U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
---- ----
Commission File No. 0-21472
AMERICAN RESOURCES OF DELAWARE, INC.
(Name of small business issuer in its charter)
DELAWARE 86-0713506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 MORGAN STREET, P. O. BOX 87
VERSAILLES, KENTUCKY 40383
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 606-873-5455
Check whether the issuer: (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES xx NO
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the issuer has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Exchange
Act after the distribution of securities under a plan confirmed
by a court.
YES xx NO
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
Issuer's classes of common equity, as of the last practicable
date:
On March 31, 1998, 10,207,231 shares of the Registrant's
Common Stock, par value $.00001 per share, were issued and
outstanding and 265,517 shares of the Registrant's Series 1993 8%
Convertible Preferred Stock were issued and outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ; No xx .
---- ------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
FORM 10-Q
For the Quarter Ended March 31, 1998
INDEX
Page
Number
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements 1
Introduction to the Financial Statements 2
Condensed Consolidated Balance Sheets -
March 31, 1998 (unaudited) and
December 31, 1997 3
Condensed Consolidated Statements of
Operations - Three Months Ended
March 31, 1998 (unaudited) and 1997 5
Condensed Consolidated Statements of
Stockholders' Equity - Three Months
Ended March 31, 1998 (unaudited) 6
Condensed Consolidated Statements of
Cash Flows - Three Months Ended March 31,
1998 (unaudited) and 1997 7
Notes to Condensed Consolidated
Financial Statements 8
Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of
Operations 14
PART II - OTHER INFORMATION 19
Item 1 - Legal Proceedings 19
Item 6 - Exhibits and Reports on Form 8-K 19
Signature 20
Exhibit Index 21
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
The Financial Statements for the three months ended March
31, 1998 and 1997 include, in the opinion of the Company,
all adjustments (which consist only of normal recurring
adjustments) necessary to present fairly the results of
operations for such periods. Results of operations for the three
months ended March 31, 1998, are not necessarily indicative of
results of operations which will be realized for the year ending
December 31, 1998. The Financial Statements should be read in
conjunction with the Company's Report on Form 10-KSB for the year
ended December 31, 1997.
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONDENSED, CONSOLIDATED FINANCIAL
---------------------------------
STATEMENTS
----------
FOR THE THREE MONTHS ENDED
--------------------------
MARCH 31, 1998 AND 1997
-----------------------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONDENSED, CONSOLIDATED BALANCE SHEETS
--------------------------------------
ASSETS
------
<TABLE>
MARCH 31,
---------
1998 DECEMBER 31,
---- ------------
(UNAUDITED) 1997(*)
----------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,314,871 $ 1,180,638
Accounts and notes receivable, net 4,365,655 4,964,253
Deferred tax asset 133,734 111,583
Prepaid expenses and other 515,327 312,900
----------- ----------
Total current assets 6,329,587 6,569,374
Oil and gas properties, at cost
(successful efforts method) 115,212,876 57,172,781
Property and equipment, at cost 12,521,479 12,352,988
----------- ----------
127,734,355 69,525,769
Less accumulated depreciation,
depletion and amortization (20,983,734) (18,276,276)
----------- ----------
Net property and equipment 106,750,621 51,249,493
----------- ----------
Other assets:
Investment in unconsolidated
subsidiaries 2,547,451 2,547,451
Notes receivable 390,137 406,806
Deferred financing costs, net 1,439,540 470,168
Other assets 293,768 322,642
----------- ----------
Total other assets 4,670,896 3,747,067
----------- ----------
$117,751,104 $61,565,934
=========== ==========
</TABLE>
(Continued)
*Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial
statements.
3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONDENSED, CONSOLIDATED BALANCE SHEETS (CONTINUED)
--------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
MARCH 31,
---------
1998 DECEMBER 31
---- -----------
(UNAUDITED) 1997(*)
----------- -------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt $ 41,309,651 $ 4,682,006
Note payable to related third party - 225,000
Accounts payable-trade 1,215,194 963,169
Accrued taxes payable 180,748 175,095
Unearned revenue 707,687 820,051
Accrued expenses and other 1,225,805 524,668
----------- ----------
Total current liabilities 44,639,085 7,389,989
Long-term debt, excluding
current maturities 44,001,771 25,392,892
Unearned revenue 1,918,432 2,095,643
Deferred tax liability 2,367,647 2,165,882
Stockholders' equity:
Series 1993 8% Convertible Preferred
Stock, par value $12.00 per share;
265,517 and 268,851 shares issued
and outstanding at March 31, 1998
and December 31, 1997, respectively 2,154,762 2,181,819
Common Stock, par value $.00001 per
share; 50,000,000 shares authorized;
10,207,231 and 10,193,676 shares
issued and outstanding at March 31,
1998 and December 31, 1997,
respectively 102 102
Additional paid-in capital 22,554,660 22,500,134
Retained earnings 828,055 552,883
Treasury stock (713,410) (713,410)
----------- ----------
Total stockholders' equity 24,824,169 24,521,528
Commitments and contingencies - -
----------- ----------
$117,751,104 $61,565,934
=========== ==========
</TABLE>
*Derived from audited financial statements.
See accompanying notes to condensed, consolidated financial
statements.
4
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
------------------------------------------
<TABLE>
1998 1997
---- ----
<S> <C> <C>
Revenues:
Production $ 6,253,877 $ 3,763,097
Transportation 192,427 211,494
Marketing 2,164,558 10,534,742
Other 91,690 11,640
---------- ----------
8,702,552 14,520,973
========== ==========
Expenses:
Production 868,061 541,766
Transportation 58,043 94,073
Marketing 2,087,862 10,548,429
Depreciation, depletion and
amortization 3,464,370 1,377,820
Administrative expenses 768,211 795,412
Other 30,668 36,461
---------- ----------
7,277,215 13,393,961
---------- ----------
Operating income 1,425,337 1,127,012
Other income (expense):
Interest income 27,908 12,486
Interest expense (948,843) (684,086)
Other - 619
---------- ----------
(920,935) (670,981)
---------- ----------
Income before income
tax expense 504,402 456,031
Income tax expense (201,761) (177,850)
---------- ----------
Net income $ 302,641 $ 278,181
========== ==========
Per common share:
Basic $.03 $.03
=== ===
Weighted average number of common
shares outstanding 9,998,564 7,224,600
========== ==========
Diluted $.03 $.03
=== ===
Weighted average number of
common shares and dilutive
potential common shares 10,265,748 8,862,019
========== ==========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONDENSED, CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
----------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1998
-----------------------------------------
(UNAUDITED)
-----------
<TABLE>
<CAPTION>
Common Stock 8% Preferred Stock
---------------- ----------------------------
Number Number Net of Additional
of Par Convertible of Par Discount Paid-in Treasury Retained
Shares Value Securities Shares Value Value Capital Stock Earnings Total
------ ----- ----------- ------ ----- -------- ------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December
31, 1997 10,193,676 $102 - 268,851 $3,226,213 $2,181,819 $22,500,134 ($713,410) $552,883 $24,521,528
Conversion
of Series 1993
Convertible
Preferred
Stock to
Common
stock 3,334 - - (3,334) (40,008) (27,057) 27,057 - - -
Common
Stock
Dividends
issued or
accrued 10,221 - - - - - 27,469 - (27,469) -
Net income - - - - - - - - 302,641 302,641
--------- --- --------- -------- ---------- ---------- ---------- ---------- --------- -----------
Balances,
March 31,
1997 10,207,731 $102 - 265,517 $3,186,205 $2,154,762 $22,554,660 $(713,410) $828,055 $24,824,169
========== ==== ========= ======== ========== ========== =========== ========= ======== ===========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
6
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONDENSED, CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
-----------------------------------------------------------
<TABLE>
THREE MONTHS ENDED MARCH 31,
----------------------------
1998 1997
---- ----
<S> <C> <C>
Net cash provided by operating
activities $ 5,107,349 $ 2,587,100
---------- ----------
Investing activities:
Purchases of property and
equipment (58,962,452) (1,653,502)
Payments on notes receivable (16,669) 150,410
Issuance of notes receivable - (35,000)
Purchase of 6% Junior
Preferred Stock - -
Proceeds from sale of assets 2,300 -
---------- ----------
Net cash used in
investing activities (58,976,821) (1,538,092)
---------- ----------
Financing activities:
Proceeds from borrowings 58,300,000 1,027,752
Payments on borrowings (3,288,476) (1,224,901)
Other (1,007,820) (167,038)
---------- ----------
Net cash provided by (used
in) financing activities 54,003,704 (364,187)
---------- ----------
Increase (decrease) in cash 134,232 684,821
Cash and cash equivalents at
beginning of period 1,180,638 353,419
---------- ----------
Cash and cash equivalents at
end of period 1,314,870 $ 1,038,240
========== ==========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared stock dividends and issued 10,221 and
10,754 shares of Common Stock to holders of the Series 1993
and Series B Preferred Stock during the three months ended March
31, 1998 and 1997, respectively.
