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, 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 0-16203 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___ 32,376,000 shares of common stock $.01 par value were outstanding as of May 4, 2004. FORM 10-Q 3rd QTR. FY 2004 INDEX PART I FINANCIAL INFORMATION PAGE NO. Item 1. Consolidated Financial Statements Consolidated Balance Sheets - March 31, 2004 (unaudited) and June 30, 2003 ........................... 3 Consolidated Statements of Operations - Three and Nine Months Ended March 31, 2004 and 2003 (unaudited) ............................................. 4-5 Consolidated Statement of Stockholders' Equity and Comprehensive Income (loss) - Year Ended June 30, 2003 and Nine Months Ended March 31, 2004 (unaudited) ............................................. 6 Consolidated Statements of Cash Flows - Nine Months Ended March 31, 2004 and 2003 (unaudited) ............................................. 7 Notes to Consolidated Financial Statements (unaudited) ............................................. 8-19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ..................... 20-30 Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................................. 30 Item 4. Controls and Procedures ................................. 30 PART II OTHER INFORMATION Item 1. Legal Proceedings ....................................... 31 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities ................... 31 Item 3. Defaults upon Senior Securities ......................... 32 Item 4. Submission of Matters to a Vote of Security Holders ........................................ 32 Item 5. Other Information ...................................... 32 Item 6. Exhibits and Reports on Form 8-K ........................ 32 The terms "Delta," "Company," "we," "our," and "us" refer to Delta Petroleum Corporation unless the context suggests otherwise. 2 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS March 31, June 30, 2004 2003 ------------ ------------ (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 28,440,000 $ 2,271,000 Marketable securities available for sale 912,000 662,000 Trade accounts receivable, net of allowance for doubtful accounts of $50,000 at March 31, 2004 and June 30, 2003 5,842,000 4,410,000 Prepaid assets 1,214,000 764,000 Inventory 1,169,000 - Other current assets 358,000 560,000 ------------ ------------ Total current assets 37,935,000 8,667,000 ------------ ------------ Property and Equipment: Oil and gas properties, successful efforts method of accounting 118,108,000 90,151,000 Drilling and trucking equipment 6,572,000 - Other 936,000 336,000 ------------ ------------ Total property and equipment 125,616,000 90,487,000 Less accumulated depreciation and depletion (18,643,000) (12,669,000) ------------ ------------ Net property and equipment 106,973,000 77,818,000 ------------ ------------ Long term assets: Investment in LNG project 1,022,000 - Deferred financing costs 95,000 117,000 Partnership net assets 208,000 245,000 ------------ ------------ Total long term assets 1,325,000 362,000 $146,233,000 $ 86,847,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt $ 4,143,000 $ 10,039,000 Accounts payable 11,574,000 3,604,000 Derivative instruments 61,000 468,000 Current foreign tax payable 703,000 703,000 Other accrued liabilities 934,000 1,087,000 ------------ ------------ Total current liabilities 17,415,000 15,901,000 ------------ ------------ Long-term Liabilities: Bank debt, net 27,050,000 22,175,000 Asset retirement obligation 975,000 868,000 Other debt, net 66,000 - ------------ ------------ Total long-term liabilities 28,091,000 23,043,000 Minority Interest 3,286,000 - 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 30,578,000 shares at March 31, 2004 and 23,286,000 at June 30, 2003 306,000 233,000 Additional paid-in capital 119,980,000 75,642,000 Accumulated other comprehensive loss 281,000 (376,000) Accumulated deficit (23,126,000) (27,596,000) ------------ ------------ Total stockholders' equity 97,441,000 47,903,000 ------------ ------------ Commitments $146,233,000 $ 86,847,000 ============ ============ See accompanying notes to consolidated financial statements. 3 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended March 31, March 31, 2004 2003 ------------ ------------ Revenue: Oil and gas sales $ 10,628,000 $ 6,817,000 Realized loss on derivative instruments, net (286,000) (971,000) ------------ ------------ Total revenue 10,342,000 5,846,000 Operating expenses: Lease operating expense 2,506,000 2,275,000 Depreciation and depletion 3,085,000 1,300,000 Exploration expense 1,698,000 83,000 Dry hole costs 210,000 89,000 Professional fees 308,000 187,000 General and administrative (includes stock compensation expense of $87,000 and $36,000 for the three months ended March 31, 2004 and 2003, respectively) 1,722,000 946,000 ------------ ------------ Total operating expenses 9,529,000 4,880,000 ------------ ------------ Income from continuing operations 813,000 966,000 Other income and (expense): Other income 43,000 - Interest and financing costs (373,000) (408,000) ------------ ------------ Total other expense (330,000) (408,000) ------------ ------------ Income before discontinued operations 483,000 558,000 Discontinued operations: Income from operations of properties sold, net 189,000 520,000 Gain on sale of properties 1,782,000 229,000 ------------ ------------ Net income $ 2,454,000 $ 1,307,000 ============ ============ Basic income per common share: Income before discontinued operations $ 0.02 $ 0.02 Discontinued operations 0.07 0.04 ------------ ------------ Net Income $ 0.09 $ 0.06 ============ ============ Diluted income per common share: Income before discontinued operations $ 0.01 $ 0.02 Discontinued operations 0.07 0.03 ------------ ------------ Net Income $ 0.08 $ 0.05 ============ ============ See accompanying notes to consolidated financial statements. 4 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Nine Months Ended March 31, March 31, 2004 2003 ------------ ------------ Revenue: Oil and gas sales $ 25,401,000 $ 17,049,000 Realized loss on derivative instruments, net (666,000) (1,391,000) ------------ ------------ Total revenue 24,735,000 15,658,000 Operating expenses: Lease operating expense 6,896,000 6,392,000 Depreciation and depletion 6,877,000 3,887,000 Exploration expense 1,966,000 130,000 Dry hole costs 387,000 132,000 Professional fees 920,000 506,000 General and administrative (includes stock compensation expense of $195,000 and $82,000 for the nine months ended March 31, 2004 and 2003, respectively) 4,443,000 2,737,000 ------------ ------------ Total operating expenses 21,489,000 13,784,000 ------------ ------------ Income from continuing operations 3,246,000 1,874,000 Other income and (expense): Other income 78,000 21,000 Interest and financing costs (1,458,000) (1,348,000) ------------ ------------ Total other expense (1,380,000) (1,327,000) ------------ ------------ Income before discontinued operations and cumulative effect on change in accounting principle 1,866,000 547,000 Discontinued operations: Income from operations of properties sold, net 850,000 1,096,000 Gain on sale of properties 1,754,000 229,000 ------------ ------------ Income before cumulative effect of change in accounting principle 4,470,000 1,872,000 Cumulative effect of change in accounting principle - (20,000) ------------ ------------ Net income $ 4,470,000 $ 1,852,000 ============ ============ Basic income per common share: Income before discontinued operations and cumulative effect of change in accounting principle $ 0.07 $ 0.02 Discontinued operations 0.11 0.06 ------------ ------------ Income before cumulative effect of change in acounting principle 0.18 0.08 Cumulative effect of change in accounting principle - - * ------------ ------------ Net income $ 0.18 $ 0.08 ============ ============ Diluted income per common share: Income before discontinued operations and cumulative effect on change in accounting principle $ 0.06 $ 0.02 Discontinued operations 0.10 0.05 ------------ ------------ Income before cumulative effect of change in accounting principle 0.16 0.07 Cumulative effect of change in accounting principle - - * ------------ ------------ Net income $ 0.16 $ 0.07 ============ ============ * less than $.01 per common share See accompanying notes to consolidated financial statements. 