U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
---- -----
Commission File No.0-21472
AMERICAN RESOURCES OF DELAWARE, INC.
(Name of small business issuer in its charter)
DELAWARE 86-0713506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 MORGAN STREET, P. O. BOX 87
VERSAILLES, KENTUCKY 40383
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 606-873-5455
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 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 xx NO
------ ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
YES xx NO
-------- ----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
Issuer's classes of common equity, as of the last practicable
date:
On June 30, 1996, 6,335,818 shares of the Registrant's
Common Stock, par value $.00001 per share, were issued and
outstanding, and 268,851 shares of the Registrant's Series 1993
8% Convertible Preferred Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ; No xx .
---- --------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
FORM 10-QSB
For the Quarter Ended June 30, 1996
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Condensed Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of
Operations - Three Months and Six Months
Ended June 30, 1996 and 1995 5
Condensed Consolidated Statements of
Stockholders' Equity - Six Months
Ended June 30, 1996 7
Condensed Consolidated Statements of
Cash Flows - Six Months Ended June 30,
1996 and 1995 8
Notes to Condensed Consolidated Financial
Statements 10
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 16
PART II - OTHER INFORMATION
Item 3 - Exhibits and Reports on Form 8-K 23
Signature 25
Exhibit Index 26
ii
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Financial Statements for the six months ended June 30,
1996 and 1995 include, in the opinion of the Company, all
adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the results of operations for such
periods. Results of operations for the six months ended June 30,
1996, are not necessarily indicative of results of operations
which will be realized for the year ending December 31, 1996.
The Financial Statements should be read in conjunction with the
Company's Report on Form 10-KSB for the year ended December 31,
1995.
1
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED FINANCIAL
---------------------------------
STATEMENTS
----------
FOR THE QUARTER AND SIX MONTHS ENDED
------------------------------------
JUNE 30, 1996 AND 1995
----------------------
2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS
--------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
JUNE 30,
--------
1996 DECEMBER 31,
---- ------------
(UNAUDITED) 1995(*)
----------- -------
Current assets:
<S> <C> <C>
Cash and temporary cash investments $ 628,422 826,393
Accounts and notes receivable, net 1,892,061 6,052,242
Deferred tax asset 29,470 184,383
Prepaid expenses and other 200,761 134,907
---------- ----------
Total current assets 2,950,714 7,197,925
Oil and gas properties, at cost
(successful efforts method) 29,900,317 23,798,261
Property and equipment, at cost 9,640,732 9,206,905
---------- ----------
39,541,049 33,005,166
Less accumulated depreciation,
depletion and amortization (4,018,901) (3,021,525)
---------- ----------
Net property and equipment 35,522,148 29,983,641
Other assets:
Investment in unconsolidated
subsidiaries 387,992 312,992
Accounts and notes receivable 6,462,399 4,653,102
Call advance 1,500,000 1,500,000
Other 612,535 549,732
---------- ----------
Total other assets 8,962,926 7,015,826
---------- ----------
$47,435,788 44,197,392
========== ==========
(Continued)
</TABLE>
See accompanying notes to condensed, consolidated financial
statements.
3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
JUNE 30,
--------
1996 DECEMBER 31,
---- ------------
(UNAUDITED) 1995(*)
----------- -------
Current liabilities:
<S> <C> <C>
Current installments of
long-term debt $ 4,093,048 4,623,341
Unearned revenue 1,307,743 -
Accounts payable 1,518,241 2,732,971
Accrued taxes payable 214,609 103,118
Accrued expenses and other 453,156 351,797
---------- ----------
Total current liabilities 7,586,797 7,811,227
Long-term debt, excluding
current maturities 13,255,096 14,568,505
Unearned revenue 2,878,204 -
Deferred income taxes and other 3,210,365 3,065,738
Stockholders' equity:
Series 1993 8% Convertible Preferred
Stock, par value $12.00 per share 2,181,819 2,181,819
Series B 6% Junior Cumulative
Convertible Preferred stock, par
value $.00001 per share - 1
Common Stock, par value $.00001 per
share; 20,000,000 shares authorized;
6,335,818 and 5,539,215 shares issued
and outstanding at June 30, 1996 and
December 31, 1995, respectively 63 55
Additional paid-in capital 16,534,693 14,887,977
Retained earnings 1,788,751 1,682,070
---------- ----------
Total stockholders' equity 20,505,326 18,751,922
Commitments and contingencies
---------- ----------
$47,435,788 44,197,392
========== ==========
</TABLE>
* Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial
statements.
4
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------- ----------------
JUNE 30, JUNE 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C>
Marketing $4,332,909 2,829,565 12,197,402 5,675,126
Production 1,405,094 701,802 2,847,827 1,085,549
Well development - 106,000 39,334 176,000
Transportation 330,772 193,970 633,464 390,286
Other 109,930 258,845 383,925 414,832
---------- ---------- ---------- ----------
6,178,705 4,090,182 16,101,952 7,741,793
---------- ---------- ---------- ----------
Expenses:
Marketing 4,528,847 2,657,265 12,136,826 5,215,321
Production 287,020 173,444 605,137 290,505
Well development 18,939 5,302 19,523 50,296
Transportation 103,987 32,996 166,272 63,329
Depreciation, depletion
and amortization 570,136 286,521 1,044,479 561,190
Other 48,944 25,750 103,161 58,738
---------- ---------- ---------- ----------
5,557,873 3,181,278 14,075,398 6,239,379
---------- ---------- ---------- ----------
620,832 908,904 2,026,554 1,502,414
Administrative expenses 475,156 579,914 927,618 1,259,133
---------- ---------- ---------- ----------
Operating income 145,676 328,990 1,098,936 243,281
---------- ---------- ---------- ----------
Other income (expense):
Gain on sale of claims - 339,201 - 2,189,616
Interest expense (508,143) (253,397) (989,457) (444,130)
Interest income 381,997 260,228 765,208 331,690
Other 13,135 (32,725) (28,763) (31,000)
---------- ---------- ---------- ----------
(113,011) 313,307 (253,012) 2,046,176
---------- ---------- ---------- ----------
Income before income
tax expense 32,665 642,297 845,924 2,289,457
Income tax expense 7,528 219,532 324,746 837,775
---------- ---------- ---------- ----------
Net income $ 25,137 422,765 521,178 1,451,682
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
Condensed, Consolidated Statements of Operations (Unaudited)
------------------------------------------------------------
(continued)
-----------
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
------------- ----------------
JUNE 30, JUNE 30,
-------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per common share:
Primary:
Net income - .11 .09 .40
= === === ===
Weighted average
number of common
shares and common
share equivalents
outstanding 6,166,953 3,802,911 5,991,679 3,600,917
========= ========= ========= =========
Fully diluted:
Net income - .07 .08 .25
= === === ===
Weighted average
number of common
shares and common
share equivalents
outstanding 6,474,247 5,824,921 6,417,791 5,843,550
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
6
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------
<TABLE>
<CAPTION>
6% JUNIOR
---------
COMMON STOCK 8% PREFERRED STOCK PREFERRED STOCK
------------ --------------------------------------- ---------------
NUMBER NUMBER DISCOUNT NUMBER ADDITIONAL
OF PAR OF PAR ON NET OF PAR PAID-IN RETAINED
SHARES VALUE SHARES VALUE PREFERRED VALUE SHARES VALUE CAPITAL EARNINGS TOTAL
------ ----- ------ ----- --------- ----- ------ ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1995 5,539,215 $55 268,851 3,226,213 (1,044,394) 2,181,819 117,000 1 14,887,977 1,682,070 18,751,922
Conversion of
Preferred Stock
to Common Stock 224,822 2 - - - - (58,941) - (10,002) - (10,000)
Issuance of Common
Stock dividend 16,781 - - - - - - - 148,328 (148,328) -
Issuance of Common
Stock and warrants
in connection
with property
acquisition 225,000 2 - - - - - - 1,157,173 - 1,157,175
Issuance of common
stock, net of
placement costs 330,000 4 - - - - - - 899,996 - 900,000
Purchase and
retirement of
Series B
Preferred Stock - - - - - - (58,059) (1) (536,730) (266,169) (802,900)
Stock registration
costs - - - - - - - - (12,049) - (12,049)
Net income - - - - - - - - - 521,178 521,178
--------- --- ------- --------- ---------- --------- ------- --- ---------- --------- ----------
Balance,
June 30, 1996 6,335,818 $63 268,851 3,226,213 (1,044,394) 2,181,819 - - 16,534,693 1,788,751 20,505,326
========= === ======= ========= ========== ========= ======= === ========== ========= ==========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
---------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net cash provided by
operating activities $2,105,231 223,366
---------- ----------
Investing activities:
Purchases of property and
equipment (5,483,076) (462,668)
Proceeds from sale of
claims receivable - 4,235,701
Issuance of notes receivable - (5,156,973)
Payments on notes receivable 801,230 -
Distribution from investment in
unconsolidated subsidiary - 82,274
Investment in call advance - (1,500,000)
Other - (8,966)
---------- ----------
Net cash used in
investing activities (4,681,846) (2,810,632)
---------- ----------
Financing activities:
Proceeds from borrowings 2,608,068 3,365,000
Payments on borrowings (4,451,770) (1,022,333)
Proceeds from production payment 4,147,300 -
Proceeds from issuance
of Common Stock 900,000 -
Purchase of 6% Junior
Preferred Stock (802,900) -
Other (22,054) (19,479)
---------- ----------
Net cash provided by
financing activities 2,378,644 2,323,188
---------- ----------
Decrease in cash (197,971) (264,078)
Cash and cash equivalents
at beginning of period 826,393 1,118,824
---------- ----------
Cash and cash equivalents
at end of period $ 628,422 854,746
========== ==========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared a stock dividend and issued 16,781 and
55,955 shares of Common Stock to holders of the Series 1993 and
Series B Preferred Stock during the six months ended June 30,
1996 and 1995, respectively.
During the six months ended June 30, 1996, 58,941 shares of
Series B Preferred Stock were converted into a total of 224,822
shares of Common Stock. During the six months ended June 30,
1995, 5,834 shares of Series 1993 and 197,326 shares of Series B
Preferred Stock were converted into a total of 635,557 shares of
common stock.
In connection with the acquisition of certain gas properties and
related equipment, the Company issued 225,000 shares of common
stock and 225,000 common stock warrants with a combined value of
$1,157,175. The Company also paid cash and assumed certain
obligations in connection with the acquisition, which was
consummated on February 26, 1996 (see Note 2).
See accompanying notes to condensed, consolidated financial
statements.
8
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
------------------------------------------------------------
(continued)
-----------
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
---------------------------------------
NON-CASH TRANSACTIONS (CONTINUED):
The Company acquired 58,059 shares of the outstanding 6% Junior
Preferred Stock for $802,900 during the six months ended June 30,
1996. Upon resolution of the Board of Directors, the shares were
retired.
During the six months ended June 30, 1995, the Company issued
20,000 shares of Common Stock under a two year consulting
agreement at a value of $56,200.
See accompanying notes to condensed, consolidated financial
statements.
9
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
-----------------------------------------------
(1) GENERAL
American Resources of Delaware, Inc. (ARI), a Delaware
corporation organized on August 14, 1992, was formed to
acquire the assets and assume certain liabilities of
Standard Oil & Exploration of Delaware, Inc. (SOE) pursuant
to SOE's Chapter 11 Bankruptcy Joint Plan of Reorganization
which was consummated effective April 22, 1993.
ARI and its wholly-owned subsidiary, Southern Gas Co. of
Delaware, Inc. (the Subsidiary) are involved in the
production, gathering, purchasing, processing, transporting
and selling of natural gas primarily in the State of
Kentucky and the Gulf of Mexico. The Subsidiary has
expanded its production efforts through its involvement in
the development of prospects offshore Louisiana in the Gulf
of Mexico. These activities are considered to be one
business segment for financial reporting purposes.
The accompanying condensed, consolidated financial
statements include the accounts of ARI and its Subsidiary,
collectively referred to as the Company. All significant
intercompany balances and transactions have been eliminated
in consolidation in order to make the financial statements,
in the opinion of management, not misleading.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
instructions to Form 10-Q and, therefore, do not include all
disclosures required by generally accepted accounting
principles. However, in the opinion of management, these
statements include all adjustments, which are of a normal
recurring nature, necessary to present fairly the financial
position at June 30, 1996 and December 31, 1995 and the
results of operations and changes in cash flows for the
periods ended June 30, 1996 and 1995. These financial
statements should be read in conjunction with the financial
statements and notes to the financial statements in the 1995
Form 10-K of the Company that was filed with the Securities
and Exchange Commission.
Net income per common share was computed after consideration
of dividend requirements on Preferred Stock, using the
weighted average number of shares outstanding during each of
the years presented. Outstanding stock options and warrants
are Common Stock equivalents and have been considered when
the effect is dilutive.
Certain reclassifications have been made to the prior period
financial statements to conform with the current period
presentation.
(2) PROPERTY ACQUISITIONS
On February 26, 1996, the Company acquired oil and gas
properties, equipment and pipelines from AKS Energy
corporation (AKS). As consideration for the assets, the
Company paid $2,909,010 in cash, assumed $125,000 of AKS's
severance tax obligations, issued 225,000 shares of the
Company's Common Stock at a value of $3.59 per share and
issued warrants with an estimated value of $348,525 to
purchase an additional 225,000 shares of the
(Continued)
10
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
Company's Common Stock with an exercise price of $5.00 per
share and an expiration date of December 31, 1998. In
December 1995, the Company advanced to AKS $1,000,000 as
consideration for the acquisition which is included in oil
and gas properties. The cash included in the purchase price
was made available from borrowings under the Company's
credit facility with its primary lender.
The Company also entered into an agreement to participate
with AKS in the joint development of leases in Southeastern
Kentucky gas fields wherein the Company will have the right
to earn 50% of the remaining undeveloped acreage.
