U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
incorporation or organization) Identification No.)
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 xx NO
------ -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the
Issuer's classes of common equity, as of the last practicable
date:
On March 31, 2000, 52,522,136 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 MARCH 31, 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 -
March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of
Operations - Three Months Ended March 31,
2000 and 1999 4
Condensed Consolidated Statements of Cash
Flows - Three Months Ended March 31, 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 8
Item 3 - Quantitative and Qualitative Disclosures
About Market Risks 11
PART II - OTHER INFORMATION 11
Item 1 - Legal Proceedings 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signature 12
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 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 THREE MONTHS ENDED
MARCH 31, 2000 AND 1999
2
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
---------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
ASSETS
------
<TABLE>
<CAPTION>
MARCH 31,
---------
2000 DECEMBER 31,
---- ------------
(UNAUDITED) 1999
---------- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 564 $ 299
Accounts and notes receivable, net 546 1,956
Prepaid expenses and other 130 144
------- ------
Total current assets 1,240 2,399
------- ------
Property and equipment, at cost
(successful efforts method) 13,801 13,800
Less accumulated depreciation,
depletion and amortization (8,422) (8,064)
------- -------
Net property and equipment 5,379 5,736
Other assets 19 34
------- -------
Total Assets $ 6,638 $ 8,169
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable-trade $ 32 $ 1,584
Accrued expenses and other 79 171
------- -------
Total current liabilities 111 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 28,220 28,220
Retained earnings (deficit) (27,016) (27,129)
------- -------
Total stockholders' equity 1,527 1,414
------- -------
Total liabilities and
stockholders' equity $ 6,638 $ 8,169
======= =======
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
3
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
-----------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2000 AND 1999
------------------------------------------
<TABLE>
<CAPTION>
2000 1999
---- ----
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Operating revenues:
Oil and gas production $ 925 $ 6,526
Marketing - 2,194
Other - 406
------- -------
925 9,126
------- -------
Operating expenses:
Oil and gas production 142 465
Exploration costs 19 476
Marketing - 2,202
Depreciation, depletion and
amortization 355 4,078
Impairment of assets - 45
Administrative expenses and other 329 1,211
------- -------
845 8,477
------- -------
Operating income 80 649
Other income (expense):
Interest income (expense) 9 (2,268)
Gain on sale of assets 25 -
------- -------
Income (loss) before income
tax expense 114 (1,619)
Income tax expense - -
------- -------
Net income (loss) $ 114 $(1,619)
Preferred dividends - (4)
------- -------
Net income (loss) attributable
to common shares $ 114 $(1,623)
======= =======
Per common share:
Basic $ 0.00 $ (.16)
======= =======
Weighted average number of common
shares outstanding 52,521,342 10,059,184
========== ==========
Diluted $ 0.00 $ (.16)
------- -------
Weighted average number of common shares
and dilutive potential common shares 52,561,024 10,059,184
========== ==========
</TABLE>
See accompanying notes to condensed, consolidated financial statements.
4
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
---------------------------------
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
----------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
2000 1999
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities $ 240 $ 413
------- -------
Investing activities:
Purchases of oil and gas property
and equipment - (347)
Change in notes receivable - (6)
Proceeds from sale of assets 25 -
------- -------
Net cash provided by (used in)
investing activities $ 25 $ (353)
------- -------
Financing activities:
Payments on borrowings - (84)
------- -------
Net cash provided by (used in)
financing activities - $ (84)
------- -------
Increase (decrease) in cash 265 (24)
Cash and cash equivalents at beginning
of period 299 255
------- -------
Cash and cash equivalents at end of period $ 564 $ 231
======= =======
</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 three months ended March 31, 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:
* 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.
* The promissory note payable to Den norske Bank (DnB
Note) and all related security interests and liens were
assigned to Blue Dolphin Exploration.
* ARO agreed that Den norske Bank will also be entitled
to receive a possible future payment for its sale of
the DnB Note.
* 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.
* 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.
* ARO amended its Amended and Restated Certificate of
Incorporation to eliminate staggered, three-year terms
of office for board members.
