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 SEPTEMBER 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 September 30, 1996, 6,346,572 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 September 30, 1996
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements
Introduction to the Financial Statements 1
Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Condensed Consolidated Statements of
Operations - Three Months and Nine
Months Ended September 30, 1996 and 1995 5
Condensed Consolidated Statements of
Stockholders' Equity - Nine Months
Ended September 30, 1996 7
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
September 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 19
PART II - OTHER INFORMATION 31
Item 4 - Submission of Matters to a Vote of
Security Holders 31
Item 6 - Exhibits and Reports on Form 8-K 31
Signature 34
Exhibit Index 35
ii
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Financial Statements for the nine months ended September
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 nine months ended
September 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 NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
Condensed, Consolidated Balance Sheets
--------------------------------------
Assets
------
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1996 DECEMBER 31
---- -----------
(unaudited) 1995(*)
----------- -------
<S> <C> <C>
Current assets:
Cash and temporary cash investments $ 4,145,405 826,393
Accounts and notes receivable, net 2,360,844 6,052,242
Deferred tax asset 229,470 184,383
Prepaid expenses and other 233,638 134,907
----------- -----------
Total current assets 6,969,357 7,197,925
Oil and gas properties, at cost
(successful efforts method) 46,345,178 23,798,261
Property and equipment, at cost 10,946,256 9,206,905
----------- -----------
57,291,434 33,005,166
Less accumulated depreciation,
depletion and amortization (4,510,400) (3,021,525)
----------- -----------
Net property and equipment 52,781,034 29,983,641
Other assets:
Investment in unconsolidated
subsidiaries 352,992 312,992
Accounts and notes receivable 447,102 4,653,102
Call advance 1,500,000 1,500,000
Other 612,843 549,732
----------- -----------
Total other assets 2,912,937 7,015,826
----------- -----------
$62,663,328 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>
SEPTEMBER 30,
-------------
1996 DECEMBER 31
---- -----------
(unaudited) 1995(*)
----------- -------
<S> <C> <C>
Current liabilities:
Current installments of
long-term debt $ 8,065,316 4,623,341
Unearned revenue 841,625 -
Accounts payable 3,743,646 2,732,971
Accrued taxes payable 206,437 103,118
Accrued expenses and other 523,175 351,797
----------- -----------
Total current liabilities 13,380,199 7,811,227
Long-term debt, excluding
current maturities 22,600,050 14,568,505
Unearned revenue 3,009,642 -
Deferred income taxes and other 3,207,496 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; 6,346,572 and 5,539,215
shares issued and outstanding at
September 30, 1996 and December 31,
1995, respectively 63 55
Additional paid-in capital 16,650,691 14,887,977
Treasury stock (52,400) -
Retained earnings 1,685,768 1,682,070
----------- -----------
Total stockholders' equity 20,465,941 18,751,922
Commitments and contingencies
----------- -----------
$62,663,328 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 Nine months ended
------------- -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Marketing $3,929,508 2,219,325 16,126,910 7,894,451
Production 1,806,357 1,033,262 4,654,184 2,118,811
Well development - - 39,334 176,000
Transportation 211,577 179,850 845,041 570,136
Gain (loss) on sale
of assets (72,765) 97,564 (94,645) 97,564
Other 50,758 186,893 434,683 451,725
---------- ---------- ---------- ----------
5,925,435 3,716,894 22,005,507 11,308,687
---------- ---------- ---------- ----------
Expenses:
Marketing 3,589,796 2,061,417 15,726,622 7,276,738
Production 371,860 75,217 976,997 365,722
Well development 803 7,845 20,326 58,141
Transportation 61,391 37,819 227,663 101,148
Depreciation, depletion and
amortization 624,448 411,645 1,668,927 972,835
Other 38,516 37,570 141,677 96,308
---------- ---------- ---------- ----------
4,686,814 2,631,513 18,762,212 8,870,892
---------- ---------- ---------- ----------
1,238,621 1,085,381 3,243,295 2,437,795
Administrative expenses 568,235 506,327 1,495,853 1,765,460
---------- ---------- ---------- ----------
Operating income 670,386 579,054 1,747,442 672,335
---------- ---------- ---------- ----------
Other income (expense):
Gain on sale of claims - - - 2,189,616
Interest expense (649,220) (295,982) (1,638,677) (740,112)
Interest income 20,176 338,282 785,384 669,972
Other 2,567 (16,038) (4,316) 102,962
---------- ---------- ---------- ----------
(626,477) 26,262 (857,609) 2,222,438
---------- ---------- ---------- ----------
Income before income
tax expense 43,909 605,316 889,833 2,894,773
Income tax expense 17,844 241,416 342,590 1,079,191
---------- ---------- ---------- ----------
Net income $ 26,065 363,900 547,243 1,815,582
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
Condensed, Consolidated Statements of Operations (Continued)
------------------------------------------------------------
(Unaudited)
-----------
<TABLE>
<CAPTION>
Quarter ended Nine months ended
------------- -----------------
September 30, September 30,
------------- -------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Per common share:
Primary:
Net income - $.09 .09 .49
= ==== === ===
Weighted average number of
common shares and common
share equivalents
outstanding 6,469,614 4,250,870 6,152,154 3,715,110
========== ========== ========== ==========
Fully diluted:
Net income - .06 .08 .33
= === === ===
Weighted average number of
common shares and common
share equivalents
outstanding 6,738,465 5,818,251 6,525,442 5,567,612
========== ========== ========== ==========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1996
--------------------------------------------
(UNAUDITED)
-----------
<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 TREASURY RETAINED
SHARES VALUE SHARES VALUE PREFERRED VALUE SHARES VALUE CAPITAL STOCK EARNINGS TOTAL
------ ----- ------ ----- --------- ----- ------ ----- --------- ----- -------- -----
<S> <C> <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 27,535 - - - - - - - 227,376 - (227,376) -
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)
Purchase of 10,480
shares of
common stock - - - - - - - - - (52,400) - (52,400)
Stock registration
costs - - - - - - - -
(25,099) - - (25,099)
Net income - - - - - - - - - -
547,243 547,243
--------- --- ------- --------- ---------- --------- ------- --- ---------- ------- -------- ----------
Balance,
September 30,
1996 6,346,572 $63 268,851 3,226,213 (1,044,394) 2,181,819 - - 16,650,691 (52,400) 1,685,768 20,465,941
========= === ======= ========= ========== ========= ======= === ========== ======= ========= ==========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 4,116,785 882,965
----------- -----------
Investing activities:
Purchases of property and equipment (24,017,828) (2,843,517)
Proceeds from sale of claims receivable - 4,235,701
Issuance of notes receivable - (8,005,800)
Payments on notes receivable 6,973,217 120,803
Proceeds from sale of assets 616,418 188,500
Distribution from investment in
unconsolidated subsidiary - 82,274
Investment in call advance - (1,500,000)
Other - (19,000)
----------- -----------
Net cash used in investing activities (16,428,193) (7,741,039)
----------- -----------
Financing activities:
Proceeds from borrowings 17,698,068 17,911,684
Payments on borrowings (6,224,548) (10,930,794)
Proceeds from production payment 4,147,300 -
Proceeds from Issuance of Common Stock 900,000 -
Purchase of 6% Junior Preferred Stock (802,900) -
Purchase of treasury stock (52,400) -
Other (35,100) (113,206)
----------- -----------
Net cash provided by financing
activities 15,630,420 6,867,684
----------- -----------
Increase in cash 3,319,012 9,610
Cash and cash equivalents at
beginning of period 826,393 1,118,824
----------- -----------
Cash and cash equivalents at
end of period $ 4,145,405 1,128,434
=========== ===========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared stock dividends and issued 27,535 and 84,405
shares of Common Stock to holders of the Series 1993 and Series B
Preferred Stock during the nine months ended September 30, 1996 and
1995, respectively.
