SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: June 30, 2003
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ..................to ...................
Commission File Number: 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of small business issuer as specified in its charter)
Delaware 73-1268729
(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)
(713) 227-7660
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report.)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
YES [ ] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
6,649,190 shares of the registrants' common stock, par value $.01 per share,
were outstanding at August 14, 2003.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements of Blue Dolphin Energy Company
and subsidiaries (the "Company" or "Blue Dolphin") included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC") and, in the opinion of
management, reflect all adjustments necessary to present a fair statement of
operations, financial position and cash flows. The Company follows the full-cost
method of accounting for oil and gas properties, wherein costs incurred in the
acquisition, exploration and development of oil and gas reserves are
capitalized. The Company 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 U.S. generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations.
The accompanying condensed consolidated financial statements of the Company
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-KSB for the
year ended December 31, 2002. Certain prior-period amounts in the condensed
consolidated financial statements have been reclassified to conform to the June
30, 2003 presentation. These reclassifications had no effect on the Company's
net loss.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
JUNE 30, 2003
ASSETS
Current assets:
Cash and cash equivalents $ 3,842,871
Accounts receivable 1,143,318
Prepaid expenses and other assets 100,124
------------
TOTAL CURRENT ASSETS 5,086,313
Property and Equipment at cost:
Oil and Gas properties, including $109,018
of unproved leasehold cost (full-cost method) 22,121,519
Pipelines 4,545,212
Onshore separation and handling facilities 1,664,128
Land 860,275
Other property and equipment 278,402
------------
29,469,536
Less: Accumulated depletion, depreciation and amortization 23,528,193
------------
5,941,343
Deferred federal income tax 244,444
Investment in New Avoca 632,214
Other assets 17,096
------------
TOTAL ASSETS $ 11,921,410
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 325,388
Asset retirement obligations, current portion 2,592,981
Accrued expenses and other liabilities 104,600
------------
TOTAL CURRENT LIABILITIES
3,022,969
Note payable 750,000
Asset retirement obligations, net of current portion 2,289,294
Common Stock, ($.01 par value, 10,000,000 shares authorized,
6,649,190 shares issued and outstanding) 66,492
Additional Paid-in Capital 26,258,394
Accumulated Deficit (20,465,739)
------------
5,859,147
TOTAL LIABILITES AND
STOCKHOLDERS' EQUITY $ 11,921,410
============
See accompanying notes to the condensed consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Three Months
Ended June 30,
2003 2002
----------- -----------
Revenue from operations:
Pipeline operations $ 256,931 $ 357,456
Oil and gas sales 745,011 689,482
----------- -----------
1,001,942 1,046,938
----------- -----------
Cost of operations:
Pipeline operating expenses 274,425 142,719
Lease operating expenses 18,218 175,212
Depletion, depreciation, amortization and abandonment 99,421 263,190
General and administrative 394,617 791,540
Accretion expense 19,167 --
----------- -----------
805,848 1,372,661
----------- -----------
INCOME (LOSS) FROM OPERATIONS 196,094 (325,723)
Other income (expense):
Interest and other expense (30,606) (105,923)
Interest and other income 305,088 42,058
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 470,576 (389,588)
Income taxes -- --
----------- -----------
Net income (loss) $ 470,576 $ (389,588)
=========== ===========
Income (loss) per common share
- basic $ 0.07 $ (0.06)
=========== ===========
- diluted $ 0.07 $ (0.06)
=========== ===========
Weighted average number of common shares outstanding
- basic 6,637,163 6,371,845
=========== ===========
- diluted 6,793,779 6,371,845
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Six Months
Ended June 30,
2003 2002
----------- -----------
Revenue from operations:
Pipeline operations $ 503,599 $ 686,753
Oil and gas sales 819,317 1,267,751
----------- -----------
1,322,916 1,954,504
----------- -----------
Cost of operations:
Pipeline operating expenses 467,819 287,435
Lease operating expenses 30,278 392,859
Depletion, depreciation, amortization and abandonment 188,469 552,757
Impairment of assets -- 339,984
General and administrative 877,323 1,376,155
Accretion expense 40,896 --
----------- -----------
1,604,785 2,949,190
----------- -----------
LOSS FROM OPERATIONS (281,869) (994,686)
Other income (expense):
Interest and other expense (43,298) (121,715)
Interest and other income 439,688 6,648
Bad debt expense -- (197,500)
----------- -----------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND INCOME TAXES 114,521 (1,257,253)
Minority interest -- (55,746)
Income taxes -- --
----------- -----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE 114,521 (1,312,999)
Cumulative effect of a change in accounting principle
for asset retirement obligations (40,455) --
----------- -----------
Net income (loss) $ 74,066 $(1,312,999)
=========== ===========
Income (loss) per common share - basic
Income (loss) before accounting change $ 0.02 $ (0.21)
=========== ===========
