-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MtJY4hUxsCc3p2qXCsai/7J7xyu5Qd8LjFMEKCQQunn9m3i3LUjE4fD3+wYVDXXo Zbq4iULcnBPdSxJcFN5RdQ== 0000890566-99-001145.txt : 19990816 0000890566-99-001145.hdr.sgml : 19990816 ACCESSION NUMBER: 0000890566-99-001145 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BLUE DOLPHIN ENERGY CO CENTRAL INDEX KEY: 0000793306 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731268729 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15905 FILM NUMBER: 99688966 BUSINESS ADDRESS: STREET 1: 801 TRAVIS SUITE 2100 CITY: HOUSTON STATE: TX ZIP: 77002-5729 BUSINESS PHONE: 7132277660 MAIL ADDRESS: STREET 1: 11 GREENWAY PLAZA SUITE 1606 STREET 2: 11 GREENWAY PLAZA SUITE 1606 CITY: HOUSTON STATE: TX ZIP: 77046 FORMER COMPANY: FORMER CONFORMED NAME: MUSTANG RESOURCES CORP DATE OF NAME CHANGE: 19900122 FORMER COMPANY: FORMER CONFORMED NAME: ZIM ENERGY CORP DATE OF NAME CHANGE: 19870921 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended: JUNE 30, 1999 or [ ] 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 registrant 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 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. 4,916,627 SHARES $.01 PAR VALUE OUTSTANDING AT AUGUST 4, 1999 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") included herein have been prepared by the Company, 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. 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 generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. 2 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS June 30, December 31, 1999 1998 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash ........................................ $ 1,732,016 $ 593,509 Trade accounts receivable ................... 1,044,724 771,268 Crude oil inventory ......................... 20,338 5,248 Prepaid expenses ............................ 156,174 152,340 ------------ ------------ Total Current Assets ....... 2,953,252 1,522,365 Property and Equipment, at cost, using full cost method for oil and gas properties .......... 26,582,688 24,980,278 Accumulated depletion, depreciation and amortization ........................... (17,089,584) (17,172,057) ------------ ------------ 9,493,104 7,808,221 Land ........................................... 930,500 1,133,333 Acquisition and development costs - Petroport .. 1,629,628 1,576,391 Other Assets ................................... 2,982,247 3,141,500 ------------ ------------ Total Assets ........... $ 17,988,731 $ 15,181,810 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses ....... $ 1,370,050 $ 997,852 Current portion of accrued abandonment costs -- 206,000 Current portion of long term-debt ........... 410,000 200,000 Accrued income taxes payable ................ 60,184 13,970 ------------ ------------ Total Current Liabilities .... 1,840,234 1,417,822 Long-Term Debt, less current portion ........... 2,050,600 2,060,600 Accrued Abandonment Costs, less current portion -- 108,594 Common Stock ................................... 49,166 45,046 Additional Paid-in Capital ..................... 19,681,929 17,700,833 Accumulated (Deficit) since January 1, 1990 .... (5,633,198) (6,151,085) ------------ ------------ Total Liabilities and Stockholders' Equity ....... $ 17,988,731 $ 15,181,810 ============ ============ 3 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED Three Months Ended June 30, ------------------------ 1999 1998 ----------- ----------- Revenue from operations: Pipeline operations ............................. $ 444,082 $ 741,539 Oil and gas sales and operating fees ............ 160,156 198,512 ----------- ----------- REVENUE FROM OPERATIONS ......... 604,238 940,051 Cost of operations: Pipeline operating expenses ..................... 249,269 198,829 Lease operating expenses ........................ 137,669 152,142 Repair and maintenance costs .................... 123,797 62,862 Depletion, depreciation, and amortization ....... 145,853 99,903 ----------- ----------- COST OF OPERATIONS .............. 656,588 513,736 ----------- ----------- INCOME (LOSS) FROM OPERATIONS ... (52,350) 426,315 Other income (expense): General and administrative ...................... (496,905) (358,210) Interest expense ................................ (57,935) (54,399) Interest and other income ....................... (36,637) 32,962 ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (643,827) 46,668 (Provision) benefit for income taxes ................ 236,881 (22,005) ----------- ----------- Net income (loss) ................................... $ (406,946) $ 24,663 =========== =========== Earnings (loss) per share-basic ............ $ (0.09) $ 0.01 =========== =========== Earnings (loss) per share-diluted .......... $ (0.09) $ 0.01 =========== =========== Weighted average number of common shares outstanding and dilutive potential common shares: Basic ........................................... 4,646,187 4,491,847 =========== =========== Diluted ......................................... 4,705,986 4,501,226 =========== =========== 4 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
