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 MARCH 31, 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 March 31, 1996, 5,929,460 shares of the Registrant's
Common Stock, par value $.00001 per share, were issued and
outstanding, 268,851 shares of the Registrant's Series 1993 8%
Convertible Preferred Stock were issued and outstanding, and
21,676 of the Registrant's 6% Junior Cumulative Convertible
Preferred Stock, Series B, 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 MARCH 31, 1996
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements 1
Introduction to the Financial Statements 2
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations -
Three Months Ended March 31, 1996 and 1995 5
Condensed Consolidated Statements of Stockholders'
Equity - Three Months Ended March 31, 1996 6
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1996 and 1995 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION 16
Item 3 - Exhibits and Reports on Form 8-K 16
Signature 18
Exhibit Index 19
ii<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Financial Statements for the three months ended March
31, 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 three months ended March
31, 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 THREE MONTHS ENDED
--------------------------
MARCH 31, 1996 AND 1995
-----------------------
2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS
--------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
MARCH 31,
--------
1996 DECEMBER 31,
---- ------------
(UNAUDITED) 1995(*)
----------- -------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 63,377 826,393
Accounts and notes receivable, net 7,075,390 6,052,242
Deferred tax asset 229,470 184,383
Prepaid expenses and other 108,975 134,907
---------- ----------
Total current assets 7,477,212 7,197,925
Oil and gas properties, at cost
(successful efforts method) 28,319,410 23,798,261
Property and equipment, at cost 9,620,387 9,206,905
---------- ----------
37,939,797 33,005,166
Less accumulated depreciation,
depletion and amortization (3,476,537) (3,021,525)
---------- ----------
Net property and equipment 34,463,260 29,983,641
Other assets:
Investment in unconsolidated
subsidiaries 412,992 312,992
Accounts and notes receivable 4,262,997 4,653,102
Call advance 1,500,000 1,500,000
Other 523,842 549,732
---------- ----------
Total other assets 6,699,831 7,015,826
---------- ----------
$48,640,303 44,197,392
========== ==========
</TABLE>
(Continued)
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>
MARCH 31,
---------
1996 DECEMBER 31,
---- ------------
(UNAUDITED) 1995(*)
----------- -------
<S> <C> <C>
Current liabilities:
Current installments of long-term
debt $ 6,140,889 4,623,341
Accounts payable 3,539,644 2,732,971
Accrued taxes payable 151,913 103,118
Accrued expenses and other 500,111 351,797
---------- ----------
Total current liabilities 10,332,557 7,811,227
Long-term debt, excluding current
maturities 15,391,230 14,568,505
Deferred income taxes and other 3,306,778 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; 5,929,460 and
5,539,215 shares issued and
outstanding at March 31, 1996
and December 31, 1995, respectively 59 55
Additional paid-in capital 15,660,994 14,887,977
Retained earnings 1,766,866 1,682,070
---------- ----------
Total stockholders' equity 19,609,738 18,751,922
Commitments and contingencies * *
---------- ----------
$48,640,303 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)
------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Marketing $7,864,493 2,845,561
Production 1,442,733 383,747
Well development 39,334 70,000
Transportation 302,692 196,316
Other 273,995 155,987
--------- ---------
9,923,247 3,651,611
--------- ---------
Expenses:
Marketing 7,607,979 2,558,056
Production 318,117 117,061
Well development 584 44,994
Transportation 62,285 30,333
Depreciation, depletion and
amortization 474,343 274,669
Other 54,217 32,988
--------- ---------
8,517,525 3,058,101
--------- ---------
1,405,722 593,510
Administrative expenses 452,462 679,219
--------- ---------
Operating income (loss) 953,260 (85,709)
--------- ---------
Other income (expense):
Interest income 383,211 73,187
Interest expense (481,314) (190,733)
Settlement income - 1,850,415
Other (41,898) -
--------- ---------
(140,001) 1,732,869
Income before income tax expense 813,259 1,647,160
Income tax expense 317,218 618,243
--------- ---------
Net income $ 496,041 1,028,917
========= =========
Per common share:
Primary:
Net income $. 09 .31
==== ===
Weighted average number of common
shares and common share equivalents
outstanding 5,816,404 3,354,768
========= =========
Fully diluted:
Net income $.08 .20
=== ===
Weighted average number of common
shares and common share equivalents
outstanding 6,369,421 5,093,062
========= =========
</TABLE>
See accompanying notes to condensed, consolidated financial
statements.
