-----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, UC8kcq1Sh/wdbkxm/dponU68poV3wm70FyOYatNHoRUG/b+e9FD1EYN8STvPXZLS P7Rb0/Kk+zeCsDFIBrrAKQ== 0000948830-03-000129.txt : 20030513 0000948830-03-000129.hdr.sgml : 20030513 20030513133124 ACCESSION NUMBER: 0000948830-03-000129 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030513 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DELTA PETROLEUM CORP/CO CENTRAL INDEX KEY: 0000821483 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 841060803 STATE OF INCORPORATION: CO FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-16203 FILM NUMBER: 03694840 BUSINESS ADDRESS: STREET 1: 475 17TH STREET SUITE 1400 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032939133 MAIL ADDRESS: STREET 1: 475 17TH STREET STREET 2: SUITE 1400 CITY: DENVER STATE: CO ZIP: 80202 10-Q 1 delta10q.txt DELTA PETROLEUM CORPORATION 10-Q (3-31-03) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2003 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 0-16203 Delta Petroleum Corporation (Exact name of registrant as specified in its charter) Colorado 84-1060803 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 475 17th Street, Suite 1400 Denver, Colorado 80202 (Address of principal executive offices) (Zip Code) (303) 293-9133 (Registrant's telephone number, including area code) 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___ 23,021,000 shares of common stock $.01 par value were outstanding as of May 5, 2003. FORM 10-Q 3rd QTR. FY 2003 INDEX PART I FINANCIAL INFORMATION PAGE NO. Item 1. Consolidated Financial Statements Consolidated Balance Sheets - March 31, 2003 (unaudited) and June 30, 2002............................................ 1 Consolidated Statements of Operations - Three and Nine Months Ended March 31, 2003 and 2002 (unaudited).......................... 3 Consolidated Statement of Stockholders' Equity and Comprehensive Income (loss) Year Ended June 30, 2002 and Nine Months Ended March 31, 2003 (unaudited)................. 5 Consolidated Statements of Cash Flows - Nine Months Ended March 31, 2003 and 2002 (unaudited).................................................. 6 Notes to Consolidated Financial Statements (unaudited)....... 7 Item 2. Management's Discussion and Analysis Or Plan of Operations........................................ 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk... 25 Item 4. Controls and Procedures...................................... 25 PART II OTHER INFORMATION Item 1. Legal Proceedings........................................... .26 Item 2. Changes in Securities........................................ 26 Item 3. Defaults upon Senior Securities.............................. 26 Item 4. Submission of Matters to a Vote of Security Holders............................................. 26 Item 5. Other Information......................................... .. 26 Item 6. Exhibits and Reports on Form 8-K............................. 26 The terms "Delta", "Company", "we", "our", and "us" refer to Delta Petroleum Corporation unless the context suggests otherwise. i DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -----------------------------------------------------------------------------
March 31 June 30, 2003 2002 ------------ ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,714,000 $ 1,024,000 Marketable securities available for sale 435,000 485,000 Trade accounts receivable, net of allowance for doubtful accounts of $50,000 at March 31, 2003 and June 30, 2002 5,264,000 4,713,000 Prepaid assets 737,000 785,000 Other current assets 338,000 442,000 ------------ ----------- Total current assets 8,488,000 7,449,000 ------------ ----------- Property and equipment: Oil and gas properties, at cost (using the successful efforts method of accounting) 78,610,000 73,002,000 Less accumulated depreciation and depletion (11,232,000) (7,018,000) ------------ ----------- Net property and equipment 67,378,000 65,984,000 ------------ ----------- Long-term assets: Deferred financing costs 116,000 260,000 Partnership net assets 267,000 384,000 ------------ ----------- Total long term assets 383,000 644,000 ------------ ----------- $ 76,249,000 $74,077,000 ============ ===========
1 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED - -----------------------------------------------------------------------------
March 31, June 30, 2003 2002 ------------ ----------- (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,223,000 $ 3,498,000 Accounts payable 3,530,000 3,488,000 Derivative instruments 691,000 - Current foreign tax payable 703,000 703,000 Other accrued liabilities 178,000 31,000 ------------ ----------- Total current liabilities 7,325,000 7,720,000 ------------ ----------- Long-term Liabilities: Asset retirement obligation 665,000 - Long-term debt, net 21,371,000 21,441,000 ------------ ----------- Total long-term liabilities 22,036,000 21,441,000 Stockholders' Equity: Preferred stock, $.10 par value; authorized 3,000,000 shares, none issued - - Common stock, $.01 par value; authorized 300,000,000 shares, issued 22,987,000 shares at March 31, 2003 and 22,618,000 at June 30, 2002 230,000 226,000 Additional paid-in capital 77,371,000 76,514,000 Put option on Delta stock (2,886,000) (2,886,000) Accumulated other comprehensive loss (826,000) (85,000) Accumulated deficit (27,001,000) (28,853,000) ------------ ----------- Total stockholders' equity 46,888,000 4,916,000 ------------ ----------- Commitments $ 76,249,000 $74,077,000 ============ ===========
See accompanying notes to consolidated financial statements 2 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - -----------------------------------------------------------------------------
Three Months Ended ------------------ March 31, March 31, 2003 2002 ---------- ----------- Revenue: Oil and gas sales $7,717,000 $ 1,138,000 Realized loss on derivative instruments, net (971,000) - Gain on sale of oil and gas properties 229,000 (107,000) ---------- ----------- Total revenue 6,975,000 1,031,000 Operating expenses: Lease operating expense 2,556,000 865,000 Depreciation and depletion 1,428,000 587,000 Exploration expense 83,000 16,000 Dry hole costs 89,000 15,000 Professional fees 187,000 284,000 General and administrative 881,000 566,000 Stock option expense 36,000 20,000 ---------- ----------- Total operating expense 5,260,000 2,353,000 ---------- ----------- Income (loss)from operations 1,715,000 (1,322,000) Other income and (expense): Other income - 9,000 Interest and financing costs (408,000) (274,000) ---------- ----------- Total other expense (408,000) (265,000) ---------- ----------- Net income (loss) $1,307,000 $(1,587,000) ========== =========== Net income (loss) per common share: Basic $ 0.06 $ (0.13) ========== =========== Diluted $ 0.05 $ (0.13)* ========== =========== * Potentially dilutive securities outstanding were anti-dilutive
See accompanying notes to consolidated financial statements 3 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) - ------------------------------------------------------------------------------
Nine Months Ended ----------------- March 31, March 31, 2003 2002 ----------- ----------- Revenue: Oil and gas sales $19,275,000 $ 5,317,000 Realized loss on derivative instruments, net (1,391,000) - Gain on sale of oil and gas properties 229,000 (107,000) ----------- ----------- Total revenue 18,113,000 5,210,000 Operating expenses: Lease operating expense 7,192,000 2,679,000 Depreciation and depletion 4,305,000 2,249,000 Exploration expense 130,000 125,000 Abandoned and impaired properties - 162,000 Dry hole costs 132,000 396,000 Professional fees 506,000 954,000 General and administrative 2,567,000 1,151,000 Stock option expense 82,000 53,000 ----------- ----------- Total operating expenses 14,914,000 7,769,000 ----------- ----------- Income (loss)from operations 3,199,000 (2,559,000) Other income and (expense) Other income 21,000 13,000 Interest and financing costs (1,348,000) (947,000) ----------- ----------- Total other expense (1,327,000) (934,000) ----------- ----------- Income (loss) before cumulative effect of 1,872,000 (3,493,000) change in accounting principle Cumulative effect of change in accounting principle (20,000) - ----------- ----------- Net income (loss) $ 1,852,000 $(3,493,000) =========== =========== Net income (loss) per common share: Basic $ 0.08 $ (0.30) =========== =========== Diluted $ 0.07 $ (0.30)* =========== =========== * Potentially dilutive securities outstanding were anti-dilutive
