SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended: MARCH 31, 2004
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ___________ to
Commission file no. 000-50228
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TOUCHSTONE RESOURCES USA, INC.
-------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 33-0967974
- --------------------------------------------- -------------------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
111 PRESIDENTIAL BOULEVARD,
SUITE 165
BALA CYNWYD, PA 19004
------------------------------------------------------
(Address of Principal Executive Offices)
(610) 771-0680
------------------------------------------------------
(Issuer's Telephone Number, including Area Code)
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 file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: There were 50,000,000
issued and outstanding shares of the registrant's common stock, par value $.001
per share, as of May 22, 2004.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ X ]
EXPLANATORY NOTE
Touchstone Resources USA, Inc. ("the Company") is filing this Amendment No. 1
("the Amendment") to its Quarterly Report on Form 10-QSB for the three-month
period ended March 31, 2004 filed with the Securities and Exchange Commission
("SEC") on May 24, 2004 ("the Original Report").
The Company recently discovered an error in its interim condensed consolidated
financial statements included in the Company's Quarterly Report on Form 10-QSB
for the three months ended March 31, 2004. The Company has corrected its interim
condensed consolidated financial statements to conform them to U.S. generally
accepted accounting principles. This correction has impacted the Company's
condensed consolidated financial statements for the period ended March 31, 2004
to increase the liabilities and goodwill and reduce revenues and related
expenses as more fully explained in Note 16 - Correction of an Error appearing
in Item 1 of this Amendment. This correction of the error did not change the
Company's reported net loss. In addition, prior to filing this Form 10-QSB/A, on
May 26, 2004, the Company settled a lawsuit which was pending at December 31,
2003. As disclosed in Note 17 - Settlement of Lawsuit with Clayton Williams, the
Company has recorded an increase in prepaid expenses and a decrease in oil and
gas interests, accounts payable and net loss in order to reflect the outcome of
this litigation. Notes 3, 5 and 6 have been updated to reflect the correction of
the error described in Note 16 and the settlement of the lawsuit described in
Note 17. The restated condensed consolidated financial statements for the period
ended March 31, 2004 do no reflect any changes in the Company's accounting
principles, practices or procedures.
The Company also recently discovered certain typographical errors in the
subsections entitled "Recent Acquisitions" and "Liquidity and Capital Resources"
under Item 2 of Part I of this Amendment. This Amendment is being filed in part
to correct these typographical errors.
With the exception of the events set forth in Note 17 of the condensed
consolidated financial statements, this Amendment does not reflect events that
have occurred after May 24, 2004, the date the Original Report was filed with
the SEC, nor does it modify or update the disclosures set forth in the Original
Report, except to reflect the effects of the restatement of the condensed
consolidated financial statements for the period ended March 31, 2004 and the
correction of the typographical errors contained in Item 2 of Part I, or as
deemed necessary in connection with the completion of such financial statements.
Information with respect to any such events has been or will be set forth, as
appropriate, in the Company's filings with the SEC subsequent to May 24, 2004.
The remaining information contained in this Amendment, which consists of all
other information originally contained in the Original Report, is not amended
hereby, but is included for the convenience of the reader.
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Part I. Financial Information
Item 1. Financial Statements 2
Condensed Consolidated Balance Sheets - (Unaudited) 3
Condensed Consolidated Statements of Operations - (Unaudited) 4
Condensed Consolidated Statements of Cash Flows - (Unaudited) 5
Notes to Financial Statements 6
Item 2. Plan of Operation 21
Item 3. Controls and Procedures 28
Part II. Other Information
Item 2. Changes in Securities and Small Business Issuer Purchases
of Equity Securities 28
Item 6. Exhibits and Reports on Form 8-K 29
2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Balance Sheets
ASSETS
March 31, December 31,
2004 2003
------------ ------------
(Unaudited) (Audited)
Current assets
Cash and cash equivalents $ 1,181,845 $ 91,578
Accounts receivable 2,445,120 --
Notes and interest receivable 36,554 --
Prepaid expenses 1,020,057 741
Other assets 350,000 --
------------ ------------
Total current assets 5,033,576 92,319
Undeveloped oil and gas interests, using successful efforts 4,137,523 --
Investment in limited partnerships and liability companies 954,265 --
Goodwill 1,249,430 --
Furniture and fixtures, net 35,658 --
------------ ------------
$ 11,410,452 $ 92,319
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable and accrued expenses $ 4,530,167 $ 31,247
Notes payable 4,507,500 --
Limited partnership subscriptions payable 325,000 --
Convertible debenture 2,100,000 100,000
------------ ------------
Total current liabilities 11,462,667 131,247
------------ ------------
Commitment and contingencies
Minority interest 8,151 --
Stockholders' deficit
Preferred stock; $.001 par value; authorized - 5,000,000 shares; shares
issued and outstanding - 0 at 2004 and 2003 -- --
Common stock; $.001 par value; authorized - 50,000,000 shares; shares issued
and outstanding - 50,000,000 at 2004 and 166,775,000 at 2003 50,000 166,775
Additional paid-in capital 73,057 --
Discount on common stock from stock split -- (120,075)
Deficit accumulated during the development stage (183,423) (85,628)
------------ ------------
Total stockholders' deficit (60,366) (38,928)
------------ ------------
$ 11,410,452 $ 92,319
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months March 5, 2001
Ended March 31, (Inception) to
------------------------------ March 31,
2004 2003 2004
------------- ------------- -------------
Revenues $ 6,622 $ -- $ 6,622
------------- ------------- -------------
Expenses
Exploration expenses 72,375 -- 72,375
Bad debt expense 15,454 -- 15,454
General and administrative 458,573 3,974 537,954
------------- ------------- -------------
Total expenses 546,402 3,974 625,783
------------- ------------- -------------
Loss from operations (539,780) (3,974) (619,161)
------------- ------------- -------------
Other (income) expense
Loss from limited partnerships and liability companies 4,735 -- 4,735
Interest income (5,570) -- (5,570)
Interest expense 21,079 -- 27,326
------------- ------------- -------------
Total other expense 20,244 -- 26,491
------------- ------------- -------------
Loss before minority interest and pre-acquisition losses (560,024) (3,974) (645,652)
------------- ------------- -------------
Minority interest and pre-acquisition losses 462,229 -- 462,229
------------- ------------- -------------
Net loss to common stockholders $ (97,795) $ (3,974) $ (183,423)
============= ============= =============
Net loss per common share - basic and diluted $ (0.00) $ (0.00) $ (0.00)
============= ============= =============
Weighted average number of common shares
outstanding - basic and diluted 125,711,264 166,775,000 153,770,967
============= ============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31, March 5, 2001
-------------------------- (Inception) to
2004 2003 March 31, 2004
----------- ----------- --------------
Cash flows from operating activities
Net cash provided by (used in) operating activities $ 148,992 $ (150) $ 99,520
----------- ----------- -----------
Cash flows from investing activities
Cash acquired from acquisition of wholly-owned subsidiary and
limited partnership interest 510,275 -- 510,275
Deposit on future investments (350,000) -- (350,000)
Investment in limited partnership interests (1,133,000) -- (1,133,000)
----------- ----------- -----------
Net cash used in investing activities (972,725) -- (972,725)
----------- ----------- -----------
Cash flows from financing activities
Advances from stockholder -- -- 10,000
Repayments to stockholder -- -- (10,000)
Proceeds from notes payable 3,000 -- 3,000
Proceeds from issuance of convertible debt 2,100,000 100,000 2,200,000
Repayment of convertible debt (100,000) -- (100,000)
Loan costs (104,000) -- (104,000)
Capital contributed by sole officer 15,000 -- 15,000
Proceeds from issuance of common stock, net of issuance costs -- -- 41,050
----------- ----------- -----------
Net cash provided by financing activities 1,914,000 100,000 2,055,050
Net increase in cash and cash equivalents 1,090,267 99,850 1,181,845
Cash and cash equivalents at beginning of year 91,578 9,401 --
----------- ----------- -----------
Cash and cash equivalents, end of period $ 1,181,845 $ 109,251 $ 1,181,845
=========== =========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements included herein have
been prepared by Touchstone Resources USA, Inc. (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
The financial statements reflect all adjustments that are, in the opinion of
management, necessary to fairly present such information. All such adjustments
are of a normal recurring nature. Although the Company believes that the
disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including a description of
significant accounting policies normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America ("US GAAP"), have been condensed or omitted pursuant to
such rules and regulations.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's 2003 Annual Report on
Form 10-KSB filed with the Securities and Exchange Commission. The results of
operations for interim periods are not necessarily indicative of the results for
any subsequent quarter or the entire fiscal year ending December 31, 2004.
The Company is a Development Stage Enterprise, as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7 "Accounting and Reporting for
Development Stage Enterprises." Under SFAS No. 7, certain additional financial
information is required to be included in the financial statements for the
period from inception of the Company to the current balance sheet date.
NOTE 2 - DESCRIPTION OF BUSINESS
Touchstone Resources USA, Inc. (formerly The Coffee Exchange, Inc.) was
incorporated under the laws of Delaware on March 5, 2001. The Company was
organized to develop Internet coffee cafes in Orange County, California that
would feature Internet coffee cafes.
On March 15, 2004, the Company experienced a change in management when all of
its directors and officers resigned from their positions and it appointed a new
officer and director. The Company's new management implemented a new business
plan and completed a series of material transactions and the Company became
engaged in oil and gas exploration, development and production and the
acquisition of producing properties focusing on projects located in Texas,
Louisiana and other traditional oil and gas producing states in the Southern
United States, as well as in New Zealand.
