U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
--- ---
Commission File No.0-21472
AMERICAN RESOURCES OF DELAWARE, INC.
(Name of small business issuer in its charter)
DELAWARE 86-0713506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 MORGAN STREET, P. O. BOX 87
VERSAILLES, KENTUCKY 40383
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 606-873-5455
Securities registered pursuant to Section 12(b) of the Exchange
Act: NONE
Securities registered pursuant to Section 12(g) of the Exchange
Act:
PREFERRED STOCK, PAR VALUE $12.00 PER SHARE
(Title of Class)
COMMON STOCK, PAR VALUE $.00001 PER SHARE
(Title of Class)
WARRANTS TO PURCHASE COMMON STOCK
(Title of Class)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to filed such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES xx NO
------- ---
X Indicate by check mark if disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this
form, and no disclosure will be contained, to the best of the
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
<PAGE>
[ ] State issuer's revenues for its most recent fiscal year.
$33,039,173
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $15,700,000 as of
March 17, 1997, based on the average bid and asked prices of such
stock as of such date.
ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PAST 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 REGISTRANTS
As of March 17, 1997, there were 7,562,283 shares of the
Registrant's Common Stock, par value $.00001 per share,
outstanding, and 268,851 shares of Registrant's Series 1993
Preferred Stock, par value $12.00 per share.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in
this report in the Part(s) indicated: None.
Transitional Small Business Disclosure Format (check one):
Yes ; No xx .
---- -------
=================================================================
ii
<PAGE>
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . . . . .18
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . .27
Item 4. Submission of Matters to a Vote of Security Holders . . .27
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . .27
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . .31
Item 7. Financial Statements . . . . . . . . . . . . . . . . . .51
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . .51
PART III
Item 9. Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act . . . . . . . . . . . . . . . . . .52
Item 10. Executive Compensation. . . . . . . . . . . . . . . . . .57
Item 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . .62
Item 12. Certain Relationships and Related Transactions. . . . . .64
PART IV
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . .71
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
iii
<PAGE>
PART I
ITEM 1. BUSINESS:
BUSINESS DEVELOPMENT:
FORM AND YEAR OF ORGANIZATION:
American Resources of Delaware, Inc. ("ARI"), a Delaware
corporation organized on August 14, 1992, was formed to acquire
the assets and assume certain liabilities of Standard Oil and
Exploration of Delaware, Inc., a Delaware corporation ("Standard
Oil"), in a reorganization proceeding pursuant to Chapter 11 of
the United States Bankruptcy Code (the "Code"). See "Standard
Oil Bankruptcy Proceedings". Southern Gas Co. Of Delaware, Inc.
("Southern Gas") is ARI's wholly owned subsidiary. When used
herein, the words "the Company" refer to both ARI and Southern
Gas unless otherwise indicated.
STANDARD OIL BANKRUPTCY PROCEEDINGS:
In light of significant operating losses and management
difficulties, Standard Oil filed a petition under Chapter 11 of
the Code with the United States Bankruptcy Court for the Western
District of Michigan (the "Bankruptcy Court") on April 12, 1991
(Case No. 91-92102). On September 13, 1991, Standard Oil and
certain of its creditors filed a Joint Plan of Reorganization
with the Bankruptcy Court, as amended on October 11, 1991 and
January 10, 1992 (collectively, the "Plan"). The Plan was
confirmed by the Bankruptcy Court on March 23, 1993 and
consummated effective April 22, 1993.
Upon consummation of the Plan, Standard Oil and the Company
entered into and closed an Asset Transfer Agreement. Under this
Agreement, the Company acquired all of Standard Oil's net assets
of approximately $3,556,000, including lease agreements,
operating agreements, letters of credit, various interests in oil
and gas wells and pipelines, and the revenues generated from the
sale of gas produced from its operating wells or transported
through Standard Oil's pipelines. In consideration for such
assets, the Company assumed liabilities of approximately $48,000
and discharged certain of Standard Oil's pre-petition obligations
totaling approximately $7,192,000 through the issuance of a
combination of 907,674 shares of the Company's Series 1993 8%
Convertible Preferred Stock, par value $12.00 per share ("Series
1993 Preferred Stock"), 1,611,031 shares (pre-split) of the
Company's Common Stock, par value $.03 per share ("Common
Stock"), and 1,224,729 shares of the Company's Common Stock
Warrants to the allowed claim holders and interest holders under
the Plan. Effective June 8, 1994 the Company declared a 1-for-4
reverse split of its then outstanding, $.03 common stock. Also
on September 9, 1994, the Company amended its Certificate of
Incorporation to increase the authorized aggregate number of
shares of capital stock and reduced the par value of the common
stock to $.0001. The value of the shares of common stock and
Series 1993 Preferred Stock issued to discharge certain of
Standard Oil's pre-petition obligations was determined based upon
negotiated settlement amounts with the
1
<PAGE>
creditors of the pre-petition claims. These valuations were
approved by the Bankruptcy Court.
ACQUISITION ACTIVITIES:
Since its inception in August, 1992, the Company has
completed a number of transactions involving the acquisition of
oil and gas properties and interests in such properties. Set
forth below is a brief description of the various properties
acquired by the Company during the most recent three years ending
December 31, 1996.
1994:
-----
[ ] The Company acquired approximately $16,800,000 million of
oil and gas properties, pipeline and equipment, and accounts
receivable of Southern Gas Company, Inc. ("SGC"), an
independent Kentucky-based natural gas production, pipeline
and gas marketing company.
[ ] The Company acquired from Southern Gas Holding Co. ("SGH"),
the parent company of SGC, its interests in certain gas
wells owned by SGH having an estimated fair market value of
$1.2 million and 441,176 shares of common stock in National
American Life Insurance Company of Pennsylvania, Inc.
("NALICO") owned by SGH. Of the 441,176 shares acquired
from SGH, 220,588 shares are held by Leonard K. Nave,
President of SGH, on behalf of the Company. Based upon an
independent appraisal of the investment, a final purchase
price of $869,000 was allocated to this investment. During
1995, NALICO's financial position continued to deteriorate,
and it was placed under rehabilitation by state regulators.
Management obtained another independent appraisal of the
Company's investment value of NALICO. As a result of the
appraisal, the Company reduced the investment's value to
zero from its carrying value of $869,000 and recognized the
reduction as a charge against income in 1995. See Note 9 to
the Notes to Financial Statements included in Item 7 to this
Report on Form 10-KSB.
[ ] The Company acquired the Jellico Pipeline consisting of
approximately sixteen (16) miles of pipeline in Whitley
County, Kentucky.
[ ] The Company acquired the Gausdale V Pipeline in Whitley
County, Kentucky, along with certain other related assets.
This pipeline connects and delivers gas from approximately
41 wells and delivers the same into the Company's
Gausdale/Meadowcreek pipeline. This pipeline also connects
with the gas transmission line of Wiser Oil & Gas Company
("Wiser") which allows the Company direct access into
Columbia Gas Transmission ("TCo") via its KA-1 pipeline.
[ ] The Company acquired from Gems Resources, Inc. ("Gems") 24%
net revenue interest in 33 producing gas wells plus 10
additional wells (which will require additional completion
work and hook-up), all of which are located in the
2
<PAGE>
Southeastern Kentucky Region (collectively, the "Gausdale
Field Wells"). The Company had previously purchased a 36%
interest in these wells from Gems in 1993. This acquisition
was arranged and paid for by Permian Petroleum Corporation
("Permian") as the remaining part of the consideration owed
to the Company from a prior transaction with Permian.
[ ] The Company acquired a gas pipeline and certain related
assets from Petroleum Exploration and Transmission, Inc.
(the "PXT Pipeline") consisting of approximately fifty miles
of gathering and transmission pipeline, related equipment,
leases, net revenue interest ownership, additional retail
sales via approximately thirty house customers and one
local distribution company. The PXT pipeline provided the
Company with additional direct interconnections with Delta
Natural Gas and the TCo KA-1 pipeline and new
interconnections with the Somerset Gas and Tranex pipelines.
The addition of the access to the Somerset Gas and Tranex
pipelines enabled the Company to market to previously
unaccessible areas. In August, 1996, the Company entered
into a Purchase and Sale Agreement with a corporation to
sell certain of the Company's gas properties and related
pipeline and equipment for approximately $590,000. The gas
properties sold consisted primarily of certain leases and
pipelines located in Clay County, Kentucky, including the
PXT Pipeline. See Note 4 to the Notes to Financial
Statements included in Item 7 of this Report on Form 10-KSB.
1995:
-----
[ ] On September 28, 1995, the Company bought-out a platform use
agreement (the "Agreement") from Century Oil Company
("Century Oil") for $1,800,000. The Agreement, dated May 26,
1995, was by and between Century Oil and Southern Gas and
set out the terms by which Southern Gas would pay for the
use of the platform located in the Gulf Coast region on a
Federal lease block known as Ship Shoal Block 150, offshore
Louisiana ("Ship Shoal 150"). The purchase of the Agreement
reduced the monthly lease operating expenses assessed
against the Company as a result of its ownership of wells
located on the lease block. See Note 8 to the Notes to
Financial Statements included in Item 7 of this Report on
Form 10-KSB.
[ ] On December 27, 1995, the Company entered into a purchase
agreement with AKS Energy Corporation ("AKS") to acquire
assets consisting of more than of 100 miles of gathering and
transmission pipeline and related equipment, approximately
50,000 acres of developed and undeveloped leases and net
revenue interest ownership in approximately 155 producing
wells containing estimated natural gas reserves of
approximately 7.7 billion cubic feet ("bcf") net to the
Company. The assets are located in the Appalachian region
in Whitley, McCreary and Clay Counties, Kentucky, and in the
State of Tennessee. The AKS pipelines provide the Company
with additional direct interconnects with Delta Natural Gas,
TCo's KA-1 pipeline and Somerset Gas and a new
interconnection with Citizens Gas Utility. This transaction
closed on February 26, 1996. See Notes 2 and 10 to the
Financial Statements included in Item 7 of this Report on
Form 10-KSB.
3
<PAGE>
1996
----
[ ] In February 1996, the Company completed its purchase of the
AKS assets, thereby extending its operations in Kentucky by
acquiring from AKS more than 100 miles of gathering and
transmission pipeline and related equipment, 50,000 acres of
developed and undeveloped leases and net revenue interest
ownership in approximately 155 producing wells containing
natural gas reserves of approximately 7.7 bcf net to the
Company. As consideration for such assets, the Company paid
AKS cash in the amount of $2,909,000, assumed $125,000 of
AKS's severance obligations, issued 225,000 shares of Common
Stock to AKS and issued warrants to AKS with an expiration
date of December 31, 1998, to purchase an additional 225,000
shares of Common Stock for $5.00 per share. The Company has
registered the 225,000 shares of Common Stock for sale under
the Securities Act of 1933. The Company agreed to register
the shares of Common Stock underlying the warrants issued to
AKS within 180 days after AKS has purchased an aggregate of
100,000 shares of Common Stock under the Warrants. AKS has
the right to put 50,000 shares of Common Stock to the
Company for $5.00 per share anytime between June 30, 1997
and June 30, 1999. In addition, the Company entered into an
agreement to participate with AKS, on a 50-50 basis, in the
joint development of leases owned by AKS on 40,000 acres of
undeveloped Southeastern Kentucky gas fields. AKS had the
right to pay its share of the development and drilling costs
by putting shares of Common Stock to the Company at a price
of $5.00 per share, and AKS has put 10,480 shares to the
Company for that purpose as of December 31, 1996. The joint
venture with AKS was terminated on November 27, 1996, when
the Company decided to focus its development efforts and
capital in the Gulf Coast region. In May 1996, under a
volumetric production payment, the Company presold
approximately 2.2 bcf of gas to be produced in the future
from the wells purchased from AKS for a current payment of
$4.3 million. See Notes 2 and 10 to the Notes to Financial
Statements included in Item 7 of this Report on Form 10-KSB.
[ ] On July 3, 1996, the Company expanded its operations in the
Gulf of Mexico region by acquiring from Century Offshore
Management Corporation ("Century") working interests in
proved developed and undeveloped oil and gas properties
(with proved reserves of approximately 12.0 bcf of gas and
465,000 barrels of oil), equipment and pipelines on property
known as the South Timbalier Area, Block 148, on the Outer
Continental Shelf off the Louisiana coastline (the "Century
Transaction"). As consideration for the purchase, the
Company paid $8,000,000 in cash, cancelled a $6,500,000
promissory note from Century to the Company and assumed
existing liens against the assets purchased in the amount of
$1,051,000. Nine of the wells in which the Company
purchased a working interest are producing; and as of March
1, 1997, the Company has drilled and completed two
additional wells on the property. The Company also agreed
to use its best efforts to obtain approval under its Line of
Credit to loan $3,000,000 to Century in three equal
installments on September 1, October 1 and November 1, 1996,
on an unsecured basis. The Company has not obtained
approval under its Line of Credit to make the loans to
4
<PAGE>
Century. The Company and Century have verbally agreed to
terminate the loan agreement.
[ ] On August 31, 1996, the Company purchased from Century a
6.2% working interest in Bayou Bouillon Salt Dome, a 5.6%
working interest in Plumb Bob Salt Dome and a 9.5% working
interest in White Castle Salt Dome, all of which are
unproved properties located onshore Louisiana, for
$4,509,000. The purchase price was paid by applying
advances the Company had previously made to Century for the
acquisition of working interests in various undeveloped
properties.
[ ] In August 1996, the Company sold oil and gas leases and
pipelines located in Clay County, Kentucky, to an
unaffiliated third party for approximately $590,000.
As of December 31, 1996, acquisitions, dispositions and
development of wells in the Appalachian region of Kentucky,
Michigan and the Gulf Coast region have resulted in the Company's
ownership of interests in approximately 480 wells, approximately
368 of which are on line and producing.
BUSINESS OF THE COMPANY:
OVERVIEW:
The Company is a fully-integrated oil and gas company
engaged in the exploration, development and acquisition of oil
and natural gas properties located in Kentucky, Michigan and the
Gulf Coast regions and the marketing and transportation of
natural gas. A substantial portion of the Company's operations
are conducted through its subsidiary, Southern Gas, an
independent oil and gas production, pipeline and gas marketing
company. The Company owns and operates properties in the
Appalachian region of Kentucky, maintains non-operating
interests in the Gulf Coast region and Michigan, and has oil and
gas reserves, gathering systems, compressors, dedicated pipeline
capacity with transportation companies and contracts to sell its
product to end-users.
The expansion of the Company's operations into the Gulf
Coast region commenced in October, 1994, when the Company entered
into an agreement, as amended, with Settle Oil and Gas Company
("Settle") relating to certain of Settle's operations in the
Gulf Coast region. Since the execution of that agreement, the
Company has: (i) acquired from Settle a 50% working interest
(23.75% in 1995 and 26.25% in 1994) in Ship Shoal 150; (ii)
agreed to loan Settle $6,500,000 (originally $5,000,000); (iii)
acquired a 44% interest in Crescent Turnkey Engineering, L.L.C.
("Crescent"), a Delaware limited liability company in which
Century and certain of Century's officers and directors are also
members with a combined ownership interest of 45%, Crescent
having been formed for the purpose of providing engineering and
contract drilling services to the Company and third parties and
for operations in which the Company is involved; (iv) entered
into Domestic Turnkey Drilling Contracts with Crescent for the
drilling of two wells on Ship Shoal 150; and (v) acquired from
5
<PAGE>
Century working interests in proved developed and undeveloped oil
and gas properties, equipment and pipelines on property known as
South Timbalier Block 148 for consideration of approximately
$15.6 million; and (vi) acquired from Century working interests
ranging from 5.6% to 9.5% in three separate onshore salt dome
unproved properties for approximately $4.5 million. See Note 2
to the Notes to Financial Statements included in Item 7 of this
Report on Form 10-KSB.
The Company's strategy is to continue to expand its reserve
base and increase its cash flow through exploration, acquisition
and development of oil and natural gas properties. The Company
emphasizes the following elements in implementing this strategy:
[ ] Reserve growth through high potential exploratory and
developmental drilling in the Gulf Coast region
[ ] Balance between exploration and acquisition of proved
properties
[ ] Control of operations and costs
[ ] Use of 3-D seismic and other advanced technology made
available by third parties
[ ] Equity ownership and other incentives to retain and
attract employees
The Company seeks a balance between its exploration program
and the acquisition of proved properties. Through December 31,
1996, the Company had proven reserves of 42.9 bcf of natural gas
and natural gas equivalents which increased primarily as a result
of acquisitions in the Gulf Coast region. The effect of these
exploration and acquisition activities represents an 88% increase
in the Company's reserves since December, 1994.
The Company believes that the expansion of its focus to the
Gulf Coast region is the foundation of its continued growth. The
Gulf Coast region is a prolific oil and gas province, accounting
for approximately 25% of domestic natural gas production, and the
Company believes that it has significant remaining undiscovered
reserve potential due to the use of 3-D seismic technology and
the discovery of additional reserves in developed fields, which
reserves were not readily apparent utilizing previously employed
2-D seismic technology.
The Company believes there are many other advantages to
operating in the Gulf Coast region. There is a significant
amount of seismic and other geologic data available at a
reasonable cost. The shallow waters of the Gulf of Mexico also
have a substantial existing infrastructure, including gathering
systems, platforms, pipelines and drilling and service companies
which facilitate cost effective operations and the timely
development of discoveries.
OPERATIONS:
The Company's exploration and acquisition activities
complement each other. Properties acquired by the Company often
hold exploration potential and can increase the Company's
presence in an area, creating the infrastructure that can make
6
<PAGE>
otherwise uneconomic exploratory prospects attractive.
Information gathered while evaluating production on acquisition
candidates and adjacent acreage is used, as appropriate, in the
Company's exploration efforts. Conversely, a successful
exploration prospect may reveal similar untested reserve
potential on a proved property believed to be marginal by its
owner, making its purchase attractive.
EXPLORATION ACTIVITIES:
The Company's natural gas and crude oil exploration and
production operations are conducted by its wholly owned
subsidiary, Southern Gas. Southern Gas is an independent oil and
gas production, pipeline and gas marketing and transportation
company. Southern Gas is engaged in the exploration for, and
development of, natural gas and crude oil reserves primarily in
the Appalachian region of Kentucky and the Gulf Coast region.
At December 31, 1996, the Company had estimated net proven
natural gas reserves of 23.3 bcf in Kentucky and 1.4 bcf in
Michigan. In the Appalachian region, the Company drilled eight
(8) and five (5) successful developmental wells during 1996 and
1995, respectively, all of which were for its own account; and
the Company drilled ten (10) exploratory wells during the fiscal
year ended December 31, 1994, all of which were drilled for
various third parties. All of these wells are operated by the
Company.
Additionally, during fiscal year 1995, the Company drilled
two (2) oil and gas wells in the Gulf Coast region. These wells
were drilled jointly with Century/Settle as follows:
[ ] In March, 1995, the Company participated with Settle in the
successful drilling and completion of a well (the "B-3
Well") located on Ship Shoal 150. The B-3 Well was drilled
to a total measured depth of 7,925 feet and logged oil and
gas pay in five (5) sands. The B-3 Well was placed on line
May 1, 1995, with initial production of approximately 800
barrels of oil and 270 thousand cubic feet ("mcf") of gas
per day. As of December 29, 1996, the B-3 Well was flowing
at the rate of approximately 960 barrels of oil and 450 mcf
of gas per day. The Company owns a 50% working interest
(33.4% net revenue interest) in the B-3 Well.
[ ] During the month of September, 1995, the Company
participated with Century, the surviving entity as a result
of a merger between Century and Settle consummated on July
21, 1995, in the successful drilling and completion of a
second well located on Ship Shoal 150. This well,
designated as the B-4 Sidetrack Well #2 (the "B-4 Well"),
encountered oil pay similar to that found in the B-3 Well
and was placed into production on October 31, 1995. As of
December 29, 1996, the B-4 Well was producing at the rate of
590 barrels of oil and 250 mcf of gas per day. The Company
owns a 50% working interest (30.5% net revenue interest) in
the B-4 Well.
During 1996 and 1995, the Company recognized approximately
$2.8 million and $1.5 million, respectively, of production
revenues from the B-3 and B-4 Wells, net of lease operating
7
<PAGE>
expenses. During the months of January and February, 1996, the
production from the B-3 and B-4 Wells was temporarily curtailed
due to operational problems experienced by a third party
platform. The third party resolved these problems by the end of
February, 1996, and production returned to its previous levels.
In February, 1997 the production from the B-3 and B-4 wells was
also temporarily curtailed due to a paraffin build-up in the
wells. The wells were cleaned out at the end of February, and
production has resumed at previous levels.
The B-4 Well verified the 3-D seismic interpretation of the
reservoir which was discovered by the B-3 Well. The 1996 year-
end independent reserve report indicates that the Company's net
revenue interest in the remaining total proved reserves of Ship
Shoal Block 150 is 561,513 barrels of oil and 0.5 bcf of natural
gas, or a total of 3.9 bcf equivalent of natural gas, which has a
net present value, based upon a 10% discount factor, of $10.8
million.
Based on 3-D seismic interpretations, the Company has
identified two additional well locations on Ship Shoal 150 which
the Company has farmed-out to Pennzoil Exploration and
Development Corporation ("Pennzoil") in exchange for an 8.3% net
overriding royalty interest. After Pennzoil recovers its cost of
developing the wells, the Company has the option to increase its
net overriding royalty interest to 10% or take a one-third
working interest in the wells. There is a significant amount of
seismic and other geologic data available at a reasonable cost.
Also, the shallow waters of the Gulf of Mexico have a substantial
existing infrastructure, including gathering systems, platforms,
pipelines and drilling and service companies, which facilitate
cost effective operations and the timely development of
discoveries.
The Company continues to pursue other selected exploration
and development opportunities in Appalachia and is actively
pursuing opportunities in the Gulf Coast region.
ACQUISITION ACTIVITIES:
The Company actively pursues the acquisition of proven oil
and gas properties in its area of operations. From its inception
through December 31, 1996, the Company acquired interests in
approximately 450 wells (net of dispositions) in Kentucky, the
Gulf Coast and Michigan as well as several hundred leases in such
areas. The Company has also increased its leasing activities in
the Gulf Coast region and at December 31, 1996, has invested
approximately $5.6 million in unproved leases in the area.
On February 26, 1996, the Company acquired assets for total
consideration of $4.2 million, consisting of cash, common stock
and common stock purchase warrants, from AKS Energy Corporation
("AKS"). The assets consisted of more than 100 miles of
gathering and transmission pipeline and related equipment,
approximately 50,000 acres of developed and undeveloped leases,
and net revenue interest ownership in approximately 155 producing
wells containing estimated natural gas reserves of approximately
8
<PAGE>
7.7 bcf net to the Company. The assets are located in the
Appalachian region in Whitley, McCreary and Clay Counties,
Kentucky, and in the State of Tennessee. The AKS pipelines
provide the Company with additional direct interconnects with
Delta Natural Gas, TCo's KA-1 pipeline and Somerset Gas as well
as a new interconnection with Citizens Gas Utility. The Company
also entered into an agreement to participate with AKS in the
joint development of leases in Southeastern Kentucky gas fields
wherein the Company would have the right to earn 50% of AKS's
remaining 40,000 undeveloped acres. However, the joint
development agreement was terminated in November, 1996, when the
Company decided to focus its development efforts and capital into
the Gulf Coast region.
On May 22, 1996, through a facility sponsored by Williams
Energy Services Company, a subsidiary of The Williams Companies,
Inc., and structured by NationsBank, the Company conveyed an
approximate 2.2 bcf volumetric production payment in the wells
purchased from AKS. The Company received $4.3 million for the
production payment which has an anticipated six-year term. Of
the funds received, $2.5 million were used to reduce the
Company's credit facility with its primary lender; and the
remainder of the funds were used for working capital and further
acquisition and development activities in the Gulf Coast region.
On July 3, 1996, the Company entered into Agreements with
Century wherein it: (i) acquired a portion of the working
interest of Century in ten oil and gas wells together with the
exploration rights on property known as South Timbalier 148,
located in the Louisiana offshore region of the Gulf of Mexico;
(ii) purchased one-third of Century's contract rights to
participate in the exploration and development in three separate
onshore salt dome properties also located in the Gulf Coast
region of Louisiana with combined acreage in excess of 100 square
miles; and (iii) received a merger option from Century whereby
the Company, at its sole option, has the right to require a
merger between the Company and Century, such option being
exercisable until June 30, 1997. On August 31, 1996, the Company
and Century entered into a Capitalization and Termination of
Purchase and Sale Agreement (Capitalization Agreement), which
effectively terminated the purchase of one-third of Century's
contract rights in the three separate onshore salt dome
properties. The Capitalization Agreement provided for the
Company to acquire between 5.6% and 9.5% contract rights from
Century in the three separate onshore Salt Domes for lesser
consideration. The consideration for the South Timbalier 148 and
Salt Dome properties, as adjusted, was approximately $20.0
million, payable in cash and/or stock and relinquishment of the
$6.5 million note due the Company from Century. These
acquisitions have added approximately 14.2 bcf equivalent of
proven reserves to the Company's reserve base.
Since the Company's acquisition of an interest in the South
Timbalier 148 Block in July, 1996, it has expended approximately
$6.0 million towards the development of the property. In
conjunction with the joint interest owner and operator of the
property, Newfield Exploration, a second and third production
platform were installed in the Company's area of interest and are
now in operation. The platforms were installed to accommodate
9
<PAGE>
the production developed as a result of the completion of the
wells acquired. Nine of the wells purchased are currently
producing. Additionally, the Companies have successfully drilled
and completed a new well on South Timbalier 148, and production
has commenced. As a result of the successful development, an
additional location was identified and was drilled and
successfully completed in February 1997.
Since the Company's acquisition of the properties, it has
recognized approximately $2.45 million of production revenues
from the South Timbalier Block 148 wells, net of lease operating
expenses. As of December 31, 1996, the South Timbalier Block 148
property was flowing at a rate of approximately 3,850 barrels of
oil and 39,900 mcf of gas per day, with net production to the
Company of approximately 900 barrels of oil and 7,100 mcf of gas
per day. The Company owns working interests in the South
Timbalier Block 148 ranging from 5% to 45%, with related net
revenue interests ranging from 3% to 30%.
The Company seeks oil and gas properties with undeveloped or
unexploited reserve potential in order to enhance returns.
Excepting the Gulf Coast region, the Company looks for properties
which it can operate and in which it can increase its interest.
The Company actively targets undervalued assets of financially
distressed companies. Acquisition properties that meet this
criteria and provide a base for further evaluation and
exploitation adjacent to production already established by the
Company are of particular interest to the Company. The Company
pursues work-overs, recompletions and development drilling on
many of its properties to increase production and cash flow,
develop proved undeveloped reserves and evaluate probable
reserves. While the above activities may provide substantial
rewards, they are not without risk.
TRANSPORTATION:
The Company operates intrastate pipelines in Kentucky.
Through its approximately 300 mile pipeline system running
through Southeastern Kentucky, the Company transmits gas to
points in its primary market area consisting of customers
accessible via the TCo pipeline system. Gas is transported for
consumption and resale by non-affiliated gas utilities and
municipalities and to other pipeline companies and end-users. A
number of the Company's customers are Fortune 500 companies.
In the Company's market area, natural gas is an energy
source available for traditional residential, commercial and
industrial uses. The Company competes with other intrastate and
interstate pipelines in the transportation and sale of gas.
Federal Energy Regulatory Commission ("FERC") orders have
challenged the industry as a whole to become more competitive
through pricing and efficiency. The primary effect of these
orders on the Company has been in the area of transportation.
While the competition in transportation remains high, the
marketing of third party gas becomes more attractive. The
profits associated therewith can be increased by the acquisition
of inexpensive unused transportation in conjunction with typical
10
<PAGE>
market sensitive gas purchases and sales. By diversifying its
internal and third party sales, the Company has been able to
offset any adverse effects of the FERC orders.
On October 1, 1994, the Company acquired the PXT Pipeline,
located in Laurel and Clay Counties, Kentucky. The PXT Pipeline
consists of approximately fifty miles of gathering and
transmission pipeline, related equipment, and interconnects with
four intrastate and interstate pipelines. It also consists of
production ownership, leases, thirty existing residential home
customer retail markets and one wholesale market. The PXT
Pipeline provided the Company with additional direct access to
Delta Natural Gas Co.'s pipeline, TCo's KA-1 pipeline, and new
interconnects with Somerset Gas and Tranex. These new
interconnects provided the Company with access to new markets for
retail and wholesale gas sale.
Initially, the Company had intended to connect its Gausdale
and Wofford fields to the PXT Pipeline in order to eliminate
winter delivery problems with TCo. In addition, the Company
estimated that there would be a significant savings in
transportation expenses. However, a significant capital
expenditure was also required to connect the system. Management
determined that there were other alternatives which might prove
to be more cost beneficial and, therefore, effectuated an
alternative transportation route to TCo through Wiser. By
connecting the Wofford and Gausdale fields and installing two
interconnects from the Gausdale field to Wiser's facilities, the
Company was able to alleviate the majority of the winter delivery
problems it had previously experienced for a substantially
reduced capital expenditure while also saving 22% in
transportation costs for the gas being delivered via the Wiser
facilities.
In August, 1996, the Company entered into a Purchase and
Sale Agreement with a corporation to sell certain of the
Company's gas properties and related pipeline and equipment for
approximately $590,000. The gas properties sold consisted
primarily of certain leases and pipelines located in Clay County,
Kentucky, including the PXT Pipeline.
TECHNOLOGY:
The Company uses advanced technology in its exploration and
development activities in order to reduce its risks and lower its
costs. These services are provided primarily by independent
geologists hired by the Company on a contract basis.
With respect to the Company's activities in the Gulf Coast
region, the Company intends to utilize 3-D seismic surveys to
evaluate its exploratory prospects prior to drilling thereon.
The availability of 3-D coverage for the shallow waters of the
Gulf of Mexico at reasonable cost makes its use in exploration
attractive from a risk management perspective. The use of 3-D
seismic technology will provide the Company with substantially
more accurate and comprehensive geological data for the
evaluation of drilling prospects than 2-D seismic technology and
traditional evaluation methods. The Company believes that its
11
<PAGE>
use of 3-D seismic technology provides it with an advantage over
those companies that do not regularly utilize similar technology
by increasing the Company's likelihood of success.
MARKETING:
The Company markets substantially all of the gas production
from Company-operated properties as well as gas production
purchased from other sources. The Company has market-sensitive
long-term contracts (accounting for approximately 31%, 36% and
50% of gas sales during 1996, 1995 and 1994, respectively) under
which the buyer has certain obligations to take natural gas. The
remaining Company-owned gas production and gas purchased in the
open market, however, is sold to a variety of purchasers under
short-term (less than 12 months) contracts or thirty-day spot gas
purchase contracts. During 1996, 1995 and 1994, the Company out-
performed market indexes and sold gas at prices exceeding average
market prices. During 1996, 1995 and 1994, Osram Sylvania
purchased in excess of 10% of the gas sold by the Company. Also
during 1995, the Company entered into an exclusive marketing
arrangement with Southern Resources, Inc. ("SRI"), a third party
company, wherein the Company is the exclusive supplier of all
natural gas to be sold by SRI. Under the agreement, after
deduction of certain expenses, the Company is entitled to receive
not less than 50% of the sales margin obtained. The Company also
provides accounting services, cash management and credit for SRI.
During 1996 and 1995, SRI purchased approximately 69% and 37%,
respectively, of the gas sold by the Company.
COMPETITION:
Competition in the oil and gas industry is intense,
particularly with respect to the acquisition of producing
properties and proved undeveloped acreage. Major and independent
oil and gas companies actively bid for desirable oil and gas
properties, as well as for the equipment and labor required to
operate and develop such properties. The Company believes that
its strategic business relationships coupled with the locations
of its leasehold acreage, its exploration, drilling and
production capabilities, and the experience of its management
generally enable it to compete effectively. Many of the
Company's competitors, however, have financial and personnel
resources and exploration and development budgets that are
substantially greater than those of the Company, which may affect
the Company's ability to compete with these companies.
CUSTOMERS:
The Company has a number of customers for its gas. Most of
the industrial end-users are located in Kentucky, with other end-
users located in Maryland, Ohio, Indiana, North Carolina, New
Jersey, Georgia, Texas and Alabama. Its largest customers
include SRI, Osram Sylvania and General Shale. The industrial
end-users are serviced through a variety of gas companies,
including Columbia Gas of Kentucky, Inc., Baltimore Gas &
Electric Co., Western Kentucky Gas Company, Cincinnati Gas &
Electric Co. and Louisville Gas & Electric Co.
12
<PAGE>
REGULATION:
FEDERAL REGULATION OF SALES AND TRANSPORTATION OF NATURAL
GAS: Historically, the transportation and sale for resale of
natural gas in interstate commerce have been regulated pursuant
to the Natural Gas Act of 1938 (the "NGA"), the Natural Gas
Policy Act of 1978 (the "NGPA") and the regulations promulgated
thereunder by the FERC. Maximum selling prices of certain
categories of natural gas sold in "first sales," whether sold in
interstate or intrastate commerce, were regulated pursuant to the
NGPA. On July 29, 1989, the Natural Gas Wellhead Decontrol Act
(the "Decontrol Act") was enacted, which removed, as of January
1, 1993, all remaining federal price controls from natural gas
sold in "first sales." The FERC's jurisdiction over natural gas
transportation was unaffected by the Decontrol Act.
Commencing in April 1992, the FERC issued Order Nos. 636,
636-A, and 636-B (collectively, "Order No. 636"), which require
interstate pipelines to provide transportation on a basis that is
equal for all gas supplies. Although Order No. 636 does not
directly regulate the Company's activities, the FERC has stated
that it intends for Order No. 636 to foster increased competition
within all phases of the natural gas industry. It is unclear
what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company's
activities. Although Order No. 636, assuming it is upheld in its
entirety, could provide the Company with additional market access
and more fairly applied transportation service rates, Order No.
636 could also subject the Company to more restrictive pipeline
imbalance tolerances and greater penalties for violation of those
tolerances. The FERC has issued final orders on virtually all
Order No. 636 pipeline restructuring proceedings. Appeals of
Order No. 636, as well as orders in the individual pipeline
restructuring proceedings, are currently pending; and the Company
cannot predict the ultimate outcome of court review. This review
may result in the reversal, in whole or in part, of Order No.
636.
The Outer Continental Shelf Lands Act (the "OCSLA") requires
that all pipelines operating on or across the Outer Continental
Shelf (the "OCS") provide open-access, non-discriminatory
service. Although the FERC has opted not to impose the
regulations of Order No. 509, in which the FERC implemented the
OCSLA, on gatherers and other non-jurisdictional entities, the
FERC has retained the authority to exercise jurisdiction over
those entities if necessary to permit non-discriminatory access
to service on the OCS. On October 28, 1993, the FERC announced
its intention to reevaluate the appropriateness of its
traditional criteria for determining whether a pipeline is a non-
regulated gathering line in light of Order No. 636 and to
establish consistent policies for gathering rates and services
for both interstate pipelines and their affiliates. If the FERC
were to apply Order No. 509 to gatherers in the OSC, eliminate
the exemption of gathering lines, and redefine its jurisdiction
over gathering lines, then these acts could result in a reduction
in available pipeline space for existing shippers in the Gulf of
Mexico. In addition, gathering lines are currently exempt from
the FERC's jurisdiction, regardless of whether or not they are on
the OCS, but the FERC could eliminate this exemption. While the
13
<PAGE>
Company does not currently own or operate any gathering lines on
the OCS, the expansion of its business into the Gulf of Mexico
may be impacted by the OCSLA.
In December 1992, the FERC issued Order No. 547, governing
the issuance of blanket marketer sales certificates to all
natural gas sellers other than interstate pipelines. The order
applies to non-first class sales that remain subject to the
FERC's NGA jurisdiction. The FERC intends Order No. 547, in
tandem with Order No. 636, to foster a competitive market for
natural gas by giving natural gas purchasers access to multiple
supply sources at market-driven prices. Order No. 547 may
increase competition in markets in which the Company's natural
gas is sold.
Additional proposals and proceedings that might affect the
natural gas industry are pending before Congress, the FERC and
the courts. The natural gas industry historically has been very
heavily regulated; therefore, there is no assurance that the less
stringent regulatory approach recently pursued by the FERC and
Congress will continue.
