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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, 1996
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 (I.R.S. Employer
incorporation or organization) Identification No.)
2644 Sherwood Forest Plaza, Suite 229
Baton Rouge, Louisiana 70816
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (504) 293-1100.
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
Class A Common Stock, par value of $.001 per share Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of Each Class on which registered
Class A Common Stock, par value of $.001 per share The Nasdaq Stock Market
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 No X
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
$3,206,426 on April 21, 1997.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock: Class A Common Stock $.001 par value: 1,696,154 shares
on April 21, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: None
1
PART I
ITEM 1. Business.
General
GulfWest Oil Company ("GulfWest" or the "Company"), a Texas corporation, is
an independent oil and gas company primarily engaged in the acquisition of
producing oil and gas properties with Proved Reserves which have the potential
for increased value through continued development and enhanced recovery
technology. The Company's objective is to significantly increase the production
of such properties through workovers of the wells, Horizontal Drilling from
existing wellbores, development drilling or other enhancement operations.
Since the Company began its acquisition program in June 1993, it has
acquired Proved Reserves of 5 million barrels of oil equivalent (BOE) with a
Present Value of approximately $40 million as of December 31, 1996. On a BOE
basis, 64% of the Proved Reserves were classified as Proved Developed and 73% of
Proved Reserves consisted of oil reserves. The Company operates 88% of its
properties, based on Present Value.
At present, substantially all of the Company's properties are located in
Texas; however, in the future the Company plans to expand to other geographic
areas in which it believes acquisition opportunities exist. The operations of
the Company are considered to fall within a single industry segment, the
acquisition, development and production of natural gas and crude oil. See "Item
2. Properties".
GulfWest Oil Company is the successor by merger with GulfWest Energy, Inc.,
a Utah corporation, in July, 1992. The purpose of the merger was 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. The Company has three wholly-owned
subsidiaries: WestCo Oil Company ("WestCo"), GulfWest Texas Company ("GulfWest
Texas") and GulfWest Permian Company ("GulfWest Permian"), all Texas
corporations. WestCo was organized July 14, 1995 and operates properties in
which the Company owns majority Working Interests. GulfWest Texas was organized
September 23, 1996 and is the owner of record for certain properties located in
the Vaughn Field, West Texas. GulfWest Permian was organized November 25, 1996
and is the owner of record for certain properties located in four counties in
West Texas. WestCo has one wholly-owned subsidiary, VanCo Well Service, Inc.
("VanCo"), a Texas corporation, which was organized September 5, 1996 and
operates well servicing equipment under contract with the Company and third
parties. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations".
The Company maintains its executive offices at 2644 Sherwood Forest Plaza,
Suite 229, Baton Rouge, Louisiana 70816, and its telephone number is
(504)293-1100. The Company also maintains an operations office at 16800 Dallas
Parkway, Suite 250, Dallas, Texas 75248 and its telephone number is
(972)250-4440.
The Company has one class of Common Stock, Class A, which is traded on The
Nasdaq SmallCap Market tier of The Nasdaq Stock Market under the symbol "GULF"
(prior to February 27, 1996 the symbol was "GFWO") and listed on the Boston
Stock Exchange under the symbol "GFW" ("Common Stock"). See "Item 5. Market for
Registrant's Common Stock and Related Stockholder Matters".
Recent Acquisitions
During the fourth quarter of 1996, the Company acquired oil properties in
the Permian Basin area of West Texas for a total purchase price of $10.8
million. The first of the two acquisitions was the purchase of
2
oil properties in the Vaughn Field ("Phase I") for $3 million, which closed
on October 10, 1996. The acquisition was funded with $1.5 million from the net
proceeds of a private placement of Preferred Stock and the assumption of $1.5
million of the seller's bank debt.
On December 9, 1996, the Company closed the purchase of an additional group
of oil properties ("Phase II"), located in Pecos, Howard, Sterling and Lynn
Counties, Texas for $7.65 million. This acquisition was funded by $150,000 in
cash from working capital, short-term seller financing of $1.6 million and the
assumption of $5.9 million of the seller's bank debt. The Phase I and Phase II
acquisitions increased the Company's Proved Reserves at December 31, 1996 by
138% to 5 million BOE and increased the Present Value of the reserves by 107% to
approximately $40 million. These properties include approximately 400 Net
Productive Wells on approximately 9,000 Net Acres.
Subsequent to year end, on April 2, 1997, the Company entered into a
Purchase and Sale Agreement, with a performance deposit of $100,000 to acquire
additional West Texas oil properties ("Phase III"), located in Pecos and
Sterling Counties, Texas for a purchase price of $4.7 million, to be funded by
financing of $3.6 million with the balance to be paid in cash and through a
production net profits interest under certain terms and conditions. The Phase
III properties contain 692,000 BOE of Proved Reserves.
Development of the Business
The development of the Company from 1993 through 1995 was based upon its
business plan which had the following major elements:
1. To establish a base of Producing Properties to provide the
Company cash flow and build oil and gas reserves. The Company
commenced this process with the acquisitions funded by proceeds
from its 1993 Public Offering.
2. Whenever possible, to use the cash flow from the acquired
properties to enhance their value and accelerate the rate of
return on the invested funds.
3. To continue an aggressive program to acquire additional Producing
Properties with enhancement and developmental potential. Since
June 1993, the Company has acquired Working Interests in 450
Gross Productive Wells, located on 22,250 Gross Acres (14,450 Net
Acres), and Royalty Interests in two additional wells.
4. To expand, through a wholly owned subsidiary, the day-to-day
operation of properties to ensure more effective and profitable
management, and to generate operator revenues to offset general
and administrative expenses of the Company. The Company's
operating subsidiary, WestCo commenced operations in August 1995
and now operates all of the properties in which the Company owns
a majority Working Interest.
1993 Core Acquisitions
Upon the successful close of its Public Offering (the "Offering") in June,
1993, the Company began to expand its acquisition program and increase its
reserve base, using the $2.2 million net proceeds from the Offering and private
financing. In July and August, 1993, GulfWest purchased Working Interests in 26
producing oil and gas wells in East Texas from Sikes Producing, Inc. (the "Sikes
Acquisition") for $930,000. Four of the wells have behind the pipe Proved
Developed Reserves and drilling locations for Proved Undeveloped Reserves.
In December, 1993, GulfWest acquired Working Interests in an additional 31
producing oil and gas wells in the Madisonville Field, Texas (the "Madisonville
Acquisition") with excellent enhancement potential
3
and considerable Proved Reserves. The Company also acquired a 37.5%
ownership in a natural gas pipeline system. During a six month period ending
December 31, 1993, GulfWest acquired Proved Reserves of 2.5 Bcf of natural gas
and 140,000 barrels of oil, for a purchase price of $1.85 million which equated
to $3.27 per BOE.
1994 Additions
On July 31, 1994, the Company exercised its option to purchase a 32.5%
interest in The Madisonville Project, Limited (the "Partnership") for $500,000
in exchange for cancellation of a note receivable from the Partnership. The
assets of the Partnership included ownership in Working Interests in producing
oil and gas properties, a 25% ownership in a natural gas pipeline gathering
system and notes receivable in the amount of $1,281,000 at June 30, 1994, of
which $640,500 was due from the Company. In November, 1994, the Company acquired
a 20% Working Interest in 1,300 undeveloped acres with proved oil and natural
gas reserves in a field where the Company owned interests in 2 producing wells.
With these additions, the Company doubled its end of year reserve base from 1993
to 1994.
1995 Developments
On July 17, 1995, GulfWest acquired from Sikes Producing, Inc. ("SPI"),
beneficial ownership of an additional 42.5% of the Working Interests in 31
Proved Producing oil and gas properties located in the Madisonville Field. Under
a Restructuring Agreement, GulfWest contributed its 37.5% ownership in the gas
pipeline gathering system and assumed a $640,000 nonrecourse note as payment for
the Working Interests. GulfWest also agreed to purchase certain additional
Working Interests in Madisonville 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 which was subsequently paid in full in 1996. WestCo assumed
operations of the 31 wells, effective August 1, 1995. These actions increased
the Company's Proved Reserves by 44% over 1994 and provided additional operating
income to WestCo through operating fees.
Risk Factors
Market Conditions and Prices
The success of the Company will depend 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 under production 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 crude oil and natural gas has placed
pressures on prices and has resulted in dramatic price fluctuations.
Accuracy of Reserve Estimates
There are numerous uncertainties in estimating quantities of Proved
Reserves and in projecting future rates of production and the timing of
development expenditures. The reserve data set forth in this Memorandum
represents only estimates. In addition, the estimates of future net cash flows
from Proved Reserves, the Present Value thereof, and the acquisition cost per
barrel of oil equivalent (BOE) thereof are based upon certain assumptions about
future production levels, prices and costs that may not prove to be correct.
