UNITED STATES
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: SEPTEMBER 30, 2004
[ ] 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.)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [X] No []
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
As of November 10, 2004, there were 6,813,689 shares of the registrants' common
stock, par value $.01 per share, outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
1
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 (referred to herein, with its predecessors and subsidiaries,
as "Blue Dolphin", "we", "us" and "our") included herein have been prepared by
us, 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. We follow 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. We believe 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.
Our accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in our Annual Report on Form 10-KSB/A-1 for the year ended December
31, 2003.
2
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET - UNAUDITED
SEPTEMBER 30, 2004
<Table>
ASSETS
Current assets:
Cash and cash equivalents $ 794,236
Accounts receivable 318,890
Related party receivable 5,766
Deferred federal income tax 244,444
Prepaid expenses and other assets 240,460
------------
TOTAL CURRENT ASSETS 1,603,796
Property and Equipment at cost:
Oil and Gas properties, including $168,131
of unproved leasehold cost (full-cost method) 507,752
Pipelines 4,546,287
Onshore separation and handling facilities 1,664,128
Land 860,275
Other property and equipment 307,238
------------
7,885,680
Less: Accumulated depletion, depreciation, amortization and impairment 2,482,077
------------
5,403,603
Investment in New Avoca 583,666
Other Assets 15,989
------------
TOTAL ASSETS $ 7,607,054
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,007,100
Notes payable 750,000
Accrued expenses and other liabilities 70,153
------------
TOTAL CURRENT LIABILITIES 1,827,253
Note payable 750,000
Interest payable 121,056
Asset retirement obligations 1,598,710
Common Stock, ($.01 par value, 10,000,000 shares authorized, 6,813,689 shares issued and outstanding) 68,137
Additional Paid-in Capital 26,458,268
Accumulated Deficit (23,216,370)
------------
3,310,035
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,607,054
============
</Table>
See accompanying notes to the condensed consolidated financial statements.
3
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<Table>
<Caption>
Three Months
Ended September 30,
2004 2003
------------ ------------
Revenue from operations:
Pipeline operations $ 187,911 $ 212,644
Oil and gas sales 67,878 449,416
------------ ------------
255,789 662,060
------------ ------------
Cost of operations:
Pipeline operating expenses 207,965 296,022
Lease operating expenses 24,296 46,465
Depletion, depreciation and amortization 91,675 116,989
General and administrative 437,970 415,928
Accretion expense 26,881 17,444
------------ ------------
788,787 892,848
------------ ------------
LOSS FROM OPERATIONS (532,998) (230,788)
Other Income (expense):
Interest and other expense (90,545) (11,343)
Interest and other income 108,878 225,385
Equity in loss of affiliate (25,830) --
------------ ------------
LOSS BEFORE INCOME TAXES (540,495) (16,746)
Income taxes -- --
------------ ------------
Net loss $ (540,495) $ (16,746)
============ ============
Loss per common share
- basic $ (0.08) $ 0.00
============ ============
- diluted $ (0.08) $ 0.00
============ ============
Weighted average number of common shares outstanding - basic 6,748,237 6,653,660
============ ============
Weighted average number of common shares outstanding - diluted 6,748,237 6,653,660
============ ============
</Table>
See accompanying notes to the condensed consolidated financial statements.
4
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
<Table>
<Caption>
Nine Months
Ended September 30,
2004 2003
------------ ------------
Revenue from operations:
Pipeline operations $ 585,448 $ 716,243
Oil and gas sales 349,048 1,268,733
Gain on sale of oil and gas property 25,809 --
------------ ------------
960,305 1,984,976
------------ ------------
Cost of operations:
Pipeline operating expenses 856,497 763,841
Lease operating expenses 91,322 76,743
Depletion, depreciation and amortization 346,183 305,458
General and administrative 1,334,211 1,293,251
Accretion expense 73,523 58,340
------------ ------------
2,701,736 2,497,633
------------ ------------
LOSS FROM OPERATIONS (1,741,431) (512,657)
Other Income (expense):
Interest and other expense (316,207) (54,641)
Interest and other income 248,331 665,073
Equity in loss of affiliate (74,200) --
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (1,883,507) 97,775
Income taxes -- --
------------ ------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING PRINCIPLE (1,883,507) 97,775
Cumulative effect of a change in accounting principle
for asset retirement obligations -- (40,455)
------------ ------------
Net income (loss) $ (1,883,507) $ 57,320
============ ============
Income (loss) per common share - basic
Income (loss) before accounting change $ (0.28) 0.02
============ ============
Cumulative effect of a change in accounting principle $ 0.00 $ (0.01)
============ ============
Net income (loss) $ (0.28) $ 0.01
============ ============
Income (loss) per common share - diluted
Income (loss) before accounting change $ (0.28) 0.02
============ ============
Cumulative effect of a change in accounting principle $ 0.00 $ (0.01)
============ ============
Net income (loss) $ (0.28) $ 0.01
============ ============
Weighted average number of common shares outstanding
- basic 6,708,060 6,634,346
============ ============
- diluted 6,708,060 6,802,923
============ ============
</Table>
See accompanying notes to the condensed consolidated financial statements
5
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
<Table>
<Caption>
Nine Months
Ended September 30,
2004 2003
------------ ------------
OPERATING ACTIVITIES
Net income (loss) $ (1,883,507) $ 57,320
