U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___ TO ____.
Commission File No.0-21472
AMERICAN RESOURCES OFFSHORE, INC.
(Name of small business issuer in its charter)
DELAWARE 86-0713506
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
801 TRAVIS, SUITE 2100
HOUSTON, TEXAS 77002
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: 713-227-7660
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
YES [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 last practicable date:
On July 31, 2000, 52,523,724 shares of the Registrant's common stock, par
value $.00001 per share, were issued and outstanding and 39,682 shares of the
Registrant's Series 1993 8% Convertible Preferred Stock were issued and
outstanding.
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION 1
Item 1 - Financial Statements (unaudited) 1
Introduction to the Financial Statements 1
Condensed Consolidated Balance Sheets -
June 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 - Quantitative and Qualitative Disclosures About
Market Risks 14
PART II - OTHER INFORMATION 14
Item 1 - Legal Proceedings 14
Item 6 - Exhibits and Reports on Form 8-K 14
Signature 15
ii
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of American Resources
Offshore, Inc. ("ARO") included herein have been prepared by ARO, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and, in the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary to present a fair statement of operations,
financial position and cash flows. ARO follows the successful efforts method of
accounting for oil and gas properties wherein costs incurred in the acquisition
and successful exploration and development of oil and gas reserves are
capitalized, and other costs are expensed as incurred. ARO believes that the
disclosures are adequate and the information presented is not misleading,
although certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations.
1
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS ENDED
JUNE 30, 2000 AND 1999
2
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 857 $ 299
Accounts and notes receivable, net ...................... 653 1,956
Prepaid expenses and other .............................. 541 144
------------ ------------
Total current assets ............................... 2,051 2,399
------------ ------------
Property and equipment, at cost
(successful efforts method) ............................. 13,689 13,800
Less accumulated depreciation,
depletion and amortization .............................. (8,757) (8,064)
------------ ------------
Net property and equipment ......................... 4,932 5,736
Other assets ............................................. 19 34
------------ ------------
Total Assets ....................................... $ 7,002 $ 8,169
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade .................................. $ 195 $ 1,584
Accrued expenses and other .............................. 241 171
------------ ------------
Total current liabilities .......................... 436 1,755
Long-term debt, excluding current portion ................ 5,000 5,000
Stockholders' equity:
Convertible preferred stock ............................. 322 322
Common stock ............................................ 1 1
Additional paid-in capital .............................. 28,209 28,220
Retained earnings (deficit) ............................. (26,966) (27,129)
------------ ------------
Total stockholders' equity ......................... 1,566 1,414
------------ ------------
Total liabilities and stockholders' equity ......... $ 7,002 $ 8,169
============ ============
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
3
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
<TABLE>
<CAPTION>
QUARTER ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas production ................ $ 1,018 $ 2,928 $ 1,943 $ 9,454
Marketing ............................. -- 1,600 -- 3,795
Other ................................. -- 1,935 -- 2,340
------------ ------------ ------------ ------------
$ 1,018 6,463 1,943 15,589
------------ ------------ ------------ ------------
Operating expenses:
Oil and gas production ................ 180 1,037 321 1,444
Exploration costs ..................... 131 315 150 791
Marketing ............................. -- 1,842 -- 4,044
Depreciation, depletion and
amortization ......................... 337 2,897 692 6,975
Impairment of assets .................. -- -- -- 46
Administrative expenses and other ..... 363 1,214 693 2,482
------------ ------------ ------------ ------------
1,011 7,305 1,856 15,782
------------ ------------ ------------ ------------
Operating income (loss) ........... 7 (842) 87 (193)
Other income (expense):
Interest income (expense) ............. 6 (2,256) 15 (4,553)
Gain (loss) on sale of assets ......... 44 (53) 69 (53)
Other ................................. (8) (293) (8) (264)
------------ ------------ ------------ ------------
42 (2,602) 76 (4,870)
------------ ------------ ------------ ------------
Income (loss) before income
tax expense ...................... 49 (3,444) 163 (5,063)
Income tax expense ..................... -- -- -- --
------------ ------------ ------------ ------------
Net income (loss) ................. 49 (3,444) 163 (5,063)
Preferred dividends .................... -- -- -- (4)
------------ ------------ ------------ ------------
Net income (loss) attributable
to common shares ...................... $ 49 $ (3,444) $ 163 $ (5,067)
============ ============ ============ ============
Per common share:
Basic ................................. -- $ (0.32) -- $ (0.48)
============ ============ ============ ============
Weighted average number of common
shares outstanding .................... 52,522,136 11,061,531 52,521,743 10,560,834
============ ============ ============ ============
Diluted ............................... -- $ (0.32) -- $ (0.48)
============ ============ ============ ============
Weighted average number of common shares
and dilutive potential common shares .. 52,561,818 11,061,531 52,561,425 10,560,834
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
4
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities .................... $ 418 $ 230
-------- --------
Investing activities:
Purchases of oil and gas property and equipment ............. -- (267)
Proceeds from sale of assets ................................ 145 (124)
Other ....................................................... 6 (4)
-------- --------
Net cash provided by (used in) investing activities .... $ 151 $ (395)
-------- --------
Financing activities:
Payments on borrowings ...................................... -- (168)
Other ....................................................... (11) 357
-------- --------
Net cash provided by (used in) financing activities .... $ (11) $ 189
-------- --------
Net change in cash ..................................... 558 24
Cash and cash equivalents at beginning of period ............. 299 255
-------- --------
Cash and cash equivalents at end of period ................... $ 857 $ 279
======== ========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared stock dividends and issued 1,588 and 9,221 shares of common
stock to holders of the Series 1993 Preferred Stock during the six months ended
June 30, 2000 and 1999, respectively.