5 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity and Comprehensive Income Year Ended June 30, 2003 and Nine Months Ended March 31, 2004 <TABLE> <CAPTION> Accumulated other com- Common Stock Additional Put Option prehensive ------------------- paid-in on income Comprehensive Accumulated Shares Amount capital Delta stock (loss) income (loss) deficit Total ---------- -------- ----------- ----------- ------------- ------------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance, July 1, 2002 22,618,000 $226,000 76,514,000 (2,886,000) (85,000) (28,853,000) $44,916,000 Comprehensive loss: Net income - - - - - 1,257,000 1,257,000 1,257,000 ------------- Other comprehensive gain, net of tax Change in fair value of derivative hedging instruments - - - - (468,000) (468,000) - (468,000) Unrealized gain on equity securities, net - - - - 177,000 177,000 - 177,000 ------------- Comprehensive income - - - - - 966,000 ============= Stock options granted as compensation 124,000 - - - 124,000 Put option on Delta stock - - (2,886,000) 2,886,000 - Shares issued for oil and gas properties 200,000 2,000 920,000 - - - 922,000 Shares issued for cash upon exercis of options 468,000 5,000 970,000 - - - 975,000 ---------- -------- ----------- ----------- ------------- ------------ ----------- Balance, June 30, 2003 23,286,000 233,000 75,642,000 - (376,000) (27,596,000) 47,903,000 Comprehensive income: Net income - - - - - 4,470,000 4,470,000 4,470,000 ------------- Other comprehensive gain, net of tax Change in fair value of derivative hedging instruments - - - - 407,000 407,000 - 250,000 Unrealized gain on equity securities, net - - - - 250,000 250,000 - 407,000 ------------- Comprehensive income - - - - - 5,127,000 ============= Stock options granted as compensation 195,000 - - - 195,000 Shares issued for cash, net 4,000,000 40,000 29,650,000 - - - 29,690,000 Shares issued for oil and gas properties 1,985,000 20,000 11,195,000 - - - 11,215,000 Shares issued for cash upon exercise of options 1,307,000 13,000 3,298,000 - - - 3,311,000 ---------- -------- ----------- ----------- ------------- ------------ ----------- Balance, March 31, 2004 30,578,000 $306,000 119,980,000 - 281,000 (23,126,000) $97,441,000 ========== ======== =========== =========== ============= ============ =========== </TABLE> See accompanying notes to consolidated financial statements. 6 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended March 31, March 31, 2004 2003 ------------ ------------ Cash flows operating activities: Net income $ 4,470,000 $ 1,852,000 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and depletion 6,829,000 3,866,000 Depreciation and depletion - discontinued operations 329,000 418,000 Accretion of abandonment obligation 48,000 21,000 Stock compensation expense 195,000 82,000 Amortization of financing costs 269,000 341,000 Gain on sale of oil and gas properties (1,754,000) (229,000) Cumulative effect of change in accounting principle - 20,000 Net changes in operating assets and operating liabilities: Increase in trade accounts receivable (1,432,000) (1,145,000) (Increase) decrease in prepaid assets (450,000) 48,000 Increase in inventory (1,169,000) - (Increase) decrease in other current assets 175,000 (80,000) Increase in accounts payable trade 1,879,000 42,000 Increase (decrease) in other accrued liabilities (153,000) 147,000 ------------ ------------ Net cash provided by operating activities $ 9,236,000 $ 5,383,000 operating activities ------------ ------------ Cash flows from investing activities: Capital and exploration expenditures, net (24,835,000) (4,956,000) Proceeds from sales of oil and gas properties 11,013,000 725,000 Payment on investment transaction (772,000) - Decrease in long term assets 37,000 117,000 ------------ ------------ Net cash used in investing activities (14,557,000) (4,114,000) investing activities ------------ ------------ Cash flows from financing activities: Stock issued for cash upon exercise of options 3,312,000 780,000 Stock issued for cash, net 29,690,000 - Proceeds from borrowings 14,204,000 - Payment of financing fees (220,000) - Repayment of borrowings (15,496,000) (1,359,000) ------------ ------------ Net cash provided by (used in) financing activities 31,490,000 (579,000) ------------ ------------ Net increase in cash and cash equivalents 26,169,000 690,000 ------------ ------------ Cash at beginning of period 2,271,000 1,024,000 ------------ ------------ Cash at end of period $ 28,440,000 $ 1,714,000 ============ ============ Supplemental cash flow information - Cash paid for interest and financing costs $ 1,256,000 $ 952,000 ============ ============ Common stock issued for the purchase of oil and gas properties $ 11,215,000 $ 922,000 ============ ============ See accompanying notes to consolidated financial statements. 7 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended March 31, 2004 and 2003 (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, 2003, 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, oil and gas properties, income taxes, derivatives, asset retirement obligation, contingencies and litigation. Actual results could differ from these estimates. (2) Recently Issued or Proposed Accounting Standards and Pronouncements The Company has been made aware that an issue has arisen within the industry regarding the application of provisions of SFAS No. 142, "Goodwill and Other Intangible Assets" and SFAS No. 141, "Business Combinations," to companies in the extractive industries, including oil and gas companies. The issue is whether SFAS No. 142 requires companies to reclassify costs associated with mineral rights, including both proved and unproved leasehold acquisition costs, as intangible assets in the balance sheet, apart from other capitalized oil and gas property costs. Historically, the Company and other oil and gas companies have included the cost of these oil and gas leasehold interests as part of oil and gas properties. Also under consideration is whether SFAS No. 142 requires registrants to provide the additional disclosures prescribed by SFAS No. 142 for intangible assets for costs associated with mineral rights. 8 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (2) Recently Issued or Proposed Accounting Standards and Pronouncements, Continued If it is ultimately determined that SFAS No. 142 requires us to reclassify costs associated with mineral rights from property and equipment to intangible assets, the amounts that would be reclassified are as follows: March 31, June 30, 2004 2003 ----------- ----------- INTANGIBLE ASSETS: Proved leasehold acquisition costs $62,223,000 $55,441,000 Unproved leasehold acquisition costs 32,651,000 23,689,000 ----------- ----------- Total leasehold acquisition costs 94,874,000 79,130,000 Less: Accumulated depletion 13,559,000 10,858,000 ----------- ----------- Net leasehold acquisition costs $81,315,000 $68,272,000 =========== =========== The reclassification of these amounts would not affect the method in which such costs are amortized or the manner in which we assess impairment of capitalized costs. As a result, net income would not be affected by the reclassification. (3) 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. Cumulative Unrealized Estimated Cost Gain (loss) Market Value -------- ----------- ------------ March 31, 2004 Bion Environmental Technologies, Inc. $152,000 $(140,000) $ 12,000 Tipperary Oil & Gas Company 418,000 482,000 900,000 -------- --------- -------- $570,000 $ 342,000 $912,000 ======== ========= ======== Cumulative Unrealized Estimated Cost Gain (loss) Market Value -------- ----------- ------------ June 30, 2003 Bion Environmental Technologies, Inc. $152,000 $(140,000) $ 12,000 Tipperary Oil & Gas Company 418,000 232,000 650,000 -------- --------- -------- $570,000 $ 92,000 $662,000 ======== ========= ======== 9 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (4) Oil and Gas Properties 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 $10,782,000, at March 31, 2004. 