U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
--- ----
Commission File No. 0-21472
AMERICAN RESOURCES OF DELAWARE, INC.
(Name of small business issuer in its charter)
DELAWARE 86-0713506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 MORGAN STREET, P. O. BOX 87
VERSAILLES, KENTUCKY 40383
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 606-873-5455
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES xx NO
------ -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
YES xx NO
--------- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
Issuer's classes of common equity, as of the last practicable
date:
On June 30, 1997, 9,682,922 shares of the Registrant's
Common Stock, par value $.00001 per share, were issued and
outstanding and 268,851 shares of the Registrant's Series 1993 8%
Convertible Preferred Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ; No xx .
---- --------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED JUNE 30, 1997
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements 1
Introduction to the Financial Statements 2
Condensed Consolidated Balance Sheets -
June 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of
Operations - Quarter and Six Months
Ended June 30, 1997 and 1996 5
Condensed Consolidated Statements of
Stockholders' Equity - Six Months
Ended June 30, 1997 6
Condensed Consolidated Statements of
Cash Flows - Six Months Ended
June 30, 1997 and 1996 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 13
PART II - OTHER INFORMATION 23
Item 4 - Submission of Matters to a Vote of
Security Holders 23
Item 6 - Exhibits and Reports on Form 8-K 24
Signature 25
ii
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Financial Statements for the six months ended June 30,
1997 and 1996 include, in the opinion of the Company, all
adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the results of operations for such
periods. Results of operations for the six months ended June 30,
1997, are not necessarily indicative of results of operations
which will be realized for the year ending December 31, 1997.
The Financial Statements should be read in conjunction with the
Company's Report on Form 10-KSB for the year ended December 31,
1996.
1
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED FINANCIAL
---------------------------------
STATEMENTS
----------
FOR THE QUARTER AND SIX MONTHS ENDED
------------------------------------
JUNE 30, 1997 AND 1996
----------------------
2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS
--------------------------------------
ASSETS
------
<TABLE>
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996(*)
----------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 980,665 $ 353,419
Accounts and notes receivable,
net 3,904,994 7,037,415
Deferred tax asset 16,319 16,319
Prepaid expenses and other 719,574 344,850
---------- ----------
Total current assets 5,621,552 7,752,003
Oil and gas properties, at cost
(successful efforts method) 50,400,248 48,136,759
Property and equipment, at cost 12,011,060 11,754,079
---------- ----------
62,411,308 59,890,838
Less accumulated depreciation,
depletion and amortization (9,651,474) (6,150,632)
---------- ----------
Net property and equipment 52,759,834 53,740,206
Other assets:
Investment in unconsolidated
subsidiaries 344,970 485,610
Call advance 1,500,000 1,500,000
Notes receivable 437,247 432,576
Deferred financing costs, net 557,998 439,695
Other 381,509 487,554
---------- ----------
Total other assets 3,221,724 3,345,435
---------- ----------
$61,603,110 $64,837,644
========== ==========
</TABLE>
(Continued)
*Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial
statements.
3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
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AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
JUNE 30,
--------
1997 DECEMBER 31,
---- ------------
(UNAUDITED) 1996(*)
----------- -------
<S> <C> <C>
Current liabilities:
Current installments of
long-term debt $ 7,108,167 $ 6,513,283
Accounts payable 1,386,470 4,861,340
Accrued severance liabilities 87,072 112,689
Accrued taxes payable 147,164 195,467
Unearned revenue 762,528 807,632
Accrued expenses and other 364,037 373,622
---------- ----------
Total current liabilities 9,855,438 12,864,033
Long-term debt, excluding
current maturities 18,863,561 19,422,421
Unearned revenue 2,449,487 2,821,611
Deferred tax liability and other 4,075,468 3,611,572
---------- ----------
Total liabilities 35,243,954 38,719,637
Stockholders' equity:
Series 1993 8% Convertible
Preferred Stock, par value
$12.00 per share 2,181,819 2,181,819
Convertible Securities,
representing approximately
0 and 2,850,000 shares of
Common Stock at June 30,
1997 and December 31, 1996,
respectively 0 4,997,554
Common Stock, par value $.00001
per share; 20,000,000 shares
authorized; 9,682,922 and
6,520,296 shares issued and
outstanding at June 30, 1997
and December 31, 1996,
respectively 97 65
Additional paid-in capital 21,034,248 16,453,899
Treasury stock (52,400) (52,400)
Retained earnings 3,195,392 2,537,070
---------- ----------
Total stockholders' equity 26,359,156 26,118,007
Commitments and contingencies - -
---------- ----------
Total liabilities and
stockholders' equity $61,603,110 $64,837,644
========== ==========
</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>
Quarter ended Six Months ended
------------- ----------------
June 30 June 30
------- -------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Production $4,881,679 $1,405,094 $8,644,776 $2,847,827
Transportation 223,458 330,772 434,952 633,464
Marketing 2,865,203 4,332,909 13,399,945 12,197,402
Other 35,618 109,930 47,258 423,259
---------- ---------- ---------- ----------
8,005,958 6,178,705 22,526,931 16,101,952
---------- ---------- ---------- ----------
Expenses:
Production 576,091 287,020 1,117,857 605,137
Transportation 108,081 103,987 202,154 166,272
Marketing 2,851,934 4,528,847 13,400,362 12,136,826
Other 76,859 67,883 113,320 122,684
Depreciation, depletion
and amortization 2,123,940 570,136 3,501,760 1,044,479
---------- ---------- ---------- ----------
5,736,905 5,557,873 18,335,453 14,075,398
---------- ---------- ---------- ----------
2,269,053 620,832 4,191,478 2,026,554
Administrative expenses 785,099 475,156 1,580,511 927,618
---------- ---------- ---------- ----------
Operating income 1,483,954 145,676 2,610,967 1,098,936
Other income (expense):
Interest income 10,588 381,997 23,074 765,208
Interest expense (670,420) (508,143) (1,354,506) (989,457)
Other 3,555 13,135 4,174 (28,763)
---------- ---------- ---------- ----------
(656,277) (113,011) (1,327,258) (253,012)
---------- ---------- ---------- ----------
Income before income
tax expense 827,677 32,665 1,283,709 845,924
Income tax expense 335,650 7,528 513,500 324,746
---------- ---------- ---------- ----------
Net income $ 492,027 $ 25,137 $ 770,209 $ 521,178
========== ========== ========== ==========
Per common share:
Primary:
Net income $.06 -- $.09 $.09
==== == ==== ====
Weighted average number
of common shares and
common share equivalents
outstanding 8,816,393 6,166,953 8,710,608 5,991,679
