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, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
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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
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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.
[X] State issuer's revenues for its most recent fiscal year.
$38,032,146
The aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $21,600,000 as
of March 16, 1998, 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 16, 1998, there were 10,207,231 shares of the
Registrant's Common Stock, par value $.00001 per share,
outstanding, and 265,517 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 .
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ii
<PAGE>
TABLE OF CONTENTS
Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . 1
Item 2. Description of Property . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . . . 19
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . 19
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . 20
Item 7. Financial Statements . . . . . . . . . . . . . . 27
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . 28
PART III
Item 9. Directors and Executive Officers, Promoters
and Control Persons; Compliance with Section
16(a) of the Exchange Act . . . . . . . . . . . . 28
Item 10. Executive Compensation . . . . . . . . . . . . . 34
Item 11. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . 40
Item 12. Certain Relationships and Related Transactions. . 42
PART IV
Item 13. Exhibits and Reports on Form 8-K. . . . . . . . . 47
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . 99
iii
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS:
OVERVIEW:
American Resources of Delaware, Inc. ("ARI") is an
integrated independent oil and gas company engaged in the
acquisition, exploration, development, and production of oil and
gas properties on and offshore Louisiana and on shore Mississippi
(the "Gulf Coast Region") and in southeastern Kentucky
("Appalachia" or the "Appalachian Region"). The Company also
gathers and markets its natural gas in Appalachia. Southern Gas
Co. of Delaware, Inc. ("Southern Gas") and American Resources
Offshore, Inc. ("ARO") are ARI's wholly owned subsidiaries. When
used herein, the words "the Company" refer collectively to ARI,
Southern Gas and ARO unless otherwise indicated.
The Company's acquisition, exploration and development
activities have resulted in substantial increases in reserves,
production and cash flow from oil and gas operations since year-
end 1994. As the result of successful drilling activities and
acquisitions, the Company has grown proved reserves 93% since
year-end 1994, resulting in 1997 earnings before interest, taxes,
depreciation/depletion and amortization and impairment on assets
("EBITDA") of $13.5 million. At December 31, 1997, the Company's
estimated net proved reserves were 35.9 billion cubic feet
("Bcf") of natural gas and 1.4 million barrels ("MMBbls") of oil,
or 44.2 Bcf equivalent with estimated future net cash flows
discounted using a rate of 10% ("PV-10 Value") of approximately
$47.8 million.
The Company plans to expand its activities in the Gulf Coast
Region, resulting in a 1998 drilling and development budget of
$39 million as compared to $2.3 million expended in 1997. Based
upon its large undeveloped acreage position and 3-D seismic
database, the Company expects to significantly increase reserves,
production and cash flow from oil and gas operations in 1998.
The Company successfully drilled 5 wells in the Gulf Coast Region
in 1997 and plans to pursue a more aggressive drilling program by
drilling up to 20 additional Gulf Coast Region wells in 1998. The
Company also plans to pursue acquisitions of additional
producing, developmental and exploratory oil and gas properties.
THE TECO ACQUISITION:
On March 5, 1998, the Company purchased interests in 41
lease blocks in the Gulf of Mexico from TECO Oil & Gas, Inc.
("TECO"). The properties consist of an average 30% interest
in approximately 197,000 acres and 5 producing wells, interests
in two joint ventures and access to approximately 12,500 square
miles of 3-D seismic data. The Company believes that the TECO
acquisition provides ample opportunity to increase reserves,
production and cash flow from development and exploration activities
and has identified 27 initial drilling locations.
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 existing credit facility and a
new facility with DNB Energy Assets, Inc. (a company owned by 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 (the "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 (the "TECO Warrant Agreement") granting TECO
warrants to acquire 600,000 shares of common stock of the Company
(the "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 grants TECO warrants to acquire common stock
equal to 10% of the Company's outstanding common stock and
options to acquire common stock 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, the "Secondary Warrants").
The price per share of common stock evidenced by the Secondary
Warrants is $.00001. On March 16, 1998, the Company filed a Form
8-K/A with the Securities and Exchange Commission regarding this
transaction.
STRATEGY:
The Company's primary goal is to increase reserves,
production and cash flow through acquisition, exploration and
development of oil and gas properties. The Company emphasizes the
following elements in implementing this strategy:
EXPAND GULF COAST REGION ACTIVITIES. The expansion of its
holdings in the Gulf Coast Region is the foundation for the
Company's continued growth. The Gulf Coast Region is a prolific
oil and gas province accounting for approximately 25% of domestic
natural gas production. Management believes that there remains
significant undiscovered reserve potential in the region,
attainable through the use of 3-D seismic technology.
COMPLETE SELECTIVE OIL AND GAS ACQUISITIONS. The Company
seeks to acquire producing oil and gas properties which contain
significant undeveloped reserve potential and opportunities to
increase cash flow through operating improvements. The Company
has demonstrated its ability to access such opportunities by
completing two reportable acquisitions since 1994 and believes
additional acquisition opportunities remain in the Gulf Coast
Region and Appalachia.
EXPAND PROJECT AND DRILL SITE GENERATION PROGRAM. The
Company intends to expand its broad project generation network.
The Company's participation in and with joint ventures such as
Louisiana Offshore Ventures, Texas 3D Program and Houston Energy
Development enables the Company to increase its exposure to a
greater number and variety of high impact drilling prospects
while controlling the costs of these operations. As a result of
the TECO acquisition, the Company gained access to a network of
geoscientists. The integration of those geoscientists with the
Company's internal exploration team will remain an important
foundation for the Company's growth through the drillbit.
USE ADVANCED TECHNOLOGIES. The Company utilizes 3-D seismic
and other advanced technologies to evaluate its exploratory
prospects in the Gulf Coast Region, provide more accurate
geological data and improve the likelihood of drilling success.
The Company has access to nearly 13,000 square miles of 3-D
seismic data, inclusive of the data in the TECO acquisition.
ACQUISITION ACTIVITIES:
The Company actively pursues the acquisition of producing
oil and gas properties in its core areas of operations. From
inception, the Company has acquired interests in approximately
477 wells in the Gulf Coast Region and Appalachia (net of
dispositions), as well as several hundred undeveloped leases in
these areas. The Company has also increased its leasing
activities in the Gulf Coast Region and at December 31, 1997, had
invested approximately $6.2 million for the acquisition of
unproved leases in the area. The Company focuses on acquiring
properties that are undeveloped and operated interests, providing
a base for further evaluation and exploitation in areas adjacent
to Company production.
Set forth below is a brief description of the major property
acquisitions by the Company during the last three years.
DECEMBER 1997 - K. E. RESOURCES - $2.5 million - The Company
acquired interests in three producing leases and one undeveloped
lease covering a combined 15,000 acres in the federal OCS
offshore Louisiana (Ship Shoal Blocks 222 and 225 and West
Cameron 368) from K.E. Resources, Ltd. The properties include 6
platforms servicing the existing wells which contain an estimated
3.5 Bcf equivalent of proved oil and gas reserves net to the
Company. Management believes there are several desirable
locations for additional exploration as well as additional
development opportunities on the property.
SEPTEMBER 1997 - PRIMA - $2.8 million - The Company
increased its position in certain producing and non-producing oil
and gas properties in the Gulf Coast Region from Prima Capital,
LLC ("Prima").
JUNE 1997 - DAUGHERTY - $0.5 million - The Company acquired
interests in 26 natural gas wells in Appalachia from Daugherty
Petroleum, Inc. The acquisition was attractive to the Company
given the properties' immediate proximity to existing Company
facilities.
JULY 1996 - CENTURY - $15.6 million - The Company acquired
working interests in proved developed and undeveloped oil and gas
properties in the Federal OCS offshore Louisiana (South Timbalier
148 containing proved reserves of approximately 12.0 Bcf of gas
and 465,000 barrels of oil) from Century Offshore Management
Corporation ("Century"). The purchase price consisted of $8
million in cash, the cancellation of a $6.5 million promissory
note from Century to the Company and the assumption of existing
liens of $1.1 million.
DECEMBER 1995 - AKS - $4.2 million - The Company acquired
properties in Appalachia from AKS Energy Company ("AKS"). The
Company acquired more than 100 miles of gathering pipelines and
related equipment, ownership in approximately 155 producing wells
located in or adjacent to the Company's existing Kentucky
facilities and net proved reserves of approximately 7.7 Bcf.
TECHNOLOGY:
The Company intends to utilize 3-D seismic surveys to
evaluate its exploratory prospects in the Gulf Coast Region prior
to drilling thereon. The availability of 3-D data for the shallow
waters of the Gulf of Mexico at reasonable cost makes it an
attractive risk management tool. 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 use of 3-D
seismic technology improves its likelihood of drilling success
and provides it with an advantage over those companies that do
not regularly utilize similar technology.
MARKETING AND CUSTOMERS:
The Company markets substantially all of the gas production
from Company-operated properties as well as gas production
purchased from other sources in the Appalachian Region. The
Company has market-sensitive long-term contracts (accounting for
approximately 27%, 31%, and 36% of gas sales during 1997, 1996,
and 1995, 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 is sold to a
variety of purchasers under short-term (less than 12 months)
contracts or thirty-day spot gas purchase contracts. During
1997, 1996 and 1995, the Company out-performed market indexes and
sold gas at prices exceeding average market prices. During 1997,
1996 and 1995, Osram Sylvania purchased in excess of 10% of the
gas sold by the Company, and Southern Resources, Inc. purchased
approximately 48%, 69% and 37%, respectively, of the gas sold by
the Company under a contract which was terminated in May 1997.
The Company has a number of customers for its Appalachian
gas, most of which are industrial end-users located in Kentucky.
However, other end-users of the Company's gas are located in
Ohio, Texas, Tennessee and West Virginia. Its largest customers
currently include Osram Sylvania and General Shale. The
industrial end-users are serviced through a variety of gas
companies, including Columbia Gas of Kentucky, Inc., Texas East
Pipeline, Western Kentucky Gas Company, Cincinnati Gas & Electric
Co. and Louisville Gas & Electric Co.
The Company sells all of its current Gulf Coast gas
production through H&N Gas, Ltd. The Company utilizes forward
sales contracts for portions of its Gulf gas production to
achieve more predictable cash flows and to reduce its exposure to
fluctuations in gas prices. The remaining portion of current
Gulf Coast production is not subject to forward sales contracts
so as to provide the Company the opportunity to benefit from
increases in prices on that portion of the production in the
event price increases materialize. The Company entered into
forward sales arrangements with respect to approximately 50% of
its estimated net natural gas production for 1997 at a weighted
average price of approximately $2.40 per thousand cubic feet
("Mcf"). All of these arrangements were settled on a monthly
basis. The Company continuously reevaluates its sales contracts
in light of market conditions, commodity price forecasts, capital
spending plans and debt service requirements.
The Company sells 50% of its Gulf Coast oil production to
Citgo Petroleum Corporation and 25% each to Texon Corporation and
Conoco.
Most of the Company's Appalachian production is transported
through its approximately 300 miles of gas gathering systems
running through Southeastern Kentucky to transmission pipelines
which are not owned by the Company. Transportation space on
these transmission pipelines may be occasionally limited and at
times unavailable due to repairs or improvements being made to
the facilities. The Company's access to transportation options
could also be affected by regulation of intrastate and interstate
gas transportation. In an attempt to promote competition, the
Federal Energy Regulatory Commission ("FERC") has issued a series
of orders which have altered significantly the marketing and
transportation of natural gas (See "Regulation: Federal
Regulation of Sales and Transportation of Natural Gas"). The
effect of these orders to date has been to enable producers such
as the Company to market their natural gas production to
purchasers other than the interstate pipelines located in the
vicinity of their producing properties. While the Company has
not experienced any inability to market its production, if
transportation space becomes restricted or is unavailable, the
Company's cash flow could be adversely affected. However, in
order to guard against curtailment of deliveries due to normal
capacity limitations, the Company maintains firm or priority
transportation capacity where available on key transmission
pipelines.
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 and banking relationships coupled with the
locations of its leasehold acreage, its exploration, drilling and
production capabilities, and the experience of its management and
staff 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.
ENVIRONMENTAL REGULATION:
Activities of the Company with respect to (1) exploration,
development, and production of oil and natural gas and (2) the
operation and construction of pipelines, plants, and other
facilities for the transportation and treatment of natural gas
and natural gas liquids are subject to stringent environmental
regulation by local, state and federal authorities, including the
U.S. Environmental Protection Agency ("EPA"). Such regulation
has increased the cost of planning, designing, drilling,
operating and in some instances, abandoning wells. Similarly,
such regulation has also increased the cost of design,
construction, and operation of natural gas pipelines and
treatment facilities. In most instances, the regulatory
requirements relate to the handling and disposal of drilling
production waste and waste created by water and air pollution
control procedures or equipment. Although the Company believes
that compliance with existing environmental regulations will not
have a material adverse effect on operations or earnings, the
risks of substantial costs and liabilities are inherent in oil
and gas operations, and there can be no assurance that
significant costs and liabilities, including civil and criminal
penalties, will not be incurred. Moreover, it is possible that
other developments, such as stricter environmental laws and
regulations, and claims for damages to property or persons
resulting from the Company's operations could result in
substantial costs and liabilities to the Company.
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 with respect 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 or property damages allegedly caused by the
hazardous substances released into the environment. At least two
federal courts have held that certain wastes associated with the
production of crude oil may be classified as hazardous substances
under CERCLA. At this time, neither the Company nor its
predecessors has been designated as a potentially responsible
party under CERCLA.
The Company generates or has generated in the past wastes,
including hazardous wastes, that are subject to the federal
Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. EPA and various state agencies have promulgated
regulations that limit the disposal options for certain hazardous
and nonhazardous wastes. Furthermore, it is possible that
certain wastes generated by the Company's oil and gas operations
that are currently exempt from treatment as "hazardous wastes"
may in the future be designated as "hazardous wastes" under RCRA
or other applicable statutes and therefor be subject to more
rigorous and costly operating and disposal requirements.
The Company currently owns or leases, or has in the past
owned or leased, numerous properties that for many years have
been either used for the exploration and production of oil and
gas or used to store and maintain equipment that was regularly
used in these operations. Although the Company utilized
operating and disposal practices that were standard for the
industry at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or
leased by the Company or on or under other locations where such
wastes have been taken for disposal. In addition, many of these
properties have from time to time been operated by third parties
whose treatment and disposal or release of hydrocarbons or other
wastes was not under the Company's control. These properties and
the waste disposed thereon may be subject to CERCLA, RCRA, and
analogous state laws. Under such laws, the Company could be
required to remove or remediate previously disposed wastes
(including wastes disposed of or released by prior owners or
operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to
prevent future contamination.