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, 2004 and that no impairment in the carrying values has 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 the 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 the Company decides not to appeal or that the Company appeals 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 the Company's interests in the leases to become impaired, and the Company will continuously evaluate those factors as they occur. On January 9, 2002, the Company 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 the Company's Offshore California properties. See disclosure in Item 1 of Part II. Fiscal 2004 - Acquisition On September 19, 2003, the Company completed an acquisition of certain producing and drilling prospects in Colorado (the "South Tongue Prospect") and Wyoming from Edward Mike Davis LLC and Edward Mike Davis, individually (collectively, "Davis"), pursuant to the terms of a Purchase and Sale Agreement effective as of August 1, 2003. The total consideration paid for these properties was 1,000,000 shares of the Company's common stock and $8,000,000, of which $2,000,000 was paid in cash and $6,000,000 in the form of a short-term promissory note payable that was paid on October 3, 2003. The shares issued were recorded at a price of $5.15 per share, a five day average surrounding the announcement of the transaction. The Company recorded an upward purchase price adjustment of approximately $220,000 which reflects the operating and acquisition related costs in excess of net revenue from the effective date of August 1, 2003 through the closing date of September 19, 2003. The total acquisition cost of $13,380,000 was allocated between proved developed producing of $5,220,000 and unproved undeveloped of $8,160,000 based on preliminary information. 10 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (4) Oil and Gas Properties, Continued On April 22, 2004, subsequent to the quarter end, the Company amended its agreement with Davis to, among other things, add certain oil and gas leases located in Colorado known as the "North Tongue Prospect," decrease the amount of Davis's reversionary working interest after payout in the properties acquired under the initial agreement from 50% to 42.5%, change the definition of payout, change certain drilling obligations and modify the Company's obligation to issue additional shares of stock to Davis upon the designation of Bonus Prospects. The initial consideration required to be paid to Davis upon execution of the Amended Agreement was 1,525,000 shares of the Company's common stock. The Company has agreed to file a registration statement with the Securities and Exchange Commission to register the re-sale of these shares by Davis and to pay all of the expenses associated with such registration. The Company is also obligated to acquire additional leases, obtain seismic surveys, drill wells and make certain other expenditures under the amended agreement. The amount of the purchase price was the result of arms-length negotiations between the parties. The amended agreement eliminates the Company's obligation to issue shares for Bonus Prospects that existed under the initial agreement with respect to the South Tongue Prospect, but it added a new obligation to issue additional shares for Bonus Prospects that are designated with respect to the North Tongue Prospect. With regard to the North Tongue Prospect only, for any prospect that is identified at any time after drilling, coring, testing and logging to contain in combination from specified formations at least one million barrels of recoverable oil or six billion cubic feet of recoverable gas or a combination of oil or gas equal to or exceeding one million barrels of oil equivalent using a six million cubic feet to one barrel gas-to-oil ratio, as determined by independent engineers, then such acreage is required to be designated as a "Bonus Prospect." Upon designation of a Bonus Prospect, the Company is required to issue to Davis as additional purchase price, up to 190,000 shares of the Company's common stock, or such lesser amount so that the value of such stock based upon the average closing price of the stock for the immediately preceding 30-day period may equal but does not exceed $950,000, for each Bonus Prospect (a "Bonus"). This requirement applies only to the North Tongue Prospect and is limited to a maximum of five Bonus Prospects. No Bonus or additional shares are payable for prospects located on the South Tongue Prospect, regardless of potential or ultimate production. The Company is obligated to file additional registration statements at the Company's expense covering the re-sale of each issuance of shares for each Bonus Prospect designation. 11 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (4) Oil and Gas Properties, Continued The following unaudited pro forma consolidated statements of operations information assumes that the Davis acquisition occurred as of July 1, 2002: Three Months Ended Nine Months Ended March 31, March 31, 2004 2003 2004 2003 ---------- ---------- ----------- ----------- Oil and gas sales $10,628,000 $ 8,480,000 $26,458,000 $19,269,000 Net income $ 2,454,000 $ 1,840,000 $ 4,809,000 $ 2,569,000 Net income per common share: Basic $ .08 $ .08 $ .16 $ .11 Diluted $ .08 $ .08 $ .16 $ .11 The above unaudited adjusted Pro Forma Consolidated Statements of Operations, based on the historical results of Davis and Delta, are not necessarily indicative of the results of operations if Delta would have acquired the Davis properties at July 1, 2002. On December 10, 2003, the Company completed an acquisition of certain production and acreage located primarily in Eland and Stadium fields in Stark County, North Dakota, from Sovereign Holdings, LLC, a privately - held Colorado limited liability company ("Sovereign"), pursuant to the terms of a Purchase and Sale Agreement effective as of December 1, 2003. The total consideration paid for these properties was 773,500 shares of the Company's common stock. The shares issued were recorded at a price of $5.58, a five day average surrounding the closing of the transaction. The Company recorded a downward purchase price adjustment of approximately $84,000 which reflects the operating and acquisition related costs in excess of net revenue from the effective date of December 1, 2003 through the closing date of December 5, 2003. The total acquisition cost of $4,233,000 was allocated to proved developed producing properties. On February 24, 2004, the Company acquired certain properties in Texas from Labyrinth Enterprises, LLC, an unrelated entity for $1,320,000 in cash and 185,000 shares of the Company's common stock valued at $1,619,000 based on a five day average surrounding the closing of the transaction. On February 26, 2004, the Company acquired approximately 135,000 leasehold acres in the Columbia River Basin project in eastern Washington from an unrelated entity for $1,357,000 in cash. The Company will become the operator once drilling begins on this acreage. Subsequent to the quarter end, the Company purchased approximately 23,000 additional net acreage in this project through State and Federal lease sales. In March 2004, the Company purchased a 50% interest in Big Dog Drilling Company, LLC ("BDDC") for an initial investment of approximately $3,000,000. The remaining interest is owned 25% by Davis described above and 25% by an unrelated individual. BDDC's primary assets include two drilling rigs rated at drilling depths of up to 10,000 feet and certain additional drilling equipment. 12 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (4) Oil and Gas Properties, Continued Also in March 2004, the Company purchased a 50% interest in Shark Trucking Company, LLC ("STC") for an initial investment of approximately $276,000. STC has a similar ownership structure to that of BDDC. STC's primary assets include the ownership of trucking equipment used for the mobilization of drilling rigs and equipment. Both BDDC and STC meet the criteria for control and require consolidation of the entities. Neither entity has commenced operations as of March 31, 2004. The drilling rigs and trucking company will be used primarily for drilling activities on Delta's properties. Increasing drilling rig rates, periodic lack of availability of drilling rigs and increased drilling by Delta were contributing factors to this venture. During the current fiscal year, the Company agreed to invest an aggregate of $1,000,000 for a 6.25% interest as a member of an unaffiliated Delaware limited liability company that is currently in the process of attempting to obtain the rights to own and operate a liquid natural gas facility from an existing platform located offshore California. If the limited liability company is successful in obtaining these rights, it intends to engage in the business of accepting and vaporizing liquid natural gas delivered by liquid natural gas tankers, transporting the vaporized liquid natural gas through proprietary gas pipelines and selling the vaporized natural gas to third party customers located in California. As payment for our membership interest in the limited liability company, we executed a term promissory note that requires us to make payments of $100,000 per month until August 1, 2004, at which time all of the amounts due under the promissory note will become due and payable. As collateral for the payment of this obligation, we granted a first lien on our membership interest in the limited liability company and on all of the proceeds and other distributions from the limited liability company that are attributable to our membership interest. As of the date of this Report, the limited liability company had not yet engaged in any revenue producing activities. The Company has accounted for its investment at cost. Fiscal 2004 - Discontinued Operations On December 5, 2003, the Company completed the sale of certain properties located in Texas to Sovereign for cash consideration of $2,600,000. The effective date of the transaction is January 1, 2004 and it resulted in a loss on the sale of oil and gas properties of $28,000. