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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, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____.
Commission file number 1-12108.
GulfWest Oil Company
(Exact name of registrant as specified in its charter)
Texas 87-0444770
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
397 N. Sam Houston Parkway East, Suite 375
Houston, Texas 77060
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 820-1919.
Securities registered pursuant to Section 12(b) of the Act:
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 Over-the-counter (OTC)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or informational statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock of the Registrant held by
non-affiliates (excluding voting shares held by officers and directors) was
$1,421,481 on August 12, 1999.
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock: Class A Common Stock $.001 par value: 7,231,486 shares
on August 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. Business.
General
GulfWest Oil Company ("GulfWest" or the "Company") is primarily engaged in
the acquisition, development, exploitation, exploration and production of oil
and natural gas. The Company is focused on increasing production from its
existing oil and gas properties, acquiring additional interests in oil and gas
properties and the further exploitation, exploration and development of its oil
and gas assets. The Company's gross revenues are derived from the following
sources:
1. Oil and gas sales that are proceeds from the sale of oil and natural
gas production to midstream purchasers;
2 Gathering system revenue consisting of fees earned through the
ownership and operation of pipeline systems which gather and transport
natural gas from properties operated by other producers;
3. Lease sales that are income from the sale of oil and gas leases
acquired by the Company for resale to third parties.
4. Operating overhead consisting of fees earned from other Working
Interest owners for operating oil and natural gas properties; and,
5. Well servicing revenues that are earnings from the operation of well
servicing equipment under contract to third party operators.
Since June 1993, when the Company made its first significant acquisition,
the Company has substantially increased its ownership in Producing Properties
and the value of its oil and natural gas reserves through a combination of
acquisitions and the further exploitation and development of the properties in
which it owns interests. At present, substantially all of the Company's
interests are in properties located on land in Texas; however, in the future the
Company plans to expand by acquiring interests in like oil and natural gas
properties located in other areas of the continental United States. The
operations of the Company are considered to fall within a single industry
segment, the acquisition, development, production and servicing of crude oil and
natural gas. See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Certain industry terms are capitalized and
defined in the Glossary.
The Company's Common Stock is traded over-the-counter (OTC) under the
symbol "GULF" and is listed on the Boston Stock Exchange under the symbol "GFW".
Corporate History
In July 1992, GulfWest Energy, Inc., a Utah corporation, merged into
GulfWest Oil Company to change the state of incorporation of the Company from
Utah to Texas. GulfWest Energy, Inc., formerly First Preference Fund, Inc. and
Gallup Acquisitions, Inc., was incorporated in 1987 as a Utah corporation.
2
GulfWest has six wholly-owned subsidiaries, all Texas corporations or companies:
1. GulfWest Texas Company ("GW Texas") was organized September 23, 1996
and is the owner of record of interests in certain properties located
in the Vaughn Field, Crockett County Texas (the "Vaughn Field").
2. DutchWest Oil Company ("DutchWest") was organized July 28, 1997 and is
the owner of record of interests in certain oil and natural gas
properties located in Hardin and Polk Counties, Texas.
3. VanCo Well Service, Inc. ("VanCo") was organized September 5, 1996 and
operates well servicing equipment for the Company and under contracts
with third parties.
4. SETEX Oil and Gas Company ("SETEX") was organized August 11, 1998 and
operates oil and natural gas properties in which the Company owns
majority Working Interests.
5. Southeast Texas Oil and Gas Company, L.L.C. ("Setex LLC")was acquired
September 1, 1998 and is the owner of record of interests in certain
oil and natural gas properties located in eight Texas counties.
6. LTW Pipeline Co. ("LTW") was organized April 19, 1999 to be the owner
and operator of natural gas gathering systems and pipelines, and to
market the natural gas produced by the Company's properties.
The Company has relocated and consolidated its offices from Dallas, Texas
and Baton Rouge, Louisiana to its main executive office located at 397 North Sam
Houston Parkway East, Suite 375, Houston, Texas 77060. The telephone number of
the main office is (281) 820-1919.
3
Business Strategy
The management of GulfWest has pursued a business strategy of acquiring
interests in oil and natural gas Producing Properties, where production and
reserves can be increased through engineering, development and exploration
activities. Such activities may include workovers, drilling, recompletions,
replacement or addition of equipment and waterflood or other secondary recovery
techniques. Management believes the Company is now poised for substantial growth
and therefore has expanded its business plan to include an increased but
controlled emphasis on the exploration for and the exploitation of additional
oil and natural gas reserves. Key elements of the Company's business strategy
include:
Continued Acquisition Program. GulfWest intends to continue to be (i) an
aggressive consolidator of interests in properties held by small,
under-capitalized operators and (ii) a purchaser of oil and natural gas
properties that may be non-core to larger independent and major oil and gas
companies.
Development and Exploitation of Existing Properties. The Company intends to
increase its development of properties in which it currently owns interests by
expending more engineering and geological effort on field studies. The intent is
to increase oil and gas production and reserves of existing assets through
relatively low-risk development activities, such as workovers, recompletions,
horizontal drilling from existing wellbores and infield drilling, as well as the
more efficient use of production facilities and the expansion of existing
waterflood operations.
Significant Operating Control. Currently, the Company is the operator of
all the wells in which it owns Working Interests. This operating control enables
the Company to better manage the nature, timing and costs of development of such
wells, and the marketing of the resulting production.
Ownership of Workover Rigs. Management of the Company has considerable
experience in operating drilling and service rigs. The Company, through its
wholly owned subsidiary, VanCo, currently owns three service rigs that it
operates for its own account and under contract for third parties. By owning and
operating the servicing equipment for its own account, management is better able
to control costs, quality of operations and availability of equipment and
services.
Greater Focus on Natural Gas. At December 31, 1998, the Company's reserves
were 49% oil and 51% natural gas. Management believes that the Company should
move toward a more gas-weighted ownership of oil and natural gas interests in
order to offset oil price fluctuations. Therefore, the Company will continue to
expand its role in the domestic natural gas industry by acquiring additional
interests in natural gas properties, increasing the production and reserve base
of its existing natural gas assets, and acquiring ownership of more natural gas
gathering systems and pipelines. Management is presently focusing its workover
and development efforts on its natural gas reserves with the goal of
significantly increasing its natural gas production. The Company is also seeking
to expand its ownership of gas gathering systems and pipelines located in its
core field areas. Management's goal is to have greater control of its natural
gas marketing, as well as the transportation of third party gas in its area of
operations.
Expanded Exploration and Exploitation Role. Historically, the Company has
not drilled exploratory wells due to the high expense associated with generating
prospective locations. At the end of 1998, the Company acquired 45 active oil
and gas wells in the Ft. Terrett area of Kimble and Sutton Counties, Texas (the
"Ft. Terrett Properties"). In addition to adding oil and gas production, this
acquisition included 14,500 acres of prospective shallow gas properties to be
evaluated and drilled by the Company. With the recent purchase of assets, rights
and data from Skidmore Energy, Inc. in Zavala County, Texas (the "Skidmore
Properties"), management has positioned the Company to commence shallow
exploration activities. The Company will now evaluate and have the right to
participate in a total of thirty (30) drilling Prospects identified
4
by Skidmore in the Serpentine Trend, a geological area located in Frio and
Zavala Counties, Texas. The Skidmore acquisition added existing shallow natural
gas production to the Company's asset base and, as importantly, provides the
Company with an immediate geological data base with shallow oil and natural gas
drilling opportunities in this trend. These two recent acquisitions have
significantly moved the Company into the natural gas development and
exploitation arena.
Fourth Quarter 1998 Developments
Effective October 1, 1998, the Company sold its 100% stock ownership in its
operating subsidiary, WestCo Oil Company ("WestCo") for $150,000 in the form of
a promissory note to a related party. The Company continues to operate its
properties, as in the past, through its wholly owned subsidiary, SETEX Oil and
Gas Company ("SETEX") which was formed in September, 1998. The sale of WestCo
was part of a continuing reduction of operating expenses by avoiding duplicate
efforts and consolidating field personnel and equipment into other subsidiaries.
