U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
--- ---
Commission File No.0-21472
AMERICAN RESOURCES OF DELAWARE, INC.
(Name of small business issuer in its charter)
DELAWARE 86-0713506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 MORGAN STREET, P. O. BOX 87
VERSAILLES, KENTUCKY 40383
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 606-873-5455
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES xx NO
------- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
YES xx NO
--------- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
Issuer's classes of common equity, as of the last practicable
date:
On March 31, 1997, 7,938,113 shares of the Registrant's
Common Stock, par value $.00001 per share, were issued and
outstanding and 268,851 shares of the Registrant's Series 1993 8%
Convertible Preferred Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ; No xx .
----- --------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
FORM 10-QSB
FOR THE QUARTER ENDED MARCH 31, 1997
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements 1
Introduction to the Financial Statements 2
Condensed Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1997 and 1996 5
Condensed Consolidated Statements of
Stockholders' Equity - Three Months
Ended March 31, 1997 6
Condensed Consolidated Statements of
Cash Flows - Three Months Ended
March 31, 1997 and 1996 7
Notes to Condensed Consolidated Financial
Statements 8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 13
PART II - OTHER INFORMATION 19
Item 3 - Exhibits and Reports on Form 8-K 19
Signature 20
ii
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Financial Statements for the three months ended March
31, 1997 and 1996 include, in the opinion of the Company, all
adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the results of operations for such
periods. Results of operations for the three months ended March
31, 1997, are not necessarily indicative of results of operations
which will be realized for the year ending December 31, 1997.
The Financial Statements should be read in conjunction with the
Company's Report on Form 10-KSB for the year ended December 31,
1996.
1
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED FINANCIAL
---------------------------------
STATEMENTS
----------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1997 AND 1996
-----------------------
2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS
--------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
March 31,
---------
1997 December 31,
---- ------------
(unaudited) 1996(*)
----------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,038,240 353,419
Accounts and notes receivable, net 4,724,384 7,037,415
Deferred tax asset 16,319 16,319
Prepaid expenses and other 371,416 344,850
---------- ----------
Total current assets 6,150,359 7,752,003
Oil and gas properties, at cost
(successful efforts method) 49,688,890 48,136,759
Property and equipment, at cost 11,855,450 11,754,079
---------- ----------
61,544,340 59,890,838
Less accumulated depreciation,
depletion and amortization (7,528,452) (6,150,632)
---------- ----------
Net property and equipment 54,015,888 53,740,206
Other assets:
Investment in unconsolidated subsidiaries 414,970 485,610
Call advance 1,500,000 1,500,000
Notes receivable 454,410 432,576
Deferred financing costs, net 514,502 439,695
Other 428,692 487,554
---------- ----------
Total other assets 3,312,574 3,345,435
---------- ----------
$63,478,821 64,837,644
========== ==========
(Continued)
</TABLE>
Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial
statements.
3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
March 31,
---------
1997 December 31
---- -----------
(unaudited) 1996(*)
----------- -------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $6,406,384 6,513,283
Accounts payable 3,587,117 4,861,340
Accrued severance liabilities 114,958 112,689
Accrued taxes payable 243,277
195,467
Unearned revenue 780,808 807,632
Accrued expenses and other 301,809 373,622
--------- ---------
Total current liabilities 11,434,353 12,864,033
Long-term debt, excluding current
maturities 19,332,171 19,422,421
Unearned revenue 2,626,410 2,821,611
Deferred tax liability and other 3,749,818 3,611,572
Stockholders' equity:
Series 1993 8% Convertible Preferred Stock,
par value $12.00 per share 2,181,819 2,181,819
Convertible Securities, representing
approximately 1,355,000 and 2,850,000
shares of Common Stock at March 31,
1997 and December 31, 1996, respectively 2,501,456 4,997,554
Common Stock, par value $.00001 per
share; 20,000,000 shares authorized;
7,949,863 and 6,520,296 shares issued
and outstanding at March 31, 1997 and
December 31, 1996, respectively 79 65
Additional paid-in capital 18,996,555 16,453,899
Treasury stock (52,400) (52,400)
Retained earnings 2,708,560 2,537,070
---------- ----------
Total stockholders' equity 26,336,069 26,118,007
Commitments and contingencies - -
$63,478,821 64,837,644
========== ==========
</TABLE>
*Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial
statements.