In 1996, the Company purchased an overriding royalty
interest in the Ship Shoal B-3 well from an officer/director
of the Company for $125,000.
(3) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------
1996 1995
---- ----
<S> <C> <C>
Note payable to Den norske
Bank AS., payable in monthly
installments, commencing
April 1, 1996 through
February 1, 2002, with interest
payable monthly commencing
November 1, 1995 at prime plus
1% per annum, secured by oil
and gas properties, equipment
and notes receivable. $16,193,000 17,500,000
Call option payable, original
balance of $1,000,000 payable
in monthly installments of
$31,250 commencing April 1,
1995, due November 1997. 500,000 718,750
Note payable to unconsolidated
subsidiary, due on demand plus
interest at prime. - 100,000
Note payable to a company,
non-interest bearing, payable in
monthly installments of $7,500. 40,216 80,216
Notes payable to related parties,
interest payable at 22%, in
connection with Participation
Agreement. 400,000 400,000
Note payable to a company pursuant
to an agreed judgment regarding
operational payables, payable on
demand, plus interest of 8%. 150,000 150,000
</TABLE>
(Continued)
11
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
-------- ------------
1996 1995
---- ----
<S> <C> <C>
Note payable to related party,
original balance of $465,000
payable in monthly installments
of $25,000, plus interest of
prime plus 2%; secured by
a gas contract. $ - 90,000
Note payable, original balance
of $166,885 payable in monthly
installments of $7,500, plus
interest at 8% per annum. - 94,439
Other notes 64,928 58,441
---------- ----------
17,348,144 19,191,846
Less - Current portion (4,093,048) (4,623,341)
Long-term debt $13,255,096 14,568,505
========== ==========
</TABLE>
On September 28, 1995, the Company entered into a
$20,000,000 revolving credit agreement through February 1,
2002 with Den norske Bank AS. (Den norske). Additional
borrowings and repayment terms under the credit facility are
dependent on a redetermination of the borrowing base, which
is primarily dependent on the value of the mortgaged
properties as determined under Den norske's internal lending
procedures. As of June 30, 1996, monthly principal
reductions will be $300,000 beginning August 1, 1996. The
borrowing base will be redetermined semi-annually on each
October 1 and April 1 prior to February 1, 2002.
Under the credit agreement with Den norske, the Company is
required to maintain certain financial ratios relating to
debt coverage ratio, current ratio, tangible net worth,
general and administrative expenses and quarterly interest
ratio. At June 30, 1996, the Company was in compliance with
the required financial covenants, except for a covenant
pertaining to its quarterly interest ratio. Under the
credit facility, the Company must maintain a quarterly ratio
of earnings, as defined in the credit facility, to interest
expense of not less than 3.0 to 1.0. At June 30, 1996, the
Company's ratio was 2.24 to 1.0, but the Company has
obtained a waiver of the covenant from Den norske. At June
30, 1996, the Company has a working capital deficit of
approximately $4,600,000 which the Company plans to satisfy
through cash from operations, equity raise-ups, bank
borrowings and property sales.
In July 1995, in order to fulfill a loan commitment to
Century Offshore Management Company (Century), an aggregate
of $400,000 was funded by the directors of the Company.
These monies were paid to the Company in exchange for a
$400,000 participation in the Century Note. Due to the fact
that the Century Note was relinquished as a part of the
Company's acquisition of the South Timbalier 148 properties
(see Note 8 - Subsequent Event), the Company and the
directors simultaneously agreed to terminate the directors'
participation in the Century Note; and the Company remains
liable to the directors for $400,000 plus interest thereon
at the rate of 22% per annum.
(Continued)
12
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
(4) CENTURY/SETTLE TRANSACTIONS
During the six months ended June 30, 1996, the Company has
paid approximately $2,950,500 to Century to obtain various
leasehold interests in prospects located in the Gulf Coast
Region (see Note 8 - Subsequent Event).
(5) STOCKHOLDERS' EQUITY
The Company has authorized two million shares (2,000,000) of
Preferred Stock, of which the following have been designated
by the Board of Directors and are outstanding at June 30,
1996:
Series B Preferred Stock is convertible into
common stock based on a conversion factor of
$10.00 divided by 73% of the common stock's
closing bid price on the conversion date. The
Series B Preferred Stock has a liquidation
preference of $10.00 per share, but is junior to
the Series 1993 Preferred Stock. Dividends are
payable quarterly at the rate of 6% in cash or
common stock. There are 1,000,000 shares
authorized and 0 and 117,000 shares outstanding at
June 30, 1996 and December 31, 1995, respectively.
In June 1996, the Company completed a private placement of
$1,000,000 ($900,000 net of offering costs). The private
placement consisted of 100 Units, each Unit consisting of
3,300 shares of common stock and one Class A Common Stock
Purchase Warrant (Class A Warrant). Each Class A Warrant
entitles the holder to purchase 1,650 shares of the
Company's common stock at an exercise price of $4.00 per
share.
The Company has reserved a total of approximately 2,000,000
shares of common stock for issuance under a 1994
Compensatory Stock Option Plan (CSO). Outstanding stock
options, which include CSO plan and non-plan options,
granted to employees, consultants, officers and directors
for the purchase of the Company's common stock are as
follows:
<TABLE>
<CAPTION>
PRICE PER SHARE
---------------
Shares From To
------ ---- --
<S> <C> <C> <C>
Balance December 31, 1995 2,710,730 $3.00 $8.00
Granted 498,500 4.50 4.50
Terminated (422,000) 3.31 6.00
--------- ---- ----
Balance June 30, 1996 2,787,230 $3.00 $8.00
========= ==== ====
</TABLE>
Outstanding options at June 30, 1996 include 1,960,910
issued under the CSO, of which 1,795,243 are exercisable,
and 826,320 non-plan options, all of which are immediately
exercisable. Outstanding options at June 30, 1996 expire
between February 14, 1997 and February 1, 2005.
(Continued)
13
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
At June 30, 1996, the Company has outstanding 1,674,878
common stock warrants convertible into 1,464,091 shares of
common stock at exercise prices from $1.63 to $5.00 per
share.
The Company purchased and retired 58,059 shares of Series B
Preferred Stock at $13.70 per share. During the quarter
ended June 30, 1996, the Company allowed the holders of
21,676 shares of Series B Preferred Stock to convert the
shares into 75,410 shares of common stock, thereby resulting
in 0 shares of Series B Preferred Stock outstanding at June
30, 1996.
(6) UNEARNED REVENUE
On May 22, 1996, the Company, through its wholly owned
subsidiary Southern Gas Company of Delaware, Inc., conveyed
an approximate 2.2 bcf volumetric production payment in
Appalachian wells recently purchased from AKS through a
facility sponsored by William Energy Services Company, a
subsidiary of the Williams Companies, Inc. and structured by
NationsBank. The Company received $4,300,000 ($4,147,300
after related costs), for the production payment, which has
an anticipated six year term. Of the funds received,
$2,500,000 was used to reduce the Company's credit facility
with its primary lender. The Company used the remainder of
the funds for working capital and further acquisition and
development activities in the Gulf Coast region.
As a result of the transaction, the Company has recorded
unearned revenue which will be recognized as the required
volumes are delivered under the production payment
conveyance.
(7) RELATED PARTY TRANSACTIONS
Significant related party transactions which are not
disclosed elsewhere in these condensed, consolidated
financial statements (see Note 2 - Property Acquisition and
Note 3 - Long-term Debt) are discussed in the following
paragraphs:
In April 1996, the Company entered into agreements
with two individuals, one of which is a director
of the Company. Under the agreements, the
individuals each paid to the Company $250,000 in
exchange for the right to participate on a pro-
rata basis in the $6,500,000 promissory note
(which bears interest at 22%), as amended, due
from Century (Century Note). The agreement allows
the individuals to receive a combined payment of
$500,000 plus interest at 22% from the Century
Note repayment. The agreements assign the
payments from the portion of the Century Note
which is not pledged to the Company's primary
lender. The proceeds received by the Company
under the agreements, which reduced the carrying
value of the Century Note, were used to fund
additional development activities in the Gulf
Coast Region. In July 1996, the Century Note was
cancelled as part of the consideration paid by the
Company to Century for the purchase of certain oil
and gas properties (see Note 8 - Subsequent
Event). The Company and the individuals
simultaneously agreed to terminate the
individuals' participation in the Century Note in
exchange for the Company repaying $500,000 to the
individuals plus interest thereon at the rate of
22% per annum.
(Continued)
14
<PAGE>
(8) SUBSEQUENT EVENT
On July 3, 1996, the Company, through its wholly owned
subsidiary, Southern Gas Co. of Delaware, Inc. (Southern),
acquired proved developed and undeveloped oil and gas
properties, equipment and pipelines from Century located
offshore Louisiana. As consideration for the assets, the
Company paid $4,000,000 in cash, issued a subordinated
debenture (Debenture) in the amount of $4,000,000 with a due
date, as amended, of August 31, 1996 (the Debenture provides
for payment at the Company's option of cash or the issuance
of restricted common stock of the Company at $3.00 per
share), the extinguishment of an existing note from Century
to the Company in the amount of $6,500,000 and the
assumption of existing liens against the assets in the
approximate amount of $1,051,000. The foregoing transaction
was effected pursuant to an asset Purchase Agreement entered
into by and between the Company, Southern and Century, dated
July 3, 1996.
Additionally, the Company, through Southern, acquired
certain rights and interests in undeveloped properties from
Century located onshore Louisiana. As consideration for
these interests, the Company has paid $3,884,000 in cash and
issued 1,500,000 shares of restricted common stock in the
Company at a deemed price of $4.00 per share. The foregoing
transaction was effected pursuant to an Asset Purchase
Agreement entered into by and between Company, Southern and
Century, dated July 3, 1996.
15
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On February 26, 1996, the Company acquired assets from AKS
Energy Corporation ("AKS") consisting of more than 100 miles of
gathering and transmission pipeline and related equipment,
approximately 50,000 acres of developed and undeveloped leases,
and net revenue interest ownership in approximately 155 producing
wells containing natural gas reserves of approximately 7.7
billion cubic feet ("BCF") net to the Company. The assets are
located in the Appalachian region in Whitley, McCreary and Clay
Counties, Kentucky, and in the State of Tennessee. The AKS
pipelines provide the Company with additional direct
interconnects with Delta Natural Gas, Columbia Gas Transmission's
KA-1 pipeline and Somerset Gas as well as a new interconnection
with Citizens Gas Utility. The Company also entered into an
agreement to participate with AKS in the joint development of
leases in Southeastern Kentucky gas fields wherein the Company
will have the right to earn 50% of AKS's remaining 40,000
undeveloped acres.
In April, 1996, the Company entered into agreements with two
individuals, one of whom is a director of the Company. Under the
agreements, the individuals each paid to the Company $250,000 in
exchange for the right to participate on a pro-rata basis in a
$6,500,000 promissory note (which bears interest at 22%), as
amended, due from Century (the "Century Note"). The agreement
allowed the individuals to receive a combined payment of $500,000
plus interest at 22% from the Century Note repayment. The
agreements assigned the payments from the portion of the Century
Note which was not pledged to the Company's primary lender. The
proceeds received by the Company under the agreements, which
reduced the carrying value of the Century Note, were used to fund
additional development activities in the Gulf Coast region. In
July, 1996, the Century Note was cancelled as part of the
consideration paid by the Company to Century for the purchase of
certain oil and gas properties (see Note 8 of the Notes to
Financial Statements included in Item 1 of this Report on Form
10-QSB). The Company and the individuals simultaneously agreed
to terminate the individuals' participation in the Century Note
in exchange for the Company repaying $500,000 to the individuals
plus interest thereon at the rate of 22% per annum.
On May 9, 1996, the Company and Century Offshore Management
Corporation ("Century") announced that the two companies have
entered into preliminary discussions to explore the possibility
of a merger. As a result of the commencement of these
discussions, Jonathan B. Rudney, who was President and Chief
Executive Officer of the Company and was also affiliated with
Century, tendered his resignation in order to avoid any potential
conflicts. Rick G. Avare, who had previously been serving the
Company as Chief Operating Officer, assumed the position of
President and Chief Executive Officer.
On May 22, 1996, the Company conveyed an approximate 2.2 BCF
volumetric production payment in the wells purchased from AKS
through a facility sponsored by Williams Energy Services Company,
a subsidiary of The Williams Companies, Inc., and structured by
NationsBank. The Company received $4.3 million for the
production payment which has an anticipated six-year term. Of
the funds received, $2.5 million were used to reduce the
Company's credit facility with its primary lender; and the
remainder of the funds were used for working capital and further
acquisition and development activities in the Gulf Coast region.
On June 27, 1996, the Company completed a private placement
of $1 million ($900,000 net of offering costs). The private
placement consisted of 100 Units, each Unit consisting of 3,300
shares of common stock and one Class A Common Stock Purchase
Warrant ("Class A Warrant"). Each Class A Warrant entitles the
holder to purchase 1,650 shares of the Company's common stock at
an exercise price of $4.00 per share.
As a result of the merger discussions with Century, on July
3, 1996, the Company entered into Agreements with Century wherein
it: (i) acquired a portion of the working interest of Century in
ten oil and gas wells together with the exploration rights on
property known as South Timbalier 148, located in the Louisiana
offshore region of
16
<PAGE>
the Gulf of Mexico; (ii) purchased one-third of Century's
contract rights to participate in the exploration and development
in three separate onshore Salt Dome properties also located in
the Gulf Coast region of Louisiana with combined acreage in
excess of 100 square miles; and (iii) received a merger option
from Century whereby the Company, at its sole option, has the
right to require a merger between the Company and Century, such
option being exercisable until June 30, 1997. The consideration
for the properties was approximately $25.4 million, payable in
cash and/or stock and relinquishment of the Century Note. These
acquisitions are expected to add approximately 17 billion cubic
feet ("BCF") equivalent of proven reserves to the Company's
reserve base and enhance cash flow as well as create significant
exploration opportunities for the Company in the Gulf Coast
region. See Note 8 of the Notes to Financial Statements included
in Item 1 of this Report on Form 10-QSB.