See accompanying notes to consolidated financial statements 4 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss) Year ended June 30, 2002 and Nine Months Ended March 31, 2003 (Unaudited) - -----------------------------------------------------------------------------
Accumu- lated other compre- Additional Put Option hensive Common Stock paid-in on income Comprehensive Accumulated Shares Amount capital Delta stock (loss) income (loss) deficit Total ---------- -------- ----------- ------------ --------- -------------- ----------- ---------- Balance, July 1, 2001 11,160,000 $112,000 $40,700,000 - $ 69,000 $(22,600,000) $18,281,000 Comprehensive loss: Net loss - - - - - (6,253,000) (6,253,000) (6,253,000) ----------- Other comprehensive loss, net of tax Unrealized loss on equity securities - - - - (154,000) (154,000) - (154,000) ----------- Comprehensive loss - - - - - (6,407,000) - =========== Stock options granted as compensation - - 143,000 - - - 143,000 Fair value of warrants issued for common stock investment agreement - - - - - - - Warrant issued in exchange for common stock investment agreement - - - - - - - Shares issued for cash, net of commissions 72,000 1,000 224,000 - - - 225,000 Shares issued for cash upon exercise of options 266,000 2,000 405,000 - - - 407,000 Shares issued for services 14,000 48,000 - 48,000 Shares issued for oil and gas properties 9,703,000 97,000 26,862,000 - - - 26,959,000 Put option on Delta stock - - 2,886,000 (2,886,000) - Shares issued for all outstanding shares of Piper Petroleum Company 1,377,000 14,000 5,220,000 - - - 5,234,000 Shares issued for debt 51,000 - 157,000 - - 157,000 Shares reacquired and retired (25,000) - (131,000) - - - (131,000) ---------- -------- ----------- ----------- ---------- ------------ ---------- Balance, June 30, 2002 22,618,000 226,000 76,514,000 (2,886,000) (85,000) (28,853,000) 44,916,000 Comprehensive loss: Net income - - - - - 1,852,000 1,852,000 1,852,000 ---------- Other comprehensive loss, net of tax Change in fair value of derivative hedging instruments - - - - (691,000) (691,000) - (691,000) Unrealized gain on equity securities - - - - (50,000) (50,000) - (50,000) ---------- Comprehensive income - - - - 1,111,000 ========== Stock options granted as compensation - - 81,000 - - - 81,000 Shares issued for cash upon exercise of options 369,000 4,000 776,000 - - - 780,000 ---------- -------- ----------- ----------- --------- ------------ ---------- Balance, March 31, 2003 22,987,000 $230,000 $77,371,000 ($2,886,000) ($826,000) $(27,001,000) $46,888,000 ========== ======== =========== =========== ========== ============ ===========
See accompanying notes to consolidated financial statements. 5 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - -----------------------------------------------------------------------------
Nine Months Ended March 31, March 31, 2003 2002 ----------- ----------- Cash flows operating activities: Net income (loss) $ 1,852,000 $(3,493,000) Adjustments to reconcile net income (loss) to cash provided by operating activities: Depreciation and depletion 4,305,000 2,249,000 Stock option expense 82,000 53,000 Amortization of financing costs 341,000 417,000 Abandoned and impaired properties - 162,000 (Gain) loss on sale of oil and gas properties (229,000) 107,000 Shares issued for services - 48,000 Cumulative effect on change in accounting principle 20,000 Net changes in operating assets and operating liabilities: Increase (decrease) in trade accounts receivable (1,145,000) 897,000 Decrease in prepaid assets 48,000 32,000 Increase in other current assets (80,000) (7,000) Increase (decrease) in accounts payable trade 42,000 (1,010,000) Increase (decrease) in other accrued liabilities 147,000 (1,000) ----------- ----------- Net cash provided by (used in) operating activities $ 5,383,000 $ (546,000) ----------- ----------- Cash flows from investing activities: Additions to property and equipment, net (4,956,000) (2,009,000) Proceeds from sale of oil and gas properties 725,000 3,398,000 Increase in oil and gas properties available for sale - (22,000) Merger with Piper - 74,000 Increase (decrease) in long term assets 117,000 (72,000) ----------- ----------- Net cash provided by (used in) investing activities (4,114,000) 1,369,000 ----------- ----------- Cash flows from financing activities: Stock issued for cash upon exercise of options 780,000 399,000 Issuance of common stock for cash - 225,000 Proceeds from borrowings - 1,633,000 Repayment of borrowings (1,359,000) (3,347,000) Decrease (increase) in accounts receivable from related parties - 23,000 ----------- ----------- Net cash used in financing activities (579,000) (1,067,000) ----------- ----------- Net increase (decrease) in cash and cash equivalents 690,000 (244,000) ----------- ----------- Cash at beginning of period 1,024,000 518,000 ----------- ----------- Cash at end of period $ 1,714,000 $ 274,000 =========== =========== Supplemental cash flow information - Cash paid for interest and financing costs $ 952,000 $ 530,000 =========== =========== Non-cash financing activities: Shares issued for all outstanding shares of Piper Petroleum Company $ - $ 5,234,000 =========== =========== Common stock issued for the purchase of oil and gas properties, net of return of deposited shares $ - $ 375,000 =========== =========== Shares recquired and retired for oil and gas properties and option exercise $ - $ 131,000 =========== =========== Common stock issued note payable and accrued interest or accounts payable $ - $ 157,000
See accompanying notes to consolidated financial statements. 6 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 (Unaudited) - ----------------------------------------------------------------------------- (1) Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and, in accordance with those rules, do not include all the information and notes required by generally accepted accounting principles for complete financial statements. As a result, these unaudited consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto filed with the Company's most recent annual report on Form 10-K. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation of the financial position of the Company and the results of its operations have been included. Operating results for interim periods are not necessarily indicative of the results that may be expected for the complete fiscal year. For a more complete understanding of the Company's operations and financial position, reference is made to the consolidated financial statements of the Company, and related notes thereto, filed with the Company's annual report on Form 10-K for the year ended June 30, 2002, previously filed with the Securities and Exchange Commission. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include oil and gas reserves, bad debts, oil and gas properties, marketable securities, income taxes, derivatives, contingencies and litigation. Actual results could differ from these estimates. (2) Marketable Securities The Company classifies its investment securities as available-for-sale securities. Pursuant to Statement of Financial Accounting Standards No. 115 (SFAS 115), such securities are measured at fair market value in the financial statements with unrealized gains or losses recorded in other comprehensive income. At the time securities are sold or otherwise disposed of, gains or losses are included in earnings. 7 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 (Unaudited) - -----------------------------------------------------------------------------
Cumulative Unrealized Estimated Cost Gain (loss) Market Value -------- ----------- ------------ March 31, 2003 Bion Environmental Technologies, Inc. $152,000 $(145,000) $ 7,000 Tipperary Oil & Gas Company $418,000 $ 10,000 $428,000 -------- --------- -------- $570,000 $(135,000) $435,000 ======== ========= ======== Cumulative Unrealized Estimated Cost Gain (loss) Market Value -------- ----------- ------------ June 30, 2002 Bion Environmental Technologies, Inc. $152,000 $ (92,000) $ 60,000 Tipperary Oil & Gas Company $418,000 $ 7,000 $425,000 -------- --------- -------- $570,000 $ (85,000) $485,000 ======== ========= ========