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations and loss on the sale of these properties have been reflected as discontinued operations. Revenues attributed to the sale of these oil and gas properties were approximately $0 and $537,000 for the three and nine months ended March 31, 2004 and $372,000 and $868,000 for the three and nine months ended March 31, 2003, respectively. On March 31, 2004, the Company completed the sale of all of our Pennsylvania properties to Castle Energy Corporation, a 25% shareholder of Delta at March 31, 2004, for cash consideration of $8,000,000, which the Company believes is fair value, with an effective date of January 1, 2004 and resulted in a gain on sale of oil and gas properties of $1,782,000. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of 13 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (4) Oil and Gas Properties, Continued Long-Lived Assets," the results of operations and gain on sale of these properties have been reflected as discontinued operations. Revenues from the sale of these oil and properties was approximately $390,000 and $1,189,000 for the three and nine months ended March 31, 2004 and $528,000 and $1,358,000 for the three and nine months ended March 31, 2003. (5) Long Term Debt On December 30, 2003, the Company amended and restated its credit facility. The new $50 million facility with Bank of Oklahoma, U.S. Bank National Association and Hibernia National Bank (the "Banks"). Currently, the Company has an available borrowing base of $37,000,000 with a current balance outstanding of $30,922,000. The facility has a variable interest rate of LIBOR +1.75% to 2.85% and/or prime +.5%/-.5% based on the total debt outstanding and no current monthly commitment reduction. The loan matures on December 31, 2006 and is collateralized by substantially all of Delta's oil and gas properties. 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 the 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 the Company is notified by the Bank of Oklahoma, the Company must make a mandatory prepayment of principal that is sufficient to cause the Company's total outstanding indebtedness to not exceed the borrowing base. The Company is required to meet quarterly debt covenants and restrictions. At March 31, 2004, the Company was in compliance with its quarterly debt covenants and restrictions. Bank Debt Kaiser Francis Oil Company - Debt On December 1, 1999, the Company borrowed $8,000,000 at prime plus 1-1/2% from Kaiser Francis Oil Company. The proceeds from this loan were used to pay off existing debt and the balance of the Point Arguello Unit and New Mexico acquisitions. During the third quarter of fiscal 2004, the loan was paid in full. Five Year Debt Maturity Schedule Maturities of long-term debt for each of the five years following March 31, 2004 are as follows: YEAR ENDING March 31, 2004................................ $ 4,143,000 2005................................ 27,071,000 2006................................ 22,000 2007................................ 23,000 ----------- $31,259,000 =========== 14 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (6) Stockholders' Equity Common Stock Issued for Cash On February 19, 2004, the Company completed the sale of 4 million shares of its common stock at a price of $8.00 per share in a private placement for $29,690,000, net of $2,310,000 in offering costs. Stock Option Plans The Company accounts for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees, and related interpretations". As such, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. In December, 2002 the FASB issued SFAS No. 148, "Accounting for Stock-based Compensation-Transition and Disclosure." SFAS 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 requirements 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 the reported results. Had compensation cost for the Company's stock-based compensation plan been determined using the fair value of the options at the grant date, the Company's net income for the nine months ended March 31, 2004 and 2003 would have been as follows: March 31, ----------------------------- 2004 2003 ---- ---- Net Income $ 4,470,000 $1,852,000 FAS 123 compensation effect (4,316,000)** (209,000) ----------- ---------- Net income after FAS 123 compensation effect $ 154,000 $1,643,000 =========== ========== Income per common share: $ * $ .07 =========== ========== *less than $.01 per common share ** During the three months ended September 30, 2003 the Company granted to its officers options to purchase 1,250,000 shares of its common stock at a price of $5.29 per share, which was the market price on the date of the grant. All of these options vested immediately upon issuance. The fair market value of each option granted was $3.45 and was calculated using a risk free rate of 4.34%, volatility factors of the expected market price of the Company's common stock of 48.94% and an expected life of 10 years, the life of the option. The Company had approximately 4,807,000 options to purchase the Company's common stock outstanding, with an average price of $3.91, at March 31, 2004. The Company granted 353,000 options to non-officer employees during the nine months ended March 31, 2004 and granted 175,000 options to non-officer employees during the nine months ended March 31, 2003. 15 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (7) 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, "Accounting for Derivative Instruments and Hedging Activities" 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. As of March 31, 2004, the Company recorded a derivative liability of approximately $61,000 for the fair market value of its derivative instruments designated as cash flow hedges and a corresponding gain in other comprehensive income. The realized net losses from hedging activities were $286,000 and $666,000 for the three and nine months ended March 31, 2004. As of March 31, 2004, the Company had approximately 364,000 mcf of natural gas subject to commodity price risk contracts for the remainder of fiscal 2004. The fiscal 2004 contract has a weighted average floor price of $4.50 per Mmbtu, with weighted average ceiling price of $5.45 per Mmbtu. (8) 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, 2004 and 2003 are as follows: Nine Months Ended Nine Months Ended March 31, 2004 March 31, 2003 ----------------- ----------------- Net Income $4,470,000 $1,852,000 Other comprehensive income (loss) Change in fair value of derivative hedging instruments 407,000 (691,000) Unrealized gain (loss) on marketable securities 250,000 (50,000) ---------- ---------- Other comprehensive income (loss) 657,000 (741,000) Comprehensive income $5,127,000 $1,111,000 ========== ========== (9) Income Taxes For income tax purposes, the Company has net operating loss carryforwards expiring at various dates through 2023. 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. 