During the nine months ended September 30, 1996, 58,941 shares of
Series B Preferred Stock were converted into a total of 224,822
shares of Common Stock. During the nine months ended September 30,
1995, 5,834 shares of Series 1993 and 320,602 shares of Series B
Preferred Stock were converted into a total of 1,132,407 shares of
common stock.
See accompanying notes to condensed, consolidated financial
statements.
8
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
(continued)
-----------
NON-CASH TRANSACTIONS (CONTINUED):
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). The Company
acquired 58,059 shares of the outstanding 6% Junior Preferred Stock
for $802,900 during the nine months ended September 30, 1996. Upon
resolution of the Board of Directors, the shares were retired.
During the nine months ended September 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 STATEMENT
----------------------------------------------------
(UNAUDITED)
-----------
(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. (Southern) 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 located 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 September 30, 1996 and December 31, 1995 and the
results of operations and changes in cash flows for the
periods ended September 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.
10
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
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 AND EQUIPMENT
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 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.
On July 3, 1996, the Company, through Southern, acquired
proved developed and undeveloped oil and gas properties,
equipment and pipelines from Century Offshore Management
Company (Century) located offshore Louisiana. As
consideration for the assets, the Company paid $4,000,000 in
cash, issued an Installment Note in the amount of $4,000,000
payable in two equal installments on August 31, 1996 and
September 30, 1996 (the Installment Note 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 (Century Note) and the
assumption of existing liens against the assets in the
approximate amount of $1,051,000. The parties subsequently
11
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AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
entered into an extension agreement dated September 24, 1996
whereby Century extended the due date of the installment
payments until the earlier of the completion of funding of
the Company's private placement or five days after written
notice from Century. As of September 30, 1996, ARI had not
completed its funding nor had Century made a request for
payment. 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.
Also on July 3, 1996, the Company, Southern and Century
entered into an Asset Purchase Agreement whereby Southern
acquired certain rights and interests in undeveloped
properties from Century located onshore Louisiana. On
August 31, 1996 the parties entered into a Capitalization
and Termination of Purchase and Sale Agreement
(Capitalization Agreement), which effectively terminated the
July 3, 1996 agreement and provided for the Company, through
Southern, to acquire between 5.6% and 9.5% contract rights
from Century in three undeveloped properties located onshore
Louisiana. As consideration for these rights, the Company
has paid $4,509,000 in cash.
In August, 1996, the Company entered into a Purchase and
Sale Agreement with a corporation to sell certain of the
Company's gas properties and related pipeline and equipment
for approximately $590,000. The gas properties sold
consisted primarily of certain leases and pipelines located
in Clay County, Kentucky, including the PXT pipeline. As a
result of sale, the Company has recognized a loss of
approximately $73,000 during the quarter ended September 30,
1996.
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.
12
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
(3) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<CAPTION>
SEPTEMBER 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. $26,083,000 17,500,000
Note payable to Century, payable in cash
or restricted common stock at $3.00 per
share at the Company's option 3,190,726 -
Call option payable, original balance of
$1,000,000 payable in monthly installments
of $31,250 commencing April 1, 1995,
due November 1997. 395,000 718,750
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. 17,216 80,216
Notes payable to related parties,
interest payable at 22%, in connection
with Participation Agreements. 515,000 400,000
</TABLE>
(Continued)
13
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
(3) LONG-TERM DEBT (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
------------- ------------
1996 1995
---- ----
<S> <C> <C>
Note payable to individual, interest payable
at 22%, in connection with Participation
Agreement 250,000 -
Note payable to a company pursuant to an
agreed judgment regarding operational
payables, payable on demand, plus
interest of 8%. 150,000 150,000
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 63,924 58,441
----------- -----------
30,665,366 19,191,846
Less - Current portion (8,065,316) (4,623,341)
----------- -----------
Long-term debt $22,600,050 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). On August 7,
1996, the revolving credit facility was increased to
$30,000,000. As of September 30, 1996, the borrowing base
under the revolving credit facility was $26,100,000.
Additional borrowings and repayment terms under the credit
facility are dependent upon a redetermination of the
borrowing base, which is primarily dependent upon the value
of the mortgaged properties as determined under Den norske's
internal lending procedures. Commencing on November 1,
1996, monthly principal reductions will be $500,000. In
addition to the monthly reduction of the borrowing base,
there will be an additional reduction of the borrowing base
14
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
of a minimum of $1,000,000 or 50% of equity raised up to a
total reduction of $3,000,000 on December 31, 1996. The
borrowing base will be redetermined semi-annually on each
October 1st and April 1st 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 September 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 September 30, 1996,
the Company's ratio was 2.59 to 1.0, but the Company has
obtained a waiver of the covenant from Den norske. At
September 30, 1996, the Company has a working capital
deficit of approximately $6,400,000 which the Company plans
to satisfy through cash from operations and equity raise-
ups.
In July 1995, in order to fulfill a 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 (see Note 2), the Company and
the Directors simultaneously agreed to terminate the
Directors' participation in the Century Note. The Company
remains liable to the Directors for the outstanding balance
at September 30, 1996 of $265,000 plus interest thereon at
the rate of 22% per annum. Pursuant to the Termination of
Participation Agreements entered into between the Company
and the Directors, payment of the balance is due at various
dates ranging from November 15 to December 1, 1996, and may
be paid in cash or by the issuance of shares of Common Stock
of the Company valued at 75% of the average closing bid
prices of the Common Stock as reported by NASDAQ for the
five trading days immediately preceding the payment date.
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 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
15
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
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 2). The Company and the individuals
simultaneously agreed to terminate the individuals'
participation in the Century Note in exchange for the
Company assuming the liability to repay $500,000 to the
individuals plus interest thereon at the rate of 22% per
annum. Subsequent to September 30, 1996, the Company paid
the non-affiliated individual in full. Pursuant to the
Termination of Participation Agreement entered into between
the Company and the Director, payment of the balance is due
on December 1, 1996, and may be paid in cash or by issuance
of shares of Common Stock of the Company valued at 75% of
the average closing bid prices of the Common Stock as
reported by NASDAQ for the five trading days immediately
preceding the payment date.
(4) STOCKHOLDERS' EQUITY
The Company has authorized one million shares (1,000,000)
shares of Series 1993 Preferred Stock and two million shares
(2,000,000) of Series Preferred Stock subject to designation
by the Board of Directors:
Series 1993 Preferred Stock is convertible into
one share of common stock with a liquidation
preference of $12 per share. Dividends are
payable semiannually at the rate of 8% per annum
in common stock. 268,851 shares are outstanding
at September 30, 1996 and December 31, 1995.
Series B Preferred Stock, designated by the Board
of Directors, 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 zero and 117,000 shares
outstanding at September 30, 1996 and December 31,
1995, respectively.