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depletion, depreciation and amortization 346,183 305,458
Amortization of debt issue costs 53,543 --
Gain from change in estimate of abandonment costs -- (488,653)
Gain on sale of oil and gas property (25,809) --
Change in accounting principle -- 40,455
Accretion of asset retirement obligations 73,523 58,340
Equity in loss of affiliate 74,200 --
Common stock issued for services 112,001 28,722
Compensation from issuance of warrants 76,768 --
Changes in operating assets and liabilities:
Accounts receivable 164,429 (199,784)
Prepaid expenses and other assets 22,955 135,209
Abandonment costs incurred -- (3,273,825)
Trade accounts payable and accrued expenses (1,471,053) 2,231,377
------------ ------------
NET CASH USED IN
OPERATING ACTIVITIES (2,456,767) (1,105,381)
------------ ------------
INVESTING ACTIVITIES
Property, equipment and other assets (2,197) (39,723)
Exploration and development costs (7,828) (73,136)
Proceeds from sale of assets 34,183 --
Development costs - New Avoca (69,167) (66,835)
Other -- (37,637)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (45,009) (217,331)
------------ ------------
FINANCING ACTIVITIES
Proceeds from Borrowings 750,000 --
Financing costs (160,629) --
Other 3,750 (18,718)
------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 593,121 (18,718)
DECREASE IN CASH AND CASH EQUIVALENTS (1,908,656) (1,341,430)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2,702,892 4,405,676
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 794,236 $ 3,064,246
============ ============
</Table>
See accompanying notes to the condensed consolidated financial statements
6
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
SEPTEMBER 30, 2004
1. LIQUIDITY
At September 30, 2004, we had a working capital deficit of approximately $.2
million. During the past few months, we have taken the following actions to
improve our liquidity and working capital position.
In August 2004, we were able to negotiate an extension of the payment terms of
our indebtedness to Tetra Applied Technologies, Inc. associated with the
Buccaneer Field abandonment/reefing in the amount of $668,000 originally due in
September and October 2004. Under the new terms we will pay the outstanding
balance to Tetra in twelve monthly installments of $55,667 beginning September
1, 2004, plus interest on the outstanding balance at the rate of 6% per annum.
In September 2004, we entered into a Note and Warrant Purchase Agreement (the
"Purchase Agreement") with certain accredited investors and certain of our
directors for the purchase and sale of promissory notes in an aggregate
principal amount of $750,000 (the "Promissory Notes") and 2,800,000 warrants
(the "Warrants") to purchase shares of common stock at a purchase price of
$0.003 per warrant. The sale of the Promissory Notes and the first tranche of
1,250,000 Warrants (the "Initial Warrants") closed on September 8, 2004, and
the closing of the sale of the second tranche of 1,550,000 Warrants (the
"Additional Warrants") is subject to stockholder approval at our November 11,
2004 special stockholders' meeting. We received net proceeds of $753,750 from
the sale of the Promissory Notes and the Initial Warrants. The Promissory Notes
mature on December 7, 2004, and accrue interest at a rate of 12.0% per annum,
of which 4% is payable monthly and 8% is payable at maturity. The Promissory
Notes are secured by a second lien on our Blue Dolphin Pipeline System. The
maturity date of the Promissory Notes will be extended to September 8, 2005, if
stockholders approve the issuance of the Additional Warrants. The Additional
Warrants will also be issued at a price of $0.003 per warrant. The Initial
Warrants and the Additional Warrants are immediately exercisable and will
expire five years after their date of issuance. Each Warrant is exercisable for
one share of common stock at an exercise price of $0.25 per share. The Warrants
contain standard antidilution provisions, as well as provisions that will
result in adjustments to the exercise price of the Warrants if we issue common
stock at a price below $0.25 per share, subject to certain exceptions.
In October 2004, we sold our 25% equity interest in New Avoca Gas Storage LLC.
Pursuant to the terms of the Purchase and Sale Agreement, we received
approximately $.9 million for our interest in New Avoca, and may receive an
additional payment of up to approximately $.4 million, subject to the
commencement of commercial operations at the New Avoca natural gas storage
facility prior to October 29, 2011.
Even though we continue to incur losses from operations, we currently believe
that we have sufficient resources in order to satisfy our working capital and
capital expenditure requirements for the twelve months ending September 30,
2005.
7
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
2. RELATED PARTY TRANSACTIONS
We own 12.8% of the common stock of Drillmar, Inc. Our Chairman, Ivar Siem
(along with certain of his affiliated entities), and one of our Directors,
Harris A. Kaffie, are owners of 30.3% and 30.6%, respectively, of Drillmar's
common stock. Messrs. Siem and Kaffie are both Directors, and Mr. Siem is
Chairman and President of Drillmar.
In 2002, we recorded a full impairment of our investment in Drillmar of
approximately $340,000 and a full reserve for the accounts receivable amount
owed to us from Drillmar of approximately $200,000, due to Drillmar's working
capital deficiency and delays in securing capital funding. During the nine
months ended September 30, 2004, we collected $120,000 from Drillmar and we
expect to continue to receive $15,000 per month until the accounts receivable
is fully collected.
In January 2003, Drillmar stockholders approved a restructuring plan whereby
Drillmar will issue up to $3.0 million of convertible notes that are
convertible into common stock representing over 99% of Drillmar's outstanding
shares. As a result, our ownership in Drillmar can be reduced to less than 1%.