FEDERAL LEASES: Certain of the Company's operations are
located on federal oil and gas leases, which are administered by
the United States Department of the Interior Minerals Management
Service (the "MMS"). Such leases are issued through competitive
bidding, contain relatively standardized terms and require
compliance with detailed MMS regulations and orders pursuant to
the OCSLA (which are subject to change by the MMS). For offshore
operations, lessees must obtain MMS approval for exploration
plans and development and production plans prior to the
commencement of such operations. In addition to permits required
from other agencies (such as the Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency), lessees must
obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore
production facilities located on the OCS to meet stringent
engineering and construction specifications. Similarly, the MMS
has promulgated other regulations governing the plugging and
abandonment of wells located offshore and the removal of all
production facilities. To cover the various obligations of
lessees on the OCS, the MMS generally requires that lessees post
substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety
can be substantial, and there is no assurance that bonds or other
surety can be obtained in all cases. In August 1993, the MMS
provided notices to lessees of OCS leases that new levels of
lease and area wide bonds will be required effective November 26,
1993. As a result of these changes, operators in the OCS waters
of the Gulf of Mexico will be required to increase their
respective area wide bonds to $3,000,000 from the current level
of $300,000. Under certain circumstances, the MMS may require
any of the Company's operations on federal leases to be suspended
or terminated. Any such suspension or termination could
materially and adversely affect the Company's financial condition
and operations. The MMS also intends to adopt financial
responsibility regulations under the OPA, as described below.
STATE AND LOCAL REGULATION OF DRILLING AND PRODUCTION: The
Company may conduct operations in the state waters of the Gulf of
Mexico offshore Louisiana. Louisiana regulates drilling and
14
<PAGE>
operating activities by requiring, among other things, drilling
permits and bonds and reports concerning operations. The laws of
Louisiana also govern a number of environmental and conservation
matters, including the unitization and pooling of oil and gas
properties and establishment of maximum rates of production from
oil and gas wells. Some states prorate production to the market
demand for oil and gas.
OIL PRICE CONTROLS AND TRANSPORTATION RATES: Sales of crude
oil, condensate and gas liquids by the Company are not currently
regulated and are made at market prices. The FERC has issued an
order establishing an indexing system for transportation rates
for oil that could increase the cost of transporting oil to the
purchaser. Because this order is subject to administrative and
judicial review, the Company is not able to predict what effect,
if any, this order will have on it.
ENVIRONMENTAL REGULATIONS: The Company's operations are
subject to numerous laws and regulations governing the discharge
of materials into the environment or otherwise relating to
environmental protection. Public interest in the protection of
the environment has increased dramatically in recent years.
Offshore drilling in certain areas has been opposed by
environmental groups and, in certain areas, has been restricted.
The Company believes that the trend of more expansive and
stricter environmental legislation and regulations will continue.
To the extent laws are enacted or other governmental action is
taken that prohibits or restricts offshore drilling or imposes
environmental protection requirements that result in increased
costs to the oil and gas industry in general and the offshore
drilling industry in particular, the business and prospects of
the Company could be adversely affected.
The Oil Pollution Act of 1990 (the "OPA") and regulations
thereunder impose a variety of regulations on "responsible
parties" related to the prevention of oil spills and liability
for damages resulting from such spills in the United States
waters. A "responsible party" includes the owner or operator of
a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. The OPA assigns liability
to each responsible party for oil removal costs and a variety of
public and private damages. While liability limits apply in some
circumstances, a party cannot take advantage of liability limits
if the spill was caused by gross negligence or willful misconduct
or resulted from violation of a federal safety, construction or
operating regulation. If the party fails to report a spill or to
cooperate fully in the cleanup, liability limits likewise do not
apply. Few defenses exist to the liability imposed by the OPA.
The OPA also imposes ongoing requirements on a responsible
party, including proof of financial responsibility to cover at
least some costs in a potential spill. On August 25, 1993, the
MMS published an advance notice of its intention to adopt a rule
under the OPA that would require owners and operators of offshore
oil and gas facilities to establish $150,000,000 in financial
responsibility. Under the proposed rule, financial
responsibility could be established through insurance, guaranty,
indemnity, surety bond, letter of credit, qualification as a
self-insurer or a combination thereof. There is substantial
15
<PAGE>
uncertainty as to whether insurance companies or underwriters
will be willing to provide coverage under the OPA because the
statute provides for direct lawsuits against insurers who provide
financial responsibility coverage, and most insurers have
strongly protested this requirement. The financial tests or
other criteria that will be used to judge self-insurance are also
uncertain. The Company cannot predict the final form of the
financial responsibility rule that will be adopted by the MMS,
but such rule has the potential to result in the imposition of
substantial additional annual costs on operators on the OCS or
otherwise materially adversely affect such operators. The impact
of the rule should not be any more adverse to the Company than it
will be to other similarly situated or less capitalized owners or
operators in the Gulf of Mexico. The comment period of the
formal rule making process expired February 28, 1994.
The OPA also imposes other requirements, such as the
preparation of an oil spill contingency plan. The Company has
such a plan in place. Failure to comply with ongoing
requirements or inadequate cooperation during a spill event may
subject a responsible party to civil or criminal enforcement
actions.
In addition, the OCSLA authorizes regulations relating to
safety and environmental protection applicable to lessees and
permittees operating on the OCS. Specific design and operational
standards may apply to OCS vessels, rigs, platforms, vehicles and
structures. Violations of lease conditions or regulations issued
pursuant to the OCSLA can result in substantial civil and
criminal penalties, as well as potential court injunctions
curtailing operations and the cancellation of leases. Such
enforcement liabilities can result from either governmental or
private prosecution.
The Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), also known as the "Superfund" law,
imposes liability, without regard to fault or the legality of the
original conduct, on certain classes of persons that are
considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner
or operator of the disposal site or sites where the release
occurred and companies that disposed or arranged for the disposal
of the hazardous substances found at the site. Persons who are
or were responsible for releases of hazardous substances under
CERCLA may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been
released into the environment and for damages to natural
resources, and it is not uncommon for neighboring landowners and
other third parties to file claims for personal injury and
property damage allegedly caused by the hazardous substances
released into the environment.
In addition, legislation has been proposed in Congress from
time to time that would reclassify certain oil and gas
exploration and production wastes as "hazardous wastes," which
would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could have a significant
impact on the operating costs of the Company, as well as the oil
16
<PAGE>
and gas industry in general. Initiatives to further regulate the
disposal of oil and gas wastes are also pending in certain
states, and these various initiatives could have a similar impact
on the Company.
Management believes that the Company is in substantial
compliance with current applicable environmental laws and
regulations and that continued compliance with existing
requirements will not have a material adverse impact on the
Company.
OPERATING HAZARDS AND INSURANCE:
The oil and gas business involves a variety of operating
risks, including the risk of fire, explosions, blow-outs, pipe
failure, casing collapse, abnormally pressured formations and
environmental hazards such as oil spills, gas leaks, ruptures and
discharges of toxic gases, the occurrence of any of which could
result in substantial losses to the Company due to injury or loss
of life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage,
clean--up responsibilities, regulatory investigation and
penalties and suspension of operations. In addition to the
foregoing, certain of the Company's operations are currently
offshore and subject to the additional hazards of marine
operations, such as capsizing, collision and adverse weather and
sea conditions.
In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks
described above. The Company maintains insurance to cover
business interruption and loss of revenues on certain proved
producing properties in the Gulf Coast region; however, the
Company's insurance does not cover business interruption or
protect against loss of revenues for properties in the
Appalachian region or in Michigan. There can be no assurance
that any insurance obtained by the Company will be adequate to
cover any losses or liabilities. The Company cannot predict the
continued availability of insurance or the availability of
insurance at premium levels that justify its purchase. The
occurrence of a significant event not fully insured or
indemnified against could materially and adversely affect the
Company's financial condition and operations.
EMPLOYEES:
On March 17, 1997, the Company, including its subsidiary,
had 19 full time employees. The Company believes that its
relationships with its employees are satisfactory. None of the
Company's employees are covered by a collective bargaining
agreement. From time to time, the Company utilizes a series of
independent consultants and contractors to perform various
professional services, particularly in the areas of geology and
environmental assessment. Field and on-site production operation
services, such as pumping, maintenance, dispatching, inspection
and testing are generally provided by independent contractors for
the Company's Michigan and Gulf Coast wells. The latter
activities are performed by the Company's employees with respect
to its Kentucky properties.
17
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY:
Proven properties of the Company are located primarily in
southeastern Kentucky, northern lower Michigan and the Gulf Coast
region in Ship Shoal 150 and South Timbalier 148, offshore
Louisiana. The Company's reserves are concentrated, with the
Gausdale field in Kentucky accounting for approximately thirty-
seven percent (37%) and the Ship Shoal 150 and South Timbalier
148 wells in the Gulf Coast region accounting for approximately
forty-two percent (42%) of the Company's equivalent proven
reserves as of December 31, 1996. The Company is the operator of
its Kentucky properties, which accounted for thirty-nine percent
(39%) of its net production in 1996; and Century and Newfield
Exploration operate the Company's Ship Shoal 150 and South
Timbalier 148 properties, respectively, which together accounted
for fifty-nine percent (59%) of its net production in 1996. The
Company's Michigan properties, which are operated by a third
party, accounted for less than two percent (2%) of the Company's
1996 production.
LOCATION, CONDITION, AND LIMITATIONS ON COMPLETE OWNERSHIP:
As of December 31, 1996, the Company owns interests in 368
producing oil and gas wells, of which 344 are located in
Kentucky, 12 are located in Michigan, 2 and 10 are located in
Ship Shoal Block 150, and South Timbalier 148, respectively,
offshore Louisiana.
KENTUCKY PROPERTIES IN GENERAL:
The majority of the wells that the Company owns in Kentucky
are located in the Gausdale gas field in Southeastern Kentucky.
Gausdale is located on the eastern edge of the Cincinnati Arch to
the Appalachian Basin. The field is also located some eight
miles from Pine Mountain. The Pine Mountain thrust system is the
front of the Eastern Overthrust Sheet.
The primary pay zones in this area involve fractures within
the limestones and shales that are thought to be the result of
overthrust tectonics and post-overthrust unloading. This has
resulted in extensive fracturing of the reservoirs overlying the
mature source bed (Devonian). The Big Lime formation, which is a
component layer, has been fractured and faulted as a result of
horizontal compression from the Pine Mountain Overthrust, and
bulging and thrusting of the underlying Devonian Shale.
In all gas producing horizons in Gausdale, the influence of
fracture porosity dominates productivity and reserves. The field
lies on a series of anticlinal structures with closure of 30 feet
or more -- evidence of the strong influence by the eastern
overthrust bolt and, to a lesser extent, the Cincinnati Arch. As
a result of up-warping of component layers by the thrust sheet, a
series of flank block faults and possible blank back thrusts
exists, causing numerous structural traps. Aside from fracture
porosity, the Big Lime contains secondary pay zones resulting
from porosity zones believed to be a barrier bar of tidal channel
18
<PAGE>
sequence around the southern limits of paleo-highs in high energy
environments. The Waverly Shale and Devonian Shale produce from
fractures related to the nearby thrust system.
The typical Gausdale well is approximately 2,100 feet in
depth and penetrates the Devonian Shale. Gas producing wells
have initial open flows from 10 thousand cubic feet (10 mcf) per
day to over 10 million cubic feet (10,000 mcf) per day, with
most wells testing between 50 and 200 mcf per day. Wells which
have limited initial rates often merit stimulation to produce
economically. The Newman, Waverly and Devonian formations have
all been successfully stimulated, resulting in increases of more
than 500% of the wells' natural productivity in certain
instances.
GULF COAST PROPERTIES IN GENERAL:
The Company has 12 producing wells in two properties which
are portions of large salt dome fields located offshore Louisiana
in the Gulf of Mexico, and working interest in three large salt
dome fields located in the swamps and marshes of onshore
Louisiana, upon which proprietary 3-D surveys are planned or are
in the process of being acquired. The offshore properties are
South Timbalier Block 148 and Ship Shoal Block 150 in which the
Company has 10 and 2 producing wells, respectively. The onshore
fields are White Castle, Bayou Bouillon, and Plumb Bob Fields.
South Timbalier Block 148 is located 30 miles offshore
Louisiana in an average water depth of 100 feet. The Company
owns an interest in the west one-half of the block, designated as
lease OCS-G 1898, which was obtained in an acquisition/farmout
agreement by Century Offshore Management Corporation ("Century")
from Conoco, Inc. ("Conoco") and Oxy USA, Inc. ("Oxy"). Conoco
and Oxy have each retained a 5.0% overriding royalty interest in
the lease. The Company acquired interest in the lease from
Century. The lease covers 2,500 acres and is situated on the
northern extension of the South Timbalier 176 Field salt dome.
South Timbalier 176 Field has produced 64 million barrels of oil
and 818 bcf of gas from upper to middle Pliocene sands. The oil
and gas accumulations on South Timbalier Block 148 are trapped on
a wing diapir structure separate from the main salt stock on its
northern flank. Accumulations occur in 22 different sands in the
upper and middle Pliocene. Three wells are currently producing
from geopressured oil reservoirs, the rest from normal or
hydropressured gas reservoirs; all are high porosity and
permeability reservoirs. OCS-G 1898 is operated by Newfield
Exploration Company. As of December 31, 1996, there were 10
producing wells on four production platforms on the lease. Well
numbers are designated by a single letter prefix denoting the
platform, and a numerical digit for the well. The Company owns
10% working interest in the B-1 and B-3 wells, 5% in the B-7 and
B-8 wells, 22.5% working interest in the C-1 and D-1, D-2, and D-
3 wells, and 45% working interest in the E-1, E-2, and E-3 wells.
On January 7, 1997, drilling commenced on the D-4 well, in which
the Company has a 15% working interest, and was successfully
completed in February, 1997. Additional future drilling on South
Timbalier Block 148 is scheduled in 1997. All drilling
opportunities on the lease are evaluated utilizing 3-D seismic.
19
<PAGE>
Ship Shoal Block 150 is located 31 miles offshore Louisiana
in an average water depth of 53 feet. The Company owns an
interest in lease OCS 0419, which was obtained, exclusive of 546
acres in the southwest corner of the block, in a farmout
agreement by Century from Chevron USA. Chevron retained a 10%
overriding royalty interest in the lease, which was later
purchased by Pennzoil. The lease is situated on the northwest
flank of the Ship Shoal Block 154 Field salt dome. Ship Shoal
154 has produced 69 million barrels of oil and 81 bcf of gas from
upper to middle Pliocene sands. The Company acquired a 50%
working interest in the 4454 acre portion of the lease earned in
the farmout agreement from Century in 1995. The Company
participated at that interest level in the drilling of the B-3
and B-4 wells, which are currently on production. The Company
entered into a farmout agreement with Pennzoil in November of
1996 under which Pennzoil will drill a well on the lease in the
first or second quarter of 1997. The Company will have an
overriding royalty interest in the well which it may convert at
its option to a working interest. Additionally, if successful,
Pennzoil will run an oil pipeline from Ship Shoal Block 150 to
its production facilities in Ship Shoal Block 154 to the
southwest. The Company may participate in the laying of this
pipeline, which would allow currently producing wells to produce
at a higher rate, and to consider adding production by a workover
of the B-1 well which is currently shut-in. Additional drilling
opportunities on the lease are being considered. All
opportunities are evaluated using 3-D seismic.
White Castle Field is a large salt dome field located 70
miles west-northwest of New Orleans in the sugarcane fields and
cypress swamps adjacent to the Mississippi near the town of White
Castle in Iberville Parish. The Company owns a 9.5% working
interest in lease options, seismic options, and seismic permits
in a seventy square mile area surrounding the Field. A
proprietary 3-D seismic survey was acquired across the Field and
was delivered in March, 1997. The Company is a participant in a
joint venture agreement to acquire the 3-D survey and drill an
initial test well between Texstar North America, Century Offshore
Management Corporation, Cheyenne Petroleum, and the Company.
Upon completion of the initial test well, Shell Oil Company, the
operator of the existing production infrastructure at the Field,
will have a 50% working interest; and all other interests will be
proportionately reduced. The Company will then have a 4.75%
working interest in all future drilling and development in White
Castle Field. The Field has produced 94 million barrels of oil
and 125 bcf of gas from Miocene and upper Oligocene intervals.
The Field has been under the control of Shell Oil Company since
its discovery in 1929. There has been very little seismic data
shot across the area, and it is anticipated that interpretation
of the 3-D survey will yield significant drilling opportunities,
both in the shallow Miocene section around the flanks of the dome
and in the deeper geopressed Oligocene section further downdip.
Bayou Bouillon and Plumb Bob Fields are salt dome fields
located in the Atchafalaya Basin, a large freshwater river/swamp
system, about 30 miles southwest of Baton Rouge in St. Martin
Parish Louisiana. Both fields were discovered in the early
1930's and are considered to be viable 3-D candidates because of
their size, structural complexity, and number of producing
horizons. The acquisition of 3-D surveys on these properties are
in the early stages of planning. The Company is a participant in
20
<PAGE>
a joint venture agreement covering each field. The Company has
6.2% interest in the Bayou Bouillon project, which is being
operated by Ageis Energy, and 5.6% in the Plumb Bob project,
which is being operated by Aspect Management. Acquisition of the
3-D surveys on these projects is expected to begin in late 1997
or early 1998.
The Company also has working interests in seven exploration
projects in the Mississippi Salt Basin. All of these prospects
fall into one or two ongoing regional plays in the Basin. The
"Salt Wall" play is based on three-way structural traps which
occur along the deep flanks of buried salt ridges, which
subparallel the perimeter of the basin, and are located in a belt
between the basin perimeter and the deep central basin. The
"Piercement Salt Dome" play is based on the realization that the
productive potential of the flanks of more than forty piercement
salt domes in the central portion of the Basin has been
overlooked for years. The objective section in both of these
plays is in the lower Cretaceous Hosston and Cotton Valley
intervals. Some salt wall prospects also have potential in the
Jurassic Smackover interval.
Oakvale Dome is a piercement salt dome prospect in Jefferson
Davis County, Mississippi. The Company has 3.5% working interest
in the property, which is operated by Texstar North America. The
initial well on the prospect, the Katherine Saltry Byrd # 31-1,
is currently being drilled and is expected to reach its total
depth of 16,700' in March, 1997. The prospective section is the
lower Cretaceous Hosston Formation, which has produced 115 bcf
and 150 bcf, respectively, from the offsetting fields of Greens
Creek and Oakvale.
Gitano is a slat wall prospect in Jones County, Mississippi.
The Company has a 3.5% interest in the property, which is
operated by J-O'B Operating Company. The initial well on the
prospect, the Hinton #1, is currently being drilled and is
expected to reach its total depth of 15,500 feet in March, 1997.
The prospective section is the lower Cretaceous Hosston and
Cotton Valley Formations, which have produced in the Soso Field
two miles north of the prospect. The Soso Field has produced 58
million barrels of oil.
Marble Creek, North Thompsons Creek, and Wausau are salt
wall prospects along two parallel salt ridges in Wayne and Greene
Counties, Mississippi. The Company has a 25% working interest in
Marble Creek and 3.5% working interest in Wausau and North
Thompsons Creek. A 3-D Survey has been acquired over Marble
Creek. The prospective section for Marble Creek is the lower
Cretaceous Cotton Valley and Jurassic Smackover Formations.
Surveys are in the planning stages for Wausau and North Thompsons
Creek, on which the prospective section is lower Cretaceous
Hosston and Cotton Valley. It is probable that a well will be
drilled on Marble Creek in 1997 following the interpretation of
the 3-D survey.
East Morgantown and Moselle Dome are deeply buried salt
anticline prospects in Marion and Jones Counties, Mississippi,
respectively. The prospective section is lower Cretaceous
Hosston and Cotton Valley for both prospects. The Company has a
21
<PAGE>
3.5% working interest in each of these prospects. They are in
the early stages of development, and have not yet begun well
planning.
MICHIGAN PROPERTIES IN GENERAL:
The wells which the Company owns in Michigan and which are
operated primarily by Oil Services are Antrim gas wells located
in the Michigan Antrim Basin in northern lower Michigan.
Currently, most Antrim shale exploration in Michigan is
concentrated in Antrim and neighboring Ostego counties because of
the presence of natural fractures within the formation in those
areas.
Unlike conventional gas sand reservoirs that are dependent
on stratigraphic traps and/or structures, Antrim shale exists as
both a hydrocarbon source rock and a reservoir rock because of
its organic carbon and type of organic matter. The shale itself
is the source of the gas and the trap is a complex natural
vertical fracture system. It is this combined source and
reservoir characteristic that gives Antrim gas wells their
characteristic long life (some Antrim wells are still producing
after more than 40 years). The shale has very low permeability,
and gas production is made possible through the natural fracture
system and subsequent state-of-the-art stimulation techniques
conventionally employed in completion of all Antrim gas wells.
The relatively low volume of gas (ranging from 25 to 150 mcf
per day per well) typically produced by Antrim wells requires
that certain economies of scale be employed to establish a
reasonable rate of return on investment. Individual wells are
seldom profitable. Unitization is the most important of these
economies and allows the operator to use the same gathering
system, central facility, brine disposal well and compressor
equipment for a group of adjacent wells.
Because of their shallow depth -- about 1,500 feet -- Antrim
wells located in Antrim and Ostego counties are inexpensive to
drill and complete relative to the Company's other areas of
interest.
EXPIRATION OF LEASES:
The mineral leases on the Sand Lake Project expired by their
terms on April 20, 1995; however, these leases provide that for
so long as oil and/or gas are produced thereon in paying
quantities, they shall remain in effect (provided the required
lease payments continue to be paid to the landowners). The
mineral leases covering the other wells in which the Company has
or will have an interest typically provide for a term within
which the wells must be drilled and completed; and then, once
completed, the lease will typically continue for so long as oil
and/or gas is produced in paying quantities.
22
<PAGE>
OIL AND GAS OPERATIONS:
RESERVES:
The following table sets forth for each of the last three
fiscal years estimated net quantities and costs of: (i) proved
oil and gas reserves; (ii) proved developed oil and gas reserves;
and (iii) proved undeveloped gas reserves of the Company. Oil
reserve information for 1994 was insignificant and, therefore,
was excluded. The dollar amounts represent the Company's cost.
<TABLE>
<CAPTION>
Net Proved Net Proved
Net Proved Developed Undeveloped
Year Reserves Reserves Reserves
Oil Gas Oil Gas Oil Gas
(bbls) (mcf) (bbls) (mcf) (bbls) (mcf)
===============================================================================
<C> <C> <C> <C> <C> <C> <C>
1996 1,202,212 35,692,711 909,194 29,033,203 293,019 6,569,508
1995 756,383 24,741,330 756,383 19,702,503 -- 5,038,827
1994 -- 22,845,597 -- 17,379,370 -- 5,466,227
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
Net Proved Net Proved
Net Proved Developed Undeveloped
Oil and Gas Oil and Gas Oil and Gas
Year Reserves ($) Reserves ($) Reserves ($)
=============================================================================
<C> <C> <C> <C>
1996 $42,450,425* $38,257,168 $4,193,257
1995 $20,037,427 $17,104,875 $2,932,552
1994 $16,607,757 $12,069,674 $4,538,083
=============================================================================
</TABLE>
*The reserve report for December 31, 1996, prepared by
independent consulting engineers reflects the estimated
standardized measure of discounted future net cash flows of the
Company's proved oil and gas reserves to be $59,950,006 based
upon a 10% discount.
PRODUCTION:
The following tables set forth for each of the last three
fiscal years by the same geographic areas, which are identified
as Kentucky, Michigan and the Gulf Coast region, the average sale
price and production cost per barrel of oil or mcf of gas
23
<PAGE>
produced by wells owned by the Company. The amounts include only
marketable production of oil or gas (on an "as sold" basis) and
produced to its interest, less royalties and production due
others. The Company does not own any oil properties in Kentucky,
and oil production relating to Michigan is insignificant (less
than 1%) of total production; therefore, these geographic areas
include gas pricing information only.
KENTUCKY (GAS ONLY)*
<TABLE>
<CAPTION>
Average Sales Average Production
Price Per Unit Cost Per Unit
Fiscal Year Gas (mcf) Gas (mcf)
====================================================================
<C> <C> <C>
1996 $2.12 $0.59
1995 $2.05 $0.41
1994 $1.67 $0.29
====================================================================
</TABLE>
MICHIGAN (GAS ONLY)*
<TABLE>
<CAPTION>
Average Sales Average Production
Price Per Unit Cost Per Unit
Fiscal Year Gas (mcf) Gas (mcf)
====================================================================
<C> <C> <C>
1996 $2.45 $1.60
1995 $2.11 $1.95
1994 $2.75 $1.79
====================================================================
</TABLE>
*For the years 1996, 1995 and 1994, the Average Sales Price and
Production Cost per Unit were calculated using the weighted
average method, comparing volumes delivered with the price for
each category previously reported.
GULF COAST REGION (OIL AND GAS)
<TABLE>
<CAPTION>
Average Sale Average Production
Fiscal Price Per Unit Cost Per Unit
Year Oil (per bbl) Gas (per mcf) Oil (per bbl) Gas (per mcf)
===========================================================================
<C> <C> <C> <C> <C>
1996 $20.71 $2.96 $2.10 $0.35
1995 $16.50 $1.81 $2.42 $0.41
===========================================================================
</TABLE>
The Company's activity in Kentucky began in 1993 with the
acquisition of gas properties from Gems Resources, Inc., and
significantly increased in 1994 with the acquisition of
properties consummated by the Company's wholly owned subsidiary,
Southern Gas.
Production costs in the Michigan area are historically high due
to the tight sand located in the Antrim formations. The Company
is communicating with the operator of the properties to continue
to reduce production costs in this region.
24
<PAGE>
The Company began production in the Gulf Coast region with the
successful drilling and completion of two wells located offshore
Louisiana on Ship Shoal 150. In 1996, the Company expanded its
operations in this region with the acquisition of the South
Timbalier Block 148, which presently has 10 producing wells and
one well which was drilled and successfully completed in early
1997. The Company intends to focus its development efforts in
this region during 1997.
PRODUCTIVE WELLS AND ACREAGE AS OF DECEMBER 31, 1996
The following tables set forth as of December 31, 1996, the
total gross and net productive wells in which the Company had an
interest (expressed separately for oil and gas), and the total
gross and net developed acres in which the Company had an
interest by geographic area.
KENTUCKY (GAS ONLY)
<TABLE>
<CAPTION>
Total Gross Total Net Total Gross Total Net
Productive Wells Productive Wells Developed Acres Developed Acres
===========================================================================
<C> <C> <C> <C>
455* 284** 31,850 19,880
===========================================================================
</TABLE>
*Of the 455 gross productive wells, 344 gross wells were on line
and producing as of December 31, 1996.
**Of the 284 net productive wells, 207 were on line and producing
as of December 31, 1996.
MICHIGAN (GAS ONLY)
<TABLE>
<CAPTION>
Total Gross Total Net Total Gross Total Net
Productive Wells Productive Wells Developed Acres Developed Acres
===========================================================================
<C> <C> <C> <C>
12* 3 480 105
===========================================================================
</TABLE>
*As of December 31, 1996, all 12 gross wells were on line and
producing.
GULF COAST REGION (GAS AND OIL PRODUCED FROM EACH WELL)
<TABLE>
<CAPTION>
Total Gross Total Net Total Gross Total Net
Productive Wells Productive Wells Developed Acres Developed Acres
===========================================================================
<C> <C> <C> <C>
13* 4 6,954 2,919
===========================================================================
</TABLE>
*As of December 31, 1996, 12 gross wells were on line and
producing.
UNDEVELOPED ACREAGE AS OF DECEMBER 31, 1996:
The following table sets forth as of December 31, 1996, the
amount of undeveloped acreage in which the Company had an
interest.
25
<PAGE>
KENTUCKY
<TABLE>
<CAPTION>
Gross Net Acreage Remaining
Undeveloped Acres Undeveloped Acres Concentration Term
===========================================================================
<C> <C> <C> <C>
8,000 6,500 * **
===========================================================================
</TABLE>
*Approximately seventy acre spacing.
**Depending on the lease, the remaining term varies from 1 year
to as long as oil or gas is produced from the lease.
During 1995, the Company made a determination to focus its
drilling efforts on the Gulf Coast region and to concentrate on
production acquisitions in the Appalachian region such as the AKS
acquisition (see Item 1, Acquisition Activities, of this Report
on Form 10-KSB). Therefore, the Company has made a conscious
effort to limit its undeveloped acres in Appalachia to more
desirable locations, thereby also reducing its lease expenses.
The Company still intends to maintain a drilling program in the
Appalachian region and is able to control sufficient acreage to
accommodate its programs by virtue of its extensive gathering
systems, particularly in and around the Gausdale area in Whitley
and Knox Counties, Kentucky. The Company also controls the
majority of the capacity in the major pipeline through which the
gas must flow to be delivered to market, thereby giving it the
competitive advantage to obtain desired drilling acreage on an
"as needed" basis. Additionally, recently enacted legislation
providing for significant taxes on unmined minerals reduces the
incentive to maintain large undeveloped acreage blocks as has
been done in past years.
MICHIGAN
<TABLE>
<CAPTION>
Gross Net Acreage Remaining
Undeveloped Acres Undeveloped Acres Concentration Term
=========================================================================
<C> <C> <C> <C>
900 180 * **
=========================================================================
</TABLE>
*Approximately forty acre spacing.
**The leases shall remain in effect so long as oil or gas are
produced thereon in paying quantities.
GULF COAST REGION
<TABLE>
<CAPTION>
Gross Net Acreage Remaining
Undeveloped Acres Undeveloped Acres Concentration Term
=========================================================================
<C> <C> <C> <C>
16,076 1,678 * **
=========================================================================
</TABLE>
*Not less than the legal spacing required by applicable
authorities.
**The remaining term of the leases varies.
26
<PAGE>
DRILLING ACTIVITY:
The following table describes the drilling activity of the
Company for the last three fiscal years.
<TABLE>
<CAPTION>
Net Productive Net Dry Net Productive Net Dry
Fiscal Exploratory Exploratory Developmental Developmental
Year Wells Drilled Wells Drilled Wells Drilled Wells Drilled
==============================================================================
<C> <C> <C> <C> <C>
1996 0 0 4(1) 0
1995 .6(2) 0 4(2) 0
1994 1(3) 0 0 0
==============================================================================
</TABLE>
(1) The Company owns a 43.75% net revenue interest in 8
developmental wells it drilled in the Kentucky region and a
30.5% net revenue interest in 1 developmental well drilled
in the Gulf Coast region in 1996.
(2) The Company currently owns a 33.4% and 30.5% net revenue
interest, respectively, in 2 exploratory wells it drilled in
the Gulf Coast region and an 87.5% net revenue interest in 5
developmental wells it drilled in the Kentucky region in
1995.
(3) The Company owns an 11.67% net revenue interest in the 10
exploratory wells it drilled in 1994.
ITEM 3. LEGAL PROCEEDINGS:
The Company has been named as a defendant in certain
lawsuits arising in the ordinary course of business. The Company
believes, based on experience to date, that the ultimate
resolution of such items, individually or in the aggregate, will
not have a material adverse impact on the Company's financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
There were no matters submitted to a vote of security
holders during the fourth quarter of 1996.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS:
MARKET INFORMATION:
On September 30, 1993, the Company's Common Stock began
trading under the symbol "GASS" on the small cap section of the
NASDAQ. The following table sets forth the closing high and low
27
<PAGE>
bid prices of the Common Stock for the period indicated, as
reported by NASDAQ. These prices are believed to be
representative inter-dealer quotations, without retail mark-up,
mark-down or commissions and may not represent prices at which
actual transactions occurred.
<TABLE>
<CAPTION>
1996 1995
Bid Bid
------------------- ------------------
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $4.25 $2.19 $7.28 $3.88
Second Quarter $4.37 $3.25 $4.94 $1.75
Third Quarter $4.24 $3.16 $4.56 $3.19
Fourth Quarter $3.56 $2.44 $4.25 $2.88
</TABLE>
HOLDERS:
At March 17, 1997, there were approximately 332 holders of
record of the Company's Common Stock, 16 holders of record of the
Company's Series 1993 Preferred Stock, and 407 holders of record
of the Company's Common Stock Purchase Warrants.
DIVIDENDS:
Holders of shares of the Company's $12.00 par value Series
1993 Preferred Stock are entitled to receive, when declared,
cumulative dividends at the rate of 8% per share based upon the
total number of shares outstanding. Such dividends are payable
semi-annually to holders of record on the 15th day of January and
July of each year. Holders of shares of the Company's $.00001
par value Series B 6% Junior Cumulative Convertible Preferred
Stock are entitled to receive, when declared, cumulative
dividends in the amount of 6% per share per annum on the total
number of shares outstanding. Such dividends are payable
quarterly to the holders of record on the 15th day of January,
April, July and October of each year. All dividends payable
on the Company's capital stock are payable in cash or common
stock, at the Company's election.
The Company has not in the past and does not intend to pay
cash or common stock dividends on its Common Stock or cash
dividends on its Series 1993 Preferred Stock in the foreseeable
future. The Company intends to retain earnings, if any, for the
future operation and development of its business. In addition,
the payment of cash dividends on any share of any class of its
capital stock is prohibited by the terms of the Company's credit
facility. See "Item 6. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Note 14 to
Notes to Financial Statements included in Item 7 of this Report
on Form 10-KSB.
28
<PAGE>
SALE OF UNREGISTERED SECURITIES:
During 1996, the Company issued the following unregistered
securities to accredited investors pursuant to an exemption from
registration afforded by Rule 506 of Regulation D under the
Securities Act of 1933.
In February, 1996, the Company issued to AKS Energy
Corporation ("AKS") 225,000 shares of Common Stock valued at
$3.59 per share and warrants with an expiration date of December
31, 1998, to purchase an additional 225,000 shares of Common
Stock for $5.00 per share. The securities were issued as partial
consideration for the purchase of oil and gas properties situated
in Southeastern Kentucky.
In June, 1996, the Company completed a private placement of
100 units for $10,000 per unit for which the Company received net
proceeds of approximately $900,000. JDK & Associates, Inc. served
as the Company's placement agent for a fee equal to 9% of the
gross sales price of the securities. Each unit consisted of 3,300
shares of Common Stock and 1996 Class A Warrants to purchase
1,650 shares of Common Stock. Each 1996 Class A Warrant entitles
the holder to purchase one share of Common Stock at an exercise
price of $4.00 per share. The 1996 Class A Warrants became
exercisable on the closing date of the offering and expire three
years after the effective date of a registration statement
covering the shares. The 1996 Class A Warrants are callable by
the Company at any time on 30 days notice to the holders, but
only if the closing price of the Common Stock as quoted on NASDAQ
is not less than $5.50 per share for 20 of 30 consecutive trading
days. If the Company calls the 1996 Class A Warrants, the holders
thereof have the right to exercise their 1996 Class A Warrants
within such 30 day period. The number and exercise price of the
1996 Class A Warrants are subject to adjustment if the Company
pays a dividend in shares of Common Stock (other than Common
Stock dividends paid on preferred stock), subdivides or combines
the Common Stock or pays a dividend on Common Stock with other
securities issued by the Company or by another issuer. The
Company may reduce the exercise price of the 1996 Class A
Warrants to any amount the Company deems appropriate at any time
after the effective date of the registration statement in which
the shares of Common Stock reserved for issuance upon exercise of
the 1996 Class A Warrants becomes effective. The Company agreed
to register the shares for resale under the Act and such shares
are included herein.
In the fourth quarter of 1996, the Company privately placed
4% Convertible Debentures in the aggregate principal amount of
$6,000,000 with a maturity date one year from date of issuance.
The Company received net proceeds of $4,997,554. World Capital
Funding, Inc. served as the Company's placement agent and
received a fee equal to 12% of the gross sales price of the
securities payable 50% in cash and 50% in shares of the Company's
common stock. The debentures are convertible at the option of the
holders into shares of Common Stock valued at the lesser of (i)
the closing bid price of the Common Stock as reported on NASDAQ
on the date of issuance of the debenture, or (ii) 75% of the
average closing bid prices of the Common Stock as reported on
29
<PAGE>
NASDAQ for the five trading days prior to the date of conversion
(the "Conversion Price"). Debentures that are not converted prior
to their maturity dates automatically convert on their maturity
dates. Accrued interest on the debentures will be paid on their
conversion dates by the issuance of shares of Common Stock valued
at the Conversion Price. If a debenture is not converted within
five business days after the Company receives notice of the
conversion, the Company is obligated to pay liquidated damages to
the debenture holder for each $100,000 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 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
debenture for a cash amount equal to 125% of the principal amount
of the debenture, plus unpaid accrued interest, if the Conversion
Price is below the closing bid price of the Common Stock as
reported on NASDAQ on the date the debenture was issued. The
closing bid prices when the debentures were issued ranged from
$3.00 to $3.50. Upon giving notice of its intention to redeem a
debenture, the debenture holder's right to convert the debenture
is suspended, but the Company must pay an additional one percent
per month in cash on a pro rata basis until the full redemption
price is paid. If the full redemption price is not paid within
ten business days after the redemption notice is given, the
debenture holder has the right to convert the debenture into
shares of Common Stock. A debenture holder may fax a notice to
the Company requiring the Company to declare, by faxed notice
within twenty-four hours after receipt of the notice from the
debenture holder, whether the Company intends to effect a
redemption within the following five business days. If the
Company does not respond during said twenty-four hour period, the
Company is precluded from redeeming that debenture holder's
debentures during said five day period. The Company agreed to
register the shares of Common Stock into which the debentures are
convertible within 120 days after demand is made by a debenture
holder. If, because of the Company's acts or failure to act, the
registration statement is not effective within 120 days, the
Company is obligated to pay the debenture holders liquidated
damages equal to 2% of the principal amount of the debentures for
the first month and 3% of the principal amount of the debentures
thereafter until the registration statement becomes effective.