4
Acquisition Risks
It generally is not feasible to examine in detail every individual property
involved in an acquisition and ordinarily review efforts are concentrated on the
higher-valued properties. Even a detailed review of all properties and records
may not reveal existing or potential problems nor will it permit the Company to
become sufficiently familiar with the properties to fully assess their
deficiencies and capabilities.
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 production 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 generate 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
which often are difficult and costly to comply with and which 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 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.
Employees
As of March 31, 1997, the Company had 47 full time employees, of whom 40
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, 1996, the Company's properties included Working Interests
in 450 gross productive oil and gas wells and Royalty Interests in 2 additional
wells. The properties contained net to the Company's interest, estimated Proved
Reserves of 3,657,953 barrels of oil and 7,960,473 Mcf of gas at year end. These
reserves are located primarily in Texas.
Proved Reserves. The following table reflects the estimated Proved Reserves
of the Company for the preceding three years.
1996 1995 1994
Crude Oil (Bbls)
Developed 2,498,287 140,702 84,081
Undeveloped 1,159,666 299,101 24,423
Total 3,657,953 439,803 108,504
Natural Gas (Mcf)
Developed 4,067,278 3,688,816 3,526,150
Undeveloped 3,893,195 3,404,739 2,569,206
Total 7,960,473 7,093,555 6,095,356
Total Equivalent Barrels(a)(b) 4,984,699 1,622,062 1,124,397
(a) Gas is converted to oil equivalent at a rate of 6 Mcf
per barrel.
(b) The above table does not include reserves for the
Company's interests in wells in Kansas and Louisiana which
represent less than 5% of the Company's operations.
Proved Developed Reserves are expected to be recovered from existing wells
with existing equipment and operating methods. Proved Undeveloped Reserves are
expected to be recovered from new wells drilled to known Reservoirs on undrilled
acreage for which the existence and recoverability of such reserves can be
estimated with reasonable certainty. Approximately 64% of the Company's total
Proved Reserves were classified as Proved Developed at December 31, 1996.
The following table sets forth as of December 31, 1996 the estimated future
net cash flow from and pre-tax SEC Value of the Company's Proved Reserves.
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, which were prepared in accordance with the
rules and regulations of the SEC, are based on current cost and price factors at
December 31, 1996. There can be no assurance that the Proved Reserves will all
be developed within the periods indicated or that prices and costs will remain
constant. There are numerous uncertainties inherent in estimating reserves and
related information and different Reservoir engineers often arrive at different
reserve estimates for the same properties. No estimates of reserves were filed
with or included in reports to any other federal authority or agency since
January 1, 1996.
6
Standardized Measure of discounted future net cash flows at December 31,
1996, 1995 and 1994.
1996 1995 1994
Future cash inflows $117,580,889 $ 21,873,331 $ 12,244,413
Future production and development costs-
Production (42,128,957) (6,942,953) (3,809,564)
Development (6,596,609) (3,876,951) (2,093,847)
Future net cash flows before income taxes 68,855,323 11,053,427 6,341,002
Future income taxes (17,027,637) (2,069,248) (972,608)
Future net cash flows after income taxes 51,827,686 8,984,179 5,368,394
10% annual discount for estimated timing
of cash flows (21,704,010) (3,076,444) (2,247,711)
Standardized Measure of discounted
future net cash flows $ 30,123,676 $ 5,907,735 $ 3,120,683
Significant Properties. Substantially all of the Company's properties are
located in Texas. Summary information on the Company's properties with Proved
Reserves is set forth below as of December 31, 1996.
Gross Net Proved Reserves Pre-Tax
Productive Productive Crude Natural Equivalent 10% NPV
Wells Wells Oil Gas Barrels Amount %
(Bbl) (Mcf)
Texas 442 414.43 3,657,953 7,960,473 4,984,699 $40,020,607 100
Kansas 6 3.00 - - - - -
Louisiana 2 .15 - - - - -
Total 450 417.58 3,657,953 7,960,473 4,984,699 $40,020,607 100
Note:Reserve information for the wells in Kansas and Louisiana are not presented
since those reserves represent less than 5% of the Company's total operations.
7
Production, Revenue and Price History
The following table sets forth information regarding production volumes of
crude oil and natural gas, net to the Company's interest, revenues and expenses
attributable to such production and certain price and cost information for the
years ended December 31, 1996, 1995 and 1994, associated with the Company's
Proved Reserves.
1996 1995 1994
Production
Oil (Bbls) 55,175 10,656 8,139
Gas (Mcf) 225,501 226,703 212,324
Equivalent (Bbl)(a) 92,758 48,439 43,526
Revenues
Oil production $1,115,647 $ 193,230 $ 132,082
Gas production 433,422 358,125 416,052
Total $1,549,069 $ 551,355 $ 548,134
Direct operating expenses $ 656,957 $ 415,816 $ 288,347
Production data
Average sales price
Per barrel of oil $20.22 $18.13 $16.23
Per Mcf of gas 2.79 1.58 1.96
Per equivalent barrel 18.81 11.38 12.59
Average operating expense
per equivalent barrel(b) $7.08 $8.58 $6.62
(a) Gas production is converted to oil equivalents at a
rate of 6 Mcf per barrel.
Productive Wells at December 31, 1996:
Gross Oil Wells Net Oil Wells
Texas 432.00 412.10
Kansas 6.00 3.00
Louisiana 2.00 0.15
Total 440.00 415.25
Gross Gas Wells Net Gas Wells
Texas 10.00 2.33
Total 10.00 2.33
8
Developed Acreage at December 31, 1996:
Gross Net
Texas 20,474.23 14,021.36
Kansas 320.00 160.00
Louisiana 155.61 11.67
Total 20,949.84 14,193.03
Undeveloped Acreage at December 31, 1996:
Gross Net
Texas 1,300.00 260.00
Drilling Results. The Company did not participate in drilling any wells
during the years ended December 31, 1996, 1995 and 1994.
ITEM 3. Legal Proceedings.
Joe L. Bruton v. Moon Operating, Inc., FSDH, Inc., formerly known as and
d/b/a GulfWest Drilling Company, Roy Williams and GulfWest Oil Company, Cause
No. 94-04325-00-0-C, 94th District Court of Nueces County, Texas. The Plaintiff
had asserted a cause of action for personal injury received at a drill site in
August, 1993 while an employee of the Company's former subsidiary. The Company
was added as a Defendant to this lawsuit on March 10, 1995. In a subsequent
event, on March 4, 1997, the parties agreed in mediation to a financial
settlement with the Plaintiff, with the Company's portion being $10,000.
Enterra Oilfield Rental Company v. GulfWest Oil Company, FSDH, Inc. and
Williams Southwest Drilling Company, Inc., Cause No. 649954, County Civil Court
at Law #2, Harris County, Texas. The plaintiff has asserted a cause of action
for collection of a past due account from FSDH, Inc. in the amount of $70,269.08
plus interest and legal fees. The Company was added as a defendant to this
lawsuit on July 20, 1995 asserting that, since FSDH (formerly GulfWest Drilling
Company) had forfeited its charter pursuant to the Texas Tax Code, GulfWest and
Williams, as the stockholders of FSDH, are liable for the past due account. The
Company has taken the position that since GulfWest had no ownership interest in
FSDH at the time FSDH forfeited its charter, as plead in the petition, GulfWest
is not liable for this claim. The Company's legal counsel has requested a
dismissal and is awaiting the consent of plaintiff's counsel. It is the opinion
of Company's legal counsel that the plaintiff has no reasonable basis for a
successful claim against the Company and therefore, no value should be placed on
this claim.
The Company's operating subsidiary, WestCo, is currently involved in a
dispute with a company over rental equipment which the Company contends was
faulty and inoperable. At present, neither party has instituted litigation,
however the Company anticipates arbitration to settle the dispute in the near
future. Based upon the representations of management as to the loss of revenues
due to the failure of the equipment to perform properly, it is the opinion of
the Company's legal counsel that any claims for back rental would be
sufficiently offset by the damages sustained by the Company, therefore no value
has been placed on this unasserted claim.
9
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting was held on July 2, 1996. The only matter
submitted to a vote of the shareholders was the election of directors. All 5 of
the serving directors were re-elected. See Item 10 of this report, which
information is incorporated herein by reference.
10
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Company's Common Stock is traded on The Nasdaq SmallCap Market tier of
The Nasdaq Stock Market under the symbol "GULF" (prior to February 27, 1996 the
symbol was "GFWO") and listed on the Boston Stock Exchange under the symbol
"GFW". The high and low trading prices for the Common Stock for each quarter in
1994, 1995 and 1996 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.
1994 High Low
First Quarter 4.25 2.75
Second Quarter 4.00 2.875
Third Quarter 3.50 2.25
Fourth Quarter 3.50 2.625
1995
First Quarter 2.875 2.375
Second Quarter 2.875 2.25
Third Quarter 2.875 2.50
Fourth Quarter 2.875 1.875
1996
First Quarter 5.375 1.25
Second Quarter 6.625 2.50
Third Quarter 4.00 2.125
Fourth Quarter 3.25 2.75
As of March 31, 1997, there were 210 shareholders of record and
approximately 324 beneficial shareholders of the Common Stock. 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 has never paid cash dividends on the Common Stock, and does not
anticipate paying any cash dividends in the foreseeable future.