4
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
------------------------------------------
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Production $ 3,763,097 1,442,733
Transportation 211,494 302,692
Marketing 10,534,742 7,864,493
Other 11,640 313,329
---------- ----------
14,520,973 9,923,247
---------- ----------
Expenses:
Production 541,766 318,117
Transportation 94,073 62,285
Marketing 10,548,429 7,607,979
Other 36,461 54,801
Depreciation, depletion and
amortization 1,377,820 474,343
---------- ----------
12,598,549 8,517,525
---------- ----------
1,922,424 1,405,722
Administrative expenses 795,412 452,462
---------- ----------
Operating income 1,127,012 953,260
Other income (expense):
Interest income 12,486 383,211
Interest expense (684,086) (481,314)
Other 619 (41,898)
---------- ----------
(670,981) (140,001)
---------- ----------
Income before income
tax expense 456,031 813,259
Income tax expense 177,850 317,218
---------- ----------
Net income $278,181 496,041
======== =======
Per common share:
Primary:
Net income $.03 $.09
==== ====
Weighted average number of common
shares and common share
equivalents outstanding 8,603,648 5,816,404
========= =========
Fully diluted:
Net income $.03 $.08
==== ====
Weighted average number of common
shares and common share
equivalents outstanding 8,871,499 6,369,421
========= =========
</TABLE>
See accompanying notes to condensed, consolidated financial
statements.
5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1997
-----------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Common Stock 8% Preferred Stock
------------- -----------------------------
Number Number Net of Additional
of Par Convertible of Par Discount Paid-in Treasury Retained
shares value Securities shares value value Capital stock Earnings Total
------ ----- ----------- ------ ----- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996 6,520,296 $65 4,997,554 268,851 3,226,213 2,181,819 16,453,899 (52,400) 2,537,070 26,118,007
Conversion of
4% Convertible
Debentures to
Common Stock 1,401,002 14 (2,496,098) - - - 2,496,084 - - -
Common Stock
Dividends issued
or accrued 28,557 - - - - - 51,759 - (106,691) (54,932)
Warrants exercised
for Common
Stock 8 - - - - - 52 - - 52
Deferred
compensation
costs - - - - - - 31,850 - - 31,850
Stock
registration
costs - - - - - - (37,089) - - (37,089)
Net income - - - - - - - - 278,181 278,181
--------- --- ---------- ------- --------- --------- ---------- ------- --------- ----------
Balance,
March 31,
1997 7,949,863 $79 2,501,456 268,851 3,226,213 2,181,819 18,996,555 (52,400) 2,708,560 26,336,069
========= === ========== ======= ========= ========= ========== ======= ========= ==========
</TABLE>
See accompanying notes to condensed, consolidated financial
statements.
6
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
<TABLE>
Three months ended March 31,
----------------------------
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities $2,587,100 1,216,781
--------- ---------
Investing activities:
Purchases of property and equipment (1,653,502) (3,819,153)
Payments on notes receivable 150,410 294,483
Issuance of notes receivable (35,000) -
Purchase of 6% Junior Preferred Stock - (795,400)
--------- ---------
Net cash used in investing activities (1,538,092) (4,320,070)
--------- ---------
Financing activities:
Proceeds from borrowings 1,027,752 2,590,000
Payments on borrowings (1,224,901) (249,727)
Other (167,038) -
--------- ---------
Net cash provided by financing
activities (364,187) 2,340,273
--------- ---------
Increase (decrease) in cash 684,821 (763,016)
Cash and cash equivalents at
beginning of period 353,419 826,393
--------- ---------
Cash and cash equivalents at
end of period $1,038,240 63,377
========= =========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared stock dividends and issued 10,754 and 15,835
shares of Common Stock to holders of the Series 1993 and Series B
Preferred Stock during the three months ended March 31, 1997 and
1996, respectively.
During the three months ended March 31, 1997, holders of
$2,996,784 ($2,496,098 net of placement costs) of the Convertible
Securities have converted the securities into 1,401,002 shares
of Common Stock and received 17,803 shares of Common Stock
dividends related to the Convertible Securities.
