EXHIBIT 99.2
[BLUE DOLPHIN EXPLORATION COMPANY LETTERHEAD]
May 21, 1999
AMERICAN RESOURCES OFFSHORE, INC.
160 Morgan Street
Versailles, KY 40383
Gentlemen:
The purpose of this letter (this "Letter of Intent") is to set forth certain
non-binding understandings and certain binding agreements between Blue Dolphin
Exploration Company ("BDEX"), a Delaware corporation, and American Resources
Offshore, Inc. ("ARO"), a Delaware corporation, with respect to the possible
acquisition (the "Possible Acquisition") of certain shares of capital stock, and
assets of ARO, on the terms set forth below.
The following numbered paragraphs of this Letter of Intent (collectively, the
"Non-binding Provisions") reflect our mutual understanding of the matters
described in them, but BDEX and ARO each acknowledge that the Non-binding
Provisions are not intended to create or constitute any legally binding
obligation between them and neither BDEX nor ARO shall have any liability to the
other with respect to the Non-binding Provisions until a fully integrated,
definitive agreement (the "Definitive Agreement"), and other related documents,
are prepared, authorized, executed and delivered by and between BDEX and ARO. In
this Letter of Intent, ARO and BDEX are sometimes referred to as the "Parties".
PART ONE
To facilitate the negotiation of a Definitive Agreement, the Parties request
that BDEX's counsel prepare an initial draft thereof. The execution of any such
Definitive Agreement would be subject to the satisfactory completion of BDEX's
ongoing investigation of ARO's business, and would also be subject to approval
by the respective Parties' board of directors. Based on the information
currently known to BDEX, it is proposed that the Definitive Agreement include
the following terms:
1. BASIC TRANSACTION. ARO is authorized to issue 50,000,000 shares of $.00001
par value common stock and 3,000,000 shares of preferred stock, of which
10,420,000 common shares and 230,000 shares of preferred stock are issued
and outstanding. ARO will take such action to convert the preferred stock
of its officers and directors to common stock, to enable BDEX to have a 75%
ownership interest in ARO upon the completion of the transactions
contemplated herein (the "Shares"). BDEX shall be entitled to anti-dilutive
rights in the event any preferred shares, warrants or options issued by ARO
prior to the Closing remain outstanding and have not been cancelled
pursuant to Article 3 b. The parties intend that the closing of the
proposed transaction will occur on or before September 30, 1999 (the
"Closing") with an effective date of January 1, 1999 (the "Effective
Date"). ARO shall provide corporate managerial services to BDEX for a
period of eighteen (18) months from the date of Closing, for a monthly fee
of thirty five thousand dollars ($35,000).
2. PURCHASE-PRICE. Based on the information known to BDEX on the date hereof,
the purchase price for (i) the Shares, and (ii) 80% of ARO's interest in
the offshore Gulf Coast properties, will be Thirty Three Million Seven
Hundred Fifty Thousand Dollars ($33,750,000), less Net Revenues received
for
American Resources Offshore, Inc.
May 21, 1999
Page 2
production from the effective date to the date of Closing, as defined
Exhibit "A". It is understood that BDEX shall have no obligations with
regard to the acquisition or disposition of the ARO Appalachian properties.
3. OTHER TERMS. At or prior to the Closing:
a. ARO shall take all appropriate action to have fully satisfied and been
released from all monetary obligations (excluding obligations to ARO's
bank and TECO Oil & Gas, Inc. ("TECO"), which are being assigned to
BDEX), including but not limited to (i) accounts payable, and joint
interest billings, (except for those arising in the ordinary course of
business from the effective date until Closing and as to which
purchase price adjustments are made), or those incurred with written
approval of BDEX, (ii) all employment agreements, and (iii) office
lease agreements.
b. Existing Management and Board Members shall agree to a voting trust to
support the terms and conditions of the transaction contemplated
herein and terminate any options or warrants issued to them by ARO.
c. ARO shall take all appropriate action to divest itself of all
Appalachian assets and dissolve all subsidiaries prior to the Closing.
d. Separate assignments in favor of BDEX executed by TECO and ARO's bank
of their respective claims, contract rights and security interests as
to ARO are to be delivered to BDEX. The Definitive Agreement would
provide for BDEX to release the assigned rights at a point
sufficiently subsequent to the Closing to enable BDEX to confirm that
ARO has complied fully with its representations, warranties and
obligations under the Definitive Agreement provided that a material
breach has not occurred.
e. BDEX agrees that production marketing positions listed in Exhibit "B"
entered into by ARO since the Effective Date shall be deemed to be in
the ordinary course of business. ARO agrees that any production
marketing positions not listed on Exhibit "B" shall not be deemed to
be in the ordinary course of business and that BDEX shall have no
responsibility whatsoever therefore, and that the settlement costs for
such positions shall not be made from the Net Revenues attributable to
the period from the Effective Date to the Closing.
f. ARO shall notify BDEX of any authority for expenditures ("AFE")
received by ARO, and ARO shall attempt to farmout on best terms,
failing which it shall not consent to the AFE unless (i) it receives
written consent and approval from BDEX, or (ii) ARO's Bank advances
the necessary capital to fund the AFE. If BDEX approves the AFE it
shall advance the necessary capital to fund the AFE and shall be
entitled to a first lien on the assets to secure repayment of this
advance. The property which is the subject matter of the AFE shall be
deemed to be included as property to be conveyed (as described below),
to Fidelity Oil Holdings, Inc. ("Fidelity"), or owned by the surviving
entity without any additional compensation.