During the three months ended March 31, 1997, holders of
$2,996,784 ($2,496,098 net of placement costs) of the Convertible
Securities have converted the securities into 1,401,002 shares of
Common Stock and received 17,803 shares of Common Stock dividends
related to the Convertible Securities.
See accompanying notes to condensed, consolidated financial
statements.
7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT
----------------------------------------------------
(UNAUDITED)
-----------
(1) GENERAL
American Resources of Delaware, Inc. (ARI or the Company), a
Delaware corporation organized on August 14, 1992, is an
independent oil and gas company engaged in the acquisition,
exploration, development and production of oil and gas
properties offshore Louisiana and onshore Mississippi (Gulf
Coast Region) and in southeastern Kentucky (Appalachian
Region). The Company also gathers and markets natural gas
in the Appalachian Region. These activities are considered
to be one business segment for financial reporting purposes.
The accompanying condensed, consolidated financial
statements include the accounts of ARI and its Subsidiaries,
collectively referred to as the Company. All significant
intercompany balances and transactions have been eliminated
in consolidation in order to make the financial statements,
in the opinion of management, not misleading.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with
instructions to Form 10-Q and, therefore, do not include all
disclosures required by generally accepted accounting
principles. However, in the opinion of management, these
statements include all adjustments, which are of a normal
recurring nature, necessary to present fairly the financial
position at March 31, 1998 and December 31, 1997 and the
results of operations and changes in cash flows for the
periods ended March 31, 1998 and 1997. These financial
statements should be read in conjunction with the
financial statements and notes to the financial statements
in the 1997 Form 10-KSB of the Company that was filed with
the Securities and Exchange Commission.
Basic and diluted income per common share were computed after
consideration of dividend requirements on Preferred Stock,
using the weighted average number of shares outstanding and
the weighted average number of common shares and dilutive
potential common shares outstanding, respectively, during
each of the years presented. Outstanding stock options
and warrants are potential Common Stock equivalents and
have been considered when the effect is dilutive.
Certain reclassifications have been made to the prior period
financial statements to conform with the current period
presentation.
(2) PROPERTY AND EQUIPMENT
On March 5, 1998, the Company purchased interests in 41
leaseblocks in the Gulf of Mexico from TECO Oil & Gas, Inc.
(TECO). The purchase consists of an average 30% interest in
approximately 194,000 acres, 5 producing wells, partnership
interests in Louisiana Offshore Ventures and Texas 3D
Ventures and access to approximately 13,500 square miles of
3-D seismic data. Louisiana Offshore Ventures and Texas 3D
Ventures are exploration and development partnerships
managed by Houston Energy Development (HED). HED has
specialized in 3-D seismic evaluation and prospect selection
for over ten years and provides the Company with access to
12 additional geoscientists and 13 state of the art 3-D
seismic workstations. The Company believes that the TECO
acquisition provides ample
8
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- - ----------------------------------------------------------------
(UNAUDITED)
-----------
opportunity to increase reserves, production and cash flow
from development and exploration activities and, with HED,
has identified 27 initial drilling locations on the acquired
properties.
As consideration for the properties, the Company paid
$57,680,000, of which $1,300,000 was paid in cash upon
execution of the Purchase and Sale Agreement, $37,880,000
was paid from funds borrowed under the Company's credit
facility and a bridge loan provided by DNB Energy Assets,
Inc. (DNB), successor to Den norske Bank, AS (Den norske),
and the balance of $18,500,000 was in the form of a
promissory note in favor of TECO (TECO Note). The TECO Note
bears interest at the initial rate of 10% per annum and
increases 2% each quarter commencing July 1, 1998, with a
maximum interest rate of 18%. The TECO Note matures on
October 1, 1998 and is secured by a lien on all properties
of the Company and its subsidiaries.
In addition to the TECO Note, the parties entered into a
warrant agreement (TECO Warrant Agreement) granting TECO
warrants to acquire 600,000 shares of common stock of the
Company (First Warrants) at a price of $2.67 per share if
the TECO Note is not paid in full by October 1, 1998.
Additionally, the TECO Warrant Agreement granted TECO
warrants to acquire common stock equal to 10% of the
Company's outstanding common stock and options if the TECO
Note is not paid in full by October 1, 1998. This
percentage will increase by an additional 5% if the TECO
Note is not paid in full by January 1, 1999, and by an
additional 5% if the TECO Note is not paid in full by April
1, 1999 (collectively, Secondary Warrants). The price per
share of common stock evidenced by the Secondary Warrants is
$.00001. The Company filed Forms 8-K and 8-K/A regarding
this transaction with the Securities and Exchange Commission
on January 16, 1998 and March 16, 1998, respectively.
9
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- - ----------------------------------------------------------------
(UNAUDITED)
-----------
(3) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
March 31, December 31,
1998 1997
<S> <C> <C>
Borrowings under the Company's credit
facility, as amended, with DNB,
reduction subject to availability under
borrowing base, $50,000,000 available
borrowing base effective March 5, 1998,
monthly reduction against the available
borrowing base of $425,000, increasing to
$600,000 on June 1, 1998, interest payable
monthly at the Floating Rate, or LIBO Rate
plus 2 1/2%, secured by oil and gas
properties, equipment and receivables. $49,000,000 $28,700,000
Term Loan A payable to DNB, due
September 30, 1998, with interest payable
monthly at the Floating Rate, or LIBO Rate
plus 3% per annum, secured by oil and gas
properties. 15,000,000 -
Term Loan B payable to DNB, due
July 1, 1998, with interest payable monthly
at the Floating Rate, or LIBO Rate plus
3% per annum, secured by oil and gas
properties. 1,500,000 -
Note payable to TECO Oil & Gas, Inc., with
interest at 10% per annum, increasing 2%
each quarter the note remains unpaid
commencing July 1, 1998, with a maximum
rate of 18%, due October 1, 1998. 18,500,000 -
Note payable to related party, recourse only
to specific properties, interest payable at 9.5%
in connection with the purchase of oil and gas
properties from Prima Capital, LLC. 1,275,000 1,500,000
Other notes 36,422 99,898
---------- ----------
85,311,422 30,299,898
Less - Current portion (41,309,651) (4,907,006)
---------- ----------
Long-term debt $44,001,771 $25,392,892
========== ==========
</TABLE>
10
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- - ----------------------------------------------------------------
(UNAUDITED)
-----------
On September 28, 1995, the Company entered into a
$20,000,000 revolving credit facility through February 1,
2002 with Den norske. By November 1, 1997, the revolving
credit facility had been increased to $75,000,000 and the
available borrowing base was increased to $30,000,000. On
March 5, 1998, the borrowing base under the revolving credit
facility was assigned to DNB and increased to $50,000,000 to
facilitate the purchase of oil and gas properties from TECO
Oil & Gas, Inc. (TECO). As of March 31, 1998, the balance
due under the revolving credit facility was $49,000,000.
