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 SEPTEMBER 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 October 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 SEPTEMBER 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 -
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 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 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 15
Item 6 - Exhibits and Reports on Form 8-K
Signature 16
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" or the "Company") included herein have been prepared by
ARO, without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, these statements include all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the Company's 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 NINE MONTHS ENDED
SEPTEMBER 30, 2000 AND 1999
2
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
2000 DECEMBER 31,
(UNAUDITED) 1999
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................................... $ 916 $ 299
Accounts receivable ............................................ 1,064 1,956
Prepaid expenses and other ..................................... 669 144
------------- -------------
Total current assets ...................................... 2,649 2,399
------------- -------------
Property and equipment, at cost
(successful efforts method) .................................... 14,357 13,800
Less accumulated depreciation,
depletion and amortization ..................................... (9,128) (8,064)
------------- -------------
Net property and equipment ................................ 5,229 5,736
Other assets .................................................... 19 34
------------- -------------
Total Assets .............................................. $ 7,897 $ 8,169
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade ......................................... $ 153 $ 1,584
Accrued expenses and other ..................................... 869 171
------------- -------------
Total current liabilities ................................. 1,022 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 ..................................... 28,180 28,220
Retained earnings (deficit) .................................... (26,628) (27,129)
------------- -------------
Total stockholders' equity ................................ 1,875 1,414
------------- -------------
Total liabilities and stockholders' equity ................ $ 7,897 $ 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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Operating revenues:
Oil and gas production ........................ $ 1,579 $ 2,828 $ 3,523 $ 12,282
Marketing ..................................... -- -- -- 3,795
Other ......................................... -- 153 -- 2,493
--------- --------- --------- ---------
1,579 2,981 3,523 18,570
--------- --------- --------- ---------
Operating expenses:
Oil and gas production ........................ 175 862 497 2,306
Exploration costs ............................. 289 1,625 438 2,416
Marketing ..................................... -- 148 -- 4,192
Depreciation, depletion and
amortization ................................. 404 2,445 1,097 9,420
Impairment of assets .......................... -- 319 -- 365
Administrative expenses and other ............. 379 955 1,071 3,437
--------- --------- --------- ---------
1,247 6,354 3,103 22,136
--------- --------- --------- ---------
Operating income (loss) ................... 332 (3,373) 420 (3,566)
Other income (expense):
Interest income (expense) ..................... 6 (2,007) 21 (6,560)
Gain (loss) on sale of assets ................. -- 194 68 141
Other ......................................... -- 12 (8) (252)
--------- --------- --------- ---------
6 (1,801) 81 (6,671)
--------- --------- --------- ---------
Income (loss) before income
tax expense ............................. 338 (5,174) 501 (10,237)
Income tax expense ............................. -- -- -- --
--------- --------- --------- ---------
Net income (loss) ......................... 338 (5,174) 501 (10,237)
Preferred dividends ............................ -- (7) -- (7)
--------- --------- --------- ---------
Net income (loss) attributable
to common shares ............................. $ 338 $ (5,181) $ 501 $ (10,244)
========= ========= ========= =========
Per common share:
Basic ......................................... $ 0.01 $ (0.42) $ 0.01 $ (0.92)
========= ========= ========= =========
Weighted average number of common
shares outstanding ............................ 52,523 12,442 52,522 11,195
========= ========= ========= =========
Diluted ....................................... $ 0.01 $ (0.42) $ 0.01 $ (0.92)
========= ========= ========= =========
Weighted average number of common shares
and dilutive potential common shares ......... 52,563 12,442 52,562 11,195
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed, consolidated financial statements
4
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash provided by (used in) operating activities ........... $ 1,208 $ (161)
-------- --------
Investing activities:
Exploration and development costs ............................ (696) (300)
Proceeds from sale of assets ................................. 145 601
Other ........................................................ -- 483
-------- --------
Net cash provided by (used in) investing activities ..... $ (551) $ 784
-------- --------
Financing activities:
Payments on borrowings ....................................... -- (277)
Other ........................................................ (40) --
-------- --------
Net cash provided by (used in) financing activities ..... $ (40) $ (277)
-------- --------
Net change in cash ...................................... 617 346
Cash and cash equivalents at beginning of period .............. 299 255
-------- --------
Cash and cash equivalents at end of period .................... $ 916 $ 601
======== ========
</TABLE>
NON-CASH TRANSACTIONS:
The Company declared stock dividends and issued 3,176 and 18,442 shares of
common stock to holders of the Series 1993 Preferred Stock during the nine
months ended September 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 nine months ended September 30, 2000 and
1999, respectively (in thousands except per share amounts).