16
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
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>
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 (439,000) 3.31 6.50
---------
Balance September 30, 1996 2,770,230 $3.00 $8.00
=========
</TABLE>
Outstanding options at September 30, 1996 include 1,943,910
issued under the CSO, of which 1,778,243 are exercisable,
and 826,320 non-plan options, all of which are immediately
exercisable. Outstanding options at September 30, 1996
expire between February 14, 1997 and February 1, 2005.
At September 30, 1996, the Company has outstanding warrants
to purchase 1,464,097 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 nine months
ended September 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 zero shares of Series B Preferred Stock outstanding at
September 30, 1996.
17
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
(5) UNEARNED REVENUE
On May 22, 1996, the Company, through Southern, conveyed an
approximate 2.2 Billion cubic feet (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.
(6) SUBSEQUENT EVENT
As of November 13, 1996, the Company had privately placed 4%
Convertible Debentures (the "Debentures") in the aggregate
principal amount of $3,240,000 with a maturity date one year
from date of issuance. The net proceeds after expenses
totaled $2,985,600. The Debentures are convertible prior to
their maturity dates at the option of the holders into
shares of Common Stock valued at 75% of the average closing
bid prices of the Common Stock as reported by NASDAQ for the
five trading days prior to the date of payment (the
"Conversion Price"). Debentures that are not converted
prior to their maturity dates will automatically convert on
their maturity dates into shares of Common Stock valued at
the Conversion Price. Accrued interest on the Debentures
will be paid on their conversion dates by the issuance of
shares of Common Stock valued at the Conversion Price. The
Company agreed to register the shares of Common Stock within
120 days after demand is made by a Debenture holder. Under
certain terms and conditions, the Company has the right to
redeem the convertible Debentures prior to conversion at
125% of the face value. The net proceeds have been used to
pay the Installment Note payable due to Century in
connection with the purchase of the South Timbalier 148
properties.
18
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RECENT DEVELOPMENTS
On October 1, 1994, the Company acquired a gas pipeline and
certain related assets from Petroleum Exploration and
Transmission, Inc. (the "PXT Pipeline"), a pipeline system
located in Laurel and Clay Counties, Kentucky. The PXT Pipeline
consists of approximately fifty (50) miles of gathering and
transmission pipeline, related equipment, and interconnects with
four intrastate and interstate pipelines. It also consists of
production ownership, leases, thirty (30) existing residential
home customer retail markets and one wholesale market. The PXT
Pipeline provided the Company with additional direct access to
Delta Natural Gas Co.'s pipeline, Columbia Gas Transmission's KA-
1 pipeline, and new interconnects with Somerset Gas and Tranex.
These new interconnects provided the Company with access to new
markets for retail and wholesale gas sale.
Initially, the Company had intended to connect its Gausdale
and Wofford fields to the PXT Pipeline in order to eliminate
winter delivery problems with Columbia Gas Transmission ("TCo").
In addition, the Company estimated that there would be a
significant savings in transportation expenses. However, a
significant capital expenditure was also required to connect the
system. Management determined that there were other alternatives
which might prove to be more cost beneficial and, therefore,
effectuated an alternative transportation route to TCo through
Wiser Oil & Gas Company ("Wiser"). By connecting the Wofford and
Gausdale fields and installing two interconnects from the
Gausdale field to Wiser's facilities, the Company was able to
alleviate the majority of the winter delivery problems it had
previously experienced for a substantially reduced capital
expenditure while also saving 22% in transportation costs for the
gas being delivered via the Wiser facilities.
In August, 1996, the Company entered into a Purchase and
Sale Agreement with a corporation to sell certain of the
Company's gas properties and related pipeline and equipment for
approximately $590,000. The gas properties sold consisted
primarily of certain leases and pipelines located in Clay County,
Kentucky, including the PXT Pipeline.
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
19
<PAGE>
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
note, as amended, due from Century Offshore Management
Corporation ("Century") in the principal amount of $6,500,000
which bears interest at 22% (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 2 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 assuming the liability to repay
$500,000 to the individuals plus interest thereon at the rate of
22% per annum. Subsequent to September 30, 1996, the Company paid
the non-affiliated individual in full. Pursuant to the
Termination of Participation Agreement entered into between the
Company and the Director, payment of the balance is due on
December 1, 1996, and may be paid in cash or by issuance of
shares of Common Stock of the Company valued at 75% of the
average closing bid prices of the Common Stock as reported by
NASDAQ for the five trading days immediately preceding the
payment date.
On May 9, 1996, the Company and Century announced that the
two companies had 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, through a facility sponsored by Williams
Energy Services Company, a subsidiary of The Williams Companies,
Inc., and structured by NationsBank, the Company conveyed an
approximate 2.2 BCF volumetric production payment in the wells
purchased from AKS. 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.
20
<PAGE>
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 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. On
August 31, 1996, the Company and Century entered into a
Capitalization and Termination of Purchase and Sale Agreement
(Capitalization Agreement), which effectively terminated the
purchase of one-third of Century's contract rights in the three
separate onshore Salt Dome properties. The Capitalization
Agreement provided for the Company to acquire between 5.6% and
9.5% contract rights from Century in the three separate onshore
Salt Domes for lesser consideration. The consideration for the
properties, as adjusted, was approximately $20.0 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 2 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 the
outstanding balance at September 30, 1996 of $265,000 plus
interest thereon at the rate of 22% per annum. Pursuant to the
Termination of Participation Agreements entered into between the
Company and the Directors, payment of the balance is due at
various dates ranging from November 15 to December 1, 1996, and
may be paid in cash or by the issuance of shares of Common Stock
of the Company valued at 75% of the average closing bid prices of
the Common Stock as reported by NASDAQ for the five trading days
immediately preceding the payment date.
As of November 13, 1996, the Company had privately placed 4%
Convertible Debentures in the aggregate principal amount of
$3,240,000 with a maturity date one year from date of issuance.
21
<PAGE>
The net proceeds after expenses totalled $2,985,600. The
Debentures are convertible prior to their maturity dates at the
option of the holders into shares of Common Stock valued at 75%
of the average closing bid prices of the Common Stock as reported
by NASDAQ for the five trading days prior to the date of payment
(the "Conversion Price"). Debentures that are not converted
prior to their maturity dates will automatically convert on their
maturity dates into shares of Common Stock valued at the
Conversion Price. Accrued interest on the Debentures will be
paid on their conversion dates by the issuance of shares of
Common Stock valued at the Conversion Price. The Company agreed
to register the shares of Common Stock into which the Debentures
are convertible within 120 days after demand is made by a
Debenture holder. The Company has the right to redeem the
convertible Debentures prior to conversion at 125% of the face
value. The net proceeds have been used to pay amounts due to
Century in connection with the Purchase of the South Timbalier
148 properties.
Since the Company's acquisition of an interest in the South
Timbalier 148 Block in July 1996, it has expended approximately
$4.6 million towards the development of the property. In
conjunction with the joint interest owner and operator of the
property, Newfield Exploration, a second and third production
platform were installed in the Company's area of interest and are
now in operation. The platforms were installed to accommodate
the production developed as a result of the completion of the
wells acquired. Seven of the wells purchased are currently
producing, and two more wells should be on line by mid-November,
1996. Additionally, the companies have successfully drilled and
completed a new well on South Timbalier 148, and production has
commenced. As a result of the successful development, an
additional location has been identified and is currently being
scheduled for drilling.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1996, AS COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER
30, 1995:
Total revenues for the nine months ended September 30, 1996,
increased 95% to $22,005,507 from $11,308,687 for the comparable
period in 1995. Corresponding operating expenses increased 112%
to $18,762,212 in 1996 from $8,870,892 in 1995. Components of
the increases are as follows:
- -- MARKETING: The Company's marketing volumes have increased
---------
to 4.83 BCF for the nine months ended September 30, 1996, as
compared to 3.1 BCF in 1995. The volume increase results
primarily from the Company's increased production and
marketing activity in the Kentucky region, and continued
focus to function as an integrated oil and gas company.
