SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to 14(a)
of the Securities Exchange Act of 1934
(Amendment No. N/A)
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2)
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
American Resources of Delaware, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if
other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required
/ / Fee computed on table below per Exchange Act Rules 14a-
6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction
applies:
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(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth
the amount on which the filing fee is calculated and
state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) andidentify the filing for
which the offsetting fee was paid previously. Identify
the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE>
PRELIMINARY
-----------
AMERICAN RESOURCES OF DELAWARE, INC.
160 Morgan Street, P.O. Box 87
Versailles, Kentucky 40383
------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held On July 1, 1997
-------------------------------
Notice is hereby given that the Annual Meeting of
Stockholders of American Resources of Delaware, Inc. (the
"Company") will be held at 11:00 a.m., Eastern Daylight Time, on
July 1, 1997 at the Marriott Hotel, 1800 Newtown Pike, Lexington,
Kentucky 40511 for the following purposes:
PROPOSAL NO. 1. To amend the Company's Restated Certificate
of Incorporation to add Article Eleven to classify the Board of
Directors into three classes of directors with staggered three-
year terms.
PROPOSAL NO. 2. To elect directors to serve for terms of
one to three years, respectively, or until their successors are
elected and qualified if Proposal No. 1 is approved, and to elect
the same persons as directors for a term of one year if Proposal
No. 1 is not approved.
PROPOSAL NO. 3. To ratify the selection of KPMG Peat Marwick
LLP as the Company's independent auditors for 1997.
PROPOSAL NO. 4. To amend Article Four of the Company's
Restated Certificate of Incorporation to increase the number of
authorized shares of $.00001 par value common stock from
20,000,000 shares to 50,000,000 shares.
PROPOSAL NO. 5. The transaction of such other business as
may be brought before the Annual Meeting or any adjournment or
adjournments thereof.
Information regarding the matters to be acted upon at the
Annual Meeting is contained in the Proxy Statement accompanying
this Notice. The Annual Meeting may be adjourned from time to
time without notice other than the announcement of the
adjournment at the Annual Meeting or any adjournment or
adjournments thereof, and any and all business for which notice
is given may be transacted at any such adjourned Annual Meeting.
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<PAGE>
All stockholders are encouraged to read the accompanying
Proxy Statement carefully for further information concerning the
proposals that will be presented at the Annual Meeting and prior
to completion of the enclosed proxy card.
Only holders of record of outstanding shares of the
Company's Common Stock and Series 1993, 8% Convertible Preferred
Stock at the close of business on May 9, 1997 are entitled to
notice of and to vote at the Annual Meeting or any adjournment or
adjournments thereof. All stockholders are invited to attend the
Annual Meeting in person; however, to ensure your representation,
whether or not you plan to attend the Annual Meeting, please
promptly complete, date, sign and return the enclosed proxy card.
Karen M. Underwood
Corporate Secretary
Versailles, Kentucky
June , 1997
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<PAGE>
PRELIMINARY
AMERICAN RESOURCES OF DELAWARE, INC.
160 Morgan Street, P.O. Box 87
Versailles, Kentucky 40383
------------------------------
PROXY STATEMENT
------------------------------
THE ANNUAL MEETING
This Proxy Statement is furnished to stockholders of
American Resources of Delaware, Inc. (the "Company") in
connection with the solicitation of proxies by and on behalf of
the Board of Directors of the Company for use at the Annual
Meeting of Stockholders to be held at 11:00 a.m., Eastern
Daylight Time, on July 1, 1997, at the Marriott Hotel, 1800
Newtown Pike, Lexington, Kentucky 40511 and at any adjournment or
adjournments thereof (the "Annual Meeting"). Commencing on or
about June 6, 1997, this Proxy Statement and the enclosed proxy
card are being mailed to stockholders of record of the Company.
The Company will bear the costs of this solicitation, which, in
addition to mail, may include personal interviews, telephone
calls, or telegrams by directors, officers and regular employees
of the Company and its affiliates. The Company has engaged
American Securities Transfer and Trust, Inc. 938 Quail Street,
Suite 101, Lakewood, Colorado 80215, to solicit proxies and
anticipates paying it compensation for such services in the
amount of approximately $3,000.
VOTING
Only record holders of outstanding shares of the Company's
Common Stock, par value $.00001 per share (the "Common Stock"),
and the Company's Series 1993 Preferred Stock, par value $12.00
per share (the "Series 1993 Preferred Stock"), at the close of
business on the record date, May 9, 1997, are entitled to notice
of and to vote at the Annual Meeting. As of such record date,
8,273,722 shares of Common Stock and 268,851 shares of Series
1993 Preferred Stock were entitled to be voted. The holders of
Common Stock are entitled to cast one vote for each share of
Common Stock owned of record. The holders of Series 1993
Preferred Stock are entitled to cast four votes for each share of
Series 1993 Preferred Stock owned of record. The holders of
Common Stock and the holders of Series 1993 Preferred Stock vote
together as a single class except as otherwise required by law.
As of the record date, the holders of the Common Stock and the
holders of the Series 1993 Preferred Stock were entitled to cast
an aggregate of 9,349,126 votes. Cumulative voting is not
permitted with respect to any proposal to be acted upon at the
Annual Meeting. See "Security Ownership" with respect to the
ownership of voting stock of the Company by directors, executive
officers and certain other holders.
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<PAGE>
The presence in person or by proxy of the holders of shares
of Common Stock and/or Series 1993 Preferred Stock entitled to
cast a majority of the aggregate votes entitled to be cast at the
Meeting, shall constitute a quorum. If a quorum should not be
present, the Annual Meeting may be adjourned from time to time
until a quorum is obtained. Stockholders are urged to sign the
accompanying proxy card and return it promptly.
The accompanying proxy card is designed to permit each
stockholder of record at the close of business on the record date
to vote in the election of directors and the proposals described
in the Proxy Statement. The proxy card provides space for a
stockholder to vote in favor of or to withhold voting for any or
all nominees for the Board of Directors, to vote for or against
any proposal to be considered at the Annual Meeting or to abstain
from voting for any proposal if the stockholder chooses to do so.
To be elected, each nominee must receive a majority of all votes
cast at the Annual Meeting. All other matters submitted to the
stockholders require the affirmative vote of majority of the
votes cast at the Annual Meeting.
To ensure representation at the Annual Meeting, each holder
of outstanding shares of Common Stock and Series 1993 Preferred
Stock entitled to be voted at the Annual Meeting is requested to
complete, date, sign and return to the Company the enclosed proxy
card, which requires no postage if mailed in the United States.
Stockholders are urged to sign the accompanying proxy card and
return it promptly. Banking institutions, brokerage firms,
custodians, trustees, nominees, and fiduciaries who are record
holders of Common Stock and/or Series 1993 Preferred Stock
entitled to be voted at the Annual Meeting are requested to
forward all proxy cards, this Proxy Statement, and the
accompanying materials to the beneficial owners of such shares
and to seek authority to execute proxies with respect to such
shares. Upon request, the Company will reimburse such record
holders for their reasonable out-of-pocket forwarding expenses.
The costs of this solicitation will be borne by the Company,
including the costs of assembling and mailing the enclosed proxy
card and this Proxy Statement.
If properly executed and received by the Company before the
Annual Meeting, or any adjournment or adjournments thereof, any
proxy representing shares of Common Stock or Series 1993
Preferred Stock entitled to be voted at the Annual Meeting and
specifying how it is to be voted will be voted accordingly.
Shares as to which authority to vote has been withheld with
respect to the election of any nominee for director will not be
counted as a vote for such nominee and neither an abstention nor
a broker nonvote will be counted as a vote for a proposal. Any
properly executed proxy received that does not specify how it is
to be voted on a proposal for which a specification may be made
will be voted FOR such proposal at the Annual Meeting and any
adjournment or adjournments thereof.
Each stockholder returning a proxy card to the Company has
the right to revoke it, at any time before it is voted, by
submitting a later dated proxy in proper form, by notifying the
Secretary of the Company in writing (signed and dated by the
stockholder) of such
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revocation, or by appearing at the Annual Meeting, requesting the
return of the proxy, and voting the shares in person.
When a signed proxy card is returned with choices specified
with respect to voting matters, the shares represented are voted
by Proxies designated on the proxy card in accordance with the
stockholder's instructions. The Proxies are Rick G. Avare,
President and Chief Executive Officer of the Company, and Douglas
L. Hawthorne, Chairman of the Board of the Company, each of whose
names are listed on the proxy card. A stockholder wishing to name
another person as his or her proxy may do so by crossing out the
names of the two designated Proxies and inserting the name(s) of
such other person(s) to act as his or her prox(ies). In that
case, it will be necessary for the stockholder to sign the proxy
card and deliver it to the person(s) named as his or her proxy
and for the person(s) so named to be present and to vote at the
Annual Meeting. Proxy cards so marked should not be mailed to the
Company.
SECURITY OWNERSHIP
The following table reflects certain information regarding
the beneficial ownership of the outstanding equity securities of
the Company as of May 9, 1997, to the extent known to the
Company's Board of Directors. Such information is included for
(i) persons who own 5% or more of such equity securities, (ii)
directors, (iii) nominees for director, (iv) the executive
officers identified in the discussion under the heading
"Executive Compensation" (the "Named Executives"), and (v)
officers and directors of the Company as a group. Unless
otherwise indicated, the Company believes that each person named
below has the sole power to vote and dispose of the equity
securities beneficially owned by such person.
<TABLE>
<CAPTION>
Shares
Beneficial Owner Title Beneficially Percent
Name/Address Of Class Owned(1) Of Class(2)
- ------------ -------- -------- -----------
<S> <C> <C> <C>
Douglas L.
Hawthorne(3)(8) 8% Pfd 3,334 1.24%
4325 Delco
Dell Road Common 530,853 6.15%
Kettering, OH
45429
Donald A.
Schellpfeffer,
M.D.(3)(10)
910 East the
Street
Sioux Falls,
SD 57105 Common 441,877 5.23%
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<PAGE>
Shares
Beneficial Owner Title Beneficially Percent
Name/Address Of Class Owned(1) Of Class(2)
- ------------ -------- -------- -----------
Southern Gas
Holding Co., Inc.
160 Morgan Street
Versailles, KY 40383 Common 993,623 12.01%
Leonard K. Nave
(3)(4)(7)
160 Morgan Street
Versailles, KY 40383 Common 1,416,744 16.58%
Leonard K. Nave,
Trustee(4)(5)
160 Morgan Street
Versailles, KY 40383 Common 993,623 12.01%
Rick G. Avare
(3)(4)(6)
Morgan Street 8% Pfd 187,500 69.74%
Versailles, KY 40383 Common 2,198,253 24.55%
David J. Fox, Jr.
Appalachian
Production Company
605 9th Street,
Ste. 519 Huntington,
WV 25701 Common 43,834 *
Ralph A. Currie
2920 Sweet William
Court
Lexington, KY 40502 Common 10,000 *
Whispering Pines of
Thomasville, Inc.
P. O. Box 638
Thomasville, GA 8% Pfd 28,334 10.54%
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<PAGE>
Shares
Beneficial Owner Title Beneficially Percent
Name/Address Of Class Owned(1) Of Class(2)
- ------------ -------- -------- -----------
Andrew J. Kacic
(3)(9)
6119 N. Black Bear
Loop
Tucson, AZ 85715 Common 844,822 9.42%
William D. Bishop Common 55,000 *
(11)
739 Lakeshore Drive
Lexington, KY 40504
Directors, Nominees
and Executive Officers
as a group All
(7 persons) Classes 3,260,492 33.43%
</TABLE>
* Represents less than 1% of the Company's outstanding stock
for the indicated class.
(1) Share information reflects the 1-for-4 reverse stock split
of the Company's common stock effected on June 8, 1994. 8%
Preferred Stock is convertible into common stock at the rate
of one share of common stock for each share of Preferred
Stock.
(2) Percentages assumes full exercise of outstanding options and
warrants to purchase shares of the Company's common stock
and conversion of 8% Preferred Stock into common stock.
(3) Includes 147,482 shares of common stock jointly owned by
Messrs. Hawthorne, Kacic, Schellpfeffer, Nave and Avare.
Each joint owner disclaims beneficial ownership of 80% of
such shares.
(4) Includes 993,623 shares of common stock owned by Southern
Gas Holding Company, Inc. ("SGH"). SGH is owned 52.5% by
Rick G. Avare, 7.5% by Leonard K. Nave, individually, and
32.5% by Leonard K. Nave, as Trustee (See Note 5). Messrs.
Avare and Nave, individually and as trustee, disclaim the
beneficial ownership of such shares of the Company's common
stock to the extent they exceed their respective percentage
ownership of SGH.
(5) Leonard K. Nave is both the grantor and trustee of a trust
which owns 325 shares (32.5%) of SGH. The Trust Agreement
provides that 75 shares (7.5%) shall be distributed to each
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<PAGE>
of his three children and 100 shares (10%) shall be
distributed to his wife not later than April 30, 2000.
Neither Mr. Nave's wife nor children have a right to vote
the shares or to cause the trust to sell or otherwise
dispose of them.
(6) Includes 680,704 shares subject to options and conversion
rights exercisable within 60 days, 297,482 shares owned by
Prima Capital, LLC ("Prima"), in which Mr. Avare owns a 20%
interest, and 1,134 shares owned by JJR Investments, a
Kentucky general partnership. Mr. Avare disclaims
beneficial ownership of 80% of the shares of the Company's
common stock owned by Prima.
(7) Includes 271,603 shares subject to options exercisable
within 60 days.
(8) Includes 358,629 shares subject to options, warrants and
conversion rights exercisable within 60 days and 24,500
shares held in Mr. Hawthorne's retirement plan.
(9) Includes 690,590 shares subject to options exercisable
within 60 days and 6,750 shares owned by the Andrew J.
Kacic Profit Sharing Plan.
(10) Includes 207,415 shares subject to options and warrants
exercisable within 60 days, 20,729 shares subject to
warrants exercisable within 60 days held by Anesthesia
Association, Inc. ("AAI"), 6,122 shares subject to warrants
exercisable within 60 days held by Midwest Anesthesiology
Profit Sharing Plan, 10,655 shares held by AAI, 470 shares
held by Midwest Anesthesiology Service II Profit Sharing
Plan, 2,068 shares held in trusts for the benefit of Dr.
Schellpfeffer's children, with respect to which Dr.
Schellpfeffer acts as custodian, 12,185 shares held in
Individual Retirement Plans for Dr. Schellpfeffer and
members of his family, and 70,872 shares held by DARS
Limited, of which Dr. Schellpfeffer is a principal.
(11) Includes 15,000 shares owned of record by Mr. Bishop in his
capacity as trustee of an irrevocable trust for his three
adult children.
PROPOSAL NO. 1
TO AMEND THE COMPANY'S RESTATED CERTIFICATE OF INCORPORATION
TO ADD ARTICLE ELEVEN TO CLASSIFY THE BOARD OF DIRECTORS INTO
THREE CLASSES OF DIRECTORS WITH STAGGERED THREE-YEAR TERMS.
Approval of Proposal No. 1 requires the affirmative vote of
the holders of a majority of the combined voting power of all of
the issued and outstanding shares of Common Stock and 1993
Preferred Stock entitled to be voted at the Annual Meeting,
voting together as a single class.
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<PAGE>
The Board of Directors has unanimously approved and
recommends that the stockholders adopt an amendment (the
"Amendment") to the Company's Restated Certificate of
Incorporation to divide the Company's Board of Directors into
three approximately equal classes with staggered terms. The
purpose of the Amendment is to promote continuity and stability
in the Company's management and policies by making an attempted
takeover of the Company more difficult. The proposed Amendment is
not, however, in response to any effort of which the Company is
aware to accumulate the Company's $.00001 par value common stock
("Common Stock"), or to obtain control of the Company. Rather,
the Board of Directors wishes to protect stockholder investments
in the Company by ensuring that unsolicited bidders will not be
in a position to place undue pressure on the Board of Directors
or stockholders of the Company and that the ability of the Board
of Directors to negotiate with any potential acquirer is from the
strongest practical position, which is in the interest of all
stockholders. Except as set forth in Proposal No. 4, the Board of
Directors does not intend to propose further amendments to the
Company's Restated Certificate of Incorporation or Amended By-
laws that might affect attempts to take over or change control of
the Company.
The Company's Restated Certificate of Incorporation contains
other provisions that may limit or prevent a change in control of
the Company. Article Four thereof, which is proposed to be
amended as described in Proposal No. 4, provides that the
authorized capital of the Company consists of 20,000,000 shares
of Common Stock, 1,000,000 shares of Series 1993, 8% Convertible
Preferred Stock and 2,000,000 shares of preferred stock ("Series
Preferred Stock"). The Board of Directors may issue, from time to
time, Common Stock, Series 1993 Preferred Stock or one or more
classes or series of Series Preferred Stock with such
designations and preferences and voting and other rights as they
deem appropriate without stockholder approval. (See "Proposed
Sale of Preferred Stock to Den norske Bank AS" under Proposal No.
4.) The Board of Directors, by issuing such Common Stock, Series
1993 Preferred Stock or Series Preferred Stock, could adversely
affect the voting power of the outstanding shares of Common Stock
and discourage any attempt to gain control of the Company.
To implement the classified Board of Directors, the
Amendment would permit Class I, Class II and Class III directors
initially to be elected at the Annual Meeting of Stockholders for
terms of one year, two years and three years, respectively. If
the Amendment is adopted, Class I directors elected at the Annual
Meeting will hold office until the 2000 Annual Meeting; Class II
directors elected at the Annual Meeting will hold office until
the 1999 Annual Meeting; and Class III directors elected at the
Annual Meeting will hold office until the 1998 Annual Meeting;
and, in each case, until their successors are duly elected and
qualified or until their earlier death, resignation or removal.
At each annual meeting commencing with the 1998 Annual Meeting,
directors elected to succeed those in the class whose terms then
expire will be elected for three-year terms so that the terms of
one class of directors will expire each year. Thus, the
stockholders will elect only approximately one-third of the
directors at each annual meeting. In addition, the Board of
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Directors may fill any vacancies which occur for the remainder of
the term of the director who ceases to be a director.
Delaware law provides that the certificate of incorporation
of a corporation may provide that the directors be divided into
one, two or three classes, the terms of the directors initially
to be classified as follows: the first class to expire at the
annual meeting next ensuing; the second class one year
thereafter; and the third class two years thereafter and that at
each annual election held after such classification, directors
shall be elected for a full term. The Amendment is also
consistent with the rules of the Nasdaq Stock Market on which the
Company's Common Stock is traded.
ADVANTAGES OF A CLASSIFIED BOARD
The Board of Directors believes that dividing the directors
into three classes is advantageous to the Company and its
stockholders because providing that directors will serve
three-year terms rather than one-year terms increases the
likelihood of continuity and stability in the policies formulated
by the Board. While management has not experienced any problems
with continuity in the past, it wishes to ensure that this
experience will continue and believes that the staggered election
of directors will promote continuity because only approximately
one-third of the directors will be subject to election each year.
The Amendment would significantly extend the time required
to make any change in control of the Board and will tend to
discourage any hostile takeover bid for the Company. Presently, a
change in control of the Board can be made by the holders of a
majority of the outstanding voting stock of the Company at a
single annual meeting. Under the proposed Amendment, it will take
at least two annual meetings for such stockholders to make a
change in control of the Board, since only a minority of the
directors will be elected at each meeting. Staggered terms would
also guarantee that approximately two-thirds of the directors at
any one time would have at least one year's experience as
directors of the Company.
DISADVANTAGES OF A CLASSIFIED BOARD
The Amendment will make it more difficult for stockholders
to change the composition of the Board even if stockholders
believe such a change would be desirable. Because of the
additional time required to change control of the Board, the
Amendment will also tend to perpetuate incumbent management. The
Amendment will increase the amount of time required for a
takeover bidder to obtain control of the Company without the
cooperation of the Board, even if the bidder were to acquire a
majority of the Company's outstanding stock; accordingly, it will
tend to discourage certain tender offers, perhaps including some
offers which stockholders might deem to be in their best
interest. As a result, stockholders may be deprived of
opportunities to sell some or all of their shares in a tender
offer. Tender offers for control usually involve a purchase price
higher than the current market price and may involve a bidding
contest between competing takeover bidders. The Amendment could
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<PAGE>
also discourage open market purchases by a potential takeover
bidder. Such purchases could temporarily increase the market
value of the Company's Common Stock, enabling stockholders to
sell their shares at a price higher than that which would
otherwise prevail. Finally, the Amendment could decrease the
market price of the Company's Common Stock by making the stock
less attractive to persons who invest in securities in
anticipation of an increase in price if a takeover attempt
develops.
For information regarding the nominees for election to the
Board of Directors at the Annual Meeting and the class of
directors in which each director will initially serve if the
Amendment is adopted, see Proposal No. 2 below.
PROPOSAL NO. 2
TO ELECT DIRECTORS TO SERVE FOR TERMS OF ONE TO THREE YEARS,
RESPECTIVELY, OR UNTIL THEIR SUCCESSORS ARE ELECTED AND QUALIFIED
IF PROPOSAL NO. 1 IS APPROVED, AND TO ELECT THE SAME PERSONS AS
DIRECTORS FOR A TERM OF ONE YEAR IF PROPOSAL NO. 1 IS NOT
APPROVED.
The affirmative vote of the holders of a majority of the
voting power of all of the issued and outstanding shares of
Common Stock and 1993 Preferred Stock entitled to be voted at the
Annual Meeting, voting together as a single class, is required to
elect each director.
If Proposal No. 1 is approved by the stockholders, the
persons named in the enclosed proxy will vote for the election of
the nominees for each class of the Board of Directors and for the
respective terms designated below unless authority to vote is
withheld. If Proposal No. 1 is not approved, the persons named in
the enclosed proxy will vote for the election of such nominees
for a one-year term expiring at the 1998 Annual Meeting of
Stockholders unless authority to vote is withheld.