5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 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 149,410 2 - - - - (37,265) - (2) - -
Issuance of Common
Stock dividend 15,835 - - - - - - - 145,076 (145,076) -
Issuance of Common
Stock and warrants
in connection
with property
acquisition 225,000 2 - - - - - - 1,157,173 - 1,157,175
Purchase and
retirement of
Series B
Preferred Stock - - - - - - (58,059) (1) (529,230) (266,169) (795,400)
Net income - - - - - - - - - 496,041 496,041
--------- ---- ------- --------- ---------- ---------- ------- ---- ---------- -------- ----------
Balance,
March 31, 1996 5,929,460 $59 268,851 3,226,213 (1,044,394) 2,181,819 21,676 - 15,660,994 1,766,866 19,609,738
========= === ======= ========= =========== ========= ======= ==== ========== ========= ==========
</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)
------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
------------------------------------------
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $1,216,781 218,052
--------- ---------
Investing activities:
Purchases of property and equipment (3,819,153) (273,892)
Proceeds from sale of claims receivable - 3,100,415
Issuance of notes receivable - (5,156,973)
Payments on notes receivable 294,483 -
Distribution from investment in
unconsolidated subsidiary - 82,274
Purchase of 6% Junior Preferred Stock (795,400) -
---------- ---------
Net cash used in investing
activities (4,320,070) (2,248,176)
---------- ----------
Financing activities:
Proceeds from borrowings 2,590,000 2,250,000
Payments on borrowings (249,727) (667,085)
---------- ----------
Net cash provided by
financing activities 2,340,273 1,582,915
---------- ----------
Decrease in cash (763,016) (447,209)
Cash and cash equivalents at
beginning of period 826,393 1,118,824
---------- ----------
Cash and cash equivalents at end of period $ 63,377 $ 671,615
========= =========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared a stock dividend and issued 15,835 and
29,113 shares of Common Stock to holders of the Series 1993 and
Series B Preferred Stock during the quarters ended March 31, 1996
and 1995, respectively.
During the quarter ended March 31, 1996, 37,265 shares of Series
B Preferred Stock were converted into a total of 149,410 shares
of Common Stock. During the quarter ended March 31, 1995, 5,834
shares of Series 1993 and 250,000 shares of Series B Preferred
Stock were converted into a total of 149,410 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
$1,157,153. The Company also paid cash and assumed certain
obligations in connection with the acquisition, which was
consummated on February 26, 1996 (see Note 2).
The Company acquired 58,059 shares of the outstanding 6% Junior
Preferred Stock for $795,400 during the three months ended March
31, 1996. Upon resolution of the Board of Directors, the shares
were retired.
See accompanying notes to condensed, consolidated financial
statements.
7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
(SELECTED DISCLOSURES OMITTED)
------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
--------------------------------------------------
(1) GENERAL
American Resources of Delaware, Inc. (ARI) was incorporated
in the State of Delaware on August 14, 1992 as a successor
company to 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 Company 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. During 1995, the Subsidiary 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 March 31, 1996 and December 31, 1995 and the
results of operations and changes in cash flows for the
periods ended March 31, 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)
8
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
(SELECTED DISCLOSURES OMITTED)
-----------------------------
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>
MARCH 31, 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. $20,000,000 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. 625,000 718,750
Note payable to unconsolidated
subsidiary, due on demand plus
interest at prime. 100,000 100,000
Note payable to a company,
non-interest bearing, payable
in monthly installments
of $7,500. 57,716 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)
9
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
(SELECTED DISCLOSURES OMITTED)
------------------------------
<TABLE>
<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. $ 15,000 90,000
Note payable, original balance
of $166,885 payable in monthly
installments of $7,500 through
April 1997, including interest at
8% per annum. 56,717 94,439
Other notes 127,686 58,441
----------- ----------
21,532,119 19,191,846
Less - Current portion (6,140,889) (4,623,341)
----------- -----------
Long-term debt $15,391,230 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 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.
Reductions on the credit facility are also dependent on the
borrowing base. Due to an increase in borrowings during the
quarter ended March 31, 1996, monthly principal reductions
will be $430,000 beginning April 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 March 31, 1996, the Company was in compliance
with the required financial convenants.