After strong prices during the first quarter of 1996, the
second and third quarters of 1996 saw a decrease in prices
and strong price competition. As a result, the Company
realized a profit of 2.5% on marketing revenues for the nine
months ended September 30, 1996, as compared to 7.8% in
1995.
- -- PRODUCTION: The Company's production revenues increased
----------
120% for the nine months ended September 30, 1996, to
$4,654,184 from $2,118,811 for the comparable period in
1995. Production on a BCF equivalent basis has increased to
1.8 BCF in 1996 as compared to .9 BCF for the comparable
period in 1995. The increase in production volumes results
primarily from an increase in the Company's Gulf Coast
region production. For the nine months ended September 30,
1996, production from the Gulf Coast region was
approximately 859,000 thousand cubic feet ("MCF") equivalent
as compared to approximately 366,000 MCF for the comparable
period in 1995. Production from the Ship Shoal B-3 and B-4
wells, which were drilled and completed in mid and late
1995, respectively, has increased to approximately 732,000
MCF equivalent for 1996 as compared to approximately 366,000
MCF for 1995. In July 1996, the Company also acquired net
working interests ranging between 5% and 22.5% in five (5)
producing wells in the South Timbalier 148 block, and
interests ranging between 22.5% and 45% in five (5) drilled
but uncompleted wells on the block. As a result, production
from the South Timbalier 148 block added production during
the period of approximately 127,000 MCF equivalent. Also in
1996, production from the Company's Kentucky wells has
increased to approximately 892,000 MCF as compared to
approximately 468,000 MCF for 1995. The increase in
Kentucky production results primarily from the Company's
acquisition of various producing gas fields from AKS in
February, 1996.
Also contributing to the increase are stronger gas and/or
oil prices during the nine months ended September 30, 1996
versus 1995. The average price per MCF equivalent on oil
and gas production in 1996 was $2.61 versus $2.33 in 1995.
Production expenses also increased to $926,997 for the nine
months ended September 30, 1996, from $365,722 for the
comparable period in 1995. The increase results from
production costs associated with the Ship Shoal and South
Timbalier properties which total approximately $380,000 for
1996 versus approximately $33,000 for 1995 and additional
operating costs relating to the property acquired from AKS.
The average production cost per MCF equivalent in 1996 was
$.52 versus $.40 for the comparable period in 1995.
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $1,668,927 for the
nine months ended September 30, 1996, as compared to
$972,835 for the same period in 1995. The increase results
primarily from approximately $596,000 of depreciation,
depletion and amortization on the Ship Shoal and South
Timbalier 148 wells and additional depreciation on
approximately $2,500,000 of property and equipment acquired
since September 30, 1995.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A decreased 15% to
----------------------------------
$1,495,893 for the nine months ended September 30, 1996, as
compared to $1,765,460 for the same period in 1995. The
decrease reflects the cost savings achieved through the
closing of the Scottsdale, Arizona, office, the results of
the emphasis on cost control initiated by management and the
23
<PAGE>
termination of a consulting contract in the fourth quarter of
1995.
Significant components of G&A for the nine months ended
September 30, 1996 include payroll of $643,155, professional
fees of $210,732, consulting fees of $78,750, insurance of
$150,613 and travel of $94,943. Significant savings of G&A
which have been achieved for the nine months ended September
30, 1996, as compared to the same period for 1995 include
reductions in professional fees of $26,089, consulting fees
of $180,594, bad debt expense of $30,187 and payroll of
$35,779.
- -- 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, which were cancelled as part of the
consideration in the acquisition of the South Timbalier
148 properties in July 1996, earned interest at 22%.
During the nine months ended September 30, 1996,
interest was earned on an average outstanding balance
of approximately $4.3 million as compared to an average
outstanding balance of approximately $4.0 million for
the same period in 1995.
* INTEREST EXPENSE: Interest expense increased to
----------------
$1,638,677 for the nine months ended September 30,
1996, as compared to $740,112 for the same period in
1995. This results from increased borrowings under the
Company's primary credit facility. Outstanding
borrowings under the facility were $26.1 million at
September 30, 1996, as compared to $12.5 million at
September 30, 1995. The additional borrowings have
been used to assist in the acquisition and development
of the South Timbalier 148 properties and to continue
to expand the Company's exploration, development and
acquisition activities in the Kentucky and Gulf Coast
regions.
* GAIN ON SALE OF CLAIMS: During the nine months ended
----------------------
September 30, 1995, the Company recognized a gain of
$2,189,616 attributable to the sale of various secured
and unsecured claims previously acquired from the
creditors of Century.
- -- NET INCOME: Net income for the nine months ended September
----------
30, 1996, was $547,243 as compared to $1,815,582 for the
same period in 1995; however, net income for the nine months
ended September 30, 1995, included a gain of $2,189,616
($1,357,000 net of tax) on the sale of claims. Operating
income for the nine months ended September 30, 1996,
increased to $1,747,442 versus $672,335 for the same period
in 1995. The increase results primarily from higher net
production levels but was partially offset by increased
depreciation, depletion and amortization and lower general
and administrative expenses.
24
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1996, AS COMPARED WITH THE THREE MONTHS ENDED SEPTEMBER
30, 1995:
Total revenues for the three months ended September 30,
1996, increased 59% to $5,925,435 from $3,716,894 for the
comparable period in 1995. Corresponding operating expenses
increased 78% to $4,686,814 in 1996, from $2,631,513 in 1995.
Components of the increases are as follows:
- -- MARKETING: The Company's marketing volumes have increased to
---------
1.36 BCF for the three months ended September 30, 1996, as
compared to .9 BCF in 1995. After strong prices during the
first quarter of 1996, the second and third quarters of 1996
saw a decrease in prices and strong price competition.
However, the third quarter of 1996 showed improvement over
the second quarter of 1996 with a profit on marketing
revenues of 8.6% which compares favorably with the 7.1%
realized in the third quarter of 1995.
- -- PRODUCTION: The Company's production revenues increased 75%
----------
for the three months ended September 30, 1996, to $1,806,357
from $1,033,262 for the comparable period in 1995.
Quarterly production on a BCF equivalent basis has increased
to .7 BCF in 1996 as compared to .4 BCF for the comparable
period in 1995. The increase in production volumes results
primarily from an increase in the Company's Gulf Coast
region production. For the three months ended September 30,
1996, production from the Gulf Coast region was
approximately 442,000 MCF equivalent as compared to
approximately 259,000 MCF for the comparable period in 1995.
Approximately 127,000 MCF equivalent of the increase is due
to production from the South Timbalier 148 properties which
were acquired in July, 1996. The remaining Gulf Coast
production increase is due to continued increases of
production flows through the production platform on the Ship
Shoal property. Production from the Ship Shoal B-3 and B-4
wells increased approximately 41% from the second quarter of
1996. Also adding to the overall production increase in
1996 from 1995 was the Company's acquisition of various
producing gas fields from AKS in February, 1996.