In July, 1995, in order to fulfill the loan commitment to
Century, an aggregate of $400,000 was funded by the directors of
the Company. These monies were paid to the Company in exchange
for a $400,000 participation in the Century Note. Due to the
fact that the Century Note was relinquished as a part of the
Company's acquisition of the South Timbalier 148 properties as
set out above, the Company and the Directors simultaneously
agreed to terminate the Directors' participation in the Century
Note; and the Company remains liable to the Directors for
$400,000 plus interest thereon at the rate of 22% per annum.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1996, AS COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1995:
Total revenues for the six months ended June 30, 1996,
increased 107% to $16,101,952 from $7,741,793 for the comparable
period in 1995. Corresponding operating expenses increased 126%
to $14,075,398 in 1996 from $6,239,379 in 1995. Components of
the increases are as follows:
- - MARKETING: The Company's marketing volumes have increased to
---------
3.48 billion cubic feet ("BCF") for the six months ended
June 30, 1996, as compared to 2.12 BCF in 1995. The volume
increase is primarily due to expansion of the Company's
activities in this area and continued focus to function as
an integrated oil and gas company. After strong prices
during the first quarter of 1996, the second quarter of 1996
saw a decrease in prices and strong price competition. As a
result, the Company realized a profit of just .5% on
marketing revenues for the six months ended June 30, 1996,
as compared to 8% in 1995.
- - PRODUCTION: The Company's production revenues increased 162%
----------
for the six months ended June 30, 1996, to $2,847,827 from
$1,085,549 for the comparable period in 1995. Increased
revenues result from production from the Ship Shoal B-3 and
B-4 wells located in the Gulf Coast region which were
drilled and completed in mid and late 1995, respectively.
Production of oil and gas from these wells on an MCF
equivalent basis for the first six months of 1996 was
approximately 416,000 MCF as compared to approximately
107,500 MCF for 1995. Also in 1996, production from the
Company's Kentucky wells has increased to approximately
614,000 MCF as compared to approximately 339,000 MCF for
1995. The increase in Kentucky production results primarily
from the Company's acquisition of various producing gas
fields from AKS Energy Corporation in February, 1996.
Also contributing to the increase are stronger gas and/or
oil prices during the six months ended June 30, 1996, versus
1995. The average price per MCF equivalent on oil and gas
production in 1996 was $2.70 versus $2.29 in 1995.
Production expenses also increased to $605,137 for the six
months ended June 30, 1996, from $290,505 for the comparable
period in 1995. The increase results from the production of
the Ship Shoal property and additional operating costs
relating to the property which was acquired from AKS. The
average production cost per MCF equivalent in 1996 was $.57
versus $.61 for the comparable period in 1995.
17
<PAGE>
- - DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $1,044,479 for the
six months ended June 30, 1996, as compared to $561,190 for
the same period in 1995. The increase results primarily
from approximately $230,000 of depreciation, depletion and
amortization on the Ship Shoal wells and additional
depreciation on approximately $2,760,000 of property and
equipment acquired since June 30, 1995.
- - GENERAL AND ADMINISTRATIVE ("G&A"): G&A decreased 26% to
----------------------------------
$927,618 for the six months ended June 30, 1996, as compared
to $1,259,133 for the same period in 1995. The decrease
reflects the cost savings achieved through the closing of
the Scottsdale, Arizona, office; the results of an emphasis
on cost control by management and the termination in the
fourth quarter of 1995 of a consulting contract.
Significant components of G&A for the six months ended June
30, 1996, include payroll of $401,800, professional fees of
$125,517, consulting fees of $52,500, insurance of $84,428
and travel of $52,900. Significant savings of G&A which
have been achieved for the six months ended June 30, 1996,
as compared to the same period for 1995 include reductions
in consulting fees of $117,640, payroll of $28,000,
professional fees of $81,062 and bad debt expense of
$50,000.
- - OTHER INCOME (EXPENSE): Other income (expense) items
----------------------
consisted of the following:
INTEREST INCOME: Interest income results primarily from
---------------
interest earned on notes receivable issued to Century. The
notes earn interest at 22% per annum and are secured by
offshore properties. During the six months ended June 30,
1996, interest was earned on an average outstanding balance
of $6.5 million as compared to an average outstanding
balance of approximately $2.3 million for the same period in
1995.
INTEREST EXPENSE: Interest expense increased to $989,457 for
----------------
the six months ended June 30, 1996, as compared to $444,130
for the same period in 1995. This results primarily from
increased borrowings under the Company's primary credit
facility. Outstanding borrowings under the facility were
$16,193,000 at June 30, 1996, as compared to $7.8 million at
June 30, 1995. The additional borrowings have been used to
assist in expanding the Company's exploration, development
and acquisition activities.
GAIN ON SALE OF CLAIMS: During the six months ended June 30,
----------------------
1995, the Company recognized a gain of $2,189,616
attributable to the sale of various secured and unsecured
claims previously acquired from creditors of Century.
- - NET INCOME: Net income for the six months ended June 30,
----------
1996, was $521,178 as compared to $1,451,682 for the same
period in 1995; however, net income for the six months
ending June 30, 1995, included a gain of $2,189,616
($1,357,000 net of tax) on the sale of claims. Operating
income for the six months ended June 30, 1996 increased to
$1,098,936 versus $243,281 for the same period in 1995. The
increase resulted primarily from higher net production
levels and lower general and administrative expenses.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
1996, AS COMPARED WITH THE THREE MONTHS ENDED JUNE 30, 1995:
Total revenues for the three months ended June 30, 1996,
increased 51% to $6,178,705 from $4,090,182 for the comparable
period in 1995. Corresponding operating expenses increased 82%
to $5,557,873 in 1996, from $3,181,278 in 1995. Components of
the increases are as follows:
- - MARKETING: After a strong first quarter, the second quarter
---------
of 1996 saw gas prices decrease at a steady rate. Although
the Company's marketing volumes increased to 1.5 bcf for the
three months ended June 30, 1996, as compared to 1.08 bcf in
1995, the increase was adversely affected by price
competition. Thus, the
18
<PAGE>
Company realized a 4.5% loss on marketing sales versus a
6.1% profit for the comparable period in 1995.
- - PRODUCTION: Production revenues were $1,405,094 for the
----------
three months ended June 30, 1996, as compared to $701,802
for the same period in 1995. The additional revenues are
primarily due to production from the Ship Shoal B-3 and B-4
wells which were successfully drilled and completed in mid
and late 1995, respectively. Production from these wells
contributed approximately $673,000 in production revenues
for the three months ended June 30, 1996. Additional
revenue was also earned as a result of the purchase of
various producing gas fields in the Appalachian area from
AKS Energy Corporation which was consummated on February 26,
1996.
Gas prices on Kentucky properties for the second quarter of
1996 averaged $2.31 per thousand cubic feet ("MCF"), down
from the $2.60 per MCF average of the first quarter of 1996
but above the $2.16 per MCF average for the second quarter
of 1995.
Production of oil and gas on an MCF equivalent basis for the
second quarter of 1996 was approximately 540,000 MCF versus
285,000 MCF for the same period in 1995. Production from
the Ship Shoal properties located in the Gulf Coast region
recovered during the second quarter of 1996, with oil
production increasing approximately 17.5% from the first
quarter of 1996. The operator has been able to increase
production flow through its production platform; however,
full production capabilities are still not being realized on
the two wells.
As can be expected, production costs also increased to
$287,020 for the three months ended June 30, 1996, from
$173,244 for the same period in 1995. This was due to the
production costs associated with the Gulf Coast wells of
approximately $88,000 and the costs associated with the
properties acquired from AKS Energy Corporation.
- - DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $570,136 for the
three months ended June 30, 1996, as compared to $286,521
for the same period in 1995. The increase results primarily
from approximately $140,000 of depreciation, depletion and
amortization on the Ship Shoal wells and additional
depreciation on approximately $2,760,000 of property and
equipment acquired since June 30, 1995.
- - GENERAL AND ADMINISTRATIVE ("G&A"): G&A decreased 18% to
----------------------------------
$475,156 for the three months ended June 30, 1996, as
compared to $579,914 for the same period in 1995. The
decrease reflects the cost savings achieved through the
closing of the Scottsdale, Arizona, office; the results of
an emphasis on cost control by management and the
termination in the fourth quarter of 1995 of a consulting
contract.
Significant components of G&A for the three months ended
June 30, 1996, include payroll of $207,228, professional
fees of $71,595, consulting fees of $26,250, insurance of
$46,435 and travel of $22,345. Significant savings of G&A
which have been achieved for the three months ended June 30,
1996, as compared to the same period for 1995 include
reductions in consulting fees of $54,865, payroll of $15,529
and rent of $4,543.
- - OTHER INCOME (EXPENSE): Other income (expense) items
----------------------
consisted of the following:
* INTEREST INCOME: Interest income results primarily
---------------
from interest earned on notes receivable issued to
Century. The notes earn interest at 22% per annum and
are secured by offshore properties. During the three
months ended June 30, 1996, interest was earned on an
average outstanding balance of $6.5 million, as
compared to an average outstanding balance of
approximately $4.6 million for the same period in
1995.
19
<PAGE>
* INTEREST EXPENSE: Interest expense increased to
----------------
$508,143 for the three months ended June 30, 1996, as
compared to $253,397 for the same period in 1995.
This results primarily from increased borrowings under
the Company's primary credit facilities.
* GAIN ON SALE OF CLAIMS: During the three months ended
----------------------
June 30, 1995, the Company recognized a gain of
$399,201 attributable to the sale of various mechanic
and materialmen's lien claims previously acquired from
creditors of Century.
- - NET INCOME: Net income for the three months ended June 30,
----------
1996 was $25,137 as compared to $422,765 for the same period
in 1995. The decrease in 1996 is primarily due to the
inclusion in 1995 of $339,201 of gain on the sale of claims
and losses on marketing of approximately $196,000 in 1996
versus a gain of approximately $172,300 in 1995.
Depreciation, depletion and amortization also increased by
approximately $284,000 due to higher depletion and
depreciation associated with the Gulf Coast region
properties. These items were partially offset in 1996 by
increased production revenues and lower general and
administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents for the six months ended June 30,
1996, totalled $628,422 as compared to $826,393 at December 31,
1995. During 1994 and 1993, the Company funded its oil and gas
exploration and development activities and a portion of its
operations with bank borrowings and equity capital from private
placements. In 1995, $353,271 of cash from operations was
contributed towards the Company's exploration and development
activities and debt service requirements, with that amount
increasing to $2,105,231 for the six months ended June 30, 1996.
At June 30, 1996, the Company had available a $20,000,000 line of
credit through Den norske, with a borrowing base of $20,000,000,
of which the Company had drawn $16,193,000. The base was
increased to $20,000,000 subsequent to December 31, 1995, to
assist in funding the purchase of proved producing properties and
related pipelines and equipment from AKS.
Under the credit agreement with Den norske Bank, S.A. ("Den
norske"), the Company is required to maintain certain ratios
relating to debt coverage ratio, current ratio, tangible net
worth, general and administrative expenses and quarterly interest
ratio. Under the covenants, the financial amounts used to
compute the requirements are specifically defined in the
agreement. At June 30, 1996, the Company was in compliance with
all of the required financial ratios except a covenant pertaining
to its quarterly interest ratio. Under the credit facility, the
Company must maintain a quarterly ratio of earnings, as defined
in the credit facility, to interest expense of not less than 3.0
to 1.0. At June 30, 1996, the Company's ratio was 2.24 to 1.0,
but the Company has obtained a waiver of this covenant from Den
norske.
On February 26, 1996, the Company acquired oil and gas
properties, equipment and pipelines from AKS. As consideration
for the assets, the Company paid $2,909,010 in cash (which
includes commissions paid to an unrelated third party), assumed
$125,000 of AKS's severance tax obligations, issued 225,000
shares of the Company's common stock at a value of $3.594 per
share (which was the closing market price on the day of Closing)
and issued warrants with an estimated value of $348,525 to
purchase an additional 225,000 shares of the Company's common
stock with an exercise price of $5.00 per share and an expiration
date of December 31, 1998. The cash included in the purchase
price was made available from borrowings under the Company's
credit facility with Den norske. The Company also entered into
an agreement to participate with AKS in the joint development of
leases in Southeastern Kentucky gas fields wherein the Company
will have the right to earn 50% of the remaining undeveloped
acreage.
20
<PAGE>
On January 2, 1996, the Company entered into a stock
purchase agreement, as amended, with the holders of the
outstanding Series B Preferred Stock. Under the agreement, the
Company, or its assignee, has the obligation to purchase the
remaining outstanding Series B Preferred Stock at $13.70 per
share. Payment terms under the agreement are as follows:
<TABLE>
<CAPTION>
Due Number
Date Of Shares Amount
---- --------- ------
<S> <C> <C>
January 02, 1996 18,248 $250,000
January 15, 1996 18,248 250,000
February 10, 1996 3,650 50,000
February 29, 1996 54,409 745,400
March 31, 1996 47,445 650,000
</TABLE>
The share commitments through January 15, 1996, were
purchased by individuals who are not associated or affiliated
with the Company or any of the Company's directors or executive
officers; and the February 10 and 29, 1996, share commitments
were purchased by the Company, primarily with funds obtained
under its Credit Facility with Den norske. Upon purchase, the
Board of Directors retired the 58,059 shares of Series B
Preferred Stock.