16 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three and Nine Months Ended March 31, 2004 and 2003 (Unaudited) - ----------------------------------------------------------------------------- (9) Income Taxes, Continued The Company recognized no tax expense in the first nine months of fiscal 2004 primarily due to recognition of deferred tax assets for which a valuation allowance had previously been provided and recognized no tax benefit in fiscal 2003 because realization was not more likely than not. The remaining deferred tax asset at March 31, 2004, for which a valuation allowance has been recorded, will be recognized in the financial statements when its realization is more likely than not. (10) Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: Three Months Ended March 31, 2004 2003 ---- ---- Numerator: Numerator for basic and diluted earnings per share - income available to common stockholders $ 2,454,000 $ 1,307,000 ----------- ----------- Denominator: Denominator for basic earnings per share-weighted average shares outstanding 27,731,000 22,952,000 Effect of dilutive securities- stock options and warrants 2,665,000 2,956,000 ----------- ----------- Denominator for diluted earnings per common share 30,396,000 25,908,000 =========== =========== Anti-dilutive securities outstanding 88,000 1,809,000 =========== =========== Basic income per common share: Income before discontinued operations $ .02 $ .02 Discontinued operations .07 .04 ----------- ----------- Net Income $ .09 $ .06 =========== =========== Diluted income per common share: Income before discontinued operations $ .02 $ .02 Discontinued operations .06 .03 ----------- ----------- Net Income $ .08 $ .05 =========== =========== 17 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Three Months Ended March 31, 2004 and 2003 - ----------------------------------------------------------------------------- (10) Earnings Per Share, Continued Nine Months Ended March 31, 2004 2003 ---- ---- Numerator: Numerator for basic and diluted earnings per share - income available to common stockholders $ 4,470,000 $ 1,852,000 ----------- ----------- Denominator: Denominator for basic earnings per share-weighted average shares outstanding 25,298,000 22,756,000 Effect of dilutive securities- stock options and warrants 2,306,000 2,905,000 ----------- ----------- Denominator for diluted earnings per common share 27,604,000 25,661,000 =========== =========== Anti-dilutive securities outstanding 88,000 1,860,000 =========== =========== Basic income per common share: Income before discontinued operations and cumulative effect of change in accounting principle $ .07 $ .02 Discontinued operations .11 .06 Income before cumulative effect of ----------- ----------- change in accounting principle .18 .08 Cumulative effect of change in - -* accounting principle ----------- ----------- Net Income $ .18 $ .08 =========== =========== Diluted income per common share: Income before discontinued operations and cumulative effect of change in accounting principle $ .06 $ .02 Discontinued operations .10 .05 Income before cumulative effect of ----------- ----------- change in accounting principle .16 .07 Cumulative effect of change in - -* accounting principle ----------- ----------- Net Income $ .16 $ .07 =========== =========== * less than $.01 per common share (11) Commitments As of March 31, 2004, the Company had approximately 280 Bbls of oil per day of its offshore production under fixed price contracts. The contracts' fixed prices range from $25.50 to $29.70 through June 2004. 18 DELTA PETROLEUM CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Nine Months Ended March 31, 2004 and 2003 - ----------------------------------------------------------------------------- (12) Reclassification Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 financial statement presentation. (13) Subsequent Events On April 21, 2004, the Company acquired a fifty percent interest in approximately 1,300 leasehold acres in the Midway Loop Project located in Polk County, Texas from WillSource Enterprises, LLC for $340,000 and 31,250 shares of the Company's common stock valued at approximately $289,000 based on a five day average surrounding the acquisition. The Company will become the operator once drilling begins on this acreage. Also on April 21, 2004, the Company acquired a seventy five percent interest in approximately 9,800 leasehold acres in the Divide Creek Extension Project located in Mesa County, Colorado from Willsource Enterprises, LLC for $90,000 in cash and 187,500 shares of the Company's common stock valued at approximately $1,734,000 based on a five day average surrounding the acquisition. The Company will become the operator once drilling begins on this acreage. 19 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements -------------------------- 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 reported in our annual report on Form 10-K. 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 Estimate ------------------------------------------ The discussion and analysis of the Company's 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 included in our annual report on Form 10-K. In response to SEC Release No. 33-8040, "Cautionary Advice 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 are 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 our 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. 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 20 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 cost 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 vary considerably from actual results. The future drilling costs associated with reserves assigned to proved undeveloped locations 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 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. We reevaluate our reserves quarterly. Impairment of Gas and Oil Properties ------------------------------------ We review our oil and gas 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 our proved properties and compare such future cash flows to the carrying amount of the proved 21 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 oil and gas 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 markets, events may arise that would require the Company to record an impairment of the recorded book values associated with gas and oil properties. The Company did not record an impairment during the nine months ended March 31, 2004 and 2003. Commodity Derivative Instruments and Hedging Activities ------------------------------------------------------- We periodically enter into commodity derivative contracts and fixed-price physical contracts to manage our exposure to oil and natural gas price volatility. We primarily utilize future contracts, swaps or options, which are generally placed with major financial institutions or with counterparties of high credit quality that we believe are minimal credit risks. The oil and natural gas reference prices of these commodity derivatives contracts are based upon crude oil and natural gas futures, which have a high degree of historical correlation with actual prices we receive. On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Under SFAS No. 133 all derivative instruments are recorded on the balance sheet at fair value. Changes in the derivative's fair value are recognized currently in earnings unless specific hedge accounting criteria are met. For qualifying cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income (loss) to the extent the hedge is effective. For qualifying fair value hedges, the gain or loss on the derivative is offset by related results of the hedged item in the income statement. Gains and losses on hedging instruments included in accumulated other comprehensive income (loss) are reclassified to oil and natural gas sales revenue in the period that the related production is delivered. 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 expense or income 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 management (CPRM) activities. Asset Retirement Obligation --------------------------- We account for our asset retirement obligations under 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 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. 