11
ITEM 6. Selected Financial Data.
The following table sets forth selected historical financial data of
GulfWest Oil Company as of December 31, 1996, 1995, 1994, 1993 and 1992, 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 and the stockholder's equity data at December 31, 1996,
1995 and 1994, and the balance sheet data at December 31, 1995 and 1994 are
derived from the Company's audited financial statements contained elsewhere
herein. The balance sheet data for the years ended 1993 and 1992, and the income
statement data and stockholder's equity for the year ended 1992 are derived from
the Company's Annual Report on Form 10-K for the year ended December 31, 1993,
after restatement for the effects of the discontinued drilling segment. 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,
1996 1995 1994 1993 1992
Income Statement Data
Operating Revenues $ 1,966,012 $ 669,367 $ 757,538 $ 197,579 $ 93,781
Net income (loss) from (824,735) (1,186,843) (879,746) (453,520) (343,880)
continuing operations
Net income (loss) from - - - 290,935 178,579
discontinued operations
Net income (loss) (824,735) (1,186,843) (879,746) (162,585) (165,301)
Income (loss) from (0.71) (1.17) (0.88) (0.48) (0.40)
continuing operations
per share of Common Stock
Net income (loss) from $ - $ - $ - $ 0.31 $ 0.21
discontinued operations,
per share of Common
Stock outstanding(1)
Net Income (loss), per $ (0.71) $ (1.17) $ (0.88) $ (0.17) $ (0.19)
share of Common Stock
outstanding(1)
Weighted average number 1,266,974 1,010,765 1,000,000 938,305 861,844
of shares of Common Stock
outstanding(1)
Balance Sheet Data
Current assets $ 699,259 $ 201,759 $ 226,860 $1,333,849 $ 303,702
Total assets 15,159,424 3,209,400 2,625,293 3,597,076 748,187
Current liabilities 2,877,290 543,565 610,843 408,661 131,431
Long-term obligations 8,877,941 1,678,039 198,675 492,895 -
Stockholders' Equity $ 3,404,193 $ 987,796 $1,815,774 $2,695,520 $ 652,756
(1) Based on number of shares after the 1 for 6 reverse stock split
effected on September 11, 1992.
12
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Comparative results of operations for the periods indicated are discussed
below.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Oil and gas sales for 1996 increased 181% to $1,549,000 from $551,300 in
1995. This was due to the addition of Working Interests ownership in the Phase I
and II acquisitions during the fourth quarter of 1996 and by increased oil and
gas prices. Lease operating expenses for 1996 increased by 58% to $657,000 from
$415,800 in 1995 because of the added Working Interests ownership.
There was no gathering system revenue or expenses for 1996 since the
Company exchanged its beneficial ownership in the system for the addition of
Working Interests in certain wells in August 1995.
Lease sales revenues in 1996 were $252,300 compared to -0- in 1995 with
cost of leases sold being $91,800 compared to -0- in 1995. The leases sold
consisted of 50% ownership in the Manvel properties which the Company had
acquired during the second quarter of 1996.
In September 1996, the Company began operating well servicing equipment to
perform work on its own properties and under contract to third parties.
Operations for third parties produced well servicing revenues of $58,900 less
expenses of $46,400.
Operating overhead and other income increased to $105,700 for 1996 compared
to $65,000 earned by the operating subsidiary after commencement of operations
in August 1995. The increase was due to a full year's operation of the
Madisonville properties and the assumption of operations for the Phase I and II
properties during the fourth quarter of 1996.
The 41% increase in Depreciation, Depletion and Amortization for 1996
compared to 1995 was due to the added Working Interests ownership in the fourth
quarter.
General and administrative costs for 1996 increased by $146,500 over 1995
due to added personnel salaries and other costs associated with company
expansion.
Interest expense increased from $172,600 in 1995 to $420,100 in 1996 due to
borrowing costs related to the acquisition of additional interests and other
debt incurred during the year to finance the Company' operations.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The net increase in oil and gas sales from 1994 to 1995 was not
significant, in that sales from the additional Working Interests ownership in
the Madisonville Field was offset by falling prices, the loss of flush
production from one well in which a new zone was stimulated in 1994, and the
curtailment of production because of low natural gas prices. Lease operating
expenses for 1995 increased to $415,800 from $288,300 in 1994, primarily because
of the added Working Interests ownership.
13
The 15% decrease in Depreciation, Depletion and Amortization for the period
ended December 31, 1995 from the comparable period in the prior year was
associated with reserve revisions at December 31, 1994 resulting from the
decline of gas prices from $2.25 at December 31, 1993 to $1.55 at December 31,
1994. Lower prices caused the reserves attributable to certain properties to be
uneconomical. Thus the elimination or Proved Reserves on these properties caused
an increase to the Depreciation, Depletion and Amortization of the remaining
undepleted book basis in 1994.
The gas gathering system income decreased because of the exchange of the
Company's beneficial ownership in the system for the addition of Working
Interests in certain wells.
Other fee income in 1994 was from consulting revenues from an affiliate,
none of which was generated in 1995. In 1995, other fee income was $20,000 from
prospect generation fees and $65,000 from management fees earned by the WestCo
subsidiary.
Interest expense increased from $68,700 to $172,600 due to borrowing costs
related to the acquisition of additional interests and other debt incurred
during the year to finance the Company's operations.
During 1994, $172,100 was recorded as consulting fee income, resulting from
a one year consulting agreement between the Company and Williams Southwest
Drilling Company, Inc. ("Williams"), effective in January, 1994. Under the
agreement, the Company provided management and accounting services for a fee of
$25,000 per month. Through March 31, 1994, consulting fees of $75,000 were
accrued and recorded as consulting fee income. Beginning in April, 1994, the
Company began to record the consulting fees on a cash basis due to uncertainty
as to the collectibility of these consulting fees. The Company recognized
$172,100 in consulting fee revenues related to this agreement during the year
ended December 31, 1994 and none in 1995.
Financial Condition and Capital Resources
During the fourth quarter, the Company acquired the Phase I and Phase II
oil properties in the Permian Basin area of West Texas for a total purchase
price of $10,800,000. Phase I was purchased on October 10, 1996 for $3,000,000,
using $1,500,000 of the net proceeds from the sale of Cumulative Convertible
Exchangeable Preferred Stock and the assumption of $1,500,000 of the seller's
bank debt. Phase II was purchased on December 9, 1996 and funded by $150,000 in
cash from working capital, seller financing of $1,600,000 and the assumption of
the seller's bank debt of $5,900,000.
At December 31, 1996, compared to December 31, 1995, the Company' total
assets increased to $15,159,000 from $3,209,000, negative working capital
increased to $2,178,031 from $326,706 and shareholder's equity increased to
$3,404,000 from $987,796.
Subsequent to year end, on January 7,1997, the Company established a
$2,000,000 revolving line of credit with a banking institution. Part of the
proceeds will be drawn for installment payments on the Phase II seller' note.
At April 24, 1997, the outstanding balance due on the line of credit was
$1,204,000. Management is currently negotiating with lending institutions to
secure a long-term note for refinancing of the outstanding debt on Phase I and
Phase II and the financing of Phase III.
In a subsequent event, on April 2, 1997, the Company entered into a
Purchase and Sale Agreement to acquire the Phase III properties for a purchase
price of $4,700,000, to be funded by bank financing of $3,600,000 with the
balance to be paid in cash and through a production net profits interest under
certain terms and conditions.
14
In a subsequent event, on April 23, 1997, the $500,000 principal and $8,329
in unpaid interest (since February 28, 1997) on its 1995 Series A Notes Issue
was to be due and payable. The Noteholders of $475,000 in principal agreed to
extend the due date of their notes to April 23, 1998, in exchange for warrants
to purchase 47,500 shares of the Company's common stock at an exercise price of
$3.25 per share and the extension of the expiration date to April 23, 1998 on
warrants they hold to purchase 47,500 shares of common stock at an exercise
price of $5.00 per share. The Noteholders also agreed to exercise warrants they
hold to purchase 47,500 shares of common stock at an exercise price of $0.50 per
share, with proceeds to the Company of $23,750.
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 fluctuations cannot be predicted by the Company.
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)
Quarterly
1994
First $13.34 $2.18 $13.21
Second 16.46 1.86 13.81
Third 16.78 1.68 13.43
Fourth 16.09 1.47 12.45
1995
First $16.85 $1.33 $12.41
Second 17.94 1.48 13.41
Third 16.51 1.51 13.08
Fourth 16.88 1.77 13.75
1996
First $18.12 $3.06 $18.24
Second 19.81 2.49 17.38
Third 19.88 2.24 16.66
Fourth 23.08 3.39 21.71
15
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 on Accounting and
Financial Disclosure.