Effective March 18, 2004, the Company changed its name from "The Coffee
Exchange, Inc." to "Touchstone Resources USA, Inc."
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ADOPTED IN 2004
Consolidated Financial Statements
The accompanying consolidated financial statements include all of the accounts
of Touchstone Resources USA, Inc. and its five subsidiaries consisting of
Touchstone Resources USA, Inc. (100% owned) ("Touchstone Subsidiary"), a Texas
Corporation incorporated in May 2000, Touchstone Awakino, Inc. (100%)
("Touchstone Awakino"), a Delaware corporation incorporated in March 2004,
Touchstone Louisiana, Inc. (100%) ("Touchstone Louisiana"), a Delaware
corporation incorporated in March 2004, Touchstone Vicksburg, Inc. (100%)
("Touchstone Vicksburg"), a Delaware corporation incorporated in March 2004, and
Knox Gas, LLC (75%) ("Knox Gas"), a Delaware limited liability company formed in
February 2004. All significant intercompany accounts and transactions have been
eliminated in consolidation.
6
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ADOPTED IN 2004 (Continued)
Equity Method
Under the guidance of Emerging Issues Task Force D-46, "Accounting for Limited
Partnership Investments" the Company uses the equity method to account for all
of its limited partnership and membership interests that exceed 5% and is less
than 50%. Under the equity method of accounting, the Company's proportionate
share of the investees' net income or loss is included in "Loss from limited
partnerships and liability companies" in the condensed consolidated statements
of operations. Any excess investment is evaluated each reporting period for
impairment.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Management believes that it is reasonably possible the following material
estimates affecting the financial statements could significantly change in the
coming year (1) estimates of any proved oil and gas reserve, (2) estimates as to
the expected future cash flow from any proved oil and gas properties, and (3)
estimates of future dismantlement and restoration costs.
The Company's business makes it vulnerable to changes in wellhead prices of
crude oil and natural gas. Such prices have been volatile in the past and can be
expected to be volatile in the future.
By definition, proved reserves are based on current oil and gas prices. Price
declines reduce the estimated quantity of proved reserves and increase annual
amortization expense (which is based on proved reserves).
Oil and Gas Accounting
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill exploratory
wells that do not find proved reserves, geological and geophysical costs, and
costs of carrying and retaining unproved properties are expensed.
Unproved oil and gas properties that are individually significant are
periodically assessed for impairment of value, and a loss is recognized at the
time of impairment by providing an impairment allowance. Other unproved
properties are amortized based on the Company's experience of successful
drilling and average holding period. Capitalized costs of producing oil and gas
properties, after considering estimated salvage values, are depreciated and
depleted by the unit-of-production method. Support equipment and other property
and equipment are depreciated over their estimated useful lives.
The Company reviews the carrying values of its long-lived assets whenever events
or changes in circumstances indicate that such carrying values may not be
recoverable. If, upon review, the sum of the undiscounted pretax cash flows is
less than the carrying value of the asset group, the carrying value is written
down to estimated fair value. Individual assets are grouped for impairment
purposes at the lowest level for which there are identifiable cash flows that
are largely independent of the cash flows of other groups of assets, generally
on a field-by-field basis. The fair value of impaired assets is determined based
on quoted market prices in active markets, if available, or upon the present
values of expected future cash flows using discount rates commensurate with the
risks involved in the asset group. The long-lived assets of the Company, which
are subject to evaluation, consist primarily of oil and gas properties.
Impairments are provided if the net capitalized costs of gas and oil properties
at the field level exceed their realizable values based upon expected future
cash flows.
7
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ADOPTED IN 2004 (Continued)
Upon the sale or retirement of a complete unit of a proved property, the cost
and related accumulated depreciation, depletion, and amortization are eliminated
from the property accounts, and the resultant gain or loss is recognized. Upon
the retirement or sale of a partial unit of proved property, the cost is charged
to accumulated depreciation, depletion, and amortization with a resulting gain
or loss recognized in income.
On the 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 an unproved property is sold, the amount
received is treated as a reduction of the cost of the interest retained.
Revenue Recognition
Revenue is recognized at the time title passes on oil and gas quantities, less
any royalties due. Revenues related to natural gas are recognized using the
entitlement method of accounting for gas imbalances. Any quantities that are in
excess of sales quantities are recorded as a receivable at the lower of the
current market price or the market price at the time the imbalance occurred. Any
quantities that are lower than the sales quantities are recorded as deferred
revenue at the market price at the time the imbalance occurred. There were no
imbalances as of March 31, 2004.
Capitalized Interest
The Company policy is to capitalize interest on expenditures for significant
exploration and development projects while activities are in progress to bring
the assets to their intended use. There was no capitalized interest as of March
31, 2004.
Segment Information
Under SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," the Company has determined it has one reportable operating segment
being the acquiring, exploration and development of natural gas and oil
properties. The company's operations are conducted in two geographic segments as
follows:
March 31, 2004 March 31, 2003
-------------------------- -------------------------
Long-lived Long-lived
Revenue Assets Revenue Assets
---------- ---------- ---------- ---------
United States $ 6,622 $4,357,182 $ -- $ --
New Zealand -- 770,264 -- --
---------- ---------- ---------- ---------
$ 6,622 $5,127,446 $ -- $ --
========== ========== ========== =========
NOTE 4 - GOING CONCERN
The Company is in the development stage and has incurred losses since its
inception. Also, its current liabilities exceed its current assets. There are no
assurances the Company will receive funding necessary to implement its business
plan. This raises substantial doubt about the ability of the Company to continue
as a going concern.
The Company believes that the completion of its private offerings of securities
and its projected revenues from oil and gas operations will provide sufficient
funds to fund its operations through March 2005. The Company will be required to
raise funds through additional offerings of its securities in order to have the
funds necessary to meet its working capital requirements, and cash calls related
to various interest in oil and gas prospects, complete other acquisitions and
continue its operations.
8
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 4 - GOING CONCERN (Continued)
The Company's ability to continue as a going concern is dependent upon raising
capital through debt and equity financing on terms desirable to the Company. If
the Company is unable to obtain additional funds when they are required or if
the funds cannot be obtained on terms favorable to the Company, management may
be required to delay, scale back or eliminate its well development program or
license third parties to develop or market products that the Company would
otherwise seek to develop or market itself, or even be required to relinquish
its interest in the properties or in the extreme situation, cease operations.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
NOTE 5 - BUSINESS COMBINATIONS
In accordance with accounting Research Bulletin No. 51 "Consolidated Financial
Statements," the financial operations of the acquired subsidiaries have been
included in the consolidation as though they have been acquired as of January 1,
2004 with the related pre-acquisition losses being deducted at the bottom of the
condensed consolidated statement of operations.
Acquisition of Touchstone Subsidiary
On March 23, 2004, the Company acquired 100% of the issued and outstanding
shares of common stock of Touchstone Subsidiary from Touchstone Resources, Ltd.
("Touchstone Canada"), in consideration for which the Company issued 7,000,000
shares of its common stock to Touchstone Canada. The 7,000,000 shares were
valued by independent valuation consultant at $70,000. The purchase price was
allocated to the assets and liabilities in accordance with SFAS No. 141
"Business Combinations." In connection with this acquisition, the Company issued
280,000 shares of its common stock to an investment advisor valued at $2,800. On
March 23, 2004, Touchstone Subsidiary had a deficit of $1,176,630, which
consisted of the following components:
Cash $ 506,261
Accounts receivable 2,393,596
Other current assets 31,185
Fixed assets 35,687
-----------
Total Assets $ 2,966,729
===========
Accounts payable $ 4,122,709
Other liabilities 20,650
-----------
Total Liabilities $ 4,143,359
===========
Net Deficit Acquired $(1,176,630)
===========
The excess purchase price pf $1,249,430 was recognized as goodwill, which will
be subject to period impairment assessment under SFAS No. 142 "Goodwill and
Other Intangible Assets."
Acquisition of Knox Gas
On March 24, 2004 the Company purchased from FEQ Gas, LLC, ("FEQ Gas"), a 75%
membership interest in Knox Gas, which owns a 99% limited partnership interest
in Knox Miss Partners, L.P., ("Knox Miss LP"), and a 1% membership interest in
Knox Miss, LLC ("Knox Miss LLC"), a Delaware limited liability company and the
general partner in Knox Miss LP. The managing member of FEQ Gas is a beneficial
owner of greater than 5% of the issued and outstanding shares of the Company.
The Company agreed to assume FEQ Gas' obligation to make capital
9
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 5 - BUSINESS COMBINATIONS (Continued)
contributions to Knox Gas in the amount of $5 million. The proceeds of the
capital obligation will be used to pay Knox Gas' obligations to Endeavour
International Corporation ("Endeavour"), formerly Continental Southern
Resources, Inc., under a secured promissory note issued to Endeavour. In April
2004, the Company paid $1,500,000 to Endeavour for partial payment of the
promissory note.
Following is the condensed consolidated balance sheet of Knox Gas on March 24,
2004:
Notes and interest receivable $ 32,335
Advance payments to operators 884,191
Unproved oil and gas property 4,079,702
Subscription receivable 4,500,000
Miscellaneous (83)
-----------
Total Assets $ 9,496,145
===========
Accrued expenses $ 41,314
Notes payable 4,504,500
Minority interest 8,151
-----------
Total Liabilities and Minority Interest $ 4,553,965
===========
Net Assets Acquired $ 4,942,180
===========
The excess purchase price of Knox Gas in the amount of $57,820 was allocated to
unproved oil and gas property.