In accordance with the Company's Bylaws, the Board of
Directors has fixed the number of directors at five. The Board of
Directors has nominated Douglas L. Hawthorne, Rick G. Avare,
Leonard K. Nave, David J. Fox and William D. Bishop for election
as directors at the Annual Meeting. All of the nominees with the
exception of Mr. Bishop are currently serving as directors of
the Company.
There are no family relationships among any directors,
nominee for director, or executive officers of the Company. Each
of the nominees has consented to being named as a nominee and to
serve as a director if elected. However, if for any reason any
nominee for director is not a candidate at the election, the
enclosed proxy will be voted for the election of a substitute
nominee at the discretion of the person of persons voting the
enclosed proxy. The Board of Directors has no reason to believe
that any nominee named herein will be unable to serve.
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<PAGE>
Information regarding the nominees is provided below and
under "Security Ownership", "Executive Compensation", and
"Certain Relationships and Related Transactions".
<TABLE>
NOMINEES FOR DIRECTOR
Class I (Term of Office Age Principal Occupation Director
- ----------------------- --- -------------------- --------
Expires in 2000) Since
- ---------------- -----
<S> <C> <S> <C>
Rick G. Avare(1) 35 President and Chief Sept. 1994
Executive Officer
of the Company
Leonard K. Nave(1) 61 Chairman, President, Sept. 1994
and Chief Executive
Officer of Southern
Gas Company of Del-
aware, Inc.
Class II (Term of Office Age Principal Occupation Director
- ------------------------ --- -------------------- --------
Expires in 1999) Since
- ---------------- -----
Douglas L. Hawthorne
(1)(2) 55 Business Consultant Mar. 1993
David Fox, Jr.(2) 76 President, Appalachian Aug. 1996
Production Company
and President and
Chairman of the Board
of FGO, Inc.
Class III (Term of Age Principal Occupation Director
- ------------------ --- -------------------- --------
Office Expires in Since
- ----------------- -----
1998)
- -----
William D. Bishop 56 Coal Executive, Quin- N/A
tana Coal Company
Kentucky
</TABLE>
(1) Member of Executive Committee.
(2) Member of Audit and Compensation Committees.
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<PAGE>
Rick G. Avare has served as President and Chief Executive
Officer of ARI since May 15, 1996, and as a director of ARI since
September, 1994. He has also served as Chief Operating Officer
of the Company's wholly-owned subsidiary, Southern Gas Company of
Delaware, Inc. ("Southern Gas"), since January 1, 1996, and as
Vice President, Treasurer and a director of Southern Gas since
February, 1994. Mr. Avare served as Chief Operating Officer and
Executive Vice President of ARI from August, 1995 until May 15,
1996, and he served as Chief Financial Officer of ARI from
September, 1994, through December, 1995. He also served as Chief
Financial Officer of Southern Gas from February, 1994 through
December, 1995. Since March, 1995, Mr. Avare has served as the
Administrative Member for Prima Capital, LLC. From February,
1995, to November 15, 1995, Mr. Avare served as a director for
Bullet Sports International, Inc. From March 29, 1993, to April
27, 1993, Mr. Avare served as a director of ARI. Mr. Avare was
the Vice President of Finance and Treasurer of Southern Gas
Company, Inc., a Kentucky corporation, ("SGC") from 1987 until
its dissolution in 1995. He has served as Chairman of the Board
and Chief Executive Officer of Southern Gas Holding Co. Inc.
("SGH"), the parent company of SGC, since January, 1995, and as a
director and Vice President and Secretary since October, 1988.
Prior to his involvement with SGC, Mr. Avare was employed by the
national accounting firm of Grant Thornton (now part of KPMG Peat
Marwick, LLP) in Lexington, Kentucky. Mr. Avare received his
Bachelor of Arts degree from Transylvania University in
Lexington, Kentucky, in 1983 and his Masters in Accounting from
the University of Kentucky in 1985. Mr. Avare is a certified
public accountant and is currently a member of the American
Institute for Certified Public Accountants and the Kentucky
Society of Certified Public Accountants.
Leonard K. Nave has served since February, 1994, as Chairman
of the Board, Chief Executive Officer, President and a director
of Southern Gas. He has served as a director of ARI since
September, 1994, and served in that position from March 29, 1993,
to April 27, 1993. Since February, 1995, Mr. Nave has served as
a director for Bullet Sports International, Inc. Mr. Nave served
as the President, Chief Executive Officer and a director of SGC,
from its inception in March, 1983, until its dissolution in
February, 1995. Since October, 1988, Mr. Nave has served as the
President and a director of SGH. In addition, Mr. Nave currently
holds the following positions: President and a director of
Nawenco Equipment, Ltd. (since March, 1992); and President and a
director of Woodway Farms, Inc. (Since August, 1983). In
February, 1996, Mr. Nave filed for reorganization and protection
under Chapter 11 of the Code. This action was initiated
primarily because of the attempted enforcement of certain
guaranties which Mr. Nave had signed on behalf of an unrelated
corporation. From November, 1991, through 1995, Mr. Nave was
Vice President and a director of Maxwell House, Inc.; and from
May, 1983, through September, 1994, he served as Vice President
and a director of Wright Resources, Inc. From 1980 to 1983, Mr.
Nave was a senior partner in the law firm of Nave, Williams &
Palmore (now Jackson & Kelly) in Lexington, Kentucky. Mr. Nave
received his Bachelor of Arts degree from the University of
Kentucky in 1956 and a Bachelor of Laws and Letters degree from
the University of Kentucky College of Law in 1959. Mr. Nave, who
has been engaged in energy and related activities for more than
twenty years, pioneered and implemented the first and largest
13
<PAGE>
direct sale of natural gas on the Columbia Gas of Kentucky
system. Mr. Nave is an active member of the Kentucky Bar
Association.
Douglas L. Hawthorne has been a director and Chairman of the
Board of ARI since March 29, 1993, and has been a director of
Southern Gas since February, 1994. Since February, 1995, Mr.
Hawthorne has been a director of Bullet Sports International,
Inc. Since 1992, Mr. Hawthorne has been a principal of Carillon
Capital, Inc., a Dayton-based investment banking firm. From 1991
to 1994, Mr. Hawthorne was a principal in SPECTRA Group, Inc., a
management consulting firm, also based in Dayton, Ohio. From
1986 to 1991, Mr. Hawthorne served as the Chairman of the Board,
President and Chief Executive Officer of Society Bank, N.A.,
Dayton, Ohio ("Society Bank"). From 1971 through 1992, he held a
variety of positions within The Third National Bank and Trust
Company ("Third National"), and its successor, Society Bank, as
it grew from $200 million to $3 billion in assets with 90 offices
spanning Southern Ohio. Mr. Hawthorne initially served as Vice
President of Corporate Development, Research and Planning of
Third National, and subsequently assumed successively more
responsible senior management positions, culminating as Chief
Executive Officer in 1984. During his association with Society
Bank, Mr. Hawthorne was a member of the Executive Management
Committee and Society Bank's Retail Bank Operating Committee.
From 1976 to 1996, he served as Board Trustee and, most recently,
as Vice Chairman of MedAmerica Health Systems Corporation and
Chairman of MedAmerica International Insurance, Ltd. From 1992
to March, 1995, Mr. Hawthorne served as a Trustee of Wright State
University and is currently a Trustee of The Dayton Foundation.
He received his undergraduate degree from Wabash College and
attended New York University's Graduate School of Business as
well as many professional development programs.
David Fox, Jr. has served as a director of ARI since August,
1996. Mr. Fox has served as Vice Chairman and Secretary-
Treasurer of McJunkin Appalachian Oil Field Supply Company since
1989. He also currently holds the position of President of
Appalachian Production Co., an oil and gas producing company, as
well as President and Chairman of the Board of FGO, Inc., a West
Virginia corporation engaged in developing residential real
estate properties in and around Huntington, West Virginia; and
President and a Director of Charleston National Properties, LLC,
a real estate development company in the Charleston, South
Carolina, area. Mr. Fox also currently serves as a Director of
KYOWVA Container Corporation; River Cities Association; Bank One,
West Virginia, Charleston; Bank One, West Virginia; and the
Marshall University Foundation. During the past five years, Mr.
Fox served as President of the Marshall University Foundation.
Mr. Fox is a graduate of Greenbrier Military School and attended
Marshall University. He is a past President of Branchland Pipe
and Supply Company and has more than fifty years of experience in
energy and related activities.
William D. Bishop has served as President of Blackhawk
Mining Company, Inc. (formerly Quintana Coal Company) since June
1985. He has also been part owner and manager of Quintana Coal
Kentucky, LLC since June 1985. Mr. Bishop has nearly thirty
14
<PAGE>
years of experience in energy and related activities, having been
employed since 1969 in executive positions with energy-related
companies, including Ashland Oil, Inc., Ashland Coal, Inc.,
Appalachian Energy Company and Sierra Coal Company/Utah
International, Inc. Mr. Bishop graduated from the University of
Kentucky in May 1965 with a Bachelors of Science Degree in
Economics and in December 1996 with a Masters Degree in Business
Administration.
PROPOSAL NO. 3
TO RATIFY THE SELECTION OF KPMG PEAT MARWICK LLP AS THE
COMPANY'S INDEPENDENT AUDITORS FOR 1997.
Approval of Proposal No. 3 requires the affirmative vote of
the holders of a majority of the voting power of all of the
issued and outstanding shares of Common Stock and 1993 Preferred
entitled to be voted at the Annual Meeting, voting together as a
single class.
KPMG Peat Marwick LLP has served as the Company's
independent auditors since 1994. The Board of Directors is of the
opinion that KPMG Peat Marwick LLP is well qualified to continue
such service and recommends that the stockholders vote FOR
ratification of the selection of Peat Marwick LLP. One or more
representatives of KPMG Peat Marwick LLP are expected to be
present at the Annual Meeting, to have the opportunity to make a
statement if they so desire, and to be available to respond to
appropriate questions.
PROPOSAL NO. 4
TO AMEND ARTICLE FOUR OF THE COMPANY'S RESTATED CERTIFICATE
OF INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF
$.00001 PAR VALUE COMMON STOCK FROM 20,000,000 SHARES TO
50,000,000 SHARES.
Approval of Proposal No. 4 requires the affirmative vote of
the holders of a majority of the combined voting power of all of
the issued and outstanding shares of Common Stock and 1993
Preferred Stock entitled to be voted at the Annual Meeting,
voting together as a single class.
The Board of Directors of the Company has unanimously
approved and recommends that Article Four of the Company's
Restated Certificate of Incorporation be amended to increase the
number of authorized shares of common stock from 20,000,000
shares to 50,000,000 shares.
REASONS FOR INCREASE.
The Company is authorized to issue 20,000,000 shares of
$.00001 par value common stock ("Common Stock"). See "Description
of Capital Stock - Common Stock
15
<PAGE>
At May 9, 1997, the Company had 8,273,722 shares of Common
Stock issued and outstanding and had reserved 11,151,703 shares
of Common Stock for future issuance. (See "Shares Reserved for
Issuance"and "Description of Derivative Securities".
To facilitate growth, the Company has issued and sold shares
of Common Stock and convertible preferred stock for cash and has
granted options and warrants to purchase shares of Common Stock
for cash in private transactions (i) to fund the acquisition of
oil and gas properties, (ii) to repay indebtedness, (iii) to pay
for services, and (iv) to provide working capital. (See "Recent
Financings", "Shares Reserved for Issuance" and "Description of
Derivative Securities".
As a result of the prior issuances of shares of Common Stock
and the reservation of shares of Common Stock to fund the
exercise of outstanding warrants and options and the conversion
of existing and proposed preferred stock, the Company only has
574,575 shares of Common Stock available unless its Certificate
of Incorporation is amended to increase its authorized shares of
Common Stock.
The Board of Directors believes that the ability to issue
additional shares of Common Stock may be essential to the
Company's continued growth and recommends that the Company's
shareholders vote for the proposal to increase the Company's
authorized Common Stock from 20,000,000 to 50,000,000 shares.
EFFECT OF AN INCREASE.
The Board of Directors is authorized to issue and sell
shares of the Company's Common Stock for any valid corporate
purpose at such prices as it may determine to be in the best
interest of the Company. Although the Board of Directors believes
that it is important to the Company's continued growth that
shares of Common Stock be made available for future issuance, the
Company does not have any present plans, arrangements or
understandings to issue any additional shares of Common Stock
other than shares that are presently reserved for issuance. (See
"Proposed Sale of Preferred Stock to Den norske Bank AS, "Shares
Reserved for Issuance" and "Description of Derivative
Securities".)
Holders of Common Stock do not have a preemptive right to
purchase additional shares of Common Stock. Therefore, the
issuance of additional shares of Common Stock would have a
dilutive effect on the percentage of equity of the Company owned
by the present holders of Common Stock. Also, depending on the
prices at which additional shares of Common Stock are issued,
such issuances could have a dilutive effect on the net book value
and net earnings per share of the Common Stock.
16
<PAGE>
PROPOSED SALE OF PREFERRED STOCK TO DEN NORSKE BANK AS.
At March 31, 1997, the Company was indebted to Den norske
Bank AS (the "Bank") under a revolving credit agreement in the
principal amount of $24,083,000 and under a development credit
agreement in the principal amount of $1,004,205.
The Bank and the Company have entered into preliminary
negotiations for the designation, issuance and sale by the
Company to the Bank of a new series of preferred stock with a
purchase price of $1,000 per share and an aggregate purchase
price of $10,000,000 cash. The Company anticipates that the new
series of preferred stock would consist of 10,000 shares of
$.0001 par value preferred stock designated 1997 Series A
Convertible Preferred Stock with the following characteristics:
Dividends: Cumulative annual dividends in the amount of
---------
$80.00 per share.
Voting. One vote per share voting as a single class with the
------
Common Stock and 1993 Preferred Stock, except as required by law.
Liquidation. $1,000 per share plus unpaid cumulative
-----------
dividends.
Conversion. Convertible in whole or in part at the option of
----------
the Bank at a conversion price equal to the then prevailing
market price of the Common Stock, but not less than $3.00 per
share during the first five years after issuance of the preferred
stock (the "Conversion Price"), provided; however, that only one-
third of the shares of preferred stock held by the Bank could be
converted during any twelve month period and no conversions could
be effected during the first twelve months after issuance of the
preferred stock.
Redemption. Redeemable in whole or in part at the option of
----------
the Company, anytime and from time to time one year after
issuance for $1100.00 per share plus unpaid cumulative dividends;
provided; however, if senior management standing for reelection
are not reelected or an involuntary change of control of the
Company occurs, the Bank would have the option to require the
Company to (i) immediately redeem all shares of the preferred
stock then held by it for $1,150 per share, plus unpaid
cumulative dividends, or (ii) immediately convert all of the
shares of preferred stock into Common Stock at the Conversion
Price. No determination has been made as to what would constitute
an involuntary change of control. Otherwise, the Bank could not
directly own, at any one time, more than 4.9% of the Company's
issued and outstanding Common Stock. In the event the Company
voluntary elects to pay in full its then existing indebtedness to
the Bank, the Bank could elect to apply such payment to the
redemption of the preferred stock rather than the payment of the
indebtedness.
The Company anticipates that it would pay the Bank a cash
placement fee equal to 7% of the aggregate purchase price of the
preferred stock. If the Company and the Bank enter into a
definitive agreement with respect to the preferred stock, the
17
<PAGE>
Company would have the right to unilaterally terminate the
agreement by paying the Bank $250,000 in liquidated damages.
The Company anticipates that it would also issue six year
warrants to the Bank to purchase 525,000 shares of Common Stock
for $3.25 per share. If the sale is consummated, it is estimated
that the net proceeds will total approximately $9,230,000,
substantially all of which would be used to repay indebtedness
with the balance, if any, used for general corporate purposes.
There can be no assurance that the Company and the Bank will
enter into a definitive agreement for the sale of the preferred
stock, or if a definitive agreement is entered into, that the
terms would not change or that the sale would be consummated. The
Company has reserved 525,000 shares of its existing authorized
and unissued Common Stock for the issuance of warrants to the
Bank and has reserved 3,333,333 shares of its existing authorized
and unissued Common Stock for conversion of the preferred stock
issued to the bank. The issuance of the warrants and the
preferred stock to the Bank is not subject to the approval of the
Company's stockholders and the Company may issue such warrants
and shares of preferred stock whether or not Proposal No. 4 is
approved or disapproved at the Annual Meeting.
DESCRIPTION OF CAPITAL STOCK.
General. The Company is authorized to issue 23,000,000
-------
shares of capital stock, consisting of 20,000,000 shares of
Common Stock, par value $.00001 per share, 1,000,000 shares of
preferred stock designated as Series 1993, 8% Convertible
Preferred Stock, and 2,000,000 shares of series preferred stock
("Preferred Stock").
Common Stock. The holders of Common Stock are entitled to
------------
one vote for each share held of record on all matters submitted
to a vote of stockholders and vote together as a single class
with the holders of the 1993 Preferred Stock. There is no
cumulative voting with respect to the election of directors.
Therefore, the holders of more than 50% of the shares of Common
Stock and 1993 Preferred Stock voting for the election of
directors can elect all of the directors if they choose to do so.
The holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets available for
distribution to them after the payment of liabilities and after
provision has been made for each class of stock having preference
over the Common Stock. Holders of shares of Common Stock have no
conversion, preemptive, subscription or redemption rights. All of
the issued and outstanding shares of Common Stock are fully paid
and nonassessable.
The Company has never paid a dividend on the Common Stock
and the Company's revolving credit agreement with the Bank
prohibits the payment of dividends. Also, no dividends can be
paid on the Common Stock unless all accrued and unpaid cumulative
18
<PAGE>
dividends have been paid on the outstanding shares of 1993
Preferred Stock. (See "1993 Preferred Stock".)
Preferred Stock. The Board of Directors has authority,
---------------
without further action by stockholders, to issue from time to
time up to 2,000,000 shares of Preferred Stock with a par value
of $.0001 per share, in one or more series, and to fix the
designations, preferences, powers and relative, participating,
optional or special rights and the qualifications, limitations or
restrictions thereof, including dividend rights, conversion
rights, voting rights, rights and terms of redemption and
liquidation preferences, any or all of which may be greater than
the rights of Common Stock; provided, however, except as
otherwise required by law, each share of Preferred Stock shall
not be entitled to more than one vote on any matter voted on by
the common stockholders. The Board of Directors, without
stockholder approval, can, from time to time, issue Preferred
Stock with voting, conversion and other rights which could
adversely affect the voting power and other rights of the holders
of Common Stock. Preferred Stock could be issued quickly with
terms calculated to delay or prevent a change in control of the
Company without any further action by the stockholders. (See
"Proposed Sale of Preferred Stock to Den norske Bank AS".)
1993 Preferred Stock. The Company is also authorized to
--------------------
issue 1,000,000 shares of Series 1993, 8% Convertible Preferred
Stock ("1993 Preferred Stock"), with a par value and liquidation
preference of $12.00 per share. Each share of 1993 Preferred
Stock is (i) entitled to four votes per share and votes together
as a single class with the holders of Common Stock, (ii) is
convertible into 1 share of Common Stock at the option of the
holders thereof (subject to adjustment for subsequent issuance of
Common Stock dividends and other changes in the number of shares
of outstanding shares of Common Stock for which the Company
receives no monetary consideration) and is entitled to receive,
as and when declared by the Board of Directors out of funds
legally available therefor, 8% cumulative annual dividends per
share payable in Common Stock on the basis of one share of Common
Stock (rounded to the nearest whole share) for each $1.00 of
declared dividends. Dividends are payable semi-annually and
interest accrues on unpaid dividends at the rate of 10% per annum
until paid. There are no accrued and unpaid dividends on the 1993
Preferred Stock as of the date of this Proxy Statement. The 1993
Preferred Stock is not redeemable.
SHARES RESERVED FOR ISSUANCE.
At April 21, 1997, the following shares of Common Stock were
reserved for issuance (See "Description of Derivative
Securities"):
<TABLE>
No. of Shares: Reserved for Issuance With Respect To:
------------- -------------------------------------
<C> <S>
2,000,000 1994 Compensatory Stock Option Plan.
950,000 Incentive Stock Option Plan.
19
<PAGE>
329,000 1994 Employee Stock Compensation Plan.
268,851 1993 Convertible Preferred Stock.
1,699,864 4% Convertible Debentures.
205,834 1995 Class A Warrants.
205,834 1995 Class B Warrants.
165,000 1996 Class A Warrants.
100,000 Morgan Lang Warrant.
100,000 AMC Consumer Services Warrant.
200,000 Bridgewater Financial Warrant.
225,000 AKS Warrant.
643,987 Andrew Kacic Stock Option.
100,000 Corporate Communications Stock Option.
100,000 World Capital Funding Stock Option.
525,000 Warrants proposed to be issued to the
Bank. (See "Proposed Sale of Preferred
Stock to Den norske Bank").
3,333,333 New Convertible Preferred Stock proposed
to be designated and issued to the Bank.
(See "Proposed Sale of Preferred Stock
to Den norske Bank".)
11,201,703
==========
</TABLE>
DESCRIPTION OF DERIVATIVE SECURITIES.
1994 Compensatory Stock Option Plan. The Company's
-----------------------------------
Compensatory Stock Option Plan was adopted by the Company's Board
of Directors for the purpose of providing an incentive to aid in
attracting and retaining qualified officers, directors and
employees. Options are priced at the current market value on the
date of grant and vest at such time or times specified by the
20
<PAGE>
Compensation Committee of the Board of Directors. The options
expire ten years after the date of grant, except that options
expire 15 months after an optionee's date of death, 12 months
after an optionee's employment is terminated without cause and
immediately if the optionee's employment is terminated with
cause.
At March 31, 1997, the Company had granted options under the plan
to purchase 1,943,910 shares of Common Stock and had reserved
56,090 shares for future grants.
1993 Preferred Stock. The Company's 1993 Preferred Stock is
--------------------
convertible into 1 share of Common Stock at the option of the
holders thereof (subject to adjustment for subsequent issuance of
Common Stock dividends and other changes in the number of shares
of outstanding shares of Common Stock for which the Company
receives no monetary consideration). See "Description of Capital
Stock - 1993 Preferred Stock".
