U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 September 30, 1997, 10,193,676 shares of the Registrant's
Common Stock, par value $.00001 per share, were issued and
outstanding and 268,851 shares of the Registrant's Series 1993 8%
Convertible Preferred Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ; No xx .
---- --------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
FORM 10-QSB
For the Quarter Ended September 30, 1997
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements 1
Introduction to the Financial Statements 2
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of
Operations - Quarter and Nine Months
Ended September 30, 1997 and 1996 5
Condensed Consolidated Statements of
Stockholders' Equity - Nine Months
Ended September 30, 1997 6
Condensed Consolidated Statements of
Cash Flows - Nine Months Ended
September 30, 1997 and 1996 7
Notes to Condensed Consolidated
Financial Statements 9
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results
of Operations 17
PART II - OTHER INFORMATION 26
Item 4 - Submission of Matters to a Vote
of Security Holders 26
Item 6 - Exhibits and Reports on Form 8-K 27
Signature 28
ii
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Financial Statements for the nine months ended September
30, 1997 and 1996 include, in the opinion of the Company, all
adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the results of operations for such
periods. Results of operations for the nine months ended September
30, 1997, are not necessarily indicative of results of operations
which will be realized for the year ending December 31, 1997. The
Financial Statements should be read in conjunction with the
Company's Report on Form 10-KSB for the year ended December 31,
1996.
1
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED FINANCIAL
---------------------------------
STATEMENTS
----------
FOR THE QUARTER AND NINE MONTHS ENDED
-------------------------------------
SEPTEMBER 30, 1997 AND 1996
---------------------------
2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS
--------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------
1997 DECEMBER 31,
---- ------------
(UNAUDITED) 1996(*)
----------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 651,219 $ 353,419
Accounts and notes receivable, net 3,841,161 7,037,415
Deferred tax asset 16,319 16,319
Prepaid expenses and other 576,952 344,850
----------- -----------
Total current assets 5,085,651 7,752,003
Oil and gas properties, at cost
(successful efforts method) 52,449,250 48,136,759
Property and equipment, at cost 12,215,713 11,754,079
----------- -----------
64,664,963 59,890,838
Less accumulated depreciation,
depletion and amortization (11,641,922) (6,150,632)
----------- -----------
Net property and equipment 53,023,041 53,740,206
Other assets:
Investment in unconsolidated subsidiaries 291,219 485,610
Call advance 1,500,000 1,500,000
Notes receivable 419,612 432,576
Deferred financing costs, net 435,541 439,695
Other 350,255 487,554
----------- -----------
Total other assets 2,996,627 3,345,435
----------- -----------
$61,105,319 $64,837,644
=========== ===========
</TABLE>
(Continued)
*Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial statements.
3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONDENSED, CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
SEPTEMBER 30,
-------------
1997 DECEMBER 31,
---- ------------
(UNAUDITED) 1996(*)
----------- -------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt $ 143,702 $ 6,513,283
Accounts payable 1,101,016 4,861,340
Accrued severance liabilities 58,625 112,689
Accrued taxes payable 165,185 195,467
Unearned revenue 744,247 807,632
Accrued expenses and other 337,749 373,622
----------- -----------
Total current liabilities 2,550,524 12,864,033
Long-term debt, excluding current maturities 24,322,959 19,422,421
Unearned revenue 2,272,566 2,821,611
Deferred tax liability and other 4,217,309 3,611,572
----------- -----------
Total liabilities 33,363,358 38,719,637
Stockholders' equity:
Series 1993 8% Convertible Preferred Stock,
par value $12.00 per share 2,181,819 2,181,819
Convertible Securities, representing
approximately 0 and 2,850,000 shares
of Common Stock at September 30, 1997
and December 31, 1996, respectively 0 4,997,554
Common Stock, par value $.00001 per
share; 20,000,000 shares authorized;
10,193,676 and 6,520,296 shares issued
and outstanding at September 30, 1997
and December 31, 1996, respectively 102 65
Additional paid-in capital 22,229,952 16,453,899
Treasury stock (52,400) (52,400)
Retained earnings 3,382,488 2,537,070
----------- -----------
Total stockholders' equity 27,741,961 26,118,007
Commitments and contingencies - -
----------- -----------
Total liabilities and stockholders'
equity $61,105,319 $64,837,644
=========== ===========
</TABLE>
*Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial statements.
4
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
AND SUBSIDIARY
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------
<TABLE>
QUARTER ENDED NINE MONTHS ENDED
------------- -----------------
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Production $ 4,812,361 $ 1,806,357 $13,457,137 $ 4,654,184
Transportation 222,445 211,577 657,397 845,041
Marketing 1,955,537 3,929,508 15,355,482 16,126,910
Other 89,439 (22,007) 136,697 379,372
----------- ----------- ----------- -----------
7,079,782 5,925,435 29,606,713 22,005,507
----------- ----------- ----------- -----------
Expenses:
Production 716,111 371,860 1,833,968 976,997
Transportation 119,895 61,391 322,049 227,663
Marketing 1,929,350 3,589,796 15,329,713 15,726,622
Unsucessful Well Costs 381,300 - 434,246 -
Other 53,121 39,319 113,495 162,003
Depreciation, depletion
and amortization 2,008,280 624,448 5,510,040 1,668,927
----------- ----------- ----------- -----------
5,208,057 4,686,814 23,543,511 18,762,212
----------- ----------- ----------- -----------
1,871,725 1,238,621 6,063,202 3,243,295
Administrative expenses 861,902 568,235 2,442,413 1,495,853
----------- ----------- ----------- -----------
Operating income 1,009,823 670,386 3,620,789 1,747,442
Other income (expense):
Interest income 9,944 20,176 33,018 785,384
Interest expense (665,835) (649,220) (2,020,341) (1,638,677)
Other 717 2,567 4,891 (4,316)
----------- ----------- ----------- -----------
(655,174) (626,477) (1,982,432) (857,609)
----------- ----------- ----------- -----------
Income before income
tax expense 354,649 43,909 1,638,357 889,833
Income tax expense 141,843 17,844 655,343 342,590
----------- ----------- ----------- -----------
Net income $ 212,806 $ 26,065 $ 983,014 $ 547,243
Per common share:
Primary:
Net income $.02 -- $.10 $.09
=== == === ===
Weighted average number
of common shares and
common share equivalents
outstanding 9,938,299 6,469,614 9,124,335 6,152,154
========= ========= ========= =========
Fully diluted:
Net income $.02 -- $.10 $.08
=== == === ===
Weighted average number
of common shares and
common share equivalents
outstanding 10,207,150 6,738,465 9,393,186 6,525,442
========== ========= ========= =========
</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 NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------------
(UNAUDITED)
-----------
<TABLE>
Common Stock 8% Preferred Stock
------------- -----------------------------
Number Number Net of Additional
of Par Convertible of Par Discount Paid-in Treasury Retained
shares value Securities shares value value Capital stock Earnings Total