Knox Gas' Acquisition of Knox Miss LP
On February 26, 2004, Knox Gas acquired 99% limited partnership interest in Knox
Miss LP and 1% membership interest in Knox Miss LLC from Endeavour, in
consideration of which Knox Gas paid $500,000 in cash and issued a secured
promissory note of $4,500,000 to Endeavour.
The following is the condensed balance sheet of Knox Miss LP on February 26,
2004:
Cash $ 3,404
Notes and interest receivable 45,368
Advance payments to operators 905,024
Unproved oil and gas property 2,766,623
----------
Total Assets $3,720,419
==========
Accrued expenses $ 23,687
Notes payable 1,250
Minority interest 8,562
----------
Total Liabilities and Minority Interest $ 33,499
==========
Net Assets Acquired $3,686,920
==========
The excess purchase price of $1,313,080 was allocated to unproved oil and gas
property.
The following pro forma presentation assumes the Company's acquisition of
Touchstone Subsidiary and Knox Gas, and Knox Gas' acquisition of Knox Miss LP
took place on January 1, 2003 and shows the pro forma effect on loss from
operations.
10
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 5 - BUSINESS COMBINATIONS (Continued)
Three Months Ending Three Months Ending
March 31, 2004 (unaudited) March 31, 2003 (unaudited)
------------------------------ ------------------------------
Historical Pro Forma Historical Pro Forma
------------- ------------- ------------- -------------
Revenue $ 6,622 $ 6,622 $ -- $ 10,630
Operating expenses 546,402 546,402 3,974 420,207
Loss from operations (539,780) (539,780) (3,974) (409,577)
Other (income) loss 20,244 20,244 -- 107,031
Net loss before minority
interest and pre-acquisition losses (560,024) (560,024) (3,974) (516,608)
Minority interest and pre-acquisition
losses 462,229 -- -- 1,993
Net loss to common
Stockholders (97,795) (560,024) (3,974) (514,615)
Net loss per common share -
basic and diluted -- -- -- --
Weighted average number of
common shares outstanding -
basic and diluted 125,711,264 125,711,264 166,775,000 166,775,000
NOTE 6 - MISSISSIPPI PROSPECTS
During 2002, Knox Miss LP entered into exploration agreements (Exploration
Agreements) with SKH Exploration, Inc. ("SKH Exploration") and SKH Energy
Partners II, LP ("SKH Energy Partners") to jointly cooperate and participate in
the exploration and development of oil, gas and mineral leases in the Livingston
Transform Area, Longview and Osborn prospects which cover several counties in
Mississippi. Pursuant to the Exploration Agreements, Knox Miss LP purchased
various leasehold interests from SKH Exploration and SKH Energy Partners for an
aggregate purchase price of $2,646,184. Upon any joint sale by the parties of
any ownership interests in the Livingston Transform Area prospect, Knox Miss LP
will be entitled to receive the first $850,000 of the proceeds. Knox Miss LP
paid KAB Investments, Inc. $185,000 fee for services rendered in connection with
the acquisition from SKH Exploration.
All operations in the Livingston Transform Area, Longview and Osborn Prospects
will be conducted in accordance with the provisions of Joint Operating
Agreements between the parties. The Joint Operating Agreements are to be in a
standard industry form with minor modifications as agreed to by the parties.
Knox Miss LP is to be named as the operator in each of the Joint Operating
Agreements. Subsequent to one year after the date of the exploration agreements,
if either party to the relevant exploration agreement elects to drill an initial
prospect exploratory well, then, depending on the results of the drilling
activities, if the other party to the Exploration Agreement elects not to
participate in the drilling activities, it may be obligated to relinquish to the
participating party: i.) its interest or right to earn or acquire an interest in
the producing unit established for the initial prospect exploratory well, and
ii.) a portion of its interest or right to earn or acquire an interest in the
remainder of the Prospect Area depending on the results of the drilling
activities.
On May 23, 2002, Knox Miss LP entered into an Exploration and Development
Agreement (the "Agreement") with Clayton Williams Energy, Inc. ("Clayton
Williams") to jointly cooperate and participate in the exploration and
development of oil, gas and mineral leases in certain prospects which cover
several counties in Mississippi. Pursuant to the Agreement, Knox Miss LP was
required to pay Clayton Williams a management fee in the aggregate amount of
$500,000 payable in twenty-four monthly installments. During 2003 and 2002, Knox
Miss LP had purchased 50% working interests in various oil, gas and mineral
leases. As a result of the settlement of Knox Miss LP's lawsuit with Clayton
Williams on May 26, 2004 (See Note 17), Knox Miss LP assigned all of its
leasehold interests it acquired, from May 23, 2002 through April 30, 2004 in the
original area of mutual interests back to Clayton Williams except for the School
Board Lease, which Knox Miss LP acquired in August 2002 for $136,644.
11
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 6 - MISSISSIPPI PROSPECTS (Continued)
In addition, Knox Miss LP assigned all of its leasehold interests in the
Savannah Lake prospect it acquired from SKH Energy during 2002 to Clayton
Williams, the value of which was approximately $261,474 and was recorded under
advanced payments to operators as of March 31, 2004.
During 2003 and 2002, Knox Miss LP acquired various leasehold interests in the
Noxubee County, Mississippi. As a result of Knox Miss LP's lawsuit settlement
with Clayton Williams, Knox Miss LP assigned half of its leasehold interests in
the Noxubee County to Clayton Williams. As of March 31, 2004, the total value of
Knox Miss LP's leasehold interests in the Noxubee County was $45,124.
Oil and gas properties consisted of the following at March 31, 2004:
Unproved properties acquisition costs $2,566,478
Other capitalized costs 200,145
Excess purchase price for Knox Gas' acquisition of Knox Miss LP
that was allocated to unproved oil and gas property (See Note 5) 1,313,080
Excess purchase price for the Company's acquisition of Knox Gas
that was allocated to unproved oil and gas property (See Note 5) 57,820
----------
Net capitalized oil and gas properties $4,137,523
==========
NOTE 7 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES
PHT Vicksburg Partners, L.P.
On March 23, 2004, Touchstone Vicksburg purchased a 9.9% limited partnership
interest in PHT Vicksburg Partners, LP ("PHT Vicksburg"), a Delaware limited
partnership from Montex Exploration, Inc. ("Montex") for $48,000. Montex and its
affiliates were then a beneficial owner of greater than 5% of the Company's
issued and outstanding shares of common stock. The Company, subsequent to the
purchase, invested an additional $135,000 in PHT Vicksburg. As of March 31,
2004, PHT Vicksburg has acquired various leasehold interests in East Coastal
Field Prospect and Sullivan City Prospect located in Star and Hidalgo Counties,
Texas for $635,197. PHT Vicksburg also made deposits of future leasehold
acquisition costs of $393,659. During the first quarter of 2004, PHT Vicksburg
incurred a total of $391,447 in drilling costs.
At the discretion of PHT Gas, LLC, the general partner of PHT Vicksburg,
available cash will be distributed 99% to the limited partner to the extent of
its unreturned capital balance and 1% to PHT Gas, LLC until all unreturned
capital balances have been returned and then 75% to the limited partner in
proportion to their percentage interest and 25% to PHT Gas, LLC. Distributions
in liquidation of the partnership will be made in accordance with the capital
accounts subject to the above distributions. In general, profits will be
allocated, after giving effect to certain regulatory allocations and cumulative
prior allocations, 75% to the limited partner and 25% to PHT Gas, LLC. Losses in
general will be allocated, after giving effect to regulatory allocations and
certain proportionate allocations, to all partners with a positive capital
account in proportion to the extent of their balances and then entirely to PHT
Gas, LLC.
12
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 7 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)
Awakino South Exploration, LLC
On March 23, 2004, Touchstone Awakino, Inc. purchased a 4.6% membership interest
in Awakino South Exploration, LLC ("Awakino South"), a Delaware limited
liability company from Montex for $150,000. Montex and its affiliates were then
a beneficial owner of greater than 5% of the Company's issued and outstanding
shares of common stock. Touchstone Awakino, subsequent to the purchase, invested
an additional $150,000 in Awakino South, of which $100,000 has been paid as of
March 31, 2004, and received an additional 4.54% membership interest. During
2003, Awakino South acquired 75% working interest in the Petroleum Exploration
Permit No. PEP38479 oil and gas prospect located in New Zealand for $3,000,000,
of which $2,825,000 has been paid as of March 31, 2004. As of March 31, 2004,
Awakino South has incurred $291,347 in exploration expenses related to the
prospect.
At the discretion of PHT Gas, LLC, the managing member of Awakino South,
available cash will be distributed based on the value of aggregate capital
contributions. Distributions in liquidation of the company will be made in
accordance with the capital accounts subject to the above distributions.
PHT Stent Partners, L.P.
On March 26, 2004, the Company agreed to contribute $475,000 to PHT Stent
Partners, L.P. ("PHT Stent"), a Delaware limited partnership in exchange for a
23.95% limited partnership interest in PHT Stent and PHT Gas, LLC is the general
partner. The Company originally contributed $200,000 to PHT Stent and was liable
to contribute an additional $275,000 as of March 31, 2004. Pursuant to the
partnership agreement, the Company and the other limited partners in PHT Stent
may be called upon from time to time for additional contributions so as to meet
the reasonable capital requirements of PHT Stent. As of March 31, 2004, PHT
Stent has incurred $142,586 in exploration expenses.