The $150,000 note had been fully reserved at December 31, 1998 due to
nonpayment.
Effective October 1, 1998, the Company sold its stock ownership in a wholly
owned subsidiary, GulfWest Permian Company ("GulfWest Permian"). GulfWest
Permian's assets included Working Interests in certain oil properties located on
approximately 5,000 acres in five (5) fields in Pecos, Howard, Sterling and Lynn
Counties, Texas with estimated Proved Reserves of approximately 1.26 million
barrels of oil. The properties were burdened by short-term debt of approximately
$9 million. The sale of GulfWest Permian relieved the Company of negative cash
flow of approximately $75,000 per month, after payment of lease operating
expenses, capital expenses and interest on the debt.
As mentioned above, the Company purchased 100% Working Interests in the Ft.
Terrett Properties from an unrelated party, effective December 1, 1998. The
purchase price for the interests was $800,000 in cash and 100,000 shares of the
Company's Common Stock. Mr. J. Virgil Waggoner, a director of the Company,
provided financing for the acquisition in the amount of $250,000 on December 15,
1998 and $550,000 on January 4, 1999. The Company also issued 50,000 shares of
Common Stock to Mr. Waggoner for arranging the acquisition. On February 22,
1999, the Company obtained a loan for $550,000 from Northridge Petroleum
Marketing U.S., Inc., secured by the Ft. Terrett Properties, with a per annum
interest rate of eleven percent (11%) and a maturity date of March 20, 2004. The
funds were used for development of the Company's properties.
On December 28, 1998 Mr. Waggoner converted $1,915,000 in outstanding
principal and interest of loans previously made to the Company to shares of the
Company's Series BB Convertible Preferred Stock, par value $.01 and liquidation
value $500 per share (the "Series BB Preferred Stock"). The Series BB Preferred
Stock is convertible to Common Stock at a conversion rate of $.60 per share of
Common Stock. The closing price of the Common Stock on December 28, 1998 was
$.60 per share.
Events Subsequent to Year End 1998
On May 28, 1999, Mr.Waggoner converted an additional $635,000 in
outstanding principal and interest to Series BB Preferred Stock. The closing
price of the Common Stock on that date was $.375 per share. On July 15, 1999,
Mr. Waggoner subscribed to purchase 4,000,0000 shares of the Company's Common
Stock at $.75 per share in a private offering for a total purchase price of
$3,000,000, of which $1,500,000 had been received at August 12, 1999. As a
result of and giving effect to the transactions described above, at August 12,
1999, Mr. Waggoner beneficially owns and has sole voting and dispositive power
for 8,983,884 shares, representing 78.2% of the Company's Common Stock,
including 4,250,000 shares issuable upon conversion of the Series BB Preferred
Stock and 20,000 shares issuable subject to the exercise of options.
5
On July 1, 1999, the Company purchased an average 45% Working Interest in
the Skidmore Properties, consisting of fourteen (14) producing wells and 2,500
acres for development. The Company also acquired the right to participate in a
total of thirty (30) drilling Prospects identified by Skidmore in the Serpentine
Trend area of South Texas.
Employees
At August 12, 1999, the Company had 25 full time salaried and contract
employees, of whom 15 were field personnel.
Executive Officers
See Item 10 of this report, which information is incorporated herein by
reference.
6
ITEM 2. Properties.
At December 31, 1998, the Company held an average 95% Working Interest in
431 gross and 411 net oil and gas wells and Royalty Interests in two (2)
additional wells. The properties contained (net to the Company's interest)
estimated Proved Reserves of approximately 1,084,147 barrels of oil and
6,655,355 Mcf of natural gas. As of December 31, 1998, daily production from
Company owned and operated wells was 1,000 Mcf and 125 barrels of oil. As of
July 31, 1999, daily production had increased to 2,600 Mcf and 350 barrels of
oil. Substantially all of the Company's reserves are located in East and West
Texas.
Proved Reserves. The following table reflects the estimated Proved Reserves
of the Company at December 31 for each of the preceding three years.
1998 1997 1996
Crude Oil (Bbl)
Developed 769,862 2,158,239 2,498,287
Undeveloped 314,285 2,518,188 1,159,166
Total 1,084,147 4,676,427 3,657,953
Natural gas (Mcf)
Developed 3,866,308 4,286,755 4,067,278
Undeveloped 2,789,047 1,908,603 3,893,195
Total 6,655,355 6,195,358 7,960,473
Total (BOE) 2,193,373 5,708,987 4,984,699
(a) The above table does not include reserves for the Company's interests
in wells in Louisiana, which represent less than 1% of the Company's
reserves.
Approximately 65% of the Company's total Proved Reserves were classified as
Proved Developed at December 31, 1998.
7
Standardized Measure of Discounted Future Net Cash Flows. The following
table sets forth as 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.
1998 1997 1996
Future cash inflows $ 22,260,688 $ 87,414,045 $ 117,580,889
Future production and development costs-
Production 10,379,070 35,441,101 42,128,957
Development 2,935,160 9,937,663 6,596,609
Future net cash flows before income taxes 8,946,458 42,035,281 68,855,323
Future income taxes ( - ) (7,852,795) (17,027,637)
Future net cash flows after income taxes 8,946,458 34,182,486 51,827,686
10% annual discount for estimated timing
of cash flows (3,756,850) (13,419,225) (21,704,010)
Standardized measure of discounted
future net cash flows(1) $ 5,189,608 $ 20,763,261 $ 30,123,676
(1) The average prices of the Company's proved reserves were $8.91 per Bbl
and $1.89 per Mcf, $15.68 per Bbl and $2.28 per Mcf and $23.64 per Bbl
and $3.91 per Mcf at December 31, 1998, 1997 and 1996, respectively.
Significant Properties. Substantially all of the Company's properties are
located in Texas. Summary information on the Company's properties with Proved
Reserves is set forth below as of December 31,1998.
Productive Wells Proved Reserves (1) Present Value (2)
Gross Net
Productive Productive Crude Natural
Wells Wells Oil Gas Total Amount ($)
(Bbl) (Mcf) (BOE)
Texas 409 389.4 1,084,147 6,655,355 2,193,373 $4,475,919
(1) The above table does not include reserves for the Company's interests
in wells in Louisiana, which represent less than 1% of the Company's
reserves.
(2) The average prices of the Company's proved reserves were $8.91 per Bbl
and $1.89 per Mcf at December 31, 1998.
8
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, Forrest Garb and Associates, Inc., Cawley,
Gillespie and Associates, Inc. and A. Van Nguyen, independent petroleum
engineers. The estimates of these engineers were based upon review of production
histories and other geological, economic, ownership and engineering data
provided by the Company. No reports on the Company's reserves have been filed
with any federal agency. In accordance with the SEC's guidelines, the Company's
estimates of Proved Reserves and the future net revenues from which Present
Values are derived are made using year end oil and gas sales prices held
constant throughout the life of the properties (except to the extent a contract
specifically provides otherwise). Operating costs, development costs and certain
production-related taxes were deducted in arriving at estimated future net
revenues, but such costs do not include debt service, general and administrative
expenses and income taxes.
There are numerous uncertainties inherent in estimating oil and gas
reserves and their values, including many factors beyond the Company's control.
The reserve data set forth in this report represents estimates only. Reservoir
engineering is a subjective process of estimating the sizes of underground
accumulations of oil and gas that cannot be measured in an exact manner. The
accuracy of any reserve estimate is a function of the quality of available data,
engineering and geological interpretation, and judgment. As a result, estimates
of different engineers, including those used by the Company, may vary. In
addition, estimates of reserves are subject to revision based upon actual
production, results of future development, exploitation and exploration
activities, prevailing oil and gas prices, operating costs and other factors,
which revisions may be material. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered and
are highly dependent upon the accuracy of the assumptions upon which they are
based. There can be no assurance that these estimates are accurate predictions
of the Company's oil and gas reserves or their values. Estimates with respect to
Proved Reserves that may be developed and produced in the future are often based
upon volumetric calculations and upon analogy to similar types of reserves
rather than actual production history. Estimates based on these methods are
generally less reliable than those based on actual production history.