See accompanying notes to condensed, consolidated financial statements.
5
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
(UNAUDITED)
(1) 1999 Corporate Restructuring
On December 2, 1999, ARO closed the sale to Blue Dolphin Exploration
Company (Blue Dolphin Exploration) of 39,509,457 shares of its common
stock, resulting in Blue Dolphin Exploration owning approximately 75% of
the combined voting power of all classes of ARO's voting securities. The
purchase price for the shares was $4,517,734 after taking into
consideration contractual price adjustments which were determined at the
closing of the purchase. The contract between ARO and Blue Dolphin
Exploration relating to this transaction is referred to as the "Investment
Agreement."
Also on December 2, 1999, ARO closed the sale to Fidelity Oil Holdings,
Inc. (Fidelity Oil) of 80% of its interest in all of its oil and gas
properties located in the Gulf of Mexico. The purchase price for the 80%
interest was $24,238,318 after taking into consideration contractual price
adjustments which were determined at the closing of the purchase. The
contract between ARO and Fidelity Oil relating to this transaction is
referred to as the "Purchase and Sale Agreement."
Pursuant to the terms of the Investment Agreement and Purchase and Sale
Agreement, prior to or at the closing of said agreements, the following
transactions were also consummated:
o ARO sold all of its Appalachian oil and gas properties and
operations located in Kentucky and Tennessee to Nami Resources
Company LLC (Nami Resources) and the stock of Southern Gas to an
affiliate of one of its former directors.
o The promissory note payable to Den norske Bank (DnB Note) and all
related security interests and liens were assigned to Blue Dolphin
Exploration.
o ARO agreed that Den norske Bank will also be entitled to receive a
possible future payment for its sale of the DnB Note.
o Two holders of approximately 83% of ARO's Series 8% Preferred Stock
(the "Preferred Stock"), both of whom were members of ARO's Board of
Directors at the time these transactions were approved, converted
their preferred shares into shares of ARO's common stock in
accordance with the existing terms of the Preferred Stock.
6
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
(UNAUDITED)
o ARO amended its Amended and Restated Certificate of Incorporation to
increase its total authorized capital stock from 53,000,000 to
73,000,000 shares and its authorized common stock from 50,000,000 to
70,000,000 shares.
o ARO amended its Amended and Restated Certificate of Incorporation to
eliminate staggered, three-year terms of office for board members.
o ARO's officers and directors were replaced by persons selected by
Blue Dolphin Exploration.
o ARO entered into a consulting arrangement under which some of its
former management personnel will assist its new management selected
by Blue Dolphin Exploration with transition matters.
o ARO and Blue Dolphin Services Co. ("Blue Dolphin Services"), an
affiliate of Blue Dolphin Exploration, entered into a contractual
arrangement for management and administrative services.
The transactions described above were voted upon and approved or ratified
by ARO's stockholders on December 1, 1999.
(2) EARNINGS PER SHARE
The following table illustrates the reconciliation of the numerators and
denominators of the basic and diluted earnings per common share
computations for income (loss) related to the unexercised stock options
outstanding for the quarter and six months ended June 30, 2000 and 1999,
respectively (in thousands except share amounts).