The Oil Pollution Act ("OPA") amends certain provisions of
the Federal Water Pollution Control Act of 1972, commonly
referred to as the Clean Water Act ("CWA") and other statutes as
they pertain to the prevention of and response to oil spills into
the navigable waters of the United States. OPA subjects owners
and operators of facilities to strict joint and several liability
for all containment and cleanup costs and certain other public
and private damages arising from a spill, including, but not
limited to, the costs of responding to a release of oil to
surface waters. OPA establishes a liability limit for onshore
facilities of $350 million and for offshore facilities of all
removal costs plus $75 million, however a party cannot take
advantage of the liability limits if the spill is caused by gross
negligence or willful misconduct or resulted from a violation of
a federal safety, construction, or operating regulation. If a
party fails to report a spill or cooperate in the cleanup,
liability limits likewise do not apply. OPA also imposes ongoing
requirements on responsible parties, including proof of financial
responsibility for potential oil spills. OPA originally required
owners and operators of offshore oil and gas facilities to
establish $150 million in financial responsibility. Under the
rule, the responsible party can establish financial
responsibility through insurance, guaranty, indemnity, surety
bond, letter of credit, qualification as a self-insurer, or a
combination thereof. On September 30, 1996, Congress passed
legislation lowering the minimum financial responsibility
requirement for offshore facilities in United States waters under
OPA to $35 million, subject to increases up to a maximum of $150
million if the risk posed by a potential oil spill indicates the
increase is warranted. The United States Department of the
Interior Minerals Management Service ("MMS") has proposed a
final rule to implement these financial assurance requirements.
See 62 Fed. Reg. 14052 (March 25, 1997). MMS has not yet issued
the final financial responsibility rule. While the financial
assurance requirements under OPA may impose additional costs
on the Company, the impact of the rule is not expected to be
any more burdensome to the Company than it will be to other
similarly situated owners and operators with operations within
or adjacent to the waters of the United States.
The CWA provides penalties for any discharges of petroleum
product in reportable quantities and imposes substantial
liability for the costs of removing a spill. State laws for the
control of water pollution also provide varying civil and
criminal penalties and liabilities in the case of releases of
petroleum or is derivatives into surface waters or in the ground.
Federal regulations under the CWA and OPA require certain owners
or operators of facilities that store or otherwise handle oil,
such as the Company, to prepare and implement spill prevention,
control and countermeasure plans and facility response plans
relating to the possible discharge of oil into surface waters.
In addition, the CWA and analogous state laws require permits to
authorize discharges into surface waters or to construct
facilities in wetland areas. With respect to certain of its
operations, the Company is required to maintain such permits or
meet general permit requirements. In 1992, EPA adopted
regulations concerning the discharge of stormwater runoff. This
program requires that covered facilities obtain individual
permits, participate in a group permit, or seek coverage under an
EPA general permit. The Company believes that it is in
substantial compliance with the requirements of the CWA and OPA
and that any non-compliance would not have a material adverse
effect on the Company.
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",such as sales by the Company of its own
production. 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 an open access
basis for all gas supplies, and separate or "unbundled" from the
pipelines sales of gas. 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 federal appellate courts have largely affirmed
the significant features of Order No. 636 and numerous related
orders pertaining to the individual pipelines. Nevertheless,
because further review of certain of these orders is still
possible, various appeals remain pending, and the FERC continues
to review and modify its open access regulations, the outcome of
such proceedings and their ultimate impact on the Company's
business is uncertain.
The FERC has announced several important transportation-
related policy statements and proposed rule changes, including
the appropriate manner in which interstate pipelines release
capacity under Order No. 636 and, more recently, the price which
shippers can charge for their released capacity. In addition, in
1995, FERC issued a policy statement on how interstate natural
gas pipelines can recover the costs of new pipeline facilities.
In January 1996, the FERC issued a policy statement and a request
for comments concerning alternatives to its traditional
cost-of-service ratemaking methodology. A number of pipelines
have obtained FERC authorization to charge negotiated rates as
one such alternative. In February 1997, the FERC announced a
broad inquiry into issues facing the natural gas industry to
assist the FERC in establishing regulatory goals and priorities
in the post-Order No. 636 environment. In November 1997, the
FERC issued a proposed rulemaking to further standardize pipeline
transportation tariffs that, if implemented as proposed, could
adversely affect the reliability of scheduled interruptible
transportation service. In December 1997, the FERC requested
comments on the financial outlook of the natural gas pipeline
industry, including among other matters, whether the FERC's
current rate making policies are suitable in the current industry
environment. While these changes would affect the Company only
indirectly, they were intended to further enhance competition in
the natural gas markets. The Company cannot predict what action
the FERC will take on these matters, nor can it predict whether
the FERC's actions will achieve its stated goal of increasing
competition in natural gas markets. However, the Company does
not believe that it will be treated materially differently than
other natural gas producers and markets with which it competes.
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. While the 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.
The Company owns certain natural gas pipeline facilities that
it believes meet the traditional tests the FERC has used to
establish a pipeline's status as a gatherer not subject to FERC
jurisdiction. Whether on state or federal land or in offshore
waters subject to the OCSLA, natural gas gathering may receive
greater regulatory scrutiny in the post-Order No. 636
environment.
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 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. The MMS also has
regulations restricting the flaring or venting of natural gas and
has recently proposed to amend such regulations to prohibit the
flaring of liquid hydrocarbons and oil without prior
authorization. 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 would be
required effective November 26, 1993. As a result of these
changes, operators in the OCS waters of the Gulf of Mexico were
required to increase their respective area wide bonds to
$3,000,000 from a 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. The MMS issued a notice of proposed
rulemaking in which it proposes to amend its regulations
governing the calculation of royalties and the valuation of crude
oil produced from federal leases. This proposed rule would modify
the valuation procedures for both arm's length and non-arm's
length crude oil transactions to decrease reliance on oil posted
prices and assign a value to crude oil that better reflects
market value, establishing a new MMS form for collecting value
differential data, and amend the valuation procedure for the sale
of federal royalty oil. The Company cannot predict what action
the MMS will take on this matter, nor can it predict at this
stage of the rulemaking proceeding how the Company might be
affected by this amendment to the MMS' regulations.
In April 1997, after two years of study, the MMS withdrew
proposed changes to the way it values natural gas for royalty
payments. These proposed changes would have established an
alternative market-based method to calculate royalties on certain
natural gas sold to affiliates or pursuant to non-arm's length
contracts.
Recently, the MMS has issued a final rule to clarify the
types of costs that are deductible transportation costs for
purposes of royalty valuation of production sold off the lease.
In particular, under the rule, the MMS will not allow deduction
of costs associated with marketer fees, cash out and other
pipeline imbalance penalties, or long-term storage fees. The
Company cannot predict what, if any effect the new rule will have
on its operations.
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
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, and generally prohibit the venting or
flaring of gas. To the extent any of the Company's natural gas
gathering facilities are subject to state regulations, regulation
of gathering facilities generally includes various safety,
environmental, and in some circumstances nondiscriminatory take
requirements, but does not generally entail rate regulation.
These regulatory burdens may affect profitability, and the
Company is unable to predict the future cost or impact of
complying with such regulations.
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. Commencing in October
1993, the FERC issued a series of rules (Order Nos. 561 and
561-A) establishing an indexing system under which oil pipelines
will be able to change their transportation rates, subject to
prescribed ceiling levels. The indexing system, which allows or
may require pipelines to make rate changes to track changes in
the Producer Price Index for Finished Goods, minus one percent,
became effective January 1, 1995. In certain circumstances, these
rules permit oil pipelines to establish rates using traditional
cost of service or other methods of rate making. The effect that
these rules may have on the cost of moving the Company's product
to market is uncertain.
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. 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 16, 1998, the Company, including its subsidiaries,
had 23 full time employees, none of whom 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.
ITEM 2. DESCRIPTION OF PROPERTY:
The Company's oil and gas properties are concentrated in the
Gulf Coast Region and Appalachia, representing approximately 61%
and 39%, respectively, of the Company's PV-10 Value as of
December 31, 1997. These regions are well established oil and
gas producing basins with a substantial history of exploration
and development activity.
The Company's interests in the wells it operates represented
approximately 39% of its PV-10 Value of December 31, 1997. The
Company has budgeted $39 million of capital expenditures for
exploration and development in the Gulf Coast Region in 1998.
The following table provides reserve information for the
Company's major fields as of December 31, 1997:
<TABLE>
<CAPTION>
% of
Gas Total
Oil Gas Equivalent PV-10
Core Area/Field (MBbl*) (MMcf*) (MMcfe*) Value
------- ------- ---------- -----
<S> <C> <C> <C> <C>
GULF COAST REGION:
- -----------------
South Timbalier 148......... 627 9,182 12,943 38%
Ship Shoal 150.............. 413 508 2,987 11%
Ship Shoal 222/225.......... 263 364 1,942 --
West Cameron 368............ 5 2,150 2,180 6%
Oakvale Dome................ 1 517 523 2%
Sunrise..................... 1 1,443 1,451 3%
Other....................... 75 0 450 1%
Appalachia:
Gausdale.................... -- 14,859 14,859 26%
Other....................... -- 6,792 6,792 13%
Michigan: -- 102 102 --
Total net proved reserves 1,385 35,917 44,229 100%
</TABLE>
*(MBbl - thousand barrels: MMcf - million cubic feet; MMcfe - million
cubic feet equivalent.)
GULF COAST REGION:
SOUTH TIMBALIER 148.
South Timbalier Block 148 is located 30 miles offshore
Louisiana in an average water depth of 100 feet and is operated
by Newfield Exploration Company. The Company owns an interest in
the west half of the block. The Company acquired its 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, which has produced 64 million barrels of oil and
818 Bcf of gas from upper to middle Pliocene sands. Oil and gas
accumulations occur in 22 different sands in the upper and middle
Pliocene. As of December 31, 1997, there were 11 producing wells
on 4 production platforms on the lease. The Company's working
interest in the wells ranges from 10% to 45%.
SHIP SHOAL 150.
Ship Shoal Block 150 is located 31 miles offshore Louisiana
in an average water depth of 53 feet and is operated by Century.
The lease is situated on the northwest flank of the Ship Shoal
Block 154 Field salt dome, which 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 from Century in 1995
and successfully drilled 2 wells that year, both of which are
currently producing. Additional exploratory drilling
opportunities exist on the lease and are currently being
evaluated utilizing 3-D seismic.
SHIP SHOAL 222/225.
Ship Shoal Blocks 222 and 225 are located in an average
water depth of 140 feet and are operated by Sonat Exploration
Inc. The Company acquired its interest from K.E. Resources,
Ltd., during the fourth quarter of 1997. The Company owns
working interests of between 14.25% and 17.81% in 12 wells which
are currently producing. Additional exploratory drilling
opportunities exist on the leases and are currently under
evaluation utilizing 3-D seismic.
WEST CAMERON 368.
West Cameron Block 368 is located 58 miles offshore
Louisiana in an average water depth of 80 feet. The Company owns
an interest covering 5,000 acres. The Company acquired its
interest from K.E. Resources, Ltd. during the fourth quarter of
1997. The property is operated by Century, and one well is
currently producing in which the Company owns a 27.5% working
interest. The Company is currently evaluating 3-D seismic data
to select developmental drilling locations.
OAKVALE DOME.
Oakvale Dome is a piercement salt dome prospect in Jefferson
Davis County, Mississippi, operated by Texstar North America. In
1997, the Company increased its working interest in the property
to 6%. The Company drilled the initial well on the prospect in
June 1997 and commenced production in September 1997. Completion
of 3-D seismic survey interpretation on the Oakvale Dome,
including the selection of future additional drilling locations,
is expected in the second quarter of 1998.
SUNRISE.
The Sunrise prospect is a salt dome field located in
Terrebonne Parish, Louisiana, operated by Mandalay Oil & Gas,
LLC. The Company owns a 10% working interest before payout which
reduces to 7.8% after payout. The initial well on the prospect,
the St. Martin #1, was drilled during the fourth quarter of 1997
and production is anticipated to commence during the first
quarter of 1998.
SUNNYSIDE.
The Sunnyside Field is a salt wall prospect in Jefferson
County, Mississippi, operated by Great West Energy, Inc. The
initial well on the prospect, the Great West Energy Folks Place
#1, was drilled and placed into production during the fourth
quarter of 1997. The Company owns a 23% working interest in this
well prior to payout, which interest will be reduced to 20.7%
after payout. The Company is currently evaluating additional
development drilling locations are currently being evaluated on
the Sunnyside prospect.
APPALACHIAN REGION:
The majority of the wells that the Company owns in the
Appalachian Region are located in the Gausdale gas field in
Southeastern Kentucky and were acquired in various transactions
since 1993. 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 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. The Company's working
interest in the wells ranges from 5% to 100%. The Company
operates all of its Kentucky wells through its subsidiary,
Southern Gas.
OIL AND GAS OPERATIONS:
OIL AND GAS RESERVES.
Estimated net quantities and the related costs and present
values of the oil and gas reserves of the Company are set out in
"Oil and Gas Producing Activities (Unaudited)" to the Financial
Statements included in Item 7 to this Report on Form 10-KSB. No
estimates of the Company's total, proved net oil or gas reserves
have been filed with or included in reports to any other federal
authority or agency since the beginning of the last fiscal year.
PRODUCTION.
The following tables set forth for each of the last three
fiscal years by the primary geographic areas in which the Company
owns production, which are identified as Kentucky and the Gulf
Coast Region, the average sale price and production cost per
barrel of oil or Mcf of gas 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.
KENTUCKY (GAS ONLY)*
<TABLE>
Average Sales Average Production
Price Per Unit Cost Per Unit
Fiscal Year Gas (Mcf) Gas (Mcf)
<C> <C> <C>
1997 $2.24 $0.79
1996 $2.12 $0.59
1995 $2.05 $0.41
</TABLE>
*For the years 1997, 1996 and 1995, 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>
Average Sales Average Production
Per Unit Per Unit
Fiscal Year Oil (per bbl) Gas (per Mcf) Oil (per bbl) Gas (per Mcf)
<C> <C> <C> <C> <C>
1997 $18.08 $2.64 $1.56 $0.27
1996 $20.71 $2.96 $2.10 $0.35
1995 $16.50 $1.81 $2.42 $0.41
</TABLE>
PRODUCTIVE WELLS AND ACREAGE AS OF DECEMBER 31, 1997.
The following tables set forth as of December 31, 1997, 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. Productive wells are producing
wells and wells capable of production, including gas wells
awaiting pipeline connections and oil wells awaiting connection
to production facilities. Wells that are completed in more than
one producing horizon are counted as one well.
KENTUCKY (GAS ONLY)
<TABLE>
Total Gross Total Net Total Gross Total Net
Productive Wells Productive Wells Developed Acres Developed Acres
<C> <C> <C> <C>
485 388 33,950 21,280
</TABLE>
GULF COAST REGION (GAS AND OIL PRODUCED FROM EACH WELL)
<TABLE>
Total Gross Total Net Total Gross Total Net
Productive Wells Productive Wells Developed Acres Developed Acres
<C> <C> <C> <C>
30 6.5 25,425 5,924
</TABLE>
Undeveloped Acreage as of December 31, 1997.
The following table sets forth as of December 31, 1997, the
amount of undeveloped gross and net leasehold acreage in which
the Company had an interest.
KENTUCKY
<TABLE>
Gross Net Acreage
Undeveloped Acres Undeveloped Acres Concentration Remaining Term
<C> <C> <C> <C>
12,000 10,500 * **
</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
the acquisition of proved producing properties 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 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.