------ ----- ----------- ------ ----- ----- ------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996 6,520,296 $65 4,997,554 268,851 3,226,213 2,181,819 16,453,899 (52,400) 2,537,070 26,118,007
Conversion of
Convertible
Securities and
Dividends to
Common Stock 3,101,864 31 (4,519,914) - - - 4,598,706 - (78,823) 0
Issuance of
Common Stock,
net of
Placement
Costs 500,000 5 - - - - 1,132,906 - - 1,132,911
Common Stock
Dividends issued
or accrued 21,508 - - - - - 47,647 - (47,647) 0
Redemption of
Convertible
Securities - - (477,640) - - - (100,257) - (11,126) (589,023)
Warrants exercised
for Common
Stock 8 - - - - - 52 - - 52
Issuance of stock
for services 50,000 1 - - - - 96,999 - - 97,000
Net income - - - - - - - - 983,014 983,014
--------- --- ---------- ------- --------- --------- ---------- ------- --------- ----------
Balance,
September 30,
1997 10,193,676 $102 0 268,851 3,226,213 2,181,819 22,229,952 (52,400) 3,382,488 27,741,961
========== ==== ========== ======= ========= ========= ========== ======= ========= ==========
</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)
-----------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
---------------------------------------------
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Net cash provided by operating activities $ 5,966,000 $ 8,264,085
---------- ----------
Investing activities:
Purchase of oil and gas properties (4,312,492) (23,960,277)
Purchases of property and equipment (489,467) (57,561)
Payments on notes receivable 231,017 6,973,217
Issuance of note receivable (35,000) -
Proceeds from sale of assets 4,200 616,418
---------- -----------
Net cash used in investing activities (4,601,742) (16,428,193)
---------- -----------
Financing activities:
Proceeds from borrowings 3,235,817 17,698,068
Payments on borrowings (4,704,860) (6,224,548)
Redemption of convertible securities (589,023) -
Proceeds from issuance of Common Stock 1,330,000 900,000
Purchase of 6% Junior Preferred Stock - (802,900)
Increase in deferred financing costs (139,663) -
Purchase of Treasury Stock - (52,400)
Other (198,729) (35,100)
---------- -----------
Net cash provided in financing
activities (1,066,458) 11,483,120
---------- -----------
Increase (decrease) in cash 297,800 (4,945,073)
Cash and cash equivalents at
beginning of period 353,419 826,393
----------- -----------
Cash and cash equivalents at
end of period $ 651,219 $ 4,145,405
=========== ===========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared stock dividends and issued 21,508 and 27,535 shares of
Common Stock to holders of the Series 1993 and Series B Preferred Stock
during the nine months ended September 30, 1997 and 1996, respectively.
During the nine months ended September 30, 1997, holders of $5,538,483
($4,519,914 net of placement costs) of the Convertible Securities have
converted the securities into 3,052,188 shares of Common Stock and received
49,676 shares of Common Stock dividends related to the Convertible
Securities. The remaining $461,517 was redeemed by the Company for a price
of $589,023.
During the nine months ended September 30, 1996, 58,941 shares of Series B
Preferred Stock were converted into a total of 224,822 shares of Common
Stock.
7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
AND SUBSIDIARY
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (CONTINUED)
During the nine months ended September 30, 1996, the Company issued 225,000
shares of common stock and 225,000 common stock warrants with a combined
value of $1,157,175 in connection with the acquisition of certain gas
properties and related equipment. The Company also paid cash and assumed
certain obligations in connection with the acquisition, which was consummated
on February 26, 1996.
During the nine months ended September 30, 1997, the Company entered into an
Amendment to Lead Generation Agreement with Corporate Relations Group ("CRG")
to provide additional services in the public relations area. The amendment
provided for the termination of options previously granted to CRG by ARI and
the issuance to CRG of 50,000 shares of registered stock in ARI. The shares
were valued at $1.94 per share which represents the closing bid price on
April 21, 1997, the date of the amendment. The cost is being amortized
during 1997 due to the timing of the services being performed.
The Company acquired 58,059 shares of the outstanding 6% Junior Preferred
Stock for $802,900 during the nine months ended September 30, 1996. Upon
resolution of the Board of Directors, the shares were retired.
8
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT
----------------------------------------------------
(UNAUDITED)
-----------
(1) GENERAL
American Resources of Delaware, Inc. ("ARI"), a Delaware corporation
organized on August 14, 1992, was formed to acquire the assets and
assume certain liabilities of Standard Oil & Exploration of Delaware,
Inc. ("SOE") pursuant to SOE's Chapter 11 Bankruptcy Joint Plan of
Reorganization which was consummated effective April 22, 1993.
ARI and its wholly-owned subsidiary, Southern Gas Co. of Delaware, Inc.
("Southern") are involved in the production, gathering, purchasing,
processing, transporting and selling of natural gas primarily in the
State of Kentucky and the Gulf of Mexico. The Subsidiary has expanded
its production efforts through its involvement in the development of
prospects located offshore Louisiana in the Gulf of Mexico. These
activities are considered to be one business segment for financial
reporting purposes.
The accompanying condensed, consolidated financial statements include
the accounts of ARI and its Subsidiary, collectively referred to as the
Company. All significant intercompany balances and transactions have
been eliminated in consolidation in order to make the financial
statements, in the opinion of management, not misleading.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with instructions to Form 10-QSB and,
therefore, do not include all disclosures required by generally accepted
accounting principles. However, in the opinion of management, these
statements include all adjustments, which are of a normal recurring
nature, necessary to present fairly the financial position at September
30, 1997 and December 31, 1996 and the results of operations and changes
in cash flows for the periods ended September 30, 1997 and 1996. These
financial statements should be read in conjunction with the financial
statements and notes to the financial statements in the 1996 Form 10-KSB
of the Company that was filed with the Securities and Exchange
Commission.
Net income per common share was computed after consideration of dividend
requirements on Preferred Stock, using the weighted average number of
shares outstanding during each of the years presented. Outstanding
stock options and warrants are Common Stock equivalents and have been
considered when the effect is dilutive.
The Company does not have, nor does it anticipate entering into, any
type of derivative financial instruments or derivative commodity
instruments.
Certain reclassifications have been made to the prior period financial
statements to conform with the current period presentation.
9
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AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
(2) PROPERTY ACQUISITIONS
In February 1997, the Company through its wholly owned subsidiary,
Southern Gas Co. of Delaware, Inc., acquired a twenty-five percent (25%)
working interest in onshore Gulf Coast undeveloped properties located in
Greene and Wayne Counties, Mississippi, for approximately $300,000.