Cumulative effect of a change in accounting principle $ (0.01) $ --
=========== ===========
Net income (loss) $ 0.01 $ (0.21)
=========== ===========
Income (loss) per common share - diluted
Income (loss) before accounting change $ 0.02 $ (0.21)
=========== ===========
Cumulative effect of a change in accounting principle $ (0.01) $ --
=========== ===========
Net income (loss) $ 0.01 $ (0.21)
=========== ===========
Weighted average number of common shares outstanding
- basic 6,624,642 6,293,022
=========== ===========
- diluted 6,740,267 6,293,022
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six Months
Ended June 30,
2003 2002
----------- -----------
OPERATING ACTIVITIES
Net income (loss) $ 74,066 $(1,312,999)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depletion, depreciation, amortization, abandonment 188,469 552,757
Gain from change in estimate of abandonment costs (278,653) --
Change in accounting principle 40,455 --
Accretion of asset retirement obligations 40,896 --
Minority interest -- 55,746
Impairment of assets -- 339,984
Bad debt expense -- 197,500
Common stock issued for services 19,722 12,004
Changes in operating assets and liabilities:
Accounts receivable (628,026) (132,686)
Prepaid expenses and other assets 194,067 (94,336)
Abandonment costs incurred (126,766) --
Trade accounts payable and accrued expenses (2,509) (1,380,809)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (478,279) (1,762,839)
----------- -----------
INVESTING ACTIVITIES
Purchases of property and equipment, and other assets (11,152) --
Exploration and development costs (26,789) (604,461)
Purchase of minority interest from subsidiary -- (253,786)
Development costs - New Avoca (46,585) (1,615)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (84,526) (859,862)
----------- -----------
FINANCING ACTIVITIES -- --
----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (562,805) (2,622,701)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,405,676 3,343,560
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,842,871 720,859
=========== ===========
NON CASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property and equipment financed with debt $ -- $ 750,000
=========== ===========
See accompanying notes to the condensed consolidated financial statements.
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
JUNE 30, 2003
1. Liquidity
At June 30, 2003, the Company's working capital was approximately $2.1 million.
During the third and fourth quarters of 2002, the Company received approximately
$5.0 million from the sale of proved oil and gas properties from two separate
transactions. Additionally, the Company began to receive payments from its
working interest in the High Island Block A-7 field which provided revenues net
of operating expenses and capital expenditures of approximately $709,000 during
the six months ended June 30, 2003. As a result, the Company believes that it
has sufficient capital to meet its obligations and operating needs through the
twelve month period ending June 2004. Historically, the Company has relied on
the proceeds from the sale of assets and capital raised from the issuance of
debt and equity securities to individual investors and related parties to
sustain its operations.
2. Related Party Transactions
The Company currently owns a 12.8% common stock ownership interest in Drillmar,
Inc. ("Drillmar"). However, if Drillmar's convertible notes are converted, the
Company's ownership will be less than 1%. Ivar Siem, Chairman of the Company,
and Harris A. Kaffie and James M. Trimble, Directors of the Company, are owners
of 30.3%, 30.6% and 6.6%, respectively, of Drillmar's common stock. Messrs. Siem
and Kaffie are both Directors, and Mr. Siem is Chairman and President of
Drillmar.
Effective April 1, 2003, the Company entered into a sublease agreement expiring
December 31, 2006 for certain of its office space with Tri-Union Development
Corporation. The Company's 2003 receipts from this sublease will be
approximately $55,600, and thereafter will be approximately $78,500 annually,
which represents the Company's actual rental cost for the subleased space. Mr.
James M. Trimble, a Director of the Company, is the Chairman and Chief Executive
Officer of Tri-Union.
3. Change in Accounting Principle
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143 ("SFAS 143"), "Accounting
for Asset Retirement Obligations", which addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or normal use of the asset.
SFAS 143 requires that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The fair value of the liability is added to
the carrying amount of the associated asset and this additional carrying amount
is depreciated over the life of the asset. If the obligation is settled for
other than the carrying amount of the liability, the Company will recognize a
gain or loss on settlement.
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2003
SFAS 143 amended Statement of Financial Accounting Standards No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies" ("SFAS 19") to
require that the fair value of a liability for an asset retirement obligation be
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. Under the provisions of SFAS 143, asset retirement
obligations are capitalized as part of the carrying value of the long-lived
asset. Under the provisions of SFAS 19, asset retirement obligations were
recognized using a cost-accumulation approach. Prior to the adoption of SFAS
143, the Company recorded asset retirement obligations through the
unit-of-production method for oil and gas properties, and the straight line
method for pipelines and related facilities.