On December 12, 1995, GulfWest Oil Company (the "Company") and Arthur
Andersen L.L.P. ("Andersen") mutually agreed to terminate the engagement of
Andersen as the Company's certifying accountants. The Company's Audit Committee
and Board of Directors approved the termination. On February 28, 1996, the
Company engaged the firm of Weaver and Tidwell, L.L.P. to replace Andersen.
In connection with the audits of the two fiscal years ended December 31,
1993 and 1994, and the subsequent interim period through December 11, 1995,
there were no disagreements with Andersen on any matter of accounting principles
or practices, financial statement disclosure, or auditing scope or procedures,
which disagreements if not resolved to their satisfaction would have caused them
to make reference in connection with their opinion to the subject matter of the
disagreement, and said firm has not advised the registrant of any reportable
events. It should be noted, however, that for the period subsequent to December
31, 1994, Andersen has not audited, reviewed, or performed any other such
procedures with respect to the Company's financial statements, financial
position or results of operations and, accordingly, Andersen's knowledge with
respect to such period is limited.
The accountants' report of Andersen on the financial statements of the
Company for the year ended December 31, 1993 did not contain any adverse opinion
or disclaimer of opinion, nor were they qualified as to uncertainty, audit
scope, or accounting principles. The accountants' report of Andersen on the
financial statements of the Company for the year ended December 31, 1994
questioned the Company's ability to continue as a going concern due to recurring
losses from operations, a working capital deficit and severe cash flow
shortages. Management's plans in regard to these matters were described in the
notes accompanying the financial statements and were subsequently implemented.
16
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
John E. Loehr 51 Chairman of the Board, 1992
Chief Financial Officer and
Director
Marshall A. Smith III 49 President, Chief Executive 1989
Officer and Director
Jim C. Bigham 61 Executive Vice President, 1991
Secretary and Director
A. Van Nguyen 41 Vice President of 1996
Operations
Ned W. Fowler 69 Director 1990
Alan J. Ostrowe 56 Director 1990
Charles D. Ledford 63 Director 1996
Henri M. Nevels 32 Director 1996
All directors will hold office until the next annual meeting of
shareholders or until their successors are elected and qualified. Officers are
elected annually by the Company's board of directors and serve for a one- year
period and until their successors are elected. There is no family relationship
between any of the named individuals above.
John E. Loehr was elected chairman of the board on September 1, 1993 and
appointed Chief Financial Officer, effective November 22, 1996. Mr. Loehr was
formerly president of Star-Tex Asset Management, a commodity trading advisor, a
position he held from 1988 until 1992 when he sold his ownership interest. Mr.
Loehr is currently president and sole shareholder of ST Advisory Corporation and
vice-president of Star- Tex Trading Company. Mr. Loehr is a CPA and is a member
of the American Institute of Certified Public Accountants and Texas Society of
Certified Public Accountants.
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 of directors. On November 20, 1992, he
resigned as president but continued as chief executive officer and chairman of
the board. Upon the resignation of Charles Major as president on September 1,
1993, Mr. Smith assumed the duties as president and resigned the position of
chairman of the board. Prior to joining the Company, Mr. Smith served in various
capacities in a number of family controlled companies.
Jim C. Bigham is a retired United States Air Force Major. During his
career, he served in both command and staff officer positions in the
operational, intelligence and planning areas. Prior to joining the Company, Mr.
Bigham held management and sales positions in the real estate and printing
industries.
17
A. Van Nguyen was appointed Vice President of Operations, effective January
1, 1996. Mr. Nguyen is a Registered Professional Engineer in the state of Texas.
He is a petroleum engineer with extensive background and experience in oil and
gas property evaluation, drilling and completion, field operations and
enhancement recovery technology. Prior to joining the Company, he was Senior
Vice President of OGP Operating, Inc., and a partner of Oil and Gas Producers,
Inc., Dallas, Texas, from 1992 to 1995. OGP Operating, Inc. was the operating
company for Fuel Resources, Inc., a wholly-owned subsidiary of Brooklyn Union
Gas Company. Prior to that, he was a senior petroleum engineer at Deminex U.S.
Oil Company, Dallas, Texas, where he was employed from 1981 to 1992.
Ned W. Fowler currently serves as special adviser to OGERD Corporation, a
company engaged in the marketing of equipment and supplies in the petroleum and
petrochemical industries worldwide. In December, 1994, Mr. Fowler retired as
executive vice president and a director of IRI International, Inc., positions he
held since 1985. IRI International, Inc. manufactures, markets, and services oil
well drilling rigs nationally and internationally. The company was formed in
1985 as a merger of the Ideco Division of Dresser Industries and Ingersoll-Rand
Oil Field Products Company. Mr. Fowler was president of Ideco-Dresser from 1982
until the merger with Ingersoll-Rand.
Alan J. Ostrowe, M.D., F.A.C.A. is a physician practicing in Baton Rouge,
Louisiana. He is on the Board of Directors and is currently the Medical Director
of Amedisys Mobile Health Case Services, Inc. He is president and a director of
General Anesthesia Services, Inc., a firm which he and two associates founded in
1987 for the purpose of supplying medical anesthesiology services in southern
Mississippi and Louisiana. He is also vice-president of Nursing Enterprises,
Inc., a position he has held since 1988.
Charles D. Ledford was appointed a director of the Company on August 5,
1996 to serve until the next annual shareholders' meeting. Mr. Ledford was
chairman of the board, chief executive officer and president of ECO2, Inc., from
its inception in 1991 until his resignation effective February 27, 1997. Since
1976, he has been active in research and development and the study of the
application of pyrolysis in business. In 1992, he patented a process converting
scrap rubber tires into carbon black and fuel oil through the use of pyrolysis.
Henri M. Nevels was appointed a director of the Company on August 22, 1996
to serve until the next annual shareholders' meeting. Mr. Nevels has extensive
experience in international business and finance. For the past 7 years, he has
been a key advisor to a private European investor group with international
holdings, including those in the United States and China.
Item 11. Executive Compensation.
Information with respect to executive compensation is incorporated herein
by reference to the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information with respect to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
Information with respect to certain relationships and related transactions
is incorporated herein by reference to the Proxy Statement.
18
GLOSSARY
The terms defined in this glossary are used throughout 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 economic producibility is
supported by either actual production or a conclusive formation test. 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
19
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 of 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.
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.
20
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.
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.
21
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:
Balance Sheets at December 31, 1996, and 1995.
Statements of Operations for the years ended December 31, 1996, 1995,
and 1994.
Statements of Stockholders' Equity for the years ended December 31,
1996, 1995 and 1994.
Statements of Cash Flows for the years ended December 31, 1996, 1995,
and 1994.
Notes to Financial Statements, December 31, 1996, 1995 and 1994.
(2) Exhibits:
Number Description
2.1 Restructuring Agreement Regarding Madisonville Prospect,
dated April 18, 1995. (6)
2.2 Unanimous Consent to First Amendment to Regulations of
S.G.C. Transmission, L.L.C., dated July 17, 1995. (6)
2.3 Security Agreement RE: Subsequently Acquired Interests,
dated July 17, 1995. (6)
2.4 Purchase and Sale Agreement, with amendments, between
Pharaoh Oil and Gas, Inc, as Seller, and WestCo Producing
Company, as Purchaser, dated June 12, 1996. (2)
2.5 Addendum of Purchase and Sale Agreement by and between Gary
O. Bolen, Individually and d/b/a Badger Oil Company, Pharaoh Oil
and Gas, Inc., and GulfWest Texas Company. (2)
2.6 Assignment of Purchase and Sale Agreement by and between
Gary O. Bolen, Individually and d/b/a Badger Oil Company, Pharaoh
Oil and Gas, Inc., GulfWest Texas Company and WestCo Producing
Company. (2)
2.7 Assignment and Bill of Sale by and between Gary O. Bolen,
Individually and d/b/a Badger Oil Company and Pharaoh Oil and
Gas, Inc. as Assignor and GulfWest Texas Company as Assignee. (2)
22
2.8 Purchase and Sale Agreement between Pharaoh Oil and Gas,
Inc., Taylor Link Operating Co. and Gary O. Bolen, Individually
and d/b/a Badger Oil Company (collectively, "Pharaoh"), as
Seller, and WestCo Producing Company, as Purchaser, dated
November 6, 1996. (1)
2.9 Addendum of Purchase and Sale Agreement between Pharaoh and
WestCo Producing Company, dated December 5, 1996. (1)
2.10 Assignment of Purchase and Sale Agreement by and between
Pharaoh, GulfWest Permian Company and WestCo Producing Company,
dated December 5, 1996. (1)
2.11 Form of Assignment and Bill of Sale by and between Pharaoh
as Assignor and GulfWest Permian Company as Assignee. (1)
3.1 Articles of Incorporation of the Registrant and Amendments
thereto. (10)
3.2 Bylaws of the Registrant. (10)
3.3 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. (2)
3.4 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. (2)
4.1 Form of Note Purchase and Sale Agreement for the Company's
1995 Series A 9.5% Subordinated Notes, undated. (4)
4.2 Subscription and Registration Rights Agreement for the
Purchase of Preferred Stock Between the Company and Eco2, Inc.