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
SEPTEMBER 30, 2000 SEPTEMBER 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 ......... $ 338 52,523 $ 0.01 $(5,181) 12,442 $ (0.42)
========= =========
Potential common shares ......... -- 40 -- --
------- ------- ------- -------
Diluted earnings per share
Income (Loss) available to
common stockholders ......... $ 338 52,563 $ 0.01 $(5,181) 12,442 $ (0.42)
======= ======= ========= ======= ======= =========
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 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 ....... $ 501 52,522 $ 0.01 $(10,244) 11,195 $ (0.92)
========= =========
Potential common shares ....... -- 40 -- --
-------- -------- -------- --------
Diluted earnings per share
Income (Loss) available to
common stockholders ....... $ 501 52,562 $ 0.01 $(10,244) 11,195 $ (0.92)
======== ======== ========= ======== ======== =========
</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, and
Section 21E of the Securities Exchange Act of 1934, as amended. 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. Some
of the risks which could affect future results and could cause actual results to
differ materially from those expressed in forward-looking statements in this
Report include:
o the volatility of oil and natural gas prices;
o the uncertainty of estimates of oil and natural gas reserves;
o the impact of competition;
o difficulties encountered during the exploration for and production
of oil and natural gas;
o changes in customer demand;
o the uncertainty of ARO's ability to attract necessary capital;
o changes in the extensive government regulations regarding the oil
and natural gas business; and
o compliance with environmental regulations.
ARO's forward-looking statements speak only as of the date of this Report. ARO
disclaims any obligation or undertaking to update any forward-looking statements
to reflect any changes in ARO's expectations or with regard to any changes in
events, circumstances or conditions on which ARO's forward-looking statements
are based. 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 10-K which ARO filed with the Securities and Exchange
Commission on March 29, 2000.
9
<PAGE>
1999 CORPORATE RESTRUCTURING
On December 2, 1999, the Company sold (i) approximately 75% of its
outstanding common stock to Blue Dolphin Exploration Company for $4,517,734 and
(ii) 80% of its interest in its oil and gas properties located in the Gulf of
Mexico to Fidelity Oil Holdings, Inc. In connection with these transactions, the
Company also sold (i) its Appalachian oil and gas properties and operations
located in Kentucky and Tennessee to Nami Resources Company, LLC, and (ii) all
of the outstanding stock of Southern Gas Co. of Delaware to an affiliate of one
of its former directors. The Company used the proceeds from these transactions
to significantly reduce its outstanding indebtedness.
As a result of these transactions, the Company's financial condition was
materially improved and its oil and gas assets were materially decreased.
Accordingly, the Company's revenue from oil and gas producing activities, oil
and gas production expense and depletion, depreciation and amortization expense
for the current periods have materially decreased from prior periods.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
REVENUES. Total revenues for ARO decreased 81% to $3.5 million for the
nine months ended September 30, 2000 ("current period") from $18.6 million in
the nine months ended September 30, 1999 ("previous period"). Oil and gas
production revenue decreased 71% to $3.5 million in the current period, due
primarily to the Company's sale of 80% of its interest in its Gulf of Mexico
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:
10
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30 %
--------------------- INCREASE
2000 1999 (DECREASE)
--------- --------- ----------
<S> <C> <C> <C>
Production volumes:*
Natural gas (MMcf) ............................. 576 4,491 (87)
Oil (MBbls) .................................... 51 227 (77)
Total (MMcfe) .................................. 882 5,856 (85)
Average sale prices:**
Natural gas (per Mcf) .......................... $ 3.62 $ 1.97 84
Oil (per Bbl) .................................. $ 28.21 $ 15.04 88
Per Mcfe ....................................... $ 3.99 $ 2.10 90
Expenses (per Mcfe):
Lease operating (including production taxes) ... $ 0.56 $ 0.39 44
Depreciation, depletion and amortization ....... $ 1.24 $ 1.61 (23)
Administrative ................................. $ 1.21 $ 0.56 116
</TABLE>
*(Mcf means thousand cubic feet of natural gas; Mbl means thousand barrels of
oil; Mcfe means thousand cubic feet of natural gas equivalent determined using
the ratio of six Mcf of natural gas to one Bbl of oil or condensate; Bbl means
barrels of oil). (Mmcf means one thousand Mcf [one million cubic feet of natural
gas]; Mmcfe means one thousand Mcfe [one million cubic feet of natural gas
equivalent determined using the ratio of six Mcf of natural gas to one Bbl of
oil or condensate].