Additional borrowings under the credit facility are
dependent upon a redetermination of the borrowing base,
which is primarily dependent upon the value of the mortgaged
properties as determined under DNB's internal lending
procedures. Reductions of the credit facility are also
dependent upon the borrowing base. At March 31, 1998,
monthly principal reductions are $425,000; however,
commencing June 1, 1998, monthly principal reductions will
be $600,000. The borrowing base will be redetermined
semi-annually on each October 1st and April 1st prior to
February 1, 2002.
On March 5, 1998, DNB also provided bridge loans totalling
$16,500,000 in order for the Company to complete the
acquisition of the TECO properties. $1,500,000 of the
bridge loans matures in July 1998 with the balance maturing
on September 30, 1998.
Under the credit agreement with DNB, the Company is required
to maintain certain financial ratios relating to debt
coverage ratio, current ratio, tangible net worth, general
and administrative expenses and quarterly interest ratio.
At March 31, 1998, the Company was in compliance with all of
the required financial covenants.
Also in order to complete the acquisition of the TECO
properties, on March 5, 1998, the Company executed a note in
favor of TECO in the amount of $18,500,000 which matures in
October 1998.
(4) CONVERTIBLE SECURITIES PRIVATE PLACEMENT
In 1996, the Company privately placed 4% convertible
securities in the aggregate principal amount of $6,000,000
($4,997,554 net of placement costs) with a required
conversion of one year from date of issuance. The
securities were convertible at the option of the holders
into shares of common stock valued at the lesser of (1) the
closing bid price of the common stock as reported on NASDAQ
on the date of issuance of the security, or (2) 75% of the
average closing bid prices of the common stock as reported
on NASDAQ for the five trading days prior to the date of
conversion (the Conversion Price). The Company agreed to
register the shares of common stock into which the
securities were convertible within 120 days after demand was
made by a security holder. As of March 31, 1997, securities
totaling $2,996,784 had been converted into 1,401,002 shares
of common stock. As of June 9, 1997, securities totaling
$5,538,483 had been converted into 3,101,864 shares of
common stock, inclusive of the 4% dividend shares paid as of
the date of conversion, and the remaining securities
totaling $461,517 had been redeemed by the Company pursuant
to its rights under the security documents. The Company was
not required to pay any liquidated damages or additional
interest as a result of the conversion or redemption of the
securities.
11
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- - ----------------------------------------------------------------
(UNAUDITED)
-----------
In conjunction with the issuance of the convertible
securities, the Company paid placement fees and related
issuance costs of $1,002,446, inclusive of 173,724
restricted shares of common stock to World Capital Funding,
Inc., Denver Colorado, or to persons designated by it, with
piggy-back registration rights, in partial payment of the
placement agent's fee, and issued five year options to World
Capital Funding, Inc., or to persons designated by it, to
purchase 100,000 shares of common stock at $4.50 per share.
The shares of common stock into which the securities are
convertible, together with the placement fee shares to World
Capital Funding, Inc., or its designees, and the shares
underlying the options issued to World Capital Funding,
Inc., or its designees, were registered under an S-3
Registration Statement which was effective on January 23,
1997.
(5) STOCKHOLDERS' EQUITY
The Company has authorized one million shares (1,000,000)
shares of Series 1993 Preferred Stock and two million shares
(2,000,000) of Series Preferred Stock subject to designation
by the Board of Directors:
Series 1993 Preferred Stock is convertible into
one share of common stock with a liquidation
preference of $12 per share. Dividends are
payable semiannually at the rate of 8% per annum
in common stock. 265,517 and 268,851 shares are
outstanding at March 31, 1998 and December 31,
1997, respectively.
Series B Preferred Stock, designated by the Board
of Directors, was convertible into common stock
based on a conversion factor of $10.00 divided by
73% of the common stock's closing bid price on the
conversion date. The Series B Preferred Stock had
a liquidation preference of $10.00 per share, but
was junior to the Series 1993 Preferred Stock.
Dividends were payable quarterly at the rate of 6%
in cash or common stock. There were 1,000,000
shares authorized and zero shares outstanding at
March 31, 1998 and December 31, 1997,
respectively. During the first quarter of 1997,
the Company's Board of Directors adopted a
resolution eliminating the Series B Preferred
Stock and returning the 1,000,000 shares to the
status of authorized but unissued Preferred Stock,
without designation. The Certificate eliminating
the Series B Preferred Stock was accepted by the
Office of the Secretary of State of Delaware on
April 16, 1997.
On January 15, 1998, the Board of Directors declared
dividends payable in Common Stock on January 22, 1998, to
holders of the Series 1993 Preferred Stock totaling 10,221
shares.
The Company has reserved 2,000,000 shares of common stock
for issuance under a 1994 Compensatory Stock Option Plan
(CSO). Outstanding stock options, which include CSO plan
12
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENT (CONTINUED)
- - ----------------------------------------------------------------
(UNAUDITED)
-----------
and non-plan options, granted to employees, consultants,
officers and directors for the purchase of the Company's
common stock are as follows:
<TABLE>
Price Per Share
Shares From To
<S> <C> <C> <C>
Balance December 31, 1997 3,120,397 $3.00 $8.00
Granted - - -
Terminated - - -
---------
Balance March 31, 1998 3,120,397 $3.00 $8.00
=========
</TABLE>
Outstanding options at March 31, 1998 include 1,976,410
issued under the CSO, all of which are exercisable, and
1,143,987 non-plan options, 843,987 of which are immediately
exercisable. Outstanding options at March 31, 1998 expire
between July 14, 1998 and February 1, 2005.
At March 31, 1998, the Company has outstanding warrants to
purchase 1,201,667 shares of common stock at exercise
prices from $3.00 to $5.00 per share.
13
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995:
This Quarterly Report on Form 10-Q includes "forward looking
statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, (the "Exchange Act"). All statements
other than statements of historical facts included in this Report
on Form 10-Q, including without limitation, statements under
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," regarding the planned capital
expenditures, increases in oil and gas production, the number of
anticipated wells to be drilled in 1998 and thereafter, the
Company's financial position, business strategy and other plans
and objectives for future operations, are forward-looking
statements. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have
been correct. There are numerous uncertainties inherent in
estimating quantities of proved oil and natural gas reserves and
in projecting future rates of production and timing of
development expenditures, including many factors beyond the
control of the Company. Reserve engineering is a subjective
process of estimating underground accumulations of oil and
natural gas that cannot be measured in an exact way, and the
accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation
and judgment. As a result, estimates made by different engineers
often vary from one another. In addition, results of drilling,
testing and production subsequent to the date of an estimate may
justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production
and development drilling. Accordingly, reserve estimates are
generally different from the quantities of oil and natural gas
that are ultimately recovered. Additional important factors that
could cause actual results to differ materially from the
Company's expectations are disclosed elsewhere in this Form 10-Q
and in the Form 8-K which the Company filed with the Securities
and Exchange Commission on July 25, 1997.
RECENT DEVELOPMENTS
On March 5, 1998, the Company purchased interests in 41
leaseblocks in the Gulf of Mexico from TECO Oil & Gas, Inc.