At the discretion of PHT Gas, LLC, the general partner, available cash will be
distributed 99% to the limited partner to the extent of its unreturned capital
balance and 1% to PHT Gas, LLC until all unreturned capital balances have been
returned and then 75% to the limited partner in proportion to their percentage
interest and 25% to PHT Gas, LLC. Distributions in liquidation of the
partnership will be made in accordance with the capital accounts subject to the
above distributions. In general, profits will be allocated, after giving effect
to certain regulatory allocations and cumulative prior allocations, 75% to the
limited partner and 25% to PHT Gas, LLC. Losses in general will be allocated,
after giving effect to regulatory allocations and certain proportionate
allocations, to all partners with a positive capital account in proportion to
the extent of their balances and then entirely to PHT Gas, LLC.
LS Gas, LLC
On March 23, 2004, the Company entered into an Interest Purchase Agreement by
and among the Company, Touchstone Louisiana and Touchstone Canada whereby
Touchstone Louisiana purchased a 10% membership interest in LS Gas, LLC, a
Delaware limited liability company, from Touchstone Canada, in consideration for
which the Company issued 100,000 shares of its common stock to Touchstone
Canada. The shares were valued at $1,000.
At the discretion of the managing member of LS Gas, LLC, available cash will be
distributed to the members pro rata in accordance with their respective
percentage interests. Profits and losses of the company will be allocated to the
members pro rata in accordance with their respective percentage interests.
13
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 7 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued)
The following table summarized the Company's interests in oil and gas non-public
limited partnerships accounted for under the equity method of accounting:
March 31, 2004
---------------------------------
(Unaudited)
Excess of
Carrying Value
Carrying Value Over Net Assets
-------------- ---------------
PHT Vicksburg Partners $ 183,000 $ 30,351
Awakino South Exploration, LLC (1) 297,504 52,494
PHT Stent Partners (2) 472,761 437,380
LS Gas, LLC 1,000 1,000
------------ ------------
$ 954,265 $ 521,225
============ ============
(1) The amounts do not include outstanding subscriptions receivable totaling
$225,000, of which the Company's portion is $50,000.
(2) The amounts do not include outstanding subscriptions receivable totaling
$1,375,000 of which the Company's portion is $275,000.
The following table summarizes financial information for the limited
partnerships accounted for under the equity method of accounting at March 31,
2004 and has been compiled from the financial statements of the respective
entities:
March 31, 2004
-----------------
(Unaudited)
Total Assets $4,765,930
==========
Total Liabilities $ 384,087
==========
Three Months Ended
March 31, 2004
------------------
(Unaudited)
Results of Operations:
Revenue $ --
Loss from operations $(459,304)
Net Loss $(459,304)
NOTE 8 - OTHER ASSETS
In March 2004, the Company prepaid $100,000 to Endeavour in connection with
Touchstone Louisiana's purchase of 24.9975% Class A Limited Partnership interest
in Louisiana Shelf Partners, LP from Endeavour (see Note 15).
In March 2004, the Company invested $250,000 in a limited partnership. The
Company subsequently terminated its investment in the limited partnership and
the $250,000 was refunded to the Company in April 2004.
14
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 9 - NOTES PAYABLE
In February 2004, Knox Gas issued a $4,500,000 promissory note to Endeavour as
part of the consideration for its purchase of Knox Miss, LP (See Note 5). The
note bears interest at 4% per annum. The Company is required to pay Endeavor
$500,000 plus accrued interest on or before March 27, 2004; $1,000,000 plus
accrued interest on or before April 27, 2004; $1,000,000 plus accrued interest
on or before June 27, 2004; and $2,000,000 plus accrued interest on or before
August 27, 2004. The note is secured by Knox Gas' 99% limited partnership
interest in Knox Miss LP and 1% membership interest in Knox Miss LLC. As of
March 31, 2004, $4,500,000 of principal along with $16,767 of accrued interest
remained outstanding. The Company subsequently paid $1,500,000 to Endeavour in
April 2004.
NOTE 10 - CONVERTIBLE DEBENTURE
In March 2003, the Company issued to a California limited liability company a
$100,000, 8% convertible debenture due March 27, 2004. All or any portion of the
convertible debenture could have been converted at any time into fully paid and
nonassessable shares of the Company's $.001 par value common stock. The
conversion or purchase price of the common stock indebtedness shall be the
market price of the Company's common stock at the time of conversion. The
Company was obligated to adjust the conversion price and number of shares to be
issued under the convertible debenture. The convertible debenture was repaid on
March 11, 2004. The interest was forgiven by the debt holder and the Company
recorded the forgiveness of debt as income.
On March 23, 2004 the Company entered into a loan agreement to borrow $2,100,000
from Trident Growth Fund, LP ("Trident"), a Delaware limited partnership. The
note is a 12% secured convertible promissory note. The note is secured by
substantially all of the assets of the Company. The note matures on March 23,
2005, however the Company has the option to redeem the note at 100% of par prior
at any time up to the maturity date. Trident has the option to convert at any
time all or a portion of the principal amount of the note into common stock of
the Company. Trident was issued a warrant to purchase 250,000 shares of the
Company's common stock as additional incentive to make the loan. The warrants
provide for a cashless exercise at the option of Trident provided that the per
share market price of one share of common stock is greater than the warrant
exercise price. The warrants expire on March 31, 2014. The initial conversion
price of the note, and warrant exercise price is, $1.00 per common share,
subject to certain adjustment provisions. The notes contain certain reset
provisions which, if triggered to a conversion price below the market price on
the day the note were issued, would require the Company to record a beneficial
conversion expense for the difference between the market price and new reset
price. The Company paid loan commitment and origination fees of 1% and 4%,
respectively, which were recorded as loan costs and will be amortized over the
life of the loan.
Interest is due monthly and payable in cash unless Trident elects to have the
interest paid in common stock of the Company. Repayment of the principal amount
of the note has been guaranteed by subsidiaries of the Company. As defined in
the loan agreement, the Company is required to comply with various financial
covenants. Any failure to comply with such covenants may be deemed a default on
the loan by Trident. Trident subsequently waived compliance with certain
negative covenants contained in the Trident Note to permit the Company to issue
convertible notes in the Company's ongoing private placement of up to $12
million of convertible notes and warrants (see Note 15), and waived compliance
with all financial covenants contained in the Trident Note until the maturity
date of the convertible notes issued in the private placement.
The Company has allocated the proceeds from issuance of the convertible Trident
promissory note and warrants based on a fair value basis for each item.
Consequently, the convertible Trident promissory note was recorded with
discounts of $1,175 based on the ascribed value of the warrants as determined by
using the Black-Scholes Method. The discount was fully amortized as of March 31,
2004.
Under the terms of the loan agreement, if the Company files a registration
statement relating to any of its securities, it is required to notify Trident in
writing and, upon Trident's request, will include in the registration statement
the offer and sale of the shares of the common stock issuable upon Trident's
conversion of the note.
15
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 11 - STOCKHOLDERS' EQUITY
Preferred Stock
The Company has not issued any of its authorized shares of preferred stock.
Common Stock
On March 15, 2004, the Company entered into stock purchase agreements with Scott
Yancey and George Sines, the Company's founding stockholders, pursuant to which
the Company purchased 116,775,000 shares of common stock for $2,000. The Company
subsequently cancelled those shares. The founding stockholders concurrently
entered into secondary stock purchase agreements with Stephen P. Harrington,
pursuant to which they sold their remaining 16,350,000 shares of common stock of
the Company. The founding stockholders subsequently resigned from their
positions as officers and directors of the Company. As a result of Stephen P.
Harrington's acquisition of 32.7% of the then issued and outstanding shares of
common stock of the Company and his appointment as the successor officer and
director of the Company, a change of control may be deemed to have occurred.
On March 19, 2004, the Company effected a twenty-five for one common stock
split. All shares and per share amounts in the financial statements have been
restated to reflect the stock split.
On March 23, 2004, Stephen P. Harrington surrendered for cancellation 7,380,000
of his shares of the Company's common stock in order to facilitate the Company
share issuance in the Touchstone acquisition described below.
On March 23, 2004, the following transactions were consummated:
(a) Pursuant to a stock purchase agreement by and between the Company
and Touchstone Canada, the Company purchased 100% of the issued and
outstanding shares of capital stock, no par value per share, of
Touchstone Subsidiary, a development stage corporation and
wholly-owned subsidiary of Touchstone Canada. As consideration for
the acquisition, the Company issued 7,000,000 shares of its common
stock to Touchstone Canada valued at $70,000 by an independent
valuation consultant. Upon the consummation of the acquisition, the
Company paid an advisory fee to HMA Advisors, Inc. consisting of
280,000 shares of its common stock, which was valued at $2,800.
(b) Pursuant to an interest purchase agreement by and among the Company,
Touchstone Louisiana and Touchstone Canada, Touchstone Louisiana
purchased a 10% membership interest in LS Gas, LLC from Touchstone
Canada, in consideration for which the Company issued 100,000 shares
of its common stock to Touchstone Canada valued at $1,000.
During March 2004, the sole officer of the company contributed $15,000 as
additional paid-in capital to fund the operating expenses of the Company.
NOTE 12 - LOSS PER SHARE
Loss per common share is calculated in accordance with SFAS No. 128, "Earnings
Per Share." Basic loss per common share is computed by dividing net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Diluted loss per share is computed similarly to basic loss
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if potentially
dilutive common shares had been issued and if the additional common shares were
dilutive. Since these additional common shares would have been anti-dilutive
(i.e. reduce the loss per share) they were not included in the denominator. As
of March 31, 2004, the Company had potentially dilutive shares of 2,350,000.