On April 2, 1997, the Company entered into an agreement to acquire a
26.4% working interest in the Main Pass Block 53 from Great River Oil &
Gas Corporation for approximately $254,000. Drilling was completed
during the third quarter of 1997, and it was determined that the well is
not economically feasible.
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.
In June 1997, the Company entered into a purchase agreement to acquire
interests in 26 natural gas wells from Daugherty Petroleum, Inc., said
wells being located in Whitley and Knox Counties, Kentucky, on the
Company's existing gathering facilities. The wells contain an estimated
1.5 billion cubic feet of natural gas reserves net to the Company, and
the purchase price is approximately $526,000. The purchase transaction
was completed in September 1997.
On September 15, 1997, the Company entered into a Letter of Intent with
Prima Capital LLC ("Prima") providing for the acquisition of an interest
in certain producing and non-producing oil and gas properties (the
"Properties") located in Mississippi. The purchase price for the
Properties is Two Million Eight Hundred Thousand Dollars ($2,800,000)
payable One Million Three Hundred Thousand Dollars ($1,300,000) on or
before closing which occurred October 10, 1997, and the balance of One
Million Five Hundred Thousand Dollars ($1,500,000) in an interest
bearing note with recourse only to the Properties. The Company
currently owns up to 3.5% interest in the Properties. An officer and
director of the Company owns a twenty percent (20%) interest in Prima.
$1,100,000 had been advanced to Prima as of September 30, 1997.
In September 1997, the Company purchased a 4.3% overriding royalty
interest in the Ship Shoal B-4 well for $330,000. The value of the
overriding royalty interest was based on discounted reserve values as
determined from the December 31, 1996 reserve report less amounts paid
through June 1997.
10
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
(3) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
September 30, December 31,
------------- ------------
1997 1996
---- ----
<S> <C> <C>
Borrowings under the Company's Credit
Agreement, as amended, with Den norske
Bank AS, reduction subject to availability
under borrowing base, $30,000,000 available
borrowing base effective September 30, 1997
reduction against the available borrowing base
of $425,000 commences November 1, 1997,
interest payable monthly at adjusted LIBO
Rate and/or prime rate as determined under
the Credit Agreement, secured by oil and gas
properties, equipment and receivables. $23,998,275 $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. - 274,000
Notes payable to related parties, interest
payable at 10.5%, in connection with
Participation Agreements. 381,431 490,000
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 86,955 39,808
----------- -----------
24,466,661 25,935,704
Less - Current portion 143,702 6,513,283
----------- -----------
Long-term debt $24,322,959 $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 September 30, 1997, the available borrowing base
under the revolving credit facility was $30,000,000. Additional
borrowings under the credit facility are dependent upon a
redetermination of the borrowing base, which is primarily dependent upon
11
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
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. 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.
On October 9, 1997, the credit facility agreement with Den norske Bank
AS was amended to (1) combine the $2,500,000 development facility and
increase the borrowing base to $30,000,000, effective September 30,
1997, and (2) provide flexibility in the determination of the applicable
interest rate. The applicable interest rate can be selected at the
Company's option to be either (1) a floating rate equal to the prime
rate or (2) LIBO Rate, plus 2.5%. As of October 23, 1997, the Company
opted for a LIBO Rate loan for the entire amount outstanding under the
credit facility. The rate for the thirty day period commencing October
23, 1997 is approximately 8.1875%. Additionally, assuming that the
borrowing base does not increase, no principal payments will be required
until November 1998.
Under the credit agreement with Den norske, the Company is required to
maintain certain financial ratios relating to debt coverage ratio,
current ratio, tangible net worth, general and administrative expenses
and quarterly interest ratio. At September 30, 1997, the Company was in
compliance with the required financial covenants.
Under the credit agreement with Den norske, the Company is required to
obtain the consent of Den norske before entering into certain
transactions, including, without limitation, i) the sale of assets
within any twelve-month period the value of which aggregates more than
$250,000; ii) the payment of any dividend or distribution for any class
of its capital stock except for common stock dividends paid on preferred
stock; iii) the expenditure for capital or fixed assets in any fiscal
year aggregating more than $400,000; and iv) a change in the corporate
structure of the Company.
(4) CONVERTIBLE SECURITIES PRIVATE PLACEMENT
In 1996, the Company privately placed 4% convertible securities in the
aggregate principal amount of $6,000,000 ($4,997,554 net of placement
costs) with a required conversion of one year from date of issuance.
The securities were convertible at the option of the holders into shares
of common stock valued at the lesser of (1) the closing bid price of the
common stock as reported on NASDAQ on the date of issuance of the
security, or (2) 75% of the average closing bid prices of the common
stock as reported on NASDAQ for the five trading days prior to the date
of conversion (the Conversion Price). Securities which were not
converted prior to their maturity dates would automatically convert on
their maturity dates. Interest accrued on the convertible securities
until the Company received notice of the conversion. If a security was
not converted within five business days after the Company received
notice of the conversion, the Company was obligated to pay liquidated
damages to the security holder for each $100,000 principal amount of
12
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AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
securities sought to be converted in the amount of $100 for each of the
first two days, $200 for each of the next two days, $300 for each of the
next two days, $400 for each of the next two days, and $500 per day
thereafter until the conversion shares were delivered. Prior to the
receipt of a conversion notice, the Company had the right to redeem any
security for a cash amount equal to 125% of the principal amount of the
security, plus unpaid accrued interest, if the conversion price was
below the closing bid price of the common stock as reported on NASDAQ on
the date the security was issued. The closing bid prices when the
securities were issued ranged from $3.00 to $3.50. Upon giving notice
of its intention to redeem a security, the security holder's right to
convert the security was suspended, but the Company would be required to
pay an additional 1% per month in cash on a pro rata basis until the
full redemption price was paid. If the full redemption price was not
paid within ten business days after the redemption notice was given, the
security holder had the right to convert the security into shares of
common stock. A security holder could fax a notice to the Company
requiring the Company to declare, by faxed notice within twenty-four
hours after receipt of the notice from the security holder, whether the
Company intended to effect a redemption within the following five
business days. If the Company did not respond during said twenty-four
hour period, the Company was precluded from redeeming that security
holder's securities during said five day period. The Company agreed to
register the shares of common stock into which the securities were
convertible within 120 days after demand was made by a security holder.
On June 9, 1997, securities totaling $5,538,483 had been converted into
3,052,188 shares of common stock for which 49,675 shares of Common Stock
dividends were issued relative thereto, and the remaining securities
totaling $461,517 had been redeemed by the Company pursuant to its
rights under the security documents for a price of $589,023. The
Company was not required to pay any liquidated damages or additional
interest as a result of the conversion or redemption of the securities.