("TECO"). The purchase consists of an average 30% interest in
approximately 194,000 acres, 5 producing wells, partnership
interests in Louisiana Offshore Ventures and Texas 3D Ventures
and access to approximately 13,500 square miles of 3-D seismic
data. Louisiana Offshore Ventures and Texas 3D Ventures are
exploration and development partnerships managed by Houston
Energy Development ("HED"). HED has specialized in 3-D seismic
evaluation and prospect selection for over ten years and
provides the Company with access to 12 additional geoscientists
and 13 state of the art 3-D seismic workstations. The Company
believes that the TECO acquisition provides ample opportunity to
increase reserves, production and cash flow from development and
exploration activities and, with HED, has identified 27 initial
drilling locations on the acquired properties.
As consideration for the properties, the Company paid
$57,680,000, of which $1,300,000 was paid in cash upon execution
of the Purchase and Sale Agreement, $37,880,000 was paid from
funds borrowed under the Company's credit facility and a bridge
loan provided by DNB Energy Assets, Inc. ("DNB"), successor to
Den norske Bank, AS ("Den norske"), and the balance of
$18,500,000 was in the form of a promissory note in favor of TECO
("TECO Note"). The TECO Note bears interest at the initial rate
of 10% per annum and increases 2% each quarter commencing July 1,
1998, with a maximum interest rate of 18%. The TECO Note matures
on October 1, 1998 and is secured by a lien on all properties of
the Company and its subsidiaries.
In addition to the TECO Note, the parties entered into a
warrant agreement ("TECO Warrant Agreement") granting TECO
warrants to acquire 600,000 shares of common stock of the Company
("First Warrants") at a price of $2.67 per share if the TECO Note is not
paid
14
<PAGE>
in full by October 1, 1998. Additionally, the TECO Warrant
Agreement granted TECO warrants to acquire common stock equal to
10% of the Company's outstanding common stock and options if the
TECO Note is not paid in full by October 1, 1998. This
percentage will increase by an additional 5% if the TECO Note is
not paid in full by January 1, 1999, and by an additional 5% if
the TECO Note is not paid in full by April 1, 1999 (collectively,
"Secondary Warrants"). The price per share of common stock
evidenced by the Secondary Warrants is $.00001. The Company
filed Forms 8-K and 8-K/A regarding this transaction with the
Securities and Exchange Commission on January 16, 1998 and March
16, 1998, respectively.
During the first quarter of 1998, the Company entered into
an agreement with J. M. Huber Corporation for the development of
Grand Island Block 55, offshore Louisiana. During the drilling
of the initial well, reserves were encountered; however, due to
mechanical difficulties, the Company is currently in the process
of drilling a sidetrack well and expects the well to reach total
depth prior to May 31, 1998. The Company owns a 50% working
interest in the well.
During the first quarter of 1998, the Company commenced the
drilling of a well on Galveston Block 213, a property purchased
in the TECO acquisition. The well is being operated by Basin
Exploration, Inc. and is expected to commence production by May
31, 1998. Based upon the initial tests, the Company believes
that the well will commence production at a rate in excess of 9
million cubic feet ("mmcf") of natural gas per day. The Company
owns a 33.3% working interest in the well.
In April 1998, the Company entered into a Participation
Agreement with Westport Oil & Gas Company, Inc. to develop
Vermillion Block 220, offshore Louisiana. The parties commenced
the drilling of a well; and after review of the drilling results,
the Company has elected not to complete the well.
On May 6, 1998, the Company entered into a Participation
Agreement to acquire 16.67% working interest in High Island Block
105, offshore Texas. The parties have commenced the drilling of
a well on that block and anticipate completion of the drilling by
May 31, 1998.
ADOPTION OF NEW ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). The adoption of SFAS No. 130 had no
impact on the Company's financial statements for the quarter ended
March 31, 1998.
In June 1997, the Financial Accounting Standards Board also
issued Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This statement establishes
standards for reporting information about operating segments
in annual financial statements and requires selected information
about operating segments be included in interim reports issued
to shareholders. SFAS No. 131 is effective for financial
statements for periods beginning after December 15, 1997. As
SFAS No. 130 establishes standards for reporting and display,
the Company does not expect the adoption of this statement
to have a material impact on its financial condition or results
of operations.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,
1998 AND 1997:
Total revenues for the first three months of 1998 decreased
40% to $8,702,552 from $14,520,973 for the comparable period in
1997. Corresponding operating expenses decreased 46% to
$7,277,215 in 1998, from $13,393,961 in 1997. Components of the
decreases are as follows:
- - -- PRODUCTION: Production revenues increased 66%, to $6,253,877
----------
for the three months ended March 31, 1998 as compared with
$3,763,097 for the same period in 1997. The additional
revenues are primarily due to production from the TECO wells
which were acquired during the first quarter of 1998.
The Company sells the bulk of its Kentucky production under
long term contracts. During the first quarter of 1998, the
Company received an average price of $2.42 per thousand
cubic feet ("mcf") on its produced gas
15
<PAGE>
as compared with $2.20 per mcf in 1997. This increase is due
to increases in pricing of certain long term contracts.
The Company's Gulf Coast production, which experienced
significant growth due to the addition of the TECO wells,
realized average prices during the first quarter of 1998 of
$13.28 per barrel of oil and $2.17 per mcf of gas. The
increase in gas production as a result of the addition of the
TECO wells assisted in offsetting the effect of declining
oil and gas prices.
As expected, production costs also increased 60% to $868,061
for the three months ended March 31, 1998 from $541,766 for
the same period in 1997. This was primarily due to the
production costs associated with the TECO wells of
approximately $175,000.
The Company acquired significant lease positions in the Gulf
Coast region from TECO during the three months ended March
31, 1998 and intends to actively develop the area with
various other joint interest owners.
- - -- MARKETING: Marketing revenues decreased 80% to $2,164,558
---------
from $10,534,742 for the comparable period in 1997.
Corresponding marketing expenses decreased 80% to $2,087,862
from $10,548,429 in the first quarter of 1997. The
Company's marketing volumes have decreased to .8 billion
cubic feet ("bcf") for the three months ended March 31, 1998
as compared to 2.8 bcf for the comparable period in 1997.
The volume decrease is primarily due to the elimination of
third party sales on the spot market through the Company's
association with Southern Resources, Inc. as a result of
the Company's decision to focus on exploration and
development activities. However, due to the small profit
margins and administrative expenses associated with the
Southern Resources gas sales contracts, its termination
had no adverse effect on the Company's net income.
The Company utilizes forward sales contracts for portions of
its Gulf Coast Region natural gas production to achieve more
predictable cash flows and to reduce its exposure to
fluctuations in natural gas prices. As of March 31, 1998,
the Company had forward sales arrangements with respect to
67% of its estimated net natural gas production for 1998,
including 10,000 mcf per day subject to call agreements at
$2.70 per mcf for a period of two years commencing April 1,
1998. The Company continuously reevaluates its sales
contracts in light of market conditions, commodity price
forecasts, capital spending plans and debt service
requirements.
- - -- DEPRECIATION, DEPLETION AND AMORTIZATION: Depreciation,
----------------------------------------
depletion and amortization increased 151% to $3,464,370 for
the three months ended March 31, 1998 as compared with
$1,377,820 for the same period in 1997. The increase
results primarily from approximately $1,100,000 of depletion
on the TECO wells.
- - -- ADMINISTRATIVE EXPENSES: Administrative expenses decreased
-----------------------
3% to $768,211 for the three months ended March 31, 1998 as
compared with $795,412 for the same period in 1997. The
decrease in administrative expenses is primarily due to the
reclassification of certain production, marketing and financing
costs to production, marketing and interest expense. The decrease
was partially offset by the Company's expansion of its Gulf
Coast operations by the formation and staffing of a
wholly-owned subsidiary, American Resources Offshore, Inc.