dated March 13, 1996. (4)
4.3 Term note in the amount of $1,500,000.00 payable to the
order of Pharaoh Oil and Gas, Inc. and to be executed by GulfWest
Texas Company. (2)
4.4 Term note in the amount of $5,900,000.00 payable to the
order of Pharaoh Oil and Gas, Inc. and executed by GulfWest
Permian Company, dated December 5, 1996. (1)
4.5 Term note in the amount of $1,604,000.00 payable to the
order of Pharaoh Oil and Gas, Inc. and executed by GulfWest
Permian Company, dated December 5, 1996. (1)
10.1 Engagement Agreement between Donald & Co. Securities, Inc.
and GulfWest Oil Company executed February 15, 1994. (9)
23
10.2 GulfWest Oil Company 1994 Stock Option Plan, approved by
the Board of Directors on February 11, 1994. (7)
10.3 Form of Nonqualified Stock Option Agreement, dated February
11, 1994 between the Company and certain officers, directors and
advisors of the Company. (7)
10.4 Letter Agreement between the Company and Madisonville
Project, Limited, dated December 28, 1993 and amendment dated
March 28, 1994. (8)
10.5 Investment Letter Subscription Agreement of the
Madisonville Project, Limited, executed by the Company on July
31, 1994. (8)
10.6 The Madisonville Project, Limited Agreement of Limited
Partnership, dated July 31, 1994. (8)
10.7 Warrant Agreement between the Company and Jackson & Walker,
L.L.P., dated December 21, 1994. (7)
10.8 Stock Option Agreement between the Company and John E.
Loehr, dated May 11, 1995. (4)
10.9 Stock Option Agreement between the Company and Marshall A.
Smith III, dated May 11, 1995. (4)
10.10 Employment Agreement between the Company and Marshall A
Smith III, dated July 1, 1995. (4)
10.11 Employment Agreement between the Company and Jim C.
Bigham, dated July 1, 1995. (4)
16 Letter from Arthur Andersen, L.L.P., dated December 28, 1995
agreeing with the statements contained in Item 4 of the Form 8-KA
report. (5)
20.1 Letter to Shareholders dated August 12, 1996. (3)
25 Power of Attorney (included on signature page of this Annual
Report).
_______________
1 Previously filed with the Company's Form 8-K, Current Report dated
December 5, 1996, filed with the Commission on December 17, 1996.
2 Previously filed with the Company's Form 8-K, Current Report dated October
10, 1996, filed with the Commission on October 25, 1996.
3 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.
4 Previously filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1995, filed with the Commission on April 12, 1996.
5 Previously filed with the Company's Form 8-KA, Current Report dated
December 12, 1995, filed with the Commission on December 29, 1995.
24
6 Previously filed with the Company's Form 8-K, Current Report dated
July 17, 1995, filed with the Commission on July 31, 1995.
7 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.
8 Previously filed with the Company's Quarterly Report on Form 10-Q for the
period ended June 30, 1994, filed with the Commission on August 14, 1994.
9 Previously filed with the Company's Annual Report on Form 10-K for the
year ended December 31, 1993, filed with the Commission on March 30,
1994.
10 Previously filed with the Company's Registration Statement (on Form S-1,
Reg. No. 33-53526), filed with the Commission on October 21, 1992.
25
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: April 28, 1997 By:\s\ Marshall A. Smith III
Marshall A. Smith III
President
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Marshall A. Smith III 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\ John E. Loehr Chairman of the Board, Chief April 28, 1997
John E. Loehr Financial Officer and Director
\s\ Marshall A. Smith III President and Director (Chief April 28, 1997
Marshall A. Smith III Executive Officer)
\s\ Jim C. Bigham Executive Vice President, April 28, 1997
Jim C. Bigham Secretary and Director
\s\A. Van Nguyen Vice President of Operations April 28, 1997
A. Van Nguyen
\s\ Ned W. Fowler Director April 28, 1997
Ned W. Fowler
26
Director
Alan J. Ostrowe
Director
\s\ Charles D. Ledford Director April 28, 1997
Charles D. Ledford
\s\ Henri M. Nevels Director April 28, 1997
Henri M. Nevels
27
GULFWEST OIL COMPANY
FINANCIAL REPORT
DECEMBER 31, 1996
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8
All 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
Board of Directors
GULFWEST OIL COMPANY
We have audited the accompanying consolidated balance sheets of GulfWest
Oil Company (a Texas Corporation) as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The 1994 financial
statements were audited by other auditors whose report, dated April 7, 1995,
expressed an unqualified opinion on those statements but contained an
explanatory paragraph identifying conditions that raised substantial doubt about
the Company's ability to continue as a going concern.
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.
The Company's financial statements do not disclose proforma results of
operations for the years ended December 31, 1996 and 1995 relating to certain
significant business acquisitions in 1996, as further described in Note 3 to the
consolidated financial statements. In our opinion, disclosure of this
information is required to conform with generally accepted accounting
principles.
In our opinion, except for the omission of the information discussed in the
previous paragraph, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
GulfWest Oil Company as of December 31, 1996 and 1995 and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles.
/s/ Weaver and Tidwell, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
April 19, 1997
619
F-1
GULFWEST OIL COMPANY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
ASSETS
1996 1995
---------------- ----------------
Cash and cash equivalents $ 84,477 $ 10,548
Accounts receivable - trade, net of allowance
for doubtful accounts of $ -0- and
$ -0- in 1996 and 1995, respectively 612,439 153,619
Prepaid expenses 2,343 37,592
---------------- ----------------
Total current assets 699,259 201,759
OIL AND GAS PROPERTIES,
using the successful efforts
method of accounting
undeveloped properties 37,910 37,910
Developed properties 14,823,561 3,340,419
Gathering systems 20,048
---------------- ----------------
14,861,471 3,398,377
OTHER PROPERTY AND EQUIPMENT 735,507 278,864
Less accumulated depreciation,
depletion, and amortization (1,249,472) (783,375)
---------------- ----------------
Net oil and gas properties and
other property and equipment 14,347,506 2,893,866
LONG-TERM ACCOUNTS AND NOTE RECEIVABLE -
RELATED PARTIES, net of allowance for doubtful accounts
of $446.948 and $395,364 in 1996 and 1995, respectively 112,659 113,775
---------------- ----------------
TOTAL ASSETS $ 15,159,424 $ 3,209,400
================ ================
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
---------------- ----------------
CURRENT LIABILITIES
Current portion of long-term debt $ 1,702,208 $ 59,906
Notes payable 87,675
Accounts payable - trade 1,018,419 329,495
Accrued expenses 156,663 66,489
---------------- ----------------
Total current liabilities 2,877,290 543,565
---------------- ----------------
LONG-TERM DEBT, net of current portion 8,352,941 1,451,938
---------------- ----------------
LONG-TERM DEBT - RELATED PARTIES 525,000 226,101
---------------- ----------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 46
Common stock 1,611 1,086
Additional paid-in capital 6,909,092 3,596,514
Retained deficit (3,506,556) (2,609,804)
---------------- ----------------
Total stockholders' equity 3,404,193 987,796
---------------- ----------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 15,159,424 $ 3,209,400
================ ================
F-3
GULFWEST OIL COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------- ------------- --------------
OPERATING REVENUES
Oil and gas sales $ 1,549,069 $ 551,355 $ 548,134
Gathering system revenue 32,385 37,264
Lease sales 252,333
Well servicing revenues 58,881
Operating overhead and other income 105,729 85,627 172,140
-------------- ------------- --------------
1,966,012 669,367 757,538
-------------- ------------- --------------
COST AND EXPENSES
Lease operating expenses 656,957 415,816 288,347
Gathering system expense 287 1,648
Cost of leases sold 91,831
Cost of well servicing operations 46,424
Lease abandonment 85,696 51,618 38,080
Depreciation, depletion, and amortization 466,097 331,315 389,578
General and administrative 1,058,870 912,322 923,494
-------------- ------------- --------------
2,405,875 1,711,358 1,641,147
-------------- ------------- --------------
LOSS FROM OPERATIONS (439,863) (1,041,991) (883,609)
-------------- ------------- --------------
OTHER INCOME AND EXPENSE
Interest income 35,211 27,708 72,547
Interest expense (420,083) (172,560) (68,684)
-------------- ------------- --------------
LOSS BEFORE INCOME TAXES (824,735) (1,186,843) (879,746)
INCOME TAXES
-------------- ------------- --------------
NET LOSS $ (824,735)$ (1,186,843)$ (879,746)
============== ============= ==============
LOSS PER SHARE $ (0.71) (1.17) (0.88)
============== ============= ==============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
GULFWEST OIL COMPANY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Number of Shares
--------------------------------------------------------
Preferred Common Treasury
Stock Stock Stock
------------ ------------ ------------
BALANCE,
December 31, 1993 1,000,000 366,754
Cancellation of treasury shares (366,754)
Net loss
------------ ------------ ------------
BALANCE,
December 31, 1994 1,000,000
Issuance of 86,125 common shares
through private placement 86,125
Issuance of warrants for goods, services
and additional financing costs
Net loss
------------ ------------ ------------
BALANCE,
December 31, 1995 1,086,125
Issuance of 525,029 common shares
(360,875 shares through private placement,
152,954 shares to convert a $500,000 note
payable and 11,200 shares for goods and
services) 525,029
Issuance of 4,621 shares of preferred stock
(900 shares of Class AA and 3,421 shares
of Class AAA through private placement and