========== ========== ========== ==========
Fully diluted:
Net income $.05 -- $.08 $.08
==== == ==== ====
Weighted average number
of common shares and
common share equivalents
outstanding 9,085,244 6,474,247 8,979,459 6,417,791
========== ========== ========== ==========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
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AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1997
--------------------------------------
(UNAUDITED)
-----------
<TABLE>
Common Stock 8% Preferred Stock
------------- -----------------------------
Number Number Net of Additional
of Par Convertible of Par Discount Paid-in Treasury Retained
shares value Securities shares value value Capital stock Earnings Total
------ ----- ----------- ------ ----- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996 6,520,296 $65 4,997,554 268,851 3,226,213 2,181,819 16,453,899 (52,400) 2,537,070 26,118,007
Conversion of
Convertible
Securities and
Dividends to
Common Stock 3,101,864 31 (4,519,914) - - - 4,598,706 - (78,823) 0
Common Stock
Dividends issued
or accrued 10,754 - - - - - 21,938 - (21,938) 0
Redemption of
Convertible
Securities - - (477,640) - - - (100,257) - (11,126) (589,023)
Warrants exercised
for Common
Stock 8 - - - - - 52 - - 52
Issuance of stock
for services 50,000 1 - - - - 96,999 - - 97,000
Stock
registration
costs - - - - - - (37,089) - - (37,089)
Net income - - - - - - - - 770,209 770,209
--------- --- ---------- ------- --------- --------- ---------- ------- --------- ----------
Balance,
June 30,
1997 9,682,922 $97 0 268,851 3,226,213 2,181,819 21,034,248 (52,400) 3,195,392 26,359,156
========= === ========== ======= ========= ========= ========== ======= ========= ==========
</TABLE>
See accompanying notes to condensed, consolidated financial
statements.
6
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
---------------------------------------
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities $3,792,027 $6,252,531
Investing activities:
Purchase of oil and gas properties (2,263,489) (5,049,249)
Purchases of property and equipment (267,316) (433,827)
Payments on notes receivable 213,382 801,230
Issuance of note receivable (35,000) -
Proceeds from sale of assets 9,033 -
---------- ----------
Net cash used in investing activities (2,343,390) (4,681,846)
---------- ----------
Financing activities:
Proceeds from borrowings 2,003,506 2,608,068
Payments on borrowings (1,967,480) (4,451,770)
Redemption of convertible securities (589,023) -
Proceeds from issuance of Common Stock - 900,000
Purchase of 6% Junior Preferred Stock - (802,900)
Increase in deferred financing costs (231,357) -
Other (37,037) (22,054)
---------- ----------
Net cash used in financing activities (821,391) (1,768,656)
---------- ----------
Increase (decrease) in cash 627,246 (197,971)
Cash and cash equivalents at
beginning of period 353,419 826,393
---------- ----------
Cash and cash equivalents at
end of period $ 980,665 $ 628,422
========== ==========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared stock dividends and issued 10,754 and 16,781
shares of Common Stock to holders of the Series 1993 and Series B
Preferred Stock during the six months ended June 30, 1997 and
1996, respectively.
During the six months ended June 30, 1997, holders of $5,538,483
($4,519,914 net of placement costs) of the Convertible Securities
have converted the securities into 3,052,188 shares of Common
Stock and received 49,676 shares of Common Stock dividends
related to the Convertible Securities. The remaining $461,517
was redeemed by the Company for a price of $589,023.
During the six months ended June 30, 1996, 58,941 shares of
Series B Preferred Stock were converted into a total of 224,822
shares of Common Stock.
7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (CONTINUED)
---------------------------------------------------
During the six months ended June 30, 1996, the Company issued
225,000 shares of common stock and 225,000 common stock warrants
with a combined value of $1,157,175 in connection with the
acquisition of certain gas properties and related equipment. The
Company also paid cash and assumed certain obligations in
connection with the acquisition, which was consummated on
February 26, 1996.
During the six months ended June 30, 1997, the Company entered
into an Amendment to Lead Generation Agreement with Corporate
Relations Group ("CRG") to provide additional services in the
public relations area. The amendment provided for the
termination of options previously granted to CRG by ARI and the
issuance to CRG of 50,000 shares of registered stock in ARI.
The shares were valued at $1.94 per share which represents the
closing bid price on April 21, 1997, the date of the amendment.
The cost is being amortized during 1997 due to the
timing of the services being performed.
The Company acquired 58,059 shares of the outstanding 6% Junior
Preferred Stock for $802,900 during the six months ended June 30,
1996. Upon resolution of the Board of Directors, the shares were
retired.
8
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
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 June 30, 1997 and December 31, 1996 and the
results of operations and changes in cash flows for the
periods ended June 30, 1997 and 1996. These financial
statements should be read in conjunction with the financial
statements and notes to the financial statements in the 1996
Form 10-K of the Company that was filed with the Securities
and Exchange Commission.
Net income per common share was computed after consideration
of dividend requirements on Preferred Stock, using the
weighted average number of shares outstanding during each of
the years presented. Outstanding stock options and warrants
are Common Stock equivalents and have been considered when
the effect is dilutive.
The Company does not have, nor does it anticipate entering
into, any type of derivative financial instruments or
derivative commodity instruments.
Certain reclassifications have been made to the prior period
financial statements to conform with the current period
presentation.
(2) PROPERTY ACQUISITIONS
In February 1997, the Company through its wholly owned
subsidiary, Southern Gas Co. of Delaware, Inc., acquired a
twenty-five percent (25%) working interest in onshore Gulf
Coast undeveloped properties located in Greene and Wayne
Counties, Mississippi, for approximately $300,000.
9
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- ----------------------------------------------------------------
(UNAUDITED)
-----------
On April 2, 1997, the Company entered into an agreement to
acquire a 26.4% working interest in the Main Pass Block 53
from Great River Oil & Gas Corporation for approximately
$254,000.
In April 1997, the Company purchased from a director of the
Company an overriding royalty interest in the Ship Shoal B-3
well for $150,000 and also purchased from an
officer/director of the Company an overriding royalty
interest in the Ship Shoal B-4 well for $180,000. Values of
the overriding royalty interests were based on discounted
reserve values as determined from the December 31, 1996
reserve reports.