16
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 12 - LOSS PER SHARE (Continued)
The number of shares of common stock and the loss per share for the periods
ended March 31, 2004 and 2003 have been updated to reflect the 25 to 1 stock
split effected in March 2004 (see Note 11).
NOTE 13 - RELATED PARTY TRANSACTIONS - NOT DESCRIBED ELSEWHERE
The Company neither owns nor leases any real or personal property. The sole
officer and director of the Company provide office space and other services
without charge. Such costs are immaterial to the financial statements in the
periods presented and, accordingly, have not been reflected therein.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
General
Federal, state and local authorities regulate the oil and gas industry. In
particular, gas and oil production operations and economics are affected by
environmental protection statutes, tax statutes and other laws and regulations
relating to the petroleum industry, as well as changes in such laws, changing
administrative regulations and the interpretations and application of such laws,
rules and regulations. The Company believes it is in compliance with all
federal, state and local laws, regulations, and orders applicable to the Company
and its properties and operations, the violation of which would have a material
adverse effect on the Company or its financial condition.
Operating Hazards and Insurance
The gas and oil business involves a variety of operating risks, including the
risk of fire, explosions, blow-outs, pipe failure, abnormally pressured
formation, and environmental hazards such as oil spills, gas leaks, ruptures or
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, cleanup responsibilities, regulatory investigation
and penalties and suspension of operations.
There can be no assurance that insurance, if any, will be adequate to cover any
losses or exposure to liability. Although the Company believes certain policies
obtained by operators provide coverage in scope and in amounts customary in the
industry, they do not provide complete coverage against all operating risks. An
uninsured or partially insured claim, if successful and of significant
magnitude, could have a material adverse effect on the Company and its financial
condition via its contractual liability to the Prospect.
Potential Loss of Oil and Gas Interests/ Cash Calls
The Company is subject to cash calls related to its various investments in oil
and gas prospects. If the Company does not pay its share of future Authorization
For Expenditures ("AFE") invoice it may have to forfeit all of its rights in
certain of its interests in the prospects and any related profits. If one or
more of the other members of the prospects fail to pay their share of the
prospect costs, the Company may need to pay additional funds to protect its
investments.
17
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 15 - SUBSEQUENT EVENTS
In April 2004, the Company commenced a private placement of convertible
promissory notes bearing interest at 1.58% per annum together with warrants to
purchase shares of common stock in the Company at an exercise price of $2.00 per
share. The notes are payable in April 2005 and subordinated to the Trident Note.
The notes are mandatorily convertible into shares of the Company's common stock
upon the earlier of (i) the Company's filing of an amendment to the Company's
Certificate of Incorporation increasing the number of common stock the Company
is authorized to issue such that a sufficient number of shares is authorized so
that all convertible notes issued in the private placement can be converted into
shares of common stock, or (ii) the first business day after the effective date
of a reverse stock split of the outstanding shares of common stock such that a
sufficient number of shares is authorized so that all convertible notes issued
in the private placement can be converted into shares of common stock. The
initial conversion price of the note is at a rate of $1.00 per common share
subject to certain adjustments. As of May 20, 2004, the Company had raised
approximately $7.2 million under the private placement.
On April 12, 2004, the holders of a majority of the issued and outstanding
shares of the Company's common stock acted by written consent to approve a
proposal to amend the Company's Certificate of Incorporation to increase the
number of shares of common stock the Company is authorized to issue from
50,000,000 to 150,000,000.
In April 2004, the Company invested an additional $98,000 in Awakino South
Exploration, LLC.
In April 2004, the Company invested an additional $412,500 in Knox Miss
Partners, L.P.
In April 2004, the Company paid the remaining balance of $275,000 to PHT Stent
(see Note 7).
In April 2004, Touchstone Awakino paid the remaining balance of $50,000 to
Awakino South to receive the 9.14% membership interest in Awakino South (see
Note 7).
In April 2004, Touchstone Louisiana, Inc. purchased a 24.9975% Class A limited
partnership interest in Louisiana Shelf Partners, LP from Endeavour, in
consideration for which the Company agreed to pay Endeavour $250,000 and issue a
contingent promissory note payable to Endeavour in the amount of $2,000,000.
During March 2004, the Company prepaid $100,000 of the purchase price.
In April 2004, the Company agreed to make an initial capital contribution of
$550,000 and an additional contribution of $50,000 to PHT Wharton Partners, L.P.
("PHT Wharton"), a limited partnership formed in January 2004, in exchange for a
29.41% limited partnership interest.
In April 2004, the Company subscribed for $1,350,000 to PHT Vela Partners, L.P.
("PHT Vela"). PHT Vela is a limited partnership formed in January 2004, of which
the Company is a limited partner with 35.64% interest and PHT Gas, LLC is the
general partner.
In May 2004, the Company contributed $251,000 to PHT West Pleito Gas, LLC. ("PHT
West"). PHT West is a limited liability company formed in April 2004, of which
the Company has 83.4% membership interest and FEQ Gas, LLC has 16.6% membership
interest.
In May 2004, the Company invested an additional $10,000 in PHT Vicksburg, L.P.
18
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 16 - CORRECTION OF AN ERROR
As disclosed in note 5, on March 23, 2004, the Company acquired 100% ownership
interest in Touchstone Subsidiary from Touchstone Canada ("Touchstone
Acquisition") for a purchase price of $72,800. Prior to the Touchstone
Acquisition, as part of the inducements for the Company to purchase Touchstone
Subsidiary, Touchstone Canada and Touchstone Subsidiary entered into an
Assignment and Assumption Agreement, pursuant to which Touchstone Canada agreed
to assume the liabilities of Touchstone Subsidiary in the amount of $2,527,735.
Touchstone Subsidiary therefore excluded the liabilities assumed by Touchstone
Canada in the amount of $2,527,735 on its balance sheet as of March 23, 2004.
Subsequent to its filing of the Form 10-QSB for the three months ended March 31,
2004, the Company realized it had not received releases from certain of its
creditors amounting to $950,976 of the total payables assumed by Touchstone
Canada. According to Emerging Issues Task Force 02-10, "Determining Whether a
Debtor is Legally Released as Primarily Obligor When the Debtor Becomes
Secondarily Liable under the Original Obligation", unless and until a novation
agreement (an agreement that is binding on a creditor and modifies the original
debt so that the creditor accepts assets or new obligations in satisfaction of
the original liability and discharges the original debt agreement with the
debtor) exists between the original debtor and the creditor or all requirements
for legal defeasance have been met, the creditor has the legal right to pursue
the original debtor under the original obligation before it pursues a new
debtor. Since Touchstone Subsidiary had not received the releases from certain
of its creditors for liabilities in the total amount of $950,976 as of March 23,
2004, it was still liable for those liabilities and required to reflect them on
its balance sheet.
The original condensed consolidated financial statements issued for the three
months ended March 31, 2004 have been corrected to conform to U.S. generally
accepted accounting principles. As a result, on the date of the Touchstone
Acquisition, accounts payable of Touchstone Subsidiary increased by $950,976 to
$4,122,709. The Company, therefore, recorded an additional amount of accounts
payable of $950,976 and increased the goodwill by the same amount on the
condensed consolidated balance sheet as of March 31, 2004. The correction of the
error has no effect on the Company's reported net loss for the three months
ended March 31, 2004.
Touchstone Subsidiary previously maintained its accounting records on a fiscal
year basis ending September 30. In preparing its financial statements for the
three months ending March 31, 2004, the Company inadvertently included in its
condensed consolidated statement of operations the revenue and expenses for
Touchstone Subsidiary for the period October 1, 2003 through March 31, 2004. The
proper period should have been January 1, 2004 through March 31, 2004. The
revenue and expense amounts have been reduced by $10,983 and $254,092,
respectively to reflect the proper amounts. Minority interest and
pre-acquisition losses have been reduced by $243,109. This correction of the
error has no effect on the Company's reported net loss as all activity prior to
the acquisition of Touchstone Subsidiary on March 23, 2004 had been properly
deducted in accordance with U.S. generally accepted accounting principles (See
Note 5).
NOTE 17 - SETTLEMENT OF LAWSUIT WITH CLAYTON WILLIAMS
On or about May 3, 2003, Knox Miss LP filed a complaint in the District Court Of
Harris County, Texas, 234th Judicial District against Clayton Williams as a
result of Clayton Williams' breach of the Exploration and Development Agreement
(See Note 6). Under the Agreement, Knox Miss LP had the right to participate for
a 50% share of certain leases acquired by Clayton Williams during the term of
the Agreement. Although Knox Miss LP had elected to participate in the
acquisition of certain additional leases and paid in excess of $1.7 million to
Clayton Williams between July and February 2003 in payment of its share of the
acquisition costs, in April 2003, Clayton Williams notified Knox Miss LP that it
would not permit Knox Miss LP to participate, alleging that the foregoing
payments were not received within the time frame set forth in the Agreement.
Knox Miss LP seeked a declaratory judgment establishing its right under the
Agreement to participate in the acquisition of the leases at issue and damages
arising from Clayton Williams' breach of the Agreement together with attorney's
fees, interest and court costs. Clayton Williams had denied all allegations.
19
TOUCHSTONE RESOURCES USA, INC.