The adoption of SFAS 143 resulted in a January 1, 2003 cumulative effect
adjustment to record (i) a $1.0 million increase in the carrying value of
pipelines, (ii) a $0 .4 million decrease in accumulated depreciation, depletion,
and amortization of property, plant and equipment, and (iii) a $1.4 million
increase in non-current abandonment liabilities. The net impact of items (i)
through (iii) was to record an expense of $40 thousand, net of tax, as a
cumulative effect adjustment of a change in accounting principle in the
Company's consolidated statement of operations upon adoption on January 1, 2003.
The following pro forma data summarizes the Company's net income (loss) and net
income (loss) per share as if the Company had adopted the provisions of SFAS 143
on January 1, 2002, including an associated pro forma asset retirement
obligation on that date of $1.0 million:
Three months ended Six months ended
June 30, June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands, except (in thousands, except
per share amounts) per share amounts)
Net income (loss), as reported ............. $ 471 $ (390) $ 74 $ (1,313)
Pro forma adjustments to reflect retroactive
adoption of SFAS 143 ....................... -- (15) -- (10)
------------ ------------ ------------ ------------
Pro forma net income (loss) ................ $ 471 $ (405) $ 74 $ (1,323)
============ ============ ============ ============
Net income (loss) per share:
Basic - as reported ..................... $ .07 $ (.06) $ .01 $ (.21)
============ ============ ============ ============
Basic - pro forma ....................... $ .07 $ (.06) $ .01 $ (.21)
============ ============ ============ ============
Diluted - as reported ................... $ .07 $ (.06) $ .01 $ (.21)
============ ============ ============ ============
Diluted - pro forma ..................... $ .07 $ (.06) $ .01 $ (.21)
============ ============ ============ ============
4. Asset Retirement Obligations
The Company has asset retirement obligations associated with its Buccaneer Field
offshore platforms, the future abandonment of pipelines and related facilities
and an offshore oil and gas property. The following table summarizes the
Company's asset retirement obligation transactions recorded in accordance with
the provisions of SFAS 143 during the three months and six months ended June 30,
2003, and in accordance with the provisions of SFAS 19 during the three months
and six months ended June 30, 2002.
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2003
Three months ended Six months ended
June 30, June 30,
------- ------- ------- -------
2003 2002 2003 2002
(in thousands) (in thousands)
Beginning asset retirement obligations ...... $ 5,206 $ 4,600 $ 3,800 $ 4,600
Cumulative effect adjustment ................ -- -- 401 --
Liabilities incurred during period .......... (2) -- 1,045 --
Liabilities settled during period ........... (62) -- (126) --
Gain from adjustment to estimated obligations (279) -- (279) --
Accretion expense ........................... 19 -- 41 --
------- ------- ------- -------
Ending asset retirement obligation ........... $ 4,882 $ 4,600 $ 4,882 $ 4,600
======= ======= ======= =======
During the operations to remove the Buccaneer Field platform complexes in 2001,
discussions were initiated with the Texas Parks and Wildlife Department ("TPW")
in an effort to leave certain of the underwater portions of the platform
complexes in place as artificial reefs. On January 3, 2003, the Company and TPW
executed deeds of donation for both of the Company's platform complexes in the
Buccaneer Field, whereby the Company will leave certain portions of the
platforms in place as artificial reefs and donate them to the TPW, along with
cash of $390,000, of which $350,000 represents half of the cost for the site
clearance work that will be eliminated (which payment the TPW required) and
$40,000 represents the cost of buoys to mark the reef sites. The Company
requested and has received an extension from the United States Minerals
Management Service ("MMS") until August 31, 2003 to complete the
abandonment/reefing operations. The work to complete the abandonment/reefing
began in July 2003 and is expected to be completed by August 31, 2003. As a
result of the progress of current operations, the Company has lowered its
provision for the Buccaneer Field abandonment costs resulting in a gain of
approximately $280,000 at June 30, 2003. The Company believes that its provision
for the Buccaneer Field abandonment costs of approximately $3.4 million at June
30, 2003 is adequate.
5. Earnings Per Share
The Company applies the provisions of Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share". SFAS 128 requires the
presentation of basic earnings per share ("EPS") which excludes dilution and is
computed by dividing net income (loss) available to common stockholders by the
weighted-average number of shares of common stock outstanding for the period.
SFAS 128 requires dual presentation of basic EPS and diluted EPS on the face of
the income statement and requires a reconciliation of the numerators and
denominators of basic EPS and diluted EPS.
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2003
Weighted-
Average Number
of Common Shares
Outstanding
and Potential Per
Net Income Dilutive Share
(Loss) Common Shares Amount
------------- ------------- -------------
Six Months ended June 30, 2003
Basic earnings per share $ 74,066 6,624,642 $ 0.01
Effect of dilutive stock options 115,625
------------- ------------- -------------
Diluted earnings per share $ 74,066 6,740,267 $ 0.01
============= ============= =============
Six Months ended June 30, 2002
Basic and diluted loss per share $ (1,312,999) 6,293,022 $ (0.21)
============= ============= =============
Quarter ended June 30, 2003
Basic earnings per share 470,576 6,637,163 $ 0.07
Effect of dilutive stock options 156,616
------------- ------------- -------------
Diluted earnings per share $ 470,576 6,793,779 $ 0.07
============= ============= =============
Quarter ended June 30, 2002
Basic and diluted loss per share $ (389,588) 6,371,845 $ (0.06)
============= ============= =============
The employee stock options at June 30, 2002, were not included in the
computation of diluted earnings per share because the effect of their assumed
exercise and conversion would have an antidilutive effect on the computation of
diluted loss per share on the loss before the cumulative effect of a change in
accounting principle.