In conjunction with the issuance of the convertible securities, the
Company paid placement fees and related issuance costs of $1,002,446,
inclusive of 173,724 restricted shares of common stock to World Capital
Funding, Inc., Denver Colorado, or to persons designated by it, with
piggy-back registration rights, in partial payment of the placement
agent's fee, and issued five year options to World Capital Funding,
Inc., or to persons designated by it, to purchase 100,000 shares of
common stock at $4.50 per share.
The shares of common stock into which the securities are convertible,
together with the placement fee shares to World Capital Funding, Inc.,
or its designees, and the shares underlying the options issued to World
Capital Funding, Inc., or its designees, have been registered under an
S-3 Registration Statement which was effective on January 23, 1997.
(5) STOCKHOLDERS' EQUITY
On July 8, 1997, the Company's stockholders approved an amendment to the
Company's Restated Certificate of Incorporation increasing the
authorized number of shares of the Company's $.00001 par value common
stock from 20,000,000 shares to 50,000,000 shares and dividing the Board
of Directors into three classes with staggered three year terms. An
appropriate Certificate of Amendment to the restated Certificate of
13
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
Incorporation of the Company was filed with the Delaware Secretary of
State on July 11, 1997.
During the nine months ended September 30, 1997, the Company issued
500,000 shares of Common Stock to Den norske Bank ASA ("Den norske") as
a result of Den norske's purchase of said shares for a price of $2.66
per share, for a total of $1,330,000 ($1,132,911 net of placement
costs). The Company and Den norske also entered into a Registration
Rights Agreement wherein Den norske was granted certain demand and
piggyback registration rights with respect to the shares purchased.
The Company has authorized one million shares (1,000,000) shares of
Series 1993 Preferred Stock and two million shares (2,000,000) of Series
Preferred Stock subject to designation by the Board of Directors:
Series 1993 Preferred Stock is convertible into one share
of common stock with a liquidation preference of $12 per
share. Dividends are payable semiannually at the rate of
8% per annum in common stock. 268,851 shares are
outstanding at September 30, 1997 and December 31, 1996.
Series B Preferred Stock, designated by the Board of
Directors, was convertible into common stock based on a
conversion factor of $10.00 divided by 73% of the common
stock's closing bid price on the conversion date. The
Series B Preferred Stock had a liquidation preference of
$10.00 per share, but was junior to the Series 1993
Preferred Stock. Dividends were payable quarterly at the
rate of 6% in cash or common stock. There were 1,000,000
shares authorized and zero shares outstanding at
September 30, 1997 and December 31, 1996, respectively.
During the first quarter of 1997, the Company's Board of
Directors adopted a resolution eliminating the Series B
Preferred Stock and returning the 1,000,000 shares to the
status of authorized but unissued Preferred Stock,
without designation. The Certificate eliminating the
Series B Preferred Stock was filed in the Office of the
Secretary of State of Delaware on April 16, 1997.
On January 15, 1997, the Board of Directors declared dividends payable
in 10,754 shares of Common Stock on January 22, 1997, to holders of the
Series 1993 Preferred Stock. On July 15, 1997, the Board of Directors
declared dividends payable in 10,754 shares of Common Stock on July 22,
1997, to holders of the Series 1993 Preferred Stock.
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:
14
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
<TABLE>
Price Per Share
Shares From To
<S> <C> <C> <C>
Balance December 31, 1996 3,370,230 $3.00 $8.00
Granted 37,500 3.00 3.00
Terminated (587,333) 3.00 3.50
---------
Balance September 30, 1997 2,820,397 $3.00 $8.00
=========
</TABLE>
On April 21, 1997, the Company entered into an Amendment to Lead
Generation Agreement with Corporate Relations Group, Inc. ("CRG") to
provide additional services in the public relations area. The Amendment
provided for, among other things, the immediate termination of 500,000
options previously granted to CRG by ARI.
Outstanding options at September 30, 1997 include 1,976,410 issued under
the CSO, of which 1,918,577 are exercisable, and 843,987 non-plan
options, all of which are immediately exercisable. Outstanding options
at September 30, 1997 expire between July 14, 1998 and February 1, 2005.
At September 30, 1997, the Company has outstanding warrants to purchase
1,201,667 shares of common stock at exercise prices from $2.75 to $5.00
per share. Warrants to purchase an additional 262,424 shares of common
stock expired by their own terms on April 24, 1997.
(6) SUBSEQUENT EVENTS
STOCKHOLDERS EQUITY:
Pursuant to an announcement in April 1997, the Board of Directors
authorized the Company to repurchase up to $2,000,000 of the Company's
common stock. As of September 30, 1997, no shares had been repurchased.
However, in October 1997, 58,910 shares were acquired at an average
price of $2.97 per share.
INVESTMENT:
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 2,471.3 shares of
the common stock of Century Offshore Management Corporation for $4
million. Said right expires December 31, 1997; and on November 4, 1997,
the Board of Directors approved the exercise of the Company's rights
under the Call Agreement. As of September 30, 1997, the Company had
advanced approximately $1.5 million under the Call Agreement, which
funds were non-refundable. The balance of $2.5 million is due on
or before December 31, 1997.
15
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
----------------------------------------------------------------
(UNAUDITED)
-----------
LONG-TERM DEBT:
On November 11, 1997, the Company's revolving credit facility with Den
norske was increased to $75,000,000 in order to give the Company greater
flexibility for future property acquisitions. The available borrowing
base has remained at $30,000,000.
16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995:
Statements, other than historical facts, contained in this Quarterly
Report on Form 10-QSB, including statements of estimated oil and gas
production and reserves, drilling plans, future cash flows, anticipated
capital expenditures and Management's strategies, plans and objectives, are
"forward looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes that its
forward looking statements are based on reasonable assumptions, it cautions
that such statements are subject to a wide range of risks and uncertainties
incident to the exploration for, acquisition, development and marketing of
oil and gas, and it can give no assurance that its estimates and expectations
will be realized. Important factors that would cause actual results to
differ materially from the forward looking statements include, but are not
limited to, changes in production volumes, worldwide demand, and commodity
prices for petroleum natural resources; the timing and extent of the
Company's success in discovering, acquiring, developing and producing oil and
gas reserves; risks incident to the drilling and operation of oil and gas
wells; future production and development costs; the effect of existing and
future laws, governmental regulations and the political and economic climate
of the United States; the effect of hedging activities; and conditions in the
capital markets.