During the three months ended March 31, 1996, 37,265 shares of
Series B Preferred Stock were converted into a total of 149,410
shares of Common Stock.
The Company acquired 58,059 shares of the outstanding 6% Junior
Preferred Stock for $802,900 during the three months ended March
31, 1996. Upon resolution of the Board of Directors, the shares
were retired.
7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(UNAUDITED)
-----------
(1) GENERAL
American Resources of Delaware, Inc. ("ARI"), a Delaware
corporation organized on August 14, 1992, was formed to
acquire the assets and assume certain liabilities of
Standard Oil & Exploration of Delaware, Inc. ("SOE")
pursuant to SOE's Chapter 11 Bankruptcy Joint Plan of
Reorganization which was consummated effective April 22,
1993.
ARI and its wholly-owned subsidiary, Southern Gas Co. of
Delaware, Inc. ("Southern") are involved in the production,
gathering, purchasing, processing, transporting and selling
of natural gas primarily in the State of Kentucky and the
Gulf of Mexico. The Subsidiary has expanded its production
efforts through its involvement in the development of
prospects located offshore Louisiana in the Gulf of Mexico.
These activities are considered to be one business segment
for financial reporting purposes.
The accompanying condensed, consolidated financial
statements include the accounts of ARI and its Subsidiary,
collectively referred to as the Company. All significant
intercompany balances and transactions have been eliminated
in consolidation in order to make the financial statements,
in the opinion of management, not misleading.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
instructions to Form 10-Q and, therefore, do not include all
disclosures required by generally accepted accounting
principles. However, in the opinion of management, these
statements include all adjustments, which are of a normal
recurring nature, necessary to present fairly the financial
position at March 31, 1997 and December 31, 1996 and the
results of operations and changes in cash flows for the
periods ended March 31, 1997 and 1996. These financial
statements should be read in conjunction with the financial
statements and notes to the financial statements in the 1996
Form 10-K of the Company that was filed with the Securities
and Exchange Commission.
Net income per common share was computed after consideration
of dividend requirements on Preferred Stock, using the
weighted average number of shares outstanding during each of
the years presented. Outstanding stock options and warrants
are Common Stock equivalents and have been considered when
the effect is dilutive.
Certain reclassifications have been made to the prior period
financial statements to conform with the current period
presentation.
8
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(UNAUDITED)
-----------
(2) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
March 31, December 31,
--------- ------------
1997 1996
---- ----
<S> <C> <C>
Note payable to Den norske Bank AS,
payable in monthly installments,
commencing April 1, 1996 through
February 1, 2002, with interest payable
monthly commencing November 1, 1995
at prime plus 1% per annum, secured
by oil and gas properties, equipment
and notes receivable. $24,083,000 25,083,000
Note payable to Den norske Bank A.S.
under $2,500,000 development facility,
due March 1, 1998, with interest payable
monthly at prime plus 2% per annum,
secured by oil and gas properties. 1,004,205 -
Call Agreement payable, original balance of
$1,000,000 payable in monthly installments
of $31,250 commencing April 1, 1995,
due November 1997. 154,650 274,000
Notes payable to related parties,
interest payable at 22%, in connection
with Participation Agreements. 240,000 240,000
Note payable to related party, interest
payable at 22%, in connection with
Participation Agreement. 200,000 250,000
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 56,700 39,008
---------- ----------
25,738,555 25,935,704
Less - Current portion (6,406,384) 6,513,283
---------- ----------
Long-term debt $19,332,171 19,422,421
========== ==========
</TABLE>
9
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(UNAUDITED)
-----------
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 March 31, 1997, the borrowing base under
the revolving credit facility was $24,500,000. Additional
borrowings under the credit facility are dependent upon a
redetermination of the borrowing base, which is primarily
dependent upon the value of the mortgaged properties as
determined under Den norske's internal lending procedures.
Reductions of the credit facility are also dependent upon
the borrowing base. At March 31, 1997, monthly principal
reductions are $500,000. The borrowing base will be
redetermined semi-annually on each October 1st and April 1st
prior to February 1, 2002.