Six Months Ended June 30, -------------------------- 1999 1998 ----------- ----------- Revenue from operations: Pipeline operations ......................................... $ 879,937 $ 1,538,195 Oil and gas sales and operating fees ........................ 308,743 399,893 ----------- ----------- REVENUE FROM OPERATIONS ..................... 1,188,680 1,938,088 Cost of operations: Pipeline operating expenses ................................. 439,368 394,563 Lease operating expenses .................................... 295,667 295,959 Repair and maintenance costs ................................ 281,697 157,412 Depletion, depreciation, and amortization ................... 246,960 197,254 ----------- ----------- COST OF OPERATIONS .......................... 1,263,692 1,045,188 ----------- ----------- INCOME (LOSS) FROM OPERATIONS ............... (75,012) 892,900 Other income (expense): General and administrative .................................. (974,213) (722,000) Interest expense ............................................ (117,253) (106,113) Gain on sale of assets ...................................... 2,052,920 -- Interest and other income ................................... (6,911) 66,622 ----------- ----------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE 879,531 131,409 Provision for income taxes ...................................... (281,310) (61,905) ----------- ----------- INCOME BEFORE CUMULATIVE EFFECT OF A CHANGE IN AN ACCOUNTING PRINCIPLE ........... 598,221 69,504 Cumulative effect at January 1, 1999 of a change in accounting principle start up costs, net of income tax benefit of $41,480 ............................................ (80,334) -- ----------- ----------- Net income ...................................................... $ 517,887 $ 69,504 =========== =========== Earnings per common share-basic Income before accounting change ............................. $ 0.13 $ 0.02 Cumulative effect of a change in accounting principle ....... 0.02 -- ----------- ----------- Net income .................................................. $ 0.11 $ 0.02 =========== =========== Earnings per common share-diluted Income before accounting change ............................. $ 0.13 $ 0.02 Cumulative effect of a change in accounting principle ....... 0.02 -- ----------- ----------- Net income .................................................. $ 0.11 $ 0.02 =========== =========== Weighted average number of common shares outstanding and dilutive potential common shares: Basic ....................................................... 4,582,428 4,491,847 =========== =========== Diluted ..................................................... 4,642,227 4,505,787 =========== ===========
5 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
Six Months Ended June 30, -------------------------- 1999 1998 ----------- ----------- OPERATING ACTIVITIES Net income ............................................................... $ 517,887 $ 69,504 Adjustments to reconcile net income to net cash provided by operating activities: Depletion, depreciation and amortization ...................... 246,960 197,254 Deferred income taxes ......................................... 380,216 19,306 Change in accounting principle ................................ 121,814 -- Gain on sale of assets ........................................ (2,052,920) -- Changes in operating assets and liabilities: (Increase) in trade accounts receivable .................. (273,456) (571,423) (Increase) in crude oil inventory and prepaid expenses ... (18,924) (54,952) Increase in accounts payable and other current liabilities 212,584 133,108 ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............... (865,839) (207,203) INVESTING ACTIVITIES Oil and gas prospect generation costs .................................... (686,308) (458,584) Reimbursement of oil and gas prospect generation costs ................... 494,393 370,610 Purchases of property and equipment ...................................... (5,436,183) (48,481) Net proceeds from sale of assets ......................................... 5,570,287 -- Funds escrowed for abandonment costs ..................................... -- (342,115) Reduction of escrowed abandonment fund ................................... -- 593,830 Development costs - Petroport ............................................ (181,052) (448,723) Exploration and development costs ........................................ -- (227,406) Decrease in other assets ................................................. 