GULF COAST REGION
<TABLE>
Gross Net Acreage
Undeveloped Acres Undeveloped Acres Concentration Remaining Term
<C> <C> <C> <C>
16,326 2,234 * **
</TABLE>
*Not less than the legal spacing required by applicable
authorities.
**The remaining term of the leases varies.
DRILLING ACTIVITIES.
The following table describes the drilling activity of the
Company for the last three fiscal years.
<TABLE>
Net Productive Net Dry Net Productive Net Dry
Exploratory Exploratory Developmental Developmental
Fiscal Year Wells Drilled Wells Drilled Wells Drilled Wells Drilled
<C> <C> <C> <C> <C>
1997 .5(1) 1.7(2) 3(1) 0
1996 0 0 4(3) 0
1995 1(4) 0 5(4) 0
</TABLE>
(1) The Company owns a 15% working interest in 1 developmental
well drilled in the Gulf Coast Region and a 50% working
interest in 6 developmental wells drilled in Kentucky,
together with working interests ranging between 6% and 23%
in 4 exploratory wells drilled in the Gulf Coast Region.
(2) The Company drilled 6 dry exploratory wells in which it had
working interests ranging between 8.5% and 48%. All of the
wells were located in the Gulf Coast Region.
(3) The Company owns a 50% working interest in 8 developmental
wells it drilled in the Kentucky Region and a 45% working
interest in 1 developmental well drilled in the Gulf Coast
Region in 1996.
(4) The Company currently owns a 50% working interest in 2
exploratory wells it drilled in the Gulf Coast Region and a
100% working interest in 5 developmental wells it drilled in
the Kentucky Region in 1995.
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.
The Kentucky Revenue Cabinet has assessed Southern Gas for
outstanding sales tax of approximately $1,500,000, plus penalties
and interest, allegedly owed to the Commonwealth of Kentucky by
Southern Gas Company ("SGC"), a dissolved entity, prior to
Southern Gas' acquisition of the assets of SGC. Southern Gas
has denied the liability and believes it will be successful in
its defense of this assessment. Southern Gas' defenses to the
assessment and/or in support of reduction of the assessment
include, but are not limited to, that credit should be
received for all gas delivered to (1) interstate customers;
(2) customers who resold the product; (3) direct pay
customers; and (4) industries where the consumable materials
are utilized in the manufacturing process. Based on these
defenses, as well as the assertion by Southern Gas that it
is not responsible for the debts of SGC, management intends
vigorously defend its position and believes that any resulting
liability will not have a significant impact on the Company's
financial condition, operations or liquidity.
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 1997.
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
sales prices of the Common Stock for the periods 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>
1997 1996
Sales Sales
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $3.88 $2.22 $4.38 $2.25
Second Quarter $3.06 $1.88 $4.50 $3.25
Third Quarter $3.03 $2.06 $4.50 $3.25
Fourth Quarter $3.88 $2.06 $3.63 $2.44
</TABLE>
HOLDERS:
At March 16, 1998, there were approximately 374 holders of
record of the Company's Common Stock, and 14 holders of record of
the Company's Series 1993 Preferred Stock.
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. 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 Note 14 to Notes to Financial Statements included
in Item 7 of this Report on Form 10-KSB.
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, 1997. The Company's consolidated 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
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 and in the
Form 8-K which the Company filed with the Securities and Exchange
Commission on July 25, 1997.
GENERAL:
American Resources of Delaware, Inc. is a fully integrated
independent oil and gas company engaged in the acquisition,
exploration, development, and production of oil and gas
properties onshore and offshore Louisiana and onshore Mississippi,
and in southeastern Kentucky. The Company also gathers and markets
its gas in Appalachia.
ARI was formed in August 1992, to acquire the assets and
assume certain liabilities of Standard Oil and Exploration of
Delaware, Inc. ("Standard Oil"). Since the consummation of the
Standard Oil transaction in April 1993, the Company has grown,
primarily through acquisition and development activities. The
Company's acquisition expenditures for 1996 through 1997 are
listed below by major areas. As a result of certain acquisitions
and dispositions of oil and gas properties, operating results may
not be comparable from period to period.
<TABLE>
Year ended December 31,
-----------------------
1997 1996
---- ----
(000) (000)
<S> <C> <C>
Gulf of Mexico
Onshore $3,793 $ 3,026
Offshore 3,179 16,088
Kentucky 536 2,251
------ -------
Total acquisitions $7,508 $21,365
</TABLE>
ARI's revenue, profitability and cash flow are substantially
dependent upon prevailing prices for oil and gas and the volumes
of oil and gas it produces. In addition, the Company's proved
reserves and oil and gas production will decline as oil and gas
are produced unless the Company is successful in acquiring
producing properties or conducts successful exploration and
development drilling activities.
The Company follows the successful efforts method of
accounting for its oil and gas properties. Under this method of
accounting, all property acquisition costs and costs of
exploratory and development wells are capitalized when incurred,
pending determination of whether the well has found proved
reserves. If an exploratory well has not found proved reserves,
the costs of drilling the well are charged to expense. The
costs of development wells are capitalized whether productive or
nonproductive.
The Company utilizes forward sales contracts for gas
production to achieve more predictable cash flows and to reduce
its exposure to fluctuations in gas prices. These arrangements
are settled on a monthly basis. The Company continuously
re-evaluates its sales contracts in light of market conditions,
commodity price forecasts, capital spending plans and debt
service requirements. As of March 16, 1998, approximately 67% of
the Company's estimated natural gas production for the period of
March 1998 through October 1998 was committed to forward sales
contracts at an average price of $2.25 per Mcf. See Item 1,
"Description of Business -- Marketing and Customers."
RESULTS OF OPERATIONS:
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER
31, 1996.
REVENUES. Total revenues for the Company increased 15% to
$38,032,146 for 1997 compared with $33,039,173 in 1996, primarily
due to an increase in production.
<TABLE>
Operating
Revenue
% Increase Increase
1997 1996 (Decrease) (Decrease)
---- ---- ---------- ----------
(000)
<S> <C> <C> <C> <C>
Production volumes:
Natural gas (MMcf) 4,579 1,830 150% $7,362
Oil (Mbbl) 426 200 113% 3,554
Average sale prices:
Natural gas (per Mcf) $2.57 $2.40 7%
Oil (per Bbl) $18.08 $20.71 (13%)
Weighted Average (Mcfe) $2.73 $2.82 (3%)
</TABLE>
Production revenue increased 128% in 1997 to $19,456,938
from $8,540,569 in 1996. The increase is primarily due to the
acquisition of South Timbalier 148 in late 1996 and subsequent
production of 11 wells thereon. The increase in production was
partially offset by reduced prices.
Marketing revenues decreased approximately $5.2 million, or
23%, primarily due to the elimination of third party sales on the
spot market through its association with Southern Resources, Inc.
as a result of the Company's decision to focus on exploration and
development activities.
PRODUCTION EXPENSE. Production expense increased $1.2
million, or 84%, for 1997, due primarily to increased production
volumes and attendant costs associated with the South Timbalier
148 wells. The average production cost was $0.36 per thousand
cubic foot equivalent ("Mcfe") versus $0.46 in 1996, a decrease of
22%. This average reflects lower operating costs in the Gulf
Coast Region of $0.27 per Mcfe versus $0.35 in 1996. The reduction
in costs in the Gulf Coast was slightly offset by increased
operating costs on the Company's Kentucky properties, $0.79 per
Mcf versus $0.59 per Mcf in 1996.
UNSUCCESSFUL WELL COSTS. The Company recognized
approximately $785,000 in dry hole expense in 1997 as a result of
unsuccessful wells encountered in its exploration and development
program. There were no such costs in 1996.
IMPAIRMENT OF ASSETS. 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." SFAS No. 121 requires that an
impairment loss be recognized whenever the carrying amount of an
asset exceeds the sum of the estimated future cash flows
(undiscounted) of the asset. For each asset determined to be
impaired, an impairment loss equal to the difference between
the carrying value and the fair value of the asset was recognized.
With respect to the Company's oil and gas properties, fair value,
on a depletable basis, was estimated to be the present value of
expected future cash flows computed by applying estimated future
gas and oil prices, as determined by management, to estimated future
production of oil and gas reserves over the economic lives of the
reserves. Pursuant to SFAS No. 121, the Company recorded a non-cash
charge of $1.6 million related to its Michigan properties.
The Company also recorded a non-cash charge of $3.5 million,
of which $2.0 million was impairment of undeveloped oil and gas
properties and $1.5 million was impairment in the Company's investment
in the common stock of Century Offshore Management Corporation ("Century").
GENERAL AND ADMINISTRATIVE ("G&A") EXPENSE. G&A expense
increased 43% to $3,322,887 in 1997, compared with $2,324,008 in
1996. This expense increased principally due to the
establishment of a New Orleans office in late 1996 and the
expanded staffing of that office during the fourth quarter of
1997.
DEPRECIATION, DEPLETION AND AMORTIZATION ("DD&A") EXPENSE.
DD&A expense increased 160% to $8,606,372 for 1997 from
$3,309,159 in 1996. The increase results primarily from increased
production on the South Timbalier 148 and Ship Shoal 150 wells and
the establishment of a reserve for future plugging and abandonment
costs.
INTEREST EXPENSE. Interest expense increased $306,104, or
13% in 1997. The increase was attributable to additional
borrowings under the Company's credit facility to fund
acquisition, exploration and development activities.
INTEREST INCOME. Interest income for 1997 was $45,491
compared with $801,633 for 1996. Interest income in 1996
resulted primarily from interest earned on notes receivable
issued to Century which were extinguished in July 1996.
NET INCOME. Due to the factors described above, net income
for the Company decreased $2,758,346 to ($1,846,591). Results
of the Company's operations for oil and gas activities were as
follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Oil and gas sales $19,456,938 $8,540,569
Unsuccessful well costs (784,931)
Gain (loss) on sale of
properties (153,000)
Production costs (2,583,426) (1,402,389)
---------- ----------
Cash flow from oil and
gas operations $16,088,581 $6,985,180
Depreciation, depletion and
amortization (7,675,249) (2,431,633)
Impairment of assets (3,595,620)
---------- ----------
$4,817,712 $4,553,547
========== ==========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES:
As of December 31, 1997, the Company had cash and cash
equivalents of approximately $1.2 million compared with
approximately $353,000 for 1996.
Funding for the Company's business activities has
historically been provided by operating cash flow, bank
borrowings and equity capital from private placements. The
Company regularly engages in discussions relating to potential
acquisitions of oil and gas properties or companies engaged in
the oil and gas business. The Company has no present agreement,
commitment or understanding with respect to any such acquisition
other than the TECO acquisition (see Item 1, "Description of
Business -- Overview & The TECO Acquisition"). Any future
acquisitions may require additional financing which will be
dependent upon financing arrangements, if any, available at the
time.
NET CASH PROVIDED BY OPERATING ACTIVITIES. Net cash
provided by operating activities was $9.4 million and $6.1
million for 1997 and 1996, respectively. Increases in oil and
gas production and revenues resulting principally from
acquisition and development activities between the two years, as
well as generally improved oil and gas prices, increased cash
flows. The increase in 1997 was primarily due to higher
production levels from the Company's South Timbalier 148
property.
NET CASH USED IN INVESTING ACTIVITIES. Net cash used in
investing activities by the Company was $12.7 million and $18.9
million for 1997 and 1996, respectively. Acquisition and
development of oil and gas properties were the primary uses of
funds.
The following table sets forth capital expenditures,
including acquisitions, made by the Company during the periods
indicated:
<TABLE>
Year ended December 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Oil and gas expenditures
Development $1,357,185 $ 3,314,867
Exploration 929,442
Acquisitions 7,508,428 21,365,152
---------- ----------
Total $9,795,055 $24,680,019
========== ==========
</TABLE>
For 1998, the Company has budgeted approximately $97 million for
oil and gas acquisition, development and exploration, including
approximately $58 million for the TECO acquisition.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Cash provided by
the Company's financing activities was $4.1 million (including
additional borrowings and net proceeds from issuance of additional
equity securities) and $12.3 million (including additional borrowings
and net proceeds from issuance of additional equity securities) for
1997 and 1996, respectively.
CREDIT FACILITY. At December 31, 1997, an aggregate of
$28.7 million was outstanding under the Credit Facility with Den
norske Bank, ASA ("Den norkse"). The Credit Facility provides for
a $75 million revolving commitment which will be payable in full
on or before February 1, 2002. The amount of credit available at
any time under the Credit Facility may not exceed the borrowing
base which was $29.2 million at December 31, 1997, and will be
redetermined semiannually. The borrowing base was increased to
$50 million in connection with the TECO acquisition and is fully
utilized at March 31, 1998. Advances under the Credit Facility
bear interest at either a Prime rate or LIBO (London Interbank
Offer) rate (plus 2.5%) of interest, at the Company's option.
The Credit Facility contains customary covenants (see the First
Amended and Restated Credit Facility Agreement attached as
Exhibit 10.86 to the Form 8-K filed with the Securities and
Exchange Commission on November 19, 1997).
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,
1997:
<TABLE>
Required Actual
<S> <C> <C>
Debt coverage ratio 1.2 to 1.0 1.6 to 1.0
Current ratio 1.0 to 1.0 3.8 to 1.0
Tangible net worth $15,577,607 $24,052,000
General and administrative expenses
(not to exceed in current year) $6,184,200 $3,323,000
Quarterly interest ratio 3.0 to 1.0 4.6 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, 1997, the Company was in compliance with all of
the required financial ratios.
EQUITY SECURITIES. In order to assist in its continued
growth and expansion, the Company completed one private placement
during 1997 and two private placements during 1996 as follows:
In July 1997, pursuant to a Securities Purchase Agreement,
the Company's primary lender, Den norske, purchased 500,000
shares of common stock of the Company for a price of $2.66
per share, for a total of $1,330,000 ($1,132,911 net of
placement costs). The Company and Den norske also entered
into a Registration Rights Agreement wherein Den norske was
granted certain demand and piggyback registration rights
with respect to the shares purchased.
In late 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 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. 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.
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.
BRIDGE FINANCING. In order to complete the acquisition of
the TECO properties in March 1998, Den norske increased the
Company's borrowing base to $50.0 million which provided an
additional $22 million under the Credit Facility; and additional
bridge financing of $16.5 million was also provided. The financing
bears interest at either Prime rate or LIBO rate plus 2.5%, at
the Company's option, and matures October 1, 1998. As partial
consideration for the TECO properties, the Company also executed
the TECO Note in the amount of $18,500,000 (see Item 1, "Description
of Business -- The TECO Acquisition").
The capital expenditures for the development and exploratory
program, estimated to be $39 million in 1998, are substantially at
the discretion of the Company. 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 Den norske bridge loan matures in July 1998
with the balance maturing in October 1998; and in the event the
Company fails to satisfy these commitments or refinance the debt,
the Bank could declare the Company in default. However, the
Company believes that cash flow from operations would be adequate
to repay the bridge loan if the capital expenditure level for the
development and exploratory program is adjusted.
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 Den norske 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 (see Item 1, "Description of
Business--The TECO Acquisition" in this Report on Form 10-KSB).
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 it 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.
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 1997
and 1996.
