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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, 1997
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.)
16800 Dallas Parkway, Suite 250
Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 250-4440.
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 X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or informational statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock of the Registrant held by
non-affiliates (excluding voting shares held by officers and directors) was
$3,403,972 on March 27, 1998.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock: Class A Common Stock $.001 par value: 1,759,185 shares
on March 27, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
The registrants' definitive Proxy Statement pertaining to the 1998 Annual
Meeting of Shareholders (the "Proxy Statement") and filed or to be filed not
later than 120 days after the end of the fiscal year pursuant to Regulation 14A
is incorporated herein by reference into Part III.
1
PART I
ITEM 1. Business.
General
GulfWest 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 the
application of enhanced recovery technology. Since June 1993, the Company has
substantially increased its reserves through a combination of acquisitions of
oil and gas properties and the further exploitation and development of such
properties.
As a result of its acquisition, exploitation and development activities,
GulfWest has significantly increased its Proved Reserves and average daily
production, while increasing its gross margin per BOE. The Company's total
Proved Reserves and Present Value increased from 565.3 MBOE (25% crude oil) and
$2.3 million (94% Proved Developed), respectively, on December 31, 1993, to
5,709 MBOE (82% crude oil) and $25.5 million (50% Proved Developed) on December
31, 1997, as determined from reserve reports prepared by independent petroleum
engineers. GulfWest's average net daily production has increased from
approximately 72 BOE for the six months ended December 31, 1993 to approximately
674 BOE for the year ended December 31, 1997. Based on pro forma reserves and
production at December 31, 1997, the Company has a reserve life index of 23.2
years. The Company's gross margin has increased from $1.80 per BOE for the six
months ended December 31, 1993 to $8.65 per BOE for the year ended December 31,
1997.
At present, substantially all of the Company's properties are located
onshore in Texas; however, in the future the Company plans to expand to
analogous onshore areas in the continental United States in which it believes
attractive 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".
The Company has a highly qualified management team and operating staff with
an average of over 20 years of industry experience in both the exploration and
production and drilling and workover segments of the industry. In addition, at
March 24, 1998, members of the Company's management and its Board of Directors
own in the aggregate 24.9% of the issued and outstanding shares of the Company's
Common Stock, warrants, options and convertible securities, on an as-converted
basis.
Corporate History
In July 1992, GulfWest Energy, Inc., a Utah corporation, merged into the
Company to change the state of incorporation of the Company from Utah to Texas.
GulfWest Energy, Inc., formerly First Preference Fund, Inc. and Gallup
Acquisitions, Inc., was incorporated in 1987 as a Utah corporation.
GulfWest has five wholly-owned subsidiaries: WestCo, GulfWest Texas Company
("GW Texas"), GulfWest Permian Company ("GW Permian"), DutchWest Oil Company
("DutchWest") and VanCo Well Service, Inc. ("VanCo"), all Texas corporations.
WestCo was organized July 14, 1995 and operates properties in which the Company
owns majority Working Interests. GW Texas was organized September 23, 1996 and
is the owner of record of certain properties located in the Vaughn Field, West
Texas. GW Permian was organized November 25, 1996, and is the owner of record of
certain properties located in four counties in West Texas. DutchWest was
organized July 28, 1997 and is the owner of record of certain properties. VanCo
was organized September 5, 1996 and operates well servicing equipment under
contracts with the Company and third parties. On July 31, 1994, the Company
exercised its option to purchase a 32.5% interest in The Madisonville Project,
Limited (the "Partnership"). At the time of acquisition, the Partnership's
assets included
2
ownership of Working Interests in 31 producing oil and gas properties, a 25%
ownership interest 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.
The Company maintains its executive offices at 16800 Dallas Parkway, Suite
250, Dallas, Texas 75248 and its telephone number is (972) 250-4440. The Company
also maintains an administrative office at 2644 Sherwood Forest Plaza, Suite
229, Baton Rouge, Louisiana 70816, and its telephone number is (504) 293-1100.
Business Strategy
GulfWest believes it is now poised for substantial growth, having
established a solid base of reserves, producing properties, operating cash flow
and qualified personnel. Key elements of the Company's business strategy, which
is designed to enhance shareholder value, include:
Acquisition Program. GulfWest intends to be an aggressive consolidator of
(i) small, under-capitalized operators with undeveloped properties and (ii) oil
and gas properties that may be non-core to larger independent and major oil and
gas companies. Acquisitions of producing oil and gas properties have contributed
significantly to the Company's historical growth in reserves. During the period
from June 30, 1993 through December 31, 1997, the Company acquired, through 14
negotiated transactions, approximately 5,396 MBOE of estimated net Proved
Reserves for an aggregate cost of approximately $15.3 million, yielding an
average cost of $2.83 per BOE. The Company will continue to be opportunistic in
its acquisition of underdeveloped properties, either through negotiated property
acquisitions or acquisitions of companies with oil and gas properties. GulfWest
will also strive to geographically diversify its asset portfolio.
Development and Exploitation of Existing Properties. The Company intends to
maximize production and continue to increase reserves through relatively
low-risk development activities, such as workovers, recompletions, horizontal
drilling from existing wellbores and infield drilling, efficient use of
production facilities, and expansion of existing waterflood operations. As of
December 31, 1997, approximately 50% (2,836.3 MBOE) of the Company's total
Proved Reserves were classified as Proved Undeveloped. The Company believes that
the proximity of these undeveloped reserves to existing production makes
development of these properties less risky and more cost-effective than other
drilling opportunities available to the Company. The Company estimates that it
has an inventory of approximately 220 potential exploitation and development
opportunities on its existing properties, which it anticipates developing over
the next 24 months at a cost of approximately $10.6 million, with approximately
$5.1 million budgeted for calendar year 1998. The exploitation and development
program is to be funded from the Company's credit lines and cash flow resulting
from increased production, subject to the successful completion of a private
placement whereby gross proceeds of up to $5.5 million will be realized from the
sale of the Company's Common Stock. The Company believes such development
activities will allow it to increase substantially its average net daily
production over that period notwithstanding any additional property
acquisitions.
Significant Operating Control. As of December 31, 1997, the Company
operated over 94% of, and owned an average 93% working interest in, its 499
producing wells. This operating control enables the Company to better control
the nature, timing and costs of development of its properties, as well as the
marketing of the resulting production.
Ownership of Workover Rigs. Management of the Company has considerable
experience operating workover and drilling rigs. The Company, through a
wholly-owned subsidiary, currently owns four workover rigs which it operates for
its own account and for third parties. Through management's experience and the
ownership and operation of equipment for its own account, the Company is better
able to control its costs, quality of operations and availability of equipment
and services. The Company's work for third parties also provides it with the
opportunity to participate in the acquisition and continued development of oil
and gas properties to which it would not otherwise be exposed. The Company may
acquire additional workover rigs and equipment to service its operations and
third parties in the future.
3
Low Operating Cost Structure. As the Company has increased its production
through acquisitions, its cost structure has improved. For the year ended
December 31, 1997, the Company's unit lease operating cost per BOE averaged
$8.69. Management believes that the unit lease operating cost will continue to
decline as production increases through capital expenditures on Company-owned
properties.
Future Expansion into Exploration. Historically, the Company has not
drilled any exploratory wells. However, in the future, the Company may allocate
a portion of its capital budget to acquire undeveloped exploratory acreage and
utilize improved seismic interpretation, subsurface geological data and
horizontal drilling technology to develop drilling prospects that it will market
to third party industry partners for a carried working interest.
Recent Developments
On December 15, 1997, the Company obtained a drilling loan from Mr. J.
Virgil Waggoner, a director of the Company, in the amount of $1,000,000 and in
January, 1998 commenced a program to drill 17 developmental wells in the Vaughn
Field. If successful, upon completion of the drilling program, the Company will
have increased its Proved Producing oil reserves in the Vaughn Field from
approximately 700,000 barrels to an estimated 1.7 million barrels. On March 25,
1998, Mr. Waggoner agreed to extend the due date of the loan to June 30, 1999
and, at the Company's option, to convert the outstanding principal amount to
Common Stock of the Company.
On March 3, 1998, the Company established a $500,000
revolving-line-of-credit with Compass Bank of Dallas, with the proceeds to be
used for equipment purchases and working capital for its subsidiary, VanCo. The
line of credit was guaranteed by J. Virgil Waggoner, a director, Marshall A.
Smith, III, President of the Company and Jay Waggoner, an officer of VanCo.
On March 20, 1998, the Company purchased 27 oil wells in West Texas for
$2.9 million. The Company financed $2.6 million and refinanced senior debt of
approximately $7.6 million with Chase of Texas, N.A. with a note totaling $10.2
million. The note bears interest at the prime rate for the first 6 months and
the prime rate plus one-half percent for the subsequent 6 months, with principal
due on March 20, 1999. The Company has entered into a purchase and sale
agreement for certain oil properties in West Texas for a purchase price of
$1,450,000 by increasing the aforementioned bank note and seller note $1 million
and $450,000, respectively.
At a special meeting of the shareholders of the Company on March 24, 1998,
the shareholders approved the offering, sale and issuance of shares of the
Company's Common Stock through a private placement at a price to be determined
whereby gross proceeds of at least $500,000 and up to $5.5 million are
anticipated to be raised. If fully subscribed, the Company expects to use the
proceeds from the offering for working capital and general corporate purposes.
These general purposes may include (i) approximately $2.75 million for payment
of the current balance of a revolving credit facility with a financial
institution and personally guaranteed by J. Virgil Waggoner, a director (this
credit facility would continue to be available to the Company for acquisition,
development and enhancement of oil and gas properties); (ii) approximately $1
million for repayment of a drilling loan from J. Virgil Waggoner (as noted
above, Mr. Waggoner has agreed to convert the outstanding principal amount of
the note to Common Stock, at the option of the Company); and (iii) approximately
$600,000 for placement agent fees and expenses of the offering. The use of
proceeds is subject to change, however, based upon the number of shares of
Common Stock sold in the offering, the amount of net proceeds to the Company,
competitive developments and the availability to the Company of other methods of
financing. See " Item 4. Submission of Matters to a Vote of Security Holders."
Also, on March 30, 1998, the Company's revolving line of credit of $2.75
million, bearing interest at the prime rate, was renewed with a maturity date of
April 10, 2000. The demand feature in the note was removed.
4
Historical Developments
1997 Acquisitions
During 1997, the Company acquired various Working Interests in oil and gas
properties located in Texas, Kansas and Oklahoma through five negotiated
transactions, with a combined total of approximately 396 MBOE of net Proved
Reserves as of the effective date of each acquisition for an aggregate purchase
price of $563,000.
1997 Prospect Sales
Effective April 1, 1997, the Company sold its non-operated 20% interest in
approximately 1,300 undeveloped acres in the White Oak Creek prospect in East
Texas for $49,000. Management determined it would be more advantageous to direct
its capital and efforts toward the enhancement and further development of its
operated properties rather than non-operated where it has no control over
expenditures. The Company retained an overriding royalty interest in the
property.
1996 Acquisitions
During the fourth quarter of 1996, the Company acquired in two separate
transactions oil properties in the Permian Basin area of West Texas for a total
purchase price of $10.65 million. The first of the two acquisitions was the
purchase of 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 $1.5 million of
seller financing.
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 long
term seller financing of $5.9 million.
The Phase I and Phase II acquisitions included 392 Net Productive Wells on
approximately 9,500 Net Acres at the time of acquisition and contained combined
Proved Reserves of 2,911 MBOE acquired for a purchase price of $3.66 per BOE.
1995 Acquisitions
On July 17, 1995, GulfWest acquired beneficial ownership of an additional
42.5% of the Working Interests in 31 producing oil and gas properties located in
the Madisonville Field from Sikes Producing, Inc. ("SPI"). Under a Restructuring
Agreement, GulfWest contributed the 37.5% ownership interest in a natural gas
pipeline gathering system that it acquired in 1993 and assumed a $640,000
nonrecourse note as payment for the Working Interests. GulfWest also agreed to
purchase certain additional Working Interests in the Madisonville Field
subsequently acquired by SPI, with $20,000 paid in cash 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 to 1,622 MBOE at December 31, 1995 and provided
additional operating income to WestCo through the generation of operating fees.
1994 Acquisitions
On July 31, 1994, the Company exercised its option to purchase a 32.5%
interest in the Partnership in exchange for the cancellation of a $500,000
promissory note owed to the Company by the Partnership. At the time of
acquisition, the Partnership's assets included ownership of Working Interests in
31 producing oil
5
and gas properties, a 25% ownership interest 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 in a field in which the
Company already owned interests in 2 producing wells. With these additions, the
Company increased its reserve base from 565.3 MBOE at December 31, 1993 to
1,124.4 MBOE at December 31, 1994.
1993 Acquisitions
During the six-month period ended December 31, 1993, through two negotiated
transactions GulfWest acquired 556.7 MBOE (75% natural gas) of estimated net
proved reserves for a purchase price of $1.85 million which equated to $3.32 per
BOE. In July and August, 1993, GulfWest purchased Working Interests in 26
producing oil and gas wells in East Texas from SPI for $930,000 (the "Sikes
Acquisition"). In December, 1993, GulfWest acquired Working Interests in an
additional 31 producing oil and gas wells in the Madisonville Field, Texas (the
"Madisonville Acquisition") and a 37.5% ownership interest in a natural gas
pipeline system.