57,993 -- ----------- ----------- NET CASH (USED IN) INVESTING ACTIVITIES ............................... (180,870) (560,869) FINANCING ACTIVITIES Net proceeds from borrowings ............................................. 200,000 -- Net proceeds from the sale of stock ...................................... 1,960,000 -- Other .................................................................... 25,216 -- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES ............................... 2,185,216 -- INCREASE (DECREASE) IN CASH ....................... 1,138,507 (768,072) CASH AT BEGINNING OF YEAR .................................................... 593,509 1,756,294 ----------- ----------- CASH AT JUNE 30 .............................................................. $ 1,732,016 $ 988,222 =========== =========== SUPPLEMENTARY CASH FLOW INFORMATION Interest paid ............................................................ $ 116,020 $ 108,137 =========== =========== Income taxes paid (refunded) ............................................. $ 12,620 $ (109,639) =========== ===========
6 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED JUNE 30, 1999 EARNINGS PER SHARE The Company applies the provisions of Statement of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings per Share. SFAS No. 128 requires the presentation of basic earnings per share (EPS) which excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. SFAS No. 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. The following table provides a reconciliation between basic and diluted earnings per share: Weighted average common shares outstanding and dilutive Per Net potential share Income Common Shares Amount -------- --------------- ------ Six Months ended June 30, 1999 Basic earnings per share ............. $517,887 4,582,428 $ 0.11 Effect of dilutive stock options .......................... -- 59,799 -- -------- --------------- ------ Diluted earnings per share ........... $517,887 4,642,227 $ 0.11 ======== =============== ====== Six Months ended June 30, 1998 Basic earnings per share ............. $ 69,504 4,491,847 $ 0.02 Effect of dilutive stock options .......................... -- 13,940 -- -------- --------------- ------ Diluted earnings per share ........... $ 69,504 4,505,787 $ 0.02 ======== =============== ====== 7 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133), was issued by the Financial Accounting Standards Board in June 1998. SFAS No. 133 standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. The Company will adopt SFAS No. 133 beginning in calendar year 2000. The Company has not determined the impact that SFAS No. 133 will have on its financial statements and believes that such determination will not be meaningful until closer to the date of initial adoption. The Company believes that adoption of this financial accounting standard will not have a material effect on its financial condition or results of operations. In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities (SOP 98-5). SOP 98-5 requires that costs of start-up activities be charged to expense as incurred and broadly defines such costs. The Company has capitalized certain costs incurred in connection with a new business segment, and SOP 98-5 required that such costs be charged to results of operations upon its adoption. The Company adopted the requirements of SOP 98-5 as of January 1, 1999 resulting in a cumulative effect of a change in an accounting principle of $80,334, net of income tax benefit of $41,480. 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. Intersegment revenues consist of transportation, general processing and storage fees charged by certain subsidiaries to another for natural gas and crude oil transported through the Blue Dolphin Pipeline System. The intercompany revenues and expenses are eliminated in consolidation. Information concerning these segments for the six months ended June 30, 1999 and 1998, and at June 30, 1999 and December 31, 1998 is as follows: 8 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED)
Operating Depletion, Intersegment income depreciation and Revenues revenues (loss)(1) amortization (2) ---------------- ---------------- ---------------- ----------------- Six months ended June 30, 1999: Oil and gas exploration and production $ 311,743 3,000 (387,281) 53,314 Pipeline operations 888,774 8,837 (163,221) 175,469 Other (11,837) (498,724) 18,177 ---------------- ---------------- ----------------- Consolidated 1,188,680 - (1,049,226) 246,960 Other income 1,928,757 ---------------- Income before income taxes 879,531 Six months ended June 30, 1998: Oil and gas exploration and production $ 403,893 4,000 (213,202) 95,559 Pipeline operations 1,553,413 15,218 616,170 88,642 Other (19,218) (232,067) 13,053 ---------------- ---------------- ----------------- Consolidated 1,938,088 - 