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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number 1-12108.
GulfWest Oil Company
(Exact name of registrant as specified in its charter)
Texas 87-0444770
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
397 N. Sam Houston Parkway East, Suite 375
Houston, Texas 77060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 820-1919.
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Class A Common Stock, par value of $.001 per share
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
Class A Common Stock, par value of $.001 per share
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or informational statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock of the Registrant held by
non-affiliates (excluding voting shares held by officers and directors) was
$7,914,021 on March 31, 2000.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock: Class A Common Stock $.001 par value: 15,730,997 shares
on March 31, 2000.
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. Business.
General
GulfWest Oil Company ("GulfWest" or the "Company") is primarily engaged
in the acquisition, development, exploitation, exploration and production of oil
and natural gas. The Company is focused on increasing production from its
existing oil and gas properties, acquiring additional interests in oil and gas
properties and the further exploitation, exploration and development of its oil
and gas assets. The Company's gross revenues are derived from the following
sources:
1. Oil and gas sales that are proceeds from the sale of oil and natural gas
production to midstream purchasers;
2. Lease sales that are income from the sale of oil and gas leases acquired
by the Company for resale to third parties.
3. Operating overhead consisting of fees earned from other working interest
owners for operating oil and natural gas properties; and,
4. Well servicing revenues that are earnings from the operation of well
servicing equipment under contract to third party operators.
Since June 1993, when the Company made its first significant acquisition,
the Company has substantially increased its ownership in producing properties
and the value of its oil and natural gas reserves through a combination of
acquisitions and the further exploitation and development of the properties in
which it owns interests. At present, substantially all of the Company's
interests are in properties located on land in Texas and Colorado. In the
future, the Company plans to expand by acquiring additional interests in those
areas, and in similar oil and natural gas properties located in other areas of
the United States. The operations of the Company are considered to fall within a
single industry segment, the acquisition, development, production and servicing
of crude oil and natural gas. See Item 7. " Management's Discussion and Analysis
of Financial Condition and Results of Operations." Certain industry terms are
italicized and defined in the Glossary.
The Company's common stock is traded over-the-counter (OTC) under the
symbol "GULF" and is listed on the Boston Stock Exchange under the symbol "GFW".
Corporate History
In July 1992, GulfWest Energy, Inc., a Utah corporation, merged into
GulfWest Oil Company to change the state of incorporation of the Company from
Utah to Texas. GulfWest Energy, Inc., formerly First Preference Fund, Inc. and
Gallup Acquisitions, Inc., was incorporated in 1987 as a Utah corporation.
2
GulfWest has seven wholly-owned subsidiaries, all Texas corporations or
companies:
1. GulfWest Oil & Gas Company was organized February 18, 1999 and is
the owner of record of interests in certain oil and natural
gas properties located in Colorado and Texas.
2. SETEX Oil and Gas Company ("SETEX") was organized August 11, 1998
and operates oil and natural gas properties in which the Company
owns majority working interests.
3. LTW Pipeline Co. ("LTW") was organized April 19, 1999 to be the
owner and operator of natural gas gathering systems and pipelines,
and to market the natural gas produced by the Company's properties.
4. VanCo Well Service, Inc. ("VanCo") was organized September 5, 1996
and operates well servicing equipment for the Company and under
contracts with third parties.
5. Southeast Texas Oil and Gas Company, L.L.C. ("Setex LLC") was
acquired September 1, 1998 and is the owner of record of interests
in certain oil and natural gas properties located in eight Texas
counties.
6. GulfWest Texas Company ("GW Texas") was organized September 23,
1996 and is the owner of record of interests in certain properties
located in the Vaughn Field, Crockett County, Texas (the "Vaughn
Field").
7. DutchWest Oil Company ("DutchWest") was organized July 28, 1997
and is the owner of record of interests in certain oil and
natural gas properties located in Hardin and Polk Counties, Texas.
The Company's main executive office is located at 397 North Sam Houston
Parkway East, Suite 375, Houston, Texas 77060. The telephone number of the main
office is (281) 820-1919.
Business Strategy
The management of GulfWest has pursued a business strategy of acquiring
interests in oil and natural gas producing properties, where production and
reserves can be increased through engineering, development and exploration
activities. Such activities may include workovers, drilling, recompletions,
replacement or addition of equipment and waterflood or other secondary recovery
techniques. Management believes the Company is now poised for substantial growth
and therefore has expanded its business plan to include an increased but
controlled emphasis on the exploration for and the exploitation of additional
oil and natural gas reserves. Key elements of the Company's business strategy
include:
Continued Acquisition Program. GulfWest intends to continue to be (i)
an aggressive consolidator of interests in properties held by small,
under-capitalized operators and (ii) a purchaser of oil and natural gas
properties that may be non-core to larger independent and major oil and gas
companies.
Development and Exploitation of Existing Properties. The Company
intends to increase its development of properties in which it currently owns
interests by expending more engineering and geological effort on field studies.
The intent is to increase oil and gas production and reserves of existing assets
through relatively low-risk development activities, such as workovers,
recompletions, horizontal drilling from existing wellbores and infield drilling,
as well as the more efficient use of production facilities and the expansion of
existing waterflood operations.
3
Significant Operating Control. Currently, the Company is the operator
of all the wells in which it owns working interests. This operating control
enables the Company to better manage the nature, timing and costs of development
of such wells, and the marketing of the resulting production.
Ownership of Workover Rigs. The Company, through its wholly owned
subsidiary, VanCo, currently owns three service rigs that it operates for its
own account and under contract for third parties. By owning and operating the
servicing equipment for its own account, management is better able to control
costs, quality of operations and availability of equipment and services.
Greater Natural Gas and Oil Balance. At December 31, 1999, the
Company's reserves were 51% oil and 49% natural gas. Management believes that
the Company should continue to move toward a more gas-weighted ownership of oil
and natural gas interests in order to offset oil price fluctuations. Therefore,
the Company will continue to expand its role in the domestic natural gas
industry by acquiring additional interests in natural gas properties, increasing
the production and reserve base of its existing natural gas assets, and
acquiring ownership of more natural gas gathering systems and pipelines. With
that said, management is presently focusing its workover and development efforts
on both oil and natural gas reserves with the goal of significantly increasing
its production of both to take advantage of higher prices of both commodities.
The Company is also seeking to expand its ownership of gas gathering systems and
pipelines located in its core field areas. Management's goal is to have greater
control of its natural gas transportation and marketing, as well as an expanded
role in the transportation of gas produced by third parties in its area of
operations.
Expanded Exploration and Exploitation Role. Historically, the Company
has not drilled exploratory wells due to the high expense associated with
generating prospective locations. However, since the end of 1998, the Company
has closed on four acquisitions of producing properties, which also included
significant acreage for prospective oil and gas development. The Company
acquired interests in 45 oil and gas wells in the Ft. Terrett area of Kimble and
Sutton Counties, Texas (the "Ft. Terrett Properties"), which included 14,500
acres of prospective shallow gas properties to be evaluated and drilled by the
Company. In mid-1999, the Company purchased producing wells and assets, rights
and data from Skidmore Energy, Inc. in Zavala County, Texas (the "Skidmore
Properties"). Effective December 31, 1999, the Company closed on the acquisition
of north Texas and Colorado properties from Pozo Resources, Inc. ("Pozo"). In a
subsequent event on April 1, 2000, the Company acquired additional interest in
producing wells and development acreage in the Leona River Field, Zavala County,
Texas (the "Leona River Properties"). These acquisitions have added existing
natural gas and oil production to the Company's asset base and, as importantly,
have provided the Company with immediate geological databases for oil and
natural gas drilling opportunities. As such, the Company has expanded its
efforts to evaluate its oil and gas properties and will increase its exploration
of reserves, by drilling more wells.
Fourth Quarter 1999 Developments
Effective December 31, 1999, the Company purchased all of Pozo's
interests in oil and gas leases, wells and equipment in Adams, Arapaho Elbert
and Weld Counties, Colorado, and Gregg and Palo Pinto Counties, Texas. Pursuant
to a purchase and sale agreement, GulfWest assumed $6.5 million of long-term
debt and issued Pozo $4 million of GulfWest preferred stock, par value $.01 and
liquidation value $500 per share, convertible after 3 years to 500,000 shares of
GulfWest common stock for a total purchase price of $10.5 million. Management of
the Company negotiated the purchase price based upon a report provided by an
independent engineering firm.
The interests in the properties purchased from Pozo averaged 73%
working interest and 55% net revenue interest. The properties have proved
natural gas (70%) and oil (30%) reserves estimated at 14.6 billion cubic feet of
natural gas equivalent, net to the acquired interests, with 54 producing wells
and an estimated 21,000 acres for development.
4
Events Subsequent to Year End 1999
In a subsequent event on March 30, 2000, a director of the Company
agreed to convert a note payable for $750,000 to 500,000 shares of common stock.
The closing price of the Company's common stock on that date was $1.50 per
share.
In a subsequent event on April 5, 2000, the Company closed a $19.3
million credit facility with Aquila Energy Capital Corporation ("Aquila"), an
energy lender, for acquisitions and development of properties in Texas and
Colorado. At closing, $12.9 million was funded for acquisitions and debt
consolidation, and subsequently $6.0 million will be made available for specific
development projects. As part of the transaction, Aquila obtained the right to
market all natural gas and natural gas liquids hydrocarbon commodities from the
Company's properties for the term of the loan.
In addition, effective April 1, 2000, the Company acquired 100% working
interest in 19 natural gas wells and 5,000 acres in the Leona River Field,
Zavala County, Texas, with total proved reserves of 3 billion cubic feet (bcf)
of natural gas. The purchase price was $2.3 million and 200,000 shares of the
Company's common stock. Current production is 600 thousand cubic feet (mcf) per
day, and there is significant shut-in production with development potential.
Employees
At March 31, 2000, the Company had 19 full time salaried and contract
employees, of whom 7 were field personnel.
Executive Officers
See Item 10 of this report, which information is incorporated herein by
reference.
5
ITEM 2. Properties.
At December 31, 1999, the Company held an average 89% working interest
in 230 gross wells and 205 net wells and royalty interests in two (2) additional
wells. The properties contained (net to the Company's interest) estimated proved
reserves of approximately 3,314,908 barrels of oil and 19,186,865 Mcf of natural
gas. Substantially all of the Company's reserves are located in Texas and
Colorado.
Proved Reserves. The following table reflects the estimated proved reserves
of the Company at December 31 for each of the preceding three years.
1999 1998 1997
-------------- ------------- ---------
Crude Oil (Bbl)
Developed 1,589,750 769,862 2,158,239
Undeveloped 1,745,158 314,285 2,518,188
--------- ------- ---------
Total 3,314,908 1,084,147 4,676,427
========= ========= =========
Natural Gas (Mcf)
Developed 9,316,529 3,866,308 4,286,755
Undeveloped 9,870,336 2,789,047 1,908,603
--------- --------- ---------
Total 19,186,865 6,655,355 6,195,358
========== ========= =========
Total (BOE) 6,512,719 2,193,373 5,708,987
========= ========= =========
(a) The above table does not include reserves for the Company's interests
in wells in Louisiana, which represent less than 1% of the Company's reserves.
(b) Approximately 48% of the Company's total proved reserves were
classified as proved developed at December 31, 1999.
6
Standardized Measure of Discounted Future Net Cash Flows. The following table
sets forth as of December 31 for each of the preceding three years, the
estimated future net cash flow from and standardized measure of discounted
future net cash flows of the Company's proved reserves which were prepared in
accordance with the rules and regulations of the SEC. Future net cash flow
represents future gross cash flow from the production and sale of proved
reserves, net of oil and gas production costs (including production taxes, ad
valorem taxes and operating expenses) and future development costs. Such
calculations are based on current cost and price factors at December 31 for each
year. There can be no assurance that the proved reserves will all be developed
within the periods used in the calculations or that prices and costs will remain
constant.
1999 1998 1997
-------------------- ------------------- --------------------
Future cash inflows $ 119,006,567 $ 22,260,688 $ 87,414,045
Future production and development costs-
Production 42,544,454 10,379,070 35,441,101
Development 9,903,729 2,935,160 9,937,663
--------- --------- ---------
Future net cash flows before income taxes 66,558,384 8,946,458 42,035,281
Future income taxes (11,847,076) ( - ) (7,852,795)
----------- ----------- ----------
Future net cash flows after income taxes 54,711,308 8,946,486 34,182,486
10% annual discount for estimated timing
of cash flows (23,755,909) (3,756,850) (13,419,225)
----------- ---------- -----------
Standardized measure of discounted
Future net cash flows(1) $ 30,955,399 $ 5,189,608 $ 20,763,261
================= ================= =================
(1) The average prices of the Company's proved reserves were $22.80 per Bbl
and $2.19 per Mcf, $8.91 per Bbl and $1.89 per Mcf, and $15.68 per Bbl and $2.28
per Mcf at December 31, 1999, 1998 and 1997, respectively.
Significant Properties. Substantially all of the Company's properties are
located in Texas and Colorado. Summary information on the Company's properties
with proved reserves is set forth below as of December 31,1999.
Productive Wells Proved Reserves (1) Present
------------------------------- ----------------------------------------------- -------
Gross Net Value (2)
---------
Productive Productive Crude Natural
Wells Wells Oil Gas Total Amount ($)
--------- ---------- --- --- ----- ----------
(Bbl) (Mcf) (BOE)
Texas 194 180 2,729,058 9,673,425 4,341,296 $26,613,239
Colorado 36 24 585,850 9,513,440 2,171,423 $11,045,178
(1) The above table does not include reserves for the Company's interests
in wells in Louisiana, which represent less than 1% of the Company's reserves.
(2) The average prices of the Company's proved reserves were $22.80 per Bbl
and $2.19 per Mcf at December 31, 1999.
7
All information set forth here in relating to the Company's proved
reserves, estimated future net cash flows and present values is taken from
reports prepared by Pressler Petroleum Consultants, Forrest Garb and Associates,
Inc., Cawley, Gillespie and Associates, Inc. and A. Van Nguyen, independent
petroleum engineers. The estimates of these engineers were based upon review of
production histories and other geological, economic, ownership and engineering
data provided by the Company. No reports on the Company's reserves have been
filed with any federal agency. In accordance with the SEC's guidelines, the
Company's estimates of proved reserves and the future net revenues from which
present values are derived are made using year end oil and gas sales prices held
constant throughout the life of the properties (except to the extent a contract
specifically provides otherwise). Operating costs, development costs and certain
production-related taxes were deducted in arriving at estimated future net
revenues, but such costs do not include debt service, general and administrative
expenses and income taxes.
There are numerous uncertainties inherent in estimating oil and gas
reserves and their values, including many factors beyond the Company's control.
The reserve data set forth in this report represents estimates only. Reservoir
engineering is a subjective process of estimating the sizes of underground
accumulations of oil and gas that cannot be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data,
engineering and geological interpretation, and judgment. As a result, estimates
of different engineers, including those used by the Company, may vary. In
addition, estimates of reserves are subject to revision based upon actual
production, results of future development, exploitation and exploration
activities, prevailing oil and gas prices, operating costs and other factors,
which revisions may be material. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered and
are highly dependent upon the accuracy of the assumptions upon which they are
based. There can be no assurance that these estimates are accurate predictions
of the Company's oil and gas reserves or their values. Estimates with respect to
proved reserves that may be developed and produced in the future are often based
upon volumetric calculations and upon analogy to similar types of reserves
rather than actual production history. Estimates based on these methods are
generally less reliable than those based on actual production history.
Subsequent evaluation of the same reserves based upon production history will
result in variations, which may be substantial, in the estimated reserves.
8
Production, Revenue and Price History
The following table sets forth information (associated with the
Company's proved reserves) regarding production volumes (net to the Company's
interest) of crude oil and gas, revenues and expenses attributable to such
production and certain price and cost information for the years ended December
31, 1999, 1998 and 1997.