RECENT DEVELOPMENTS
In February 1997, the Company's $30,000,000 revolving credit agreement
with Den norske Bank, AS ("Den norske") was amended to reduce the interest
rate to the prime rate plus 1/2% per annum, and establish a $2,500,000
development facility which can be drawn upon by the Company to develop
properties. On October 9, 1997, the credit agreement was further amended to
combine the credit and development facilities, establish an available
borrowing base of $30,000,000 and allow for an interest rate option, at the
Company' s election. The Company may select a rate equal to the LIBO Rate,
plus 2.5%, or a floating rate based on the current prime rate. As of the
date of this report, the Company had opted to have the LIBO Rate apply to the
entire balance outstanding under this agreement, or $25,000,000. The rate
for the thirty-day period commencing October 23, 1997 is approximately
8.1875%.
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. South Timbalier 148 was down for ten days in August 1997 due to
the installation of a compressor which will allow enhanced recovery from the
"B" platform wells.
On March 2, 1997, the OCS G-1898 #D-4 well had been successfully drilled
and was put on production, with an initial flow rate of 3.5 million cubic
feet of gas and 350 barrels of gas liquids per day. As of June 30, 1997,
production had been increased to 14 million cubic feet of gas and 800 barrels
of gas liquids per day. The well was drilled from the D Platform on South
Timbalier Block 148 to a total depth of 16,535 feet. ARI has a 15% working
interest in the well, and it is operated by Newfield Exploration Company.
ARI purchased its interest in the South Timbalier Block 148 in July 1996,
consisting of ten existing wells, five of which were producing. Since the
purchase, the Company has successfully completed and placed into production
17
<PAGE>
the remaining five wells and drilled and hooked up two additional wells.
This brings the number of wells in which the Company owns an interest in the
offshore Gulf Coast region to 14.
Jeffrey J. Hausman has served as Chief Financial Officer of the Company
since January 1, 1996 and Treasurer since August 1996. During this time, Mr.
Hausman resided with his family in Nashville, Tennessee. Due to the excess
time required by Mr. Hausman's position as a result of the Company's growth
and his family's desire to remain in Nashville, Mr. Hausman tendered his
resignation as an officer of the Company effective April 1, 1997. However,
he has agreed to continue with the Company in an advisory capacity. Mr.
Hausman was succeeded by Ralph A. Currie, a former partner of KPMG Peat
Marwick, Lexington, Kentucky.
On April 2, 1997, the Company entered into an agreement to acquire a
26.4% working interest in the Main Pass Block 53 from Great River Oil & Gas
Corporation. The property is operated by Mustang Energy L.C., and drilling
of the first well commenced on July 17, 1997. Drilling was completed during
the third quarter of 1997, and it was determined that the well is not
economically feasible.
In the fourth quarter of 1996, the Company privately placed 4%
convertible securities in the aggregate principal amount of $6,000,000
($4,997,554 net of placement costs) with a required conversion of one year
from date of issuance. The securities were convertible at the option of the
holders into shares of common stock valued at the lesser of (1) the closing
bid price of the common stock as reported on NASDAQ on the date of issuance
of the security, or (2) 75% of the average closing bid prices of the common
stock as reported on NASDAQ for the five trading days prior to the date of
conversion (the Conversion Price). Securities that were not converted prior
to their maturity dates automatically convert on their maturity dates.
Interest accrued on the convertible securities until the Company received
notice of the conversion. If a security was not converted within five
business days after the Company received notice of the conversion, the
Company was obligated to pay liquidated damages to the security holder for
each $100,000 principal amount of securities sought to be converted in the
amount of $100 for each of the first two days, $200 for each of the next two
days, $300 for each of the next two days, $400 for each of the next two days,
and $500 per day thereafter until the conversion shares were delivered.
Prior to the receipt of a conversion notice, the Company had the right to
redeem any security for a cash amount equal to 125% of the principal amount
of the security, plus unpaid accrued interest, if the conversion price was
below the closing bid price of the common stock as reported on NASDAQ on the
date the security was issued. The closing bid prices when the securities
were issued ranged from $3.00 to $3.50. Upon giving notice of its intention
to redeem a security, the security holder's right to convert the security was
suspended, but the Company would be required to pay an additional 1% per
month in cash on a pro rata basis until the full redemption price was paid.
If the full redemption price was not paid within ten business days after the
redemption notice was given, the security holder had the right to convert the
security into shares of common stock. A security holder could fax a notice
to the Company requiring the Company to declare, by faxed notice within
twenty-four hours after receipt of the notice from the security holder,
whether the Company intended to effect a redemption within the following five
business days. If the Company did not respond during said twenty-four hour
period, the Company was precluded from redeeming that security holder's
securities during said five day period. The Company agreed to register the
shares of common stock into which the securities are convertible within 120
days after demand was made by a security holder. On June 9, 1997, securities
totaling $5,538,483 had been converted into 3,101,864 shares of common stock
inclusive of the 4% dividend shares paid as of the date of conversion, and
the remaining securities totaling $461,517 had been redeemed by the Company
pursuant to its rights under the security documents. The Company was not
required to pay any liquidated damages or additional interest as a result of
the conversion or redemption of the securities.
In conjunction with the issuance of the convertible securities, the
Company paid placement fees and related issuance costs of $1,002,446,
inclusive of 173,724 restricted shares of common stock to World Capital
Funding, Inc., Denver Colorado, or to persons designated by it, with piggy-
back registration rights, in partial payment of the placement agent's fee,
18
<PAGE>
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 Dollars
($2,000,000.00) of the Company's common stock in market transactions from
time to time at prices deemed to be favorable by the Company. As of
September 30, 1997, no shares had been repurchased by the Company. However,
in October 1997, 58,910 shares were acquired at an average price of $2.97 per
share.
In April 1997, the Company purchased from a director of the Company an
overriding royalty interest in the Ship Shoal B-3 well for $150,000. The
Company also purchased from an officer/director of the Company an overriding
royalty interest in the Ship Shoal B-4 well for $180,000. Values of the
overriding royalty interests were based on discounted reserve values as
determined from the December 31, 1996 reserve reports.
During the first quarter of 1997, the Company's Board of Directors
adopted a resolution eliminating the Series B Preferred Stock and returning
the 1,000,000 shares to the status of authorized but unissued Preferred
Stock, without designation. The certificate eliminating the Series B
Preferred Stock was accepted by the Office of the Secretary of State of
Delaware on April 16, 1997.
On April 21, 1997, the Company entered into an Amendment to Lead
Generation Agreement with Corporate Relations Group, Inc. ("CRG") to provide
additional services in the public relations area. The Amendment also
provided for the immediate termination of 500,000 options previously granted
to CRG by ARI and the issuance to CRG of 50,000 shares of registered stock in
ARI. The shares were valued at $1.94 per share which represents the closing
bid price on April 21, 1997. The cost is being amortized during 1997 due to
the timing of the services being performed.
Effective May 1, 1997, the Company brought all marketing functions in
house, thus cancelling its existing contract with Southern Resources, Inc.
The Company believes that this will have little or no impact on current and
future net earnings.