**Includes effect of hedging (excluding hedging, the average price for gas would
have been $3.74 per Mcf, and the average price per Mcfe would have been $4.07).
OIL AND GAS PRODUCTION EXPENSE. Oil and gas production expense decreased
78% to $497,000 in the current period 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 of Mexico properties on December 2, 1999 and the sale of its
Appalachian properties and operations effective July 1, 1999. Oil and gas
production expense was $0.56 per Mcfe in the current period as compared to $0.39
in the previous period, an increase of 44%. The per unit increase was primarily
the result of decreased production and planned, government mandated upgrades of
production facilities.
EXPLORATION COSTS. During the current period, costs of approximately
$438,000 were attributable to dry hole expense and/or other directly allocable
geological and geophysical costs, compared with $2.4 million for the previous
period.
ADMINISTRATIVE EXPENSE. Administrative expense decreased 69% to $1.1
million in the current period from $3.4 million in the previous period. In
December 1999, as part of its restructuring efforts, the Company entered into a
consulting arrangement with an affiliate of its former chief executive officer
under which certain former members of management assist the current management
with transition matters at a monthly cost of $7,000. The Company also
11
<PAGE>
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 substantially reduced with the
remaining employees becoming employees of Blue Dolphin Services.
DD&A EXPENSE. DD&A expense decreased 88% to $1.1 million for the current
period due to the Company's sale of 80% of its interest in its Gulf of Mexico
properties on December 2, 1999, and the sale of its Appalachian properties and
operations effective July 1, 1999.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
REVENUES. Total revenues for ARO decreased 47% to $1.6 million for the
quarter ended September 30, 2000 ("current quarter") from $3 million in the
quarter ended September 30, 1999 ("previous quarter"). Oil and gas production
revenue decreased 44% to $1.6 million in the current quarter, due primarily to
the Company's sale of 80% of its interest in its Gulf of Mexico properties on
December 2, 1999. The decrease in oil and gas production revenue was
significantly offset by a 270% increase in the average sales price of natural
gas, together with a 50% increase in the average sales price of oil.
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:
<TABLE>
<CAPTION>
QUARTER ENDED
SEPTEMBER 30 %
--------------------- INCREASE
2000 1999 (DECREASE)
--------- --------- ---------
<S> <C> <C> <C>
Production volumes:*
Natural gas (MMcf) ................................. 256 1,077 (76)
Oil (MBbls) ........................................ 16 78 (79)
Total (MMcfe) ...................................... 352 1,543 (77)
Average sale prices:**
Natural gas (per Mcf) .............................. $ 4.25 $ 1.15 270
Oil (per Bbl) ...................................... $ 30.68 $ 20.41 50
Per Mcfe ........................................... $ 4.49 $ 1.83 145
Expenses (per Mcfe):
Lease operating (including production taxes) ....... $ 0.50 $ 0.56 (11)
Depreciation, depletion and amortization ........... $ 1.15 $ 1.59 (26)
Administrative ..................................... $ 1.08 $ 0.62 (74)
</TABLE>
*(Mcf means thousand cubic feet of natural gas; Mbl means thousand barrels of
oil; Mcfe means thousand cubic feet of natural gas equivalent determined using
the ratio of six Mcf of natural gas to one Bbl of oil or condensate; Bbl means
barrels of oil). (Mmcf means one thousand Mcf [one million cubic feet of natural
gas]; Mmcfe means one thousand Mcfe [one million cubic feet of natural gas
equivalent determined using the ratio of six Mcf of natural gas to one Bbl of
oil or
12
<PAGE>
condensate].
**Includes effect of hedging (excluding hedging, the average price for gas would
have been $4.63 per Mcf, and the average price per Mcfe would have been $4.76).
OIL AND GAS PRODUCTION EXPENSE. Oil and gas production expense decreased
80% to $175,000 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 of Mexico properties on December 2, 1999 and the sale of
its Appalachian properties and operations effective July 1, 1999. Oil and gas
production expense was $0.50 per Mcfe in the current quarter as compared to
$0.56 in the previous quarter, a decrease of 11%.