The share commitment due March 31, 1996, was amended to
allow the holders of the Series B Preferred Stock to convert
25,769 shares of the Series B Preferred Stock into 100,000 shares
of common stock. The remaining share commitment of 21,676 shares
of Series B Preferred Stock for $296,932 was extended by mutual
consent to April 30, 1996. The Company subsequently allowed the
holders of the Series B Preferred Stock to convert the remaining
21,676 shares of Series B Preferred Stock into 75,410 shares of
common stock.
In April, 1996, the Company entered into agreements with two
individuals, one of whom is a Director of the Company. Under the
agreements, the individuals each paid to the Company $250,000 in
exchange for the right to participate on a pro rata basis in the
$6,500,000 Century Note. The agreement allowed the individuals
to receive a combined payment of $500,000 plus interest at 22%
from the Century Note repayment. The agreements assigned the
payments from the portion of the Century Note which was not
pledged to the Company's primary lender. The proceeds received
by the Company under the agreements, which reduced the carrying
value of the Century Note, were used to fund additional
development activities in the Gulf Coast region. In July, 1996,
the Century Note was cancelled as part of the consideration paid
by the Company to Century for the purchase of certain oil and gas
properties (see Note 8 of the Notes to Financial Statements
included in Item 1 of this Report on Form 10-QSB). The Company
and the individuals simultaneously agreed to terminate the
individuals' participation in the Century Note in exchange for
the Company repaying $500,000 to the individuals plus interest
thereon at the rate of 22% per annum.
On May 22, 1996, the Company conveyed an approximate 2.2 BCF
volumetric production payment in Appalachian wells recently
purchased from AKS through a facility sponsored by Williams
Energy Services Company, a subsidiary of the Williams Companies,
Inc., and structured by NationsBank. The Company received $4.3
million ($4,147,300 after related costs) for the production
payment which has an anticipated six year term. Of the funds
received $2.5 million was used to reduce the Company's credit
facility with its primary lender. The Company used the remainder
of the funds for working capital and further acquisition and
development activities in the Gulf Coast region.
On July 3, 1996, the Company acquired proved developed and
undeveloped oil and gas properties, equipment and pipelines
located offshore Louisiana from Century. As consideration for
the assets, the Company paid $4 million in cash, issued a
subordinated debenture ("Debenture") in the amount of $4 million
with a due date, as amended, of August 31, 1996 (the Debenture
provides for payment at the Company's option of cash or the
issuance
21
<PAGE>
of restricted common stock of the Company at $3.00 per share),
the extinguishment of an existing note from Century to the
Company in the amount of $6.5 million and the assumption of
existing liens against the assets in the approximate amount of
$1,051,000. The foregoing transaction was effected pursuant to
an Asset Purchase Agreement entered into on July 3, 1996.
Additionally, the Company acquired certain rights and
interests in undeveloped properties located onshore Louisiana
from Century. As consideration for these interests, the Company
has paid $3,884,000 in cash and issued 1.5 million shares of
restricted common stock in the Company at a deemed price of $4.00
per share. The foregoing transaction was effected pursuant to an
Asset Purchase Agreement entered into on July 3, 1996.
The following is a summary of the Company's expected cash
flow estimates for the remainder of 1996:
<TABLE>
<S> <C> <C>
Cash requirements:
Capital costs $15,494,000
Debt service payments 4,730,000
Total cash requirements $20,224,000
Cash Sources:
Cash from operations $ 5,758,000
Equity raise-ups 10,870,000
Bank borrowings 6,300,000
Sale of property 500,000
Total cash sources 23,428,000
-----------
Excess $ 3,204,000
===========
</TABLE>
As can be seen above, the Company intends to meet its cash
requirements for the remainder of 1996 with cash flow from
operations, equity raise-ups and additional bank borrowings. The
equity raise-ups are to be achieved by a series of private
placements. If the funds are not raised within the expected
timetable, capital projects will be adjusted accordingly. In
August, 1996, Den norske Bank increased the Company's credit
facility to $30,000,000, with a current borrowing base of
$22,500,000.
The continued expansion of the Company's development and
acquisition activities are expected to be financed with
internally generated cash flow and new financings, if available.
The completion or success of any new opportunities is subject to
a number of factors, including the price of oil and gas, and the
ability of the Company to raise additional capital or obtain debt
financing on terms acceptable to the Company. Many of these
factors are outside of the Company's control. There can be no
assurance that the Company will be able to undertake any of these
opportunities or that, if undertaken, they will prove successful.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following Exhibits are either attached hereto or
incorporated herein by reference:
EXHIBIT
NUMBER DESCRIPTION
10.0 Asset Purchase Agreement of December 27,
1995, by and between American Resources of
Delaware, Inc., Southern Gas Co. of
Delaware, Inc., Arakis Energy Corporation
and AKS Energy Corporation (incorporated by
reference to Exhibit A to the Registrant's
Form 8-K filed on March 12, 1996).
10.1 Joint Development Agreement of February 26,
1996, between Southern Gas Co. of Delaware,
Inc. and AKS Energy Corporation
(incorporated by reference to Exhibit B to
the Registrant's Form 8-K filed on March 12,
1996).
10.2 Stock Purchase Agreement of January 2, 1996,
as amended, between American Resources of
Delaware, Inc. and GFL Ultra Fund, Ltd.
(incorporated by reference to Exhibit 10.53
to the Registrant's Report on Form 10-KSB
for the year ended December 31, 1995).
10.3 Participation Agreement of April 12, 1996,
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.3 to the
Registrant's Report on Form 10-QSB for the
quarterly period ended March 31, 1996).
10.4 Production Payment Conveyance of May 22,
1996, by and between Southern Gas Co. of
Delaware, Inc., and Austin Energy Funding
Partners.*
10.5 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation
dated July 3, 1996, for the acquisition of
the South Timbalier 148 properties
(incorporated by reference to Exhibit A to
the Registrant's Form 8-K filed on July 18, 1996).
10.6 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation
dated July 3, 1996, for the acquisition of
the contractual rights for salt dome
properties (incorporated by reference to
Exhibit B to the Registrant's Form 8-K filed
on July 18, 1996).
* Filed herewith
23
<PAGE>
(b) Reports on Form 8-K:
On July 18, 1996, the Company filed a Form
8-K reporting the purchase of oil and gas
properties from Century Offshore Management
Corporation.
24
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and
Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN RESOURCES OF DELAWARE, INC.
Date: August 13, 1996 By: /S/Jeffrey J. Hausman
--------------- --------------------------------
Jeffrey J. Hausman
Chief Financial Officer
(Principal Accounting and
Financial Officer)
<PAGE>
EXHIBIT INDEX
AMERICAN RESOURCES OF DELAWARE, INC.
EXHIBIT
NUMBER DESCRIPTION PAGE
10.0 Asset Purchase Agreement of December 27,
1995, by and between American Resources of
Delaware, Inc., Southern Gas Co. of
Delaware, Inc., Arakis Energy Corporation
and AKS Energy Corporation (incorporated by
reference to Exhibit A to the Registrant's
Form 8-K filed on March 12, 1996). *
10.1 Joint Development Agreement of February 26,
1996, between Southern Gas Co. of Delaware,
Inc. and AKS Energy Corporation
(incorporated by reference to Exhibit B to
the Registrant's Form 8-K filed on March 12,
1996). *
10.2 Stock Purchase Agreement of January 2, 1996,
as amended, between American Resources of
Delaware, Inc. and GFL Ultra Fund, Ltd.
(incorporated by reference to Exhibit 10.53
to the Registrant's Report on Form 10-KSB
for the year ended December 31, 1995). *
10.3 Participation Agreement of April 12, 1996,
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.3 to the
Registrant's Report on Form 10-QSB for the
quarterly period ended March 31, 1996). *
10.4 Production Payment Conveyance of May 22,
1996, by and between Southern Gas Co. of
Delaware, Inc., and Austin Energy Funding
Partners. 29
10.5 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation
dated July 3, 1996, for the acquisition of
the South Timbalier 148 properties
(incorporated by reference to Exhibit A to
the Registrant's Form 8-K filed on July 18,
1996). *
10.6 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation
dated July 3, 1996, for the acquisition of
the contractual rights for salt dome
properties (incorporated by reference to
Exhibit B to the Registrant's Form 8-K filed
on July 18, 1996). *
26
<PAGE>
PRODUCTION PAYMENT CONVEYANCE
THIS CONVEYANCE (this "Conveyance") dated as of the
Effective Date set out at the end hereof, is from and by Southern
Gas Co. of Delaware, Inc. (herein called "Grantor"), to Austin
Energy Funding Partners, a Texas general partnership (herein
called "Grantee").
ARTICLE I
Section 1.1. Defined Terms. When used in this Conveyance
-------------
or in any exhibit or schedule hereto (unless otherwise defined in
any such exhibit or schedule), the following terms have the
respective meanings assigned to them in this section or in the
sections, subsections, exhibits and schedules referred to below:
"Affiliate" means, with respect to any Person: (a) any other
---------
Person directly or indirectly owning, controlling or holding with
power to vote 10% or more of the outstanding voting securities of
such Person, (b) any other Person 10% or more of whose
outstanding voting securities are directly or indirectly owned,
controlled or held with power to vote by such Person, and (c) any
other Person directly or indirectly controlling, controlled by or
under common control with such Person.
"Agreed Rate" means a per annum rate of interest which is
-----------
equal to the lesser of: (a) that fluctuating rate of interest
which is two percent (2.0 %) above the prime rate of interest of
NationsBank of Texas, N.A., as announced or published by such
bank from time to time, and (b) the maximum rate of interest from
time to time permitted by applicable law.
"Base Quantity" means 2,670,066 MMBTUs.
-------------
"British Thermal Unit" or "BTU" means the amount of energy
-------------------- ---
required to raise the temperature of one pound of pure water one
degree Fahrenheit from 58.5 degrees Fahrenheit to 59.5 degrees
Fahrenheit, as defined in the American Gas Association Gas
Measurement Manual and any subsequent revisions.
"Certain Percentage" means:
------------------
(a) with respect to each portion of Subject Lands
described on Exhibit A, the greater of (i) the percentage
shown on Exhibit A as the "Certain Percentage" for such
portion of Subject Lands or (ii) the portion of Hydrocarbons
produced from such portion of Subject Lands which is
attributable (after deducting all royalties, overriding
royalties, production payments and similar burdens, except
the Production Payment, burdening the Subject Interests) to
Subject Interests, and
1
<PAGE>
(b) for each other portion of Subject Lands, the
portion of Hydrocarbons produced from such portion of
Subject Lands which is attributable (after deducting all
royalties, overriding royalties, production payments and
similar burdens, except the Production Payment, burdening
the Subject Interests) to Subject Interests.
"Commercial Well" shall have the meaning given such term in
---------------
Section 3.3(c).
"Designated Event" has the meaning assigned to it in
----------------
Section 5.1.
"Direct Taxes" means all ad valorem, property, gathering,
------------
transportation, pipeline regulating, gross receipts, severance,
production, excise, heating content, carbon, value, value added,
environmental, occupation, sales, use, fuel, and other taxes and
governmental charges and assessments imposed on all or any part
of the Subject Interests, Hydrocarbons produced from Subject
Interests or the proceeds thereof, the Production Payment or the
PP Hydrocarbons or the proceeds thereof, regardless of the point
at which such taxes, charges or assessments are charged,
collected, levied or otherwise imposed. The only taxes which are
not Direct Taxes are federal income taxes and Texas franchise
taxes.
"Environmental Laws" means all applicable local, state or
------------------
federal laws, rules, regulations, or orders regulating or
otherwise pertaining to (a) the use, generation, migration,
storage, removal, treatment, remedy, discharge, release,
transportation, disposal or cleanup of pollutants, contamination,
hazardous wastes, hazardous substances, hazardous materials,
toxic substances or toxic pollutants, (b) the soil, surface
waters, groundwaters, land, stream sediments, surface or
subsurface strata, ambient air and any other environmental medium
on or off any Subject Interest, or (c) the environment or health
and safety-related matters; including the following as from time
to time amended and all others whether similar or dissimilar:
the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended by the Superfund Amendments and
Reauthorization Act of 1986, the Resource Conservation and
Recovery Act of 1976, as amended by the Used Oil Recycling Act of
1980, the Solid Waste Disposal Act Amendments of 1980, and the
Hazardous and Solid Waste Amendments of 1984, the Hazardous
Materials Transportation Act, as amended, the Toxic Substance
Control Act, as amended, the Clean Air Act, as amended, the Clean
Water Act, as amended, and all regulations promulgated pursuant
thereto.
"Force Majeure" shall mean any act, omission, or
-------------
circumstances occasioned by or in consequence of any blockages,
insurrections, riots, epidemics, flood, washouts, landslides,
earthquakes, extreme cold or freezing weather, lightening,
arrests and restraint of rules and peoples (federal, state,
local, tribal, civil or military), civil disturbances,
2
<PAGE>
explosions, breakage of or accident to machinery or line or pipe,
the order of any court of governmental authority having
jurisdiction, or any other causes, whether of the kind herein
enumerated or otherwise, not reasonably within the control of the
party claiming force majeure, not caused by the fault or
negligence of such party, and which by the exercise of due
diligence such party is unable to prevent or overcome; provided
that failures to prevent or settle strikes, changes in market
conditions, losses of markets, and changes in tax laws shall not
be considered events of Force Majeure.
"Gas" means natural gas and other gaseous hydrocarbons
---
(including casinghead gas, but excluding condensate and other
liquid hydrocarbons removed by mechanical field separation prior
to the Measurement Points).
"Grantee" means the Person named in the preamble to this
-------
Conveyance as the Grantee, and, unless the context in which used
shall otherwise require, such term means any successor-owner at
the time in question of any or all of the Production Payment.
"Grantor" means the Person named in the preamble of this
-------
Conveyance as Grantor, and, unless the context in which used
shall otherwise require, such term means any successor-owner at
the time in question of any or all of the Subject Interests.
"Hydrocarbons" means Gas.