Employees
At February 15, 1998, the Company had approximately 46 full time employees,
of whom 37 were field personnel.
Executive Officers
See Item 10 of this report, which information is incorporated herein by
reference.
6
ITEM 2. Properties.
The Company holds an average 93% Working Interest in 499 gross productive
oil and gas wells and Royalty Interests in 2 additional wells. At December 31,
1997, the properties contained (net to the Company's interest) estimated Proved
Reserves of 4,676,427 barrels of oil and 6,195,358 Mcf of natural gas.
Substantially all of the Company's reserves are located in Texas, with
approximately 69% of the Texas reserves located in the Permian Basin of West
Texas and approximately 31% located in East Texas.
Proved Reserves. The following table reflects the estimated Proved Reserves
of the Company at December 31 for each of the preceding three years.
1997 1996 1995
------------ ----------- ----------
Crude Oil (Bbls)
Developed 2,158,239 2,498,287 140,702
Undeveloped 2,518,188 1,159,666 299,101
Total 4,676,427 3,657,953 439,803
Natural gas (Mcf)
Developed 4,286,755 4,067,278 3,688,816
Undeveloped 1,908,603 3,893,195 3,404,739
Total 6,195,358 7,960,473 7,093,555
Total BOE(a) 5,708,987 4,984,699 1,622,062
(a) The above table does not include reserves for the Company's interests
in wells in Louisiana which represents less than 1% of the Company's
operations.
Approximately 50% of the Company's total Proved Reserves were
classified as Proved Developed at December 31, 1997.
7
Standardized Measure of Discounted Future Net Cash Flows. The following
table sets forth as of December 31 for each of the preceding three years, the
estimated future net cash flow from and standardized measure of discounted
future net cash flows of the Company's Proved Reserves which were prepared in
accordance with the rules and regulations of the SEC. Future net cash flow
represents future gross cash flow from the production and sale of Proved
Reserves, net of oil and gas production costs (including production taxes, ad
valorem taxes and operating expenses) and future development costs. Such
calculations are based on current cost and price factors at December 31 for each
year. There can be no assurance that the Proved Reserves will all be developed
within the periods used in the calculations or that prices and costs will remain
constant.
1997 1996 1995
-------------------- ------------------- -------------------
Future cash inflows $ 87,414,045 $ 117,580,889 $ 21,873,331
Future production and development costs-
Production (35,441,101) (42,128,957) (6,942,953)
Development (9,937,663) (6,596,609) (3,876,951)
-------------------- ------------------- -------------------
Future net cash flows before income taxes 42,035,281 68,855,323 11,053,427
Future income taxes (7,852,795) (17,027,637) (2,069,248)
-------------------- ------------------- -------------------
Future net cash flows after income taxes 34,182,486 51,827,686 8,984,179
10% annual discount for estimated timing
of cash flows (13,419,225) (21,704,010) (3,076,444)
-------------------- ------------------- -------------------
Standardized measure of discounted
future net cash flows(1) $20,763,261 $30,123,676 $ 5,907,735
==================== =================== ===================
(1) Based upon year end weighted average prices of $23.64 per Bbl and $3.91 per
Mcf for the calendar year 1996 and $15.68 per Bbl and $2.28 per Mcf for the
calendar year 1997.
8
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, 1997.
Proved Reserves(1) Present Value(2)
------------------------------------------- -----------------
Gross Net
Productive Productive Crude Natural
Wells Wells Oil Gas Total Amount %
---------- ---------- --------- --------- --------- ----------- ---
(Bbl) (Mcf) (BOE)
Texas:
Permian
Basin 417 416.32 3,916,440 - 3,916,440 $17,328,796 69
East 71 43.78 734,244 5,912,050 1,719,586 7,800,437 31
Tex.
Kansas 5 2.50 20,149 - 20,149 78,611 -
Oklahoma 4 3.00 5,594 283,308 52,812 325,393 -
Louisiana ---------- ---------- --------- --------- --------- ----------- ---
Total 499 465.75 4,676,427 6,195,358 5,708,987 $25,533,237 100
---------- ---------- --------- --------- --------- ----------- ---
(1) The above table does not include reserves for the Company's interests in
wells in Louisiana which represents less than 1% of the Company's
operations.
(2) Based upon year end weighted average prices of $15.68 per Bbl and $2.28 per
Mcf for the calendar year 1997.
All information set forth herein relating to the Company's Proved Reserves,
estimated future net cash flows and Present Values is taken from reports
prepared by Ryder Scott Company and H. J. Gruy & Associates (with respect to the
Company's West Texas properties), Forrest Garb and Associates, Inc., Eastex
Geological Consultants and Thomas R. Kaetzer (with respect to the Company's East
Texas properties) and James Engineering, Inc. (with respect to the Company's
Oklahoma and Kansas properties), each of which is a firm of independent
petroleum engineers. The estimates of these engineers were based upon review of
production histories and other geological, economic, ownership and engineering
data provided by the Company. No reports on the Company's reserves have been
filed with any federal agency. In accordance with the SEC's guidelines, the
Company's estimates of Proved Reserves and the future net revenues from which
Present Values are derived are made using year end oil and gas sales prices held
constant throughout the life of the properties (except to the extent a contract
specifically provides otherwise). The prices of oil and gas at December 31, 1996
used to estimate the Company's Proved Reserves and the future net revenues from
which Present Value is derived were substantially higher than the prices used in
previous years to make such estimates. The closing price on the New York
Mercantile Exchange ("NYMEX") for the prompt month futures contract for delivery
of West Texas Intermediate Crude Oil on December 31, 1996 and March 24, 1998 was
$25.92 and $15.92 per Bbl, respectively. The closing price on the NYMEX for the
prompt month futures contract for natural gas delivered at Henry Hub, Louisiana
on December 31, 1996 and March 24, 1998 was $2.76 and $2.28 per MMBtu,
respectively. The Present Value of the Company's estimated total net Proved
Reserves on December 31, 1996, would have been $21.3 million if calculated using
$18.00 per Bbl of oil and $2.00 per Mcf of natural gas at that date, which the
Company believes is more in line with current and expected future prices. See
"Item 2. Properties. Risk Factors-Uncertainty of Estimates of Oil and Gas
Reserves." Operating costs, development costs and certain production-related
taxes were deducted in arriving at estimated future net revenues, but such costs
do not include debt service, general and administrative expenses and income
taxes.
9
There are numerous uncertainties inherent in estimating oil and gas
reserves and their values, including many factors beyond the Company's control.
The reserve data set forth in this report represents estimates only. Reservoir
engineering is a subjective process of estimating the sizes of underground
accumulations of oil and gas that cannot be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data,
engineering and geological interpretation, and judgment. As a result, estimates
of different engineers, including those used by the Company, may vary. In
addition, estimates of reserves are subject to revision based upon actual
production, results of future development, exploitation and exploration
activities, prevailing oil and gas prices, operating costs and other factors,
which revisions may be material. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered and
are highly dependent upon the accuracy of the assumptions upon which they are
based. There can be no assurance that these estimates are accurate predictions
of the Company's oil and gas reserves or their values. Estimates with respect to
Proved Reserves that may be developed and produced in the future are often based
upon volumetric calculations and upon analogy to similar types of reserves
rather than actual production history. Estimates based on these methods are
generally less reliable than those based on actual production history.
Subsequent evaluation of the same reserves based upon production history will
result in variations, which may be substantial, in the estimated reserves. See
"Item 2. Properties. Risk Factors-Uncertainty of Estimates of Oil and Gas
Reserves."
10
Production, Revenue and Price History
The following table sets forth information (associated with the Company's
Proved Reserves) regarding production volumes (net to the Company's interest) of
crude oil and gas, revenues and expenses attributable to such production and
certain price and cost information for the years ended December 31, 1997, 1996
and 1995.
1997 1996 1995
--------------- -------------- -------------------------------
Production
Oil (Bbls) 200,898 55,175 10,656
Natural gas (Mcf) 271,263 225,501 226,703
Total (BOE) 246,109 92,758 48,439
Revenue
Oil production $3,637,911 $1,115,647 $ 193,230
Gas production --------------- -------------- -------------
Total $4,269,032 $1,549,069 $ 551,355
Operating expenses $2,139,128 $ 656,957 $ 415,816
Production Data
Average sales price
Per Bbl of oil $18.11 $20.22 $18.13
Per Mcf of natural gas 2.33 1.92 1.58
Per BOE 17.35 16.70 11.38
Average expenses per BOE
Lease Operating $8.69 $7.08 $8.58
DD&A 6.60 5.02 6.84
G&A 6.01 11.42 18.83
Productive Wells at December 31, 1997:
Gross Net Gross Net
Oil Wells Oil Wells Natural Natural
Gas Wells Gas Wells
-------------------- ------------------ --------------- ------------------
Texas:
Permian Basin 417.00 416.32
East Texas 41.00 31.32 30.00 12.46
Kansas 5.00 2.50
Oklahoma 4.00 3.00
Louisiana 2.00 0.15
-------------------- ------------------ --------------- ------------------
Total 465.00 450.29 34.00 15.46
==================== ================== =============== ==================
11
Developed Acreage at December 31, 1997:
Gross Net
----------------------- -----------------------
Texas:
Permian Basin 9,266.61 9,246.18
East Texas 12,102.23 6,982.26
Kansas 160.00 80.00
Oklahoma 640.00 480.00
Louisiana 155.61 11.68
----------------------- -----------------------
Total 22,324.45 16,800.12
======================= =======================
Undeveloped Acreage. The Company did not own any undeveloped acreage at
December 31, 1997.
Drilling Results. The Company did not participate in drilling any wells
during the years ended December 31, 1995, 1996 and 1997.
Risk Factors
Market Conditions and Prices
The Company's success depends heavily upon its ability to market its oil
and gas production at favorable prices, of which there can be no assurance. In
recent decades, there have been both periods of worldwide overproduction and
underproduction of hydrocarbons and periods of increased and relaxed energy
conservation efforts. Such conditions have resulted in periods of excess supply
of, and reduced demand for, crude oil on a worldwide basis and for natural gas
on a domestic basis; these periods have been followed by periods of short supply
of, and increased demand for, crude oil and, to a lesser extent, natural gas.
The excess or short supply of oil and gas has placed pressures on prices and has
resulted in dramatic price fluctuations.
Historical Operating Losses and Variability of Operating Results
The Company has incurred net losses since its inception and there can be no
assurance that the Company will be profitable in the future. In addition, the
Company's future operating results may fluctuate significantly depending upon a
number of factors, including industry conditions, prices of oil and gas, rates
of production, timing of capital expenditures and drilling success. This
variability could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Item 6. Selected Financial
Data" and "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Uncertainty of Estimates of Oil and Gas Reserves
This report contains estimates of the Company's proved oil and gas reserves
and the estimated future net revenues therefrom that rely upon various
assumptions, including assumptions as to oil and gas prices, drilling and
operating expenses, capital expenditures, taxes and availability of funds. The
process of estimating oil and gas reserves is complex, requiring significant
decisions and assumptions in the evaluation of available geological,
geophysical, engineering and economic data for each reservoir. As a result, such
estimates are inherently imprecise. Actual future production, oil and gas
prices, revenues, taxes, development expenditures, operating expenses and
quantities of recoverable oil and gas reserves may vary substantially from those
estimated in the reports obtained by the Company from reserve engineers. Any
significant variance in these assumptions could materially affect the estimated
quantities and Present Value of reserves set forth in this
12
Report. In addition, the Company's Proved Reserves may be subject to downward or
upward revision based upon production history, results of future exploration and
development, prevailing oil and gas prices and other factors, many of which are
beyond the Company's control. Actual production, revenues, taxes, development
expenditures and operating expenses with respect to the Company's reserves will
likely vary from the estimates used, and such variances may be material.
Approximately 50% of the Company's total estimated Proved Reserves at
December 31, 1997 were undeveloped, which are by their nature less certain.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. The reserve data set forth in the reserve
engineer reports assumes that substantial capital expenditures by the Company
will be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated.
The Present Value referred to in this report should not be construed as the
current market value of the estimated oil and gas reserves attributable to the
Company's properties. In accordance with applicable requirements of the SEC, the
estimated discounted future net cash flows from Proved Reserves are generally
based on prices and costs as of the date of the estimate, whereas actual future
prices and costs may be materially higher or lower. The estimates at December
31, 1996 of the Company's Proved Reserves and the future net revenues from which
Present Value is derived were made using weighted average sales prices of $23.64
per Bbl of oil and $3.91 per Mcf of natural gas at that date, which prices were
substantially higher than the prices used in previous years to make such
estimates. The closing price on the NYMEX for the prompt month futures contract
for delivery of West Texas Intermediate Crude Oil on December 31, 1996 and March
24, 1998 was $25.92 and $15.92 per Bbl, respectively. The closing price on the
NYMEX for the prompt month futures contract for natural gas delivered at Henry
Hub, Louisiana on December 31, 1996 and March 24, 1998 was $2.76 and $2.28 per
MMBtu, respectively. Actual future net cash flows will also be affected by
increases or decreases in consumption by oil and gas purchasers and changes in
governmental regulations or taxation. The timing of actual future net cash flows
from Proved Reserves, and thus their actual Present Value, will be affected by
the timing of both the production and the incurring of expenses in connection
with development and production of oil and gas properties. In addition, the 10%
discount factor, which is required by the SEC to be used in calculating
discounted future net cash flows for reporting purposes, is not necessarily the
most appropriate discount factor based on interest rates in effect from time to
time and risks associated with the Company or the oil and gas industry in
general.