However, in November 2003, we converted a contingent obligation due from
Drillmar for providing office space, accounting and administrative services
from May 2002 through January 2003 totaling $162,000 (9 months at $18,000 per
month) into a convertible note, which if converted along with all of Drillmar's
outstanding convertible notes, would represent 7.0% of Drillmar's common stock.
Messrs. Siem, Kaffie and Trimble (one of our Directors) also hold Drillmar
convertible notes, which if converted along with all of Drillmar's outstanding
convertible notes, would represent 45.5%, 26.0% and 1.9%, respectively, of
Drillmar's common stock.
We entered into a new agreement with Drillmar effective February 1, 2003,
whereby we provide and charge for office space, which is currently
approximately $4,000 per month. We also provided professional, accounting and
administrative services to Drillmar billed at hourly rates based on our cost.
Since our implementation of staff reductions in mid 2004, no such services have
been provided. The agreement can be terminated upon 30 days notice or by the
mutual agreement of the parties.
Effective April 1, 2003, we entered into a sublease agreement expiring December
31, 2006 for certain of our office space with TexCal (GP) LLC, formerly
Tri-Union Development Corporation. Our receipts from this sublease are
approximately $78,500 annually. Mr. Trimble is the President and Chief
Executive Officer of TexCal.
8
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
Pursuant to the Purchase Agreement consummated in September 2004, F. Gardner
Parker and Laurence N. Benz were appointed to our Board of Directors. Messers.
Benz and Parker each purchased a Promissory Note in the aggregate principal
amount of $25,000 and Michael S. Chadwick purchased a Promissory Note in the
aggregate principal amount of $12,500. Messrs. Benz, Parker and Chadwick also
purchased 41,667, 41,663 and 20,834 Initial Warrants, respectively, in
September 2004, and subject to stockholder approval at the November 11, 2004
special stockholders meeting, will purchase 41,667, 341,665 and 20,834
Additional Warrants, respectively.
In addition to serving on our Board of Directors, Mr. Chadwick is also a Senior
Vice President and Managing Director of Sanders Morris Harris, the investment
banking subsidiary at Sanders Morris Harris Group ("SMH"). We paid SMH a
$25,000 fee in connection with the placement of the Promissory Notes and
Warrants and agreed to retain SMH as our financial advisor to provide, among
other services, a fairness opinion in connection with our next merger,
acquisition or similar transaction. In September 2004, we also entered into a
consulting agreement with Mr. Parker. Mr. Parker's consulting agreement with us
has a term of up to eighteen months. Under the terms of the consulting
agreement, we will pay him a monthly fee of $2,000 and a bonus that will accrue
at the rate of $3,000 per month, payable upon consummation of a merger or
acquisition.
Pursuant to the terms of the Purchase Agreement, we agreed to grant warrants to
acquire 100,000 shares of Common Stock to each of Messrs. Benz, Chadwick and
Parker, each of whom currently serves as a director. The warrants granted to
Messrs. Benz, Chadwick and Parker will be immediately exercisable and will
expire five years after their date of issuance. Each warrant is exercisable for
one share of Common Stock at an exercise price of $0.25 per share. These
warrants contain standard antidilution provisions, as well as provisions that
will result in adjustments to the exercise price of the warrants if we issue
Common Stock at a price below $0.25, subject to certain exceptions. The
issuance of these warrants is subject to stockholder approval at our November
11, 2004 special stockholders meeting.
On September 8, 2004, we sold the common stock of our wholly owned subsidiary
American Resources Offshore, Inc. ("ARO") to Ivar Siem on behalf of those
stockholders who hold a number of shares of our common stock above a threshold
to be determined by Mr. Siem, provided, however, that such threshold shall be
set at a level, which will include a minimum of the 30 largest shareholders on
a proportionate basis. ARO had no revenue and no assets, except for federal net
operating loss carryforwards. The consideration paid to us consisted of $1,000
cash, the assumption of the transaction costs, including incremental costs
associated with the reporting and disclosure of this transaction incurred by us
in our filings with the SEC and any other required filings or announcements,
and the assumption of any and all liabilities of ARO.
3. CONTINGENCIES
We are involved in various claims and legal actions arising in the ordinary
course of business. In our opinion, the ultimate disposition of these matters
will not have a material effect on our financial position, results of
operations or cash flows.
9
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
4. 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 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 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, we will recognize a gain or loss on settlement. Under the provisions
of SFAS 19, asset retirement obligations were recognized using a
cost-accumulation approach. Prior to the adoption of SFAS 143, we 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 $ .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 our
consolidated statement of operations upon adoption on January 1, 2003.
5. EARNINGS PER SHARE
We apply 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.