In February 1997, the credit agreement was amended to reduce
the interest rate to the prime rate plus 1/2% per annum and
establish a $2,500,000 development facility which can be
drawn upon by the Company to develop properties.
Under the credit agreement with Den norske, the Company is
required to maintain certain financial ratios relating to
debt coverage ratio, current ratio, tangible net worth,
general and administrative expenses and quarterly interest
ratio. At March 31, 1997, the Company was in compliance
with the required financial covenants.
(3) 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
10
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(UNAUDITED)
-----------
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 31, 1997, securities totaling
$2,996,784 have been converted into 1,401,002 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.
(4) STOCKHOLDERS' EQUITY
The Company has authorized one million shares (1,000,000)
shares of Series 1993 Preferred Stock and two million shares
(2,000,000) of Series Preferred Stock subject to designation
by the Board of Directors:
Series 1993 Preferred Stock is convertible into
one share of common stock with a liquidation
preference of $12 per share. Dividends are
payable semiannually at the rate of 8% per annum
in common stock. 268,851 shares are outstanding
at March 31, 1997 and December 31, 1996.
Series B Preferred Stock, designated by the Board
of Directors, is convertible into common stock
based on a conversion factor of $10.00 divided by
73% of the common stock's closing bid price on the
conversion date. The Series B Preferred Stock has
a liquidation preference of $10.00 per share, but
is junior to the Series 1993 Preferred Stock.
Dividends are payable quarterly at the rate of 6%
in cash or common stock. There are 1,000,000
shares authorized and zero shares outstanding at
March 31, 1997 and December 31, 1996,
respectively. During the first quarter of 1997,
the Company's Board of Directors adopted a
resolution eliminating the Series B Preferred
Stock and returning the 1,000,000 shares to the
status of authorized but unissued Preferred Stock,
without designation. The Certificate eliminating
the Series B Preferred Stock
11
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
-----------------------------------------------------------
(UNAUDITED)
-----------
was accepted by the Office of the Secretary
of State of Delaware on April 16, 1997.
On January 15, 1997, the Board of Directors declared
dividends payable in Common Stock on January 22, 1997, to
holders of the Series 1993 Preferred Stock totaling 10,754
shares.
The Company has reserved a total of approximately 2,000,000
shares of common stock for issuance under a 1994
Compensatory Stock Option Plan (CSO). Outstanding stock
options, which include CSO plan and non-plan options,
granted to employees, consultants, officers and directors
for the purchase of the Company's common stock are as
follows:
<TABLE>
Price Per Share
---------------
Shares From To
------ ---- --
<S> <C> <C> <C>
Balance December 31, 1996 3,370,230 $3.00 $8.00
Granted - - -
Terminated (82,233) 3.00 3.50
----------
Balance March 31, 1997 3,287,897 $3.00 $8.00
==========
</TABLE>
Outstanding options at March 31, 1997 include 1,943,910
issued under the CSO, of which 1,886,077 are exercisable,
and 1,343,987 non-plan options, all of which are immediately
exercisable. Outstanding options at March 31, 1997 expire
between November 26, 1997 and February 1, 2005.
At March 31, 1997, the Company has outstanding warrants to
purchase 1,464,090 shares of common stock at exercise
prices from $1.63 to $5.00 per share; however, warrants to
purchase 262,424 shares of common stock are scheduled to
expire by their own terms on April 24, 1997.
(5) SUBSEQUENT EVENTS
In April 1997, the Company purchased from a director of the
Company an overriding royalty interest in the Ship Shoal B-3
well for $150,000 and also purchased from an
officer/director of the Company an overriding royalty
interest in the Ship Shoal B-4 well for $180,000. Values of
the overriding royalty interests were based on discounted
reserve values as determined from the December 31, 1996
reserve reports.