Subsequent evaluation of the same reserves based upon production history will
result in variations, which may be substantial, in the estimated reserves.
9
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, 1998, 1997
and 1996.
1998 1997 1996
Production
Oil (Bbl) 111,426 200,898 55,175
Natural Gas (Mcf) 200,225 271,263 225,501
Total (BOE) 144,797 246,109 92,758
Revenue
Oil Production $1,358,767 $3,637,911 $1,115,647
Natural Gas Production 445,380 631,121 433,422
Total $1,804,147 $4,269,032 $1,549,069
Operating Expenses $1,647,329 $2,139,128 $656,957
Production Data
Average Sales Price
Per Bbl of oil $12.19 $18.11 $20.22
Per Mcf of natural gas 2.22 2.33 1.92
Per BOE 12.46 17.35 16.70
Average expenses per BOE
Lease Operating $11.38 $8.69 $7.08
DD&A 16.04 6.60 5.02
G&A 14.25 6.01 11.91
Productive Wells at December 31, 1998:
Gross Net Gross Net
Oil Wells Oil Wells Gas Wells Gas Wells
Texas 377 366.74 48 41.49
Oklahoma - - 4 3.00
Louisiana 2 .15 - -
Total 379 366.99 52 44.49
10
Developed Acreage at December 31, 1998:
Gross Net
Texas 16,410 15,149
Louisiana 156 12
Oklahoma 640 480
Total 17,206 15,641
Undeveloped Acreage. At December 31, 1998, the Company owned 7,000 acres of
undeveloped acreage. This included 1,000 acres along the Gulf Coast of Texas and
6,000 acres in Kimble and Sutton Counties, Texas.
Drilling Results. The Company successfully drilled six (6) wells in 1998. In the
fourth quarter 1998, the Company drilled a horizontal well by sidetracking an
existing wellbore in the Company's Madisonville Field, Texas. This well is
producing commercial oil and gas at a daily rate of 165 barrels of oil and 400
Mcf of gas. A gas well was drilled in late 1998 as a vertical hole drilled to
9,600 feet in Hardin County, Texas. This well is currently being tested for
commercial completion. The Company also drilled five (5) 1,500' depth wells in
its Vaughn Waterflood field in early 1998. One (1) of the wells was a water
injection well, three (3) were producing oil wells, and one (1) was plugged for
mechanical reasons. The Company did not drill any wells during the years ended
December 31, 1997 or 1996.
Risk Factors
Substantial Leverage
The degree to which the Company is leveraged could have important
consequences to shareholders, including the following: (i) the Company's
indebtedness, acquisitions, working capital, capital expenditures or other
purposes may be impaired, (ii) funds available to the Company for its operations
and general corporate purposes or for capital expenditures will be reduced as a
result of the dedication of a substantial portion of the Company's consolidated
cash flow from operations to the payment of the principal and interest on its
indebtedness, (iii) the Company may be more highly leveraged than certain of its
competitors, which may place it at a competitive disadvantage, (iv) the
agreements governing the Company's and its subsidiaries' long-term indebtedness
and bank loans contain restrictive financial and operating covenants, (v) an
event of default (not cured or waived) under financial and operating covenants
contained in the Company's or its subsidiaries' debt instruments could occur and
have a material adverse effect on the Company, (vi) certain of the borrowings
under debt agreements of the Company's subsidiaries have floating rates of
interest, which causes the Company and its subsidiaries to be vulnerable to
increases in interest rates and (vii) the Company's substantial degree of
leverage could make it more vulnerable to a downturn in general economic
conditions.
The ability of the Company to make principal and interest payments under
long-term indebtedness and bank loans will be dependent upon its future
performance, which is subject to financial, economic and other factors affecting
the Company, some of which are beyond its control. There can be no assurance
that the current level of operating results of the Company will continue or
improve. The Company believes that it will need to access the capital markets in
the future in order to provide the funds necessary to repay a significant
portion of its indebtedness. There can be no assurance that any such refinancing
will be possible or that any additional financing can be obtained, particularly
in view of the Company's anticipated high levels of debt. If no such refinancing
or additional financing were available, the Company and/or its subsidiaries
could default on their respective debt obligations.
11
Market Conditions and Prices
The Company's success depends heavily upon its ability to market its oil
and gas production at favorable prices, of which there can be no assurance. In
recent decades, there have been both periods of worldwide overproduction and
underproduction of hydrocarbons and periods of increased and relaxed energy
conservation efforts. Such conditions have resulted in periods of excess supply
of, and reduced demand for, crude oil on a worldwide basis and for natural gas
on a domestic basis; these periods have been followed by periods of short supply
of, and increased demand for, crude oil and, to a lesser extent, natural gas.
The excess or short supply of oil and gas has placed pressures on prices and has
resulted in dramatic price fluctuations.
Historical Operating Losses and
Variability of Operating Results
The Company has incurred net losses since its inception and there can be no
assurance that the Company will be profitable in the future. In addition, the
Company's future operating results may fluctuate significantly depending upon a
number of factors, including industry conditions, prices of oil and gas, rates
of production, timing of capital expenditures and drilling success. This
variability could have a material adverse effect on the Company's business,
financial condition and results of operations.
Uncertainty of Estimates of Oil and Gas Reserves
This Annual Report on Form 10-K for the year ended December 31, 1998
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 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 35% of the Company's total estimated Proved Reserves at
December 31, 1998 were undeveloped, which are by their nature less certain.
Recovery of such reserves will require significant capital expenditures and
successful drilling operations. The reserve data set forth in the reserve
engineer reports assumes that substantial capital expenditures by the Company
will be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated.
The Present Value referred to in this report should not be construed as the
current market value of the estimated oil and gas reserves attributable to the
Company's properties. In accordance with applicable requirements of the
Securities and Exchange Commission (the "SEC"), the estimated discounted future
net cash flows from Proved Reserves are generally based on prices and costs as
of the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. The estimates at December 31, 1998 of the Company's
12
Proved Reserves and the future net revenues from which Present Value is derived
were made using actual prices on a property-by-property basis at December 31,
1998. The average prices of all properties were $8.91 per barrel of oil and
$1.89 per Mcf of natural gas at that date. Actual future net cash flows will
also be affected by increases or decreases in consumption by oil and gas
purchasers and changes in governmental regulations or taxation. The timing of
actual future net cash flows from Proved Reserves, and thus their actual Present
Value, will be affected by the timing of both the production and the incurring
of expenses in connection with development and production of oil and gas
properties. In addition, the 10% discount factor, which is required by the SEC
to be used in calculating discounted future net cash flows for reporting
purposes, is not necessarily the most appropriate discount factor based on
interest rates in effect from time to time and risks associated with the Company
or the oil and gas industry in general.
Replacement of Reserves
In general, production from oil and gas properties declines as reserves are
depleted. Except to the extent the Company acquires properties containing Proved
Reserves or conducts successful development and exploitation activities, or
both, the Proved Reserves of the Company will decline as reserves are produced.
The Company's future oil and gas production is, therefore, highly dependent upon
its level of success in finding or acquiring additional reserves. The business
of acquiring, enhancing or developing reserves is capital intensive. To the
extent cash flow from operations is reduced and external sources of capital
become limited or unavailable, the Company's ability to make the necessary
capital investment to maintain or expand its asset base of oil and gas reserves
would be impaired. In addition, there can be no assurance that the Company's
future acquisition and development activities will result in additional Proved
Reserves or that the Company will be able to drill productive wells at
acceptable costs.
Industry Risks
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or gas Reservoirs will be encountered,
that operations may be curtailed, delayed or canceled, and that title problems,
weather conditions, compliance with governmental requirements, mechanical
difficulties or shortages or delays in the delivery of drilling rigs and other
equipment may limit the Company's ability to develop, produce and market its
reserves.
There can be no assurance that new wells drilled by the Company will be
productive or that the Company will recover all or any portion of its
investment. Drilling for oil and gas may involve unprofitable efforts, not only
from dry wells but also from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs. In addition, the Company's properties may be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties.