In conjunction with the Fourth Quarter, 1996, Private
Placement, the Company issued 173,724 restricted shares of Common
Stock to World Capital Funding, Inc. 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.
On November 27, 1996, the Company entered into a five year
corporate relations agreement with Corporate Relations Group,
Inc. Winter Park, Florida, to assist the Company with its
shareholder relations. As consideration for the agreement, the
Company paid Corporate Relations Group, Inc. $550,000 cash and
granted Corporate Relations Group, Inc. a one-year option to
purchase 100,000 shares of Common Stock for $3.00 per share, a
two-year option to purchase 100,000 shares of Common Stock for
$3.60 per share, a three-year option to purchase 100,000 shares
of Common Stock for $4.20 per share, a five-year option to
30
<PAGE>
purchase 100,000 shares of Common Stock for $4.80 per share and
a five-year option to purchase 100,000 shares of Common Stock for
$6.00 per share. The Company agreed to register the shares of
Common Stock underlying the options and such shares are included
herein.
All of the foregoing securities were sold to accredited
investors. Each purchaser represented and warranted to the
Company in writing that the securities were being acquired for
their own account for investment and not with a view to resale or
distribution and agreed not to sell or transfer the securities in
the absence of an effective registration statement except in
compliance with Rule 144 under the Securities Act of 1933. The
certificates representing the securities bear appropriate
restrictive legends and stop transfer orders have been entered
prohibiting the transfer of such securities in violation of
Section 5 of the Securities Act of 1933.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS:
The following discussion is intended to assist in an
understanding of the Company's financial position and results of
operations for each year of the two-year period ended December
31, 1996. The Company's financial statements and the notes
thereto which follow contain detailed information that should be
referred to in conjunction with the following discussion.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
Statements, other than historical facts, contained in this
Annual Report on Form 10-KSB, including statements of estimated
oil and gas production and reserves, drilling plans, future cash
flows, anticipated capital expenditures and Management's
strategies, plans and objectives, are "forward looking
statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Although the Company believes
that its forward looking statements are based on reasonable
assumptions, it cautions that such statements are subject to a
wide range of risks and uncertainties incident to the exploration
for, acquisition, development and marketing of oil and gas, and
it can give no assurance that its estimates and expectations will
be realized. Important factors that would cause actual results
to differ materially from the forward looking statements include,
but are not limited to, changes in production volumes, worldwide
demand, and commodity prices for petroleum natural resources; the
timing and extent of the Company's success in discovering,
acquiring, developing and producing oil and gas reserves; risks
incident to the drilling and operation of oil and gas wells;
future production and development costs; the effect of existing
and future laws, governmental regulations and the political and
economic climate of the United States and foreign countries in
which the Company operates, if any; the effect of hedging
activities; and conditions in the capital markets. Other risk
factors are discussed elsewhere in this Form 10-KSB, including
31
<PAGE>
those risk factors described under the headings "General,"
"Sales" and "Environmental Matters."
GENERAL:
The Company was formed in August, 1992, to acquire the
assets and assume certain liabilities of Standard Oil and
Exploration of Delaware, Inc. ("Standard Oil"), an oil and gas
company operating under Chapter 11 bankruptcy protection at that
time. Since the consummation of the Standard Oil transaction in
April, 1993, the Company has taken a number of steps to become a
fully integrated oil and gas company and enhance its financial
position on a prospective basis, including the following:
[ ] By February, 1994, the Company had completed a number of
transactions involving the acquisition of oil and gas
properties and interests in such properties. Notable among
these transactions was the Company's acquisition of the
assets of Southern Gas Company, Inc. ("SGC"), an independent
Kentucky-based natural gas production, pipeline and gas
marketing company. The addition of the SGC assets together
with its experienced management team has been a significant
factor in the Company's success and growth to date.
[ ] During 1995, the Company participated with Century Offshore
Management Corporation ("Century") in the successful
drilling and completion of two wells (the B-3 and B-4 Wells)
on the Federal lease block known as Ship Shoal Block 150
(Ship Shoal 150) in the Gulf Coast region. The wells are
located offshore Louisiana and were flowing at combined
rates of 1,550 barrels of oil and 700 thousand cubic feet
(mcf) of gas per day as of December 29, 1996. The Company
owns a 50% working interest (33.4% net revenue interest) in
the B-3 well and a 50% working interest (30.5% net revenue
interest) in the B-4 well.
[ ] On September 28, 1995, the Company entered into a
$20,000,000 revolving credit agreement through February 1,
2002, with Den norske Bank AS. (Den norske). On August 7,
1996, the revolving credit facility was increased to
$30,000,000. As of December 31, 1996, the borrowing base
under the revolving credit facility was $25,083,000.
Additional borrowings under the credit facility are
dependent on a redetermination of the borrowing base, which
is primarily dependent on the value of the mortgaged
properties as determined under Den norske's internal lending
procedures. Reductions on the credit facility are also
dependent on the borrowing base. At December 31, 1996,
monthly principal reductions are $500,000. The borrowing
base will be redetermined semi-annually on each October 1
and April 1 prior to February 1, 2002.
32
<PAGE>
The proceeds were used primarily to pay the outstanding
balances under a previous credit facility with Bank One
Texas, N.A., and fund development activities in the
Louisiana Gulf Coast area.
In February, 1997, the credit agreement with Den norske was
amended to reduce the interest rate to the prime rate plus
1/2% per annum and establish a $2,500,000 development
facility which can be drawn upon by the Company to develop
properties. The development facility matures on March 1,
1998, and carries an interest rate of prime plus 2% per
annum.
[ ] In November, 1995, the Company completed a private placement
of its common stock which raised $1,235,000 ($1,128,236 net
of offering costs). Under the private placement, the
Company sold to accredited investors an aggregate of 41.17
units, each consisting of 10,000 shares of the Company's
common stock, par value $.00001 per share, and one Class A
Warrant and one Class B Warrant.
[ ] In December, 1995, the Board of Directors reviewed all
existing consulting agreements in order to evaluate the cost
effectiveness of the services being provided to the Company.
As a result, contracts funded with common stock with
Corporate Communications Network, Inc. ("CCN"), and Bridge
Water Financial ("BWF"), unrelated third parties, were
terminated, resulting in a one-time, non-cash charge against
income of $1,116,913, which represented the unamortized
balance of the contracts.
[ ] In connection with an asset purchase transaction in 1994,
the Company acquired an ownership interest in National
American Life Insurance Company of Pennsylvania, Inc.
("NALICO"), a privately held insurance company. The non-
operating investment was recorded at an acquired cost basis
of $869,000. Based upon information received relative to
the financial deterioration of NALICO, which included the
fact that NALICO was operating under rehabilitation
proceedings, Management obtained an independent appraisal of
the Company's investment value in NALICO as of December 31,
1995. As a result of the appraisal, the Company reduced the
investment value to zero from its acquired cost basis and
recognized the reduction as a charge against income in 1995.
[ ] On February 26, 1996, the Company acquired gas properties,
equipment and pipelines from AKS Energy Corporation (AKS).
As consideration for the assets, the Company paid $2,909,010
in cash, assumed $125,000 of AKS's severance tax
obligations, issued 225,000 shares of the Company's common
stock at a value of $3.59 per share and issued warrants with
an estimated value of $348,525 to purchase an additional
225,000 shares of the Company's common stock with an
exercise price of $5.00 per share and an expiration date of
December 31, 1998. In December, 1995, the Company advanced
$1,000,000 to AKS as partial consideration for the
acquisition which was included in gas properties. The cash
33
<PAGE>
included in the purchase price was made available from
borrowings under the Company's credit facility with its
primary lender.
The Company also entered into an agreement to participate
with AKS in the joint development of leases in Southeastern
Kentucky gas fields wherein the Company would have the right
to earn 50% of the remaining undeveloped acreage. However,
the joint development agreement was terminated in November,
1996, when the Company decided to focus its development
efforts and capital into the Gulf Coast region.
The foregoing transaction was effected pursuant to an Asset
Purchase Agreement entered into by and between the Company
and AKS dated December 27, 1995.
[ ] On May 22, 1996, the Company conveyed an approximate 2.2
billion cubic feet (bcf) volumetric production payment in
Appalachian wells recently purchased from AKS through a
facility sponsored by William Energy Services Company, a
subsidiary of the Williams Companies, Inc. and structured by
NationsBank. The Company received $4,300,000 ($4,147,300
after related costs) for the production payment, which has
an anticipated six year term. Of the funds received,
$2,500,000 was used to reduce the Company's credit facility
with its primary lender. The Company used the remainder of
the funds for working capital and further acquisition and
development activities in the Gulf Coast region.
[ ] In June, 1996, the Company completed a private placement of
$1,000,000 ($900,000 net of offering costs). The private
placement consisted of 100 units, each unit consisting of
3,300 shares of common stock and one Class A Common Stock
Purchase Warrant (Class A Warrant). Each Class A Warrant
entitles the holder to purchase 1,650 shares of the
Company's common stock at an exercise price of $4.00 per
share. The Class A Warrants are immediately exercisable and
expire October 8, 1999.
In 1996, the Company filed a Registration Statement,
effective in October, 1996, which registered the shares of
common stock sold in the private placement and the shares of
common stock for which the Class A Warrants may be
exercised.
[ ] On July 3, 1996, the Company acquired proved developed and
undeveloped oil and gas properties, equipment and pipelines
from Century located on the Federal lease block known as
South Timbalier Block 148 (South Timbalier 148), offshore
Louisiana. As consideration for the assets, the Company
paid $4,000,000 in cash, issued an Installment Note in the
amount of $4,000,000 payable in two equal installments on
August 31, 1996, and September 30, 1996 (the Installment
Note provided for payment at the Company's option of cash or
the issuance of restricted common stock of the Company at
$3.00 per share), extinguished an existing note from Century
to the Company in the amount of $6,500,000 (Century Note)
34
<PAGE>
and assumed existing liens against the assets in the
approximate amount of $1,051,000. The parties subsequently
entered into an extension agreement, dated September 24,
1996, whereby Century extended the due date of the
installment payments until the earlier of the completion of
funding of the Company's private placement or five days
after written notice from Century. As of December, 1996,
the Company's private placement (see Note 6 to the Notes to
Financial Statements included in Item 7 of this Report on
Form 10-KSB) was completed and the Company had completed the
funding of the installment payments. The foregoing
transaction was effected pursuant to an Asset Purchase
Agreement entered into by and between the Company, Southern
Gas and Century, dated July 3, 1996.
Also on July 3, 1996, the Company, Southern Gas and Century
entered into an Asset Purchase Agreement whereby Southern
Gas acquired certain rights and interests in undeveloped
properties from Century located onshore Louisiana. On
August 31, 1996, the parties entered into a Capitalization
and Termination of Purchase and Sale Agreement
(Capitalization Agreement), which effectively terminated
the July 3, 1996, agreement and provided for the Company,
through Southern Gas, to acquire between 5.6% and 9.5%
contract rights from Century in three undeveloped properties
located onshore Louisiana. As consideration for these
rights, the Company has paid $4,509,000 in cash.
[ ] In November, 1996, the Company privately placed 4%
convertible securities in the aggregate principal amount of
$6,000,000 ($4,997,554 net of placement costs) with a
maturity date one year from date of issuance. The
securities are convertible at the option of the holders into
shares of common stock valued at the lesser of (1) the
closing bid price of the common stock as reported on NASDAQ
on the date of issuance of the security, or (2) 75% of the
average closing bid prices of the common stock as reported
on NASDAQ for the five trading days prior to the date of
conversion (the Conversion Price). Securities that are not
converted prior to their maturity dates automatically
convert on their maturity dates. Prior to the receipt of a
conversion notice, the Company has the right to redeem any
security for a cash amount equal to 125% of the principal
amount of the security, plus unpaid accrued interest, if the
conversion price is below the closing bid price of the
common stock as reported on NASDAQ on the date the security
was issued. The Company agreed to register the shares of
common stock into which the securities are convertible
within 120 days after demand is made by a security holder.
The shares of common stock into which the securities are
convertible have been registered under an S-3 registration
statement which was effective on January 23, 1997.
[ ] On November 27, 1996, the Company entered into a five year
corporate relations agreement with Corporate Relations
Group, Inc. (CRG), Winter Park, Florida, to assist the
Company with its shareholder relations. As consideration
for the agreement, the Company paid CRG $550,000 cash and
granted CRG a one year option to purchase 100,000 shares of
common stock for $3.00 per share, a two year option to
35
<PAGE>
purchase 100,000 shares of common stock for $3.60 per share,
a three year option to purchase 100,000 shares of common
stock for $4.20 per share, a five year option to purchase
100,000 shares of common stock for $4.80 per share, and a
five year option to purchase 100,000 shares of common stock
for $6.00 per share. The options have a weighted average
fair value of approximately $1.27 per share.
The Company believes its relationship with Settle Oil and
Gas Company ("Settle") and Century and the Company's
corresponding expansion into the Gulf Coast region will play a
significant role in the Company's future growth. On July 21,
1995, under a plan of reorganization approved by the Bankruptcy
Court, Settle merged with Century. Any and all references to
Settle subsequent to July 21, 1995, refer to the merged entity.
As of March 17, 1997, this relationship has resulted in the
following transactions:
[ ] The Company provided $6,500,000 in financing to fund
Settle's working interest participation in the drilling of
oil and gas wells located on South Timbalier 148 in the Gulf
of Mexico, offshore Louisiana. The South Timbalier 148
field comprises the under-developed northwest flank of the
highly productive South Timbalier 176 salt dome. Cumulative
production to date on this salt dome is approximately 1.3
trillion cubic feet of gas and oil equivalents. This loan
was secured by a mortgage on Settle's interest in several
producing properties and bore interest at 22% per annum. On
July 3, 1996, the Company extinguished the loan as partial
consideration for the acquisition of the properties securing
the loan.
[ ] The Company acquired for $750,000 a 26.25% working interest
from Settle in Ship Shoal 150 in the Gulf of Mexico, also
off-shore Louisiana. The interest purchased is located on
the under-developed west flank of a highly productive salt
dome which has produced over 65 million barrels of oil and
65 bcf of gas to date. Two successful wells were drilled in
1995 on this property from an existing production platform.
The Company acquired an additional 23.75% working interest
in Ship Shoal 150 by funding 100% of the costs of drilling
the first well thereon.
[ ] The Company invested in the formation of a new limited
liability company known as Crescent Turnkey & Engineering,
L.L.C. ("Crescent"), a Delaware limited liability company
formed for the purpose of performing contract drilling
services for the Company and third parties. Crescent was
capitalized at $250,000, with the Company providing $110,000
for a 44% ownership interest. Century and certain of
Century's officers and directors are also members of
Crescent, with a combined ownership interest of 45%; and
Century has also contributed additional services and
expertise from certain of its existing personnel. During
1995, Crescent drilled the B-3 and B-4 Wells on Ship Shoal
150 for the Company.
[ ] The Company and Century have agreed to jointly drill and
develop, subject to available financing, prospects owned by
Century in the Gulf Coast region, both on-shore and off-
shore. Recently acquired 3-D seismic surveys on certain of
36
<PAGE>
these prospects indicate significant potential reserves. At
this time, the Company has invested an additional $4.5
million towards the joint development of unproved properties
in the Gulf Coast region with Century. These funds have
been expended for lease acquisition costs on certain onshore
prospects.
[ ] In 1995, the Company sold various mechanics' and
materialmen's liens and an unsecured claim of a major
creditor of Century for approximately $4,200,000. The
Company had acquired $10,900,000 of claims at a combined
cost of approximately $2,100,000. The sale resulted in non-
recurring gains of approximately $2,100,000, which were used
to fund various commitments with Century and provide
development funds.
[ ] In September, 1995, the Company bought out a production
platform use agreement from Century Oil Company ("Century
Oil") in the offshore Louisiana waters, Ship Shoal 150, for
$1,800,000 in connection with their joint development of the
lease block. Prior to its purchase of the platform, the
Company was paying approximately $37,500 per month for use
of the platform for one well which, with the addition of a
second well, would have amounted to a total of $75,000 per
month. The purchase was funded with proceeds from the Den
norske credit facility.
[ ] Under the October 17, 1994, letter agreement with Settle,
the Company had the right to acquire a 10% equity interest
in Settle for $4,000,000 (the "Settle Securities"). Due to
the fact that the Company was not in a position to acquire
this equity interest, the agreement was subsequently amended
to permit a third party to acquire the Settle Securities.
The funds used to effect the foregoing acquisition were
borrowed by the third party from Prima Capital, LLC
("Prima"), a limited liability company of which an
officer/director of the Company is a member. The third
party is also a member of Prima and the principal
stockholder of Southern Resources, Inc. Prima, in turn,
borrowed the funds it used to provide the foregoing loan
from a bank in Lexington, Kentucky. The Company has not
guaranteed nor is it obligated on the Prima bank loan, and
the bank will look solely to Prima and its members for
payments. In connection with this transaction, the Company
entered into a Put Agreement (the "Put Agreement") dated
March 15, 1995, with Prima which provided that in the event
Prima obtained title to the Settle Securities, Prima had the
right to require the Company to purchase the Settle
Securities for $4,000,000, payable in cash and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a new agreement, as amended, providing for the Company's
ability to call the Settle Securities from the third party
member of Prima for $4,000,000 has been substituted therefor
(the "Call Agreement"). The Call Agreement also provides
for non-refundable monthly installments of $31,250 (as
originally required under the Put Agreement) until such time
as a total of $1,000,000 has been advanced under the Call
Agreement (including payments previously made under the Put
Agreement). In the event the Company elects to call the
37
<PAGE>
Settle Securities, the advance payments shall be credited
toward the purchase price. Additionally, a $500,000
Certificate of Deposit held as collateral for Prima's loan
was liquidated by the Company, and the funds were advanced
to Prima under the potential Call Agreement. Prima used the
$500,000 to purchase shares of Series B Preferred Stock
which it subsequently converted to common stock. In the
event the Company exercises the Call option, the $500,000
will be credited towards the purchase. The Company's right
to call the Settle Securities begins January 15, 1997, and
ends December 31, 1997.
While the Company believes its activities to date have
formed the foundation for continued growth and profitability, the
Company notes that its revenue, profitability and future rate of
growth are substantially dependent upon prevailing prices for
natural gas, oil and condensate which are dependent upon numerous
factors beyond the Company's control such as economic, political
and regulatory developments and competition from other sources of
energy. The energy markets have historically been very volatile,
and there can be no assurance that oil and gas prices will not be
subject to wide fluctuations in the future. A substantial or
extended decline in oil and gas prices could have a material
adverse effect on the Company's financial position, results of
operations, quantities of oil and gas reserves that may be
economically produced and access to capital.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996
AND 1995:
Total revenues increased 92% to $33,039,173 in 1996,
compared to $17,214,299 in 1995. Corresponding operating
expenses increased 91% to $27,503,339 in 1996, compared to
$14,421,916 in 1995. Operating income in 1996 was $3,211,826,
compared to a loss of ($1,060,265) in 1995. Components of the
changes are as follows:
[ ] MARKETING: The Company's marketing volumes have increased to
---------
6.6 bcf in 1996, as compared to 4.7 bcf in 1995. The volume
increase results primarily from the Company's increased
production and marketing activity in the Kentucky region,
and continued focus to function as an integrated oil and gas
company. Strong gas prices during the first and fourth
quarters of 1996 helped offset lower prices in the second
and third quarters. However, strong price competition
resulted in a 2.0% profit on marketing revenues in 1996, as
compared to 5.3% in 1995.
[ ] PRODUCTION: The Company's production revenues increased
----------
167% in 1996, to $8,540,569 from $3,198,987 in 1995.
Production on a bcf equivalent basis has increased to 3.3
bcf in 1996 as compared to 1.4 bcf in 1995. The increase in
production volumes results primarily from an increase in the
Company's Gulf Coast region production. In 1996, production
from the Gulf Coast region was approximately 1.8 bcf
equivalent as compared to approximately .7 bcf in 1995.
Production from the Ship Shoal 150 B-3 and B-4 wells, which
were drilled and completed in mid and late 1995,
respectively, has increased to approximately 1.0 bcf
38
<PAGE>
equivalent for 1996 as compared to approximately .7 bcf for
1995. In July, 1996, the Company also acquired working
interests ranging between 5% and 22.5% in five (5) producing
wells in the South Timbalier 148 block, and interests
ranging between 22.5% and 45% in five (5) drilled but
uncompleted wells on the block. Since the acquisition, the
Company has completed the five (5) uncompleted wells and has
drilled a successful developmental well on the block. As a
result, production from the South Timbalier 148 block added
production during the period of approximately 127,000 mcf
equivalent. Also in 1996, production from the Company's
Kentucky wells has increased to approximately 1.2 bcf as
compared to approximately .6 bcf for 1995. The increase in
Kentucky production results primarily from the Company's
acquisition of various producing gas fields from AKS in
February, 1996.
Also contributing to the increase are stronger gas and/or
oil prices during 1996 versus 1995. The average price per
mcf equivalent on oil and gas production in 1996 was $2.82
versus $2.33 in 1995. Contributing to the price increase in
1996 was Gulf Coast production where the Company realized an
average of $20.11 per barrel of oil and $2.96 per mcf of
gas.
Production expenses also increased to $1,402,389 in 1996,
from $765,285 in 1995. The increase results from production
costs associated with the Ship Shoal 150 and South Timbalier
148 properties which total approximately $428,000 for 1996
versus approximately $230,000 for 1995, and additional
operating costs relating to the property acquired from AKS.
The average production cost per mcf equivalent in 1996 was
$.46 versus $.56 for the comparable period in 1995. This
reflects lower operating costs per mcf equivalent in the
Gulf Coast region of $.35 in 1996 versus $.41 in 1995. The
reduction in costs in the Gulf Coast were slightly offset by
increased operating costs on the Company's Kentucky
properties ($.59 per mcf in 1996 versus $.41 per mcf in
1995).
[ ] DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased to $3,309,159 in 1996
from $1,577,770 in 1995. The increase results primarily
from approximately $1,667,000 of depreciation, depletion and
amortization on the Gulf Coast properties.
The Company expended approximately $21,700,000 on oil and
gas proved property acquisition and development costs and
$3,100,000 on property and equipment costs during 1996. The
company's finding cost of proved reserves for 1996 versus
1995 on an mcf equivalent basis was $.89 versus $.63,
respectively. The Company expects depreciation, depletion
and amortization to continue to increase in 1997 with its
continued development in the Gulf Coast area.
[ ] GENERAL AND ADMINISTRATIVE ("G&A"): G&A decreased 2% to
--------------------------
$2,324,008 in 1996, as compared to $2,364,389 in 1995. As a
percentage of total revenue less related marketing expenses,
G&A decreased to 22% in 1996 versus 44% in 1995.
39
<PAGE>
During 1996, the Company closed its Scottsdale, Arizona
office and consolidated the principal offices to Versailles,
Kentucky. In late 1996, the Company established an office
in New Orleans, Louisiana, to monitor and expand the Gulf
Coast operations.
Primary components of G&A in 1996 include payroll
($898,753), professional fees ($223,224), consulting fees
($98,000), insurance ($234,254) and travel ($136,236). The
same components of G&A for 1995 were, payroll ($892,914),
professional fees ($271,636), consulting fees ($326,340),
insurance ($163,264) and travel ($100,453). Consulting fees
have decreased from 1995 due to less outsourcing of projects
and increased internal control of projects. Insurance costs
have increased primarily due to the Company's involvement in
offshore Louisiana properties. The Company carries
liability, property and business interruption coverage on
the offshore properties.
[ ] OTHER INCOME (EXPENSE): Other income (expense) consisted of
---------------------
the following:
* INTEREST INCOME: Interest income resulted primarily
---------------
from interest earned on notes receivable issued to
Century. The notes, which were extinguished as part of
the consideration in the acquisition of the South
Timbalier 148 properties in July, 1996, earned interest
at 22%. Approximately $720,000 of the interest earned
in 1996 related to these notes.
* INTEREST EXPENSE: Interest expense increased to
----------------
$2,440,453 in 1996 as compared to $1,151,950 in 1995.
The increase was attributable to debt service payments
made on additional borrowings under the Company's
credit facility agreement. The Company had weighted
average borrowings under the facility of approximately
$20.8 million as compared to approximately $10 million
in 1995. The Company's outstanding indebtedness under
the facility was $25.1 million versus $17.5 million at
December 31, 1996 and 1995, respectively.
* SETTLEMENT INCOME: In 1995, the Company recognized a
-----------------
gain of $2,189,616 on the sale of various mechanics'
and materialmen's liens and unsecured claims relating
to the Century reorganization (see Note 8 to the Notes
to Financial Statements included in Item 7 of this
Report on Form 10-KSB).
* IMPAIRMENT OF STOCK INVESTMENT: In December, 1995, the
------------------------------
Company impaired the acquired cost of stock held in
NALICO to zero. The stock was acquired in connection
with a purchase transaction in 1994. Due to a
deterioration of NALICO's financial position,
management obtained an independent appraisal of the
Company's investment value in NALICO as of December 31,
1995. As a result of the appraisal, an impairment of
the non-operating asset resulted in a charge against
income of $869,000.
40
<PAGE>
* DEFERRED COMPENSATION AND EMPLOYEE SEVERANCE EXPENSE:
----------------------------------------------------
The expense recognized in 1995 resulted from a
$1,116,913 charge against income pertaining to the
termination of two consulting agreements funded with
the Company's common stock. The consulting agreements
were with CCN and BWF and were for seven and two years,
respectively. Upon review of the contracts, Management
decided it was in the long-term best interest of the
Company to terminate the agreements. The charge
against income represented the unamortized balance of
the contracts.
Also, effective December 31, 1995, the Company entered
into a severance agreement with former President, Chief
Executive Officer and founder, who resigned effective
as of that date. Under the agreement, the executive
was paid $85,000 and will receive the sum of $10,000
per month through March 31, 1998. As a result of the
agreement, the Company recognized a charge against
income of $371,346 in 1995 (see Note 18 of the
Consolidated Financial Statements).
[ ] NET INCOME: Net income for 1996 increased to $911,755 from
----------
$266,153 in 1995. The increase results from higher
profitability levels mainly in the Company's oil and gas
production operation. Results of the Company's operations
for oil and gas activities is as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Oil and gas sales $8,540,569 3,198,987
Gain (loss) on sale of properties (153,000) 91,000
Production costs (1,402,389) (765,285)
Depreciation, depletion and amortization (2,431,633) (881,085)
--------- ---------
$4,553,547 1,643,617
========== =========
</TABLE>
However, the effect of the higher profitability on oil and
gas operations was partially offset by higher interest
expense due to increased borrowing levels, increased
depreciation on property and equipment expenditures and the
Company's net effective tax rate of 41%.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at December 31, 1996, was $353,419
as compared to $826,393 at December 31, 1995. The Company also
41
<PAGE>
had a working capital deficit of approximately $5.1 million at
December 31, 1996. Historically, the Company has funded its oil
and gas exploration, development and acquisition activities
primarily with bank borrowings and, to a lesser extent, equity
capital from private placements and cash flow from operations.
The working capital deficit at December 31, 1996, was primarily
due to $6.0 million of current maturities owed under the Den
norske credit facility. However, the credit facility is designed
to be repaid with cash flow from operations. The Company's net
cash provided by operating activities increased in 1996 to
approximately $6.1 million as compared to approximately $350,000
in 1995. The Company expects to meet its debt service
obligations in 1997 with the additional cash flow anticipated to
be generated from the acquisition and completion of various wells
on the South Timbalier Block 148 property. The Company completed
five wells and drilled an additional successful developmental
well on the property during the fourth quarter of 1996. The
Company also drilled and completed an additional well on the
property during the first quarter of 1997. Production from South
Timbalier Block 148 is expected to generate between $600,000 and
$750,000 of additional cash flow per month. The Company also has
additional drilling prospects identified in the Gulf Coast region
for 1997 which should also add to cash flow.
To assist in the Company's ongoing exploration, development
and acquisition efforts, the Company has a $30 million credit
facility available with Den norske. At December 31, 1996, the
borrowing base under the revolving credit facility was
$25,083,000. Additional borrowings under the credit facility are
dependent upon a redetermination of the borrowing base, which is
primarily dependent on the value of the mortgaged properties as
determined under Den norske's internal lending procedures.
Reductions on the credit facility are also dependent upon the
borrowing base. Borrowings under the credit facility are
collateralized by substantially all of the Company's oil and gas
properties.
In order to meet current and long-term working capital
needs, the Company intends to utilize expected increases in cash
flow from oil and gas production activities, potential additional
equity raised through private placements, and additional
availability under its credit facility as increases in the
borrowing base are achieved through oil and gas reserve
increases. To immediately assist with the Company's ongoing
development of the Gulf Coast region, in February, 1997, the Den
norske credit agreement was amended to reduce the interest rate
to prime rate plus 1/2% per annum. The borrowing base was
redetermined to be $25,000,000; and at March 1, 1997, the Company
has $24,083,000 of outstanding borrowings against the borrowing
base. Additionally, Den norske established a $2,500,000
development facility which allows the Company to borrow up to
$2,500,000 at prime rate plus 2% per annum for development of its
Gulf Coast properties. The development facility matures on March
1, 1998, and the Company had borrowings against the development
facility of approximately $832,000 at March 17, 1997. The
Company also completed two private placements totalling
$7,000,000 during 1996, which generated approximately $5.9
million after placement costs. The Company is continuing to seek
funds through private placements in 1997 in order to assist
funding its exploration, development and acquisition activities.
The Company is also exploring the availability of funds through
volumetric production payments similar to the production payment
42
<PAGE>
consummated in 1996 with Williams Energy Services Company.
Volumetric production payments allow the Company to obtain non-
recourse financing on specific properties. This type of
financing is especially attractive for the Company's Kentucky
region production in Appalachia.
Under the credit facility with Den norske, the Company is
required to maintain certain ratios relating to debt coverage
ratio, current ratio, tangible net worth, general and
administrative expenses and quarterly interest ratio. Under the
covenants, the financial amounts used to compute the requirements
are specifically defined in the credit facility. The following
lists the specific requirements and the actual amounts as
calculated under the terms of the credit facility at December 31,
1996:
<TABLE>
Required Actual
-------- ------
<S> <C> <C>
Debt coverage ratio 1.2 to 1.0 1.67 to 1.0
Current ratio 1.0 to 1.0 1.16 to 1.0
Tangible net worth $16,963,257 $25,927,316
General and administrative expenses $3,178,396 $2,324,008
Quarterly interest ratio 3.0 to 1.0 3.90 to 1.0
</TABLE>
Under the required calculation of the current ratio, the
Company is allowed to deduct from current liabilities current
amounts of principal and interest due under the credit facility.
At December 31, 1996, the Company was in compliance with all of
the required financial ratios.
The following tables summarize the Company's financial
position and statements of cash flows at December 31, 1996 and
1995, and for the years then ended:
<TABLE>
(Amounts in Thousands)
1996 1995
---- ----
<S> <C> <C>
Working Capital $(5,112) (613)
Property and equipment 53,740 29,984
Other 3,345 7,016
------- ------
$51,973 $36,387
======= =======
Long-term debt $19,422 14,569
Deferred taxes and other 6,183 3,066
Stockholders' equity 26,368 18,752
------- ------
$51,973 36,387
======= ======
</TABLE>
43
<PAGE>
<TABLE>
(Amounts in Thousands) 1996 1995
---- ----
<C> <S> <C> <C>
Net cash provided by operating activities 6,087 353
Net cash provided by investing activities (18,851) (13,391)
Net cash provided by financing activities 12,291 12,746
------- ------
Decrease in cash and cash equivalents $ (473) $ (292)
======= =======
</TABLE>
As the above tables reflect, the Company's working capital
position decreased approximately $4,500,000 which was primarily
due to increased borrowings which aided in financing various
property acquisitions during 1996. The principal acquisitions
were as follows:
On February 26, 1996, the Company acquired gas
properties, equipment and pipelines from AKS. As
consideration for the assets, the Company paid
$2,909,010 in cash, assumed $125,000 of AKS's severance
tax obligations, issued 225,000 shares of the Company's
common stock at a value of $3.59 per share and issued
warrants with an estimated value of $348,525 to
purchase an additional 225,000 shares of the Company's
common stock with an exercise price of $5.00 per share
and an expiration date of December 31, 1998. In
December, 1995, the Company advanced $1,000,000 to AKS
as partial consideration for the acquisition which was
included in gas properties. The cash included in the
purchase price was made available from borrowings under
the Company's credit facility.
The Company also entered into an agreement to
participate with AKS in the joint development of leases
in Southeastern Kentucky gas fields wherein the Company
would have the right to earn 50% of the remaining
undeveloped acreage. However, the joint development
agreement was terminated in November, 1996, when the
Company decided to focus its development efforts and
capital into the Gulf Coast region.
On July 3, 1996, the Company acquired proved developed
and undeveloped oil and gas properties, equipment and
pipelines from Century located offshore Louisiana on
South Timbalier 148. As consideration for the assets,
the Company paid $4,000,000 in cash, issued an
Installment Note in the amount of $4,000,000 payable in
two equal installments on August 31, 1996, and
September 30, 1996 (the Installment Note provided for
payment at the Company's option of cash or the issuance
of restricted common stock of the Company at $3.00 per
share), extinguished the Century Note to the Company in
the amount of $6,500,000 (Century Note) and assumed
existing liens against the assets in the approximate
amount of $1,051,000. The parties subsequently entered
into an extension agreement, dated September 24, 1996,
whereby Century extended the due date of the
installment payments until the earlier of the
44
<PAGE>
completion of funding of the Company's private placement or
five days after written notice from Century. As of
December, 1996, the Company's private placement was
completed and the Company had completed the funding of the
installment payments. The foregoing transaction was
effected pursuant to an Asset Purchase Agreement entered
into by and between the Company, Southern Gas and Century,
dated July 3, 1996.
Also on July 3, 1996, the Company, Southern Gas and
Century entered into an Asset Purchase Agreement
whereby Southern Gas acquired certain rights and
interests in undeveloped properties from Century
located onshore Louisiana. On August 31, 1996, the
parties entered into a Capitalization and Termination
of Purchase and Sale Agreement (Capitalization
Agreement), which effectively terminated the July 3,
1996, agreement and provided for the Company, through
Southern Gas, to acquire between 5.6% and 9.5% contract
rights from Century in three undeveloped properties
located onshore Louisiana. As consideration for these
rights, the Company has paid $4,509,000 in cash.
On May 22, 1996, through a facility sponsored by Williams
Energy Services Company, a subsidiary of the Williams Companies,
Inc., and structured by NationsBank, the Company conveyed an
approximate 2.2 bcf volumetric production payment in Appalachian
wells recently purchased from AKS. The Company received $4.3
million ($4,147,300 after related costs) for the production
payment which has an anticipated six year term. Of the funds
received, $2.5 million was used to reduce the Company's credit
facility with its primary lender. The Company used the remainder
of the funds for working capital and further acquisition and
development activities in the Gulf Coast region.
In July, 1995, in order to fulfill a loan commitment to
Century, an aggregate of $400,000 was funded by the directors of
the Company. These monies were paid to the Company in exchange
for a $400,000 participation in the Century Note. Due the fact
that the Century Note was relinquished as a part of the Company's
acquisition of the South Timbalier 148 properties, the Company
and the directors simultaneously agreed to terminate the
directors' participation in the Century Note. The Company
remains liable to the directors for the outstanding balance at
December 31, 1996, of $240,000 plus interest thereon at the rate
of 22% per annum. Pursuant to the Termination of Participation
Agreements entered into between the Company and the directors,
payment of the balance is due in monthly installments of $12,352,
beginning April 1, 1997, with the final payment due March 1,
1999.
In April, 1996, the Company entered into agreements with two
individuals, one of whom is a director of the Company. Under the
agreements, the individuals each paid to the Company $250,000 in
exchange for the right to participate on a pro rata basis in the
Century Note. The agreement allowed the individuals to receive a
combined payment of $500,000 plus interest at 22% from the
Century Note repayment. The agreements assigned the payments
45
<PAGE>
from the portion of the Century Note which was not pledged to the
Company's primary lender. The proceeds received by the Company
under the agreements, which reduced the carrying value of the
Century Note, were used to fund additional development activities
in the Gulf Coast region. In July, 1996, the Century Note was
canceled as part of the consideration paid by the Company to
Century for the purchase of certain oil and gas properties. The
Company and the individuals simultaneously agreed to terminate
the individuals' participation in the Century Note in exchange
for the Company assuming the liability to repay $500,000 to the
individuals plus interest thereon at the rate of 22% per annum.