10
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
<Table>
<Caption>
Weighted-
Average Number
of Common Shares
Outstanding Per
Net Income and Potential Dilutive Share
(Loss) Common Shares Amount
--------------- ---------------------- ---------------
Nine Months ended September 30, 2004
Basic and diluted loss per share $ (1,883,507) 6,708,060 $ (0.28)
=============== =============== ===============
Nine Months ended September 30, 2003
Basic earnings per share $ 57,320 6,634,346 $ 0.01
Effect of dilutive stock options 168,577
--------------- --------------- ---------------
Diluted earnings per share $ 57,320 6,802,923 $ 0.01
=============== =============== ===============
Quarter ended September 30, 2004
Basic and diluted loss per share $ (540,495) 6,748,237 $ (0.08)
=============== =============== ===============
Quarter ended September 30, 2003
Basic and diluted loss per share $ (16,746) 6,653,660 $ 0.00
=============== =============== ===============
</Table>
6. BUSINESS SEGMENT INFORMATION
Our 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 nine months and quarters ended September 30,
2004 and 2003, and at September 30, 2004 are as follows:
11
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
<Table>
<Caption>
Operating Depletion,
Income Depreciation and
Revenues (Loss)(*) Amortization
----------- ----------- ----------------
Nine Months ended September 30, 2004:
Oil and gas exploration and production $ 349,048 (184,419) 91,855
Pipeline operations 585,448 (1,143,779) 245,545
Other 25,809 (413,233) 8,783
----------- ----------- -----------
Consolidated 960,305 (1,741,431) 346,183
----------- -----------
Other loss, net (142,076)
-----------
Loss before income taxes (1,883,507)
Nine Months ended September 30, 2003:
Oil and gas exploration and production $ 1,268,733 563,244 47,819
Pipeline operations 716,243 (675,770) 243,309
Other -- (400,131) 14,330
----------- ----------- -----------
Consolidated 1,984,976 (512,657) 305,458
----------- -----------
Other income, net 610,432
-----------
Income before income taxes 97,775
Quarter ended September 30, 2004:
Oil and gas exploration and production $ 67,878 (63,249) 7,067
Pipeline operations 187,911 (342,891) 81,874
Other -- (126,858) 2,734
----------- ----------- -----------
Consolidated 255,789 (532,998) 91,675
----------- -----------
Other income, net (7,497)
-----------
Loss before income taxes (540,495)
Quarter ended September 30, 2003:
Oil and gas exploration and production $ 449,416 166,117 31,678
Pipeline operations 212,644 (281,694) 81,103
Other (115,211) 4,208
----------- ----------- -----------
Consolidated 662,060 (230,788) 116,989
----------- -----------
Other income, net 214,042
-----------
Loss before income taxes (16,746)
</Table>
12
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
<Table>
<Caption>
September 30, 2004
------------------
Identifiable assets:
Oil and gas exploration and production $ 324,295
Pipeline operations 5,438,955
Other 1,843,804
--------------
Consolidated $ 7,607,054
==============
</Table>
(*) Consolidated loss from operations includes $430,259 and $385,801
in unallocated general and administrative expenses, and
unallocated depletion, depreciation and amortization of $8,783 and
$14,330 for the nine months ended September 30, 2004 and 2003,
respectively.
Consolidated income (loss) from operations includes $124,124 and
$111,003 in unallocated general and administrative expenses, and
unallocated depletion, depreciation and amortization of $2,734 and
$4,208 for the quarters ended September 30, 2004 and 2003,
respectively.
7. STOCK BASED COMPENSATION
We account for stock-based compensation granted under our 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 our net loss in the nine months and three months ended
September 30, 2004 and 2003, as all options granted had exercise prices equal to
the market value of the underlying Common Stock on the dates of grant. However,
we did recognize compensation expense from the sale of our warrants in September
2004 as a result of the exercise price of the warrants being below the market
value of the underlying common stock at the time of the sale. The following
table illustrates the effect on net income (loss) and income (loss) per share if
we 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:
13
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
<Table>
<Caption>
Three months ended Nine months ended
September 30, September 30
-------------------------------- --------------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
(in thousands, except per share amounts)
Net income (loss), as reported ...................... $ (540) $ (17) $ (1,884) $ 57
Add: Total stock-based employee compensation
expense included in reported net income,
net of related tax effects ....................... 77 -- 77 --
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for awards, net of related tax effects .... (99) -- (99) (30)
------------ ------------ ------------ ------------
Pro forma net income (loss) ......................... $ (562) $ (17) $ (1,906) $ 27
============ ============ ============ ============
Net income (loss) per share:
Basic - as reported $ (0.08) $ 0.00 $ (0.28) $ 0.01
============ ============ ============ ============
Basic - pro forma $ (0.08) $ 0.00 $ (0.28) $ 0.00
============ ============ ============ ============
Diluted - as reported $ (0.08) $ 0.00 $ (0.28) $ 0.01
============ ============ ============ ============
Diluted - pro forma $ (0.08) $ 0.00 $ (0.28) $ 0.00
============ ============ ============ ============
</Table>
During the quarter ended September 30, 2004, 177,142 stock options were
exercised, with the exercise prices ranging from $.35 per share to $.43 per
share. At September 30, 2004 there were 369,942 stock options outstanding with
exercise prices ranging from $.35 per share to $6.00 per share. Certain of the
stock options exercised were done so by using the value of the shares of common
stock exercised to pay for the option price. As a result, 23,454 shares of
common stock exercised were exchanged to the Company for payment of the exercise
price.
As of September 30, 2004, there were 1,250,000 warrants outstanding. The
warrants are vested, are exercisable at $.25 per warrant into one share of
common stock, and have a five year term expiring on September 7, 2009. See
note 1.
14
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED - CONTINUED
SEPTEMBER 30, 2004
8. RECENT ACCOUNTING DEVELOPMENTS
In July 2003, an issue was brought before the FASB regarding whether or not
contract-based oil and gas mineral rights held by lease or contract ("mineral
rights") should be recorded or disclosed as intangible assets. The issue
presents a view that these mineral rights are intangible assets as defined in
SFAS No. 141, "Business Combinations," and, therefore, should be classified
separately on the balance sheet as intangible assets. SFAS No. 141 and SFAS No.