(3) Recently Issued Accounting Standards and Pronouncements Statement 145, Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145) was issued in April 2002. This statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of income taxes. As a result, the criteria in APB 30 will now be used to classify those gains and losses. Any gain or loss on the extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB 30 for classification as an extraordinary item shall be reclassified. The provisions of this Statement are effective for fiscal years beginning after January 1, 2003. The Company does not believe this statement will have a material impact to the Financial Statements. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure an amendment of FASB statement No. 123." SFAS No. 148 amends FASB statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement 8 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 (Unaudited) - ----------------------------------------------------------------------------- amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The statement is effective for fiscal years beginning after December 15, 2002, however earlier application is encouraged. The Company is currently assessing the impact of SFAS No. 148. In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which requires that a guarantor disclose and recognize in its financial statements its obligations relating to guarantees that it has issued. Liability recognition is required at the inception of the guarantee, whether or not payment is probable. The Company will apply the recognition and measurement provisions of FIN No. 45 on a prospective basis and, as such does not expect it to have an initial material impact on its financial statements upon adoption. (4) Asset Retirement Obligations In July 2001, the Financial Accounting Standards Board approved for issuance SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires entities to record the fair value of a liability for retirement obligations of acquired assets. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company adopted SFAS No. 143 on July 1, 2002 and recorded a cumulative effect of a change in accounting principle on prior years of $20,000, net of tax effects, related to the depreciation and accretion expense that would have been reported had the fair value of the asset retirement obligations, and corresponding increase in the carrying amount of the related long-lived assets, been recorded when incurred. The Company's asset retirement obligations arise from the plugging and abandonment liabilities for its oil and gas wells. On July 1, 2002 the Company also recorded $644,000 of asset retirement obligations (using an 8% discount rate), an increase in the carrying amount of its oil and gas properties of $664,000 and a decrease to accumulated depreciation of $20,000. The following is a description of the changes and pro forma changes to the Company's asset retirement obligations from July 1, 2002 to March 31, 2003. Asset retirement obligation - July 1, 2002 $644,000 Accretion 21,000 Additions - * Settlements - * -------- Asset retirement obligation - March 31, 2003 665,000 Less: Current asset retirement obligation - -------- Long-term asset retirement obligation $665,000 -------- * less than $1,000 9 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 (Unaudited) - ----------------------------------------------------------------------------- (4) Asset Retirement Obligations, Continued The pro forma effects of the application of SFAS No. 143 would have an immaterial effect on net income and no effect on earnings per share. (5) Unproved Undeveloped Offshore California Properties The Company has ownership interests ranging from 2.49% to 75% in five unproved undeveloped offshore California oil and gas properties with aggregate carrying values of $10,127,000, at March 31, 2003. These property interests are located in proximity to existing producing federal offshore units near Santa Barbara, California and represent the right to explore for, develop and produce oil and gas from offshore federal lease units. Preliminary exploration efforts on these properties have occurred and the existence of substantial quantities of hydrocarbons has been indicated. The recovery of the Company's investment in these properties will require extensive exploration and development activities (and costs) that cannot proceed without certain regulatory approvals that have been delayed and is subject to other substantial risks and uncertainties. Based on indications of levels of hydrocarbons present from drilling operations conducted in the past, the Company believes the fair values of its property interests are in excess of their carrying values at March 31, 2003 and that no impairment in the carrying values have occurred. Pursuant to a ruling in California v. Norton, later affirmed by the 9th Circuit Court of Appeals, the U.S. Government is required to make a consistency determination relating to our 1999 lease suspension requests under a 1990 amendment to the Coastal Zone Management Act. In the event that there is some future adverse ruling under the Coastal Zone Management Act that we decide not to appeal or that we appeal without success, it is likely that some or all of our interests in these leases would become impaired and written off at that time. It is also possible that other events could occur during the Coastal Zone Management Act review or appellate process that would cause our interests in the leases to become impaired, and we will continuously evaluate those factors as they occur. (6) Long Term Debt March 31, 2003 June 30, 2002 A $18,668,000 $18,918,000 B $ 4,926,000 $ 6,021,000 ----------- ----------- $23,594,000 $24,939,000 Current Portion $ 2,223,000 $ 3,498,000 ----------- ----------- Long-Term Portion $21,371,000 $21,441,000 =========== =========== 10 DELTA PETROLEUM CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 - ----------------------------------------------------------------------------- A. On May 31, 2002, the Company obtained a $20 million credit facility with Bank of Oklahoma and Local Oklahoma Bank (the "Banks"). The facility has a variable interest rate component based on the total debt outstanding, (4.75% at March 31, 2003) and a monthly commitment reduction of $82,000 as of March 31, 2003. The proceeds from this facility were used for the acquisition of Castle's properties and to pay off the remaining US Bank debt. The loan is collateralized by substantially all of Delta's oil and gas properties excluding the oil and gas properties collateralized under the Kaiser-Francis Oil Company ("KFOC") note discussed below. The Company's borrowing base and monthly commitment amount will be redetermined at least semi-annually. If as a result of any such monthly commitment reduction or reduction in the amount of our borrowing base, the total amount of our outstanding debt ever exceeds the amount of the revolving commitment then in effect, then within 30 days after we are notified by the Bank of Oklahoma, we must make a mandatory prepayment of principal that is sufficient to cause our total outstanding indebtedness to not exceed our borrowing base. The Company is in compliance with its quarterly debt covenants and restrictions. B. On December 1, 1999, the Company borrowed $8,000,000 at prime plus 1-1/2% from KFOC. In addition, the Company will be required to pay a fee of $250,000 on June 1, 2003 if the loan has not been retired prior to this date. The proceeds from this loan were used to pay off existing debt and the balance of the Point Arguello Unit and New Mexico acquisitions. The Company is required to make minimum monthly payments of principal and interest equal to the greater of $150,000 or 75% of net cash flows from the acquisitions completed on November 1, 1999 and December 1, 1999. The loan is collateralized by the Company's remaining oil and gas properties acquired with the loan proceeds. 