* ARO's officers and directors were replaced by persons
selected by Blue Dolphin Exploration.
6
<PAGE>
AMERICAN RESOURCES OFFSHORE, INC.
---------------------------------
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
---------------------------------------------------
(UNAUDITED)
-----------
* 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.
* 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 ended March 31, 2000 and 1999, respectively (in
thousands except share amounts).
<TABLE>
<CAPTION>
Quarter ended Quarter ended
March 31, 2000 March 31, 1999
-------------- --------------
Per Per
Net Share Net 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 $114 52,521,342 $ 0.00 $(1,623) 10,059,184 $(0.16)
Potential common
shares - 39,682 - -
---- ---------- ------- ----------
Diluted earnings
per share
Income (Loss)
available to
common stockholders $114 52,561,024 $ 0.00 $(1,623) 10,059,184 $(0.16)
---- ---------- ------ ------- ---------- ------
</TABLE>
7
<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.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 AND 1999:
REVENUES. Total revenues for ARO decreased 90% to $925,000
for the quarter ended March 31, 2000 ("current period") from $9.1
million in the quarter ended March 31, 1999 ("previous period").
Oil and gas production revenue decreased 86% to $925,000 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 $2.2 million for the
previous period. This decrease was due to the sale of the
Company's Appalachian properties and operations effective July 1,
1999.
8
<PAGE>
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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED %
MARCH 31 INCREASE
2000 1999 (DECREASE)
---- ---- ---------
<S> <C> <C> <C>
Production volumes:
Natural gas (MMcf*) 153 2,079 (93%)
Oil (MBbls*) 18 77 (77%)
Total (MMcfe*) 261 2,538 (90%)
Average sale prices:**
Natural gas (per Mcf*) $ 2.88 $ 2.85 1%
Oil (per Bbl*) $26.75 $10.37 158%
Per Mcfe* $ 3.54 $ 2.65 34%
Expenses (per Mcfe*):
Lease operating (including
production taxes) $ 0.54 $ 0.16 238%
Depreciation, depletion
and amortization $ 1.36 $ 1.61 (16%)
Administrative $ 1.26 $ 0.47 168%
</TABLE>
*(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 $2.61 per Mcf, and the average
price per Mcfe would have been $3.38).
OIL AND GAS PRODUCTION EXPENSE. Oil and gas production
expense decreased 65% to $142,000 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 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 $0.54 per Mcfe in the current
period as compared to $0.16 in the previous period, an increase
of 238%. 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 $19,000 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 $476,000 for the previous period.
ADMINISTRATIVE EXPENSE. Administrative expense decreased
73% to $329,000 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
9
<PAGE>
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 employees who are now employed by Blue Dolphin Services.
DD&A EXPENSE. DD&A expense decreased 91% to $355,000 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.
LIQUIDITY AND CAPITAL RESOURCES:
Cash and cash equivalents at March 31, 2000 totaled
$564,000.
To improve its financial condition, in and prior to December
1999, the Company
* sold an 80% interest in its Gulf of Mexico properties;
* sold all of its Appalachian oil and gas properties; and
* issued 39,509,507 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 quarter of 2000, ARO expended approximately
$19,000 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.
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.
10
<PAGE>
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 Ralph Currie, ARO's 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. AND RALPH CURRIE, 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.
11
<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: May 12, 2000 By: /s/ G. Brian Lloyd
------------------------------------
G. Brian Lloyd
Vice President and Treasurer
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000899717
<NAME> AMERICAN RESOURCES OFFSHORE, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 564
<SECURITIES> 0
<RECEIVABLES> 546
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,240
<PP&E> 13,801
<DEPRECIATION> 8,422
<TOTAL-ASSETS> 6,638
<CURRENT-LIABILITIES> 111
<BONDS> 0
0
322
<COMMON> 1
<OTHER-SE> 1,204
<TOTAL-LIABILITY-AND-EQUITY> 6,638
<SALES> 925
<TOTAL-REVENUES> 925
<CGS> 0
<TOTAL-COSTS> 845
<OTHER-EXPENSES> 0
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