("ARO") subsequent to March 31, 1997.
Significant components of administrative expenses for the
three months ended March 31, 1998 included payroll of
$400,576, professional fees of $84,756, and insurance of $45,471.
- - -- OTHER INCOME(EXPENSE): Other income (expense) items
---------------------
consisted of the following:
* INTEREST INCOME: Interest income for the three months
---------------
ended March 31, 1998 was $27,908 compared with $12,486
for the same period in 1997.
16
<PAGE>
* INTEREST EXPENSE: Interest expense increased to
----------------
$948,843 for the three months ended March 31, 1998 as
compared to $684,086 for the same period in 1997. This
results primarily from increased borrowings under the
Company's credit facility and bridge loans and the TECO
Note. Outstanding borrowings were $85,311,422 at
March 31, 1998 as compared with $25,087,205 at March 31,
1997. The additional borrowings have been used to assist
in expanding the Company's exploration, development and
property acquisition activities.
* NET INCOME: Net income for the three months ended
----------
March 31, 1998 was $302,641 as compared with $278,181
for the same period in 1997. Operating income was
$1,425,337 in 1998 versus $1,127,012 in 1997. The
operating income increase in 1998 is primarily
attributable to an increase in production revenues net
of production expenses of approximately $2,164,485.
The effect of this increase was partially offset by
increases in depreciation, depletion and amortization
of $2,086,550.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 1998 totalled
$1,314,871 as compared to $1,180,638 at December 31, 1997.
Historically, the Company has funded its oil and gas exploration
and development activities with operating cash flows, bank
borrowings and issuance of equity and debt securities. The
Company has a $75 million credit facility through DNB which
provides a $50 million borrowing base. Of the $50 million
borrowing base, $49 million has been fully utilized in order
to complete the acquisition of the TECO properties in March
1998. The remaining purchase price for the TECO properties was
provided by bridge loans of $16.5 million from DNB and the
TECO Note in the amount of $18.5 million.
Under the credit facility with DNB, the Company is required
to maintain certain ratios relating to debt coverage ratio,
current ratio, tangible net worth, general and administrative
expenses and quarterly interest ratio. Under the covenants, the
financial amounts used to compute the requirements are
specifically defined in the agreement. At March 31, 1998, the
Company was in compliance with all of the required financial
ratios.
In its Report on Form 10-KSB for the year ending December
31, 1997, the Company estimated the capital expenditures for its
development and exploratory program to be $39 million in 1998.
However, after further review and consideration, the Company has
revised its estimate to $34 million. These expenditures are
substantially at the discretion of the Company; and while the
Company does not currently have sufficient cash to fully fund the
proposed program, it does intend to obtain the necessary funds.
There are no assurances that the funds can be obtained or that
they can be obtained under terms acceptable to the Company. In
the event the Company is unable to obtain sufficient funds under
acceptable terms, it will be necessary for the Company to adjust
the level of the development and exploratory program.
A portion of the DNB bridge loan matures in July 1998 with
the balance maturing on September 30, 1998; and in the event the
Company fails to satisfy these commitments or refinance the debt,
the Bank could declare the Company in default. To date, the Company
has not taken any steps to adjust its capital expenditures in
order to cover the DNB bridge loans. Unless DNB extends the terms
of the bridge loans, the shortage will have to be covered from
funds from other sources, including additional borrowings.
The TECO Note matures in October 1998; and in the event the
Company fails to satisfy this commitment or refinance the debt,
TECO could declare the Company in default. However, TECO is a
party to an agreement between the Company and DNB which
substantially limits TECO's remedies against the Company unless
the Bank is paid in full or declares a default and takes
affirmative action against the Company.
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
17
<PAGE>
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.
YEAR 2000. The Company does not expect that the cost of
converting its computer systems to year 2000 compliance will be
material to its financial condition. The Company believes that
it will be able to achieve year 2000 compliance by the end of
1999, and its does not currently anticipate any disruption in
its operations as a result of any failure by the Company to be
in compliance. The Company does not currently have any information
concerning the year 2000 compliance status of its customers.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company has previously reported legal proceedings in its
10-K (see the Company's Report on Form 10-KSB for the year ended
December 31, 1997).
On May 13, 1998, the Company was named as a defendant in
litigation filed by Wright Enterprises asserting successor
liability to certain alleged obligations of Southern Gas Company,
Inc. Based upon the allegations set forth in the complaint, the
Company believes there is a strong likelihood that it will be
successful in the defense of this matter; and the litigation will
have no material impact on the Company.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following Exhibits are either attached
hereto or incorporated herein by reference:
10.88 Press release announcing agreement to acquire
offshore Gulf of Mexico assets from TECO Oil
& Gas, Inc. (incorporated by reference to
Exhibit 10.88 to the Company's Report on Form
8-K filed on January 16, 1998).
10.89 Purchase and Sale Agreement between American
Resources of Delaware, Inc., American
Resources Offshore, Inc., TECO Oil & Gas,
Inc. and TECO Energy, Inc. (incorporated by
reference to Exhibit 10.89 to the Company's
Report on Form 8-K/A filed on March 16, 1998).
10.90 Promissory Note from American Resources
Offshore, Inc. in favor of TECO Oil & Gas,
Inc. (incorporated by reference to Exhibit
10.90 to the Company's Report on Form 8-K/A
filed on March 16, 1998).
10.91 Warrant Agreement between American Resources
of Delaware, Inc. and TECO Oil and Gas, Inc.
(incorporated by reference to Exhibit 10.91
to the Company's Report on Form 8-K/A filed on
March 16, 1998).
10.92 First Amendment to First Amended and Restated
Credit Agreement dated March 5, 1998 between
American Resources of Delaware, Inc.,
Southern Gas Co. of Delaware, Inc., American
Resources Offshore, Inc. and DNB Energy
Assets, Inc.*
*Filed herewith.
(b) Reports on Form 8-K:
On January 16, 1998, the Company filed a voluntary
Report on Form 8-K reporting that it had entered into a
letter agreement to purchase all of the offshore Gulf
of Mexico assets of TECO Oil & Gas, Inc.
On March 16, 1998, the Company filed Amendment No.
1 to its Report on Form 8-K filed January 16, 1998,
reporting that on March 5, 1998, the Company completed
the acquisition of the offshore Gulf of Mexico assets
of TECO Oil & Gas, Inc.
19
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and
Exchange Act of 1934, the Registrant has caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
AMERICAN RESOURCES OF DELAWARE INC.
Date: May 15, 1998 By: /s/ Ralph A. Currie
--------------------------------
Ralph A. Currie
Chief Financial Officer
(Principal Accounting and
Financial Officer)
20
<PAGE>
EXHIBIT INDEX
AMERICAN RESOURCES OF DELAWARE, INC.
EXHIBIT
NUMBER DESCRIPTION PAGE NO.
10.88 Press release announcing agreement to
acquire offshore Gulf of Mexico assets
from TECO Oil & Gas, Inc. (incorporated
by reference to Exhibit 10.88 to the
Company's Report on Form 8-K filed on
January 16, 1998). *
10.89 Purchase and Sale Agreement between American
Resources of Delaware, Inc., American Resources
Offshore, Inc., TECO Oil & Gas, Inc. and
TECO Energy, Inc. (incorporated by reference
to Exhibit 10.89 to the Company's Report on
Form 8-K/A filed on March 16, 1998). *
10.90 Promissory Note from American Resources
Offshore, Inc. in favor of TECO Oil & Gas,
Inc. (incorporated by reference to Exhibit
10.90 to the Company's Report on Form 8-K/A
filed on March 16, 1998). *
10.91 Warrant Agreement between American Resources
of Delaware, Inc. and TECO Oil and Gas, Inc.