Industry operating risks include the risks of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards, such as
oil spills, natural gas leaks, ruptures or discharges of toxic gases, the
occurrence of any of which could result in substantial losses to the Company due
to injury or loss of life, severe damage to or destruction of property, natural
resources and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension
operations. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance will be adequate to cover losses or
liabilities. The Company cannot predict the continued availability of insurance
at premium levels that justify its purchase.
13
Acquisition Risks
The Company's growth has been attributable largely to acquisitions of
producing oil and gas properties with Proved Reserves. The successful
acquisition of such properties requires an assessment of recoverable reserves,
future oil and gas prices, operating costs, potential environmental and other
liabilities and other factors beyond the Company's control. Such assessments are
necessarily inexact and their accuracy inherently uncertain. In connection with
such an assessment, the Company performs a review of the subject properties that
it believes to be generally consistent with industry practices. Such a review,
however, will not reveal all existing or potential problems, nor will it permit
a buyer to become sufficiently familiar with the properties to fully assess
their deficiencies and capabilities. Inspections may not always be performed on
every well, and structural and environmental problems are not necessarily
observable even when an inspection is undertaken. In most cases, the Company is
not entitled to contractual indemnification for pre-closing liabilities,
including environmental liabilities, and generally acquires interests in the
properties on an "as is" basis with limited remedies for breaches of
representations and warranties. In those circumstances in which the Company has
contractual indemnification rights for pre-closing liabilities, there can be no
assurance that the seller will be able to fulfill its contractual obligations.
In addition, competition for producing oil and gas properties is intense and
many of the Company's competitors have financial and other resources that are
substantially greater than those available to the Company. Therefore, no
assurance can be given that the Company will be able to acquire producing oil
and gas properties which contain economically recoverable reserves or that it
will make such acquisitions at acceptable prices.
Risks as to Minority or Royalty Interest Purchases
The Company may acquire less than the controlling Working Interest or
Overriding (or other forms of) Royalty Interests in oil and gas properties. In
such cases, it is likely that the Company would not operate these properties.
The Company would limit such acquisitions to properties operated by competent
entities with which the Company has discussed the operator's plans for the
properties, but the Company will not have complete control over decisions
affecting such properties.
Environmental Liability
Oil and gas activities can result in liability under federal, state and
local environmental regulations for activities involving, among other things,
water pollution and hazardous waste transport, storage, and disposal. Such
liability can attach not only to the operator of record of the well, but also to
other parties that may be deemed to be current or prior operators or owners of
the wells or the equipment involved.
Substantial Capital Requirements
The Company makes and will continue to make substantial capital
expenditures in its exploitation and development projects. The Company intends
to finance these capital expenditures, in part, with the net proceeds from
future equity offerings, cash flow from operations and its existing financing
arrangements. Additional financing will be required in the future to fund the
Company's developmental and exploitation activities. No assurance can be given
as to the availability or terms of any such additional financing that may be
required or that financing will continue to be available under the existing or
new financing arrangements. If additional capital resources are not available to
the Company, its developmental and other activities may be curtailed and its
business, financial condition and results of operations could be materially
adversely affected.
14
Marketability of Production
The marketability of the Company's natural gas production depends in part
upon the availability, proximity and capacity of natural gas gathering systems,
pipelines and processing facilities. Most of the Company's natural gas is
delivered through natural gas gathering systems and natural gas pipelines that
are not owned by the Company. Federal, state and local regulation of oil and gas
production and transportation, tax and energy policies, changes in supply and
demand and general economic conditions all could adversely affect the Company's
ability to produce and market its oil and gas. Any dramatic change in market
factors could have a material adverse effect on the Company's financial
condition and results of operations.
Competition
The oil and gas industry is highly competitive in all its phases.
Competition is particularly intense with respect to the acquisition of desirable
producing properties, the acquisition of oil and gas prospects suitable for
enhanced recovery efforts, and the hiring of experienced personnel. The
competitors of the Company in oil and gas acquisition, development, and
production include the major oil companies in addition to numerous independent
oil and gas companies, individual proprietors and drilling programs. Many of
these competitors possess and employ financial and personnel resources
substantially in excess of those which are available to the Company and may,
therefore, be able to pay more for desirable producing properties and prospects
and to define, evaluate, bid for, and purchase a greater number of producing
properties and prospects than the financial or personnel resources of the
Company will permit. The ability of the Company to acquire additional reserves
in the future will be dependent on the Company's ability to select and acquire
suitable producing properties and prospects in competition with these companies.
Governmental Regulation
Domestic exploration for and production and sale of oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Also, numerous
departments and agencies, both federal and state, are authorized by statute to
issue, and have issued, rules and regulations affecting the oil and gas industry
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 change in such laws, rules or regulations, or the
interpretation thereof, will not have a material adverse effect on the Company's
financial condition or results of operations.
Dependence on Key Personnel
The business of the Company will depend on the continued services of its
chief executive officer, Marshall A. Smith III and its president, Thomas R.
Kaetzer. Effective September 9, 1997 and December 14, 1998 respectively, the
Company entered into employment agreements with Mr. Smith and Mr. Kaetzer for a
period of three years. The loss of the services of Mr. Smith or Mr. Kaetzer
would be particularly detrimental to the Company because of their background and
experience in the oil and gas industry.
15
Delisting by The Nasdaq SmallCap Market
Effective April 7, 1999, the Company's Common Stock was delisted by The
Nasdaq SmallCap Market due to the Company's failure to evidence compliance with
the net tangible assets standard and failure to maintain the minimum bid price
requirement necessary for continued listing. The Company has requested a review
of the Nasdaq delisting decision, however there can be no assurance that the
decision will be reversed. The Company's Common Stock is traded over-the-counter
and is listed on the Boston Stock Exchange.
No Dividends on Common Stock
The Company's Board of Directors presently intends to retain all of the
Company's earnings for the expansion of its business, except as required by the
terms of the preferred stock. The Company therefore does not anticipate the
distribution of cash dividends on its Common Stock in the foreseeable future.
Further, the holders of outstanding Class AA and Class AAA preferred stock are
entitled to receive annual dividends of $50 and $45 per share, respectively, and
all cumulative dividends must be paid prior to the payment of any dividends on
the Common Stock. Any future decision of the Company's Board of Directors to pay
cash dividends will depend, among other factors, upon the Company's earnings,
financial position, and cash requirements.
Preemptive Rights, Cumulative Voting and Control
Holders of the Company's Common Stock have no preemptive rights in
connection with such shares. The shareholders may be further diluted in their
percentage ownership of the Company if the Company issues additional shares.
Cumulative voting in the election of directors is prohibited. Accordingly, the
holders of a majority of the shares of Common Stock present, in person or by
proxy, will be able to elect all the members of the Company's Board of
Directors.
ITEM 3. Legal Proceedings.
General. From time to time, the Company is involved in litigation relating
to claims arising out of its operations or from disputes with vendors in the
normal course of business. As of August 12, 1999, the Company was not engaged in
any legal proceedings that are expected, individually or in the aggregate, to
have a material adverse effect on the Company, with the exception of the pending
litigation discussed below.
League Energy Group, LLC (Plaintiff) vs. Southeast Texas Oil & Gas, LLC and
GulfWest Oil Company (Defendants). On January 27, 1999, suit was filed by
Plaintiff versus Defendants in the District Court of Harris County, Texas, 11th
Judicial District. Plaintiff seeks to recover damages for an alleged breach of
contract and seeks to recover approximately $260,000 plus interest. The Company
has recorded a note payable to League for $175,000. The remaining $85,000
reflects legal fees sought by League. Defendants assert the contract is
unenforceable and the claim should be barred due to failure of consideration and
other equitable and legal defenses. As of this date, the outcome of this case
cannot be reasonably determined. Management believes the ultimate outcome will
not have a material effect on the Company's financial position.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 1998.
16
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters.