300 shares of Class AA to covert a $150,000
note payable) 4,621
Issuance of warrants for goods, services
and additional financing costs
Net loss
Dividends paid on preferred stock
------------ ------------ ------------
BALANCE,
December 31, 1996 4,621 1,611,154
============ ============ ============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-5
Additional
Common Preferred Paid-In Retained Treasury
Stock Stock Capital Deficit Stock
------------ ------------ ------------ ------------ ------------
$ 1,367 $ $ 3,237,735 $ (543,215) $ (367)
(367) 367
(879,746)
------------ ------------ ------------ ------------ ------------
1,000 3,237,735 (1,422,961)
86 129,101
229,678
(1,186,843)
------------ ------------ ------------ ------------ ------------
1,086 3,596,514 (2,609,804)
525 1,078,721
46 2,131,681
102,176
(824,735)
(72,017)
------------ ------------ ------------ ------------ ------------
$ 1,611 $ 46 $ 6,909,092 $ (3,506,556) $
============ ============ ============ ============ ============
F-6
GULFWEST OIL COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS END DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
-------------- ------------- --------------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (824,735) $ (1,186,843) $ (879,746)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 466,097 331,315 389,578
Abandoned leases 85,696 51,618
Common stock and warrants issued
and charged to operations 122,276 358,865
Provision for bad debts 61,482
Conversion of accrued liabilities to notes payable 75,790
(Increase) decrease in accounts
receivable - trade, net (458,820) (80,099) 6,639
(Increase) decrease in prepaid expenses 35,249 (32,113) 6,283
(Increase) decrease in discounts on notes payable 33,334 (43,846)
Increase (decrease) in accounts payable
and accrued expenses 779,098 (3,902) 198,920
-------------- ------------- --------------
Net cash provided by (used in) operating activities 299,677 (529,215) (278,326)
-------------- ------------- --------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
(Increase) decrease in short-term investments 101,066
Purchase of property and equipment (2,713,569) (245,309) (516,953)
(Increase) decrease in accounts and notes
receivable - related party (60,366) 140,737 98,501
(Increase) decrease in note receivable 82,027
Payments received in loans to related parties 244,571
-------------- ------------- --------------
Net cash provided by (used in) investing activities (2,773,935) (104,572) 9,212
-------------- ------------- --------------
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 1,059,145
Proceeds from sale of preferred stock, net 1,981,728
Payments on debt (743,875) (220,526) (46,716)
Proceeds from debt issuance 323,206 834,000 14,539
Dividends paid (72,017)
-------------- ------------- --------------
Net cash provided by (used in) financing activities 2,548,187 613,474 (32,177)
-------------- ------------- --------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 73,929 (20,313) (301,291)
CASH AND CASH EQUIVALENTS,
beginning of year 10,548 30,861 332,152
-------------- ------------- --------------
CASH AND CASH EQUIVALENTS,
end of year $ 84,477 $ 10,548 $ 30,861
============== ============= ==============
CASH PAID FOR INTEREST $ 202,111 $ 85,214 $ 57,529
============== ============= ==============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-7
GULFWEST OIL COMPANY
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 (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: WestCo Producing Company (WestCo), formed in 1995;
Vanco Well Service, Inc. ("Vanco"), GulfWest Texas Company ("GWT") and GulfWest
Permian Company ("GWP") all formed in 1996. All material intercompany
transactions and balances are eliminated upon consolidation.
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
WestCo, operates. Such amounts are secured by the underlying ownership interests
in the properties.
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.
In 1995, the Company acquired oil and gas properties through the assumption
and issuance of debt totaling $720,508. Additionally, the Company financed
$50,061 towards the purchase of other property and equipment.
In 1996, a $150,000 note payable was converted to preferred stock. In
addition, the Company acquired oil and gas properties and other property and
equipment through the issuance of debt totaling $9,291,864 and $348,486,
respectively.
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.
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.
F-8
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Oil and Gas Properties - continued
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, after considering estimated dismantlement and abandonment costs and
estimated salvage values, are depreciated and depleted by the unit-of-production
method. Support equipment and other property and equipment are depreciated over
their estimated useful lives.
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.
Depreciation and Amortization
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
Oil and Gas Revenues
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, 1996, 1995, and 1994 were not significant.
Reclassifications
Some amounts on the 1995 financial statements have been reclassified to
conform to 1996 presentation. Such reclassifications had no effect on result of
operations for 1995.
Accounting Pronouncements
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," was issued. The statement was adopted by the Company in the
first quarter of 1996. Under provisions of the statement, impairments, measured
using fair market value, are recognized whenever events or changes in
circumstances indicate that the carrying amount of long-lived assets may not be
recoverable and the future undiscounted cash flows attributable to the asset are
less than its carrying value. Adoption of the statement had no effect on
financial position or results of operations in 1996.
F-9
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Accounting Pronouncements - continued
In October 1995, SFAS No. 123, "Stock Based Compensation," 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 are required by
SFAS No. 123 to make pro forma disclosures of net income and earnings per share
as if the fair value method had been applied in its 1996 and 1995 financial
statements. See Note 6 to the consolidated financial statements for further
information.
Note 2. Operations and Management Plans
At December 31, 1996, the Company had suffered recurring operating losses,
had cash on hand of $84,500 and its current liabilities exceeded its
current assets by $2,178,000. Subsequent to year end, the Company
established a $2,000,000 revolving line of credit with a banking
institution with part of the proceeds to be used for payment of short- term
notes incurred with acquisitions made during the fourth quarter. The line
of credit is due January 10, 1998 and is guaranteed by an unrelated third
party in exchange for warrants to purchase 250,000 shares of the Company's
common stock at an exercise price of $2.88 per share.
During the fourth quarter of 1996, the Company acquired and assumed
operations for $10,654,000 in oil properties in West Texas. Intensive
efforts are underway to increase daily production from presently owned
properties from 1,000 equivalent barrels of oil per day currently to 1,500
equivalent barrels of oil per day by the end of the second quarter of 1997.
Utilizing independently prepared petroleum engineering reports and expected
average prices for oil and gas of $18 per barrel and $2 per MCF,
respectively, for 1997 (both prices lower than existed at December 31,
1996), management estimates the Company will have sufficient cash flows
from operations to fund debt service obligations and preferred stock
dividend obligations as they become due.
Management is seeking a partner to assist in the horizontal development of
wells on its Madisonville properties. Management has identified 7 wells for
entry using its horizontal technique which has proved up an additional
400,000 equivalent barrels of oil. The partner would be required to provide
sufficient funds to pay down the existing debt on the property and fund the
drilling and completion of the horizontal wells in exchange for a
substantial operating interest in those wells.
Management will continue an aggressive acquisition strategy with a target
of $20,000,000 in additional properties during 1997, and continues to
explore the possibilities of issuing more preferred or common shares as the
market allows to fund such acquisitions. In a subsequent event, on April 2,
1997, the Company entered into a Purchase and Sale Agreement to acquire oil
and gas properties ("Phase III") for a purchase price of $4,700,000, to be
funded by bank financing of $3,600,000, with a balance to be paid in cash
and through a production net profits interest under certain terms and
conditions.
The Company is presently negotiating with a credit facility for a long-term
loan in order to consolidate the debt incurred by the Company as part of
the Phase I and II purchases and to finance the Phase III purchase.
F-10
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Operations and Management Plans - continued
In a subsequent event, on April 23, 1997, the $500,000 principal and $8,329
in unpaid interest (since February 28, 1997) on its subordinated promissory
notes was to be due and payable. The note holders of $475,000 in principal
agreed to extend the due date of their notes to April 23, 1998, in exchange
for warrants to purchase 47,500 shares of the Company's common stock at an
exercise price of $3.25 per share and the extension of the expiration date
to April 23, 1998 on warrants they hold to purchase 47,500 shares of common
stock at an exercise price of $5,00 per share. The note holders also agreed
to exercise warrants they hold to purchase 47,500 shares of common stock at
an exercise price of $0.50 per share, with proceeds to the Company of
$23,750.