(incorporated by reference to Exhibit 10.91
to the Company's Report on Form 8-K/A filed on
March 16, 1998). *
10.92 First Amendment to First Amended and Restated
Credit Agreement dated March 5, 1998 between
American Resources of Delaware, Inc., Southern
Gas Co. of Delaware, Inc., American Resources
Offshore, Inc. and DNB Energy Assets, Inc.* 22
*Previously filed.
21
<PAGE>
FIRST AMENDMENT TO FIRST AMENDED
AND RESTATED CREDIT AGREEMENT
AMONG
AMERICAN RESOURCES OF DELAWARE, INC.
SOUTHERN GAS CO. OF DELAWARE, INC.
AMERICAN RESOURCES OFFSHORE, INC.
and
DNB ENERGY ASSETS, INC.
March 5, 1998
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .1
1.01 Terms Defined Above . . . . . . . . . . . . . . . . .1
1.02 Terms Defined in Agreement. . . . . . . . . . . . . .1
1.03 References. . . . . . . . . . . . . . . . . . . . . .1
1.04 Articles and Sections . . . . . . . . . . . . . . . .1
1.05 Number and Gender . . . . . . . . . . . . . . . . . .2
ARTICLE II AMENDMENTS. . . . . . . . . . . . . . . . . . . .2
2.01 Amendment of Section 1.2. . . . . . . . . . . . . . .2
2.02 Amendment of Section 2.9. . . . . . . . . . . . . . .2
2.03 Amendment of Section 6.17 . . . . . . . . . . . . . .3
2.04 Amendment of Section 6.18 . . . . . . . . . . . . . .3
2.05 Addition of Section 2.25. . . . . . . . . . . . . . .3
2.06 Amendment of Exhibit I. . . . . . . . . . . . . . . .3
ARTICLE III. CONDITIONS. . . . . . . . . . . . . . . . . . . .3
3.01 Receipt of Documents . . . . . . . . . . . . . . . . .4
3.02 Accuracy of Representations and Warranties. . . . . .4
3.03 Matters Satisfactory to Lender . . . . . . . . . . . .4
ARTICLE IV REPRESENTATIONS AND WARRANTIES. . . . . . . . . .4
ARTICLE V RATIFICATION . . . . . . . . . . . . . . . . . . . . .4
ARTICLE VI MISCELLANEOUS . . . . . . . . . . . . . . . . . .4
6.01 Scope of Amendment . . . . . . . . . . . . . . . . . .4
6.02 Agreement as Amended . . . . . . . . . . . . . . . . .5
6.03 Parties in Interest. . . . . . . . . . . . . . . . . .5
6.04 Rights of Third Parties. . . . . . . . . . . . . . . .5
6.05 ENTIRE AGREEMENT . . . . . . . . . . . . . . . . . . .5
6.06 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . .5
6.07 JURISDICTION AND VENUE . . . . . . . . . . . . . . . .5
<PAGE>
FIRST AMENDMENT TO FIRST AMENDED AND RESTATED
---------------------------------------------
CREDIT AGREEMENT
----------------
This FIRST AMENDMENT TO FIRST AMENDED AND RESTATED
CREDIT AGREEMENT (this "Amendment") is made and entered into
---------
effective as of March 5, 1998, among AMERICAN RESOURCES OF
DELAWARE, INC. ("ARI"), SOUTHERN GAS CO. OF DELAWARE, INC.
---
("Southern") and AMERICAN RESOURCES OFFSHORE, INC., ("Offshore"),
-------- --------
each a Delaware corporation, (ARI, Southern and Offshore each
being a "Borrower" and collectively being the "Borrowers"), and
-------- ---------
DNB ENERGY ASSETS, INC., a Delaware corporation, successor to Den
Norske Bank AS, a Norwegian Bank (the "Lender").
------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the above named parties or their assignors did
execute and exchange counterparts of that certain First Amended
and Restated Credit Agreement dated November 1, 1997 (as amended,
the "Agreement"), to which reference is here made for all
---------
purposes;
WHEREAS, the parties subject to and bound by the
Agreement are desirous of amending the Agreement in the
particulars hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual
covenants and agreements of the parties to the Agreement, as set
forth therein, and the mutual covenants and agreements of the
parties hereto, as set forth in this Amendment, the parties
hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.01 Terms Defined Above. As used herein, each of the
-------------------
terms "Agreement," "Amendment," "ARI," "Borrower," "Borrowers",
--------- --------- --- -------- ---------
"Lender", "Offshore", and "Southern" shall have the meaning
------ -------- --------
assigned to such term hereinabove.
1.02 Terms Defined in Agreement. As used herein, each
--------------------------
term defined in the Agreement shall have the meaning assigned
thereto in the Agreement, unless expressly provided herein to the
contrary.
1.03 References. References in this Amendment to
----------
Article or Section numbers shall be to Articles and Sections of
this Amendment, unless expressly stated herein to the contrary.
References in this Amendment to "hereby," "herein,"
"hereinafter," "hereinabove," "hereinbelow," "hereof," and
"hereunder" shall be to this Amendment in its entirety and not
only to the particular Article or Section in which such reference
appears.
1.04 Articles and Sections. This Amendment, for
---------------------
convenience only, has been divided into Articles and Sections and
it is understood that the rights, powers, privileges, duties, and
other legal relations of the parties hereto shall be determined
from this Amendment as an entirety and without regard to such
division into Articles and Sections and without regard to
headings prefixed to such Articles and Sections.
1.05 Number and Gender. Whenever the context
-----------------
requires, reference herein made to the single number shall be
understood to include the plural and likewise the plural shall be
understood to include the singular. Words denoting sex shall be
construed to include the masculine, feminine, and neuter, when
such construction is appropriate, and specific enumeration shall
not exclude the general, but shall be construed as cumulative.
Definitions of terms defined in the singular and plural shall be
equally applicable to the plural or singular, as the case may be.
ARTICLE II
AMENDMENTS
----------
The Borrower and the Lender hereby amend the Agreement
in the following particulars:
2.01 Amendment of Section 1.2. Section 1.2 of the
------------------------
Agreement is hereby amended as follows:
The following definition is amended to read as follows:
"Applicable Margin" shall mean as to each LIBO
-----------------
Rate Loan, the following:
Borrowing Base LIBO
Utilization Rate Loan
-------------- ---------
1) greater than 75% two and one-half
of Borrowing Base percent (22%)
2) less than or equal to 75% two and one-fourth
and equal to 50% percent (23%)
of Borrowing Base
3) less than 50% and two percent (2%)
greater than 25%
of Borrowing Base
4) equal to or less than 25% one and three-fourths
of Borrowing Base percent (1-3/4%)
2.02 Amendment of Section 2.9. Section 2.9(a) is
------------------------
amended to read as follows:
"(a) The Borrowing Base as of the closing of
the Teco Oil & Gas, Inc. acquisition is
acknowledged by the Borrower and the Lender
to be $50,000,000. Commencing on the first
Business Day of May, 1998, and continuing
thereafter on the first Business Day of each
calendar month through the Commitment
Termination Date, the amount of the Borrowing
Base shall be reduced by $600,000."
2.03 Amendment of Section 6.14. Section 6.14 is
-------------------------
amended to read as follows:
"6.14 Rental or Lease Agreement. Enter into any
-------------------------
contract to rent or lease any Properties,
real or personal; provided, however, the
foregoing restriction shall not apply to oil,
gas and mineral leases and personal property
and equipment leased in the ordinary course
of business and included as lease operating
expenses in the third party engineering
report furnished to the Lender."