(3) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
June 30, December 31,
-------- ------------
1997 1996
---- ----
<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, as amended, at prime plus 1/2%
per annum, secured by oil and gas properties,
equipment and notes receivable. $23,500,000 $25,083,000
Note payable to Den norske Bank A.S.
under $2,500,000 development facility,
due March 1, 1998, with interest payable
monthly at prime plus 2% per annum,
secured by oil and gas properties. 1,843,275 -
Call Agreement payable, original balance of
$1,000,000 payable in monthly installments
of $31,250 commencing April 1, 1995,
due November 1997. - 274,000
Notes payable to related parties,
interest payable at 22%, in connection
with Participation Agreements. 243,593 240,000
Note payable to related party, interest
payable at 22%, in connection with
Participation Agreement. 311,923 250,000
</TABLE>
10
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
June 30, December 31,
-------- ------------
1997 1996
---- ----
<S> <C> <C>
Note payable, original balance of
$165,000 payable on January 15, 1998,
secured by an interest in oil and
gas properties. - 49,696
Other notes 72,937 39,008
---------- ----------
25,971,728 25,935,704
Less - Current portion 7,108,167 6,513,283
---------- ----------
Long-term debt $18,863,561 $19,422,421
========== ==========
</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 June 30, 1997, the borrowing base under
the revolving credit facility was $23,500,000. Additional
borrowings 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.
Reductions of the credit facility are also dependent upon
the borrowing base. At June 30, 1997, monthly principal
reductions are $500,000. The borrowing base will be
redetermined semi-annually on each October 1st and April 1st
prior to February 1, 2002.
In February 1997, the credit agreement was amended to reduce
the interest rate to the prime rate plus 1/2% per annum and
establish a $2,500,000 development facility which can be
drawn upon by the Company to develop properties.
Under the credit agreement with Den norske, the Company is
required to maintain certain financial ratios relating to
debt coverage ratio, current ratio, tangible net worth,
general and administrative expenses and quarterly interest
ratio. At June 30, 1997, the Company was in compliance with
the required financial covenants.
(4) CONVERTIBLE SECURITIES PRIVATE PLACEMENT
In 1996, the Company privately placed 4% convertible
securities in the aggregate principal amount of $6,000,000
($4,997,554 net of placement costs) with a required
conversion of one year from date of issuance. The
securities were convertible at the option of the holders
into shares of common stock valued at the lesser of (1) the
closing bid price of the common stock as reported on NASDAQ
on the date of issuance of the security, or (2) 75% of the
average closing bid prices of the common stock as reported
on NASDAQ for the five trading days prior to the date of
conversion (the Conversion Price). Securities which were
not converted prior to their maturity dates would
automatically convert on their maturity dates. Interest
11
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- ----------------------------------------------------------------
(UNAUDITED)
-----------
accrued on the convertible securities until the Company
received notice of the conversion. If a security was not
converted within five business days after the Company
received notice of the conversion, the Company was obligated
to pay liquidated damages to the security holder for each
$100,000 principal amount of securities sought to be
converted in the amount of $100 for each of the first two
days, $200 for each of the next two days, $300 for each of
the next two days, $400 for each of the next two days, and
$500 per day thereafter until the conversion shares were
delivered. Prior to the receipt of a conversion notice, the
Company had the right to redeem any security for a cash
amount equal to 125% of the principal amount of the
security, plus unpaid accrued interest, if the conversion
price was below the closing bid price of the common stock as
reported on NASDAQ on the date the security was issued. The
closing bid prices when the securities were issued ranged
from $3.00 to $3.50. Upon giving notice of its intention to
redeem a security, the security holder's right to convert
the security was suspended, but the Company would be
required to pay an additional 1% per month in cash on a pro
rata basis until the full redemption price was paid. If the
full redemption price was not paid within ten business days
after the redemption notice was given, the security holder
had the right to convert the security into shares of common
stock. A security holder could fax a notice to the Company
requiring the Company to declare, by faxed notice within
twenty-four hours after receipt of the notice from the
security holder, whether the Company intended to effect a
redemption within the following five business days. If the
Company did not respond during said twenty-four hour period,
the Company was precluded from redeeming that security
holder's securities during said five day period. The
Company agreed to register the shares of common stock into
which the securities were convertible within 120 days after
demand was made by a security holder. As of June 30, 1997,
securities totaling $5,538,483 had been converted into
3,052,188 shares of common stock for which 49,675 shares of
Common Stock dividends were issued relative thereto, and the
remaining securities totaling $461,517 had been redeemed by
the Company pursuant to its rights under the security
documents for a price of $589,023. The Company was not
required to pay any liquidated damages or additional
interest as a result of the conversion or redemption of the
securities.
In conjunction with the issuance of the convertible
securities, the Company paid placement fees and related
issuance costs of $1,002,446, inclusive of 173,724
restricted shares of common stock to World Capital Funding,
Inc., Denver Colorado, or to persons designated by it, with
piggy-back registration rights, in partial payment of the
placement agent's fee, and issued five year options to World
Capital Funding, Inc., or to persons designated by it, to
purchase 100,000 shares of common stock at $4.50 per share.
The shares of common stock into which the securities are
convertible, together with the placement fee shares to World
Capital Funding, Inc., or its designees, and the shares
underlying the options issued to World Capital Funding,
Inc., or its designees, have been registered under an S-3
Registration Statement which was effective on January 23,
1997.
12
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- ----------------------------------------------------------------
(UNAUDITED)
-----------
(5) 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 June 30, 1997 and December 31, 1996.
Series B Preferred Stock, designated by the Board
of Directors, was 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 had
a liquidation preference of $10.00 per share, but
was junior to the Series 1993 Preferred Stock.
Dividends were payable quarterly at the rate of 6%
in cash or common stock. There were 1,000,000
shares authorized and zero shares outstanding at
June 30, 1997 and December 31, 1996, respectively.
During the first quarter of 1997, the Company's
Board of Directors adopted a resolution
eliminating the Series B Preferred Stock and
returning the 1,000,000 shares to the status of
authorized but unissued Preferred Stock, without
designation. The Certificate eliminating the
Series B Preferred Stock was filed in the
Office of the Secretary of State of Delaware on
April 16, 1997.
On January 15, 1997, the Board of Directors declared
dividends payable in Common Stock on January 22, 1997, to
holders of the Series 1993 Preferred Stock totaling 10,754
shares.