In June 1997, the Company entered into a purchase agreement to acquire
interests in 26 natural gas wells from Daugherty Petroleum, Inc., said wells
being located in Whitley and Knox Counties, Kentucky, on the Company's
existing gathering facilities. The wells contain an estimated 1.5 billion
cubic feet of natural gas reserves net to the Company, and the purchase price
is approximately $526,000. The purchase transaction was completed in September
1997.
On July 16, 1997, pursuant to a Securities Purchase Agreement, the
Company's primary lender, Den norske purchased 500,000 shares of common stock
of the Company for a price of $2.66 per share, for a total of $1,330,000
($1,132,911 net of placement costs). The Company and Den norske also entered
into a Registration Rights Agreement wherein Den norske was granted certain
demand and piggyback registration rights with respect to the shares
purchased. The Company used the funds for general operational purposes.
On September 15, 1997, the Company entered into a Letter of Intent with
Prima Capital, LLC ("Prima") providing for the acquisition of an interest in
certain producing and non-producing oil and gas properties (the "Properties")
located in Mississippi. The purchase price for the Properties is Two Million
Eight Hundred Thousand Dollars ($2,800,000) payable One Million Three Hundred
19
<PAGE>
Thousand Dollars ($1,300,000) on or before closing which occurred October 10,
1997, and the balance of One Million Five Hundred Thousand Dollars
($1,500,000) in an interest bearing note with recourse only to the
Properties. The Company currently owns up to 3.5% interest in the Properties.
An Officer and Director of the Company owns a twenty percent (20%) interest
in Prima. After reviewing an independent geologist's report on the
Properties, the Letter of Intent was approved by a majority of the
disinterested directors of the Company at a Special Meeting of the Board of
Directors held on September 15, 1997.
On September 23, 1997, the Company received a letter from William D.
Bishop in which Mr. Bishop resigned as a director of the Company. Mr.
Bishop's resignation was prompted by the Board of Directors' approval of a
related party transaction with Prima, which Mr. Bishop voted against. The
subject transaction was reported in the Company's Current Report on Form 8-K
which was filed on September 24, 1997, with the Securities and Exchange
Commission.
In September 1997, the Company purchased a 4.3% overriding royalty
interest in the Ship Shoal B-4 well for $330,000. The value of the
overriding royalty interest was based on discounted reserve values as
determined from the December 31, 1996 reserve report less amounts paid
through June, 1997.
In July 1995, the Company entered into a Call Agreement with Prima, a
limited liability company in which an officer/director owns 20%, wherein the
Company has the right to acquire 2,471.3 shares of the common stock of
Century Offshore Management Corporation for $4 million. Said right expires
December 31, 1997; and on November 4, 1997, the Board of Directors approved
the exercise of the Company's rights under the Call Agreement. As of
September 30, 1997, the Company had advanced $1.5 million under the Call
Agreement, which funds were non-refundable. The balance of $2.5 million
is due on or before December 31, 1997.
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 three 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 NINE MONTHS ENDED SEPTEMBER 30, 1997,
AS COMPARED WITH THE NINE MONTHS ENDED SEPTEMBER 30, 1996:
Total revenues for the nine months ended September 30, 1997, increased
35% to $29,606,713 from $22,005,507 for the comparable period in 1996.
Corresponding operating expenses increased 26% to $23,543,511 in 1997 from
$18,762,212 for the first nine months of 1996. Components of the increases
are as follows:
- -- MARKETING: The Company's marketing volumes have decreased to
approximately 4.72 billion cubic feet ("BCF") for the nine months ended
September 30, 1997, as compared to 4.83 BCF for the same period in 1996.
The volume decrease was partially offset by the Company's increase in
volumes sold to Williams Energy Co. from 175,587 thousand cubic feet
("MCF") in the first nine months of 1996 to 433,237 MCF for the
comparable period in 1997. The resulting decrease is primarily a result
of the Company's elimination of third party sales on the spot market
through its association with Southern Resources, Inc. Due to various
short term positions taken during the first nine months of 1997,
marketing operated at essentially a break-even position as compared with
a profit of 2.5% for the comparable period in 1996.
20
<PAGE>
- -- PRODUCTION: The Company's production revenues increased 189% for the
nine months ended September 30, 1997, to $13,457,137 from $4,654,184 for
the comparable period in 1996. The additional revenues are due to
production from the South Timbalier Block 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. Total production on a BCF equivalent
basis has increased to 5.1 BCF in 1997 as compared to 1.8 BCF for the
comparable period in 1996. Production of oil and gas from the Company's
Gulf Coast wells on a BCF equivalent basis for the first nine months of
1997 was approximately 4.3 BCF equivalent as compared to approximately
.859 BCF equivalent for the same period in 1996. The South Timbalier
Block 148 wells contributed 3.5 BCF equivalent to the increase in
production volumes. The increase was partially offset by reduced
production from the Company's Ship Shoal Block 150 wells which were down
during most of the month of February 1997 due to a paraffin buildup.
South Timbalier Block 148 was down for 10 days in August 1997 due to the
installation of a compressor which will allow enhanced recovery from the
"B" platform wells. Also in 1997, production from the Company's
Kentucky wells has decreased to approximately 771,000 MCF as compared to
approximately 892,000 MCF for the first nine months of 1996. The
decrease in Kentucky production results primarily from operational
changes which are expected to reduce operating costs and extend the life
of the Appalachian production. The first nine months of 1996 also
included Appalachian production from wells which were sold to K-
Petroleum in September 1996.
The increase in production revenues was partially offset by reduced gas
and/or oil prices during the nine months ended September 30, 1997 versus
1996. The Company sells the bulk of its Kentucky production under long
term contracts. During the first nine months of 1997, the Company
received an average price of approximately $2.22 per MCF on its produced
gas as compared with approximately $2.21 per MCF for the same period in
1996. The Company's Gulf Coast production realized average prices of
$18.80 per barrel of oil and $2.47 per MCF of gas during the first nine
months of 1997 as compared with $20.28 per barrel of oil and $2.29 per
MCF of gas during the same period in 1996.
As can be expected, production costs also increased to $1,833,968 for
the nine months ended September 30, 1997, from $976,997 for the
comparable period in 1996. The increase results primarily from the
production costs associated with the South Timbalier Block 148 wells of
approximately $859,000.
During the nine months ended September 30, 1997, the Company also
recognized approximately $434,000 in dry hole expenses as a result of
unsuccessful wells encountered in its active exploration and development
program. This compares with $0 for the comparable period in 1996.
The Company has taken additional lease positions in the Gulf Coast
region during the nine months ended September 30, 1997, and intends to
continue to develop in the area with various joint interest owners.