11 DELTA PETROLEUM CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 - ----------------------------------------------------------------------------- (7) Stockholder's Equity Swartz Agreement On July 21, 2000, the Company entered into an investment agreement with Swartz Private Equity, LLC ("Swartz") and issued Swartz a warrant to purchase 500,000 shares of common stock exercisable at $3.00 per share until May 31, 2005. The Investment Agreement was amended and restated on April 10, 2002. A warrant to purchase 150,000 shares of the Company's common stock at $3.00 per share for five years was also issued to another unrelated company as consideration for its efforts in this transaction and have been recorded as an adjustment to equity. On December 20, 2002 the parties entered into an agreement which terminated the investment agreement with Swartz. On September 4, 2002, Swartz exercised 100,000 warrants in a cashless exercise transaction, which was permitted by the terms of the warrant. As a result of this exercise, Swartz received 20,761 shares of the Company's common stock. On December 20, 2002, the Company entered into a one year consulting agreement with Swartz in the amount of $100,000, whereby Swartz will provide business and financial planning and assist with the identification and review of potential merger and acquisition possibilities. (8) Commodity Derivative Instruments and Hedging Activities The Company periodically enters into commodity price risk transactions to manage its exposure to oil and gas price volatility. These transactions may take the form of futures contracts, swaps or options. All transactions are accounted for in accordance with requirements of SFAS No. 133 which the Company adopted on January 1, 2001. Accordingly, unrealized gains and losses related to the change in fair market value of derivative contracts which qualify and are designated as cash flow hedges are recorded as other comprehensive income or loss and such amounts are reclassified to realized gain (loss) on derivative instruments as the associated production occurs. Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at market value in the consolidated balance sheet, and the associated unrealized gains and losses are recorded as current income or expense in the consolidated statement of operations. While such derivative contracts do not qualify for hedge accounting, management believes these contracts can be utilized as an effective component of commodity price risk activities. 12 DELTA PETROLEUM CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 - ----------------------------------------------------------------------------- As of March 31, 2003, the Company recorded a derivative liability of approximately $691,000 for the fair market value of its derivative instruments designated as cash flow hedges and a corresponding loss in other comprehensive income. The realized net losses from hedging activities were $1,391,000 for the nine months ended March 31, 2003. As of March 31, 2003, the Company had approximately 18,000 Bbls of oil and 382,000 Mcf of natural gas subject to commodity price risk contracts for the remainder of fiscal 2003. The fiscal 2003 contracts have weighted average floor prices of $25.02 per barrel and $3.00 per Mmbtu, with weighted average ceiling prices of $25.02 per barrel and $4.50 per Mmbtu, respectively. The Company has approximately 18,000 Bbls of oil and 386,000 Mcf of natural gas subject to commodity price risk contracts for fiscal 2004. The fiscal 2004 contracts have weighted average floor prices of $25.02 per barrel and $3.00 per Mmbtu, with weighted average ceiling prices of $25.02 per barrel and $4.50 per Mmbtu, respectively. (9) Comprehensive Income Comprehensive income (loss) includes all changes in equity during a period. The components of comprehensive income (loss) for the nine months ended March 31, 2003 and 2002 are as follows:
Nine Months Ended Nine Months Ended March 31, 2003 March 31, 2002 ----------------- ----------------- Net Income (loss) $1,852,000 $(3,493,000) Other comprehensive income Change in fair value of derivative hedging instruments (691,000) - Unrealized gain (loss) on marketable Securities $ (50,000) $ (109,000) --------- ----------- Other comprehensive income Comprehensive income (loss) $1,111,000 $(3,602,000) ========= ===========
13 DELTA PETROLEUM CORPORATION AND SUBSIDIARY Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2003 and 2002 - ----------------------------------------------------------------------------- (10) Income Taxes For income tax purposes, the Company has net operating loss carryforwards expiring at various dates through 2022. As a result of the acquisitions and other issuances of stock, the utilization of the net operating loss carryforwards is subject to an annual limitation by the provisions of Section 382 of the Internal Revenue Code. The Company recognized no tax expense in fiscal 2003 primarily due to recognition of deferred tax assets for which a valuation allowance had previously been provided and recognized no tax benefit in fiscal 2002 because realization was not more likely than not. The remaining deferred tax asset at March 31, 2003, for which a valuation allowance has been recorded, will be recognized in the financial statements when its realization is more likely than not. (11) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended March 31, 2003 2002 ---- ---- Numerator: Numerator for basic and diluted earnings (loss) per share - income (loss) available to common stockholders $ 1,307,000 $(1,587,000) ----------- ----------- Denominator: Denominator for basic earnings (loss) per share-weighted average shares outstanding 22,952,000 12,124,000 Effect of dilutive securities- stock options and warrants 2,956,000 * ----------- ----------- Denominator for diluted earnings per common share 25,908,000 12,124,000 =========== =========== Basic earnings (loss) per common share $ .06 $ (.13) =========== =========== Diluted earnings (loss) per common share $ .05 $ (.13)* =========== =========== Anti-dilutive securities outstanding 1,809,000 5,564,000 =========== ===========
* Potentially dilutive securities outstanding were anti-dilutive. 14 The following table sets forth the computation of basic and diluted earnings per share:
Nine Months Ended March 31, 2003 2002 ---- ---- Numerator: Numerator for basic and diluted earnings (loss) per share - income (loss) available to common stockholders $ 1,852,000 $(3,493,000) ----------- ----------- Denominator: Denominator for basic earnings (loss) per share-weighted average shares outstanding 22,756,000 11,513,000 Effect of dilutive securities- stock options and warrants 2,905,000 * ----------- ----------- Denominator for diluted earnings (loss) per common share 25,661,000 11,513,000 =========== =========== Basic earnings (loss) per common share $ .08 $ (.30)* =========== ========== Diluted earnings (loss) per common share $ .07 $ (.30)* =========== =========== Anti-dilutive securities outstanding 1,860,000 5,564,000 =========== ===========
* Potentially dilutive securities outstanding were anti-dilutive. 15 Item 2. Management's Discussion and Analysis or Plan of Operations Forward Looking Statement ------------------------- The statements contained in this report which are not historical fact are "forward looking statements" that involve various important risks, uncertainties and other factors which could cause our actual results to differ materially from those expressed in such forward looking statements. These factors include, without limitation, the risks and factors included in the following text as well as other risks previously discussed in our annual report on Form 10-K. Critical Accounting Policies and Estimates ------------------------------------------ The discussion and analysis of our financial condition and results of operations were based upon the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Our significant accounting policies are described in Note 1 to our consolidated financial statements. In response to SEC Release No. 33-8040, "Cautionary Advise Regarding Disclosure About Critical Accounting Policies," we have identified certain of these policies as being of particular importance to the portrayal of our financial position and results of operations and which require the application of significant judgment by management. We analyze our estimates, including those related to oil and gas reserves, bad debts, oil and gas properties, marketable securities, income taxes, derivatives, contingencies and litigation, and base our estimates on historical experience and various other assumptions that we believe reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the Company's financial statements. Successful Efforts Method of Accounting --------------------------------------- We account for natural gas and crude oil exploration and development activities utilizing the successful efforts method of accounting. Under this method, costs of productive exploratory wells, development dry holes and productive wells and undeveloped leases are capitalized. Gas and oil lease acquisition costs are also capitalized. Exploration costs, including personnel costs, certain geological and geophysical expenses and delay rentals for gas and oil leases, are charged to expense as incurred. Exploratory drilling costs are initially capitalized, but charged to expense if and when the well is determined not to have found reserves in commercial quantities. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the unit-of-production amortization rate. A gain or loss is recognized for all other sales of producing properties. 16 The application of the successful efforts method of accounting requires managerial judgment to determine that proper classification of wells designated as developmental or exploratory which will ultimately determine the proper accounting treatment of the costs incurred. The results from a drilling operation can take considerable time to analyze and the determination that commercial reserves have been discovered requires both judgment and industry experience. Wells may be completed that are assumed to be productive and actually deliver gas and oil in quantities insufficient to be economic, which may result in the abandonment of the wells at a later date. Wells are drilled that have targeted geologic structures that are both developmental and exploratory in nature and an allocation of costs is required to properly account for the results. Delineation seismic incurred to select development locations within an oil and gas field is typically considered a development costs and capitalized but often these seismic programs extend beyond the reserve area considered proved and management must estimate the portion of the seismic costs to expense. The evaluation of gas and oil leasehold acquisition costs requires managerial judgment to estimate the fair value of these costs with reference to drilling activity in a given area. Drilling activities in an area by other companies may also effectively condemn leasehold positions. The successful efforts method of accounting can have a significant impact on the operational results reported when the Company is entering a new exploratory area in hopes of finding a gas and oil field that will be the focus of future development drilling activity. The initial exploratory wells may be unsuccessful and will be expensed. Seismic costs can be substantial which will result in additional exploration expenses when incurred. Reserve Estimates ----------------- Estimates of gas and oil reserves, by necessity, are projections based on geologic and engineering data, and there are uncertainties inherent in the interpretation of such data as well as the projection of future rates of production and the timing of development expenditures. Reserve engineering is a subjective process of estimating underground accumulations of gas and oil that are difficult to measure. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment. Estimates of economically recoverable gas and oil reserves and future net cash flows necessarily depend upon a number of variable factors and assumptions, such as historical production from the area compared with production from other producing areas, the assumed effects of regulations by governmental agencies and assumptions governing future gas and oil prices, future operating costs, severance taxes, development costs and workover gas costs, all of which may in fact very considerable from actual results. The future drilling costs associated with reserves assigned to proved undeveloped location may ultimately increase to an extent that these reserves may be later determined to be uneconomic. For these reasons, estimates of the economically recoverable quantities of gas and oil attributable to any particular group of properties, classifications of such reserves based on risk of recovery, and estimates of the future net cash flows expected therefrom may vary substantially. Any significant variance in the assumptions could materially affect the estimated quantity and value of the reserves, which could affect the carrying value of the our gas and oil properties and/or the rate of depletion of the gas and oil properties. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. 17 Impairment of Gas and Oil Properties ------------------------------------ We review our gas and oil properties for impairment whenever events and circumstances indicate a decline in the recoverability of their carrying value. We estimate the expected future cash flows of its gas and oil properties and compares such future cash flows to the carrying amount of the gas and oil properties to determine if the carrying amount is recoverable. If the carrying amount exceeds the estimated undiscounted future cash flows, we will adjust the carrying amount of the gas and oil properties to their fair value. The factors used to determine fair value include, but are not limited to, estimates of proved reserves, future commodity pricing, future production estimates, anticipated capital expenditures, and a discount rate commensurate with the risk associated with realizing the expected cash flows projected. Given the complexities associated with gas and oil reserve estimates and the history of price volatility in the gas and oil markers, events may arise that would require us to record an impairment of the recorded book values associated with gas and oil properties. As a result of our review, we recognized an impairment of $162,000 for the nine months ended March 31, 2002. We did not record an impairment during the nine months ended March 31, 2003. Recently Issued Accounting Standards and Pronouncements ------------------------------------------------------- Statement 145, Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFAS No. 145) was issued in April 2002. This statement rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of income taxes. As a result, the criteria in APB 30 will now be used to classify those gains and losses. Any gain or loss on the extinguishment of debt that was classified as an extraordinary item in prior periods presented that does not meet the criteria in APB 30 for classification as an extraordinary item shall be reclassified. The provisions of this Statement are effective for fiscal years beginning after January 1, 2003. We do not believe this statement will have a material impact to our financial statements. In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure an amendment of FASB statement No. 123." SFAS No. 148 amends FASB statement No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirement of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The statement is effective for fiscal years beginning after December 15, 2002, however earlier application is encouraged. We are currently assessing the impact of SFAS No. 148. In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," which requires that a guarantor disclose and recognize in its financial statements its obligations relating to guarantees that it has issued. Liability recognition is required at the inception of the 18 guarantee, whether or not payment is probable. We will apply the recognition and measurement provisions of FIN No. 45 on a prospective basis and, as such, do not expect it to have an initial material impact on our financial statements upon adoption. Liquidity and Capital Resources ------------------------------- Liquidity is a measure of a company's ability to access cash. We have historically addressed our long-term liquidity requirements through the issuance of debt and equity securities, when market conditions permit, and most recently through the use of a bank credit facility and cash provided by operating activities. The prices we receive for future oil