The Company has paid the non-affiliated individual in full.
Pursuant to the Termination of Participation Agreement entered
into between the Company and the director, payment terms of the
balance include $50,000 due and payable by March 10, 1997, and
the remaining balance due in monthly installments of $10,293
beginning April 1, 1997, with the final payment due March 1,
1999.
Since the Company's acquisition of an interest in the South
Timbalier 148 Block, it has expended approximately $6.0 million
towards the development of the property. In conjunction with the
joint interest owner and operator of the property, Newfield
Exploration, a second and third production platform were
installed in the Company's area of interest and are now in
operation. The platforms were installed to accommodate the
production developed as a result of the completion of the wells
acquired. Nine of the wells purchased are currently producing.
In addition to the South Timbalier 148 wells acquired, two
new wells have been successfully drilled and completed on the
property and production had commenced March 1, 1997.
In order to assist in the Company's continued growth and
expansion the Company also completed two private placements
during 1996 and one private placement during 1995 as follows:
In June, 1996, the Company completed a private
placement of $1,000,000 ($900,000 net of offering
costs). The private placement consisted of 100 units,
each unit consisting of 3,300 shares of common stock
and one Class A Warrant . Each Class A Warrant
entitles the holder to purchase 1,650 shares of the
Company's common stock at an exercise price of $4.00
per share. The Class A Warrants are immediately
exercisable and expire October 8, 1999.
In November, 1995 the Company completed a private
placement of its common stock which raised $1,235,000
($1,128,236 net of offering costs). Under the private
placement, the Company sold to accredited investors an
aggregate of 41.17 units each consisting of 10,000
shares of the Company's common stock, and one Class A
Warrant and one Class B Warrant.
46
<PAGE>
In 1996, the Company filed a Registration Statement,
effective in October, 1996, which registered the shares
of common stock sold in the private placements and the
shares of common stock for which the 1996 and 1995
Class A Warrants may be exercised.
In 1996, the Company privately placed 4% convertible
securities in the aggregate principal amount of
$6,000,000 ($4,997,554 net of placement costs) with a
maturity date one year from date of issuance. The
securities are convertible at the option of the holders
into shares of common stock valued at the lesser of (1)
the closing bid price of the common stock as reported
on NASDAQ on the date of issuance of the security, or
(2) 75% of the average closing bid prices of the common
stock as reported on NASDAQ for the five trading days
prior to the date of conversion (the Conversion Price).
Securities that are not converted prior to their
maturity dates automatically convert on their maturity
dates. Interest accrues on the convertible securities
until the Company receives notice of the conversion.
If a security is not converted within five business
days after the Company receives notice of the
conversion, the Company is obligated to pay liquidated
damages to the security holder for each $100,000
principal amount of securities sought to be converted
in the amount of $100 for each of the first two days,
$200 for each of the next two days, $300 for each of
the next two days, $400 for each of the next two days,
and $500 per day thereafter until the conversion shares
are delivered. Prior to the receipt of a conversion
notice, the Company has the right to redeem any
security for a cash amount equal to 125% of the
principal amount of the security, plus unpaid accrued
interest, if the conversion price is below the closing
bid price of the common stock as reported on NASDAQ on
the date the security was issued. The closing bid
prices when the securities were issued ranged from
$3.00 to $3.50. Upon giving notice of its intention to
redeem a security, the security holder's right to
convert the security is suspended, but the Company must
pay an additional 1% per month in cash on a pro rata
basis until the full redemption price is paid. If the
full redemption price is not paid within ten business
days after the redemption notice is given, the security
holder again has the right to convert the security into
shares of common stock. A security holder may fax a
notice to the Company requiring the Company to declare,
by faxed notice within twenty-four hours after receipt
of the notice from the security holder, whether the
Company intends to effect a redemption within the
following five business days. If the Company does not
respond during said twenty-four hour period, the
Company is precluded from redeeming that security
holder's securities during said five day period. The
Company agreed to register the shares of common stock
into which the securities are convertible within 120
days after demand is made by a security holder. As
of March 1, 1997, $2,273,483 securities have been
converted into 1,038,946 shares of common stock.
47
<PAGE>
In conjunction with the issuance of the convertible
securities, the Company paid placement fees and related
issuance costs of $1,002,446, inclusive of 173,724
restricted shares of common stock to World Capital
Funding, Inc., Denver Colorado, or to persons
designated by it, with piggy-back registration rights,
in partial payment of the placement agent's fee, and
issued five year options to World Capital Funding,
Inc., or to persons designated by it, to purchase
100,000 shares of common stock at $4.50 per share.
The shares of common stock into which the securities
are convertible, together with the placement fee shares
to World Capital Funding, Inc., or its designees, and
the shares underlying the options issued to World
Capital Funding, Inc., or its designees, have been
registered under an S-3 Registration Statement which
was effective on January 23, 1997.
In addition to the increased bank borrowings and equity
raise-ups, the Company's cash provided from operating activities
increased approximately $2,100,000 during 1996. The increase was
primarily due to higher production levels in the Company's Gulf
Coast properties. The acquisition of the South Timbalier 148
property in July, 1996, added approximately $2,400,000 of cash
flow during 1996. The majority of this occurred in November and
December 1996 when the South Timbalier 148 properties were
completely brought on line. The Company has completed an
additional well on the block subsequent to December 31, 1996,
which will yield an approximate 10% revenue interest.
Other items which have or will have an effect on the
Company's liquidity and capital resources include:
On January 2, 1996, the Company entered into a stock
purchase agreement, as amended, with the holders of the
outstanding Series B Preferred Stock. Under the agreement,
the Company, or its assignee, had the obligation to purchase
the remaining outstanding series B Preferred Stock at $13.70
per share. Payment terms under the agreement were as
follows:
<TABLE>
Due Number
Date of Shares Amount
---- --------- ------
<S> <C> <C>
January 2, 1996 18,248 $250,000
January 15, 1996 18,248 250,000
February 10, 1996 3,650 50,000
February 29, 1996 54,409 745,400
March 31, 1996 47,445 650,000
</TABLE>
The share commitments through January 15, 1996, were
purchased by individuals who are not associated or
affiliated with the Company or any of the Company's
directors or executive officers; and the February 10 and 29,
1996, share commitments were purchased by the Company,
48
<PAGE>
primarily with funds obtained under its Credit Facility with
Den norske. Upon purchase, the Board of Directors retired
the 58,059 shares of Series B Preferred Stock.
The share commitment due March 31, 1996, was amended to
allow the holders of the Series B Preferred Stock to convert
25,769 shares of the Series B Preferred Stock into 100,000
shares of common stock. The remaining share commitment of
21,676 shares of Series B Preferred Stock for $296,932 was
extended by mutual consent to April 30, 1996. The Company
subsequently allowed the holders of the Series B Preferred
Stock to convert the remaining 21,676 shares of Series B
Preferred Stock into 75,410 shares of common stock.
Under the letter agreement dated October 17, 1994, the
Company had the right to acquire a 10% equity interest in
the Settle Securities for $4,000,000. Due to the fact that
the Company was not in a position to acquire this entity
interest, the Agreement was subsequently amended to permit a
third party to acquire the Settle Securities. The funds
used to effect the foregoing acquisition were borrowed by
the third party from Prima, a limited liability company of
which an officer/director of the Company is a member. The
third party is also a member of Prima and the principal
stockholder of Southern Resources, Inc. Prima, in turn,
borrowed the funds it used to provide the foregoing loan
from a bank in Lexington, Kentucky. The Company has not
guaranteed, nor is it obligated on, the Prima bank loan and
the bank will look solely to Prima and its members for
payments. In connection with this transaction, the Company
entered into the Prima Put, dated March 15, 1995, which
provided that, in the event Prima obtained title to the
Settle Securities, Prima had the right to require the
Company to purchase the Settle Securities for $4,000,000
payable in cash and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a Call Agreement providing for the Company's ability to
call the Settle Securities from the third party member of
Prima for $4,000,000 has been substituted therefor. The
Call Agreement also provides for non-refundable monthly
installments of $31,250 (as originally required under the
Prima Put) until such time as a total of $1,000,000 has been
advanced under the Call Agreement (including payments
previously made under the Prima Put). In the event the
Company elects to call the Settle Securities, the advance
payments shall be credited toward the purchase price. The
Company's right to call the Settle Securities begins January
15, 1997, and ends December 31, 1997. Additionally, a
$500,000 Certificate of Deposit held as collateral for
Prima's loan was liquidated by the Company and the funds
were advanced to Prima under the potential Call Agreement.
Prima used the $500,000 to purchase shares of Series B
Preferred Stock from a third party which it subsequently
converted to common stock. In the event the Company
exercises the Call Agreement, the $500,000 will be credit
towards the purchase.
49
<PAGE>
In December, 1995, the Company entered into a severance
agreement with its former President and Chief Executive
Officer who resigned effective December 31, 1995. Under the
agreement, the executive was paid $85,000 and will receive
the sum of $10,000 per month through March 31, 1998. In
return, the executive surrendered 515,590 1994 Compensatory
Stock Option Plan ("CSO") common stock options under a
Severance Plan which had exercise prices between $6.00 and
$8.00 per share and expired between March 18, 2003, and
February 1, 2005. In return, the executive received 643,987
common stock options at an exercise price of $4.00 per share
and which expire on November 29, 2000. He also retained
46,203 CSO common stock options immediately exercisable,
previously issued to him, at $3.50 per share which expire on
October 11, 2002. The Company also agreed to provide for
payment of an office lease through October, 1996, and
assigned a 1% gross overriding royalty interest in certain
oil and gas properties. As a result of the agreement, the
Company recognized a charge against income of $371,346 in
1995 and has an accrued severance liability at December 31,
1996, of $142,293 based on an 8% discount factor.
On November 27, 1996, the Company entered into a five year
corporate relations agreement with CRG, Winter Park,
Florida, to assist the Company with its shareholder
relations. As consideration for the agreement, the Company
paid CRG $550,000 cash and granted CRG a one year option to
purchase 100,000 shares of common stock for $3.00 per share,
a two year option to purchase 100,000 shares of common stock
for $3.60 per share, a three year option to purchase 100,000
shares of common stock for $4.20 per share, a five year
option to purchase 100,000 shares of common stock for $4.80
per share, and a five year option to purchase 100,000 shares
of common stock for $6.00 per share. The options have a
fair value of approximately $1.27 per share.
The Company plans to continue to focus its oil and gas
development efforts in the Gulf Coast for 1997. It has acquired
non-operating working interests in other properties along the
Gulf Coast, particularly three large salt domes located onshore
Louisiana. The funding of this development will continue to be
through the Den norske credit facility and development facility
and cash generated from operations.
The oil and gas industry is intensely capital driven and
demands on the Company's capital resources may increase further
during 1997. The potential increases may result from additional
drilling and completion obligations relating to prospects the
Company holds in the Gulf Coast and the possibility of future
joint ventures, acquisitions or other arrangements to assist in
increasing the Company's reserve base and production revenues.
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
50
<PAGE>
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.
ITEM 7. FINANCIAL STATEMENTS:
The information required hereunder is included in this
report as set forth in the "Index to Financial Statements" on
page F1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE:
There have been no changes in or disagreements with
accountants on accounting and financial disclosure during 1996
and 1995.
(LEFT BLANK INTENTIONALLY)
51
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
ACT:
DIRECTORS AND EXECUTIVE OFFICERS:
Information concerning the names, ages, positions and
business experience of the current directors and executive
officers of the Company is set forth below.
Name Age Position
---- --- --------
Douglas L. Hawthorne 55 Chairman of the Board (1) and
a member of the Board Audit
and Compensation Committees
Donald A. Schellpfeffer 54 Director and a member of the
Board Audit and Compensation
Committees
Leonard K. Nave 61 Director (2)
Rick G. Avare 35 Director, President and Chief
Executive Officer (3)
David Fox, Jr. 76 Director and a member of the
Board Audit and Compensation
Committees
Jeffrey J. Hausman 39 Chief Financial Officer (4)
and Treasurer (has tendered
his resignation effective
April 1, 1997)
Ralph A. Currie 42 Chief Financial Officer-Elect
(effective April 1, 1997) (5)
(1) Also serves as a director of ARI's wholly owned subsidiary,
Southern Gas Co. of Delaware, Inc. ("Southern Gas")
(2) Also serves as Chairman of the Board, President and Chief
Executive Officer of Southern Gas.
(3) Also serves as a director, a Vice President of Finance and
Chief Operating Officer of Southern Gas.
(4) Also serves as Chief Financial Officer of Southern Gas.
(5) Will also serve as Chief Financial Officer of Southern Gas.
52
<PAGE>
Directors of the Company are elected to hold office until
the next annual meeting of shareholders or until their respective
successors are duly elected and qualified. Officers of the
Company are elected annually by the Board of Directors and hold
office until their successors are duly elected and qualified.
The Company anticipates holding its 1997 annual meeting in the
second quarter of 1997.
DOUGLAS L. HAWTHORNE, age 55, has been a director and
Chairman of the Board of ARI since March 29, 1993, and has been a
director of Southern Gas since February, 1994. In August, 1996,
he was appointed to the newly established Audit and Compensation
Committees of ARI's Board. Since February, 1995, Mr. Hawthorne
has been a director of Bullet Sports International, Inc. Since
1992, Mr. Hawthorne has been a principal of Carillon Capital,
Inc., a Dayton-based investment banking firm. From 1991 to 1994,
Mr. Hawthorne was a principal in SPECTRA Group, Inc., a
management consulting firm, also based in Dayton, Ohio. From
1986 to 1991, Mr. Hawthorne served as the Chairman of the Board,
President and Chief Executive Officer of Society Bank, N.A.,
Dayton, Ohio ("Society Bank"). From 1971 through 1992, he held a
variety of positions within The Third National Bank and Trust
Company ("Third National"), and its successor, Society Bank, as
it grew from $200 million to $3 billion in assets with 90 offices
spanning Southern Ohio. Mr. Hawthorne initially served as Vice
President of Corporate Development, Research and Planning of
Third National, and subsequently assumed successively more
responsible senior management positions, culminating as Chief
Executive Officer in 1984. During his association with Society
Bank, Mr. Hawthorne was a member of the Executive Management
Committee and Society Bank's Retail Bank Operating Committee.
From 1976 to 1996, he served as Board Trustee and, most recently,
as Vice Chairman of MedAmerica Health Systems Corporation and
Chairman of MedAmerica International Insurance, Ltd. From 1992
to March, 1995, Mr. Hawthorne served as a Trustee of Wright State
University and is currently a Trustee of The Dayton Foundation.
He received his undergraduate degree from Wabash College and
attended New York University's Graduate School of Business as
well as many professional development programs.
DONALD A. SCHELLPFEFFER, M.D., age 54, has served as a
director of ARI since March, 1993. In August, 1996, he was
appointed to the newly established Audit and Compensation
Committees of ARI's Board. Since 1985, Dr. Schellpfeffer has
served as a full time practicing anesthesiologist and medical
doctor at the Sioux Falls Surgical Center, Sioux Falls, South
Dakota. Dr. Schellpfeffer was a major investor in one of the
drilling programs sponsored by Standard Oil & Exploration of
Delaware, Inc. ("Standard Oil") and was one of the co-plan
proponents of Standard Oil's Plan of Reorganization (the "Plan").
Upon consummation of the Plan, Dr. Schellpfeffer exchanged his
administrative claims against Standard Oil for equity securities
of the Company. See "Certain Relationships and Related
Transactions." In January, 1974, he purchased a limited partner
interest in Grenoble Partnership, a South Dakota Limited
Partnership which owned and operated an apartment complex in
Nebraska. In 1987, he was elected as general partner of that
partnership. In August, 1991, that partnership filed for
bankruptcy protection under Chapter 11 of the U.S. Bankruptcy
Code (the "Code"). Through restructuring and extension of loans,
all creditors have been satisfied, and that partnership's plan of
reorganization was confirmed on November 15, 1992.
53
<PAGE>
LEONARD K. NAVE, age 61, has served since February, 1994, as
Chairman of the Board, Chief Executive Officer, President and a
director of Southern Gas. He has served as a director of ARI
since September, 1994, and served in that position from March 29,
1993, to April 27, 1993. Since February, 1995, Mr. Nave has
served as a director for Bullet Sports International, Inc. Mr.
Nave served as the President, Chief Executive Officer and a
director of Southern Gas Company, Inc. ("SGC"), a Kentucky
corporation, from its inception in March, 1983, until its
dissolution in February, 1995. Since October, 1988, Mr. Nave has
served as the President and a director of Southern Gas Holding
Company, Inc. ("SGH"), the parent company of SGC. See "Certain
Relationships and Related Transactions." In addition, Mr. Nave
currently holds the following positions: President and a director
of Nawenco Equipment, Ltd. (since March, 1992); and President and
a director of Woodway Farms, Inc. (Since August, 1983). In
February, 1996, Mr. Nave filed for reorganization and protection
under Chapter 11 of the Code. This action was initiated
primarily because of the attempted enforcement of certain
guaranties which Mr. Nave had signed on behalf of an unrelated
corporation. From November, 1991, through 1995, Mr. Nave was
Vice President and a director of Maxwell House, Inc.; and from
May, 1983, through September, 1994, he served as Vice President
and a director of Wright Resources, Inc. From 1980 to 1983, Mr.
Nave was a senior partner in the law firm of Nave, Williams &
Palmore (now Jackson & Kelly) in Lexington, Kentucky. Mr. Nave
received his Bachelor of Arts degree from the University of
Kentucky in 1956 and a Bachelor of Laws and Letters degree from
the University of Kentucky College of Law in 1959. Mr. Nave, who
has been engaged in energy and related activities for more than
twenty years, pioneered and implemented the first and largest
direct sale of natural gas on the Columbia Gas of Kentucky
system. Mr. Nave is an active member of the Kentucky Bar
Association.
RICK G. AVARE, age 35, has served as President and Chief
Executive Officer of ARI since May 15, 1996, and as a director of
ARI since September, 1994. He has also served as Chief Operating
Officer of Southern Gas since January 1, 1996, and as Vice
President, Treasurer and a director of Southern Gas since
February, 1994. Mr. Avare served as Chief Operating Officer and
Executive Vice President of ARI from August, 1995 until May 15,
1996, and he served as Chief Financial Officer of ARI from
September, 1994, through December, 1995. He also served as Chief
Financial Officer of Southern Gas from February, 1994 through
December, 1995. Since March, 1995, Mr. Avare has served as the
Administrative Member for Prima Capital, LLC. From February,
1995, to November 15, 1995, Mr. Avare served as a director for
Bullet Sports International, Inc. From March 29, 1993, to April
27, 1993, Mr. Avare served as a director of ARI. Mr. Avare was
the Vice President of Finance and Treasurer of SGC from 1987
until its dissolution in 1995. He has served SGH as Chairman of
the Board and Chief Executive Officer since January, 1995, and as
a director and Vice President and Secretary since October, 1988.
See "Certain Relationships and Related Transactions." Prior to
his involvement with SGC, Mr. Avare was employed by the national
accounting firm of Grant Thornton (now part of KPMG Peat Marwick,
LLP) in Lexington, Kentucky. Mr. Avare received his Bachelor of
Arts degree from Transylvania University in Lexington, Kentucky,
in 1983 and his Masters in Accounting from the University of
Kentucky in 1985. Mr. Avare is a certified public accountant and
is currently a member of the American Institute for Certified
Public Accountants and the Kentucky Society of Certified Public
Accountants.
54
<PAGE>
DAVID FOX, JR., age 76, has served as a director of ARI
since August, 1996. In August, 1996, he was also appointed to
the newly established Audit and Compensation Committees of ARI's
Board. Mr. Fox has served as Vice Chairman and Secretary-
Treasurer of McJunkin Appalachian Oil Field Supply Company since
1989. He also currently holds the position of President of
Appalachian Production Co., an oil and gas producing company, as
well as President and Chairman of the Board of FGO, Inc., a West
Virginia corporation engaged in developing residential real
estate properties in and around Huntington, West Virginia; and
President and a Director of Charleston National Properties, LLC,
a real estate development company in the Charleston, South
Carolina, area. Mr. Fox also currently serves as a Director of
KYOWVA Container Corporation; River Cities Association; Bank One,
West Virginia, Charleston; Bank One, West Virginia; and the
Marshall University Foundation. During the past five years, Mr.
Fox served as President of the Marshall University Foundation.
Mr. Fox is a graduate of Greenbrier Military School and attended
Marshall University. He is a past President of Branchland Pipe
and Supply Company and has more than fifty years of experience in
energy and related activities.
JEFFREY J. HAUSMAN, age 39, has served as Chief Financial
Officer of the Company since January 1, 1996, and also serves in
that same capacity for Southern Gas. He has also served as
Treasurer of ARI since August, 1996. Mr. Hausman resides in
Nashville, Tennessee, where he has been a Partner with the public
accounting firm of William Puryear & Co. since 1987. Mr. Hausman
received a degree in Business Administration from the University
of Notre Dame in 1979. He is a certified public accountant and
is currently a member of the American Institute of Certified
Public Accountants and the Tennessee Society of Certified Public
Accountants. Due to the excess time required of Mr. Hausman's
position as a result of the Company's growth, and his family's
desire to remain in Nashville, Mr. Hausman has tendered his
resignation as an officer of the Company effective April 1, 1997.
RALPH A. CURRIE, age 42, has been elected to serve as Chief
Financial Officer and Treasurer of both ARI and Southern Gas
effective April 1, 1997. From November, 1994, to the present,
Mr. Currie has served as Chief Financial Officer of American
Rehabilitation Group, P.S.C., a Kentucky-wide physical therapy
company. From April, 1991, until November, 1994, he was a
partner with the regional business and financial planning firm of
Cramer, Currie & Company, Lexington, Kentucky. From 1976, until
April, 1991, he held various positions with the national
accounting firm of KPMG Peat Marwick, LLP, the most recent of
which was from 1987 until 1991 as Partner-in-Charge-Tax in the
Lexington, Kentucky, office. Mr. Currie received his B.S. degree
in Accounting from Kansas State in 1976. He is a certified
public accountant and is currently a member of the following
organizations: Lexington Habitat for Humanity (1991-Present,
President in 1994; Treasurer 1991-1992), Lexington Arts and
Cultural Counsel (1990-Present, Allocations Committee member),
Kansas State University (Foundation Trustee 1986-Present,
Presidents Club Member 1984-Present), the American Institute for
Certified Public Accountants, and the Kentucky Society of
Certified Public Accountants.
55
<PAGE>
MEETINGS AND COMPENSATION:
During the year ended December 31, 1996, the Board of
Directors of the Company met on 10 occasions, either in person or
telephonically. Each of the Company's directors attended at
least 75% of the meetings of the Board of Directors. In August,
1996, the Company's Board of Directors established an Audit
Committee and a Compensation Committee and appointed Messrs.
Hawthorne, Schellpfeffer and Fox to serve on both of the
Committees. The Committees are charged with reviewing on a
periodic basis the Company's processes for producing financial
data, its external controls, the independence of the Company's
external audit and the Company's executive compensation programs.
During 1996, the Company's non-employee director, Dr.
Schellpfeffer, received no compensation for his services to the
Company; however, he was reimbursed for reasonable travel
expenses incurred in connection with his attendance at meetings
of the Board of Directors. In addition, non-employee directors
are eligible for stock options granted under the Company's 1994
Compensatory Stock Option Plan.
FAMILY RELATIONSHIPS:
There are no family relationships among directors, executive
officers or persons nominated or chosen to become directors or
executive officers of the Company.
LEGAL PROCEEDINGS:
During the past five years, no directors or executive
officers or persons nominated or chosen to become directors or
executive officers of the Company, other than Donald A.
Schellpfeffer, were general partners or directors of any business
either at the time a bankruptcy petition was filed by or against
such business or within two years prior to that time. Donald A.
Schellpfeffer was the general partner of Grenoble Partnership, a
South Dakota Limited Partnership, when that partnership filed a
petition under Chapter 11 of the Code.
During the past five years, no directors or executive
officers or persons nominated or chosen to become directors or
executive officers of the Company were (i) convicted in any
criminal proceeding or the subject of any criminal proceeding
(other than traffic violations and other minor offenses), (ii)
subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining, barring,
suspending or otherwise limiting his involvement in any type of
business, securities or banking activities, or (iii) found by a
court of competent jurisdiction in a civil proceeding, the
Securities and Exchange Commission or the Commodities Trading
Commission, to have violated a federal or state securities or
commodities law, and the judgment has not been reversed,
suspended or vacated.
56
<PAGE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT:
Section 16(a) of the Securities Exchange Act of 1934
requires the Company's officers and directors and persons who own
more than 10% of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership
with the Securities and Exchange Commission ("SEC"). Officers,
directors and greater than 10% stockholders are required by SEC
regulation to furnish the Company with copies of all Section
16(a) forms they file.
Based solely upon a review of the copies of such forms
furnished to the Company or written representations that no other
reports were required, the Company believes that during the 1996
fiscal year, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied
with except that the initial Form 3 filings for Messrs. Hausman
and Fox were late.
ITEM 10. EXECUTIVE COMPENSATION:
The table below sets forth information concerning the annual
and long-term compensation for services to the Company and its
subsidiary, Southern Gas, for the fiscal years ended December 31,
1996, 1995 and 1994 of those persons who were, at December 31,
1996 (i) the chief executive officer and (ii) the other four most
highly compensated executive officers of the Company (the "Named
Officers"):
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
------------ ------------
Securities
Underlying All Other
Name and Principal Other Annual Stock LTIP Compen-
Position (1) Year Salary Bonus Compensation Options Payouts sation
- ------------ ---- ------ ----- ------------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Douglas L. Hawthorne 1996 -- -- $60,000 354,315 -- --
Chairman of the Board 1995 -- -- 54,000 354,315 -- --
1994 -- -- 27,000 182,712 -- --
Leonard K. Nave 1996 $175,761 -- $ 3,281 271,603 -- $8,750(2)
Chairman of the Board 1995 175,500 -- 4,692 246,603 -- 8,750(2)
President & Chief 1994 175,000 -- -- 100,000 -- 8,750(2)
Executive Officer,
Southern Gas
Rick G. Avare 1996 $137,684 $50,000(3) $17,400(4) 493,204 -- $6,846(2)
President & Chief 1995 99,546 50,000(5) 18,533(6) 268,204 -- 4,952(2)
Executive Officer 1994 63,978 -- 11,023(7) 50,000 -- 5,000(2)
Jeffrey J. Hausman 1996 $71,546 -- -- 25,000 -- --
Vice President & Chief 1995 -- -- -- -- -- --
Financial Officer 1994 -- -- -- -- -- --
</TABLE>
<PAGE>
(1) The disclosures in this table for Messrs. Hawthorne and
Hausman have been provided for informational purposes only
and in light of their status as significant employees of the
Company. SEC rules require only the disclosure of the four
most highly compensated executive officers whose total
annual salary and bonus exceeds $100,000.
(2)) Represents contribution made on behalf of the Named Officer
to a 401(K) plan.
57
<PAGE>
(3) Represents a bonus for the Named Officer which was accrued
as of December 31, 1996, and $30,000 of which was paid in
February, 1997.
(4) Includes car allowance of $11,907.
(5) In December, 1995, the Board of Directors approved a bonus
for the Named Officer which was accrued as of December 31,
1995, and paid in January, 1996.
(6) Includes car allowance of $12,038.
(7) Represents a car allowance.
The table below contains information on grants of stock
options during 1996 to the Named Officers. No stock appreciation
rights were granted during 1996.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
<CAPTION>
Percent of
Securities Total Options
Underlying Granted to
Options Employees in Exercise Price Expiration
Name Granted (#) 1996 ($/share)(4) Date
---- ----------- ---- ------------ ----
<S> <C> <C> <C> <C>
Leonard K. Nave 25,000(1) 5.0% $4.50 03/03/2001
Rick G. Avare 225,000(1) 45.1% $4.50 03/03/2001
Jeffrey J. Hausman 75,000(2) 15.0% $4.50 (3)
</TABLE>
(1) These options were granted on March 4, 1996, under the
Company's CSO Plan and are immediately exercisable.
(2) These options were granted on March 4, 1996, under the
Company's CSO Plan, and they vest 25,000 immediately; 25,000
on March 4, 1997; and 25,000 on March 4, 1998.
(3) Five years from date of vesting (i.e., 25,000 expire
3/3/2001, 25,000 expire 3/3/2002, and 25,000 expire
3/3/2003.
Shown below is information with respect to all unexercised
options to purchase the Company's Common Stock granted to the
Named Officers through the end of fiscal year 1996. No options
were exercised by the Named Officers during 1996. No stock
appreciation rights have been granted.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Value of
Number of Securities Unexercised
Underlying in-the-Money
Unexercised Options Options
Shares at FY-End at FY-End($)
Acquired on Value Exercisable/ Exercisable/
Name Exercise(#) Realized($) Unexercisable Unexercisable
---- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Douglas L. Hawthorne -- -- 354,315/0 0/0
Leonard K. Nave -- -- 271,603/0 0/0
Rick G. Avare -- -- 493,204/0 0/0
Jeffrey J. Hausman -- -- 25,000/50,000 0/0
</TABLE>
58
<PAGE>
On April 14, 1994, the Board of Directors adopted two formal
stock plans: (i) the CSO Plan, and (ii) the 1994 Employee Stock
Compensation Plan ("Employee Plan"). The CSO Plan is a
compensatory (non-statutory) stock option plan covering 2,000,000
(post-reverse stock split) shares of the Company's common stock,
which is not a qualified plan under Section 422 of the Internal
Revenue Code of 1986. The number of shares authorized for
issuance under the CSO was originally 750,000; however, this
amount was increased to 2,000,000 on June 22, 1995, by approval
of the shareholders.
The Employee Plan is an employee stock compensation plan
covering 650,000 (post-reverse stock split) shares of the
Company's Common Stock. The Employee Plan is not qualified under
section 401(a) of the Internal Revenue Code of 1986. As of
December 31, 1995, 271,000 shares have been issued under the
Employee Plan.
From March 19, 1994, and at various dates until February 2,
1995, the Company entered into separate Compensatory Stock Option
Agreements with the following individuals: (i) Douglas L.
Hawthorne, Chairman of the Board; (ii) Donald Schellpfeffer,
Director; (iii) Leonard K. Nave, Director of the Company and
President, Chief Executive Officer and a Director of Southern
Gas; and (iv) Rick G. Avare, Director and President and Chief
Executive Officer of the Company and Director, Vice President of
Finance and Chief Operating Officer of Southern Gas. Pursuant to
the terms of these agreements, Messrs. Hawthorne, Schellpfeffer,
Nave and Avare were granted options to purchase 307,712, 150,000,
200,000 and 175,000 shares of Common Stock, respectively, at
exercise prices of between $6.00 and $8.00 per share and
expiring between March 18, 2003, and February 1, 2005. Effective
March 4, 1996, the Board of Directors of the Company approved a
Resolution wherein all options previously granted under the CSO
Plan may be amended, at the election of the optionee, to provide
that the option price be reduced to $4.50 per share and the term
be reduced to 5 years from March 4, 1996.
On November 12, 1996, the Company's Board of Directors
adopted an Incentive Bonus Plan (the "Bonus Plan"). The Bonus
Plan provides that in each Contribution Period, as hereinafter
defined, (the "Bonus Period") the Company will make a Bonus
Contribution to the Bonus Plan. One-half of the Bonus
Contribution will be an amount equal to two and one-half cents
($.025) per million cubic feet equivalent of the net increase in
the Company's proved producing reserves during the Bonus Period;
and the other one-half of the Bonus Contribution will be an
amount equal to two percent (2%) of the Company's net income
before taxes during the Bonus Period as determined in accordance
with generally accepted accounting principles, excluding
extraordinary items such as net gain or loss resulting from the
sale, exchange or other disposition of capital assets (other than
in the ordinary course of business), and, to the extent deducted
in arriving at net income, interest, depreciation, depletion and
amortization expenses. Provided, however, that the Bonus
Contribution made during any Bonus Period cannot exceed the sum
of $500,000.
The initial contribution period begins January 1, 1997, and
calendar year 1997 and each successive calendar year thereafter
constitutes a Contribution Period until such time as the Bonus
Plan is modified or terminated by the Board of Directors.
59
<PAGE>
Within 60 days after the end of each Bonus Period, the
President of the Company is required to recommend the manner in
which the Bonus Contribution is to be distributed among the
Company's Chief Executive Officer, Chief Financial Officer,
Senior Vice Presidents, General Counsel, Corporate Secretary and
other key personnel. All distributions are subject to approval by
the Compensation Committee of the Board of Directors and by the
Board of Directors.
EXECUTIVE OFFICER EMPLOYMENT AGREEMENTS:
On March 19, 1993, the Company executed a five-year
employment agreement with Mr. Hawthorne, its Chairman of the
Board, providing for such compensation as the Board of Directors
deems appropriate and the grant of an option to purchase 392,541
shares of the Company's common stock (which number was
subsequently adjusted to 32,712 following connection with the
Company's reverse stock splits). Pursuant to the terms of a
separate registration rights agreement, Mr. Hawthorne also was
granted piggy-back registration rights with respect to the
securities underlying the options granted under his employment
agreement; however, on July 15, 1994, the Board of Directors
cancelled the previously issued options and granted replacement
options to Mr. Hawthorne on the same terms as the previous
options but with a new exercise price. These replacement options
were issued under the Company's 1994 CSO. Mr. Hawthorne's
employment agreement does not require that he devote his full
time to the Company.
In August, 1993, SGC executed a five-year employment
agreement with Mr. Nave providing for such compensation as the
Board of Directors deems appropriate and providing for severance
pay to Mr. Nave under certain conditions. The Company assumed
this agreement as a result of the purchase transaction with SGC
in February 1994.
On November 12, 1996, the Company entered into an Employment
Agreement with Rick G. Avare, the Company's President and Chief
Executive Officer, to serve in such capacity for a period of five
years. If written notice of intent to terminate the agreement is
not given by either party at least six months prior to the third
anniversary of the agreement, after the fifth anniversary of the
agreement it is automatically extended from year to year unless
either party gives written notice of intent to terminate at least
six months prior to the next anniversary date, at which time the
agreement will terminate. As consideration for Mr. Avare's
agreement to serve as President and Chief Executive Officer, the
Company agreed to pay him a salary of $160,000 per year plus
benefits customarily paid to executives holding similar
positions. Mr. Avare's salary is subject to annual review by the
Board of Directors. It can be increased by the Board of
Directors, but it cannot be decreased.
On the same date, the Company entered into a Change of
Control Agreement with Mr. Avare. The agreement is for a term of
five years. If written notice of intent to terminate the
agreement is not given by either party at least six months prior
to the third anniversary of the agreement, after the fifth
anniversary of the agreement it is automatically extended from
year to year unless either party gives written notice of intent
to terminate at least six months prior to the next anniversary
date, at which time the agreement will terminate. Provided,
however, the Company is prohibited from giving notice of intent
60
<PAGE>
to terminate if within one year prior to the termination date the
Company has received notice of or has reason to believe that a
change of control may occur.
The agreement provides that if a change of control occurs
and Mr. Avare's employment subsequently terminates for any
reason, the Company will pay to Mr. Avare an amount of monies
equal to the sum of (i) any monies due him under the remaining
term of his employment contract, (ii) any monies received by him
from the sale of the Company's common stock acquired as the
result of the exercise of stock options, (iii) 2.99 times the
bonus awarded to him for the prior year under the Company's
Incentive Bonus Plan or $300,000, whichever is greater, and (iv)
all legal fees and expenses incurred by him as a result of such
termination and in seeking to obtain or enforce any right under
the agreement. In addition, the Company is obligated to permit
Mr. Avare to participate, for a period of three years after
termination, in the Company's insurance programs at no cost to
Mr. Avare.
Under the agreement, a change of control is deemed to occur
if (i) any person or group of persons, other than a group of
persons consisting of the Company's officers and directors as of
the date of the agreement, acting in concert, acquires beneficial
ownership of the Company's then outstanding capital stock
representing 20% or more of the voting power of all of such
shares, (ii) the Company or any of its subsidiaries sell, assign
or transfer assets for consideration greater than 50% of the book
value of the Company's then consolidated assets as determined
under generally accepted accounting principles, (iii) the Company
or any of its subsidiaries merge, consolidate or otherwise
reorganize and the Company's officers and directors as of the
date of the agreement receive less than 35% of the voting power
of the capital stock of the surviving or resulting entity, (iv)
the Company adopts a plan of liquidation or dissolution, (v) the
commencement of a tender offer for the Company's common stock,
which, if successful, would result in a deemed change of control
as defined in the agreement, (vi) a determination by the Board of
Directors of the Company, in view of then current circumstances
or impending events, that a deemed change of control as defined
in the agreement has occurred or is imminent, (vii) the persons
who were directors of the Company immediately prior to any
merger, consolidation, sale of assets or contested election, or
any combination of the foregoing, cease to constitute a majority
of the Company's Board of Directors, and (viii) the persons who
were directors immediately prior to a tender offer or exchange
offer for the Company's voting stock (other than by the Company
or any of its subsidiaries) cease to constitute a majority of the
Company's Board of Directors within two years after such tender
or exchange offer.