142, "Goodwill and Other Intangible Assets," became effective for transactions
subsequent to June 30, 2001, with the disclosure requirements of SFAS No. 142
required as of January 1, 2002. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the purchase
method and that intangible assets be disaggregated and reported separately from
goodwill. SFAS No. 142 established new accounting guidelines for both finite
lived intangible assets and indefinite lived intangible assets. Under the
statements, intangible assets should be separately reported on the face of the
balance sheet and accompanied by disclosure in the notes to financial
statements. SFAS No. 142 does not apply to accounting utilized by the oil and
gas industry as prescribed by SFAS No. 19, and is silent about whether or not
its disclosure provisions apply to oil and gas companies.
In September 2004, the FASB posted FASB staff position ("FSP") SFAS 142-2,
"Application of SFAS 142 to Oil and Gas Producing Entities." The FSP clarifies
that the exception in paragraph 8(b) of SFAS No. 142, "Goodwill and Other
Intangible Assets," includes the balance sheet classification and disclosures
for drilling and mineral rights of oil and gas producing entities. Accordingly,
the FASB staff believes that the scope exception extends to the disclosure
provisions of SFAS No. 142 for drilling and mineral rights of oil and gas
producing entities. SFAS 142-2 will be effective for the first reporting period
after September 2, 2004. The FSP will have no impact on our financial position,
results of operations or cash flows.
15
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. We caution 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:
- availability and cost of capital;
- the level of utilization of our pipelines;
- the level of exploration activities around our pipelines;
- the risks associated with exploration;
- the level of production from oil and gas properties;
- gas and oil price volatility;
- uncertainties in the estimation of proved reserves and in the
projection of future rates of production and timing of
development expenditures;
- actions or inactions of third party operators for properties
where we have an interest;
- regulatory developments; and
- 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 our Form 10-KSB/A-1 for the fiscal year ended
December 31, 2003. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. We
undertake no duty to update these forward-looking statements. Readers are urged
to carefully review and consider the various disclosures made by us which
attempt to advise interested parties of the additional factors which may affect
our business, including the disclosures made under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
this report.
16
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
EXECUTIVE SUMMARY
We are engaged in two lines of business; pipeline operations and oil
and gas exploration and production. We are a holding company and conduct our
operations through our subsidiaries, which provide pipeline transportation
services to producer/shippers, and sell oil and gas from our producing
properties. Our assets primarily are located offshore and onshore in the Texas
Gulf coast area.
LIQUIDITY AND CAPITAL RESOURCES
Our financial condition has been significantly and negatively affected by the
poor performance of our businesses and our significant indebtedness. For the
year ended December 31, 2003, we generated $1.4 million of revenue from the
sales of oil and gas production from the High Island Block A-7 field,
approximately 57% of our revenues for that period. Oil and gas production from
the High Island Block A-7 field has declined significantly and for the nine
months ended September 30, 2004, our revenues from the sales of oil and gas
production decreased approximately 78.6% to $0.3 million, which accounted for
approximately 36% of our revenues for that period. As a result of the decline
in production from this field we expect that a significant portion of our
revenues in 2004 will continue to be derived from utilization of our pipeline
systems. Production from the High Island Block A-7 field is expected to cease
in early 2006. Presently, our pipeline systems are generating negative cash
flow.
In order to attempt to address our capital needs, we (i) engaged Sanders Morris
Harris Group, Inc. and American Capital Group, LLC as financial advisers to
assist us in raising capital, (ii) implemented a cost savings plan to reduce
our operating costs and overhead costs, (iii) restructured the terms of certain
of our indebtedness, and (iv) sold certain non-core assets.
We implemented our cost savings in June and July of 2004, consisting primarily
of personnel reductions. The annual cost savings associated with the cost
reductions are expected to be approximately $360,000.
In August 2004, we extended the remaining payments totaling $668,000 due in
September and October 2004 to our contractor Tetra Technologies Inc. ("Tetra")
for the abandonment/reefing of the Bucaneer Field. Under the revised terms we
will pay Tetra the outstanding balance in twelve monthly installments of
$55,667 beginning September 1, 2004, plus interest on the outstanding balance
at the rate of six percent per annum. As of September 30, 2004, the remaining
balance due to Tetra was approximately $0.6 million.
On September 8, 2004, we entered into the Purchase Agreement with certain
accredited investors and certain of our directors for the purchase and sale of
promissory notes in an aggregate principal amount of $750,000 (the "Promissory
Notes") and 2,800,000 warrants (the "Warrants") to purchase shares of common
stock at a purchase price of $0.003 per Warrant. The sale of the Promissory
Notes and the first tranche of 1,250,000 Warrants (the "Initial Warrants")
closed on September 8, 2004, and the closing of the sale of the second tranche
of 1,550,000 Warrants (the "Additional Warrants") is subject to stockholder
approval at our November 11, 2004 special stockholders meeting. We received
proceeds of $753,750 from the issuance of the promissory notes and the sale of
the Initial Warrants, which will be used for general corporate purposes.