4% Convertible Debenture. In the fourth quarter of 1996,
------------------------
the Company issued $6,000,000 principal amount of 4% debentures
that are convertible at the option of the holders into shares of
Common Stock valued at the lesser of (i) the closing bid price of
the common stock as reported by NASDAQ on the date of issuance
of the debenture, and (ii) 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 conversion (the "Conversion Price").
The closing bid prices when the debentures were issued ranged
between $3.00 and $3.50 per share. Debentures that are not
converted prior to their maturity dates will automatically
convert on their maturity dates. 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 has the right, subject to certain terms and conditions,
to redeem any debenture for 125% of its principal balance plus
accrued interest if the Conversion Price falls below the closing
bid price on the date of issuance of that debenture. As of May 9,
1997, $3,529,075 principal amount of the 4% debentures had been
converted into shares of Common Stock. (See "Recent Financings".)
1995 Class A Warrants. 1995 Class A Warrants to purchase an
---------------------
aggregate of 205,834 shares of Common Stock were issued by the
Company in the November 1995 Private Placement. (See "Recent
Financings".) Each 1995 Class A Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $3.50
per share. The 1995 Class A Warrants are exercisable for 36
months commencing October 8, 1997. The 1995 Class A Warrants are
callable by the Company at any time on 30 days notice to the
holders, but only if the closing price of the Common Stock as
quoted on NASDAQ is not less than $5.50 per share for 20 of 30
consecutive trading days. If the Company calls the 1995 Class A
Warrants, the holders thereof have the right to exercise their
1995 Class A Warrants within such 30 day period. The number and
exercise price of the 1995 Class A Warrants are subject to
adjustment if the Company pays a dividend in shares of Common
Stock (other than Common Stock dividends paid on preferred
stock), subdivides or combines the Common Stock or pays a
dividend on Common Stock with other securities issued by the
Company or by another issuer. The Company may reduce the exercise
price of the 1995 Class A Warrants to any amount the Company
deems appropriate.
21
<PAGE>
1995 Class B Warrants. 1995 Class B Warrants to purchase an
---------------------
aggregate of 205,834 shares of Common Stock were issued by the
Company in the November 1995 Private Placement. (See "Recent
Financings".) Each 1995 Class B Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $5.00
per share. The 1995 Class B Warrants are exercisable for 36
months commencing October 8, 1997. The 1995 Class B Warrants are
callable by the Company at any time on 30 days notice to the
holders, but only if the closing price of the Common Stock as
quoted on NASDAQ is not less than $7.00 per share for 20 of 30
consecutive trading days. If the Company calls the 1995 Class B
Warrants, the holders thereof have the right to exercise their
1995 Class B Warrants within such 30 day period. The number and
exercise price of the 1995 Class B Warrants are subject to
adjustment if the Company pays a dividend in shares of Common
Stock (other than Common Stock dividends paid on preferred
stock), subdivides or combines the Common Stock or pays a
dividend on Common Stock with other securities issued by the
Company or by another issuer. The Company may reduce the exercise
price of the 1995 Class B Warrants to any amount the Company
deems appropriate.
1996 Class A Warrants. 1996 Class A Warrants to purchase an
---------------------
aggregate of 165,000 shares of Common Stock were issued by the
Company in the June 1996 Private Placement. (See "Recent
Financings".) Each 1996 Class A Warrant entitles the holder to
purchase one share of Common Stock at an exercise price of $4.00
per share. The 1996 Class A Warrants became exercisable on the
closing date of the offering and expire October 8, 1999. The 1996
Class A Warrants are callable by the Company at any time on 30
days notice to the holders, but only if the closing price of the
Common Stock as quoted on NASDAQ is not less than $5.50 per share
for 20 of 30 consecutive trading days. If the Company calls the
1996 Class A Warrants, the holders thereof have the right to
exercise their 1996 Class A Warrants within such 30 day period.
The number and exercise price of the 1996 Class A Warrants are
subject to adjustment if the Company pays a dividend in shares of
Common Stock (other than Common Stock dividends paid on preferred
stock), subdivides or combines the Common Stock or pays a
dividend on Common Stock with other securities issued by the
Company or by another issuer. The Company may reduce the exercise
price of the 1996 Class A Warrants to any amount the Company
deems appropriate.
Morgan Lang Warrant. On June 16, 1995, the Company issued
-------------------
warrants with an expiration date of June 15, 1998 to Morgan Lang
Limited to purchase an aggregate of 150,000 shares of Common
Stock (the "Morgan Lang Warrants"). Fifty thousand (50,000)
shares of the Morgan Lang Warrants were exercisable at $2.63 per
share, 50,000 shares are exercisable at $3.00 per share and
50,000 shares are exercisable at $3.50 per share. Morgan Lang has
exercised Morgan Lang Warrants to purchase 50,000 shares of
Common Stock for $2.63 per share. The Morgan Lang Warrants were
issued as part of the consideration for a public relations
consulting agreement with will terminate on June 15, 1998.
22
<PAGE>
AMC Consumer Warrant. On June 16, 1995, the Company issued
--------------------
warrants with an expiration date of June 15, 1998 to AMC Consumer
Services ("AMC") to purchase an aggregate of 150,000 shares of
Common Stock (the "AMC Warrants"). Fifty thousand (50,000) shares
of the AMC Warrants were exercisable at $2.63 per share, 50,000
shares are exercisable at $3.00 per share and 50,000 shares are
exercisable at $3.50 per share. AMC has exercised AMC Warrants to
purchase 50,000 shares of Common Stock for $2.63 per share. The
AMC Warrants were issued as part of the consideration for a
public relations consulting agreement which will terminate on
June 15, 1998.
Bridge Water Financial Warrant. On May 11, 1995, the Company
------------------------------
issued warrants with an expiration date of May 10, 2000 to Bridge
Water Financial to purchase 200,000 shares of Common Stock with
an exercise price of $2.75 per share. The warrants were issued as
part of the consideration for a public relations consulting
agreement that was terminated in January 1996.
AKS Warrant. On February 26, 1996, the Company issued
-----------
warrants with an expiration date of December 31, 1998 to AKS to
purchase 225,000 shares of Common Stock with an exercise price of
$5.00 per share (the "AKS Warrants"). The AKS Warrants were
issued as part of the consideration for the purchase price for
certain properties and equipment.
Andrew Kacic Options. See "Certain Relationships and Related
--------------------
Transactions- Executive Officers".
Corporate Communications Options. On September 7, 1995, the
--------------------------------
Company issued options to Corporate Communications Network, Inc.
to purchase 100,000 shares of Common Stock for $4.50 per share.
The options expire on September 6, 1998. The options were issued
as part of the consideration for a public relations consulting
agreement.
World Capital Options. In conjunction with the November 1996
---------------------
Private Placement, the Company issued five-year options to
designees of World Capital Funding, Inc., to purchase 100,000
shares of Common Stock at $4.50 per share. (See "Recent
Financings".)
RECENT FINANCINGS.
In November 1995, the Company completed a private placement
of 41.167 units for $30,000 per unit for which the Company
received net proceeds of approximately $1,128,000 (the "November
1995 Private Placement"). Each unit consisted of 10,000 shares of
Common Stock, 1995 Class A Warrants to purchase 5,000 shares of
Common Stock and 1995 Class B Warrants to purchase 5,000 shares
of Common Stock. The exercise price of the 1995 Class A Warrants
is $3.50 per share and the exercise price of the 1995 Class B
Warrants is $5.00 per share. Both the Class A and Class B
Warrants are exercisable for a period of 36 months commencing
October 8, 1997.
23
<PAGE>
In June 1996, the Company completed a private placement of
100 units for $10,000 per unit for which the Company received net
proceeds of approximately $900,000 (the "June 1996 Private
Placement"). Each unit consisted of 3,300 shares of Common Stock
and 1996 Class A Warrants to purchase 1,650 shares of Common
Stock (the "June Private Placement Securities"). The exercise
price of the 1996 Class A Warrants is $4.00 per share. The 1996
Class A Warrants were immediately exercisable and expire October
8, 1999.
In the fourth quarter of 1996, the Company privately placed
4% Convertible Debentures in the aggregate principal amount of
$6,000,000 with a maturity date one year from date of issuance
(the "November 1996 Private Placement"). The debentures are
convertible at the option of the holders into shares of Common
Stock valued at the lesser of (i) the closing bid price of the
Common Stock as reported on NASDAQ on the date of issuance of the
debenture, or (ii) 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").
Debentures that are not converted prior to their maturity dates
automatically convert on their maturity dates. 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. If a debenture is not converted within five business days
after the Company receives notice of the conversion, the Company
is obligated to pay liquidated damages to the debenture holder
for each $100,000 principal amount of debentures sought to be
converted in the amount of $100 for the first two days, $200 for
the next two days, $300 for the next two days, $400 for the next
two days and $500 for each day thereafter until the conversion
shares are delivered. Prior to the receipt of a conversion
notice, the Company has the right to redeem any debenture for a
cash amount equal to 125% of the principal amount of the
debenture, plus unpaid accrued interest, if the Conversion Price
is below the closing bid price of the Common Stock as reported on
NASDAQ on the date the debenture was issued. The closing bid
prices when the debentures were issued ranged from $3.00 to
$3.50. Upon giving notice of its intention to redeem a debenture,
the debenture holder's right to convert the debenture is
suspended, but the Company must pay an additional one percent per
month in cash on a pro rata basis until the full redemption price
is paid. If the full redemption price is not paid within ten
business days after the redemption notice is given, the debenture
holder has the right to convert the debenture into shares of
Common Stock. A debenture holder may 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 debenture holder,
whether the Company intends to effect a redemption within the
following five business days. If the Company does not respond
during said twenty-four hour period, the Company is precluded
from redeeming that debenture holder's debentures during said
five day period.
In conjunction with the November 1996 Private Placement, the
Company agreed to issue 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
24
<PAGE>
Funding, Inc., or to persons designated by it, to purchase
100,000 shares of Common Stock at $4.50 per share.
PROPOSAL NO. 5
THE TRANSACTION OF SUCH OTHER BUSINESS AS MAY BE BROUGHT
PROPERLY BEFORE THE ANNUAL MEETING OR ANY ADJOURNMENT OR
ADJOURNMENTS THEREOF.
The Board of Directors of the Company currently is unaware
of any proposal to be presented at the Annual Meeting other than
the matters specified in the Notice of Annual Meeting
accompanying this Proxy Statement. Should any other proposal
properly come before the Annual Meeting, the persons named in the
enclosed proxy card will vote on each such proposal in accordance
with their discretion.
EXECUTIVE COMPENSATION
The table below sets forth information concerning the annual
and long-term compensation for services to the Company and its
subsidiary, Southern Gas Company of Delaware, Inc., for the
fiscal years ended December 31, 1996, 1995 and 1994 of those
persons who were, at December 31, 1996 (i) the chief executive
officer and (ii) the other four most highly compensated executive
officers of the Company (the "Named Officers"):
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Principal Other Annual Stock LTIP Compen-
Position (1) Year Salary Bonus Compensation Options Payouts sation
- ------------ ---- ------ ----- ------------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas L. Hawthorne 1996 -- -- $60,000 354,315 -- --
Chairman of the Board 1995 -- -- 54,000 354,315 -- --
1994 -- -- 27,000 182,712 -- --
Leonard K. Nave 1996 $175,761 -- $ 3,281 271,603 -- $8,750(2)
Chairman of the Board 1995 175,500 -- 4,692 246,603 -- 8,750(2)
President & Chief 1994 175,000 -- -- 100,000 -- 8,750(2)
Executive Officer, Southern Gas
Rick G. Avare 1996 $137,684 $50,000(3) $17,400(4) 493,204 -- $6,846(2)
President & Chief 1995 99,546 50,000(5) 18,533(6) 268,204 -- 4,952(2)
Executive Officer 1994 63,978 -- 11,023(7) 50,000 -- 5,000(2)
Jeffrey J. Hausman 1996 $71,546 -- -- 25,000 -- --
Vice President & Chief 1995 -- -- -- -- -- --
Financial Officer 1994 -- -- -- -- -- --
</TABLE>
<PAGE>
(1) The disclosures in this table for Messrs. Hawthorne and
Hausman have been provided for informational purposes only
and in light of their status as significant employees of
the Company. SEC rules require only the disclosure of the
four most highly compensated executive officers whose total
annual salary and bonus exceeds $100,000.
(2) Represents contribution made on behalf of the Named Officer
to a 401(K) plan.
25
<PAGE>
(3) Represents a bonus for the Named Officer which was accrued
as of December 31, 1996, and $30,000 of which was paid in
February, 1997.
(4) Includes car allowance of $11,907.
(5) In December, 1995, the Board of Directors approved a bonus
for the Named Officer which was accrued as of December 31,
1995, and paid in January, 1996.
(6) Includes car allowance of $12,038.
(7) Represents a car allowance.
The table below contains information on grants of stock
options during 1996 to the Named Officers. No stock appreciation
rights were granted during 1996.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price Expiration
Name Granted (#) 1996 ($/share)(4) Date
- ---- ----------- ---- ------------ ----
<S> <C> <C> <C> <C>
Leonard K. Nave 25,000(1) 5.0% $4.50 03/03/2001
Rick G. Avare 225,000(1) 45.1% $4.50 03/03/2001
Jeffrey J. Hausman 75,000(2) 15.0% $4.50 (3)
</TABLE>
(1) These options were granted on March 4, 1996, under the
Company's CSO Plan and are immediately exercisable.
(2) These options were granted on March 4, 1996, under the
Company's CSO Plan, and they vest 25,000 immediately; 25,000
on March 4, 1997; and 25,000 on March 4, 1998.
(3) Five years from date of vesting (i.e., 25,000 expire
3/3/2001, 25,000 expire 3/3/2002, and 25,000 expire
3/3/2003.
Shown below is information with respect to all unexercised
options to purchase the Company's Common Stock granted to the
Named Officers through the end of fiscal year 1996. No options
were exercised by the Named Officers during 1996. No stock
appreciation rights have been granted.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying in-the-Money
Unexercised Options Options
Shares at FY-End at FY-End($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise (#) Realized($) Unexercisable Unexercisable
- ---- ------------ ----------- ------------- -------------
<S> <C> <C> <C> <C>
Douglas L. Hawthorne -- -- 354,315/0 0/0
Leonard K. Nave -- -- 271,603/0 0/0
Rick G. Avare -- -- 493,204/0 0/0
Jeffrey J. Hausman -- -- 25,000/50,000 0/0
</TABLE>
26
<PAGE>
On April 14, 1994, the Board of Directors adopted two formal
stock plans: (i) the CSO Plan, and (ii) the 1994 Employee Stock
Compensation Plan ("Employee Plan"). The CSO Plan is a
compensatory (non-statutory) stock option plan covering 2,000,000
(post-reverse stock split) shares of the Company's common stock,
which is not a qualified plan under Section 422 of the Internal
Revenue Code of 1986. The number of shares authorized for
issuance under the CSO was originally 750,000; however, this
amount was increased to 2,000,000 on June 22, 1995, by approval
of the shareholders.
The Employee Plan is an employee stock compensation plan
covering 650,000 (post-reverse stock split) shares of the
Company's Common Stock. The Employee Plan is not qualified under
section 401(a) of the Internal Revenue Code of 1986. As of May
9, 1997, 321,000 shares have been issued under the Employee Plan.
From March 19, 1994, and at various dates until February 2,
1995, the Company entered into separate Compensatory Stock Option
Agreements with the following individuals: (i) Douglas L.
Hawthorne, Chairman of the Board; (ii) Donald Schellpfeffer,
Director; (iii) Leonard K. Nave, Director of the Company and
President, Chief Executive Officer and a Director of Southern
Gas; and (iv) Rick G. Avare, Director and President and Chief
Executive Officer of the Company and Director, Vice President of
Finance and Chief Operating Officer of Southern Gas. Pursuant to
the terms of these agreements, Messrs. Hawthorne, Schellpfeffer,
Nave and Avare were granted options to purchase 307,712, 150,000,
200,000 and 175,000 shares of Common Stock, respectively, at
exercise prices of between $6.00 and $8.00 per share and
expiring between March 18, 2003, and February 1, 2005. Effective
March 4, 1996, the Board of Directors of the Company approved a
Resolution wherein all options previously granted under the CSO
Plan may be amended, at the election of the optionee, to provide
that the option price be reduced to $4.50 per share and the term
be reduced to 5 years from March 4, 1996.
On November 12, 1996, the Company's Board of Directors
adopted an Incentive Bonus Plan (the "Bonus Plan"). The Bonus
Plan provides that in each Contribution Period, as hereinafter
defined, (the "Bonus Period") the Company will make a Bonus
Contribution to the Bonus Plan. One-half of the Bonus
Contribution will be an amount equal to two and one-half cents
($.025) per million cubic feet equivalent of the net increase in
the Company's proved producing reserves during the Bonus Period;
and the other one-half of the Bonus Contribution will be an
amount equal to two percent (2%) of the Company's net income
before taxes during the Bonus Period as determined in accordance
with generally accepted accounting principles, excluding
extraordinary items such as net gain or loss resulting from the
sale, exchange or other disposition of capital assets (other than
in the ordinary course of business), and, to the extent deducted
in arriving at net income, interest, depreciation, depletion and
amortization expenses. Provided, however, that the Bonus
Contribution made during any Bonus Period cannot exceed the sum
of $500,000.
27
<PAGE>
The initial contribution period begins January 1, 1997, and
calendar year 1997 and each successive calendar year thereafter
constitutes a Contribution Period until such time as the Bonus
Plan is modified or terminated by the Board of Directors.
Within 60 days after the end of each Bonus Period, the
President of the Company is required to recommend the manner in
which the Bonus Contribution is to be distributed among the
Company's Chief Executive Officer, Chief Financial Officer,
Senior Vice Presidents, General Counsel, Corporate Secretary and
other key personnel. All distributions are subject to approval by
the Compensation Committee of the Board of Directors and by the
Board of Directors.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS:
On March 19, 1993, the Company executed a five-year
employment agreement with Mr. Hawthorne, its Chairman of the
Board, providing for such compensation as the Board of Directors
deems appropriate and the grant of an option to purchase 392,541
shares of the Company's common stock (which number was
subsequently adjusted to 32,712 following connection with the
Company's reverse stock splits). Pursuant to the terms of a
separate registration rights agreement, Mr. Hawthorne also was
granted piggy-back registration rights with respect to the
securities underlying the options granted under his employment
agreement; however, on July 15, 1994, the Board of Directors
cancelled the previously issued options and granted replacement
options to Mr. Hawthorne on the same terms as the previous
options but with a new exercise price. These replacement options
were issued under the Company's 1994 CSO. Mr. Hawthorne's
employment agreement does not require that he devote his full
time to the Company.
In August, 1993, SGC executed a five-year employment
agreement with Mr. Nave providing for such compensation as the
Board of Directors deems appropriate and providing for severance
pay to Mr. Nave under certain conditions. The Company assumed
this agreement as a result of the purchase transaction with SGC
in February, 1994.
On November 12, 1996, the Company entered into an Employment
Agreement with Rick G. Avare, the Company's President and Chief
Executive Officer, to serve in such capacity for a period of five
years. If written notice of intent to terminate the agreement is
not given by either party at least six months prior to the third
anniversary of the agreement, after the fifth anniversary of the
agreement it is automatically extended from year to year unless
either party gives written notice of intent to terminate at least
six months prior to the next anniversary date, at which time the
agreement will terminate. As consideration for Mr. Avare's
agreement to serve as President and Chief Executive Officer, the
Company agreed to pay him a salary of $160,000 per year plus
benefits customarily paid to executives holding similar
positions. Mr. Avare's salary is subject to annual review by the
Board of Directors. It can be increased by the Board of
Directors, but it cannot be decreased.
28
<PAGE>
On the same date, the Company entered into a Change of
Control Agreement with Mr. Avare. The agreement is for a term of
five years. If written notice of intent to terminate the
agreement is not given by either party at least six months prior
to the third anniversary of the agreement, after the fifth
anniversary of the agreement it is automatically extended from
year to year unless either party gives written notice of intent
to terminate at least six months prior to the next anniversary
date, at which time the agreement will terminate. Provided,
however, the Company is prohibited from giving notice of intent
to terminate if within one year prior to the termination date the
Company has received notice of or has reason to believe that a
change of control may occur.
The agreement provides that if a change of control occurs
and Mr. Avare's employment subsequently terminates for any
reason, the Company will pay to Mr. Avare an amount of monies
equal to the sum of (i) any monies due him under the remaining
term of his employment contract, (ii) any monies received by him
from the sale of the Company's common stock acquired as the
result of the exercise of stock options, (iii) 2.99 times the
bonus awarded to him for the prior year under the Company's
Incentive Bonus Plan or $300,000, whichever is greater, and (iv)
all legal fees and expenses incurred by him as a result of such
termination and in seeking to obtain or enforce any right under
the agreement. In addition, the Company is obligated to permit
Mr. Avare to participate, for a period of three years after
termination, in the Company's insurance programs at no cost to
Mr. Avare.
Under the agreement, a change of control is deemed to occur
if (i) any person or group of persons, other than a group of
persons consisting of the Company's officers and directors as of
the date of the agreement, acting in concert, acquires beneficial
ownership of the Company's then outstanding capital stock
representing 20% or more of the voting power of all of such
shares, (ii) the Company or any of its subsidiaries sell, assign
or transfer assets for consideration greater than 50% of the book
value of the Company's then consolidated assets as determined
under generally accepted accounting principles, (iii) the Company
or any of its subsidiaries merge, consolidate or otherwise
reorganize and the Company's officers and directors as of the
date of the agreement receive less than 35% of the voting power
of the capital stock of the surviving or resulting entity, (iv)
the Company adopts a plan of liquidation or dissolution, (v) the
commencement of a tender offer for the Company's common stock,
which, if successful, would result in a deemed change of control
as defined in the agreement, (vi) a determination by the Board of
Directors of the Company, in view of then current circumstances
or impending events, that a deemed change of control as defined
in the agreement has occurred or is imminent, (vii) the persons
who were directors of the Company immediately prior to any
merger, consolidation, sale of assets or contested election, or
any combination of the foregoing, cease to constitute a majority
of the Company's Board of Directors, and (viii) the persons who
were directors immediately prior to a tender offer or exchange
offer for the Company's voting stock (other than by the Company
or any of its subsidiaries) cease to constitute a majority of the
Company's Board of Directors within two years after such tender
or exchange offer.