Also contributing to the increase are stronger gas and/or
oil prices during the three months ended September 30, 1996
versus 1995. The average price per MCF equivalent on oil
and gas production in 1996 was $2.47 versus $2.36 in 1995.
Production expenses also increased to $371,860 for the three
months ended September 30, 1996, from $75,217 for the
comparable period in 1995. The increase results from
production costs associated with the Ship Shoal and South
Timbalier properties and additional operating costs relating
to the property acquired from AKS.
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $624,448 for the
three months ended September 30, 1996, as compared to
$411,645 for the same period in 1995. The increase results
25
<PAGE>
primarily from approximately $141,000 of depreciation,
depletion and amortization on the South Timbalier 148 wells
and additional depreciation on approximately $2,500,000 of
property and equipment acquired since September 30, 1995.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A increased 12% to
----------------------------------
$568,235 for the three months ended September 30, 1996, as
compared to $506,327 for the same period in 1995. The
increase is due to increased insurance costs related to the
Gulf Coast operations and professional fees and travel
expenses associated with corporate funding opportunities.
Significant components of G&A for the three months ended
September 30, 1996, include payroll of $205,576,
professional fees of $85,216, consulting fees of $26,250,
insurance of $87,302 and travel of $42,042.
- -- 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, which were cancelled as part of the
consideration in the acquisition of the South Timbalier
148 properties in July 1996, earned interest at 22%.
Therefore, interest income recognized for the three
months ended September 30, 1996, was minimal compared
to amounts earned for the same period in 1995.
* INTEREST EXPENSE: Interest expense increased to
----------------
$649,220 for the three months ended September 30, 1996,
as compared to $295,982 for the same period in 1995.
This results from increased borrowings under the
Company's primary credit facility.
- -- NET INCOME: Net income for the three months ended September
----------
30, 1996, was $26,065 as compared to $363,900 for the same
period in 1995. The decrease in 1996 was primarily due to
the elimination of interest income related to the notes
receivable cancelled as part of the consideration given in
the purchase of the South Timbalier 148 property and the
additional interest incurred by the Company on increased
borrowings. The purchase of South Timbalier 148 consisted
of ten wells, five of which produced during two months of
the third quarter, generating revenues of approximately
$150,000 per month produced. The remaining wells were in
the process of being completed, and one additional well was
drilled on the property. These wells are expected to be on-
line by mid-November 1996.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents for the nine months ended
September 30, 1996, totalled $4,145,405 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
26
<PAGE>
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 $4,116,785 for the nine months ended
September 30, 1996. At September 30, 1996, the Company had
available a $30,000,000 line of credit through Den norske with a
borrowing base of $26,100,000, of which the Company had drawn
$26,083,000. The base was increased to $30,000,000 subsequent to
December 31, 1995, to assist in funding the property purchases
from AKS and Century in the Kentucky and Gulf Coast regions,
respectively.
Under the credit agreement with Den norske Bank, A.S. ("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 September 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 September 30, 1996, the
Company's ratio was 2.59 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.
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:
27
<PAGE>
<TABLE>
Due Number
Date of Shares Amount
---- --------- ------
<S> <C> <C>
January 2, 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 2 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 assuming the liability to repay $500,000 to the
individuals plus interest thereon at the rate of 22% per annum.
Subsequent to September 30, 1996, the Company paid the non-
affiliated individual in full. Pursuant to the Termination of
Participation Agreement entered into between the Company and the
Director, payment of the balance is due on December 1, 1996, and
may be paid in cash or by issuance of shares of Common Stock of
the Company valued at 75% of the average closing bid prices of
the Common Stock as reported by NASDAQ for the five trading days
immediately preceding the payment date.
28
<PAGE>
On May 22, 1996, through a facility sponsored by Williams
Energy Services Company, a subsidiary of the Williams Companies,
Inc., and structured by NationsBank, the Company conveyed an
approximate 2.2 BCF volumetric production payment in Appalachian
wells recently purchased from AKS. 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 in an area identified as
South Timbalier 148. As consideration for the assets, the
Company paid $4 million in cash, issued an installment note
("Installment Note") in the amount of $4 million payable in two
equal installments on August 31, 1996 and September 30, 1996 (the
Installment Note 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 $6.5 million and the
assumption of existing liens against the assets in the
approximate amount of $1 million. The parties subsequently
entered into an extension agreement dated September 24, 1996
whereby Century extended the timeframe in which the installment
payments were due under the Installment Note until the earlier of
completion of funding of the company's private placement or five
days after written notice from Century. As of September 30,
1996, ARI had not completed its funding nor had Century made a
request for payment. The foregoing transaction was effected
pursuant to an Asset Purchase Agreement entered into on July 3,
1996.
Since the Company's acquisition of an interest in the South
Timbalier 148 Block, it has expended approximately $4.6 million
towards the development of the property. In conjunction with the
joint interest owner and operator of the property, Newfield
Exploration, a second and third production platform were
installed in the Company's area of interest and are now in
operation. The platforms were installed to accommodate the
production developed as a result of the completion of the wells
acquired. Seven of the wells purchased are currently producing,
and two more should be on line by mid-November, 1996.
In addition to the South Timbalier 148 wells acquired, a new
well has been successfully drilled and completed on the property
and production has commenced. As a result of the successful
development, an additional location has been identified and is
currently being scheduled for drilling.
Increasing production throughout the Fourth Quarter of 1996
should positively affect the results in that quarter. A full
three months of production from the wells should have a
significant impact on the results for the First Quarter of 1997.
29
<PAGE>
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 $4,509,000 in cash. The foregoing transaction was
effected pursuant to a Capitalization and Termination of Purchase
and Sale Agreement entered into on August 31, 1996, which
effectively terminated a prior 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>
Cash requirements:
<S> <C> <C>
Capital costs $ 3,750,000
Debt service payments 7,600,000
Total cash requirements $11,350,000
Cash Sources:
Cash in bank $ 4,145,000
Cash from operations $ 2,000,000
Equity raise-ups 5,900,000
Total cash sources 12,045,000
-----------
Excess $ 695,000
===========
</TABLE>
As can be seen above, the Company intends to meet its cash
requirements for the remainder of 1996 with equity raise-ups and
cash flow from operations. In August 1996, Den norske Bank
increased the Company's credit facility to $30,000,000 with a
current borrowing base of $26,100,000. The Company increased its
borrowings under the Den norske credit facility by approximately
$9.9 million during the quarter ended September 30, 1996. As of
November 13, 1996, the Company had privately placed 4%
Convertible Debentures in the aggregate principal amount of
$3,240,000 with a maturity date one year from date of issuance.
The net proceeds after expenses totalled $2,985,600. The
Debentures are convertible prior to their maturity dates at the
option of the holders into shares of Common Stock valued at 75%
of the average closing bid prices of the Common Stock as reported
by NASDAQ for the five trading days prior to the date of payment
(the "Conversion Price"). Debentures that are not converted
prior to their maturity dates will automatically convert on their
maturity dates into shares of Common Stock valued at the
Conversion Price. Accrued interest on the Debentures will be
paid on their conversion dates by the issuance of shares of
Common Stock valued at the Conversion Price. The Company agreed
to register the shares of Common Stock into which the Debentures
are convertible within 120 days after demand is made by a
Debenture holder. The Company has the right to redeem the
30
<PAGE>
convertible Debentures prior to conversion at 125% of the face
value. The net proceeds from the private placements have been
used to retire obligations associated with the purchase of the
South Timbalier 148 property. Additional equity raise-ups are to
be achieved by a series of private placements.