170,901 197,254 Other expense (39,492) ---------------- Income before income taxes 131,409 Three months ended June 30, 1999: Oil and gas exploration and production $ 161,657 1,500 (213,698) 27,648 Pipeline operations 448,664 4,583 (323,022) 108,908 Other (6,083) (12,536) 9,297 ---------------- ---------------- ----------------- Consolidated 604,238 - (549,256) 145,853 Other income (expense) (94,571) ---------------- Loss before income taxes (643,827) Three months ended June 30, 1998: Oil and gas exploration and production $ 200,512 2,000 (150,100) 48,672 Pipeline operations 749,430 7,891 79,881 44,781 Other (9,891) 138,326 6,450 ---------------- ---------------- ----------------- Consolidated 940,051 - 68,107 99,903 Other expense (21,439) ---------------- Income before income taxes 46,668 Identifiable Identifiable assets assets ---------------- ----------------- Six months ended June 30, 1999: Year ended December 31, 1998 Oil and gas exploration Oil and gas exploration and production $ 6,398,642 and production $ 5,253,370 Pipeline operations 6,423,314 Pipeline operations 2,453,396 Other 5,166,775 Other 7,475,004 ---------------- ----------------- Consolidated 17,988,731 Consolidated 15,181,810
9 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) 1. Consolidated income from operations includes $58,192 and $57,171 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $6,609 and $6,833 for the six months ended June 30, 1999 and 1998, respectively. Consolidated income from operations includes $37,973 and $26,801 in unallocated general and administrative expenses, and unallocated depletion, depreciation and amortization of $3,299 and $3,303 for the quarter ended June 30, 1999 and 1998, respectively. 2. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $10,970 and $13,170 for the six months ended June 30, 1999 and 1998, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $11,187 and $14,939 for the six months ended June 30, 1999 and 1998, respectively. Pipeline depletion, depreciation and amortization includes a provision for pipeline abandonment of $4,935 and $6,785 for the quarter ended June 30, 1999 and 1998, respectively. Oil and gas depletion, depreciation and amortization includes a provision for abandonment costs of platforms and wells of $5,850 and $7,630 for the quarter ended June 30, 1999 and 1998, respectively. ASSET ACQUISITIONS/DIVESTITURE On March 1, 1999 the Company acquired Black Marlin Pipeline Company (BMPC) from Enron Pipeline Company for $5,404,270 cash. BMPC is the owner of the 75 mile Black Marlin Pipeline System, see Part I, Item 1. "Business" in the Company's December 31, 1998 Form 10-K for a description of the Black Marlin Pipeline System. This acquisition was funded by selling a one-sixth (1/6) undivided interest in the Company's Blue Dolphin Pipeline System, the Black Marlin Pipeline System and the Omega Pipeline to WBI Southern Inc. (WBI) for $3,713,000 and selling a one-third (1/3) undivided interest in the Black Marlin Pipeline System to MCNIC Pipeline & Processing Company (MCNIC) for $1,801,423. MCNIC owns a one-third (1/3) undivided interest in the Blue Dolphin Pipeline System. The Company recognized a gain of $2,052,920 in connection with the sale of a one-sixth interest in the Blue Dolphin Pipeline System on March 1, 1999. The following unaudited pro forma information for the six months ended June 30, 1999 and 1998, presents a summary of consolidated results of operations as if the acquisition/divestiture made in 1999 had occurred on January 1, 1998 with pro forma adjustments to give effect to depreciation and certain other adjustments together with related income tax effects: 10 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES FOOTNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED (CONTINUED) Six Months Ended June 30, --------------------------- 1999 1998 ---------- ---------- Revenues ..................................... $1,510,038 $2,580,838 Net earnings ................................. $ 595,563 $2,277,776 Basic and diluted earnings per share ......... $ 0.13 $ 0.51 The above pro forma information is not necessarily indicative of the results of operations as they would have been had the acquisition been effected on January 1, 1998. On August 3, 1999, the Company signed a definitive agreement to acquire a 75% ownership interest in American Resources Offshore, Inc. ("ARO") through subscription of new shares, and certain of ARO's senior indebtedness. At the time of closing, ARO's assets will be limited to its Gulf of Mexico assets. The purchase price for the ARO shares will be approximately $4.7 million, subject to certain upward or downward adjustments based on ARO's liabilities at closing and its revenues and expenses from its Gulf of Mexico properties from January 1, 1999 through closing of the transaction. Concurrent with the