(A DEVELOPMENT STAGE ENTITY)
Notes to Condensed Consolidated Financial Statements
NOTE 17 - SETTLEMENT OF LAWSUIT WITH CLAYTON WILLIAMS (Continued)
On October 31, 2003, Clayton Williams filed a counterclaim against Knox Miss LP
and a third party petition against PHT Gas, LLC alleging that Knox Miss LP
breached the Agreement by assigning an overriding royalty interest to PHT Gas,
LLC in the area of mutual interest ("AMI") subject to the Agreement to PHT Gas,
LLC. Clayton Williams sought a declaratory judgment establishing its rights
under the Agreement and an order of specific performance compelling Knox Miss LP
to convey the royalty interest to Clayton Williams together with attorney's
fees. Knox Miss LP had not answered the counterclaim.
On May 26, 2004, Knox Miss LP and Clayton Williams entered into a Settlement
Agreement and Mutual Release ("Settlement"), pursuant to which:
A. Clayton Williams paid $75,000 to Knox Miss LP;
B. Knox Miss LP assigned all of its leasehold interests it acquired
from May 23, 2002 through April 30, 2004 in the AMI to Clayton
Williams except for the School Board Lease on the Mathiston
prospect, in which Knox Miss LP keeps its 50% interest (see Note 6);
C. Knox Miss LP assigned all of its leasehold interests it acquired
pursuant to an exploration agreement with SKH Exploration (see Note
6) in the Savannah Lake prospect to Clayton Williams;
D. Knox Miss LP assigned half of the leasehold interests it acquired
for $90,249 in the Noxubee County, Mississippi to Clayton Williams;
E. Knox Miss LP received a release of certain deed of trust between
Knox Miss LP as the grantor and Trident Growth Fund as the
beneficiary as to the interests assigned by Knox Miss LP to Clayton
Williams;
F. Knox Miss LP was deemed to have paid all amounts owed to Clayton
Williams as of April 30, 2004 and received a credit from Clayton
Williams in the amount of $1,000,000. The credit would be applied to
Knox Miss LP's share of the drilling and completing costs of the
Gammill well, which is estimated to be $1,649,999, as well as the
final monthly payment of Knox Miss LP's AMI management fee owed to
Clayton Williams in the amount of $20,833 (See Note 6). The Gammill
well will be drilled within the School Board Lease on the Mathiston
prospect;
G. Knox Miss LP withdrew its leasehold interests and participation
rights on the Natchez Trace prospect. As a result, the advance
payment Knox Miss LP made to Clayton Williams in the amount of
$549,600 in April 2004 was also applied as a credit towards Knox
Miss LP's share of the drilling and completing costs of the Gammill
well; and
H. Knox Miss LP paid the remaining balance of $257,875 for its share of
the drilling and completing costs of the Gammill well to Clayton
Williams.
As a result of the Settlement, Knox Miss LP recorded $884,191 of advanced
payments to Clayton Williams as of March 31, 2004. The advanced payments
to Clayton Williams represent the excess payments to Clayton Williams over
the cost of the School Board Lease and management fees.
20
CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS
This report includes "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. All statements other than
statements of historical facts included or incorporated by reference in this
report, including, without limitation, statements regarding the Company's future
financial position, business strategy, budgets, projected revenues, projected
costs and plans and objective of management for future operations, are
forward-looking statements. In addition, forward-looking statements generally
can be identified by the use of forward-looking terminology such as "may,"
"will," "expect," "intend," "project," "estimate," "anticipate," or "believe" or
the negative thereof or any variation thereon or similar terminology. Although
we believe that the expectations reflected in such forward-looking statements
are reasonable, we can give no assurance that such expectations will prove to
have been correct.
Important factors that could cause actual results to differ materially
from our expectations include, but are not limited to, our assumptions about
energy markets, production levels, reserve levels, operating results,
competitive conditions, technology, the availability of capital resources,
capital expenditure obligations, the supply and demand for oil, natural gas, and
other products or services, the price of oil, natural gas, and other products or
services, currency exchange rates, the weather, inflation, the availability of
goods and services, successful exploration and drilling, drilling risks, future
processing volumes and pipeline throughput, general economic conditions, either
nationally or internationally or in the jurisdictions in which we or any of its
subsidiaries are doing business, legislative or regulatory changes, including
changes in environmental regulation, environmental risks and liability under
federal, state and foreign environmental laws and regulations, the securities or
capital markets and other factors disclosed under "Risk Factors" in our annual
report on Form 10-KSB and other filings with the Securities and Exchange
Commission. All subsequent written and oral forward-looking statements
attributable to the Company, or persons acting on our behalf, are expressly
qualified in their entirety by these cautionary statements. Except as required
by law, we assume no duty to update or revise our forward-looking statements
based on changes in internal estimates or expectations
ITEM 2. PLAN OF OPERATIONS
Touchstone Resources USA, Inc. (f/k/a The Coffee Exchange, Inc.) is a
Delaware corporation formed on March 5, 2001. Our offices are located at 111
Presidential Boulevard, Suite 165, Bala Cynwyd, Pennsylvania 19004. Unless the
context otherwise requires, references to the "Company," "Touchstone," "we,"
"us" or "our," mean Touchstone Resources USA, Inc., our consolidated
subsidiaries and/or partnerships or companies in which we have an interest. The
following discussion should be read in conjunction with our condensed
consolidated financial statements and related notes thereto included elsewhere
in this report.
We were formerly engaged in the business of developing internet cafes
in Orange County, California. On March 15, 2004, all of our officers and
directors resigned and Stephen P. Harrington was appointed as our Chief
Executive Officer, Treasurer, Secretary and sole Director. Immediately following
the change in management, we entered into the oil and gas exploration business,
changed our name from The Coffee Exchange, Inc. to Touchstone Resources USA,
Inc. and effected a 25-for-1 stock split of our shares of common stock.
21
OVERVIEW
We are an independent energy company engaged primarily in oil and gas
exploration, development and production and the acquisition of producing
properties. We target high-potential oil and gas assets located primarily in
Texas, Louisiana and other traditional oil producing states in the southern
United States, as well as in New Zealand.
Our operations are focused on the identification and evaluation of
prospective oil and gas properties, and the contribution of capital to projects
that we believe have the potential to produce oil or gas in commercial
quantities. We participate in projects directly and indirectly as equity
participants in limited partnerships and limited liability companies. We also
act as the operator of certain of the properties in which we acquire interests,
drilling the wells thereon and producing any oil and gas located therein. We
assist and advise companies and partnerships in identifying and leasing
properties on favorable terms. We also provide such entities with additional
reserve assessment analysis and engineering services in connection with the
exploration and development of prospects.
Our primary objectives are to build reserves, production, cash flow and
earnings per share by acquiring oil and gas properties, exploring for new oil
and gas reserves, and optimizing production and value from existing oil and gas
properties. We seek to achieve these objectives by acquiring and developing high
profit margin properties, disposing of producing, marginal and non-strategic
properties, balancing reserves between oil and gas, and maintaining a high
degree of financial flexibility.
We seek to create shareholder value by building oil and gas reserves,
production revenues and operating cash flow. We believe that building oil and
gas reserves and production, on a cost-effective basis, are the most important
indicators of performance success for an independent oil and gas company. We
seek to build oil and gas reserves, production and cash flow through a balanced
program of capital expenditures involving acquisition, exploitation and
exploration activities. We intend to place primary emphasis on issuances of
public and private debt and equity to finance our business.
Our ability to generate future revenues and operating cash flow will be
dependent on the successful development of our inventory of capital projects,
the volume and timing of our production, as well as commodity prices for oil and
gas. Such pricing factors are largely beyond our control, and may result in
fluctuations in our earnings.
We are in the development stage, have significant debt obligations to
repay, have current liabilities that exceed our current assets and have incurred
losses since inception. We will need significant funds during the next twelve
months to meet cash calls on our various interests in oil and gas prospects and
to acquire additional properties. Due to these and other factors, our
independent auditors have included an explanatory paragraph in their opinion for
the year ended December 31, 2003 as to the substantial doubt about our ability
to continue as a going concern. In order to continue operations, we must
continue to raise the capital necessary to fund existing and new opportunities
and our long-term viability and growth will ultimately depend upon acquiring
interests in successful projects, as to which there can be no assurances.
22
BUSINESS STRATEGY
Our business strategy is to provide long-term growth in net asset value
through the acquisition of oil and gas reserves and production. We plan on
building reserve value through the careful evaluation and aggressive pursuit of
oil and gas drilling and acquisition opportunities.
Some of the key elements of our business strategy are as follows:
o Exploit and Develop Existing Property Base. We seek to
maximize the value of the properties we acquire by developing
and exploiting properties with the highest production and
reserve growth potential. We intend to perform continuous
field studies of such properties using advanced technologies,
and seek to minimize costs by controlling operations to the
extent possible.
o Selectively Grow Through Exploration. We are in the process of
implementing an active exploration program that is designed to
complement our exploitation and development efforts with
exploration projects offering superior reserve potential. We
utilize 2-D and 3-D seismic data and other technical
applications, as appropriate, to manage our exploration risks.
o Pursue Strategic Acquisitions. We seek to leverage our
extensive regional knowledge base by acquiring leasehold
acreage and producing or non-producing properties in areas,
such as Louisiana and Texas, that are in mature fields with
complex geology that have multiple reservoirs and existing
infrastructure.
o Joint Venture Formation. We may seek to form joint ventures
and seek joint venture partners in order to reduce our
investment in a particular project and share the costs of
operating the prospect.
o Rationalize Property Portfolio. We intend to rationalize the
portfolio of properties we acquire by selling marginal
properties in an effort to redeploy capital to exploitation,
development and exploration projects that offer a potentially
higher overall return.