(4) CENTURY/SETTLE TRANSACTIONS
During the three months ended March 31, 1996, the Company
has advanced approximately $1,450,000 to Century Offshore
Management Company (Century) to obtain various leasehold
interests in prospects located in the Gulf Coast Region.
(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 March 31,
1996:
(Continued)
10
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
(SELECTED DISCLOSURES OMITTED)
------------------------------
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 21,676 and 117,000 shares outstanding at March 31, 1996
and December 31, 1995, respectively.
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>
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 (402,000) 3.31 6.00
---------- ---- ----
Balance March 31, 1996 877,014 $3.00 $8.00
========= ==== ====
</TABLE>
Outstanding options at March 31, 1996 include 1,980,910
issued under the CSO, of which 1,815,243 are exercisable,
and 826,320 non-plan options, all of which are immediately
exercisable.
Outstanding options at March 31, 1996 expire between
February 14, 1997 and February 1, 2005.
The Company purchased and retired 58,059 shares of Series B
Preferred Stock at $13.70 per share. At March 31, 1996,
there are 21,676 shares of Series B Preferred Stock
outstanding. The Company subsequently allowed the holders
of the remaining shares of Series B Preferred Stock to
convert the shares into 75,410 shares of common stock.
(6) RELATED PARTY TRANSACTIONS
Significant related party transactions which are not
disclosed elsewhere in these condensed, consolidated
financial statements are discussed in the following
paragraphs (see Note 2 - Property Acquisition and Note 3 -
Long-term Debt).
In 1996, the Company, pursuant to the terms of an employment
and stock option agreement, has paid or accrued compensation
to the Company's chairman of $15,000.
(Continued)
11
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS
-----------------------------------------------------
(SELECTED DISCLOSURES OMITTED)
------------------------------
(7) SUBSEQUENT EVENT
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 (the
Note), as amended, due from Century. The agreement allows
the individuals to receive a combined payment of $500,000
plus interest at 22% from the Note repayment. The
agreements assign the payments from the portion of the Note
which is not pledged to the Company's primary lender. The
proceeds received by the Company under the agreements were
used to fund additional development activities in the Gulf
Coast Region.
12
<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.
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; however, no definitive agreements have been entered
into at this time.
Jonathan B. Rudney, current President and Chief Executive
Officer of the Company, is also affiliated with Century and,
therefore, has tendered his resignation in order to avoid any
potential conflicts. Rick G. Avare, who currently serves the
Company as Chief Operating Officer, will assume the position of
acting President and Chief Executive Officer at this time.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1996 AND 1995:
Total revenues for the first three months of 1996 increased
172% to $9,923,247 from $3,651,611 for the comparable period in
1995. Corresponding operating expenses increased 178% to
$8,517,525 in 1996, from $3,058,101 in 1995. Components of the
increases are as follows:
- -- MARKETING: The Company's marketing volumes have increased to
---------
1.98 bcf for the three months ended March 31, 1996, as
compared to 1.04 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. The marketing volume increase was
partially offset by a lower profit margin as a percent of
revenue. In 1996, the Company has realized approximately
3.3% profit margin on marketing activity as compared to
approximately 10% profit margin for the same period in 1995.
- -- PRODUCTION: Production revenues were $1,442,733 for the
----------
three months ended March 31, 1996, as compared to $383,747
for the same period in 1995. The additional revenues are
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 $608,000 in production revenues
for the three months ended March 31, 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.
Favorable gas prices in the first quarter also had a
positive impact on operations. During the three months
ended March 31, 1996, the average gas price received on
Kentucky properties was $2.60 per thousand cubic feet
("mcf") versus $2.03 per mcf for the same period in 1995.
13
<PAGE>
Production from the Ship Shoal properties, which are located
in the Gulf Coast region, was down from expected amounts due
to the operator's inability to adequately flow the oil and
gas through its production platform. As a result,
production from the two wells was reduced significantly in
January, 1996, but steadily increased in February and March,
1996. However, full production capabilities are still not
being realized from the two wells due to the facility's
production constraints. The Company is currently working
with the operator and exploring other alternatives to return
the wells to their full production capabilities.
As can be expected, production costs also increased to
$318,117 for the three months ended March 31, 1996, from
$117,061 for the same period in 1995. This was due to the
production costs associated with the Gulf Coast wells of
approximately $121,000 and the costs associated with the
properties acquired from AKS Energy Corporation.