17
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - CONTINUED
The Promissory Notes mature on December 7, 2004, and accrue interest at a rate
of 12.0% per annum, of which 4% is payable monthly and 8% is payable at
maturity. The Promissory Notes are secured by a second lien on our Blue Dolphin
Pipeline System. The maturity date of the Promissory Notes will be extended to
September 8, 2005, if stockholders approve the issuance of the Additional
Warrants. The Additional Warrants will also be sold at a price of $0.003 per
warrant. The Initial Warrants and the Additional Warrants are immediately
exercisable and will expire five years after their date of issuance. Each
Warrant is exercisable for one share of common stock at an exercise price of
$0.25 per share. The Warrants contain standard antidilution provisions, as well
as provisions that will result in adjustments to the exercise price of the
Warrants if we issue common stock at a price below $0.25 per share, subject to
certain exceptions.
In October 2004, we sold our 25% equity interest in New Avoca Gas Storage, LLC.
Pursuant to the terms of the Purchase and Sale Agreement, we received
approximately $.9 million for our interest in New Avoca, and may receive an
additional payment of up to approximately $.4 million, subject to the
commencement of commercial operations at the New Avoca natural gas storage
facility prior to October 29, 2011. The proceeds from the sale of our interest
in New Avoca will be used for general corporate purposes.
18
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 our contractual obligations
and other commercial commitments at September 30, 2004 (amounts in thousands):
<Table>
<Caption>
Payments Due by Period
------------------------------------------------------------------------------
Contractual 1 year After
Obligations Total or less 1-3 years 3-5 years 5 years
- --------------------------------- ---------- ---------- ---------- ---------- ----------
Accounts Payable - Tetra $ 612 612 -- -- --
Short-Term Debt 756 756
Long-Term Debt 871 -- 871 -- --
Operating Leases, net of sublease 268 122 146 -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Obligations $ 2,507 1,490 1,017 -- --
========== ========== ========== ========== ==========
</Table>
<Table>
<Caption>
Amount of Commitment Expiration Per Period
------------------------------------------------------------------------------
Other Commercial 1 year After
Commitments Total or less 1-3 years 3-5 years 5 years
- --------------------------------- ---------- ---------- ---------- ---------- ----------
Abandonment - Costs $ 1,599 -- 185 -- 1,414
---------- ---------- ---------- ---------- ----------
Total Commercial Obligations $ 1,599 -- 185 -- 1,414
========== ========== ========== ========== ==========
</Table>
19
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 our financial position for the periods
indicated (amounts in thousands):
<Table>
<Caption>
September 30, December 31,
2004 2003
--------------------------- ---------------------------
Amount % Amount %
---------- ---------- ---------- ----------
Working Capital $ -- -- $ 680 9
Property and equipment, net 5,404 88 5,775 79
Other noncurrent assets 707 12 848 12
---------- ---------- ---------- ----------
Total $ 6,111 100 $ 7,303 100
========== ========== ========== ==========
Working Capital Deficit $ 322 5 $ -- --
Long-term Liabilities 2,479 41 2,302 32
Stockholders' equity 3,310 54 5,001 68
---------- ---------- ---------- ----------
Total $ 6,111 100 $ 7,303 100
========== ========== ========== ==========
</Table>
The change in our financial position from December 31, 2003 to September 30,
2004, was primarily due to our net loss for the nine months ended September 30,
2004 of approximately $1.9 million, and the issuance of approximately $.75
million of promissory notes.
The net cash provided by or used in operating, investing and financing
activities is summarized below:
<Table>
<Caption>
Nine Months Ended September 30,
(amounts in thousands)
------------------------------------------------
2004 2003
-------------------- --------------------
Net cash provided by (used in):
Operating activities $ (2,457) $ (1,105)
Investing activities (45) (217)
Financing activities 593 (19)
-------------------- --------------------
Net decrease in cash $ (1,909) $ (1,341)
==================== ====================
</Table>
20
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS - CONTINUED
The net cash used in operating activities during the nine months ended
September 30, 2004, reflects the payment of Buccaneer Field abandonment costs
and other payables, and the net loss from operations.
During 2002, we sold substantially all of our interests in our proved oil and
gas properties. From October 2002 to late April 2003, we had no interest in any
producing oil and gas properties. In late April 2003, we began to receive
revenue from our 8.9% reversionary working interest in the High Island Area
Block A-7 field, in the Gulf of Mexico. Oil and gas production from this field
comes from one well that currently produces at a gross rate of approximately
1.0 MMcf/day.
During 2004, we were in negotiations with a group of private investors to
provide capital to us. In July 2004, the negotiations ended unsuccessfully.
Legal and other fees incurred associated with the proposed transaction were
approximately $200,000.
During the nine months ended September 30, 2004, we incurred no capital
expenditures for the development of our proved reserves. Projected capital
expenditures totaling $25,000 and $185,000 are expected to be incurred in the
years ending December 31, 2004 and 2006, respectively. Capital expenditures in
2004 represent workover costs, net to our interest, for the producing well in
the High Island Block A-7 field and in 2006 represent the abandonment costs net
to our interest of our High Island Area Block A-7 field. No capital
expenditures are currently expected in 2005, 2007 and 2008.
We have significant available capacity in our Blue Dolphin Pipeline system.