On April 21, 1997, the Company entered into an Amendment to
Lead Generation Agreement with Corporate Relations Group,
Inc. ("CRG") to provide additional services in the public
relations area. The Amendment also provided for the
immediate termination of 500,000 options previously granted
to CRG by ARI and the issuance to CRG of 50,000 shares of
free trading stock in ARI. The shares were valued at $1.94
per share which represents the closing bid price on April
21, 1997. The cost is being amortized over a one-year
period due to the timing of the services being performed.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
Statements, other than historical facts, contained in this
Quarterly Report on Form 10-QSB, including statements of
estimated oil and gas production and reserves, drilling plans,
future cash flows, anticipated capital expenditures and
Management's strategies, plans and objectives, are "forward
looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the
Company believes that its forward looking statements are based on
reasonable assumptions, it cautions that such statements are
subject to a wide range of risks and uncertainties incident to
the exploration for, acquisition, development and marketing of
oil and gas, and it can give no assurance that its estimates and
expectations will be realized. Important factors that would
cause actual results to differ materially from the forward
looking statements include, but are not limited to, changes in
production volumes, worldwide demand, and commodity prices for
petroleum natural resources; the timing and extent of the
Company's success in discovering, acquiring, developing and
producing oil and gas reserves; risks incident to the drilling
and operation of oil and gas wells; future production and
development costs; the effect of existing and future laws,
governmental regulations and the political and economic climate
of the United States and foreign countries in which the Company
operates, if any; the effect of hedging activities; and
conditions in the capital markets.
RECENT DEVELOPMENTS
In February 1997, the Company's $30,000,000 revolving credit
agreement with Den norske Bank, AS ("Den norske") was amended to
reduce the interest rate to the prime rate plus 1/2% per annum,
and establish a $2,500,000 development facility which can be
drawn upon by the Company to develop properties. The development
facility matures on March 1, 1998 and carries an interest rate of
prime plus 2% per annum.
Also in February 1997, the Company through its wholly owned
subsidiary, Southern Gas Co. of Delaware, Inc., acquired a
twenty-five percent (25%) working interest in onshore Gulf Coast
undeveloped properties located in Greene and Wayne Counties,
Mississippi. The largest working interest owner and operator is
Aviara Energy Corporation located in Houston, Texas. The Company
is currently in the process of evaluating the properties to
select a location for the first well to be drilled.
During the first quarter of 1997, production from the Ship
Shoal B-3 and B-4 wells was down from expected amounts due to a
paraffin buildup on the wells. As a result, production from the
two Gulf Coast wells was reduced significantly in February 1997
but returned to previous production levels in March 1997.
On March 2, 1997, the OCS G-1898 #D-4 well had been
successfully drilled and was put on production, with an initial
flow rate of 3.5 million cubic feet of gas and 350 barrels of gas
liquids per day. As of March 19, 1997, production had been
increased to 4.0 million cubic feet of gas and 420 barrels of gas
liquids per day. The well was drilled from the D Platform on
South Timbalier Block 148 to a total depth of 16,535 feet. ARI
has a 15% working interest in the well, and it is operated by
Newfield Exploration Company. ARI purchased its interest in the
South Timbalier Block 148 in July 1996, consisting of ten
existing wells, five of which were producing. Since the
purchase, the Company has successfully completed and placed into
production the remaining five wells and drilled and hooked up two
additional wells. This brings the number of wells in which the
Company owns an interest in the offshore Gulf Coast region to 14.
Jeffrey J. Hausman has served as Chief Financial Officer of
the Company since January 1, 1996 and Treasurer since August
1996. During this time, Mr. Hausman resided with his family in
Nashville, Tennessee. Due to the excess time required by Mr.
Hausman's position as a result of the Company's growth and his
family's desire to remain
13
<PAGE>
in Nashville, Mr. Hausman tendered his resignation as an officer
of the Company effective April 1, 1997. However, he has agreed
to continue with the Company in an advisory capacity. Mr.
Hausman was succeeded by Ralph A. Currie, a former partner of
KPMG Peat Marwick, Lexington, Kentucky.
On April 2, 1997, the Company entered into an agreement to
acquire a 26.4% working interest in the Main Pass Block 53 from
Great River Oil & Gas Corporation. The property is operated by
Mustang Energy L.C., and the Company anticipates drilling to
commence during the last week of May 1997.
In the fourth quarter of 1996, the Company privately placed
4% convertible securities in the aggregate principal amount of
$6,000,000 ($4,997,554 net of placement costs) with a required
conversion of one year from date of issuance. The securities 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 April 30, 1997, securities
totaling $3,355,584 have been converted into 1,641,145 shares of
common stock inclusive of the 4% dividend shares paid as of the
date of conversion.