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
Rick G. Avare(1)(6) 36 Director, President and
Chief Executive Officer
Douglas L. Hawthorne(2)(6)(7) 56 Chairman of the Board
Leonard K. Nave(3)(6) 62 Director
Donald A. Schellpfeffer(8) 55 Director
David Fox, Jr.(7)(8) 77 Director
Len Aldridge(8) 60 Director
Robert L. McIntyre(7) 52 Director
Ralph A. Currie(4) 43 Vice President of Finance,
Chief Financial Officer
and Treasurer
William D. Bishop(5)
(1) Also serves as a director, Executive Vice President and
Chief Operating Officer of ARI's wholly owned subsidiary,
Southern Gas Co. of Delaware, Inc. ("Southern Gas") as well
as Chairman of the Board and Chief Executive Officer of
ARI's wholly owned subsidiary, American Resources Offshore,
Inc. ("ARO").
(2) Also serves as a director of Southern Gas.
(3) Also serves as Chairman of the Board, President and Chief
Executive Officer of Southern Gas.
(4) Also serves as Chief Financial Officer and Treasurer of both
Southern Gas and ARO as well as a director of ARO.
(5) Mr. Bishop served as a director of the Company from July 8,
1997 until he resigned effective September 2, 1997.
(6) Member of Executive Committee.
(7) Member of Compensation Committee.
(8) Member of Audit Committee.
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 1998 annual meeting in the
second quarter of 1998.
RICK G. AVARE, age 36, has served as President and Chief
Executive Officer of ARI since May 15, 1996, and as a director of
ARI since September 1994. In April 1997, Mr. Avare was appointed
to the newly established Executive Committee of the Board of ARI.
He has also served as Chief Operating Officer of Southern Gas
since January 1, 1996, as Executive Vice President of Southern
Gas since July 1997 and as a director of Southern Gas since
February 1994. Mr. Avare has also served as Chairman of the
Board and Chief Executive Officer of ARO since its inception in
December 1997. He 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 Vice
President of Finance and Treasurer for Southern Gas from February
1994 until July 1997 and was 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 ("Prima"). He has also served as Administrative
Member of MAP, LLC since September 1996 and acts as an outside
consultant to the Boston Celtics limited partnership from time
to time. From February 1995 to November 15, 1995, Mr. Avare
served as a director for Bullet Sports International, Inc.
From March 29, 1993 to April 27, 1993, Mr. Avare served as a
director of ARI. Mr. Avare was the Vice President of Finance
and Treasurer of Southern Gas Company, Inc. ("SGC"), a Kentucky
corporation, from 1987 until its dissolution in February 1995.
He served Southern Gas Holding Company, Inc. ("SGH"), the parent
company of SGC, as Chairman of the Board and Chief Executive Officer
from January 1995 until February 1998, and as a director and Vice
President and Secretary from October 1988 until February 1998. 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.
DOUGLAS L. HAWTHORNE, age 56, 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 April 1997, he
was appointed to the newly established Executive Committee of the
Board of ARI and has served on the Board's Compensation Committee
since August 1996. Mr. Hawthorne also served on the Audit
Committee of ARI's Board from August 1996 until July 1997. 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.
LEONARD K. NAVE, age 62, has served since February 1994 as
Chairman of the Board, Chief Executive Officer, and President of
Southern Gas. He has served as a director of ARI since September
1994 and also served in that position from March 29, 1993 to
April 27, 1993. In April 1997, Mr. Nave was appointed to the
newly established Executive Committee of the Board of ARI. Since
February 1995, Mr. Nave has served as a director for Bullet
Sports International, Inc. Mr. Nave served as the President,
Chief Executive Officer and a director of SGC from its inception
in March 1983 until its dissolution in February 1995. Since
October 1988, Mr. Nave has served as the President and a director
of SGH. 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 United
States Bankruptcy Code (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. Mr. Nave's discharge from Chapter 11 was effective
March 18, 1998. 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.
DONALD A. SCHELLPFEFFER, M.D., age 55, has served as a
director of ARI since March 1993. He has served on the Audit
Committee of the Board of ARI since August 1996 and also served
on the Board's Compensation Committee from August 1996 until July
1997. 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 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.
DAVID FOX, JR., age 77, has served as a director of ARI
since August 1996. He has served on the Compensation Committee
of the Board of ARI since August 1996 and on the Board's Audit
Committee since September 1997, having previously served on the
Board's Audit Committee from August 1996 until July 1997. 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.
LEN ALDRIDGE, age 60, has served as a director of ARI since
July 1997 and has also served on the Audit Committee of the Board
of ARI since that time. Mr. Aldridge has served as Vice
President of Limited Partners of Lexington, a Kentucky
corporation engaged in the development and management of real
estate, since March 1984. Mr. Aldridge also currently holds the
following positions: Partner of Poole & Aldridge (since 1975),
Vice President of Poole Enterprises, Inc. (since 1988), Director
of Rafferty's Inc. (Since 1991), and Vice President/Treasurer of
Mason Headley Development (since 1994). Mr. Aldridge graduated
from the University of Kentucky in 1959 with a Bachelors of
Science Degree in Commerce and has been a certified public
accountant since 1962 as well as a certified financial planner
since 1993. He is also currently a member of the American
Institute of Certified Public Accountants and the Kentucky
Society of Certified Public Accountants.
ROBERT L. MCINTYRE, age 52, has served as a director of ARI
since July 1997 and has also served on the Compensation Committee
of the Board of ARI since that time. Mr. McIntyre has been Of
Counsel to the law firm of Breeding, Cunningham, Dance and Cress,
PLC, of Lexington, Kentucky, since October 1996. From April 1992
through September 1996, he was a partner with the law firm of
Breeding, McIntyre & Cunningham, PSC, wherein he managed the
firm's energy, corporate, transactional and international
practice. From April 1985 to March 1992, he served in various
positions with Transco Energy Company ("Transco") and its
subsidiaries, the most recent of which was as Vice President and
Associate General Counsel for Transco from September 1989 through
March 1992. Mr. McIntyre has nearly twenty-five years of
experience in energy and related activities, having been employed
since 1973 as staff or general counsel for energy-related
companies, including The Superior Oil Company, Occidental
Petroleum Company and subsidiaries, Burmah Oil & Gas Company and
Texas International Company. Mr. McIntyre graduated from the
University of Oklahoma in 1968 with a Bachelors of Science Degree
in Geology and obtained his law degree from the University of
Houston, Bates college of Law, in 1972. He is currently an
active member of the State Bars of Kentucky and Texas, the
American Bar Association, the American Petroleum Institute and
various legal committees thereof, the Eastern Mineral Law
Foundation, the American Corporate Counsel Association and the
Rocky Mountain Mineral Law Foundation. Mr. McIntyre is also
currently the Secretary (and former Legal Committee Chairman) for
Affiliated Gas Producer Group and a Director of the American
Heart Association (Houston Chapter). Additionally, he has
chaired many programs involving the transportation, deregulation,
marketing, exploration and production of natural gas and has been
featured speaker at numerous seminars for energy-related
associations.
RALPH A. CURRIE, age 43, has been Chief Financial Officer of
ARI and Southern Gas since April 1, 1997. He has also served as
Vice President of Finance and Treasurer of ARI as well as
Treasurer of Southern Gas since July 1997. Mr. Currie has served
as a director, Chief Financial Officer and Treasurer of ARO since
its inception in December 1997. Since November 1994, 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 (1991-1996, President in 1994; Treasurer
1991-1992), Lexington Arts and Cultural Council (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.
MEETINGS AND COMPENSATION:
During the year ended December 31, 1997, the Board of
Directors of the Company met on five occasions, either in person
or telephonically. Each of the Company's directors attended at
least 75% of the meetings of the Board of Directors except for
Donald A. Schellpfeffer who attended 60% of the meetings. In
April 1997, the Company's Board of Directors established an
Executive Committee and appointed Messrs. Hawthorne, Nave and
Avare to serve on the Committee. The Committee is charged with
all of the powers and authority of the Board of Directors in the
management of the business, including the declaration of
dividends on preferred stock and the sale and issuance of shares
of common and preferred stock, provided, however, that the
Committee does not have the power or authority to approve, adopt
or recommend to the stockholders any action or matter expressly
required by the Delaware General Corporation Law to be submitted
to stockholders for approval, or to adopt, amend or repeal any
by-law of the Company.
During 1997, the Company's non-employee directors, Dr.
Schellpfeffer and Messrs. Aldridge, McIntyre and Bishop, received
no compensation for their services to the Company; however, they
were reimbursed for reasonable travel expenses incurred, if any,
in connection with their 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 executive officers 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. That
partnership's plan of reorganization was confirmed on November
15, 1992.
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 ("SEC") 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.
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 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 1997
fiscal year, all filing requirements applicable to its officers,
directors and greater than 10% beneficial owners were complied
with.
ITEM 10. EXECUTIVE COMPENSATION:
The table below sets forth information concerning the annual
and long-term compensation for services to the Company and its
subsidiaries, Southern Gas and ARO, for the fiscal years ended
December 31, 1997, 1996 and 1995 of those persons who were, at
December 31, 1997 (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>
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 1997 -- -- $40,000 354,315 -- --
Chairman of the Board 1996 -- -- 60,000 354,315 -- --
1995 -- -- 54,000 354,315 -- --
Leonard K. Nave 1997 $175,000 -- $ 4,655 271,603 -- $8,000(2)
Chairman of the Board 1996 175,761 -- 3,281 271,603 -- 8,750(2)
President & Chief Executive 1995 175,500 -- 4,692 246,603 -- 8,750(2)
Officer, Southern Gas
Rick G. Avare 1997 $166,455 $140,000 $ 3,678 493.204 -- $8,000(2)
President & Chief Executive 1996 137,684 50,000 17,400(3) 493,204 -- 6,846(2)
Officer 1995 99,546 50,000 18,533(4) 268,204 -- 4,952(2)
Ralph A. Currie 1997 $ 68,138 $32,000 $ 7,200(5) -- -- --
Vice President & 1996 -- -- -- -- -- --
Chief Financial Officer 1995 -- -- -- -- -- --
Jeffrey J. Hausman 1997 $80,042 -- -- 75,000 -- $4,002(2)
Former Vice President & 1996 71,546 -- -- 25,000 -- --
Chief Financial Officer 1995 -- -- -- -- -- --
David J. Stetson 1997 $99,821 $39,500 $11,020(5) 33,333 -- $3,830(2)
General 1996 -- -- -- 16,667(6) -- --
1995 -- -- -- -- -- --
</TABLE>
<PAGE>
(1) The disclosures in this table for Messrs. Hawthorne, Currie
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.
(3) Includes car allowance of $11,907.
(4) Includes car allowance of $12,038.
(5) Includes car allowance of $7,200.
(6) 50,000 options granted on March 4, 1996, under the Company's
CSO Plan, vesting 1/3 immediately, 1/3 on March 4, 1997 and
1/3 on March 4, 1998.
The table below contains information on grants of stock
options during 1997 to the Named Officers. No stock appreciation
rights were granted during 1997.
OPTION GRANTS IN LAST FISCAL YEAR
(Individual Grants)
<TABLE>
Percent of
Securities Total Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted (#) 1997 ($/share) Date
<S> <S>
Douglas L. Hawthorne None
Leonard K. Nave None
Rick G. Avare None
Ralph A. Currie None
Jeffrey J. Hausman None
David J. Stetson None
</TABLE>
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 1997. No options
were exercised by the Named Officers during 1997. No stock
appreciation rights have been granted.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
Number of
Securities Value of
Underlying Unexercised
Unexercised in-the-Money
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
Ralph A. Currie -- -- 0/0 0/0
Jeffrey J. Hausman -- -- 75,000/0 0/0
David J. Stetson -- -- 33,333/16,667 0/0
</TABLE>
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, 1997, 321,000 shares have been issued under the
Employee Plan.
From March 19, 1994, and at various dates until February 2,
1995, the Company entered into separate Compensatory Stock Option
Agreements with the following individuals: (i) Douglas L.
Hawthorne, Chairman of the Board; (ii) Donald Schellpfeffer,
Director; (iii) Leonard K. Nave, Director of the Company and
President, Chief Executive Officer and a Director of Southern
Gas; and (iv) Rick G. Avare, Director and President and Chief
Executive Officer of the Company and Director, Vice President of
Finance and Chief Operating Officer of Southern Gas and Chairman
of the Board and Chief Executive Officer of ARO. 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 thousand 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. However, 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.
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. For 1997 and 1996, the total bonus pool was
$225,000 and $125,000, respectively.
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 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 April 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. Effective March 17, 1998,
the Board of Directors approved an increase in Mr. Avare's base
salary to $185,000 per year.
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, it is automatically
extended from year to year after the fifth anniversary of the
agreement 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. However, the Company
is prohibited from giving notice of intent to terminate if within
one year prior to the termination date the Company has received
notice of or has reason to believe that a change of control may
occur.
The agreement provides that if a change of control occurs
and Mr. Avare's employment subsequently terminates for any
reason, the Company will pay to Mr. Avare an amount of monies
equal to the sum of (i) any monies due him under the remaining
term of his employment contract, (ii) any monies received by him
from the sale of the Company's common stock acquired as the
result of the exercise of stock options, (iii) 2.99 times the
bonus awarded to him for the prior year under the Company's
Incentive Bonus Plan or $300,000, whichever is greater, and (iv)
all legal fees and expenses incurred by him as a result of such
termination and in seeking to obtain or enforce any right under
the agreement. In addition, the Company is obligated to permit
Mr. Avare to participate, for a period of three years after
termination, in the Company's insurance programs at no cost to
Mr. Avare.
Under the agreement, a change of control is deemed to occur
if (i) any person or group of persons, other than a group of
persons consisting of the Company's officers and directors as of
the date of the agreement, acting in concert, acquires beneficial
ownership of the Company's then outstanding capital stock
representing 20% or more of the voting power of all of such
shares, (ii) the Company or any of its subsidiaries sell, assign
or transfer assets for consideration greater than 50% of the book
value of the Company's then consolidated assets as determined
under generally accepted accounting principles, (iii) the Company
or any of its subsidiaries merge, consolidate or otherwise
reorganize and the Company's officers and directors as of the
date of the agreement receive less than 35% of the voting power
of the capital stock of the surviving or resulting entity, (iv)
the Company adopts a plan of liquidation or dissolution, (v) the
commencement of a tender offer for the Company's common stock,
which, if successful, would result in a deemed change of control
as defined in the agreement, (vi) a determination by the Board of
Directors of the Company, in view of then current circumstances
or impending events, that a deemed change of control as defined
in the agreement has occurred or is imminent, (vii) the persons
who were directors of the Company immediately prior to any
merger, consolidation, sale of assets or contested election, or
any combination of the foregoing, cease to constitute a majority
of the Company's Board of Directors, and (viii) the persons who
were directors immediately prior to a tender offer or exchange
offer for the Company's voting stock (other than by the Company
or any of its subsidiaries) cease to constitute a majority of the
Company's Board of Directors within two years after such tender
or exchange offer.
On April 1, 1997, the Company entered into an Employment
Agreement with Ralph A. Currie, the Company's Chief Financial
Officer, to serve in such capacity for a period of three years.
