature within one year. As a result, the Company is in technical default with certain covenants in the loan agreements. If the Merger Agreement is not consummated, the Company will begin discussions with its Lenders to extend its bank credit facilities. The Company has no other unused lines of credit. Results of Operations Six months ended June 30, 1998 compared to six months ended June 30, 1997 The Company recorded a net loss before dividends of $2,427,000 in 1998 as compared to net income of $956,000 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 $2,542,000 in 1998 as compared to 1997. Oil production increased to 336,000 barrels in 1998 as compared to 307,000 barrels in 1997, resulting in a $590,000 sales increase. The Company has begun realizing production from the new wells drilled during late 1997 and early 1998. The average price received for oil was $14.12 in 1998 as compared to $20.58 in 1997, resulting in a $2,168,000 sales decrease. Gas production in 1998 increased to 2,813,000 Mcf as compared to 2,684,000 Mcf in 1997, resulting in a $270,000 sales increase. The increase in gas production is attributable primarily to new wells drilled in Canada in late 1997. The average price received for gas decreased to $1.65 in 1998 as compared to $2.09 in 1997, resulting in a $1,233,000 sales decrease. The average price received for gas excluding certain production payment volumes was $1.83 in 1998 as compared to $2.94 in 1997. Lease operating expenses ("LOE") related to oil and gas properties increased $1,127,000 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 $6.36 from $5.29 in 1997 primarily as a result of increases in the cost of services. Interest expense increased $239,000 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 $712,000 and $457,000 in 1998 and 1997, respectively, is a non-cash item that is added back to cash flows in the Consolidated Statements of Cash Flows. Three months ended June 30, 1998 compared to three months ended June 30, 1997 The Company recorded a net loss before dividends of $1,623,000 in 1998 as compared to net income of $55,000 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 $562,000 in 1998 as compared to 1997. Oil production increased to 175,000 barrels in 1998 as compared to 165,000 barrels in 1997, resulting in a $192,000 sales increase. The Company has begun realizing production from the new wells drilled during late 1997 and early 1998. The average price received for oil was $13.77 in 1998 as compared to $19.34 in 1997, resulting in a $975,000 sales decrease. Gas production in 1998 increased to 1,437,000 Mcf as compared to 1,171,000 Mcf in 1997, resulting in a $502,000 sales increase. The increase in gas production is attributable primarily to new wells drilled in Canada in late 1997. The average price received for gas decreased to $1.69 in 1998 as compared to $1.89 in 1997, resulting in a $281,000 sales decrease. The average price received for gas excluding certain production payment volumes was $1.88 in 1998 as compared to $2.46 in 1997. Lease operating expenses ("LOE") related to oil and gas properties increased $899,000 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 $6.72 from $5.24 in 1997 as a result of increases in the cost of services as well as decreased gas production from Keystone. Interest expense increased $139,000 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 $373,000 and $233,000 in 1998 and 1997, respectively, is a non-cash item that is added back to cash flows in the Consolidated Statements of Cash Flows. Part II. Item 6. EXHIBITS AND REPORTS ON FORM 8-K Form 8-K current report dated May 28, 1998, was filed on June 4, 1998. This report was filed pursuant to the Company and Pogo entering into the Merger Agreement that will provide for a tax-free, stock for stock transaction through which the Company will become a wholly owned subsidiary of Pogo. The Merger Agreement provides for a fixed exchange ratio of one share of Pogo common stock for 10.4 shares of the Company's common stock. In addition, holders of the Company's preferred stock will receive one share of Pogo common stock for each 1.04 shares of preferred stock they hold. Former holders of the Company's stock will hold approximately six percent of Pogo common stock after the merger. The total number of outstanding Pogo shares after the merger will be approximately 40,100,000 shares. Based on the Company's closing price of $2.47 on May 28, 1998, and the assumption of approximately $48.5 million of the Company's debt and production payment obligations, the transaction has a total value of approximately $115 million. The Boards of Directors of both Pogo and the Company unanimously approved the merger; however, the merger is also subject to approval by the Company's shareholders and to customary regulatory approvals. Executive officers and directors of the Company, Threshold Development Corporation and all of the holders of the Company's preferred stock, representing approximately 47% of the Company's outstanding stock entitled to vote on the merger at the shareholders meeting, have entered into agreements with Pogo agreeing to vote in favor of the merger. A special meeting of shareholders of the Company will take place on August 14, 1998, wherein the shareholders will be asked to approve and adopt the Merger Agreement. If approved, the Merger Agreement will be closed on or about August 17, 1998. The merger is expected to be accounted for as a pooling of interests and qualify as a tax-free reorganization. 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: August 12, 1998 /s/ Fred Cantu Fred Cantu Treasurer and Chief Financial Officer 11 EX-27 2
5 1,000 6-MOS DEC-31-1998 JUN-30-1998 924 0 3,725 0 0 5,292 113,793 28,506 96,623 43,578 0 20,000 0 173 6,556 96,623 11,957 12,226 7,465 7,465 3,524 0 2,279 (3,670) (1,243) (2,427) 0 0 0 (2,427) (0.19) 0
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