------------
"Initial Time" shall mean 7:00 A.M. local time at the
------------
location of the Subject Interests, respectively, on June 1, 1996.
"Internal Revenue Code" means the Internal Revenue Code of
---------------------
1986, as amended from time to time, and any successor statute or
statutes.
"Make-Up Deliveries" means, for each Month during the
------------------
Production Payment Period, the positive remainder, if any, of
(a) the quantity (expressed in MMBTUs, based on the MMBTU Content
thereof) of PP Hydrocarbons actually received hereunder by
Grantee from the Subject Interests during such Month (as measured
at the Measurement Points), minus (b) the Specified Quantity for
such Month.
"Make-Whole Balance" means, when determined as of the end of
------------------
any Month during the Production Payment Period, the Make-Whole
Balance as of the beginning of such Month adjusted as follows:
(a) increased by an amount equal to the product of
(i) the Volume Shortfall, if any, for such Month, times
(ii) the Marker Price (shortfall) for such Month;
(b) decreased by an amount equal to the product of
(i) the Make-Up Deliveries, if any, for such Month, times
(ii) the Marker Price (makeup) for such Month;
3
<PAGE>
(c) increased by any amounts (including Direct Taxes)
which Grantor is obligated hereunder to pay but has not paid
and which are paid (or otherwise borne, including by means
of deduction from proceeds) by Grantee during such Month,
plus an amount equal to interest on any such amounts at the
Agreed Rate for the period from the date such amounts are
paid or borne (amounts borne by deduction from proceeds
being deemed borne at the time when the proceeds are
received from which the same were deducted) by Grantee to
the end of such Month;
(d) decreased by any amounts previously included in
the Make Whole Balance pursuant to clause (c) but for which
Grantor has reimbursed Grantee during such Month; and
(e) increased by an amount equal to the interest
which would have accrued during such Month on an amount
equal to the sum of (i) the amount computed under clause (a)
above, plus (ii) the Make-Whole Balance at the beginning of
such Month, had such amount borne interest at the Agreed
Rate on each day during such Month.
The Make-Whole Balance at the Initial Time will be zero, and the
Make-Whole Balance shall never be reduced by the above
adjustments to be less than zero.
"Marker Price (makeup)" means, for each Month, an amount
---------------------
equal to 99% of an amount equal to the price published in the
first issue of such Month which is listed in "Prices of Spot Gas
Delivered to Pipelines" in Inside FERC's Gas Market Report under
-------------------------------
the heading "Columbia Gas Transmission Corp. - Appalachia (W.
Va., Ohio, Kentucky)".
"Marker Price (shortfall)" means, for each Month, an amount
------------------------
equal to (i) the price published in the first issue of such Month
which is listed in "Prices of Spot Gas Delivered to Pipelines" in
Inside FERC's Gas Market Report under the heading "Columbia Gas
- -------------------------------
Transmission Corp. - Appalachia (W. Va., Ohio, Kentucky)".
"Measurement Points" means the points designated as such on
------------------
Schedule 2.
"MMBTU" means 1,000,000 British Thermal Units.
-----
"MMBTU Content" means the heating value, expressed in
-------------
MMBTUs, of any particular Hydrocarbons. The MMBTU Content of any
particular quantity of Gas shall be the actual heating value
thereof as determined on a dry basis.
"Month" means (i) the period between the Initial Time and
-----
7:00 A.M. local time at the location of the Subject Interests,
respectively, on the first day of the calendar month following
the calendar month in which the Initial Time falls and
(ii) thereafter, the period between 7:00 A.M. local time at the
location of the Subject Interests respectively on the first day
4
<PAGE>
of one calendar month and 7:00 A.M. local time at the location of
the Subject Interests respectively on the first day of the next
calendar month.
"Non-Affiliate" means, with respect to any Person, any
-------------
Person who is not an Affiliate of such Person.
"Person" means an individual, corporation, partnership,
------
limited liability company, association, joint stock company,
trust or trustee thereof, estate or executor thereof,
unincorporated organization or joint venture, court or
governmental unit or any agency or subdivision thereof, or any
other legally recognizable entity.
"PP Hydrocarbons" means the Hydrocarbons attributable to the
---------------
Production Payment.
"Production Payment" means the limited term overriding
------------------
royalty interest which is granted herein to Grantee, and all
other rights, titles, interests, estates, remedies, powers and
privileges appurtenant or incident to such limited term
overriding royalty interest.
"Production Payment Percentage" means: (a) for each Month
-----------------------------
for which there is no Specified Quantity, ninety percent (90%)
and (b) for each other Month the lesser of (i) ninety percent
(90%) or (ii) that percentage necessary to cause Grantee to
receive hereunder a quantity (expressed in MMBTUs based on the
MMBTU Content thereof) of Hydrocarbons (measured at the
Measurement Points) during such Month equal to the Specified
Quantity for such Month, plus that additional quantity (expressed
in MMBTUs based on the MMBTU Content thereof) of Hydrocarbons
(measured at the Measurement Points) which would be required to
cause the Make Whole Balance to be reduced to zero at the end of
such Month.
"Production Payment Period" means the period from and after
-------------------------
the Initial Time until the Termination Time.
"Purchase Agreement" means the Purchase Agreement of even
------------------
date herewith between Grantor and Grantee.
"Retained Interests" means the interests retained by Grantor
------------------
in the Subject Interests after conveyance of the Production
Payment hereunder.
"Specified Quantity" for any Month means the number of
------------------
MMBTUs set out for such Month in Schedule 1 hereto.
"Subject Hydrocarbons" means that portion of the
--------------------
Hydrocarbons in and under and that, during the Production Payment
Period, may be produced from (or, to the extent pooled or
unitized, allocated to) Subject Lands, which is attributable
(after deducting all royalties, overriding royalties, production
payments and similar burdens, except the Production Payment,
5
<PAGE>
burdening the Subject Interests at the Initial Time which are
reflected on Exhibit A) to the Subject Interests.
"Subject Interests" means:
-----------------
(a) All of those properties described in Exhibit A
attached hereto and made a part hereof for all purposes; and
(b) Without limitation of the foregoing, all other
right, title and interest (of whatever kind or character,
whether legal or equitable, and whether vested or
contingent) of Grantor in and to the oil, gas and other
minerals in and under or that may be produced from lands
which have been described on Exhibit A hereto or which are
described in any lease or other instrument described on
Exhibit A hereto (including interests in oil, gas or mineral
leases covering such lands, overriding royalties, production
payments and net profits interests in such lands or such
leases, and fee mineral interests, fee royalty interests and
other interests in such oil, gas and other minerals) even
though Grantor's interest in such oil, gas and other
minerals may be incorrectly described in, or omitted from,
such Exhibit A (and without limitation by any depth
limitations set forth in Exhibit A); and
(c) All rights, titles and interests of Grantor in
and to, or otherwise derived from, all presently existing
and valid oil, gas or mineral unitization, pooling, or
communitization agreements, declarations or orders and in
and to the properties covered and the units created thereby
(including all units formed under orders, rules,
regulations, or other official acts of any federal, state,
or other authority having jurisdiction, voluntary
unitization agreements, designations or declarations, and
so-called "working interest units" created under operating
agreements or otherwise) relating to the properties
described in subsections (a) and (b) above.
"Subject Lands" means (a) the lands and depths described in
-------------
Exhibit A (where no depth limit is specified, Subject Lands shall
include all depths) and (b) all other lands and depths which are
covered by Subject Interests.
"Subject Wells" means all wells now located on the Subject
-------------
Interests or hereafter drilled on the Subject Interests, and any
other wells now or hereafter located on lands or leases pooled,
communitized or unitized with the Subject Interests.
"Termination Time" has the meaning assigned to it in Section
----------------
2.2.
"Volume Shortfall" means, for each Month during the
----------------
Production Payment Period, the positive remainder, if any, of
(a) the Specified Quantity for such Month, minus (b) the quantity
of the PP Hydrocarbons (expressed in MMBTUs, based on the MMBTU
6
<PAGE>
Content thereof) actually received hereunder by Grantee from the
Subject Interests during such Month (as measured at the
Measurement Points).
Section 1.2. Rules of Construction. All references in this
---------------------
Conveyance to articles, sections, subsections and other
subdivisions refer to corresponding articles, sections,
subsections and other subdivisions of this Conveyance unless
expressly provided otherwise. Titles appearing at the beginning
of any of such subdivisions are for convenience only and shall
not constitute part of such subdivisions and shall be disregarded
in construing the language contained in such subdivisions. The
words "this Conveyance", "this instrument", "herein", "hereof",
"hereunder" and words of similar import refer to this Conveyance
as a whole and not to any particular subdivision unless expressly
so limited. Unless the context otherwise requires: "including"
and its grammatical variations mean "including without
limitation"; "or" is not exclusive; words in the singular form
shall be construed to include the plural, and vice versa; words
in any gender include all other genders; references herein to any
instrument or agreement refer to such instrument or agreement as
it may be from time to time amended or supplemented; and
references herein to any Person include such Person's successors
and assigns. All references in this Conveyance to exhibits and
schedules refer to exhibits and schedules to this Conveyance
unless expressly provided otherwise, and all such exhibits and
schedules are hereby incorporated herein by reference and made a
part hereof for all purposes.
ARTICLE II
Section 2.1. Conveyance. Grantor does hereby GRANT,
----------
BARGAIN, SELL, CONVEY, ASSIGN, TRANSFER, SET OVER AND DELIVER
unto Grantee, as a production payment, a limited term overriding
royalty interest equal to the Production Payment Percentage of
the Certain Percentage of all Hydrocarbons in and under and that,
during the Production Payment Period, may be produced from (or,
to the extent pooled or unitized, allocated to) the Subject
Lands.
TO HAVE AND TO HOLD the Production Payment unto Grantee, its
successors and assigns forever.
Section 2.2. Termination. The Production Payment shall
-----------
remain in full force and effect until the time (the "Termination
Time") which is the later of:
(a) the beginning of the Month which first follows
the Month in which the total quantity (expressed in MMBTUs,
based on the MMBTU content thereof) of PP Hydrocarbons
actually received by Grantee (measured at the Measurement
Points) equals (i) the Base Quantity, plus (ii) the amount
(if any) by which (A) the total of all Makeup Deliveries for
all Months from and after the Initial Time exceeds (B) the
7
<PAGE>
total of all Volume Shortfalls for all Months from and after
the Initial Time (provided that if (B) equals or exceeds
(A), the amount under clause (ii) will be zero);
(b) the beginning of the Month which first follows
the Month in which the Make-Whole Balance has been reduced
to zero and any other sums owing hereunder to Grantee have
been paid; and
(c) 7:00 a.m., local time at the location of each of
the Subject Interests, on June 1, 2002.
In determining when the Termination Time is reached (or in
determining Volume Shortfalls or Makeup Deliveries or the
Production Payment Percentage, all as provided for above), all
volumes of Hydrocarbons and the MMBTU Content thereof shall be
measured at the respective Measurement Points. At the
Termination Time all rights, titles and interests herein conveyed
in and to any Hydrocarbons thereafter produced shall
automatically terminate and vest in Grantor, and, upon request by
Grantor, Grantee shall execute and deliver such instrument or
instruments (in proper recordable form, if applicable) as may be
necessary to evidence such termination of the Production Payment;
provided that, notwithstanding the foregoing or anything herein
to the contrary, any obligations which any Person may have to
indemnify or compensate Grantee, or to make payments to Grantee
on account of PP Hydrocarbons produced before the Termination
Time, shall survive any termination of the Production Payment.
Section 2.3. Non Cost Bearing. The Production Payment
----------------
shall be free of all Direct Taxes and all costs and expenses of
exploring, developing and operating the Subject Interests and all
costs and expenses of producing Hydrocarbons or compressing,
treating, transporting or handling the same prior to the
Measurement Points, and all of such Direct Taxes and other costs
and expenses shall be borne by the Retained Interests and paid by
Grantor.
Section 2.4. Hydrocarbons Lost or Used. For the purposes
-------------------------
of determining Hydrocarbons attributable to the Production
Payment, there shall be excluded from Hydrocarbons produced from
(or, to the extent pooled or unitized, allocated to) Subject
Lands those Hydrocarbons which are unavoidably lost in the
production thereof or in the compression, treatment,
transportation or handling thereof prior to the applicable
Measurement Point, or which are used by Grantor or the operator
of any Subject Interest for such purposes, in each case only to
the extent the same are lost or used in the course of operations
which are being conducted prudently and in a good and workmanlike
manner.
Section 2.5. No Proportionate Reduction. It is understood
--------------------------
and agreed that, though the Production Payment is conveyed by
Grantor to Grantee out of the Subject Interests, such Production
Payment shall be equal to the full Production Payment Percentage
8
<PAGE>
of the Certain Percentage of the Hydrocarbons produced from (or,
to the extent pooled or unitized, allocated to) the Subject
Lands, and shall not be reduced for any reason. For example, the
same shall not be reduced if the undivided interest in a lease
represented by Subject Interests is less than the entire interest
in such lease, or if the interest in oil, gas and other minerals
underlying any portion of the Subject Lands which is covered by a
particular lease (or group of leases) is less than the entire
interest in the oil, gas and other minerals in such portion of
the Subject Lands, or if the share of production from (or, to the
extent pooled or unitized, allocated to) any portion of Subject
Lands which is attributable to the Subject Interests is less than
the "Certain Percentage" set forth on Exhibit A for such portion
of the Subject Lands or if Grantor does not own, or otherwise
have good title to, the Subject Interests described on Exhibit A.