Replacement of Reserves
In general, the volume of production from oil and gas properties declines
as reserves are depleted. Except to the extent the Company acquires properties
containing Proved Reserves or conducts successful development and exploitation
activities, or both, the Proved Reserves of the Company will decline as reserves
are produced. The Company's future oil and gas production is, therefore, highly
dependent upon its level of success in finding or acquiring additional reserves.
The business of acquiring, enhancing or developing reserves is capital
intensive. To the extent cash flow from operations is reduced and external
sources of capital become limited or unavailable, the Company's ability to make
the necessary capital investment to maintain or expand its asset base of oil and
gas reserves would be impaired. In addition, there can be no assurance that the
Company's future acquisition and development activities will result in
additional Proved Reserves or that the Company will be able to drill productive
wells at acceptable costs.
Reserve Concentration Risk
Substantially all of the Company's reserves are located in Texas, with 69%
of the total reserves located in the Permian Basin of West Texas and 31% located
in East Texas. Any interruption in the production from these reserves could
materially adversely affect the operations of the Company.
13
Industry Risks
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or gas reservoirs will be encountered,
that operations may be curtailed, delayed or canceled, and that title problems,
weather conditions, compliance with governmental requirements, mechanical
difficulties or shortages or delays in the delivery of drilling rigs and other
equipment may limit the Company's ability to develop, produce and market its
reserves. There can be no assurance that new wells drilled by the Company will
be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and gas may involve unprofitable efforts, not only
from dry wells but also from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs. In addition, the Company's properties may be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties.
Industry operating risks include the risks of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards, such as
oil spills, natural gas leaks, ruptures or discharges of toxic gases, the
occurrence of any of which could result in substantial losses to the Company due
to injury or loss of life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance will be adequate to cover losses or
liabilities. The Company cannot predict the continued availability of insurance
at premium levels that justify its purchase.
Acquisition Risks
The Company's growth has been attributable largely to acquisitions of
producing oil and gas properties with Proved Reserves. The successful
acquisition of such properties requires an assessment of recoverable reserves,
future oil and gas prices, operating costs, potential environmental and other
liabilities and other factors beyond the Company's control. Such assessments are
necessarily inexact and their accuracy inherently uncertain. In connection with
such an assessment, the Company performs a review of the subject properties that
it believes to be generally consistent with industry practices. Such a review,
however, will not reveal all existing or potential problems, nor will it permit
a buyer to become sufficiently familiar with the properties to fully assess
their deficiencies and capabilities. Inspections may not always be performed on
every well, and structural and environmental problems are not necessarily
observable even when an inspection is undertaken. In most cases, the Company is
not entitled to contractual indemnification for pre-closing liabilities,
including environmental liabilities, and generally acquires interests in the
properties on an "as is" basis with limited remedies for breaches of
representations and warranties. In those circumstances in which the Company has
contractual indemnification rights for pre-closing liabilities, there can be no
assurance that the seller will be able to fulfill its contractual obligations.
In addition, competition for producing oil and gas properties is intense and
many of the Company's competitors have financial and other resources which are
substantially greater than those available to the Company. Therefore, no
assurance can be given that the Company will be able to acquire producing oil
and gas properties which contain economically recoverable reserves or that it
will make such acquisitions at acceptable prices.
Substantial Capital Requirements
The Company makes and will continue to make substantial capital
expenditures in its exploitation and development projects. The Company intends
to finance these capital expenditures with cash flow from operations, existing
financing arrangements and equity offerings. Additional financing may be
required in the future to fund the Company's developmental and exploitation
activities. No assurance can be given as to the availability or terms of any
such additional financing that may be required or that financing will continue
to be available under the existing or new financing arrangements. If additional
capital resources are not available
14
to the Company, its developmental and other activities may be curtailed and its
business, financial condition and results of operations could be materially
adversely affected. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations-Financial Condition and Capital
Resources."
Marketability of Production
The marketability of the Company's natural gas production depends in part
upon the availability, proximity and capacity of natural gas gathering systems,
pipelines and processing facilities. Most of the Company's natural gas is
delivered through natural gas gathering systems and natural gas pipelines that
are not owned by the Company. Federal, state and local regulation of oil and gas
production and transportation, tax and energy policies, changes in supply and
demand and general economic conditions all could adversely affect the Company's
ability to produce and market its oil and gas. Any dramatic change in market
factors could have a material adverse effect on the Company's financial
condition and results of operations.
Dependence on Key Personnel
The business of the Company will depend on the continued services of its
president and chief executive officer, Marshall A. Smith III. Effective
September 9, 1997, the Company entered into an employment agreement with Mr.
Smith for a period of 3 years. The loss of the services of Mr. Smith would be
particularly detrimental to the Company because of his background and experience
in the oil and gas industry.
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 natural gas sold within their states.
The Company's operations are also subject to numerous laws and regulations
governing plugging and abandonment, the discharge of materials into the
environment or otherwise relating to environmental protection. The heavy
regulatory burden on the oil and gas industry increases its costs of doing
business and consequently affects its profitability. Although the Company
believes it is in compliance with such laws, rules and regulations, there can be
no assurance that a
15
change in such laws, rules or regulations, or the interpretation thereof, will
not have a material adverse effect on the Company's financial condition or
results of operations.
The transportation and sale for resale of natural gas in interstate
commerce have historically been regulated by the Federal Regulatory Commission
("the FERC"). While sales of natural gas by producers such as the Company, and
all sales of crude oil, condensate and natural gas liquids can currently be made
at uncontrolled market prices, the federal government in the past has regulated
the prices at which oil and gas could be sold, and Congress could reenact price
controls in the future.
The Company's sales of natural gas are affected by the availability, terms
and cost of transportation. The price and terms for access to pipeline
transportation remain subject to extensive federal and state regulation. Several
major regulatory changes have been implemented by Congress and the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry, most notably interstate natural gas
transmission companies, which remain subject to the FERC's jurisdiction. These
initiatives may also affect the intrastate transportation of natural gas under
certain circumstances. The stated purpose of many of these regulatory changes is
to promote market competition among the various sectors of the natural gas
industry and these initiatives generally reflect more light-handed regulation of
the natural gas industry. Although the ultimate impact of these complex rules
and regulations, many of which are repeatedly subjected to judicial challenge
and interpretation, cannot be predicated, the Company does not believe it will
be affected by any action taken materially different than other producers with
which it competes.
The Company owns certain gas pipelines that it believes meet the standards
the FERC has used to establish a pipeline's status as a gatherer not subject to
FERC jurisdiction. State regulation of gathering facilities generally includes
various safety, environmental, and in some circumstances, nondiscriminatory take
requirements. The Texas Railroad Commission has been reviewing changes to its
regulations governing transportation and gathering services provided by
intrastate pipelines and gatherers, and recently implemented a code of conduct
intended to prevent undue discrimination by intrastate pipelines and gatherers
in favor of their marketing affiliates.
The natural gas industry historically has been very heavily regulated;
therefore, there is no assurance that the less stringent regulatory approach
recently pursued by the FERC and Congress will continue.
Operational Risks and Insurance
GulfWest's oil and gas activities are subject to all of the risks normally
incident to drilling for and production of oil and gas, including blowouts,
cratering and fires, each of which could result in damage to life and property.
In accordance with customary industry practices, GulfWest carries insurance
against some, but not all, of these risks. Losses and liabilities resulting from
such events would reduce revenues and increase costs to GulfWest to the extent
not covered by insurance. See "Risk Factors-Industry Risks."
Environmental Matters
The Company is subject to environmental risks normally incident to the
operation of oil and gas properties. These environmental risks include
uncontrollable flows of natural gas, fluids and other substances into the
environment, explosions, fires, pollution and other environmental and safety
risks. The following is a discussion of certain environmental and safety
concerns related to the Company. It is not intended to constitute a complete
discussion of the various federal, state and local statutes, rules, regulations,
or orders to which the Company's operations may be subject. Further, the recent
trend in environmental legislation and regulations is toward stricter standards,
and this will likely continue in the future.
16
The Company's activities are subject to environmental and safety regulation
by federal and state authorities, including, without limitation, the state
environmental agencies and the EPA, which can increase the costs of such
operations. Such regulation may increase the cost of planning, designing,
drilling, operating, and abandoning wells. In most instances, the regulatory
requirements relate to the handling and disposal of drilling and production
waste products and measures to control water and air pollution.
The Company currently owns or leases properties that for many years have
been used for the exploration and production of oil and gas. Although the
Company has utilized operating and disposal practices that were standard for the
industry at the time, hydrocarbons or other wastes may have been disposed of or
released on or under the properties owned or leased by the Company or on or
under other locations where such wastes have been taken for disposal. In
addition, many of the Company's properties were previously operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under the Company's control. These properties and wastes disposed
thereon may be subject to the Comprehensive Environmental Response,
Compensation, and Liability Act, the Resource Conservation and Recovery Act, or
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed or released
by prior owners or operators) or property contamination (including groundwater
contamination) or to perform remedial plugging operations to prevent future
contamination.
Environmental laws and regulations may require the acquisition of a permit
or other authorization before certain activities may be conducted by the
Company. These laws also include fines and penalties for non-compliance.
Further, these laws and regulations may limit or prohibit activities on certain
lands lying within wilderness areas, wetlands, areas providing habitat for
certain species or other protected areas. The Company is also subject to other
federal, state, and local laws covering the handling, storage or discharge of
materials used by the Company, or otherwise relating to protection of the
environment, safety and health. The Company believes that it is in material
compliance with all applicable environmental laws and regulations. The Company
periodically conducts environmental assessments of its assets and is not aware
of any material environmental problems requiring remediation. Because the
requirements imposed by environmental laws and regulations frequently change and
because the risk of substantial environmental costs is inherent in oil and gas
operations, the Company is unable to predict the ultimate costs of compliance
with such requirements or whether the incurrence of such costs would have a
material adverse effect on the operations of the Company.
ITEM 3. Legal Proceedings.
The Company's operating subsidiary, WestCo, is currently involved in a
dispute with a company over rental equipment which WestCo 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.
Due to the loss of revenues caused by the failure of the equipment to perform
properly, the Company believes any claims for back rental would be sufficiently
offset by the damages sustained by WestCo. Accordingly, no value has been placed
on the other company's claim.
The Company is not a party to any other material legal proceedings.
17
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company's annual meeting was held on October 21, 1997. The only matter
submitted to a vote of the shareholders was the election of directors. All 7 of
the serving directors were re-elected. See Item 10 of this report, which
information is incorporated herein by reference.
A special meeting of the shareholders of the Company was held on March 24,
1998 to consider a proposal for the offering, sale and issuance of the Company's
Common Stock through a private placement at a price to be determined whereby
gross proceeds of at least $500,000 and up to $5.5 million are anticipated to be
raised. Of the 1,759,185 outstanding shares of Common Stock entitled to be voted
at the meeting, there were, either in person or represented by proxy, 1,024,465
of such shares voted, which was 58% of the outstanding shares entitled to be
voted at the meeting and was a sufficient quorum to conduct business. The
proposal was approved with 987,691 votes for the proposal, 44,608 votes against
and 1,166 abstentions. No other matters were considered at this special meeting.
18
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
1996, 1997 and 1998 (through March 27, 1998) 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.
1996 High Low
---- ---- ---
First Quarter 5.375 1.25
Second Quarter 6.625 2.50
Third Quarter 4.00 2.125
Fourth Quarter 3.25 2.75
1997
----
First Quarter 3.75 2.25
Second Quarter 2.875 1.875
Third Quarter 3.125 2.00
Fourth Quarter 3.25 2.50
1998
----
First Quarter (through 3/27/98) 2.63 1.875
Common Stock
The Company is authorized to issue 20,000,000 shares of Class A Common
Stock, par value $.001 per share (the "Common Stock"). As of March 27, 1998,
1,759,185 shares of Class A Common Stock were issued and outstanding and held by
approximately 572 beneficial owners. Fidelity Transfer Company, 1800 South West
Temple, Suite 301, Box 53, Salt Lake City, Utah 84115, (801)484-7222 is the
transfer agent for the Common Stock.
Holders of Common Stock are entitled, among other things, to one vote per
share on each matter submitted to a vote of shareholders and, in the event of
liquidation, to share ratably in the distribution of assets remaining after
payment of liabilities (including preferential distribution and dividend rights
of holders of Preferred Stock). Holders of Common Stock have no cumulative
rights, and, accordingly, the holders of a majority of the outstanding shares of
the Common Stock have the ability to elect all of the directors.
Holders of Common Stock have no preemptive or other rights to subscribe for
shares. Holders of Common Stock are entitled to such dividends as may be
declared by the Board of Directors out of funds legally available therefor. The
Company has never paid cash dividends on the Common Stock and does not
anticipate paying any cash dividends in the foreseeable future.