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:
1996 1995
Unproved oil and gas properties $ 37,910 $ 37,910
Proved oil and gas properties 14,469,593 3,087,824
Support equipment and facilities 353,968 272,643
14,861,471 3,398,377
Less accumulated depreciation,
depletion and amortization ( 1,070,883) ( 679,150)
Net capitalized costs $13,970,588 $2,719,227
Results of Operations for Oil and Gas Producing Activities:
1996 1995 1994
Oil and gas sales $ 1,549,069 $ 511,355 $ 548,134
Gathering system revenues 32,385 37,264
Production costs ( 656,957) ( 416,103) ( 289,995)
Exploration costs (lease abandonments) ( 85,696) ( 51,618) ( 38,080)
Depreciation, depletion and amortization ( 391,494) ( 289,112) ( 352,494)
Income tax expense
Results of operations for oil and gas
producing activities - income (loss) $ 414,922 ($ 213,093) ($ 95,171)
F-11
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
Costs Incurred in Oil and Gas Producing Activities:
1996 1995 1994
Property Acquisitions
Proved $ 11,158,616 $ 956,058 $ 77,885
Unproved 37,910
Development Costs 273,799 114,779 321,111
$ 11,432,415 $ 1,070,837 $ 436,906
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. This noncash transaction is not reflected in the accompany
statement of cash flows for the year ended December 31, 1994. 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, 1996 and 1995, and its
results of operations for the years ended December 31, 1996 and 1995 and
for the period August 1, 1994, through December 31, 1994, 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.
In 1996, the Company acquired significant oil and gas reserves from an
unrelated entity in two separate transactions. In the first transaction
("Phase I"), the Company acquired various properties for $3,000,000.
$1,500,000 was paid at closing and a $1,500,000 note payable was issued. In
the second transaction (Phase II'), the Company acquired various properties
for $7,654,000. $150,000 was paid at closing and two notes payable totaling
$7,504,000 were issued. In connection with the Phase I and Phase II
transactions, the Company incurred $200,000 in commissions to a related
party.
Generally accepted accounting principles for publicly held entities require
pro-forma results of operations for 1996 and 1995 for the Phase I and Phase
II transactions as if the acquisitions had occurred at the beginning of
1995. Because of the unavailability to date of the accounting records
necessary to provide such disclosures, such required disclosures are not
presented herein. The Company is continuing its efforts to gather the
required information and, if successful, will make the amended filings as
soon as practicable.
F-12
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Accrued Expenses
Accrued expenses consisted of the following:
December 31, December 31,
1996 1995
Payroll and payroll taxes $ 23,729 $ 6,783
Interest 106,634 29,706
Professional fees 20,000 30,000
Sales taxes 7,300
$ 156,663 $ 66,489
Note 5. Notes Payable and Long-Term Debt
Notes payable are as follows:
1996 1995
Short-term note payable secured by certain
oil and gas properties at 10% interest
per annum; retired. $ $ 80,000
Other, retired 7,675
Total notes payable $ $ 87,675
Long-term debt is as follows:
Nonrecourse debt to the Partnership to acquire
oil and gas properties, at 8% interest per annum. $ 865,210 $ 865,210
Subordinated promissory notes, net of discount of $10,511
and $43,846 in 1996 and 1995, respectively, to various
individuals at 9.5% interest per annum; $25,000 due
April 23, 1997; $464,489 including $325,000 to related
parties due in April, 1998. 489,489 456,154
Notes payable to finance vehicles, payable in aggregate
monthly installments of $5,623 including interest of 8.5%
to 10.5% per annum secured by the related equipment,
due various dates through 2001. 182,813 58,685
Non-interest bearing notes payable to unrelated entities
(interest imputed at 10% per annum), payable in monthly
installments of $14,000; final payments due December,
1997 through February, 1998; secured by oil and gas well
servicing equipment. 174,333
Note payable to unrelated entity to acquire oil and gas
properties, payable in monthly installments of $14,343
plus accrued interest of 1.5% above prime, final payment
of $998,000 due October, 1999, secured by the related
oil and gas properties. 1,474,926
F-13
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt - continued
Promissory note to an individual at 7% interest. The
note was increased to $150,000 and then converted
to preferred stock in 1996. 50,000
Note payable to unrelated entity to purchase oil and
gas properties, original amount of $7,504,000
includes $1,604,000 non-interest bearing note
(interest imputed at 9% per annum); $250,000
paid in 1996; $422,000 due in 1997 and balance
of $932,000 due March, 1998 (all including
imputed interest). Remainder of $5,900,000 due
in monthly installments of $49,205 plus accrued
interest of prime plus 1.5%; final payment of
$4,274,781 due October, 1999; secured by
related oil and gas properties. 7,193,378
Individuals notes at 6% to 12% interest ($226,101
to related parties). Converted to subordinated
promissory notes in 1996. 307,896
Note payable to shareholder, interest at 10%;
due November, 1996 and subsequently
retired in February, 1997. 200,000
10,580,149 1,737,945
Less current portion ( 1,702,208) ( 59,906)
Total long-term debt $ 8,877,941 $ 1,678,039
Repayment on the nonrecourse debt to the Partnership is to be made from 75%
of the operating cash flow from the acquired wells, with payments applied
first to interest, then to principal. In addition, the lender received a
15% net profits interest, as defined in the purchase agreement, in amounts
realized from the acquired properties.
Based upon the borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of long-term debt
approximates its carrying value.
Estimated maturities for long-term debt as of December 31, 1996, are as
follows:
1996
1997 $ 1,702,208
1998 2,264,645
1999 5,964,813
2000 104,345
2001 83,969
Thereafter 460,169
$10,580,149
F-14
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity
Common Stock 1996 1995
Par value $.001; 20,000,000 shares authorized;
1,611,154 and 1,086,125 shares issued
and outstanding as of December 31,
1996 and 1995, respectively. $ 1,611 $ 1,086
Preferred Stock
Class AA, par value $.01; 4,000 shares authorized;
1,200 shares issued and outstanding. Dividends
are cumulative and payable quarterly at the rate
of $50 per share per annum. Shares are
redeemable at any time, at Company's option, at
120% of price paid by shareholder plus accrued
dividends. The shares are also convertible into
common stock at the rate of 100 common shares
for every preferred share converted. Holders of
Class AA preferred also have the right to receive
cumulative distributions, commencing December 31,
1997, of up to 25% of the net profits, as defined,
of the oil and gas properties acquired with the
Class AA proceeds. $ 12 $
Class AAA, par value $.01; 4,000 shares authorized;
3,421 shares issued and outstanding. 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 (ii) 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. Should the Company be unable
to register sufficient securities by May 15, 1997 to cover
public resales of common stock issuable upon conversion
of Class AAA shares, the Company is obligated for 90
days thereafter to pay Class AAA shareholders $2 per
week per $1,000 purchase amount of Class AAA stock
(increasing $.10 per week per $1,000 purchase amount
thereafter). 34
$ 46 $
Class AA and AAA preferred shareholders have liquidation preference over common
shareholders of $500 per preferred share, plus accrued dividends.
F-15
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Stock Options
The Company maintains a Non-Qualified Stock Option Plan (the "Plan") which
authorizes the grant of options of up to 200,000 shares of common stock.
Under the Plan, options may be granted to any of the Company's key
employees (including officers), directors, or advisors. The Plan is
administered by the Stock Option Committee of the Board of Directors. All
options granted under the Plan vest immediately and have been granted at an
option price of $3,00 per share. In addition, the Company has granted stock
options to a financial consultant in 1994 at stock options, including
weighted-average ("WTD AVG") exercise prices of options in each category.
1996 1995 1994
WTD AVG WTD AVG WTD AVG
Prices Number Prices Number Prices Number
Balance, January 1 $ 3.07 205,000 $ 3.06 180,000 $
Options issued $ 3.00 10,000 $ 3.13 25,000 $ 3.06 180,000
Options exercised/expired $ $ $
Balance, December 31 $ 3.06 215,000 $ 3.07 205,000 $ 3.06 180,000
Following is a schedule by year and by exercise price of the expiration of the Company's stock options issued as
of December 31, 1996:
1997 1998 1999 2000 2001 Total
$3.00 100,000 10,000 110,000
$3.13 105,000 105,000
205,000 10,000 215,000
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:
1996 1995 1994
WTD AVG WTD AVG WTD AVG
Prices Number Prices Number Prices Number
Balance, January 1 $ 3.84 867,555 $ 5.69 286,130 $ 6.30 250,000
Warrants issued $ 2.84 1,986,500 $ 2.93 581,425 $ 1.43 36,130
Warrants exercised/expired $ 2.89 ( 152,000) $ $
Balance, December 31 $ 3.16 2,702,055 $ 3.84 867,555 $ 5.69 286,130
Included in the "warrants issued" and "warrants exercised/expired" columns
in 1996 are 121,000 warrants issued in 1995 whose expiration dates were
extended in 1996.