2.04 Amendment of Section 6.17. Section 6.17 is
-------------------------
amended to read as follows:
"6.17 Current Ratio. For either Borrower,
-------------
permit the ratio of Current Assets of such
Borrower to Current Liabilities of such
Borrower to be less than 1.00 to 1.00.
2.05 Amendment of Section 6.18. Section 6.18 is
-------------------------
amended to read as follows:
"6.18 Tangible Net Worth of Borrowers.
-------------------------------
Permit Tangible Net Worth of Borrowers as of
the close of any fiscal quarter to be less
than $17,900,000 as of September 30, 1997,
plus any equity raised and/or property
acquisitions, plus 75% of quarterly net
income beginning December 31, 1997."
2.06 Addition of Section 2.25. Section 2.25 is added
------------------------
to the Agreement as follows:
"2.25 Term Loans. (A) Term Loan A. The
---------- -----------
Lender agrees to lend to Borrower the sum of
$15,000,000 to provide temporary financing
for the acquisition of Oil and Gas Properties
from Teco Oil & Gas, Inc. Such sum shall be
advanced pursuant to the Note described as
Exhibit I to this Amendment and shall bear
interest at the Floating Rate or LIBO Rate,
plus three percent (3%) and the interest
shall be payable April 1, 1998, and
continuing on the first day of each month
thereafter, until September 30, 1998, when
all interest and principal shall be due and
payable. Upon any sale of equity or debt
securities by Borrower, Borrower, shall
prepay the Term Loan A and all accrued
interest and other amounts payable in respect
thereof, in full, out of proceeds of such
sale.
(B) Term Loan B. The Lender agrees to lend
-----------
to Borrower the sum of $1,500,000 to provide
temporary financing for the acquisition of
Oil and Gas Properties from Teco Oil & Gas,
Inc. Such sum shall be advanced pursuant to
the Note described as Exhibit I to this
Amendment and shall bear interest at the
Floating Rate or LIBO Rate, plus three
percent (3%) and the interest shall be
payable April 1, 1998, and continuing on the
first day of each month thereafter, until
July 1, 1998, when all interest and principal
shall be due and payable. Payment of Term
Loan B shall be funded with additional
capital hereunder to be contributed to
Borrower by the officers and/or members of
the Boards of Directors of Borrower, or by
any other Person designated by Rick G. Avare,
Chief Executive Officer, or any of them,
unless already paid out of proceeds of
another sale of equity or debt security to
third parties sufficient to pay Term Loan A
and other obligations required to be paid out
of such sale.@
2.07 Amendment of Exhibit I. Exhibit I, i.e. the Form
----------------------
of Promissory Note, is as set forth on the three exhibits marked
"Exhibit I" attached to this Amendment.
ARTICLE III.
CONDITIONS
----------
The obligation of the Lender to amend the Agreement as
provided herein is subject to the fulfillment of the following
conditions precedent:
3.01 Receipt of Documents. The Lender shall have
--------------------
received, reviewed, and approved the following documents and
other items, appropriately executed when necessary and in form
and substance satisfactory to the Lender:
(a) multiple counterparts of this First Amendment
and the Note, as requested by the Lender;
(b) Ratification and Amendment of Mortgages;
(c) satisfactory proof that the Teco Oil &
Gas, Inc. acquisition has been completed;
(d) Intercreditor Agreement dated March 5,
1998, by and between Teco Oil & Gas, Inc.,
DNB Energy Assets, Inc., American Resources
of Delaware, Inc., American Resources
Offshore, Inc. and Southern Gas Co. of
Delaware, Inc.;
(e) Promissory Note in the amount of
$18,500,000 from American Resources Offshore,
Inc. to Teco Oil & Gas, Inc. in a form and
substance satisfactory to the Lender; and
(f) such other agreements, documents, items,
instruments, opinions, certificates, waivers,
consents, and evidence as the Lender may
reasonably request.
3.02 Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties contained in Article IV of the
Agreement and this Amendment shall be true and correct.
3.03 Matters Satisfactory to Lender. All matters
------------------------------
incident to the consummation of the transactions contemplated
hereby shall be satisfactory to the Lender.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
The Borrowers hereby expressly re-make, in favor of the
Lender, all of the representations and warranties set forth in
Article IV of the Agreement, and represent and warrant that all
such representations and warranties remain true and unbreached.
ARTICLE V
RATIFICATION
------------
Each of the parties hereto does hereby adopt, ratify,
and confirm the Agreement and the other Loan Documents, in all
things in accordance with the terms and provisions thereof, as
amended by this Amendment.
ARTICLE VI
MISCELLANEOUS
-------------
6.01 Scope of Amendment. The scope of this Amendment
------------------
is expressly limited to the matters addressed herein and this
Amendment shall not operate as a waiver of any past, present, or
future breach, Default, or Event of Default under the Agreement,
except to the extent, if any, that any such breach, Default, or
Event of Default is remedied by the effect of this Amendment.
6.02 Agreement as Amended. All references to the
--------------------
Agreement in any document heretofore or hereafter executed in
connection with the transactions contemplated in the Agreement
shall be deemed to refer to the Agreement as amended by this
Amendment.
6.03 Parties in Interest. All provisions of this
-------------------
Amendment shall be binding upon and shall inure to the benefit of
the Borrower, the Lender and their respective successors and
assigns.
6.04 Rights of Third Parties. All provisions herein
-----------------------
are imposed solely and exclusively for the benefit of the Lender
and the Borrower, and no other Person shall have standing to
require satisfaction of such provisions in accordance with their
terms and any or all of such provisions may be freely waived in
whole or in part by the Lender at any time if in its sole
discretion it deems it advisable to do so.
6.05 ENTIRE AGREEMENT. THIS AMENDMENT CONSTITUTES THE
----------------
ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE
SUBJECT HEREOF AND SUPERSEDES ANY PRIOR AGREEMENT, WHETHER
WRITTEN OR ORAL, BETWEEN SUCH PARTIES REGARDING THE SUBJECT
HEREOF. FURTHERMORE IN THIS REGARD, THIS AMENDMENT, THE
AGREEMENT, THE NOTE, THE SECURITY INSTRUMENTS, AND THE OTHER
WRITTEN DOCUMENTS REFERRED TO IN THE AGREEMENT OR EXECUTED IN
CONNECTION WITH OR AS SECURITY FOR THE NOTE REPRESENT,
COLLECTIVELY, THE FINAL AGREEMENT AMONG THE PARTIES THERETO AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
6.06 GOVERNING LAW. THIS AGREEMENT AND THE NOTE SHALL
-------------
BE DEEMED TO BE CONTRACTS MADE UNDER AND SHALL BE CONSTRUED IN
ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK
WITHOUT GIVING EFFECT TO PRINCIPLES THEREOF RELATING TO CONFLICTS
OF LAW.
6.07 JURISDICTION AND VENUE. ALL ACTIONS OR
----------------------
PROCEEDINGS WITH RESPECT TO, ARISING DIRECTLY OR INDIRECTLY IN
CONNECTION WITH, OUT OF, RELATED TO, OR FROM THIS AGREEMENT OR
ANY OTHER LOAN DOCUMENT MAY BE LITIGATED, AT THE SOLE DISCRETION
AND ELECTION OF THE LENDER, IN COURTS HAVING SITUS IN NEW YORK,
NEW YORK. EACH BORROWER HEREBY SUBMITS TO THE JURISDICTION OF
ANY LOCAL, STATE, OR FEDERAL COURT LOCATED IN NEW YORK, NEW YORK,
AND HEREBY WAIVES ANY RIGHTS IT MAY HAVE TO TRANSFER OR CHANGE
THE JURISDICTION OR VENUE OF ANY LITIGATION BROUGHT AGAINST IT BY
THE LENDER IN ACCORDANCE WITH THIS SECTION.