29
<PAGE>
The Company also maintains Indemnity Agreements with Rick G.
Avare, in his capacity as President and Chief Executive Officer;
Ralph A. Currie, its Chief Financial Officer; Karen M. Underwood,
its Corporate Secretary; and Douglas L. Hawthorne, Donald A.
Schellpfeffer, Leonard K. Nave, Rick G. Avare and David Fox, Jr.,
its Board of Directors.
MANAGEMENT CHANGES:
Andrew J. Kacic served as President, Secretary and Treasurer
of the Company from the Company's inception in August, 1992,
until he resigned effective December 31, 1995. He also served as
a director of the Company from August, 1992, until August, 1996.
Jonathan B. Rudney, an investor in Century, was elected President
and Chief Executive Officer of the Company on January 1, 1996;
however, he resigned in May, 1996, to avoid a conflict of
interest in connection with the Company's negotiations for the
purchase of oil and gas properties from Century. Rick G. Avare,
who has served as a director of the Company since September,
1994, and who had served as Executive Vice President and Chief
Operating Officer of the Company since August, 1995, succeeded
Mr. Rudney as President and Chief Executive Officer. Mr. Kacic
did not stand for reelection as a director, and his position on
the Board was filled by the election of David Fox, Jr., at the
Company's Annual Meeting of Shareholders held on August 14, 1996.
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 has resided with his family
in Nashville, Tennessee. Due to the excess time required of Mr.
Hausman's position as a result of the Company's growth and his
family's desire to remain in Nashville, Mr. Hausman resigned as
an officer of the Company effective April 1, 1997. Mr. Hausman
was succeeded by Ralph A. Currie, a certified public accountant
and a former partner of KPMG Peat Marwick, Lexington, Kentucky.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BANKRUPTCY PROCEEDINGS.
Donald Schellpfeffer, a director and beneficial owner of
more than 5% of the Company's Common Stock, Boyt Investment
Company, Donald Szymik, John Dennis, James Perry and Lavonne
Anderson (collectively, the "Sioux Falls Investors") were working
interest owners in the Sand Lake Project, which was owned at such
time in part by the Company's predecessor, Standard Oil.
Standard Oil filed a petition under Chapter 11 of the Code in
April, 1991. Andrew J. Kacic was a director and executive
officer of Standard Oil when the petition was filed.
Collectively, the Sioux Falls Investors invested pre-petition
$771,750 in the Sand Lake Project in late 1989 and received in
exchange therefor a 24.5% working interest in the Project. The
Sioux Falls Investors also provided, post-petition, $737,924
toward expenses incurred in performing an inquiry into the
financial status of Standard Oil as well as toward legal and
accounting expenses, the salary of Mr. Kacic and other fees
necessary to develop and consummate the Plan. The funds advanced
30
<PAGE>
by the Sioux Falls Investors were designated as administrative
expenses in the Plan for which they received Preferred Stock.
Additionally, Jonathan B. Rudney, who was President of the
Company from January 1, 1996, until May 15, 1996, was Chief
Operating Officer of Century when it filed for bankruptcy
protection under Chapter 11 of the Code in August, 1993. In
1996, Leonard K. Nave, a director of ARI, a director and
executive officer of Southern Gas and a beneficial owner of more
than 5% of the Company's Common Stock, filed for reorganization
and protection under Chapter 11 of the Code. This action was
initiated primarily because of the attempted enforcement of
certain guaranties which Mr. Nave signed on behalf of an
unaffiliated corporation.
SOUTHERN GAS, SGC AND SGH.
Mr. Nave, in his capacity as Trustee of a Trust for the
benefit of his family, an executive officer of Southern Gas and
director of ARI, and Mr. Avare, an executive officer of Southern
Gas and an executive officer and director of ARI, are the
principal stockholders, directors and executive officers of SGH.
SGH was the parent company of SGC, a Kentucky corporation; and as
part of the dissolution of SGC, SGH received 993,623 shares of
common stock of the Company. From March 29, 1993, to April 27,
1993, Messrs. Nave and Avare served as directors of the Company
and have served as directors continuously since September, 1994.
During 1994 and 1995, the Company engaged in various transactions
involving SGH and SGC and certain third parties regarding the
acquisition of oil and gas properties and interests therein,
including the acquisition of substantially all of the assets and
certain liabilities of SGC in February, 1994. At the time such
transactions were negotiated and consummated, Messrs. Nave and
Avare were neither directors nor officers or stockholders of the
Company.
In 1995, the Company purchased a pipeline in the Gausdale
Field for $400,000 from SGH. The price was determined based upon
future estimated cash flows from transportation fees discounted
at 10%.
At December 31, 1996, the Company has made advances to SGH
totaling $163,728 which the principals of SGH intend to secure
with Shares of Company Stock as it becomes available.
SEQUA TRANSACTIONS.
At December 31, 1994, Sequa Financial Corporation ("Sequa")
held 6.57% (202,800 shares) of common stock of the Company.
Pursuant to a Settlement Agreement dated February 28, 1994, among
Sequa, SGC, SGH, Wright Resources, Inc., Natural Resources
Services, Inc. and Leonard K. Nave (the "Settlement Agreement"),
Sequa agreed to the settlement of SGC's indebtedness of
approximately $10,500,000 (including accrued interest) in
consideration for the payment in cash of $5,750,000 and 811,200
shares (pre-reverse split) of the Company's restricted common
stock (which were issued to SGC pursuant to an Asset Purchase
Agreement therewith and subsequently transferred by SGC to
Sequa).
31
<PAGE>
In connection with the transfer to Sequa of the 811,200
shares of common stock, the Company, SGC, SGH and Sequa entered
into a Stockholders Agreement dated February 28, 1994 (the
"Stockholders Agreement"). Pursuant to the Stockholders
Agreement, Sequa granted to the Company the right and option (the
"Call Option") to purchase from Sequa 311,200 restricted shares
of common stock of the Company (the "Call Shares") for an
aggregate purchase price of $750,000 plus earnings accrued
thereon from the closing to the date of payment at an interest
rate of 15% per annum. This Call Option expired by its terms on
December 31, 1994.
The Shareholders Agreement also granted unlimited piggy-back
registration rights to Sequa exercisable in connection with the
Company's registration of any of its stock or other securities
under the Securities Act of 1933. The shares were included in an
S-3 Registration Statement filed by the Company which became
effective October 8, 1996. Sequa has since liquidated its share
position.
OFFICE LEASE.
In connection with the acquisition of the assets of SGC, The
Company has assumed the obligations of a certain lease dated June
1, 1986, between Nave Properties, a sole proprietorship, and SGC
relating to certain office space located in Versailles, Kentucky.
This office serves as the principal headquarters of Southern Gas
(formerly the principal headquarters of SGC); and effective
January 31, 1996, the Company's Scottsdale, Arizona, office was
closed and operations were consolidated in the Kentucky office.
Nave Properties, which is owned by Leonard K. Nave, is an
affiliate of the Company. The lease provides for monthly lease
payments of $3,100 ($37,200 annually). The lease expires on
February 28, 1998.
PRIVATE PLACEMENT.
In October and November of 1994, the Company issued and sold
to GFL Ultra Fund Limited ("GFL") for $6,500,000, an aggregate of
650,000 shares of 6% Junior Cumulative Convertible Preferred
Stock, Series B (the "Series B Preferred Stock"), and warrants to
purchase 156,000 shares of common stock at $8.75 per share, such
warrants having expired at the end of 1995. In connection with
this transaction, GFL entered into a Standstill and Registration
Rights Agreement (the "Standstill Agreement") with the Company.
The Standstill Agreement provided that GFL would vote all of its
voting securities of the Company in accordance with the
recommendation of the Company. Further, under the terms of the
Standstill Agreement, GFL would not, without the prior written
approval of the Board of Directors of the Company: (a) acquire
beneficial ownership of additional voting securities of the
Company; (b) transfer any voting securities of the Company except
(i) pursuant to an exemption from the registration requirements
of the Securities Act of 1933 (the "Act"); (ii) through a public
offering designed to achieve a widespread distribution; or (iii)
in connection with a Business Combination (as defined in the
32
<PAGE>
Standstill Agreement); (c) do or attempt to do any of the
following matters: (i) submit any proposal with respect to a
Business Combination involving the Company or any affiliate
thereof; (ii) join or in any way participate in any "group"
(within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934) with respect to any voting securities of
the Company; or (iii) solicit proxies from the stockholders of
the Company; or (d) deposit any shares held by it in a voting
trust or subject any of such shares to any arrangement or
agreement with respect to the voting thereof.
On May 5, 1995, the Company entered into a stock option
agreement, as amended, with the holders of the Series B Preferred
Stock. Under the agreement, the holders granted the Company or
its nominee the right to acquire the then outstanding 425,000
shares of the Series B Preferred Stock. The agreement was
amended to allow the holders to convert 47,326 shares of the
Series B Preferred Stock to 236,000 shares of common stock. Also
pursuant to the original agreement, 36,638 shares of the Series B
Preferred Stock were acquired jointly by the directors of the
Company; and these shares were subsequently converted into
146,004 shares of common stock. 36,638 shares of the Series B
Preferred Stock were also acquired by Prima, an investment group
in which Rick G. Avare owns a 20% interest. These shares were
also subsequently converted into 146,004 shares of common stock.
Of the remaining 304,398 optioned Series B Preferred Stock
shares, the holder converted 50,000 of such optioned shares into
204,842 shares of common stock in accordance with the conversion
factor. The remaining 254,398 optioned shares could have been
purchased by the Company or its nominee at $13.48803 per share;
however, the option terminated on September 19, 1995, without
exercise.
On January 2, 1996, the Company entered into a stock
purchase agreement, as amended, with the holders of the
outstanding Series B Preferred Stock. Under the agreement, the
Company or its assignee has the obligation to purchase the
remaining outstanding Series B Preferred Stock at $13.70 per
share. Payment terms under the agreement are as follows:
<TABLE>
DUE NUMBER
DATE OF SHARES AMOUNT
---- --------- ------
<S> <C> <C>
January 02, 1996 18,248 $ 250,000
January 15, 1996 18,248 250,000
February 10, 1996 3,650 50,000
February 29, 1996 54,409 745,400
March 31, 1996 47,445 650,000
</TABLE>
The share commitments through January 15, 1996, were
purchased by individuals who are not associated or affiliated
with the Company or any of the Company's directors or executive
officers, and the February 10 and 29, 1996, share commitments
were purchased by the Company, primarily with funds obtained
under its credit facility with Den norske. Upon purchase, the
Board of Directors retired 58,059 shares of Series B Preferred
Stock.
33
<PAGE>
The share commitment due March 31, 1996, was amended to
allow the holders of the Series B Preferred Stock to convert
25,679 shares of the Series B Preferred Stock into 100,000
shares of common stock. The remaining 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.
LOAN TRANSACTIONS.
In March, 1995, in order to meet a corporate commitment, the
Company borrowed monies totalling $500,000 from Douglas L.
Hawthorne and Rick G. Avare, who are officers/directors of the
Company. The funds bore interest at the rate of 10% per annum
and were due in full in July, 1996. The note was secured by gas
properties, and the individuals had the option to convert their
note to a working interest position in wells to be drilled
offshore Louisiana. In July, 1995, the related parties converted
their note to a 13.75% working interest in two wells. Pursuant
to an agreement between the parties, the Company had the right to
repurchase the working interest position on or before September
30, 1995. The Company exercised the right, as amended, to
repurchase the working interest position for $750,000 plus a
3.875% overriding royalty interest prior to September 30, 1995.
In 1996, the Company purchased Mr. Avare's overriding royalty
interest in the Ship Shoal 150 B-3 well for $125,000. The
Company is considering repurchasing the remaining overriding
royalty interests of Messrs. Hawthorne and Avare in the Ship
Shoal 150 wells based upon the fair market value of the wells
utilizing the 1996 year-end reserve report. However, no action
has been taken by the Board of Directors at this time.
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 an existing note from Century
Offshore Management Corporation ("Century") to the Company in the
amount of $6,500,000 (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, 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
December 31, 1996, of $240,000 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 in monthly installments of $12,352,
beginning April 1, 1997, with the final payment due March 1,
1999.
In April, 1996, the Company entered into agreements with two
individuals, one of whom is Douglas L. Hawthorne, 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 Century Note which
34
<PAGE>
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 canceled as part of the consideration paid
by the Company to Century for the purchase of certain oil and gas
properties. 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. The Company has paid the non-affiliated
individual in full. Pursuant to the Termination of Participation
Agreement entered into between the Company and Mr. Hawthorne,
payment terms of the balance include $50,000 due and payable by
March 10, 1997, and the remaining balance due in monthly
installments of $10,293 beginning April 1, 1997, with the final
payment due March 1, 1999.
PRIMA TRANSACTIONS.
Under the letter agreement dated October 17, 1994, the
Company had the right to acquire a 10% equity interest in Settle
for $4,000,000 (the "Settle Securities"). Due to the fact that
the Company was not in a position to acquire this equity
interest, the agreement was subsequently amended to permit a
third party to acquire the Settle Securities. The funds used to
effect the foregoing acquisition were borrowed by the third party
from Prima, a limited liability company in which Rick G. Avare
owns a 20% interest. The third party is also a member of Prima
and the principal stockholder of Southern Resources, Inc. Prima,
in turn, borrowed the funds it used to provide the foregoing loan
from a bank in Lexington, Kentucky. The Company has not
guaranteed nor is it obligated on the Prima bank loan, and the
bank will look solely to Prima and its members for payments. In
connection with this transaction, the Company entered into a Put
Agreement (the "Put Agreement") dated March 15, 1995, with Prima
which provided that in the event Prima obtained title to the
Settle Securities, Prima had the right to require the Company to
purchase the Settle Securities for $4,000,000, payable in cash
and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a new agreement, as amended, providing for the Company's
ability to call the Settle Securities from the third party member
of Prima for $4,000,000 has been substituted therefor (the "Call
Agreement"). The Call Agreement also provides for non-refundable
monthly installments of $31,250 (as originally required under the
Put Agreement) until such time as a total of $1,000,000 has been
advanced under the Call Agreement (including payments previously
made under the Put Agreement). In the event the Company elects
to call the Settle Securities, the advance payments shall be
credited toward the purchase price. Additionally, a $500,000
certificate of deposit held as collateral for Prima's loan was
liquidated by the Company and the funds were advanced to Prima
under the potential Call Agreement. Prima used the $500,000 to
purchase shares of Series B Preferred Stock from a third party,
which Preferred Stock it subsequently converted to common stock.
In the event the Company exercises the Call
35
<PAGE>
option, the $500,000 will be credited towards the purchase. The
Company's right to call the Settle Securities begins January 15,
1997, and ends December 31, 1997.
EXECUTIVE OFFICERS.
In September, 1995, the Company bought out a production
platform use agreement from Century Oil, which is owned by
Jonathan Rudney. Mr. Rudney was President of the Company from
January 1, 1996, until May 15, 1996.
Mr. Rudney is also a 25% owner of Century, with whom the
Company is jointly developing certain offshore and onshore
properties in the Gulf Coast region (see Item 2, Description of
Property, Gulf Coast Properties in General, of this Report on
Form 10-KSB, regarding the Joint Operating Agreement between the
Company and Century).
The Company has paid or accrued fees of approximately
$68,000 and $44,000 during 1995 and 1994, respectively, to
Advisory Services, Inc., for consulting and administrative
services. Advisory Services is owned by Andrew J. Kacic who is a
former officer and director of the Company.
Effective December 31, 1995, the Company entered into a
severance agreement with Andrew J. Kacic, its former President,
Chief Executive Officer and founder, who resigned effective
December 31, 1995. Under the agreement, Mr. Kacic was paid
$85,000 and will receive the sum of $10,000 per month through
March 31, 1998. In addition, the executive surrendered 515,590
CSO common stock options which had exercise prices of between
$6.00 and $8.00 per share and expired between March 18, 2003, and
February 1, 2005. In return, Mr. Kacic received 643,987 common
stock options under a Severance Plan, at an exercise price of
$4.00 per share and which expire on November 29, 2000. He also
retained 46,203 CSO common stock options immediately exercisable,
previously issued to him at $3.50 per share and which expire on
October 11, 2002. The Company also agreed to provide for payment
of an office lease through October, 1996, and assigned a one
percent (1%) gross overriding royalty interest in certain oil and
gas properties. As a result of the agreement, the Company
recognized a charge against income of $371,346 and accrued a
severance liability at December 31, 1995, of $286,346 based on an
eight percent (8%) discount factor. As of December 31, 1996,
this amount had been reduced to $142,293.
STOCKHOLDER PROPOSALS
Any proposal that a stockholder of the Company intends to
present at the 1998 Annual Meeting of Stockholders must be
received by the Secretary at the Company's principal executive
offices by March 2, 1998 in order to be considered by the Board
of Directors for inclusion in the Board of Directors' proxy
solicitation materials for that meeting.
36
<PAGE>
ANNUAL REPORT
The Company's 1996 Annual Report to Stockholders accompanies
this Proxy Statement. All financial statements and other
financial information and managements discussion and analysis of
the financial condition and results of operations included in the
Annual Report are incorporated herein by reference. Otherwise,
the Annual Report does not form any part of the material for the
solicitation of proxies.
<PAGE>
PROXY SOLICITED ON BEHALF
OF THE BOARD OF DIRECTORS OF
AMERICAN RESOURCES OF DELAWARE, INC.
The undersigned hereby constitutes and appoints Douglas L.
Hawthorne and Rick G. Avare, and each of them (acting together if
both are present and voting, or if only one of them is present
and voting, then by one), with full power of substitution in each
of them, the attorneys and proxies of the undersigned to vote as
designated below at the Annual Meeting of Stockholders of
American Resources of Delaware, Inc. (the "Company") to be held
on June 3, 1997, or at any adjournment or adjournments thereof
(the "Meeting"), all shares which the undesigned is entitled to
vote at the Meeting.
PROPOSAL NO. 1: Amendment to the Company's Restated Certificate
of Incorporation to add Article Eleven to classify the Board of
Directors into three classes of directors with staggered three-
year terms.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL NO. 2: Election of Directors:
Nominees: Rick G. Avare, Leonard K. Nave, Douglas L. Hawthorne,
David J. Fox, Jr. and William D. Bishop.
/ / VOTE FOR nominees listed above, except vote withheld from
following nominees (if any):
------------------------------------
- ----------------------------------------------------------------
/ / VOTE WITHHELD from all nominees.
PROPOSAL NO. 3: Ratification of the selection of KPMG Peat
Marwick LLP as independent auditors of the Company for 1997.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL NO. 4: Amendment to Article Four of the Company's
Restated Certificate of Incorporation to increase the number of
authorized shares of common stock from 20,000,000 shares to
50,000,000 shares.
/ / FOR / / AGAINST / / ABSTAIN
PROPOSAL NO. 5: In their discretion, upon such other matters as
may be brought properly before the Meeting.
THIS PROXY, IF IN PROPER FORM AND NOT REVOKED, WILL BE VOTED
AS SPECIFIED BY THE STOCKHOLDER. IF NO CHOICE IS SPECIFIED, THIS
PROXY WILL BE VOTED FOR THE APPROVAL OF PROPOSALS NO. 1, 3 AND 4
AND FOR THE ELECTION OF THE NOMINEES NAMED IN PROPOSAL NO. 2.
THIS PROXY IS REVOCABLE AT ANY TIME BEFORE IT IS VOTED AS
INDICATED IN THE ACCOMPANYING PROXY STATEMENT. THE ACCOMPANYING
PROXY STATEMENT DESCRIBES THE DISCRETIONARY AUTHORITY OF THE
PROXIES TO VOTE FOR A SUBSTITUTE NOMINEE IF ANY OF THE NOMINEES
NAMED ABOVE FAILS TO STAND FOR ELECTION AT THE MEETING.
PLEASE VOTE, DATE, SIGN AND PROMPTLY RETURN THIS PROXY.
PLEASE SIGN YOUR NAME LEGIBLY EXACTLY AS IT APPEARS HEREON. EACH
JOINT OWNER SHOULD SIGN. IF EXECUTED BY A CORPORATION, PLEASE
SIGN FULL CORPORATE NAME BY A DULY AUTHORIZE OFFICER. ATTORNEYS,
EXECUTORS, ADMINISTRATORS, TRUSTEES, GUARDIANS, ETC., SHOULD GIVE
FULL TITLE AS SUCH.
DATE:
---------------------------------
---------------------------------
---------------------------------
---------------------------------
<PAGE>
ATTACHED FOR INFORMATIONAL PURPOSES ONLY IS A COPY OF THE
FOLLOWING ITEMS WHICH ARE INCLUDED IN THE 1996 ANNUAL REPORT TO
STOCKHOLDERS OF AMERICAN RESOURCES OF DELAWARE, INC. AND WHICH
ARE INCORPORATED BY REFERENCE INTO THE PROXY STATEMENT:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
AMERICAN RESOURCES OF DELAWARE, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1996 AND 1995
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in an
understanding of the Company's financial position and results of
operations for each year of the two-year period ended December
31, 1996. The Company's financial statements and the notes
thereto which follow contain detailed information that should be
referred to in conjunction with the following discussion.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
Statements, other than historical facts, contained in this
Annual Report on Form 10-KSB, 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 and foreign countries in
which the Company operates, if any; the effect of hedging
activities; and conditions in the capital markets. Other risk
factors are discussed elsewhere in this Form 10-KSB, including
those risk factors described under the headings "General,"
"Sales" and "Environmental Matters."