The Company's Common Stock is listed on the Boston Stock Exchange under the
symbol "GFW" and traded on the over-the-counter ("OTC") Bulletin Board under the
symbol "GULF". The high and low trading prices for the Common Stock for each
quarter in 1997, 1998 and 1999 (through August 12, 1999) 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.
1997 High Low
First Quarter 3.75 2.25
Second Quarter 2.875 1.875
Third Quarter 3.125 2.00
Fourth Quarter 3.25 2.50
1998
First Quarter 2.63 1.875
Second Quarter 2.25 1.50
Third Quarter 2.00 .875
Fourth Quarter 1.0625 .50
1999
First Quarter 2.63 1.875
Second Quarter 1.00 .375
Third Quarter (through 8/12/99) .75 .375
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 August 12, 1999,
there were 7,481,486 shares of Class A Common Stock issued and outstanding and
held by approximately 580 beneficial owners. Fidelity Transfer Company, 1800
South West Temple, Suite 301, Box 53, Salt Lake City, Utah 84115, (801)484-7222
is the transfer agent for the Common Stock.
The Company's Common Stock is traded over-the-counter (OTC) under the
symbol "GULF" and is listed on the Boston Stock Exchange under the symbol "GFW".
Effective April 7, 1999, the Company's Common Stock was delisted by The Nasdaq
SmallCap Market due to the Company's failure to evidence compliance with the net
tangible assets standard and failure to maintain the minimum bid price
requirement necessary for continued listing. The Company has requested a review
of the Nasdaq delisting decision, however there can be no assurance that the
decision will be reversed.
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.
17
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.
Preferred Stock
The Board of Directors is authorized, without further shareholder action,
to issue Preferred Stock in one or more series and to designate the dividend
rate, voting rights and other rights, preferences and restrictions of each such
series. As of August 12, 1999, the Company had 9,175 shares of Preferred Stock
issued and outstanding in three classes or series (the "Classes or Series"):
1,950 shares in Class AA, 3,225 shares in Class AAA, and 4,000 shares in Series
C. The rights and preferences of each Class or Series of Preferred Stock are as
follows:
All of the Classes or Series are equal in preference and senior to the
Common Stock regarding payment of dividends and liquidation. None of the Classes
or Series has voting rights and none is entitled to the benefits of any
retirement or sinking fund. All of the Classes or Series have one-time
"piggyback" registration rights of the underlying Common Stock, subject to
certain restrictions, including underwriter holdback.
The Class AA is entitled to receive dividends at the rate of ten percent
(10%) per annum or $50.00 per share. It is redeemable at anytime, at the option
of the Company, at a price equal to one hundred twenty percent (120%) of the
price paid ($500) by the purchaser which equals $600 per share. The Class AA is
convertible to Common Stock at a rate based upon the purchase price ($500)
divided by $5.00 per share of Common Stock. The Class AA also has a limited
right to participate in the net profits from production of the oil and gas
properties acquired with the proceeds from the sale of the Class AA.
The Class AAA is entitled to receive dividends at the rate of nine percent
(9%) per annum or $45.00 per share. On July 7, 1999, the holders agreed to
convert the Class AAA Preferred Stock to Common Stock at a rate based upon the
purchase price per share ($500 per share), plus accrued and unpaid dividends,
divided by $.90 per share of Common Stock. When completed, the Company will have
issued approximately 2,128,115 shares of Common Stock for the conversion of the
Class AAA Preferred Stock, and accrued and unpaid dividends.
The Series BB is entitled to receive dividends at the rate of nine percent
(9%) per annum or $60.00 per share. On July 15, 1999, the Board of Directors
approved the immediate conversion of the Series BB to Common Stock at a rate
based upon the purchase price ($500 per share) divided by $.60 per share of
Common Stock. Upon conversion, Mr. Waggoner, the sole shareholder of the Series
BB Preferred Stock, with an aggregate value of $2,550,000, will be issued
4,250,000 shares of Common Stock.
The Series C is not entitled to receive dividends. After one (1) year from
the date of issuance, provided the price of the Common Stock is at least $10.00
per share for ten (10) consecutive trading days, the Company may call for the
mandatory conversion to Common Stock at a rate based upon the purchase price
($500) divided by the greater of (i) $10.00 per share or (ii) the average
closing price of the Common Stock for the 10 trading days preceding the date of
a conversion notice.
At August 12, 1999, the Company had outstanding warrants and options for
the purchase of 2,578,343 shares of Common Stock at prices ranging from $.48 to
$5.75 per share, including Employee Stock Options to purchase 210,000 shares at
$1.81 per share and 75,000 shares at $3.00 per share. In July, 1999, the Board
of Directors authorized that all employee and director options under the plan be
reduced to a price of $.75 per share
18
ITEM 6. Selected Financial Data.
The following table sets forth selected historical financial data of
GulfWest Oil Company as of December 31, 1998, 1997, 1996, 1995 and 1994, 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, 1998, 1997 and 1996 and
the balance sheet data at December 31, 1998 and 1997 are derived from the
Company's audited financial statements contained elsewhere herein. The balance
sheet data at December 31, 1996, 1995 and 1994 and income statement data for the
years ended December 31, 1995 and 1994 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,
1998 1997 1996 1995 1994
Income Statement Data
Operating Revenues $ 2,403,553 $ 4,960,966 $ 1,966,012 $ 669,367 $ 682,538
Net income (loss) from (6,329,884) (598,320) (485,588) (1,186,843) (879,746)
operations
Net income (loss) (8,387,060) (1,676,681) (1,519,764) (1,186,843) (879,746)
Dividends on Preferred (427,173) (380,928) (1,363,677) - -
Stock
Net income (loss) available (8,814,233) (2,057,609) (2,883,441) (1,186,843) (879,746)
to Common Shareholders
Net Income (loss), per $ (3.68) $ (1.19) $ (2.28) $ (1.17) $ (0.88)
Share of Common Stock
Weighted average number 2,394,866 1,725,926 1,266,974 1,010,765 1,000,000
of shares of Common Stock
outstanding (1)
Balance Sheet Data
Current assets $ 820,984 $ 1,536,396 $ 699,259 $ 201,759 $ 226,860
Total assets 8,058,827 17,089,855 15,046,765 3,095,625 2,370,781
Current liabilities 6,559,393 2,879,256 2,877,290 543,565 610,843
Long-term obligations 3,401,371 12,185,055 8,877,941 1,678,039 198,676
Stockholders' Equity (Deficit) (1,901,937) 2,025,544 3,291,534 874,021 1,561,262
(1) Basic and diluted loss per share are the same since potential common stock
equivalents are anti-dilutive.
19
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Prior Period Adjustments
Based upon comments by the SEC during a review of the Company's Preliminary
Proxy Statement (subsequently abandoned), the Company adjusted its accounting
for certain common stock purchase warrants and stock options which had been
issued in 1996 and 1997, and adjusted its accounting for the convertible
preferred stock issued with a discounted conversion feature in 1996. The Company
used the intrinsic method of accounting under APB 25 to measure employee stock
based compensation and fair value method of accounting under SFAS 123 to measure
other stock based compensation, utilizing a 60% discount off the Nasdaq market
price at the measurement date for both methods. The Company has restated stock
based compensation utilizing a 0% discount off the Nasdaq market price at the
measurement date. During 1996, the Company issued Class AAA Convertible
Preferred Stock with a 30% discounted conversion feature, convertible at the
issue date. 1996 is restated to reflect the effects of the 30% discount. During
1997, options were issued to a director of the Company. The options have since
been irrevocably rescinded by the director, effective retroactively to the grant
date. Additionally, the penalty feature for the Class AAA preferred dividends
have been restated because of a mathematical error in 1997. The aggregate of
these adjustments resulted in an increase to previously reported net loss to
common shareholders of $1,986,689 and $1.57 per share for 1996, and a decrease
of $30,266 and $.02 per share in 1997. These adjustments did not have any effect
on income taxes for the periods ended December 31, 1996 and 1997. The 1996 and
1997 consolidated balance sheet and related consolidated statement of
operations, stockholders equity, and statement of cash flows have been restated
to reflect these adjustments.