RECENT ACQUISITIONS
In furtherance of this plan, we recently acquired interests in the
following projects:
Vela Project. During April and May 2004, we acquired a 35.64% limited
partnership interest in PHT Vela Partners, L.P., a Delaware limited partnership,
which owns an approximate 50% interest in approximately 1,600 acres in Zapata
County, Texas. PHT Gas, LLC serves as the general partner and Reichmann
Petroleum acts as the operator of this project. As of the date of this report,
we have made $950,000 of capital contributions to PHT Vela Partners, L.P.
West Pleito Project. In May, 2004, we acquired an 83.4% membership
interest in PHT West Pleito Gas, LLC, a Delaware limited liability company,
which owns an approximate 35% interest in approximately 1,800 acres in Kern
County, California. PHT Gas, LLC serves as the manager and we act as operator of
this project. As of the date of this report, we have made $251,000 of capital
contributions to PHT West Pleito Gas, LLC.
23
RESEARCH AND DEVELOPMENT; EMPLOYEES
We anticipate that our research and development efforts over the next
12 months will be limited to our analysis of 2-D and 3-D seismic data and other
technical applications to identify prospects and develop properties having the
highest production and reserve growth potential. We also anticipate that the
number of employees and consultants that we will utilize will increase over the
next 12 months as we continue to execute our business plan.
LIQUIDITY AND CAPITAL RESOURCES
We are a development stage company with no significant operating
history. Our principal requirements for cash are for working capital needs for
existing operations, costs of development of oil and gas properties, and the
acquisition of oil and gas properties. We do not currently maintain a line of
credit with any commercial bank or other financial institution, nor do we expect
to during the next twelve months. We expect to raise all necessary capital
through public and private placements of debt or equity securities, property
divestitures and joint ventures with industry participants.
On or about March 23, 2004, we obtained gross proceeds of $2,100,000
through the issuance of a $2,100,000 principal amount secured convertible
promissory note (the "Convertible Note") and warrants to Trident Growth Fund, LP
("Trident"). The Convertible Note is due March 23, 2005, accrues interest at 12%
per annum payable monthly in arrears, is secured by substantially all of our
assets, is convertible at the option of Trident into shares of our common stock
at an initial conversion price of $1.00 per share (subject to adjustment
pursuant to anti dilution provisions), and is redeemable at our option at 100%
of par prior to maturity. Interest is payable in cash unless Trident elects to
have it paid in shares of common stock. The Convertible Note contains various
financial covenants with which we are required to comply and various negative
covenants which prohibit us from taking certain action without obtaining the
prior written consent of Trident. These include incurring additional liens on
our property, incurring indebtedness in excess of $100,000, selling any of our
assets other than in the ordinary course of business, and making capital
expenditures in excess of $50,000. Trident subsequently waived compliance with
certain negative covenants to permit us to commence a private placement of up to
$12 million of convertible notes and warrants (described below), and waived
compliance with all financial covenants contained in the Convertible Note until
the maturity date of the convertible notes issued in the private placement.
In connection with the issuance of the Convertible Note, we issued
warrants to Trident to purchase 250,000 shares of common stock. The warrants are
immediately exercisable at an exercise price of $1.00 per share (subject to
adjustment pursuant to anti dilution provisions of the warrant) and terminate 10
years from the date of grant.
During April and May 2004, we raised gross cash proceeds of
approximately $7,200,000 through the issuance of convertible notes and warrants
in a private placement which is continuing. The notes automatically convert into
shares of common stock at a conversion price of $1.00 per share upon the
effective date of an amendment to our certificate of incorporation to increase
the number of shares we are authorized to issue. We intend to raise up to an
additional $4.8 million in this offering.
24
The forgoing constitutes our principal sources of financing during the
past twelve months.
We recently purchased interests in the various oil and gas limited
partnerships and limited liability companies for consideration consisting of a
combination of cash, shares of our common stock and promissory notes. We issued
or assumed promissory notes in the following amounts to purchase interests in
the following entities:
o a $2,000,000 contingent note for the purchase of our interest
in Louisiana Shelf; and
o a $4,5000,000 note for the purchase of our interest in Knox
Gas of which $1,500,000 has been paid.
In addition, we will need significant funds to meet capital calls,
drilling and production costs on our various interests in oil and gas prospects
to explore, produce, develop, and eventually sell the underlying natural gas and
oil products. Specifically, we expect to incur capital calls and production
costs with respect to our various limited partnership and limited liability
company interests during the next 12 months as follows (each amount an
approximation):
o $300,000 for exploration costs on PHT Vicksburg over the next
12 months;
o $1.2 million for exploration costs on Louisiana Shelf by June
30, 2004;
o $2 million for exploration costs on Knox Gas over the next 12
months;
o $400,000 for exploration costs on PHT Wharton over the next 12
months;
o $500,000 for exploration costs on PHT Stent over the next six
(6) months;
o $150,000 for exploration costs on Awakino South over the next
six (6) months;
o $400,000 of capital contributions to PHT Vela Partners, L.P.
over the next 12 months; and
o $425,000 of capital contributions to PHT West Pleito Gas, LLC
over the next 12 months.
If any of the other owners of the leasehold interests in any of the
projects in which we participate, or any of the limited partners or membership
interest holders in our limited partnerships or limited liability companies,
respectively, fails to pay their equitable portion of development costs or
capital calls, we may need to pay additional funds to protect our ownership
interests.
We will need approximately $5.5 million to execute our business plan
and satisfy capital calls, drilling and production costs during the next twelve
months. In addition, we will need approximately $7.1 million to repay our
outstanding indebtedness during the next twelve months. Based on available cash
resources, the completion of the current private offering of our securities and
projected revenue from our various oil and gas projects, we believe we will have
sufficient funds to continue to meet such capital calls and operate at current
levels for the next twelve months. However, if we locate additional prospects
for acquisition, experience cost overruns at our prospects or fail to generate
projected revenues, we will be required to raise additional funds through sales
of our securities or otherwise. If we are unable to obtain additional funds on
terms favorable to us, if at all, we may be required to delay, scale back or
eliminate some or all of our exploration and well development programs, and may
be required to relinquish our interest in certain prospects.
25
CRITICAL ACCOUNTING POLICIES
Our financial statements are prepared in accordance with accounting
principles generally accepted in the United States. The preparation of our
financial statements requires us to make estimates and judgments that affect the
reported amount of assets, liabilities, revenues and expenses. These estimates
are based on information that is currently available to us and on various other
assumptions that we believe to be reasonable under the circumstances. Actual
results could vary significantly from those estimates under different
assumptions and conditions.
Critical accounting policies are defined as those significant
accounting policies that are most critical to an understanding of a company's
financial condition and results of operation. We consider an accounting estimate
or judgment to be critical if (i) it requires assumptions to be made that were
uncertain at the time the estimate was made, and (ii) changes in the estimate or
different estimates that could have been selected could have a material impact
on our results of operations or financial condition.
Our recent entrance into the oil and gas business subjects us to new
accounting policies that we were not previously subject to. We believe that the
following significant accounting policies will be most critical to an evaluation
of our future financial condition and results of operations.
Proved Oil and Natural Gas Reserves
Proved reserves are defined by the SEC as the estimated quantities of
crude oil, condensate, natural gas and natural gas liquids that geological and
engineering data demonstrate with reasonable certainty are recoverable in future
years from known reservoirs under existing economic and operating conditions.
Prices include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future conditions.
Prices do not include the effect of derivative instruments, if any, entered into
by the Company.
Proved developed reserves are those reserves expected to be recovered
through existing equipment and operating methods. Additional oil and gas
expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery are included as proved developed reserves only after testing
of a pilot project or after the operation of an installed program has confirmed
through production response that increase recovery will be achieved.
26
Proved undeveloped oil and gas reserves are reserves that are expected
to be recovered from new wells on non-drilled acreage, or from existing wells
where a relatively major expenditure is required for re-completion. Reserves on
non-drilled acreage are limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled. Proved reserves
for other non-drilled units are claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation.
Volumes of reserves are estimates that, by their nature, are subject to
revision. The estimates are made using all available geological and reservoir
data as well as production performance data. There are numerous uncertainties in
estimating crude oil and natural gas reserve quantities, projecting future
production rates and projecting the timing of future development expenditures.
Oil and gas reserve engineering must be recognized as a subjective process of
estimating underground accumulations of oil and gas that cannot be measured in
an exact way and estimates of engineers that we use may differ from those of
other engineers. The accuracy of any reserve estimate is a function of the
quantity of available data and of engineering and geological interpretation and
judgment. Accordingly, future estimates are subject to change as additional
information becomes available.
Successful Efforts Accounting
The Company intends to utilize the successful efforts method to account
for our crude oil and natural gas operations. Under this method of accounting,
all costs associated with oil and gas lease acquisition costs, successful
exploratory wells and all development wells are capitalized and amortized on a
unit-of-production basis over the remaining life of proved developed reserves
and proved reserves on a field basis. Unproved leasehold costs are capitalized
pending the results of exploration efforts. Exploration costs, including
geological and geophysical expenses, exploratory dry holes and delay rentals,
are charge to expense when incurred.
Impairment of Properties
We review our proved properties at the field level when management
determines that events or circumstances indicate that the recorded carrying
value of the properties may not be recoverable. Such events include a projection
of future oil and natural gas reserves that will be produced from a field, the
timing of this future production, future costs to produce the oil and natural
gas, and future inflation levels. If the carrying amount of an asset exceeds the
sum of the undiscounted estimated future net cash flows, we recognize impairment
expense equal to the difference between the carrying value and the fair value of
the asset which is estimated to be the expected present value of future net cash
flows from proved reserves, utilizing a risk-free rate of return. The Company
cannot predict the amount of impairment charges that may be recorded in the
future. Unproved leasehold costs are reviewed periodically and a loss is
recognized to the extent, if any, that the cost of the property has been
impaired.