<PAGE>
IN WITNESS WHEREOF, this First Amendment to Amended and
Restated Credit Agreement is executed effective the date first
hereinabove written.
BORROWERS:
---------
AMERICAN RESOURCES OF DELAWARE, INC.
By: /s/ David Stetson
---------------------------------
David Stetson
General Counsel
SOUTHERN GAS CO. OF DELAWARE, INC.
By: /s/ David Stetson
--------------------------------
David Stetson
General Counsel
AMERICAN RESOURCES OFFSHORE, INC.
By: /s/ David Stetson
-------------------------------
David Stetson
General Counsel
LENDER:
------
DNB ENERGY ASSETS, INC.
By: /s/ William V. Moyer
------------------------------
William V. Moyer
First Vice President
By: /s/ Morten Kreutz
-----------------------------
Morten Kreutz
Vice President
<PAGE>
EXHIBIT I
---------
FORM OF NOTE
PROMISSORY NOTE
---------------
$75,000,000.00 Houston, Texas March 5, 1998
FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned
("Maker") promises to pay to the order of DNB ENERGY ASSETS,
-----
INC., ("Payee"), at its office at 200 Park Avenue, 31st Floor,
-----
New York, New York 10020, the sum of SEVENTY-FIVE MILLION AND
NO/100 DOLLARS ($75,000,000.00), or so much thereof as may be
advanced against this Note pursuant to the First Amended and
Restated Credit Agreement dated of even date herewith by and
among Maker and Payee (as amended, supplemented, or restated from
time to time, the "Credit Agreement"), together with interest at
----------------
the rates and calculated as provided in the Credit Agreement.
Reference is hereby made to the Credit Agreement for
matters governed thereby, including, without limitation, certain
events which will entitle the holder hereof to accelerate the
maturity of all amounts due hereunder. Capitalized terms used
but not defined in this Note shall have the meanings assigned to
such terms in the Credit Agreement.
This Note is issued pursuant to, is the "Note" under,
and is payable as provided in the Credit Agreement. Subject to
compliance with applicable provisions of the Credit Agreement,
Maker may at any time pay the full amount or any part of this
Note without the payment of any premium or fee, but such payment
shall not, until this Note is fully paid and satisfied, excuse
the payment as it becomes due of any payment on this Note
provided for in the Credit Agreement.
This Note is issued, in whole or in part, in renewal
and extension, but not in novation or discharge, of the remaining
principal balance of the Existing Note.
Without being limited thereto or thereby, this Note is
secured by the Security Instruments.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW.
AMERICAN RESOURCES OF DELAWARE, INC.
By:
-----------------------------------
David G. Stetson
General Counsel
SOUTHERN GAS CO. OF DELAWARE, INC.
By:
-----------------------------------
David Stetson
General Counsel
AMERICAN RESOURCES OFFSHORE, INC.
By:
----------------------------------
David Stetson
General Counsel
<PAGE>
EXHIBIT I
---------
FORM OF TERM NOTE A
PROMISSORY NOTE
---------------
$15,000,000 Houston, Texas March 5, 1998
FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned
("Maker") promises to pay to the order of DNB ENERGY ASSETS,
-----
INC., ("Payee"), at its office at 200 Park Avenue, 31st Floor,
-----
New York, New York 10020, the sum of FIFTEEN MILLION DOLLARS
($15,000,000), or so much thereof as may be advanced against this
Note pursuant to the Credit Agreement dated of even date herewith
by and between Maker and Payee (as amended, restated, or
supplemented from time to time, the "Credit Agreement"), together
----------------
with interest at the rates and calculated as provided in the
Credit Agreement.
Reference is hereby made to the Credit Agreement for
matters governed thereby, including, without limitation, certain
events which will entitle the holder hereof to accelerate the
maturity of all amounts due hereunder. Capitalized terms used
but not defined in this Note shall have the meanings assigned to
such terms in the Credit Agreement.
This Note is issued pursuant to, is the "Note" under,
and is payable as provided in the Credit Agreement. Subject to
compliance with applicable provisions of the Credit Agreement,
Maker may at any time pay the full amount or any part of this
Note without the payment of any premium or fee, but such payment
shall not, until this Note is fully paid and satisfied, excuse
the payment as it becomes due of any payment on this Note
provided for in the Credit Agreement.
Without being limited thereto or thereby, this Note is
secured by the Security Instruments.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW.
AMERICAN RESOURCES OF DELAWARE, INC.
By:
-----------------------------------
David G. Stetson
General Counsel
SOUTHERN GAS CO. OF DELAWARE, INC.
By:
-----------------------------------
David Stetson
General Counsel
AMERICAN RESOURCES OFFSHORE, INC.
By:
----------------------------------
David Stetson
General Counsel
<PAGE>
EXHIBIT I
---------
FORM OF TERM NOTE B
PROMISSORY NOTE
---------------
$1,500,000 Houston, Texas March 5, 1998
FOR VALUE RECEIVED and WITHOUT GRACE, the undersigned
("Maker") promises to pay to the order of DNB ENERGY ASSETS,
-----
INC., ("Payee"), at its office at 200 Park Avenue, 31st Floor,
-----
New York, New York 10020, the sum of ONE MILLION, FIVE HUNDRED
THOUSAND DOLLARS ($1,500,000), or so much thereof as may be
advanced against this Note pursuant to the Credit Agreement dated
of even date herewith by and between Maker and Payee (as amended,
restated, or supplemented from time to time, the "Credit
------
Agreement"), together with interest at the rates and calculated
- - ---------
as provided in the Credit Agreement.
Reference is hereby made to the Credit Agreement for
matters governed thereby, including, without limitation, certain
events which will entitle the holder hereof to accelerate the
maturity of all amounts due hereunder. Capitalized terms used
but not defined in this Note shall have the meanings assigned to
such terms in the Credit Agreement.
This Note is issued pursuant to, is the "Note" under,
and is payable as provided in the Credit Agreement. Subject to
compliance with applicable provisions of the Credit Agreement,
Maker may at any time pay the full amount or any part of this
Note without the payment of any premium or fee, but such payment
shall not, until this Note is fully paid and satisfied, excuse
the payment as it becomes due of any payment on this Note
provided for in the Credit Agreement.
Without being limited thereto or thereby, this Note is
secured by the Security Instruments.
THIS NOTE SHALL BE GOVERNED AND CONTROLLED BY THE LAWS
OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO PRINCIPLES
THEREOF RELATING TO CONFLICTS OF LAW.
AMERICAN RESOURCES OF DELAWARE, INC.
By:
-----------------------------------
David G. Stetson
General Counsel
SOUTHERN GAS CO. OF DELAWARE, INC.
By:
-----------------------------------
David Stetson
General Counsel
AMERICAN RESOURCES OFFSHORE, INC.
By:
----------------------------------
David Stetson
General Counsel
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899717
<NAME> AMERICAN RESOURCES OF DELAWARE INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,314,871
<SECURITIES> 0
<RECEIVABLES> 4,370,604
<ALLOWANCES> 4,949
<INVENTORY> 0
<CURRENT-ASSETS> 6,329,587
<PP&E> 127,734,355
<DEPRECIATION> 20,983,734
<TOTAL-ASSETS> 117,751,104
<CURRENT-LIABILITIES> 44,639,085
<BONDS> 0
0
2,154,762
<COMMON> 102
<OTHER-SE> 22,669,305
<TOTAL-LIABILITY-AND-EQUITY> 117,751,104
<SALES> 8,702,552
<TOTAL-REVENUES> 8,702,552
<CGS> 0
<TOTAL-COSTS> 7,277,215
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 948,843
<INCOME-PRETAX> 504,402
<INCOME-TAX> 201,761
<INCOME-CONTINUING> 302,641
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 302,641
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