19
Preferred Stock
The Board of Directors is authorized, without further shareholder action,
to issue Preferred Stock in one or more series and to designate the dividend
rate, voting rights and other rights, preferences and restrictions of each such
series. Currently, there are two classes of Preferred Stock outstanding, Class
AA and Class AAA, both immediately convertible into shares of Common Stock.
There were 1,950 shares of Class AA Preferred Stock outstanding at March
27, 1998, with a stated annual dividend rate of $50 per share, payable annually
on a cumulative basis as declared, and convertible to 100 shares of Common Stock
per share. Currently, dividends on the Class AA Preferred Stock are in arrears
by $45,900. The Company may call the Class AA Preferred Stock for redemption, in
whole or in part, at $600 per share (120% of the price paid for each share).
There were 3,440 shares of Class AAA Preferred Stock outstanding at March
27, 1998, with a stated annual dividend rate of $45 per share, payable quarterly
on a cumulative basis as declared. The Company is attempting to renegotiate the
terms of its Class AAA Preferred Stock to (a) change the strike price of the
conversion feature of the Preferred Stock from 70% of the 15 day trailing
average bid price of GulfWest's Common Stock to 100% of the offering price of
the private placement, (b) make the Preferred Stock mandatorily redeemable by
the Company beginning one year after the filing of a resale registration
statement, subject to certain terms and conditions and (c) to provide the
holders of the Preferred Stock a bonus equal to one quarterly dividend payment
in satisfaction of any past or future compensation in connection with any delay
in the registration of the Common Stock underlying the Preferred Stock and
accompanying warrants to which the holders of the Preferred Stock might
otherwise have been entitled. If the Company is unable to obtain the approval of
all of the holders of the Preferred Stock, the present terms and conditions
governing the Preferred Stock will remain in effect. Currently, dividends on the
Class AAA Preferred Stock are in arrears approximately $141,400.
Both classes of the Preferred Stock have preference over the Company's
Common Stock in payment of dividends and in distributions upon liquidation,
dissolution or winding up of the Company. The holders of the Preferred Stock
have no preemptive rights. The holders of the Preferred Stock, as a class, have
no voting rights (except as required by Texas law or in connection with an
amendment to the Certificate of Designation of the Shares to change their
rights), other than those resulting from a default in judgment of debt or from a
non-payment of dividends for more than six quarters. If the Company has been
notified of a default in payment of debt which it is unable to cure or if the
dividends on the Preferred Stock are in arrears by more than six quarters, the
number of directors of the Company shall be increased to such number that permit
the Preferred Shareholders and all such other Preferred Shareholders ("Preferred
Class"), voting as a single class, to elect one-fourth of the directors of the
Company. The Preferred Stock has transfer restrictions unless such transaction
is registered under the Securities Act and applicable state securities laws or
is exempt therefrom.
It is not possible to state the actual effects of the issuance of
additional Preferred Stock upon the rights of holders of Common Stock until the
Board of Directors of the Company determines the specific rights of the holders
of such Preferred Stock. However, as in the case of the outstanding shares of
Class AA and Class AAA Preferred Stock, such effects might include restricting
dividends on the Common Stock, diluting the voting power of the Common Stock,
impairing the liquidation rights of the Common Stock and delaying or preventing
a change in control of the Company without further action by the shareholders.
20
Convertible Debentures
On November 18, 1997, the Company completed a private offering of $500,000
of convertible debentures (the "Debentures"). The Debentures bear interest at a
rate of 12% payable quarterly and are collateralized by certain assets of the
Company. Upon the earlier of the close of a private placement or one year from
the issuance date of the Debentures, the principal and any accrued and unpaid
interest will become payable upon demand. The holders of such Debentures will
have the option, for one year from the due date to convert all or a part of the
outstanding principal and any accrued and unpaid interest to GulfWest Common
Stock at a strike price equal to 80% of the private placement offering price.
21
ITEM 6. Selected Financial Data.
The following table sets forth selected historical financial data of
GulfWest Oil Company as of December 31, 1997, 1996, 1995, 1994 and 1993, and for
each of the periods then ended. See "Item 1. Business" and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." The
income statement data for the years ended December 31, 1997, 1996 and 1995, and
the balance sheet data at December 31, 1997 and 1996 are derived from the
Company's audited financial statements contained elsewhere herein. The balance
sheet data at December 31, 1995, 1994 and 1993 and income statement data for the
years ended December 31, 1994 and 1993 are derived from the Company's Annual
Report on Form 10-K for those periods. The data should be read in conjunction
with the consolidated financial statements and the notes thereto of the Company
included elsewhere herein.
Year Ended December 31,
---------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------- ----------- ----------- ---------- -----------
Income Statement Data
- ---------------------
Operating Revenues $ 4,960,966 $ 1,966,012 $ 669,367 $ 682,538 $ 197,579
Net income (loss) from (1,750,413) (824,735) (1,186,843) (879,746) (453,520)
continuing operations
Net income (loss) from - - - - 290,935
discontinued operations
Net income (loss) $(1,750,413) $ (824,735) $(1,186,843) $ (879,746) $ (162,585)
Income (loss) from $ (1.21) $ (0.71) $ (1.17) $ (0.88) $ (0.48)
continuing operations
per share of Common Stock
Net income (loss) from - - - - 0.31
discontinued operations,
per share of Common
Stock outstanding(1)
Net Income (loss), per $ (1.21) $ (0.71) $ (1.17) $ (0.88) $ (0.17)
share of Common Stock
outstanding(1)
Weighted average number 1,725,926 1,266,974 1,010,765 1,000,000 938,305
of shares of Common Stock
outstanding(1)
Balance Sheet Data
- -------------------
Current assets $ 1,536,396 $ 699,259 $ 201,759 $ 226,860 $1,333,849
Total assets 17,089,855 15,046,765 3,095,625 2,370,781 4,020,666
Current liabilities 2,879,256 2,877,290 543,565 610,843 408,661
Long-term obligations 12,185,055 8,877,941 1,678,039 198,676 492,895
Stockholders' Equity 2,025,544 3,291,534 874,021 1,561,262 3,173,486
(1) Basic and diluted loss per share are the same since potential common stock
equivalents are anti-dilutive.
22
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
GulfWest 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 the
application of 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.
During the fourth quarter of 1996, the Company acquired producing oil
properties with Proved Reserves from an unrelated entity in two separate
transactions ("Phase I" and "Phase II") for a total purchase price of
$10,654,000. The Company's subsidiary, WestCo Oil Company ("WestCo"), is the
operator of the acquired properties.
Results of Operations
Comparative results of operations for the periods indicated are discussed
below.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Oil and gas sales for 1997 increased 176% to $4,269,000 from $1,549,000 in
1996. This was due to the addition of Working Interests ownership in the Phase I
and II properties acquired in the fourth quarter of 1996.
Lease sales revenues in 1997 were $73,000 compared to $252,000 in 1996 with
cost of leases sold being $38,000 compared to $92,000 in 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 $482,000 less
expenses of $279,000 in 1997 compared to $58,900 less expenses of $46,400 for
1996.
Costs and Expenses
Lease operating expenses for 1997 increased by 226% to $2,139,000 from
$657,000 in 1996 because of the added Working Interests ownership.
The 249% increase in Depreciation, Depletion and Amortization to $1,625,000
for 1997 from $466,000 in 1996 was due to the added Working Interests ownership
in the Phase I and II properties in the fourth quarter of 1996 and economic
factors affecting the year end prices of oil and gas.
General and administrative costs for 1997 increased by $419,000 over 1996
due to costs associated with company expansion.
23
Interest expense increased from $385,000 in 1996 to $1,161,000 in 1997 due
to borrowing costs related to the acquisition of additional interests and other
debt incurred during the year to finance the Company's operations.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues
Oil and gas sales for 1996 increased 181% to $1,549,000 in 1996 compared to
$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 to
increases in oil and gas prices.
There was no gathering system revenue in 1996 compared to $32,385 in 1995,
since the Company exchanged its beneficial ownership in the gathering system for
additional Working Interests in wells in the Madisonville Field in August 1995.
Lease sales revenues in 1996 were $252,300 compared to -0- in 1995, with
cost of leases sold being $91,800 in 1996 compared to -0- in 1995. The leases
sold consisted of 50% ownership in 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 in 1996.
Revenue from operating overhead (administrative fees for operating oil and
gas properties) and other income increased by 63% to $105,700 in 1996 compared
to $65,000 in 1995 after commencement of operations by the operating subsidiary
in August 1995. The increase was due to a full year's operation of the
Madisonville properties and the assumption of operations for properties acquired
during the fourth quarter of 1996.
Costs and Expenses
Lease operating expenses for 1996 increased by 58% to $657,000 in 1996
compared to $415,800 in 1995 because of the added Working Interests ownership.
Depreciation, Depletion and Amortization increased 41% to $466,100 in 1996
compared to $331,300 in 1995, due to the acquisition of Working Interests in the
fourth quarter of 1996.
Interest expense increased 143% to $420,100 in 1996 compared to $172,600 in
1995, due to borrowing costs related to the acquisition of additional interests
and other debt incurred during 1996 to finance the Company's operations.
General and administrative costs for 1996 increased by 16% to $1,058,900 in
1996 compared to $912,300 in 1995, due to added personnel salaries and other
costs associated with company expansion.
Financial Condition and Capital Resources
During the fourth quarter of 1996, the Company acquired and assumed
operations for $10,654,000 in oil properties in West Texas. In connection with
these acquisitions, the Company issued senior debt due
24
October and December, 1999 in the original principal amount of $7,400,000. In a
subsequent event, on March 20, 1998, the Company obtained a loan from a banking
institution for $10,237,000, which included $7,632,000 for refinancing oil
properties in West Texas purchased in October and December, 1996 (the "Acquired
Properties") and $2,605,000 for payment toward the acquisition of certain other
oil properties in West Texas (the "Additional Properties"), with a purchase
price of $2,976,000. The Company has entered into a purchase and sale agreement
for certain other oil properties in West Texas (the "Remaining Properties") for
a purchase price of $1,450,000, with $1,000,000 in bank financing and $450,000
in seller financing to be closed, subject to various conditions such as title
curative matters, not later than May 7, 1998.
On November 18, 1997, the Company completed a private offering of $500,000
of Debentures. The Debentures bear interest at a rate of 12% payable quarterly
and are collateralized by certain assets of the Company. Upon the earlier of the
close of a private placement or one year from the issuance date of the
Debentures, the principal and any accrued and unpaid interest will become
payable upon demand. The holders of such Debentures will have the option, for
one year from the due date to convert all or a part of the outstanding principal
and any accrued and unpaid interest to GulfWest Common Stock at a strike price
equal to 80% of the private placement offering price.
On January 7, 1997, the Company established a $2,000,000 revolving
line-of-credit with Southwest Bank of Texas, with part of the proceeds to be
used for payment of short-term notes incurred for acquisitions made during the
fourth quarter of 1996. On July 2, 1997, the Company's revolving line-of-credit
was increased to $2,750,000 with the additional funds to be used for
acquisitions and further enhancements of the Company's West Texas properties.
The line-of-credit is guaranteed by Mr. J. Virgil Waggoner, a director of the
Company. On March 30, 1998, the line-of-credit of $2,750,000 was renewed with a
maturity date of April 10, 2000 and the demand feature of the note was removed.
On December 15, 1997, the Company obtained a loan from Mr. J. Virgil
Waggoner, a director of the Company, in the amount of $1,000,000 to drill
seventeen developmental wells in the Vaughn Field. On March 25, 1998, Mr.
Waggoner agreed to extend the due date of the note to June 30, 1999 and, at the
Company's option, to convert the outstanding principal amount of the note to
Common Stock of the Company.
On March 3, 1998, the Company established a $500,000
revolving-line-of-credit with Compass Bank of Dallas, with the proceeds to be
used for equipment purchases and working capital for its subsidiary, VanCo Well
Service, Inc. ("VanCo"). The line of credit was guaranteed by J. Virgil
Waggoner, a director, Marshall A. Smith, III, President of the Company and Jay
Waggoner, an officer of VanCo.
At a special meeting of the shareholders of the Company on March 24, 1998,
the shareholders approved the offering, sale and issuance of shares of the
Company's Common Stock through a private placement at a price to be determined
whereby gross proceeds of at least $500,000 and up to $5.5 million are
anticipated to be raised. If fully subscribed, the Company expects to use the
proceeds from the offering for working capital and general corporate purposes.
These general purposes may include (i) approximately $2.75 million for payment
of the current balance of a revolving credit facility with a financial
institution and personally guaranteed by J. Virgil Waggoner, a director (this
credit facility would continue to be available to the Company for acquisition,
development and enhancement of oil and gas properties); (ii) approximately $1
million for repayment of a drilling loan from J. Virgil Waggoner (as noted
above, Mr. Waggoner has agreed to convert the outstanding principal amount of
the note to Common Stock, at the option of the Company); and (iii) approximately
$600,000 for placement agent fees and expenses of the offering. The use of
proceeds is subject to change, however, based upon the number of shares of
Common Stock sold in the offering, the amount of net proceeds to the Company,
competitive developments and the availability to the Company of other methods of
financing.