If written notice of intent to terminate the agreement is not
given by either party at least three months prior to the second
anniversary of the agreement, it is automatically extended from
year to year after the third anniversary of the agreement unless
either party gives written notice of intent to terminate at least
three months prior to the next anniversary date, at which time
the agreement will terminate. As consideration for Mr. Currie's
agreement to serve as Chief Financial Officer, the Company agreed
to pay him a salary of $85,000 for the first year, $95,000 for
the second year, $105,000 for the third year and not less than
$105,000 for each year thereafter, plus benefits customarily paid
to executives holding similar positions.
The Company also maintains Indemnity Agreements with Rick G.
Avare, in his capacity as President and Chief Executive Officer;
Ralph A. Currie, its Chief Financial Officer, Vice President of
Finance and Treasurer; Karen M. Underwood, its Vice President of
Corporate Compliance and Corporate Secretary; and Douglas L.
Hawthorne, Donald A. Schellpfeffer, Leonard K. Nave, Rick G.
Avare, David Fox, Jr., Len Aldridge and Robert L. McIntyre, its
Board of Directors.
MANAGEMENT CHANGES:
Jeffrey J. Hausman served as Chief Financial Officer of the
Company from January 1, 1996 through March 31, 1997, and
Treasurer from August 1996 through March 31, 1997. During this
time, Mr. Hausman 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 tendered his
resignation as an officer of the Company effective April 1, 1997.
However, he agreed to continue with the Company in an advisory
capacity. Mr. Hausman was succeeded by Ralph A. Currie. See Mr.
Currie's biography contained in "Part III. Item 9. Directors,
Executive Officers, Promoters and Control Persons; Compliance
with Section 16(1) of the Exchange Act: Directors and Executive
Officers" contained in this Report on Form 10-KSB.
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 16, 1998, 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>
Shares
Beneficial Owner Title Beneficially Percent
Name/Address Of Class Owned(1) Of Class(2)
- ------------ -------- -------- --------
<S> <C> <C> <C>
Douglas L. Hawthorne(7) 8% Preferred 3,334 1.26%
4325 Delco Dell Road Common Stock 487,163 4.70%
Kettering, OH 45429
Donald A. Schellpfeffer, M.D.(9)
910 East the Street Common Stock 327,247 3.22%
Sioux Falls, SD 57105
Southern Gas Holding Co., Inc. Common Stock 643,623 6.43%
160 Morgan Street
Versailles, KY 40383
Leonard K. Nave(3)(6)
160 Morgan Street Common Stock 948,462 9.23%
Versailles, KY 40383
Leonard K. Nave, Trustee(3)(4) Common Stock 643,623 6.43%
160 Morgan Street
Versailles, KY 40383
Rick G. Avare(5) 8% Preferred 187,500 70.62%
160 Morgan Street Common Stock 1,866,250 17.46%
Versailles, KY 40383
Prima Capital, LLC Common Stock 602,088 6.02%
1532 Lake Wood Drive
Lexington, KY 40502
David J. Fox, Jr. Common Stock 43,834 *
Appalachian Production Company
605 9th Street, Ste. 519
Huntington, WV 25701
Len Aldridge Common Stock 101,000 1.01%
1999 Richmond Road
Suite 2-A
Lexington, KY 40502
Ralph A. Currie Common Stock 75,000 *
160 Morgan St.
Versailles, KY 40383
David J. Stetson Common Stock 26,000 *
160 Morgan Street
Versailles, KY 40383
Whispering Pines of
Thomasville, Inc. 8% Preferred 28,334 10.67%
P. O. Box 638
Thomasville, GA
Andrew J. Kacic(8) Common Stock 711,540 6.65%
6119 N. Black Bear Loop
Tucson, AZ 85715 20
Directors and Executive Officers
as a group (8 persons) All classes 3,874,956 33.74%
</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 643,623 shares of common stock owned by Southern
Gas Holding Company, Inc. ("SGH"). SGH is owned 7.5% by
Leonard K. Nave, individually, and 32.5% by Leonard K. Nave,
as Trustee (See Note 4). Mr. Nave, individually and as
trustee, disclaims the beneficial ownership of such shares
of the Company's common stock to the extent they exceed his
percentage ownership of SGH.
(4) 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.
(5) Includes 680,704 shares subject to options and conversion
rights exercisable within 60 days, 602,088 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.
(6) Includes 271,603 shares subject to options exercisable
within 60 days.
(7) Includes 357,649 shares subject to options and conversion
rights exercisable within 60 days, 121,400 shares held in
Mr. Hawthorne's retirement plan and 1,792 shares to which
Mr. Hawthorne is entitled as a 1/3 beneficiary of the
Frances R. Hawthorne Trust.
(8) Includes 690,590 shares subject to options exercisable
within 60 days, 6,750 shares owned by the Andrew J. Kacic
Profit Sharing Plan, 6,390 shares held by Advisory Services
and 7,810 shares held by Andrew J. Kacic & Associates.
(9) Includes 169,973 shares subject to options exercisable
within 60 days, 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:
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 United States Bankruptcy
Code. This action was initiated primarily because of the attempted
enforcement of certain guaranties which Mr. Nave signed on behalf
of an unaffiliated corporation. Mr. Nave's plan of reorganization
was confirmed by the Court on February 20, 1998, and his discharge
from Chapter 11 was effective March 18, 1998.
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, is the principal stockholder, director and
executive officer of SGH. Mr. Avare, in his capacity as an
executive officer of Southern Gas and an executive officer and
director of ARI, was a stockholder, director and officer of SGH
from October 1988 until February 1998. 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. Mr. Avare
resigned as president and director of SGH in February 1998 and
divested himself of his ownership of stock in SGH in exchange for
350,000 shares of the common stock of the Company. 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.
At December 31, 1997, the Company has made advances to SGH
totaling $230,784 which the principal of SGH intends to secure
with 143,000 shares of the Company's Common Stock held by SGH.
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 is currently
being renegotiated for renewal.
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. During
1997, the Company purchased the remaining overriding royalties of
Messrs. Hawthorne and Avare in the Ship Shoal 150 wells, for
$150,000 and $180,000, respectively, based upon the fair market
value of the wells utilizing the 1996 year-end reserve report.
In July 1995, in order to fulfill a loan commitment to
Century Offshore Management Corporation ("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 to the Company in
the amount of $6,500,000 (the Century Note) and upon which
interest was being paid at the rate of 22% per annum. 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
entered into Termination of Participation Agreements with the
directors wherein payment of the balance was due in monthly
installments of $12,352, beginning April 1, 1997, with the final
payment due March 1, 1999; however, the Company paid the balance
due in full during 1997 due to the high interest rate associated
with the loan.
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 paid the non-affiliated individual in
full prior to December 31, 1996. The Company entered into a
Termination of Participation Agreement with Mr. Hawthorne wherein
payment terms of the balance included $50,000 which was due and
payable by March 10, 1997, with the remaining balance due in
monthly installments of $10,293 beginning April 1, 1997, with the
final payment due March 1, 1999; however, the Company paid the
balance due in full during 1997 due to the high interest rate
associated with the loan.
PRIMA TRANSACTIONS:
On September 15, 1997, the Company entered into a Letter of
Intent with Prima, a limited liability company in which Rick G.
Avare owns a 20% interest, providing for the acquisition of an
interest in certain producing and non-producing oil and gas
properties (the "Properties") located in Mississippi. The
purchase price for the Properties was $2,800,000 payable
$1,300,000 on or before closing which occurred October 10, 1997,
and the balance of $1,500,000 in an interest bearing note with
recourse only to the Properties. The Company already owned up to
3.5% interest in the Properties; and after reviewing an
independent geologist's report on the Properties, the Letter of
Intent was approved by a majority of the disinterested directors
of the Company at a special meeting of the Board of Directors
held on September 15, 1997.
Under a letter agreement dated October 17, 1994, the Company
had the right to acquire 2,471.3 shares of the common stock in
Century for $4,000,000 (the "Century Securities" which were referred
to as the "Settle Securities" prior to the merger of Settle into
Century). 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 Century
Securities for $2,500,000. 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. 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 Century Securities, Prima had the right to
require the Company to purchase them 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 Century Securities from the third party
member of Prima for $4,000,000 was substituted therefor (the
"Call Agreement"). The Call Agreement also provided 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 was advanced under the Call Agreement (including
payments previously made under the Put Agreement). In the event
the Company elected to call the Century Securities, the advance
payments would be credited toward the purchase price.
Additionally, a $500,000 certificate of deposit held as
collateral for Prima's loan was liquidated by the Company and the
funds were advanced to Prima under the potential Call Agreement.
Prima used the $500,000 to purchase shares of Series B Preferred
Stock from a third party, which Preferred Stock it subsequently
converted to common stock. In the event the Company exercised
the Call option, the $500,000 would be credited towards the
purchase. The Company's right to call the Settle Securities
began January 15, 1997 and ended December 31, 1997.
On November 4, 1997, the Board of Directors approved the
exercise of the Company's rights under the Call Agreement; and
all funds due pursuant thereto had been paid on or before
December 31, 1997. Due to the subsequent decline in oil and gas
prices, the Company determined there was an other than temporary
decline in the carrying value of the Century common stock. As
of December 31, 1997, the Company recorded a $1.5 million impairment
to its investment in Century, resulting in a net book value of
$2.5 million. The impairment of the Century stock was determined
by comparing the carrying value of the stock on the Company's books,
after the exercise of the Century "Call Agreement," to the estimated
fair value of the stock based on the most recent sale activity.
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.
The Company has paid or accrued fees of approximately $2,057
and $10,659 during 1997 and 1996, 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, 1997,
this amount had been reduced to $29,604.
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).
3.11 Copy of the Certificate eliminating the Series B
Preferred Stock (incorporated by reference to Exhibit
3.11 to the Company's Form 8-K filed on April 24,
1997).
3.12 Certificate of Amendment of Restated Certificate of
Incorporation filed with the Delaware Secretary of
State on July 11, 1997 (incorporated by reference to
Exhibit 3.12 to the Company's Form 8-K filed on July
25, 1997).
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).
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).
10.13 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).
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).20
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 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).
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).
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).
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).
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).
10.63 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"]).
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 (incorporated by
reference to Exhibit 10.74 to the Registrant's Form
10-KSB for the fiscal year ended December 31, 1996
[the "1996 Form 10-KSB"]).
10.75 Termination of Participation Agreement by and between
American Resources of Delaware, Inc. and The Kandy
Limited Partnership, dated December 29, 1996 (incorporated
by reference to Exhibit 10.75 to the Registrant's
1996 Form 10-KSB).
10.76 Termination of Participation Agreement by and between
American Resources of Delaware, Inc. and Donald A.
Schellpfeffer, dated December 29, 1996 (incorporated
by reference to Exhibit 10.76 to the Registrant's
1996 Form 10-KSB).
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 (incorporated by reference to
Exhibit 10.79 to the Registrant's 1996 Form 10-KSB).
10.80 Securities Purchase Agreement dated July 16, 1997
between the Company and Den norske Bank ASA
(incorporated by reference to Exhibit 10.80 to
Company's Form 8-K filed on July 25, 1997).
10.81 Registration Rights Agreement dated July 16, 1997
between the Company and Den norske Bank ASA
(incorporated by reference to Exhibit 10.81 to the
Company's Form 8-K filed on July 25, 1997).
10.82 Co-Sale Agreement dated July 16, 1997 among the
Company, Rick G. Avare, Southern Gas Holding Company,
Inc. and Den norske Bank ASA (incorporated by reference
to Exhibit 10.82 to the Company's Form 8-K filed on
July 25, 1997).
10.83 Letter of Intent between the Company and Prima Capital,
LLC (incorporated by reference to Exhibit 10.83 to the
Company's Form 8-K filed on September 24, 1997).
10.84 Copy of the letter of resignation from William Bishop
(incorporated by reference to Exhibit 10.84 to the
Company's Form 8-K filed on October 1, 1997).
10.85 Copy of the Stock Purchase Agreement between Prima
Capital, LLC and the Company (incorporated by reference
to Exhibit 10.85 to the Company's Form 8-K filed on
November 19, 1997).
10.86 Copy of the First Amended and Restated Credit Agreement
between the Company and Den norske Bank, AS
(incorporated by reference to Exhibit 10.86 to the
Company's Form 8-K filed on November 19, 1997).
10.87 Purchase and Sale Agreement by and between the Company
and K.E. Resources, Ltd., entered into on December 16,
1997 (incorporated by reference to Exhibit 10.87 to the
Company's Form 8-K filed on December 30, 1997).
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 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 Form 8-K 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 Form 8-K
filed on March 16, 1998).
10.91 Warrant Agreement between American Resources of
Delaware, Inc. and TECO Oil & Gas, Inc. (incorporated
by reference to Exhibit 10.91 to the Company's Form 8-K
filed on March 16, 1998).
21.0 Subsidiaries of American Resources of Delaware, Inc.*
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.*
23.4 Consent of Ryder Scott Company, Petroleum Engineers*
* Filed herewith
(b) Reports on Form 8-K:
On November 19, 1997, the Company filed a Form 8-K reporting
the acquisition of 2,471.3 shares of common stock in
Century Offshore Management Corporation and voluntarily
filing its First Amended and Restated Credit Agreement with
Den norske Bank, AS.
On December 30, 1997, the Company filed a Form 8-K reporting
the acquisition of properties located offshore Louisiana on
Ship Shoal Block 222, Ship Shoal Block 225 and West Cameron
Block 368 from K.E. Resources, Ltd.