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------ -------------------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT (LOSS) SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per share
Income (Loss) available to
common stockholders ................ $ 49 52,522,136 -- $ (3,444) 11,061,531 $ (0.32)
Potential common shares ................ -- 39,682 -- --
------------ ------------ ------------ ------------
Diluted earnings per share
Income (Loss) available to
common stockholders ................ $ 49 52,561,818 -- $ (3,444) 11,061,531 $ (0.32)
============ ============ ============ ============ ============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------------------------------------ -------------------------------------------
NET PER SHARE NET PER SHARE
INCOME SHARES AMOUNT (LOSS) SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings (loss) per share
Income (Loss) available to
common stockholders ................ $ 163 52,521,743 -- $ (5,067) 10,560,834 $ (0.48)
Potential common shares ................ -- 39,682 -- --
------------ ------------ ------------ ------------
Diluted earnings per share
Income (Loss) available to
common stockholders ................ $ 163 52,561,425 -- $ (5,067) 10,560,834 $ (0.48)
============ ============ ============ ============ ============
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995:
This Quarterly Report on Form 10-Q includes "forward looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended,
(the "Exchange Act"). All statements other than statements of historical facts
included in this Report on Form 10-Q, including without limitation, statements
under "Management's Discussion and Analysis of Financial Condition and Results
of Operations," regarding the planned capital expenditures, increases in oil and
gas production, the number of anticipated wells to be drilled in 2000 and
thereafter, ARO's financial position, business strategy and other plans and
objectives for future operations, are forward-looking statements. Although ARO
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. There are numerous uncertainties inherent in estimating quantities
of proved oil and natural gas reserves and in projecting future rates of
production and timing of development expenditures, including many factors beyond
the control of ARO. Reserve engineering is a subjective process of estimating
underground accumulations of oil and natural gas that cannot be measured in an
exact way, and the accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
As a result, estimates made by different engineers often vary from one another.
In addition, results of drilling, testing and production subsequent to the date
of an estimate may justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates are generally different from the
quantities of oil and natural gas that are ultimately recovered. Additional
important factors that could cause actual results to differ materially from
ARO's expectations are disclosed elsewhere in this Form 10-Q and in the Form 8-K
which ARO filed with the Securities and Exchange Commission on July 25, 1997.
RECENT DEVELOPMENTS
During the second quarter of 2000, ARO's Board of Directors formed a
special committee for the purpose of evaluating the possible exchange of ARO's
outstanding common stock and preferred stock for shares of the common stock of
Blue Dolphin Energy Company ("Blue Dolphin"). The special committee is made up
of ARO's directors who are not affiliated with Blue Dolphin.
9
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2000 AND 1999:
REVENUES. Total revenues for ARO decreased 88% to $1.9 million for the six
months ended June 30, 2000 ("current period") from $15.6 million in the six
months ended June 30, 1999 ("previous period"). Oil and gas production revenue
decreased 80% to $1.9 million in the current period, due primarily to the
Company's sale of 80% of its interest in its Gulf Coast Region properties on
December 2, 1999 and the sale of its Appalachian properties and operations
effective July 1, 1999. The Company had no marketing revenues during the current
period as compared with $3.8 million for the previous period. This decrease was
due to the sale of the Company's Appalachian properties and operations effective
July 1, 1999.
The following table summarizes production volumes, average sales prices
and period to period comparisons for ARO's oil and gas operations for the
periods indicated:
SIX MONTHS ENDED
JUNE 30 %
--------------------- INCREASE
2000 1999 (DECREASE)
--------- --------- ------------
Production volumes:
Natural gas (MMcf*) .......... 321 3,415 (91)
Oil (MBbls*) ................. 35 150 (77)
Total (MMcfe*) ............... 530 4,313 (87)
Average sale prices:**
Natural gas (per Mcf*) ....... $ 3.12 $ 2.23 36
Oil (per Bbl*) ............... $ 27.08 $ 12.26 121
Per Mcfe* .................... $ 3.67 $ 2.19 65
Expenses (per Mcfe*):
Lease operating (including
production taxes) .......... $ 0.61 $ 0.34 79
Depreciation, depletion and
amortization ............... $ 1.30 $ 1.62 (20)
Administrative ............... $ 1.30 $ 0.54 141
*(MMcf = million cubic feet; Mbl = thousand barrels; MMcfe = million cubic
feet equivalent; Mcf = thousand cubic feet; Bbl = barrel)
**Includes effect of hedging (excluding hedging, the average price for gas would
have been $3.04 per Mcf, and the average price per Mcfe would have been $3.62).
OIL AND GAS PRODUCTION EXPENSE. Oil and gas production expense decreased
78% to $321,000 in the current period due primarily to a significant decrease in
the Company's
10
<PAGE>
production volumes as a result of the sale of 80% of its interest in its Gulf
Coast Region properties on December 2, 1999 and the sale of its Appalachian
properties and operations effective July 1, 1999. Oil and gas production expense
was $0.61 per Mcfe in the current period as compared to $0.34 in the previous
period, an increase of 79%. The per unit increase was primarily the result of
decreased production and planned regulatory mandated upgrades of production
facilities.