GENERAL:
The Company was formed in August, 1992, to acquire the
assets and assume certain liabilities of Standard Oil and
Exploration of Delaware, Inc. ("Standard Oil"), an oil and gas
company operating under Chapter 11 bankruptcy protection at that
time. Since the consummation of the Standard Oil transaction in
April, 1993, the Company has taken a number of steps to become a
fully integrated oil and gas company and enhance its financial
position on a prospective basis, including the following:
- -- By February, 1994, the Company had completed a number of
transactions involving the acquisition of oil and gas
properties and interests in such properties. Notable among
these transactions was the Company's acquisition of the
assets of Southern Gas Company, Inc. ("SGC"), an independent
Kentucky-based natural gas production, pipeline and gas
marketing company. The addition of the SGC assets together
with its experienced management team has been a significant
factor in the Company's success and growth to date.
<PAGE>
- -- During 1995, the Company participated with Century Offshore
Management Corporation ("Century") in the successful
drilling and completion of two wells (the B-3 and B-4 Wells)
on the Federal lease block known as Ship Shoal Block 150
(Ship Shoal 150) in the Gulf Coast region. The wells are
located offshore Louisiana and were flowing at combined
rates of 1,550 barrels of oil and 700 thousand cubic feet
(mcf) of gas per day as of December 29, 1996. The Company
owns a 50% working interest (33.4% net revenue interest) in
the B-3 well and a 50% working interest (30.5% net revenue
interest) in the B-4 well.
- -- 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 December 31, 1996, the borrowing base
under the revolving credit facility was $25,083,000.
Additional borrowings under the credit facility are
dependent on a redetermination of the borrowing base, which
is primarily dependent on the value of the mortgaged
properties as determined under Den norske's internal lending
procedures. Reductions on the credit facility are also
dependent on the borrowing base. At December 31, 1996,
monthly principal reductions are $500,000. The borrowing
base will be redetermined semi-annually on each October 1
and April 1 prior to February 1, 2002.
The proceeds were used primarily to pay the outstanding
balances under a previous credit facility with Bank One
Texas, N.A., and fund development activities in the
Louisiana Gulf Coast area.
In February, 1997, the credit agreement with 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.
- -- In November, 1995, the Company completed a private placement
of its common stock which raised $1,235,000 ($1,128,236 net
of offering costs). Under the private placement, the
Company sold to accredited investors an aggregate of 41.17
units, each consisting of 10,000 shares of the Company's
common stock, par value $.00001 per share, and one Class A
Warrant and one Class B Warrant.
- -- In December, 1995, the Board of Directors reviewed all
existing consulting agreements in order to evaluate the cost
effectiveness of the services being provided to the Company.
As a result, contracts funded with common stock with
Corporate Communications Network, Inc. ("CCN"), and Bridge
Water Financial ("BWF"), unrelated third parties, were
terminated, resulting in a one-time, non-cash charge against
income of $1,116,913, which represented the unamortized
balance of the contracts.
- -- In connection with an asset purchase transaction in 1994,
the Company acquired an ownership interest in National
American Life Insurance Company of Pennsylvania, Inc.
("NALICO"), a privately held insurance company. The non-
operating investment was recorded at an acquired cost basis
<PAGE>
of $869,000. Based upon information received relative to
the financial deterioration of NALICO, which included the
fact that NALICO was operating under rehabilitation
proceedings, Management obtained an independent appraisal of
the Company's investment value in NALICO as of December 31,
1995. As a result of the appraisal, the Company reduced the
investment value to zero from its acquired cost basis and
recognized the reduction as a charge against income in 1995.
- -- On February 26, 1996, the Company acquired 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
$1,000,000 to AKS as partial consideration for the
acquisition which was included in 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 would have the right
to earn 50% of the remaining undeveloped acreage. However,
the joint development agreement was terminated in November,
1996, when the Company decided to focus its development
efforts and capital into the Gulf Coast region.
The foregoing transaction was effected pursuant to an Asset
Purchase Agreement entered into by and between the Company
and AKS dated December 27, 1995.
- -- On May 22, 1996, the Company 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.
- -- 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 Class A Warrants are immediately exercisable and
expire October 8, 1999.
In 1996, the Company filed a Registration Statement,
effective in October, 1996, which registered the shares of
common stock sold in the private placement and the shares of
<PAGE>
common stock for which the Class A Warrants may be
exercised.
- -- On July 3, 1996, the Company acquired proved developed and
undeveloped oil and gas properties, equipment and pipelines
from Century located on the Federal lease block known as
South Timbalier Block 148 (South Timbalier 148), 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 provided for payment at the Company's option of cash or
the issuance of restricted common stock of the Company at
$3.00 per share), extinguished an existing note from Century
to the Company in the amount of $6,500,000 (Century Note)
and assumed existing liens against the assets in the
approximate amount of $1,051,000. The parties subsequently
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 December, 1996,
the Company's private placement (see Note 6 to the Notes to
Financial Statements included in Item 7 of this Report on
Form 10-KSB) was completed and the Company had completed the
funding of the installment payments. The foregoing
transaction was effected pursuant to an Asset Purchase
Agreement entered into by and between the Company, Southern
Gas and Century, dated July 3, 1996.
Also on July 3, 1996, the Company, Southern Gas and Century
entered into an Asset Purchase Agreement whereby Southern
Gas 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 Gas, 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 November, 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
maturity date one year from date of issuance. The
securities are 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 are not
converted prior to their maturity dates automatically
convert on their maturity dates. Prior to the receipt of a
conversion notice, the Company has 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 is below the closing bid price of the
common stock as reported on NASDAQ on the date the security
was issued. The Company agreed to register the shares of
common stock into which the securities are convertible
within 120 days after demand is made by a security holder.
The shares of common stock into which the securities are
convertible have been registered under an S-3 registration
statement which was effective on January 23, 1997.
<PAGE>
- -- On November 27, 1996, the Company entered into a five year
corporate relations agreement with Corporate Relations
Group, Inc. (CRG), Winter Park, Florida, to assist the
Company with its shareholder relations. As consideration
for the agreement, the Company paid CRG $550,000 cash and
granted CRG a one year option to purchase 100,000 shares of
common stock for $3.00 per share, a two year option to
purchase 100,000 shares of common stock for $3.60 per share,
a three year option to purchase 100,000 shares of common
stock for $4.20 per share, a five year option to purchase
100,000 shares of common stock for $4.80 per share, and a
five year option to purchase 100,000 shares of common stock
for $6.00 per share. The options have a weighted average
fair value of approximately $1.27 per share.
The Company believes its relationship with Settle Oil and
Gas Company ("Settle") and Century and the Company's
corresponding expansion into the Gulf Coast region will play a
significant role in the Company's future growth. On July 21,
1995, under a plan of reorganization approved by the Bankruptcy
Court, Settle merged with Century. Any and all references to
Settle subsequent to July 21, 1995, refer to the merged entity.
As of March 17, 1997, this relationship has resulted in the
following transactions:
- -- The Company provided $6,500,000 in financing to fund
Settle's working interest participation in the drilling of
oil and gas wells located on South Timbalier 148 in the Gulf
of Mexico, offshore Louisiana. The South Timbalier 148
field comprises the under-developed northwest flank of the
highly productive South Timbalier 176 salt dome. Cumulative
production to date on this salt dome is approximately 1.3
trillion cubic feet of gas and oil equivalents. This loan
was secured by a mortgage on Settle's interest in several
producing properties and bore interest at 22% per annum. On
July 3, 1996, the Company extinguished the loan as partial
consideration for the acquisition of the properties securing
the loan.
- -- The Company acquired for $750,000 a 26.25% working interest
from Settle in Ship Shoal 150 in the Gulf of Mexico, also
off-shore Louisiana. The interest purchased is located on
the under-developed west flank of a highly productive salt
dome which has produced over 65 million barrels of oil and
65 bcf of gas to date. Two successful wells were drilled in
1995 on this property from an existing production platform.
The Company acquired an additional 23.75% working interest
in Ship Shoal 150 by funding 100% of the costs of drilling
the first well thereon.
- -- The Company invested in the formation of a new limited
liability company known as Crescent Turnkey & Engineering,
L.L.C. ("Crescent"), a Delaware limited liability company
formed for the purpose of performing contract drilling
services for the Company and third parties. Crescent was
capitalized at $250,000, with the Company providing $110,000
for a 44% ownership interest. Century and certain of
Century's officers and directors are also members of
Crescent, with a combined ownership interest of 45%; and
Century has also contributed additional services and
expertise from certain of its existing personnel. During
1995, Crescent drilled the B-3 and B-4 Wells on Ship Shoal
150 for the Company.
<PAGE>
- -- The Company and Century have agreed to jointly drill and
develop, subject to available financing, prospects owned by
Century in the Gulf Coast region, both on-shore and off-
shore. Recently acquired 3-D seismic surveys on certain of
these prospects indicate significant potential reserves. At
this time, the Company has invested an additional $4.5
million towards the joint development of unproved properties
in the Gulf Coast region with Century. These funds have
been expended for lease acquisition costs on certain onshore
prospects.
- -- In 1995, the Company sold various mechanics' and
materialmen's liens and an unsecured claim of a major
creditor of Century for approximately $4,200,000. The
Company had acquired $10,900,000 of claims at a combined
cost of approximately $2,100,000. The sale resulted in non-
recurring gains of approximately $2,100,000, which were used
to fund various commitments with Century and provide
development funds.
- -- In September, 1995, the Company bought out a production
platform use agreement from Century Oil Company ("Century
Oil") in the offshore Louisiana waters, Ship Shoal 150, for
$1,800,000 in connection with their joint development of the
lease block. Prior to its purchase of the platform, the
Company was paying approximately $37,500 per month for use
of the platform for one well which, with the addition of a
second well, would have amounted to a total of $75,000 per
month. The purchase was funded with proceeds from the Den
norske credit facility.
- -- Under the October 17, 1994, letter agreement with Settle,
the Company had the right to acquire a 10% equity interest
in Settle for $4,000,000 (the "Settle Securities"). Due to
the fact that the Company was not in a position to acquire
this equity interest, the agreement was subsequently amended
to permit a third party to acquire the Settle Securities.
The funds used to effect the foregoing acquisition were
borrowed by the third party from Prima Capital, LLC
("Prima"), a limited liability company of which an
officer/director of the Company is a member. The third
party is also a member of Prima and the principal
stockholder of Southern Resources, Inc. Prima, in turn,
borrowed the funds it used to provide the foregoing loan
from a bank in Lexington, Kentucky. The Company has not
guaranteed nor is it obligated on the Prima bank loan, and
the bank will look solely to Prima and its members for
payments. In connection with this transaction, the Company
entered into a Put Agreement (the "Put Agreement") dated
March 15, 1995, with Prima which provided that in the event
Prima obtained title to the Settle Securities, Prima had the
right to require the Company to purchase the Settle
Securities for $4,000,000, payable in cash and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a new agreement, as amended, providing for the Company's
ability to call the Settle Securities from the third party
member of Prima for $4,000,000 has been substituted therefor
(the "Call Agreement"). The Call Agreement also provides
for non-refundable monthly installments of $31,250 (as
originally required under the Put Agreement) until such time
as a total of $1,000,000 has been advanced under the Call
Agreement (including payments previously made under the Put
Agreement). In the event the Company elects to call the
Settle Securities, the advance payments shall be credited
<PAGE>
toward the purchase price. Additionally, a $500,000
Certificate of Deposit held as collateral for Prima's loan
was liquidated by the Company, and the funds were advanced
to Prima under the potential Call Agreement. Prima used the
$500,000 to purchase shares of Series B Preferred Stock
which it subsequently converted to common stock. In the
event the Company exercises the Call option, the $500,000
will be credited towards the purchase. The Company's right
to call the Settle Securities begins January 15, 1997, and
ends December 31, 1997.
While the Company believes its activities to date have
formed the foundation for continued growth and profitability, the
Company notes that its revenue, profitability and future rate of
growth are substantially dependent upon prevailing prices for
natural gas, oil and condensate which are dependent upon numerous
factors beyond the Company's control such as economic, political
and regulatory developments and competition from other sources of
energy. The energy markets have historically been very volatile,
and there can be no assurance that oil and gas prices will not be
subject to wide fluctuations in the future. A substantial or
extended decline in oil and gas prices could have a material
adverse effect on the Company's financial position, results of
operations, quantities of oil and gas reserves that may be
economically produced and access to capital.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995:
Total revenues increased 92% to $33,039,173 in 1996,
compared to $17,214,299 in 1995. Corresponding operating
expenses increased 91% to $27,503,339 in 1996, compared to
$14,421,916 in 1995. Operating income in 1996 was $3,211,826,
compared to a loss of ($1,060,265) in 1995. Components of the
changes are as follows:
- -- MARKETING: The Company's marketing volumes have increased to
---------
6.6 bcf in 1996, as compared to 4.7 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. Strong gas prices during the first and fourth
quarters of 1996 helped offset lower prices in the second
and third quarters. However, strong price competition
resulted in a 2.0% profit on marketing revenues in 1996, as
compared to 5.3% in 1995.
- -- PRODUCTION: The Company's production revenues increased
----------
167% in 1996, to $8,540,569 from $3,198,987 in 1995.
Production on a bcf equivalent basis has increased to 3.3
bcf in 1996 as compared to 1.4 bcf in 1995. The increase in
production volumes results primarily from an increase in the
Company's Gulf Coast region production. In 1996, production
from the Gulf Coast region was approximately 1.8 bcf
equivalent as compared to approximately .7 bcf in 1995.
Production from the Ship Shoal 150 B-3 and B-4 wells, which
were drilled and completed in mid and late 1995,
respectively, has increased to approximately 1.0 bcf
equivalent for 1996 as compared to approximately.7 bcf for
1995. In July, 1996, the Company also acquired 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. Since the acquisition, the
Company has completed the five (5) uncompleted wells and has
<PAGE>
drilled a successful developmental well 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 1.2 bcf as
compared to approximately .6 bcf 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 1996 versus 1995. The average price per
mcf equivalent on oil and gas production in 1996 was $2.82
versus $2.33 in 1995. Contributing to the price increase in
1996 was Gulf Coast production where the Company realized an
average of $20.11 per barrel of oil and $2.96 per mcf of
gas.
Production expenses also increased to $1,402,389 in 1996,
from $765,285 in 1995. The increase results from production
costs associated with the Ship Shoal 150 and South Timbalier
148 properties which total approximately $428,000 for 1996
versus approximately $230,000 for 1995, and additional
operating costs relating to the property acquired from AKS.
The average production cost per mcf equivalent in 1996 was
$.46 versus $.56 for the comparable period in 1995. This
reflects lower operating costs per mcf equivalent in the
Gulf Coast region of $.35 in 1996 versus $.41 in 1995. The
reduction in costs in the Gulf Coast were slightly offset by
increased operating costs on the Company's Kentucky
properties ($.59 per mcf in 1996 versus $.41 per mcf in
1995).
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $3,309,159 in 1996
from $1,577,770 in 1995. The increase results primarily
from approximately $1,667,000 of depreciation, depletion and
amortization on the Gulf Coast properties.
The Company expended approximately $21,700,000 on oil and
gas proved property acquisition and development costs and
$3,100,000 on property and equipment costs during 1996. The
Company's finding cost of proved reserves for 1996 versus
1995 on an mcf equivalent basis was $.89 versus $.63,
respectively. The Company expects depreciation, depletion
and amortization to continue to increase in 1997 with its
continued development in the Gulf Coast area.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A decreased 2% to
--------------------------
$2,324,008 in 1996, as compared to $2,364,389 in 1995. As a
percentage of total revenue less related marketing expenses,
G&A decreased to 22% in 1996 versus 44% in 1995.
During 1996, the Company closed its Scottsdale, Arizona
office and consolidated the principal offices to Versailles,
Kentucky. In late 1996, the Company established an office
in New Orleans, Louisiana, to monitor and expand the Gulf
Coast operations.
Primary components of G&A in 1996 include payroll
($898,753), professional fees ($223,224), consulting fees
($98,000), insurance ($234,254) and travel ($136,236). The
same components of G&A for 1995 were, payroll ($892,914),
<PAGE>
professional fees ($271,636), consulting fees ($326,340),
insurance ($163,264) and travel ($100,453). Consulting fees
have decreased from 1995 due to less outsourcing of projects
and increased internal control of projects. Insurance costs
have increased primarily due to the Company's involvement in
offshore Louisiana properties. The Company carries
liability, property and business interruption coverage on
the offshore properties.
- -- OTHER INCOME (EXPENSE): Other income (expense) consisted
----------------------
of the following:
* INTEREST INCOME: Interest income resulted primarily
---------------
from interest earned on notes receivable issued to
Century. The notes, which were extinguished as part of
the consideration in the acquisition of the South
Timbalier 148 properties in July, 1996, earned interest
at 22%. Approximately $720,000 of the interest earned
in 1996 related to these notes.
* INTEREST EXPENSE: Interest expense increased to
----------------
$2,440,453 in 1996 as compared to $1,151,950 in 1995.
The increase was attributable to debt service payments
made on additional borrowings under the Company's
credit facility agreement. The Company had weighted
average borrowings under the facility of approximately
$20.8 million as compared to approximately $10 million
in 1995. The Company's outstanding indebtedness under
the facility was $25.1 million versus $17.5 million at
December 31, 1996 and 1995, respectively.
* SETTLEMENT INCOME: In 1995, the Company recognized a
-----------------
gain of $2,189,616 on the sale of various mechanics'
and materialmen's liens and unsecured claims relating
to the Century reorganization (see Note 8 to the Notes
to Financial Statements included in Item 7 of this
Report on Form 10-KSB).
* IMPAIRMENT OF STOCK INVESTMENT: In December, 1995, the
------------------------------
Company impaired the acquired cost of stock held in
NALICO to zero. The stock was acquired in connection
with a purchase transaction in 1994. Due to a
deterioration of NALICO's financial position,
management obtained an independent appraisal of the
Company's investment value in NALICO as of December 31,
1995. As a result of the appraisal, an impairment of
the non-operating asset resulted in a charge against
income of $869,000.
* DEFERRED COMPENSATION AND EMPLOYEE SEVERANCE EXPENSE:
----------------------------------------------------
The expense recognized in 1995 resulted from a
$1,116,913 charge against income pertaining to the
termination of two consulting agreements funded with
the Company's common stock. The consulting agreements
were with CCN and BWF and were for seven and two years,
respectively. Upon review of the contracts, Management
decided it was in the long-term best interest of the
Company to terminate the agreements. The charge
against income represented the unamortized balance of
the contracts.
Also, effective December 31, 1995, the Company entered into
a severance agreement with former President, Chief Executive
Officer and founder, who resigned effective as of that date.
<PAGE>
Under the agreement, the executive was paid $85,000 and will
receive the sum of $10,000 per month through March 31, 1998.
As a result of the agreement, the Company recognized a
charge against income of $371,346 in 1995 (see Note 18 of
the Consolidated Financial Statements).
- -- NET INCOME: Net income for 1996 increased to $911,755 from
----------
$266,153 in 1995. The increase results from higher
profitability levels mainly in the Company's oil and gas
production operation. Results of the Company's operations
for oil and gas activities is as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Oil and gas sales $8,540,569 3,198,987
Gain (loss) on sale of
properties (153,000) 91,000
Production costs (1,402,389) (765,285)
Depreciation, depletion
and amortization (2,431,633) (881,085)
--------- ----------
$4,553,547 1,643,617
========== ==========
</TABLE>
However, the effect of the higher profitability on oil and
gas operations was partially offset by higher interest
expense due to increased borrowing levels, increased
depreciation on property and equipment expenditures and the
Company's net effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at December 31, 1996, was $353,419
as compared to $826,393 at December 31, 1995. The Company also
had a working capital deficit of approximately $5.1 million at
December 31, 1996. Historically, the Company has funded its oil
and gas exploration, development and acquisition activities
primarily with bank borrowings and, to a lesser extent, equity
capital from private placements and cash flow from operations.
The working capital deficit at December 31, 1996, was primarily
due to $6.0 million of current maturities owed under the Den
norske credit facility. However, the credit facility is designed
to be repaid with cash flow from operations. The Company's net
cash provided by operating activities increased in 1996 to
approximately $6.1 million as compared to approximately $350,000
in 1995. The Company expects to meet its debt service
obligations in 1997 with the additional cash flow anticipated to
be generated from the acquisition and completion of various wells
on the South Timbalier Block 148 property. The Company completed
five wells and drilled an additional successful developmental
well on the property during the fourth quarter of 1996. The
Company also drilled and completed an additional well on the
property during the first quarter of 1997. Production from South
Timbalier Block 148 is expected to generate between $600,000 and
$750,000 of additional cash flow per month. The Company also has
<PAGE>
additional drilling prospects identified in the Gulf Coast region
for 1997 which should also add to cash flow.
To assist in the Company's ongoing exploration, development
and acquisition efforts, the Company has a $30 million credit
facility available with Den norske. At December 31, 1996, the
borrowing base under the revolving credit facility was
$25,083,000. Additional borrowings under the credit facility are
dependent upon a redetermination of the borrowing base, which is
primarily dependent on the value of the mortgaged properties as
determined under Den norske's internal lending procedures.
Reductions on the credit facility are also dependent upon the
borrowing base. Borrowings under the credit facility are
collateralized by substantially all of the Company's oil and gas
properties.
In order to meet current and long-term working capital
needs, the Company intends to utilize expected increases in cash
flow from oil and gas production activities, potential additional
equity raised through private placements, and additional
availability under its credit facility as increases in the
borrowing base are achieved through oil and gas reserve
increases. To immediately assist with the Company's ongoing
development of the Gulf Coast region, in February, 1997, the Den
norske credit agreement was amended to reduce the interest rate
to prime rate plus 1/2% per annum. The borrowing base was
redetermined to be $25,000,000; and at March 1, 1997, the Company
has $24,083,000 of outstanding borrowings against the borrowing
base. Additionally, Den norske established a $2,500,000
development facility which allows the Company to borrow up to
$2,500,000 at prime rate plus 2% per annum 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 $832,000 at March 17, 1997. The
Company also completed two private placements totalling
$7,000,000 during 1996, which generated approximately $5.9
million after placement costs. The Company is continuing to seek
funds through private placements in 1997 in order to assist
funding its exploration, development and acquisition activities.