Natural gas throughput on our Blue Dolphin Pipeline system is currently 7 MMBtu
per day, representing 4% of system capacity, however we are currently not aware
of additional throughput volumes that could be connected to the system in the
short term and existing throughput volumes are expected to decline. As a result
of increased leasing and oil and gas prospect development activity around the
Blue Dolphin Pipeline system and anticipated drilling activity, we expect that
utilization of the Blue Dolphin Pipeline system will increase in 2005. Due to
operating losses we incurred from operating the Blue Dolphin Pipeline system,
we have exercised the economic hardship provision contained in most of our gas
transportation contracts, whereby the rates charged by us can be renegotiated.
Currently contracts representing approximately 40% of our gas transportation
volumes have been renegotiated, with average rates increasing over 200%. The
renegotiated transportation rates were effective October 1, 2004. Natural gas
throughput on our GA 350 pipeline system increased to 32 MMBtu per day in the
third quarter 2004 representing 49% of system capacity, as a result of a new
well drilled by an existing shipper and recompletion of two wells by another
existing shipper. Future utilization of our pipeline and related facilities
will depend upon the success of drilling programs around our pipeline systems,
and attraction and retention of producer/shippers to the systems.
We continue to explore the possibility of expanding our Freeport, Texas
operations to include terminalling and shipment by barge of oil and condensate
received by truck and/or pipeline (in addition to the Blue Dolphin pipeline).
With excess capacity, including ample available acreage to handle liquids, we
believe a liquids storage and transportation service can add to the base Blue
Dolphin Pipeline production gathering business.
21
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
In February 2002, we acquired an additional 1/3 interest in the Blue Dolphin
Pipeline system and the inactive Omega Pipeline from MCNIC Pipeline and
Processing Group, Inc. ("MCNIC"). Pursuant to the terms of the purchase and
sales agreement, Blue Dolphin Pipe Line Company 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. As of September
30, 2004, no payments have been made on this promissory note and the amount
owed MCNIC is $750,000 plus accrued interest of approximately $121,000.
RESULTS OF OPERATIONS
We reported a net loss for the nine months ended September 30, 2004
("current period") of $1,883,507 compared to net income of $57,320 reported for
the nine months ended September 30, 2003 ("previous period"). For the three
months ended September 30, 2004 ("current quarter"), we reported a net loss of
$540,495, compared to a net loss of $16,746 for the three months ended
September 30, 2003 ("previous quarter").
Nine Months of 2004 compared to Nine Months of 2003
Revenue from pipeline operations. Revenues from pipeline operations
decreased by $130,795 or 18% in the current period to $585,448. The decrease
was due primarily to a decrease in transportation volumes on the Blue Dolphin
Pipeline system of 34%, resulting in a decrease in revenues of approximately
$202,000, offset in part by a 42% increase in revenues, of approximately
$68,000, from the GA 350 Pipeline.
Revenue from oil and gas sales. Revenues from oil and gas sales
decreased by $919,685 in the current period from those of the previous period
primarily due to a significant production decline in the High Island Block A-7
field, which provided revenues from oil and gas sales of approximately $285,000
in the current period compared to approximately $1,269,000 in the previous
period. Current period oil and gas sales include approximately $64,000 from our
interest in the High Island Block 34 field, which interest was received in late
2003.
Gain on sale of oil and gas property. Gain on sale of oil and gas
property represents the gain of $25,809 recognized from the sale of our
interest in the High Island Block 34 field in June 2004.
Pipeline operating expenses. Pipeline operating expenses in the
current period increased by $92,656 from $763,841 in the previous period due to
higher repairs and maintenance costs of approximately $173,000, and legal costs
of approximately $21,000, offset in part by cost reductions that were
implemented during 2003 that resulted in lower operating costs of approximately
$100,000. The legal costs are associated with an action filed against us, the
outcome of which we do not believe will have a material impact. However, if
this litigation continues for a prolonged period of time, we would incur
significant legal expenses, which could have a material adverse effect on our
financial condition.
22
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
General and administrative. General and administrative expenses
increased by $40,960 from $1,293,251 in the previous period. The increase was
due to non-cash compensation expense recorded in the current period of
$150,000, offset primarily by lower personnel and other costs as a result of
our cost reduction plans implemented in 2003 and mid 2004.
Interest and other expense. Interest and other expense increased
$261,566 in the current period. Other expense in the current period includes
legal and other fees associated with a proposed financing transaction that was
subsequently terminated of approximately $200,000 and the amortization of costs
associated with the Purchase Agreement of approximated $54,000.
Interest and other income. Interest and other income decreased
$416,742 in the current period. Other income in the current period includes the
collection of accounts receivable that were previously written off of $120,000,
and consulting services provided by us, associated with the evaluation of oil
and gas properties, of approximately $110,000. Other income in the previous
period includes an approximately $489,000 gain resulting from a reduction in
our provision for the Buccaneer Field abandonment costs, and fees generated for
consulting services we provided, associated with the evaluation of oil and gas
properties, of approximately $104,000.
Equity in loss of affiliate. In the current period we recorded a loss
from our equity interest in New Avoca of $74,200.
Cumulative effect of a change in accounting principal. In the previous
period, as a result of our adoption of SFAS No. 143, we recorded a cumulative
effect adjustment at January 1, 2003 of a change in accounting principle for
asset retirement obligations of $40,455 (see note 4 to the Condensed
Consolidated Financial Statements).
Third Quarter of 2004 compared to Third Quarter of 2003
Revenue from pipeline operations. Current quarter revenues from
pipeline operations decreased by $24,733 or 12% from the previous quarter to
$187,911 due to a 35% decrease in throughput on the Blue Dolphin Pipeline
System in the current quarter, partially offset by a 47% increase in throughput
on the GA 350 System.