6. Business Segment Information
The Company's income producing operations are conducted in two principal
business segments: oil and gas exploration and production, and pipeline
operations. There were no intersegment revenues during the periods presented.
Information concerning these segments for the six months and quarters ended June
30, 2003 and 2002, and at June 30, 2003 are as follows:
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2003
Depletion,
Depreciation,
Amortization,
Operating Abandonment,
Income and
Revenues (Loss)(1) Impairment (2)
-------------- -------------- --------------
Six months ended June 30, 2003:
Oil and gas exploration and production $ 819,317 397,127 16,141
Pipeline operations 503,599 (394,077) 162,206
Other -- (284,919) 10,122
-------------- -------------- --------------
Consolidated 1,322,916 (281,869) 188,469
Other income, net -- 396,390 --
--------------
Income before minority interest and income taxes 114,521
Six months ended June 30, 2002:
Oil and gas exploration and production $ 1,267,751 93,103 457,534
Pipeline operations 686,753 139,155 84,511
Other -- (1,226,944) 10,712
-------------- -------------- --------------
Consolidated 1,954,504 (994,686) 552,757
Other income (loss), net -- (262,567) --
--------------
Loss before minority interest and income taxes (1,257,253)
Quarter ended June 30, 2003:
Oil and gas exploration and production $ 745,011 409,991 16,141
Pipeline operations 256,931 (114,034) 78,228
Other -- (121,592) 5,050
-------------- -------------- --------------
Consolidated 1,001,942 174,365 99,419
Other income, net -- 296,211 --
--------------
Income before minority interest and income taxes 470,576
Quarter ended June 30, 2002:
Oil and gas exploration and production $ 689,482 138,541 225,101
Pipeline operations 357,456 103,910 32,733
Other -- (568,174) 5,356
-------------- -------------- --------------
Consolidated 1,046,938 (325,723) 263,190
Other income (loss), net -- (63,865) --
--------------
Loss before minority interest and income taxes (389,588)
June 30, 2003
--------------
Identifiable assets:
Oil and gas exploration and production $ 1,174,872
Pipeline operations 6,151,685
Other 4,594,853
--------------
Consolidated $ 11,921,410
==============
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2003
(1) Consolidated income (loss) from operations includes $274,797
and $876,249 in unallocated general and administrative
expenses, and unallocated depletion, depreciation and
amortization of $10,122 and $10,712 for the six months ended
June 30, 2003 and 2002, respectively.
Consolidated income (loss) from operations includes $116,542
and $562,818 in unallocated general and administrative
expenses, and unallocated depletion, depreciation and
amortization of $5,050 and $5,356 for the quarters ended June
30, 2003 and 2002, respectively.
(2) The Company recorded an impairment expense of $339,984 for the
six months ended June 30, 2002, of its investment in Drillmar.
7. Stock Based Compensation
The Company accounts for stock-based compensation granted under its long-term
incentive plans using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations. Stock-based compensation expenses associated with
option grants were not recognized in the net income (loss) of the Company in the
six months and three months ended June 30, 2003 and 2002, as all options granted
had exercise prices equal to the market value of the underlying common stock on
the dates of grant. The following table illustrates the effect on net income
(loss) and income (loss) per share if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" to stock-based employee compensation:
Three months ended Six months ended
June 30, June 30,
------------------------- ------------------------
2003 2002 2003 2002
----------- ----------- ---------- -----------
(in thousands, except (in thousands, except
per share amounts) per share amounts)
Net income (loss), as reported ..................... $ 471 $ (390) $ 74 $ (1,313)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (30) -- (30) (123)
----------- ----------- ---------- -----------
Pro forma net income (loss) ........................ $ 441 $ (390) $ 44 $ (1,436)
=========== =========== ========== ===========
Net income (loss) per share:
Basic - as reported ............................. $ .07 $ (.06) $ .01 $ (0.21)
=========== =========== ========== ===========
Basic - pro forma ............................... $ .07 $ (.06) $ .01 $ (0.21)
=========== =========== ========== ===========
Diluted - as reported ........................... $ .07 $ (.06) $ .01 $ (0.21)
=========== =========== ========== ===========
Diluted - pro forma ............................. $ .06 $ (.06) $ .01 $ (0.21)
=========== =========== ========== ===========
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - Continued
JUNE 30, 2003
8. Recently Issued Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. This interpretation provides
guidance on the identification of, and financial reporting for, variable
interest entities. Variable interest entities are entities that lack the
characteristics of a controlling financial interest or lack sufficient equity to
finance its activities without additional subordinated financial support. FIN 46
requires a company to consolidate a variable interest entity if that company is
obligated to absorb the majority of the entity's expected losses or entitled to
receive the majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. FIN
46 is applicable immediately to variable interest entities created after January
31, 2003. For all variable interest entities created prior to February 1, 2003,
FIN 46 is applicable to periods beginning after June 15, 2003. The Company is in
the process of assessing the impact that FIN 46 will have on its consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Instruments
with Characteristics of Both Liabilities and Equity", ("SFAS 150") which
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 requires that an issuer classify a financial instrument that is within its
scope, which may have previously been reported as equity, as a liability (or an
asset in some circumstances). This statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003 for public companies. The Company does not believe that the adoption of
SFAS 150 will have a significant impact on its financial statements.