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation, depletion and
amortization increased to $5,510,040 for the nine months ended September
30, 1997, as compared to $1,668,927 for the same period in 1996. The
increase results primarily from approximately $3,609,000 of depletion on
the South Timbalier Block 148 Gulf Coast wells and approximately
$630,000 of depletion on the Ship Shoal wells for the nine months ended
September 30, 1997. Depreciation increased as a result of approximately
$1,270,000 of property and equipment acquired since September 30, 1996.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A increased 63% to $2,442,413 for
the nine months ended September 30, 1997 as compared to $1,495,893 for
the nine months ended September 30, 1996. Subsequent to September 30,
1996, the Company opened a New Orleans office to monitor and expand its
21
<PAGE>
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 88% for the nine months ended
September 30, 1997 as compared to the same period in 1996. The Company
carries business interruption insurance on all its producing Gulf Coast
properties. In September 1997, the Company began an insurance program
to cover all phases of the Gulf Coast operations, thereby eliminating
the need to pay operators of the Gulf Coast properties for insurance on
drilling and production.
Significant components of G&A for the nine months ended September 30,
1997 include payroll of $951,047, professional fees of $258,435,
advertising and promotion costs of $206,475, insurance of $282,680,
amortization of deferred financing costs of $135,847, and licenses and
fees of $147,499.
- -- OTHER INCOME(EXPENSE): Other income (expense) items consisted of the
following:
* INTEREST INCOME: Interest income for the nine months ended
September 30, 1997 was $33,018 compared with $785,384 for the same
period in 1996. Interest income for 1996 resulted primarily from
interest earned on a note receivable issued to Century Offshore
Management Corporation ("Century"). The note earned interest at
22% per annum and was secured by offshore properties. In July
1996, the note was extinguished as part of the consideration for
the Company's purchase of the properties securing the note.
Therefore, during the nine months ended September 30, 1997, no
interest was earned on the note while interest was earned on an
average outstanding balance of approximately $4.3 million for the
same period in 1996.
* INTEREST EXPENSE: Interest expense increased to $2,020,341 for the
nine months ended September 30, 1997, as compared to $1,638,677 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
$23,998,275 at September 30, 1997, as compared to $26.1 million at
September 30, 1996. However, the average outstanding balance
during the nine months ended September 30, 1996, was less than that
of the subsequent comparable period due to the fact that the South
Timbalier Block 148 properties were not purchased until July 1996.
* NET INCOME: Net income for the nine months ended September 30,
1997, was $983,014 as compared to $547,243 for the same period in
1996. Operating income was $3,620,789 for the nine months ended
September 30, 1997, compared with $1,747,442 for the nine months
ended September 30, 1996. The operating income increase in 1997 is
primarily attributable to an increase in production revenues net of
production expenses of approximately $7,946,000. The effect of
this increase was partially offset by increases in depreciation,
depletion and amortization of $3,841,113 and G&A of $946,560. The
resultant increase in net income was somewhat offset by increased
interest expenses as the result of additional borrowings used to
expand the Company's operations and reduced interest income as a
result of the extinguishment of the Century note discussed above.
22
<PAGE>
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND
1996:
Total revenues for the three months ended September 30, 1997 increased
19% to $7,079,782 from $5,925,435 for the comparable period in 1996.
Corresponding operating expenses increased 11% to $5,208,057 in 1997, from
$4,686,814 in 1996. Components of the increases are as follows:
- -- MARKETING: The Company's marketing volumes have decreased to 720,108 MCF
for the three months ended September 30, 1997 as compared to 1.36 BCF in
1996. The volume decrease is primarily due to the Company's reduction
of spot market activities during the second quarter of 1997 and
continuing through the third quarter. As a result, marketing operated
at essentially a break-even position compared with an 8.6% profit during
the same period in 1996.
- -- PRODUCTION: Production revenues were $4,812,361 for the three months
ended September 30, 1997 as compared to $1,806,357 for the same period
in 1996, for an increase of 166%. The additional revenues are due to
production from the South Timbalier Block 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. Total quarterly production on a BCF
equivalent basis has increased to 1.9 BCF in 1997 as compared with .7
BCF for the comparable period in 1996. Production of oil and gas from
the Company's Gulf Coast wells on a BCF equivalent basis for the three
months ended September 30, 1997, was approximately 1.6 BCF as compared
to approximately .442 BCF equivalent for the same period in 1996.
Also during the third quarter of 1997, production from the Company's
Kentucky wells has decreased to approximately 263,000 MCF as compared to
approximately 278,000 MCF during the comparable quarter in 1996. The
decrease in Kentucky production results primarily from operational
changes which are expected to reduce operating costs and extend the life
of the Appalachian production. The third quarter of 1996 also included
Appalachian production from wells which were sold to K-Petroleum in
September 1996.
The Company sells the bulk of its Kentucky production under long term
contracts. During the third quarter of 1997, the Company received an
average price of approximately $2.32 per MCF on its produced gas as
compared with $2.31 per MCF for the same period in 1996. The variance
in price is due to general market conditions.
The Company's Gulf Coast production, which experienced significant
growth due to the addition of the South Timbalier Block 148 property,
realized average prices during the third quarter of 1997 of $17.26 per
barrel of oil and $2.41 per MCF of gas as compared with $21.23 per
barrel of oil and $2.13 per MCF of gas during the same period in 1996.
As can be expected, production costs also increased to $716,111 for the
three months ended September 30, 1997 from $371,860 for the same period
in 1996. This was due to the production costs associated with the South
Timbalier Block 148 Gulf Coast wells of approximately $336,000.
During the three months ended September 30, 1997, the Company also
recognized $381,300 in dry hole costs as a result of unsuccessful wells
encountered in its active exploration and development program. This
compares with $0 for the comparable period in 1996.
The Company has taken additional lease positions in the Gulf Coast
region during the three months ended September 30, 1997 and intends to
continue to develop in the area with various joint interest owners.
23
<PAGE>
- -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation, depletion and
amortization increased to $2,008,280 for the three months ended
September 30, 1997 as compared to $624,448 for the same period in 1996.
The increase results primarily from approximately $1,298,000 of
depletion on the South Timbalier Block 148 Gulf Coast wells and
additional depreciation on approximately $1,270,000 of property and
equipment acquired since September 30, 1996.
- -- GENERAL AND ADMINISTRATIVE ("G&A"): G&A increased 52% to $861,902 for
the three months ended September 30, 1997 as compared to $568,235 for
the same period in 1996. Subsequent to September 30, 1996, the Company
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 60% for the three months ended
September 30, 1997 as compared with the same period in 1996. The
Company carries business interruption insurance on all its producing
Gulf Coast properties. In September 1997, the Company began an
insurance program to cover all phases of the Gulf Coast operations,
thereby eliminating the need to pay operators of the Gulf Coast
properties for insurance on drilling and production.