EXPLORATION COSTS. During the current period, costs of approximately
$150,000 were attributable to dry hole expense and the purchase of seismic data,
analysis of such data and other directly allocable geological and geophysical
costs, compared with $791,000 for the previous period.
ADMINISTRATIVE EXPENSE. Administrative expense decreased 72% to $693,000
in the current period. In December 1999, as part of its restructuring efforts,
the Company entered into a consulting arrangement under which some of its former
management will assist new management with transition matters at a monthly cost
of $7,000 to ARO; and the Company entered into a contractual arrangement with
Blue Dolphin Services Co. ("Blue Dolphin Services") pursuant to which Blue
Dolphin Services will provide management and administrative services to the
Company for compensation at the rate of $83,333 per month. As a result, the
Company's Kentucky office was eliminated; and the New Orleans office was reduced
to two individuals who are now employed by Blue Dolphin Services.
DD&A EXPENSE. DD&A expense decreased 90% to $692,000 for the current
period due to the Company's sale of 80% of its interest in its Gulf Coast Region
properties on December 2, 1999, and the sale of its Appalachian properties and
operations effective July 1, 1999.
THREE MONTHS ENDED JUNE 30, 2000 AND 1999:
REVENUES. Total revenues for ARO decreased 84% to $1 million for the
quarter ended June 30, 2000 ("current quarter") from $6.5 million in the quarter
ended June 30, 1999 ("previous quarter"). Oil and gas production revenue
decreased 65% to $1 million in the current quarter, due primarily to the
Company's sale of 80% of its interest in its Gulf Coast Region properties on
December 2, 1999 and the sale of its Appalachian properties and operations
effective July 1, 1999. The Company had no marketing revenues during the current
quarter as compared with $1.6 million for the previous quarter. This decrease
was due to the sale of the Company's Appalachian properties and operations
effective July 1, 1999.
The following table summarizes production volumes, average sales prices
and quarter to quarter comparisons for ARO's oil and gas operations for the
quarters indicated:
11
<PAGE>
QUARTER ENDED
JUNE 30 %
--------------------- INCREASE
2000 1999 (DECREASE)
--------- --------- ------------
Production volumes:
Natural gas (MMcf*) ............ 168 1,336 (87)
Oil (MBbls*) ................... 17 73 (77)
Total (MMcfe*) ................. 270 1,775 (85)
Average sale prices:**
Natural gas (per Mcf*) ......... $ 3.33 $ 1.27 150
Oil (per Bbl*) ................. $ 27.43 $ 14.25 92
Per Mcfe* ...................... $ 3.80 $ 1.55 139
Expenses (per Mcfe*):
Lease operating (including
production taxes) ............ $ 0.67 $ 0.58 14
Depreciation, depletion and
amortization ................. $ 1.25 $ 1.63 (41)
Administrative ................. $ 1.34 $ 0.64 109
*(MMcf = million cubic feet; Mbl = thousand barrels; MMcfe = million cubic
feet equivalent; Mcf = thousand cubic feet; Bbl = barrel)
**Includes effect of hedging (excluding hedging, the average price for gas would
have been $3.43 per Mcf, and the average price per Mcfe would have been $3.85).
OIL AND GAS PRODUCTION EXPENSE. Oil and gas production expense decreased
83% to $180,000 in the current quarter due primarily to a significant decrease
in the Company's production volumes as a result of the sale of 80% of its
interest in its Gulf Coast Region properties on December 2, 1999 and the sale of
its Appalachian properties and operations effective July 1, 1999. Oil and gas
production expense was $0.67 per Mcfe in the current quarter as compared to
$0.58 in the previous quarter, an increase of 14%. The per unit increase was
primarily the result of decreased production and planned regulatory mandated
upgrades of production facilities.
EXPLORATION COSTS. During the current quarter, costs of approximately
$131,000 were attributable to dry hole expense and the purchase of seismic data,
analysis of such data and other geological and geophysical costs, compared with
$315,000 for the previous quarter.
ADMINISTRATIVE EXPENSE. Administrative expense decreased 70% to $363,000
in the current quarter. In December 1999, as part of its restructuring efforts,
the Company entered into a consulting arrangement under which some of its former
management will assist new management with transition matters at a monthly cost
of $7,000 to ARO; and the Company entered into a contractual arrangement with
Blue Dolphin Services pursuant to which Blue Dolphin Services will provide
management and administrative services to the Company for compensation at the
rate of
12
<PAGE>
$83,333 per month. As a result, the Company's Kentucky office was eliminated;
and the New Orleans office was reduced to two individuals who are now employed
by Blue Dolphin Services.