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, 1996 3,370,230 $3.00 $8.00
Granted - - -
Terminated (587,333) 3.00 3.50
---------
Balance June 30, 1997 2,782,897 $3.00 $8.00
========= ===== =====
</TABLE>
13
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- ----------------------------------------------------------------
(UNAUDITED)
-----------
On April 21, 1997, the Company entered into an Amendment to
Lead Generation Agreement with Corporate Relations Group,
Inc. ("CRG") to provide additional services in the public
relations area. The Amendment provided for, among other
things, the immediate termination of 500,000 options
previously granted to CRG by ARI.
Outstanding options at June 30, 1997 include 1,938,910
issued under the CSO, of which 1,881,077 are exercisable,
and 843,987 non-plan options, all of which are immediately
exercisable. Outstanding options at June 30, 1997 expire
between July 17, 1998 and February 1, 2005.
At June 30, 1997, the Company has outstanding warrants to
purchase 1,201,667 shares of common stock at exercise
prices from $2.75 to $5.00 per share. Warrants to purchase
an additional 262,424 shares of common stock expired by
their own terms on April 24, 1997.
(6) SUBSEQUENT EVENTS
In June 1997, the Company entered into a purchase agreement
to acquire interests in 26 natural gas wells from Daugherty
Petroleum, Inc., said wells being located in Whitley and
Knox Counties, Kentucky, on the Company's existing gathering
facilities. The wells contain an estimated 1.5 billion
cubic feet of natural gas reserves net to the Company, and
the purchase price is approximately $526,000. As of June 30,
1997, the Company has advanced approximately $328,000 toward
the purchase price. The Company expects the transaction to
close in August 1997. In the event it does not close, the
funds will be returned to the Company.
On July 8, 1997, the company's stockholders approved an
amendment to the Company's Restated Certificate of
Incorporation increasing the unauthorized number of shares
of the Company's $.00001 par value common stock from
20,000,000 shares to 50,000,000 shares and dividing the
Board of Directors into three classes with staggered three
year terms. An appropriate Certificate of Amendment to the
restated Certificate of Incorporation of the Company was
filed with the Delaware Secretary of State on July 11, 1997.
On July 15, 1997, the Board of Directors of the Company
declared a dividend of 8% per annum for stockholders of the
Company's Series 1993 8% Convertible Preferred Stock of
record as of July 15, 1997, and issued 10,754 shares of
Common Stock to holders of the Series 1993 8% Convertible
Preferred Stock on July 22, 1997.
On July 16, 1997, pursuant to a Securities Purchase
Agreement, the Company's primary lender, Den norske Bank ASA
("Den norske"), purchased 500,000 shares of common stock of
the Company for a price of $2.66 per share, for a total of
$1,330,000. The Company and Den norske also entered into a
Registration Rights Agreement wherein Den norske was granted
certain demand and piggyback registration rights with
respect to the shares purchased. The Company plans to use
the funds for general operational purposes.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
Statements, other than historical facts, contained in this
Quarterly Report on Form 10-QSB, including statements of
estimated oil and gas production and reserves, drilling plans,
future cash flows, anticipated capital expenditures and
Management's strategies, plans and objectives, are "forward
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the
Company believes that its forward looking statements are based on
reasonable assumptions, it cautions that such statements are
subject to a wide range of risks and uncertainties incident to
the exploration for, acquisition, development and marketing of
oil and gas, and it can give no assurance that its estimates and
expectations will be realized. Important factors that would
cause actual results to differ materially from the forward
looking statements include, but are not limited to, changes in
production volumes, worldwide demand, and commodity prices for
petroleum natural resources; the timing and extent of the
Company's success in discovering, acquiring, developing and
producing oil and gas reserves; risks incident to the drilling
and operation of oil and gas wells; future production and
development costs; the effect of existing and future laws,
governmental regulations and the political and economic climate
of the United States; the effect of hedging activities; and
conditions in the capital markets.
RECENT DEVELOPMENTS
In February 1997, the Company's $30,000,000 revolving credit
agreement with Den norske Bank, AS ("Den norske") was amended to
reduce the interest rate to the prime rate plus 1/2% per annum,
and establish a $2,500,000 development facility which can be
drawn upon by the Company to develop properties. The development
facility matures on March 1, 1998 and carries an interest rate of
prime plus 2% per annum.
Also in February 1997, the Company through its wholly owned
subsidiary, Southern Gas Co. of Delaware, Inc., acquired a
twenty-five percent (25%) working interest in onshore Gulf Coast
undeveloped properties located in Greene and Wayne Counties,
Mississippi. The largest working interest owner and operator is
Aviara Energy Corporation located in Houston, Texas. The Company
is currently in the process of evaluating the properties to
select a location for the first well to be drilled.
During the first quarter of 1997, production from the Ship
Shoal B-3 and B-4 wells was down from expected amounts due to a
paraffin buildup on the wells. As a result, production from the
two Gulf Coast wells was reduced significantly in February 1997
but returned to previous production levels in March 1997.
On March 2, 1997, the OCS G-1898 #D-4 well had been
successfully drilled and was put on production, with an initial
flow rate of 3.5 million cubic feet of gas and 350 barrels of gas
liquids per day. As of June 30, 1997, production had been
increased to 14 million cubic feet of gas and 800 barrels of gas
liquids per day. The well was drilled from the D Platform on
South Timbalier Block 148 to a total depth of 16,535 feet. ARI
has a 15% working interest in the well, and it is operated by
Newfield Exploration Company. ARI purchased its interest in the
South Timbalier Block 148 in July 1996, consisting of ten
existing wells, five of which were producing. Since the
purchase, the Company has successfully completed and placed into
production the remaining five wells and drilled and hooked up two
additional wells. This brings the number of wells in which the
Company owns an interest in the offshore Gulf Coast region to 14.
Jeffrey J. Hausman has served as Chief Financial Officer of
the Company since January 1, 1996 and Treasurer since August
1996. During this time, Mr. Hausman resided with his family in
Nashville, Tennessee. Due to the excess time required by Mr.
Hausman's position as a result of the Company's growth and his
family's desire to remain in Nashville, Mr. Hausman tendered his
resignation as an officer of the Company effective April 1, 1997.
15
<PAGE>
However, he has agreed to continue with the Company in an
advisory capacity. Mr. Hausman was succeeded by Ralph A. Currie,
a former partner of KPMG Peat Marwick, Lexington, Kentucky.