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, were registered under an S-3 Registration
Statement which was effective on January 23, 1997.
In April 1997, due to the recent decline in the market price
of the Company's common stock to a level below its book value,
the Board of Directors authorized the Company to repurchase up to
Two Million
14
<PAGE>
Dollars ($2,000,000.00) of the Company's common stock in market
transactions from time to time at prices deemed to be favorable
by the Company.
In April 1997, the Company purchased from a director of the
Company an overriding royalty interest in the Ship Shoal B-3 well
for $150,000. The Company also purchased from an
officer/director of the Company an overriding royalty interest in
the Ship Shoal B-4 well for $180,000. Values of the overriding
royalty interests were based on discounted reserve values as
determined from the December 31, 1996 reserve reports.
During the first quarter of 1997, the Company's Board of
Directors adopted a resolution eliminating the Series B Preferred
Stock and returning the 1,000,000 shares to the status of
authorized but unissued Preferred Stock, without designation.
The certificate eliminating the Series B Preferred Stock was
accepted by the Office of the Secretary of State of Delaware on
April 16, 1997.
On April 21, 1997, the Company entered into an Amendment to
Lead Generation Agreement with Corporate Relations Group, Inc.
("CRG") to provide additional services in the public relations
area. The Amendment also provided for the immediate termination
of 500,000 options previously granted to CRG by ARI and the
issuance to CRG of 50,000 shares of free trading stock in ARI.
The shares were valued at $1.94 per share which represents the
closing bid price on April 21, 1997. The cost is being
amortized over a one-year period due to the timing of the
services being performed.
In July 1995, the Company entered into a Call Agreement with
Prima Capital, LLC, a limited liability company in which an
officer/director owns 20%, wherein the Company has the right to
acquire a 10% equity interest in Century Offshore Management
Corporation for $4 million. Said right expires December 31,
1997, and the Company is currently evaluating whether or not it
will exercise its rights under the Call Agreement.
PENDING ADOPTION OF NEW ACCOUNTING PRINCIPLE
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, EARNINGS PER SHARE. SFAS No. 128 supersedes APB Opinion No.
15, EARNINGS PER SHARE ("Opinion No. 15"), and requires the
calculation and dual presentation of Basic and Diluted earnings
per shares ("EPS"), replacing the measures of Primary and Fully-
diluted EPS as reported under Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for periods ending
after December 15, 1997; earlier application is not permitted.
Accordingly, EPS for the first quarters of 1997 and 1996
presented on the accompanying statements of operations are
calculated under the guidance of Opinion 15.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1997 AND 1996:
Total revenues for the first three months of 1997 increased
46.3% to $14,520,973 from $9,923,247 for the comparable period in
1996. Corresponding operating expenses increased 48% to
$12,598,549 in 1997, from $8,517,525 in 1996. Components of the
increases are as follows:
- -- MARKETING: The Company's marketing volumes have increased to
---------
2.8 billion cubic feet ("bcf") for the three months ended
March 31, 1997 as compared to 1.98 bcf in 1996. The volume
increase is primarily due to expansion of the Company's
activities in this area and continued focus to function as
an integrated oil and gas company. However, due to various
short-term positions taken during the first quarter of 1997,
marketing operated at essentially a break-even position as
opposed to the 3.3% profit margin earned in 1996. The
Company expects margins to return to the 2 to 3% range for
the remainder of 1997.
<PAGE>
- -- PRODUCTION: Production revenues were $3,763,097 for the
----------
three months ended March 31, 1997 as compared to $1,442,733
for the same period in 1996. The additional revenues are
due to production from the South Timbalier 148 wells which
were acquired and completed in mid and late 1996,
respectively, together with two additional wells which were
drilled, completed and placed in production in November 1996
and March 1997. Production from the South Timbalier 148
wells contributed approximately $2,515,000 in production
revenues for the three months ended March 31, 1997.