ARTICLE III
Operation of the Subject Interests
----------------------------------
Section 3.1. Operations. As between Grantee and Grantor,
----------
Grantor shall have exclusive charge, management and control of
all operations to be conducted on the Subject Interests. Grantor
shall take or cause to be taken any and all actions which a
prudent operator would deem necessary or advisable in the
exploration, development, operation, maintenance and management
thereof and in the production, handling, treating and
transportation of Hydrocarbons produced therefrom up to the
Measurement Points, and in so acting Grantor shall not take into
account the diminution in Grantor's share of production from the
Subject Interests caused by the granting of the Production
Payment, and Grantor shall make its economic decisions as if
Grantor owned the full interest in the Subject Interests
undiminished by the Production Payment. Without limitation of
the foregoing, Grantor shall (a) operate and maintain the Subject
Interests in conformity with all applicable laws and all rules,
regulations and orders of all duly constituted authorities having
jurisdiction (including all Environmental Laws) and in conformity
with all leases and other contracts and agreements forming a part
of or relating to the Subject Interests; (b) promptly pay all
costs and expenses (including all Direct Taxes and all costs,
expenses and liabilities for labor, materials and equipment
incurred in connection with the Subject Interests and all
obligations to the holders of royalty interests and other
interests affecting the Subject Interests) incurred in exploring,
developing, operating and maintaining the Subject Interests (or
in producing, handling, treating and transporting Hydrocarbons
produced therefrom up to the Measurement Points); and (c)
maintain in full force and effect, free of any right of
cancellation, forfeiture or termination, the Subject Interests,
as well as all contracts, agreements, permits, licenses,
easements, servitudes and other rights necessary or useful in
connection with the exploration, development, operation or
9
<PAGE>
management of the Subject Interests or the producing, handling,
treating and transporting of Hydrocarbons produced therefrom.
As to any of the Subject Interests of which Grantor is now, or
hereafter becomes, the operator, Grantor will not resign, or
otherwise voluntarily relinquish, its position as operator. As
to any matters which Grantor does not control because Grantor is
not at that time the operator of a part of Subject Interests,
Grantor shall exercise its full legal rights to cause the
operator of such part of Subject Interests to take any and all
actions as are required above.
Section 3.2. Disposition of Production.
-------------------------
(a) Except as provided in Subparagraph (b) below, Grantor
shall have no right or obligation to sell PP Hydrocarbons. It is
recognized that, except to the extent that Grantor is selling or
causing to be sold PP Hydrocarbons pursuant to Section 3.2(b),
Grantee and Grantor will each be taking quantities of
Hydrocarbons from the Subject Interests, and that coordination
between Grantee and Grantor will be required with respect
thereto. Grantor agrees to cooperate with, and assist, Grantee
in connection with Grantee's receipt of PP Hydrocarbons. Without
limitation of the foregoing: (i) not less than 5 days prior to
the first day of each Month, Grantor will notify Grantee or its
authorized representatives, in writing, of the total amounts and
average daily amounts of gas, if any, which Grantor expects to be
produced from the Subject Interests during such Month, and the
portion thereof which Grantor projects will be attributable to
the Production Payment and the allocation of such amounts between
Measurement Points, (ii) Grantor shall immediately notify Grantee
in writing of any change in the rate of delivery of Hydrocarbons
from Subject Interests, and (iii) Grantor and Grantee will
cooperate to ensure that nominations to gas transporters and gas
buyers are timely made and that such nominations reflect expected
deliveries from the various Subject Interests, and Grantee and
its authorized representatives shall be entitled to rely upon
Grantor's production projections for the purpose of scheduling
deliveries with transporters and purchasers. Should Grantee so
request, Grantor will furnish the information provided for in the
preceding sentence, and make nominations and schedule deliveries
(and make any revisions to such nominations and reschedule
deliveries) for PP Hydrocarbons (in the form and at the times
required by such parties), directly to parties purchasing or
transporting PP Hydrocarbons for Grantee. In the event any
charges, costs, penalties or expenses are incurred or payable to
any party solely as a result of Grantee's failure to adjust
nominations or scheduled deliveries in accordance with
notification from Grantor of any increase or decrease in
quantities to be delivered from any Subject Well where it was
reasonably possible for Grantee to make such adjustment without
detriment to it (and where Grantee had not previously requested
Grantor to handle such matters, as provided above), then, as
between the parties hereto, Grantee shall be liable for and shall
hold Grantor harmless from any such charges, costs, penalties or
expenses. In the event any such charges, costs, penalties or
10
<PAGE>
expenses are incurred or payable to any party other than in the
circumstances provided for in the preceding sentence (including
such charges, costs, penalties or expenses as are caused by
failure to deliver projected quantities, or failure to provide
notice of changes in deliveries, or such charges, costs,
penalties or expenses are incurred when Grantor is making
nominations, and/or revisions to nominations, on behalf of
Grantee, as provided for above), then, as between the parties
hereto, Grantor shall be liable for and shall hold Grantee
harmless for such charges, costs, penalties or expenses. Each of
Grantor and Grantee shall promptly notify the other of any notice
received by it from any third party that indicates an imbalance
in deliveries exists or is occurring that may give rise to any
such charges, costs, penalties or expenses.
(b) If, and only if, Grantee from time to time so requires
in writing with respect to any part of PP Hydrocarbons (the
"Designated PP Hydrocarbons"), Grantor shall sell or cause to be
sold the Designated PP Hydrocarbons on behalf of Grantee in
accordance with reasonable and prudent business judgment and
sound oil field practices and on such terms and conditions as
Grantor shall determine to be in the best interest of Grantee;
provided, however, that all such sales of Designated PP
Hydrocarbons:
(i) shall be upon terms and conditions which are the
best terms and conditions available as determined in good
faith by Grantor taking into account all relevant
circumstances, including price, quality of production,
access to markets or lack thereof, minimum purchase
guarantees, identity of purchaser and length of commitment,
(ii) shall be upon terms and conditions at least as
favorable as Grantor obtains for Hydrocarbons not subject to
this Conveyance which are of comparable type and quality and
in the same location, except where such terms and conditions
cannot be made available to sales of the Designated PP
Hydrocarbons under contracts in existence at the Initial
Time (provided that in all events such terms and conditions
must be at least as favorable as those obtained by Grantor
or any Affiliate of Grantor in the same oil, gas or mineral
properties from which the Designated PP Hydrocarbons are
produced, and shall not include consideration other than
payment for production delivered),
(iii) shall be made to Non-Affiliates of Grantor,
unless prior written consent is obtained from Grantee,
(iv) shall not contain provisions whereby payment for
production is (in whole or in part) payable in advance of
such production occurring (including "take or pay"
provisions), or whereby payment is or can be deferred for
more than 60 days after the month in which such production
is delivered, or whereby payments are made other than by
11
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checks, drafts, wire transfer advises or other similar writings,
instruments or communications for the immediate payment of money,
and
(v) shall be made cancelable upon 90 days or less
notice with no resultant penalty.
Grantor will exercise its best efforts to perform all obligations
binding on it under any marketing agreements or arrangements so
entered into and to enforce the performance of the obligations of
third parties thereunder; provided, however, that Grantor shall
have no liability for the performance of the obligations of any
purchaser of Designated PP Hydrocarbons in the absence of any
negligence or willful misconduct on the part of Grantor. As to
any third party, all acts of Grantor in marketing the Designated
PP Hydrocarbons as provided in this Section and all contracts
executed by Grantor shall be binding on Grantee and the
Production Payment; it shall not be necessary for Grantee to join
in any such contracts. Notwithstanding any provision hereof to
the contrary, any acts of Grantor in marketing PP Hydrocarbons
which are not in compliance with the provisions of this
Conveyance shall be subject to immediate rejection by Grantee.
In the event Grantor sells Designated PP Hydrocarbons on behalf
of Grantee pursuant to this Section, Grantee shall, nevertheless,
be entitled to receive payment of proceeds from such sale
directly from the purchasers of such Designated PP Hydrocarbons,
and Grantor shall take such actions (including executing all
division orders, transfer orders, instructions in lieu thereof
and other additional instruments) as are necessary or appropriate
to achieve such result.
(c) If any proceeds attributable to the sale of PP
Hydrocarbons are ever received by Grantor, such proceeds shall be
held in trust by Grantor for Grantee; and Grantor shall pay such
proceeds (by wire transfer to such account as Grantee shall have
designated from time to time to Grantor) no more than two
business days after such receipt thereof by Grantor. Grantor
will cooperate with Grantee in instructing all purchasers of PP
Hydrocarbons to pay such proceeds directly to Grantee and shall
execute such additional instruments (including division orders,
transfer orders and instructions in lieu thereof) as may be
necessary or appropriate in connection therewith.
(d) No pipeline company or other Person purchasing, taking,
or processing PP Hydrocarbons shall ever be required to take
notice of, or keep informed concerning, the termination of the
Production Payment, until actual receipt of written notice from
Grantee confirming that such termination has occurred.
Section 3.3. Shut-in or Abandonment of Subject Wells;
----------------------------------------
Abandonment of Subject Interests.
- --------------------------------
(a) Until the termination of the Production Payment,
Grantor shall not, without first obtaining the written consent of
Grantee:
12
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(i) abandon (or propose or consent to the abandonment
of) any Subject Well, or surrender, abandon or release (or
propose or consent to the surrender, abandonment or release
of) any Subject Interest; provided, however, that without
the consent of Grantee:
(A) Subject to the provisions of Section 3.3(d),
Grantor shall have the right to abandon a Subject Well
if and when such Subject Well ceases to be a
Commercial Well and it would not be economically
feasible (without regard to the burden of the
Production Payment) to restore the productivity of
such well by reworking, recompleting, reconditioning,
deepening, plugging back, or otherwise conducting
remedial work thereon; and
(B) Subject to the provisions of Section 3.3(d),
Grantor shall have the right to surrender and release
any Subject Interest or any part of a Subject Interest
when there is no Commercial Well located thereon and
to drill, rework, recomplete, recondition, deepen,
plug back or otherwise conduct remedial work on a well
thereon would not be economically feasible (without
regard to the burden of the Production Payment),
provided that no part of a Subject Interest shall be
so surrendered or released which is included within
the drilling or spacing unit of a Commercial Well;
or
(ii) voluntarily shut-in or restrict the flow from a
Subject Well (or propose or consent to such a shut-in or
restriction); provided that (A) a shut-in of, or restriction
of flow from a well shall not be deemed to be voluntarily
made if it is caused by or results from governmental
requirements, operation and maintenance requirements, or
sound reservoir management requirements, or from an act or
event of Force Majeure, and (B) a Subject Well which has
ceased to be a Commercial Well and can be abandoned under
clause (A) above may be shut-in pending such abandonment.
(b) If, prior to the termination of the Production Payment,
a Subject Well ceases to be a Commercial Well, and (i) it would
be economically feasible (without regard to the burden of the
Production Payment) to restore the productivity of such well by
reworking, recompleting, reconditioning, deepening, plugging
back, or otherwise conducting remedial work thereon, then Grantor
shall take such action to restore the productivity of such well
or (ii) it would be economically feasible (without regard to the
burden of the Production Payment) to redrill such well, then
Grantor shall redrill such well.
(c) For all purposes of this Conveyance, (i) a well shall
be deemed to be a "Commercial Well" unless and until there arises
a condition which reasonably appears to be permanent, such that
the aggregate value of the Hydrocarbons which are being produced
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or which it reasonably appears will be produced from such well --
net of Direct Taxes and of royalties, overriding royalties and
similar burdens reflected on Exhibit A, but without regard to the
burden of the Production Payment -- no longer exceeds or will not
exceed the costs and expenses directly related to the operation
and maintenance of such well (without limitation, such direct
costs and expenses do not include items which are included in
overhead charges under the applicable operating agreement or if
there is no such operating agreement, under the 1984 COPAS
Accounting Procedure with the election "shall" selected in
Article III), and (ii) the restoration of the productivity of a
well or the drilling of a well shall be deemed to be
"economically feasible" whenever the aggregate value of the
Hydrocarbons which it reasonably appears will be produced from
such well -- net of Direct Taxes and of royalties, overriding
royalties and similar burdens reflected on Exhibit A, but without
regard to the burden of the Production Payment -- will exceed the
costs and expenses directly related to such restoration or
drilling and the operation and maintenance of such well
(excluding, without limitation, items included in overhead
charges, as described above).
(d) Before abandoning any Subject Well, or surrendering or
releasing any Subject Interest or part thereof, Grantor shall
offer, in writing, to assign the same to Grantee (or its
designee) upon Grantee's (or such designee's) payment to Grantor
of the net salvage value (if any) of Grantor's interest in
equipment attributable thereto, and, if Grantee so elects within
15 days of receipt of such offer, Grantor will so assign the same
to Grantee (or its designee) who shall, upon receipt of such
assignment, pay such amount to Grantor. This provision shall not
be applicable if a well has ceased to be a Commercial Well (in
the absence of any breach by Grantor of the provisions hereof)
and as a result the Subject Interest on which such well was
located has terminated.
Section 3.4. Adverse Claims. Grantor will, immediately
--------------
after discovery of such claim or demand, cause written notice to
be given to Grantee of every adverse claim or demand made by any
Person affecting the Subject Interests or the Hydrocarbons
produced therefrom in any manner whatsoever, or of any
proceedings instituted with respect thereto; and Grantor will
cause all necessary and proper steps to be diligently taken to
protect and defend the Subject Interests and such Hydrocarbons
against any such adverse claim or demand.
Section 3.5. Insurance and Losses.
--------------------
(a) Grantor shall maintain or cause to be maintained, at
its sole cost and expense and with financially sound and
reputable insurers reasonably satisfactory to Grantee, insurance
covering the Subject Interests and all wells, equipment and
facilities located thereon, against such liabilities, casualties,
risks and contingencies and in such types, as is customary in the
case of companies engaged in similar operations and having
14
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similar property. Such insurance shall in any event include the
types and coverages described in Schedule 3, with limits of
coverage no less than those set out in such Schedule. All
liability insurance shall name Grantee as an additional insured.
Grantor shall furnish annual certificates of such insurance to
Grantee not less than 30 days prior to the expiration or
termination of such policy of insurance.