22 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 - --------------- We have working capital of $20,520,000 at March 31, 2004 compared to a working capital deficit of $7,234,000 at June 30, 2003. The increase in working capital is primarily related to the private equity offering completed in February for net proceeds of approximately $29,690,000. Cash Provided by Operating Activities - ------------------------------------- During the nine months ended March 31, 2004, we had cash provided by operating activities of $9,236,000 compared to cash provided by operating activities of $5,383,000 during the same period ended March 31, 2003. This increase in operating activities is a result of the increase in oil and natural gas sales relating to acquisitions completed during the last year as discussed below. Cash Used in Investing Activities - --------------------------------- During the nine months ended March 31, 2004, we had cash used in investing activities of $14,557,000 compared to cash used in investing activities of $4,114,000 during the same period ended March 31, 2003. Investing activities for fiscal 2004 included $15,520,000 used toward the numerous acquisitions, described below, completed during the nine months and $9,315,000 for development activities offset by sales proceeds of $11,013,000. Investing activities for fiscal 2003 included approximately $2,774,000 for development costs. During our current fiscal year, we agreed to invest an aggregate of $1,000,000 as a member of an unaffiliated Delaware limited liability company that is currently in the process of attempting to obtain the rights to own and operate a liquid natural gas facility from an existing platform located offshore California. If the limited liability company is successful in obtaining these rights, it intends to engage in the business of accepting and vaporizing liquid natural gas delivered by liquid natural gas tankers, transporting the vaporized liquid natural gas through proprietary gas pipelines and selling the vaporized natural gas to third party customers located in California. As payment for our membership interest in the limited liability company, we executed a term promissory note that requires us to make payments of $100,000 per month until August 1, 2004, at which time all of the amounts due under the promissory note will become due and payable. As collateral for the payment of this obligation, we granted a first lien on our 23 membership interest in the limited liability company and on all of the proceeds and other distributions from the limited liability company that are attributable to our membership interest. As of the date of this Report, the limited liability company had not yet engaged in any revenue producing activities. Cash Used In Financing Activities - --------------------------------- During the nine months ended March 31, 2004, we had cash provided by financing activities of $31,490,000 compared to cash used in financing activities of $579,000 for the same period ended March 31, 2003. Financing activities for fiscal 2004 consist of net proceeds of approximately 29,690,000 from a private equity offering completed in February, proceeds from borrowings of $14,204,000, repayment of borrowings and financing costs of $15,496,000 and stock issued for cash upon exercise of options of $3,312,000. Financing activities for fiscal 2003 consist of repayment of borrowings and financing costs of $1,359,000 and stock issued for cash upon exercise of options of $780,000. Fiscal 2004 - Acquisitions - -------------------------- On September 19, 2003, we completed an acquisition of certain producing and drilling prospects in Colorado (the "South Tongue Prospect") and Wyoming from Edward Mike Davis LLC and Edward Mike Davis, individually (collectively, "Davis"), pursuant to the terms of a Purchase and Sale Agreement effective as of August 1, 2003. The total consideration paid for these properties was 1,000,000 shares of our common stock and $8,000,000, of which $2,000,000 was paid in cash and $6,000,000 in the form of a short-term promissory note payable that was paid on October 3, 2003. The shares issued were recorded at a price of $5.15 per share, a five day average surrounding the announcement of the transaction. We recorded an upward purchase price adjustment of approximately $220,000 which reflects the operating and acquisition related costs in excess of net revenue from the effective date of August 1, 2003 through the closing date of September 19, 2003. The total acquisition cost of $13,380,000 was allocated between proved developed producing of $5,220,000 and unproved undeveloped of $8,160,000 based on preliminary information. On April 22, 2004, subsequent to the quarter end, we amended our agreement with Davis to, among other things, add certain oil and gas leases located in Colorado known as the "North Tongue Prospect," decrease the amount of Davis's reversionary working interest after payout in the properties acquired under the initial agreement from 50% to 42.5%, change the definition of payout, change certain drilling obligations and modify our obligation to issue additional shares of stock to Davis upon the designation of Bonus Prospects. The initial consideration required to be paid to Davis upon execution of the Amended Agreement was 1,525,000 shares of our common stock. We have agreed to file a registration statement with the Securities and Exchange Commission to register the re-sale of these shares by Davis and to pay all of the expenses associated with such registration. We are also obligated to acquire additional leases, obtain seismic surveys, drill wells and make certain other expenditures under the amended agreement. The amount of the purchase price was the result of arms-length negotiations between the parties. The amended agreement eliminates our obligation to issue shares for Bonus Prospects that existed under the initial agreement with respect to the South Tongue Prospect, but it added a new obligation to issue additional shares for Bonus Prospects that are designated with respect to the North Tongue Prospect. With regard to the North Tongue Prospect only, for any 24 prospect that is identified at any time after drilling, coring, testing and logging to contain in combination from specified formations at least one million barrels of recoverable oil or six billion cubic feet of recoverable gas or a combination of oil or gas equal to or exceeding one million barrels of oil equivalent using a six million cubic feet to one barrel gas-to-oil ratio, as determined by independent engineers, then such acreage is required to be designated as a "Bonus Prospect." Upon designation of a Bonus Prospect, we are required to issue to Davis as additional purchase price, up to 190,000 shares of our common stock, or such lesser amount so that the value of such stock based upon the average closing price of the stock for the immediately preceding 30-day period may equal but does not exceed $950,000, for each Bonus Prospect (a "Bonus"). This requirement applies only to the North Tongue Prospect and is limited to a maximum of five Bonus Prospects. No Bonus or additional shares are payable for prospects located on the South Tongue Prospect, regardless of potential or ultimate production. We are obligated to file additional registration statements at our expense covering the re-sale of each issuance of shares for each Bonus Prospect designation. On December 10, 2003, we completed an acquisition of certain production and acreage located primarily in Eland and Stadium fields of Stark County, North Dakota, from Sovereign Holdings, LLC, a privately - held Colorado limited liability company ("Sovereign"), pursuant to the terms of a Purchase and Sale Agreement effective as of December 1, 2003. The total consideration paid for these properties was 773,500 shares of our common stock. The shares issued were recorded at a price of $5.58, a five day average surrounding the closing of the transaction. We recorded an downward purchase price adjustment of approximately $84,000 which reflects the operating and acquisition related costs in excess of net revenue from the effective date of December 1, 2003 through the closing date of December 5, 2003. The total acquisition cost of $4,233,000 was allocated to proved developed producing properties. On February 24, 2004, we acquired certain properties in Texas from Labyrinth Enterprises, LLC, an unrelated entity for $1,320,000 in cash and 185,000 shares of our common stock valued at $1,619,000 based on a five day average surrounding the closing of the transaction. On February 26, 2004, we acquired approximately 135,000 leasehold acres in the Columbia River Basin project in eastern Washington from an unrelated entity for $1,357,000 in cash. The Company will become the operator once drilling begins on this acreage. Subsequent to the quarter end, the Company purchased approximately 23,000 additional net acreage in this project through State and Federal lease sales. In March 2004, we purchased a 50% interest in Big Dog Drilling Company, LLC ("BDDC") for an initial investment of approximately $3,000,000. The remaining interest is owned 25% by Davis described above and 25% by an unrelated individual. BDDC's primary assets include two drilling rigs rated at drilling depths of up to 10,000 feet and certain additional drilling equipment. Also in March 2004, we purchased a 50% interest in Shark Trucking Company, LLC ("STC") for an initial investment of approximately $276,000. STC has a similar ownership structure to that of BDDC. STC's primary assets include the ownership of trucking equipment used for the mobilization of drilling rigs and equipment. Both BDDC and STC meet the criteria for control and require consolidation for the entities. Neither entity has commended operations as of March 31, 2004. 