On April 2, 1997, the Company entered into an agreement to
acquire a 26.4% working interest in the Main Pass Block 53 from
Great River Oil & Gas Corporation. The property is operated by
Mustang Energy L.C., and drilling of the first well commenced on
July 17, 1997.
In the fourth quarter of 1996, the Company privately placed
4% convertible securities in the aggregate principal amount of
$6,000,000 ($4,997,554 net of placement costs) with a required
conversion of one year from date of issuance. The securities
were convertible at the option of the holders into shares of
common stock valued at the lesser of (1) the closing bid price of
the common stock as reported on NASDAQ on the date of issuance of
the security, or (2) 75% of the average closing bid prices of the
common stock as reported on NASDAQ for the five trading days
prior to the date of conversion (the Conversion Price).
Securities that were not converted prior to their maturity dates
automatically convert on their maturity dates. Interest accrued
on the convertible securities until the Company received notice
of the conversion. If a security was not converted within five
business days after the Company received notice of the
conversion, the Company was obligated to pay liquidated damages
to the security holder for each $100,000 principal amount of
securities sought to be converted in the amount of $100 for each
of the first two days, $200 for each of the next two days, $300
for each of the next two days, $400 for each of the next two
days, and $500 per day thereafter until the conversion shares
were delivered. Prior to the receipt of a conversion notice, the
Company had the right to redeem any security for a cash amount
equal to 125% of the principal amount of the security, plus
unpaid accrued interest, if the conversion price was below the
closing bid price of the common stock as reported on NASDAQ on
the date the security was issued. The closing bid prices when
the securities were issued ranged from $3.00 to $3.50. Upon
giving notice of its intention to redeem a security, the security
holder's right to convert the security was suspended, but the
Company would be required to pay an additional 1% per month in
cash on a pro rata basis until the full redemption price was
paid. If the full redemption price was not paid within ten
business days after the redemption notice was given, the security
holder had the right to convert the security into shares of
common stock. A security holder could fax a notice to the
Company requiring the Company to declare, by faxed notice within
twenty-four hours after receipt of the notice from the security
holder, whether the Company intended to effect a redemption
within the following five business days. If the Company did not
respond during said twenty-four hour period, the Company was
precluded from redeeming that security holder's securities during
said five day period. The Company agreed to register the shares
of common stock into which the securities are convertible within
120 days after demand was made by a security holder. As of June
30, 1997, securities totaling $5,538,483 had been converted into
3,101,864 shares of common stock inclusive of the 4% dividend
shares paid as of the date of conversion, and the remaining
securities totaling $461,517 had been redeemed by the Company
pursuant to its rights under the security documents. The Company
was not required to pay any liquidated damages or additional
interest as a result of the conversion or redemption of the
securities.
In conjunction with the issuance of the convertible
securities, the Company paid placement fees and related issuance
costs of $1,002,446, inclusive of 173,724 restricted shares of
common stock to World Capital Funding, Inc., Denver Colorado, or
to persons designated by it, with piggy-back registration rights,
in partial payment of the placement agent's fee, and issued five
year options to World Capital Funding, Inc., or to persons
designated by it, to purchase 100,000 shares of common stock at
$4.50 per share.
The shares of common stock into which the securities are
convertible, together with the placement fee shares to World
Capital Funding, Inc., or its designees, and the shares
underlying the options issued to World Capital Funding, Inc., or
16
<PAGE>
its designees, were registered under an S-3 Registration
Statement which was effective on January 23, 1997.
In April 1997, due to the recent decline in the market price
of the Company's common stock to a level below its book value,
the Board of Directors authorized the Company to repurchase up to
Two Million Dollars ($2,000,000.00) of the Company's common stock
in market transactions from time to time at prices deemed to be
favorable by the Company. As of June 30, 1997, no shares have
been repurchased by the Company.
In April 1997, the Company purchased from a director of the
Company an overriding royalty interest in the Ship Shoal B-3 well
for $150,000. The Company also purchased from an
officer/director of the Company an overriding royalty interest in
the Ship Shoal B-4 well for $180,000. Values of the overriding
royalty interests were based on discounted reserve values as
determined from the December 31, 1996 reserve reports.
During the first quarter of 1997, the Company's Board of
Directors adopted a resolution eliminating the Series B Preferred
Stock and returning the 1,000,000 shares to the status of
authorized but unissued Preferred Stock, without designation.
The certificate eliminating the Series B Preferred Stock was
accepted by the Office of the Secretary of State of Delaware on
April 16, 1997.
On April 21, 1997, the Company entered into an Amendment to
Lead Generation Agreement with Corporate Relations Group, Inc.
("CRG") to provide additional services in the public relations
area. The Amendment also provided for the immediate termination
of 500,000 options previously granted to CRG by ARI and the
issuance to CRG of 50,000 shares of registered stock in ARI.
The shares were valued at $1.94 per share which represents the
closing bid price on April 21, 1997. The cost is being
amortized during 1997 due to the timing of the services being
performed.
Effective May 1, 1997, the Company brought all marketing
functions in house, thus cancelling its existing contract with
Southern Resources, Inc. The Company believes that this will
have little or no impact on current and future net earnings.
In June 1997, the Company entered into a purchase agreement
to acquire interests in 26 natural gas wells from Daugherty
Petroleum, Inc., said wells being located in Whitley and Knox
Counties, Kentucky, on the Company's existing gathering
facilities. The wells contain an estimated 1.5 billion cubic
feet of natural gas reserves net to the Company, and the purchase
price is approximately $526,000.
On July 16, 1997, pursuant to a Securities Purchase
Agreement, the Company's primary lender, Den norske Bank ASA
("Den norske"), purchased 500,000 shares of common stock of the
Company for a price of $2.66 per share, for a total of
$1,330,000. The Company and Den norske also entered into a
Registration Rights Agreement wherein Den norske was granted
certain demand and piggyback registration rights with respect to
the shares purchased. The Company plans to use the funds for
general operational purposes.
In July 1995, the Company entered into a Call Agreement with
Prima Capital, LLC, a limited liability company in which an
officer/director owns 20%, wherein the Company has the right to
acquire a 10% equity interest in Century Offshore Management
Corporation for $4 million. Said right expires December 31,
1997, and the Company is currently evaluating whether or not it
will exercise its rights under the Call Agreement.
PENDING ADOPTION OF NEW ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE. SFAS No. 128 supersedes APB Opinion No.