Overview
GulfWest is primarily engaged in the acquisition, development,
exploitation, exploration and production of oil and natural gas. The Company is
focused on the acquisition of interests in wells and leases that are currently
producing crude oil and natural gas and that have the potential for increased
production revenue and reserve value through further exploitation, exploration
and development. The Company's gross revenues are derived from the following
sources:
1. Oil and gas sales that are proceeds from the sale of oil and natural gas
production to midstream purchasers;
2 Gathering system revenue consisting of fees earned through the ownership
and operation of pipeline systems which gather and transport natural gas
from properties operated by other producers;
3. Lease sales that are income from the sale of leases acquired by the Company
for resale to third parties.
4. Operating overhead consisting of fees earned from other Working Interest
owners for operating oil and natural gas properties; and,
5. Well servicing revenues that are earnings from the operation of well
servicing equipment under contract to third party operators.
20
The following is a discussion of the Company's consolidated financial
condition, results of operations, liquidity and capital resources. This
discussion should be read in conjunction with the Consolidated Financial
Statements of the Company and the Notes thereto. See "Financial Statements".
Results of Operations
Effective October 1, 1998, the Company sold its stock ownership in a wholly
owned subsidiary, GulfWest Permian. GulfWest Permian's assets included Working
Interests in certain oil properties located on approximately 5,000 acres in five
(5) fields in Pecos, Howard, Sterling and Lynn Counties, Texas with estimated
Proved Reserves of approximately 1.26 million barrels of oil. The properties
were burdened by short-term debt of approximately $9 million. The sale of
GulfWest Permian relieved the Company of negative cash flow of approximately
$75,000 per month, after payment of lease operating expenses, capital expenses
and interest on the debt.
The factors which most significantly affect the Company's results of
operations are (1) the sales price of crude oil and natural gas, (2) the level
of total sales volumes of crude oil and natural gas, (3) the level of and
interest rates on borrowings and, (4) the level and success of new acquisitions
and development of existing properties.
Comparative results of operations for the periods indicated are discussed
below.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues
Oil and Gas Sales. During the period ended December 31, 1998, operating
revenues from the sale of crude oil and natural gas decreased by 58% from
$4,269,000 in 1997 to $1,804,000 in 1998. This decrease was primarily
attributable to a decline in commodity prices and the sale of GulfWest Permian
and its oil assets, effective October 1, 1998.
Well Servicing Revenues. Earnings from well servicing operations decreased
by 10% from $482,000 in 1997 to $432,000 in 1998. This decrease was due to lower
rig utilization under contract to third parties as a result of the decline in
commodity prices.
Operating Overhead Revenues. Revenues from the operating of properties
increased 22% from $137,000 in 1997 to $167,000 in 1998. This increase was due
to the acquisition of Setex LLC ,which generates overhead fees through the
management of a limited oil and gas partnership.
Costs and Expenses
Lease Operating Expenses. Lease operating expenses decreased 23% from
$2,139,000 in 1997 to $1,647,000 in 1998. This decrease in operating expenses
was due primarily to management's decision to shut- in a number of oil wells
because of the lower oil prices in 1998 and the sale of GulfWest Permian.
Cost of Well Servicing Operations. Well servicing expenses increased 51%
from $279,000 in 1997 to $421,000 in 1998. This increase in expenses was due to
the reduced utilization of the Company's equipment under contract to third
parties. The Company incurred additional expenses to secure the rigs in order to
protect the Company's investment.
21
Impairment of Assets. Impairment of assets increased to $2,279,000 in 1998
from -0- in 1997. The increase was due to the Company's requirement to write
down the carrying values of oil and gas properties (whose future estimated
undiscounted net cash inflows are less than such carrying value) to fair value.
An impairment of assets write down is a charge to earnings which does not impact
cash flow from operating activities. However, such write downs do impact the
amount of the Company's stockholders' equity. The risk that the Company will be
required to write down the carrying value of its oil and gas reserves increases
when oil and gas prices are depressed or volatile as the Company experienced at
December 31, 1998. No assurance can be given that the Company will not
experience additional write downs in the future should commodity prices decline.
General and Administrative (G&A) Expenses. G&A expenses increased 40% from
$1,478,000 for the year ended December 31, 1997 to $2,064,000 for the year ended
December 31, 1998, as a result of the Company's unsuccessful attempts to close
two equity offerings.
Depreciation, Depletion and Amortization (DD&A). DD&A increased 43% from
$1,625,000 in 1997 to $2,322,000 in 1998. The increase was due primarily to
lower oil prices which caused depletion to accelerate.
Interest Expense and Dividends on Preferred Stock. Interest expense
increased 20% from $1,087,000 in 1997 to $1,303,000 in 1998. This increase was
due to the borrowing of funds needed for operating capital. Preferred dividends
increased $46,000 due to the issuance of warrants with the preferred stock in
conjunction with the purchase of Setex LLC, and additional dividends due the
Class AAA preferred stockholders under a penalty provision. In a subsequent
event, on July 7, 1999, the Class AAA preferred stockholders agreed to convert
their preferred stock to Common Stock at a rate based upon the purchase price
per share ($500), plus accrued and unpaid dividends, divided by $.90 per share
of Common Stock.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Oil and Gas Sales. Revenues for 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.
Well Servicing Revenues. 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. Costs for operating leases in 1997 increased by
226% to $2,139,000 from $657,000 in 1996 primarily because of the added Working
Interests ownership discussed above.
22
Depreciation, Depletion and Amortization. The 249% increase in DD&A 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. G&A for 1997 increased by $419,000 over 1996
due to costs associated with company expansion.
Interest Expense. Borrowing costs related to the acquisition of additional
interests and other debt incurred during the year to finance the Company's
operations increased interest expense from $385,000 in 1996 to $1,161,000 in
1997.
Financial Condition and Capital Resources
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 is guaranteed by Mr. Waggoner, a director and Mr. Marshall A.
Smith, III, chief executive officer and director of the Company.
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 were
anticipated to be raised. At June 30,1998 when the offering was closed, the
Company had received $190,000 in cash proceeds and $1,490,741 through the
conversion of debt to equity.
Since January, 1997, Mr. J. Waggoner has personally guaranteed (i) a
revolving line-of-credit with Southwest Bank of Texas, with an outstanding
balance at August 12, 1999 of $3,000,000; (ii) a revolving line- of-credit with
Compass Bank, with an outstanding balance at August 12, 1999 of $500,000; and
(iii) the payment of monthly installments in the amount of $25,000 on a note
with Compass Bank, with an outstanding balance at August 12, 1999 of $1,275,000.
On December 15, 1997, the Company obtained a personal loan from Mr.Waggoner
in the amount of $1,000,000, bearing interest at the floating Prime Rate, which
was 8.5% at the time of the loan. On June 29, 1998, Mr. Waggoner converted the
principal and interest of the loan to Common Stock at $1.625 per share, as part
of a private offering by the Company.
On December 1, 1998, the Company purchased the Ft. Terrett Properties from
an unrelated party. The purchase price for the interests was $800,000 in cash
and 100,000 shares of the Company's Common Stock. Mr.Waggoner provided financing
for the acquisition in the amount of $250,000 on December 15, 1998 and $550,000
on January 4, 1999. The Company issued 50,000 shares of Common Stock to Mr.
Waggoner for arranging the acquisition.
On December 28, 1998, Mr. Waggoner converted $1,915,000 in outstanding
principal and interest of loans made to the Company during the last six months
of 1998 to shares of the Series BB Preferred Stock.
In subsequent events, Mr. Waggoner converted $635,000 in outstanding
principal and interest of loans made to the Company in 1999 to Series BB
Preferred Stock on May 28, 1999 and purchased 4,000,0000 shares of the Company's
Common Stock in a private offering at $.75 per share, for a total purchase price
of $3,000,000 on July 15, 1999. The closing price of the Common Stock on July
15, 1999 was $.6875 per share.
23
As a result of and giving effect to the transactions described above, at
August 12, 1999, Mr. Waggoner beneficially owns and has sole voting and
dispositive power for 8,983,884 shares, representing 78.2% of the Company's
Common Stock, which includes 4,250,000 upon conversion of the Series BB and
20,000 shares subject to the exercise of options.