1999 1998 1997
----------------- ----------------- ----------------
Production
Oil (Bbl) 79,661 98,157 200,898
Natural Gas (Mcf) 467,350 200,225 271,263
----------------- --------------- ---------------
Total (BOE) 157,553 131,528 246,109
Revenue
Oil Production $1,565,200 $1,358,767 $3,637,911
Natural Gas Production 968,104 445,380 631,121
----------------- --------------- ---------------
Total $2,533,304 $1,804,147 $4,269,032
Operating Expenses $1,399,710 $1,647,329 $2,139,128
Production Data
Average Sales Price
Per Barrel of oil $19.65 $13.84 $18.11
Per Mcf of natural gas 2.07 2.22 2.33
Per BOE 16.08 13.71 17.35
Average expenses per BOE
Lease Operating $8.88 $12.52 $8.69
DD&A 4.47 17.66 6.60
G&A 12.59 15.69 6.01
Productive Wells at December 31, 1999:
Gross Net Gross Net
Oil Wells Oil Wells Gas Wells Gas Wells
--------- --------- --------- ---------
Texas 136 130.11 58 50.50
Colorado 17 10.43 19 13.64
----- ------- ---- -----
Total 153 140.54 77 64.14
=== ====== == =====
9
Developed Acreage at December 31, 1999
Gross Net
----- ---
Texas 17,000 15,650
Colorado 4,000 2,700
------- -------
Total 21,000 18,350
====== ======
Undeveloped Acreage. At December 31, 1999, the Company owned 29,000 acres of
undeveloped acreage. This included 2,000 acres along the Gulf Coast of Texas,
6,000 acres in Kimble and Sutton Counties, Texas and 21,000 acres in four
counties in Colorado.
Drilling Results. The Company did not drill any wells in 1999, however six wells
were drilled in 1998. A horizontal well was drilled by sidetracking an existing
wellbore in the Madisonville Field, Texas. This well is producing commercial oil
and gas at a daily rate of 175 barrels of oil and 750 Mcf of gas. A gas well was
drilled to 9,600 feet in Hardin County, Texas. This well is currently being
tested for commercial completion. The Company also drilled five 1,500' depth
wells in its Vaughn waterflood field in 1998. One (1) of the wells was converted
to a water injection well, three were producing oil wells, and one was plugged
for mechanical reasons.
Risk Factors
Substantial Leverage
The degree to which the Company is leveraged could have important
consequences to shareholders, including the following: (i) the Company's
indebtedness, acquisitions, working capital, capital expenditures or other
purposes may be impaired, (ii) funds available to the Company for its operations
and general corporate purposes or for capital expenditures will be reduced as a
result of the dedication of a substantial portion of the Company's consolidated
cash flow from operations to the payment of the principal and interest on its
indebtedness, (iii) the Company may be more highly leveraged than certain of its
competitors, which may place it at a competitive disadvantage, (iv) the
agreements governing the Company's and its subsidiaries' long-term indebtedness
and bank loans contain restrictive financial and operating covenants, (v) an
event of default (not cured or waived) under financial and operating covenants
contained in the Company's or its subsidiaries' debt instruments could occur and
have a material adverse effect on the Company, (vi) certain of the borrowings
under debt agreements of the Company's subsidiaries have floating rates of
interest, which causes the Company and its subsidiaries to be vulnerable to
increases in interest rates and (vii) the Company's substantial degree of
leverage could make it more vulnerable to a downturn in general economic
conditions.
The ability of the Company to make principal and interest payments
under long-term indebtedness and bank loans will be dependent upon its future
performance, which is subject to financial, economic and other factors affecting
the Company, some of which are beyond its control. There can be no assurance
that the current level of operating results of the Company will continue or
improve. The Company believes that it will need to access the capital markets in
the future in order to provide the funds necessary to repay a significant
portion of its indebtedness. There can be no assurance that any such refinancing
will be possible or that any additional financing can be obtained, particularly
in view of the Company's anticipated high levels of debt. If no such refinancing
or additional financing were available, the Company and/or its subsidiaries
could default on their respective debt obligations.
10
Market Conditions and Prices
The Company's success depends heavily upon its ability to market its
oil and gas production at favorable prices, of which there can be no assurance.
In recent decades, there have been both periods of worldwide overproduction and
underproduction of hydrocarbons and periods of increased and relaxed energy
conservation efforts. Such conditions have resulted in periods of excess supply
of, and reduced demand for, crude oil on a worldwide basis and for natural gas
on a domestic basis; these periods have been followed by periods of short supply
of, and increased demand for, crude oil and, to a lesser extent, natural gas.
The excess or short supply of oil and gas has placed pressures on prices and has
resulted in dramatic price fluctuations.
Historical Operating Losses and
Variability of Operating Results
The Company has incurred net losses since its inception and there can
be no assurance that the Company will be profitable in the future. In addition,
the Company's future operating results may fluctuate significantly depending
upon a number of factors, including industry conditions, prices of oil and gas,
rates of production, timing of capital expenditures and drilling success. This
variability could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainty of Estimates of Oil and Gas Reserves
This Annual Report on Form 10-K for the year ended December 31, 1999
contains estimates of the Company's proved oil and gas reserves and the
estimated future net revenues there from that rely upon various assumptions,
including assumptions as to oil and gas prices, drilling and operating expenses,
capital expenditures, taxes and availability of funds. The process of estimating
oil and gas reserves is complex, requiring significant decisions and assumptions
in the evaluation of available geological, geophysical, engineering and economic
data for each reservoir. As a result, such estimates are inherently imprecise.
Actual future production, oil and gas prices, revenues, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves may vary substantially from those estimated in the reports obtained by
the Company from reserve engineers. Any significant variance in these
assumptions could materially affect the estimated quantities and present value
of reserves set forth in this report. In addition, the Company's proved reserves
may be subject to downward or upward revision based upon production history,
results of future exploration and development, prevailing oil and gas prices and
other factors, many of which are beyond the Company's control. Actual
production, revenues, taxes, development expenditures and operating expenses
with respect to the Company's reserves will likely vary from the estimates used,
and such variances may be material.
Approximately 48% of the Company's total estimated proved reserves at
December 31, 1999 were undeveloped, which are by their nature less certain.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. The reserve data set forth in the reserve
engineer reports assumes that substantial capital expenditures by the Company
will be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated.
The present value referred to in this report should not be construed as
the current market value of the estimated oil and gas reserves attributable to
the Company's properties. In accordance with applicable requirements of the
Securities and Exchange Commission (the "SEC"), the estimated discounted future
net cash flows from proved reserves are generally based on prices and costs as
of the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. The estimates at December 31, 1999 of the Company's
11
proved reserves and the future net revenues from which present value is derived
were made using actual prices on a property-by-property basis at December 31,
1999. The average prices of all properties were $22.80 per barrel of oil and
$2.19 per Mcf of natural gas at that date. Actual future net cash flows will
also be affected by increases or decreases in consumption by oil and gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from proved reserves, and thus their actual present
value, will be affected by the timing of both the production and the incurring
of expenses in connection with the development and production of oil and gas
properties. In addition, the 10% discount factor, which is required by the SEC
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the Company
or the oil and gas industry in general.
Replacement of Reserves
In general, production from oil and gas properties declines as
reserves are depleted. Except to the extent the Company acquires properties
containing proved reserves or conducts successful development and exploitation
activities, or both, the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and gas production is, therefore, highly
dependent upon its level of success in finding or acquiring additional reserves.
The business of acquiring, enhancing or developing reserves is capital
intensive. To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, the Company's ability to make
the necessary capital investment to maintain or expand its asset base of oil and
gas reserves would be impaired. In addition, there can be no assurance that the
Company's future acquisition and development activities will result in
additional proved reserves or that the Company will be able to drill productive
wells at acceptable costs.
Industry Risks
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or gas reservoirs will be encountered,
that operations may be curtailed, delayed or canceled, and that title problems,
weather conditions, compliance with governmental requirements, mechanical
difficulties or shortages or delays in the delivery of drilling rigs and other
equipment may limit the Company's ability to develop, produce and market its
reserves.
There can be no assurance that new wells drilled by the Company will be
productive or that the Company will recover all or any portion of its
investment. Drilling for oil and gas may involve unprofitable efforts, not only
from dry wells but also from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs. In addition, the Company's properties may be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties.
Industry operating risks include the risks of fire, explosions,
blow-outs, pipe failure, abnormally pressured formations and environmental
hazards, such as oil spills, natural gas leaks, ruptures or discharges of toxic
gases, the occurrence of any of which could result in substantial losses to the
Company due to injury or loss of life, severe damage to or destruction of
property, natural resources and equipment, pollution or other environmental
damage, clean-up responsibilities, regulatory investigation and penalties and
suspension operations. In accordance with customary industry practice, the
Company maintains insurance against some, but not all, of the risks described
above. There can be no assurance that any insurance will be adequate to cover
losses or liabilities. The Company cannot predict the continued availability of
insurance at premium levels that justify its purchase.
12
Acquisition Risks
The Company's growth has been attributable largely to acquisitions of
producing oil and gas properties with proved reserves. The successful
acquisition of such properties requires an assessment of recoverable reserves,
future oil and gas prices, operating costs, potential environmental and other
liabilities and other factors beyond the Company's control. Such assessments are
necessarily inexact and their accuracy inherently uncertain. In connection with
such an assessment, the Company performs a review of the subject properties that
it believes to be generally consistent with industry practices. Such a review,
however, will not reveal all existing or potential problems, nor will it permit
a buyer to become sufficiently familiar with the properties to fully assess
their deficiencies and capabilities. Inspections may not always be performed on
every well, and structural and environmental problems are not necessarily
observable even when an inspection is undertaken. In most cases, the Company is
not entitled to contractual indemnification for pre-closing liabilities,
including environmental liabilities, and generally acquires interests in the
properties on an "as is" basis with limited remedies for breaches of
representations and warranties. In those circumstances in which the Company has
contractual indemnification rights for pre-closing liabilities, there can be no
assurance that the seller will be able to fulfill its contractual obligations.
In addition, competition for producing oil and gas properties is intense and
many of the Company's competitors have financial and other resources that are
substantially greater than those available to the Company. Therefore, no
assurance can be given that the Company will be able to acquire producing oil
and gas properties which contain economically recoverable reserves or that it
will make such acquisitions at acceptable prices.
Risks as to Minority or Royalty Interest Purchases
The Company may acquire less than the controlling working interest or
overriding (or other forms of) royalty interests in oil and gas properties. In
such cases, it is likely that the Company would not operate these properties.
The Company would limit such acquisitions to properties operated by competent
entities with which the Company has discussed the operator's plans for the
properties, but the Company will not have complete control over decisions
affecting such properties.
Environmental Liability
Oil and gas activities can result in liability under federal, state and
local environmental regulations for activities involving, among other things,
water pollution and hazardous waste transport, storage, and disposal. Such
liability can attach not only to the operator of record of the well, but also to
other parties that may be deemed to be current or prior operators or owners of
the wells or the equipment involved.
Substantial Capital Requirements
The Company makes and will continue to make substantial capital
expenditures in its exploitation and development projects. The Company intends
to finance these capital expenditures, in part, with the net proceeds from
future equity offerings, cash flow from operations and its existing financing
arrangements. Additional financing will be required in the future to fund the
Company's developmental and exploitation activities. No assurance can be given
as to the availability or terms of any such additional financing that may be
required or that financing will continue to be available under the existing or
new financing arrangements. If additional capital resources are not available to
the Company, its developmental and other activities may be curtailed and its
business, financial condition and results of operations could be materially
adversely affected.
13
Marketability of Production
The marketability of the Company's natural gas production depends in
part upon the availability, proximity and capacity of natural gas gathering
systems, pipelines and processing facilities. Most of the Company's natural gas
is delivered through natural gas gathering systems and natural gas pipelines
that are not owned by the Company. Federal, state and local regulation of oil
and gas production and transportation, tax and energy policies, changes in
supply and demand and general economic conditions all could adversely affect the
Company's ability to produce and market its oil and gas. Any dramatic change in
market factors could have a material adverse effect on the Company's financial
condition and results of operations.
Competition
The oil and gas industry is highly competitive in all its phases.
Competition is particularly intense with respect to the acquisition of desirable
producing properties, the acquisition of oil and gas prospects suitable for
enhanced recovery efforts, and the hiring of experienced personnel. The
competitors of the Company in oil and gas acquisition, development, and
production include the major oil companies in addition to numerous independent
oil and gas companies, individual proprietors and drilling programs. Many of
these competitors possess and employ financial and personnel resources
substantially in excess of those which are available to the Company and may,
therefore, be able to pay more for desirable producing properties and prospects
and to define, evaluate, bid for, and purchase a greater number of producing
properties and prospects than the financial or personnel resources of the
Company will permit. The ability of the Company to acquire additional reserves
in the future will be dependent on the Company's ability to select and acquire
suitable producing properties and prospects in competition with these companies.
Governmental Regulation
Domestic exploration for and production and sale of oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Also, numerous
departments and agencies, both federal and state, are authorized by statute to
issue, and have issued, rules and regulations affecting the oil and gas
industry. These are often difficult and costly to comply with and carry
substantial penalties for noncompliance. State statutes and regulations require
permits for drilling operations, drilling bonds, and reports concerning
operations. Most states in which the Company will operate also have statutes and
regulations governing conservation matters, including the unitization or pooling
of properties and the establishment of maximum rates of production from wells.
Many state statutes and regulations may limit the rate at which oil and gas
could otherwise be produced from acquired properties. Some states have also
enacted statutes prescribing ceiling prices for natural gas sold within their
states. The Company's operations are also subject to numerous laws and
regulations governing plugging and abandonment, the discharge of materials into
the environment or otherwise relating to environmental protection. The heavy
regulatory burden on the oil and gas industry increases its costs of doing
business and consequently affects its profitability. Although the Company
believes it is in compliance with such laws, rules and regulations, there can be
no assurance that a change in such laws, rules or regulations, or the
interpretation thereof, will not have a material adverse effect on the Company's
financial condition or results of operations.
Dependence on Key Personnel
The business of the Company will depend on the continued services of its
chief executive officer, Marshall A. Smith III and its president, Thomas R.
Kaetzer. Effective September 9, 1997 and December 14, 1998 respectively, the
Company entered into employment agreements with Mr. Smith and Mr. Kaetzer for a
period of three years. The loss of the services of Mr. Smith or Mr. Kaetzer
would be particularly detrimental to the Company because of their background and
experience in the oil and gas industry.
14
Delisting by The Nasdaq SmallCap Market and Boston Stock Exchange
Effective April 7, 1999 and December 20, 1999, respectively, the
Company's common stock was delisted by The Nasdaq SmallCap Market and the Boston
Stock Exchange due to the Company's failure to maintain compliance with the net
tangible assets standard and the minimum bid price requirement necessary for
continued listing. The Company's common stock continues to be traded in the
over-the-counter market.
No Dividends on Common Stock
The Company's Board of Directors (the "Board") presently intends to
retain all of the Company's earnings for the expansion of its business and
therefore does not anticipate the distribution of cash dividends on its common
stock in the foreseeable future.
Preemptive Rights, Cumulative Voting and Control
Holders of the Company's common stock have no preemptive rights in
connection with such shares. The shareholders may be further diluted in their
percentage ownership of the Company if the Company issues additional shares.
Cumulative voting in the election of directors is prohibited. Accordingly, the
holders of a majority of the shares of common stock present, in person or by
proxy, will be able to elect all the members of the Board.
ITEM 3. Legal Proceedings.
General. From time to time, the Company is involved in litigation
relating to claims arising out of its operations or from disputes with vendors
in the normal course of business. As of March 31, 2000, the Company was not
engaged in any legal proceedings that are expected, individually or in the
aggregate, to have a material adverse effect on the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders was held on November 19, 1999, at
which two matters were submitted to a vote: (1) The election of directors and
(2) a proposal to amend the Company's Articles of Incorporation to increase the
number of shares of common stock that the Company will have authority to issue
from 20,000,000 to 40,000,000 shares.
(1) The six nominees for director were re-elected by a majority of votes
(See Item 10 of this report).
(2) The proposal to amend the Company's Articles of Incorporation to
increase the number of shares of common stock that the Company
will have authority to issue from 20,000,000 to 40,000,000 shares
was approved with 12,808,374 votes cast for the proposal, 2,560
votes cast against the proposal and 3,970 abstentions.
15
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Company's common stock is traded over-the-counter under the symbol
"GULF". The high and low trading prices for the common stock for each quarter in
1997, 1998, 1999 and the first quarter of 2000 are set forth below. The trading
prices represent prices between dealers, without retail mark-ups, mark-downs, or
commissions, and may not necessarily represent actual transactions.