American Resources Offshore, Inc.
May 21, 1999
Page 3
g. ARO shall immediately take steps to terminate its joint venture
agreements with Houston Energy on terms and conditions agreed to and
approved by BDEX.
IN CONNECTION WITH THE CLOSING, 80% OF THE OFFSHORE GULF COAST PROPERTIES OF
ARO, AS DESCRIBED IN PARAGRAPH 2. (II), WILL BE ASSIGNED TO FIDELITY WITH AN
EFFECTIVE DATE OF JANUARY 1, 1999, FOR NO ADDITIONAL CONSIDERATION TO ARO.
4. DEFINITIVE AGREEMENT. ARO will make comprehensive representations and
warranties to BDEX, and will provide comprehensive covenants, indemnities
and other protections for the benefit of BDEX. If a Definitive Agreement is
not executed by June 15, 1999, or the Parties have not extended this Letter
of Intent by mutual agreement in writing, this Letter of Intent shall
automatically expire as of June 15, 1999, at 5:00 P.M. Central Daylight
Time. The consummation of the contemplated transaction by BDEX would be
subject to the satisfaction of various conditions, including, but not
limited to:
a. ARO has no knowledge of any Environmental Liability relating to or
arising out of the companies' assets except as disclosed at or prior
to the Effective Date. This warranty shall not apply to (a) any
liability relating to the (i) plugging and abandonment of wells and
(ii) associated site restoration (except to the extent that it
involves the removal of Hazardous Substances therefrom); or (b) each
individual claim in respect of Environmental Liability of less than
$25,000 up to a maximum aggregate of $250,000.
b. A limited warranty to the effect that there are no title defects,
liens, claims, or encumbrances occurring by, through or under ARO or
any of its subsidiaries, or relating to events or actions which
occurred prior to Closing, which would have a material adverse effect
on the value of the companies' assets, but with full substitution and
subrogation of BDEX in and to all representations and warranties of
every kind and character heretofore given or made to ARO or its
subsidiaries and their predecessors in title by others with respect
thereto.
c. BDEX will perform standard due diligence to: (i) confirm the oil and
gas reserve report information provided to BDEX by ARO, (ii) confirm
the accuracy of the title to the properties owned by ARO as
represented in said reserve reports, and (iii) determine the financial
condition and pending legal matters of ARO.
The Definitive Agreement will contain default and remedy provisions typical of a
transaction of this type.
PART TWO
The following paragraphs of this letter (the "Binding Provisions") are the
legally binding and enforceable agreements of BDEX and ARO.
1. ACCESS. During the period from the date this letter is signed by ARO (the
"Signing Date") until the date
American Resources Offshore, Inc.
May 21, 1999
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on which either Party provides the other Party with written notice that
negotiations toward a Definitive Agreement are terminated (the "Termination
Date"), ARO will afford BDEX full and free access to ARO, its personnel,
properties, contracts, books and records, and all other documents and data.
2. EXCLUSIVE DEALING. Until the later of (i) (90) days after the, Signing Date
or (ii) the Termination Date:
a. ARO will not, directly or indirectly, through any representative or
otherwise, solicit or entertain offers from, negotiate with or in any
manner encourage, discuss, accept, or consider any proposal of any
other person relating to the acquisition of the Shares, its assets or
business, in whole or in part, whether directly or indirectly, through
purchase, merger, consolidation, or otherwise (other than in the
ordinary course). Notwithstanding the foregoing, BDEX's exclusive
rights shall terminate prior to the end of the ninety day period if
during such period ARO receives an unsolicited offer and ARO's Board
of Directors determines in good faith, based on the advice of outside
counsel, that its failure to accept such an unsolicited offer would
constitute a breach of the Board of Directors' fiduciary duty; and
b. ARO will immediately notify the BDEX regarding any contact between ARO
and their respective representatives and any other person regarding
any such offer or proposal or any related inquiry.
3. CONDUCT OF BUSINESS. During the period from the Signing Date until the
Termination Date, ARO shall operate its business in the ordinary course and
shall refrain from any extraordinary transactions.