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FOR THE YEARS ENDED
-------------------
DECEMBER 31, 1997 AND 1996
--------------------------
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
FOR THE YEARS ENDED
-------------------
DECEMBER 31, 1997 AND 1996
--------------------------
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-10
Oil and Gas Producing Activities (Unaudited) F-32
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors
American Resources of Delaware, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
American Resources of Delaware, Inc. and Subsidiaries (the
Company) as of December 31, 1997 and the related consolidated
statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1997 and 1996. 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 Subsidiaries
as of December 31, 1997, and the results of their operations and
their cash flows for the years ended December 31, 1997 and 1996
in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Houston, TX
March 30, 1998
F-1
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 1997
-----------------
ASSETS
------
<TABLE>
<S> <C>
Current assets:
Cash and cash equivalents $ 1,180,638
Accounts and notes receivable:
Trade 4,594,787
Notes 70,000
Related party 304,415
Allowance for doubtful accounts (4,949)
----------
4,964,253
Deferred tax asset 111,583
Prepaid expenses and other 312,900
----------
Total current assets 6,569,374
----------
Oil and gas properties, at cost
(successful efforts method) 57,172,781
Property and equipment, at cost 12,352,988
----------
69,525,769
Less accumulated depreciation,
depletion and amortization (18,276,276)
----------
Net property and equipment 51,249,493
----------
Other assets:
Investment in unconsolidated subsidiaries 2,547,451
Notes receivable 406,806
Deferred financing costs, net 470,168
Other assets 322,642
----------
Total other assets 3,747,067
----------
Total assets $61,565,934
==========
</TABLE>
(Continued)
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED BALANCE SHEET (CONTINUED)
--------------------------------------
DECEMBER 31, 1997
-----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<S> <C>
Current liabilities:
Current maturities of long-term debt 4,682,006
Note payable to related party 225,000
Accounts payable - Trade 963,169
Accrued taxes payable 175,095
Unearned revenue 820,051
Accrued expenses and other 524,668
----------
Total current liabilities 7,389,989
Long-term debt, excluding current maturities 25,392,892
Unearned revenue 2,095,643
Deferred tax liability 2,165,882
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
Common stock, par value $.00001 per share;
50,000,000 shares authorized; 10,193,676
shares issued and outstanding 102
Additional paid-in-capital 22,500,134
Retained earnings 552,883
Treasury stock at cost, representing 201,890
shares of common stock (713,410)
----------
Total stockholders' equity 24,521,528
----------
Commitments and contingencies
Total liabilities and stockholders' equity $61,565,934
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Revenues:
Production $19,456,938 $ 8,540,569
Transportation 869,863 1,070,647
Marketing 17,499,156 22,712,996
Other 206,189 714,961
---------- ----------
38,032,146 33,039,173
---------- ----------
Expenses:
Production 2,583,426 1,402,389
Transportation 404,330 315,458
Marketing 17,418,349 22,269,876
Unsuccessful well costs 784,931 -
Depreciation, depletion and amortization 8,606,372 3,309,159
Impairment of assets 5,095,620 -
Other 137,952 206,457
---------- ----------
35,030,980 27,503,339
---------- ----------
Sub-total 3,001,166 5,535,834
Administrative expenses 3,322,887 2,324,008
---------- ----------
Operating income (loss) (321,721) 3,211,826
---------- ----------
Other income (expense):
Interest income 45,491 801,633
Interest expense (2,746,557) (2,440,453)
Loss on sale of assets (21,845) (174,645)
Other 5,567 152,334
---------- ----------
(2,717,344) (1,661,131)
---------- ----------
Income (loss) before income taxes (3,039,065) 1,550,695
Income tax benefit (expense) 1,192,474 (638,940)
---------- ----------
Net income (loss) ($1,846,591) $ 911,755
========== ==========
Per common share:
Basic ($0.21) $0.14
==== ====
Weighted average number of common
shares outstanding 9,021,810 6,123,635
========== ==========
Diluted ($0.21) $0.13
==== ====
Weighted average number of common
shares and dilutive potential
common shares 9,021,810 6,895,446
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------
<TABLE>
<CAPTION>
Common Stock 8% Preferred Stock
--------------- -------------------------------------
Number Number Discount Additional
of Par Convertible of Par On Net Paid-in Treasury Retained
Shares Value Securities Shares Value Preferred Value Capital Stock Earnings Total
------ ----- ----------- ------ ----- --------- ----- ---------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1996 6,520,296 $65 4,997,554 268,851 $3,226,213 ($1,044,394) $2,181,819 $16,453,899 ($52,400) $2,537,070 $26,118,007
Issuance
of common
stock
dividend
on 8%
preferred
stock 21,508 0 - - - - - 47,647 - (47,647) -
Conversion
of warrants
to common
stock 8 0 - - - - - 52 - - 52
Conversion
of convertible
securities
and dividend
to common
stock 3,101,864 31 (4,519,914) - - - - 4,598,705 - (78,823) -
Redemption
of convertible
securities - - (477,640) - - - - (100,257) - (11,126) (589,023)
Common stock
issued, net
of placement
costs 500,000 5 - - - - - 1,132,906 - - 1,132,911
Common stock
and options
issued for
professional
services 50,000 1 - - - - - 117,182 - - 117,182
Exercise
of Put
Warrants - - - - - - - 250,000 - - 250,000
Treasury
stock
purchased - - - - - - - - (661,010) - (661,010)
Net income - - - - - - - - - (1,846,591) (1,846,591)
--------- --- --------- -------- ---------- ----------- ---------- ----------- --------- --------- -----------
Balance,
December
31,
1997 10,193,676 $102 - 268,851 $3,226,213 ($1,044,394) $2,181,819 $22,500,134 ($713,410) $552,883 $24,521,528
========== ==== ========= ======== ========== ============ ========== =========== ========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
----------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
<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
acquisi-
tion 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 for
treasury - - - - - - - - - (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>
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Operating activities:
Net income (loss) ($1,846,591) $ 911,755
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 8,889,442 3,419,945
Amortization of deferred professional fees 97,000 -
Decrease in allowance for doubtful accounts (5,263) -
Impairment of assets 5,095,620 -
Unsuccessful well costs 784,931 -
Deferred income taxes (1,241,532) 613,281
(Gain) loss on sale of assets 21,845 174,645
Deferred revenue (713,549) (557,391)
Proceeds from production payment - 4,147,300
Equity in earnings of unconsolidated
subsidiary 238,160 (172,618)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 1,822,110 (4,033,122)
Decrease (increase) in prepaid expenses
and other 197,939 (148,244)
Increase (decrease) in accounts payable (3,898,171) 2,128,369
Increase (decrease) in accrued taxes
payable (20,372) 92,349
Increase in prepaid public relations
contract - (550,000)
Increase in accrued expenses and other 8,752 61,159
----------- -----------
Net cash provided by operating activities 9,430,321 6,087,428
----------- -----------
Investing activities:
Purchases of oil and gas properties (9,699,272) (17,022,845)
Purchases of property and equipment (669,173) (3,108,478)
Proceeds from sales of property and equipment 4,200 549,860
Issuance of notes receivable (35,000) -
Payments on notes receivable 243,823 731,781
Investment in Common Stock of Century Offshore (2,500,000) -
Other (1,732)
----------- -----------
Net cash used in investing activities (12,655,422) (18,851,414)
----------- ----------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
-------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Financing activities:
Proceeds from borrowings from related parties $ - $ 250,000
Proceeds from other borrowings 11,901,731 17,613,068
Proceeds from sale of stock to Den norske 1,330,000 -
Proceeds from exercise of warrants 52 -
Payments on borrowings from related parties (490,000) (250,000)
Payments on other borrowings (7,047,537) (10,869,210)
Increase in deferred financing and convertible
issuance costs (194,804) (462,446)
Stock issuance and registration costs (197,089) -
Issuance of common shares, net - 900,000
Issuance of convertible securities - 6,000,000
Redemption of convertible securities (589,023) -
Purchase of 6% Junior Preferred Stock (802,900)
Purchase of treasury stock (661,010) (52,400)
Other - (35,100)
----------- -----------
Net cash provided by financing activities 4,052,320 12,291,012
----------- -----------
Increase (decrease) in cash 827,219 (472,974)
Cash and cash equivalents at beginning of year 353,419 826,393
----------- -----------
Cash and cash equivalents at end of year $ 1,180,638 $ 353,419
=========== ===========
Supplementary cash flow information:
Interest paid $2,676,795 $2,182,727
=========== ===========
Income taxes paid $ 4,975 $ 15,090
=========== ===========
</TABLE>
NON-CASH TRANSACTIONS:
During 1997, holders of $5,538,483 of the Convertible Securities
converted the securities into 3,052,188 shares of Common Stock and
received 49,676 shares of Common Stock dividends related to the
Convertible Securities. The remaining $461,517 was redeemed by
the Company for a price of $589,023.
During 1997, the Company entered into an Amendment to Lead
Generation Agreement with Corporate Relations Group (CRG) to
provide additional services in the public relations area. The
amendment provided for the termination of options previously
granted to CRG by ARI and the issuance to CRG of 50,000 shares of
registered stock in ARI. The shares were valued at $1.94 per
share which represents the closing bid price on April 21, 1997,
the date of the amendment.
During 1996, 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 ($907,175 net of placement costs).
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, in
July 1996 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 21,508 and 27,535
shares of common stock to holders of the Series 1993 and Series B
Preferred Stock during 1997 and 1996, respectively.
During 1996, 58,941 shares of Series B Preferred Stock were
converted into a total of 224,822 shares of common stock.
During 1996, 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.
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
DECEMBER 31, 1997 and 1996
--------------------------
(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 subsidiaries, American
Resources Offshore, Inc. (ARO) and Southern Gas Co. of
Delaware, Inc. (Southern Gas) (collectively, the
Subsidiaries), are involved in the production,
gathering, purchasing, processing, transporting and
selling of natural gas primarily in the Gulf Coast
Region and the State of Kentucky. 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 Subsidiaries, 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. Exploratory
dry holes and geological and 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 are 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.
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 was the exclusive supplier
of all natural gas to be sold by SRI. Under the
agreement, after deduction of certain expenses, the
Company was entitled to receive not less than 50% of
the sales margin obtained. Included in the statements
of operations for the first four months of 1997 is the
Company's 50% participation in SRI's marketing revenues
and expenses. The marketing arrangement with SRI was
terminated in May 1997.
(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-linebasis over the period
of the credit facility, which is seven years. For the
years ended December 31, 1997 and 1996, approximately
$96,000 and $101,000, 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 less
impairment, if any. 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. Earnings or losses are included
in other income.
(k) INCOME TAXES
The Company follows 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 the asset and liability method, 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," (Statement
No. 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) EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This statement establishes standards for computing
and presenting earnings per share and requires, among other
things, dual presentation of basic and diluted earnings per
share on the face of the statement of operations. In
accordance with SFAS No. 128, earnings per share and weighted
average shares outstanding have been restated to conform to
this statement for all periods presented.
The following table provides a reconciliation between basic
and diluted earnings (loss) per share:
<TABLE>
Weighted
Average
Common
Net Income Shares Per Share*
(Loss) Outstanding Amount
---------- ----------- ----------
<S> <C> <C> <C>
Year Ended December 31, 1997:
Basic earnings per share............ ($1,846,591) 9,021,810 ($0.21)
--------- ---------
Diluted earnings per share.......... ($1,846,591) 9,021,810 ($0.21)
========= =========
Year Ended December 31, 1996:
Basic earnings per share............ $ 911,755 6,123,635 $0.14
Effect of dilutive potential
common shares..................... 771,811
--------- ---------
Diluted earnings per share.......... $ 911,755 6,895,446 $0.13
========= =========
</TABLE>
*Adjusted for preferred stock dividends of $47,647 and $70,174 for
1997 and 1996.
At December 31, 1997, the stock options, warrants and
Convertible Preferred Stock were not included in the
computation of diluted loss per share because the effect
of their assumed exercise and conversion would have an
antidilutive effect on the computation of diluted loss
per share.
At December 31, 1996, the Convertible Preferred Stock
was not included in the computation of diluted earnings
per share because the effect of their assumed exercise
and conversion would have an antidilutive effect on the
computation of diluted earnings per share.
(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.
(o) ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB)
issued SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and display of
comprehensive income and its components in the Company's
financial statements. Comprehensive income includes all
changes in the Company's equity except investments by and
distributions to owners and includes, among other things,
foreign currency translation adjustments. In June 1997, the
FASB also issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." 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. Both of these
statements are effective for financial statements for periods
beginning after December 15, 1997. As both SFAS Nos. 130 and
131 establish standards for reporting and display, the Company
does not expect the adoption of these statements to have a
material impact on its financial condition or results of
operations.
(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
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. AKS executed the
put provisions, and the Company purchased the stock during
1997. 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, 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 paid $4,509,000 in cash. An
impairment of $1,709,709 was recorded at December 31, 1997.
Assuming the acquisitions had occurred on January 1, 1996,
the following unaudited proforma operating data gives effect
to the acquisitions for the year ended December 31, 1996:
<PAGE>
<TABLE>
1996
----
<S> <C>
Total revenue $33,894,000
==========
Net income from operations $ 3,418,000
=========
Basic earnings per share $0.11
====
Diluted earnings per share $0.11
====
</TABLE>
Basic and diluted earnings per share are based on
6,123,635 and 6,895,446 shares, respectively, outstanding
for 1996.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
Estimated
useful lives
(years)
<S> <C> <C>
Pipeline support facilities 7-15 $ 8,190,321
Field equipment 7 3,713,643
Other 3-7 449,024
----------
$12,352,988
==========
</TABLE>
For the years ended December 31, 1997 and 1996, depreciation
expense on property and equipment was $1,011,849 and
$877,526, respectively.
(4) OIL AND GAS PROPERTIES
A summary of oil and gas properties follows:
Proved properties - Developed $45,095,998
Proved properties - Undeveloped 4,193,257
Unproved properties 7,883,526
----------
$57,172,781
==========
In February 1997, the Company through its wholly owned
subsidiary, Southern Gas, acquired a 25% working interest
in onshore Gulf Coast undeveloped properties located in
Greene and Wayne Counties, Mississippi, for approximately
$300,000.
On April 2, 1997, the Company entered into an agreement to
acquire a 26.4% working interest in the Main Pass Block 53 from
Great River Oil & Gas Corporation for approximately $254,000.
Drilling was completed during the third quarter of 1997, and it
was determined that the well is not economically feasible.
In April 1997, the Company purchased from a director of the
Company an overriding royalty interest in the Ship Shoal B-3 well
for $150,000 and also purchased from an officer/director of the
Company an overriding royalty interest in the Ship Shoal B-4 well
for $180,000. (See Note 15.)
In June 1997, the Company entered into a purchase agreement to
acquire interests in 26 natural gas wells from Daugherty
Petroleum, Inc., said wells being located in Whitley and Knox
Counties, Kentucky, on the Company's existing gathering
facilities. The wells contain an estimated 1.5 billion cubic
feet of natural gas reserves net to the Company, and the purchase
price was approximately $526,000. The purchase transaction was
completed in September 1997.
On September 15, 1997, the Company entered into a Letter of
Intent with Prima Capital, LLC (Prima) providing for the
acquisition of an interest in certain producing and
non-producing oil and gas properties located in Mississippi.
(See Note 15.)
In September 1997, the Company purchased a 4.3% overriding
royalty interest in the Ship Shoal B-4 well for $330,000. The
value of the overriding royalty interest was based on discounted
reserve values as determined from the December 31, 1996 reserve
report less amounts paid through June 1997.
On December 16, 1997, the Company entered into a Purchase and
Sale Agreement to acquire proved developed and undeveloped oil
and gas properties, platforms, equipment and pipelines located
offshore Louisiana on Ship Shoal Block 222, Ship Shoal Block 225
and West Cameron Block 368 from K.E. Resources, Ltd. The
purchase price was $2,500,000, which was funded from the
Company's line of credit with Den norske Bank, A.S. (Den norske).
The transaction was completed and funded on December 19, 1997.
On December 22, 1997, the Company entered into a Purchase and
Sale Agreement to acquire additional interests in the properties
located on West Cameron Block 368 from Apache Corporation
pursuant to a preferential right of first refusal election. The
purchase was $127,000, which was funded from the Company's line
of credit with Den norske. It is anticipated that this
transaction will close by December 31, 1997.
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.
For the years ended December 31, 1997 and 1996, depletion
expense on oil and gas properties was $7,594,523 and
$2,431,633, respectively, or $1.05 and $0.80 per mcf
equivalent.
Pursuant to SFAS No. 121, the Company recorded a non-cash
charge of $1.6 million related to its Michigan Properties.
The Company also recorded a non-cash impairment of
undeveloped oil and gas properties in the amount of $2
million.