High Low
---- ---
1997
----
First Quarter 3.75 2.25
Second Quarter 2.875 1.875
Third Quarter 3.125 2.00
Fourth Quarter 3.25 2.50
1998
----
First Quarter 2.63 1.875
Second Quarter 2.25 1.50
Third Quarter 2.00 .875
Fourth Quarter 1.0625 .50
1999
----
First Quarter 2.63 1.875
Second Quarter 1.00 .375
Third Quarter .75 .375
Fourth Quarter .9375 .625
2000
----
First Quarter 1.75 .875
Common Stock
The Company is authorized to issue 40,000,000 shares of Class A Common
Stock, par value $.001 per share (the "common stock"). As of March 31, 2000,
there were 15,730,997 shares of Class A Common Stock issued and outstanding and
held by approximately 580 beneficial owners. Fidelity Transfer Company, 1800
South West Temple, Suite 301, Box 53, Salt Lake City, Utah 84115, (801)484-7222
is the transfer agent for the common stock.
The Company's common stock is traded over-the-counter (OTC) under the
symbol "GULF". Effective April 7, 1999 and December 20, 1999, respectively, the
Company's common stock was de-listed by The Nasdaq SmallCap Market and the
Boston Stock Exchange, due to the Company's failure to meet the net tangible
assets and minimum bid requirements necessary for continued listing. 16
16
Holders of common stock are entitled, among other things, to one vote per
share on each matter submitted to a vote of shareholders and, in the event of
liquidation, to share ratably in the distribution of assets remaining after
payment of liabilities (including preferential distribution and dividend rights
of holders of preferred stock). Holders of common stock have no cumulative
rights, and, accordingly, the holders of a majority of the outstanding shares of
the common stock have the ability to elect all of the directors.
Holders of common stock have no preemptive or other rights to subscribe for
shares. Holders of common stock are entitled to such dividends as may be
declared by the Board out of funds legally available therefore. The Company has
never paid cash dividends on the common stock and does not anticipate paying any
cash dividends in the foreseeable future.
Preferred Stock
The Board of Directors is authorized, without further shareholder action,
to issue preferred stock in one or more series and to designate the dividend
rate, voting rights and other rights, preferences and restrictions of each such
series. As of March 31, 2000, the Company had 8,765 shares of preferred stock
issued and outstanding in two classes or series (the "Classes or Series"): 765
shares in Class AAA, and 8,000 shares in Series D. The rights and preferences of
each Class or Series of preferred stock are as follows:
All of the Classes or Series are equal in preference and senior to the
common stock regarding payment of dividends and liquidation. None of the Classes
or Series has voting rights and none is entitled to the benefits of any
retirement or sinking fund.
The Class AAA is entitled to receive dividends at the rate of nine percent
(9%) per annum or $45.00 per share. On July 7, 1999, the holders agreed to
convert the Class AAA Preferred Stock to common stock at a rate based upon the
purchase price per share ($500 per share), plus accrued and unpaid dividends,
divided by $.90 per share of common stock. When completed, the Company will have
issued approximately 2,128,115 shares of common stock for the conversion of the
Class AAA Preferred Stock, and accrued and unpaid dividends.
The Series D is not entitled to receive dividends. After three (3) year
from the date of issuance, the preferred stock may be converted to common stock
at a rate based upon the value of the preferred stock ($4,000,000) divided by
$8.00 per share of common stock.
At March 31, 2000, the Company had outstanding warrants and options for the
purchase of 2,236,754 shares of common stock at prices ranging from $.75 to
$6.00 per share, including Employee Stock Options to purchase 867,000 shares at
prices ranging from $.75 to $3.00 per share.
17
ITEM 6. Selected Financial Data.
The following table sets forth selected historical financial data of
GulfWest Oil Company as of December 31, 1999, 1998, 1997, 1996 and 1995, and for
each of the periods then ended. See "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
income statement data for the years ended December 31, 1999, 1998 and 1997 and
the balance sheet data at December 31, 1999 and 1998 are derived from the
Company's audited financial statements contained elsewhere herein. The balance
sheet data at December 31, 1997, 1996 and 1995 and income statement data for the
years ended December 31, 1996 and 1995 are derived from the Company's Annual
Report on Form 10-K for those periods. The data should be read in conjunction
with the consolidated financial statements and the notes thereto of the Company
included elsewhere herein.
Year Ended December 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------------- ----------------- ----------------- ----------------- -----------------
Income Statement Data
- ---------------------
Operating Revenues $ 2,812,639 $ 2,403,553 $ 4,960,966 $ 1,966,012 $ 669,367
Net income (loss) from
operations (1,464,094) (6,329,884) (598,320) (485,588) (1,041,991)
Net income (loss) (2,269,506 (8,387,060) (1,676,681) (1,519,764) (1,186,843)
Dividends on preferred stock (450,684) (427,173) (380,928) (1,363,677) -
Net income (loss) available to
Common Shareholders (2,720,190) (8,814,233) (2,057,609) (2,883,441) (1,186,843)
Net income (loss), per
share of common stock $ (.34) $ (3.68) $ (1.19) $ (2.28) $ (1.17)
Weighted average number
of shares of common stock
outstanding (1)` 7,953,147 2,394,866 1,725,926 1,266,974 1,010,765
Balance Sheet Data
- ------------------
Current assets $ 1,357,465 $ 820,984 $ 1,536,396 $ 699,259 $ 201,759
Total assets 20,009,793 8,058,827 17,089,855 15,046,765 3,095,625
Current liabilities 4,650,691 6,559,393 2,879,256 2,877,290 543,565
Long-term obligations 11,304,318 3,401,371 12,185,055 8,877,941 1,678,039
Stockholders' Equity
(Deficit) 4,054,784 (1,901,937) 2,025,544 3,291,534 874,021
(1) Basic and diluted loss per share are the same since potential common stock
equivalents are anti-dilutive.
18
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
GulfWest is primarily engaged in the acquisition, development,
exploitation, exploration and production of oil and natural gas. The Company is
focused on the acquisition of interests in wells and leases that are currently
producing crude oil and natural gas and that have the potential for increased
production revenue and reserve value through further exploitation, exploration
and development. The Company's gross revenues are derived from the following
sources:
1. Oil and gas sales that are proceeds from the sale of oil and natural gas
production to midstream purchasers;
2. Lease sales that are income from the sale of oil and gas leases acquired
by the Company for resale to third parties.
3. Operating overhead consisting of fees earned from other working interest
owners for operating oil and natural gas properties; and,
4. Well servicing revenues that are earnings from the operation of well
servicing equipment under contract to third party operators.
The following is a discussion of the Company's consolidated financial
condition, results of operations, liquidity and capital resources. This
discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto. See "Financial Statements".
Results of Operations
The factors which most significantly affect the Company's results of
operations are (1) the sales price of crude oil and natural gas, (2) the level
of total sales volumes of crude oil and natural gas, (3) the level of and
interest rates on borrowings and, (4) the level and success of new acquisitions
and development of existing properties.
Comparative results of operations for the periods indicated are discussed
below.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Revenues
Oil and Gas Sales. During the period ended December 31, 1999, operating
revenues from the sale of crude oil and natural gas increased by 40% from
$1,804,000 in 1998 to $2,533,000 in 1999. This was due to increased oil and gas
production, and higher oil and gas prices.
Well Servicing Revenues. Revenues from well servicing operations decreased
by 73% from $432,000 in 1998 to $117,000 in 1999. This decrease was due to lower
rig utilization under contract to third parties as a result of significantly
lower industry activity.
19
Operating Overhead Revenues. Revenues from the operating of properties
decreased 2% from $167,000 in 1998 to $163,000 in 1999. This decrease was due to
a slightly smaller operation of wells for other working interest owners.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses decreased 15% from
$1,647,000 in 1998 to $1,400,000 in 1999. This decrease in operating expenses
was due the sale of GulfWest Permian assets, effective October 1, 1998, and the
overall reduction in operating expenses.
Cost of Well Servicing Operations. Well servicing expenses decreased 55%
from $421,000 in 1998 to $190,000 in 1999. This decrease in expenses was due to
the reduced utilization of the Company's equipment under contract to third
parties.
Impairment of Assets. Impairment of assets decreased to $-0- in 1999 from
$2,279,000 in 1998. The decrease was due to the Company not being required to
write down the carrying values of oil and gas properties (whose future estimated
undiscounted net cash inflows are less than such carrying value) to fair value.
An impairment of assets write-down is a charge to earnings, which does not
impact cash flow from operating activities. However, such write-downs do impact
the amount of the Company's stockholders' equity. The risk that the Company will
be required to write down the carrying value of its oil and gas reserves
increases when oil and gas prices are depressed or volatile as the Company
experienced at December 31, 1998. No assurance can be given that the Company
will not experience additional write-downs in the future should commodity prices
decline.
General and Administrative (G&A) Expenses. G&A expenses decreased 4% from
$2,064,000 for the year ended December 31, 1998 to $1,983,000 for the year ended
December 31, 1999, as a result of a consolidation of offices to Houston, Texas.
This reduction was achieved despite the cost of relocating the office and its
staff from Dallas, Texas and Baton Rouge, Louisiana.
Depreciation, Depletion and Amortization (DD&A). DD&A decreased 70% from
$2,322,000 in 1998 to $704,000 in 1999. The decrease was due to the significant
write-down of the oil and gas property book values in 1998 and the increased
reserves booked in 1999.
Interest Expense and Dividends on Preferred Stock. Interest expense
decreased 32% from $1,303,000 in 1998 to $890,000 in 1999. This decrease was due
to the sale of GulfWest Permian in 1998 and the resulting significant debt
reduction. Preferred dividends increased $19,000 due to the increase in the
amount of preferred stock issued; however, by year-end 1999, the majority of the
preferred stock had been converted to common stock.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Oil and Gas Sales. During the period ended December 31, 1998, operating
revenues from the sale of crude oil and natural gas decreased by 58% from
$4,269,000 in 1997 to $1,804,000 in 1998. This decrease was primarily
attributable to a decline in commodity prices and, to a lesser extent, the sale
of GulfWest Permian and its oil assets, effective October 1, 1998.
20
Well Servicing Revenues. Earnings from well servicing operations decreased
by 10% from $482,000 in 1997 to $432,000 in 1998. This decrease was due to lower
rig utilization under contract to third parties as a result of the decline in
commodity prices.
Operating Overhead Revenues. Revenues from the operating of properties
increased 22% from $137,000 in 1997 to $167,000 in 1998. This increase was due
to the acquisition of Setex LLC,which generates overhead fees through the
management of a limited oil and gas partnership.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses decreased 23% from
$2,139,000 in 1997 to $1,647,000 in 1998. This decrease in operating expenses
was due primarily to management's decision to shut-in a number of oil wells
because of the lower oil prices in 1998 and the sale of GulfWest Permian.
Cost of Well Servicing Operations. Well servicing expenses increased 51%
from $279,000 in 1997 to $421,000 in 1998. This increase in expenses was due to
the reduced utilization of the Company's equipment under contract to third
parties. The Company incurred additional expenses to secure the rigs in order to
protect the Company's investment.
Impairment of Assets. Impairment of assets increased to $2,279,000 in 1998
from -0- in 1997. The increase was due to the Company's requirement to write
down the carrying values of oil and gas properties (whose future estimated
undiscounted net cash inflows are less than such carrying value) to fair value.
An impairment of assets write down is a charge to earnings which does not impact
cash flow from operating activities. However, such write downs do impact the
amount of the Company's stockholders' equity. The risk that the Company will be
required to write down the carrying value of its oil and gas reserves increases
when oil and gas prices are depressed or volatile as the Company experienced at
December 31, 1998. No assurance can be given that the Company will not
experience additional write downs in the future should commodity prices decline.
General and Administrative (G&A) Expenses. G&A expenses increased 40% from
$1,478,000 for the year ended December 31, 1997 to $2,064,000 for the year ended
December 31, 1998, as a result of the Company's unsuccessful attempts to close
two equity offerings.
Depreciation, Depletion and Amortization (DD&A). DD&A increased 43% from
$1,625,000 in 1997 to $2,322,000 in 1998. The increase was due primarily to
lower oil prices which caused depletion to accelerate.
Interest Expense and Dividends on Preferred Stock. Interest expense
increased 20% from $1,087,000 in 1997 to $1,303,000 in 1998. This increase was
due to the borrowing of funds needed for operating capital. Preferred dividends
increased $46,000 due to the issuance of warrants with the preferred stock in
conjunction with the purchase of Setex LLC, and additional dividends due the
Class AAA preferred stockholders under a penalty provision. In a subsequent
event, on July 7, 1999, the Class AAA preferred stockholders agreed to convert
their preferred stock to common stock at a rate based upon the purchase price
per share ($500), plus accrued and unpaid dividends, divided by $.90 per share
of common stock.
21
Financial Condition and Capital Resources
At December 31, 1999, the Company's current liabilities exceeded its
current assets by $3,293,226 and the Company was either past due or in default
of certain of its debt agreements. Further, the Company has experienced
significant recurring net losses.
Management has defined a tactical and strategic business plan to (1) use
its existing assets to achieve positive cash flow, and (2) identify and evaluate
additional development and acquisition opportunities to further grow the
Company. Following are steps management has taken and is proceeding with in an
attempt to move the Company to profitability:
In a subsequent event, on April 5, 2000, the Company entered into an
agreement with Aquila to provide $19,302,000 in financing, of which $12,900,000
was funded at closing. The proceeds were used to retire existing debt, including
accrued interest, of $10,234,977; acquire oil and gas properties in Zavala
County, Texas for $2,300,000, including $3,266 in cash paid by the Company and
200,000 shares of the Company's common stock; and, to acquire additional
interests in the Madisonville Field, Texas, including the release of a 15% net
profits interest by the Partnership, for $368,289. The lender agreed to provide
an additional $6,000,000 in development capital to be used for development
projects on the Company's existing properties, as identified by the Company and
approved by the lender. The remaining $402,000 will be used for costs associated
with closing the loan. The loan is secured by substantially all of the Company's
interests in oil and gas properties, bears interest at prime plus 3.5% and
matures May 29, 2004. Monthly payments as to principal and interest are from an
85% net revenue interest in the secured properties. The lender retains a 7%
overriding royalty interest with payments commencing after the loan is paid in
full.
The Company is now proceeding with its development plan to be funded by the
new financing. This plan should significantly increase production and allow the
Company to meet its debt obligations and attain additional growth. Although
management believes the above actions will ultimately provide the Company with
the means to become profitable, there is no guarantee these actions can be
effectively implemented. Adverse changes in prices of oil and gas and/or the
inability of the Company to continue to raise the money necessary to develop
existing reserves or acquire new reserves would have a severe impact on the
Company.
22
Inflation and Changes in Prices
While the general level of inflation affects certain costs associated with
the petroleum industry, factors unique to the industry result in independent
price fluctuations. Such price changes have had, and will continue to have a
material effect; however, the Company cannot predict the fluctuations. The
following table indicates the average oil and gas prices received over the last
three years by quarter. Average prices per equivalent barrel indicate the
composite impact of changes in oil and gas prices. Natural gas production is
converted to oil equivalents at the rate of 6 Mcf per barrel.
Average Prices
----------------------------------------
Crude Oil Per
and Natural Equivalent
Liquids Gas Barrel
--------- ----------- ------
(per Bbl) (Per Mcf)
1997
----
First $20.69 $2.61 $19.90
Second 17.73 2.17 16.99
Third 17.24 2.09 16.53
Fourth 17.38 2.60 17.14
1998
----
First $13.51 $1.75 $13.00
Second 11.13 2.05 11.33
Third 13.05 1.78 12.62
Fourth 9.92 2.25 12.36
1999
----
First $ 9.72 $1.63 $ 9.84
Second 14.28 2.17 13.71
Third 19.77 2.77 18.52
Fourth 20.27 2.71 18.64
Year 2000 Issue
The Company experienced no difficulties related to the Year 2000 issue.
Recent Accounting Pronouncements
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", No. 131 "Disclosures About Segments of an Enterprise and Related
Information" and No. 132 "Employers Disclosures About Pensions and Other Post
Retirement Benefits". Adoption of these statements had no material effects on
the Company's financial position, results of operations or cash flows.
23
Actual Results May Differ From Forward-Looking Statements
Statements in this Form 10-K that reflect projections or expectations of
future financial or economic performance of the Company, and statements of the
Company's plans and objectives for future operations are "forward-looking"
statements within the meaning of Section 27A of the Securities and Exchange Act
of 1993, as amended. No assurance can be given that actual results or events
will not differ materially from those projected, estimated, assumed or
anticipated in any such forward looking statements. Important factors (the
"Cautionary Disclosures") that could result in such differences include: general
economic conditions in the Company's markets, including inflation, recession,
interest rates and other economic factors; the availability of qualified
personnel; the level of competition experienced by the Company; the Company's
ability to implement its business strategies and to manage its growth; and other
factors that affect businesses generally. Subsequent written and oral
"forward-looking" statements attributable to the Company or persons acting on
its behalf are expressly qualified by the Cautionary Disclosures.