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Forward Looking Statements. Certain of the statements included in this quarterly
report on Form 10-QSB, including those regarding future financial performance or
results or that are not historical facts, are "forward-looking" statements as
that term is defined in Section 21E of the Securities Exchange Act of 1934, as
amended, and Section 27A of the Securities Act of 1933, as amended. The words
"expect", "plan", "believe", "anticipate", "project", "estimate", and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that any such statements are not guarantees of future
performance or events and such statements involve risks and uncertainties that
may cause actual results and outcomes to differ materially from those indicated
in the forward-looking statements. Some of the important factors, risks and
uncertainties that could cause actual results to vary from the forward-looking
statements include:
o the risks associated with exploration;
o gas and oil price volatility;
o uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of
development expenditures;
o the level of utilization of the Company's pipelines;
o availability and cost of capital;
o actions or inactions of third party operators for properties
where the Company has an interest;
o regulatory developments; and
o general economic conditions.
Additional factors that could cause actual results to differ materially from
those indicated in the forward-looking statements are discussed under the
caption "Risk Factors" in the Company's Form 10-KSB for the fiscal year ended
December 31, 2002. Readers are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date hereof. The Company
undertakes no duty to update these forward-looking statements. Readers are urged
to carefully review and consider the various disclosures made by the Company
which attempt to advise interested parties of the additional factors which may
affect the Company's business, including the disclosures made under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in this report.
LIQUIDITY AND CAPITAL RESOURCES
The Company's future cash flows are subject to a number of variables, including
oil and gas production volumes from the High Island Block A-7 field, utilization
of its pipeline systems and commodity prices among others. The Company believes
that it had sufficient capital at June 30, 2003 to meet its obligations and
operating needs through the twelve month period ending June 30, 2004. However,
there can be no assurance that operations and other capital resources will
provide cash in sufficient amounts to maintain planned levels of expenditures.
The net cash provided by or used in operating, investing and financing
activities is summarized for the periods indicated below (amounts in thousands):
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Six Months Ended June 30,
2003 2002
----------- -----------
Net cash used in:
Operating activities $ (478) $ (1,763)
Investing activities (85) (860)
Financing activities -- --
----------- -----------
Net decrease in cash $ (563) $ (2,623)
=========== ===========
During 2002, the Company sold substantially all of its interests in its proved
oil and gas properties for approximately $5.0 million. The properties sold
generated all of the Company's oil and gas sales revenues in 2002. From October
2002 to late April 2003, the Company had no producing oil and gas properties. In
late April 2003, the Company began to receive revenue from its 8.9% reversionary
working interest in High Island Area Block A-7 field, in the Gulf of Mexico, as
a result of "payout" occurring in late April 2003. Payout occurred when all of
the other working interest owners recovered their costs and expenses associated
with developing the field from sales of gas and oil production from the field.
Oil and gas production from this field comes from two wells that produced at a
combined gross average rate of 29 MMcf/day during the three months ended June
30, 2003. During June 2003, one of the wells was recompleted at a cost of
approximately $27,000 net to the Company's interest. During the three months
ended June 30, 2003, the Company recorded revenues from oil and gas sales of
approximately $745,000, and operating expenses of approximately $9,000.
Historically, the Company has relied on the proceeds from the sale of assets and
capital raised from the issuance of debt and equity securities to individual
investors and related parties to sustain its operations. However, the Company
expects that it will be able to sustain a portion of its operations from
revenues generated from oil and gas sales. At June 30, 2003, the Company's
working capital was approximately $2.1 million. In addition to using working
capital to satisfy its obligations associated with current operating activities,
the Company may also use working capital to finance future acquisitions of oil
and gas properties and pipeline systems. However, there can be no assurance that
the Company will be able to acquire and develop additional economically
recoverable oil and gas reserves or pipeline systems.
15
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
The following table summarizes certain of the Company's contractual obligations
and other commercial commitments at June 30, 2003 (amounts in thousands).