25 The drilling rigs and trucking company will be used primarily for drilling activities on our properties. Increasing drilling rig rates, periodic lack of availability of drilling rigs and increased drilling by us were contributing factors to this venture. On April 21, 2004, we acquired a fifty percent interest in approximately 1,300 leasehold acres in the Midway Loop Project located in Polk County, Texas from Willsource Enterprises, LLC for $340,000 and 31,250 shares of the Company's common stock valued at approximately $289,000. We will become the operator once drilling begins on this acreage. Also on April 21, 2004,we acquired a seventy five percent interest in approximately 9,800 leasehold acres in the Divide Creek Extension Project located in Mesa County, Colorado from Willsource Enterprises, LLC for $90,000 in cash and 187,500 shares of the Company's common stock valued at approximately $1,688,000. We will become the operator once drilling begins on this acreage. Fiscal 2004 - Discontinued Operations - ------------------------------------- On December 5, 2003, we completed the sale of certain properties located in Texas to Sovereign for cash consideration of $2,600,000. The effective date of the transaction is January 1, 2004 and resulted in a loss on sale of oil and gas properties of $28,000. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations and loss on sale of these properties have been reflected as discontinued operations. Revenues attributed to the sale of these oil and properties were approximately $0 and $537,000 for the three and nine months ended March 31, 2004 and $372,000 and $868,000 for the three and nine months ended March 31, 2003, respectively. On March 31, 2004, we completed the sale of all of our Pennsylvania properties to Castle Energy Corporation, a 25% shareholder of Delta at March 31, 2004, for cash consideration of $8,000,000, which the Company believes is fair value, with an effective date of January 1, 2004 and resulted in a gain on sale of oil and gas properties of $1,782,000. In accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," the results of operations and gain on sale of these properties have been reflected as discontinued operations. Revenues from the sale of these oil and properties was approximately $390,000 and $1,189,000 for the three and nine months ended March 31, 2004 and $528,000 and $1,358,000 for the three and nine months ended March 31, 2003. Fiscal 2004 Property Expenditures - --------------------------------- During the nine months ended March 31, 2004, we incurred approximately $26,735,000 in acquisition costs and an additional $9,315,000 on development of our oil and gas properties. We estimate our capital expenditures for development of onshore properties to range from $5,000,000 to $10,000,000 depending on drill rig availability and success of drilling programs for the remainder of fiscal 2004. We anticipate that we will drill one to two developmental wells from the Point Arguello Unit platforms to the Rocky Point structure during fiscal 2004. Each well will cost approximately $10,000,000 ($670,000 to our interest). We anticipate paying for all capital expenditures out of cash on hand and anticipated cash flow which assumes certain price levels for production. 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. 26 Common Stock Issued for Cash - ---------------------------- On February 19, 2004, we completed the sale of 4 million shares of our common stock at a price of $8.00 per share in a private placement for approximately $29,690,000, net of $2,310,000 in offering costs. Options - ------- We received proceeds from the exercise of options to purchase shares of our common stock of $3,311,000 and $975,000 during the nine months ended March 31, 2004 and year ended June 30, 2003, respectively. Credit Facility - --------------- On December 30, 2003, we amended and restated our credit facility. The new $50 million facility with Bank of Oklahoma, U.S. Bank National Association and Hibernia National Bank (the "Banks"). Currently we have an available borrowing base of $37,000,000. The facility has a variable interest rate component of LIBOR +1.75% to 2.85% and/or prime +.5%/-.5% based on the total debt outstanding and no current monthly commitment reduction. The loan matures on December 31, 2006 and is collateralized by substantially all of Delta's oil and gas properties. Our 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 the borrowing base, the total amount of the 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. We are required to meet quarterly debt covenants and restrictions. At March 31, 2004, we were in compliance with our quarterly debt covenants and restrictions. 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 an exhibit to this report. As of March 31, 2004, we had outstanding borrowings of approximately $30,922,000 and letters of credit for Operator's Bonds outstanding of $550,000. Results of Operations for the Three and Nine Months Ended March 31, 2004 Compared to the Three and Nine Months Ended March 31, 2003 - -------------------------------------------------------------------------- Net Earnings (Loss). Our net income for the three and nine months ended March 31, 2004 were $2,454,000 and $4,470,000 compared to a net income of $1,307,000 and $1,852,000 for the three and nine months ended March 31, 2003. The results for the three and nine months ended March 31, 2004 and 2003 were effected by the items described in detail below. 27 Revenue. Total revenues from continuing operations for the three and nine months ended March 31, 2004 were $10,342,000 and $24,735,000 compared to $5,846,000 and $15,658,000 for the three and nine months ended March 31, 2003. Oil and gas sales from continuing operations for the nine months ended March 31, 2004 were $10,628,000 and $25,401,000 compared to $6,817,000 and $17,049,000 for the three and nine months ended March 31, 2003. The increase in oil and gas sales during the three and nine months ended March 31, 2004 resulted from the acquisitions completed during fiscal 2004 and an increase in oil and gas prices. Production volumes and average prices received for the three months ended March 31, 2004 and 2003 are as follows: Three Months Ended March 31, 2004 2003 Onshore Offshore Onshore Offshore ------- -------- ------- -------- Production: Oil (barrels) 166,000 42,000 53,000 53,000 Gas (Mcf) 709,000 - 642,000 - Discontinued Operations Production: Oil (barrels) - - 10,000 - Gas (Mcf) 77,000 - 106,000 - Average Price received from continuing operations: Oil (per barrel) $33.98 $21.60 $32.52 $22.82 Gas (per Mcf) $ 5.75 $ - $ 6.05 $ - Hedge effect: (Per barrel equivalent) $(1.01) $(6.07) Production volumes and average prices received for the nine months ended March 31, 2004 and 2003 are as follows: Nine Months Ended March 31, 2004 2003 Onshore Offshore Onshore Offshore ------- -------- ------- -------- Production: Oil (barrels) 396,000 138,000 162,000 175,000 Gas (Mcf) 1,991,000 - 1,948,000 - Discontinued Operations Production: Oil (barrels) 16,000 - 27,000 - Gas (Mcf) 268,000 - 340,000 - Average Price received from continuing operations: Oil (per barrel) $31.43 $20.48 $28.58 $20.61 Gas (per Mcf) $ 5.09 $ - $ 4.52 $ - Hedge effect: (Per barrel equivalent) $(.92) $(2.86) 28 Lease Operating Expenses. Lease operating expenses from continuing operations for the three and nine months ended March 31, 2004 were $2,506,000 and $6,896,000 compared to $2,275,000 and $6,392,000 for the three and nine months ended March 31, 2003. Lease operating expense increased slightly compared to fiscal 2003 and first quarter fiscal 2004 as a result of the JAED and Davis acquisitions completed during fourth quarter fiscal 2003. On a per barrel ("Bbl") equivalent basis, production expenses and taxes were $5.77 and $6.23 for onshore properties and $20.65 and $17.09 