ITEM 8. Financial Statements and Supplementary Data.
Information with respect to this Item 8 is contained in the Company's
financial statements beginning on Page F-1 of this Annual Report.
ITEM 9. Changes In and Disagreements With Accountants and Accounting and
Financial Disclosure.
None
24
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Year First
Elected
Director
Name Age Position or Officer
Anthony P. Towell(1)(2)(3) 68 Chairman of the Board 1997
Marshall A. Smith III (3) 52 Chief Executive Officer 1989
and Director
Thomas R. Kaetzer (3) 41 President, 1998
Chief Operating Officer
and Director
Jim C. Bigham 64 Executive Vice President, 1991
Secretary and Director
Richard L. Creel 51 Vice President of Finance 1998
and Controller
John E. Loehr (1)(2)(3) 54 Director 1992
J. Virgil Waggoner (1)(2)(3) 72 Director 1997
Steven M. Morris 48 Director 2000
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
Anthony P. Towell has served as a director of the Company since November
13, 1997 and as chairman of the board since July 8, 1998. Mr. Towell also is a
director of a number of public companies, both in the United Kingdom and the
United States, in the safety, environmental and computer network industries. Mr.
Towell has been in the petroleum business since 1957 and has held executive
positions with various public oil and gas companies including the Royal Dutch
Shell group companies and Pacific Resources, Inc.
Marshall A. Smith III has served as an officer and a director of the
Company since July 1989. From July 1989 to November 20, 1992, he served as
president and chairman of the Board. On November 20, 1992, he resigned as
president but continued as chief executive officer and chairman of the board. On
September 1, 1993, Mr. Smith reassumed the duties of president and resigned as
chairman of the board. On December 21, 1998, he resigned as president but
remained chief executive officer.
25
Thomas R. Kaetzer was appointed senior vice president and chief operating
officer of the Company on September 15, 1998 and on December 21, 1998 became
president and a director. Mr. Kaetzer has 17 years experience in the oil and gas
industry, including 14 years with Texaco Inc., which involved the evaluation,
exploitation and management of oil and gas assets. He has both onshore and
offshore experience in operations and production management, asset acquisition,
development, drilling and workovers in the continental U.S., Gulf of Mexico,
North Sea, Colombia, Saudi Arabia, China and West Africa. Mr. Kaetzer has a
Masters Degree in Petroleum Engineering from Tulane University and a Bachelor of
Science Degree in Civil Engineering from the University of Illinois.
Jim C. Bigham has served as executive vice president of the Company since
1996 and as secretary and a director since 1991 when he joined the Company.
Prior to joining the Company, Mr. Bigham held management and sales positions in
the real estate and printing industries. Mr. Bigham is also a retired United
States Air Force Major. During his military career, he served in both command
and staff officer positions in the operational, intelligence and planning areas.
Richard L. Creel has served as controller of the Company since May 1, 1997
and was elected vice president of finance on May 28, 1998. Prior to joining the
Company, Mr. Creel served as Branch Manager of the Nashville, Tennessee office
of Management Reports and Services, Inc. Mr. Creel has also served as controller
of TLO Energy Corp. He has extensive experience in general accounting, petroleum
accounting, and financial consulting and income tax preparation.
John E. Loehr has served as a director of the Company since 1992, as
chairman of the board from September 1, 1993 to July 8, 1998 and as chief
financial officer from November 22, 1996 to May 28, 1998. Mr. Loehr is also
currently president and sole shareholder of ST Advisory Corporation, an
investment company, and vice-president of Star-Tex Trading Company, also an
investment company. Mr. Loehr was formerly president of Star-Tex Asset
Management, a commodity-trading advisor, and a position he held from 1988 until
1992, when he sold his ownership interest. Mr. Loehr is a CPA and is a member of
the American Institute of Certified Public Accountants and Texas Society of
Certified Public Accountants.
J. Virgil Waggoner has served as a director of the Company since December
1, 1997. Mr. Waggoner's career in the petrochemical industry began in 1950 and
included senior management positions with Monsanto Company and El Paso Products
Company, the petrochemical and plastics unit of El Paso Company. Mr. Waggoner
served as president and chief executive officer of Sterling Chemicals, Inc. from
the firm's inception in 1986 until its sale and his retirement in 1996. Mr.
Waggoner continues to serve as non-executive vice chairman of the Board of
Directors of Sterling Chemicals, Inc. Mr. Waggoner is on the Board of Directors
of Kirby Corporation and is an advisory board director of First Commercial Bank
of Little Rock, Arkansas. He is currently president and chief executive officer
of JVW Investments, Ltd., a private company.
Steven M. Morris was appointed director of the Company on January 6, 2000.
He was the president of Pozo Resources, Inc., an oil and gas production company,
until its asset were sold to the Company on December 31, 1999. Mr. Morris is a
certified public accountant and president of Pentad Enterprises, Inc., a private
investment firm in Houston, Texas. Mr. Morris is also currently a director of
the following companies: Bank of Tanglewood, Houston, Texas, and Quicksilver
Resources, Inc., a publicly traded oil and gas exploration and production
company with offices in Ft. Worth, Texas.
26
Meetings and Committees of the Board
The business of the Company is managed under the direction of the Board.
The Board meets on a regularly scheduled basis to review significant
developments affecting the Company and to act on matters requiring Board
approval. It also holds special meetings when an important matter requires Board
action between scheduled meetings. The Board met five times during the calendar
year ended December 31, 1999.
The Board has three standing committees: the Audit Committee, the
Compensation Committee and the Executive Committee. The functions of these
committees, their current members, and the number of meetings held during 1999
are described below.
The Audit Committee was established to review the professional services and
independence of the Company's independent auditors, and the Company's accounts,
procedures and internal controls. The Audit Committee is comprised of Mr. John
E. Loehr (Chairman), Mr. Anthony P. Towell and Mr. J. Virgil Waggoner. The Audit
Committee met twice in 1999.
The function of the Compensation Committee is to fix the annual salaries
and other compensation for the officers and key employees of the Company. The
Compensation Committee is comprised of Mr. Anthony P. Towell (Chairman), Mr. J.
Virgil Waggoner Mr. John E. Loehr. The Compensation Committee met twice in 1999.
The Executive Committee was established to make recommendations to the
Board in the areas of financial planning, strategies and business alternatives.
The Executive Committee is comprised of Mr. Anthony P. Towell (Chairman), Mr. J.
Virgil Waggoner, Mr. Marshall A. Smith III, Mr. John E. Loehr and Mr. Thomas R.
Kaetzer. The Executive Committee met twice in 1999.
The Company does not have a nominating committee. The functions customarily
performed by a nominating committee are performed by the Board as a whole.
Compensation of Directors
At the Annual Meeting of Shareholders on May 28, 1998, the shareholders
approved an amended and restated Employee Stock Option Plan, which included a
provision for the payment of reasonable fees to directors. Each director was
issued 10,000 shares of stock as payment of director fees in 1999.
27
ITEM 11. Executive Compensation
Summary Compensation Table
The following table sets forth information regarding compensation paid to
the Company's executive officers whose total annual compensation is $100,000 or
more during each of the last three years.
Long Term
Compensation
Annual Compensation (1) Awards (2)
------------------------------ ---------------
Other All
Annual Restricted Other
Year Compen- Stock Compen-
Name and Principal Position End Salary($) Bonus($) sation($) Awards($) Options(#) sation($)
- --------------------------- --- ---------- -------- -------- --------- ---------- --------
Marshall A. Smith III 1999 125,000 - - - -
Chief Executive Officer 1998 125,000 - - 20,000 -
1997 125,000 - - - -
Thomas R. Kaetzer(3) 1999 125,000 - - 75,000 100,000 -
President and Chief 1998 100,000 - - - -
Operating Officer
(1) Includes deferred compensation of $25,000 in 1997, $50,000 in 1998 and
$11,458 in 1999 payable to Mr. Smith.
(2) 100,000 shares of common stock issued as part of Employment Agreement.
(3) Mr. Kaetzer joined the Company as Chief Operating Officer in September,
1998 and was elected president in December, 1998. His base annual
salary was increased to $125,000 on August 1, 1999.
Option Grants During 1998
Mr. Smith, along with other directors, received stock options to purchase
20,000 shares of common stock, as director compensation fees.
Option Exercises During 1998 and
Year End Option Values (1)
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at FY-End (#) at FY-End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- ---- ------------- -------------
Marshall A. Smith III 20,000 -0-
-0- -0-
(1) Since no options were exercised by Mr. Smith, no shares were acquired
or value realized upon the exercise of options. Report of the
Compensation Committee of the Board on Executive Compensation
28
The Board approved an annual salary for the CEO of $100,000 on July 1, 1991
and it remained at that level until April 1, 1997, when the Compensation
Committee recommended and the Board approved increasing the annual salary of the
CEO to $125,000 where it has remained.
On April 16, 1993, the Board established the Compensation Committee and
authorized it to develop and administer an executive compensation system, which
will enable the Company to attract and retain qualified executives. Compensation
for the CEO and other executive officers is determined by the Compensation
Committee which functions under the philosophy that compensation of executive
officers, specifically including that of the CEO, should be directly and
materially linked to the Company's performance.
On September 9, 1997, the Compensation Committee recommended and the Board
approved entering into Employment Agreements with Mr. Marshall A. Smith III,
chief executive officer, Mr. Jim C. Bigham, executive vice president and
secretary, and Mr. Richard L. Creel, vice president of finance and controller,
for a period of three years. On December 21, 1998, the Compensation Committee
recommended and the Board approved entering into an Employment Agreement with
Mr. Thomas R. Kaetzer, president and chief operating officer, with a base annual
salary of $100,000 and the issuance of 100,000 shares of restricted common
stock. (See: "Employment and Change of Control Agreements".)
This report is submitted by the members of the Compensation Committee:
Compensation Committee:
-----------------------
Anthony P. Towell, Chairman J. Virgil Waggoner John E. Loehr
Stock Performance Chart
The following chart compares the yearly percentage change in the cumulative
total shareholder return on the Company's common stock during the five years
ended December 31, 1999 with the cumulative total return on The Nasdaq Stock
Market Index and The Nasdaq Non-Financial Stock Index. The comparison assumes
$100 was invested on December 31, 1994 in the Company's common stock and in each
of the foregoing indices and assumes reinvestment of dividends. The Company paid
no dividends during such five-year period.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG COMPANY, NASDAQ INDEX & NASDAQ NON-FINANCIAL STOCK INDEX
[Graphic Omitted]
Nasdaq Index 100.00 141.33 173.89 213.07 300.18 545.66
Non-Financial 100.00 139.25 169.15 198.08 290.26 562.28
GulfWest 100.00 75.00 100.00 83.30 16.70 29.20
29
Employment Agreements
Effective September 9, 1997, the Company entered into Employment Agreements
with Mr. Marshall A. Smith III, CEO, Mr. Jim C. Bigham, executive vice president
and secretary, and Mr. Richard L. Creel, vice president of finance and
controller, for a period of three years. Effective December 21, 1998, the
Company entered into an Employment Agreement with Mr. Thomas R. Kaetzer,
president and chief operating officer.
Under the Employment Agreements, Mr. Smith will receive a base annual
salary of $125,000, Mr. Kaetzer $100,000, Mr. Bigham $75,000 and Mr. Creel
$50,000, all increasing a minimum of 15% annually. In the event of a change of
control, the employees will have the option to continue as employees of the
Company under the terms of the Employment Agreements or receive a lump-sum cash
severance payment equal to 300% of their annual base salary for the year
following the change of control.
A "change of control" is defined in the Employment Agreements as: (i) an
acquisition (other than from the Company) by an individual, entity or a group
(excluding the Company, its subsidiaries, a related employee benefit plan or a
corporation the voting stock of which is beneficially owned following such
acquisition 50% or more by the Company's stockholders in substantially the same
proportions as their holdings in the Company prior to such acquisition) of
beneficial ownership of 20% or more of the Company's voting stock; (ii) a change
in a majority of the Board (excluding any persons approved by a vote of at least
a majority of the incumbent Board other than in connection with a proxy
contest); (iii) the approval by the stockholders of a reorganization, merger or
consolidation (other than a reorganization, merger or consolidation in which all
or substantially all of the stockholders of the Company receive 50% or more of
the voting stock of the surviving company); or (iv) a complete liquidation or
dissolution of the Company or the sale of all, or substantially all, of its
assets.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of March 31, 2000 regarding
the beneficial ownership of common stock by each person known by the Company to
own beneficially 5% or more of the outstanding common stock, each director of
the Company, certain named executive officers, and the directors and executive
officers of the Company as a group. The persons named in the table have sole
voting and investment power with respect to all shares of common stock owned by
them, unless otherwise noted.
Name and Address of Amount and Nature of Percent
Beneficial Owner Beneficial Ownership
---------------- -------------------- --------------
Anthony P. Towell 543,542 1,2 3.4%
Marshall A. Smith III 730,190 2,3 4.4%
Thomas R. Kaetzer 352,600 2,4 2.2%
Jim C. Bigham 196,985 2,5 1.2%
Richard L. Creel 85,000 2,6 .5%
John E. Loehr 419,491 2,7 2.6%
J. Virgil Waggoner 9,553,929 2,8 60.6%
All current directors
and officers as a group 11,881,737 9 69.2%
(7 persons)
30
1. Includes 20,000 shares subject to presently exercisable options.
2. Shareholder's address is 397 N. Sam Houston Parkway East, Suite 375,
Houston, Texas 77060.
3. Includes 676,754 shares subject to presently exercisable warrants and
options and 49,770 shares owned directly, 333 shares owned by Joyce
Smith, the wife of Mr. Smith, and 3,333 shares owned by Marshall
A. Smith IV and Mark Shelton, sons of Mr. Smith. Mr. Smith III
disclaims beneficial ownership of the shares owned by Senior Drilling
Company, which is controlled by Mitchell D. Smith, the brother of
Mr. Smith.
4. Includes 225,000 shares subject to presently exercisable options.
5. Includes 145,000 shares subject to presently exercisable warrants and
options, and 50,985 shares held directly, and 1,000 shares held by Jeff
G. Gray, son of Mr. Bigham.
6. Includes 70,000 subject to presently exercisable options.
7. Includes 290,000 shares subject to presently exercisable warrants and
options and 62,653 shares held directly; 64,838 shares held by ST
Advisory Corporation; and 2,000 shares held by his daughter's trust,
the Joanna Drake Loehr Trust. Mr. Loehr is president and sole
shareholder of ST Advisory Corporation.
8. Includes 20,000 shares subject to presently exercisable options.
9. Includes 1,446,754 shares subject to presently exercisable warrants and
options.
ITEM 13. Certain Relationships and Related Transactions
On May 28, 1999, Mr. J. Virgil Waggoner, a director and significant
shareholder, converted $635,000 in outstanding principal and interest of loans
made to the Company in 1999 to Series BB Preferred Stock. On July 15, 1999, Mr.
Waggoner purchased 4,000,0000 shares of the Company's common stock in a private
offering at $.75 per share, for a total purchase price of $3,000,000. The
closing price of the common stock on July 15, 1999 was $.6875 per share. On
August 16, 1999, Mr. Waggoner converted all of his Series BB Preferred Stock to
4,250,000 shares of common stock.
SECTION 16 REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission (the "SEC"). Such persons are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to 1999, or written representations from certain reporting persons, the
Company believes that its officers, directors and persons who own more than 10%
of a registered class of the Company's equity securities have complied with all
applicable filing requirements.
31
GLOSSARY
The following are definitions of certain terms used in this Form 10-K.
Bbl. Barrel.
BOE. Barrel of oil equivalent, based on a ratio of 6,000 cubic feet of
natural gas for each barrel of oil.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interests is owned.
Horizontal Drilling. High angle directional drilling with lateral
penetration of one or more productive reservoirs.
Mcf. One thousand cubic feet.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells.
Net oil and gas sales. Oil and natural gas sales less oil and natural gas
production expenses.
Overriding Royalty Interest. The right to a share of production from a well
free of all costs and expenses except transportation, in addition to
other Royalties reserved by the lessor by the property.