Payments Due by Period
----------------------
Contractual Less than After
Obligations Total 1 year 2-3 years 4-5 years 5 years
----------- --------- --------- --------- --------- ---------
Long-Term Debt $ 817 -- -- 817 --
Operating Leases, net of sublease 409 116 234 59
Abandonment - Costs 3,061 2,260 801 -- --
--------- --------- --------- --------- ---------
Total Contractual
Obligations $ 4,287 2,376 1,035 876 --
========= ========= ========= ========= =========
Amount of Commitment Expiration Per Period
------------------------------------------
Other Commercial Less than After
Commitments Total 1 year 2-3 years 4-5 years 5 years
----------- --------- --------- --------- --------- ---------
Abandonment - Costs* $ 1,821 333 -- 173 1,315
--------- --------- --------- --------- ---------
Total Commercial
Obligations $ 1,821 333 -- 173 1,315
========= ========= ========= ========= =========
* Commitments expected to be incurred in less than one year are associated with
the Buccaneer Field, commitments expected to be incurred in 2-3 years are
associated with the High Island A-7 Field, and commitments expected to be
incurred after five years are associated with the Company's pipelines.
The following table summarizes the Company's financial position for the periods
indicated (amounts in thousands):
June 30, December 31,
2003 2002
--------------- ---------------
Amount % Amount %
------ ------ ------ ------
Working Capital $2,063 23 $2,243 29
Property and equipment, net 5,941 67 4,687 60
Other noncurrent assets 894 10 845 11
------ ------ ------ ------
Total $8,898 100 $7,775 100
====== ====== ====== ======
Long-term Liabilities $3,039 34 $2,010 26
Stockholders' equity 5,859 66 5,765 74
------ ------ ------ ------
Total $8,898 100 $7,775 100
====== ====== ====== ======
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
The change in the Company's financial position from December 31, 2002 to June
30, 2003, was primarily due to the adoption of SFAS No. 143 (see Note 4. Change
in Accounting Principle, in Part I, Item 1.)
In November 2000, the Company elected to abandon the Buccaneer Field due to
adverse developments in the field. In August 2001, the Company reached an
agreement with Tetra Applied Technologies, Inc. ("Tetra") to remove the
Buccaneer Field platforms for a cost of approximately $2.6 million. Pursuant to
the agreement, Tetra and the Company agreed to extended payment terms, whereby
the Company will pay 20% upon completion of the abandonment operations and 5%
per month for twelve months, with the remaining balance due in the thirteenth
month. To provide security for the extended payment terms, the Company provided
Tetra with a first lien on a 50% interest in the Blue Dolphin Pipeline System.
Operations to remove the platforms commenced in August 2001 and were suspended
in December 2001, while the Company continued discussions with and was awaiting
a decision from the Texas Parks and Wildlife Department ("TPW") to leave the
underwater portion of the platforms in place as artificial reefs. Approval by
the TPW was granted and Deeds of Donation executed by TPW and the Company in
January 2003. While the scope of work with Tetra has changed, due to reefing
rather than complete removal as originally contemplated, the contract price and
payment terms remain unchanged. The Company requested and has received an
extension from the Minerals Management Service until August 31, 2003 to complete
operations needed to convert the platform complexes into artificial reefs. Tetra
resumed operations during late July 2003, with the work expected to be completed
by August 31, 2003. The Company is also obligated to pay $390,000 to TPW, of
which $350,000 represents half of the site clearance work that has been
eliminated (which payment the TPW required) and $40,000 represents the cost of
buoys to mark the reef sites. As a result of the progress of current
reefing/abandonment operations, the Company has lowered its provision for the
Buccaneer Field abandonment costs resulting in a gain of approximately $280,000
at June 30, 2003. The Company believes that its provision for the Buccaneer
Field abandonment costs, of approximately $3.4 million at June 30, 2003, is
adequate.
In February 2002, the Company acquired an additional 1/3 interest in the Blue
Dolphin Pipeline System and the inactive Omega Pipeline from MCNIC Pipeline and
Processing Company ("MCNIC"). Pursuant to the terms of the purchase and sales
agreement, Blue Dolphin Pipeline issued MCNIC a $750,000 promissory note due
December 31, 2006, with required monthly payments to be made out of 90% of the
net revenues of the interest acquired. The note bears interest at the rate of 6%
per annum and is secured by the interest acquired. Additionally, contingent
payments of up to $750,000 will be made, if the promissory note is retired
before its maturity date, payable annually after the promissory note is retired
until December 31, 2006, out of 50% of the net revenues from the interest
acquired. The maturity date, December 31, 2006, will be extended by one
additional year, up to a maximum of two years, for years in which non-recurring,
extraordinary expenditures, attributable to the interest acquired, exceeds
$200,000, in the aggregate, during any year. As of June 30, 2003, the amount
owed MCNIC is $750,000 plus accrued interest of approximately $67,000.