The Company also maintains Indemnity Agreements with Rick G.
Avare, in his capacity as President and Chief Executive Officer;
Jeffrey J. Hausman, its Chief Financial Officer; Karen M.
Underwood, its Corporate Secretary; and Douglas L. Hawthorne,
Donald A. Schellpfeffer, Leonard K. Nave, Rick G. Avare and David
Fox, Jr., its Board of Directors.
MANAGEMENT CHANGES:
Andrew J. Kacic served as President, Secretary and Treasurer
of the Company from the Company's inception in August, 1992,
until he resigned effective December 31, 1995. He also served as
61
<PAGE>
a director of the Company from August, 1992, until August, 1996.
Jonathan B. Rudney, an investor in Century, was elected President
and Chief Executive Officer of the Company on January 1, 1996;
however, he resigned in May, 1996, to avoid a conflict of
interest in connection with the Company's negotiations for the
purchase of oil and gas properties from Century. Rick G. Avare,
who has served as a director of the Company since September,
1994, and who had served as Executive Vice President and Chief
Operating Officer of the Company since August, 1995, succeeded
Mr. Rudney as President and Chief Executive Officer. Mr. Kacic
did not stand for reelection as a director, and his position on
the Board was filled by the election of David Fox, Jr., at the
Company's Annual Meeting of Shareholders held on August 14, 1996.
Jeffrey J. Hausman has served as Chief Financial Officer of
the Company since January 1, 1996, and Treasurer since August,
1996. During this time, Mr. Hausman has resided with his family
in Nashville, Tennessee. Due to the excess time required of Mr.
Hausman's position as a result of the Company's growth and his
family's desire to remain in Nashville, Mr. Hausman has 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 will be succeeded by Ralph A.
Currie.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT:
The following table reflects certain information regarding
the beneficial ownership of the outstanding equity securities of
the Company as of March 17, 1997, to the extent known to the
Company's Board of Directors. Such information is included for
(i) persons who own 5% or more of such equity securities, (ii)
directors, (iii) the executive officers identified in the
discussion under the heading "Executive Compensation" (the "Named
Executives"), and (iv) officers and directors of the Company as a
group. Unless otherwise indicated, the Company believes that
each person named below has the sole power to vote and dispose of
the equity securities beneficially owned by such person.
<TABLE>
<CAPTION>
Shares
Beneficial Owner Title Beneficially Percent
Name/Address Of Class Owned(1) Of Class(2)
------------ -------- -------- -----------
<S> <C> <C> <C>
Douglas L. Hawthorne(3)(9) 8% Preferred 3,334 1.24%
4325 Delco Dell Road Common Stock 521,833 6.59%
Kettering, OH 45429
Donald A. Schellpfeffer, M.D.(3)(11)
910 East the Street Common Stock 506,170 6.49%
Sioux Falls, SD 57105
Southern Gas Holding
Co., Inc. Common Stock 993,623 13.14%
160 Morgan Street
Versailles, KY 40383
Leonard K. Nave(3)(4)(7)
160 Morgan Street Common Stock 1,416,744 18.08%
Versailles, KY 40383
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
Shares
Beneficial Owner Title Beneficially Percent
Name/Address Of Class Owned(1) Of Class(2)
------------ -------- -------- -----------
<S> <C> <C> <C>
Leonard K. Nave,
Trustee(4)(5) Common Stock 993,623 13.14%
160 Morgan Street
Versailles, KY 40383
Rick G. Avare(3)(4)(6) 8% Preferred 187,500 69.74%
160 Morgan Street Common Stock 2,048,253 24.85%
Versailles, KY 40383
David J. Fox, Jr. Common Stock 38,834 *
Appalachian Production Company
605 9th Street, Ste. 519
Huntington, WV 25701
Jeffrey J. Hausman(8) Common Stock 50,000 *
160 Morgan St.
Versailles, KY 40383
Whispering Pines of
Thomasville, Inc. 8% Preferred 28,334 10.54%
P. O. Box 638
Thomasville, GA
Andrew J. Kacic(3)(10) Common Stock 844,822 10.24%
6119 N. Black Bear Loop
Tucson, AZ 85715
Directors and Executive Officers
as a group (6 persons) All classes 3,106,931 33.93%
</TABLE>
* Represents less than 1% of the Company's outstanding stock
for the indicated class.
(1) Share information reflects the 1-for-4 reverse stock split
of the Company's common stock effected on June 8, 1994. 8%
Preferred Stock is convertible into common stock at the rate
of one share of common stock for each share of Preferred
Stock.
(2) Percentage assumes full exercise of outstanding options and
warrants to purchase shares of the Company's common stock
and conversion of 8% Preferred Stock into common stock.
(3) Includes 147,482 shares of common stock jointly owned by
Messrs. Hawthorne, Kacic, Schellpfeffer, Nave and Avare.
Each joint owner disclaims beneficial ownership of 80% of
such shares.
(4) Includes 993,623 shares of common stock owned by Southern
Gas Holding Company, Inc. ("SGH"). SGH is owned 52.5% by
Rick G. Avare, 7.5% by Leonard K. Nave, individually, and
32.5% by Leonard K. Nave, as Trustee (See Note 5). Messrs.
Avare and Nave, individually and as trustee, disclaim the
beneficial ownership of such shares of the Company's common
stock to the extent they exceed their respective percentage
ownership of SGH.
63
<PAGE>
(5) Leonard K. Nave is both the grantor and trustee of a trust
which owns 325 shares (32.5%) of SGH. The Trust Agreement
provides that 75 shares (7.5%) shall be distributed to each
of his three children and 100 shares (10%) shall be
distributed to his wife not later than April 30, 2000.
Neither Mr. Nave's wife nor children have a right to vote
the shares or to cause the trust to sell or otherwise
dispose of them.
(6) Includes 680,704 shares subject to options and conversion
rights exercisable within 60 days, 147,482 shares owned by
Prima Capital, LLC ("Prima"), in which Mr. Avare owns a 20%
interest, and 1,134 shares owned by JJR Investments, a
Kentucky general partnership. Mr. Avare disclaims
beneficial ownership of 80% of the shares of the Company's
common stock owned by Prima.
(7) Includes 271,603 shares subject to options exercisable
within 60 days.
(8) Includes 50,000 shares subject to options exercisable within
60 days.
(9) Includes 358,629 shares subject to options, warrants and
conversion rights exercisable within 60 days and 14,500
shares held in Mr. Hawthorne's retirement plan.
(10) Includes 690,590 shares subject to options exercisable
within 60 days and 6,750 shares owned by the Andrew J.
Kacic Profit Sharing Plan.
(11) Includes 207,415 shares subject to options and warrants
exercisable within 60 days, 20,729 shares subject to
warrants exercisable within 60 days held by Anesthesia
Association, Inc. ("AAI"), 6,122 shares subject to warrants
exercisable within 60 days held by Midwest Anesthesiology
Profit Sharing Plan, 10,655 shares held by AAI, 470 shares
held by Midwest Anesthesiology Service II Profit Sharing
Plan, 2,068 shares held in trusts for the benefit of Dr.
Schellpfeffer's children, with respect to which Dr.
Schellpfeffer acts as custodian, 12,185 shares held in
Individual Retirement Plans for Dr. Schellpfeffer and
members of his family, and 70,872 shares held by DARS
Limited, of which Dr. Schellpfeffer is a principal.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BANKRUPTCY PROCEEDINGS:
Donald Schellpfeffer, a director and beneficial owner of
more than 5% of the Company's Common Stock, Boyt Investment
Company, Donald Szymik, John Dennis, James Perry and Lavonne
Anderson (collectively, the "Sioux Falls Investors") were working
interest owners in the Sand Lake Project, which was owned at such
time in part by the Company's predecessor, Standard Oil.
Standard Oil filed a petition under Chapter 11 of the Code in
April, 1991. Andrew J. Kacic was a director and executive
officer of Standard Oil when the petition was filed.
Collectively, the Sioux Falls Investors invested pre-petition
64
<PAGE>
$771,750 in the Sand Lake Project in late 1989 and received in
exchange therefor a 24.5% working interest in the Project. The
Sioux Falls Investors also provided, post-petition, $737,924
toward expenses incurred in performing an inquiry into the
financial status of Standard Oil as well as toward legal and
accounting expenses, the salary of Mr. Kacic and other fees
necessary to develop and consummate the Plan. The funds advanced
by the Sioux Falls Investors were designated as administrative
expenses in the Plan for which they received Preferred Stock.
Additionally, Jonathan B. Rudney, who was President of the
Company from January 1, 1996, until May 15, 1996, was Chief
Operating Officer of Century when it filed for bankruptcy
protection under Chapter 11 of the Code in August, 1993. In
1996, Leonard K. Nave, a director of ARI, a director and
executive officer of Southern Gas and a beneficial owner of more
than 5% of the Company's Common Stock, filed for reorganization
and protection under Chapter 11 of the Code. This action was
initiated primarily because of the attempted enforcement of
certain guaranties which Mr. Nave signed on behalf of an
unaffiliated corporation.
SOUTHERN GAS, SGC AND SGH:
Mr. Nave, in his capacity as Trustee of a Trust for the
benefit of his family, an executive officer of Southern Gas and
director of ARI, and Mr. Avare, an executive officer of Southern
Gas and an executive officer and director of ARI, are the
principal stockholders, directors and executive officers of SGH.
SGH was the parent company of SGC, a Kentucky corporation; and as
part of the dissolution of SGC, SGH received 993,623 shares of
common stock of the Company. From March 29, 1993, to April 27,
1993, Messrs. Nave and Avare served as directors of the Company
and have served as directors continuously since September, 1994.
During 1994 and 1995, the Company engaged in various transactions
involving SGH and SGC and certain third parties regarding the
acquisition of oil and gas properties and interests therein,
including the acquisition of substantially all of the assets and
certain liabilities of SGC in February, 1994. At the time such
transactions were negotiated and consummated, Messrs. Nave and
Avare were neither directors nor officers or stockholders of the
Company.
In 1995, the Company purchased a pipeline in the Gausdale
Field for $400,000 from SGH. The price was determined based upon
future estimated cash flows from transportation fees discounted
at 10%.
At December 31, 1996, the Company has made advances to SGH
totaling $163,728 which the principals of SGH intend to secure
with Shares of Company Stock as it becomes available.
SEQUA TRANSACTIONS:
At December 31, 1994, Sequa Financial Corporation ("Sequa")
held 6.57% (202,800 shares) of common stock of the Company.
Pursuant to a Settlement Agreement dated February 28, 1994, among
Sequa, SGC, SGH, Wright Resources, Inc., Natural Resources
65
<PAGE>
Services, Inc. and Leonard K. Nave (the "Settlement Agreement"),
Sequa agreed to the settlement of SGC's indebtedness of
approximately $10,500,000 (including accrued interest) in
consideration for the payment in cash of $5,750,000 and 811,200
shares (pre-reverse split) of the Company's restricted common
stock (which were issued to SGC pursuant to an Asset Purchase
Agreement therewith and subsequently transferred by SGC to
Sequa).
In connection with the transfer to Sequa of the 811,200
shares of common stock, the Company, SGC, SGH and Sequa entered
into a Stockholders Agreement dated February 28, 1994 (the
"Stockholders Agreement"). Pursuant to the Stockholders
Agreement, Sequa granted to the Company the right and option (the
"Call Option") to purchase from Sequa 311,200 restricted shares
of common stock of the Company (the "Call Shares") for an
aggregate purchase price of $750,000 plus earnings accrued
thereon from the closing to the date of payment at an interest
rate of 15% per annum. This Call Option expired by its terms on
December 31, 1994.
The Shareholders Agreement also granted unlimited piggy-back
registration rights to Sequa exercisable in connection with the
Company's registration of any of its stock or other securities
under the Securities Act of 1933. The shares were included in an
S-3 Registration Statement filed by the Company which became
effective October 8, 1996. Sequa has since liquidated its share
position.
OFFICE LEASE:
In connection with the acquisition of the assets of SGC, The
Company has assumed the obligations of a certain lease dated June
1, 1986, between Nave Properties, a sole proprietorship, and SGC
relating to certain office space located in Versailles, Kentucky.
This office serves as the principal headquarters of Southern Gas
(formerly the principal headquarters of SGC); and effective
January 31, 1996, the Company's Scottsdale, Arizona, office was
closed and operations were consolidated in the Kentucky office.
Nave Properties, which is owned by Leonard K. Nave, is an
affiliate of the Company. The lease provides for monthly lease
payments of $3,100 ($37,200 annually). The lease expires on
February 28, 1998.
PRIVATE PLACEMENT:
In October and November of 1994, the Company issued and sold
to GFL Ultra Fund Limited ("GFL") for $6,500,000, an aggregate of
650,000 shares of 6% Junior Cumulative Convertible Preferred
Stock, Series B (the "Series B Preferred Stock"), and warrants to
purchase 156,000 shares of common stock at $8.75 per share, such
warrants having expired at the end of 1995. In connection with
this transaction, GFL entered into a Standstill and Registration
Rights Agreement (the "Standstill Agreement") with the Company.
The Standstill Agreement provided that GFL would vote all of its
voting securities of the Company in accordance with the
recommendation of the Company. Further, under the terms of the
Standstill Agreement, GFL would not, without the prior written
66
<PAGE>
approval of the Board of Directors of the Company: (a) acquire
beneficial ownership of additional voting securities of the
Company; (b) transfer any voting securities of the Company except
(i) pursuant to an exemption from the registration requirements
of the Securities Act of 1933 (the "Act"); (ii) through a public
offering designed to achieve a widespread distribution; or (iii)
in connection with a Business Combination (as defined in the
Standstill Agreement); (c) do or attempt to do any of the
following matters: (i) submit any proposal with respect to a
Business Combination involving the Company or any affiliate
thereof; (ii) join or in any way participate in any "group"
(within the meaning of Section 13(d)(3) of the Securities
Exchange Act of 1934) with respect to any voting securities of
the Company; or (iii) solicit proxies from the stockholders of
the Company; or (d) deposit any shares held by it in a voting
trust or subject any of such shares to any arrangement or
agreement with respect to the voting thereof.
On May 5, 1995, the Company entered into a stock option
agreement, as amended, with the holders of the Series B Preferred
Stock. Under the agreement, the holders granted the Company or
its nominee the right to acquire the then outstanding 425,000
shares of the Series B Preferred Stock. The agreement was
amended to allow the holders to convert 47,326 shares of the
Series B Preferred Stock to 236,000 shares of common stock. Also
pursuant to the original agreement, 36,638 shares of the Series B
Preferred Stock were acquired jointly by the directors of the
Company; and these shares were subsequently converted into
146,004 shares of common stock. 36,638 shares of the Series B
Preferred Stock were also acquired by Prima, an investment group
in which Rick G. Avare owns a 20% interest. These shares were
also subsequently converted into 146,004 shares of common stock.
Of the remaining 304,398 optioned Series B Preferred Stock
shares, the holder converted 50,000 of such optioned shares into
204,842 shares of common stock in accordance with the conversion
factor. The remaining 254,398 optioned shares could have been
purchased by the Company or its nominee at $13.48803 per share;
however, the option terminated on September 19, 1995, without
exercise.
On January 2, 1996, the Company entered into a stock
purchase agreement, as amended, with the holders of the
outstanding Series B Preferred Stock. Under the agreement, the
Company or its assignee has the obligation to purchase the
remaining outstanding Series B Preferred Stock at $13.70 per
share. Payment terms under the agreement are as follows:
<TABLE>
<CAPTION>
Due Number
Date Of Shares Amount
---- --------- ------
<S> <C> <C>
January 02, 1996 18,248 $ 250,000
January 15, 1996 18,248 250,000
February 10, 1996 3,650 50,000
February 29, 1996 54,409 745,400
March 31, 1996 47,445 650,000
</TABLE>
67
<PAGE>
The share commitments through January 15, 1996, were
purchased by individuals who are not associated or affiliated
with the Company or any of the Company's directors or executive
officers, and the February 10 and 29, 1996, share commitments
were purchased by the Company, primarily with funds obtained
under its credit facility with Den norske. Upon purchase, the
Board of Directors retired 58,059 shares of Series B Preferred
Stock.
The share commitment due March 31, 1996, was amended to
allow the holders of the Series B Preferred Stock to convert
25,679 shares of the Series B Preferred Stock into 100,000
shares of common stock. The remaining commitment of 21,676
shares of Series B Preferred Stock for $296,932 was extended by
mutual consent to April 30, 1996. The Company subsequently
allowed the holders of the Series B Preferred Stock to convert
the remaining 21,676 shares of Series B Preferred Stock into
75,410 shares of common stock.
LOAN TRANSACTIONS:
In March, 1995, in order to meet a corporate commitment, the
Company borrowed monies totalling $500,000 from Douglas L.
Hawthorne and Rick G. Avare, who are officers/directors of the
Company. The funds bore interest at the rate of 10% per annum
and were due in full in July, 1996. The note was secured by gas
properties, and the individuals had the option to convert their
note to a working interest position in wells to be drilled
offshore Louisiana. In July, 1995, the related parties converted
their note to a 13.75% working interest in two wells. Pursuant
to an agreement between the parties, the Company had the right to
repurchase the working interest position on or before September
30, 1995. The Company exercised the right, as amended, to
repurchase the working interest position for $750,000 plus a
3.875% overriding royalty interest prior to September 30, 1995.
In 1996, the Company purchased Mr. Avare's overriding royalty
interest in the Ship Shoal 150 B-3 well for $125,000. The
Company is considering repurchasing the remaining overriding
royalty interests of Messrs. Hawthorne and Avare in the Ship
Shoal 150 wells based upon the fair market value of the wells
utilizing the 1996 year-end reserve report. However, no action
has been taken by the Board of Directors at this time.
In July, 1995, in order to fulfill a loan commitment to
Century, an aggregate of $400,000 was funded by the directors of
the Company. These monies were paid to the Company in exchange
for a $400,000 participation in an existing note from Century
Offshore Management Corporation ("Century") to the Company in the
amount of $6,500,000 (the Century Note). Due to the fact that
the Century Note was relinquished as a part of the Company's
acquisition of the South Timbalier 148 properties, the Company
and the directors simultaneously agreed to terminate the
directors' participation in the Century Note. The Company
remains liable to the directors for the outstanding balance at
December 31, 1996, of $240,000 plus interest thereon at the rate
of 22% per annum. Pursuant to the Termination of Participation
Agreements entered into between the Company and the directors,
payment of the balance is due in monthly installments of $12,352,
beginning April 1, 1997, with the final payment due March 1,
1999.
68
<PAGE>
In April, 1996, the Company entered into agreements with two
individuals, one of whom is Douglas L. Hawthorne, a director of
the Company. Under the agreements, the individuals each paid to
the Company $250,000 in exchange for the right to participate on
a pro rata basis in the Century Note. The agreement allowed the
individuals to receive a combined payment of $500,000 plus
interest at 22% from the Century Note repayment. The agreements
assigned the payments from the portion of the Century Note which
was not pledged to the Company's primary lender. The proceeds
received by the Company under the agreements, which reduced the
carrying value of the Century Note, were used to fund additional
development activities in the Gulf Coast region. In July, 1996,
the Century Note was canceled as part of the consideration paid
by the Company to Century for the purchase of certain oil and gas
properties. The Company and the individuals simultaneously
agreed to terminate the individuals' participation in the Century
Note in exchange for the Company assuming the liability to repay
$500,000 to the individuals plus interest thereon at the rate of
22% per annum. The Company has paid the non-affiliated
individual in full. Pursuant to the Termination of Participation
Agreement entered into between the Company and Mr. Hawthorne,
payment terms of the balance include $50,000 due and payable by
March 10, 1997, and the remaining balance due in monthly
installments of $10,293 beginning April 1, 1997, with the final
payment due March 1, 1999.
PRIMA TRANSACTIONS:
Under the letter agreement dated October 17, 1994, the
Company had the right to acquire a 10% equity interest in Settle
for $4,000,000 (the "Settle Securities"). Due to the fact that
the Company was not in a position to acquire this equity
interest, the agreement was subsequently amended to permit a
third party to acquire the Settle Securities. The funds used to
effect the foregoing acquisition were borrowed by the third party
from Prima, a limited liability company in which Rick G. Avare
owns a 20% interest. The third party is also a member of Prima
and the principal stockholder of Southern Resources, Inc. Prima,
in turn, borrowed the funds it used to provide the foregoing loan
from a bank in Lexington, Kentucky. The Company has not
guaranteed nor is it obligated on the Prima bank loan, and the
bank will look solely to Prima and its members for payments. In
connection with this transaction, the Company entered into a Put
Agreement (the "Put Agreement") dated March 15, 1995, with Prima
which provided that in the event Prima obtained title to the
Settle Securities, Prima had the right to require the Company to
purchase the Settle Securities for $4,000,000, payable in cash
and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a new agreement, as amended, providing for the Company's
ability to call the Settle Securities from the third party member
of Prima for $4,000,000 has been substituted therefor (the "Call
Agreement"). The Call Agreement also provides for non-refundable
monthly installments of $31,250 (as originally required under the
Put Agreement) until such time as a total of $1,000,000 has been
advanced under the Call Agreement (including payments previously
made under the Put Agreement). In the event the Company elects
to call the Settle Securities, the advance payments shall be
credited toward the purchase price. Additionally, a $500,000
69
<PAGE>
certificate of deposit held as collateral for Prima's loan was
liquidated by the Company and the funds were advanced to Prima
under the potential Call Agreement. Prima used the $500,000 to
purchase shares of Series B Preferred Stock from a third party,
which Preferred Stock it subsequently converted to common stock.
In the event the Company exercises the Call option, the $500,000
will be credited towards the purchase. The Company's right to
call the Settle Securities begins January 15, 1997, and ends
December 31, 1997.
EXECUTIVE OFFICERS:
In September, 1995, the Company bought out a production
platform use agreement from Century Oil, which is owned by
Jonathan Rudney. Mr. Rudney was President of the Company from
January 1, 1996, until May 15, 1996.
Mr. Rudney is also a 25% owner of Century, with whom the
Company is jointly developing certain offshore and onshore
properties in the Gulf Coast region (see Item 2, Description of
Property, Gulf Coast Properties in General, of this Report on
Form 10-KSB, regarding the Joint Operating Agreement between the
Company and Century).
The Company has paid or accrued fees of approximately
$68,000 and $44,000 during 1995 and 1994, respectively, to
Advisory Services, Inc., for consulting and administrative
services. Advisory Services is owned by Andrew J. Kacic who is a
former officer and director of the Company.
Effective December 31, 1995, the Company entered into a
severance agreement with Andrew J. Kacic, its former President,
Chief Executive Officer and founder, who resigned effective
December 31, 1995. Under the agreement, Mr. Kacic was paid
$85,000 and will receive the sum of $10,000 per month through
March 31, 1998. In addition, the executive surrendered 515,590
CSO common stock options which had exercise prices of between
$6.00 and $8.00 per share and expired between March 18, 2003, and
February 1, 2005. In return, Mr. Kacic received 643,987 common
stock options under a Severance Plan, at an exercise price of
$4.00 per share and which expire on November 29, 2000. He also
retained 46,203 CSO common stock options immediately exercisable,
previously issued to him at $3.50 per share and which expire on
October 11, 2002. The Company also agreed to provide for payment
of an office lease through October, 1996, and assigned a one
percent (1%) gross overriding royalty interest in certain oil and
gas properties. As a result of the agreement, the Company
recognized a charge against income of $371,346 and accrued a
severance liability at December 31, 1995, of $286,346 based on an
eight percent (8%) discount factor. As of December 31, 1996,
this amount had been reduced to $142,293.
70
<PAGE>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) and (a)(2) Financial Statements and Financial Statement
Schedules.
See "Index to Financial Statements" set forth on page
F-1.
(a)(3) Exhibits:
The following Exhibits are either attached hereto or
incorporated herein by reference:
EXHIBIT
NUMBER DESCRIPTION
3.9 By-Laws of the Company, as amended
(incorporated by reference to Exhibit 3.2 to
the Registrant's Form 10-SB).
3.10 Restated Certificate of Incorporation filed
with the Delaware Secretary of State
(incorporated by reference to Exhibit 3.10 to
the Company's Form 8-K filed December 12,
1996).
4.1 Specimen Common Stock Certificate
(incorporated by reference to Exhibit 4.1 to
the Registrant's Form 10-SB).
4.2 Specimen Preferred Stock Certificate
(incorporated by reference to Exhibit 4.2 to
the Registrant's Form 10-SB).
4.3 Specimen Warrant Certificate and Agreement
(incorporated by reference to Exhibit 4.3 to
the Registrant's Form 10-SB).
4.5 Warrant Agreement dated as of October 6, 1994
between American Resources of Delaware, Inc.
and GFL Ultra Fund, Ltd. (incorporated by
reference to Exhibit 4.1 to the Registrant's
September, 1994, Form 10-QSB).
4.6 Warrant Agreement dated as of November 10,
1994 between American Resources of Delaware,
Inc. and GFL Ultra Fund, Ltd. (incorporated
by reference to Exhibit 4.6 to the
Registrant's Form 10-KSB for the fiscal year
ended December 31, 1994 [the "1994 Form 10-
KSB"]).
71
<PAGE>
4.9 Specimen copy of the Convertible Debenture
Purchase Agreement, with exhibits.
(incorporated by reference to Exhibit 4.9 to
the Company's Form 8-K filed December 12,
1996).
4.10 Specimen copy of a Stock Option Agreement
between American Resources of Delaware, Inc.,
and Corporate Relations Group, Inc.
(incorporated by reference to Exhibit 4.10 to
the Company's Form 8-K filed December 12,
1996).
4.11 Copy of a Stock Option Agreement between
American Resources of Delaware, Inc., and
World Capital Funding, Inc. (incorporated by
reference to Exhibit 4.11 to the Company's
Form 8-K filed December 12, 1996).
10.1 Asset Purchase Agreement between American
Resources of Delaware, Inc. and Southern Gas
Company, Inc. dated October 6, 1993 (incorporated
by reference to Exhibit 1.1 to the Registrant's
Form 8-K filed October 19, 1993).
10.2 Amendment to Asset Purchase Agreement by and
between American Resources of Delaware, Inc. and
Southern Gas Company, Inc. dated February 28, 1994
(incorporated by reference to Exhibit 2.8 to the
Registrant's Form 10-KSB for the fiscal year ended
December 31, 1993 [the "1993 Form 10-KSB"]).
10.3 Purchase Agreement between Southern Gas Holding
Company, Inc. and American Resources of Delaware,
Inc. dated February 24, 1994 (incorporated by
reference to Exhibit 2.2 to the Company's Form 8-
K filed March 14, 1994).
10.4 Amended and Restated Credit Agreement between
American Resources of Delaware, Inc., Southern Gas
Company of Delaware, Inc., and Bank One, Texas,
National Association dated February 24, 1994
(incorporated by reference to Exhibit 4.1 to the
Registrant's Form 8-K filed on March 14, 1994).
10.5 Form of First Amendment to Amended and Restated
Credit Agreement between American Resources of
Delaware, Inc., Southern Gas Company of Delaware,
Inc., and Bank One, Texas, National Association
(incorporated by reference to Exhibit 10.5 to the
Registrant's 1994 Form 10-KSB).
72
<PAGE>
10.6 Promissory Note in the amount of $7,375,000
from American Resources of Delaware, Inc. to
Bank One, Texas, National Association dated
February 24, 1994 (incorporated by reference
to Exhibit 4.2 to the Registrant's Form 8-K
filed on March 14, 1994).
10.7 Form of Promissory Note from American
Resources of Delaware, Inc. to Bank One,
Texas, National Association (incorporated by
reference to Exhibit 10.7 to the Registrant's
1994 Form 10-KSB).
10.8 Note Repurchase Agreement dated February 24,
1994, between American Resources of Delaware,
Inc. and National American Life Insurance
Company of Pennsylvania (incorporated by
reference to Exhibit 4.3 to the Registrant's
Form 8-K filed on March 14, 1994).
10.9 Promissory Note dated March 24, 1994 in the
amount of $3,500,000 from Southern Gas
Holding Company et al. to National American
-- --
Life Insurance Company of Pennsylvania (assumed by the
Company) (incorporated by reference to Exhibit 4.4 to
the Company's Form 8-K filed on March 14, 1994).
10.10 Stockholders Agreement dated February 28,
1994, between American Resources of
Delaware, Inc., Southern Gas Holdings, Inc.,
Southern Gas Company, Inc., and Sequa Capital
Corporation (incorporated by reference to
Exhibit 4.5 to the Registrant's Form 8-K
filed on March 14, 1994).
10.11 Settlement Agreement dated February 28, 1994,
among Sequa Capital Corporation, Southern Gas
Company, Inc., Southern Gas Holding, Inc.,
Wright Resources, Inc., Natural Resource
Services, Inc. and Leonard K. Nave
(incorporated by reference to Exhibit 4.6 to
the Registrant's Form 8-K filed on March 14,
1994).
10.12 Shareholders Agreement among Leonard K. Nave,
American Resources of Delaware, Inc., and Don
Peracchi dated February 7, 1994 (incorporated
by reference to Exhibit 4.10 to the
Registrant's 1993 Form 10-KSB).
10.13 Agreement among Southern Gas Holding Company,
Inc., Gems Resources, Inc., and American
Resources of Delaware, Inc., dated February
21, 1994 (incorporated by reference to
Exhibit 4.11 to the Registrant's 1993 Form
10-KSB).
73
<PAGE>
10.14 Employment and Stock Option Agreement of
Andrew J. Kacic dated March 19, 1993
(incorporated by reference to Exhibit 10.1
the Registrant's Form 10-SB).
10.15 Registration Rights Agreement dated March 19,
1993 between the Registrant and Andrew J.
Kacic (incorporated by reference to Exhibit
10.2 to the Registrant's Form 10-SB).
10.16 Employment and Stock Option Agreement dated
March 19, 1993 between the Registrant and
Charles A. Smith, III dated March 19, 1993
(incorporated by reference to Exhibit 10.3 to
the Registrant's Form 10-SB).
10.17 Registration Rights Agreement between the
Company and Charles A. Smith, III dated March
19, 1993 (incorporated by reference to
Exhibit 10.4 to the Registrant's Form 10-SB).
10.18 Employment and Stock Option Agreement dated
March 19, 1993 between the Registrant and
Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.5 to the Registrant's
Form 10-SB).
10.19 Registration Rights Agreement dated March 19,
1993 between the Registrant and Douglas L.
Hawthorne (incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-SB).
10.20 Agreement between the Company and Oilfield
Investments Ltd. dated March 8, 1994
(incorporated by reference to Exhibit 10.28
to the Registrant's 1993 Form 10-KSB).
10.21 Office Lease dated June 1, 1986 between Nave
Properties and Southern Gas (assigned to
SGCD) (incorporated by reference to Exhibit
10.36 to the Registrant's 1993 Form 10-KSB).
10.22 Incentive Stock Option Plan (incorporated by reference
to Exhibit 10.0 to the Registrant's September, 1994,
Form 10-QSB).
10.23 Letter Agreement dated October 17, 1994
between the Registrant and Settle Oil and Gas
Company (incorporated by reference to Exhibit
10.1 to the Registrant's September, 1994,
Form 10-QSB).
74
<PAGE>
10.24 Letter Agreement dated December 30, 1994,
between the Registrant and Settle Oil and Gas
Company (incorporated by reference to Exhibit
10.24 to the Registrant's 1994 Form 10-KSB).
10.25 Letter Agreement dated January 12, 1995,
between the Registrant and Settle Oil and Gas
Company (incorporated by reference to Exhibit
10.25 to the Registrant's 1994 Form 10-KSB).
10.26 Letter Agreement dated February 20, 1995,
between the Registrant and Settle Oil and Gas
Company (incorporated by reference to Exhibit
10.26 to the Registrant's 1994 Form 10-KSB).
10.27 Agreement and Assignment dated September 30,
1994, between Petroleum Exploration and
Transmission, Inc. and Southern Gas Company
of Delaware, Inc. (incorporated by reference
to Exhibit 10.27 to the Registrant's 1994
Form 10-KSB).
10.28 Mortgage and Security Agreement dated
September 30, 1994, between Southern Gas
Company of Delaware, Inc. and Melinda C.
Provo (incorporated by reference to Exhibit
10.28 to the Registrant's 1994 Form 10-KSB).
10.29 Promissory Note dated September 30, 1994 from
Southern Gas Company of Delaware, Inc. to
Melinda C. Provo (incorporated by reference
to Exhibit 10.29 to the Registrant's 1994
Form 10-KSB).
10.30 Form of Put Agreement dated March 15, 1995,
between American Resources of Delaware, Inc.
and Prima Capital, L.L.C. (incorporated by
reference to Exhibit 10.30 to the
Registrant's 1994 Form 10-KSB).
10.31 Form of Limited Liability Company Agreement
of Crescent Turnkey & Engineering, L.L.C.
dated December 30, 1994 (incorporated by
reference to Exhibit 10.31 to the
Registrant's 1994 Form 10-KSB).
75
<PAGE>
10.32 Domestic Turnkey Drilling Contract --
Offshore dated December 30, 1994, between
American Resources of Delaware, Inc. and
Crescent Turnkey Engineering, L.L.C.
(incorporated by reference to Exhibit 10.32
to the Registrant's 1994 Form 10-KSB).
10.33 Purchase and Sale Agreement dated effective
October 31, 1994, between American Resources
of Delaware, Inc. and Settle Oil and Gas
Company (incorporated by reference to Exhibit
10.33 to the Registrant's 1994 Form 10-KSB).
10.34 Subscription Agreement for 22% Secured
Convertible Note of Settle Oil and Gas
Company dated November 28, 1994, and executed
by American Resources of Delaware, Inc.
(incorporated by reference to Exhibit 10.34
to the Registrant's 1994 Form 10-KSB).
10.35 22% Secured Convertible Note dated November
28, 1994, in the amount of $5,000,000 from
Settle Oil and Gas Company to American
Resources of Delaware, Inc. (incorporated by
reference to Exhibit 10.35 to the
Registrant's 1994 Form 10-KSB).
10.36 Assignment of Convertible Promissory Note
dated December 30, 1994, from American
Resources of Delaware, Inc. to Southern Gas
Company of Delaware, Inc. (incorporated by
reference to Exhibit 10.36 to the
Registrant's 1994 Form 10-KSB).
10.37 Assignment of Convertible Promissory Note
dated December 30, 1994, from Southern Gas
Company of Delaware, Inc. to Century Offshore
Management Corporation, Settle Oil and Gas
Company, and Southern Gas Company of
Delaware, Inc. (incorporated by reference to
Exhibit 10.37 to the Registrant's 1994 Form
10-KSB).
10.38 Mortgage and Security Agreement dated
November 15, 1994, among Settle Oil and Gas
Company, Century Offshore Management
Corporation and American Resources of
Delaware, Inc. (incorporated by reference to
Exhibit 10.38 to the Registrant's 1994 Form
10-KSB).
76
<PAGE>
10.39 Put Agreement dated as of March 15, 1995,
between the American Resources of Delaware,
Inc., Southern Gas Company of Delaware, Inc.
And Prima Capital, LLC (incorporated by
reference to Exhibit 10.0 to the Registrant's
Form 10-QSB for the quarterly period ended
March 31, 1995 [the "March, 1995, Form 10-
QSB"]).
10.40 $500,000 Promissory Note from Southern Gas
Company of Delaware, Inc. In favor of Rick G.
Avare, Douglas L. Hawthorne Retirement Plan-
001, Dtd. February 22, 1995, and Douglas L.
Hawthorne (incorporated by reference to
Exhibit 10.1 to the Registrant's March, 1995,
Form 10-QSB).
10.41 Agreement dated January 31, 1995, between
Southern Gas Company of Delaware, Inc., Rick
G. Avare, Douglas L. Hawthorne Retirement
Plan-001, Dtd. February 22, 1995, and Douglas
L. Hawthorne (incorporated by reference to
Exhibit 10.2 to the Registrant's March, 1995,
Form 10-QSB).
10.42 Amendment to Put Agreement dated as of July
1, 1995, between American Resources of
Delaware, Inc., Southern Gas Company of
Delaware, Inc. and Prima Capital, LLC
(incorporated by reference to Exhibit 10.0 to
the Registrant's Form 10-QSB for the
quarterly period ended June 30, 1995 [the
"June, 1995, Form 10-QSB"]).
10.43 $900,000 Promissory Note from Settle
(incorporated by reference to Exhibit 10.1 to
the Registrant's June, 1995, Form 10-QSB).
10.44 Participation agreement dated as of July 25,
1995, between American Resources of Delaware,
Inc. And its Board of Directors (incorporated
by reference to Exhibit 10.2 to the
Registrant's June, 1995, Form 10-QSB).