Present value. The pre-tax present value, discounted at 10%, of future net
cash flows from estimated proved reserves, calculated holding prices and
costs constant at amounts in effect on the date of the report (unless
such prices or costs are subject to change pursuant to contractual
provisions) and otherwise in accordance with the Commission's rules for
inclusion of oil and gas reserve information in financial statements filed
with the Commission.
Proceeds of Production. Money received (usually monthly) from the sale of
oil and gas produced from producing properties.
Producing Properties. Properties that contain one or more wells that
produce oil and/or gas in paying quantities (i.e., a well for which
proceeds from production exceed operating expenses).
Productive well. A well that is producing oil or gas or that is capable of
production.
Prospect. A lease or group of leases containing possible reserves, capable
of producing crude oil, natural gas, or natural gas liquids in
commercial quantities, either at the time of acquisition, or after
vertical or horizontal drilling, completion of workovers, recompletions, or
operational modifications.
Proved Reserves. Estimated quantities of crude oil, natural gas, and
natural gas liquids that geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic conditions; i.e., prices and costs
as of the date the estimate is made. reservoirs are considered proved if
either actual production or a conclusive formation test supports economic
producibility.
32
The area of a reservoir considered proved includes:
a. That portion delineated by drilling and defining by gas-oil or
oil-water contacts, if any; and
b. The immediately adjoining portions not yet drilled but which can be
reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included
in the "proved" classification when successful testing by a pilot
project, or the operation of an installed program in the reservoir,
provides support for the engineering analysis on which the project or
program was based.
Proved Reserves do not include:
a. Oil that may become available from known reservoirs but is
classified separately as "indicated additional reserves";
b. Crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to
geology, reservoir characteristics, or economic factors;
c. Crude oil, natural gas, and natural gas liquids that may
occur in undrilled prospects; and
d. Crude oil, natural gas, and natural gas liquids that may be
recovered from oil shales and other sources.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid injection
or other improved recovery techniques for supplementing the natural forces and
mechanisms of primary recovery should be included as "proved developed" only
after testing by a pilot project or after operation of an installed program has
confirmed through production response that increased recovery will be achieved.
Proved Undeveloped Reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on undrilled acreage shall be
limited to those drilling units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for other units that have
not been drilled can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proven effective by actual tests in the area and in the same reservoir.
Recompletion. The completion for production of an existing wellbore in
another formation from that in which the well has previously been completed.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil or gas that is confined by impermeable rock or
water barriers and is individual and separate from other reservoirs.
33
Royalty. The right to a share of production from a well free of all costs
and expenses.
Royalty Interest. An interest in an oil and gas property entitling the owner
to a share of oil and natural gas production free of costs of production.
Standardized Measure. The present value, discounted at 10%, of future net cash
flows from estimated proved reserves, after income taxes, calculated holding
prices and costs constant at amounts in effect on the date of the report (unless
such prices or costs are subject to change pursuant to contractual provisions)
and otherwise in accordance with the Commission's rules for inclusion of oil and
gas reserve information in financial statements filed with the Commission.
Waterflood. An engineered, planned effort to inject water into an existing
oil reservoir with the intent of increasing oil reserve
recovery and production rates.
Working Interest. The operating interest under a lease, the owner of which has
the right to explore for and produce oil and gas covered by such lease. The full
working interest bears 100 percent of the costs of exploration, development,
production, and operation, and is entitled to the portion of gross revenue from
the proceeds of production which remains after proceeds allocable to royalty and
overriding royalty interests or other lease burdens have been deducted.
Workover. Rig work performed to restore an existing well to production or
improve its production from the current existing reservoir.
34
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements:
Consolidated Balance Sheets at December 31, 1999, and 1998.
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998, and 1997.
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998, and 1997.
Notes to Consolidated Financial Statements, December 31, 1999,
1998 and 1997.
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits:
Number Description
^2.1 Purchase and Sale Agreement between Pharaoh,
as Seller, and WestCo Oil Company, or its
assigns, as Purchaser, dated March 1, 1997.
^2.2 Assignment of Purchase and Sale Agreement by
and between WestCo Oil Company and GulfWest
Permian Company, dated March 20, 1998.
^2.3 Form of Assignment and Bill of Sale by and
between Pharaoh as Assignor and GulfWest
Permian Company as Assignee, executed March
20, 1998.
^2.4 Term Renewal Note in the amount of
$10,237,215.00 payable to the order of Chase
Bank of Texas, N.A. and executed by GulfWest
Permian Company and GulfWest Texas Company,
dated March 20, 1998.
^2.5 Term note in the amount of $612,675.00
payable to the order of Pharaoh Oil and
Gas, Inc. and executed by GulfWest Permian
Company, dated March 20, 1998.
^2.6 Security Agreement-Pledge of GulfWest
Permian stock to Chase Bank of Texas, N.A.
by GulfWest Oil Company, dated March 20,1998.
35
^2.7 Limited Guaranty Agreement by and between
GulfWest Oil Company and Chase Bank of
Texas, N.A., executed March 20, 1998.
#2.8 Purchase and Sale Agreement between Pozo
Resources, Inc. and GulfWest Oil Company,
effective December 31, 1999.
*3.1 Articles of Incorporation of the Registrant
and Amendments thereto.
*3.2 Bylaws of the Registrant.
@4.1 Statement of Resolution Establishing and
Designating the Company's Class AA Preferred
Stock, filed with the Secretary of State of
Texas as an amendment to the Company's
Articles of Incorporation on September 23,
1996.
@4.2 Statement of Resolution Establishing and
Designating the Company's Class AAA Preferred
Stock, filed with the Secretary of State of
Texas as an amendment to the Company's
Articles of Incorporation on September 23,
1996.
&4.7 Statement of Resolution Establishing and
Designating the Company's Class C Preferred
Stock, filed with the Secretary of State of
Texas as an amendment to the Company's
Articles of Incorporation on September 15,
1998.
>4.8 Statement of Resolution Establishing and
Designating the Company's Class BB Preferred
Stock, filed with the Secretary of State of
Texas as an amendment to the Company's
Articles of Incorporation on January 27,
1999.
%10.1 GulfWest Oil Company 1994 Stock Option and
Compensation Plan, amended and restated as of
April 15, 1998 and approved by the
shareholders on May 28, 1998.
$10.2 Employment Agreement between the Company and
Marshall A Smith III,dated September 9, 1997.
$10.3 Employment Agreement between the Company and
Jim C. Bigham, dated September 9, 1997.
$10.4 Employment Agreement between the Company and
Richard L. Creel, dated September 9, 1997.
<21.1 Form of Letter of Agreement with Class AAA
Preferred Stockholder, dated July 7, 1999.
22.1 Subsidiaries of the Registrant filed
herewith.
25 Power of Attorney (included on signature page
of this Annual Report).
27.1 Financial Data Schedule filed herewith.
36
# Previously filed with the Company's Form 8-K, Current Report dated
December 31, 1999, filed with the Commission on January 10,2000.
@ Previously filed with the Company's Form 8-K, Current Report dated
October 10, 1996, filed with the Commission on October 25, 1996.
^ Previously filed with the Company's Form 8-K, Current Report dated
March 20, 1998, filed with the Commission on April 3, 1998.
* Previously filed with the Company's Registration Statement (on Form
S-1, Reg. No. 33-53526),filed with the Commission on October 21, 1992.
$ Previously filed with the Company's Quarterly Report on Form 10-Q/A
for the period ended September 30, 1997, as amended and filed with the
Commission on April 8, 1998.
% Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1994, filed with the Commission on April 14,
1995.
+ Previously filed with the Company's Quarterly Report on Form 10-Q for
the period ended June 30, 1996, filed with the Commission on August 14,
1996.
< Previously filed with the Company's Current Report on Form 8-K dated
July 15, 1999 and filed with the Commission on July 23, 1999.
> Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1998, filed with the Commission on
August 27, 1999.
37
S I G N A T U R E S
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.
GULFWEST OIL COMPANY
Date: By:\s\ Thomas R. Kaetzer
Thomas R. Kaetzer, President
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature
appears below constitutes and appoints Thomas R. Kaetzer as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his
name, place, and stead, in any and all capacities to sign any and all amendments
or supplements to this Annual Report on Form 10-K, and to file the same, and
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons, on behalf of the
registrant, and in the capacities and on the dates indicated.
Signature Title Date
\s\ Anthony P. Towell Chairman of the Board of April 12, 2000
- --------------------------
Anthony P. Towell Directors
\s\ Marshall A. Smith III Chief Executive Officer and April 12, 2000
- --------------------------
Marshall A. Smith III Director
\s\ Thomas R. Kaetzer President, Chief Operating April 12, 2000
- -------------------------- Officer and Director
Thomas R. Kaetzer
\s\ Jim C. Bigham Executive Vice President, April 12, 2000
- -------------------------- Secretary and Director
Jim C. Bigham
\s\ Richard L. Creel Vice President of Finance, April 12, 2000
- -------------------------- Controller
Richard L. Creel
\s\ J. Virgil Waggoner Director April 12, 2000
- --------------------------
J. Virgil Waggoner
\s\ John E. Loehr Director April 12, 2000
- --------------------------
John E. Loehr
\s\ Steven M.Morris Director April 12, 2000
- --------------------------
Steven M. Morris
38
GULFWEST OIL COMPANY
FINANCIAL REPORT
DECEMBER 31, 1999
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity (deficit) F-5
Consolidated statements of cash flows F-9
Notes to consolidated financial statements F-10
INDEPENDENT AUDITOR'S REPORT ON
THE FINANCIAL STATEMENT SCHEDULE F-30
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts F-31
All other Financial Statement Schedules have been omitted because they are
either inapplicable or the information required is included in the
financial statements or the notes thereto.
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
GULFWEST OIL COMPANY
We have audited the accompanying consolidated balance sheets of GulfWest Oil
Company (a Texas Corporation) and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GulfWest Oil Company and Subsidiaries as of December 31, 1999 and 1998 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with generally
accepted accounting principles.
\s\WEAVER AND TIDWELL, L.L.P
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 5, 2000
F-1
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS
1999 1998
---- ----
CURRENT ASSETS
Cash and cash equivalents $ 287,300 $ 204,307
Accounts receivable - trade, net of allowance
for doubtful accounts of $ -0-
in 1999 and 1998 990,402 527,791
Prepaid expenses 79,763 74,961
Inventory 13,925
------ ------
Total current assets 1,357,465 820,984
--------- -------
OIL AND GAS PROPERTIES,
using the successful efforts
method of accounting 20,083,696 8,033,833
OTHER PROPERTY AND EQUIPMENT 1,358,400 1,406,987
Less accumulated depreciation,
depletion, and amortization (2,940,191) (2,411,755)
---------- ----------
Net oil and gas properties and
other property and equipment 18,501,905 7,029,065
---------- ---------
DEPOSITS 27,638 17,300
INVESTMENTS 122,785 191,478
------- -------
TOTAL ASSETS $ 20,009,793 $ 8,058,827
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1999 1998
---- ----
CURRENT LIABILITIES
Notes payable $ 250,000 $ 487,000
Notes payable - related parties 750,000 950,000
Current portion of long-term debt 2,114,251 2,972,731
Current portion of long-term debt - related parties 234,355 300,914
Accounts payable - trade 839,129 1,406,131
Accrued expenses 462,956 442,617
------- -------
Total current liabilities 4,650,691 6,559,393
--------- ---------
LONG-TERM DEBT, net of current portion 11,040,744 3,120,245
---------- ---------
LONG-TERM DEBT - RELATED PARTIES 263,574 281,126
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 88 130
Common stock 15,697 3,113
Additional paid-in capital 21,321,909 12,763,936
Retained deficit (17,130,436) (14,516,642)
Long-term accounts and notes receivable -
related parties, net of allowance for doubtful
accounts of $700,230 in 1999
and 1998 (152,474) (152,474)
-------- --------
Total stockholders' equity (deficit) 4,054,784 (1,901,937)
--------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 20,009,793 $ 8,058,827
============ ================
F-3
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
OPERATING REVENUES
Oil and gas sales $ 2,533,304 $ 1,804,147 $ 4,269,032
Lease sales 73,297
Well servicing revenues 116,791 432,352 481,562
Operating overhead and other income 162,544 167,054 137,075
------- ------- -------
2,812,639 2,403,553 4,960,966
--------- --------- ---------
OPERATING EXPENSES
Lease operating expenses 1,399,710 1,647,329 2,139,128
Cost of leases sold 37,747
Cost of well servicing operations 190,399 420,527 279,340
Impairment of assets 2,279,449
Depreciation, depletion and amortization 703,533 2,322,423 1,624,759
General and administrative 1,983,091 2,063,709 1,478,312
--------- --------- ---------
4,276,733 8,733,437 5,559,286
--------- --------- ---------
LOSS FROM OPERATIONS (1,464,094) (6,329,884) (598,320)
OTHER INCOME AND EXPENSE
Interest income 5,162 11,602 8,678
Interest expense (889,796) (1,302,885) (1,087,039)
Gain (loss) on sale of assets 79,222 (765,893)
------ -------- --------
LOSS BEFORE INCOME TAXES (2,269,506) (8,387,060) (1,676,681)
INCOME TAXES --------- --------- ---------
NET LOSS $ (2,269,506) $ (8,387,060) $ (1,676,681)
DIVIDENDS ON PREFERRED STOCK
(PAID 1999 - $344,288; 1998- $101,254;
1997 - $150,062) (450,684) (427,173) (380,928)
-------- -------- --------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (2,720,190) $ (8,814,233) $ (2,057,609)
============= ============== =============
LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (.34) $ (3.68) $ (1.19)
============= ============== =============
F-4
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Number of Shares
-------------------------------
Preferred Common
Stock Stock
-------------- -------------
BALANCE, December 31, 1996 4,621 1,611,154
Conversion of 45 shares of Class AAA preferred stock to 11,781
shares of common stock (45) 11,781
Issuance of 814 shares of preferred stock, net of offering costs
(750 shares of Class AA and 64 shares of Class AAA through
private placement) 814
Increase in accounts and notes receivable - related parties
Issuance of 136,250 common shares, net of offering costs
(85,000 shares through private placement and 51,250 shares
through exercise of warrants) 136,250
Payments on loans to related parties
Issuance of warrants for services and additional financing costs
Provision for bad debts - receivables from related parties
Net loss
Dividends paid on preferred stock
-------------- -------------
BALANCE, December 31, 1997 5,390 1,759,185
Conversion of 200 shares of AAA preferred stock and unpaid
dividends to 77,988 shares of common stock (200) 77,988
Conversion of related party debt to 3,830 shares of BB preferred stock 3,830
Issuance of 4,000 shares of C preferred stock for acquisition of assets 4,000
Issuance of 1,276,344 common shares, net of offering costs (116,920
through private placement, 53,587 through exercise of warrants, 955,837
in exchange for debt, accrued interest, deferred compen-
sation and accounts payable, 150,000 for acquisition of assets) 1,276,344
Issuance of options/warrants for services and additional financing
Increase in accounts and notes receivable - related parties
Provision for bad debts - receivables from related parties
Net loss
Dividends paid on preferred stock
-------------- -------------
BALANCE, December 31, 1998 13,020 3,113,517
============== =============
The Notes to Consolidated Financials are an integral part of these statements
F-5
Common Preferred Additional Retained Receivables from
Stock Stock Paid-In Capital Deficit Related Parties
---------------------- -------------------- ---------------------- ----------------- ---------------------
$ 1,611 $ 46 $ 7,604,121 $ (4,201,585) $ (112,659)
12 (12)
8 406,958
(139,584)
136 178,879
98,487
14,587
1,282
(1,676,681)
(150,062)
---------------------- -------------------- ---------------------- ---------------------- ---------------------
1,759 54 8,204,533 (6,028,328) (152,474)
78 (2) 6,876
38 1,914,962
40 630,094
1,276 1,845,439
162,032
(152,000)
152,000
(8,387,060)
(101,254)
---------------------- -------------------- ---------------------- ---------------------- ---------------------
$ 3,113 $ 130 $ 12,763,936 $ (14,516,642) $ (152,474)
====================== ==================== ====================== ====================== =====================
F-6
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
Number of Shares
--------------------------------
Preferred Common
Stock Stock
-------------- ---------------
BALANCE, December 31, 1998 13,020 3,113,517
Conversion of 2,425 shares of Class AAA preferred stock and unpaid
dividends to 1,661,604 shares of common stock (2,425) 1,661,604
Conversion of 1,950 shares of Class AA preferred stock and unpaid
dividends to 1,550,000 shares of common stock (1,950) 1,550,000
Conversion of 5,100 shares of Series BB preferred stock to 4,250,000
shares of common stock (5,100) 4,250,000
Conversion of 4,000 shares of Series C preferred stock to 200,000
shares of common stock (4,000) 200,000
Issuance of 1,270 shares of Series BB preferred stock for the conversion
of debt 1,270
Issuance of 8,000 shares of Series D preferred stock for the
acquisition of assets 8,000
Issuance of 4,921,761 shares of common stock, net of offering costs
(4,000,000 through private placement, 104,139 through exercise of
warrants, 300,000 for acquisition of assets, 273,000 for services,
244,622 in exchange for debt) 4,921,761
Issuance of warrants and options for services and additional financing
Net loss
Dividends paid on preferred stock
-------------- ---------------
BALANCE, December 31, 1999 8,815 15,696,882
============== ===============
The Notes to Consolidated Financials are an integral part of these statements
F-7
Common Preferred Additional Retained Receivables from
Stock Stock Paid-In Capital Deficit Related Parties
---------------------- -------------------- --------------------- ---------------------- ---------------------
$ 3,113 $ 130 $ 12,763,936 $ (14,516,642) $ (152,474)
1,662 (24) 232,803
1,550 (19) 108,257
4,250 (51) (4,199)
200 (40) (160)
12 634,987
80 3,999,920
4,922 3,541,715
44,650
(2,269,506)
(344,288)
---------------------- -------------------- --------------------- ---------------------- ---------------------
$ 15,697 $ 88 $ 21,321,909 $ (17,130,436) $ (152,474)
====================== ==================== ===================== ====================== =====================
F-8
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,269,506) $ (8,387,060) $ (1,676,681)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 703,533 2,322,423 1,624,759
Partnership loss 68,693 8,522
Common stocks and warrants issued and charged
to operations 234,250 162,032 14,586
(Gain) loss on sale of assets (79,222) 765,893
Impairment of assets 2,279,449
Provision for bad debt 252,000 1,282
(Increase) decrease in accounts receivable - trade, net (447,855) 329,439 (242,944)
(Increase) decrease in inventory 13,925 (13,925)
(Increase) decrease in prepaid expenses (4,802) (20,467) (52,151)
(Increase) decrease in discounts on note payable 10,911
Increase (decrease)in accounts payable and accrued expenses (359,290) 1,587,723 568,566
-------- --------- -------
Net cash provided by (used in) operating activities (2,140,274) (713,971) 247,928
---------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits (10,338)
Proceeds from sale of property and equipment 155,844 148,351
Purchase of property and equipment (1,482,548) (6,407,296) (2,626,655)
(Increase) decrease in accounts and notes receivable - related party (102,000) (139,584)
Payments received on loans to related parties 25,305
---------- ---------- ----------
Net cash used in investing activities (1,337,042) (6,360,945) (2,740,934)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 3,000,000 155,827 153,390
Proceeds from sale of preferred stock, net 406,967
Payments on debt (1,300,891) (247,702) (1,941,602)
Proceeds from debt issuance 1,861,200 6,845,833 4,566,355
Dividends paid (101,254) (150,062)
---------- ---------- ----------
Net cash provided by financing activities 3,560,309 6,652,704 3,035,048
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 82,993 (422,212) 542,042
CASH AND CASH EQUIVALENTS,
beginning of year 204,307 626,519 84,477
---------- --------- ---------
CASH AND CASH EQUIVALENTS,
end of year $ 287,300 $ 204,307 $ 626,519
========== ============ ==========
CASH PAID FOR INTEREST $ 758,226 $ 407,054 $ 922,563
========== ============ ==========
The Notes to Consolidated Financial Statements are an integral part of these
statements.