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.
31
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Stockholders on August 14, 1996,
the stockholders of the Company re-elected four (4) directors and
elected one (1) new director to its five (5) member board of
directors and ratified the Board's selection of accountants for
1996.
The voting results with respect to the foregoing matters are
set forth below:
Proposal #1 ELECTION OF DIRECTORS For Withhold
<TABLE>
<S> <C> <C>
DOUGLAS L. HAWTHORNE 5,619,455 17,032
DONALD SCHELLPFEFFER 5,615,658 20,829
LEONARD K. NAVE 5,618,108 18,379
RICK G. AVARE 5,619,233 17,254
DAVID FOX, JR. 5,615,683 20,804
</TABLE>
Proposal #2 RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK
LLP AS INDEPENDENT PUBLIC ACCOUNTANT FOR THE
COMPANY FOR ITS 1996 FISCAL YEAR.
For Against Withhold
5,630,187 2,000 4,300
ITEM 6. 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).
32
<PAGE>
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 (incorporated by reference to
Exhibit 10.4 to the Registrant's Report on
Form 10-QSB for the quarterly period ending
June 30, 1996).
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).
10.7 Capitalization Agreement and Termination of
Purchase and Sale Agreement by and between
Southern Gas Co. of Delaware, Inc., American
Resources of Delaware, Inc. and Century
Offshore Management Corporation, dated August
31, 1996 (incorporated by reference to
Exhibit A to the Registrant's Form 8-K/A
filed on September 16, 1996).
10.8 Amendment to South Timbalier Purchase and
Sale Agreement by and between Southern Gas
Co. of Delaware, Inc., American Resources of
Delaware, Inc. and Century Offshore
Management Corporation, dated August 31, 1996
(incorporated by reference to Exhibit B to
the Registrant's Form 8-K/A filed on
September 16, 1996).
33
<PAGE>
10.9 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne, dated September 30,
1996.*
10.10 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and The Kandy Limited Partnership, dated
September 30, 1996.*
10.11 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Donald A. Schellpfeffer, dated September
30, 1996.*
10.12 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Southern Gas Holding Company, Inc., dated
September 30, 1996.*
10.13 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne Retirement Plan-001
Dtd. 2/22/95, dated September 30, 1996.*
* Filed herewith
(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.
On September 16, 1996, the Company filed a
Form 8-K/A amending its previous Form 8-K
filed on July 18, 1996, in order to provide
the financial information required by Item 7
of Form 8-K and to amend portions of Item 2
which referenced the acquisition by the
Registrant of properties from Century located
onshore and offshore Louisiana.
34
<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: November 13, 1996 By: /S/ Jeffrey J. Hausman
------------------------------------
Jeffrey J. Hausman
Chief Financial Officer
(Principal Accounting and Financial
Officer)
35
<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 (incorporated by reference to
Exhibit 10.4 to the Registrant's Report on
Form 10-QSB for the quarterly period ending
June 30, 1996). *
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). *
36
<PAGE>
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). *
10.7 Capitalization Agreement and Termination of
Purchase and Sale Agreement by and between
Southern Gas Co. of Delaware, Inc., American
Resources of Delaware, Inc. and Century
Offshore Management Corporation, dated August
31, 1996 (incorporated by reference to
Exhibit A to the Registrant's Form 8-K/A
filed on September 16, 1996). *
10.8 Amendment to South Timbalier Purchase and
Sale Agreement by and between Southern Gas
Co. of Delaware, Inc., American Resources of
Delaware, Inc. and Century Offshore
Management Corporation, dated August 31, 1996
(incorporated by reference to Exhibit B to
the Registrant's Form 8-K/A filed on
September 16, 1996). *
10.9 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne, dated September 30,
1996. 37
10.10 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and The Kandy Limited Partnership, dated
September 30, 1996. 41
10.11 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Donald A. Schellpfeffer, dated September
30, 1996. 44
10.12 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Southern Gas Holding Company, Inc., dated
September 30, 1996. 47
10.13 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne Retirement Plan-001
Dtd. 2/22/95, dated September 30, 1996. 51
37
<PAGE>
EXHIBIT 10.9
TERMINATION OF PARTICIPATION AGREEMENT
This Termination of Participation Agreement ("Agreement")
entered into this 7th day of October, 1996, by and between
American Resources of Delaware, Inc. (hereinafter referred to as
"ARI") with an address of 160 Morgan Street, Versailles, KY 40383
and Doug Hawthorne (hereinafter referred to as "Hawthorne"), 4325
Delco Dell Road, Kettering, OH 45429.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Hawthorne to participate in the
Century Primary Obligation; and
WHEREAS, ARI and Hawthorne entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Hawthorne would participate with ARI in the Century
Primary Obligation by advancing to ARI (the "Hawthorne Advance")
the sum of Eighty Thousand Dollars ($80,000.00) to be utilized by
ARI to fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation and Hawthorne were
secured by a first mortgage on certain properties known as the
South Timbalier 148 Properties offshore Louisiana (the "Century
Properties"); and
<PAGE>
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
WHEREAS, Hawthorne has agreed to the forgiveness by ARI of
the Century Primary Obligation in exchange for certain
compensation; and
WHEREAS, the parties wish to memorialize their understanding
in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. TERMINATION OF CENTURY PRIMARY OBLIGATION. Hawthorne
-----------------------------------------
hereby consents to the forgiveness of the Century Primary
Obligation and acknowledges that the forgiveness resulted in the
release of any and all mortgages held by ARI as security for the
Century Primary Obligation, including that mortgage granted to
Century by ARI on the Century Properties.
2. REPAYMENT OF PRINCIPAL. ARI shall pay Hawthorne the
----------------------
sum of Eighty Thousand Dollars ($80,000.00) which represents the
original contribution of principal advanced to ARI under the
Hawthorne Advance and which shall be payable by (i) the payment
of Thirty Thousand Dollars ($30,000.00) in cash by November 15,
1996 and (ii) the remaining balance of the Hawthorne Advance
shall be payable as follows: (a) the issuance to Hawthorne of
ARI restricted common stock (the "Common Stock") in an amount
equal to the Conversion Price set forth in the World Capital
Funding, Inc.'s Convertible Debenture Purchase Agreement (the
"Private Placement") or (b) in the event ARI successfully nets
Five Million Dollars
2
<PAGE>
($5,000,000) in the Private Placement, Hawthorne may elect to be
paid in cash. ARI agrees, at its own cost and expense, that it
will prepare and file, at the earliest practical time pursuant to
reasonable and prudent business practice, a Form S-3 Statement
(the "Registration Statement") under the Securities Act of 1933
(the "Securities Act") in compliance with all the requirements of
the Securities Act applicable thereto for the purpose of
registering the ARI stock described above. ARI shall use its
best efforts to cause a Registration Statement to become
effective as soon as practical, to qualify the ARI stock under
the Securities or Blue Sky Laws in such jurisdictions as the
parties reasonably agree and to keep the Registration Statement
and such qualifications current and in effect for a period of two
years from the date in which it becomes effective.
3. PAYMENT OF INTEREST. ARI agrees to pay to Hawthorne by
-------------------
November 15, 1996 all accrued but unpaid interest on the
Hawthorne's Advance.