The Company is also exploring the availability of funds through
volumetric production payments similar to the production payment
consummated in 1996 with Williams Energy Services Company.
Volumetric production payments allow the Company to obtain non-
recourse financing on specific properties. This type of
financing is especially attractive for the Company's Kentucky
region production in Appalachia.
Under the credit facility 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 credit facility. The following
lists the specific requirements and the actual amounts as
calculated under the terms of the credit facility at December 31,
1996:
<PAGE>
<TABLE>
Required Actual
-------- ------
<S> <C> <C>
Debt coverage ratio 1.2 to 1.0 1.67 to 1.0
Current ratio 1.0 to 1.0 1.16 to 1.0
Tangible net worth $16,963,257 $25,927,316
General and administrative
expenses $3,178,396 $2,324,008
Quarterly interest ratio 3.0 to 1.0 3.90 to 1.0
</TABLE>
Under the required calculation of the current ratio, the
Company is allowed to deduct from current liabilities current
amounts of principal and interest due under the credit facility.
At December 31, 1996, the Company was in compliance with all of
the required financial ratios.
The following tables summarize the Company's financial
position and statements of cash flows at December 31, 1996 and
1995, and for the years then ended:
<TABLE>
(Amounts in Thousands)
1996 1995
---- ----
<S> <C> <C>
Working Capital $(5,112) (613)
Property and equipment 53,740 29,984
Other 3,345 7,016
------- -------
$51,973 $36,387
======= =======
Long-term debt $19,422 14,569
Deferred taxes and other 6,183 3,066
Stockholders' equity 26,368 18,752
------- -------
$51,973 36,387
======= =======
(Amounts in Thousands) 1996 1995
---- ----
Net cash provided by
operating activities 6,087 353
Net cash provided by
investing activities (18,851) (13,391)
Net cash provided by
financing activities 12,291 12,746
------- -------
Decrease in cash and
cash equivalents $ (473) $ (292)
======= =======
</TABLE>
As the above tables reflect, the Company's working capital
position decreased approximately $4,500,000 which was primarily
due to increased borrowings which aided in financing various
property acquisitions during 1996. The principal acquisitions
were as follows:
On February 26, 1996, the Company acquired gas
properties, equipment and pipelines from 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,
<PAGE>
1995, the Company advanced $1,000,000 to AKS as partial
consideration for the acquisition which was included in gas
properties. The cash included in the purchase price was
made available from borrowings under the Company's credit
facility.
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
would have the right to earn 50% of the remaining
undeveloped acreage. However, the joint development
agreement was terminated in November, 1996, when the
Company decided to focus its development efforts and
capital into the Gulf Coast region.
On July 3, 1996, the Company acquired proved developed and
undeveloped oil and gas properties, equipment and pipelines
from Century located offshore Louisiana on South Timbalier
148. 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
provided for payment at the Company's option of cash or the
issuance of restricted common stock of the Company at $3.00
per share), extinguished the Century Note to the Company in
the amount of $6,500,000 (Century Note) and assumed existing
liens against the assets in the approximate amount of
$1,051,000. The parties subsequently 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 December, 1996, the Company's
private placement was completed and the Company had
completed the funding of the installment payments. The
foregoing transaction was effected pursuant to an Asset
Purchase Agreement entered into by and between the Company,
Southern Gas and Century, dated July 3, 1996.
Also on July 3, 1996, the Company, Southern Gas and
Century entered into an Asset Purchase Agreement whereby
Southern Gas 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 Gas, 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.
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
<PAGE>
development activities in the Gulf Coast region.
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 the fact
that the Century Note was relinquished as a part of the Company's
acquisition of the South Timbalier 148 properties, 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
December 31, 1996, of $240,000 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 in monthly installments of $12,352,
beginning April 1, 1997, with the final payment due March 1,
1999.
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 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
canceled as part of the consideration paid by the Company to
Century for the purchase of certain oil and gas properties. 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.
The Company has paid the non-affiliated individual in full.
Pursuant to the Termination of Participation Agreement entered
into between the Company and the director, payment terms of the
balance include $50,000 due and payable by March 10, 1997, and
the remaining balance due in monthly installments of $10,293
beginning April 1, 1997, with the final payment due March 1,
1999.
Since the Company's acquisition of an interest in the South
Timbalier 148 Block, it has expended approximately $6.0 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. Nine of the wells purchased are currently producing.
In addition to the South Timbalier 148 wells acquired, two
new wells have been successfully drilled and completed on the
property and production had commenced March 1, 1997.
In order to assist in the Company's continued growth and
expansion the Company also completed two private placements
during 1996 and one private placement during 1995 as follows:
<PAGE>
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 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 Class A
Warrants are immediately exercisable and expire October
8, 1999.
In November, 1995 the Company completed a private
placement of its common stock which raised $1,235,000
($1,128,236 net of offering costs). Under the private
placement, the Company sold to accredited investors an
aggregate of 41.17 units each consisting of 10,000
shares of the Company's common stock, and one Class A
Warrant and one Class B Warrant.
In 1996, the Company filed a Registration Statement,
effective in October, 1996, which registered the shares
of common stock sold in the private placements and the
shares of common stock for which the 1996 and 1995 Class
A Warrants may be exercised.
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
maturity date one year from date of issuance. The
securities are 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 are not converted prior to their
maturity dates automatically convert on their maturity
dates. Interest accrues on the convertible securities
until the Company receives notice of the conversion. If
a security is not converted within five business days
after the Company receives notice of the conversion, the
Company is 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 are delivered.
Prior to the receipt of a conversion notice, the Company
has 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 is
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 is suspended, but the
Company must pay an additional 1% per month in cash on a
pro rata basis until the full redemption price is paid.
If the full redemption price is not paid within ten
business days after the redemption notice is given, the
<PAGE>
security holder again has the right to convert the security
into shares of common stock. A security holder may 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 intends
to effect a redemption within the following five business
days. If the Company does not respond during said twenty-
four hour period, the Company is 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 is made by a security holder. As of
March 1, 1997, $2,273,483 securities have been converted
into 1,038,946 shares of common stock.
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.
In addition to the increased bank borrowings and equity
raise-ups, the Company's cash provided from operating activities
increased approximately $2,100,000 during 1996. The increase was
primarily due to higher production levels in the Company's Gulf
Coast properties. The acquisition of the South Timbalier 148
property in July, 1996, added approximately $2,400,000 of cash
flow during 1996. The majority of this occurred in November and
December 1996 when the South Timbalier 148 properties were
completely brought on line. The Company has completed an
additional well on the block subsequent to December 31, 1996,
which will yield an approximate 10% revenue interest.
Other items which have or will have an effect on the
Company's liquidity and capital resources include:
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, had the obligation to purchase
the remaining outstanding series B Preferred Stock at $13.70
per share. Payment terms under the agreement were as
follows:
<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.
Under the letter agreement dated October 17, 1994, the
Company had the right to acquire a 10% equity interest in
the Settle Securities for $4,000,000. Due to the fact that
the Company was not in a position to acquire this entity
interest, the Agreement was subsequently amended to permit a
third party to acquire the Settle Securities. The funds
used to effect the foregoing acquisition were borrowed by
the third party from Prima, a limited liability company of
which an officer/director of the Company is a member. The
third party is also a member of Prima and the principal
stockholder of Southern Resources, Inc. Prima, in turn,
borrowed the funds it used to provide the foregoing loan
from a bank in Lexington, Kentucky. The Company has not
guaranteed, nor is it obligated on, the Prima bank loan and
the bank will look solely to Prima and its members for
payments. In connection with this transaction, the Company
entered into the Prima Put, dated March 15, 1995, which
provided that, in the event Prima obtained title to the
Settle Securities, Prima had the right to require the
Company to purchase the Settle Securities for $4,000,000
payable in cash and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a Call Agreement providing for the Company's ability to
call the Settle Securities from the third party member of
Prima for $4,000,000 has been substituted therefor. The
Call Agreement also provides for non-refundable monthly
installments of $31,250 (as originally required under the
Prima Put) until such time as a total of $1,000,000 has been
advanced under the Call Agreement (including payments
previously made under the Prima Put). In the event the
Company elects to call the Settle Securities, the advance
payments shall be credited toward the purchase price. The
<PAGE>
Company's right to call the Settle Securities begins January
15, 1997, and ends December 31, 1997. Additionally, a
$500,000 Certificate of Deposit held as collateral for
Prima's loan was liquidated by the Company and the funds
were advanced to Prima under the potential Call Agreement.
Prima used the $500,000 to purchase shares of Series B
Preferred Stock from a third party which it subsequently
converted to common stock. In the event the Company
exercises the Call Agreement, the $500,000 will be credit
towards the purchase.
In December, 1995, the Company entered into a severance
agreement with its former President and Chief Executive
Officer who resigned effective December 31, 1995. Under the
agreement, the executive was paid $85,000 and will receive
the sum of $10,000 per month through March 31, 1998. In
return, the executive surrendered 515,590 1994 Compensatory
Stock Option Plan ("CSO") common stock options under a
Severance Plan which had exercise prices between $6.00 and
$8.00 per share and expired between March 18, 2003, and
February 1, 2005. In return, the executive received 643,987
common stock options at an exercise price of $4.00 per share
and which expire on November 29, 2000. He also retained
46,203 CSO common stock options immediately exercisable,
previously issued to him, at $3.50 per share which expire on
October 11, 2002. The Company also agreed to provide for
payment of an office lease through October, 1996, and
assigned a 1% gross overriding royalty interest in certain
oil and gas properties. As a result of the agreement, the
Company recognized a charge against income of $371,346 in
1995 and has an accrued severance liability at December 31,
1996, of $142,293 based on an 8% discount factor.
On November 27, 1996, the Company entered into a five year
corporate relations agreement with CRG, Winter Park,
Florida, to assist the Company with its shareholder
relations. As consideration for the agreement, the Company
paid CRG $550,000 cash and granted CRG a one year option to
purchase 100,000 shares of common stock for $3.00 per share,
a two year option to purchase 100,000 shares of common stock
for $3.60 per share, a three year option to purchase 100,000
shares of common stock for $4.20 per share, a five year
option to purchase 100,000 shares of common stock for $4.80
per share, and a five year option to purchase 100,000 shares
of common stock for $6.00 per share. The options have a
fair value of approximately $1.27 per share.
The Company plans to continue to focus its oil and gas
development efforts in the Gulf Coast for 1997. It has acquired
non-operating working interests in other properties along the
Gulf Coast, particularly three large salt domes located onshore
Louisiana. The funding of this development will continue to be
through the Den norske credit facility and development facility
and cash generated from operations.
The oil and gas industry is intensely capital driven and
demands on the Company's capital resources may increase further
during 1997. The potential increases may result from additional
drilling and completion obligations relating to prospects the
Company holds in the Gulf Coast and the possibility of future
joint ventures, acquisitions or other arrangements to assist in
increasing the Company's reserve base and production revenues.
<PAGE>
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.
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FOR THE YEARS ENDED
-------------------
DECEMBER 31, 1996 AND 1995
--------------------------
TABLE OF CONTENTS
-----------------
Page No.
--------
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
Oil and Gas Producing Activities (Unaudited) F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
American Resources of Delaware, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of
American Resources of Delaware, Inc. and Subsidiary (the Company)
as of December 31, 1996 and the related consolidated statements
of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of American Resources of Delaware, Inc. and Subsidiary
as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
March 17, 1997
F-1
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 1996
-----------------
ASSETS
------
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 353,419
Accounts and notes receivable:
Trade 6,597,418
Notes 253,053
Related party 195,630
Interest 1,526
Allowance for doubtful accounts (10,212)
-----------
7,037,415
Deferred tax asset 16,319
Prepaid expenses and other 344,850
-----------
Total current assets 7,752,003
-----------
Oil and gas properties, at cost
(successful efforts method) 48,136,759
Property and equipment, at cost 11,754,079
-----------
59,890,838
Less accumulated depreciation,
depletion and amortization (6,150,632)
-----------
Net property and equipment 53,740,206
-----------
Other assets:
Investment in unconsolidated subsidiaries 485,610
Call advance 1,500,000
Notes receivable 432,576
Deferred financing costs, net 439,695
Other assets 487,554
-----------
Total other assets 3,345,435
-----------
Total assets $64,837,644
===========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED BALANCE SHEET (CONTINUED)
--------------------------------------
DECEMBER 31, 1996
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<S> <C>
Current liabilities:
Current installments of long-term debt:
Third parties $ 6,317,918
Related parties 195,365
Accounts payable:
Trade 4,588,194
Related party 9,524
Interest 263,622
----------
4,861,340
Accrued severance liabilities 112,689
Accrued taxes payable 195,467
Unearned revenue 807,632
Accrued expenses and other 373,622
----------
Total current liabilities 12,864,033
Long-term debt, excluding current maturities:
Third parties 19,127,786
Related parties 294,635
Unearned revenue 2,821,611
Deferred tax liability 3,331,968
Severance liability 29,604
Put warrants 250,000
Stockholders' equity:
Series 1993 8% convertible preferred stock,
par value and liquidation preference $12.00
per share; 1,000,000 shares authorized;
268,851 shares issued and outstanding 2,181,819
Series B 6% Junior Convertible Preferred Stock,
par value $.00001 per share; liquidation preference
$10.00 per share; 1,000,000 shares authorized;
0 shares issued and outstanding -
Convertible securities, representing approximately
2,850,000 shares of common stock 4,997,554
Common stock, par value $.00001 per share;
20,000,000 shares authorized; 6,520,296
shares issued and outstanding 65
Additional paid-in capital 16,453,899
Treasury stock at cost, representing
10,480 shares of common stock (52,400)
Retained earnings 2,537,070
----------
Total stockholders' equity 26,118,007
----------
Commitments and contingencies -
Total liabilities and stockholders' equity $64,837,644
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Revenues:
Production $ 8,540,569 $ 3,198,987
Transportation 1,070,647 731,522
Marketing 22,712,996 12,486,676
Other 714,961 797,114
---------- ----------
33,039,173 17,214,299
---------- ----------
Expenses:
Production 1,402,389 765,285
Transportation 315,458 144,378
Marketing 22,269,876 11,829,798
Other 206,457 104,685
Depreciation, depletion and
amortization 3,309,159 1,577,770
---------- ----------
27,503,339 14,421,916
---------- ----------
5,535,834 2,792,383
Administrative expenses 2,324,008 2,364,389
Deferred compensation and employee
severance expense - 1,488,259
Operating income (loss) 3,211,826 (1,060,265)
---------- ----------
Other income (expense):
Settlement income - 2,189,616
Interest income 801,633 1,081,276
Interest expense (2,440,453) (1,151,950)
Gain (loss) on sale of assets (174,645) 97,278
Impairment of stock investment - (869,000)
Other 152,334 122,511
---------- ----------
(1,661,131) 1,469,731
---------- ----------
Income before taxes 1,550,695 409,466
Income tax expense (638,940) (143,313)
---------- ----------
Net income $ 911,755 $ 266,153
========== ==========
Per common share:
Primary $0.13 --
==== ==
Weighted average number of common
shares and common share
equivalent outstanding 6,548,409 4,067,677
========= =========
Fully diluted $0.12 --
==== ==
Weighted average number of common
shares and common share
equivalent outstanding 6,895,446 5,722,432
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
6% Junior
Common Stock 8% Preferred Stock Preferred Stock
--------------- ------------------------------------- ---------------
Number Number Discount Number Additional
of Par Convertible of Par On Net of Par Paid-in Retained
Shares Value Securities Shares Value Preferred Value Shares Value Capital Earnings Total
------ ----- ----------- ------ ----- --------- ----- ------ ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1994 3,085,433 $31 - 336,224 4,034,688 (1,306,114) 2,728,574 575,000 6 11,068,023 1,988,224 15,784,858
Issuance of
common stock,
net of
$106,761 in
offering
costs 411,666 4 - - - - - - - 1,128,232 - 1,128,236
Issuance of
common stock
dividend 95,308 1 - - - - - - - 292,718 (292,719) -
Conversion
of preferred
stock to
common
stock 1,716,803 17 - (67,373) (808,475) 261,720 (546,755) (458,000) (5) 292,718 - -
Issuance of
common stock
for placement
fees in connection
with 6% Series B
Preferred Stock
issue 110,000 1 - - - - - - - 611,874 - 611,875
Placement fees
netted against
capital
raised in
Series B - - - - - - - - - (611,875) - (611,875)
Common stock
issued for
professional
fees 20,000 0 - - - - - - - 56,200 - 56,200
Amortization of
deferred
professional
fees - - - - - - - - - 1,253,943 - 1,253,943
Warrants
exercised
for common
stock 100,005 1 - - - - - - 262,531 - 262,532
Net
income - - - - - - - - - - 266,153 266,153
--------- ---- - ------- --------- ---------- --------- -------- - ---------- --------- ----------
Balance,
December
31, 1995 5,539,215 $55 - 268,851 3,226,213 (1,044,394) 2,181,819 117,000 1 14,608,389 1,961,658 18,751,922
========= === = ======= ========= ========== ========= ======= = ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
6% Junior
Common Stock 8% Preferred Stock Preferred Stock
--------------- ----------------------------- ---------------
Number Number Net of Number Additional
of Par Convertible of Par Discount of Par Paid-in Treasury Retained
Shares Value Securities Shares Value 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 2,181,819 117,000 1 14,608,389 - 1,961,658 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 - - - - - - - 70,174 - (70,174) -
Issuance of
common stock
and put
warrants in
connection
with
property
acquisition 225,000 2 - - - - - - 907,173 - - 907,175
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)
Issuance of
convertible
securities,
net of
issuance
costs - - 4,997,554 - - - - - - - - 4,997,554
Issuance of
common stock
in connection
with convertible
securities 173,724 2 - - - - - - 539,998 - - 540,000
Stock
registration
costs - - - - - - - - (25,099) - - (25,099)
Net
income - - - - - - - - - - 911,755 911,755
--------- --- --------- ------- --------- --------- ------- - ---------- ------- --------- ----------
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
========= === ========= ======= ========= ========= ======= = ========== ======= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income $ 911,755 266,153
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization 3,419,945 1,641,412
Amortization and write-off of
deferred professional fees - 1,310,146
Deferred income taxes 613,281 180,000
(Gain) loss on sale of assets 174,645 (97,278)
(Gain) on sale of claims - (2,189,616)
Deferred revenue (557,391) (147,721)
Proceeds from production payment 4,147,300 -
Equity in earnings of
unconsolidated subsidiary (172,618) (281,517)
Impairment of stock investment - 869,000
Changes in operating assets
and liabilities:
(Increase)in accounts receivable (4,033,122) (1,400,501)
(Increase) in prepaid expenses
and other (148,244) (44,140)
Increase in accounts payable 2,128,369 232,287
Increase (decrease) in accrued
taxes payable 92,349 (69,523)
Increase in prepaid public
relations contract (550,000) -
Increase in accrued expenses
and other 61,159 84,569
----------- -----------
Net cash provided by operating
activities 6,087,428 353,271
----------- -----------
Investing activities:
Purchases of property and equipment (20,131,323) (8,312,288)
Proceeds from sales of property
and equipment 549,860 88,500
Issuance of notes receivable - (8,155,800)
Payments on notes receivable 731,781 239,155
Investment in unconsolidated subsidiary - 82,274
Investment in call advance - (1,500,000)
Proceeds from sale of claims receivable - 4,235,701
Other (1,732) (168,933)
----------- -----------
Net cash used in investing
activities (18,851,414) (13,391,391)
----------- -----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Financing activities:
Proceeds from borrowings from
related parties $ 250,000 545,000
Proceeds from other borrowings 17,613,068 22,412,109
Payments on borrowings from
related parties (250,000) (309,000)
Payments on other borrowings (10,869,210) (10,859,021)
Increase in deferred financing and
convertible issuance costs (462,446) (434,164)
Issuance of common shares, net 900,000 1,128,236
Issuance of convertible securities 6,000,000 -
Purchase of 6% Junior Preferred Stock (802,900) -
Purchase of treasury stock (52,400) -
Proceeds from exercise of warrants - 262,529
Other (35,100) -
----------- -----------
Net cash provided by financing
activities 12,291,012 12,745,689
----------- -----------
Decrease in cash (472,974) (292,431)
Cash and cash equivalents at
beginning of year 826,393 1,118,824
----------- -----------
Cash and cash equivalents at
end of year $ 353,419 826,393
=========== ===========
Supplementary cash flow information:
Interest paid $ 2,182,727 1,238,699
=========== ===========
Income taxes paid $15,090 180,890
====== =======
</TABLE>
NON-CASH TRANSACTIONS:
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 put 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).
In connection with the acquisition of certain gas properties, the
Company extinguished a $6.5 million note receivable as partial
consideration.
The Company acquired 58,059 shares of the outstanding 6% Junior
Preferred Stock for $802,900 during 1996. Upon resolution of the
Board of directors, the shares were retired.
The Company declared stock dividends and issued 27,535 and 95,308
shares of common stock to holders of the Series 1993 and Series B
Preferred Stock during 1996 and 1995, respectively.
During 1996, 58,941 shares of Series B Preferred Stock were
converted into a total of 224,822 shares of common stock. During
1995, 67,373 shares of Series 1993 and 458,000 shares of Series B
Preferred Stock were converted into a total of 1,716,803 shares
of common stock.
In connection with the issuance of 4% convertible securities in
the aggregate principal amount of $6,000,000, the Company issued
173,724 shares of common stock at an average value of $3.11 per
share as partial consideration for placement fees.
During 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 consolidated financial statements.
F-7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996 AND 1995
--------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) 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 and Exploration of Delaware, Inc. (SOE)
pursuant to SOE's Chapter 11 Bankruptcy Joint Plan of
Reorganization which was consummated effective April
22, 1993.