and natural gas production and the level of production have significant impacts on operating cash flows. We are unable to predict with any degree of certainty the prices we will receive for our future oil and gas production. We continue to examine alternative sources of long-term capital, including bank borrowings, the issuance of debt instruments, the sale of common stock, sales of non-strategic assets, and joint venture financing. Availability of these alternative sources of capital will depend upon a number of factors, some of which are beyond our control. Working Capital --------------- At March 31, 2003, we had working capital of $1,163,000 compared to a working capital deficit of $271,000 at June 30, 2002. Our current assets include trade accounts receivable of $5,264,000. Our current liabilities include the current portion of long-term debt of $2,223,000 at March 31, 2003. The decrease in the current portion of long-term debt and increase in working capital from March 31, 2003 is primarily attributable to the reduction of our monthly commitment under our current bank facility. Our increase in working capital is primarily attributable to the net income derived from our recent acquisitions. Cash Provided by (Used in) Operating Activities ----------------------------------------------- During the nine months ended March 31, 2003, we had cash provided by operating activities of $5,383,000 compared to cash used in operating activities of $546,000 during the same period ended March 31, 2002. This increase in operating activities is a result of increased cash flow from the properties acquired from Castle Energy Corporation ("Castle") and Piper Petroleum Company ("Piper") during fiscal year 2002. Offshore Undeveloped Properties ------------------------------- On January 9, 2002, we and several other plaintiffs filed a lawsuit in the United States Court of Federal Claims in Washington, D.C. alleging that the U.S. Government has materially breached the terms of forty undeveloped federal leases, some of which are part of our Offshore California properties. The suit seeks compensation for the lease bonuses and rentals paid to the Federal Government, exploration costs and related expenses, or alternatively, for the amount the lessees would have received if the leases had not been 19 breached. The total amount claimed by all lessees for bonuses and rentals exceeds $1.2 billion, with additional amounts for exploration costs and related expenses. Our claim (including the claim of our subsidiary Amber Resources Company) for lease bonuses and rentals paid by us and our predecessors is in excess of $152,000,000. In addition, our claim for exploration costs and related expenses will also be substantial. The Complaint is based on allegations by the collective plaintiffs that the United States has materially breached the terms of certain of their Offshore California leases by attempting to deviate significantly from the procedures and standards that were in effect when the leases were entered into, and by failing to carry out its own obligations relating to those leases in a timely and fair manner. More specifically, the plaintiffs have alleged that the judicial determination in the California v. Norton case that a 1990 amendment to the Coastal Zone Management Act required the Government to make a consistency determination prior to granting lease suspension requests in 1999 constitutes a material change in the procedures and standards that were in effect when the leases were issued. The plaintiffs have also alleged that the United States has failed to afford them the timely and fair review of their lease suspension requests which has resulted in significant, continuing and material delays to their exploratory and development operations. As noted, our pending litigation against the United States is in part predicated on the ruling in California v. Norton that a 1990 amendment to the Coastal Zone Management Act required the Government to make a consistency determination prior to granting lease suspension requests in 1999, a ruling which the United States appealed to the 9th Circuit Court of Appeals. The 9th Circuit has affirmed the lower court's decision and made legal findings consistent with our claims in our pending litigation against the United States. The forty undeveloped leases are located in the Offshore Santa Maria Basin off the coast of Santa Barbara and San Luis Obispo counties, and in the Santa Barbara Channel off Santa Barbara and Ventura counties. None of our interests in these leases is currently impaired, but in the event that there is some future adverse ruling under the Coastal Zone Management Act that we decide not to appeal or that we appeal without success, it is likely that some or all of our interests in these leases would become impaired and written off at that time, although we would undoubtedly proceed with our litigation. It is also possible that other events could occur during the Coastal Zone Management Act review or appellate process that would cause our interests in the leases to become impaired, and we will continuously evaluate those factors as they occur, although once again we would undoubtedly proceed with our litigation. Offshore Producing Properties ----------------------------- Point Arguello Unit. Pursuant to a financial arrangement between Whiting and us, we hold what is essentially the economic equivalent of a 6.07% working interest, which we call a "net operating interest", in the Point Arguello Unit and related facilities. In layman's terms, the term "net operating interest" is defined in our agreement with Whiting as being the positive or negative cash flow attributable to the interest from a seven step calculation which in summary subtracts royalties, operating expenses, severance taxes, production taxes and ad valorem taxes, capital expenditures, Unit fees and certain other expenses from the oil and gas sales and certain other revenues that are attributable to the interest. Within this unit are three producing platforms (Hidalgo, Harvest and Hermosa) which are operated by Arguello, Inc., a 20 subsidiary of Plains Resources, Inc. In an agreement between Whiting and Delta, Whiting agreed to retain all of the abandonment costs associated with our interest in the Point Arguello Unit and the related facilities. We anticipate that we will participate in the drilling of four wells in fiscal 2003. Each well will cost approximately $2.8 million ($170,000 to our interest). We anticipate the drilling costs to be paid through current operations or additional financing. Onshore Producing Properties ---------------------------- We estimate our capital expenditures for onshore properties to be approximately $6,000,000 for the year ending June 30, 2003. However, we are not obligated to participate in future drilling programs and will not enter into future commitments to do so unless management believes we have the ability to fund such projects. Agreement with Swartz --------------------- On July 21, 2000, we entered into an investment agreement with Swartz Private Equity, LLC ("Swartz") and issued Swartz a warrant to purchase 500,000 shares of common stock exercisable at $3.00 per share until May 31, 2005. The Investment Agreement was amended and restated on April 10, 2002. A warrant to purchase 150,000 shares of the Company's common stock at $3.00 per share for five years was also issued to another unrelated company as consideration for its efforts in this transaction and has been recorded as an adjustment to equity. On December 20, 2002 the parties entered into an agreement which terminated the July 21, 2000 agreement as amended and as a result, the Company will not have the ability to issue and sell ("Put") its common stock to Swartz. On September 4, 2002, Swartz exercised 100,000 warrants in a cashless exercise transaction, which was permitted by the terms of the warrant. As a result of this exercise, Swartz received 20,761 shares of the Company's common stock. On December 20, 2002, the Company entered into a one year consulting agreement with Swartz in the amount of $100,000, whereby Swartz will provide business and financial planning and assist with the identification and review of potential merger and acquisition possibilities. Options ------- We received the proceeds from the exercise of options to purchase shares of our common stock of $780,000 and $407,000 during the nine months ended March 31, 2003 and year ended June 30, 2002, respectively. Credit Facility --------------- We entered into our credit facility with Bank of Oklahoma and Local Oklahoma Bank ("Credit Facility") upon closing the Castle acquisition, which was subsequently amended. The Credit Facility, as amended, provides for a maximum borrowing base of $20 Million and a monthly commitment reduction of $82,000. The Credit Facility has a variable interest rate component of prime +1.5%/-.5% based on the total debt outstanding, (currently at prime +.5%). 