25
In January 1998, the Company commenced a program to drill seventeen (17)
infield wells in the Vaughn Field, Crockett County, Texas. If successful, upon
completion of the drilling program, the Company will have increased its Proved
Producing oil reserves in the Vaughn Field from approximately 700,000 barrels to
an estimated 1.7 million barrels.
Management is seeking a partner to assist in the horizontal development of
wells on its Madisonville properties. Management has identified 7 wells for
re-entry using its horizontal technique which has proved up an additional
400,000 barrels of oil equivalent. 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's acquisition strategy is for the Company to be an aggressive
consolidator of small, under-capitalized operators with Undeveloped Properties
and oil and gas properties that may be non-core to larger independent and major
oil and gas companies.
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.
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)
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
1997
----
First $20.69 $2.61 $19.90
Second 17.73 2.17 16.99
Third 17.24 2.09 16.53
Fourth 17.38 2.60 17.14
26
Year 2000 Issue
To date, the Company has not made an assessment of the effects, if any, on
its business, operations or operating systems of the widely reported year 2000
computer problem.
Recent Accounting Pronouncements
During June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" and Statement of Financial Accounting Standards No. 131 "Disclosure
About Segments of an Enterprise and Related Information". During February 1998,
the FASB issued Statement of Financial Accounting Standards No. 132 "Employers'
Disclosure about Pensions and other Post Retirement Benefits". Preliminary
analysis of these new standards by the Company indicates that the standards will
not have a material impact on the Company. The standards are effective for
financial statements for fiscal years beginning after December 15, 1997.
Actual Results May Differ From Forward-Looking Statements
Statements in this Form 10-K that reflect projections or expectations of
future financial or economic performance of the Company, and statements of the
Company's plans and objectives for future operations are "forward-looking"
statements within the meaning of Section 27A of the Securities and Exchange Act
of 1993, as amended. No assurance can be given that actual results or events
will not differ materially from those projected, estimated, assumed or
anticipated in any such forward looking statements. Important factors (the
"Cautionary Disclosures") that could result in such differences include: general
economic conditions in the Company's markets, including inflation, recession,
interest rates and other economic factors; the availability of qualified
personnel; the level of competition experienced by the Company; the Company's
ability to implement its business strategies and to manage its growth; and other
factors that affect businesses generally. Subsequent written and oral
"forward-looking" statements attributable to the Company or persons acting on
its behalf are expressly qualified by the Cautionary Disclosures.
ITEM 8. Financial Statements and Supplementary Data.
Information with respect to this Item 8 is contained in the Company's
financial statements beginning on Page F-1 of this Annual Report.
ITEM 9. Changes In and Disagreements With Accountants and Accounting and
Financial Disclosure.
None
27
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 52 Chairman of the Board, 1992
Chief Financial Officer and
Director
Marshall A. Smith III 50 President, Chief Executive 1989
Officer and Director
Jim C. Bigham 62 Executive Vice President, 1991
Secretary and Director
A. Van Nguyen 42 Vice President of 1996
Operations
Ned W. Fowler 70 Director 1990
Charles D. Ledford 64 Director 1996
Henri M. Nevels 33 Director 1996
James L. Crowson 59 Director 1997
Anthony P. Towell 66 Director 1997
J. Virgil Waggoner 70 Director 1997
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 is
also currently president and sole shareholder of ST Advisory Corporation, an
investment company, and vice-president of Star-Tex Trading Company, also an
investment company. Mr. Loehr was formerly president of Star-Tex Asset
Management, a commodity trading advisor, a position he held from 1988 until
1992, when he sold his ownership interest. Mr. Loehr is a CPA and is a member of
the American Institute of Certified Public Accountants and Texas Society of
Certified Public Accountants.
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
28
board. On September 1, 1993, Mr. Smith reassumed the duties of president and
resigned as 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 has served as Executive Vice President of the Company since
1996 and as a director since 1991. Mr. Bigham joined the Company in 1991 as
secretary. Prior to joining the Company in 1991, Mr. Bigham held management and
sales positions in the real estate and printing industries. Mr. Bigham is also a
retired United States Air Force Major. During his career, he served in both
command and staff officer positions in the operational, intelligence and
planning areas.
A. Van Nguyen has served as Vice President of Operations of the Company
since 1996. Prior to joining the Company, he was Senior Vice President of OGP
Operating, Inc., and a principal of Oil and Gas Producers, Inc., 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, where he was employed
from 1981 to 1992. Mr. Nguyen is a Registered Professional Engineer in the State
of Texas. Mr. Nguyen is a petroleum engineer with extensive background and
experience in oil and gas property evaluation, drilling and completion, field
operations and enhancement recovery technology.
Ned W. Fowler has served as a director of the Company since 1990. He also
currently serves as a special advisor to OGERD Corporation, a company engaged in
the marketing of equipment and supplies to 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 had 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.
Charles D. Ledford has served as a director since August 5, 1996. Mr.
Ledford served as chairman of the board, chief executive officer and president
of ECO2, Inc., a rubber tire recycling company, from its inception in 1991 until
February, 1997. Since 1976, Mr. Ledford has been active in research and
development and the study of the application of pyrolysis in business. In 1992,
Mr. Ledford patented a process converting scrap rubber tires into carbon black
and fuel oil through the use of pyrolysis.
Henri M. Nevels has served as a director of the Company since August 22,
1996. Mr. Nevels also serves as an advisor to a private European investor group
with international holdings, including those in the United States and China. Mr.
Nevels has held this position for the past seven years.
James L. Crowson has served as a director of the Company since July 7,
1997. Mr. Crowson also is Deputy Chancellor for Texas Tech University and Texas
Tech University Health Sciences Center, a position he assumed in 1996. Mr.
Crowson is responsible for activities of the Board of Regents and is the direct
administrator over the Vice Chancellors for institutional advancement,
governmental relations, legal affairs, and fiscal affairs. From 1987 to 1995,
Mr. Crowson was employed by the Lomas Financial Group as Senior Vice President
and General Counsel until 1994 and as Executive Vice President in 1994-1995. Mr.
Crowson served in various positions from 1970 to 1980 in the University of Texas
system.
Anthony P. Towell has served as a director of the Company since November
13, 1997. Mr. Towell also is a director of a number of public companies, both in
the United Kingdom and the United States, in the safety, environmental and
computer network industries. Mr. Towell has been in the petroleum business since
29
1957 and has held executive positions with various public oil and gas companies
including the Royal Dutch Shell group companies and Pacific Resources, Inc.
J. Virgil Waggoner has served as a director of the Company since December
1, 1997. Mr. Waggoner's career in the petrochemical industry began in 1950 and
included senior management positions with Monsanto Company and El Paso Products
Company, the petrochemical and plastics unit of El Paso Company. Mr. Waggoner
served as president and chief executive officer of Sterling Chemicals, Inc. from
the firm's inception in 1986 until its sale and his retirement in 1996. Mr.
Waggoner continues to serve as non-executive vice chairman of the Board of
Directors of Sterling Chemicals, Inc. Mr. Waggoner is on the Board of Directors
of Kirby Corporation and is an advisory board director of First Commercial Bank
of Little Rock, Arkansas. He is currently president and chief executive officer
of JVW Investments, Ltd., a private company.
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.
30
DEFINITIONS
The following are definitions of certain terms used in this Form 10-K.
Bbl. Barrel.
BOE. Barrel of oil equivalent, based on a ratio of 6,000 cubic feet of natural
gas for each barrel of oil.
Grossacres 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 froom 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 contractural 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
31
b. The immediately adjoining portions not yet drilled but which can
be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of
information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot project, or the operation of
an installed program in the reservoir, provides support for the engineering
analysis on which the project or program was based.
Proved Reserves do not include:
a. Oil that may become available from known Reservoirs but is
classified separately as "indicated additional reserves";
b. Crude oil, natural gas, and natural gas liquids, the recovery of
which is subject to reasonable doubt because of uncertainty as to
geology, Reservoir characteristics, or economic factors;
c. Crude oil, natural gas, and natural gas liquids that may occur in
undrilled Prospects; and
d. Crude oil, natural gas, and natural gas liquids that may be
recovered from oil shales and other sources.
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. Additional oil and
gas expected to be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces and mechanisms
of primary recovery should be included as "proved developed" only after testing
by a pilot project or after operation of an installed program has confirmed
through production response that increased recovery will be achieved.
Proved Undeveloped Reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage 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.
32
Royalty Interest. An interest in an oil and gas property entitling the owner to
a share of oil and natural gas production free of costs of production.
Standardized Measure. The present value, discounted at 10%, of future net cash
flows from estimated proved reserves, after income taxes, calculated holding
prices and costs constant at amounts in effect on the date of the report (unless
such prices or costs are subject to change pursuant to contractual provisions)
and otherwise in accordance with the Commission's rules for inclusion of oil and
gas reserve information in financial statements filed with the Commission.
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.
33
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this Report:
(1) Financial Statements:
Consolidated Balance Sheets at December 31, 1997, and 1996.
Consolidated Statements of Operations for the years ended December 31,
1997, 1996, and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996, and 1995.
Notes to Consolidated Financial Statements, December 31, 1997, 1996
and 1995.
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits:
Number Description
------ -----------
X2.1 Restructuring Agreement Regarding Madisonville Prospect, dated
April 18, 1995.
X2.2 Unanimous Consent to First Amendment to Regulations of S.G.C.
Transmission, L.L.C., dated July 17, 1995.
X2.3 Security Agreement RE: Subsequently Acquired Interests, dated
July 17, 1995.
+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.
+2.5 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.
34
+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.
+2.7 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.
&2.8 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.
&2.9 Addendum of Purchase and Sale Agreement between Pharaoh and
WestCo Producing Company, dated December 5, 1996.
&2.10Assignment of Purchase and Sale Agreement by and between
Pharaoh, GulfWest Permian Company and WestCo Producing Company,
dated December 5, 1996.
&2.11Form of Assignment and Bill of Sale by and between Pharaoh as
Assignor and GulfWest Permian Company as Assignee.
*3.1 Articles of Incorporation of the Registrant and Amendments
thereto.
*3.2 Bylaws of the Registrant.
+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.
+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.
^ 4.1 Form of Note Purchase and Sale Agreement for the Company's
1995 Series A 9.5% Subordinated Notes, undated.
^4.2 Subscription and Registration Rights Agreement for the Purchase
of Preferred Stock Between the Company and Eco2, Inc. dated March
13, 1996.
+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.
&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.
35
&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.
@10.2GulfWest Oil Company 1994 Stock Option Plan, approved by the
Board of Directors on February 11, 1994.
@10.3Form of Nonqualified Stock Option Agreement, dated February 11,
1994 between the Company and certain officers, directors and
advisors of the Company.
#10.4Letter Agreement between the Company and Madisonville Project,
Limited, dated December 28, 1993 and amendment dated March 28,
1994.
#10.5Investment Letter Subscription Agreement of the Madisonville
Project, Limited, executed by the Company on July 31, 1994.
#10.6The Madisonville Project, Limited Agreement of Limited
Partnership, dated July 31, 1994.
@10.7Warrant Agreement between the Company and Jackson & Walker,
L.L.P., dated December 21, 1994.
^10.8Stock Option Agreement between the Company and John E. Loehr,
dated May 11, 1995.
^10.9Stock Option Agreement between the Company and Marshall A. Smith
III, dated May 11, 1995.
^10.10 Employment Agreement between the Company and Marshall A Smith
III, dated July 1, 1995.
^10.11 Employment Agreement between the Company and Jim C. Bigham,
dated July 1, 1995.
"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.
?20.1 Letter to Shareholders dated August 12, 1996.
25 Power of Attorney (included on signature page of this Annual
Report).
%27.1 Financial Data Schedule.
_______________
& Previously filed with the Company's Form 8-K, Current Report
dated December 5, 1996, filed with the Commission on December 17,
1996.
+ Previously filed with the Company's Form 8-K, Current Report
dated October 10, 1996, filed with the Commission on October 25,
1996.
36
? Previously filed with the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996, filed with the Commission on
August 14, 1996.
^ Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1995, filed with the Commission
on April 12, 1996.
" Previously filed with the Company's Form 8-K/A, Current Report
dated December 12, 1995, filed with the Commission on December
29, 1995.
X Previously filed with the Company's Form 8-K, Current Report
dated July 17, 1995, filed with the Commission on July 31, 1995.
@ Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, filed with the Commission
on April 14, 1995.
# Previously filed with the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1994, filed with the Commission on
August 14, 1994.
* Previously filed with the Company's Registration Statement (on
Form S-1, Reg. No. 33-53526), filed with the Commission on
October 21, 1992.
% Filed herewith.