ARI and its wholly-owned subsidiary, Southern Gas
Company of Delaware, Inc. (the Subsidiary), are
involved in the production, gathering, purchasing,
processing, transporting and selling of natural gas
primarily in the State of Kentucky. The Subsidiary has
expanded its production efforts through its involvement
in the development of prospects offshore Louisiana in
the Gulf of Mexico. These activities are considered to
be one business segment for financial reporting
purposes.
(b) PRINCIPLES OF CONSOLIDATION
The 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.
Certain reclassifications have been made to prior year
financial statements to conform with the current year
presentation.
(c) CASH EQUIVALENTS
For purposes of the statement of cash flows, the
Company considers any liquid investments with an
original maturity of three months or less as a cash
equivalent.
(d) OIL AND GAS PROPERTIES
The Company uses the successful efforts method of
accounting for its oil and gas operations. The costs
of unproved leaseholds are capitalized pending the
results of exploration efforts. Significant unproved
leasehold costs are assessed periodically, on a
property-by-property basis, and a loss is recognized to
the extent, if any, that the cost of the property has
been impaired. The costs of individually insignificant
unproved leaseholds estimated to be nonproductive are
amortized over estimated holding periods based on
historical experience. As of January 1, 1996, the
Company began assessing the impairment of capitalized
costs of proved oil and gas properties and other long-
lived assets in accordance with Statement of Financial
Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". Under this
method, the Company generally assesses its oil and gas
properties on a depletable unit basis utilizing its
current estimate of future revenues and operating
expenses. In the event net undiscounted cash flow is
less than the carrying value, an impairment loss is
recorded based on estimated fair value, which would
consider discounted future net cash flows. Prior to
January 1, 1996, if the net capitalized costs exceeded
the estimated future undiscounted after tax net cash
flows, based on year end prices, from proved oil and
gas reserves, such excess costs would have been charged
to expense. Exploratory dry holes and geological and
(Continued)
F-9
<PAGE>
geophysical charges on exploratory projects are
expensed. Depletion of proved leaseholds and
amortization and depreciation of the costs of all
development and successful exploratory drilling are
provided by the unit-of-production method based upon
estimates of proved and proved-developed oil and gas
reserves, respectively, for each property. The
estimated costs of dismantling and abandoning offshore
site remediation and significant onshore facilities are
provided currently using the unit-of-production method;
such costs for other onshore facilities are
insignificant and are expensed as incurred.
Significant changes in the various estimates discussed
above could affect the financial position and results
of operations of the Company.
On sale of an entire interest in an unproved property
for cash or cash equivalent, gain or loss on the sale
is recognized, taking into consideration the amount of
any recorded impairment if the property had been
assessed individually. If a partial interest in the
unproved property is sold, the amount received is
treated as a reduction of the cost of the interest
retained.
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Expenditures
representing additions or improvements are capitalized.
Maintenance and repairs are charged to expense as
incurred. Upon retirement or disposition, costs and
accumulated depreciation are removed from the accounts
and the resulting gain or loss is recognized in income.
The Company adopted SFAS No. 121 effective January 1,
1996, and no impairments have been recognized as a
result of the adoption.
Depreciation and amortization is provided by the
straight-line method over the estimated useful lives of
the assets.
(f) GAS MARKETING ACTIVITIES
In the conduct of its marketing activities, the Company
enters into both long-term and short-term contracts to
purchase and/or sell at a future date specified
quantities of products at specified prices. Settlement
of such contracts may occur through the purchase, sale
and/or exchange of products in the open market or from
production. Resulting gains or losses, if any, are
recorded in the month of delivery. During 1995, the
Company entered into an exclusive marketing arrangement
with Southern Resources, Inc. ("SRI"), a third party
company, wherein the Company is the exclusive supplier
of all natural gas to be sold by SRI. Under the
agreement, after deduction of certain expenses, the
Company is entitled to receive not less than 50% of the
sales margin obtained. Included in the statements of
operations is the Company's 50% participation in SRI's
marketing revenues and expenses. In return, the
Company provides accounting services, cash management
and credit for SRI.
(g) DRILLING REVENUES
At times, the Company performs drilling and completion
services for drilling programs, primarily under turnkey
drilling contracts in which it utilizes third party
contract drillers. Revenue is recognized upon the
completion of the initial producing zone.
(h) PIPELINE TRANSPORTATION REVENUE
Revenue from the transportation of gas is recognized on
the accrual basis as products are transported.
(i) DEFERRED FINANCING COSTS
In connection with obtaining a credit facility, the
Company has capitalized third party costs directly
associated with the closing thereof. The costs are
being amortized on a straight-line
(Continued)
F-10
<PAGE>
basis over the period of the credit facility, which is
seven years. For the years ended December 31, 1996 and
1995, approximately $101,000 and $57,000, respectively,
have been amortized to expense in connection with these
costs.
(j) INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Investments in companies which the Company has less
than a 20% interest are carried at cost. Dividends
received are included in other income. Dividends
received in excess of the Company's proportionate share
of earnings are applied as a reduction of the cost of
the investment.
Investments in companies which the Company has a 20% to
50% interest are carried at cost, adjusted for the
Company's proportionate share of their undistributed
earnings or losses.
(k) INCOME TAXES
The Company follows SFAS No. 109 which requires the
asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the
years in which those temporary differences are expected
to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the
period that includes the enactment date.
(l) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (FASB 123)
encourages, but does not require companies to record
compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to
continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB Opinion 25) and related
interpretations. Accordingly, compensation cost for
stock options issued to employees and directors is
measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock.
(m) INCOME PER SHARE
Net income (loss) 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, convertible securities and
warrants are common stock equivalents and have been
considered when the effect is dilutive. Earnings per
share for 1995 was restated to reflect the impact of
preferred stock dividends.
(n) USE OF ESTIMATES
Management of the Company has made a number of
estimates and assumptions relating to the reporting of
assets and liabilities and disclosure of contingent
assets and liabilities to prepare these consolidated
financial statements in conformity with generally
accepted accounting principles. Actual results could
differ from the estimates.
(2) BUSINESS COMBINATIONS
On February 26, 1996, the Company acquired gas properties,
equipment and pipelines from AKS Energy Corporation (AKS).
As consideration for the assets, the Company paid $2,909,010
(Continued)
F-11
<PAGE>
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. AKS has the right to put 50,000 shares
of Common Stock to the Company for $5.00 per share anytime
between June 30, 1997, and June 30, 1999. In December,
1995, the Company advanced $1,000,000 to AKS as partial
consideration for the acquisition which was included in 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 would have the right
to earn 50% of the remaining undeveloped acreage. However,
the joint development agreement was terminated in November,
1996, when the Company decided to focus its development
efforts and capital into the Gulf Coast region.
On July 3, 1996, the Company 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 provided for payment at the Company's
option of cash or the issuance of restricted common stock of
the Company at $3.00 per share), extinguished an existing
note from Century to the Company in the amount of $6,500,000
(Century Note) and assumed existing liens against the assets
in the approximate amount of $1,051,000. The parties
subsequently 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 December, 1996,
the Company's private placement (see Note 6) was completed
and the Company had completed the funding of the installment
payments. The foregoing transaction was effected pursuant
to an Asset Purchase Agreement entered into by and between
the Company, the Subsidiary and Century, dated July 3, 1996.
Also on July 3, 1996, the Company, the Subsidiary and
Century entered into an Asset Purchase Agreement whereby the
Subsidiary 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 the Subsidiary, 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.
Assuming the acquisitions had occurred on January 1, 1995,
the following unaudited proforma operating data gives effect
to the acquisitions for the years ended December 31, 1995
and 1996:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Total revenue $33,894,000 18,602,000
========== ==========
Net income (loss) from operations $3,418,000 (1,628,000)
========= =========
Primary earnings (loss) per share $.11 ($.39)
=== ====
Fully diluted earnings per share $.10 -
=== ===
</TABLE>
Estimated primary and fully diluted earnings per share are
based on 6,548,409 and 6,895,446 shares, respectively,
outstanding for 1996 and 4,292,677 shares outstanding for
1995.
(Continued)
F-12
<PAGE>
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
ESTIMATED
USEFUL LIVES
(YEARS)
------------
<S> <C> <C>
Pipeline support facilities 7-15 $ 8,061,570
Field equipment 7 3,367,820
Other 3-7 324,689
----------
$11,754,079
==========
</TABLE>
For the years ended December 31, 1996 and 1995, depreciation
expense on property and equipment was $877,526 and $702,492,
respectively.
(4) OIL AND GAS PROPERTIES
A summary of oil and gas properties follows:
<TABLE>
<S> <C>
Proved properties - Developed $38,257,168
Proved properties - Undeveloped 4,193,257
Unproved properties 5,686,334
----------
$48,136,759
==========
</TABLE>
In 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 which
was purchased in 1994. As a result of sale, the Company has
recognized a loss of approximately $153,000 during 1996.
In 1995, the Company sold all of its interest in a Michigan
producing field which had a net book value of approximately
$91,000 for $188,500, resulting in a gain of approximately
$97,500.
For the years ended December 31, 1996 and 1995, depletion
expense on oil and gas properties was $2,431,633 and
$881,085, respectively, or $0.80 and $0.64 per mcf
equivalent.
(5) Long-term Debt
A summary of long-term debt follows:
<TABLE>
<S> <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. $25,083,000
Call Agreement payable, original balance
of $1,000,000 payable in monthly
installments of $31,250 commencing
April 1, 1995, due November 1997
(see Note 8). 274,000
Notes payable to related parties, interest
payable at 22%, in connection with
Participation Agreement. 240,000
Note payable to related party interest
payable at 22%, in connection with
Participation Agreement. $ 250,000
(Continued)
F-13
<PAGE>
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 39,008
------------
25,935,704
Less - Current portion (6,513,283)
----------
Long-term debt $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 December 31, 1996, the borrowing base
under the revolving credit facility was $25,083,000.
Additional borrowings under the credit facility are
dependent upon a redetermination of the borrowing base,
which is primarily dependent on the value of the mortgaged
properties as determined under Den norske's internal lending
procedures. Reductions on the credit facility are also
dependent on the borrowing base. At December 31, 1996,
monthly principal reductions are $500,000. The borrowing
base will be redetermined semi-annually on each October 1
and April 1 prior to February 1, 2002.
The proceeds were used primarily to pay the outstanding
balances under a previous credit facility with Bank One
Texas, N.A. and fund development activities in the Louisiana
Gulf Coast area.
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. The
development facility matures on March 1, 1998, and carries
an interest rate of prime plus 2% per annum.
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 December 31, 1996, the Company was in compliance
with the required financial covenants.
The Company has a working capital deficit of approximately
$5.1 million at December 31, 1996. Based upon the Company's
current reserve estimates, the Company believes its cash
flow from operations will be sufficient to meet the required
approximate $6.0 million current maturities due under the
Den norske credit facility.
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 December 31, 1996, of $240,000 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 in monthly
installments of $12,352, beginning April 1, 1997, with the
final payment due March 1, 1999.
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
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
canceled 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
(Continued)
F-14
<PAGE>
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. The Company has paid the non-affiliated individual
in full. Pursuant to the Termination of Participation
Agreement entered into between the Company and the director,
payment terms of the balance include $50,000 due and payable
by March 10, 1997, and the remaining balance due in monthly
installments of $10,293 beginning April 1, 1997, with the
final payment due March 1, 1999.
Maturities of long-term debt as of December 31, 1996, are as
follows:
<TABLE>
<C> <C>
1997 $6,513,283
1998 6,263,175
1999 6,073,502
2000 6,002,744
2001 1,083,000
----------
$25,935,704
==========
</TABLE>
(6) 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 are 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 are not
converted prior to their maturity dates automatically
convert on their maturity dates. Interest accrues on the
convertible securities until the Company receives notice of
the conversion. If a security is not converted within five
business days after the Company receives notice of the
conversion, the Company is 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 are delivered. Prior to the receipt
of a conversion notice, the Company has 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 is 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 is
suspended, but the Company must pay an additional 1% per
month in cash on a pro rata basis until the full redemption
price is paid. If the full redemption price is not paid
within ten business days after the redemption notice is
given, the security holder has the right to convert the
security into shares of common stock. A security holder may
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 intends to effect a redemption within the following
five business days. If the Company does not respond during
said twenty-four hour period, the Company is 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 is made by a security holder.
As of March 1, 1997, securities totaling $2,273,483 have
been converted into 1,038,946 shares of common stock.
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
(Continued)
F-15
<PAGE>
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.
(7) INDEPENDENT CONTRACTOR AGREEMENTS
On November 27, 1996, the Company entered into a five year
corporate relations agreement with Corporate Relations
Group, Inc. ("CRG"), Winter Park, Florida, to assist the
Company with its shareholder relations. As consideration
for the agreement, the Company paid CRG $550,000 cash and
granted CRG a one year option to purchase 100,000 shares of
common stock for $3.00 per share, a two year option to
purchase 100,000 shares of common stock for $3.60 per share,
a three year option to purchase 100,000 shares of common
stock for $4.20 per share, a five year option to purchase
100,000 shares of common stock for $4.80 per share, and a
five year option to purchase 100,000 shares of common stock
for $6.00 per share. The options have a fair value of
approximately $1.27 per share which will be expensed over
the term of the agreement.
During 1995, the Company terminated consulting contracts
with Corporate Communications Network, Inc. and Bridge Water
Financial which resulted in a charge against income of
$1,116,913 which represented the unamortized balance of the
contracts.
(8) CENTURY/SETTLE TRANSACTIONS
On October 17, 1994, the Company entered into a letter
agreement, as amended, with Settle Oil and Gas Company
(Settle), a privately owned corporation involved in the
development of lease blocks in the federal waters of the
Gulf of Mexico offshore Louisiana (as discussed below,
Settle was subsequently merged into Century as the result of
Century's reorganization under Chapter 11 of the Bankruptcy
Code). Under the agreement, the Company initially agreed to
loan Settle $5,000,000 to fund Settle's working interest
share of certain drilling and completion costs in an
offshore lease block. On August 18, 1995, the loan was
increased to $6,500,000. The loan bore interest at 22%
payable quarterly and was secured by certain offshore
properties. The Company had advanced $6,500,000 of the
commitment at December 31, 1995. However, in order to
fulfill its commitment, it was necessary for $400,000 to be
funded by certain of the directors and officers of the
Company pursuant to a Participation Agreement entered into
by the parties. At the time the final installment on the
commitment was due, the majority of the Company's resources
were being directed towards its Gulf Coast development,
thereby necessitating the Participation Agreement. The
Participation Agreement granted the directors and officers
the benefits of the underlying loan documents with Settle
and, therefore, they participated proportionately in the
costs, expenses and revenues generated from said loan. On
July 3, 1996, the Company extinguished the loan as partial
consideration for the acquisition of the properties securing
the loan (see Note 2). The related $400,000 funded under
the Participation Agreement has been assumed by the Company
(see Note 5).
The agreement also provides the Company with the right of
first refusal to purchase and/or market Settle's natural gas
which is not bound to currently existing contracts.
Under a separate consulting agreement with Settle, the
Company has provided restructuring advice and assistance in
negotiations with creditors of Century, a company which was
affiliated with Settle through common ownership and was
preparing a reorganization plan under Title XI of the United
States Bankruptcy Act. On July 21, 1995, the reorganization
plan was approved by the Bankruptcy Court and resulted in
the merger of Settle into Century. Any and all references
to Settle subsequent to July 21, 1995, refer to the merged
entity. The Company recognized $250,000 in other income for
the year ended December 31, 1995 under the agreement.
The Company has also negotiated directly with various
creditors of Century. As a result of these negotiations,
the Company was able to purchase various mechanics and
materialmen lien claims totaling $1,537,482 for a cost of
$806,872. In June, 1995, the Company sold these claims to
an independent investment group for $1,100,000, resulting in
a gain on sale of $339,201.
The Company also purchased a $9,368,479 unsecured claim from
a major creditor of Century for $1,250,000. In January,
1995, the Company sold to Settle $3,750,000 of the claim for
$1,250,000, with these funds then being used by the Company
to fund a portion of their $5,000,000 commitment to Settle.
On March 16, 1995, Settle exercised its option to purchase
(Continued)
F-16
<PAGE>
the remainder of the receivables and assumed all obligations
of the original purchase agreement for an additional
$1,850,415, which represented $.3333 for each $1.00 of the
remaining claim. As a result, the Company recognized a gain
on sale of $1,850,415.
In September, 1995, the Company bought out a production
platform use agreement from Century Oil Company, which is
owned by an individual who was an officer of the Company
from January 1, 1996 through May 15, 1996, in the offshore
Louisiana waters for $1,800,000 in connection with their
joint development of an oil and gas lease block. The
purchase was funded with proceeds from the Den norske credit
facility. The individual is also 25% owner of Century, with
whom the Company is jointly developing certain offshore and
onshore properties in the Gulf Coast region.
Under the letter agreement dated October 17, 1994, the
Company had the right to acquire a 10% equity interest in
Settle for $4,000,000 (the Settle Securities). Due to the
fact that the Company was not in a position to acquire this
equity interest, the Agreement was subsequently amended to
permit a third party to acquire the Settle Securities. The
funds used to effect the foregoing acquisition were borrowed
by the third party from Prima Capital, LLC (Prima), a
limited liability company of which an officer/director of
the Company is a member. The third party is also a member
of Prima and the principal stockholder of Southern
Resources, Inc. Prima, in turn, borrowed the funds it used
to provide the foregoing loan from a bank in Lexington,
Kentucky. The Company has not guaranteed, nor is it
obligated on, the Prima bank loan and the bank will look
solely to Prima and its members for payments. In connection
with this transaction, the Company entered into a Put
Agreement with Prima, dated March 15, 1995, which provided
that, in the event Prima obtained title to the Settle
Securities, Prima had the right to require the Company to
purchase the Settle Securities for $4,000,000 (the Prima
Put) payable in cash and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a new agreement providing for the Company's ability to
call the Settle Securities from the third party member of
Prima for $4,000,000 has been substituted therefor (the Call
Agreement). The Call Agreement also provides for
non-refundable monthly installments of $31,250 (as
originally required under the Prima Put) until such time as
a total of $1,000,000 has been advanced under the Call
Agreement (including payments previously made under the
Prima Put). In the event the Company elects to call the
Settle Securities, the advance payments shall be credited
toward the purchase price. The Company's right to call the
Settle Securities begins January 15, 1997, and ends December
31, 1997. Additionally, a $500,000 Certificate of Deposit
held as collateral for Prima's loan was liquidated by the
Company and the funds were advanced to Prima under the
potential Call Agreement. Prima used the $500,000 to
purchase shares of Series B Preferred Stock from a third
party which it subsequently converted to common stock. In
the event the Company exercises the Call Agreement, the
$500,000 will be credited towards the purchase.
On July 3, 1995, the Company made an unsecured working
capital loan to Settle in the amount of $900,000. At
December 31, 1996, the outstanding balance on the loan is
$183,053. The loan bears interest at the rate of 10% per
annum and is payable in 21 equal monthly installments of
$46,894 commencing on July 31, 1995, and on the last day of
each month thereafter until paid in full.
(9) INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
On December 30, 1994, the Company invested in the formation
of a new Limited Liability Company (the LLC) whose purpose
is to perform contract drilling services for the Company and
third parties. The LLC was capitalized at $250,000 with the
Company providing $110,000 for a 44% ownership. Century and
certain of Century's officers and directors are also members
of the LLC, with a combined ownership interest of 45%.
Summary combined information of the investee company at
December 31, 1996, follows (unaudited):
(Continued)
F-17
<PAGE>
<TABLE>
<S> <C>
Current assets $1,287,000
Current liabilities 297,775
---------
Working capital 989,225
Property and equipment, net 13,536
Other assets 9,621
---------
Members' capital $1,012,382
=========
Revenues $3,347,805
Expenses 3,099,425
---------
Net income $ 248,380
=========
</TABLE>
In 1995, the Company reduced its investment in a privately
held insurance company which was being carried on the cost
method at $869,000 to zero. The reduction was due to a
continued deterioration of the financial position of the
insurance company and was recognized as a charge against
income in 1995.
(10) UNEARNED REVENUE
On May 22, 1996, the Company 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.
(11) INCOME TAXES
The provision for income taxes for the years ended December
31, 1996 and 1995 is summarized as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Current tax expense (benefit):
Federal - (45,087)
State $ 25,659 8,400
------- -------
$ 25,659 (36,687)
======= =======
Deferred tax expense:
Federal $537,591 161,760
State 75,690 18,240
------- -------
$613,281 180,000
======= =======
</TABLE>
The Company's effective tax rate (41%) in 1996 is above the
U.S. federal income tax rate of 34% because of state income
taxes (net of federal benefit) of 4% and other of 3%.
The Company's effective tax rate (35%) in 1995 is above the
U.S. federal income tax rate of 34% because of state income
taxes (net of federal benefit) (4%) and the increase in
valuation allowance and other (3%).
(Continued)
F-18
<PAGE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1996, are presented as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $2,587,142
Severance pay 56,917
Basis differences in unconsolidated
investee 27,103
Allowance for doubtful accounts 15,410
Other 18,424
---------
Total gross deferred tax
assets 2,704,996
Less - Valuation allowance (640,786)
---------
Net deferred tax assets 2,064,210
---------
Deferred tax liabilities:
Basis differences in oil and
gas properties $4,315,445
Basis differences in property
and equipment 565,182
Basis differences in notes
payable 498,337
Other 895
---------
Deferred tax liabilities 5,379,859
---------
Net deferred tax liability $3,315,649
=========
Current deferred tax asset $16,319
======
Non-current deferred tax
liability $3,331,968
=========
</TABLE>
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The Company has established a valuation allowance
for such deferred tax assets to the extent such amounts are
not likely to be utilized to offset existing deferred tax
liabilities reversing in the same period.
At December 31, 1996, the Company has approximately
$6,143,000 and $8,309,000 of net operating loss (NOL)
carryforwards available to offset future taxable income for
federal and state purposes, respectively. The carryforwards
expire from 1998 to 2011.