On March 25, 2003, the Company, and WBI Pipeline & Storage Group, Inc. ("WBI"),
executed a non-binding Letter of Intent ("LOI") to sell 100% of the assets of
New Avoca Gas Storage, LLC ("New Avoca") to Gotham Energy Partners, LLC
("Gotham"). The Company holds a 25% equity interest and is the manager of New
Avoca, and WBI holds a 75% equity interest. The term of the LOI expired on June
15, 2003, but both New Avoca and Gotham have verbally agreed to extend the terms
of the LOI on a month to month basis. Closing of the transaction is subject to
the execution of a definitive purchase and sale agreement, due diligence by
Gotham and other customary matters.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
RESULTS OF OPERATIONS
---------------------
The Company reported net income for the six months ended June 30, 2003,
("current period") of $74,066, compared to a net loss of $1,312,999 reported for
the six months ended June 30, 2002 ("previous period"), and net income for the
three months ended June 30, 2003 ("current quarter"), of $470,576, compared to a
net loss of $389,588 for the three months ended June 30, 2002 ("previous
quarter").
Revenues:
First Half of 2003 vs. First Half of 2002. Current period revenues from pipeline
operations decreased by $183,154 or 27% from the previous period to $503,599.
The decrease is primarily due to a 35% decrease in throughput on the Blue
Dolphin Pipeline System in the current period, partially offset by a 108%
increase in throughput on the GA 350 System.
Current period revenues from oil and gas sales decreased by $448,434, from those
of the previous period to $819,317. The decrease was due to the sale of the
Company's oil and gas properties in the second half of 2002. The properties sold
represented all of the Company's previous period oil and gas sales. Current
period oil and gas revenues include approximately $745,000 in sales from the
Company's interest in the High Island Block A-7 field which interest was
received in late April 2003, and approximately $74,000 for adjustments for
periods prior to the sale of the oil and gas properties in 2002.
Second Quarter of 2003 vs. Second Quarter of 2002. Current quarter revenues from
pipeline operations decreased by $100,555 from the previous quarter to $256,931.
The decrease is primarily due to a 33% decrease in throughput on the Blue
Dolphin Pipeline System in the current quarter, partially offset by a 59%
increase in throughput on the GA 350 System.
Current quarter revenues from oil and gas sales increased by $55,529 from the
previous quarter to $745,011. Current quarter revenues represent sales from the
Company's interest in the High Island Block A-7 field which interest was
received in late April 2003. Previous quarter oil and gas revenues represent
sales from the Company's oil and gas properties that were sold in the second
half of 2002.
Costs and Expenses:
First Half of 2003 vs. First Half of 2002. Current period pipeline operating
expense increased by $180,384 or 63% from the previous period to $467,819. The
increase was due to increased insurance costs of approximately $118,000, legal
costs of approximately $34,000, transportation costs of approximately $17,000
and personnel costs of approximately $14,000.
Current period lease operating expense decreased by $362,581 from the previous
period to $30,278. The decrease was due to the sale of the Company's oil and gas
properties in the second half of 2002. The properties sold represented all of
the Company's previous period lease operating expenses. Current period lease
operating expenses include approximately $9,000 in expenses attributable to the
Company's interest in the High Island Block A-7 field which interest was
received in late April 2003 and approximately $19,000 for adjustments for
periods prior to the sale of the oil and gas properties in 2002.
18
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Current period depletion, depreciation and amortization decreased $364,288 from
the previous period to $188,469. In the previous period the Company recorded
depletion of approximately $455,000 associated with the oil and gas properties
sold in the second half of 2002 compared to depletion of approximately $4,000
recorded in the current period. Pipeline depreciation expense increased by
approximately $67,000 in the current period.
In the previous period, the Company elected to record a full impairment of its
investment in Drillmar of $339,984 and a full reserve for the accounts
receivable amount owed from Drillmar of $197,500 due to Drillmar's working
capital deficiency and delays in securing capital funding.
General and administrative expenses for the current period decreased $498,832
from the previous period to $877,323. The decrease is primarily due to a cost
reduction program initiated in 2002 that resulted in a reduction in personnel
and related costs of approximately $255,000 and elimination of legal costs
associated with litigation that was settled in the previous period of
approximately $245,000.
In the current period, as a result of the Company adopting SFAS No. 143 (see
Note 3. Change of Accounting Principle in Part I, Item I), the Company recorded
accretion expense of $40,896, which reflects the increase in future asset
retirement obligations, and recorded a cumulative effect adjustment at January
1, 2003 of a change in accounting principle for asset retirement obligations of
$40,455,
Interest and other expense decreased in the current period by $78,417 from the
previous period. In the previous period the Company recorded an expense
associated with the settlement of litigation of approximately $300,000, offset
in part by a reduction of an obligation to Den norske Bank of approximately
$200,000.