F-9
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies
consistently applied by management in the preparation of the accompanying
financial statements.
Organization/Concentration of Credit Risk
GulfWest Oil Company and subsidiaries (the "Company") intends to
pursue the acquisition of quality oil and gas prospects which have
proved developed and undeveloped reserves and the development of
prospects with third party industry partners.
The accompanying financial statements include the Company and its
wholly-owned subsidiaries: Vanco Well Service, Inc. ("Vanco"),
GulfWest Texas Company ("GWT"), both formed in 1996; DutchWest Oil
Company formed in 1997; SETEX Oil and Gas Company ("SETEX") formed
August 11, 1998; Southeast Texas Oil and Gas Company, L.L.C. ("Setex
LLC") acquired September 1, 1998; GulfWest Oil & Gas Company formed
February 18, 1999; and LTW Pipeline Co. formed April 19, 1999. All
material intercompany transactions and balances are eliminated upon
consolidation. The financial statements also include the results of
operations for the first nine months of 1998 for the Company's former
wholly-owned subsidiaries: WestCo Oil Company (WestCo), formed in 1995
and sold October 1, 1998; and GulfWest Permian Company ("GWP") formed
in 1996 and sold October 1, 1998.
The Company grants credit to independent and major oil and gas
companies for the sale of crude oil and natural gas. In addition, the
Company grants credit to joint owners of oil and gas properties which
the Company, through SETEX (or formerly WestCo), operates. Such
amounts are secured by the underlying ownership interests in the
properties. The Company also grants credit to various third parties
through Vanco for well servicing operations.
The Company maintains cash on deposit in interest and
non-interest bearing accounts which, at times, exceed federally
insured limits. The Company has not experienced any losses on such
accounts and believes it is not exposed to any significant credit risk
on cash and equivalents.
Statement of Cash Flows
The Company considers all highly liquid investment instruments
purchased with remaining maturities of three months or less to be cash
equivalents for purposes of the consolidated statements of cash flows.
Non-Cash Investing and Financing Activities:
-------------------------------------------
In 1999, the Company converted deferred compensation of $47,883,
debt of $700,000, accounts payable of $10,000 and $108,465 of accrued
interest to common stock. In addition, the Company issued notes
payable for $6,679,700, along with 300,000 shares of common stock,
valued at $150,000, and 8,000 shares of preferred stock, valued at
$4,000,000, for the acquisition of properties and equipment. Common
stock was also issued for the exercise of warrants by converting
$21,025 in deferred compensation and the conversion of 13,475 shares
of preferred stock, plus 344,288 in unpaid dividends, to 7,661,604
shares of common stock. Equipment was exchanged for the assumption of
$7,975 of debt. As a result of the sale of assets, accounts receivable
were reduced by $14,756 and notes payable were reduced by $39,009.
F-10
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
In 1998, $1,965,000 of notes payable, $311,500 of accounts
payable, $100,090 of accrued expenses and $1,105,000 of long-term debt
were converted to common or preferred stock. All of the outstanding
membership interest of Setex LLC was acquired in exchange for $630,134
of preferred stock. In addition, $131,250 in common stock was issued
in exchange for property and equipment costs. Long-term debt totaling
$1,299,200 was re-financed during 1998.
In 1997, the Company acquired other property and equipment
through the issuance of debt totaling $130,875. Additionally, the
Company exchanged a related party note receivable of $73,782 for oil
and gas properties. 51,250 shares of common stock were issued to
related parties upon the exercise of warrants and paid for by
conversion of accrued expenses to such parties of $26,250.
Use of Estimates in the Preparation of Financial Statements
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. Actual results
could differ from those estimates.
Use Oil and Gas Properties
The Company uses the successful efforts method of accounting for
oil and gas producing activities. Costs to acquire mineral interests
in oil and gas properties, to drill and equip exploratory wells that
find proved reserves, and to drill and equip development wells are
capitalized. Costs to drill exploratory wells that do not find proved
reserves, and geological and geophysical costs are expensed.
As the Company acquires significant oil and gas properties, any
unproved property that is considered individually significant is
periodically assessed for impairment of value, and a loss is
recognized at the time of impairment by providing an impairment
allowance. Capitalized costs of producing oil and gas properties and
support equipment, after considering estimated dismantlement and
abandonment costs and estimated salvage values, are depreciated and
depleted by the unit-of-production method.
On the sale of an entire interest in an unproved property, gain
or loss on the sale is recognized, taking into consideration the
amount of any recorded impairment if the property has been assessed
individually. If a partial interest in an unproved property is sold,
the amount received is treated as a reduction of the cost of the
interest retained. On the sale of an entire or partial interest in a
proved property, gain or loss is recognized, based upon the fair
values of the interests sold and retained.
Other Property and Equipment
The following tables set forth certain information with respect
to the Company's other property and equipment.
The Company provides for depreciation and amortization using the
straight-line method over the following estimated useful lives of the
respective assets:
Automobiles 3 - 5 years
Office equipment 7 years
Gathering system 10 years
Well servicing equipment 10 years
F-11
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Capitalized costs relating to other properties and equipment:
1999 1998
--------- ---------
Automobiles $376,443 $507,175
Office equipment 39,820 39,820
Gathering system 291,796 133,806
Well servicing equipment 650,341 726,186
------------------------ -----------------------
1,358,400 1,406,987
Less accumulated depreciation (585,595) (584,632)
------------------------ -----------------------
Net capitalized cost $772,805 $822,355
======================== =======================
Revenue Recognition
The Company recognizes oil and gas revenues on the sales method
as oil and gas production is sold. Differences between sales and
production volumes during the years ended December 31, 1999, 1998, and
1997 were not significant. Well servicing revenues are recognized as
the related services are performed. Operating overhead income is
recognized based upon monthly contractual amounts for lease
operations. Occasionally, the Company will acquire undeveloped oil and
gas leases with the intent to resell all or a portion of such leases.
Lease sales are recognized (and the related applicable costs as "Costs
of Leases Sold") as such sales are made.
Fair Value of Financial Instruments
At December 31, 1999 and 1998, the Company's financial
instruments consist of notes receivable from related parties, notes
payable and long-term debt. Interest rates currently available to the
Company for notes receivable, notes payable and long-term debt with
similar terms and remaining maturities are used to estimate fair value
of such financial instruments. Accordingly, the carrying amounts are a
reasonable estimate of fair value.
Investments
Investments consist of an interest in a partnership acquired in
the Setex LLC acquisition, accounted for under the equity method of
accounting.
Earnings (Loss) Per Share
Earnings (loss) per share are calculated based upon the
weighted-average number of outstanding common shares. Diluted earnings
(loss) per share are calculated based upon the weighted-average number
of outstanding common shares, plus the effect of dilutive stock
options, warrants, convertible preferred stock and convertible
debentures.
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share", which requires that
both basic earnings (loss) per share and diluted earnings (loss) per
share be presented on the face of the statement of operations. All
per-share amounts are presented on a diluted basis, that is, based
upon the weighted-average number of outstanding common shares and the
effect of all potentially diluted common shares. Implementation of
SFAS No. 128 had no effect on previously reported loss per share
amounts.
F-12
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Impairments
Impairments, measured using fair market value, are recognized
whenever events or changes in circumstances indicate that the carrying
amount of long-lived assets (other than unproved oil and gas
properties discussed above) may not be recoverable and the future
undiscounted cash flows attributable to the asset are less than its
carrying value. Because of declining sales prices for oil and gas in
1998, certain producing oil and gas properties were impaired at
December 31, 1998. The Company charged $2,279,449 to operations in
1998 as an impairment loss, based upon the discounted net present
value of future cash flows of related oil and gas properties.
Stock Based Compensation
In October 1995, SFAS No. 123, "Stock Based Compensation," (SFAS
123) was issued. This statement requires the Company to choose between
two different methods of accounting for stock options and warrants.
The statement defines a fair-value-based method of accounting for
stock options and warrants but allows an entity to continue to measure
compensation cost for stock options and warrants using the accounting
prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." Use of the APB 25 accounting method results in
no compensation cost being recognized if options are granted at an
exercise price at the current market value of the stock or higher. The
Company will continue to use the intrinsic value method under APB 25
but is required by SFAS 123 to make pro forma disclosures of net
income (loss) and earnings (loss) per share as if the fair value
method had been applied in its 1999, 1998 and 1997 financial
statements. See Note 6 to the consolidated financial statements for
further information.
Implementation of New Financial Accounting Standards
The Company adopted SFAS No. 130 "Reporting Comprehensive
Income", No. 131 "Disclosures About Segments of an Enterprise and
Related Information" and No. 132 "Employers Disclosures About
Pensions and Other Post Retirement Benefits" in 1998. Adoption of
these statements had no material effects on the Company's
financial position, results of operations or cash flows.
F-13
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Operations and Management Plans
At December 31, 1999, the Company's current liabilities exceeded its
current assets by $3,293,226 and the Company was either past due or in default
of certain of its debt agreements. Further, the Company has experienced
significant recurring net losses.
Management has defined a tactical and strategic business plan to (1)
use its existing assets to achieve positive cash flow, and (2) identify and
evaluate additional development and acquisition opportunities to further grow
the Company. Following are steps management has taken and is proceeding with in
an attempt to move the Company to profitability:
In a subsequent event on March 30, 2000, a director of the Company
agreed to convert a note payable for $750,000 to 500,000 shares of common stock.
The closing price of the Company's common stock on that date was $1.50 per
share.
In a subsequent event, on April 5, 2000, the Company entered into an
agreement with Aquila Energy Capital, an energy lender, to provide $19,302,000
in financing, of which $12,900,000 was funded at closing. The proceeds were used
to retire existing debt, including accrued interest of $10,234,977; acquire oil
and gas properties in Zavala County, Texas for $2,300,000, including $3,266 in
cash paid by the Company and 200,000 shares of the Company's common stock; and,
to acquire additional interests in the Madisonville Field, Texas, including the
release of a 15% net profits interest by the Partnership, for $368,289. The
lender agreed to provide an additional $6,000,000 in development capital to be
used for development projects on the Company's existing properties, as
identified by the Company and approved by the lender. The remaining $402,000
will be used for costs associated with closing the loan. The loan is secured by
substantially all of the Company's interests in oil and gas properties, bears
interest at prime plus 3.5% and matures May 29, 2004. Monthly payments as to
principal and interest are from an 85% net revenue interest in the secured
properties. The lender retains a 7% overriding royalty interest with payments
commencing after the loan is paid in full.
The Company is now proceeding with its development plan to be funded by
the new financing. This plan should significantly increase production and allow
the Company to meet its debt obligations and attain additional growth. Although
management believes the above actions will ultimately provide the Company with
the means to become profitable, there is no guarantee these actions can be
effectively implemented. Adverse changes in prices of oil and gas and/or the
inability of the Company to continue to raise the money necessary to develop
existing reserves or acquire new reserves would have a severe impact on the
Company.
Note 3. Cost of Oil and Gas Properties
The following tables set forth certain information with respect to the
Company's oil and gas producing activities for the periods presented:
Capitalized Costs Relating to Oil and Gas Producing Activities:
1999 1998
---- ----
Unproved oil and gas properties $ 6,171 $ 4,585
Proved oil and gas properties 19,096,565 7,309,587
Support equipment and facilities 980,960 719,661
--------------- ---------------
20,083,696 8,033,833
Less accumulated depreciation,
depletion and amortization (2,354,596) (1,827,123)
--------------- --------------
Net capitalized costs $ 17,729,100 $ 6,206,710
============ =============
F-14
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
Results of Operations for Oil and Gas Producing Activities:
1999 1998 1997
---- ---- ----
Oil and gas sales $ 2,533,304 $ 1,804,147 $ 4,269,032
Production costs (1,399,710) (1,647,329) (2,139,128)
Depreciation, depletion and amortization (524,295) (2,100,332) (1,470,368)
Income tax expense __________ ___________ __________
Results of operations for oil and gas
producing activities - income (loss) $ 609,299 $ (1,943,514) $ 659,536
========== ============= ==========
Costs Incurred in Oil and Gas Producing Activities:
1999 1998 1997
---- ----- ----
Property Acquisitions
Proved $11,006,257 $ 4,704,408 $ 683,616
Unproved 1,568 - 4,585
Development Costs 1,041,858 1,786,900 1,477,458
------------ ----------- -----------
$12,049,683 $ 6,491,308 $ 2,165,659
=========== ============ ===========
On July 3, 1994, the Company exercised its option under the
Investment Letter and Subscription Agreement with Madisonville
Project, Ltd. (the "Partnership"), an unrelated party, to convert
$500,000 of the note receivable from the Partnership into 100
Partnership units. At December 31, 1994, the Company's 100 units
represent an interest of 32.46% of the Partnership. Per the agreement
with the Partnership, income and expenses are to be distributed
between partners based on the weighted average interest in the
partnership during the year. As a result of the investment in the
Partnership, the balance sheet of the Partnership as of December 31,
1999 and 1998, and its results of operations for the years ended
December 31, 1999, 1998 and 1997 have been proportionately
consolidated with the accompanying balance sheets, statements of
operations and cash flows of the Company. All material intercompany
transactions and balances have been eliminated in consolidation.