4. RELEASE OF INDEBTEDNESS OF ARI. Upon the receipt of
------------------------------
the above referenced principal and interest payments, Hawthorne
agrees to release ARI from any and all obligations as more fully
set forth in that Participation Agreement and upon request shall
execute a general release of ARI from any and all claims that
Hawthorne may have under the Participation Agreement.
5. EFFECTIVE DATE. This Agreement shall be deemed
--------------
effective as of September 30, 1996.
3
<PAGE>
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Karen M. Underwood
-----------------------------------
Its: Corporate Secretary
----------------------------------
By: /s/ Doug Hawthorne
-----------------------------------
DOUG HAWTHORNE
DS\Hawthorne.agr
4
<PAGE>
EXHIBIT 10.10
TERMINATION OF PARTICIPATION AGREEMENT
This Termination of Participation Agreement ("Agreement")
entered into this 7th day of October, 1996 by and between
American Resources of Delaware, Inc. (hereinafter referred to as
"ARI") with an address of 160 Morgan Street, Versailles, KY 40383
and The Kandy Limited Partnership (hereinafter referred to as
"Kandy"), P. O. Box 1946, Scottsdale, AZ 85252.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Five Million Dollars
($5,000,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Kandy to participate in the Century
Primary Obligation; and
WHEREAS, ARI and Kandy entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Kandy would participate with ARI in the Century Primary
Obligation by advancing to ARI (the "Kandy Advance") the sum of
Eighty Thousand Dollars ($80,000.00) to be utilized by ARI to
fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation was secured by a
first mortgage on certain properties known as the South Timbalier
148 Properties offshore Louisiana (the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
<PAGE>
WHEREAS, Kandy has agreed to the forgiveness by ARI of the
Century Primary Obligation in exchange for certain compensation;
and
WHEREAS, the parties wish to memorialize their understanding
in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. TERMINATION OF CENTURY PRIMARY OBLIGATION. Kandy
-----------------------------------------
hereby consents to the forgiveness of the Century Primary
Obligation and acknowledges that the forgiveness resulted in the
release of any and all mortgages held by ARI as security for the
Century Primary Obligation, including that mortgage granted to
Century by ARI on the Century Properties.
2. REPAYMENT OF PRINCIPAL. ARI shall pay Kandy the sum of
----------------------
Eighty Thousand Dollars ($80,000.00), which represents the
original contribution of principal advanced to ARI by Kandy, by
December 1, 1996.
3. PAYMENT OF INTEREST. ARI agrees to pay to Kandy by
-------------------
December 1, 1996 all accrued but unpaid interest on the Kandy's
Advance.
4. RELEASE OF INDEBTEDNESS OF ARI. Upon the receipt of
------------------------------
the above referenced principal and interest payments, Kandy
agrees to release ARI from any and all obligations as more fully
set forth in that Participation Agreement and upon request shall
execute a general release of ARI from any and all claims that
Kandy may have under the Participation Agreement.
2
<PAGE>
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Karen M. Underwood
------------------------------------
Its: Corporate Secretary
-----------------------------------
THE KANDY LIMITED PARTNERSHIP
By: /s/ Andrew Kacic
------------------------------------
ANDREW KACIC
Its: General Partner
-----------------------------------
DS\Kandy.agr
3
<PAGE>
EXHIBIT 10.11
TERMINATION OF PARTICIPATION AGREEMENT
This Termination of Participation Agreement ("Agreement")
entered into this 7th day of October, 1996, by and between
American Resources of Delaware, Inc. (hereinafter referred to as
"ARI") with an address of 160 Morgan Street, Versailles, KY 40383
and Don Schellpeffer (hereinafter referred to as "Schellpeffer"),
910 E. 20th Street, Sioux Falls, SD 57105.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Schellpeffer to participate in the
Century Primary Obligation; and
WHEREAS, ARI and Schellpeffer entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Schellpeffer would participate with ARI in the Century
Primary Obligation by advancing to ARI (the "Schellpeffer
Advance") the sum of Eighty Thousand Dollars ($80,000.00) to be
utilized by ARI to fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation and the Schellpeffer
Advance were secured by a first mortgage on certain properties
known as the South Timbalier 148 Properties offshore Louisiana
(the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
<PAGE>
WHEREAS, Schellpeffer has agreed to the forgiveness by ARI
of the Century Primary Obligation in exchange for certain
compensation; and
WHEREAS, the parties wish to memorialize their understanding
in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. TERMINATION OF CENTURY PRIMARY OBLIGATION.
-----------------------------------------
Schellpeffer hereby consents to the forgiveness of the Century
Primary Obligation and acknowledges that the forgiveness resulted
in the release of any and all mortgages held by ARI as security
for the Century Primary Obligation, including that mortgage
granted to Century by ARI on the Century Properties.
2. REPAYMENT OF PRINCIPAL. ARI shall pay Schellpeffer the
----------------------
sum of Eighty Thousand Dollars ($80,000.00) which represents the
original contribution of principal amount of the Schellpeffer
Advance and which shall be payable by (a) the issuance to
Schellpeffer of ARI restricted Common Stock (the "Common Stock")
in an amount equal to the Conversion Price set forth in the World
Capital Funding Inc.'s Convertible Debenture Purchase Agreement
(the "Private Placement") or (b) in the event ARI successfully
nets Five Million Dollars ($5,000,000.00) from the Private
Placement, Schellpeffer may elect to be paid in cash. ARI
agrees, at its own cost and expense, that it will prepare and
file, at the earliest practical time pursuant to reasonable and
prudent business practice, a Form S-3 Statement (the
"Registration Statement") under the Securities Act of 1933 (the
"Securities Act") in compliance with all the requirements of the
Securities Act applicable thereto for the purpose of registering
2
<PAGE>
the ARI stock described above. ARI shall use its best efforts to
cause a Registration Statement to become effective as soon as
practical, to qualify the ARI stock under the Securities or Blue
Sky Laws in such jurisdictions as the parties reasonably agree
and to keep the Registration Statement and such qualifications
current and in effect for a period of two years from the date in
which it becomes effective.
3. PAYMENT OF INTEREST. ARI agrees to pay to Schellpeffer
-------------------
by November 15, 1996 all accrued and unpaid interest on
Schellpeffer's Advance.
4. RELEASE OF INDEBTEDNESS OF ARI. Upon the receipt of
------------------------------
the above referenced principal and interest payments,
Schellpeffer agrees to release ARI from any and all obligations
as more fully set forth in that Participation Agreement and upon
request shall execute a general release of ARI from any and all
claims that Schellpeffer may have under the Participation
Agreement.
5. EFFECTIVE DATE. This Agreement shall be deemed
--------------
effective as of September 30, 1996.