37
S I G N A T U R E S
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
GULFWEST OIL COMPANY
Date: March 31, 1998 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 March 31, 1998
John E. Loehr Financial Officer and Director
\s\ Marshall A. Smith III President, Chief Executive March 31, 1998
Marshall A. Smith III Officer and Director
\s\ Jim C. Bigham Executive Vice President, March 31, 1998
Jim C. Bigham Secretary and Director
\s\ A. Van Nguyen Vice President of Operations March 31, 1998
A. Van Nguyen
\s\ Ned W. Fowler Director March 31, 1998
Ned W. Fowler
38
\s\Charles D. Ledford Director March 31, 1998
Charles D. Ledford
\s\Henri M. Nevels Director March 31, 1998
Henri M. Nevels
\s\James L. Crowson Director March 31, 1998
James L. Crowson
\s\ Anthony P. Towell Director March 31, 1998
Anthony P. Towell
\s\ J. Virgil Waggoner Director March 31, 1998
J. Virgil Waggoner
39
GULFWEST OIL COMPANY
FINANCIAL REPORT
DECEMBER 31, 1997
C O N T E N T S
Page
----
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity F-5
Consolidated statements of cash flows F-7
Notes to consolidated financial statements F-8
INDEPENDENT AUDITOR' REPORT ON
THE FINANCIAL STATEMENT SCHEDULE F-25
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts F-26
All other Financial Statement Schedules have
been omitted because they are either
inapplicable or the information required is
included in the financial statements or
the notes thereto.
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
GULFWEST OIL COMPANY
We have audited the accompanying consolidated balance sheets of GulfWest Oil
Company (a Texas Corporation) and Subsidiaries as of December 31, 1997 and 1996,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GulfWest Oil Company and Subsidiaries as of December 31, 1997 and 1996 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
\s\WEAVER AND TIDWELL, L.L.P
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
March 25, 1998
715
F-1
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
1997 1996
----------------- ----------------
CURRENT ASSETS
Cash and cash equivalents $ 626,519 $ 84,477
Accounts receivable - trade, net of allowance
for doubtful accounts of $ -0- and
$ -0- in 1997 and 1996, respectively 855,383 612,439
Prepaid expenses 54,494 2,343
-------------- --------------
Total current assets 1,536,396 699,259
-------------- --------------
OIL AND GAS PROPERTIES,
using the successful efforts
method of accounting
Undeveloped properties 4,585 37,910
Developed properties 17,026,171 14,823,561
-------------- --------------
17,030,756 14,861,471
OTHER PROPERTY AND EQUIPMENT 1,171,214 735,507
Less accumulated depreciation,
depletion, and amortization (2,874,403) (1,249,472)
-------------- --------------
Net oil and gas properties and
other property and equipment 15,327,567 14,347,506
-------------- --------------
DEPOSITS ON DEVELOPED OIL & GAS PROPERTIES 225,892
-------------- --------------
TOTAL ASSETS $ 17,089,855 $ 15,046,765
============== ==============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY
1997 1996
----------------- ----------------
CURRENT LIABILITIES
Notes payable $ 350,000 $
Notes payable - related parties 150,000
Current portion of long-term debt 311,233 1,702,208
Current portion of long-term debt - related parties 350,000
Accounts payable - trade 1,427,661 1,018,419
Accrued expenses 290,362 156,663
--------------- --------------
Total current liabilities 2,879,256 2,877,290
--------------- --------------
LONG-TERM DEBT, net of current portion 11,185,055 8,352,941
--------------- --------------
LONG-TERM DEBT - RELATED PARTIES 1,000,000 525,000
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock 54 46
Common stock 1,759 1,611
Additional paid-in capital 7,583,236 6,909,092
Retained deficit (5,407,031) (3,506,556)
Long-term accounts and notes receivable -
related parties, net of allowance for doubtful
accounts of $448,230 and $446,948 in 1997
and 1996, respectively (152,474) (112,659)
--------------- --------------
Total stockholders' equity 2,025,544 3,291,534
--------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 17,089,855 $ 15,046,765
=============== ==============
F-3
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
-------------- -------------- -------------
OPERATING REVENUES
Oil and gas sales $ 4,269,032 $ 1,549,069 $ 551,355
Gathering system revenue 32,385
Lease sales 73,297 252,333
Well servicing revenues 481,562 58,881
Operating overhead and other income 137,075 105,729 85,627
-------------- -------------- --------------
4,960,966 1,966,012 669,367
-------------- -------------- --------------
COST AND EXPENSES
Lease operating expenses 2,139,128 656,957 415,816
Gathering system expense 287
Cost of leases sold 37,747 91,831
Cost of well servicing operations 279,340 46,424
Lease abandonment 85,696 51,618
Depreciation, depletion, and amortization 1,624,759 466,097 331,315
General and administrative 1,478,312 1,058,870 912,322
-------------- -------------- --------------
5,559,286 2,405,875 1,711,358
-------------- -------------- --------------
LOSS FROM OPERATIONS (598,320) (439,863) (1,041,991)
-------------- -------------- --------------
OTHER INCOME AND EXPENSE
Interest income 8,678 332 18,460
Interest expense (1,160,771) (385,204) (163,312)
-------------- -------------- --------------
LOSS BEFORE INCOME TAXES (1,750,413) (824,735) (1,186,843)
INCOME TAXES
-------------- -------------- --------------
NET LOSS $ (1,750,413) $ (824,735) $ (1,186,843)
DIVIDENDS ON PREFERRED STOCK
(PAID 1997 - $150,062; 1996 - $72,017) (337,462) (72,017)
-------------- -------------- --------------
NET LOSS AVAILABLE TO
COMMON SHAREHOLDERS $ (2,087,875) $ (896,752) $ (1,186,843)
============== ============== ==============
LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (1.21) $ (0.71) $ (1.17)
============== ============== ==============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-4
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Number of Shares
-------------------------------
Preferred Common
Stock Stock
----------- -----------
BALANCE, December 31, 1994 1,000,000
Issuance of 86,125 common shares through
private placement, net of offering costs 86,125
Issuance of warrants for goods, services
and additional financing costs
Increase in accounts and notes receivable - related parties
Payments on loans to related parties
Net loss
----------- -----------
BALANCE, December 31, 1995 1,086,125
Issuance of 525,029 common shares, net of offering costs
(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
Increase in accounts and notes receivable-related parties
Issuance of 4,621 shares of preferred stock, net of offering
costs (900 shares of Class AA and 3,421 shares of Class
AAA through private placement and 300 shares of Class
AA to convert a $150,000 note payable) 4,621
Payments on loans to related parties
Issuance of warrants for goods, services and additional
financing costs
Provision for bad debts - receivables from related parties
Net loss
Dividends paid on preferred stock
----------- -----------
BALANCE, December 31, 1996 4,621 1,611,154
Conversion of 45 shares of Class AAA preferred
stock to 11,781 shares of common stock (45) 11,781
Issuance of 814 shares of preferred stock, net of
offering costs (750 shares of Class AA and 64
shares of Class AAA through private placement) 814
Increase in accounts and notes receivable - related parties
Issuance of 136,250 common shares, net of offiering costs
(85,000 shares through private placement and 51,250
through excercise of warrants) 136,250
Payments on loans to related parties
Issuance of warrants for services and additional
financing costs
Provision for bad debts - receivables from related parties
Net loss
Dividends paid on preferred stock
----------- -----------
BALANCE, December 31, 1997 5,390 1,759,185
=========== ===========
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-5
Additional
Common Preferred Paid-In Retained Receivables
from
Stock Stock Capital Deficit Related Parties
----------- ----------- ----------- ----------- -------------
1,000 $ $ 3,237,735 $ (1,422,961) $ (254,512)
86 129,101
229,678
(31,242)
171,979
(1,186,843)
----------- ----------- ----------- ----------- -------------
1,086 3,596,514 (2,609,804) (113,775)
525 1,078,721
(83,416)
46 2,131,681
23,050
102,176
61,482
(824,735)
(72,017)
----------- ----------- ----------- ----------- -------------
1,611 46 6,909,092 (3,506,556) (112,659)
12 (12)
8 406,958
(139,584)
136 178,879
98,487
88,319
1,282
(1,750,413)
(150,062)
----------- ----------- ----------- ----------- -------------
$ 1,759 $ 54 $ 7,583,236 $ (5,407,031) $ (152,474)
=========== =========== =========== =========== =============
F-6
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS END DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,750,413) $ (824,735) $ (1,186,843)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 1,624,759 466,097 331,315
Abandoned leases 85,696 51,618
Common stock and warrants issued and charged to 88,318 122,276 358,865
operations
Provision for bad debts 1,282 61,482
(Increase) decrease in accounts
receivable - trade, net (242,944) (458,820) (80,099)
(Increase) decrease in prepaid expenses (52,151) 35,249 (32,113)
(Increase) decrease in discounts on notes payable 10,511 33,334 (43,846)
Increase (decrease) in accounts payable
and accrued expenses 568,566 779,098 71,888
------------- ------------- -------------
Net cash provided by (used in) operating activities 247,928 299,677 (529,215)
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (2,626,655) (2,713,569) (245,309)
(Increase) in accounts and notes and receivable - related party (139,584) (83,416) (31,242)
Payments received on loans to related parties 25,305 23,050 171,979
------------- ------------- -------------
Net cash used in investing activities (2,740,934) (2,773,935) (104,572)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 153,390 559,145
Proceeds from sale of preferred stock, net 406,967 1,981,728
Payments on debt (1,941,602) (743,875) (220,526)
Proceeds from debt issuance 4,566,355 823,206 834,000
Dividends paid (150,062) (72,017)
------------- ------------- -------------
Net cash provided by financing activities 3,035,048 2,548,187 613,474
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 542,042 73,929 (20,313)
CASH AND CASH EQUIVALENTS,
beginning of year 84,477 10,548 30,861
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
end of year $ 626,519 $ 84,477 $ 10,548
============= ============= =============
CASH PAID FOR INTEREST $ 922,563 $ 202,111 $ 85,214
============= ============= =============
The Notes to Consolidated Financial Statements
are an integral part of these statements.
F-7
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies
consistently applied by management in the preparation of the accompanying
financial statements.
Organization/Concentration of Credit Risk
GulfWest Oil Company and subsidiaries (the "Company") intends to pursue the
acquisition of quality oil and gas prospects which have proved developed and
undeveloped reserves and the development of prospects with third party industry
partners.
The accompanying financial statements include the Company and its
wholly-owned subsidiaries: 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; and DutchWest Oil Company formed in
1997. 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 also grants credit to various third parties
through Vanco for well servicing operations.
The Company maintains cash on deposit in interest and non-interest bearing
accounts which, at times, exceed federally insured limits. The Company has not
experienced any losses on such accounts and believes it is not exposed to any
significant credit risk on cash and equivalents.
Statement of Cash Flows
The Company considers all highly liquid investment instruments purchased
with remaining maturities of three months or less to be cash equivalents for
purposes of the consolidated statements of cash flows.
Non-Cash Investing and Financing Activities:
In 1997, the Company acquired other property and equipment through the
issuance of debt totaling $130,875. Additionally, the Company exchanged a
related party note receivable of $73,782 for oil and gas properties. 51,250
shares of common stock were issued to related parties upon the exercise of
warrants and paid for by conversion of accrued expenses to such parties of
$26,250.
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. A $500,000 note payable was converted to common stock in 1996.
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.
F-8
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
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.
As the Company acquires significant oil and gas properties, any unproved
property that is considered individually significant is periodically assessed
for impairment of value, and a loss is recognized at the time of impairment by
providing an impairment allowance. Capitalized costs of producing oil and gas
properties and support equipment, after considering estimated dismantlement and
abandonment costs and estimated salvage values, are depreciated and depleted by
the unit-of-production method.
On the sale of an entire interest in an unproved property, gain or loss on
the sale is recognized, taking into consideration the amount of any recorded
impairment if the property has been assessed individually. If a partial interest
in an unproved property is sold, the amount received is treated as a reduction
of the cost of the interest retained. On the sale of an entire or partial
interest in a proved property, gain or loss is recognized, based upon the fair
values of the interests sold and retained.
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, 1997, 1996, and 1995 were not significant.
Fair Value of Financial Instruments
At December 31, 1997 and 1996, the Company's financial instruments consist
of notes receivable from related parties, notes payable and long-term debt. The
Company believes that the recorded values approximate fair value.
F-9
GULFWEST OIL COMPANY AMD SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Earnings (Loss) Per Share
Earnings (loss) per share are calculated based upon the weighted-average
number of outstanding common shares. Diluted earnings (loss) per share are
calculated based upon the weighted-average number of outstanding common shares,
plus the effect of dilutive stock options, warrants, convertible preferred stock
and convertible debentures.
The Company has adopted Statement of financial Accounting Standards
(SFAS) No. 128 "Earnings Per Share", which requires that both basic
earnings (loss) per share and diluted earnings (loss) per share be
presented on the face of the statement of operations. All per-share amounts
are presented in a diluted basis, that is, based upon the weighted-average
number of outstanding common shares and the effect of all potentially
diluted common shares. Implementation of SFAS No. 128 had no effect on
previously reported loss per share amounts.
Reclassifications
Some amounts on the 1996 and 1995 financial statements have been
reclassified to conform to 1997 presentation. Such reclassifications had no
effect on results of operations for 1996 and 1995.
Impairments
Impairments, measured using fair market value, are recognized whenever
events or changes in circumstances indicate that the carrying amount of
long-lived assets (other than unproved oil and gas properties discussed
above) may not be recoverable and the future undiscounted cash flows
attributable to the asset are less than its carrying value.