DD&A EXPENSE. DD&A expense decreased 88% to $337,000 for the current
quarter due to the Company's sale of 80% of its interest in its Gulf Coast
Region properties on December 2, 1999, and the sale of its Appalachian
properties and operations effective July 1, 1999.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at June 30, 2000 totaled $857,000.
To improve its financial condition, in and prior to December 1999, the
Company
o sold an 80% interest in its Gulf of Mexico properties to Fidelity
Oil;
o sold all of its Appalachian oil and gas properties; and
o issued 39,509,457 shares of its common stock to Blue Dolphin
Exploration Company.
As a result of these transactions, the Company expects that its revenues,
production expenses and results of operations will decrease materially from
those of prior years.
During the third quarter of 1999, ARO was released from $12.5 million of
Den norske Bank debt as a result of the sale of its Appalachian properties and
operations. Immediately after the sale of the 80% interest in its Gulf of Mexico
properties, ARO paid Den norske Bank an additional $27 million. Den norske Bank
then assigned the debt to Blue Dolphin Exploration; and ARO entered into an
amendment to the credit agreement wherein Blue Dolphin Exploration agreed, among
other things, to reduce the balance due on the debt to $5 million and to forgive
all of the remaining indebtedness, including all principal and interest, if ARO
remains in compliance with the modified loan documents and the Investment
Agreement through December 31, 2000.
Funding for ARO's business activities has historically been provided by
operating cash flow, bank borrowings and equity capital from private placements.
ARO's principal uses of capital have been for the acquisition, exploration and
development of oil and gas properties. ARO has no present agreement, commitment
or understanding with respect to any acquisitions of oil and gas properties and
plans to use all available resources, if any, for the development of its
existing properties.
During the first six months of 2000, ARO expended approximately $489,000
in its exploration and development program. ARO will evaluate each of the
exploration and development opportunities and its available capital resources to
determine whether to participate, sell its interest or sell a portion of its
interest and use the proceeds to participate at a reduced interest.
13
<PAGE>
ARO continuously reevaluates the use of forward sales contracts for gas
production in light of market conditions, commodity price forecasts, capital
spending plans and debt service requirements in order to achieve more
predictable cash flows and to reduce its exposure to fluctuations in gas prices.
These arrangements are settled on a monthly basis.
In October 1999, ARO sold call options for 5 MMBtu's per day at a call
price of $3.25 per MMBtu to H & N Gas. The call options expire in September
2000. In exchange for establishing a ceiling of $3.25 per MMBtu over the option
term, ARO received an average option premium of approximately $0.12 per MMBtu on
the volumes contracted for under the call option agreement. Fidelity Oil agreed
to assume 80%, or 4 MMBtu's per day, of any liability from these options. The
call options are settled each month. The months of October 1999 through May 2000
expired with no liability to the Company. The liability from the June 2000
option was $147,900, of which Fidelity Oil reimbursed the Company $118,320. For
the months of July and August 2000, the settlement amounts were $222,580 and
$79,515, respectively, of which Fidelity Oil has reimbursed the Company $178,064
and $63,612, respectively. The settlement price for September 2000 is unknown at
this time. As a result of the legal proceedings with H & N Gas (see Part II,
Item 1. Legal Proceedings, below), we are holding the funds due to H & N Gas in
a separate bank account.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISKS
There have been no material changes in market risks since December 31,
1999.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 8, 2000, the Company and its former Chief Financial Officer were
named in a lawsuit in the United States District Court for the Southern District
of Texas, Houston Division, styled H&N GAS AND HOWARD ENERGY MARKETING, L.L.C.
V. AMERICAN RESOURCES OFFSHORE, INC., ET AL (Case No. H-00-1371). The lawsuit
alleges that H&N Gas and ARO entered into illegal and fraudulent natural gas
purchase operation agreements that benefitted ARO at the expense of H&N Gas. H&N
Gas is seeking a claim against ARO of $2.8 million plus treble damages. ARO
intends to vigorously defend this claim.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits: The following Exhibits are either attached hereto or
incorporated herein by reference:
None.
(b) Reports on Form 8-K:
None.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMERICAN RESOURCES OFFSHORE, INC.
Date: AUGUST 9, 2000 By: /s/ G. BRIAN LLOYD
------------------------ ----------------------------------------
G. Brian Lloyd
Vice President and Treasurer
(Principal Accounting Officer)
15