On July 17, 1995, the Company acquired from SPI beneficial
ownership of an additional 42-1/2% of the working interests in 31
proved producing oil and gas properties located in Madison and Grimes
Counties, Texas. The acquisition was made pursuant to a Restructuring
Agreement (the "Agreement") dated April 18, 1995 which also provided
for the assumption of operations of the properties and gathering
system by WestCo, a wholly owned subsidiary of the Company. The
Agreement was entered into by and between the Company, SPI, Sikes
Operating, Inc. ("SOI"), an unrelated party, WestCo, S.G.C.
Transmission, L.L.C. ("SGC") a Texas limited liability company of
which the Company is a member, and the Partnership, of which the
Company is a limited partner. The Company gave SPI its 37-1/2%
ownership of the gas pipeline gathering system and assumed a $640,000
nonrecourse note from the Partnership as payment for the working
interests.
The Company also agreed to purchase certain working interest
subsequently acquired by SPI for a purchase price of $100,000, with
$20,000 paid in cash at closing and a promissory note for $80,000,
payable on or before 120 days from the date of the closing with
interest at 10% per annum. This note was paid in full in March, 1996.
F-15
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
Costs Incurred in Oil and Gas Producing Activities: - continued
In 1997, the Company acquired an oil and gas property in
satisfaction of a $73,782 note receivable from a related party. In
connection with two other property acquisitions in 1997, the Company
incurred a total of $62,500 in commissions to a related party.
Effective April 1, 1998, the Company acquired oil and gas
reserves from an unrelated party. The acquisition cost was $3,072,000,
including $2,575,000 in long-term debt, $100,000 cash paid in 1998,
$200,000cash paid in 1997 and other fees and expenses totaling
$197,000. Effective October 1, 1998, the Company sold its interest in
these properties as part of the sale of its wholly owned subsidiary,
GulfWest Permian.
Effective September 1, 1998, the Company acquired all the
membership interests of Setex LLC, pursuant to an Interest Purchase
Agreement ("Agreement"). The aggregate purchase consideration for all
the membership interests consisted of 4,000 shares of the Series C
Preferred Stock of GulfWest and warrants to purchase 100,000 shares of
GulfWest common stock. In this transaction, the Company acquired
working interests in proved undeveloped oil and gas properties located
in six (6) counties in South and East Texas with estimated proved
reserves of approximately 3 billion cubic feet of natural gas
equivalent net to the Company's interest. The net consideration
received ($630,134) was determined through negotiations based upon
third party engineering reports.
Supplemental unaudited pro forma information (under the purchase
method of accounting) presenting the results of operations for the years
ended December 31, 1998 and 1997, as if the Setex LLC transaction had
occurred as of January 1, 1998 and 1997:
Year Ended Year Ended
December 31, December 31,
1998 1997
-------------- ------------
Operating Revenues $ 2,485,510 $ 5,244,524
Operating expenses 8,988,287 5,882,696
--------------- ---------------
Income (loss) from operations ( 6,502,777) ( 638,172)
Other income and expense ( 2,058,063) ( 1,079,771)
Income taxes - -
Net income (loss) ($ 8,560,840) ($ 1,717,943)
============== =============
Earnings (loss) per share - basic and diluted ($ 3.75) ($ 1.22)
=============== =============
F-16
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
Costs Incurred in Oil and Gas Producing Activities: - continued
Effective July 1, 1999, the Company acquired interests in oil and
gas properties in Zavala County, Texas from an unrelated party. The
acquisition cost was $438,759, consisting of $150,000 cash, $138,757
in debt and 300,000 shares of common stock.
Effective December 31, 1999, the Company acquired interests in
oil and gas properties in Colorado and Texas from an unrelated party,
Pozo Resources, Inc. The acquisition cost was $10,500,000, consisting
of 8,000 shares of Series D preferred stock and $6,500,000 in debt. In
addition, the Company paid a $65,000 commission to an unrelated party.
On the same date, the Company transferred its ownership interest in
these properties to its wholly owned subsidiary, GulfWest Oil & Gas
Company.
Supplemental unaudited pro forma information (under the purchase method of
accounting) presenting the results of operations for the years ended
December 31, 1999 and 1998, as if the Pozo Resources transaction had
occurred as of January 1, 1999 and 1998:
Year Ended Year Ended
December 31, December 31,
1999 1998
-------------- ---------------
Operating Revenues $ 3,885,644 $ 3,812,107
Operating Expenses 5,169,105 9,750,701
--------------- ---------------
Income (loss) from operations ( 1,283,461) ( 5,938,594)
Other income and expense ( 2,091,662) ( 3,343,426)
Income taxes - -
Net income (loss) ($ 3,375,123) ($ 9,282,020)
============= =============
Earnings (loss) per share - basic and diluted ($ .48) ($ 4.05)
=============== ==============
Note 4. Accrued Expenses
Accrued expenses consisted of the following:
December 31, December 31,
1999 1998
----------------- -------------
`
Payroll and payroll taxes $ 28,841 $ 92,586
Interest 388,063 310,573
Professional fees 36,000 30,000
Sales taxes 10,052 9,458
----------------- --------------
$ 462,956 $ 442,617
=============== ============
F-17
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Notes payable is as follows:
1999 1998
--------------- ---------
$500,000 notes payable (including $100,000 to related parties in 1999
and $150,000 in 1998) due October through November, 1998. 12%
interest payable quarterly; secured by 20% interest in the
Madisonville Project, Ltd. (Note 3); $50,000 converted to common
stock June, 1998;$50,000 converted to common stock September, 1999. $ 400,000 $ 450,000
$175,000 notes payable due May, 1998. Interest at
prime rate, plus 2% (prime rate at 8.5% at December 31,
1999); 18% past due rate, payable monthly. Secured by
oil and gas properties. 175,000 175,000
$12,000 notes payable due on demand. Interest at 8%
payable quarterly; unsecured; retired July, 1999. 12,000
Promissory notes payable to director of the Company at 8.5% interest;
various due dates from January, 2000 through
June, 2000; unsecured. 750,000 800,000
Promissory note payable to unrelated party at 10% interest;
due April, 2000; unsecured. 75,000
Note payable to unrelated entity to finance oil and gas properties;
Due August, 2000; secured by related oil and gas properties and
guaranty of director; interest at prime rate plus1/2% (8.5% at
December 31, 1999). 6,257,403
Promissory note payable to related party at 10% interest; due on demand;
unsecured. 242,597
Promissory note payable to a director of a subsidiary of the Company
At 8.5%; due May, 2000; unsecured. 200,000
----------- -------------
$ 8,100,000 $ 1,437,000
=============
Notes reclassified as a result of the Aquila financing (Note 2) (7,100,000)
-----------
$ 1,000,000
===========
F-18
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Long-term debt is as follows:
1999 1998
--------------- --------
Line of credit (up to $3,000,000) to bank; due April 10, 2000;
secured by guaranty of a director. Interest at prime rate
(8.5% at December 31, 1999). $ 2,709,515 $ 2,999,515
Nonrecourse debt to the Partnership to acquire
oil and gas properties, at 8% interest per annum. 865,210 865,210
Subordinated promissory notes to various individuals at 9.5% interest
per annum; $25,000 retired April, 1997; $105,000 converted to
common stock June, 1998; $50,000 converted to common stock
September, 1999; amounts include $195,000 ($245,000 - 1998) due to
related parties; past due. 320,000 370,000
Notes payable to finance vehicles, payable in aggregate monthly
installments of approximately $10,000, including interest of 8.5%
to 10.5% per annum; secured by the related
equipment, due various dates through 2002. 102,632 253,251
Notes payable to unrelated entity to retire other debt at an
interest rate of prime plus 1%, changed to prime in April, 1999
(prime at December, 1999 8.5%); due February 1, 2001. Secured
by oil and gas properties, and guaranty of a director. 1,150,000 1,350,000
Notes payable to related party to finance equipment with monthly
installments of $7,800, including interest at 10% per annum; final
payment due September, 2003; secured
by related equipment, retired July, 1999. 337,040
Line of credit up to $500,000 to bank; due April, 2000; secured by
guaranties of a director and officer.
Interest at prime rate (8.5% at December 31, 1999). 490,000 500,000
Note payable to related party to finance equipment with monthly
installments of $5,200, including interest at 13.76% per annum;
final payment due October, 2003; secured by related equipment. 185,071
Note payable to unrelated party with monthly installments of $12,500;
interest at 11%; due March, 2004; secured by oil and gas properties. 480,360
Promissory note to a director of the Company; interest at 8.5%;
due December 31, 2001. 117,858
F-19
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt
Long-term debt is - continued:
Non-interest bearing note payable to unrelated party (interest imputed
at 10%); payable out of 25% net profits from certain oil and gas
properties; due January, 2001; secured by related oil and gas
properties. 132,278
---------- ----------
6,552,924 6,675,016
Notes reclassified as a result of the Aquila financing (Note 2) 7,100,000
-------------
13,652,924
Less current portion (2,348,606) ( 3,273,645)
------------- --------------
Total long-term debt $ 11,304,318 $ 3,401,371
=============== ==============
In a subsequent event, on April 5, 2000, the Company entered into a
financing agreement with Aquila Energy Capital Corporation. This financing
retired $10,085,571 of the debt existing at December 31, 1999 (Note 2).
For purposes of the following table, the debt has been amortized assuming
equal monthly installments
for forty-seven months at twelve percent interest.
Estimated annual maturities for long-term debt, including the
refinancing, are as follows:
2000 $ 2,348,606
2001 2,490,448
2002 5,359,522
2003 2,962,622
2004 491,726
----------------
$ 13,652,924
================
Note 6. Stockholders' Equity
Common Stock 1999 1998
------------ ----------- --------------
Par value $.001; 40,000,000 shares authorized; 15,696,882 and
3,113,517 shares issued and outstanding as of December 31, 1999
and 1998, respectively. $ 15,697 $ 3,113
=========== ==============
Preferred Stock
Class AA, par value $.01; 4,000 shares authorized; 1,950 shares
issued and outstanding as of December 31, 1998. Under special
agreement with the preferred shareholders, the AA shares and
approximately $110,000 in unpaid preferred dividends
were converted to 1,550,000 common shares in 1999. $ $ 19
F-20
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Preferred Stock - continued 1999 1998
----------- ---------
Class AAA, par value $.01; 4,000 shares authorized; 815 and 3,240
shares issued and outstanding as of December 31, 1999 and 1998,
respectively. Dividends are cumulative and payable quarterly at
the rate of $45 per share per annum. The shares are convertible
into common stock based upon a purchase value of $500 per share
of Class AAA stock divided by the lesser of (i) $3.50 per share
or (i) 70% of the average closing NASDAQ bid price of the
common stock for the 15 trading days that end on the 3rd
business day preceding conversion. In addition, the Company is
obligated to pay $2.10 per week (from August 15, 1997; $2.00
from May 15 to August 15, 1997) per $1,000 purchase amount to
Class AAA stock as additional dividends until sufficient
securities are registered to cover public resales of common
stock issuance upon conversion of Class AAA shares. Under
special agreement, a majority of the Class AAA preferred
shareholders (2,425 shares) converted their shares and
approximately $235,000 in unpaid dividends into
1,661,064 common shares in 1999. 8 33
Series BB, par value $.01; 12,000 shares authorized; 3,830 shares
issuable as of December 31, 1998. The sole shareholder
converted $635,000 of debt into 1,270 Series BB shares in 1999.
Subsequently, under special agreement, the Series BB
shareholder converted the 5,100 shares into
4,250,000 common shares. 38
Series C, par value $.01; 12,000 shares authorized; 4,000 shares
issuable as of December 31, 1998. Under special agreement, the
Series C shareholders converted their
shares into 200,000 common shares in 1999. 40
Series D, par value $.01; 12,000 shares authorized; 8,000 issued
and outstanding at December 31, 1999. The Series D preferred
stock does not pay dividends and is not redeemable. The
liquidation value is $500 per share. After three years from the
date of issuance, and thereafter, the shares are convertible
into common stock based upon a value of $500 per Series D
share divided by $8 per share of common stock. 80
--------------- ----------------
$ 88 $ 130
=============== =================
F-21
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
All classes of preferred shareholders have liquidation preference
over common shareholders of $500 per preferred share, plus accrued
dividends. Dividends in arrears at December 31, 1999 were $379,601
($220,192 - Class AAA; $159,409 - Series BB). Dividends in arrears at
December 31, 1998 were $541,796 ($49,151 - Class AA; $492,645 - Class
AAA).
Stock Options
The Company maintains a Non-Qualified Stock Option Plan (as
amended and restated, the "Plan") which authorizes the grant of
options of up to 1,000,000 shares of common stock. Under the Plan,
options may be granted to any of the Company's key employees
(including officers), employee and nonemployee directors, and
advisors. The Plan is administered by a committee appointed by the
Board. Prior to 1999, options granted under the Plan had been granted
at an option price of $3.13 and $1.81 per share. In July 1999, the
Board authorized that all then current employee and director options
under the plan be reduced to a price of $.75 per share. Following is a
schedule by year of the activity related to stock options, including
weighted-average ("WTD AVG") exercise prices of options in each
category.
1999 1998 1997
------------------- ----------------- -------------------
WTD AVG WTD AVG WTD AVG
Prices Number Prices Number Prices Numbers
---------- -------- -------- ------ ------- ---------
Balance, January 1 $ 2.52 490,000 $ 2.85 800,000 $ 3.06 215,000
Options issued $ .75 582,000 $ 1.81 210,000 $ 2.77 585,000
Options expired $ 2.53 (355,000) $ 3.12 (520,000) $ - -
-------- -------- ------
Balance, December 31 $ 1.07 717,000 $ 2.52 490,000 $ 2.85 800,000
======== ======= =======
All options were exercisable at December 31, 1999. Following is a
schedule by year and by exercise price of the expiration of the
Company's stock options issued as of December 31, 1999:
2000 2001 2002 2003 2004 Thereafter Total
------ ----- ------- ------ -------- ---------- --------
$ .75 432,000 150,000 582,000
$1.81 60,000 60,000
$3.00 10,000 65,000 75,000
------ ------ ------ ------ -------- ---------- ---------
10,000 65,000 432,000 210,000 717,000
====== ====== ====== ======= ======== ========= ========
F-22
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Stock Warrants
The Company has issued a significant number of stock warrants for
a variety of reasons, including compensation to employees, additional
inducements to purchase the Company's common or preferred stock,
inducements related to the issuance of debt and for payment of goods
and services. Following is a schedule by year of the activity related
to stock warrants, including weighted-average exercise prices of
warrants in each category:
1999 1998 1997
----------------------- ---------------------- ----------------------
WTD AVG WTD AVG WTD AVG
Prices Number Prices Number Prices Number
-------- --------- -------- ----------- --------- ------------
Balance, January 1 $ 3.16 2,888,343 $ 3.23 2,654,555 $ 3.16 2,702,055
Warrants issued $ 1.09 694,254 $ 3.49 1,008,500 $ 3.00 93,750
Warrants exercised/expired $ 2.90 (2,212,843) $ 1.92 (774,712) $ 1.54 (141,250)
----------- ---------- ------------
Balance, December 31 $ 2.53 1,369,754 $ 3.16 2,888,343 $ 3.23 2,654,555
=========== ========== ==========
Included in the "warrants exercised/expired" column in 1999 were
43,589 with a weighted average of $.49 exercised by related parties.
Included in the "warrants issued" and "warrants exercised/expired"
columns in 1999 were 536,754 warrants whose price was reduced in 1999 to
$.75. The remaining 1,632,500 warrants expired. Included in the
"warrants exercised/expired" column in 1998 were 53,587 warrants with a
weighted average price of $.48 exercised by related parties. Included in
the "warrants issued" and "warrants exercised/expired" column in 1998
were 644,250 warrants issued in previous years whose expiration dates
were extended. The remaining 76,875 warrants expired.