The Company sells the bulk of its Kentucky production under
long term contracts. During the first quarter of 1997, the
Company received an average price of $2.20 per thousand
cubic feet ("mcf") on its produced gas as compared with
$2.60 per mcf in 1996. This decrease is due to excess
supplies caused by above average temperatures experienced in
1997 which resulted in lower spot prices on non-fixed
contract gas.
The Company's Gulf Cost production, which experienced
significant growth due to the addition of the South
Timbalier 148 property, realized average prices during the
first quarter of 1997 of $20.87 per barrel of oil and $2.72
per mcf of gas. The operator of the property has decided to
gradually increase gas flows during the second quarter of
1997 which will assist in offsetting the effect of declining
gas prices. Production from the Ship Shoal properties,
which are located in the Gulf Coast region, was down from
expected amounts due to a paraffin buildup on the wells. As
a result, production from the two wells was reduced
significantly in February 1997 but returned to previous
production levels in March 1997.
As can be expected, production costs also increased to $541,777
for the three months ended March 31, 1997 from $318,117
for the same period in 1996. This was due to the production
costs associated with the South Timbalier 148 Gulf Coast
wells of approximately $273,000.
The Company has taken additional lease positions in the Gulf
Coast region during the three months ended March 31, 1997
and intends to continue to jointly develop the area with
various joint interest owners.
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $1,377,820 for the
three months ended March 31, 1997 as compared to $474,343
for the same period in 1996. The increase results primarily
from approximately $840,000 of depreciation, depletion and
amortization on the South Timbalier 148 Gulf Coast wells and
additional depreciation on approximately $2,235,000 of
property and equipment acquired since March 31, 1996.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A increased 76% to
--------------------------
$795,412 for the three months ended March 31, 1997 as
compared to $452,462 for the same period in 1996. The
Company has opened a New Orleans office to monitor and
expand its Gulf Coast operations and hired a corporate
General Counsel to monitor regulatory and legal
responsibilities.
Also, with the Company's continued expansion in the Gulf
Coast, insurance costs have risen approximately 126% for the
three months ended March 31, 1997 as compared to 1996. The
Company carries business interruption insurance on all its
producing Gulf Coast properties.
Significant components of G&A for the three months ended
March 31, 1997 included payroll of $305,746, professional
fees of $73,785, marketing costs of $94,185, insurance of
$86,167, state franchise taxes and fees of $56,922 and
amortization of deferred financing costs of $56,661.
16
<PAGE>
- -- OTHER INCOME(EXPENSE): Other income (expense) items
---------------------
consisted of the following:
* INTEREST INCOME: Interest income for the three months
ended March 31, 1997 was $12,486 compared with $383,211
for the same period in 1996. Interest income for 1996
resulted primarily from interest earned on a note
receivable issued to Century. The note earned interest
at 22% per annum and was secured by offshore
properties. In July 1996, the note was extinguished as
part of the consideration for the Company's purchase of
the properties securing the note. Therefore, during the
three months ended March 31, 1997, no interest was
earned on the note while interest was earned on an
average outstanding balance of approximately $6,500,000
for the same period in 1996.
* INTEREST EXPENSE: Interest expense increased to
$684,086 for the three months ended March 31, 1997 as
compared to $481,314 for the same period in 1996. This
results primarily from increased borrowings under the
Company's primary credit and development facilities.
Outstanding borrowings under the facilities were
$25,087,205 at March 31, 1997 as compared to
$20,000,000 at March 31, 1996. The additional
borrowings have been used to assist in expanding the
Company's exploration, development and property
acquisition activities.
* NET INCOME: Net income for the three months ended
March 31, 1997 was $278,181 as compared to $496,041 for
the same period in 1996. Operating income was
$1,127,012 in 1997 versus $953,260 in 1996. The
operating income increase in 1997 is primarily
attributable to an increase in production revenues net
of production expenses of approximately $2,123,715.
The effect of this increase was partially offset by
increases in depreciation, depletion and amortization
of $903,477 and G&A of $342,950. Net income was lower
due to increased interest expense on borrowings and
lower profitability on marketing and transportation
activities which was affected by lower gas prices.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 1997 totalled
$1,038,240 as compared to $353,419 at December 31, 1996.