(b) In the event of any damage to or loss of any well,
equipment or facility on the Subject Interests, Grantor (at no
cost to Grantee) shall promptly redrill, rebuild, reconstruct,
repair, restore or replace such damaged or lost property.
Section 3.6. Government Regulation.
---------------------
(a) The obligations of Grantor hereunder shall be subject
to all applicable federal, state and local laws, rules,
regulations and orders (including those of any applicable agency,
board, official or commission having jurisdiction). Grantor
shall make all filings with all applicable agencies, boards,
officials and commissions having jurisdiction with respect to the
Subject Interests or the operation thereof.
(b) Should any statute, or any rules or regulations of any
governmental body, or any provisions in private contracts
(including those limiting the size of overriding royalties and
similar interests) become applicable to the Subject Interests so
as to limit the portion of the Hydrocarbons produced from the
lands covered by a particular Subject Interest which may be
attributable to the Production Payment, the Production Payment
shall, as to such Subject Interest and for the period of time
during which such statute, rule, regulation or contractual
provision is applicable, be limited to the maximum amount of
production from such lands which can be attributed to the
Production Payment under such statute, rule, regulation or
contractual provision; provided, however, should such limitation
come into effect as to one or more Subject Interests, then
(without prejudice to other rights Grantee may have) that portion
of production from (or, to the extent pooled or unitized,
allocated to) Subject Lands covered by other Subject Interests
which would be attributable to the Production Payment in the
absence of the provisions of this subsection shall be increased,
to the maximum extent possible (and, if necessary, to 100% of the
production attributable to such Subject Interests), so as to
cause, to the maximum extent possible, Grantee to receive, by
virtue of ownership of the Production Payment, the same amount of
Hydrocarbons which Grantee would have received had the
aforementioned statute, rule, regulation or contractual provision
not reduced the share of production from the aforementioned
Subject Interest with respect to which the Production Payment
could be paid.
15
<PAGE>
Section 3.7. Pooling and Unitization. Certain of the
-----------------------
Subject Interests may have been pooled or unitized for the
production of Hydrocarbons prior to the date hereof, and may,
after the date hereof, be pooled or unitized (a) pursuant to any
law, rule, regulation or order of any governmental body or
official, or (b) by Grantor with the consent of Grantee. To the
extent certain Subject Interests are so pooled or unitized, such
Subject Interests are and shall be subject to the terms and
provisions of such pooling and unitization agreements or orders,
and, as to production of substances covered by such agreements or
orders, the production from Subject Lands (or any portion
thereof) shall be the production from such units which is
allocated to Subject Lands (or such portion thereof) under and by
virtue of the applicable pooling and unitization agreements or
orders.
Section 3.8. Non-Consent Operations. Without the prior
----------------------
written consent of Grantee, Grantor shall not elect to be a
non-participating party with respect to any drilling, deepening,
plugging back, reworking, sidetracking, completion, or other
operation on any Subject Interest (or lands pooled therewith), or
(except in instances where abandonment of such well would be
permitted without Grantee's consent under Section 3.3) elect to
be an abandoning party with respect to a well located on any
Subject Interest (or lands pooled therewith), if the consequence
of such election is that Grantor's interest in such Subject
Interest or any part thereof is temporarily (e.g., during a
recoupment period) or permanently forfeited to the parties
participating in such operations or electing not to abandon such
well. Upon any such election by Grantor which is consented to by
Grantee, such election shall also be binding on the Production
Payment as to the interest so temporarily or permanently
forfeited. Any additional interests acquired by Grantor by
virtue of electing to pay for or acquire the interest of a non-
consenting, or abandoning, party in a situation of the type
described in the preceding sentence shall not become a part of
Subject Interests and subject to the Production Payment.
Section 3.9. Future Gas Imbalances.
---------------------
(a) Without the prior written consent of Grantee, Grantor
will not take (for itself and for Grantee) a lesser share of the
Gas produced from a Subject Well than the share of Gas which
Grantor and Grantee are collectively entitled to take by virtue
of ownership of the Subject Interests (without regard to any
rights to take a lesser share under any gas balancing agreement
or other arrangement or any rights under common law with respect
to gas balancing), except as a result of Grantor and Grantee, or
any predecessor in title to such Subject Interest, having
previously taken from such Subject Well or other wells located on
Subject Interests more Gas than such parties would be entitled to
receive by virtue of their ownership ("previous overproduction"),
but only to the extent that the amount of such previous
overproduction occurred after the Initial Time or occurred prior
to the Initial Time and is disclosed on Schedule 4.
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<PAGE>
(b) Without the prior written consent of Grantee, Grantor
will not take (for itself and for Grantee) a greater share of the
Gas produced from a Subject Well than the share of Gas which
Grantor and Grantee are collectively entitled to take by virtue
of ownership of the Subject Interests (without regard to any
rights to take a greater share under any gas balancing agreement
or other arrangement or any rights under common law with respect
to gas balancing), except (i) as a result of Grantor and Grantee,
or any predecessor in title to such Subject Interest having
previously taken from such Subject Well or other wells located on
Subject Interests less Gas than such parties would be entitled to
receive by virtue of their ownership ("previous
underproduction"), but only to the extent that the amount of such
previous underproduction occurred after the Initial Time or
occurred prior to the Initial Time and is disclosed on Schedule 4
or (ii) as a result of other parties contemporaneously taking a
lesser share from Subject Well than they would be entitled (by
virtue of their ownership of their interests in such well) to
take in circumstances where Grantor cannot elect to take only the
share attributable to Grantor and Grantee notwithstanding such
other parties taking a lesser share.
(c) If, with the consent of Grantee (or in the above
provided for circumstances where Grantee's consent is not
required), Grantor takes more, or less, Gas from a Subject Well
than Grantor and Grantee collectively are otherwise entitled to
by virtue of ownership of Subject Interests, such action will be
binding on the Production Payment and the Certain Percentage, for
such well during such period, shall be increased or decreased in
proportion to the increase or decrease in Gas taken by Grantor
(and Grantee shall be subject to, and entitled to the benefits
of, any gas balancing agreements to the extent the same are
applicable to such well and such action). If, without the
consent of Grantee (and not in the above provided for
circumstances where Grantee consent is not required), and if
Grantee does not agree to such action, Grantor takes more, or
less, gas from a Subject Well than Grantor and Grantee
collectively are otherwise entitled to by virtue of the ownership
of Subject Interests, such action will not be binding on Grantee
and the share of Hydrocarbons from such well, which, during such
period, is attributable to the Production Payment is the share
which would have been attributable thereto absent such action.
Section 3.10. Renewals and Extensions and New Leases.
--------------------------------------
This Conveyance and the Production Payment shall apply to all
renewals, extensions and other similar arrangements of the leases
(or other determinable interests) which are included in the
Subject Interests, whether such renewals, extensions or
arrangements have heretofore been obtained by Grantor or are
hereafter obtained by or for Grantor or any Affiliate thereof and
whether or not the same are described in Exhibit A. For the
purposes of the preceding sentence, a new lease which covers the
same interest (or any part thereof) which was covered by a prior
lease, and which is acquired within one year after the
17
<PAGE>
expiration, termination, or release of such prior lease, shall be
treated as a renewal or extension of such prior lease.
ARTICLE IV
SECTION 4.1. NO LIABILITY OF GRANTEE; INDEMNITY. GRANTEE
----------------------------------
SHALL NEVER BE RESPONSIBLE FOR ANY PART OF THE COSTS, EXPENSES OR
LIABILITIES INCURRED IN CONNECTION WITH THE EXPLORING,
DEVELOPING, OPERATING, OWNING OR MAINTAINING OF THE SUBJECT
INTERESTS OR SUBJECT LANDS OR (EXCEPT TO THE EXTENT THAT PP
HYDROCARBONS ARE OWNED BY GRANTEE DOWNSTREAM OF THE MEASUREMENT
POINTS) IN CONNECTION WITH THE HANDLING, TREATING OR TRANSPORTING
OF HYDROCARBONS PRODUCED THEREFROM (INCLUDING ANY COSTS, EXPENSES
OR LIABILITIES RELATED TO DAMAGE TO OR REMEDIATION OF THE
ENVIRONMENT, WHETHER OR NOT ARISING OUT OF OWNERSHIP OF AN
INTEREST IN PROPERTY), AND GRANTOR AGREES TO INDEMNIFY AND HOLD
GRANTEE HARMLESS FROM AND AGAINST ALL COSTS, EXPENSES AND
LIABILITIES INCURRED BY GRANTEE IN CONNECTION WITH ANY OF THE
FOREGOING OR IN CONNECTION WITH THE PRODUCTION PAYMENT, THE
PURCHASE AGREEMENT, THIS CONVEYANCE, OR THE TRANSACTIONS AND
EVENTS (INCLUDING THE ENFORCEMENT OR DEFENSE THEREOF OR HEREOF)
AT ANY TIME ASSOCIATED WITH OR CONTEMPLATED IN ANY OF THE
FOREGOING. THE FOREGOING INDEMNITY SHALL ALSO COVER ALL COSTS
AND EXPENSES OF GRANTOR, INCLUDING REASONABLE LEGAL FEES AND
EXPENSES, WHICH ARE INCURRED INCIDENT TO THE MATTERS INDEMNIFIED
AGAINST, AND SHALL EXTEND TO GRANTEE AND ITS SUCCESSORS AND
ASSIGNS (INCLUDING GRANTEE'S MORTGAGEES AND LENDERS), ALL THEIR
RESPECTIVE AFFILIATES AND ALL THEIR RESPECTIVE OFFICERS,
DIRECTORS, AGENTS, ATTORNEYS AND EMPLOYEES. THE FOREGOING
INDEMNITY SHALL APPLY WHETHER OR NOT ANY COSTS, EXPENSES, OR
LIABILITIES ARISE OUT OF THE SOLE, JOINT OR CONCURRENT
NEGLIGENCE, FAULT OR STRICT LIABILITY OF GRANTEE OR OF ANY OTHER
PERSON OR ENTITY INDEMNIFIED HEREUNDER AND SHALL APPLY, WITHOUT
LIMITATION, TO ANY LIABILITY IMPOSED UPON ANY PERSON INDEMNIFIED
HEREUNDER AS A RESULT OF ANY STATUTE, RULE, REGULATION, THEORY OF
STRICT LIABILITY OR OTHERWISE. THE FOREGOING INDEMNITY SHALL
SURVIVE THE TERMINATION OF THE PRODUCTION PAYMENT AND OF THIS
CONVEYANCE.
18
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ARTICLE V
Section 5.1. Remedies. As used herein, "Designated Event"
-------- ----------------
means any breach of this Conveyance or of the Purchase Agreement
by Grantor (whether of a covenant, a representation or warranty,
or otherwise) which, in the case of an obligation to pay money is
not fully cured within 5 days after such breach occurs or which,
in the case of any other breach, is not fully cured and remedied
within 30 days after such breach occurs. If a Designated Event
occurs then Grantee may, either on its own behalf or through any
agent or representative and in addition to all other rights and
remedies available to it at law and in equity (including the
right to sue for damages, which right of Grantee is specifically
acknowledged), exercise any one or more of the following remedies
(it being agreed that the exercising of any one remedy shall not
preclude the exercising of any other remedy):
(a) If Grantor has failed to perform any act or to
take any action which Grantor is required hereunder to
perform or take or to pay any money which Grantor is
required hereunder to pay, then, upon written notice to
Grantor, Grantee may, but shall not be obligated to, perform
or cause to be performed such act or take such action or pay
such money, all in Grantor's name or in Grantee's own name.
Any expenses so incurred by Grantee and any money so paid by
Grantee shall be a demand obligation owing by Grantor to
Grantee (which obligation Grantor hereby expressly promises
to pay) and Grantee, upon making such payment, shall be
subrogated to all of the rights of the Person receiving such
payment. Each amount due and owing by Grantor to Grantee
pursuant to this subsection shall bear interest each day,
from the date of such expenditure or payment until paid, at
the Agreed Rate, which interest shall be payable on the
first day of each Month and shall itself bear interest at
the same rate if not timely paid.
(b) Upon written notice to Grantor, Grantee shall
have the right (and is hereby assigned such right) to
require any or all of the purchasers of production from
Subject Interests to pay to Grantee or any trustee or paying
agent designated by Grantee all or any part of the proceeds
of Hydrocarbons attributable to Subject Interests. Such
proceeds shall be used by Grantee or such trustee or paying
agent to pay to Grantee all amounts to which Grantee is
entitled by virtue of this Conveyance and to reimburse
Grantee for amounts expended in exercising such right and
for all reasonable costs and expenses of any such trustee or
paying agent. Grantee or such trustee or paying agent shall
pay to Grantor the net amounts, if any, remaining after (i)
making any payments to third parties which Grantee elects to
make under subparagraph (a) above and (ii) making any
payments then due to Grantee as provided for above in this
subsection or elsewhere in this Conveyance. Where Grantee
or such trustee or paying agent does not have actual
knowledge of any item or of the exact amount thereof,
19
<PAGE>
Grantee or such trustee or paying agent may in its discretion
estimate the amount thereof. IN CONNECTION WITH ANY ACTION TAKEN
BY GRANTEE OR SUCH TRUSTEE OR PAYING AGENT PURSUANT TO THIS
SUBSECTION, GRANTEE OR SUCH TRUSTEE OR PAYING AGENT SHALL NOT BE
LIABLE FOR ANY LOSS SUSTAINED BY GRANTOR RESULTING FROM ANY ACT
OR OMISSION OF GRANTEE OR SUCH TRUSTEE OR PAYING AGENT UNLESS
SUCH LOSS IS CAUSED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
OF GRANTEE OR SUCH TRUSTEE OR PAYING AGENT. Grantor will cause
to be prepared and executed all division orders, transfer orders,
and instructions in lieu thereof which Grantee may require to
facilitate exercise of the remedies provided for in this
subsection.