transaction with the Company, ARO will sell an 80% interest in its Gulf of Mexico assets to Fidelity Oil Holdings, Inc. The proceeds received by ARO will be used to retire debts. Closing is expected to occur in the fourth quarter 1999 and is subject to a number of conditions, including the approval of ARO's stockholders and the simultaneous closing of the transaction between ARO and Fidelity Oil Holdings, Inc. ARO's assets will then consist of an average 6% non-operated working interest in eight producing properties and one proved undeveloped property along with leasehold interests in 34 additional offshore tracts all located in the Gulf of Mexico offshore Louisiana and Texas. The properties have estimated proven reserves of approximately 7.2 billion cubic feet of natural gas equivalent. The Company believes significant exploratory drilling opportunities also exist. 11 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain of the statements included below, including those regarding future financial performance or results, or that are not historical facts, are or contain "forward-looking" information as that term is defined in 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, uncertainties and assumptions, including but not limited to industry conditions, prices of crude oil and natural gas, regulatory changes, general economic conditions, interest rates and competition. Should one or more of these risks or uncertainties materialize or should the underlying assumptions prove incorrect, actual results and outcomes may differ materially from those indicated in the forward-looking statements. 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 obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following is a review of certain aspects of the financial condition and results of operations of the Company and should be read in conjunction with the Condensed Consolidated Financial Statements included in Item 1.of this report. On March 1, 1999, the Company acquired Black Marlin Pipeline Company and sold an interest in its pipeline systems to fund the acquisition (see Asset Acquisitions/Divestiture in Footnotes to Condensed Consolidated Financial Statements in Item 1. of this report). The Company's ownership interest in the Blue Dolphin Pipeline system, the Black Marlin Pipeline system and the Omega Pipeline is now 50%. On August 3, 1999, the Company signed a definitive agreement to acquire a 75% ownership interest in American Resources Offshore, Inc. ("ARO") through subscription of new shares, and certain of ARO's senior indebtedness (see Asset Acquisitions/Divestitures in Footnotes to Condensed Consolidated Financial Statements in Item 1.of this report). FINANCIAL CONDITION At June 30, 1999, the Company's working capital (current assets less current liabilities) was $1,113,018, representing an increase of $1,008,475 as compared with working capital of $104,543 at December 31, 1998. As previously announced in June 1999, the Company received $1,960,000 through a successful private placement of 392,000 shares of its' common stock, $.01 par value per share, at $ 5.00 per share. The proceeds will be used to replenish working capital previously used for planned investments in longer term, high potential programs and general working capital requirements. 12 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Company maintains a $10,000,000 reducing revolving credit facility with Bank One, Texas, N.A. ("Loan Agreement"). Effective March 1, 1999, the borrowing base was adjusted to $620,000 reducing by $60,000 per month beginning April 1, 1999. The borrowing base and reducing amount are redetermined semi-annually. The maturity date is January 14, 2000, when the then outstanding principal balance, if any, is due and payable. At June 30, 1999 the outstanding balance under the credit facility was $410,000. The facility is available for the acquisition of oil and gas reserve based assets and other working capital needs. The Loan Agreement includes certain restrictive covenants, including restrictions on the payment of dividends on capital stock, and the maintenance of certain financial coverage ratios. At June 30, 1999, the Company was in compliance with the financial coverage ratios. The Company also has outstanding $2,050,600 principal amount of 10 1/4% promissory notes due December 31, 2000. Although pipeline revenues significantly decreased in first half 1999 vs. 1998, due to a 48% decrease in gas throughput on the Blue Dolphin Pipeline system, revenues on the recently acquired Black Marlin Pipeline system are expected to increase. A new producer/shipper on the Black Marlin Pipeline system commenced production operations in late June 1999. As a result, gas throughput increased by greater than 50% in July 1999 compared to June 1999. Additionally, a new discovery in the vicinity of the Black