(5) LONG-TERM DEBT
A summary of long-term debt follows:
<TABLE>
<S> <C>
Borrowings under the Company's Credit Agreement,
as amended, with Den norske Bank AS, reduction
subject to availability under borrowing base,
$30,000,000 available borrowing base effective
September 30, 1997, reduction against the available
borrowing base of $425,000 commences November 1,
1997, interest payable monthly at adjusted LIBO Rate
plus 2.5% and/or prime rate as determined under the Credit
Agreement, secured by oil and gas properties,
equipment and receivables. $28,700,000
Note payable to related party, recourse only to
specific properties, payable at 9.5% in connection
with the purchase of the Prima properties (see
Note 15). 1,500,000
Other notes 99,898
----------
30,299,898
Less - Current portion (4,907,006)
----------
Long-term debt $25,392,892
==========
</TABLE>
On September 28, 1995, the Company entered into a
$20,000,000 revolving credit agreement through February 1,
2002, with Den norske On August 7, 1996, the revolving
credit facility was increased to $30,000,000. 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. During
the fourth quarter of 1997, Den norske combined the credit
and development facilities, increased the credit facility
to $75,000,000 and the borrowing base to $30,000,000, and
allowed the Company, at its option, to alternate between a
Prime rate or LIBO (London Interbank Offer) rate (plus 2.5%)
of interest. As of December 31, 1997, the available borrowing
base under the revolving credit facility had been reduced to
$29,150,000 and the outstanding balance was $28,700,000.
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, 1997, monthly borrowing base
reductions are $425,000. The borrowing base will be
redetermined semi-annually on each October 1 and April 1 prior
to February 1, 2002. See Note 20 for subsequent revisions
to the credit agreement.
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, 1997, the Company was in compliance
with the required financial covenants.
The Company generated cash flow from operations of
approximately $9.4 million at December 31, 1997. Based upon
the Company's current reserve estimates, the Company
believes its cash flow from operations will be sufficient to
meet the required approximate $4.9 million current
maturities.
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
remained 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 was due in monthly
installments of $12,352, beginning April 1, 1997, with the
final payment due March 1, 1999; however, the Company paid
the balance in full during 1997 due to the high interest
rate associated with the loan.
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
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 paid the non-affiliated individual in
full prior to December 31, 1996. Pursuant to the
Termination of Participation Agreement entered into between
the Company and the director, payment terms of the balance
included $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; however, the Company paid the balance in full during
1997 due to the high interest rate associated with the loan.
Maturities of long-term debt as of December 31, 1997 are as
follows:
1998 $4,907,006
1999 6,404,384
2000 5,125,730
2001 5,112,779
2002 and thereafter 8,750,000
---------
$30,299,898
==========
(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). As of June 9, 1997,
securities totaling $5,538,483 had been converted into
3,101,864 shares of common stock inclusive of 4% dividend
shares paid as of the date of conversion, and the remaining
$461,517 had been redeemed by the Company pursuant to its
rights under the security documents. The Company was not
required to pay any liquidated damages or additional
interest as a result of the conversion or redemption of the
securities.
In conjunction with the issuance of the convertible
securities, the Company paid placement fees and related
issuance costs of $1,002,446, inclusive of 173,724
restricted shares of common stock to World Capital Funding,
Inc., Denver, Colorado, or to persons designated by it, with
piggy-back registration rights, in partial payment of the
placement agent's fee, 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.
(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 had a fair value of
approximately $1.27 per share. On April 21, 1997, the
Company entered into an Amendment to Lead Generation
Agreement with CRG to provide additional services in the
public relations area. The Amendment also provided for the
immediate termination of the 500,000 options previously
granted to CRG by the Company and the issuance to CRG of
50,000 shares of registered stock in the Company. The
shares were valued at $1.94 per share which represents the
closing bid price on April 21, 1997. The cost was amortized
during 1997 due to the timing of the services being
performed.
(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 was assumed and subsequently
paid 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.
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.
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 for
$2.5 million. 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. 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, as amended, providing for the Company's
ability to call the Century Securities from the third party
member of Prima for $4,000,000 was substituted therefor (the
Call Agreement). The Call Agreement also provided 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 was advanced under the Call
Agreement (including payments previously made under the Put
Agreement). In the event the Company elected to call the
Century Securities, the advance payments would be credited
toward the purchase price. Additionally, a $500,000
certificate of deposit held as collateral for Prima's loan
was liquidated by the Company and the funds were advanced to
Prima under the potential Call Agreement. Prima used the
$500,000 to purchase shares of Series B Preferred Stock from
a third party, which Preferred Stock it subsequently
converted to common stock. In the event the Company
exercised the Call option, the $500,000 would be credited
towards the purchase. The Company's right to call the
Settle Securities began January 15, 1997 and ended December
31, 1997.
On November 4, 1997, the Board of Directors approved the
exercise of the Company's rights under the Call Agreement;
and all funds due pursuant thereto had been paid on or
before December 31, 1997. The investment is reported on the
Balance Sheet in "Other Assets: Investment in
Unconsolidated Subsidiaries." See Note 9 regarding
impairment of this asset.
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 was
$183,053. The loan bore interest at the rate of 10% per
annum and was 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. The note was paid
in full during 1997.
(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%. In
October 1997, the operating committee voted to liquidate the
LLC. As of December 31, 1997, the remaining investment is
$47,451. During 1997, the Company recognized losses of
$234,409.
In 1997, the Company acquired 2,471.3 shares of the common
stock of Century under the Call Agreement (see Note 8) for
$4 million. Due to the subsequent decline in oil and gas
prices, the Company determined there was an other than
temporary decline in the carrying value of the Century common
stock. As of December 31, 1997, the Company recorded a $1.5
million impairment to its investment in Century resulting in
a net book value of $2.5 million. The impairment of the Century
Stock was determined by comparing the carrying value of the
Stock on the Company's books, after the exercise of the
Century "Call Agreement," to the estimated fair value of the
Stock based on the most recent sale activity.
(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 is being 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, 1997 and 1996 is summarized as follows:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Current tax expense (benefit):
Federal - -
State $49,058 $25,659
------ ------
$49,058 $25,659
====== ======
Deferred tax expense:
Federal ($1,048,429) $537,591
State (193,103) 75,690
--------- -------
($1,241,532) $613,281
========= =======
</TABLE>
The Company's effective tax rate (40%) in 1997 is above the
U.S.federal income tax rate of 34% because of state income
taxes.
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 tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred
tax liabilities at December 31, 1997, are presented as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards $2,424,853
Severance pay 11,842
Basis differences in unconsolidated
investee 600,000
Allowance for doubtful accounts 110,674
Other 37,729
---------
Total gross deferred tax assets 3,185,098
Less - Valuation allowance (637,813)
---------
Net deferred tax assets 2,547,285
---------
Deferred tax liabilities:
Basis differences in oil and gas
properties $3,226,967
Basis differences in property and
equipment 1,370,962
Other 3,655
---------
Deferred tax liabilities 4,601,584
---------
Net deferred tax liability $2,054,299
=========
Current deferred tax asset $111,583
=======
Non-current deferred tax liability $2,165,882
=========
</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, 1997, the Company has approximately
$5,675,000 and $7,924,000 of net operating loss (NOL)
carryforwards available to offset future taxable income for
federal and state purposes, respectively. The carryforwards
expire from 1998 to 2012.
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 1997. 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, 1997. 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 $1,180,638 1,180,638
Trade accounts receivable 4,594,787 4,594,787
Related party receivables 304,415 304,415
Notes receivable 476,806 476,806
Century Stock 2,500,000 2,500,000
Financial liabilities:
Trade accounts payable 963,169 963,169
Related party note 1,500,000 1,500,000
Accrued expenses 524,668 524,668
Long-term debt 28,799,898 28,799,898
</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 PLACEMENTS
In July 1997, pursuant to a Securities Purchase Agreement,
the Company's primary lender, Den norske, purchased 500,000
shares of common stock of the Company for a price of $2.66
per share, for a total of $1,330,000 ($1,132,911 net of
placement costs). The Company and Den norske also entered
into a Registration Rights Agreement wherein Den norske was
granted certain demand and piggyback registration rights
with respect to the shares purchased.
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, among other
things, 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.
(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:
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, 1997
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,
1997. During the first quarter of 1997, the Company's
Board of Directors adopted a resolution eliminating
Series B Preferred Stock and returning the 1,000,000
shares to the status of authorized but unissued
Preferred Stock, without designation. The Certificate
eliminating the Series B Preferred Stock was filed in
the Office of the Secretary of State of Delaware on
April 16, 1997.
The Company paid dividends on the Series 1993 Preferred
Stock and Series B Preferred Stock through the issuance of
21,508 and 27,535 shares of common stock in 1997 and 1996,
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.
In April 1997, due to the recent decline in the market price
of the Company's common stock to a level below its book
value, the Board of Directors authorized the Company to
repurchase up to $2 million of the Company's common stock in
market transactions from time to time at prices deemed to
be favorable by the Company. As of December 31, the Company
had acquired 141,410 shares at an average price of $2.91
per share.
During the fourth quarter of 1997, the Company acquired
50,000 shares of its common stock from AKS for $5.00 per
share pursuant to the put provisions contained in that
certain Purchase & Sale Agreement dated December 27, 1995.
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 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, 1997, 321,000 shares have been issued under
the ESC at prices ranging from $1.94 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
1997 or 1996. 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>
1997 1996
---- ----
<S> <C> <C>
NET INCOME
----------
As reported ($1,846,591) $911,755
========= =======
Proforma ($1,993,701) $464,427
========= =======
BASIC EARNINGS PER SHARE
------------------------
As reported ($0.21) $0.14
==== =====
Proforma ($0.23) $0.06
==== =====
DILUTED EARNINGS PER SHARE
--------------------------
As reported ($0.21) $0.13
==== =====
Proforma ($0.23) $0.06
==== =====
</TABLE>
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:
1997 1996
---- ----
Dividend Yield -- --
Risk-free interest rate 5.00% 5.73%
Expected life 5 YRS. 4 YRS.
Expected volatility 69.47% 69.47%
A summary of the status of CSO and non-plan options granted
to employees, consultants, officers and directors for the
purchase of the Company's common stock follows:
<TABLE>
CSO NON-PLAN
--- --------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 1996 1,943,910 $5.16 1,426,320 $4.14
Granted 37,500 3.00 300,000 3.00
Exercised - - - -
Terminated (5,000) (6.00) (582,333) (4.16)
--------- ---- --------- ----
Balance, December 31, 1997 1,976,410 $5.12 1,143,987 $3.83
========= ==== ========= ====
Weighted average fair value of
options granted during 1997 $1.31 per share
====
</TABLE>
At December 31, 1997, 1,918,577 CSO options and 843,987
non-plan options were fully vested. The remaining 57,833
CSO options and 300,000 non-plan options will vest over the
next one to three years.
<TABLE>
CSO NON-PLAN
--- --------
WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Balance, December 31, 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>
The following is a summary of the status of CSO and non-plan
options outstanding at December 31, 1997:
<TABLE>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE REMAINING EXERCISE EXERCISE
PRICE RANGE NUMBER LIFE PRICE NUMBER PRICE
- ------------- ------ ---- ----- ------ -----
<C> <C> <C> <C> <C> <C>
$3.00 - $3.60 815,486 4.5 $3.20 515,486 $3.32
$4.00 - $4.80 1,392,487 3.8 4.25 1,334,654 4.44
$6.00 - $8.00 912,424 6.6 6.54 912,424 6.54
</TABLE>
At December 31, 1997, the Company has reserved 1,201,667
shares of common stock which are issuable upon the exercise
of the following warrants:
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 1,201,667 shares of common
stock reserved upon exercise of all outstanding warrants is
$3.94.
At December 31, 1996, the Company had an additional
1,049,720 common stock warrants outstanding which had been
issued in connection with the Company's merger with SOE;
however, the warrants expired on April 24, 1997.
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, 16, and 19).
In both 1997 and 1996, the Company, pursuant to the terms of
an employment and stock option agreement, has paid or
accrued compensation to the Company's Chairman of $40,000
and $60,000, respectively. The Chairman has been assisting
management in various financing transactions.
In 1997 and 1996, the Company paid $279,421 and $276,500,
respectively, 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 during 1996 related to advances and notes payable
from Southern Gas Holding Co., Inc. (Holding), a company
primarily owned by a director of the Company. At December 31,
1997, the Company has made advances to Holding totaling
$230,784 which the principal of Holding intends to secure
with assets of Holding.
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 of the
officer/director in the Ship Shoal B-3 well for $125,000.
During 1997, the Company purchased the remaining overriding
royalties of the officer/director and director in the Ship
Shoal 150 wells for $180,000 and $150,000, respectively,
based upon the fair market value of the wells utilizing the
1996 year-end reserve report.
On September 15, 1997, the Company entered into a Letter of
Intent with Prima, a limited liability company in which an
officer/director owns a 20% interest, providing for the
acquisition of an interest in certain producing and
non-producing oil and gas properties (the Properties)
located in Mississippi. The purchase price for the
Properties was $2,800,000 payable $1,300,000 on or before
closing which occurred October 10, 1997, and the balance of
$1,500,000 in an interest bearing note with recourse only to
the Properties, with interest thereon at 1 1/2% over Prime,
payable interest only until March 1998 and amortizing
thereafter over a two year period. The Company already
owned up to 3.5% interest in the Properties; and after
reviewing an independent geologist's report on the Properties,
the Letter of Intent was approved by a majority of the
disinterested directors of the Company at a special meeting
of the Board of Directors held on September 15, 1997.
(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>
1998 31,344
1999 25,044
2000 13,686
2001 9,900
2002 9,900
------
$89,874
======
</TABLE>
The Company rents equipment and office space under various
operating leases. Rental expense for the years ended
December 31, 1997 and 1996, was approximately $52,000 and
$61,200, respectively. Included in both 1997 and 1996 is
$37,800 paid to an officer/director of the Company related
to office space rental. The lease agreement was effective
through February 28, 1998 at a monthly rate of $3,100 and is
currently being renegotiated for renewal.
(17) DEFINED CONTRIBUTION PLAN
The Company maintains a Defined Contribution Plan (the Plan)
for all full-time employees of the Subsidiaries. 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, 1997
and 1996, approximately $44,250 and $32,500, respectively, were
recognized as a general and administrative expense for
contributions to the Plan.
(18) SIGNIFICANT CUSTOMER CONCENTRATION
The Company's primary market areas are the Appalachian
Region of Kentucky and the Gulf Coast Region. For the years
ended December 31, 1997 and 1996, 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.
Appalachian Region:
------------------
Approximately 27% and 31% of the Company's gas sales in 1997
and 1996, 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>
1997 1996
---- ----
$ % $ %
- - - -
<S> <C> <C> <C> <C>
Company A 9,506,199 53 15,650,000 69
Company B 3,118,575 18 2,543,000 11
</TABLE>
Gulf Coast Region:
-----------------
The Company sells all of its current Gulf Coast gas
production through H&N Gas, Ltd. The Company sells 50% of
its Gulf Coast oil production to Citgo Petroleum Corporation
and 25% each to Texon Corporation and Conoco.