Stock Based Compensation
In October 1995, SFAS No. 123, "Stock Based Compensation," (SFAS 123)
was issued. This statement requires the Company to choose between two
different methods of accounting for stock options and warrants. The
statement defines a fair-value-based method of accounting for stock options
and warrants but allows an entity to continue to measure compensation cost
for stock options and warrants using the accounting prescribed by APB
Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." Use of
the APB 25 accounting method results in no compensation cost being
recognized if options are granted at an exercise price at the current
market value of the stock or higher. The Company will continue to use the
intrinsic value method under APB 25 but are required by SFAS 123 to make
pro forma disclosures of net income and earnings per share as if the fair
value method had been applied in its 1997 and 1996 financial statements.
See Note 6 to the consolidated financial statements for further
information.
Implementation of New Financial Accounting Standards
In June 1997, SFAS No. 130, "Reporting Comprehensive Income", was
issued. The statement must be adopted by the Company in the first quarter
of 1998. Under provisions of this statement, the Company will be required
to include a financial statements presentation of comprehensive income and
its components to conform to these new requirements. Implementation of this
disclosure standard is not expected to affect the Company's financial
position or results of operations.
F-10
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Operations and Management Plans
At December 31, 1997, the Company had suffered recurring operating losses,
had cash on hand of approximately $626,500 and its current liabilities exceeded
its current assets by $1,342,860. Subsequent to year end, the Company purchased
an additional 27 oil wells in Pecos County, Texas for $2.6 million and
refinanced its outstanding senior debt of approximately $7.4 million plus
accrued interest of approximately $200,000 with Chase of Texas, N.A. with a note
totaling $10.2 million. The note bears interest at the prime rate for the first
6 months and the prime rate plus one-half percent for the subsequent 6 months,
with the principal due March 20, 1999. The Company also paid $300,000 cash in
connection with the purchase ($200,000 is included as deposits on oil and gas
properties on the balance sheet), $170,000 in workover costs on the properties
(included in accounts receivable on the balance sheet) and issued the seller a
$162,675 note payable with interest at 8% due September 20, 1998. Subject to
obtaining clear title, the Company intends to purchase additional properties
from the same seller for $1,450,000 by increasing the aforementioned bank note
and seller note $1,000,000 and $450,000, respectively.
The Company's revolving line of credit of $2.75 million, bearing interest
at the prime rate, was extended to April 10, 2000 and a $1 million note, bearing
interest at the prime rate, from a director, was extended to June 30, 1999. The
director further agreed that, at the Company's option, the loan may be exchanged
for common stock of the Company. Also, in March, 1997, the Company obtained a
$500,000 line of credit from a bank, interest at prime, due April, 1999.
Subsequent to year end, the shareholders approved the offering, sale and
issuance of shares of the Company's common stock through a private placement at
a price to be determined whereby gross proceeds of at least $500,000 and up to
$5.5 million are anticipated to be raised. If fully subscribed, the Company
expects to use the proceeds from the offering for working capital and general
corporate purposes. These general purposes may include (i) approximately $2.75
million for payment of the current balance of a revolving credit facility with a
financial institution and personally guaranteed by a director (this credit
facility would continue to be available to the Company for acquisition,
development and enhancement of oil and gas properties); (ii) approximately $1
million for repayment of a drilling loan from a director (as noted above, the
director has agreed to convert the outstanding principal amount of the note to
common stock, at the option of the Company); and (iii) approximately $600,000
for placement agent fees and expenses of the offering. The use of proceeds is
subject to change, however, based upon the number of shares of common stock sold
in the offering, the amount of net proceeds to the Company, competitive
developments and the availability to the Company of other methods of financing.
In January 1998, the Company commenced a program to drill 17 infield wells
in the Vaughn Field, Crockett County, Texas. If successful, upon completion of
the drilling program, the Company estimates it will increase its proved
producing oil reserves in the Such Field from approximately 700,000 barrels to
an estimated 1.7 million barrels.
Management is seeking a partner to assist in the horizontal development of
wells on its Madisonville properties. Management has identified 7 wells for
re-entry using its horizontal technique which has proved up an additional
400,000 barrels of oil equivalent. 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's acquisition strategy is for the Company to be an aggressive
consolidator of small, under-capitalized operators with undeveloped properties
and oil and gas properties that may be non-core to larger independent and major
oil and gas companies.
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.
F-11
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
1997 1996
---------------- --------------
Unproved oil and gas properties $ 4,585 $ 37,910
Proved oil and gas properties 16,292,916 14,469,593
Support equipment and facilities 733,255 353,968
---------------- --------------
17,030,756 14,861,471
Less accumulated depreciation,
depletion and amortization ( 2,513,105) ( 1,070,883)
---------------- --------------
Net capitalized costs $ 14,517,651 $ 13,970,588
================ ==============
Results of Operations for Oil and Gas Producing Activities:
1997 1996 1995
---------------- -------------- -------------
Oil and gas sales $ 4,269,032 $ 1,549,069 $ 511,355
Gathering system revenues 32,385
Production costs ( 2,139,128) ( 656,957) ( 416,103)
Exploration costs (lease abandonments) ( 85,696) ( 51,618)
Depreciation, depletion and amortization ( 1,470,368) ( 391,494) ( 289,112)
---------------- -------------- -------------
Income tax expense
Results of operations for oil and gas
producing activities - income (loss) $ 659,536 $ 414,922 ($ 213,093)
================ ============== =============
Costs Incurred in Oil and Gas Producing Activities:
1997 1996 1995
---------------- -------------- -------------
Property Acquisitions
Proved $ 683,645 $ 11,158,616 $ 956,058
Unproved 4,585
Development Costs 1,477,458 273,799 114,779
---------------- -------------- -------------
$ 2,165,688 $ 11,432,415 $ 1,070,837
================ ============== =============
On July 3, 1994, the Company exercised its option under the Investment
Letter and Subscription Agreement with Madisonville Project, Ltd. (the
"Partnership"), an unrelated party, to convert $500,000 of the note receivable
from the Partnership into 100 Partnership units. At December 31, 1994, the
Company's 100 units represent an interest of 32.46% of the Partnership. Per the
agreement with the Partnership, income and expenses are to be distributed
between partners based on the weighted average interest in the partnership
during the year. As a result of the investment in the Partnership, the balance
sheet of the Partnership as of December 31, 1997 and 1996, and its results of
operations for the years ended December 31, 1997, 1996 and 1995 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.
F-12
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
Costs Incurred in Oil and Gas Producing Activities: - continued
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
$150,000 in commissions to a related party.
In 1997, the Company acquired an oil and gas property in satisfaction of a
$73,782 note receivable from a related party. In connection with two other
property acquisitions in 1997, the Company incurred a total of $62,500 in
commissions to a related party.
Supplemental unaudited pro forma information presenting the results of
operations for the years ended December 31, 1996 and 1995, as if the Phase I and
Phase II transactions had occurred as of January 1, 1996 and 1995:
Year Ended Year Ended
December 31, December 31,
1996 1995
------------ ------------
Revenues $ 4,945,513 $ 3,347,456
Costs and expenses 4,526,103 4,504,947
---------------- ----------------
Income (loss) from operations 419,410 ( 1,157,491)
Other income and expense ( 1,081,997) ( 866,352)
Income taxes ---------------- ----------------
Net income (loss) ($ 662,587) ($ 2,023,843)
================ ================
Earnings (loss) per share - basic and diluted ($ 0.52) ($ 2.00)
================ ================
F-13
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4. Accrued Expenses
Accrued expenses consisted of the following:
December 31, December 31,
1997 1996
--------------- -------------
Payroll and payroll taxes $ 79,366 $ 23,729
Interest 181,525 106,634
Professional fees 21,000 20,000
Sales taxes 8,471 7,300
-------------- -------------
$ 290,362 $ 156,663
============== =============
Note 5. Notes Payable and Long-Term Debt
Notes payable is as follows:
1997 1996
-------------- -------------
$500,000 notes payable (including $150,000 to
related parties) due October through November,
1998. 12% interest payable quarterly; secured by
20% interest in the Madisonville Project, Ltd. (Note 3).
Note may be converted in whole or in part prior to
maturity into common stock (subject to the Company
raising at least $3,000,000 in a private offering of
common stock), at a price equal to 80% of the price
per share of the common stock sold in such offering. $ 500,000 $
============== =============
Long-term debt is as follows:
Line of credit (up to $2,750,000 to bank; due January 10,
1998 (or upon demand); secured by guarantee of a
director. Interest at prime rate (8.5% at
December 31, 1997). $ 2,729,515 $
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
in 1996, to various individuals at 9.5% interest per annum;
$25,000 retired April, 1997; $475,000 including $350,000
to related parties due in April, 1998. 475,000 489,489
Notes payable to finance vehicles, payable in in aggregate
monthly installments of approximately $10,000 including
interest of 8.5% to 10.5% per annum; secured by the related
equipment, due various dates through 2001. 245,609 182,813
Non-interest bearing notes payable to unrelated entities
(interest imputed at 10% per annum), payable in aggregate
monthly installments of $21,860; final payments due December,
1997 through November, 1998; secured by oil and gas well
servicing equipment. 98,968 174,333
F-14
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt - continued
Long-term debt is as follows: - continued
1997 1996
-------------- -------------
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. 1,299,200 1,474,926
Promissory note to director of the Company at 8.5% interest
(prime at December 31, 1997). Due December 15,
1998; unsecured. 1,000,000
Note payable to unrelated entity to acquire 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. 6,132,786 7,193,378
Note payable to shareholder, interest at 10%;
due November, 1996 and subsequently
retired in February, 1997. 200,000
-------------- -------------
12,846,288 10,580,149
Less current portion ( 661,233) ( 1,702,208)
-------------- -------------
Total long-term debt $ 12,185,055 $ 8,877,941
============== =============
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.
Subsequent to December 31, 1997, the following refinancing of long-term
debt occurred:
* The $2,729,515 line of credit due date was extended to April 10,
2000 and the demand feature removed.
* The $1,000,000 promissory note to a director due date was
extended to June 30, 1999.
* The notes payable to acquire oil and gas properties totaling
$7,431,986 were refinanced with a bank, as well as accrued
interest of $201,717 and the financing of $2,603,512 in
additional oil and gas properties on March 20, 1998. The new note
($10,237,215) is due in a lump sum amount on March 20, 1999.
Interest is payable at prime rate quarterly through September 20,
1998; prime plus .5% quarterly thereafter.
F-15
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt - continued
Estimated annual maturities for long-term debt, considering the above
refinancing , are as follows:
1998 $ 661,233
1999 11,250,407
2000 53,854
2001 880,794
--------------
$ 12,846,288
==============
Note 6. Stockholders' Equity
Common Stock 1997 1996
--------------- --------------
Par value $.001; 20,000,000 shares authorized; 1,759,185
and 1,611,154 shares issued and outstanding as of
December 31, 1997 and 1996, respectively. $ 1,759 $ 1,611
Preferred Stock
Class AA, par value $.01; 4,000 shares authorized; 1,950 and
1,200 shares issued and outstanding as of December 31, 1997
and 1996, respectively. 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. $ 19 $ 12
Class AAA, par value $.01; 4,000 shares authorized; 3,440 and
3,421 shares issued and outstanding as of December 31,
1997 and 1996, respectively. Dividends are cumulative and
payable quarterly at the rate of $45 per share per annum. The
shares are convertible into common stock based upon a
purchase value of $500 per share of Class AAA stock divided
by the lesser of (i) $3.50 per share or (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. In addition, the Company is obligated to pay
$2.10 per week (from November 16, 1997; $2.00 from August 15
to November 15, 1997) per $1,000 purchase amount to Class
AAA stock as additional dividends until sufficient securities are
registered to cover public resales of common stock issuance
upon conversion of Class AAA shares. 34 34
--------------- --------------
$ 53 $ 46
=============== ==============
F-16
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Class AA and AAA preferred shareholders have liquidation preference over
common shareholders of $500 per preferred share, plus accrued dividends.
Dividends in arrears at December 31, 1997 were approximately $187,400 ($141,400
- - Class AAA; $45,900 - Class AA). There was no dividends in arrears at December
31, 1996.
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 have been granted at an option price of $3,00 per share. In addition, the
Company has granted stock options to outside parties, including 500,000 options
to a director related to the issuance and quarantee of Company debt. Following
is a schedule by year of the activity related to stock options, including
weighted-average ("WTD AVG") exercise prices of options in each category.