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Karen M. Underwood
-----------------------------------
Its: Corporate Secretary
----------------------------------
By: /s/ Don Schellpfeffer
-----------------------------------
DON SCHELLPFEFFER
DS\Schellpeffer.agr
3
<PAGE>
EXHIBIT 10.12
TERMINATION OF PARTICIPATION AGREEMENT
This Termination of Participation Agreement ("Agreement")
entered into this 7th day of October, 1996 by and between
American Resources of Delaware, Inc. (hereinafter referred to as
"ARI") with an address of 160 Morgan Street, Versailles, KY 40383
and Southern Gas Holdings, Inc., a Kentucky corporation with an
address of (hereinafter referred to as "Southern"), of
Versailles, Kentucky.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Southern, via its principal
shareholders, Rick Avare ("Avare") and Leonard Nave ("Nave"), to
participate in the Century Primary Obligation; and
WHEREAS, ARI, Avare and Nave entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Avare and Nave would participate with ARI in the Century
Primary Obligation by advancing to ARI (the "Southern Advance")
the sum of One Hundred and Sixty Thousand Dollars ($160,000.00)
to be utilized by ARI to fund the Century Primary Obligation; and
WHEREAS, the funds which were to be advanced by Avare and
Nave under the Participation Agreement, were actually advanced by
Southern and inadvertently reported by ARI as being from Avare
and Nave, individually: and
<PAGE>
WHEREAS, Southern has aknowledged that it advanced the funds
pursuant to the Participation Agreement and the parties agree
that Southern shall be sustituted as the funding party under the
Participation Agreement: and
WHEREAS, the Century Primary Obligation and the Southern
Advance were secured by a first mortgage on certain properties
known as the South Timbalier 148 Properties offshore Louisiana
(the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
WHEREAS, Southern has agreed to the forgiveness by ARI of
the Century Primary Obligation in exchange for certain
compensation; and
WHEREAS, the parties wish to memorialize their understanding
in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. TERMINATION OF CENTURY PRIMARY OBLIGATION. Southern
-----------------------------------------
hereby consents to the forgiveness of the Century Primary
Obligation and acknowledges that the forgiveness resulted in the
release of any and all mortgages held by ARI as security for the
Century Primary Obligation, including that mortgage granted to
Century by ARI on the Century Properties.
2. REPAYMENT OF PRINCIPAL. ARI shall pay Southern the sum
----------------------
of One Hundred and Sixty Thousand Dollars ($160,000.00) which
represents the principal amount of the Southern Advance no later
than December 1, 1996.
2
<PAGE>
3. PAYMENT OF INTEREST. ARI agrees to pay to Southern by
-------------------
December 1, 1996 all accrued but unpaid interest on Southern's
Advance.
4. RELEASE OF INDEBTEDNESS OF ARI. Upon the receipt of
------------------------------
the above referenced principal and interest payments, Southern
agrees to release ARI from any and all obligations as more fully
set forth in that Participation Agreement and upon request shall
execute a general release of ARI from any and all claims that
Southern may have under the Participation Agreement.
5. AVARE AND NAVE ACKNOWLEDGMENT. Avare and Nave enter
-----------------------------
into this Agreement for the purpose of acknowledging that
Southern advanced the monies to ARI under the Participation
Agreement and is entitled to be substituted as the funding party.
Avare and Nave further release ARI from any and all claims, title
or rights they may have in the Participation Agreement, including
payment thereunder.
6. EFFECTIVE DATE. This Agreement shall be deemed
--------------
effective as of September 30, 1996.
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Karen M. Underwood
----------------------------------
Its: Corporate Secretary
---------------------------------
3
<PAGE>
SOUTHERN GAS HOLDING, INC.
By: /s/ Rick G. Avare
----------------------------------
Its: President
---------------------------------
Rick G. Avare
/s/ Rick G. Avare
-------------------------------------
Leonard Nave
/s/ Leonard Nave
-------------------------------------
DS\Southern.agr
4
<PAGE>
EXHIBIT 10.13
TERMINATION OF PARTICIPATION AGREEMENT
This Termination of Participation Agreement ("Agreement")
entered into this 7th day of October, 1996 by and between
American Resources of Delaware, Inc. (hereinafter referred to as
"ARI") with an address of 160 Morgan Street, Versailles, KY 40383
and Douglas L. Hawthorne Retirement Plan 001 (hereinafter
referred to as "Hawthorne"), 4325 Delco Dell Road, Kettering, OH
45429.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Hawthorne to participate in the
Century Primary Obligation; and
WHEREAS, ARI and Hawthorne entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Hawthorne would participate with ARI in the Century
Primary Obligation by advancing to ARI (the "Hawthorne Advance")
the sum of Two Hundred and Fifty Thousand Dollars ($250,000.00)
to be utilized by ARI to fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation and the Hawthorne
Advance were secured by a first mortgage on certain properties
known as the South Timbalier 148 Properties offshore Louisiana
(the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
<PAGE>
WHEREAS, Hawthorne has agreed to the forgiveness by ARI of
the Century Primary Obligation in exchange for certain
compensation; and
WHEREAS, the parties wish to memorialize their understanding
in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. TERMINATION OF CENTURY PRIMARY OBLIGATION. Hawthorne
-----------------------------------------
hereby consents to the forgiveness of the Century Primary
Obligation and acknowledges that the forgiveness resulted in the
release of any and all mortgages held by ARI as security for the
Century Primary Obligation, including that mortgage granted to
Century by ARI on the Century Properties.
2. REPAYMENT OF PRINCIPAL. ARI shall pay Hawthorne the
----------------------
sum of Two Hundred and Fifty Thousand Dollars ($250,000.00) which
represents the principal amount of the Hawthorne Advance and
which shall be payable by (i) the payment of One Hundred and
Twenty Five Thousand Dollars ($125,000.00) in cash by December 1,
1996 and (ii) the remaining portion of the Hawthorne Advance
shall be payable, at follows: (a) the issuance to Hawthorne of
ARI restricted common stock (the "Common Stock") at the in an
amount equal to the Conversion Price set forth in the World
Capital Funding, Inc.'s Convertible Debenture Purchase Agreement
(the "Private Placement") or (b) in the event ARI successfully
nets Five Million Dollars ($5,000,000) from the Private
Placement, Hawthorne may elect to be paid in cash. In the event
ARI issues Common Stock to Hawthorne, ARI agrees, at its own
cost and expense, that it will prepare and file, at the earliest
practical time pursuant to reasonable and prudent business
practice, a Form S-3 Statement (the "Registration Statement")
2
<PAGE>
under the Securities Act of 1933 (the "Securities Act") in
compliance with all the requirements of the Securities Act
applicable thereto for the purpose of registering the ARI stock
described above. ARI shall use its best efforts to cause a
Registration Statement to become effective as soon as practical,
to qualify the ARI stock under the Securities or Blue Sky Laws in
such jurisdictions as the parties reasonably agree and to keep
the Registration Statement and such qualifications current and in
effect for a period of two years from the date in which it
becomes effective.
3. PAYMENT OF INTEREST. ARI agrees to pay to Hawthorne by
-------------------
December 1, 1996 all accrued but unpaid interest on Hawthorne's
Advance.
4. RELEASE OF INDEBTEDNESS OF ARI. Upon the receipt of
------------------------------
the above referenced principal and interest payments, Hawthorne
agrees to release ARI from any and all obligations as more fully
set forth in that Participation Agreement and upon request shall
execute a general release of ARI from any and all claims that
Hawthorne may have under the Participation Agreement.
5. EFFECTIVE DATE. This Agreement shall be deemed
--------------
effective as of September 30, 1996.
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Karen M. Underwood
----------------------------------
Its: Corporate Secretary
---------------------------------
By: /s/ Douglas L. Hawthorne
----------------------------------
DOUGLAS L. HAWTHORNE, TRUSTEE FOR
DOUGLAS L. HAWTHORNE RETIREMENT
PLAN 001
DS\Hawthorne.agr
3
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<NAME> AMERICAN RESOURCES OF DELAWARE, INC.
<S> <C>
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<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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2,181,819
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