At December 31, 1998, the Company's current liabilities exceeded its
current assets by $5,738,409 and the Company was either past due or in default
of certain of its debt agreements. Further, the Company has experienced
significant recurring net losses. Following are steps management has taken and
are proceeding with in an attempt to move the Company to profitability:
- First, management elected to focus more on natural gas reserves and
production and sold its subsidiary, GulfWest Permian. This sale
eliminated a very significant portion of its debt which was tied to
older, higher cost oil production and reserves.
- Second, at the same time GulfWest Permian was sold, management decided
to sell the old operating company, WestCo, bring in a new operating
team, SETEX, and consolidate the Company's offices in Houston.
- Third, since December 31, 1998, the Company has raised working capital
to meet its immediate obligations and began to enhance production. A
director of the Company purchased $635,000 of Series BB Preferred
Stock and subscribed to purchase $3,000,000 of Common Stock,
$1,500,000 of which the Company has received at August 12, 1999. The
funds from these equity offerings are being used specifically to
reduce current liabilities and increase production through workovers
and installation of surface equipment.
- Fourth, with the operating capital commitment and a consolidated
office in Houston, the Company focused on evaluating and acquiring
natural gas assets to achieve a more balanced cash flow from oil and
natural gas.
- Fifth, the near-term operating focus of SETEX was to turn each
remaining oil and gas asset of the Company into a positive cash flow
property, even at lower oil and gas prices. This was to be done by
significantly lowering expenses and increasing production.
- Sixth, the Company brought in key technical staff to focus on the
evaluation of existing properties and pipelines, and to continue with
efforts to increase production and revenue from the Company's existing
core assets.
- Seventh, the Company defined a tactical and strategic business plan to
use existing assets to achieve a positive corporate cash flow and to
identify and evaluate additional development and acquisition
opportunities to further grow the Company. Specifically, the Company's
staff has identified and continues to evaluate workover and drilling
projects on its existing oil and gas properties. If successful, these
"in-hand" opportunities are projected to provide the Company with
sufficient revenue to become profitable. In addition, the Company has
identified, and is evaluating and negotiating the acquisition of
additional oil and gas properties in its core areas.
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.
24
nflation and Changes in Prices
While the general level of inflation affects certain costs associated with
the petroleum industry, factors unique to the industry result in independent
price fluctuations. Such price changes have had, and will continue to have a
material effect; however, the Company cannot predict the fluctuations. The
following table indicates the average oil and gas prices received over the last
three years by quarter. Average prices per equivalent barrel indicate the
composite impact of changes in oil and gas prices. Natural gas production is
converted to oil equivalents at the rate of 6 Mcf per barrel.
Average Prices
Crude Oil Per
and Natural Equivalent
Liquids Gas Barrel
(per Bbl) (Per Mcf)
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
1998
First $13.51 $1.75 $13.00
Second 11.13 2.05 11.33
Third 13.05 1.78 12.62
Fourth 9.92 2.25 12.36
Year 2000 Issue
The Company is working to resolve the potential impact of the year
2000 on the ability of the Company's computerized information systems to
accurately process information that may be date sensitive. Any of the
Company's programs that recognize a date using "00" as the year 1900 rather
than the year 2000 could result in errors or system failures. The Company
utilizes a number of computer programs across its entire operation.
The Company has not completed its assessment, particularly related to
outside customers or vendors. The Company has received notification from
its general ledger vendor that its current system is compliant. The Company
intends to complete its outside customer/vendor assessment in the fourth
quarter of 1999. If the Company and/or third parties upon which it relies
are unable to address this issue in a timely manner, it could result in a
material financial risk to the Company, possibly delaying receipts from
sales of oil and natural gas.
25
ecent Accounting Pronouncements
During 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive
Income", No. 131 "Disclosures About Segments of an Enterprise and Related
Information" and No. 132 "Employers Disclosures About Pensions and Other
Post Retirement Benefits". Adoption of these statements had no material
effects on the Company's financial position, results of operations or cash
flows.
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
26
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The directors and executive officers of the Company are as follows:
Year First
Elected
Director
Name Age Position or Officer
Anthony P. Towell(1)(2)(3) 67 Chairman of the Board 1997
Marshall A. Smith III(3) 51 Chief Executive Officer 1989
and Director
Thomas R. Kaetzer(3) 40 President, Chief Operating 1998
Officer and Director
Jim C. Bigham 63 Executive Vice President, 1991
Secretary and Director
Richard L. Creel 50 Vice President of Finance 1998
and Controller
John E. Loehr(1)23)(3) 53 Director 1992
Henri M. Nevels(1) 34 Director 1996
J. Virgil Waggoner(2)(3) 71 Director 1997
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Executive Committee.
Anthony P. Towell has served as a director of the Company since November
13, 1997 and as chairman of the board since July 8, 1998. Mr. Towell also is a
director of a number of public companies, both in the United Kingdom and the
United States, in the safety, environmental and computer network industries. Mr.
Towell has been in the petroleum business since 1957 and has held executive
positions with various public oil and gas companies including the Royal Dutch
Shell group companies and Pacific Resources, Inc.
Marshall A. Smith III has served as an officer and a director of the
Company since July 1989. From July 1989 to November 20, 1992, he served as
president and chairman of the board of directors. On November 20, 1992, he
resigned as president but continued as chief executive officer and chairman of
the board. On September 1, 1993, Mr. Smith reassumed the duties of president and
resigned as chairman of the board. On December 21, 1998, he resigned as
president but remained chief executive officer.
27
Thomas R. Kaetzer was appointed senior vice president and chief operating
officer of the Company on September 15, 1998 and on December 21, 1998 became
president and a director. Mr. Kaetzer has 17 years experience in the oil and gas
industry, including 14 years with Texaco Inc., which involved the evaluation,
exploitation and management of oil and gas assets. He has both onshore and
offshore experience in operations and production management, asset acquisition,
development, drilling and workovers in the continental U.S., Gulf of Mexico,
North Sea, Colombia, Saudi Arabia, China and West Africa. Mr. Kaetzer has a
Masters Degree in Petroleum Engineering from Tulane University and a Bachelor of
Science Degree in Civil Engineering from the University of Illinois.
Jim C. Bigham has served as executive vice president of the Company since
1996 and as secretary and a director since 1991 when he joined the Company.
Prior to joining the Company, Mr. Bigham held management and sales positions in
the real estate and printing industries. Mr. Bigham is also a retired United
States Air Force Major. During his military career, he served in both command
and staff officer positions in the operational, intelligence and planning areas.
Richard L. Creel has served as controller of the Company since May 1, 1997
and was elected vice president of finance on May 28, 1998. Prior to joining the
Company, Mr. Creel served as Branch Manager of the Nashville, Tennessee office
of Management Reports and Services, Inc. Mr. Creel has also served as controller
of TLO Energy Corp. He has extensive experience in general accounting, petroleum
accounting, and financial consulting and income tax preparation.
John E. Loehr has served as a director of the Company since 1992, as
chairman of the board from September 1, 1993 to July 8, 1998 and as chief
financial officer from November 22, 1996 to May 28, 1998. Mr. Loehr is also
currently president and sole shareholder of ST Advisory Corporation, an
investment company, and vice-president of Star-Tex Trading Company, also an
investment company. Mr. Loehr was formerly president of Star-Tex Asset
Management, a commodity-trading advisor, and a position he held from 1988 until
1992, when he sold his ownership interest. Mr. Loehr is a CPA and is a member of
the American Institute of Certified Public Accountants and Texas Society of
Certified Public Accountants.
Henri M. Nevels has served as a director of the Company since August 22,
1996. For the past eight years, Mr. Nevels has served as an advisor to a private
European investor group with international holdings, including those in the
United States and China.
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.
Meetings and Committees of the Board
The business of the Company is managed under the direction of the Board.
The Board meets on a regularly scheduled basis to review significant
developments affecting the Company and to act on matters requiring Board
approval. It also holds special meetings when an important matter requires Board
action between scheduled meetings. The Board met seven times during the calendar
year ended December 31, 1998.