10.45 Stock Option Agreement dated May 5, 1995,
between American Resources of Delaware, Inc.
and GFL Ultra Fund Limited (incorporated by
reference to Exhibit 10.3 to the Registrant's
June, 1995, Form 10-QSB).
10.46 First Amendment to Stock Option Agreement
dated June 19, 1995, between American
Resources of Delaware, Inc. And GFL Ultra
Fund Limited (incorporated by reference to
Exhibit 10.4 to the Registrant's June, 1995,
Form 10-QSB).
77
<PAGE>
10.47 Second Amendment to Stock Option Agreement
dated July 13, 1995, between American
Resources of Delaware, Inc. and GFL Ultra
Fund Limited (incorporated by reference to
Exhibit 10.5 to the Registrant's June, 1995,
Form 10-QSB).
10.48 Promissory Note of September 28, 1995, to Den
norske Bank, A.S. (incorporated by reference
to Exhibit 10.0 to the Registrant's Form 10-
QSB for the quarterly period ended September
30, 1995 [the "September, 1995, Form 10-QSB"]).
10.49 Amendment to Settle Note (incorporated by
reference to Exhibit 10.1 to the Registrant's
September, 1995, Form 10-QSB).
10.50 Asset Purchase Agreement of December 27,
1995, by and between American Resources of
Delaware, Inc., Southern Gas Co. of Delaware,
Inc., Arakis Energy Corporation and AKS
Energy Corporation (incorporated by reference
to Exhibit A to the Registrant's Form 8-K
filed on March 12, 1996).
10.51 Joint Development Agreement of February 26,
1996, between Southern Gas Co. of Delaware,
Inc. and AKS Energy Corporation (incorporated
by reference to Exhibit B to the Registrant's
Form 8-K filed on March 12, 1996).
10.52 Joint Operating Agreement of December 1,
1994, between Century Offshore Management
Corporation, Settle Oil and Gas Company and
Southern Gas Co. of Delaware, Inc.
(incorporated by reference to Exhibit 10.52
to the Registrant's Form 10-KSB for the
fiscal year ended December 31, 1995 [the
"1995 Form 10-KSB"]).
10.53 Stock Purchase Agreement of January 2, 1996,
as amended, between American Resources of
Delaware, Inc. and GFL Ultra Fund, Ltd.
(incorporated by reference to Exhibit 10.53
to the Registrant's 1995 Form 10-KSB).
10.54 Purchase Agreement of December 29, 1995,
between Southern Gas Holding Company and
Southern Gas Co. Of Delaware, Inc.
(incorporated by reference to Exhibit 10.54
to the Registrant's 1995 Form 10-KSB).
78
<PAGE>
10.55 Severance Agreement of November 30, 1995,
between American Resources of Delaware, Inc.
and Andrew J. Kacic. (incorporated by
reference to Exhibit 10.55 to the
Registrant's 1995 Form 10-KSB).
10.56 Second Amendment to Put Agreement of October
4, 1995, between American Resources of
Delaware, Inc., Prima Capital, LLC, and
Southern Gas Co. of Delaware, Inc.
(incorporated by reference to Exhibit 10.56
to the Registrant's 1995 Form 10-KSB).
10.57 Specimen Change of Control Agreement
(incorporated by reference to Exhibit 10.57
to the Registrant's Form 8-K filed December
12, 1996).
10.58 Employment Agreement with Rick G. Avare
(incorporated by reference to Exhibit 10.58
to the Registrant's Form 8-K filed December
12, 1996).
10.59 Specimen copy of the Indemnity Agreement with
Officers and Directors (incorporated by
reference to Exhibit 10.59 to the
Registrant's Form 8-K filed December 12,
1996).
10.60 Lead Generation Agreement with Corporate
Relations Group, Inc. (incorporated by
reference to Exhibit 10.60 to the
Registrant's Form 8-K filed December 12,
1996).
10.61 Asset Purchase Agreement of December 27,
1995, by and between American Resources of
Delaware, Inc., Southern Gas Co. of Delaware,
Inc., Arakis Energy Corporation and AKS
Energy Corporation (incorporated by reference
to Exhibit A to the Registrant's Form 8-K
filed on March 12, 1996).
10.62 Joint Development Agreement of February 26,
1996, between Southern Gas Co. of Delaware,
Inc. and AKS Energy Corporation (incorporated
by reference to Exhibit B to the Registrant's
Form 8-K filed on March 12, 1996).
10.63 Participation Agreement of April 12, 1996,
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.3 to the Registrant's
Report on Form 10-QSB for the quarterly
period ended March 31, 1996).
79
<PAGE>
10.64 Production Payment Conveyance of May 22,
1996, by and between Southern Gas Co. of
Delaware, Inc., and Austin Energy Funding
Partners (incorporated by reference to
Exhibit 10.4 to the Registrant's Report on
Form 10-QSB for the quarterly period ending
June 30, 1996).
10.65 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation dated
July 3, 1996, for the acquisition of the
South Timbalier 148 properties (incorporated
by reference to Exhibit A to the Registrant's
Form 8-K filed on July 18, 1996).
10.66 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation dated
July 3, 1996, for the acquisition of the
contractual rights for salt dome properties
(incorporated by reference to Exhibit B to
the Registrant's Form 8-K filed on July 18,
1996).
10.67 Capitalization Agreement and Termination of
Purchase and Sale Agreement by and between
Southern Gas Co. of Delaware, Inc., American
Resources of Delaware, Inc. and Century
Offshore Management Corporation, dated August
31, 1996 (incorporated by reference to
Exhibit A to the Registrant's Form 8-K/A
filed on September 16, 1996).
10.68 Amendment to South Timbalier Purchase and
Sale Agreement by and between Southern Gas
Co. of Delaware, Inc., American Resources of
Delaware, Inc. and Century Offshore
Management Corporation, dated August 31, 1996
(incorporated by reference to Exhibit B to
the Registrant's Form 8-K/A filed on
September 16, 1996).
10.69 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne, dated September 30,
1996 (incorporated by reference to Exhibit
10.9 to the Registrant's Form 10-QSB for the
quarterly period ending September 30, 1996
[the "September, 1996, Form 10-QSB"]).
80
<PAGE>
10.70 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and The Kandy Limited Partnership, dated
September 30, 1996 (incorporated by reference
to Exhibit 10.10 to the Registrant's
September, 1996, Form 10-QSB).
10.71 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Donald A. Schellpfeffer, dated September
30, 1996 (incorporated by reference to
Exhibit 10.11 to the Registrant's September,
1996, Form 10-QSB).
10.72 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Southern Gas Holding Company, Inc., dated
September 30, 1996 (incorporated by reference
to Exhibit 10.12 to the Registrant's
September, 1996, Form 10-QSB).
10.73 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne Retirement Plan-001
Dtd. 2/22/95, dated September 30, 1996
(incorporated by reference to Exhibit 10.13
to the Registrant's September, 1996, Form 10-
QSB).
10.74 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne, dated December 29,
1996.*
10.75 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and The Kandy Limited Partnership, dated
December 29, 1996.*
10.76 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Donald A. Schellpfeffer, dated December
29, 1996.*
10.79 Termination of Participation Agreement by and
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne Retirement Plan-001
Dtd. 2/22/95, dated December 29, 1996.*
21.0 Subsidiaries of American Resources of
Delaware, Inc. (incorporated by reference to
Exhibit 21.0 to the Registrant's 1994 Form
10-KSB).
81
<PAGE>
23.1 Consent of KPMG Peat Marwick, LLP.*
23.2 Consent of Netherland, Sewell & Associates, Inc.*
23.3 Consent of Richard M. Russell & Associates, Inc.*
* Filed herewith
(b) Reports on Form 8-K:
On December 12, 1996, the Company voluntarily filed a
Form 8-K reporting recent developments.
82
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FOR THE YEARS ENDED
-------------------
DECEMBER 31, 1996 AND 1995
--------------------------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FOR THE YEARS ENDED
-------------------
DECEMBER 31, 1996 AND 1995
--------------------------
TABLE OF CONTENTS
-----------------
Page No.
--------
Independent Auditors' Report F-1
Consolidated Balance Sheet F-2
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders' Equity F-5
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
Oil and Gas Producing Activities (Unaudited) F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
American Resources of Delaware, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheet of
American Resources of Delaware, Inc. and Subsidiary (the Company)
as of December 31, 1996 and the related consolidated statements
of operations, stockholders' equity and cash flows for the years
ended December 31, 1996 and 1995. These consolidated financial
statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial
position of American Resources of Delaware, Inc. and Subsidiary
as of December 31, 1996, and the results of their operations and
their cash flows for the years ended December 31, 1996 and 1995
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
March 17, 1997
F-1
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 1996
-----------------
ASSETS
------
<TABLE>
Current assets:
<S> <C>
Cash and cash equivalents $ 353,419
Accounts and notes receivable:
Trade 6,597,418
Notes 253,053
Related party 195,630
Interest 1,526
Allowance for doubtful accounts (10,212)
-----------
7,037,415
Deferred tax asset 16,319
Prepaid expenses and other 344,850
-----------
Total current assets 7,752,003
-----------
Oil and gas properties, at cost
(successful efforts method) 48,136,759
Property and equipment, at cost 11,754,079
-----------
59,890,838
Less accumulated depreciation,
depletion and amortization (6,150,632)
-----------
Net property and equipment 53,740,206
-----------
Other assets:
Investment in unconsolidated subsidiaries 485,610
Call advance 1,500,000
Notes receivable 432,576
Deferred financing costs, net 439,695
Other assets 487,554
-----------
Total other assets 3,345,435
-----------
Total assets $64,837,644
===========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED BALANCE SHEET (CONTINUED)
--------------------------------------
DECEMBER 31, 1996
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
Current liabilities:
<S> <C>
Current installments of long-term debt:
Third parties $ 6,317,918
Related parties 195,365
Accounts payable:
Trade 4,588,194
Related party 9,524
Interest 263,622
----------
4,861,340
Accrued severance liabilities 112,689
Accrued taxes payable 195,467
Unearned revenue 807,632
Accrued expenses and other 373,622
----------
Total current liabilities 12,864,033
Long-term debt, excluding current maturities:
Third parties 19,127,786
Related parties 294,635
Unearned revenue 2,821,611
Deferred tax liability 3,331,968
Severance liability 29,604
Put warrants 250,000
Stockholders' equity:
Series 1993 8% convertible preferred stock,
par value and liquidation preference $12.00
per share; 1,000,000 shares authorized;
268,851 shares issued and outstanding 2,181,819
Series B 6% Junior Convertible Preferred Stock,
par value $.00001 per share; liquidation preference
$10.00 per share; 1,000,000 shares authorized;
0 shares issued and outstanding -
Convertible securities, representing approximately
2,850,000 shares of common stock 4,997,554
Common stock, par value $.00001 per share;
20,000,000 shares authorized; 6,520,296
shares issued and outstanding 65
Additional paid-in capital 16,453,899
Treasury stock at cost, representing
10,480 shares of common stock (52,400)
Retained earnings 2,537,070
----------
Total stockholders' equity 26,118,007
----------
Commitments and contingencies -
Total liabilities and stockholders' equity $64,837,644
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
<CAPTION>
1996 1995
---- ----
Revenues:
<S> <C> <C>
Production $ 8,540,569 $ 3,198,987
Transportation 1,070,647 731,522
Marketing 22,712,996 12,486,676
Other 714,961 797,114
---------- ----------
33,039,173 17,214,299
---------- ----------
Expenses:
Production 1,402,389 765,285
Transportation 315,458 144,378
Marketing 22,269,876 11,829,798
Other 206,457 104,685
Depreciation, depletion and
amortization 3,309,159 1,577,770
---------- ----------
27,503,339 14,421,916
---------- ----------
5,535,834 2,792,383
Administrative expenses 2,324,008 2,364,389
Deferred compensation and employee
severance expense - 1,488,259
Operating income (loss) 3,211,826 (1,060,265)
---------- ----------
Other income (expense):
Settlement income - 2,189,616
Interest income 801,633 1,081,276
Interest expense (2,440,453) (1,151,950)
Gain (loss) on sale of assets (174,645) 97,278
Impairment of stock investment - (869,000)
Other 152,334 122,511
---------- ----------
(1,661,131) 1,469,731
---------- ----------
Income before taxes 1,550,695 409,466
Income tax expense (638,940) (143,313)
---------- ----------
Net income $ 911,755 $ 266,153
========== ==========
Per common share:
Primary $0.13 --
==== ==
Weighted average number of common
shares and common share
equivalent outstanding 6,548,409 4,067,677
========= =========
Fully diluted $0.12 --
==== ==
Weighted average number of common
shares and common share
equivalent outstanding 6,895,446 5,722,432
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
<CAPTION>
6% Junior
Common Stock 8% Preferred Stock Preferred Stock
--------------- ------------------------------------- ---------------
Number Number Discount Number Additional
of Par Convertible of Par On Net of Par Paid-in Retained
Shares Value Securities Shares Value Preferred Value Shares Value Capital Earnings Total
------ ----- ----------- ------ ----- --------- ----- ------ ----- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1994 3,085,433 $31 - 336,224 4,034,688 (1,306,114) 2,728,574 575,000 6 11,068,023 1,988,224 15,784,858
Issuance of
common stock,
net of
$106,761 in
offering
costs 411,666 4 - - - - - - - 1,128,232 - 1,128,236
Issuance of
common stock
dividend 95,308 1 - - - - - - - 292,718 (292,719) -
Conversion
of preferred
stock to
common
stock 1,716,803 17 - (67,373) (808,475) 261,720 (546,755) (458,000) (5) 546,743 - -
Issuance of
common stock
for placement
fees in connection
with 6% Series B
Preferred Stock
issue 110,000 1 - - - - - - - 611,874 - 611,875
Placement fees
netted against
capital
raised in
Series B - - - - - - - - - (611,875) - (611,875)
Common stock
issued for
professional
fees 20,000 0 - - - - - - - 56,200 - 56,200
Amortization of
deferred
professional
fees - - - - - - - - - 1,253,943 - 1,253,943
Warrants
exercised
for common
stock 100,005 1 - - - - - - 262,531 - 262,532
Net
income - - - - - - - - - - 266,153 266,153
--------- ---- - ------- --------- ---------- --------- -------- - ---------- --------- ----------
Balance,
December
31, 1995 5,539,215 $55 - 268,851 3,226,213 (1,044,394) 2,181,819 117,000 1 14,608,389 1,961,658 18,751,922
========= === = ======= ========= ========== ========= ======= = ========== ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
<CAPTION>
6% Junior
Common Stock 8% Preferred Stock Preferred Stock
--------------- ----------------------------- ---------------
Number Number Net of Number Additional
of Par Convertible of Par Discount of Par Paid-in Treasury Retained
Shares Value Securities Shares Value Value Shares Value Capital Stock Earnings Total
------ ----- ----------- ------ ----- --------- ------ ----- ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1995 5,539,215 $55 - 268,851 3,226,213 2,181,819 117,000 1 14,608,389 - 1,961,658 18,751,922
Conversion
of preferred
stock to
common
stock 224,822 2 - - - - (58,941) - (10,002) - - (10,000)
Issuance of
common stock
dividend 27,535 - - - - - - - 70,174 - (70,174) -
Issuance of
common stock
and put
warrants in
connection
with
property
acquisition 225,000 2 - - - - - - 907,173 - - 907,175
Issuance of
common stock,
net of
placement
costs 330,000 4 - - - - - - 899,996 - - 900,000
Purchase and
retirement of
Series B
Preferred
Stock - - - - - - (58,059) (1) (536,730) - (266,169) (802,900)
Purchase of
10,480 shares
of common
stock - - - - - - - - - (52,400) - (52,400)
Issuance of
convertible
securities,
net of
issuance
costs - - 4,997,554 - - - - - - - - 4,997,554
Issuance of
common stock
in connection
with convertible
securities 173,724 2 - - - - - - 539,998 - - 540,000
Stock
registration
costs - - - - - - - - (25,099) - - (25,099)
Net
income - - - - - - - - - - 911,755 911,755
--------- --- --------- ------- --------- --------- ------- - ---------- ------- --------- ----------
Balance,
December
31, 1996 6,520,296 $65 4,997,554 268,851 3,226,213 2,181,819 - - 16,453,899 (52,400) 2,537,070 26,118,007
========= === ========= ======= ========= ========= ======= = ========== ======= ========= ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Operating activities:
Net income $ 911,755 266,153
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization 3,419,945 1,641,412
Amortization and write-off of
deferred professional fees - 1,310,146
Deferred income taxes 613,281 180,000
(Gain) loss on sale of assets 174,645 (97,278)
(Gain) on sale of claims - (2,189,616)
Deferred revenue (557,391) (147,721)
Proceeds from production payment 4,147,300 -
Equity in earnings of
unconsolidated subsidiary (172,618) (281,517)
Impairment of stock investment - 869,000
Changes in operating assets
and liabilities:
(Increase)in accounts receivable (4,033,122) (1,400,501)
(Increase) in prepaid expenses
and other (148,244) (44,140)
Increase in accounts payable 2,128,369 232,287
Increase (decrease) in accrued
taxes payable 92,349 (69,523)
Increase in prepaid public
relations contract (550,000) -
Increase in accrued expenses
and other 61,159 84,569
----------- -----------
Net cash provided by operating
activities 6,087,428 353,271
----------- -----------
Investing activities:
Purchases of property and equipment (20,131,323) (8,312,288)
Proceeds from sales of property
and equipment 549,860 88,500
Issuance of notes receivable - (8,155,800)
Payments on notes receivable 731,781 239,155
Investment in unconsolidated subsidiary - 82,274
Investment in call advance - (1,500,000)
Proceeds from sale of claims receivable - 4,235,701
Other (1,732) (168,933)
----------- -----------
Net cash used in investing activities (18,851,414) (13,391,391)
----------- -----------
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Financing activities:
Proceeds from borrowings from
related parties $ 250,000 545,000
Proceeds from other borrowings 17,613,068 22,412,109
Payments on borrowings from
related parties (250,000) (309,000)
Payments on other borrowings (10,869,210) (10,859,021)
Increase in deferred financing and
convertible issuance costs (462,446) (434,164)
Issuance of common shares, net 900,000 1,128,236
Issuance of convertible securities 6,000,000 -
Purchase of 6% Junior Preferred Stock (802,900) -
Purchase of treasury stock (52,400) -
Proceeds from exercise of warrants - 262,529
Other (35,100) -
----------- -----------
Net cash provided by financing
activities 12,291,012 12,745,689
----------- -----------
Decrease in cash (472,974) (292,431)
Cash and cash equivalents at
beginning of year 826,393 1,118,824
----------- -----------
Cash and cash equivalents at
end of year $ 353,419 826,393
=========== ===========
Supplementary cash flow information:
Interest paid $2,182,727 1,238,699
========== =========
Income taxes paid $15,090 180,890
====== =======
</TABLE>
NON-CASH TRANSACTIONS:
In connection with the acquisition of certain gas properties and
related equipment, the Company issued 225,000 shares of common
stock and 225,000 common stock put warrants with a combined value
of $1,157,175. The Company also paid cash and assumed certain
obligations in connection with the acquisition, which was
consummated on February 26, 1996 (see Note 2).
In connection with the acquisition of certain gas properties, the
Company extinguished a $6.5 million note receivable as partial
consideration.
The Company acquired 58,059 shares of the outstanding 6% Junior
Preferred Stock for $802,900 during 1996. Upon resolution of the
Board of directors, the shares were retired.
The Company declared stock dividends and issued 27,535 and 95,308
shares of common stock to holders of the Series 1993 and Series B
Preferred Stock during 1996 and 1995, respectively.
During 1996, 58,941 shares of Series B Preferred Stock were
converted into a total of 224,822 shares of common stock. During
1995, 67,373 shares of Series 1993 and 458,000 shares of Series B
Preferred Stock were converted into a total of 1,716,803 shares
of common stock.
In connection with the issuance of 4% convertible securities in
the aggregate principal amount of $6,000,000, the Company issued
173,724 shares of common stock at an average value of $3.11 per
share as partial consideration for placement fees.
During 1995, the Company issued 20,000 shares of common stock
under a two year consulting agreement at a value of $56,200.
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1996 AND 1995
--------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) GENERAL
American Resources of Delaware, Inc. (ARI), a Delaware
corporation organized on August 14, 1992, was formed to
acquire the assets and assume certain liabilities of
Standard Oil and Exploration of Delaware, Inc. (SOE)
pursuant to SOE's Chapter 11 Bankruptcy Joint Plan of
Reorganization which was consummated effective April
22, 1993.
ARI and its wholly-owned subsidiary, Southern Gas
Company of Delaware, Inc. (the Subsidiary), are
involved in the production, gathering, purchasing,
processing, transporting and selling of natural gas
primarily in the State of Kentucky. The Subsidiary has
expanded its production efforts through its involvement
in the development of prospects offshore Louisiana in
the Gulf of Mexico. These activities are considered to
be one business segment for financial reporting
purposes.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the
accounts of ARI and its Subsidiary, collectively
referred to as the Company. All significant
intercompany balances and transactions have been
eliminated in consolidation.
Certain reclassifications have been made to prior year
financial statements to conform with the current year
presentation.
(c) CASH EQUIVALENTS
For purposes of the statement of cash flows, the
Company considers any liquid investments with an
original maturity of three months or less as a cash
equivalent.
(d) OIL AND GAS PROPERTIES
The Company uses the successful efforts method of
accounting for its oil and gas operations. The costs
of unproved leaseholds are capitalized pending the
results of exploration efforts. Significant unproved
leasehold costs are assessed periodically, on a
property-by-property basis, and a loss is recognized to
the extent, if any, that the cost of the property has
been impaired. The costs of individually insignificant
unproved leaseholds estimated to be nonproductive are
amortized over estimated holding periods based on
historical experience. As of January 1, 1996, the
Company began assessing the impairment of capitalized
costs of proved oil and gas properties and other long-
lived assets in accordance with Statement of Financial
Accounting Standards No. 121 (SFAS No. 121),
"Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of". Under this
method, the Company generally assesses its oil and gas
properties on a depletable unit basis utilizing its
current estimate of future revenues and operating
expenses. In the event net undiscounted cash flow is
less than the carrying value, an impairment loss is
recorded based on estimated fair value, which would
consider discounted future net cash flows. Prior to
January 1, 1996, if the net capitalized costs exceeded
the estimated future undiscounted after tax net cash
flows, based on year end prices, from proved oil and
gas reserves, such excess costs would have been charged
to expense. Exploratory dry holes and geological and
(Continued)
F-9
<PAGE>
geophysical charges on exploratory projects are
expensed. Depletion of proved leaseholds and
amortization and depreciation of the costs of all
development and successful exploratory drilling are
provided by the unit-of-production method based upon
estimates of proved and proved-developed oil and gas
reserves, respectively, for each property. The
estimated costs of dismantling and abandoning offshore
site remediation and significant onshore facilities are
provided currently using the unit-of-production method;
such costs for other onshore facilities are
insignificant and are expensed as incurred.
Significant changes in the various estimates discussed
above could affect the financial position and results
of operations of the Company.
On sale of an entire interest in an unproved property
for cash or cash equivalent, gain or loss on the sale
is recognized, taking into consideration the amount of
any recorded impairment if the property had been
assessed individually. If a partial interest in the
unproved property is sold, the amount received is
treated as a reduction of the cost of the interest
retained.
(e) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Expenditures
representing additions or improvements are capitalized.
Maintenance and repairs are charged to expense as
incurred. Upon retirement or disposition, costs and
accumulated depreciation are removed from the accounts
and the resulting gain or loss is recognized in income.
The Company adopted SFAS No. 121 effective January 1,
1996, and no impairments have been recognized as a
result of the adoption.
Depreciation and amortization is provided by the
straight-line method over the estimated useful lives of
the assets.
(f) GAS MARKETING ACTIVITIES
In the conduct of its marketing activities, the Company
enters into both long-term and short-term contracts to
purchase and/or sell at a future date specified
quantities of products at specified prices. Settlement
of such contracts may occur through the purchase, sale
and/or exchange of products in the open market or from
production. Resulting gains or losses, if any, are
recorded in the month of delivery. During 1995, the
Company entered into an exclusive marketing arrangement
with Southern Resources, Inc. ("SRI"), a third party
company, wherein the Company is the exclusive supplier
of all natural gas to be sold by SRI. Under the
agreement, after deduction of certain expenses, the
Company is entitled to receive not less than 50% of the
sales margin obtained. Included in the statements of
operations is the Company's 50% participation in SRI's
marketing revenues and expenses. In return, the
Company provides accounting services, cash management
and credit for SRI.
(g) DRILLING REVENUES
At times, the Company performs drilling and completion
services for drilling programs, primarily under turnkey
drilling contracts in which it utilizes third party
contract drillers. Revenue is recognized upon the
completion of the initial producing zone.
(h) PIPELINE TRANSPORTATION REVENUE
Revenue from the transportation of gas is recognized on
the accrual basis as products are transported.
(i) DEFERRED FINANCING COSTS
In connection with obtaining a credit facility, the
Company has capitalized third party costs directly
associated with the closing thereof. The costs are
being amortized on a straight-line
(Continued)
F-10
<PAGE>
basis over the period of the credit facility, which is
seven years. For the years ended December 31, 1996 and
1995, approximately $101,000 and $57,000, respectively,
have been amortized to expense in connection with these
costs.
(j) INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
Investments in companies which the Company has less
than a 20% interest are carried at cost. Dividends
received are included in other income. Dividends
received in excess of the Company's proportionate share
of earnings are applied as a reduction of the cost of
the investment.
Investments in companies which the Company has a 20% to
50% interest are carried at cost, adjusted for the
Company's proportionate share of their undistributed
earnings or losses.
(k) INCOME TAXES
The Company follows SFAS No. 109 which requires the
asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing assets
and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the
years in which those temporary differences are expected
to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the
period that includes the enactment date.
(l) STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," (FASB 123)
encourages, but does not require companies to record
compensation cost for stock-based employee compensation
plans at fair value. The Company has elected to
continue to account for stock-based compensation using
the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," (APB Opinion 25) and related
interpretations. Accordingly, compensation cost for
stock options issued to employees and directors is
measured as the excess, if any, of the quoted market
price of the Company's stock at the date of grant over
the amount an employee must pay to acquire the stock.
(m) INCOME PER SHARE
Net income (loss) per common share was computed after
consideration of dividend requirements on preferred
stock, using the weighted average number of shares
outstanding during each of the years presented.
Outstanding stock options, convertible securities and
warrants are common stock equivalents and have been
considered when the effect is dilutive. Earnings per
share for 1995 was restated to reflect the impact of
preferred stock dividends.
(n) USE OF ESTIMATES
Management of the Company has made a number of
estimates and assumptions relating to the reporting of
assets and liabilities and disclosure of contingent
assets and liabilities to prepare these consolidated
financial statements in conformity with generally
accepted accounting principles. Actual results could
differ from the estimates.
(2) BUSINESS COMBINATIONS
On February 26, 1996, the Company acquired gas properties,
equipment and pipelines from AKS Energy Corporation (AKS).
As consideration for the assets, the Company paid $2,909,010
(Continued)
F-11
<PAGE>
in cash, assumed $125,000 of AKS's severance tax
obligations, issued 225,000 shares of the Company's common
stock at a value of $3.59 per share and issued warrants with
an estimated value of $348,525 to purchase an additional
225,000 shares of the Company's common stock with an
exercise price of $5.00 per share and an expiration date of
December 31, 1998. AKS has the right to put 50,000 shares
of Common Stock to the Company for $5.00 per share anytime
between June 30, 1997, and June 30, 1999. In December,
1995, the Company advanced $1,000,000 to AKS as partial
consideration for the acquisition which was included in gas
properties. The cash included in the purchase price was
made available from borrowings under the Company's credit
facility with its primary lender.
The Company also entered into an agreement to participate
with AKS in the joint development of leases in Southeastern
Kentucky gas fields wherein the Company would have the right
to earn 50% of the remaining undeveloped acreage. However,
the joint development agreement was terminated in November,
1996, when the Company decided to focus its development
efforts and capital into the Gulf Coast region.
On July 3, 1996, the Company acquired proved developed and
undeveloped oil and gas properties, equipment and pipelines
from Century Offshore Management Company (Century) located
offshore Louisiana. As consideration for the assets, the
Company paid $4,000,000 in cash, issued an Installment Note
in the amount of $4,000,000 payable in two equal
installments on August 31, 1996, and September 30, 1996 (the
Installment Note provided for payment at the Company's
option of cash or the issuance of restricted common stock of
the Company at $3.00 per share), extinguished an existing
note from Century to the Company in the amount of $6,500,000
(Century Note) and assumed existing liens against the assets
in the approximate amount of $1,051,000. The parties
subsequently entered into an extension agreement, dated
September 24, 1996, whereby Century extended the due date of
the installment payments until the earlier of the completion
of funding of the Company's private placement or five days
after written notice from Century. As of December, 1996,
the Company's private placement (see Note 6) was completed
and the Company had completed the funding of the installment
payments. The foregoing transaction was effected pursuant
to an Asset Purchase Agreement entered into by and between
the Company, the Subsidiary and Century, dated July 3, 1996.
Also on July 3, 1996, the Company, the Subsidiary and
Century entered into an Asset Purchase Agreement whereby the
Subsidiary acquired certain rights and interests in
undeveloped properties from Century located onshore
Louisiana. On August 31, 1996, the parties entered into a
Capitalization and Termination of Purchase and Sale
Agreement (Capitalization Agreement), which effectively
terminated the July 3, 1996, agreement and provided for the
Company, through the Subsidiary, to acquire between 5.6% and
9.5% contract rights from Century in three undeveloped
properties located onshore Louisiana. As consideration for
these rights, the Company has paid $4,509,000 in cash.
Assuming the acquisitions had occurred on January 1, 1995,
the following unaudited proforma operating data gives effect
to the acquisitions for the years ended December 31, 1995
and 1996:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Total revenue $33,894,000 18,602,000
========== ==========
Net income (loss) from operations $3,418,000 (1,628,000)
========= =========
Primary earnings (loss) per share $.11 ($.39)
=== ====
Fully diluted earnings per share $.10 -
=== ===
</TABLE>
Estimated primary and fully diluted earnings per share are
based on 6,548,409 and 6,895,446 shares, respectively,
outstanding for 1996 and 4,292,677 shares outstanding for
1995.
(Continued)
F-12
<PAGE>
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
ESTIMATED
USEFUL LIVES
(YEARS)
-----------
<S> <C> <C>
Pipeline support facilities 7-15 $ 8,061,570
Field equipment 7 3,367,820
Other 3-7 324,689
----------
$11,754,079
==========
</TABLE>
For the years ended December 31, 1996 and 1995, depreciation
expense on property and equipment was $877,526 and $702,492,
respectively.
(4) OIL AND GAS PROPERTIES
A summary of oil and gas properties follows:
<TABLE>
<S> <C>
Proved properties - Developed $38,257,168
Proved properties - Undeveloped 4,193,257
Unproved properties 5,686,334
----------
$48,136,759
==========
</TABLE>
In 1996, the Company entered into a Purchase and Sale
Agreement with a corporation to sell certain of the
Company's gas properties and related pipeline and equipment
for approximately $590,000. The gas properties sold
consisted primarily of certain leases and pipelines located
in Clay County, Kentucky, including the PXT Pipeline which
was purchased in 1994. As a result of sale, the Company has
recognized a loss of approximately $153,000 during 1996.
In 1995, the Company sold all of its interest in a Michigan
producing field which had a net book value of approximately
$91,000 for $188,500, resulting in a gain of approximately
$97,500.
For the years ended December 31, 1996 and 1995, depletion
expense on oil and gas properties was $2,431,633 and
$881,085, respectively, or $0.80 and $0.64 per mcf
equivalent.
(5) Long-term Debt
A summary of long-term debt follows:
<TABLE>
<S> <C>
Note payable to Den norske Bank AS., payable
in monthly installments, commencing
April 1, 1996, through February 1, 2002,
with interest payable monthly commencing
November 1, 1995, at prime plus 1% per
annum, secured by oil and gas properties,
equipment and notes receivable. $25,083,000
Call Agreement payable, original balance
of $1,000,000 payable in monthly
installments of $31,250 commencing
April 1, 1995, due November 1997
(see Note 8). 274,000
Notes payable to related parties, interest
payable at 22%, in connection with
Participation Agreement. 240,000
Note payable to related party interest
payable at 22%, in connection with
Participation Agreement. $ 250,000
(Continued)
F-13
<PAGE>
Note payable, original balance of $165,000
payable on January 15, 1998; secured by
an interest in oil and gas properties. 49,696
Other notes 39,008
------------
25,935,704
Less - Current portion (6,513,283)
----------
Long-term debt $19,422,421
==========
</TABLE>
On September 28, 1995, the Company entered into a
$20,000,000 revolving credit agreement through February 1,
2002, with Den norske Bank AS. (Den norske). On August 7,
1996, the revolving credit facility was increased to
$30,000,000. As of December 31, 1996, the borrowing base
under the revolving credit facility was $25,083,000.
Additional borrowings under the credit facility are
dependent upon a redetermination of the borrowing base,
which is primarily dependent on the value of the mortgaged
properties as determined under Den norske's internal lending
procedures. Reductions on the credit facility are also
dependent on the borrowing base. At December 31, 1996,
monthly principal reductions are $500,000. The borrowing
base will be redetermined semi-annually on each October 1
and April 1 prior to February 1, 2002.
The proceeds were used primarily to pay the outstanding
balances under a previous credit facility with Bank One
Texas, N.A. and fund development activities in the Louisiana
Gulf Coast area.
In February, 1997, the credit agreement was amended to
reduce the interest rate to the prime rate plus 1/2% per
annum, and establish a $2,500,000 development facility which
can be drawn upon by the Company to develop properties. The
development facility matures on March 1, 1998, and carries
an interest rate of prime plus 2% per annum.
Under the credit agreement with Den norske, the Company is
required to maintain certain financial ratios relating to
debt coverage ratio, current ratio, tangible net worth,
general and administrative expenses and quarterly interest
ratio. At December 31, 1996, the Company was in compliance
with the required financial covenants.
The Company has a working capital deficit of approximately
$5.1 million at December 31, 1996. Based upon the Company's
current reserve estimates, the Company believes its cash
flow from operations will be sufficient to meet the required
approximate $6.0 million current maturities due under the
Den norske credit facility.
In July, 1995, in order to fulfill a loan commitment to
Century, an aggregate of $400,000 was funded by the
directors of the Company. These monies were paid to the
Company in exchange for a $400,000 participation in the
Century Note. Due to the fact that the Century Note was
relinquished as a part of the Company's acquisition of the
South Timbalier 148 properties (see Note 2), the Company and
the directors simultaneously agreed to terminate the
directors' participation in the Century Note. The Company
remains liable to the directors for the outstanding balance
at December 31, 1996, of $240,000 plus interest thereon at
the rate of 22% per annum. Pursuant to the Termination of
Participation Agreements entered into between the Company
and the directors, payment of the balance is due in monthly
installments of $12,352, beginning April 1, 1997, with the
final payment due March 1, 1999.
In April, 1996, the Company entered into agreements with two
individuals, one of whom is a director of the Company.
Under the agreements, the individuals each paid to the
Company $250,000 in exchange for the right to participate on
a pro rata basis in the Century Note. The agreement allowed
the individuals to receive a combined payment of $500,000
plus interest at 22% from the Century Note repayment. The
agreements assigned the payments from the portion of the
Century Note which was not pledged to the Company's primary
lender. The proceeds received by the Company under the
agreements, which reduced the carrying value of the Century
Note, were used to fund additional development activities in
the Gulf Coast region. In July, 1996, the Century Note was
canceled as part of the consideration paid by the Company to
Century for the purchase of certain oil and gas properties
(see Note 2). The Company and the individuals
(Continued)
F-14
<PAGE>
simultaneously agreed to terminate the individuals'
participation in the Century Note in exchange for the
Company assuming the liability to repay $500,000 to the
individuals plus interest thereon at the rate of 22% per
annum. The Company has paid the non-affiliated individual
in full. Pursuant to the Termination of Participation
Agreement entered into between the Company and the director,
payment terms of the balance include $50,000 due and payable
by March 10, 1997, and the remaining balance due in monthly
installments of $10,293 beginning April 1, 1997, with the
final payment due March 1, 1999.