21 As of March 31, 2003, we had outstanding borrowings of approximately $18,668,000, letters of credit for Operator's Bonds outstanding of $525,000 and a reduction in borrowing base of $492,000 representing 6 months of commitment reductions. As of March 31, 2003, we had approximately $315,000 available under the Credit Facility. Our borrowing base and monthly commitment reduction will be redetermined at least semi-annually. This determination will be based on our "Engineered Value". This value is determined by our future net revenues discounted at the discount rate used by the Bank of Oklahoma as of the date that the redetermination is made using the pricing parameters used in the engineering report that is furnished to the Bank of Oklahoma. The most recent redetermination was effective October 1, 2002. The foregoing does not purport to be a complete summary of the Credit Agreement and other loan documents. Complete copies of the original credit facility documents are filed as exhibits to our Report on Form 8-K dated May 24, 2002. Income Taxes ------------ The Company recognized tax expense in 2003 primarily due to recognition of deferred tax assets for which a valuation allowance had previously been provided and recognized no tax benefit in 2002 because realization was not more likely than not. The remaining deferred tax asset at March 31, 2003, for which a valuation allowance has been recorded, will be recognized in the financial statements when its realization is more likely than not. Results of Operations for the Three and Nine Months Ended March 31, 2003 Compared to the Three and Nine Months Ended March 31, 2002. - -------------------------------------------------------------------------- Net Earnings (Loss). Our net income for the three and nine months ended March 31, 2003 were $1,307,000 and $1,852,000 compared to a net loss of $1,587,000 and $3,493,000 for the three and nine months ended March 31, 2002. The results for the three and nine months ended March 31, 2003 and 2002 were effected by the items described in detail below. Revenue. Total revenue for the three and nine months ended March 31, 2003 were $6,975,000 and $18,113,000 compared to $1,031,000 and $5,210,000 for the three and nine months ended March 31, 2002. Oil and gas sales for the nine months ended March 31, 2003 were $7,717,000 and $19,275,000 compared to $1,138,000 and $5,317,000 for the three and nine months ended March 31, 2002. The increase in oil and gas sales during the three and nine months ended March 31, 2003 resulted from the acquisitions completed during fiscal 2002 and an increase in oil and gas prices. Offshore revenue increased by approximately $381,000 and $753,000 while experiencing a decline in production of 15% and 15% for the three and nine months ended March 31, 2003, respectively, compared to the same period a year ago. Production volumes and average prices received for the three months ended March 31, 2003 and 2002 are as follows: 22 Three Months Ended March 31, 2003 2002 Onshore Offshore Onshore Offshore ------- -------- ------- -------- Production: Oil (barrels) 63,000 53,000 5,000 62,000 Gas (Mcf) 748,000 - 154,000 - Average Price: Net of forward contract sales and derivative activity Oil (per barrel) $30.11 $22.82 $17.26 $13.24 Gas (per Mcf) $ 4.87 $ - $ 1.43 $ - Gross of forward contract sales and derivative activity Oil (per barrel) $32.32 $25.55 $17.26 $13.24 Gas (per Mcf) $ 5.98 $ - $ 1.43 $ - Revenues for the three months ended March 31, 2003 include impact of derivative loss of $971,000. Production volumes and average prices received for the nine months ended March 31, 2003 and 2002 are as follows: Nine Months Ended March 31, 2003 2002 Onshore Offshore Onshore Offshore ------- -------- ------- -------- Production: Oil (barrels) 189,000 175,000 61,100 207,000 Gas (Mcf) 2,288,000 - 471,000 - Average Price: Net of forward contract sales and derivative activity Oil (per barrel) $27.52 $20.61 $21.70 $13.81 Gas (per Mcf) $ 3.97 $ - $ 2.41 $ - Gross of forward contract sales and derivative activity Oil (per barrel) $28.57 $21.75 $21.84 $13.81 Gas (per Mcf) $ 4.49 $ - $ 2.41 $ - Revenues for nine months ended March 31, 2003 include impact of derivative loss of $1,391,000. Gain on sale of oil and gas properties. During the quarter ended March 31, 2003, the Company sold some immaterial non-strategic properties primarily acquired in the Piper acquisition. As a result of the sale, the Company recorded a gain on sale of $229,000. Lease Operating Expenses. Lease operating expenses for the three and nine months ended March 31, 2003 were $2,556,000 and $7,192,000, respectively compared to $865,000 and $2,679,000 for the three and nine months ended March 31, 2002, respectively. Lease operating expense increased compared to 2002 as a result of the acquisitions completed during fiscal 2003. On a per Bbl equivalent basis, production expenses and taxes were $9.47 and $8.25 for onshore properties and $14.71 and $14.21 for offshore properties during the three and nine months ended March 31, 2003, respectively compared to $4.06 and $4.12 for onshore properties and $11.82 and $10.17 for offshore properties for the three and nine months ended March 31, 2002, respectively. The properties 23 acquired during fiscal 2002 have more typical operating costs than those previously owned by the Company, and as such, lease operating costs per equivalent Bbl increased during 2003 compared to the prior year. Offshore lease operating expenses increased slightly for the three and nine months ended March 31, 2003 and the costs per Bbl equivalent increased as production declined 14% and 15%, respectively. Depreciation and Depletion Expense. Depreciation and depletion expense for the three and nine months ended March 31, 2003 was $1,428,000 and $4,305,000, respectively compared to $587,000 and $2,249,000, for the three and nine months ended March 31, 2002. On a per Bbl equivalent basis, the depletion rate was $6.18 and $5.98 for onshore properties and $4.81 and $4.90 for offshore properties during the three and nine months ended March 31, 2003, respectively compared to $9.34 and $10.08 for onshore properties and $4.05 and $4.77 for offshore properties for the three and nine months ended March 31, 2002, respectively. Depreciation and depletion expense increased during the three and nine months relating to the acquisitions completed during fiscal 2003. The fluctuation in oil and gas prices either extends on curtails the lives of our properties resulting in either lower or higher depletion expense. Exploration Expenses. Exploration expenses consist of geological, geophysical costs and lease rentals. Exploration expenses were $83,000 and $130,000 respectively for the three and nine months ended March 31, 2003 compared to $16,000 and $125,000 for the three and nine months ended March 31, 2002, respectively. Abandoned and Impaired Properties. For the nine months ended March 31, 2002 we impaired $60,000 relating to undeveloped properties in onshore California and $102,000 relating to our Eland and Stadium fields in Stark County, North Dakota, which were sold on February 1,2002. There were no abandonments or impairments for the nine months ended March 31, 2002. Dry Hole Costs. Dry hole costs for the three and nine months ended March 31, 2003 were $89,000 and $132,000, respectively compared to $15,000 and $396,000 for the three and nine months ended March 31, 2002, respectively. The costs incurred in fiscal 2003 represent one operated drilling location in Louisiana and two non-operated drilling locations, one in Texas and one in Montana. The costs incurred during fiscal 2002 