(c) Grantee shall be entitled to apply to a court of
competent jurisdiction for the specific performance or
observance of any covenant or agreement or in aid of the
execution of any power herein granted and for the
appointment of a receiver for the Subject Interests and the
Subject Hydrocarbons, but no such appointment shall
prejudice or affect the rights of Grantee to receive all PP
Hydrocarbons, any proceeds thereof and any amounts due
hereunder.
Section 5.2. Termination of Remedies. The specific rights
-----------------------
to which Grantee may become entitled under Sections 5.1(a)
through (c) shall cease to be exercisable when all Designated
Events have ceased to exist for a continuous period of thirty
days or more (provided that the effecting of performance or
observation of any unperformed covenant or agreement, or other
resolution of a Designated Event, by Grantee or Grantee's agent
or representative shall not be deemed to cure such Designated
Event), without prejudice, however, to the exercise of any such
rights upon any subsequent occurrence of a Designated Event.
Nothing in this Section shall impose limitations or otherwise
inhibit the exercise of any other rights which Grantee may have.
ARTICLE VI
Section 6.1. Assignments by Grantor. Without the prior
----------------------
written consent of Grantee, Grantor shall not assign, sell,
transfer, convey, mortgage or pledge all or any part of the
Subject Interests or create a security interest therein.
Section 6.2. Assignments by Grantee. Grantee shall have
----------------------
the right to assign the Production Payment in whole or in part.
Section 6.3. Binding Effect. All the covenants and
--------------
agreements of Grantor herein contained shall be deemed to be
covenants running with the Subject Interests and the lands
covered thereby or included therein. All of the provisions
20
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hereof shall inure to the benefit of and be binding upon each
party hereto and its successors and assigns.
ARTICLE VII
Section 7.1. Access to Books and Records. In addition to
---------------------------
any reports and information specifically required by the terms of
this Conveyance, Grantor agrees to furnish to Grantee full
information pertaining to the operation of the Subject Interests,
at all reasonable times as Grantee may reasonably request.
Subject to any restrictions on Grantor's right to do so under
applicable operating agreements, confidentiality agreements, or
similar contracts, Grantor will permit representatives designated
by Grantee, including independent accountants, agents, attorneys,
and other Persons, to visit and inspect the Subject Interests and
Grantor's books and records pertaining to the Subject Interests
(and to make copies and photocopies from such records and to
write down and record such information as such representatives
may request), and Grantor shall permit Grantee and its designated
representatives reasonably to investigate and verify the accuracy
of information furnished to Grantee hereunder or in connection
herewith and to discuss all such matters with its officers,
employees and representatives.
Section 7.2. Access to Geological Data. Upon request
-------------------------
Grantor shall, subject to the limitations of confidentiality
undertakings with co-owners or other third parties, furnish to
Grantee copies of all electric and other logs of all wells
hereafter drilled on the Subject Interests and all seismic data
(and interpretations thereof) obtained by Grantor with respect to
the Subject Interests or lands covered thereby, and Grantee shall
also have access to all cores, cuttings, and other non-
interpretative geological, well and production data secured by
Grantor with respect to the Subject Interests.
Section 7.3. Periodic Reports. Grantor will furnish the
----------------
following statements and reports to Grantee at Grantor's expense:
(a) Upon request of Grantee, but not more often than
quarterly, Grantor shall furnish reports, in detail
reasonably acceptable to Grantee, concerning any material
change in methods of operation of all or any Subject Wells,
any new drilling or development, any method of secondary
recovery by repressuring or otherwise, or any other action
with respect to the Subject Interests, the decision as to
which may increase or reduce the quantity of Hydrocarbons
ultimately recoverable from the Subject Interests, or the
rate of production therefrom, or which may shorten or
prolong the period of time required for termination of the
Production Payment.
(b) Monthly, within 30 days after the end of the
Month to which such report applies, Grantor shall furnish a
report, in detail reasonably acceptable to Grantee, showing:
21
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(i) the gross production of Hydrocarbons from each Subject
Well, (ii) the portion of gross production of Hydrocarbons
from each Subject Well which is attributable to the Subject
Interests (including, and separately identifying, the
quantities thereof, if any, used in lease operations), (iii)
the quantity of Hydrocarbons sold for Grantor's account,
(iv) the quantity of PP Hydrocarbons delivered in kind to
Grantee, (v) the quantity of PP Hydrocarbons, if any, sold
for Grantee's account in the circumstances provided for in
Section 3.2(b), (vi) the Direct Taxes paid by Grantor on
production from the Subject Interests (including the
Production Payment), whether paid directly or deducted from
or paid out of proceeds, (vii) the most recent status of any
Gas imbalances, if any, affecting the Subject Interests,
(viii) the cumulative amount of Hydrocarbons remaining to be
delivered pursuant to the Production Payment, (ix) the
number of wells operated, wells drilled and wells abandoned
on the Subject Interests, and (x) if requested, the costs to
Grantor of operating the Subject Interests. To the extent
that any of such information is not available to Grantor
(despite all reasonable efforts to obtain same) at the time
the monthly report is furnished, it shall be supplied to
Grantee promptly after receipt.
(c) Monthly, within 30 days after the end of the
Month to which such report applies, Grantor shall furnish a
report, in detail acceptable to Grantee, showing the
calculations of the Make-Whole Balance.
(d) On or before March 15 of each calendar year (but
effective as of January 1 of such year), Grantor shall
furnish a reserve report covering the Subject Interests,
prepared in form and scope reasonably acceptable to Grantee
by an independent petroleum engineering firm acceptable to
Grantee, using such pricing and other economic parameters as
are customarily utilized by the firm preparing such report
(consistent with marketing arrangements to which Grantor's
interest in Subject Interests is then subject).
(e) Upon request of Grantee, copies of surface maps
showing property lines and well locations, well logs, core
analysis data, flow and pressure tests, natural gas analysis
and casing programs and other similar information related to
the Subject Interests, Subject Wells and the production
therefrom.
(f) Upon request of Grantee, at any time and from
time to time, Grantor will provide at Grantor's sole expense
an inspection or audit of the Subject Interests or the
Subject Lands from an engineering or consulting firm
approved by Grantee, indicating compliance or non-compliance
with Environmental Laws.
22
<PAGE>
ARTICLE VIII
Section 8.1. Warranty. Grantor hereby binds itself to
--------
warrant and forever defend all and singular title to the
Production Payment unto Grantee, its successors and assigns,
against every person lawfully claiming or to claim the same or
any part thereof. Grantor represents and warrants to Grantee
that the ownership of Grantor of the Subject Interests does and
will, with respect to each well or unit listed on Schedule 5
hereto (each item identified as a unit on Schedule 5 is a unit;
each other item is a well): (a) entitle Grantor to receive
(subject to the Production Payment), free and clear of liens and
encumbrances, a decimal share of the Hydrocarbons produced from,
or allocated to, such well or unit equal to not less than the
decimal interest set forth in Schedule 5 in connection with such
well or unit in the column headed "Net Revenue Interest", and
(b) cause Grantor to be obligated to bear a decimal share of the
cost of operation of such well or unit not greater than the
decimal share set forth in Schedule 5 in connection with such
well or unit in the column headed "Working Interest", and such
shares of production which Grantor is entitled to receive, and
shares of expenses which Grantor is obligated to bear, are not
and will not be subject to change except, and only to the extent
that, such changes are reflected on Schedule 5. This Conveyance
is made with full substitution and subrogation of Grantee in and
to all covenants, representations and warranties by others
heretofore given or made with respect to the Subject Interests.
Section 8.2. Choice of Law. This Conveyance shall be
-------------
construed and enforced in accordance with and governed by the
laws of the State of Kentucky (without regard to conflict of law
principles thereof that would cause another state's law to apply)
and the laws of the United States of America, except that, to the
extent that the law of a state in which a portion of the Subject
Interests is located (or which is otherwise applicable to a
portion of the Subject Interests) necessarily governs with
respect to procedural and substantive matters relating to the
Production Payment, the law of such state shall apply as to that
portion of the Subject Interests located in (or otherwise subject
to the laws of) such state.
Section 8.3. Intentions of the Parties. Nothing herein
-------------------------
contained shall be construed to constitute either party hereto
(under state law or for tax purposes) in partnership with the
other party. In addition, the parties hereto intend that the
Production Payment shall at all times be treated (and all
provisions of this Conveyance shall be construed and treated
accordingly): (a) as a production payment (i.e., a limited term
overriding royalty interest) and an interest in real property
under the laws of each state in which Subject Interests are
located; and (b) for federal and state income tax purposes only,
as a mortgage loan (and not a "royalty" or other "economic
interest" in Hydrocarbons) within the meaning of the Internal
Revenue Code and the regulations and judicial authority relating
23
<PAGE>
thereto, which mortgage loan shall be deemed by the parties
hereto to bear interest at the appropriate applicable federal
rate as published by the Internal Revenue Service (with payments
made hereunder being accordingly allocated between principal and
interest), and Grantee and Grantor will so report the Production
Payment on their federal and state income tax returns, if any.
Section 8.4. Ownership of Equipment. The Production
----------------------
Payment does not include any right, title or interest in and to
any of the personal property, fixtures, structures or equipment
now or hereafter placed on, or used in connection with, the
Subject Interests and the interest herein conveyed to Grantee is
exclusively a production payment (i.e., a limited term overriding
royalty interest) and Grantee shall look exclusively to
production of Subject Hydrocarbons for the realization of the
Production Payment.
Section 8.5. Further Assurances. Grantor agrees to execute
------------------
and deliver to Grantee all such other and additional instruments,
notices, division orders, transfer orders and other documents and
to do all such other and further acts and things as may be
necessary to more fully and effectively grant, convey and assign
to Grantee the rights, titles, interest and estates conveyed to
Grantee hereby or intended to be so conveyed.
Section 8.6. Partition. Grantor and Grantee acknowledge
---------
that neither has any right or interest that would permit it to
partition any portion of the Subject Interests as against the
other, and each waives any such right.
Section 8.7. Notices and Addresses. All notices and other
---------------------
communications required or permitted under this Conveyance shall
be in writing and, unless otherwise specifically provided, shall
be delivered personally or by telecopier or (except for periodic
reports provided for under Section 7.3 above which may be sent by
regular mail) by registered or certified mail, postage prepaid,
or by delivery service with proof of delivery, at the respective
addresses shown opposite the signatures of Grantee and Grantor to
this instrument, and shall be deemed delivered on the date of
receipt. Either party may specify as its proper address any
other post office address within the continental limits of the
United States by giving notice to the other party, in the manner
provided in this Section, at least fifteen (15) days prior to the
effective date of such change of address.
Section 8.8. Attorneys' Fees. Grantor shall pay, or
---------------
reimburse Grantee for the payment of, any costs or expenses of
Grantee in connection with the enforcement of, or the defense of
Grantee's rights, title and interest under, any provision of this
Conveyance or the Purchase Agreement or any other document
executed in connection herewith or therewith.
Section 8.9. Counterparts. This Conveyance is being
------------
executed in multiple counterparts, all of which are identical,
except that, (i) to facilitate recordation, in certain
24
<PAGE>
counterparts hereof only those portions of Exhibit A which
contain descriptions of properties located in the recording
jurisdiction in which the particular counterpart is to be
recorded are included, and (ii) Schedules 2, 3 and 4 may be
omitted from counterparts hereof which are being recorded. All
of such counterparts shall constitute one and the same
instrument. Complete copies of this Conveyance containing the
entirety of Exhibit A, and all schedules hereto, have been
retained by Grantor and Grantee.
IN WITNESS WHEREOF, this Conveyance is executed this 22nd
day of May, 1996.
Address of Grantor: SOUTHERN GAS CO. OF DELAWARE, INC.
160 Morgan Street
Versailles, Kentucky 40383 By: /S/Rick G. Avare
--------------------------------
Rick G. Avare
Chief Operating Officer
STATE OF TEXAS )
)ss
COUNTY OF DALLAS )
This instrument was acknowledged before me this 22nd day of
May, 1996, by Rick G. Avare, as Chief Operating Officer of
Southern Gas Co. of Delaware, Inc., a Delaware corporation, on
behalf of said corporation.
/S/Melissa K. Vance
------------------------------
NOTARY PUBLIC, STATE OF TEXAS
My commission expires:
2-20-2000
- ----------------------------
This instrument prepared by:
Samuel D. Haas
Thompson & Knight, a Professional
Corporation
1700 Pacific Ave., Suite 3300
Dallas, Texas 75201
/S/Samuel D. Haas
- -----------------------------
Samuel D. Haas
25
<PAGE>
LIST OF EXHIBITS AND SCHEDULES
------------------------------
Exhibit A - Property descriptions
Full descriptions, including disclosure of
undivided interests and burdens, is assumed
Schedule 1 - Specified Quantities (month by month)
Schedule 2 - Measurement Points
Schedule 3 - Insurance
Schedule 4 - Any Existing Imbalances
Schedule 5 - NRI and WI representations, by well or unit
26
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899717
<NAME> AMERICAN RESOURCES OF DELAWARE, INC.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 628,422
<SECURITIES> 0
<RECEIVABLES> 1,892,061
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,950,714
<PP&E> 39,541,049
<DEPRECIATION> 4,018,901
<TOTAL-ASSETS> 47,435,788
<CURRENT-LIABILITIES> 7,586,797
<BONDS> 13,255,096
0
2,181,819
<COMMON> 63
<OTHER-SE> 16,534,693
<TOTAL-LIABILITY-AND-EQUITY> 47,435,788
<SALES> 16,101,952
<TOTAL-REVENUES> 16,101,952
<CGS> 14,075,398
<TOTAL-COSTS> 15,003,016
<OTHER-EXPENSES> 28,763
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (989,457)
<INCOME-PRETAX> 845,924
<INCOME-TAX> 324,746
<INCOME-CONTINUING> 521,178
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 521,178
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