Revenue from oil and gas sales. Current quarter revenues from oil and
gas sales decreased by $381,538 due to significant production declines in the
High Island Block A-7 field, which provided revenues from oil and gas sales of
approximately $68,000 in the current quarter compared to approximately $450,000
in the previous quarter.
23
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
Pipeline operating expenses. Pipeline operating expenses in the
current quarter decreased by $88,057 from $296,022 in the previous quarter due
primarily to lower insurance costs of approximately $35,000 and legal costs of
approximately $33,000.
General and administrative. General and administrative expenses
increased by $22,042 in the current quarter due to non-cash compensation
expense recorded in the current quarter of $76,000, offset primarily by lower
personnel and other costs as a result of our cost reduction plan implemented in
mid 2004.
Interest and other income. Interest and other income decreased
$116,507 in the current quarter. Other income in the current quarter includes
the collection of accounts receivable that were previously written off of
$45,000, and consulting services of $60,000. Other income in the previous
quarter includes an approximately $210,000 gain resulting from a reduction in
our provision for the Buccaneer Field abandonment costs.
Equity in loss of affiliate. In the current quarter, we recorded a
loss from our equity interest in New Avoca of $25,830.
RECENT ACCOUNTING DEVELOPMENTS
See Note 8 in Item 1.
24
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Principal Accounting Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13(a) - 14(c) and 15(d) - 14(c) under the
Securities Exchange Act of 1934, as amended). Based upon the evaluation, the
Chief Executive Officer and Principal Accounting Officer concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed by us in reports that we file or submit under the
Securities Exchange Act of 1934, are recorded, processed, summarized and
reported within the time periods specified in Securities and Exchange
Commission rules and forms. There were no significant changes in our 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.
25
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
A) Exhibits
3.1 (1) Certificate of Incorporation of the Company.
3.2 (2) Certificate of Correction to the Certificate of
Incorporation of the Company dated June 30, 1987.
3.3 (2) Certificate of Amendment to the Certificate of
Incorporation of the Company dated June 30, 1987.
3.4 (2) Certificate of Amendment to the Certificate of
Incorporation of the Company dated December 11, 1989.
3.5 (2) Certificate of Amendment to the Certificate of
Incorporation dated December 14, 1989.
3.7 (3) Certificate of Amendment to the Certificate of
Incorporation dated December 8, 1997.
3.8 (4) Amended and Restated Bylaws of the Company.
4.2 (5) Form of Promissory Note issued pursuant to the Note and
Warrant Purchase Agreement dated September 8, 2004.
4.3 (5) Form of Warrant issued pursuant to the Note and Warrant
Purchase Agreement dated September 8, 2004.
31.1 Ivar Siem 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 Ivar Siem 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.
(1) Incorporated herein by reference to Exhibits filed in
connection with Registration Statement on Form S-4 of ZIM
Energy Corp. filed under the Securities Act of 1933
(Commission File No. 33-5559).
(2) Incorporated herein by reference to Exhibits filed in
connection with Form 10-K of Blue Dolphin Energy Company for
the year ended December 31, 1989 under the Securities and
Exchange Act of 1934, dated March 30, 1990 (Commission File
No. 000-15905).
26
BLUE DOLPHIN ENERGY COMPANY AND SUBSIDIARIES
PART II. OTHER INFORMATION
(3) Incorporated herein by reference to Exhibits filed in
connection with the definitive Information Statement on
Schedule 14C of Blue Dolphin Energy Company under the
Securities and Exchange Act of 1934, dated November 18, 1997
(Commission File No. 000-15905).
(4) Incorporated herein by reference to Exhibits filed in
connection with Form 10-QSB of Blue Dolphin Energy Company
under the Securities and Exchange Act of 1934, dated August
23, 2004 (Commission File No. 000-15905).
(5) Incorporated herein by reference to Exhibits filed in
connection with the current report on Form 8-K of Blue
Dolphin Energy Company, dated September 14, 2004 (Commission
File No. 000-15905).
27
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: November 10, 2004 /s/ Ivar Siem
------------------------------------
Ivar Siem
Chairman and Chief Executive Officer
/s/ G. Brian Lloyd
------------------------------------
G. Brian Lloyd
Vice President, Treasurer
(Principal Accounting and Financial Officer)
28
A) Exhibits
3.1 (1) Certificate of Incorporation of the Company.
3.2 (2) Certificate of Correction to the Certificate of
Incorporation of the Company dated June 30, 1987.
3.3 (2) Certificate of Amendment to the Certificate of
Incorporation of the Company dated June 30, 1987.
3.4 (2) Certificate of Amendment to the Certificate of
Incorporation of the Company dated December 11, 1989.
3.5 (2) Certificate of Amendment to the Certificate of
Incorporation dated December 14, 1989.
3.7 (3) Certificate of Amendment to the Certificate of
Incorporation dated December 8, 1997.
3.8 (4) Amended and Restated Bylaws of the Company.
4.2 (5) Form of Promissory Note issued pursuant to the Note and
Warrant Purchase Agreement dated September 8, 2004.
4.3 (5) Form of Warrant issued pursuant to the Note and Warrant
Purchase Agreement dated September 8, 2004.
31.1 Ivar Siem 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 Ivar Siem 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.
29