related to an unsuccessful drilling program in South Dakota. Professional Fees. Professional fees for the three and nine months ended March 31, 2003 were $187,000 and $506,000, respectively compared to $284,000 and $954,000 for the three and nine months ended March 31, 2002, respectively. Professional fees consist of corporate, legal and accounting costs related to investor relations and legal fees for representation in negotiations and discussions with various state and federal governmental agencies relating to the Company's undeveloped offshore California leases. General and Administrative Expenses. General and administrative expenses for three and nine months ended March 31, 2003 were $881,000 and $2,567,000, respectively compared to $566,000 and $1,151,000 for the three and nine months ended March 31, 2002, respectively. The increase in general and administrative expenses is primarily attributed to increased costs associated with the acquisitions completed in fiscal 2003 including office relocation and additional staff. Stock Option Expense. Stock option expense has been recorded for the three and nine months ended March 31, 2003 in the amount of $36,000 and 24 $82,000, respectively and $20,000 and $53,000, respectively, for the three and nine months ended March 31, 2002. This expense is for options granted to certain directors and consultants at option prices below the market price at the date of grant. The stock option expense for fiscal 2003 and 2002 can primarily be attributed to options to certain consultants that provide us with shareholder relations services and options to our directors. Interest and Financing Costs. Interest and financing costs for the three and nine months ended March 31, 2003 were $408,000 and $1,348,000, respectively compared to $274,000 and $947,000 for the three and nine months ended March 31, 2002, respectively. The increase in interest and financing costs can be attributed to the Castle acquisition which closed on May 31, 2002. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk Market risk is the potential loss arising from adverse changes in market rates and prices, such as foreign currency exchange and interest rates and commodity prices. We do not use financial instruments to any degree to manage foreign currency exchange and interest rate risks and do not hold or issue financial instruments to any degree for trading purposes. All of our revenue and related receivables are payable in U.S. dollars. Market Rate and Price Risk -------------------------- Beginning in fiscal 2003, we began to hedge a portion of our oil and gas production using swap and collar agreements. The purpose of these hedge agreements is to provide a measure of stability to our cash flow in an environment of volatile oil and gas prices and to manage the exposure to commodity price risk. Interest Rate Risk ------------------ We were subject to interest rate risk on $23,593,000 of variable rate debt obligations at March 31, 2003. The annual effect of a one percent change in interest rates would be approximately $235,930. The interest rate on these variable rate debt obligations approximates current market rates as of March 31, 2003. Item 4. Controls and Procedures Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation and our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based upon their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. 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. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings. On January 9, 2002, we filed a lawsuit along with several other companies in the United States Court of Federal Claims in Washington, D.C. alleging that the U.S. Government materially breached the terms of forty undeveloped federal leases, some of which are part of our Offshore California properties. The Complaint is based on our collective claims that post-leasing amendments to a federal statute governing offshore activities have now been interpreted to alter significantly our rights and abilities to move forward with further exploration and development activities, and that the Government has failed to carry out its own obligations under the leases which has resulted in substantial delays and interference in our exploration and development efforts. The forty undeveloped leases are located in the Offshore Santa Maria Basin off the coast of Santa Barbara and San Luis Obispo counties, and in the Santa Barbara Channel off Santa Barbara and Ventura counties. The suit seeks compensation for the lease bonuses and rentals paid to the Federal Government, exploration costs, and related expenses. The total amount claimed by all of the collective plaintiffs for bonuses and rentals exceeds $1.2 billion, with additional amounts for exploration costs and related expenses. Our claim (including the claim of our subsidiary Amber Resources Company) for lease bonuses and rentals paid by us and our predecessors is in excess of $152,000,000. In addition, we have asserted a claim for exploration costs and related expenses. The U.S. Government has not yet filed an answer to our Complaint. Item 2. Changes in Securities. During the quarter ended March 31, 2003, Delta did not issue any securities in transactions that were not registered under the Securities Act of 1933. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. None Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. Exhibit No. Description 99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (b) Reports on Form 8-K. During the quarter ended March 31, 2003, Delta filed Reports on Form 8-K as follows: None. 26 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amended Report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: May 13, 2003 DELTA PETROLEUM CORPORATION (Registrant) By: /s/ Roger A. Parker ------------------------------------- Roger A. Parker President and Chief Executive Officer By: /s/ Kevin K. Nanke ------------------------------------- Kevin K. Nanke, Treasurer and Chief Financial Officer 27 CERTIFICATIONS PURSUANT TO RULE 13a-14 AND 15d-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Roger A. Parker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Delta Petroleum Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Roger A. Parker ----------------------------------------- Name: Roger A. Parker Title: Chief Executive Officer 28 CERTIFICATIONS PURSUANT TO RULE 13a-14 AND 15d-14 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED I, Kevin K. Nanke, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Delta Petroleum Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 13, 2003 /s/ Kevin K. Nanke ------------------------------------- Name: Kevin K. Nanke Title: Chief Financial Officer 29 EX-99 3 deltaex991.txt DELTA PETROLEUM CORPORATION 10-Q (3-31-03) EX 99.1 EXHIBIT 99.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER DELTA PETROLEUM CORPORATION PURSUANT TO 18 U.S.C. SECTION 1350 I hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of Delta Petroleum Corporation for the period ending March 31, 2003: (1) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of Delta Petroleum Corporation. /s/ Roger A. Parker - ------------------------------ Roger A. Parker Chief Executive Officer May 13, 2003 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Delta Petroleum Corporation and will be retained by Delta Petroleum Corporation and furnished to the Securities and Exchange Commission upon request. EX-99 4 deltaex992.txt DELTA PETROLEUM CORPORATION 10-Q (3-31-03) EX 99.2 EXHIBIT 99.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER DELTA PETROLEUM CORPORATION PURSUANT TO 18 U.S.C. SECTION 1350 I hereby certify that, to the best of my knowledge, the Quarterly Report on Form 10-Q of Delta Petroleum Corporation for the period ending March 31, 2003: (1) complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material aspects, the financial condition and results of operations of Delta Petroleum Corporation. /s/ Kevin K. Nanke - ----------------------------- Kevin K. Nanke Chief Financial Officer May 13, 2003 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Delta Petroleum Corporation and will be retained by Delta Petroleum Corporation and furnished to the Securities and Exchange Commission upon request. -----END PRIVACY-ENHANCED MESSAGE-----