Following is a schedule by year and by exercise price of the
expiration of the Company's stock warrants issued as of December 31,
1999:
2000 2001 2002 2003 2004 Thereafter Total
---- ---- ---- ---- ---- ---------- --------
$ .75 7,500 166,754 370,000 544,254
1.50 50,000 50,000
1.625 19,000 19,000
2.00 56,500 56,500
2.25 40,000 40,000
2.50 50,000 50,000
3.00 50,000 200,000 250,000
3.50 90,000 90,000
5.00 50,000 50,000
5.75 20,000 20,000
6.00 200,000 200,000
------- ------- ------- ------- ------- --------- --------
147,500 215,500 366,754 640,000 1,369,754
========= ======== ======= ======= ======== ========= ==========
F-23
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Stock Warrants - continued
Warrants outstanding to officers, directors and employees of the
Company at December 31, 1999 and 1998 were approximately 807,000 and
1,050,000, respectively. The exercise prices on these warrants range
from $.75 to $6.00 and expire various dates through 2006.
Other Stock Based Compensation Disclosures
During 1999, 1998 and 1997, the Company issued options and
warrants totaling 963,754 (all exercisable); 1998 - 90,000 (all
exercisable) and 1997- 85,000 (25,000 exercisable), respectively, to
employees as compensation. As disclosed in Note 1, the Company
continues to use the intrinsic value based method of APB 25 to measure
stock based compensation. If the Company had used the fair value
method required by SFAS 123, the Company's net loss and per share
information would approximate the following amounts:
1999 1998 1997
---- ---- ----
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- --------- ----------- --------- ----------- ---------
SFAS 123 compensation $ $ 312,749 $ $ 128,210 $ $ 39,750
cost
APB 25 compensation $ $ $ $ $ $
cost
Net Loss ($ 2,269,507) ($ 2,582,254) ($8,387,060) ($ 8,515,160) ($ 1,676,681) ($ 1,716,431)
Loss per common share-
basic and diluted ($ . 34) ($ .38) ($ 3.68) ($ 3.73) ($ 1.19) ($ 1.22)
The effects of applying SFAS 123 as disclosed above are not indicative of future
amounts. The Company anticipates making additional stock based employee
compensation awards in the future.
The Company utilized the Black-Sholes option pricing model to estimate the fair
value of the options and warrants (to employee and non-employees) on the grant
date. Significant assumptions include (1) 5.75% risk free interest rate; (2)
weighted average expected life of 1999 - 4 years; 1998 - 4.4 years; 1997 - 3
years; (3) expected volatility of 1999 - 95.68%; 1998 - 70.48%; 1997 - 77.68%;
and (4) no expected dividends.
Note 7. Loss Per Common Share
The following is a reconciliation of the numerators and denominators used in
computing loss per share:
1999 1998 1997
---- ---- ----
Net loss ($ 2,269,506) ($ 8,387,060) ($ 1,676,681)
Preferred stock dividends ( 450,684) ( 427,173) ( 380,928)
------------------ ------------------ -----------------
Loss available to common
shareholders (numerator) ($ 2,720,190) ($ 8,814,233) ($ 2,057,609)
================== ================== =================
Weighted-average number of shares
of common stock (denominator) 7,953,147 2,394,866 1,725,926
------------------ ------------------ --------------
Loss per share ($ .34) ($ 3.68) ($ 1.19)
================== ================== =================
F-24
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Loss per Common Share - continued
Potential dilutive securities (1999, 1998 and 1997 - stock options, stock
warrants, convertible preferred stock and convertible debentures) have not been
considered since the Company reported a net loss and, accordingly, their effects
would be antidilutive.
Note 8. Related Party Transactions
On December 1, 1992, Ray Holifield and Associates, Inc. executed an
unsecured promissory note to the Company for $118,645 with interest at 10% per
annum, due on October 1, 1993. At December 31, 1993, the note was still
outstanding. During 1994, the Company entered into an agreement with the
Holifield Trust in which Holifield will make payments on the past due note from
future oil and gas revenue. During 1995, $10,995 of interest payments were
received. At December 31, 1999 and 1998 the unsecured promissory note has been
fully reserved.
On December 1, 1992, Parkway Petroleum Company, a Ray Holifield related
company, executed an unsecured promissory note to the Company for $54,616 with
interest at 10% per annum, due on October 1, 1993. The note was issued for
amounts due from contract drilling services provided by the Company. At December
31, 1993, the note was still outstanding. During 1994, the Company entered into
an agreement with the Holifield Trust in which Holifield will make payments on
the past due note from future oil and gas revenue. During 1995, $6,250 of
interest payments were received. At December 31, 1999 and 1998, the unsecured
promissory note has been fully reserved.
On January 10, 1994, the Company entered into a consulting agreement
with Williams whereby the Company would provide management and accounting
services for $25,000 per month for a period of one year. The Company accrued the
consulting fees with an offset to deferred income until payment of the fees are
actually received. During 1994, $172,140 was recorded as consulting fee income.
Beginning in the second quarter 1994, the Company began recognizing consulting
income only as cash payments were received. Prior to the second quarter, $75,000
in consulting fee revenue was accrued. The Company has received $97,140 in
consulting fee payments. As of December 31, 1994, the receivable from Williams
of $202,860 for consulting fees has been offset by deferred income of $127,860
and a provision for doubtful accounts of $75,000. Effective January 1, 1995, the
Company received a promissory note from Williams in the amount of $202,860,
bearing interest at the rate of 10% per annum, and payable in quarterly
installments of principal and interest of $15,538.87. At December 31, 1999 and
1998, the unsecured promissory note has been fully reserved.
As of December 31, 1995, the Company had accrued compensation for two
officers of the Company totaling $54,123. On March 27, 1996, notes due April 1,
1997 were issued to these two officers for this amount. Additionally, the
Company has accrued consulting fees to ST Advisory Corp., a related party owned
by a director of the Company, totaling $12,500 for services performed in
connection with economic evaluations and non-recourse financing arrangements for
future acquisitions of oil and gas properties and other corporate development
opportunities. As of December 31, 1996, accrued compensation to one officer
totaled $10,500. At December 31, 1997, accrued compensation to three officers
totaled approximately $75,000. At December 31, 1998, accrued compensation to one
current and two former officers totaled $89,917. At December 31, 1999, accrued
compensation to one director totaled $14,392.
From July 22 to August 13, 1998, the Company advanced sums totaling
$102,000 to Gulf Coast Exploration, Inc. At December 31, 1998, the debt had been
fully reserved.
On October 1, 1998, Toro Oil Company executed an unsecured promissory
note to the Company for the purchase of 100% of WestCo for $150,000, with
interest at the prime rate per annum and due September 30, 1999. To date, no
principal payments have been received. At December 31, 1998, the promissory note
had been fully reserved.
Interest expensed on related party notes totaled approximately
$165,400, $154,000 and $49,000 for the years December 31, 1999, 1998 and 1997,
respectively.
F-25
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes
The components of the net deferred federal income tax assets
(liabilities) recognized in the Company's balance sheet were as follows:
December 31, December 31,
1999 1998
---- ----
Deferred tax assets
Provision for bad debts $ 238,078 $ 238,078
Net operating loss carryforwards 4,000,998 3,356,309
Oil and gas properties 720,800 744,413
Capital Loss carryforwards 114,997 114,997
Deferred tax liability
Oil and gas properties ( - ) ( - )
------------ ------------
Net deferred tax assets before
valuation allowance 5,074,873 4,453,797
Valuation allowance ( 5,074,873) ( 4,453,797)
------------- ------------
Net deferred tax assets (liabilities) $ - $ -
============= ==============
As of December 31, 1999 and 1998, the Company did not believe it
was more likely than not that the net operating loss carryforwards
would be realizable through generation of future taxable income;
therefore, they were fully reserved.
The following table summarizes the difference between the actual
tax provision and the amounts obtained by applying the statutory tax
rate of 34% to the loss before income taxes for the years ended
December 31, 1999, 1998 and 1997.
1999 1998 1997
---- ---- ----
Tax benefit calculated at statutory rate ($ 771,632) ($ 2,851,601) ($ 595,140)
Increase (reductions) in taxes due to:
Effect of net operating loss carryforwards 684,773 1,945,266 562,638
Effect on non-deductible expenses 50,479 66,724 42,703
Impairment of oil and gas assets - 775,012 -
Other 36,380 64,599 ( 10,201)
------------- ------------- ------------
Current federal income tax provision $ - $ - $ -
============== ============== ============
F-26
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes - continued
As of December 31, 1999, the Company had net operating loss
carryforwards of $11,800,000 and capital loss carryforwards of approximately
$338,000, which are available to reduce future taxable income and capital gains,
respectively, and the related income tax liability. The capital loss
carryforward expires in 2003. The net operating loss carryforward expires at
various dates through 2019.
Note 10. Commitments and Contingencies
Lease Obligations
The Company leases office space at one location under a three
(3) year lease which commenced January 1, 1999. Annual commitments
under the lease are: 1999 - $38,353, 2000 - $51,829 and 2001 -
$54,055.
Litigation
The Company is involved in other litigation and disputes.
Management believes such claims are without merit with respect to the
Company or are adequately covered by insurance and has concluded the
ultimate resolution of such disputes will not have a material effect
on the Company's consolidated financial statements.
Note 11. Oil and Gas Reserves Information (Unaudited)
The estimates of proved oil and gas reserves utilized in the
preparation of the financial statements are estimated in accordance
with guidelines established by the Securities and Exchange Commission
and the Financial Accounting Standards Board, which require that
reserve estimates be prepared under existing economic and operating
conditions with no provision for price and cost escalations over
prices and costs existing at year end except by contractual
arrangements.
The Company emphasizes that reserve estimates are inherently
imprecise. Accordingly, the estimates are expected to change as more
current information becomes available. The Company's policy is to
amortize capitalized oil and gas costs on the unit of production
method, based upon these reserve estimates. It is reasonably possible
that, because of changes in market conditions or the inherent
imprecision of these reserve estimates, that the estimates of future
cash inflows, future gross revenues, the amount of oil and gas
reserves, the remaining estimated lives of the oil and gas properties,
or any combination of the above may be increased or reduced in the
near term. If reduced, the carrying amount of capitalized oil and gas
properties may be reduced materially in the near term.
F-27
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
The following unaudited table sets forth proved oil and gas
reserves, all within the United States, at December 31, 1999, 1998,
and 1997, together with the changes therein.
Crude Oil Natural Gas
(Bbls) (Mcf)
------------- -----
QUANTITIES OF PROVED RESERVES:
Balance December 31, 1996 3,657,953 7,960,473
Revisions ( 160,726) ( 5,028)
Extensions, discoveries, and additions 1,340,770
Purchases 55,204 495,797
Sales ( 15,876) (1,984,621)
Production ( 200,898) ( 271,263)
----------- -----------
Balance December 31, 1997 4,676,427 6,195,358
Revisions ( 2,317,025) ( 845,166)
Extensions, discoveries, and additions 21,306 65,751
Purchases 177,416 2,958,550
Sales ( 1,375,820) ( 1,518,913)
Production ( 98,157) ( 200,225)
----------- ----------
Balance December 31, 1998 1,084,147 6,655,355
Revisions 1,184,623 ( 754,478)
Extensions, discoveries, and additions 343,857 2,917,613
Purchase 781,942 10,835,725
Sales - -
Production ( 79,661) ( 467,350)
---------- ------------
Balance December 31, 1999 3,314,908 19,186,865
========== ===========
PROVED DEVELOPED RESERVES:
December 31, 1997 2,158,239 4,286,755
========== ==========
December 31, 1998 769,862 3,866,308
========== =========
December 31, 1999 1,569,750 9,316,529
========== ===========
F-28
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
STANDARDIZED MEASURE:
Standardized measure of discounted future net cash flows relating to
proved reserves:
1999 1998 1997
Future cash inflows $119,006,567 $ 22,260,688 $ 87,414,045
Future production and development costs
Production 42,544,454 10,379,070 35,441,101
Development 9,903,729 2,935,160 9,937,663
---------------- --------------- --------------
Future cash flows before income taxes 66,558,384 8,946,458 42,035,281
Future income taxes (11,847,076) ( - ) ( 7,852,795)
---------------- --------------- --------------
Future net cash flows after income taxes 54,711,308 8,946,458 34,182,486
10% annual discount for estimated
timing of cash flows (23,755,909) ( 3,756,850) ( 13,419,225)
---------------- --------------- --------------
Standardized measure of discounted
future net cash flows $ 30,955,399 $ 5,189,608 $ 20,763,261
================ =============== ==============
The following reconciles the change in the standardized measure of
discounted future net cash flows:
Beginning of year $ 5,189,608 $ 20,763,261 $ 30,123,676
Changes from:
Purchases 14,211,998 1,619,804 551,704
Sales ( 7,563,199) ( 3,076,199)
Extensions, discoveries and improved
recovery, less related costs 4,798,128 258,112 7,167,886
Sales of oil and gas produced net of
production costs (1,133,594) ( 156,818) ( 2,129,904)
Revision of quantity estimates 7,363,300 ( 7,584,033) ( 860,133)
Accretion of discount 518,961 2,553,324 4,002,061
Change in income taxes (6,703,020) 4,769,976 5,126,956
Changes in estimated future
development costs (1,434,291) ( 677,160) ( 1,429,664)
Development costs incurred that
reduced future development costs 1,012,141 1,786,900 1,447,458
Change in sales and transfer prices,
net of production costs 6,348,062 ( 11,523,635) ( 19,265,762)
Changes in production rates (timing)
and other 784,106 943,076 ( 894,818)
--------------- ------------- --------------
End of year $ 30,955,399 $ 5,189,608 $20,763,261
=============== ============= ==============
F-29
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
GULFWEST OIL COMPANY
Our report on the consolidated financial statements of GulfWest Oil Company
and Subsidiaries as of December 31, 1999 and 1998 and for each of the three
years in the period ended December 31, 1999, is included on page F-1. In
connection with our audit of such financial statements, we have also audited the
related financial statement schedule for the years ended December 31, 1999, 1998
and 1997 on page F-31.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
\s\ WEAVER AND TIDWELL, L.L.P.
- ------------------------------
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 5, 2000
F-30
GULFWEST OIL COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
BALANCE BALANCE
AT BEGINNING AT END
OF PROVISIONS/ RECOVERIES/ OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS PERIOD
- ----------- ------ --------- ---------- ------
For the year ended
December 31, 1997:
Accounts and notes receivable
related parties $ 446,948 $ 1,282 $ $ 448,230
=============== ========== ============= =============
Valuation allowance for
deferred tax assets $ 1,108,937 $ 534,619 $ $ 1,643,556
=============== ========== ============= =============
For the year ended
December 31, 1998:
Accounts and notes receivable
related parties $ 448,230 $ 252,000 $ $ 700,230
=============== ========== ============= =============
Valuation allowance for
deferred tax assets $ 1,643,556 $2,810,241 $ $ 4,453,797
=============== ========== ============= =============
For the year ended
December 31, 1999:
Accounts and notes receivable -
related parties $ 700,230 $ $ $ 700,230
=============== ========== ============= =============
Valuation allowance for
deferred tax assets $ 4,453,797 $ 621,076 $ $ 5,074,873
=============== ========== ============= =============
F-31
Exhibit 22.1
Subsidiaries of the Registrant
GulfWest has six wholly-owned subsidiaries, all Texas corporations or
companies:
1. GulfWest Oil & Gas Company was organized February 18, 1999 and is the
owner of record of interests in certain properties located in
Colorado and Texas.
2. SETEX Oil and Gas Company ("SETEX") was organized August 11, 1998 and
operates oil and natural gas properties in which the Company owns
majority working interests.
3. LTW Pipeline Co. ("LTW") was organized April 19, 1999 to be the owner
and operator of natural gas gathering systems and pipelines, and to
market the natural gas produced by the Company's properties.
4. VanCo Well Service, Inc. ("VanCo") was organized September 5, 1996 and
operates well servicing equipment for the Company and under contracts
with third parties.
5. Southeast Texas Oil and Gas Company, L.L.C. ("Setex LLC")was acquired
September 1, 1998 and is the owner of record of interests in certain
oil and natural gas properties located in four counties in South and
East Texas.
6. GulfWest Texas Company ("GW Texas") was organized September 23, 1996 and
is the owner of record of interests in certain properties located in
the Vaughn Field, Crockett County Texas (the "Vaughn Field").
7. DutchWest Oil Company ("DutchWest") was organized July 28, 1997 and is
the owner of record of interests in certain oil and natural gas
properties located in Hardin and Polk Counties, Texas.