4. CONFIDENTIALITY. Except as and to the extent required by law, BDEX will not
disclose or use, and will direct its representatives not to disclose or use
any Confidential Information (as defined below) with respect to ARO
furnished, or to be furnished, by either ARO or their respective
representatives to BDEX or its representatives at any time or in any manner
to top lease any ARO oil and gas leases. "Confidential Information" means
seismic data, well logs, and lease title information, unless (a) such
information is already known to BDEX or its representatives or to others
not bound by a duty of confidentiality or such information becomes publicly
available through no fault of BDEX or its representatives, (b) the use of
such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
Possible Acquisition, or (c) the furnishing or use of such information is
required by or necessary or appropriate in connection with legal
proceedings or negotiations with any creditor of ARO. The provisions of
this section supercede any prior agreement between the parties pertaining
to confidentiality matters. Upon the written request of ARO, BDEX will
promptly return to ARO or destroy any Confidential Information in its
possession and certify in writing to ARO that it has done so.
5. DISCLOSURE. Except as and to the extent required by law, without the prior
written consent of the other Party, neither BDEX nor ARO will, and each
will direct its representatives not to make, directly or indirectly, any
public comment, statement, or communication with respect to, or otherwise
to disclose or to permit the disclosure of the existence of discussions
regarding, a possible transaction between the Parties or any of the terms,
conditions, or other aspects of the transaction proposed in this letter. If
a Party is required by law to make any such disclosure, it must first
provide to the other Party the content
American Resources Offshore, Inc.
May 21, 1999
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of the proposed disclosure, the reasons that such disclosure is required by
law, and the time and place that the disclosure will be made.
6. COSTS. BDEX and ARO be responsible for and bear all of its own costs and
expenses (including any broker's or finder's fees and the expenses of its
representatives) incurred at any time in connection with pursuing or
consummating the Possible Acquisition. Notwithstanding the preceding
sentence, BDEX will pay one half and ARO will pay one-half of the HSR Act
filing fee, if applicable.
7. CONSENTS. During the period from the Signing Date until the Termination
Date, BDEX and ARO will cooperate with each other and proceed, as promptly
as is reasonably practical, to prepare and to file the notifications
required by the HSR Act, if applicable.
8. ENTIRE AGREEMENT. The Binding Provisions constitute the entire agreement
between the parties, and supersede all prior oral or written agreements,
understandings, representations and warranties, and courses of conduct and
dealing between the parties on the subject matter hereof. Except as
otherwise provided herein, the Binding Provisions may be amended or
modified only by a writing executed by all of the parties.
9. GOVERNING LAW. The Binding Provisions will be governed by and construed
under the laws of the State of Delaware without regard to conflicts of laws
principles.
10. JURISDICTION - SERVICE OF PROCESS. Any action or proceeding seeking to
enforce any provision of, or based on any right arising out of, this Letter
may be brought against any of the parties in the courts of the State of
Delaware and each of the parties consents to the jurisdiction of such
courts (and of the appropriate appellate courts) in any such action or
proceeding and waives any objection to venue laid therein. Process in any
action or proceeding referred to in the preceding sentence may be served on
any party anywhere in the world.
11. TERMINATION. The Binding Provisions will automatically terminate on June 15
1999 and may be terminated earlier upon written notice by either party to
the other party unilaterally, for any reason or no reason, with or without
cause, at any time; provided, however, that the termination of the Binding
Provisions will not affect the liability of a party for breach of any of
the Binding Provisions prior to the termination. Upon termination of the
Binding Provisions, the parties will have no further obligations hereunder,
except as stated in Paragraphs 2, 3, 5, 7, 9, 10, 11, 12, 13 and 14 of this
Part Two, which will survive any such termination.
12. COUNTERPARTS. This Letter may be executed in one or more counterparts, each
of which will be deemed to be an original copy of this Letter and all of
which, when taken together, will be deemed to constitute one and the same
agreement.
13. NO LIABILITY. The paragraphs and provisions of Part One of this letter do
not constitute and will not give rise to any legally binding obligation on
the part of any of the Parties. Moreover, except as expressly provided in
the Binding Provisions (or as expressly provided in any binding written
American Resources Offshore, Inc.
May 21, 1999
Page 6
agreement that the Parties may enter into in the future), no past or future
action, course of conduct, or failure to act relating to the Possible
Acquisition, or relating to the negotiation of the terms of the Possible
Acquisition or any Definitive Agreement, will give rise to or serve as a
basis for any obligation or other liability on the part of the Parties.
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May 21, 1999
Page 7
If you are in agreement with the foregoing, please sign and return one copy of
this letter agreement, which thereupon will constitute our agreement with
respect to its subject matter.
Yours truly,
BLUE DOLPHIN EXPLORATION
COMPANY
By:/s/JOHN P. ATWOOD
John P. Atwood
Vice President, Finance &
Corporate Development
Duly executed and agreed as to the Binding Provisions on this 21 day of
May, 1999.
AMERICAN RESOURCES OFFSHORE, INC.
By:/s/RICK AVARE
Name: Rick Avare
Title: Pres. & CEO