Maturities of long-term debt as of December 31, 1996, are as
follows:
<TABLE>
<C> <C>
1997 $6,513,283
1998 6,263,175
1999 6,073,502
2000 6,002,744
2001 1,083,000
----------
$25,935,704
==========
</TABLE>
(6) CONVERTIBLE SECURITIES PRIVATE PLACEMENT
In 1996, the Company privately placed 4% convertible
securities in the aggregate principal amount of $6,000,000
($4,997,554 net of placement costs) with a required
conversion of one year from date of issuance. The
securities are convertible at the option of the holders into
shares of common stock valued at the lesser of (1) the
closing bid price of the common stock as reported on NASDAQ
on the date of issuance of the security, or (2) 75% of the
average closing bid prices of the common stock as reported
on NASDAQ for the five trading days prior to the date of
conversion (the Conversion Price). Securities that are not
converted prior to their maturity dates automatically
convert on their maturity dates. Interest accrues on the
convertible securities until the Company receives notice of
the conversion. If a security is not converted within five
business days after the Company receives notice of the
conversion, the Company is obligated to pay liquidated
damages to the security holder for each $100,000 principal
amount of securities sought to be converted in the amount of
$100 for each of the first two days, $200 for each of the
next two days, $300 for each of the next two days, $400 for
each of the next two days, and $500 per day thereafter until
the conversion shares are delivered. Prior to the receipt
of a conversion notice, the Company has the right to redeem
any security for a cash amount equal to 125% of the
principal amount of the security, plus unpaid accrued
interest, if the conversion price is below the closing bid
price of the common stock as reported on NASDAQ on the date
the security was issued. The closing bid prices when the
securities were issued ranged from $3.00 to $3.50. Upon
giving notice of its intention to redeem a security, the
security holder's right to convert the security is
suspended, but the Company must pay an additional 1% per
month in cash on a pro rata basis until the full redemption
price is paid. If the full redemption price is not paid
within ten business days after the redemption notice is
given, the security holder has the right to convert the
security into shares of common stock. A security holder may
fax a notice to the Company requiring the Company to
declare, by faxed notice within twenty-four hours after
receipt of the notice from the security holder, whether the
Company intends to effect a redemption within the following
five business days. If the Company does not respond during
said twenty-four hour period, the Company is precluded from
redeeming that security holder's securities during said five
day period. The Company agreed to register the shares of
common stock into which the securities are convertible
within 120 days after demand is made by a security holder.
As of March 1, 1997, securities totaling $2,273,483 have
been converted into 1,038,946 shares of common stock.
In conjunction with the issuance of the convertible
securities, the Company paid placement fees and related
issuance costs of $1,002,446, inclusive of 173,724
restricted shares of common stock to World Capital Funding,
Inc., Denver Colorado, or to persons designated by it, with
piggy-back registration rights, in partial payment of the
placement agent's fee, and issued five year options to World
Capital Funding, Inc., or to persons designated by it, to
purchase 100,000 shares of common stock at $4.50 per share.
The shares of common stock into which the securities are
convertible, together with the placement fee shares to World
Capital Funding, Inc., or its designees, and the shares
(Continued)
F-15
<PAGE>
underlying the options issued to World Capital Funding,
Inc., or its designees, have been registered under an S-3
Registration Statement which was effective on January 23,
1997.
(7) INDEPENDENT CONTRACTOR AGREEMENTS
On November 27, 1996, the Company entered into a five year
corporate relations agreement with Corporate Relations
Group, Inc. ("CRG"), Winter Park, Florida, to assist the
Company with its shareholder relations. As consideration
for the agreement, the Company paid CRG $550,000 cash and
granted CRG a one year option to purchase 100,000 shares of
common stock for $3.00 per share, a two year option to
purchase 100,000 shares of common stock for $3.60 per share,
a three year option to purchase 100,000 shares of common
stock for $4.20 per share, a five year option to purchase
100,000 shares of common stock for $4.80 per share, and a
five year option to purchase 100,000 shares of common stock
for $6.00 per share. The options have a fair value of
approximately $1.27 per share which will be expensed over
the term of the agreement.
During 1995, the Company terminated consulting contracts
with Corporate Communications Network, Inc. and Bridge Water
Financial which resulted in a charge against income of
$1,116,913 which represented the unamortized balance of the
contracts.
(8) CENTURY/SETTLE TRANSACTIONS
On October 17, 1994, the Company entered into a letter
agreement, as amended, with Settle Oil and Gas Company
(Settle), a privately owned corporation involved in the
development of lease blocks in the federal waters of the
Gulf of Mexico offshore Louisiana (as discussed below,
Settle was subsequently merged into Century as the result of
Century's reorganization under Chapter 11 of the Bankruptcy
Code). Under the agreement, the Company initially agreed to
loan Settle $5,000,000 to fund Settle's working interest
share of certain drilling and completion costs in an
offshore lease block. On August 18, 1995, the loan was
increased to $6,500,000. The loan bore interest at 22%
payable quarterly and was secured by certain offshore
properties. The Company had advanced $6,500,000 of the
commitment at December 31, 1995. However, in order to
fulfill its commitment, it was necessary for $400,000 to be
funded by certain of the directors and officers of the
Company pursuant to a Participation Agreement entered into
by the parties. At the time the final installment on the
commitment was due, the majority of the Company's resources
were being directed towards its Gulf Coast development,
thereby necessitating the Participation Agreement. The
Participation Agreement granted the directors and officers
the benefits of the underlying loan documents with Settle
and, therefore, they participated proportionately in the
costs, expenses and revenues generated from said loan. On
July 3, 1996, the Company extinguished the loan as partial
consideration for the acquisition of the properties securing
the loan (see Note 2). The related $400,000 funded under
the Participation Agreement has been assumed by the Company
(see Note 5).
The agreement also provides the Company with the right of
first refusal to purchase and/or market Settle's natural gas
which is not bound to currently existing contracts.
Under a separate consulting agreement with Settle, the
Company has provided restructuring advice and assistance in
negotiations with creditors of Century, a company which was
affiliated with Settle through common ownership and was
preparing a reorganization plan under Title XI of the United
States Bankruptcy Act. On July 21, 1995, the reorganization
plan was approved by the Bankruptcy Court and resulted in
the merger of Settle into Century. Any and all references
to Settle subsequent to July 21, 1995, refer to the merged
entity. The Company recognized $250,000 in other income for
the year ended December 31, 1995 under the agreement.
The Company has also negotiated directly with various
creditors of Century. As a result of these negotiations,
the Company was able to purchase various mechanics and
materialmen lien claims totaling $1,537,482 for a cost of
$806,872. In June, 1995, the Company sold these claims to
an independent investment group for $1,100,000, resulting in
a gain on sale of $339,201.
The Company also purchased a $9,368,479 unsecured claim from
a major creditor of Century for $1,250,000. In January,
1995, the Company sold to Settle $3,750,000 of the claim for
$1,250,000, with these funds then being used by the Company
to fund a portion of their $5,000,000 commitment to Settle.
On March 16, 1995, Settle exercised its option to purchase
(Continued)
F-16
<PAGE>
the remainder of the receivables and assumed all obligations
of the original purchase agreement for an additional
$1,850,415, which represented $.3333 for each $1.00 of the
remaining claim. As a result, the Company recognized a gain
on sale of $1,850,415.
In September, 1995, the Company bought out a production
platform use agreement from Century Oil Company, which is
owned by an individual who was an officer of the Company
from January 1, 1996 through May 15, 1996, in the offshore
Louisiana waters for $1,800,000 in connection with their
joint development of an oil and gas lease block. The
purchase was funded with proceeds from the Den norske credit
facility. The individual is also 25% owner of Century, with
whom the Company is jointly developing certain offshore and
onshore properties in the Gulf Coast region.
Under the letter agreement dated October 17, 1994, the
Company had the right to acquire a 10% equity interest in
Settle for $4,000,000 (the Settle Securities). Due to the
fact that the Company was not in a position to acquire this
equity interest, the Agreement was subsequently amended to
permit a third party to acquire the Settle Securities. The
funds used to effect the foregoing acquisition were borrowed
by the third party from Prima Capital, LLC (Prima), a
limited liability company of which an officer/director of
the Company is a member. The third party is also a member
of Prima and the principal stockholder of Southern
Resources, Inc. Prima, in turn, borrowed the funds it used
to provide the foregoing loan from a bank in Lexington,
Kentucky. The Company has not guaranteed, nor is it
obligated on, the Prima bank loan and the bank will look
solely to Prima and its members for payments. In connection
with this transaction, the Company entered into a Put
Agreement with Prima, dated March 15, 1995, which provided
that, in the event Prima obtained title to the Settle
Securities, Prima had the right to require the Company to
purchase the Settle Securities for $4,000,000 (the Prima
Put) payable in cash and common stock.
The Put Agreement with Prima was terminated in July, 1995,
and a new agreement providing for the Company's ability to
call the Settle Securities from the third party member of
Prima for $4,000,000 has been substituted therefor (the Call
Agreement). The Call Agreement also provides for
non-refundable monthly installments of $31,250 (as
originally required under the Prima Put) until such time as
a total of $1,000,000 has been advanced under the Call
Agreement (including payments previously made under the
Prima Put). In the event the Company elects to call the
Settle Securities, the advance payments shall be credited
toward the purchase price. The Company's right to call the
Settle Securities begins January 15, 1997, and ends December
31, 1997. Additionally, a $500,000 Certificate of Deposit
held as collateral for Prima's loan was liquidated by the
Company and the funds were advanced to Prima under the
potential Call Agreement. Prima used the $500,000 to
purchase shares of Series B Preferred Stock from a third
party which it subsequently converted to common stock. In
the event the Company exercises the Call Agreement, the
$500,000 will be credited towards the purchase.
On July 3, 1995, the Company made an unsecured working
capital loan to Settle in the amount of $900,000. At
December 31, 1996, the outstanding balance on the loan is
$183,053. The loan bears interest at the rate of 10% per
annum and is payable in 21 equal monthly installments of
$46,894 commencing on July 31, 1995, and on the last day of
each month thereafter until paid in full.
(9) INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES
On December 30, 1994, the Company invested in the formation
of a new Limited Liability Company (the LLC) whose purpose
is to perform contract drilling services for the Company and
third parties. The LLC was capitalized at $250,000 with the
Company providing $110,000 for a 44% ownership. Century and
certain of Century's officers and directors are also members
of the LLC, with a combined ownership interest of 45%.
Summary combined information of the investee company at
December 31, 1996, follows (unaudited):
(Continued)
F-17
<PAGE>
<TABLE>
<S> <C>
Current assets $1,287,000
Current liabilities 297,775
---------
Working capital 989,225
Property and equipment, net 13,536
Other assets 9,621
---------
Members' capital $1,012,382
=========
Revenues $3,347,805
Expenses 3,099,425
---------
Net income $ 248,380
=========
</TABLE>
In 1995, the Company reduced its investment in a privately
held insurance company which was being carried on the cost
method at $869,000 to zero. The reduction was due to a
continued deterioration of the financial position of the
insurance company and was recognized as a charge against
income in 1995.
(10) UNEARNED REVENUE
On May 22, 1996, the Company conveyed an approximate 2.2
billion cubic feet (bcf) volumetric production payment in
Appalachian wells recently purchased from AKS through a
facility sponsored by William Energy Services Company, a
subsidiary of the Williams Companies, Inc. and structured by
NationsBank. The Company received $4,300,000 ($4,147,300
after related costs), for the production payment, which has
an anticipated six year term. Of the funds received,
$2,500,000 was used to reduce the Company's credit facility
with its primary lender. The Company used the remainder of
the funds for working capital and further acquisition and
development activities in the Gulf Coast region.
As a result of the transaction, the Company has recorded
unearned revenue which will be recognized as the required
volumes are delivered under the production payment
conveyance.
(11) INCOME TAXES
The provision for income taxes for the years ended December
31, 1996 and 1995 is summarized as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Current tax expense (benefit):
Federal - (45,087)
State $ 25,659 8,400
------- -------
$ 25,659 (36,687)
======= =======
Deferred tax expense:
Federal $537,591 161,760
State 75,690 18,240
------- -------
$613,281 180,000
======= =======
</TABLE>
The Company's effective tax rate (41%) in 1996 is above the
U.S. federal income tax rate of 34% because of state income
taxes (net of federal benefit) of 4% and other of 3%.
The Company's effective tax rate (35%) in 1995 is above the
U.S. federal income tax rate of 34% because of state income
taxes (net of federal benefit) (4%) and the increase in
valuation allowance and other (3%).
(Continued)
F-18
<PAGE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1996, are presented as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $2,587,142
Severance pay 56,917
Basis differences in unconsolidated
investee 27,103
Allowance for doubtful accounts 15,410
Other 18,424
---------
Total gross deferred tax
assets 2,704,996
Less - Valuation allowance (640,786)
---------
Net deferred tax assets 2,064,210
---------
Deferred tax liabilities:
Basis differences in oil and
gas properties $4,315,445
Basis differences in property
and equipment 565,182
Basis differences in notes
payable 498,337
Other 895
---------
Deferred tax liabilities 5,379,859
---------
Net deferred tax liability $3,315,649
=========
Current deferred tax asset $16,319
======
Non-current deferred tax
liability $3,331,968
=========
</TABLE>
In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be
realized. The Company has established a valuation allowance
for such deferred tax assets to the extent such amounts are
not likely to be utilized to offset existing deferred tax
liabilities reversing in the same period.
At December 31, 1996, the Company has approximately
$6,143,000 and $8,309,000 of net operating loss (NOL)
carryforwards available to offset future taxable income for
federal and state purposes, respectively. The carryforwards
expire from 1998 to 2011.
The Tax Reform Act of 1986 significantly limits the amount
of NOL available to offset future taxable income when a
change of ownership occurs. Such a limitation of the NOL in
a given year could prevent the Company from realizing the
full benefit of the NOL within the 15 year statutory limit.
The Company had one change in ownership prior to 1996. The
Company believes that the limitations, if any, would not
have a significant impact on the consolidated financial
statements.
(12) FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and
estimated fair values of the Company's financial instruments
at December 31, 1996. The Company has no derivative
financial instruments. Financial Accounting Standards Board
Statement No. 107, "Disclosures About Fair Value of
Financial Instruments," defines the fair value of a
financial instrument as the amount at which the instrument
could be exchanged in a current transaction between willing
parties.
<TABLE>
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 353,419 353,419
Trade accounts receivable 6,587,206 6,587,206
Related party receivables 195,630 195,630
Notes receivable 685,629 685,629
</TABLE>
(Continued)
F-19
<PAGE>
<TABLE>
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial liabilities:
Trade accounts payable 4,588,194 4,588,194
Related party payable 9,524 9,524
Accrued expenses 975,004 975,004
Long-term debt 25,935,704 25,995,015
</TABLE>
The carrying amounts shown in the table are included in the
consolidated balance sheet under the indicated captions.
The following methods and assumptions were used to estimate
the fair value of each class of financial instruments:
CASH AND CASH EQUIVALENTS, TRADE ACCOUNTS RECEIVABLE,
RELATED PARTY RECEIVABLES, CURRENT INSTALLMENTS OF
LONG-TERM DEBT, TRADE ACCOUNTS PAYABLE, RELATED PARTY
PAYABLE AND ACCRUED EXPENSES: The carrying amounts
approximate fair value because of the short maturity of
those instruments.
NOTES RECEIVABLE: The fair value is determined as the
present value of expected cash flows discounted at the
interest rate currently offered by the Company, which
management believes approximates rates which would be
offered by local lending institutions for loans of
similar terms to companies with comparable credit risk.
LONG-TERM DEBT: The fair value of the Company's
long-term debt is estimated by discounting the future
cash flows of each instrument at rates currently
offered to the Company for similar debt instruments of
comparable maturities by the Company's bankers.
(13) COMMON STOCK PRIVATE PLACEMENT
In June, 1996, the Company completed a private placement of
$1,000,000 ($900,000 net of offering costs). The private
placement consisted of 100 units, each unit consisting of
3,300 shares of common stock and one Class A Common Stock
Purchase Warrant (Class A Warrant). Each Class A Warrant
entitles the holder to purchase 1,650 shares of the
Company's common stock at an exercise price of $4.00 per
share. The Class A Warrants are immediately exercisable and
expire October 8, 1999.
In November, 1995, the Company completed a private placement
of $1,235,000 ($1,128,236 net of offering costs). The
private placement consisted of 41.17 units, each unit
consisting of 10,000 shares of common stock and one 1995
Class A Warrant and one 1995 Class B Warrant. Each warrant
entitles the holder to purchase 5,000 shares of the
Company's common stock at $3.50 and $5.00 per share,
respectively. The warrants expire in October, 1999. The
Company has a call right on the 1995 Class A Warrants and
the 1995 Class B Warrants at share prices of $5.50 and
$7.00, respectively.
In 1996, the Company filed a Registration Statement,
effective in October, 1996, which registered the shares of
common stock sold in the private placement and the shares of
common stock for which the Class A Warrants and the 1995
Class A Warrants and 1995 Class B Warrants may be exercised.
(14) STOCKHOLDERS' EQUITY
The Company has authorized one million (1,000,000) shares of
Series 1993 Preferred Stock and two million (2,000,000)
shares of Series Preferred Stock subject to designation by
the Board of Directors:
(Continued)
F-20
<PAGE>
Series 1993 Preferred Stock is convertible into one
share of common stock with a liquidation preference of
$12 per share. Dividends are payable semiannually at
the rate of 8% per share based upon the total number of
shares outstanding. Outstanding at December 31, 1996
are 268,851 shares.
Series B Preferred Stock, designated by the Board of
directors, is convertible into common stock based on a
conversion factor of $10.00 divided by 73% of the
common stock's closing bid price on the conversion
date. The Series B Preferred Stock has a liquidation
preference of $10.00 per share, but is junior to the
Series 1993 Preferred Stock. Dividends are payable
quarterly at the rate of 6% in cash or common stock, at
the Company's option. There are 1,000,000 shares
authorized and zero shares outstanding at December 31,
1996.
The Company paid dividends on the Series 1993 Preferred
Stock and Series B Preferred Stock through the issuance of
27,535 and 95,308 shares of common stock in 1996 and 1995,
respectively. Also during 1996, the Company purchased and
retired 58,059 shares of Series B Preferred Stock at $13.70
per share and allowed the holders of 21,676 Series B
Preferred Stock to convert the shares into 75,410 shares of
common stock.
On January 15, 1997, the Board of Directors declared
dividends payable in common stock on January 22, 1997, to
holders of the Series 1993 Preferred Stock totaling 10,754
shares.
The Company has registered on a Form S-8 registration
statement, as amended, 650,000 shares of common stock to be
issued pursuant to its 1994 Employee Stock Compensation Plan
(ESC). The ESC provides for stock compensation through the
award of the Company's common stock to persons whose
experience, ability and services are considered valuable.
At December 31, 1996, 271,000 shares have been issued under
the ESC at prices ranging from $2.81 to $8.00 per share.
The Company has reserved and registered under a Form S-8
registration statement 2,000,000 shares of common stock to
be issued pursuant to a 1994 Compensatory Stock Option Plan
(CSO). The CSO is a nonstatutory stock option plan intended
as an employment incentive to aid in attracting and
retaining in the employ or service of the Company persons of
experience and ability and whose services are considered
valuable.
The Company applies APB Opinion 25 in accounting for the CSO
and non-plan options. Accordingly, no compensation cost has
been recognized for the CSO and non-plan options granted in
1996 or 1995. Had compensation cost been determined on the
basis of fair value pursuant to FASB 123, net income and
earnings per share would have been reduced as follows:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
NET INCOME
----------
As reported $911,755 266,153
======== =======
Proforma $464,427 ($2,467,170)
======= =========
PRIMARY EARNINGS PER SHARE
--------------------------
As reported $0.13 --
==== ==
Proforma $0.06 ($0.68)
==== ====
FULLY DILUTED EARNINGS PER SHARE
--------------------------------
As reported $0.12 --
==== ==
Proforma $0.06 --
==== ==
</TABLE>
The proforma deficit of approximately $2.5 million in 1995
results primarily from the grant of 2,349,306 CSO and non-
plan options, all of which were 100% vested as of the date
of grant.
The fair value of each option granted is estimated on the
grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Dividend yield -- --
Risk-free interest rate 5.73% 6.0%
Expected life 4 YRS. 5 YRS.
Expected volatility 69.47% 69.47%
</TABLE>
(Continued)
F-21
<PAGE>
A summary of the status of CSO and non-plan options granted
to employees, consultants, officers and directors for the
purchase of the Company's common stock follows:
<TABLE>
<CAPTION>
CSO Non-Plan
--- --------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31,
1995 1,484,410 $5.42 1,226,320 $3.78
Granted 498,500 4.50 600,000 4.35
Exercised - - - -
Terminated (39,000) (6.45) (400,000) (3.38)
--------- ----- --------- -----
Balance, December 31,
1996 1,943,910 $5.16 1,426,320 $4.14
========= ===== ========= =====
Weighted average fair
value of options granted
during 1996 $1.66 per share
====
</TABLE>
At December 31, 1996, 1,778,243 CSO options and all non-plan
options were fully vested. The 165,667 remaining CSO options
will vest over the next two years.
<TABLE>
<CAPTION>
CSO Non-Plan
--- --------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31,
1994 877,014 $6.68 - -
Granted 1,122,986 5.05 1,226,320 $3.78
Exercised - - - -
Terminated (515,590) (6.75) - -
--------- ----- --------- ----
Balance, December 31,
1995 1,484,410 $5.42 1,226,320 $3.78
========= ==== ========= ====
Weighted average fair
value of options granted
during 1995 $2.32 per share
=====
</TABLE>
The following is a summary of the status of CSO and non-plan
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Outstanding Options Exercisable Options
----------------------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Remaining Exercise Exercise
Price Range Number Life Price Number Price
----------- ------ ---- ----- ------ -----
<C> <C> <C> <C> <C> <C>
$3.00 - $3.60 760,319 3.0 $3.31 760,319 $3.31
$4.00 - $4.80 1,592,487 3.9 4.28 1,426,820 4.26
$6.00 - $8.00 1,017,424 7.3 6.48 1,017,424 6.48
</TABLE>
At December 31, 1996, the Company has reserved 1,464,097 shares
of common stock which are issuable upon the exercise of the
following warrants:
At December 31, 1996, the Company has outstanding 1,049,720
common stock warrants issued in connection with the
Company's merger with SOE. Four warrants convert to one
share of common stock. On February 2, 1995, the Board of
Directors approved a resolution to reduce the exercise price
of the warrants to $1.625, or $6.50 per share, in order to
give effect to the Company's 1-for-4 reverse stock split
effected in September, 1994. The warrants, which previously
(Continued)
F-22
<PAGE>
expired on April 24, 1996, have been extended to April 24,
1997, by the Board of Directors.
In connection with a common stock private placement closed
in 1995, the Company has issued 41.17 Class A Warrants and
41.17 Class B Warrants. Each Class A and Class B Warrant is
convertible to 5,000 shares of common stock. The Class A
Warrants have exercise prices of $3.50 and $5.00 per share,
respectively. The Warrants are exercisable for thirty-six
months, commencing October 8, 1997. The Company has a call
right on the Class A and Class B Warrants at a share price
of $5.50 and $7.00, respectively.
The Company has outstanding 400,000 common stock warrants
issued in connection with various consulting agreements.
Each Warrant is convertible into one share of common stock
at exercise prices from $3.00 to $3.50 per share. The
warrants expire in June, 1998.
In connection with a common stock private placement closed
in 1996, the Company issued 100 1996 Class A Warrants. Each
1996 Class A Warrant is convertible to 1,650 shares of
common stock. The 1996 class A Warrants are exercisable
through October 8, 1999, and have an exercise price of $4.00
per share.
In connection with the purchase of certain gas properties
from AKS (see Note 2), the Company issued 225,000 warrants
to purchase 225,000 shares of common stock. The warrants
have an exercise price of $5.00 per share and expire on
December 31, 1998.
The weighted average price of the 1,464,097 shares of common
stock reserved upon exercise of all outstanding warrants is
$4.40.
On January 2, 1996, the Company entered into a stock purchase
agreement, as amended, with the holders of the outstanding Series
B Preferred Stock. Under the agreement, the Company or its
assignee had the obligation to purchase the remaining outstanding
Series B Preferred Stock at $13.70 per share. Payment terms
under the agreement were as follows:
<TABLE>
Due Number
Date Of Shares Amount
---- --------- ------
<S> <C> <C>
January 2, 1996 18,248 $ 250,000
January 15, 1996 18,248 250,000
February 10, 1996 3,650 50,000
February 29, 1996 54,409 745,400
March 31, 1996 47,445 650,000
</TABLE>
The share commitments through January 15, 1996, were
purchased by individuals who are not associated or
affiliated with the Company or any of the Company's
directors or executive officers, and the February 10 and 29,
1996, share commitments were purchased by the Company,
primarily with funds obtained under its credit facility with
Den norske. Upon purchase, the Board of Directors retired
58,059 shares of Series B Preferred Stock.
The share commitment due March 31, 1996, was amended to
allow the holders of the Series B Preferred Stock to convert
25,679 shares of the Series B Preferred Stock into 100,000
shares of common stock. The remaining commitment of 21,676
shares of Series B Preferred Stock for $296,932 was extended
by mutual consent to April 30, 1996. The Company
subsequently allowed the holders of the Series B Preferred
Stock to convert the remaining 21,676 shares of Series B
Preferred Stock into 75,410 shares of common stock.
(15) RELATED PARTY TRANSACTIONS
Significant related party transactions which are not
disclosed elsewhere in these consolidated financial
statements are discussed in the following paragraphs (see
Notes 5, 8, 14, 15, and 19).
In both 1996 and 1995, the Company, pursuant to the terms of
an employment and stock option agreement, has paid or
accrued compensation to the Company's Chairman of $60,000.
The Chairman has been assisting management in various
financing transactions.
(Continued)
F-23
<PAGE>
The Company paid or accrued fees of approximately $68,000
during 1995 to a company owned by a former officer/director
of the Company for legal and administrative services.
The Company has billed $15,000 during 1995 for financial
consulting services to a company in which an
officer/director of the Company is a principal.
In 1996, the Company paid $276,500 to purchase gas from a
company owned 20% by a director of the Company, which
participated as a joint venture partner in drilling various
wells in the Appalachian area.
The Company has paid or accrued interest of approximately
$21,500 and $31,000 during 1996 and 1995, respectively,
related to advances and notes payable from Southern Gas
Holding Co., Inc. (Holding), a company primarily owned by
two officers/directors of the Company. At December 31,
1996, the Company has made advances to Holding totaling
$163,728 which the principals of Holding intend to secure
with shares of Company stock as it becomes available.
In 1995, the Company purchased a pipeline in the Gausdale
Field for $400,000 from Holding. The price was determined
based upon future estimated cash flows from transportation
fees discounted at 10%.
In March, 1995, in order to meet a corporate commitment, the
Company borrowed monies from an officer/director and a
director of the Company totaling $500,000. The funds bore
interest at the rate of 10% per annum and were due in full
in July, 1996. The note was secured by gas properties, and
the individuals had the option to convert their note to a
working interest position in wells to be drilled offshore
Louisiana. In July, 1995, the related parties' converted
their note to a 13.75% working interest in two wells.
Pursuant to an agreement between the parties, the Company
had the right to repurchase the working interest position on
or before September 30, 1995. The Company exercised the
right, as amended, to repurchase the working interest
position for $750,000 plus a 3.875% overriding royalty
interest prior to September 30, 1995.
In 1996, the Company purchased the overriding royalty
interest in the Ship Shoal B-3 well from the
officer/director of the Company for $125,000.
(16) LEASES
Future minimum rental payments for operating leases with
noncancelable lease terms in excess of one year are as
follows:
<TABLE>
Years ending
December 31,
------------
<C> <C>
1997 $37,800
1998 6,300
$44,100
======
</TABLE>
The Company rents equipment and office space under various
operating leases. Rental expense for the years ended
December 31, 1996 and 1995, was approximately $61,200 and
$106,900, respectively. Included in both 1996 and 1995 is
$37,800 paid to an officer/director of the Company related
to office space rental. The lease agreement is effective
through February 28, 1998 at a monthly rate of $3,150.
(17) DEFINED CONTRIBUTION PLAN
The Company maintains a Defined Contribution Plan (the Plan) for
all full-time employees of the Subsidiary. Employees are
entitled to make contributions based on their percentage of
compensation. The Company provides a matching contribution up
to 5% of each employee's compensation. For the years ended
December 31, 1996 and 1995, approximately $32,500 and $26,100,
respectively, were recognized as a general and administrative
expense for contributions to the Plan.
(Continued)
F-24
<PAGE>
(18) SIGNIFICANT CUSTOMER CONCENTRATION
The Company's primary market areas are the State of Kentucky and
the Gulf Coast region, primarily Louisiana. For the years ended
December 31, 1996 and 1995, most of the Company's gas sales are
on credit to major industrial or local distributing companies.
Trade receivables are not generally collateralized; however, the
Company's customers' historical and future credit positions are
thoroughly analyzed prior to extending credit. In certain
instances, the Company will require a letter of credit.
Approximately 31% and 36% of the Company's gas sales in 1996 and
1995, respectively, are subject to fixed pricing contracts,
while the remainder are based on spot prices. The Company
presently uses its marketing operations to provide gas supplies
to customers solely to meet delivery requirements when internal
production will not suffice. The Company provides gas supplies
to industrial end users and local distributing companies
primarily for commercial use.
Marketing revenues from major customers are summarized below:
<TABLE>
1996 1995
---- ----
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Company A 15,650,000 69 6,393,000 37
Company B 2,543,000 11 2,464,000 14
</TABLE>
(19) COMMITMENTS AND CONTINGENCIES
In December, 1995, the Company entered into a severance
agreement with its former President and Chief Executive Officer
who resigned effective December 31, 1995. Under the agreement,
the executive was paid $85,000 and will receive the sum of
$10,000 per month through March 31, 1998. In return, the
executive surrendered 515,590 CSO common stock options under a
Severance Plan which had exercise prices between $6.00 and $8.00
per share and expired between March 18, 2003, and February 1,
2005. In return, the executive received 643,987 common stock
options at an exercise price of $4.00 per share and which expire
on November 29, 2000. He also retains 46,203 CSO common stock
options immediately exercisable, previously issued to him, at
$3.50 per share which expire on October 11, 2002. The Company
also agreed to provide for payment of an office lease through
October, 1996, and assigned a 1% gross overriding royalty
interest in certain oil and gas properties. As a result of the
agreement, the Company has recognized a charge against income of
$371,346 in 1995 and has an accrued severance liability at
December 31, 1996, of $142,293 based on an 8% discount factor.
In the normal course of business, the Company enters into
short-term supply and purchase agreements. These agreements can
stipulate either a fixed contract price or a floating price
based on spot prices. Management attempts to schedule
deliveries to mitigate any possible adverse effects of changing
prices; however, gas prices are susceptible to change due to
industry supply and demand positions.
F-25
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
The following supplemental information regarding oil and gas
activities of the company is presented pursuant to the disclosure
requirements promulgated by the Securities and Exchange Commission
(SEC) and Statement of Financial Accounting Standards No. 69 (SFAS
No. 69), "Disclosures About Oil and Gas Producing Activities."
<TABLE>
1996 1995
---- ----
<S> <C> <C>
CAPITALIZED COSTS RELATING TO OIL AND
GAS PRODUCING ACTIVITIES:
Proved undeveloped oil and gas properties $ 4,193,257 2,932,552
Proved oil and gas properties 38,257,168 17,104,875
Unproved oil and gas properties 5,686,334 2,760,834
Other - 1,000,000
Support equipment and facilities 8,061,570 7,802,245
---------- ----------
56,198,329 31,600,506
Less accumulated depreciation, depletion,
amortization, and impairment (5,703,885) (2,838,928)
---------- ----------
Net capitalized costs $50,494,444 28,761,578
========== ==========
COSTS INCURRED IN OIL AND GAS PRODUCING
PROPERTY ACQUISITION, EXPLORATION AND
DEVELOPMENT ACTIVITIES:
Property acquisition costs:
Proved $18,439,652 1,030,500
Unproved 2,925,500 2,760,834
Exploration costs - 341,334
Development costs 3,314,867 1,746,807
---------- ----------
$24,680,019 5,879,475
========== ==========
RESULTS OF OPERATIONS FOR OIL AND GAS ACTIVITIES:
Oil and gas sales $8,540,569 3,198,987
Gain (loss) on sale of gas properties (153,000) 91,000
Production costs (1,402,389) (765,285)
Depreciation, depletion, and amortization (2,431,633) (881,085)
---------- ----------
Results of operations for oil and gas
producing activities $4,553,547 1,643,617
========= =========
</TABLE>
RESERVE QUANTITY INFORMATION FOR THE YEAR ENDED DECEMBER 31, 1996
AND 1995:
The following estimates of proved developed and proved
undeveloped reserve quantities, and related standardized measure
of discounted net cash flow, are estimates only and have been
provided by Richard M. Russell & Associates, Inc.
(Kentucky/Appalachian region properties); Netherland, Sewell &
Associates, Inc. (Gulf Coast region properties); and McConnell
Consulting, Inc. (Michigan properties), independent engineering
consulting firms. The amounts do not purport to reflect
realizable values or fair market values of the Company's
reserves. The Company emphasizes that reserve estimates are
inherently imprecise and that estimates of new discoveries are
more imprecise than those of currently producing oil and gas
properties. Accordingly, these estimates are expected to change
as future information becomes available. All of the Company's
reserves are located in the United States, and primarily in the
State of Kentucky and the Gulf Coast Region offshore Louisiana.
(Continued)
F-26
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
The success of future development efforts and the amount, timing
and costs thereof may significantly increase or decrease the
Company's total unproved and proved developed reserve volumes,
the "Standardized Measure of Discounted Future Net Flows," and
the components and changes therein.
Proved reserves are estimated reserves of crude oil (including
condensate and natural gas liquids), and natural gas that
geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through
existing wells, equipment, and operating methods. Gas volumes
are expressed in thousands of cubic feet and oil reserves in
barrels.
<TABLE>
1996 1995
---- ----
Oil Gas Oil Gas
--- --- --- ---
<S> <C> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year 756,383 24,741,330 - 22,845,597
Revisions of previous
estimated (45,694) (2,346,294) - 1,419,239
Purchases of minerals
in place 691,712 18,373,382 - 101,893
Extensions and discoveries - - 857,899 1,447,916
Production (200,189) (1,829,503) (101,516) (761,175)
Sales and transfers of
minerals in place - (3,246,204) - (312,140)
-------- ---------- ------- ----------
Total proved reserves 1,202,212 35,692,711 756,383 24,741,330
========= ========== ======= ==========
Proved developed reserves:
Beginning of year 756,383 19,702,503 - 17,379,370
End of year 909,194 29,033,203 756,383 19,702,503
======= ========== ======= ==========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES AS OF
DECEMBER 31, 1996 AND 1995:
The standardized measure of discounted future net cash flows is
computed by applying year-end prices of oil and gas (with
consideration of price changes only to the extent provided by
contractual arrangements) to the estimated future production of
proved gas reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and producing the
proved reserves, less estimated future income tax expenses (based
on year-end statutory tax rates, with consideration of future tax
rates already legislated) to be incurred on pre-tax net cash
flows less tax basis of the properties and available credits, and
assuming continuation of existing economic conditions. The
estimated future net cash flows less are then discounted using a
rate of 10% a year to reflect the estimated timing of the future
cash flows.
The average crude oil price at year-end 1996 used for this
calculation was $24.29 per barrel. The average natural gas price
used was $3.72 for Gulf Coast, $2.17 for Kentucky region and
$2.75 for Michigan. In general, oil and natural gas prices
declined in early 1997.
At December 31, 1996 and 1995, the Company's future discounted
net cash flow from proved reserves was located as follows:
(Continued)
F-27
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARY
--------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
----------------------------------------------
<TABLE>
KENTUCKY GULF COAST MICHIGAN TOTAL
-------- ---------- -------- -----
<C> <C> <C> <C> <C>
1996 $16,972,496 41,678,600 1,298,910 $59,950,006
=========== ========== ========= ===========
1995 $17,327,392 10,728,200 1,392,500 $29,448,092
=========== ========== ========= ===========
</TABLE>
At December 31, 1996, the South Timbalier 148 Field accounted for
approximately 74% of the Company's future net cash flows in the
Gulf Coast region. At December 31, 1996 and 1995, the Gausdale
Field accounted for approximately 49% and 83% of the Company's
future net cash flows from the Kentucky region.
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Standard measure of discounted future
net cash flows at December 31:
Future cash inflows $124,117,714 67,476,132
Future production costs (16,015,402) (8,612,212)
Future development costs (8,893,219) (2,473,326)
Future taxes (2,501,238) (2,408,364)
----------- ----------
96,707,855 53,982,230
Future net cash flows, 10% annual discount
for estimated timing of cash flows (36,757,849) (24,534,138)
----------- -----------
Standardized measure of discounted
future net cash flows relating to
proved gas reserves $ 59,950,006 29,448,092
=========== ==========
</TABLE>
The following reconciles the change in the standardized measure
of discounted future net cash flows during the years 1996 and
1995:
<TABLE>
1996 1995
---- ----
<S> <C> <C>
Beginning of year $29,448,092 15,968,977
Sales of gas produced, net of
production costs (7,138,180) (2,433,702)
Net changes in prices and
production costs 4,933,466 (110,565)
Extensions and discoveries - 11,659,628
Revisions of previous quantity
estimates (2,659,980) 1,418,562
Change from purchases of
minerals in place 36,340,737 93,226
Change from sale and transfers
of minerals in place (2,361,900) (323,019)
Changes in future taxes 42,210 347,171
Accretion of discount 2,655,425 1,596,898
Changes in timing and other (1,309,864) 1,230,916
---------- ----------
End of year $59,950,006 29,448,092
========== ==========
</TABLE>
The change from purchases of minerals in place reflects the
Company's acquisition of the South Timbalier 148 lease block
located offshore Louisiana and the acquisition of various fields
located in Kentucky from AKS.