15, EARNINGS PER SHARE ("Opinion No. 15"), and requires the
calculation and dual presentation of Basic and Diluted earnings
17
<PAGE>
per shares ("EPS"), replacing the measures of Primary and Fully-
diluted EPS as reported under Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending
after December 15, 1997; earlier application is not permitted.
Accordingly, EPS for the first and second quarters of 1997 and
1996 presented on the accompanying statements of operations are
calculated under the guidance of Opinion 15.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30,
1997, AS COMPARED WITH THE SIX MONTHS ENDED JUNE 30, 1996:
Total revenues for the six months ended June 30, 1997,
increased 40% to $22,526,931 from $16,101,952 for the comparable
period in 1996. Corresponding operating expenses increased 30%
to $18,335,453 in 1997 from $14,075,398 for the first six months
of 1996. Components of the increases are as follows:
- -- MARKETING: The Company's marketing volumes have increased
---------
to approximately 4.00 billion cubic feet ("BCF") for the six
months ended June 30, 1997, as compared to 3.48 BCF for the
same period in 1996. The volume increase is primarily due
to the Company's increase in volumes sold to Williams Energy
Co. from 41,769 MCF in the first six months of 1996 to
288,610 MCF for the comparable period in 1997. The
remaining increase is a result of third party sales on the
spot market through the Company's association with Southern
Resources, Inc. Due to various short term positions taken
during the first six months of 1997, marketing operated at
essentially a break-even position as compared with a profit
of .5% for the comparable period in 1996.
- -- PRODUCTION: The Company's production revenues increased
----------
204% for the six months ended June 30, 1997, to $8,644,776
from $2,847,827 for the comparable period in 1996. The
additional revenues are due to production from the South
Timbalier 148 wells which were acquired and completed in mid
and late 1996, respectively, together with two additional
wells which were drilled, completed and placed in production
in November 1996 and March 1997. Production of oil and gas
from the Company's Gulf Coast wells on a thousand cubic foot
("MCF") equivalent basis for the first six months of 1997
was approximately 2,664,000 MCF equivalent as compared to
approximately 392,000 MCF equivalent for the same period in
1996. The increase was partially offset by reduced
production from the Company's Ship Shoal Block 150 wells
which were down during most of the month of February 1997
due to a paraffin buildup but returned to previous
production levels in March 1997. Also in 1997, production
from the Company's Kentucky wells has decreased to
approximately 508,000 MCF as compared to approximately
614,000 MCF for the first six months of 1996. The decrease
in Kentucky production results primarily from operational
changes which are expected to reduce operating costs and
extend the life of the Appalachian production. The first
six months of 1996 also included Appalachian production from
wells which were sold to K-Petroleum in September 1996.
The increase in production revenues was partially offset by
reduced gas and/or oil prices during the six months ended
June 30, 1997 versus 1996. The Company sells the bulk of
its Kentucky production under long term contracts. During
the first six months of 1997, the Company received an
average price of approximately $2.17 per MCF on its produced gas as
compared with approximately $2.46 per MCF for the same period in 1996.
The Company's Gulf Coast production realized average prices
of $19.81 per barrel of oil and $2.51 per MCF of gas during
the first six months of 1997 as compared with $19.45 per
barrel of oil and $2.70 per MCF of gas during the same
period in 1996. The operator of the Company's South
Timbalier Block 148 wells gradually increased gas flows
during the second quarter of 1997 which assisted in
offsetting the effect of declining gas prices.
As can be expected, production costs also increased to
$1,117,857 for the six months ended June 30, 1997, from
$605,137 for the comparable period in 1996. The increase
results primarily from the production costs associated with
the South Timbalier Block 148 wells of approximately
$523,000.
18
<PAGE>
The Company has taken additional lease positions in the Gulf
Coast region during the six months ended June 30, 1997, and
intends to continue to develop in the area with various
joint interest owners.
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $3,501,760 for the
six months ended June 30, 1997, as compared to $1,044,479
for the same period in 1996. The increase results primarily
from approximately $2,311,000 of depletion on the South
Timbalier Block 148 Gulf Coast wells for the six months
ended June 30, 1997 and additional depreciation on
approximately $2,370,000 of property and equipment acquired
since June 30, 1996.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A increased 70% to
----------------------------------
$1,580,511 for the six months ended June 30, 1997 as
compared to $927,618 for the six months ended June 30, 1996.
The Company recently opened a New Orleans office to monitor
and expand its Gulf Coast operations and hired a corporate
General Counsel to monitor regulatory and legal
responsibilities.
Also, with the Company's continued expansion in the Gulf
Coast, insurance costs have risen approximately 110% for the
six months ended June 30, 1997 as compared to the same
period in 1996. The Company carries business interruption
insurance on all its producing Gulf Coast properties.
Significant components of G&A for the six months ended June
30, 1997 include payroll of $600,999, professional fees of
$166,304, marketing costs of $147,812, insurance of
$176,895, amortization of deferred financing costs of
$113,278, and licenses and fees of $102,583.
- -- OTHER INCOME(EXPENSE): Other income (expense) items
---------------------
consisted of the following:
* INTEREST INCOME: Interest income for the six months
---------------
ended June 30, 1997 was $23,074 compared with $765,208
for the same period in 1996. Interest income for 1996
resulted primarily from interest earned on a note
receivable issued to Century Offshore Management
Corporation ("Century"). The note earned interest at
22% per annum and was secured by offshore properties.
In July 1996, the note was extinguished as part of the
consideration for the Company's purchase of the
properties securing the note. Therefore, during the
six months ended June 30, 1997, no interest was earned
on the note while interest was earned on an average
outstanding balance of approximately $6.5 million for
the same period in 1996.
* INTEREST EXPENSE: Interest expense increased to
----------------
$1,354,506 for the six months ended June 30, 1997, as
compared to $989,457 for the same period in 1996. This
results primarily from increased borrowings under the
Company's primary credit and development facilities.
Outstanding borrowings under the facilities were
$25,343,275 at June 30, 1997, as compared to
$16,193,000 at June 30, 1996. The additional
borrowings have been used to assist in expanding the
Company's exploration, development and property
acquisition activities.
* NET INCOME: Net income for the six months ended June
----------
30, 1997, was $770,209 as compared to $521,178 for the
same period in 1996. Operating income was $2,610,967
for the six months ended June 30, 1997, compared with
$1,098,936 for the six months ended June 30, 1996. The
operating income increase in 1997 is primarily
attributable to an increase in production revenues net
of production expenses of approximately $5,284,229.