for offshore properties during the three and nine months ended March 31, 2004 compared to $9.34 and $8.02 for onshore properties and $14.71 and $14.21 for offshore properties for the three and nine months ended March 31, 2003. Onshore costs per equivalent Bbl decreased as operating cost from our recent acquisitions in Colorado, Kansas and North Dakota incur much lower cost than our previous property base. The unit operator has received approval to drill the east half of lease 451 of our Rocky Point unit and we anticipate that the first well will be drilled in May 2004. If successful, the increase in production from the Rocky Point production should lower per Bbl equivalent costs for the offshore properties. Depreciation and Depletion Expense. Depreciation and depletion expense for the three and nine months ended March 31, 2004 was $3,085,000 and $6,877,000 compared to $1,300,000 and $3,887,000 for the three and nine months ended March 31, 2003. On a per Bbl equivalent basis, the depletion rate was $9.75 and $8.50 for onshore properties and $5.57 and $3.82 for offshore properties during the three and nine months ended March 31, 2004 compared to $6.45 and $6.15 for onshore properties and $4.81 and $4.90 for offshore properties for the three and nine months ended March 31, 2003. The increase in depletion expense can be attributed to the Davis and North Dakota acquisitions completed during fiscal 2004. The major portion of the production from both of these property acquisitions will be produced in the first few years and as a result they have a high depletion rate. Exploration Expenses. Exploration expenses consist of geological and geophysical costs and lease rentals. Exploration expenses were $1,698,000 and $1,966,000 for the three and nine months ended March 31, 2004 compared to $83,000 and $130,000 for the three and nine months ended March 31, 2003. Exploration costs during the quarter ended March 31, 2004 included an extensive seismic program in Washington County. The Company has expanded its seismic program based on initial results. The Company will continue to incur seismic costs over the next few quarters. Dry Hole Costs. The Company incurred dry hole costs of $387,000 during the nine months ended March 31, 2004 relating to non-operated properties in Richmond County, Montana and Renville County, North Dakota. Professional Fees. Professional fees for the three and nine months ended March 31, 2004 were $308,000 and $920,000 compared to $187,000 and $506,000 for the three and nine months ended March 31, 2003. Professional fees consist of corporate, legal and accounting costs related to investor relations and legal fees for representation in litigation, 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, 2004 were $1,722,000 and $4,443,000 compared to $946,000 and $2,737,000 for the three and nine months ended March 31, 2003. The increase in general and administrative expenses is primarily attributed to the increase in technical staff expanded office facility and increased fees relating to our listing on the NASDAQ National Market System. 29 Interest and Financing Costs. Interest and financing costs for the three and nine months ended March 31, 2004 were $373,000 and $1,458,000 compared to $408,000 and $1,348,000 for the three and nine months ended March 31, 2003. Interest expense decreased with the reduction in interest rates and our recent debt reduction during the quarter ended March 31, 2004. Income Taxes ------------ The Company recognized no tax expense in 2004 primarily due to recognition of deferred tax assets for which a valuation allowance had previously been provided and recognized no tax benefit in 2004 because realization was not more likely than not. The remaining deferred tax asset at March 31, 2004, for which a valuation allowance has been recorded, will be recognized in the financial statements when its realization is more likely than not, which continues to monitor. 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 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 $30,922,000 of variable rate debt obligations at March 31, 2004. The annual effect of a one percent change in interest rates would be approximately $309,000. The interest rate on these variable rate debt obligations approximates current market rates as of March 31, 2004. Item 4. Controls and Procedures As of March 31, 2004, under the supervision and with the participation of the Company's Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2004. There were no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting. The Company will continue to monitor change to its internal control procedures. 30 PART II - OTHER INFORMATION Item 1. Legal Proceedings. 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 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. 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 lessees for bonuses and rentals exceeds $1.2 billion, with additional amounts for exploration costs and related expenses. Our claim 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. In the event, however, that we receive any proceeds as the result of such litigation, we will be obligated to pay a portion of any amount received by us to landowners and other owners of royalties and similar interests, and to pay expenses of litigation and to fulfill certain pre-existing contractual commitments to third parties. Although the computation of the various amounts that we would be required to pay to landowners and other owners of royalties and similar interests is dependent upon facts and circumstances that are not yet known, it is possible that they may be as much as twenty percent of any proceeds that we might ultimately obtain. The Federal Government has not yet filed an answer in this proceeding pending its motion to dismiss the lawsuit, which motion has not yet been heard by the court. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities. During the quarter ended March 31, 2004, we issued securities that were not registered under the Securities Act of 1933 as follows: On February 19, 2004, we issued a total of 4,000,000 shares of our common stock to 37 Accredited Investors in a private placement. The shares were sold for $8.00 per share for an aggregate of $32,000,000. In connection with the private placement we paid Sterne, Agee & Leach, Inc., the placement agent, a commission of $2,240,000. In connection with this offering we relied on the exemptions provided by Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D promulgated under the Securities Act of 1933. We reasonably believe that all of the investors are "Accredited Investors" as such term is 31 defined in Rule 501 of Regulation D at the time the offering occurred. The investors acquired the shares for investment purposes. Restrictive legends were placed on the certificates issued to the investors, and stop transfer orders were given to our transfer agent. A Form D reporting the offering was filed with the Securities and Exchange Commission. On February 24, 2004, we issued a total of 185,000 shares of our common stock to Labyrinth Enterprises, LLC in connection with the acquisition of certain production primarily located in South Texas. In connection with this transaction we relied on the exemption provided by Section 4(2) of the Securities Act of 1933. We reasonably believe that the investor is an "Accredited Investor" as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 at the time the transactions occurred. The investor acquired the shares for investment purposes. A restrictive legend was placed on the certificate issued to the investor, and stop transfer orders were given to our transfer agent. Item 3. Defaults Upon Senior Securities. None. Item 4. Submission of Matters to a Vote of Security Holders. Item 5. Other Information. None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits are as follows: 31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith electronically 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. Filed herewith electronically (b) Reports on Form 8-K. During the quarter ended March 31, 2004, Delta filed Reports on Form 8-K as follows: 1. Report on Form 8-K dated February 4, 2004, reporting information under Item 5, Item 7 and Item 12 filed on February 5, 2004. 2. Report on Form 8-K dated March 8, 2004, reporting information under Item 5 filed on March 8, 2004. 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. 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 Date: May 10, 2004