Marlin Pipeline has been recently announced. The Company is aggressively competing to provide transportation services. In June 1999, the Company removed an inactive satellite platform in the Buccaneer Field at a cost of approximately $355,000. The U.S. Minerals Management Service has waived the Company's annual abandonment escrow fund payment of $250,000 that was due in June 1999. In order to enhance the productivity of the prospect generation program, during 1998 the Company transitioned from use of consulting geologists and geophysicists to a 100% in house effort. Annual incremental costs associated with changing to a 100% in house effort is approximately $700,000. The Company has placed a 50% interest in its 1998/1999 program, whereby in exchange for certain participation rights, the participant partially funds the costs associated with the program. The remaining program costs will be reimbursed to the Company as prospects are developed and leases acquired. The 50% available interest in prospects is for sale on an individual prospect basis. However, the Company is continuing its efforts to attract program participants. The Company had previously entered into a multi-year 3-D seismic data acquisition and licensing agreement, whereby a minimum of $1,500,000 was committed over a 5 year period that ended July 31, 1999 to acquire 3-D seismic data. The remaining commitment under this agreement, $450,000, was paid in July 1999. As previously reported, the Company is seeking partners to jointly continue development of the Petroport deepwater port facility. Although the commercial evaluation, based upon the original facility design concept was favorable, alternative design configurations and the phasing-in of operations, which would result in significantly reduced capital costs and an accelerated start-up date, have been developed and are being reviewed with prospective partners and potential system users. The Company believes it has selected and is in discussions with prospective partners who can facilitate licensing and construction, and enhance the over-all commercial viability of the project. 13 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) In general, the Company believes that it has or can obtain adequate capital resources and liquidity to continue to finance and otherwise meet its anticipated business requirements. The availability or cost of capital resources may, however, adversely affect the Company's timing for major pipeline expansions, further development of the Buccaneer Field, growth in oil and gas prospect generation activities and the Petroport project. RESULTS OF OPERATIONS The Company reported net income for the six months ended June 30, 1999, ("current period") of $517,887, compared to net income of $69,504 reported for the six months ended June 30, 1998 ("previous period"). The increase is primarily due to the gain on sale of a one-sixth interest in the Blue Dolphin Pipeline system of $2,068,986 that took place during the first quarter of 1999. For the quarter ended June 30, 1999 the Company reported a net loss of $406,946 compared to net income of $24,663 for the quarter ended June 30, 1998. REVENUES: SIX MONTHS 1999 VS. 1998. Revenues for the current period decreased by $749,408 or 39% to $1,188,680 compared to revenues of $1,938,088 reported for the previous period. Current period revenues from pipeline operations decreased by $658,258 or 43% from the previous period primarily due to a 48% decrease in gas volumes transported on the Blue Dolphin Pipeline system resulting in a $335,813 reduction in revenues. Revenues from the acquisition of the Black Marlin Pipeline system were offset by revenues associated with the sale of a one sixth interest in the Blue Dolphin Pipeline system. Current period revenues from oil and gas sales, and operating fees decreased by $91,150 from those of the previous period. Oil and gas sales, and operating fees declined $54,244 and $36,906, respectively, due primarily to normal production declines. SECOND QUARTER 1999 VS. 1998. Revenues for the current quarter decreased by $335,813 or 36% to $604,238 compared to revenues of $940,051 reported for the previous quarter. Current quarter revenues from pipeline operations decreased by $297,457 or 40% from the previous quarter primarily due to a decrease in gas volumes transported on the Blue Dolphin Pipeline System. Current quarter revenues from oil and gas sales, and operating fees decreased by $38,356 from those of the previous quarter due primarily to normal production declines. 