The effect of this increase was partially offset by
increases in depreciation, depletion and amortization
of $2,457,281 and G&A of $652,893. The resultant
increase in net income was somewhat offset by increased
interest expenses as the result of additional
borrowings used to expand the Company's operations and
reduced interest income as a result of the
extinguishment of the Century note discussed above.
19
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30,
1997 AND 1996:
Total revenues for the three months ended June 30, 1997
increased 30% to $8,005,958 from $6,178,705 for the comparable
period in 1996. Corresponding operating expenses increased 3% to
$5,736,905 in 1997, from $5,557,873 in 1996. Components of the
increases are as follows:
- -- MARKETING: The Company's marketing volumes have decreased to
---------
1.17 billion cubic feet ("bcf") for the three months ended
June 30, 1997 as compared to 1.5 bcf in 1996. The volume
decrease is primarily due to the Company's reduction of spot
market activities during the second quarter of 1997. Due to
various short-term positions taken during April of 1997 and
the subsequent reduction of the spot market activities
during the remainder of the second quarter of 1997,
marketing operated at essentially a break-even position
compared with a 4.5% loss during the same period in 1996.
- -- PRODUCTION: Production revenues were $4,881,679 for the
----------
three months ended June 30, 1997 as compared to $1,405,094
for the same period in 1996. The additional revenues are
due to production from the South Timbalier 148 wells which
were acquired and completed in mid and late 1996,
respectively, together with two additional wells which were
drilled, completed and placed in production in November 1996
and March 1997. Production of oil and gas from the
Company's Gulf Coast wells on a thousand cubic foot ("MCF")
equivalent basis for the three months ended June 30, 1997,
was approximately 1,667,000 as compared to approximately
210,000 MCF equivalent for the same period in 1996. Also
during the second quarter of 1997, production from the
Company's Kentucky wells has decreased to approximately
188,000 MCF as compared to approximately 242,000 MCF during
the comparable quarter in 1996. The decrease in Kentucky
production results primarily from operational changes which
are expected to reduce operating costs and extend the life
of the Appalachian production. The second quarter of 1996
also included Appalachian production from wells which were
sold to K-Petroleum in September 1996.
The Company sells the bulk of its Kentucky production under
long term contracts. During the second quarter of 1997, the
Company received an average price of approximately $2.00 per
MCF on its produced gas as compared with $2.31 per MCF for
the same period in 1996. The variance in price is due to general
market conditions.
The Company's Gulf Cost production, which experienced
significant growth due to the addition of the South
Timbalier 148 property, realized average prices during the
second quarter of 1997 of $18.48 per barrel of oil and $2.28
per MCF of gas as compared with $19.86 per barrel of oil and
$2.35 per MCF of gas during the same period in 1996. The
operator of the South Timbalier property gradually increased
gas flows during the second quarter of 1997 which assisted
in offsetting the effect of declining gas prices.
As can be expected, production costs also increased to
$576,091 for the three months ended June 30, 1997 from
$287,020 for the same period in 1996. This was due to the
production costs associated with the South Timbalier Block
148 Gulf Coast wells of approximately $250,000.
The Company has taken additional lease positions in the Gulf
Coast region during the three months ended June 30, 1997,
and intends to continue to develop in the area with various
joint interest owners.
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $2,123,940 for the
three months ended June 30, 1997 as compared to $570,136 for
the same period in 1996. The increase results primarily
from approximately $1,470,000 of depletion on the South
Timbalier 148 Gulf Coast wells and additional depreciation
on approximately $2,370,000 of property and equipment
acquired since June 30, 1996.
20
<PAGE>
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A increased 65% to
----------------------------------
$785,099 for the three months ended June 30, 1997 as
compared to $475,156 for the same period in 1996. The
Company has opened a New Orleans office to monitor and
expand its Gulf Coast operations and hired a corporate
General Counsel to monitor regulatory and legal
responsibilities.
Also, with the Company's continued expansion in the Gulf
Coast, insurance costs have risen approximately 95% for the
three months ended June 30, 1997 as compared to the same
period in 1996. The Company carries business interruption
insurance on all its producing Gulf Coast properties.
Significant components of G&A for the three months ended
June 30, 1997 included payroll of $295,254, professional
fees of $92,519, marketing costs of $53,627, insurance of
$90,728, amortization of deferred financing costs of
$56,617, and licenses and fees of $45,660.
- -- OTHER INCOME(EXPENSE): Other income (expense) items
---------------------
consisted of the following:
* INTEREST INCOME: Interest income for the three months
---------------
ended June 30, 1997 was $10,588 compared with $381,997
for the same period in 1996. Interest income for 1996
resulted primarily from interest earned on a note
receivable issued to Century. The note earned interest
at 22% per annum and was secured by offshore
properties. In July 1996, the note was extinguished as
part of the consideration for the Company's purchase of
the properties securing the note. Therefore, during the
three months ended June 30, 1997, no interest was
earned on the note while interest was earned on an
average outstanding balance of approximately $6,500,000
for the same period in 1996.
* INTEREST EXPENSE: Interest expense increased to
----------------
$670,420 for the three months ended June 30, 1997 as
compared to $508,143 for the same period in 1996. This
results primarily from increased borrowings under the
Company's primary credit and development facilities.
Outstanding borrowings under the facilities were
$25,343,275 at June 30, 1997 as compared to $16,193,000
at June 30, 1996. The additional borrowings have been
used to assist in expanding the Company's exploration,
development and property acquisition activities.
* NET INCOME: Net income for the three months ended June
----------
30, 1997 was $492,027 as compared to $25,137 for the
same period in 1996. Operating income was $1,483,954
in the three months ended June 30, 1997 versus $145,676
for the comparable 1996 period. The operating income
increase in 1997 is primarily attributable to an
increase in production revenues net of production
expenses of approximately $3,187,514. The effect of
this increase was partially offset by increases in
depreciation, depletion and amortization of $1,553,804
and G&A of $309,943. The resultant increase in net
income was somewhat offset by increased interest
expense on borrowings used to expand the Company's
operations and reduced interest income as a result of
the extinguishment of the Century note discussed above.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at June 30, 1997 totalled $980,665
as compared to $353,419 at December 31, 1996. Historically, the
Company has funded its oil and gas exploration and development
activities primarily with bank borrowings and, to a lesser
extent, with cash flow from operations and equity capital from
private placements. The Company has available a $30,000,000 line
of credit through Den norske, with a current borrowing base of
$23,500,000. Additionally, in February 1997, Den norske
established a development facility which allows the Company to
borrow up to $2,500,000 for development of its Gulf Coast
properties. The development facility matures on March 1, 1998,
and the Company had borrowings against the development facility
of approximately $1,843,000 at June 30, 1997. The Company
generated approximately $4,651,000 of cash flow from operations
21
<PAGE>
prior to adjustments for changes in operating assets and
liabilities during the six months ended June 30, 1997. The
Company anticipates that its existing capital resources and cash
flow generated from future operations will allow it to maintain
its current level of operations and its planned operations for
the foreseeable future. Future acquisitions may necessitate that
the Company make additional borrowings or raise equity capital.