(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, 1997, of $29,604 based on an 8%
discount factor.
The Kentucky Revenue Cabinet has assessed Southern Gas for
outstanding sales tax of approximately $1,500,000, plus
penalties and interest, allegedly owed to the Commonwealth
of Kentucky by Southern Gas Company ("SGC"), a dissolved entity,
prior to Southern Gas' acquisition of the assets of SGC.
Southern Gas has denied the liability and believes it will
be successful in its defense of this assessment. Southern
Gas' defenses to the assessment and/or in support of reduction
of the assessment include, but are not limited to, that credit
should be received for all gas delivered to (1) interstate
customers; (2) customers who resold the product; (3) direct pay
customers; and (4) industries where the consumable materials
are utilized in the manufacturing process. Based on these
defenses, as well as the assertion by Southern Gas that it
is not responsible for the debts of SGC, management intends
to vigorously defend its position and believes that any
resulting liability will not have a significant impact on
the Company's financial condition, operations or liquidity.
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.
(20) SUBSEQUENT EVENTS
THE TECO ACQUISITION
On March 5, 1998, the Company purchased interests in 41
leaseblocks in the Gulf of Mexico from TECO Oil & Gas, Inc.
("TECO"). The properties consist of an interest in
approximately 197,000 acres and 5 producing wells, interests
in two joint ventures and access to approximately 12,500
square miles of 3-D seismic data. The Company believes that
the TECO acquisition provides ample opportunity to increase
reserves, production and cash flow from development and
exploration activities and has identified 27 initial
drilling locations.
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 existing
credit facility and a new facility with DNB Energy Assets,
Inc. (a company owned by 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 (the "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 (the "TECO Warrant Agreement") granting
TECO warrants to acquire 600,000 shares of common stock of
the Company (the "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 grants TECO
warrants to acquire common stock equal to 10% of the
Company's outstanding common stock and options to acquire
common stock if the TECO Note is not paid in full by October
1, 1998, such percentage increasing 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, the "Secondary Warrants"). The
price per share of common stock evidenced by the Secondary
Warrants is $.00001. On March 16, 1998, the Company filed a
Form 8-K/A with the Securities and Exchange Commission
regarding this transaction.
BRIDGE FINANCING
In order to complete the acquisition of the TECO properties
in March 1998, Den norske increased the Company's borrowing
base to $50.0 million which provided an additional $22 million
under the Credit Facility; and additional bridge financing
of $16.5 million was also provided. The financing bears
interest at either Prime rate or LIBO rate plus 2.5%, at
the Company's option and matures October 1, 1998.
The capital expenditures for the development and exploratory
program, estimated to be $39 million in 1998, are substantially at
the discretion of the Company. 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 Den norske bridge loan matures in July 1998
with the balance maturing in October 1998; and in the event the
Company fails to satisfy these commitments or refinance the debt,
the Bank could declare the Company in default. However, the
Company believes that cash flow from operations would be adequate
to repay the bridge loan if the capital expenditure level for the
development and exploratory program is adjusted.
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 Den norske 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 (see "The TECO Acquisition," above).
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
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>
1997 1996
---- ----
<S> <C> <C>
Capitalized costs relating to oil and
gas producing activities:
Proved undeveloped oil and gas properties $ 4,193,257 $ 4,193,257
Proved oil and gas properties 45,095,998 38,257,168
Unproved oil and gas properties 7,883,526 5,686,334
Support equipment and facilities 8,190,321 8,061,570
---------- ----------
65,363,102 56,198,329
Less accumulated depreciation, depletion,
amortization, and impairment (16,736,991) (5,703,885)
---------- ----------
Net capitalized costs $48,626,111 $50,494,444
========== ==========
Costs incurred in oil and gas producing
property acquisition, exploration and
development activities:
Property acquisition costs:
Proved $3,714,950 $18,439,652
Unproved 3,793,478 2,925,500
Exploration costs 929,442 -
Development costs 1,357,185 3,314,867
---------- ----------
$9,795,055 $24,680,019
========== ==========
Results of operations for oil and
gas activities:
Oil and gas sales $19,456,938 $8,540,569
Gain (loss) on sale of gas properties - (153,000)
Unsuccessful well costs (784,931) -
Production costs (2,583,426) (1,402,389)
Depreciation, depletion, and amortization (7,677,232) (2,431,633)
Impairment of oil and gas properties (3,595,620) -
---------- ----------
Results of operations for oil and gas
producing activities (excluding
corporate overhead) $4,815,729 $4,553,547
========= =========
</TABLE>
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
Reserve Quantity Information for the Year Ended December 31, 1997
and 1996:
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. (all Gulf Coast Region properties except West
Cameron 368 and Sunrise); Ryder Scott Company (Gulf Coast Region
properties of West Cameron 368 and Sunrise); 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.
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>
1997 1996
---- ----
OIL GAS OIL GAS
--- --- --- ---
<S> <C> <C> <C> <C>
Proved developed and
undeveloped reserves:
Beginning of year 1,202,212 35,692,711 756,383 24,741,330
Revisions of previous
estimated 136,860 (4,378,474) (45,694) (2,346,294)
Purchases of minerals
in place 267,558 3,714,000 691,712 18,373,382
Extensions and
discoveries 204,472 5,467,731 - -
Production (425,888) (4,578,607) (200,189) (1,829,503)
Sales and transfers
of minerals in place - - - (3,246,204)
---------- ---------- -------- ----------
Total proved developed &
undeveloped reserves 1,385,214 35,917,361 1,202,212 35,692,711
========== ========== ========= ==========
Proved developed reserves:
Beginning of year 909,194 29,033,203 756,383 19,702,503
End of year 1,092,363 30,175,424 909,194 29,033,203
========== ========== ========= ==========
</TABLE>
<PAGE>
AMERICAN RESOURCES OF DELAWARE, INC.
------------------------------------
AND SUBSIDIARIES
----------------
OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
--------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
----------------------------------------------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND GAS RESERVES AS OF
DECEMBER 31, 1997 AND 1996:
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 1997 used for this
calculation was $16.47 per barrel. The average natural gas price
used was $2.83 for Gulf Coast, $2.45 for Kentucky Region and
$2.41 for Michigan. In general, oil and natural gas prices
declined in early 1997.
At December 31, 1997 and 1996, the Company's future discounted
net cash flow from proved reserves was located as follows:
<TABLE>
KENTUCKY GULF COAST MICHIGAN TOTAL
-------- ---------- -------- -----
<C> <C> <C> <C> <C>
1997 $18,635,796 29,091,932 45,740 $47,773,468
1996 $16,972,496 41,678,600 1,298,910 $59,950,006
========== ========== ========= ==========
</TABLE>
At December 31, 1997, the South Timbalier 148 Field accounted for
approximately 38% of the Company's future net cash flows in the
Gulf Coast Region. At December 31, 1997 and 1996, the Gausdale
Field accounted for approximately 23% and 58% of the Company's
future net cash flows from the Kentucky Region.
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Standard measure of discounted future
net cash flows at December 31:
Future cash inflows $113,391,033 $124,117,714
Future production costs (20,924,748) (16,015,402)
Future development costs (6,982,050) (8,893,219)
Future taxes (2,758,828) (2,501,238)
----------- -----------
82,725,407 96,707,855
Future net cash flows, 10% annual
discount for estimated timing
of cash flows (34,951,939) (36,757,849)
---------- ----------
Standardized measure of
discounted future net cash
flows relating to proved
gas reserves $47,773,468 $ 59,950,006
=========== ============
</TABLE>
<PAGE>
The following reconciles the change in the standardized measure
of discounted future net cash flows during the years 1997 and
1996:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Beginning of year $59,950,006 $29,448,092
Sales of gas produced, net of
production costs (16,873,512) (7,138,180)
Net changes in prices and
production costs (8,580,456) 4,933,466
Extensions and discoveries 9,476,051 -
Revisions of previous quantity
estimates (4,970,078) (2,659,980)
Change from purchases of minerals
in place 3,946,617 36,340,737
Change from sale and transfers of
minerals in place - (2,361,900)
Changes in future taxes (117,072) 42,210
Accretion of discount 3,810,642 2,655,425
Changes in timing and other 1,131,270 (1,309,864)
---------- ----------
End of year $47,773,468 $59,950,006
========== ==========
</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.
<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: April 7, 1998
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 April 7, 1998
- -------------------------
Douglas L. Hawthorne
President, Chief Executive
/s/ Rick G. Avare Officer, and Director April 7, 1998
- -------------------------
Rick G. Avare (Principal Executive Officer)
Director and President,
Southern Gas Company
/s/ Leonard K. Nave of Delaware, Inc. April 7, 1998
- -------------------------
Leonard K. Nave
/s/ Ralph A. Currie Chief Financial Officer April 7, 1998
- -------------------------
Ralph A. Currie
Director
- -------------------------
Dr. Donald A. Schellpfeffer
/s/ David Fox, Jr. Director April 7, 1998
- -------------------------
David Fox, Jr.
/s/ Len Aldridge Director April 7, 1998
- -------------------------
Len Aldridge
Director
- ------------------------
Robert L. McIntyre
<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). *
3.11 Copy of the Certificate eliminating the
Series B Preferred Stock (incorporated by
reference to Exhibit 3.11 to the Company's
Form 8-K filed on April 24, 1997). *
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). *
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). *
10.13 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). *
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). *
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). *
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). *
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"]). *
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). *
10.63 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"]). *
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 (incorporated by reference
to Exhibit 10.74 to the Registrant's Form
10-KSB for the fiscal year ended December 31,
1996 [the "1996 Form 10-KSB"]). *
10.75 Termination of Participation Agreement
by and between American Resources of
Delaware, Inc. and The Kandy Limited
Partnership, dated December 29, 1996
(incorporated by reference to Exhibit 10.75
to the Registrant's 1996 Form 10-KSB). *
10.76 Termination of Participation Agreement
by and between American Resources of
Delaware, Inc. and Donald A. Schellpfeffer,
dated December 29, 1996 (incorporated by
reference to Exhibit 10.76 to the Registrant's
1996 Form 10-KSB). *
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 (incorporated by reference to Exhibit
10.79 to the Registrant's 1996 Form 10-KSB). *
10.80 Securities Purchase Agreement dated July 16,
1997 between the Company and Den norske Bank ASA
(incorporated by reference to Exhibit 10.80 to
Company's Form 8-K filed on July 25, 1997). *
10.81 Registration Rights Agreement dated July 16,
1997 between the Company and Den norske Bank
ASA (incorporated by reference to Exhibit 10.81
to the Company's Form 8-K filed on July 25, 1997). *
10.82 Co-Sale Agreement dated July 16, 1997 among
the Company, Rick G. Avare, Southern Gas
Holding Company, Inc. and Den norske Bank ASA
(incorporated by reference to Exhibit 10.82
to the Company's Form 8-K filed on July 25,
1997). *
10.83 Letter of Intent between the Company and
Prima Capital, LLC (incorporated by reference
to Exhibit 10.83 to the Company's Form 8-K
filed on September 24, 1997). *
10.84 Copy of the letter of resignation from
William Bishop (incorporated by reference to
Exhibit 10.84 to the Company's Form 8-K filed
on October 1, 1997). *
10.85 Copy of the Stock Purchase Agreement between
Prima Capital, LLC and the Company (incorporated
by reference to Exhibit 10.85 to the Company's
Form 8-K filed on November 19, 1997). *
10.86 Copy of the First Amended and Restated
Credit Agreement between the Company and Den
norske Bank, AS (incorporated by reference to
Exhibit 10.86 to the Company's Form 8-K filed
on November 19, 1997). *
10.87 Purchase and Sale Agreement by and between
the Company and K.E. Resources, Ltd., entered
into on December 16, 1997 (incorporated by
reference to Exhibit 10.87 to the Company's
Form 8-K filed on December 30, 199). *
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 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 Form 8-K 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 Form 8-K filed
on March 16, 1998). *
10.91 Warrant Agreement between American Resources
of Delaware, Inc. and TECO Oil & Gas, Inc.
(incorporated by reference to Exhibit 10.91
to the Company's Form 8-K filed on March 16,
1998). *
21.0 Subsidiaries of American Resources of
Delaware, Inc. 110
23.1 Consent of KPMG Peat Marwick, LLP. 111
23.2 Consent of Netherland, Sewell & Associates, Inc. 112
23.3 Consent of Richard M. Russell & Associates, Inc. 113
23.4 Consent of Ryder Scott Company, Petroleum
Engineers 114
* Previously filed
<PAGE>
Exhibit 21.0
SUBSIDIARIES OF AMERICAN RESOURCES OF DELAWARE, INC.
1. Southern Gas Co. of Delaware, Inc., a Delaware corporation
2. American Resources Offshore, Inc., a Delaware corporation
<PAGE>
Exhibit 23.1
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 26, 1998 related
to the consolidated balance sheet of American Resources of
Delaware, Inc. and Subsidiary as of December 31, 1997 and the
related statements of operations, stockholders' equity and cash
flows for the years ended December 31, 1997 and 1996, which
report appears in the December 31, 1997 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
April 7, 1998
<PAGE>
Exhibit 23.2
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, 1997, to the interest of American Resources of
Delaware, Inc. and subsidiary (ARI) 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, 1997,
and (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).
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Clarence M. Netherland
------------------------------------
Clarence M. Netherland
Chairman
Dallas, Texas
March 31, 1998
<PAGE>
Exhibit 23.3
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 18, 1998
setting forth our estimates of reserves and future revenue as of
January 1, 1998 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, 1997,
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 24, 1998
2003 BLAIR BOULEVARD NASHVILLE, TENNESSEE 37212
615-385-5446 FAX 615-292-7375 E MAIL RCYCLE @IX.NETCOM.COM
<PAGE>
Exhibit 23.4
Ryder Scott Company
Petroleum Engineers
- -------------------
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
---------------------------------------------------------
As independent oil and gas consultants, Ryder Scott Company
hereby consents to (a) the use of our report setting forth our
estimates of proved reserves and future revenue, as of December 31,
1997, to the interest of American Resources of Delaware, Inc. and
subsidiary (ARI) 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, 1997, (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.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
Houston, Texas
March 31, 1998
<TABLE> <S> <C>
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<CIK> 0000899717
<NAME> AMERICAN RESOURCES OF DELAWARE INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,180,638
<SECURITIES> 0
<RECEIVABLES> 4,969,202
<ALLOWANCES> (4,949)
<INVENTORY> 0
<CURRENT-ASSETS> 6,569,374
<PP&E> 69,525,769
<DEPRECIATION> (18,276,276)
<TOTAL-ASSETS> 61,565,934
<CURRENT-LIABILITIES> 6,752,488
<BONDS> 0
0
2,181,819
<COMMON> 102
<OTHER-SE> 22,339,607
<TOTAL-LIABILITY-AND-EQUITY> 61,565,934
<SALES> 36,956,094
<TOTAL-REVENUES> 38,032,146
<CGS> 0
<TOTAL-COSTS> 21,328,988
<OTHER-EXPENSES> 17,024,879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,746,557
<INCOME-PRETAX> (3,039,065)
<INCOME-TAX> 1,192,474
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,846,591)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