Historically, the Company has funded its oil and gas exploration
and development activities primarily with bank borrowings and, to
a lesser extent, with cash flow from operations and equity
capital from private placements. The Company has available a
$30,000,000 line of credit through Den norske, with a current
borrowing base of $24,500,000. Additionally, in February 1997,
Den norske established a development facility which allows the
Company to borrow up to $2,500,000 for development of its Gulf
Coast properties. The development facility matures on March 1,
1998, and the Company had borrowings against the development
facility of approximately $1,004,205 at March 31, 1997. The
Company generated approximately $1,800,000 of cash flow from
operations prior to adjustments for changes in operating assets
and liabilities during the three months ended March 31, 1997.
The Company anticipates that its existing capital resources and
cash flow generated from future operations will allow it to
maintain its current level of operations and its planned
operations for the foreseeable future. Future acquisitions may
necessitate that the Company make additional borrowings or raise
equity capital.
Under the credit agreement with Den norske, the Company is
required to maintain certain ratios relating to debt coverage
ratio, current ratio, tangible net worth, general and
administrative expenses and quarterly interest ratio. Under the
covenants, the financial amounts used to compute the requirements
are specifically defined in the agreement. At March 31, 1997,
the Company was in compliance with all of the required financial
ratios.
In addition to the South Timbalier 148 wells acquired and
drilled in 1996, an additional well has been successfully drilled
and completed on the property and production commenced in March
17
<PAGE>
1997. Through March 31, 1997, the Company had realized
approximately $5.3 million in production revenues from the South
Timbalier 148 properties since acquisition in July 1996.
The following is a summary of the Company's expected cash
flow estimates for the remainder of 1997:
<TABLE>
<S> <C> <C>
Cash requirements:
Capital costs $1,300,000
Debt service payments $5,700,000
Total cash requirements $7,000,000
Cash Sources:
Cash in bank $1,040,000
Cash from operations $6,800,000
Additional borrowings $1,100,000
Total cash sources $8,940,000
----------
Excess $1,940,000
==========
</TABLE>
As can be seen above, the Company intends to meet its cash
requirements in 1997 with cash flow expected to be generated from
its operations in the Gulf Coast and Appalachian regions and
additional borrowings under its development facility with Den
norske. As proved reserves are added to the Company's reserve
base, payment requirements under the Credit Facility are reduced.
The continued expansion of the Company's development and
acquisition activities are expected to be financed with
internally generated cash flow, additional borrowings under the
credit facility and new financings, if available. In the event
that cash flow or available borrowings under the credit facility
are not sufficient or if additional financing is needed and
cannot be obtained, the Company believes that it could be
required to reduce its growth oriented expansion strategy. The
completion or success of any new opportunities is subject to a
number of factors, including the price of oil and gas, and the
ability of the Company to raise additional capital or obtain debt
financing on terms acceptable to the Company. Many of these
factors are outside of the Company's control. There can be no
assurance that the Company will be able to undertake any of these
opportunities or that, if undertaken, they will prove successful.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: None.
(b) Reports on Form 8-K: None.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and
Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN RESOURCES OF DELAWARE INC.
Date: May 9, 1997 By: /s/ Ralph A. Currie
---------------- -------------------------------
Ralph A. Currie
Chief Financial Officer
(Principal Accounting and
Financial Officer)
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,038,240
<SECURITIES> 0
<RECEIVABLES> 4,734,596
<ALLOWANCES> 10,212
<INVENTORY> 0
<CURRENT-ASSETS> 6,150,359
<PP&E> 61,544,340
<DEPRECIATION> 7,528,452
<TOTAL-ASSETS> 63,478,821
<CURRENT-LIABILITIES> 11,434,353
<BONDS> 19,332,171
0
2,181,819
<COMMON> 79
<OTHER-SE> 24,154,171
<TOTAL-LIABILITY-AND-EQUITY> 63,478,821
<SALES> 14,520,973
<TOTAL-REVENUES> 14,520,973
<CGS> 12,598,549
<TOTAL-COSTS> 13,393,961
<OTHER-EXPENSES> (13,105)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 684,086
<INCOME-PRETAX> 456,031
<INCOME-TAX> 177,850
<INCOME-CONTINUING> 278,181
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 278,181
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