14 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) COSTS AND EXPENSES: SIX MONTHS 1999 VS. 1998. Current period pipeline operating expenses increased $44,805 or 11% from those of the previous period. The increase is due to additional costs associated with the acquisition of the Black Marlin Pipeline system of approximately $120,600, offset in part by the sale of a one sixth interest in the Blue Dolphin Pipeline system of approximately $65,700. Repair and maintenance costs for the current period increased by $124,285 due primarily to repairs and modifications to the Buccaneer Field production platforms and facilities incurred in the current period. General and administrative expenses for the current period increased $252,213, or 35% from the previous period principally due to an increase in staff costs and consulting fees associated with prospective asset acquisitions. SECOND QUARTER 1999 VS. 1998. Current quarter pipeline operating expenses increased $50,440 or 25% from those of the previous period. The increase is due primarily to additional costs associated with the acquisition of the Black Marlin Pipeline system of approximately $88,555, offset in part by the sale of a one sixth interest in the Blue Dolphin Pipeline system of approximately $53,985. Repair and maintenance costs for the current quarter increased by $60,935 due primarily to repairs and modifications to the Buccaneer Field production platforms and facilities incurred in the current quarter. General and administrative expenses for the current quarter increased $138,695, or 39% from the previous quarter principally due to an increase in staff costs and consulting fees associated with prospective asset acquisitions. YEAR 2000 ISSUE The Company has conducted a review of its computer equipment and software to identify the systems that could be affected by the "Year 2000" issue. The Year 2000 issue results from computer programs being written using two digits (rather than four) to define the applicable year. As a result, certain of the Company's programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. Accordingly, the Company has initiated a plan to address the Year 2000 issues associated with its operations and business. The plan includes several phases; (i) assessment of all of the Company's systems and technology; (ii) testing of existing systems and technology, both financial and operational; (iii) modification to or replacement of non-compliant systems and technology; (iv) communication with key business partners regarding Year 2000 issues; and (v) contingency planning. In planning and developing the project, the Company has considered both its information technology (IT) and its non-IT systems. The term "computer equipment and software" includes systems that are commonly thought of as IT systems, including accounting, data processing, telephone systems, scanning equipment, 15 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) and other miscellaneous systems. Non-IT systems include alarm systems, measurement devices, fax machines, and other miscellaneous equipment. Both IT and non-IT systems may contain embedded technology, which complicates the Company's Year 2000 identification, assessment, testing, and remediation efforts. The Company has tested most of its IT systems, primarily financial and operational software, for necessary compliance. As of the date of this filing, the Company has completed its Year 2000 plan related to these IT systems, including any necessary remedial action. The Company continues to evaluate its vulnerability to Year 2000 issues related to its non-IT systems, primarily field operational systems and equipment. The failure to correct a material Year 2000 issue could result in an interruption in, or a failure of, certain normal business activities, resulting in a material adverse affect on the Company's results of operations, liquidity and financial position. The Company's remediation efforts are expected to reduce significantly the Company's level of uncertainty about Year 2000 compliance and the possibility of interruptions of normal operations. However, there can be no guarantee that other companies' systems, on which the Company's systems rely, will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. In a recent Securities and Exchange Commission release regarding Year 2000 disclosures, the Securities and Exchange Commission stated that public companies must disclose the most reasonably likely worst case Year 2000 scenario. Analysis of the most reasonably likely worst case Year 2000 scenario the Company may face leads to contemplation of the following possibilities which, though unlikely in some or many cases, must be included in any consideration of worst cases: widespread failure of oil and gas producers transporting production through the Company's pipeline systems, widespread failure of electrical, gas, and similar supplies by utilities serving the Company; widespread disruption of the services of communications common carriers; similar disruption to means and modes of transportation for the Company and its employees, contractors, suppliers and customers; significant disruption