Interest and other income increased in the current period by $383,040 from the
previous period. The increase is due primarily to the Company's approximately
$280,000 gain from the reduction to its provision for the Buccaneer Field
abandonment costs, and fees generated for consulting services provided by the
Company in the current period associated with the evaluation of oil and gas
properties of approximately $93,000.
Second Quarter of 2003 vs. Second Quarter of 2002. Current quarter pipeline
operating expenses increased by $131,706 or 92% from the previous quarter to
$274,425. The increase was due to increased insurance costs of approximately
$61,000, transportation costs of approximately $18,000, legal costs of
approximately $12,000 and personnel costs of approximately $13,000.
Current quarter lease operating expenses decreased by $156,994 from the previous
quarter to $18,218. The decrease was due to the sale of the Company's oil and
gas properties in the second half of 2002. The properties sold represented all
of the Company's previous quarter lease operating expenses. Current quarter
lease operating expenses represent expenses from the Company's interest in the
High Island Block A-7 field and adjustments for periods prior to the sale of oil
and gas properties in 2002.
19
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Current quarter depletion, depreciation and amortization decreased $163,769 from
the previous quarter to $99,421. In the previous quarter the Company recorded
depletion of approximately $224,000 associated with the oil and gas properties
sold in the second half of 2002, compared to depletion of approximately $4,000
recorded in the current quarter. Pipeline depreciation expense increased by
approximately $45,000 in the current quarter.
General and administrative expenses for the current quarter decreased $396,923
from the previous quarter to $394,617. The decrease is primarily due to a cost
reduction program initiated in 2002 that resulted in a reduction in personnel
and related costs of approximately $136,000, elimination of legal costs
associated with litigation that was settled in the previous quarter of
approximately $115,000 and elimination of costs associated with the oil and gas
properties sold in the second half of 2002 of approximately $75,000.
In the current quarter, the Company recorded accretion expense of $19,167 as a
result of its adoption of SFAS No. 143, which reflects the increase in future
asset retirement obligations.
Interest and other expense decreased in the current quarter by $75,317 from the
previous quarter. In the previous quarter the Company recorded an expense
associated with the settlement of litigation of approximately $300,000 offset in
part by a reduction of an obligation to Den norske Bank of approximately
$200,000.
Interest and other income increased in the current quarter by $263,030 from the
previous quarter. The increase is due primarily to the Company's approximately
$280,000 gain from the reduction to its provision for the Buccaneer Field
abandonment costs.
20
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET PRICE
The Company is exposed to market risk, including adverse changes in commodity
prices and interest rates as discussed below.
Commodity Price Risk- The Company sells natural gas, crude oil and natural gas
liquids. As a result, the Company's financial results can be significantly
affected if commodity prices fluctuate widely in response to changing market
forces. The Company does not use derivative products to manage commodity price
risk.
Interest Rate Risk- The Company currently has no short-term or long-term debt
with floating interest rates, and thus currently is not subject to risk of
interest rate changes.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this Quarterly Report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Primary Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures (as defined in Rules 13a -
14(c) and 15d - 14 (c) under the Securities Exchange Act of 1934). Based upon
the evaluation, the Chief Executive Officer and Primary Financial Officer
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
21
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on May 21, 2003. The
matters that were voted upon at the meeting, and the number of votes cast for,
against or withheld, as well as the number of abstentions and broker non-votes,
as to such matter, where applicable, are set forth below.
Votes Votes Votes Broker
For Against Withheld Abstentions Non-Votes
--------- --------- --------- --------- ---------
1) Election of Directors
Ivar Siem 4,810,033 22,148 1,699,199 - 103,770
Michael S. Chadwick 4,816,956 15,225 1,699,199 - 103,770
Harris A. Kaffie 4,831,146 1,035 1,699,199 - 103,770
James M. Trimble 4,815,580 16,601 1,699,199 - 103,770
2) Amendment to the Company's 2000 Stock Incentive Plan to increase the number
of shares of common stock that can be issued pursuant to the plan.
3,992,715 856,947 - 1,681,718 103,770
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
A) Exhibits
31.1 Michael J. Jacobson Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 G. Brian Lloyd Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Michael J. Jacobson Certification Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 G. Brian Lloyd Certification Pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley
Act of 2002.
B) Reports on Form 8-K
On July 18, 2003, the Company filed a current report on Form
8-K dated July 16, 2003, reporting that NASDAQ granted an
extension of time until October 8, 2003 for the Company to be
in compliance with its minimum bid price of $1.00 per share.
The item in such current report was Item 5 (Other Events).
22
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
By: BLUE DOLPHIN ENERGY COMPANY
Date: August 14, 2003 /s/ Michael J. Jacobson
--------------------------------------------
Michael J. Jacobson
President and Chief Executive Officer
/s/ G. Brian Lloyd
--------------------------------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting and Financial Officer)
23