The Tax Reform Act of 1986 significantly limits the amount
of NOL available to offset future taxable income when a
change of ownership occurs. Such a limitation of the NOL in
a given year could prevent the Company from realizing the
full benefit of the NOL within the 15 year statutory limit.
The Company had one change in ownership prior to 1996. The
Company believes that the limitations, if any, would not
have a significant impact on the consolidated financial
statements.
(12) FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and
estimated fair values of the Company's financial instruments
at December 31, 1996. The Company has no derivative
financial instruments. Financial Accounting Standards Board
Statement No. 107, "Disclosures About Fair Value of
Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing
parties.
<TABLE>
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 353,419 353,419
Trade accounts receivable 6,587,206 6,587,206
Related party receivables 195,630 195,630
Notes receivable 685,629 685,629
(Continued)
F-19
<PAGE>
Carrying Fair
Amount Value
------ -----
Financial liabilities:
Trade accounts payable 4,588,194 4,588,194
Related party payable 9,524 9,524
Accrued expenses 975,004 975,004
Long-term debt 25,935,704 25,995,015
</TABLE>
The carrying amounts shown in the table are included in the
consolidated balance sheet under the indicated captions.
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS, TRADE ACCOUNTS RECEIVABLE,
RELATED PARTY RECEIVABLES, CURRENT INSTALLMENTS OF
LONG-TERM DEBT, TRADE ACCOUNTS PAYABLE, RELATED PARTY
PAYABLE AND ACCRUED EXPENSES: The carrying amounts
approximate fair value because of the short maturity of
those instruments.
NOTES RECEIVABLE: The fair value is determined as the
present value of expected cash flows discounted at the
interest rate currently offered by the Company, which
management believes approximates rates which would be
offered by local lending institutions for loans of
similar terms to companies with comparable credit risk.
LONG-TERM DEBT: The fair value of the Company's
long-term debt is estimated by discounting the future
cash flows of each instrument at rates currently
offered to the Company for similar debt instruments of
comparable maturities by the Company's bankers.
(13) COMMON STOCK PRIVATE PLACEMENT
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 Class A Warrants are immediately exercisable and
expire October 8, 1999.
In November, 1995, the Company completed a private placement
of $1,235,000 ($1,128,236 net of offering costs). The
private placement consisted of 41.17 units, each unit
consisting of 10,000 shares of common stock and one 1995
Class A Warrant and one 1995 Class B Warrant. Each warrant
entitles the holder to purchase 5,000 shares of the
Company's common stock at $3.50 and $5.00 per share,
respectively. The warrants expire in October, 1999. The
Company has a call right on the 1995 Class A Warrants and
the 1995 Class B Warrants at share prices of $5.50 and
$7.00, respectively.
In 1996, the Company filed a Registration Statement,
effective in October, 1996, which registered the shares of
common stock sold in the private placement and the shares of
common stock for which the Class A Warrants and the 1995
Class A Warrants and 1995 Class B Warrants may be exercised.
(14) STOCKHOLDERS' EQUITY
The Company has authorized one million (1,000,000) shares of
Series 1993 Preferred Stock and two million (2,000,000)
shares of Series Preferred Stock subject to designation by
the Board of Directors:
(Continued)
F-20
<PAGE>
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 share based upon the total number of
shares outstanding. Outstanding at December 31, 1996
are 268,851 shares.
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, at
the Company's option. There are 1,000,000 shares
authorized and zero shares outstanding at December 31,
1996.
The Company paid dividends on the Series 1993 Preferred
Stock and Series B Preferred Stock through the issuance of
27,535 and 95,308 shares of common stock in 1996 and 1995,
respectively. Also during 1996, the Company purchased and
retired 58,059 shares of Series B Preferred Stock at $13.70
per share and allowed the holders of 21,676 Series B
Preferred Stock to convert the shares into 75,410 shares of
common stock.
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 registered on a Form S-8 registration
statement, as amended, 650,000 shares of common stock to be
issued pursuant to its 1994 Employee Stock Compensation Plan
(ESC). The ESC provides for stock compensation through the
award of the Company's common stock to persons whose
experience, ability and services are considered valuable.
At December 31, 1996, 271,000 shares have been issued under
the ESC at prices ranging from $2.81 to $8.00 per share.
The Company has reserved and registered under a Form S-8
registration statement 2,000,000 shares of common stock to
be issued pursuant to a 1994 Compensatory Stock Option Plan
(CSO). The CSO is a nonstatutory stock option plan intended
as an employment incentive to aid in attracting and
retaining in the employ or service of the Company persons of
experience and ability and whose services are considered
valuable.
The Company applies APB Opinion 25 in accounting for the CSO
and non-plan options. Accordingly, no compensation cost has
been recognized for the CSO and non-plan options granted in
1996 or 1995. Had compensation cost been determined on the
basis of fair value pursuant to FASB 123, net income and
earnings per share would have been reduced as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
NET INCOME
----------
As reported $911,755 266,153
======== =======
Proforma $464,427 ($2,467,170)
======= ===========
PRIMARY EARNINGS PER SHARE
--------------------------
As reported $0.13 --
==== ==
Proforma $0.06 ($0.68)
==== ====
FULLY DILUTED EARNINGS PER SHARE
--------------------------------
As reported $0.12 --
==== ==
Proforma $0.06 --
==== ==
</TABLE>
The proforma deficit of approximately $2.5 million in 1995
results primarily from the grant of 2,349,306 CSO and non-
plan options, all of which were 100% vested as of the date
of grant.
The fair value of each option granted is estimated on the
grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Dividend yield -- --
Risk-free interest rate 5.73% 6.0%
Expected life 4 YRS. 5 YRS.
Expected volatility 69.47% 69.47%
</TABLE>
(Continued)
F-21
<PAGE>
A summary of the status of CSO and non-plan options granted
to employees, consultants, officers and directors for the
purchase of the Company's common stock follows:
<TABLE>
CSO Non-Plan
--- --------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31,
1995 1,484,410 $5.42 1,226,320 $3.78
Granted 498,500 4.50 600,000 4.35
Exercised - - - -
Terminated (39,000) (6.45) (400,000) (3.38)
--------- ----- --------- -----
Balance, December 31,
1996 1,943,910 $5.16 1,426,320 $4.14
========= ===== ========= =====
Weighted average fair
value of options granted
during 1996 $1.66 per share
====
</TABLE>
At December 31, 1996, 1,778,243 CSO options and all non-plan
options were fully vested. The 165,667 remaining CSO options
will vest over the next two years.
<TABLE>
CSO Non-Plan
--- --------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31,
1994 877,014 $6.68 - -
Granted 1,122,986 5.05 1,226,320 $3.78
Exercised - - - -
Terminated (515,590) (6.75) - -
--------- ----- --------- ----
Balance, December 31,
1995 1,484,410 $5.42 1,226,320 $3.78
========= ==== ========= ====
Weighted average fair
value of options granted
during 1995 $2.32 per share
=====
</TABLE>
The following is a summary of the status of CSO and non-plan
options outstanding at December 31, 1996:
<TABLE>
Outstanding Options Exercisable Options
-------------------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
- ----------- ------ ---- ----- ------ -----
<C> <C> <C> <C> <C> <C>
$3.00 - $3.60 760,319 3.0 $3.31 760,319 $3.31
$4.00 - $4.80 1,592,487 3.9 4.28 1,426,820 4.26
$6.00 - $8.00 1,017,424 7.3 6.48 1,017,424 6.48
</TABLE>
At December 31, 1996, the Company has reserved 1,464,097 shares
of common stock which are issuable upon the exercise of the
following warrants:
At December 31, 1996, the Company has outstanding 1,049,720
common stock warrants issued in connection with the
Company's merger with SOE. Four warrants convert to one
share of common stock. On February 2, 1995, the Board of
Directors approved a resolution to reduce the exercise price
of the warrants to $1.625, or $6.50 per share, in order to
give effect to the Company's 1-for-4 reverse stock split
effected in September, 1994. The warrants, which previously
(Continued)
F-22
<PAGE>
expired on April 24, 1996, have been extended to April 24,
1997, by the Board of Directors.
In connection with a common stock private placement closed
in 1995, the Company has issued 41.17 Class A Warrants and
41.17 Class B Warrants. Each Class A and Class B Warrant is
convertible to 5,000 shares of common stock. The Class A
Warrants have exercise prices of $3.50 and $5.00 per share,
respectively. The Warrants are exercisable for thirty-six
months, commencing October 8, 1997. The Company has a call
right on the Class A and Class B Warrants at a share price
of $5.50 and $7.00, respectively.
The Company has outstanding 400,000 common stock warrants
issued in connection with various consulting agreements.
Each Warrant is convertible into one share of common stock
at exercise prices from $3.00 to $3.50 per share. The
warrants expire in June, 1998.
In connection with a common stock private placement closed
in 1996, the Company issued 100 1996 Class A Warrants. Each
1996 Class A Warrant is convertible to 1,650 shares of
common stock. The 1996 class A Warrants are exercisable
through October 8, 1999, and have an exercise price of $4.00
per share.
In connection with the purchase of certain gas properties
from AKS (see Note 2), the Company issued 225,000 warrants
to purchase 225,000 shares of common stock. The warrants
have an exercise price of $5.00 per share and expire on
December 31, 1998.
The weighted average price of the 1,464,097 shares of common
stock reserved upon exercise of all outstanding warrants is
$4.40.
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 had the obligation to purchase the remaining outstanding
Series B Preferred Stock at $13.70 per share. Payment terms
under the agreement were as follows:
<TABLE>
Due Number
Date Of Shares Amount
---- --------- ------
<C> <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
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
25,679 shares of the Series B Preferred Stock into 100,000
shares of common stock. The remaining 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.
(15) RELATED PARTY TRANSACTIONS
Significant related party transactions which are not
disclosed elsewhere in these consolidated financial
statements are discussed in the following paragraphs (see
Notes 5, 8, 14, 15, and 19).
In both 1996 and 1995, the Company, pursuant to the terms of
an employment and stock option agreement, has paid or
accrued compensation to the Company's Chairman of $60,000.
The Chairman has been assisting management in various
financing transactions.
(Continued)
F-23
<PAGE>
The Company paid or accrued fees of approximately $68,000
during 1995 to a company owned by a former officer/director
of the Company for legal and administrative services.
The Company has billed $15,000 during 1995 for financial
consulting services to a company in which an
officer/director of the Company is a principal.
In 1996, the Company paid $276,500 to purchase gas from a
company owned 20% by a director of the Company, which
participated as a joint venture partner in drilling various
wells in the Appalachian area.
The Company has paid or accrued interest of approximately
$21,500 and $31,000 during 1996 and 1995, respectively,
related to advances and notes payable from Southern Gas
Holding Co., Inc. (Holding), a company primarily owned by
two officers/directors of the Company. At December 31,
1996, the Company has made advances to Holding totaling
$163,728 which the principals of Holding intend to secure
with shares of Company stock as it becomes available.
In 1995, the Company purchased a pipeline in the Gausdale
Field for $400,000 from Holding. The price was determined
based upon future estimated cash flows from transportation
fees discounted at 10%.
In March, 1995, in order to meet a corporate commitment, the
Company borrowed monies from an officer/director and a
director of the Company totaling $500,000. The funds bore
interest at the rate of 10% per annum and were due in full
in July, 1996. The note was secured by gas properties, and
the individuals had the option to convert their note to a
working interest position in wells to be drilled offshore
Louisiana. In July, 1995, the related parties' converted
their note to a 13.75% working interest in two wells.
Pursuant to an agreement between the parties, the Company
had the right to repurchase the working interest position on
or before September 30, 1995. The Company exercised the
right, as amended, to repurchase the working interest
position for $750,000 plus a 3.875% overriding royalty
interest prior to September 30, 1995.
In 1996, the Company purchased the overriding royalty
interest in the Ship Shoal B-3 well from the
officer/director of the Company for $125,000.
(16) LEASES
Future minimum rental payments for operating leases with
noncancelable lease terms in excess of one year are as
follows:
<TABLE>
Years ending
December 31,
------------
<C> <C>
1997 $37,800
1998 6,300
------
$44,100
======
</TABLE>
The Company rents equipment and office space under various
operating leases. Rental expense for the years ended
December 31, 1996 and 1995, was approximately $61,200 and
$106,900, respectively. Included in both 1996 and 1995 is
$37,800 paid to an officer/director of the Company related
to office space rental. The lease agreement is effective
through February 28, 1998 at a monthly rate of $3,150.
(17) DEFINED CONTRIBUTION PLAN
The Company maintains a Defined Contribution Plan (the Plan) for
all full-time employees of the Subsidiary. Employees are
entitled to make contributions based on their percentage of
compensation. The Company provides a matching contribution up
to 5% of each employee's compensation. For the years ended
December 31, 1996 and 1995, approximately $32,500 and $26,100,
respectively, were recognized as a general and administrative
expense for contributions to the Plan.
(Continued)
F-24
<PAGE>
(18) SIGNIFICANT CUSTOMER CONCENTRATION
The Company's primary market areas are the State of Kentucky and
the Gulf Coast region, primarily Louisiana. For the years ended
December 31, 1996 and 1995, most of the Company's gas sales are
on credit to major industrial or local distributing companies.
Trade receivables are not generally collateralized; however, the
Company's customers' historical and future credit positions are
thoroughly analyzed prior to extending credit. In certain
instances, the Company will require a letter of credit.
Approximately 31% and 36% of the Company's gas sales in 1996 and
1995, respectively, are subject to fixed pricing contracts,
while the remainder are based on spot prices. The Company
presently uses its marketing operations to provide gas supplies
to customers solely to meet delivery requirements when internal
production will not suffice. The Company provides gas supplies
to industrial end users and local distributing companies
primarily for commercial use.
Marketing revenues from major customers are summarized below:
<TABLE>
1996 1995
---- ----
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Company A 15,650,000 69 6,393,000 37
Company B 2,543,000 11 2,464,000 14
</TABLE>
(19) COMMITMENTS AND CONTINGENCIES
In December, 1995, the Company entered into a severance
agreement with its former President and Chief Executive Officer
who resigned effective December 31, 1995. Under the agreement,
the executive was paid $85,000 and will receive the sum of
$10,000 per month through March 31, 1998. In return, the
executive surrendered 515,590 CSO common stock options under a
Severance Plan which had exercise prices between $6.00 and $8.00
per share and expired between March 18, 2003, and February 1,
2005. In return, the executive received 643,987 common stock
options at an exercise price of $4.00 per share and which expire
on November 29, 2000. He also retains 46,203 CSO common stock
options immediately exercisable, previously issued to him, at
$3.50 per share which expire on October 11, 2002. The Company
also agreed to provide for payment of an office lease through
October, 1996, and assigned a 1% gross overriding royalty
interest in certain oil and gas properties. As a result of the
agreement, the Company has recognized a charge against income of
$371,346 in 1995 and has an accrued severance liability at
December 31, 1996, of $142,293 based on an 8% discount factor.
In the normal course of business, the Company enters into
short-term supply and purchase agreements. These agreements can
stipulate either a fixed contract price or a floating price
based on spot prices. Management attempts to schedule
deliveries to mitigate any possible adverse effects of changing
prices; however, gas prices are susceptible to change due to
industry supply and demand positions.
F-25
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
The following supplemental information regarding oil and gas
activities of the company is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission
(SEC) and Statement of Financial Accounting Standards No. 69 (SFAS
No. 69), "Disclosures About Oil and Gas Producing Activities."
<TABLE>
1996 1995
---- ----
<S> <C> <C>
CAPITALIZED COSTS RELATING TO OIL AND
GAS PRODUCING ACTIVITIES:
Proved undeveloped oil and gas properties $ 4,193,257 2,932,552
Proved oil and gas properties 38,257,168 17,104,875
Unproved oil and gas properties 5,686,334 2,760,834
Other - 1,000,000
Support equipment and facilities 8,061,570 7,802,245
---------- ----------
56,198,329 31,600,506
Less accumulated depreciation, depletion,
amortization, and impairment (5,703,885) (2,838,928)
---------- ----------
Net capitalized costs $50,494,444 28,761,578
========== ==========
COSTS INCURRED IN OIL AND GAS PRODUCING
PROPERTY ACQUISITION, EXPLORATION AND
DEVELOPMENT ACTIVITIES:
Property acquisition costs:
Proved $18,439,652 1,030,500
Unproved 2,925,500 2,760,834
Exploration costs - 341,334
Development costs 3,314,867 1,746,807
---------- ----------
$24,680,019 5,879,475
========== ==========
RESULTS OF OPERATIONS FOR OIL AND GAS ACTIVITIES:
Oil and gas sales $8,540,569 3,198,987
Gain (loss) on sale of gas properties (153,000) 91,000
Production costs (1,402,389) (765,285)
Depreciation, depletion, and amortization (2,431,633) (881,085)
---------- ----------
Results of operations for oil and gas
producing activities $4,553,547 1,643,617
========= =========
</TABLE>
RESERVE QUANTITY INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND 1995:
The following estimates of proved developed and proved
undeveloped reserve quantities, and related standardized measure
of discounted net cash flow, are estimates only and have been
provided by Richard M. Russell & Associates, Inc.
(Kentucky/Appalachian region properties); Netherland, Sewell &
Associates, Inc. (Gulf Coast region properties); and McConnell
Consulting, Inc. (Michigan properties), independent engineering
consulting firms. The amounts do not purport to reflect
realizable values or fair market values of the Company's
reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are
more imprecise than those of currently producing oil and gas
properties. Accordingly, these estimates are expected to change
as future information becomes available. All of the Company's
reserves are located in the United States, and primarily in the
State of Kentucky and the Gulf Coast Region offshore Louisiana.
(Continued)
F-26
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
The success of future development efforts and the amount, timing
and costs thereof may significantly increase or decrease the
Company's total unproved and proved developed reserve volumes,
the "Standardized Measure of Discounted Future Net Flows," and
the components and changes therein.
Proved reserves are estimated reserves of crude oil (including
condensate and natural gas liquids), and natural gas that
geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through
existing wells, equipment, and operating methods. Gas volumes
are expressed in thousands of cubic feet and oil reserves in
barrels.
<TABLE>
1996 1995
---- ----
Oil Gas Oil Gas
--- --- --- ---
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year 756,383 24,741,330 - 22,845,597
Revisions of previous
estimated (45,694) (2,346,294) - 1,419,239
Purchases of minerals
in place 691,712 18,373,382 - 101,893
Extensions and discoveries - - 857,899 1,447,916
Production (200,189) (1,829,503) (101,516) (761,175)
Sales and transfers of
minerals in place - (3,246,204) - (312,140)
-------- ---------- ------- ----------
Total proved reserves 1,202,212 35,692,711 756,383 24,741,330
========= ========== ======= ==========
Proved developed reserves:
Beginning of year 756,383 19,702,503 - 17,379,370
End of year 909,194 29,033,203 756,383 19,702,503
======= ========== ======= ==========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES AS OF
DECEMBER 31, 1996 AND 1995:
The standardized measure of discounted future net cash flows is
computed by applying year-end prices of oil and gas (with
consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production of
proved gas reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based
on year-end statutory tax rates, with consideration of future tax
rates already legislated) to be incurred on pre-tax net cash
flows less tax basis of the properties and available credits, and
assuming continuation of existing economic conditions. The
estimated future net cash flows less are then discounted using a
rate of 10% a year to reflect the estimated timing of the future
cash flows.
The average crude oil price at year-end 1996 used for this
calculation was $24.29 per barrel. The average natural gas price
used was $3.72 for Gulf Coast, $2.17 for Kentucky region and
$2.75 for Michigan. In general, oil and natural gas prices
declined in early 1997.
At December 31, 1996 and 1995, the Company's future discounted
net cash flow from proved reserves was located as follows:
(Continued)
F-27
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
KENTUCKY GULF COAST MICHIGAN TOTAL
-------- ---------- -------- -----
<C> <C> <C> <C> <C>
1996 $16,972,496 41,678,600 1,298,910 $59,950,006
=========== ========== ========= ===========
1995 $17,327,392 10,728,200 1,392,500 $29,448,092
=========== ========== ========= ===========
</TABLE>
At December 31, 1996, the South Timbalier 148 Field accounted for
approximately 74% of the Company's future net cash flows in the
Gulf Coast region. At December 31, 1996 and 1995, the Gausdale
Field accounted for approximately 49% and 83% of the Company's
future net cash flows from the Kentucky region.
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Standard measure of discounted future
net cash flows at December 31:
Future cash inflows $124,117,714 67,476,132
Future production costs (16,015,402) (8,612,212)
Future development costs (8,893,219) (2,473,326)
Future taxes (2,501,238) (2,408,364)
----------- ----------
96,707,855 53,982,230
Future net cash flows, 10% annual discount
for estimated timing of cash flows (36,757,849) (24,534,138)
----------- -----------
Standardized measure of discounted
future net cash flows relating to
proved gas reserves $ 59,950,006 29,448,092
=========== ==========
</TABLE>
The following reconciles the change in the standardized measure
of discounted future net cash flows during the years 1996 and
1995:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Beginning of year $29,448,092 15,968,977
Sales of gas produced, net of
production costs (7,138,180) (2,433,702)
Net changes in prices and
production costs 4,933,466 (110,565)
Extensions and discoveries - 11,659,628
Revisions of previous quantity
estimates (2,659,980) 1,418,562
Change from purchases of
minerals in place 36,340,737 93,226
Change from sale and transfers
of minerals in place (2,361,900) (323,019)
Changes in future taxes 42,210 347,171
Accretion of discount 2,655,425 1,596,898
Changes in timing and other (1,309,864) 1,230,916
---------- ----------
End of year $59,950,006 29,448,092
========== ==========
</TABLE>
The change from purchases of minerals in place reflects the
Company's acquisition of the South Timbalier 148 lease block
located offshore Louisiana and the acquisition of various fields
located in Kentucky from AKS.
The increase in extensions and discoveries for 1995 primarily
reflects the Company's successful completion and development of
wells in the Ship Shoal lease located in the Gulf Coast region.
F-28