The Company has taken additional lease positions in the Gulf
Coast region during the three months ended March 31, 1996,
at a cost of approximately $1,450,000 and intends to
continue to jointly develop the area with Century.
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $474,343 for the
three months ended March 31, 1996, as compared to $274,669
for the same period in 1995. The increase results primarily
from approximately $120,000 of depreciation, depletion and
amortization on the Ship Shoal wells and additional
depreciation on approximately $2,760,000 of property and
equipment acquired since March 31, 1995.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A decreased 33% to
----------------------------------
$452,462 for the three months ended March 31, 1996, as
compared to $679,219 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 initiated 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
March 31, 1996, include payroll of $194,572, professional
fees of $53,921, consulting fees of $26,250, insurance of
$37,994 and travel of $30,555. Significant savings of G&A
which have been achieved for the three months ended March
31, 1996, as compared to the same period for 1995 include
reductions in professional fees ($85,349), consulting fees
($62,775), bad debt expense ($50,000), payroll ($12,475),
rent ($7,928) and telephone ($6,122).
- -- 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 March 31, 1996, interest was earned on an
average outstanding balance of $6,500,000, as compared
to an average outstanding balance of approximately
$1,350,000 for the same period in 1995.
* INTEREST EXPENSE: Interest expense increased to
----------------
$481,314 for the three months ended March 31, 1996, as
compared to $190,733 for the same period in 1995. This
results primarily from increased borrowings under the
Company's primary credit facilities. Outstanding
borrowings under the facilities were $20,000,000 at
March 31, 1996, as compared to $7,996,480 at March 31,
1995. The additional borrowings have been used to
assist in expanding the Company's exploration,
development and property acquisition activities.
14
<PAGE>
* SETTLEMENT INCOME: During the three months ended March
-----------------
31, 1995, the Company recognized a gain of $1,850,415
attributable to the sale of an unsecured claim
previously acquired from a major creditor of Century.
* NET INCOME: Net income for the three months ended
----------
March 31, 1996 was $496,041 as compared to $1,028,917
for the same period in 1995. Operating income was
$953,260 in 1996 versus a loss of $85,709 in 1995. The
increase in 1996 is primarily attributable to an
increase in production revenues net of production
expenses of approximately $858,000. Also, 1995 income
included a non-operating pre-tax gain of $1,850,415
from a claim settlement. Approximately 80% of the
interest expense for the three months ended March 31,
1996, was offset by interest earned on notes
receivable.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents for the three months ended March
31, 1996, totalled $63,377 as compared to $826,393 for the same
period in 1995. Historically, the Company has funded its oil and
gas exploration and development activities primarily with bank
borrowings and, to a lesser extent, with cash flow from
operations and equity capital from private placements. The
Company has available a $20,000,000 line of credit through Den
norske, with a current borrowing base of $20,000,000. 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. The Company
anticipates that its existing capital resources and cash flow
generated from future operations will allow it to maintain its
current level of operations and its planned operations for the
foreseeable future. Future acquisitions may necessitate that the
Company make additional borrowings or raise equity capital.
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 March 31, 1996, the Company was in compliance with
all of the required financial ratios.
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.
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:
15
<PAGE>
<TABLE>
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
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 promissory note (the "Note"), as amended, due from
Century. The agreement allows the individuals to receive a
combined payment of $500,000 plus interest at 22% from the Note
repayment. The agreements assign the payments from the portion
of the Note which is not pledged to the Company's primary lender.
The proceeds received by the Company under the agreements were
used to fund additional development activities in the Gulf Coast
region.
The Company intends to meet its cash requirements in 1996
with cash flow expected to be generated from its operations in
the Gulf Coast region and amounts generated from the recent
acquisition of proved properties in Kentucky. As proved reserves
are added to the Company's reserve base, payment requirements
under the Credit Facility are reduced. Also, funds generated
from payments on the 22% note receivable with Settle are expected
to generate additional funds.
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.
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:
16
<PAGE>
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.*
* Filed herewith
(b) Reports on Form 8-K:
On January 29, 1996, the Company voluntarily
filed a Form 8-K reporting recent
developments.
On March 12, 1996, the Company filed a Form
8-K reporting the purchase of oil and gas
properties, equipment and pipelines from AKS
Energy Corporation.
On May 13, 1996, the Company filed a Form
8-K/A providing the required proforma
financial data with regards to the AKS Energy
Corporation purchase which was filed on Form
8-K on March 12, 1996.