The increase in extensions and discoveries for 1995 primarily
reflects the Company's successful completion and development of
wells in the Ship Shoal lease located in the Gulf Coast region.
F-28
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Rick G. Avare
----------------------------------
Rick G. Avare
President, CEO and Director
Date: March 27, 1997
---------------------
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed by the following persons on
behalf of the registrant in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Chairman of the Board
/s/ Douglas L. Hawthorne and Director March 27, 1997
- -------------------------
Douglas L. Hawthorne
President, Chief Executive
/s/ Rick G. Avare Officer, and Director
- -------------------------
Rick G. Avare (Principal Executive Officer) March 27, 1997
Director and President,
Southern Gas Company
/s/ Leonard K. Nave of Delaware, Inc. March 27, 1997
- -------------------------
Leonard K. Nave
/s/ Jeffrey J. Hausman Chief Financial Officer March 27, 1997
- -------------------------
Jeffrey J. Hausman
/s/ Dr. Donald A.
Schellpfeffer Director
- ------------------------- --------------
Dr. Donald A. Schellpfeffer
/s/ David Fox, Jr. Director
- ------------------------- --------------
David Fox, Jr.
<PAGE>
EXHIBIT INDEX
AMERICAN RESOURCES OF DELAWARE, INC.
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
3.9 By-Laws of the Company, as amended
(incorporated by reference to Exhibit 3.2
to the Registrant's Form 10-SB). *
3.10 Restated Certificate of Incorporation filed
with the Delaware Secretary of State
(incorporated by reference to Exhibit 3.10
to the Company's Form 8-K filed December
12, 1996). *
4.1 Specimen Common Stock Certificate
(incorporated by reference to Exhibit 4.1
to the Registrant's Form 10-SB). *
4.2 Specimen Preferred Stock Certificate
(incorporated by reference to Exhibit 4.2
to the Registrant's Form 10-SB). *
4.3 Specimen Warrant Certificate and Agreement
(incorporated by reference to Exhibit 4.3
to the Registrant's Form 10-SB). *
4.5 Warrant Agreement dated as of October 6, 1994
between American Resources of Delaware, Inc.
and GFL Ultra Fund, Ltd. (incorporated by
reference to Exhibit 4.1 to the Registrant's
September, 1994, Form 10-QSB). *
4.6 Warrant Agreement dated as of November 10, 1994
between American Resources of Delaware, Inc.
and GFL Ultra Fund, Ltd. (incorporated by
reference to Exhibit 4.6 to the Registrant's
Form 10-KSB for the fiscal year ended
December 31, 1994 [the "1994 Form 10-KSB"]). *
4.9 Specimen copy of the Convertible Debenture
Purchase Agreement, with exhibits.
(incorporated by reference to Exhibit 4.9
to the Company's Form 8-K filed December 12,
1996). *
4.10 Specimen copy of a Stock Option Agreement
between American Resources of Delaware, Inc.,
and Corporate Relations Group, Inc.
(incorporated by reference to Exhibit 4.10
to the Company's Form 8-K filed December 12, 1996). *
i
<PAGE>
4.11 Copy of a Stock Option Agreement between
American Resources of Delaware, Inc., and
World Capital Funding, Inc. (incorporated
by reference to Exhibit 4.11 to the Company's
Form 8-K filed December 12, 1996). *
10.1 Asset Purchase Agreement between American
Resources of Delaware, Inc. and Southern Gas
Company, Inc. dated October 6, 1993
(incorporated by reference to Exhibit 1.1
to the Registrant's Form 8-K filed
October 19, 1993). *
10.2 Amendment to Asset Purchase Agreement by
and between American Resources of Delaware,
Inc. and Southern Gas Company, Inc. dated
February 28, 1994 (incorporated by reference
to Exhibit 2.8 to the Registrant's Form 10-KSB
for the fiscal year ended December 31, 1993
[the "1993 Form 10-KSB"]). *
10.3 Purchase Agreement between Southern Gas Holding
Company, Inc. and American Resources of
Delaware, Inc. dated February 24, 1994
(incorporated by reference to Exhibit 2.2
to the Company's Form 8-K filed March 14, 1994). *
10.4 Amended and Restated Credit Agreement between
American Resources of Delaware, Inc., Southern
Gas Company of Delaware, Inc., and Bank One,
Texas, National Association dated February 24,
1994 (incorporated by reference to Exhibit 4.1
to the Registrant's Form 8-K filed on
March 14, 1994). *
10.5 Form of First Amendment to Amended and Restated
Credit Agreement between American Resources of
Delaware, Inc., Southern Gas Company of
Delaware, Inc., and Bank One, Texas, National
Association (incorporated by reference to
Exhibit 10.5 to the Registrant's 1994
Form 10-KSB). *
10.6 Promissory Note in the amount of $7,375,000
from American Resources of Delaware, Inc.
to Bank One, Texas, National Association
dated February 24, 1994 (incorporated by
reference to Exhibit 4.2 to the Registrant's
Form 8-K filed on March 14, 1994). *
10.7 Form of Promissory Note from American
Resources of Delaware, Inc. to Bank One,
Texas, National Association (incorporated by
reference to Exhibit 10.7 to the
Registrant's 1994 Form 10-KSB). *
ii
<PAGE>
10.8 Note Repurchase Agreement dated February 24,
1994, between American Resources of Delaware,
Inc. and National American Life Insurance
Company of Pennsylvania (incorporated by
reference to Exhibit 4.3 to the Registrant's
Form 8-K filed on March 14, 1994). *
10.9 Promissory Note dated March 24, 1994 in the
amount of $3,500,000 from Southern Gas Holding
Company et al. to National American Life
-- --
Insurance Company of Pennsylvania (assumed
by the Company) (incorporated by reference
to Exhibit 4.4 to the Company's Form
8-K filed on March 14, 1994). *
10.10 Stockholders Agreement dated February 28,
1994, between American Resources of
Delaware, Inc., Southern Gas Holdings,
Inc., Southern Gas Company, Inc., and
Sequa Capital Corporation (incorporated by
reference to Exhibit 4.5 to the Registrant's
Form 8-K filed on March 14, 1994). *
10.11 Settlement Agreement dated February 28,
1994, among Sequa Capital Corporation,
Southern Gas Company, Inc., Southern Gas
Holding, Inc., Wright Resources, Inc.,
Natural Resource Services, Inc. and Leonard K.
Nave (incorporated by reference to Exhibit 4.6
to the Registrant's Form 8-K filed on
March 14, 1994). *
10.12 Shareholders Agreement among Leonard K. Nave,
American Resources of Delaware, Inc., and
Don Peracchi dated February 7, 1994
(incorporated by reference to Exhibit 4.10
to the Registrant's 1993 Form 10-KSB). *
10.13 Agreement among Southern Gas Holding
Company, Inc., Gems Resources, Inc., and
American Resources of Delaware, Inc., dated
February 21, 1994 (incorporated by reference
to Exhibit 4.11 to the Registrant's 1993
Form 10-KSB). *
10.14 Employment and Stock Option Agreement of
Andrew J. Kacic dated March 19, 1993
(incorporated by reference to Exhibit 10.1
the Registrant's Form 10-SB). *
10.15 Registration Rights Agreement dated
March 19, 1993 between the Registrant and
Andrew J. Kacic (incorporated by reference
to Exhibit 10.2 to the Registrant's Form 10-SB). *
iii
<PAGE>
10.16 Employment and Stock Option Agreement dated
March 19, 1993 between the Registrant and
Charles A. Smith, III dated March 19, 1993
(incorporated by reference to Exhibit 10.3
to the Registrant's Form 10-SB). *
10.17 Registration Rights Agreement between the
Company and Charles A. Smith, III dated
March 19, 1993 (incorporated by reference
to Exhibit 10.4 to the Registrant's Form 10-SB). *
10.18 Employment and Stock Option Agreement
dated March 19, 1993 between the Registrant
and Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.5 to the
Registrant's Form 10-SB). *
10.19 Registration Rights Agreement dated March 19,
1993 between the Registrant and Douglas L.
Hawthorne (incorporated by reference to
Exhibit 10.6 to the Registrant's Form 10-SB). *
10.20 Agreement between the Company and Oilfield
Investments Ltd. dated March 8, 1994
(incorporated by reference to Exhibit 10.28
to the Registrant's 1993 Form 10-KSB). *
10.21 Office Lease dated June 1, 1986 between Nave
Properties and Southern Gas (assigned to SGCD)
(incorporated by reference to Exhibit 10.36
to the Registrant's 1993 Form 10-KSB). *
10.22 Incentive Stock Option Plan (incorporated
by reference to Exhibit 10.0 to the
Registrant's September, 1994, Form 10-QSB). *
10.23 Letter Agreement dated October 17, 1994
between the Registrant and Settle Oil and
Gas Company (incorporated by reference to
Exhibit 10.1 to the Registrant's
September, 1994, Form 10-QSB). *
10.24 Letter Agreement dated December 30, 1994,
between the Registrant and Settle Oil and
Gas Company (incorporated by reference to
Exhibit 10.24 to the Registrant's 1994
Form 10-KSB). *
10.25 Letter Agreement dated January 12, 1995,
between the Registrant and Settle Oil and
Gas Company (incorporated by reference to
Exhibit 10.25 to the Registrants 1994
Form 10-KSB). *
10.26 Letter Agreement dated February 20, 1995,
between the Registrant and Settle Oil and
Gas Company (incorporated by reference to
Exhibit 10.26 to the Registrant's 1994
Form 10-KSB). *
iv
<PAGE>
10.27 Agreement and Assignment dated September 30,
1994, between Petroleum Exploration and
Transmission, Inc. and Southern Gas
Company of Delaware, Inc. (incorporated by
reference to Exhibit 10.27 to the
Registrant's 1994 Form 10-KSB). *
10.28 Mortgage and Security Agreement dated
September 30, 1994, between Southern Gas
Company of Delaware, Inc. and Melinda C.
Provo (incorporated by reference to
Exhibit 10.28 to the Registrant's 1994
Form 10-KSB). *
10.29 Promissory Note dated September 30, 1994
from Southern Gas Company of Delaware, Inc.
to Melinda C. Provo (incorporated by
reference to Exhibit 10.29 to the
Registrant's 1994 Form 10-KSB). *
10.30 Form of Put Agreement dated March 15, 1995,
between American Resources of Delaware, Inc.
and Prima Capital, L.L.C. (incorporated
by reference to Exhibit 10.30 to the
Registrant's 1994 Form 10-KSB). *
10.31 Form of Limited Liability Company Agreement
of Crescent Turnkey & Engineering, L.L.C.
dated December 30, 1994 (incorporated by
reference to Exhibit 10.31 to the
Registrant's 1994 Form 10-KSB). *
10.32 Domestic Turnkey Drilling Contract -- Offshore
dated December 30, 1994, between American
Resources of Delaware, Inc. and Crescent
Turnkey Engineering, L.L.C. (incorporated
by reference to Exhibit 10.32 to the
Registrant's 1994 Form 10-KSB). *
10.33 Purchase and Sale Agreement dated effective
October 31, 1994, between American Resources
of Delaware, Inc. and Settle Oil and Gas
Company (incorporated by reference to
Exhibit 10.33 to the Registrant's 1994
Form 10-KSB). *
10.34 Subscription Agreement for 22% Secured
Convertible Note of Settle Oil and Gas
Company dated November 28, 1994, and
executed by American Resources of Delaware,
Inc. (incorporated by reference to
Exhibit 10.34 to the Registrant's 1994
Form 10-KSB). *
10.35 22% Secured Convertible Note dated November 28,
1994, in the amount of $5,000,000 from
Settle Oil and Gas Company to American
Resources of Delaware, Inc. (incorporated
by reference to Exhibit 10.35 to the
Registrant's 1994 Form 10-KSB). *
v
<PAGE>
10.36 Assignment of Convertible Promissory Note
dated December 30, 1994, from American
Resources of Delaware, Inc. to Southern Gas
Company of Delaware, Inc. (incorporated
by reference to Exhibit 10.36 to the
Registrant's 1994 Form 10-KSB). *
10.37 Assignment of Convertible Promissory Note
dated December 30, 1994, from Southern Gas
Company of Delaware, Inc. to Century
Offshore Management Corporation, Settle Oil
and Gas Company, and Southern Gas Company
of Delaware, Inc. (incorporated by reference
to Exhibit 10.37 to the Registrant's 1994
Form 10-KSB). *
10.38 Mortgage and Security Agreement dated
November 15, 1994, among Settle Oil and
Gas Company, Century Offshore Management
Corporation and American Resources of
Delaware, Inc. (incorporated by reference
to Exhibit 10.38 to the Registrant's
1994 Form 10-KSB). *
10.39 Put Agreement dated as of March 15, 1995,
between the American Resources of Delaware,
Inc., Southern Gas Company of Delaware, Inc.
and Prima Capital, LLC (incorporated by
reference to Exhibit 10.0 to the Registrant's
Form 10-QSB for the quarterly period ended
March 31, 1995 [the "March, 1995, Form 10-QSB"]). *
10.40 $500,000 Promissory Note from Southern Gas
Company of Delaware, Inc. In favor of Rick G.
Avare, Douglas L. Hawthorne Retirement
Plan-001, Dtd. February 22, 1995, and
Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.1 to the Registrant's
March, 1995, Form 10-QSB). *
10.41 Agreement dated January 31, 1995, between
Southern Gas Company of Delaware, Inc.,
Rick G. Avare, Douglas L. Hawthorne
Retirement Plan-001, Dtd. February 22, 1995,
and Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.2 to the
Registrant's March, 1995, Form 10-QSB). *
10.42 Amendment to Put Agreement dated as of
July 1, 1995, between American Resources
of Delaware, Inc., Southern Gas Company of
Delaware, Inc. and Prima Capital, LLC
(incorporated by reference to Exhibit 10.0
to the Registrant's Form 10-QSB for the
quarterly period ended June 30, 1995
[the "June, 1995, Form 10-QSB"]). *
10.43 $900,000 Promissory Note from Settle
(incorporated by reference to Exhibit 10.1
to the Registrant's June, 1995, Form 10-QSB). *
vi
<PAGE>
10.44 Participation agreement dated as of
July 25, 1995, between American Resources
of Delaware, Inc. and its Board of Directors
(incorporated by reference to Exhibit 10.2
to the Registrant's June, 1995, Form 10-QSB). *
10.45 Stock Option Agreement dated May 5, 1995,
between American Resources of Delaware, Inc.
and GFL Ultra Fund Limited (incorporated
by reference to Exhibit 10.3 to the
Registrant's June, 1995, Form 10-QSB). *
10.46 First Amendment to Stock Option Agreement
dated June 19, 1995, between American
Resources of Delaware, Inc. And GFL Ultra
Fund Limited (incorporated by reference to
Exhibit 10.4 to the Registrant's June, 1995,
Form 10-QSB). *
10.47 Second Amendment to Stock Option Agreement
dated July 13, 1995, between American
Resources of Delaware, Inc. and GFL
Ultra Fund Limited (incorporated by
reference to Exhibit 10.5 to the
Registrant's June, 1995, Form 10-QSB). *
10.48 Promissory Note of September 28, 1995, to
Den norske Bank, A.S. (incorporated by
reference to Exhibit 10.0 to the Registrant's
Form 10-QSB for the quarterly period
ended September 30, 1995 [the "September,
1995, Form 10-QSB"]). *
10.49 Amendment to Settle Note (incorporated by
reference to Exhibit 10.1 to the
Registrant's September, 1995, Form 10-QSB). *
10.50 Asset Purchase Agreement of December 27,
1995, by and between American Resources
of Delaware, Inc., Southern Gas Co. of
Delaware, Inc., Arakis Energy Corporation
and AKS Energy Corporation (incorporated
by reference to Exhibit A to the
Registrant's Form 8-K filed on March 12, 1996). *
10.51 Joint Development Agreement of February 26,
1996, between Southern Gas Co. of
Delaware, Inc. and AKS Energy Corporation
(incorporated by reference to Exhibit B to
the Registrant's Form 8-K filed on
March 12, 1996). *
10.52 Joint Operating Agreement of December 1,
1994, between Century Offshore Management
Corporation, Settle Oil and Gas Company and
Southern Gas Co. of Delaware, Inc.
(incorporated by reference to Exhibit 10.52
to the Registrant's Form 10-KSB for the fiscal
year ended December 31, 1995 [the "1995
Form 10-KSB"]). *
vii
<PAGE>
10.53 Stock Purchase Agreement of January 2, 1996,
as amended, between American Resources of
Delaware, Inc. and GFL Ultra Fund, Ltd.
(incorporated by reference to Exhibit 10.53
to the Registrant's 1995 Form 10-KSB). *
10.54 Purchase Agreement of December 29, 1995,
between Southern Gas Holding Company and
Southern Gas Co. Of Delaware, Inc.
(incorporated by reference to Exhibit 10.54
to the Registrant's 1995 Form 10-KSB). *
10.55 Severance Agreement of November 30, 1995,
between American Resources of Delaware,
Inc. and Andrew J. Kacic. (incorporated by
reference to Exhibit 10.55 to the
Registrant's 1995 Form 10-KSB). *
10.56 Second Amendment to Put Agreement of
October 4, 1995, between American Resources
of Delaware, Inc., Prima Capital, LLC, and
Southern Gas Co. of Delaware, Inc.
(incorporated by reference to Exhibit 10.56
to the Registrant's 1995 Form 10-KSB). *
10.57 Specimen Change of Control Agreement
(incorporated by reference to Exhibit 10.57
to the Registrant's Form 8-K filed
December 12, 1996). *
10.58 Employment Agreement with Rick G. Avare
(incorporated by reference to Exhibit 10.58
to the Registrant's Form 8-K filed
December 12, 1996). *
10.59 Specimen copy of the Indemnity Agreement
with Officers and Directors (incorporated
by reference to Exhibit 10.59 to the
Registrant's Form 8-K filed December 12, 1996). *
10.60 Lead Generation Agreement with Corporate
Relations Group, Inc. (incorporated by
reference to Exhibit 10.60 to the Registrant's
Form 8-K filed December 12, 1996). *
10.61 Asset Purchase Agreement of December 27,
1995, by and between American Resources
of Delaware, Inc., Southern Gas Co. of
Delaware, Inc., Arakis Energy Corporation
and AKS Energy Corporation (incorporated
by reference to Exhibit A to the Registrant's
Form 8-K filed on March 12, 1996). *
viii
<PAGE>
10.62 Joint Development Agreement of February 26,
1996, between Southern Gas Co. of Delaware,
Inc. and AKS Energy Corporation (incorporated
by reference to Exhibit B to the Registrant's
Form 8-K filed on March 12, 1996). *
10.63 Participation Agreement of April 12, 1996,
between American Resources of Delaware, Inc.
and Douglas L. Hawthorne (incorporated by
reference to Exhibit 10.3 to the Registrant's
Report on Form 10-QSB for the quarterly
period ended March 31, 1996).
10.64 Production Payment Conveyance of May 22, 1996,
by and between Southern Gas Co. of Delaware,
Inc., and Austin Energy Funding Partners
(incorporated by reference to Exhibit 10.4
to the Registrant's Report on Form 10-QSB
for the quarterly period ending June 30, 1996). *
10.65 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation
dated July 3, 1996, for the acquisition
of the South Timbalier 148 properties
(incorporated by reference to Exhibit A
to the Registrant's Form 8-K filed on
July 18, 1996). *
10.66 Asset Purchase Agreement by and between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., and
Century Offshore Management Corporation
dated July 3, 1996, for the acquisition
of the contractual rights for salt dome
properties (incorporated by reference to
Exhibit B to the Registrant's Form 8-K
filed on July 18, 1996). *
10.67 Capitalization Agreement and Termination of
Purchase and Sale Agreement by and between
Southern Gas Co. of Delaware, Inc., American
Resources of Delaware, Inc. and Century
Offshore Management Corporation, dated
August 31, 1996 (incorporated by reference
to Exhibit A to the Registrant's Form 8-K/A
filed on September 16, 1996). *
10.68 Amendment to South Timbalier Purchase and
Sale Agreement by and between Southern
Gas Co. of Delaware, Inc., American
Resources of Delaware, Inc. and Century
Offshore Management Corporation, dated
August 31, 1996 (incorporated by reference
to Exhibit B to the Registrant's Form 8-K/A
filed on September 16, 1996). *
10.69 Termination of Participation Agreement by
and between American Resources of Delaware,
Inc. and Douglas L. Hawthorne, dated
September 30, 1996 (incorporated by
reference to Exhibit 10.9 to the
Registrant's Form 10-QSB for the
quarterly period ending September 30,
1996 [the "September, 1996, Form 10-QSB"]). *
ix
<PAGE>
10.70 Termination of Participation Agreement by
and between American Resources of Delaware,
Inc. and The Kandy Limited Partnership,
dated September 30, 1996 (incorporated by
reference to Exhibit 10.10 to the
Registrant's September, 1996, Form 10-QSB). *
10.71 Termination of Participation Agreement by
and between American Resources of Delaware,
Inc. and Donald A. Schellpfeffer, dated
September 30, 1996 (incorporated by reference
to Exhibit 10.11 to the Registrant's
September, 1996, Form 10-QSB). *
10.72 Termination of Participation Agreement
by and between American Resources of
Delaware, Inc. and Southern Gas Holding
Company, Inc., dated September 30, 1996
(incorporated by reference to Exhibit 10.12
to the Registrant's September, 1996, Form 10-QSB). *
10.73 Termination of Participation Agreement by
and between American Resources of Delaware,
Inc. and Douglas L. Hawthorne Retirement
Plan-001 Dtd. 2/22/95, dated September 30,
1996 (incorporated by reference to
Exhibit 10.13 to the Registrant's
September, 1996, Form 10-QSB). *
10.74 Termination of Participation Agreement by
and between American Resources of Delaware,
Inc. and Douglas L. Hawthorne, dated
December 29, 1996. 128
10.75 Termination of Participation Agreement
by and between American Resources of
Delaware, Inc. and The Kandy Limited
Partnership, dated December 29, 1996. 130
10.76 Termination of Participation Agreement
by and between American Resources of
Delaware, Inc. and Donald A. Schellpfeffer,
dated December 29, 1996. 132
10.79 Termination of Participation Agreement by
and between American Resources of Delaware,
Inc. and Douglas L. Hawthorne Retirement
Plan-001 Dtd. 2/22/95, dated December 29, 1996. 134
21.0 Subsidiaries of American Resources of
Delaware, Inc. (incorporated by reference to
Exhibit 21.0 to the Registrant's 1994
Form 10-KSB). *
x
<PAGE>
23.1 Consent of KPMG Peat Marwick, LLP. 136
23.2 Consent of Netherland, Sewell & Associates, Inc. 137
23.3 Consent of Richard M. Russell & Associates, Inc. 138
* Previously filed
ix
<PAGE>
AMENDED TERMINATION OF PARTICIPATION AGREEMENT
This Amendment of the Termination of Participation Agreement
("Amended Agreement") entered into this 29th day of December,
1996 by and between American Resources of Delaware, Inc.
(hereinafter referred to as "ARI") with an address of 160 Morgan
Street, Versailles, KY 40383 and Douglas L. Hawthorne
(hereinafter referred to as "Hawthorne"), 4325 Delco Dell Road,
Kettering, OH 45429.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Hawthorne to participate in the
Century Primary Obligation; and
WHEREAS, ARI and Hawthorne entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Hawthorne would participate with ARI in the Century
Primary Obligation by advancing to ARI (the "Hawthorne Advance")
the sum of Eighty Thousand Dollars ($80,000.00) to be utilized by
ARI to fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation and the Hawthorne
Advance were secured by a first mortgage on certain properties
known as the South Timbalier 148 Properties offshore Louisiana
(the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
Exhibit 10.74
<PAGE>
WHEREAS, Hawthorne has agreed to the forgiveness by ARI of
the Century Primary Obligation in exchange for certain
compensation and entered into a Termination of Participation
Agreement with ARI; and
WHEREAS, the parties wish to amend the Participation
Agreement to extend the terms of repayment and wish to
memorialize their understanding in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. AMENDMENT TO THE TERMS OF REPAYMENT OF THE HAWTHORNE
----------------------------------------------------
ADVANCE. ARI shall pay Hawthorne the sum of Eighty Thousand
- -------
Dollars ($80,000.00) in equal monthly installments commencing
April 1, 1997, based on a two year amortization schedule attached
hereto as Exhibit "A".
2. RATIFICATION OF TERMINATION AGREEMENT. The parties
-------------------------------------
hereby ratify all terms and conditions of the Termination
Agreement not specifically amended herein.
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Rick G. Avare
-----------------------------------
Its: President
----------------------------------
By: /s/ Douglas L. Hawthorne
-----------------------------------
DOUGLAS L. HAWTHORNE
DS\Haamp
2
<PAGE>
AMENDED TERMINATION OF PARTICIPATION AGREEMENT
This Amendment of the Termination of Participation Agreement
("Amended Agreement") entered into this 29th day of December,
1996 by and between American Resources of Delaware, Inc.
(hereinafter referred to as "ARI") with an address of 160 Morgan
Street, Versailles, KY 40383 and The Kandy Limited Partnership
(hereinafter referred to as "Kandy"), P.O. Box 1946, Scottsdale,
AZ 85252.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Kandy to participate in the Century
Primary Obligation; and
WHEREAS, ARI and Kandy entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Kandy would participate with ARI in the Century Primary
Obligation by advancing to ARI (the "Kandy Advance") the sum of
Eighty Thousand Dollars ($80,000.00) to be utilized by ARI to
fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation and the Kandy
Advance were secured by a first mortgage on certain properties
known as the South Timbalier 148 Properties offshore Louisiana
(the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
Exhibit 10.75
<PAGE>
WHEREAS, Kandy has agreed to the forgiveness by ARI of the
Century Primary Obligation in exchange for certain compensation
and entered into a Termination of Participation Agreement with
ARI; and
WHEREAS, the parties wish to amend the Participation
Agreement to extend the terms of repayment and wish to
memorialize their understanding in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. AMENDMENT TO THE TERMS OF REPAYMENT OF THE KANDY
ADVANCE. --------------------------------------------------
- ------
ARI shall pay Kandy the sum of Eighty Thousand Dollars
($80,000.00) in equal monthly installments commencing April 1,
1997, based on a two year amortization schedule attached hereto
as Exhibit "A".
2. RATIFICATION OF TERMINATION AGREEMENT. The parties
-------------------------------------
hereby ratify all terms and conditions of the Termination
Agreement not specifically amended herein.
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Rick G. Avare
-----------------------------------
Its: President
----------------------------------
By: /s/ Andrew J. Kacic , G.P.
-----------------------------------
The Kandy Limited Partnership
DS\kandy.ame
2
<PAGE>
AMENDED TERMINATION OF PARTICIPATION AGREEMENT
This Amendment of the Termination of Participation Agreement
("Amended Agreement") entered into this 29th day of December,
1996 by and between American Resources of Delaware, Inc.
(hereinafter referred to as "ARI") with an address of 160 Morgan
Street, Versailles, KY 40383 and Don Schellpfeffer (hereinafter
referred to as "Schellpfeffer"), 910 E. 20th Street, Sioux Falls,
SD 57105.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Schellpfeffer to participate in the
Century Primary Obligation; and
WHEREAS, ARI and Schellpfeffer entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Schellpfeffer would participate with ARI in the Century
Primary Obligation by advancing to ARI (the "Schellpfeffer
Advance") the sum of Eighty Thousand Dollars ($80,000.00) to be
utilized by ARI to fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation and the
Schellpfeffer Advance were secured by a first mortgage on certain
properties known as the South Timbalier 148 Properties offshore
Louisiana (the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
Exhibit 10.76
<PAGE>
WHEREAS, Schellpfeffer has agreed to the forgiveness by ARI
of the Century Primary Obligation in exchange for certain
compensation and entered into a Termination of Participation
Agreement with ARI; and
WHEREAS, the parties wish to amend the Participation
Agreement to extend the terms of repayment and with to
memorialize their understanding in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. AMENDMENT TO THE TERMS OF REPAYMENT OF THE
------------------------------------------
SCHELLPFEFFER ADVANCE. ARI shall pay Schellpfeffer the sum of
- ---------------------
Eighty Thousand Dollars ($80,000.00) in equal monthly
installments commencing April 1, 1997, based on a two year
amortization schedule attached hereto as Exhibit "A".
2. RATIFICATION OF TERMINATION AGREEMENT. The parties
-------------------------------------
hereby ratify all terms and conditions of the Termination
Agreement not specifically amended herein.
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Rick G. Avare
------------------------------------
Its: President
-----------------------------------
By: /s/ Don Schellpfeffer
------------------------------------
Don Schellpfeffer
DS\Schellpfeffer.ame
2
<PAGE>
AMENDED TERMINATION OF PARTICIPATION AGREEMENT
This Amendment of the Termination of Participation Agreement
("Amended Agreement") entered into this 29th day of December,
1996 by and between American Resources of Delaware, Inc.
(hereinafter referred to as "ARI") with an address of 160 Morgan
Street, Versailles, KY 40383 and Douglas L. Hawthorne Retirement
Plan 001 (hereinafter referred to as "Hawthorne"), 4325 Delco
Dell Road, Kettering, OH 45429.
R E C I T A L S
---------------
WHEREAS, ARI agreed to loan Century Offshore Management,
Inc. ("Century") approximately Six Million Five Hundred Thousand
Dollars ($6,500,000.00) (the "Century Primary Obligation"); and
WHEREAS, ARI requested Hawthorne to participate in the
Century Primary Obligation; and
WHEREAS, ARI and Hawthorne entered into a Participation
Agreement dated July 5, 1995 (the "Participation Agreement")
whereby Hawthorne would participate with ARI in the Century
Primary Obligation by advancing to ARI (the "Hawthorne Advance")
the sum of Two Hundred and Fifty Thousand Dollars ($250,000.00)
to be utilized by ARI to fund the Century Primary Obligation; and
WHEREAS, the Century Primary Obligation and the Hawthorne
Advance were secured by a first mortgage on certain properties
known as the South Timbalier 148 Properties offshore Louisiana
(the "Century Properties"); and
WHEREAS, ARI acquired the interest of Century in the Century
Properties on July 3, 1996 and in consideration for that
acquisition forgave the Century Primary Obligation; and
Exhibit 10.79
<PAGE>
WHEREAS, Hawthorne has agreed to the forgiveness by ARI of
the Century Primary Obligation in exchange for certain
compensation and entered into a Termination of Participation
Agreement with ARI; and
WHEREAS, the parties wish to amend the Participation
Agreement to extend the terms of repayment and wish to
memorialize their understanding in this Agreement.
NOW THEREFORE, in consideration of the mutual covenants and
conditions contained herein, the parties agree as follows:
1. AMENDMENT TO THE TERMS OF REPAYMENT OF THE HAWTHORNE
----------------------------------------------------
ADVANCE. ARI shall pay Hawthorne the sum of Fifty Thousand
- -------
Dollars ($50,000.00) on or before March 15, 1997, with the
balance of the Hawthorne Advance being paid in equal monthly
installments commencing April 1, 1997, based on a two year
amortization schedule attached hereto as Exhibit "A".
2. RATIFICATION OF TERMINATION AGREEMENT. The parties
-------------------------------------
hereby ratify all terms and conditions of the Termination
Agreement not specifically amended herein.
IN WITNESS THEREOF:
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ Rick G. Avare
-----------------------------------
Its: President
----------------------------------
By: Douglas L. Hawthorne
-----------------------------------
DOUGLAS L. HAWTHORNE, TRUSTEE FOR
DOUGLAS L. HAWTHORNE RETIREMENT
PLAN 001
DS\Hawthorne.ama
2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
American Resources of Delaware, Inc. and Subsidiary:
We consent to incorporation by reference in the following
registration statements of American Resources of Delaware, Inc.
and Subsidiary of our report dated March 17, 1997 related to the
consolidated balance sheet of American Resources of Delaware,
Inc. and Subsidiary as of December 31, 1996 and the related
statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1996 and 1995, which report appears
in the December 31, 1996 annual report on Form 10-KSB of American
Resources of Delaware, Inc. and Subsidiary.
(a) The company's registration statement on Form S-8, Commission
File No. 33-78882 (1994 Employee Stock Compensation Plan).
(b) The company's registration statement on Form S-8, Commission
File No. 33-78884 (1994 Compensatory Stock Option Plan).
(c) The company's registration statement on Form S-8, Commission
File No. 33-82422 (1994 Employee Stock Compensation Plan -
Additional Shares).
(d) The company's registration statement on Form S-8, Commission
File No. 33-95260 (1994 Compensatory Stock Option Plan -
Additional Shares).
(e) The company's registration statement on Form S-8, Commission
File No. 333-654 (Andrew J. Kacic Severance Agreement).
(f) The company's registration statement on Form S-3, Commission
File No. 333-656 (effective October 8, 1996).
(g) The company's registration statement on Form S-3, Commission
File No. 333-18821 (effective January 23, 1997).
KPMG Peat Marwick LLP
Houston, Texas
March 28, 1997
Exhibit 23.1
<PAGE>
NSAI NETHERLAND, SEWELL
& ASSOCIATES, INC.
- ----------------------------
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
---------------------------------------------------------
As independent oil and gas consultants, Netherland, Sewell &
Associates, Inc. hereby consents to (a) the use of our report
setting forth our estimates of proved reserves and future
revenue, as of December 31, 1996, to the American Resources of
Delaware, Inc. and subsidiary (ARI) interest in certain oil and
gas properties, (b) all references to our firm included in or
made a part of ARI's annual report on Form 10-KSB for the year
ended December 31, 1996, (c) the incorporation by reference
thereof into ARI's Registration Statement on Form S-8 (Nos.
33-78882, 33-78884, 33-82422, 33-95260, and 333-654) and Form S-3
(Nos. 333-656 and 333-18821), and (d) the reference of our firm
under the heading "Experts" in the prospectus.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D Sewell
-----------------------------------
Frederic D. Sewell
President
Dallas, Texas
March 25, 1997
Exhibit 23.2
<PAGE>
RICHARD M. RUSSELL & ASSOCIATES, INC.
- ----------------------------------------------------------------
CONSULTING ENGINEERS
Consent of Independent Consulting Engineer
------------------------------------------
As independent consulting engineer, Richard M. Russell &
Associates, Inc. consents to a) the use of our report dated
February 12, 1997 setting forth our estimates of reserves and
future revenue as of January 1, 1997 to American Resources of
Delaware, Inc. and subsidiary (ARI) interest in certain oil and
gas properties, and b) all references to our firm included in or
made a part of ARI's annual report on Form 10-KSB for the year
ended December 31, 1996, c) the incorporation by reference
thereof into ARI's Registration Statement on Form S-8 (Nos.
33-78882, 33-78884, 33-82422, 33-95260, and 333-654) and Form S-3
(Nos. 333-656 and 333-18821), and d) the reference to our firm
under the heading "Experts" in the prospectus.
Richard M. Russell & Associates, Inc.
By: /s/ Richard M. Russell
-------------------------------------
Richard M. Russell
President
Nashville, Tennessee
March 26, 1997
2003 BLAIR BOULEVARD NASHVILLE, TENNESSEE 37212
615-385-5446 FAX 615-292-7375 E MAIL RCYCLE @IX.NETCOM.COM
Exhibit 23.3
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899717
<NAME> AMERICAN RESOURCES OF DELAWARE INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 353,419
<SECURITIES> 0
<RECEIVABLES> 7,047,627
<ALLOWANCES> (10,212)
<INVENTORY> 0
<CURRENT-ASSETS> 7,752,003
<PP&E> 59,890,838
<DEPRECIATION> (6,150,632)
<TOTAL-ASSETS> 64,837,644
<CURRENT-LIABILITIES> 12,864,033
<BONDS> 19,422,421
0
2,181,819
<COMMON> 65
<OTHER-SE> 23,936,123
<TOTAL-LIABILITY-AND-EQUITY> 64,837,644
<SALES> 33,039,173
<TOTAL-REVENUES> 33,039,173
<CGS> 27,503,339
<TOTAL-COSTS> 29,827,347
<OTHER-EXPENSES> 22,311
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,440,453)
<INCOME-PRETAX> 1,550,695
<INCOME-TAX> (638,940)
<INCOME-CONTINUING> 911,755
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 911,755
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
</TABLE>