1997 1996
--------------------- -------------------
WTD AVG WTD AVG
Prices Number Prices Number
------- --------- ------- ---------
Balance, January 1 $ 3.06 215,000 $ 3.07 205,000
Options issued $ 2.77 585,000 $ 3.00 10,000
Options exercised/expired $ $
======= ======= ======= =======
Balance, December 31 $ 2.85 800,000 $ 3.06 215,000
======= ======= ======= =======
Options covering 740,000 (1996 - 215,000) common shares were exercisable at
December 31, 1997, at a weighted-average option price of $2.84 (1996 - $3.06)
per share. Following is a schedule by year and by exercise price of the
expiration of the Company's stock options issued as of December 31, 1997:
1998 1999 2000 2001 2002 Total
---- ------- ------- ------- ------- -------
$2.56 100,000 100,000
$2.62 150,000 150,000
$2.87 250,000 250,000
$3.00 100,000 10,000 85,000 195,000
$3.13 105,000 105,000
---- ------- ------- ------- ------- -------
205,000 500,000 10,000 85,000 800,000
==== ======= ======= ======= ======= =======
F-17
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Stock Warrants
The Company has issued a significant number of stock warrants for a variety
of reasons, including compensation to employees, additional inducements to
purchase the Company's common or preferred stock, inducements related to the
issuance of debt and for payment of goods and services. Following is a schedule
by year of the activity related to stock warrants, including weighted-average
exercise prices of warrants in each category:
1997 1996
-------------------------- ---------------------
WTD AVG WTD AVG
Prices Number Prices Number
---------- ------------ ------- ------------
Balance, January 1 $ 3.16 2,702,055 $ 3.84 867,555
Warrants issued $ 3.00 93,750 $ 2.84 1,986,500
Warrants exercised/expired $ 1.54 ( 141,250) $ 2.89 ( 152,000)
========== ============ ======= ============
Balance, December 31 $ 3.23 2,654,555 $ 3.16 2,702,055
========== =========== ======= ===========
Included in the "warrants exercised/expired" column in 1997 were 51,250
$.50 warrants exercised by related parties. The remaining 90,000 warrants
expired. 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. The remaining 31,000 warrants expired.
Following is a schedule by year and by exercise price of the expiration of
the Company's stock warrants issued as of December 31, 1997:
1998 1999 2000 2001 2002 Thereafter Total
-------- --------- ------ ------ ---- ---------- ---------
$ .475 68,546 68,546
.50 1,875 28,630 30,505
1.50 175,000 175,000
1.75 182,000 449,250 631,250
1.80 33,750 33,750
2.00 2,500 2,500
2.25 40,000 40,000
2.50 25,000 75,000 100,000
3.00 666,754 666,754
3.25 47,500 47,500
4.50 174,250 174,250
5.00 138,500 106,000 100,000 344,500
5.75 50,000 40,000 90,000
6.00 200,000 200,000
7.50 50,000 50,000
------- --------- ------ ------ ---- ------- ---------
681,125 1,029,500 40,000 903,930 2,654,555
======= ========= ====== ====== ==== ======= =========
Warrants outstanding to officers, directors and employees of the Company at
December 31, 1997and 1996 were approximately 1,300,000 and 1,160,000,
respectively. The exercise prices on these warrants range from $.475 to $6.00
and expire various dates through 2006.
F-18
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Other Stock Based Compensation Disclosures
During 1997 and 1996, the Company issued options and warrants totaling
85,000 (25,000 exercisable) and 653,000 (all exercisable), respectively, to
employees as compensation. No compensatory equity instruments were issed to
employees in 1995. As disclosed in Note 1, the Company continues to use the
intrinsic value based method of APB 25 to measure stock based compensation. If
the Company had used the fair value method required by SFAS 123, the Company's
net loss and per share information would approximate the following amounts:
1997 1996
--------------------------------- ---------------------------
As Reported Pro Forma As Reported Pro Forma
----------- ----------- ----------- -----------
SFAS 123 compensation cost $ $ 9,500 $ $ 390,150
APB 25 compensation cost $ $ $ $
Net loss ($1,750,413) ($1,759,913) ($ 824,735) ($ 1,214,885)
Loss per common share -
basic and diluted ($ 1.21) ($ 1.22) ($ .71) ($ 1.02)
The effects of applying SFAS 123 as disclosed above are not indicative of
future amounts. The Company anticipates making additional stock based employee
compensation awards in the future.
The Company utilized the Black-Sholes option pricing model to estimate the
fair value of the options and warrants on the grant date. 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 1997 and 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 1997 - 3 years; 1996 - 4.95 years; (3)
expected volatility of 1997 - 77.68%; 1996 - 81.89% and (4) no expected
dividends.
Note 7. Loss Per Common Share
The following is a reconciliation of the numerators and denominators
used in computing loss per share:
1997 1996 1995
------------- ------------- -------------
Net loss ($ 1,750,413) ($ 824,735) ($ 1,186,843)
Preferred stock dividends ( 337,462) ( 72,017)
------------- ------------- -------------
Loss available to common
shareholders (numerator) ($ 2,087,875) ($ 896,752) ($ 1,186,843)
============= ============= =============
Weighted-average number of shares
of common stock (denominator) 1,725,926 1,266,974 1,010,765
============ ============= =============
Loss per share ($ 1.21) ($ .71) ($ 1.17)
============= ============= =============
Potential dilutive securities (1997 - stock options, stock warrants,
convertible preferred stock and convertible debentures; 1996 - stock
options, stock warrants and convertible preferred stock; 1995 - stock
options and stock warrants) have not been considered since the Company
reported a net loss and, accordingly, their effects would be antidilutive.
F-19
GULFWEST OIL COMPANY AND SUBSIDIARIES
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 1997 or 1996. At
December 31, 1997 the unsecured promissory note has been fully reserved.
On December 1, 1992, Parkway Petroleum Company, a Ray Holifield
related company, executed an unsecured promissory note to the Company for
$54,616 with interest at 10% per annum, due on October 1, 1993. The note
was issued for amounts due from contract drilling services provided by the
Company. At December 31, 1993, the note was still outstanding. During 1994,
the Company entered into an agreement with the Holifield Trust in which
Holifield will make payments on the past due note from future oil and gas
revenue. During 1995, $6,250 of interest payments were received. No
principal payments were received during 1997 or 1996. At December 31, 1997,
the unsecured promissory note has been fully reserved.
On January 10, 1994, the Company entered into a consulting agreement
with Williams whereby the Company would provide management and accounting
services for $25,000 per month for a period of one year. The Company
accrued the consulting fees with an offset to deferred income until payment
of the fees are actually received. During 1994, $172,140 was recorded as
consulting fee income. Beginning in the second quarter 1994, the Company
began recognizing consulting income only as cash payments were received.
Prior to the second quarter, $75,000 in consulting fee revenue was accrued.
The Company has received $97,140 in consulting fee payments. As of December
31, 1994, the receivable from Williams of $202,860 for consulting fees has
been offset by deferred income of $127,860 and a provision for doubtful
accounts of $75,000. Effective January 1, 1995, the Company received a
promissory note from Williams in the amount of $202,860, bearing interest
at the rate of 10% per annum, and payable in quarterly installments of
principal and interest of $15,538.87. During 1997 and 1996, the Company
received no payments on this note. At December 31, 1997, the unsecured
promissory note has been fully reserved.
As of December 31, 1995, the Company had accrued compensation for two
officers of the Company totaling $54,123. On March 27, 1996, notes due
April 1, 1997 were issued to these two officers for this amount.
Additionally, the Company has accrued consulting fees to ST Advisory Corp.,
a related party owned by a director of the Company, totaling $12,500 for
services performed in connection with economic evaluations and 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. At December 31, 1997,
accrued compensation to three officers totaled approximately $75,000.
Interest expensed on related party notes totaled approximately
$49,000, $26,000 and $19,000 for the years December 31, 1997, 1996 and
1995, respectively.
F-20
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes
The components of the net deferred federal income tax assets
(liabilities) recognized in the Company's balance sheet were as
follows:
December 31, December 31,
1997 1996
---------------- ----------------
Deferred tax assets
Provision for bad debts $ 152,398 $ 151,962
Net operating loss carryforwards 1,521,758 977,174
Deferred tax liability
Oil and gas properties ( 30,600) ( 20,199)
---------------- ----------------
Net deferred tax assets before
valuation allowance 1,643,556 1,108,937
Valuation allowance ( 1,643,556) ( 1,108,937)
---------------- ----------------
Net deferred tax assets (liabilities) $ $
================ ================
As of December 31, 1997 and 1996, 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, 1997 and 1996.
1997 1996
--------------- ----------------
Tax benefit calculated at statutory rate ($ 595,140) ($ 280,410)
Increase (reductions) in taxes due to:
Effect of net operating loss carryforwards 562,638 210,294
Effect on non-deductible expenses 42,703 71,306
Other ( 10,201) ( 1,190)
--------------- ----------------
Current federal income tax provision $ $
=============== ================
As of December 31, 1997, the Company had net operating loss carryforwards
of $4,475,758, which are available to reduce future taxable income and the
related income tax liability. These carryforwards expire as follows:
Net
Operating
Losses
--------------
2004 $ 73,939
2006 217,957
2008 152,504
2009 636,826
2010 1,174,305
2011 565,410
2012 1,654,817
--------------
$ 4,475,758
==============
F-21
GULFWEST OIL COMPANY AND SUBSIDIARIES
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. The Company also leases four compressors
used in the production of oil and gas revenue.
Year 2000 Computer Issues
To date, the Company has not made an assessment of the effects, if any, on
its business, operations or operating systems of the widely reported year 2000
computer problem.
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.
The following unaudited table sets forth proved oil and gas reserves, all
within the United States, at December 31, 1997, 1996, and 1995, together with
the changes therein.
F-22
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
Crude Oil Natural Gas
(Bbls) (Mcf)
----------- ------------
QUANTITIES OF PROVED RESERVES:
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
Revisions ( 160,726) ( 5,028)
Extensions, discoveries, and additions 1,340,770
Purchases 55,204 495,797
Sales ( 15,876) ( 1,984,621)
Production ( 200,898) ( 271,263)
----------- ------------
Balance December 31, 1997 4,676,427 6,195,358
===========
PROVED DEVELOPED RESERVES:
December 31, 1995 140,702 3,688,906
----------- ------------
December 31, 1996 2,498,287 4,067,278
----------- ------------
December 31, 1997 2,158,239 4,286,755
----------- ------------
F-23
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
STANDARDIZED MEASURE:
Standardized measure of discounted future net cash flows relating to proved
reserves:
1997 1996 1995
----------- ------------ -----------
Future cash inflows $87,414,045 $117,580,889 $21,873,331
Future production and development costs
Production 35,441,101 42,128,957 6,942,953
Development 9,937,663 6,596,609 3,876,951
----------- ------------ -----------
Future cash flows before income taxes 42,035,281 68,855,323 11,053,427
Future income taxes ( 7,852,795) ( 17,027,637) ( 2,069,248)
----------- ------------ -----------
Future net cash flows after income taxes 34,182,486 51,827,686 8,984,179
10% annual discount for estimated
timing of cash flows ( 13,419,225) ( 21,704,010) ( 3,076,444)
----------- ------------ -----------
Standardized measure of discounted
future net cash flows $20,763,261 $ 30,123,676 $ 5,907,735
=========== ============ ===========
The following reconciles the change in the standardized measure of
discounted future net cash flows:
Beginning of year $30,123,676 $ 5,907,735 $ 3,120,683
Changes from:
Purchases 551,704 22,269,011 1,223,501
Sales ( 3,076,199) ( 1,307,000) ( 263,598)
Extensions, discoveries and improved
recovery, less related costs 7,167,886 4,174,440 2,588,778
Sales of oil and gas produced net of
production costs ( 2,129,904) ( 892,112) ( 135,538)
Revision of quantity estimates ( 860,133) ( 164,080) ( 1,157,929)
Accretion of discount 4,002,061 715,122 312,068
Change in income taxes 5,126,956 ( 8,653,448) ( 806,057)
Changes in estimated future
development costs ( 1,429,664) ( 673,185) ( 1,328,518)
Development costs incurred that
reduced future development costs 1,447,458 273,799 114,779
Change in sales and transfer prices,
net of production costs ( 19,265,762) 7,576,032 1,963,197
Changes in production rates (timing)
and other ( 894,818) 897,362 276,369
----------- ------------ -----------
End of year $20,763,261 $ 30,123,676 $ 5,907,735
=========== ============ ===========
F-24
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
GULFWEST OIL COMPANY
Our report on the consolidated financial statements of GulfWest Oil Company as
of December 31, 1997 and 1996 and for each of the three years in the period
ended December 31, 1997, is included on page F-1. In connection with our audit
of such financial statements, we have also audited the related financial
statement schedule for the years ended December 31, 1997, 1996 and 1995 on page
F-26.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information required to be
included therein.
\s\ WEAVER AND TIDWELL, L.L.P.
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
March 25, 1998
F-25
GULFWEST OIL COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
BALANCE BALANCE
AT AT END
BEGINNING
OF PROVISIONS/ RECOVERIES/ OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS PERIOD
- ---------------------------------------- -------------- -------------- --------------- ---------------
For the year ended
December 31, 1995:
Accounts and notes receivable -
related parties $ 395,364 $ $ $ 395,364
============== ============== =============== ===============
Valuation allowance for
deferred tax assets $ 419,572 $ 461,533 $ $ 881,105
============== ============== =============== ===============
For the year ended
December 31, 1996:
Accounts and notes receivable -
related parties $ 395,364 $ 61,842 $ 10,258 $ 446,948
============== ============== =============== ===============
Valuation allowance for
deferred tax assets $ 881,105 $ 227,832 $ $ 1,108,937
============== ============== =============== ===============
For the year ended
December 31, 1997:
Accounts and notes receivable -
related parties $ 446,948 $ 1,282 $ $ 448,230
============== ============== =============== ===============
Valuation allowance for
deferred tax assets $ 1,108,937 $ 534,619 $ $ 1,643,556
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F-26