EXPLORATION COSTS. During the current quarter, costs of approximately
$289,000 were attributable to dry hole expense and the purchase of seismic data,
analysis of such data and other geological and geophysical costs, compared with
$1.6 million for the previous quarter.
ADMINISTRATIVE EXPENSE. Administrative expense decreased 60% to $379,000
in the current quarter from $955,000 in the previous period. In December 1999,
as part of its restructuring efforts, the Company entered into a consulting
arrangement with an affiliate of its former chief executive officer under which
certain former members of management assist the currrent management with
transition matters at a monthly cost of $7,000. The Company also 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 $83,333 per month. As a result, the
Company's Kentucky office was eliminated; and the New Orleans office was
substantially reduced with the remaining employees becoming employees of Blue
Dolphin Services.
DD&A EXPENSE. DD&A expense decreased 83% to $404,000 for the current
quarter due to the Company's sale of 80% of its interest in its Gulf of Mexico
properties on December 2, 1999.
LIQUIDITY AND CAPITAL RESOURCES:
Working capital at September 30, 2000 totaled $1,627,000.
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 for the development of its existing
properties.
During the nine months ended September 30, 2000, the Company expended
$1,615,000 on exploration and development opportunities. For the year ending
December 31, 2000, the
13
<PAGE>
Company expects to spend an additional $338,000. The Company has used its
working capital to fund its exploration and development opportunities.
In October 1999, ARO sold call options for 5 MMBtus per day at a call
price of $3.25 per MMBtu to H & N Gas. The call options expired 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 MMBtus 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. For the months of June, July, August
and September 2000, the settlement amounts were $147,900, $222,580, $79,515 and
$215,250, respectively, of which Fidelity Oil has reimbursed the Company
$118,320, $178,064, $63,612 and $172,200, respectively. As a result of the legal
proceedings with H & N Gas (see Part II, Item 1. Legal Proceedings, below), ARO
is holding the settlements (totaling $665,245 at September 30, 2000) in a
separate interest bearing account pending resolution of the H&N Gas litigation.
At September 30, 2000, ARO had no open forward sales contracts, option contracts
on its production or price swap agreements.
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.
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. As a result of the lawsuit filed by H&N Gas
(see Part II, Item 1. Legal Proceedings, below), the forgiveness of this debt
may be delayed pending the Company successfully resolving the H&N Gas lawsuit.
Pursuant to the terms of the Note Purchase Agreement between DnB Energy
Assets, Den norske Bank, Blue Dolphin Exploration Company and Fidelity Oil
Holdings, Inc., it was agreed that Den norske Bank will be entitled to receive a
possible future payment for its sale of the DnB Note if the combined, cumulative
net revenues received by ARO and Fidelity Oil that are attributable to ARO's
proved oil and gas reserves in the Gulf of Mexico as of January 1, 1999 exceed
$30.0 million during the period from January 1, 1999 through December 31, 2001.
If that occurs, Den norske Bank will be entitled to an amount equal to 50% of
those net revenues in excess of $30.0 million during that three-year period.
Additionally, if any contingent amount
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becomes payable to Den norske Bank, 80% will be paid by Fidelity Oil and 20%
will be paid by ARO. ARO estimates that net revenues to ARO and Fidelity Oil
attributable to proved reserves from January 1, 1999 through June 30, 2000 total
$17.8 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
See Item 2 - Liquidity and Capital Resources.
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, LIMITED PARTNERSHIP, ET. AL. V.
RICHARD A. HALE, ET. AL. (Case No. H-02-1371). The lawsuit alleges, among other
things, that H&N Gas was defrauded by American Resources in connection with
natural gas purchase options and natural gas price swap contracts entered into
from February 1998 through September 1999. H&N alleges unlawful collusion
between American Resources' prior management and the then president of H&N,
Richard Hale ("Hale"), to the detriment of H&N. H&N generally alleges that Hale
directed H&N Gas to purchase illusory options from ARO that bore no relation to
any physical gas business and that ARO did not have the financial resources
and/or sufficient quantity of natural gas to perform. H&N further alleges that
ARO and H&N colluded with respect to swap transactions that were designated to
benefit ARO at the expense of H&N Gas. H&N Gas is seeking approximately $5.65
million in actual damages, treble damages, punitive damages, pre-judgment
interest and attorneys" fees. 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:
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None.
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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: NOVEMBER 9, 2000 By: /S/ G. BRIAN LLOYD
G. Brian Lloyd
Vice President and Treasurer
(Principal Accounting Officer)
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