Significant components of G&A for the three months ended September 30,
1997 included payroll of $350,048, professional fees of $92,132,
advertising and promotion costs of $58,663, insurance of $105,785,
amortization of deferred financing costs of $22,569, and licenses and
fees of $44,916.
- -- OTHER INCOME(EXPENSE): Other income (expense) items consisted of the
following:
* INTEREST INCOME: Interest income for the three months ended
September 30, 1997 was $9,944 compared with $20,176 for the same
period in 1996.
* INTEREST EXPENSE: Interest expense increased to $665,835 for the
three months ended September 30, 1997 as compared to $649,220 for
the same period in 1996. This results primarily from increased
average borrowings under the Company's primary credit and
development facilities for the three months ended September 30,
1997. The additional borrowings have been used to assist in
expanding the Company's exploration, development and property
acquisition activities. Outstanding borrowings under the facilities
were $23,998,275 at September 30, 1997 as compared to $26.1
million at September 30, 1996.
* NET INCOME: Net income for the three months ended September 30,
1997 was $212,806 as compared to $26,065 for the same period in
1996. Operating income was $1,009,823 in the three months ended
September 30, 1997 versus $670,383 for the comparable 1996 period.
The operating income increase in 1997 is primarily attributable to
an increase in production revenues net of production expenses of
approximately $2,662,000. The effect of this increase was
partially offset by increases in depreciation, depletion and
amortization of $1,383,832 and G&A of $293,667. The resultant
increase in net income was somewhat offset by increased interest
expense on borrowings used to expand the Company's operations.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at September 30, 1997 totalled $651,219 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 borrowing base of
$30,000,000 and an outstanding balance of $23,998,275 as of September 30,
24
<PAGE>
1997. The Company generated approximately $6,934,000 of cash flow from
operations prior to adjustments for changes in operating assets and
liabilities during the nine months ended September 30, 1997. The Company
anticipates that its existing capital resources and cash flow generated from
future operations will allow it to maintain its current level of operations
and its planned operations for the foreseeable future. Future acquisitions
may necessitate that the Company make additional borrowings or raise equity
capital.
Under the credit agreement with Den norske, the Company is required to
maintain certain ratios relating to debt coverage ratio, current ratio,
tangible net worth, general and administrative expenses and quarterly
interest ratio. Under the covenants, the financial amounts used to compute
the requirements are specifically defined in the agreement. At September 30,
1997, the Company was in compliance with all of the required financial
ratios.
In addition to the South Timbalier Block 148 wells acquired and drilled
in 1996, an additional well was successfully drilled and completed on the
property and production commenced in March 1997. Through September 30, 1997,
the Company had realized approximately $11,865,000 in production revenues
from the South Timbalier Block 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 $2,100,000
Debt service payments $ 600,000
Total cash requirements $2,700,000
Cash Sources:
Cash in bank $ 651,219
Cash from operations $3,500,000
Total cash sources $4,151,219
Excess $1,451,219
=========
</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. As proved reserves are added to the
Company's reserve base, payment requirements under the Credit Facility are
reduced. Assuming that the borrowing base does not increase, no principal
payments will be required until November 1998.
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.
25
<PAGE>
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At its Annual Meeting of Stockholders on July 8, 1997, the Stockholders
of the Company approved an amendment to the Company's Restated Certificate of
Incorporation dividing the Board of Directors into three classes with
staggered three year terms and increasing the authorized number of shares of
the Company's $.00001 par value common stock from 20,000,000 shares to
50,000,000 shares. The stockholders also re-elected five (5) directors and
elected three (3) new directors to its eight (8) member Board of Directors
and ratified the Board's selection of accountants for 1997.
The voting results with respect to the foregoing matters are set forth
below:
Proposal #1 CLASSIFICATION OF BOARD OF DIRECTORS INTO STAGGERED THREER
YEAR TERMS
For Against Abstain
5,119,725 104,076 31,818
Proposal #2 ELECTION OF DIRECTORS For Withhold
DOUGLAS L. HAWTHORNE 8,212,267 79,485
DONALD SCHELLPFEFFER 8,223,342 68,410
LEONARD K. NAVE 8,224,842 66,910
RICK G. AVARE 8,220,842 70,910
DAVID FOX, JR. 8,193,167 98,585
LEN ALDRIDGE 8,217,984 73,768
WILLIAM D. BISHOP 8,198,892 92,860
ROBERT L. MCINTYRE 8,186,467 105,285
Proposal #3 RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK LLP AS
INDEPENDENT PUBLIC ACCOUNTANT FOR THE COMPANY FOR ITS 1997
FISCAL YEAR
For Against Abstain
8,235,656 35,193 20,903
Proposal #4 INCREASE OF AUTHORIZED NUMBER OF SHARES OF THE COMPANY'S
$.00001 PAR VALUE COMMON STOCK FROM 20,000,000 TO 50,000,000
For Against Abstain
7,887,418 298,918 55,416
26
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The following exhibits are either attached hereto or incorporated
herein by reference.
Exhibit Number Description
10.83 Letter of Intent between the Company and Prima
(incorporated by reference to Exhibit 10.83 to
the Registrant's Form 8-K filed on September 24,
1997).
10.84 Copy of the letter of resignation from William
Bishop (incorporated by reference to Exhibit
10.84 to the Registrant's Form 8-K filed on
October 1, 1997).
(b) Reports on Form 8-K:
On September 24, 1997, the Company filed a Form 8-K reporting the
acquisition of an interest in certain producing and non-producing
properties in Mississippi from Prima Capital, LLC.
On October 1, 1997, the Company filed a Form 8-K reporting the
resignation of William D. Bishop as a Director of the Company.
27
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
AMERICAN RESOURCES OF DELAWARE INC.
Date: November 14, 1997 By: /s/ Ralph A. Currie
---------------------- ------------------------------------
Ralph A. Currie
Chief Financial Officer
(Principal Accounting and Financial
Officer)
28
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899717
<NAME> AMERICAN RESOURCES OF DELAWARE, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 651,219
<SECURITIES> 0
<RECEIVABLES> 3,841,161
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,085,651
<PP&E> 64,664,963
<DEPRECIATION> 11,641,922
<TOTAL-ASSETS> 61,105,319
<CURRENT-LIABILITIES> 1,101,016
<BONDS> 24,322,959
0
2,181,819
<COMMON> 102
<OTHER-SE> 22,229,952
<TOTAL-LIABILITY-AND-EQUITY> 61,105,319
<SALES> 29,606,714
<TOTAL-REVENUES> 29,606,714
<CGS> 23,543,511
<TOTAL-COSTS> 25,985,924
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,020,341)
<INCOME-PRETAX> 1,638,357
<INCOME-TAX> 655,343
<INCOME-CONTINUING> 983,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 983,014
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
</TABLE>