Under the credit agreement with Den norske, the Company is
required to maintain certain ratios relating to debt coverage
ratio, current ratio, tangible net worth, general and
administrative expenses and quarterly interest ratio. Under the
covenants, the financial amounts used to compute the requirements
are specifically defined in the agreement. At June 30, 1997, the
Company was in compliance with all of the required financial
ratios.
In addition to the South Timbalier 148 wells acquired and
drilled in 1996, an additional well was successfully drilled and
completed on the property and production commenced in March 1997.
Through June 30, 1997, the Company had realized approximately
$8,650,000 in production revenues from the South Timbalier 148
properties since acquisition in July 1996.
The following is a summary of the Company's expected cash
flow estimates for the remainder of 1997:
Cash requirements:
Capital costs $1,500,000
Debt service payments $2,000,000
Total cash requirements $3,500,000
Cash Sources:
Cash in bank $ 950,000
Cash from operations $5,720,000
Cash from issuance of
new shares $1,330,000
Total cash sources $8,000,000
----------
Excess $4,500,000
==========
As can be seen above, the Company intends to meet its cash
requirements in 1997 with cash flow expected to be generated from
its operations in the Gulf Coast and Appalachian regions and the
issuance of new shares to Den norske. As proved reserves are
added to the Company's reserve base, payment requirements under
the Credit Facility are reduced.
The continued expansion of the Company's development and
acquisition activities are expected to be financed with
internally generated cash flow, additional borrowings under the
credit facility and new financings, if available. In the event
that cash flow or available borrowings under the credit facility
are not sufficient or if additional financing is needed and
cannot be obtained, the Company believes that it could be
required to reduce its growth oriented expansion strategy. The
completion or success of any new opportunities is subject to a
number of factors, including the price of oil and gas, and the
ability of the Company to raise additional capital or obtain debt
financing on terms acceptable to the Company. Many of these
factors are outside of the Company's control. There can be no
assurance that the Company will be able to undertake any of these
opportunities or that, if undertaken, they will prove successful.
22
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Stockholders on July 8, 1997, the
Stockholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation dividing the
Board of Directors into three classes with staggered three year
terms and increasing the authorized number of shares of the
Company's $.00001 par value common stock from 20,000,000 shares
to 50,000,000 shares. The stockholders also re-elected five (5)
directors and elected three (3) new directors to its eight (8)
member Board of Directors and ratified the Board's selection of
accountants for 1997.
The voting results with respect to the foregoing matters are
set forth below:
Proposal #1 CLASSIFICATION OF BOARD OF DIRECTORS INTO
STAGGERED THREE YEAR TERMS
For Against Abstain
5,119,725 104,076 31,818
Proposal #2 ELECTION OF DIRECTORS For Withhold
DOUGLAS L. HAWTHORNE 8,212,267 79,485
DONALD SCHELLPFEFFER 8,223,342 68,410
LEONARD K. NAVE 8,224,842 66,910
RICK G. AVARE 8,220,842 70,910
DAVID FOX, JR. 8,193,167 98,585
LEN ALDRIDGE 8,217,984 73,768
WILLIAM D. BISHOP 8,198,892 92,860
ROBERT L. MCINTYRE 8,186,467 105,285
Proposal #3 RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK
LLP AS INDEPENDENT PUBLIC ACCOUNTANT FOR THE
COMPANY FOR ITS 1997 FISCAL YEAR
For Against Abstain
8,235,656 35,193 20,903
Proposal #4 INCREASE OF AUTHORIZED NUMBER OF SHARES OF THE
COMPANY'S $.00001 PAR VALUE COMMON STOCK FROM
20,000,000 TO 50,000,000
For Against Abstain
7,887,418 298,918 55,416
23
<PAGE>
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
-------------- -----------
3.11 Copy of the Certificate eliminating
the Series B Preferred Stock
(incorporated by reference to
Exhibit 3.11 to the Registrant's
Form 8-K filed on April 24, 1997).
3.12 Certificate of Amendment of
Restated Certificate of
Incorporation filed with the
Delaware Secretary of State on July
11, 1997 (incorporated by reference
to Exhibit 3.12 to the Registrant's
Form 8-K filed on July 25, 1997).
10.80 Securities Purchase Agreement dated
July 16, 1997 between the Company
and Den norske Bank ASA
(incorporated by reference to
Exhibit 10.80 to the Registrant's
Form 8-K filed on July 25, 1997).
10.81 Registration Rights Agreement dated
July 16, 1997 between the Company
and Den norske Bank ASA
(incorporated by reference to
Exhibit 10.81 to the Registrant's
Form 8-K filed on July 25, 1997).
10.82 Co-Sale Agreement dated July
16,1997 among the Company, Rick G.
Avare, Southern Gas Holding
Company, Inc. and Den norske Bank
ASA (incorporated by reference to
Exhibit 10.82 to the Registrant's
Form 8-K filed on July 25, 1997).
(b) Reports on Form 8-K:
On April 24, 1997, the Company filed a Form 8-K
reporting the elimination of its Series B Preferred
Stock.
On July 25, 1997, the Company filed a Form 8-K
reporting the amendment of its Certificate of
Incorporation to increase the authorized number of
shares of the Company's Common Stock from 20,000,000 to
50,000,000 and to divide the Board of Directors into
three classes with staggered three year terms,
reporting the sale of 500,000 shares of Common Stock to
Den norske Bank ASA and listing Risk Factors pertaining
to the Company of which investors and potential
investors should be aware.
24
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and
Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN RESOURCES OF DELAWARE INC.
Date: 8/13/97 By: /s/ Ralph A. Currie
--------------- -------------------------------
Ralph A. Currie
Chief Financial Officer
(Principal Accounting and
Financial Officer)
25
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