17
<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: May 9, 1996 By: /S/Jeffrey J. Hausman
----------------- ------------------------------
Jeffrey J. Hausman
Chief Financial Officer
(Principal Accounting and
Financial Officer)
18
<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. 20
19
<PAGE>
PARTICIPATION AGREEMENT
This Participation Agreement entered into by and between
American Resources of Delaware, Inc. (hereinafter referred to as
"ARI") with an address of 160 Morgan Street, Versailles, Kentucky
40383, and Douglas L. Hawthorne Retirement Plan-001 Dtd.
2/22/95 (hereinafter referred to as "Hawthorne") with an address
of 4325 Delco Dell Road, Kettering, Ohio 45429.
R E C I T A L S
WHEREAS, ARI has loaned Century Offshore Management, Inc.
("Century") the sum of Six Million Five Hundred Thousand Dollars
($6,500,00.00) ("Primary Obligation"); and
WHEREAS, Hawthorne wishes to participate with ARI in the
Primary Obligation of Century in the sum of Two Hundred Fifty
Thousand Dollars ($250,000.00), and
WHEREAS, the parties wish to memorialize their understanding
as to their individual rights under the Primary Obligation.
W I T N E S S E T H:
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. That Hawthorne shall pay to ARI the sum of Two Hundred
Fifty Thousand Dollars ($250,000.00) which shall be considered a
payment under the Primary Obligation to Century. Said monies
shall be evidenced by that Promissory Note as amended in the
principal amount of Six Million Five Hundred Thousand Dollars
($6,500,000.00) and secured by that first mortgage against
certain assets of Century. A copy of the Promissory Note and
Mortgage is attached hereto as Exhibit "A" and identified herein
as the "Loan Documents". Hawthorne acknowledges that ARI has
pledged Five Million Dollars ($5,000,000.00) of the Primary
Obligation to Den norske Bank, N.A.
2. That Hawthorne shall inure to the same rights as ARI in
the Loan Documents and receive the benefits and impairments of
the Loan Documents in the same proportion as Hawthorne"s
contribution bear to the Primary Obligation, except that
Hawthorne"s interest shall be assigned to him from the One and
One-half Million Dollars ($1,500,000.00) loan position which is
not pledged to Den norske Bank, N.A. and is free from any lien or
encumbrance.
3. ARI shall administer this loan at no charge to
Hawthorne, nor shall Hawthorne be responsible for any out-of-
pocket expenses incurred by ARI in the enforcement and
administration of this loan.
20
<PAGE>
4. The parties shall not increase the indebtedness to
Century pursuant
to the terms and conditions of the Loan Documents without the
express written consent of the other, except for advances for
taxes, insurance or other cost which Century is or will be
obligated to incur under the Loan Documents and to the extent
said items are not paid by Century.
5. The parties hereto agree to promptly notify each other
in writing, at the addresses noted herein within sixty (60) days
in the event of any default for reason of nonpayment by Century,
or within thirty (30) days in the event that any of them
undertake any collection activity with respect to amounts owed to
them by Century.
6. This agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Kentucky.
IN WITNESS THEREOF, we have hereunto set our hands as our
seals this the 12th day of April , 1996.
------------------ -------------
American Resources of Delaware, Inc.
BY: /s/Rick G. Avare /s/Douglas L. Hawthorne
---------------------------- --------------------------
TS: C.O.O. Douglas L. Hawthorne
----------------------------
21
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899717
<NAME> RCDYHC3$
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 63,377
<SECURITIES> 0
<RECEIVABLES> 7,075,390
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 7,477,212
<PP&E> 37,939,797
<DEPRECIATION> (3,476,537)
<TOTAL-ASSETS> 48,640,303
<CURRENT-LIABILITIES> 10,332,557
<BONDS> 15,391,230
0
2,181,819
<COMMON> 59
<OTHER-SE> 15,660,994
<TOTAL-LIABILITY-AND-EQUITY> 48,640,303
<SALES> 9,923,247
<TOTAL-REVENUES> 9,923,247
<CGS> 8,517,525
<TOTAL-COSTS> 8,969,987
<OTHER-EXPENSES> 41,898
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 481,314
<INCOME-PRETAX> 813,259
<INCOME-TAX> 317,218
<INCOME-CONTINUING> 496,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 496,041
<EPS-PRIMARY> .09
<EPS-DILUTED> .08
</TABLE>