F-16
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders''Equity - continued
Following is a schedule by year and by exercise price of the expiration of the Company's stock warrants issued as
of December 31, 1996:
1997 1998 1999 2000 2001 Thereafter Total
$ .475 68,546 68,546
.50 73,125 28,630 101,755
1.50 175,000 175,000
1.75 90,000 92,000 444,250 626,250
1.80 40,000 40,000
2.25 40,000 40,000
2.50 25,000 75,000 100,000
3.00 20,000 666,754 686,754
4.50 169,250 169,250
5.00 57,500 91,000 106,000 100,000 354,500
5.75 50,000 40,000 90,000
6.00 200,000 200,000
7.50 50,000 50,000
305,625 433,000 1,019,500 40,000 903,930 2,702,055
Warrants outstanding to officers, directors and employees of the Company at
December 31, 1996, 1995 and 1994 were 687,300, 44,300 and -0-,
respectively. The exercise prices on these warrants range from $.50 to
$5.00 and expire various dates through 2006.
During 1996, the Company issued options and warrants totaling 653,000 to
employees as compensation. As disclosed in Note 1, the Company continues to
use the intrinsic value based method to measure stock based compensation.
As such, no compensation cost was recognized as the exercise price was
greater than the stock's fair value at the measurement date. If the Company
had used the fair value method required by SFAS No. 123, compensation
expense would have increased approximately $390,000 for the year ended
December 31, 1996. Loss per share would have increased from ($0.71) to
($1.02) for the year ended December 31, 1996. There would be no effect on
income taxes. No compensatory equity instruments were issued to employees
in 1995.
The Company utilized the Black-Sholes option pricing model to estimate the
fair value of the options and warrants. A 60% discount off the NASDAQ
market price at the measurement date was utilized because of (1) the
restricted nature of the stock underlying the options/warrants and (2) the
dilutive effect of the substantial number of options/warrants issued and
outstanding. Accordingly, the exercise price of all stock options and
warrants issued in 1996 exceeded the discounted market price at the
measurement date. Other significant assumptions include (1) 5.75% risk free
interest rate; (2) weighted average expected life of 4.95 years; (3)
expected volatility of 82% and (4) no expected dividends.
Note 7. Loss Per Common Share
Loss per share has been computed based upon the weighted average number of
common shares outstanding. The weighted average common shares outstanding
at December 31, 1996, 1995 and 1994 were 1,266,974, 1,010,765 and
1,000,000, respectively. Loss per share for 1996 was computed by adding the
net loss for the year plus preferred dividends divided by the weighted
average shares outstanding at December 31, 1996. Loss per share for 1995
and 1994 was computed as net loss divided by the weighted average shares
outstanding at December 31, 1995 and 1994, respectively. Stock options and
stock warrants (and convertible preferred stock in 1996) were not
considered in any year as their inclusion would decrease reported loss per
share and thus be anti-dilutive.
F-17
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. No principal payments were received during 1996 or 1995. At
December 31, 1996 the unsecured promissory note has been partially
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. No principal payments were
received during 1994 or 1995. At December 31, 1996, the unsecured
promissory note has been partially reserved.
On January 10, 1994, the Company entered into a consulting agreement with
Williams Southwest Drilling Company, Inc. ("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.
During 1996 and 1995, the Company received no payments on this note.
Effective March 31, 1994, the Company recorded a note receivable from
Williams Drilling Equipment, Inc. (WDE), a related part and an affiliate of
Williams, in the amount of $100,000 bearing interest at the rate of 10% per
annum. The note is secured by the borrower's equity in a lease/purchase
agreement on drilling equipment. At December 31, 1994, the outstanding
principal balance due on the note was $100,000. The principal balance was
repaid in 1995.
On May 31, 1994, the Company executed a $40,000 note bearing interest at
the rate of 10.0% per annum, payable to Star-Tex Trading Corp., a related
entity owned by a shareholder of the Company. This note is now a part of
the subordinated promissory notes described in Note 5 and is due April,
1998.
On February 6, 1995, the Company executed a $50,000 one year note bearing
interest at 10% with ST Advisory Corp., (a related party owned by a
director of the Company). At December 31, 1995, the full amount of the note
and accrued interest is outstanding. This note is now a part of the
subordinated promissory notes described in Note 5 and is due April, 1998.
F-18
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Related Party Transactions - continued
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 nonrecourse
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.
On January 17, 1995, the Company executed a $20,000 note bearing interest
at 10% with Marshall Smith, Senior, grandfather of the president. At
December 31, 1995, the note was outstanding. On March 27, 1996, the
principal and interest on this note was extended by a new note due April,
1998.
Interest expensed on related party notes totaled approximately $26,000 and
$19,000 for the years December 31, 1996 and 1995, respectively.
Note 9. Income Taxes
On January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109 ("SFAS 109"), which changes the method of accounting for
income taxes under generally accepted accounting principles. There was no
effect on the Company's results of operations as a result of adopting SFAS
109.
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,
1996 1995
Deferred tax assets
Provision for bad debts $ 151,962 $ 134,424
Net operating loss carryforwards 977,174 766,880
Deferred tax liability
Oil and gas properties ( 20,199) ( 20,199)
Net deferred tax assets before
valuation allowance 1,108,937 881,105
Valuation allowance ( 1,108,937) ( 881,105)
Net deferred tax assets (liabilities) $ $
F-19
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes - continued
As of December 31, 1996 and 1995, 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, 1996
and 1995.
1996 1995
Tax benefit calculated at statutory rate ($ 280,410) ($ 403,527)
Increase (reductions) in taxes due to:
Effect of net operating loss carryforwards 210,294 412,027
Effect on non-deductible expenses 71,306
Other ( 1,190) ( 8,500)
Current federal income tax provision $ $
The benefit of the net operating loss generated for the year ended December
31, 1995 was not recognized because the benefit was not assured of being
realized.
As of December 31, 1996, the Company had net operating loss carryforwards
of $2,874,039, which are available to reduce future taxable income and the
related income tax liability. These carryforwards expire as follows:
Net
Operating
Losses
2004 $ 73,936
2006 217,957
2008 152,504
2009 636,826
2010 1,174,305
2011 618,511
$ 2,874,039
F-20
GULFWEST OIL COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments and Contingencies
Lease Obligations
The Company leases office space at two locations. Both lease agreements are
maintained on a month-to- month basis on a month-to-month basis. The Company
also leases four compressors used in the production of oil and gas revenue.
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-21
GULFWEST OIL COMPANY
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, 1996, 1995, and 1994, together
with the changes therein.
Crude Oil Natural Gas
(Bbls) (Mcf)
QUANTITIES OF PROVED RESERVES:
Balance December 31, 1993 140,532 2,548,863
Revisions ( 49,733) 272,102
Extensions, discoveries, and additions
Purchases 25,844 3,486,715
Sales
Production ( 8,139) ( 212,324)
Balance December 31, 1994 108,504 6,095,356
Revisions ( 16,991) ( 963,894)
Extensions, discoveries, and additions 274,585 823,752
Purchases 85,782 1,875,897
Sales ( 1,421) ( 510,853)
Production ( 10,656) ( 226,703)
Balance December 31, 1995 439,803 7,093,555
Revisions 47,808 ( 379,529)
Extensions, discoveries, and additions 250,995 1,132,433
Purchases 3,008,522 689,515
Sales ( 34,000) ( 350,000)
Production ( 55,175) ( 225,501)
Balance December 31, 1996 3,657,953 7,960,473
PROVED DEVELOPED RESERVES:
December 31, 1994 84,081 3,526,150
December 31, 1995 140,702 3,688,906
December 31, 1996 2,498,287 4,067,278
F-22
GULFWEST OIL COMPANY
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:
1996 1995 1994
Future cash inflows $117,580,889 $ 21,873,331 $ 12,244,413
Future production and development costs
Production 42,128,957 6,942,953 3,809,564
Development 6,596,609 3,876,951 2,093,847
Future cash flows before income taxes 68,855,323 11,053,427 6,341,002
Future income taxes ( 17,027,637) ( 2,069,248) ( 972,608)
Future net cash flows after income taxes 51,827,686 8,984,179 5,368,394
10% annual discount for estimated
timing of cash flows ( 21,704,010) ( 3,076,444) ( 2,247,711)
Standardized measure of discounted
future net cash flows $ 30,123,676 $ 5,907,735 $ 3,120,683
The following reconciles the change in the standardized measure of discounted future net cash flows:
Beginning of year $ 5,907,735 $ 3,120,683 $ 2,077,579
Changes from:
Purchases 22,269,011 1,223,501 2,805,047
Sales ( 1,307,000) ( 263,598)
Extensions, discoveries and improved
recovery, less related costs 4,174,440 2,588,778
Sales of oil and gas produced net of
production costs ( 892,112) ( 135,538) ( 259,787)
Revisions 7,909,928 ( 132,102) ( 1,406,686)
Accretion of discount 715,122 312,068 207,758
Change in income taxes ( 8,653,448) ( 806,057) ( 303,228)
End of year $ 30,123,676 $ 5,907,735 $ 3,120,683
F-23