to the Company's ability to gain access to, and remain working in, office buildings and other facilities; the failure of substantial numbers of the Company's mission-critical information (computer) hardware and software systems, including both internal business systems and systems (such as those with embedded chips) controlling operational facilities such as oil and gas rigs, oil and gas pipelines and gas plants. The effects of which would have a cumulative material adverse impact on the Company. Among other things, the Company could face substantial claims by customers or loss of revenues due to service interruptions, inability to fulfill contractual obligations, inability to account for certain revenues or obligations or to bill customers accurately and on a timely basis, increased expenses associated with litigation, stabilization of operations following mission-critical failures, and the execution of contingency plans. The Company could also experience the inability by customers to pay, on a timely basis or at all, obligations owed to the Company. Under these circumstances, the adverse effect on the Company, and the diminution of the Company's revenues, would be material, although not quantifiable at this time. Further in this scenario, the cumulative effect of these failures could have a substantial adverse effect on the economy, domestically and internationally. The adverse effect on the Company, and the diminution of the Company's revenues, from a domestic or global recession or depression is also likely to be material, although not quantifiable at this time. 16 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) As of June 30, 1999, the Company has incurred minimal costs in connection with Year 2000 compliance and does not anticipate any additional costs. 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 produces and sells natural gas, crude oil, and natural gas liquids. As a result, the Company's financial results can be significantly affected if these commodity prices fluctuate widely in response to changing market forces. The Company has not used derivative products in the past to manage commodity price risk. INTEREST RATE RISK- The Company's exposure to changes in interest rates primarily results from its short-term and long-term debt with floating interest rates. Based upon the current credit facility a 10% change in the interest rate on the credit facility would result in a minimal increase in interest expense. 17 BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORT ON FORM 8-K A) Exhibits - None B) Form 8-K : On May 14, 1999, the Company filed a current report on Form 8-K/A dated March 1, 1999 with respect to Blue Dolphin Energy Company's acquisition of Black Marlin Pipeline Company. The items reported in such current report were Item 2 (Acquisitions or Dispositions of Assets) and Item 7 (Financial Statement and Exhibits). On June 1, 1999, the Company filed a current report on Form 8-K dated May 26, 1999 with respect to Blue Dolphin Energy Company's intent to acquire a controlling interest in American Resources Offshore, Inc. The item reported in such current report was Item 5 (Other Events). On June 18, 1999, the Company filed a current report on Form 8-K dated June 15, 1999 with respect to Blue Dolphin Energy Company's amendment to extend the termination date of its intent to acquire a controlling interest in American Resources Offshore, Inc. The item reported in such current report was Item 5 (Other Events). On July 19, 1999, the Company filed a current report on Form 8-K dated July 16, 1999 with respect to Blue Dolphin Energy Company's further amendment to extend the termination date of its intent to acquire a controlling interest in American Resources Offshore, Inc. The item reported in such current report was Item 5 (Other Events). On August 9, 1999, the Company filed a current report on Form 8-K dated August 3, 1999 with respect to Blue Dolphin Energy Company's investment agreement to acquire a controlling interest in American Resources Offshore, Inc. The items reported in such current report were Item 5 (Other Events) and Item 7 (Financial Statement and Exhibits). 18 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 13, 1999 /S/ MICHAEL J. JACOBSON ------------------------------------ Michael J. Jacobson President and Chief Executive Officer /S/ G. BRIAN LLOYD ------------------------------------ G. Brian Lloyd Vice President, Treasurer 19 EX-27.1 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AND INCORPORATED HEREIN BY REFERENCE. 6-MOS DEC-31-1999 JUN-30-1999 1,732,016 0 1,044,724 0 20,338 2,953,252 27,513,188 17,089,584 17,988,731 1,840,234 2,050,600 0 0 49,166 14,048,731 17,988,731 158,229 604,238 479,513 656,588 0 0 57,935 (643,827) (236,881) (406,946) 0 0 0 (406,946) 0.11 0.11
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