27
Property Retirement Obligations
The Company is required to make estimates of the future costs of the
retirement obligations of its producing oil and gas properties. This requirement
necessitates the Company to make estimates of its property abandonment costs
that, in some cases, will not be incurred until a substantial number of years in
the future. Such cost estimates could be subject to significant revisions in
subsequent years due to changes in regulatory requirements, technological
advances and other factors that may be difficult to predict.
Income Taxes
The Company is subject to income and other related taxes in areas in
which it operates. When recording income tax expense, certain estimates are
required by management due to timing and the impact of future events on when
income tax expenses and benefits are recognized by the Company. The Company will
periodically evaluate its tax operating loss and other carryforwards to
determine whether a gross deferred tax asset, as well as a related valuation
allowance, should be recognized in its financial statements.
ITEM 3. CONTROLS AND PROCEDURES.
An evaluation of the effectiveness of our "disclosure controls and
procedures" (as such term is defined in Rules 13a-15(e) or 15d-15(e) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) was carried
out by us under the supervision and with the participation of our Chief
Executive Officer ("CEO") and Treasurer ("Treasurer"). Based upon that
evaluation, our CEO and Treasurer concluded that, as of the end of the period
covered by this quarterly report, our disclosure controls and procedures were
effective to provide reasonable assurance that information we are required to
disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission rules and forms. There has been no change in
our internal control over financial reporting identified in connection with that
evaluation that occurred during the period covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
Sales of Unregistered Securities
In March 2004, we commenced a private offering of up to $12 million of
units comprised of convertible promissory notes and warrants. The principal
amount and all accrued interest due under the notes is convertible into shares
of common stock at a conversion price of $1.00 per share and automatically
converts upon the effective date of an amendment to our certificate of
incorporation increasing the number of shares of common stock we are authorized
to issue. Each warrant is exercisable into one share of common stock at an
exercise price of $2.00 per share, subject to adjustment, for a term of three
years. To date, $7,190,499 of units has been purchased in the offering. The
offering is being made to a limited number of accredited investors in a private
placement transaction exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof and Rule
506 of Regulation D promulgated thereunder, without payment of underwriting
discounts or commissions to any person.
28
SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
- ----------------------- --------------------------- ----------------------- ------------------------- ---------------------------
TOTAL NUMBER OF SHARES MAXIMUM NUMBER OF SHARES
PURCHASED AS PART OF THAT MAY YET BE PURCHASED
TOTAL NUMBER OF SHARES AVERAGE PRICE PAID PUBLICLY ANNOUNCED UNDER THE PLANS OR
PERIOD PURCHASED (A) PER SHARE PLANS OR PROGRAMS PROGRAMS
- ----------------------- --------------------------- ----------------------- ------------------------- ---------------------------
March, 2004 4,671,000 $.0004 0 0
- ----------------------- --------------------------- ----------------------- ------------------------- ---------------------------
(a) On or about March 15, 2004, we repurchased 1,700,000 shares of
common stock from George Sines in consideration of cash
payment of $1,000 and 2,971,000 shares of common stock from
Scott Yancey in consideration of cash payment of $1,000 in
privately negotiated transactions. The forgoing shares were
not purchased pursuant to any publicly announced plan or
program. At the time of the purchase, Messrs. Yancey and Sines
were the sole officers and directors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit No. Exhibit Method of Filing
----------- ------- ----------------
2.1 Stock Purchase Agreement by and between Incorporated by reference to Exhibit 2.1 to the
Touchstone Resources, Ltd. and the Company, Company's Current Report on Form 8-K filed
dated March 15, 2004 April 15, 2004
2.2 Agreement and Plan of Merger by and between Previously filed
the Company and Touchstone Resources USA,
Inc., a Delaware company and wholly owned
subsidiary of the Company
3.1 Certificate of Incorporation Incorporated by reference to Exhibit 3.1 to the
Registrant's Registration Statement on Form
SB-2 filed on December 7, 2001
29
3.2 Certificate of Ownership Merging Touchstone Previously filed
Resources USA, Inc into The Coffee Exchange,
Inc. dated March 18, 2004
3.3 Bylaws Incorporated by reference to Exhibit 3.2 to
the Registrant's Registration Statement on
Form SB-2 filed on December 7, 2001
10.1 Stock Redemption Agreement, dated February 28, Incorporated by reference to Exhibit 10.1 to
2004, by and between Scott Yancey and the the Company's Current Report on Form 8-K
Company filed March 30, 2004
10.2 Stock Redemption Agreement, dated February 28, Incorporated by reference to Exhibit 10.2 to
2004, by and between George Sines, and the the Company's Current Report on Form 8-K
Company filed March 30, 2004
10.3 Stock Purchase Agreement dated February 28, Incorporated by reference to Exhibit 10.3 to
2004 between Stephen P. Harrington and Scott the Company's Current Report on Form 8-K
Yancey filed March 30, 2004
10.4 Stock Purchase Agreement dated February 28, Incorporated by reference to Exhibit 10.4 to
2004 between Stephen P. Harrington and George the Company's Current Report on Form 8-K
Sines filed March 30, 2004
10.5 Interest Purchase Agreement, dated March 23, Incorporated by reference to Exhibit 10.1 to
2004, by and among the Company, Touchstone the Company's Current Report on Form 8-K
Louisiana, Inc. and Touchstone Resources, Ltd. filed April 15, 2004
10.6 Interest Purchase Agreement dated March 23, Incorporated by reference to Exhibit 10.2 to
2004, by and among Touchstone Vicksburg, Inc., the Company's Current Report on Form 8-K
Touchstone Awakino, Inc. and Montex filed April 15, 2004.
Exploration, Inc.
10.7 Loan Agreement dated March 23, 2004 by and Previously filed
between the Company and Trident Growth Fund,
L.P. ("Trident")
30
10.8 12% Secured Convertible Promissory Note dated Previously filed
March 23, 2004 in the principal amount of
$2,100,000 issued to Trident
10.09 Security Agreement dated March 23, 2004 by and Previously filed
between the Company and Trident
10.10 Warrant to purchase 250,000 shares of common Previously filed
stock dated March 23, 2004 issued to Trident
10.11 Form of Convertible Note Previously filed
10.12 Securities Purchase Agreement, dated March 24, Incorporated by reference to Exhibit 10.1 to
2004, by and among the Company FEQ Gas, LLC, the Company's Current Report on Form 8-K
Knox Gas, LLC and Knox Miss., LLC. filed May 24, 2004
10.13 Secured Promissory Note, dated February 26, Incorporated by reference to Exhibit 10.2 to
2004, made by Knox Gas, LLC in favor of the Company's Current Report on Form 8-K
Endeavour International Corporation (f/k/a filed May 24, 2004
Continental Southern Resources, Inc.).
10.14 Interest Pledge Agreement, dated February 26, Incorporated by reference to Exhibit 10.3 to
2004, by and between Knox Gas, LLC and the Company's Current Report on Form 8-K
Endeavour International Corporation. filed May 24, 2004
10.15 Subscription Agreement, dated March 26, 2004, Incorporated by reference to Exhibit 10.4 to
by and between Touchstone Resources USA, Inc. the Company's Current Report on Form 8-K
and PHT Stent Partners, L.P. filed May 24, 2004
10.16 Subscription Agreement, dated April 4, 2004, Incorporated by reference to Exhibit 10.5 to
by and between Touchstone Resources USA, Inc. the Company's Current Report on Form 8-K
and PHT Wharton Partners, L.P. filed May 24, 2004
31
10.17 Interest Purchase Agreement, dated April Incorporated by reference to Exhibit 10.6 to
30, 2004, by and between Touchstone the Company's Current Report on Form 8-K filed
Louisiana, Inc. and Endeavour International May 24, 2004
Corporation
10.18 Promissory Note, dated April 30, 2004, made Incorporated by reference to Exhibit 10.7 to
by Touchstone Louisiana, Inc. in favor of the Company's Current Report on Form 8-K filed
Endeavour International Corporation May 24, 2004
31.1 Certificate of CEO of Registrant required by Filed herewith
Rule 13a-14(a) under the Securities Exchange
Act of 1934, as amended
31.2 Certificate of Treasurer of Registrant Filed herewith
required by Rule 13a-14(a) under the
Securities Exchange Act of 1934, as amended
32.1 Certificate of CEO and Treasurer of Filed herewith
Registrant required by Rule 13a-14(b) under
the Securities Exchange Act of 1934, as
amended
(b) Current Reports on Form 8-K filed during the three month period ended March
31, 2004:
On March 30, 2004, the Company filed a Current Report on Form 8-K dated
March 15, 2004, reporting under Items 1 and 5 a Change in Control of the Company
and a change in the name of the Company.
32
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, as amended, the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
TOUCHSTONE RESOURCES, INC.
Date: August 2, 2004 /s/ Stephen P. Harrington
-------------- --------------------------
Stephen P. Harrington
Chief Executive Officer, President and
Treasurer
33
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
31.1 Certificate of CEO of Registrant required by Rule 13a-14(a)
under the Securities Exchange Act of 1934, as amended
31.2 Certificate of Treasurer of Registrant required by Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended
32.1 Certificate of CEO and Treasurer of Registrant required by
Rule 13a-14(b) under the Securities Exchange Act of 1934, as
amended