28
The Board has three standing committees: the Audit Committee, the
Compensation Committee and the Executive Committee. The functions of these
committees, their current members, and the number of meetings held during 1998
are described below.
The Audit Committee was established to review the professional services and
independence of the Company's independent auditors, and the Company's accounts,
procedures and internal controls. The Audit Committee is comprised of Mr. John
E. Loehr (Chairman), Mr. Anthony P. Towell and Mr. Henri M. Nevels. The Audit
Committee met twice in 1998.
The function of the Compensation Committee is to fix the annual salaries
and other compensation for the officers and key employees of the Company. The
Compensation Committee is comprised of Mr. Anthony P. Towell (Chairman), Mr. J.
Virgil Waggoner Mr. John E. Loehr. The Compensation Committee met twice in 1998.
The Executive Committee was established to make recommendations to the
Board in the areas of financial planning, strategies and business alternatives.
The Executive Committee is comprised of Mr. Anthony P. Towell (Chairman), Mr. J.
Virgil Waggoner, Mr. Marshall A. Smith III, Mr. John E. Loehr and Mr. Thomas R.
Kaetzer. The Executive Committee met twice in 1998.
The Company does not have a nominating committee. The functions customarily
performed by a nominating committee are performed by the Board as a whole.
Compensation of Directors
In the past, the Company has not paid directors for their Board activities,
except for travel expenses incurred by certain directors. At the Annual Meeting
of Shareholders on May 28, 1998, the shareholders approved an amended and
restated Employee Stock Option Plan, which included an increase in authorized
plan shares from 200,000 to 1,000,000, a one-time grant of options to purchase
20,000 shares of Common Stock to each director in office on the effective date
and a provision for the payment of reasonable fees to directors.
29
ITEM 11. Executive Compensation
Summary Compensation Table
The following table sets forth information regarding compensation paid to
the Company's executive officers whose total annual compensation is $100,000 or
more during each of the last three years.
Long Term
Compensation
Annual Compensation (1) Awards (2)
Year Other Annual All Other
Name and Principal Position End Salary($) Bonus($) Compensation($) Options(#) Compensation($)
Marshall A. Smith 1998 125,000 - - 20,000 -
Chief Executive Officer 1997 125,000 - - - -
1996 100,000 - - 270,000 158,400
Thomas R. Kaetzer(3) 1998 100,000 - - - -
President and Chief
Operating Officer
Jim C. Bigham 1998 75,000 - - 20,000 -
Executive Vice President 1997 75,000 - - - -
And Secretary 1996 66,000 - - 106,000 66,650
- ------------------------
(1) Includes deferred compensation of $25,000 in 1997 and $50,000 in 1998
payable to Mr. Smith and $4,500 payable to Mr. Bigham.
(2) Long Term Compensation includes warrants issued in 1996 to Mr. Smith to
acquire 200,000 shares of Common Stock at an exercise price of $3.00 per
share, 50,000 shares of Common Stock at an exercise price of $5.00 per
share, and 20,000 shares of Common Stock at an exercise price of $5.75 per
share. Mr. Bigham was issued warrants in 1996 to acquire 2,750 shares of
Common Stock at an exercise price of $.50, 500 shares of Common Stock at an
exercise price of $1.75, 100,000 shares of Common Stock at an exercise
price of $3.00 and 2,750 shares of Common Stock at an exercise price of
$5.00. The value of warrants issued was derived utilizing the Black-Sholes
pricing model.
(3) Mr. Kaetzer joined the Company as Chief Operating Officer in September,
1998 and was elected President in December, 1998. His base annual salary is
$100,000.
Option Grants During 1998
Mr. Smith and Mr. Bigham, along with other directors, each received
Employee Stock Options to purchase 20,000 shares of Common Stock, under a
director compensation plan.
30
Option Exercises During 1998 and
Year End Option Values (1)
Number of Securities Value of Unexercised
Underlying Unexercised Options In-the-Money Options
at FY-End (#) at FY-End ($)
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
Marshall A. Smith 20,000 -0-
-0- -0-
Jim C. Bigham 35,000 -0-
-0- -0-
(1) Since no options were exercised by the above-named executives in 1998, no
shares were acquired or value realized upon the exercise of options of such
persons in the last fiscal year.
Report of the Compensation Committee of the
Board on Executive Compensation
The Board approved an annual salary for the CEO of $100,000 on July 1, 1991
and it remained at that level until April 1, 1997, when the Compensation
Committee recommended and the Board approved increasing the annual salary of the
CEO to $125,000 where it has remained.
On April 16, 1993, the Board established the Compensation Committee and
authorized it to develop and administer an executive compensation system which
will enable the Company to attract and retain qualified executives. Compensation
for the CEO and other executive officers is determined by the Compensation
Committee which functions under the philosophy that compensation of executive
officers, specifically including that of the CEO, should be directly and
materially linked to the Company's performance.
On September 9, 1997, the Compensation Committee recommended and the Board
approved entering into Employment Agreements with Mr. Marshall A. Smith III,
chief executive officer, Mr. Jim C. Bigham, executive vice president and
secretary, and Mr. Richard L. Creel, controller, for a period of three years. On
December 21, 1998, the Compensation Committee recommended and the Board approved
entering into an Employment Agreement with Mr. Thomas R. Kaetzer, president and
chief operating officer, with a base annual salary of $100,000. (See:
"Employment and Change of Control Agreements".)
This report is submitted by the members of the Compensation Committee:
Compensation Committee:
Anthony P. Towell, Chairman
J. Virgil Waggoner
John E. Loehr
31
Stock Performance Chart
The following chart compares the yearly percentage change in the cumulative
total shareholder return on the Company's Common Stock during the five years
ended December 31, 1998 with the cumulative total return on The Nasdaq Stock
Market Index and The Nasdaq Non-Financial Stock Index. The comparison assumes
$100 was invested on December 31, 1993 in the Company's Common Stock and in each
of the foregoing indices and assumes reinvestment of dividends. The Company paid
no dividends during such five- year period.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG COMPANY, NASDAQ INDEX & NASDAQ NON-FINANCIAL STOCK INDEX
[GRAPHIC OMITTED]
NASDAQ Index 100.00 97.75 138.26 170.00 208.58 293.21
Non-Financial 100.00 96.16 134.03 162.84 191.04 279.82
GulfWest 100.00 109.08 81.81 109.08 90.90 18.18
32
Employment Agreements
Effective September 9, 1997, the Company entered into Employment Agreements
with Mr. Marshall A. Smith III, CEO, Mr. Jim C. Bigham, executive vice president
and secretary, and Mr. Richard L. Creel, controller, for a period of three
years. Effective December 21, 1998, the Company entered into an Employment
Agreement with Mr. Thomas R. Kaetzer, president and chief operating officer.
Under the Employment Agreements, Mr. Smith will receive a base annual
salary of $125,000, Mr. Kaetzer $100,000, Mr. Bigham $75,000 and Mr. Creel
$50,000, all increasing a minimum of 15% annually. In the event of a change of
control, the employees will have the option to continue as employees of the
Company under the terms of the Employment Agreements or receive a lump-sum cash
severance payment equal to 300% of their annual base salary for the year
following the change of control.
A "change of control" is defined in the Employment Agreements as: (i) an
acquisition (other than from the Company) by an individual, entity or a group
(excluding the Company, its subsidiaries, a related employee benefit plan or a
corporation the voting stock of which is beneficially owned following such
acquisition 50% or more by the Company's stockholders in substantially the same
proportions as their holdings in the Company prior to such acquisition) of
beneficial ownership of 20% or more of the Company's voting stock; (ii) a change
in a majority of the Board (excluding any persons approved by a vote of at least
a majority of the incumbent Board other than in connection with a proxy
contest); (iii) the approval by the stockholders of a reorganization, merger or
consolidation (other than a reorganization, merger or consolidation in which all
or substantially all of the stockholders of the Company receive 50% or more of
the voting stock of the surviving company); or (iv) a complete liquidation or
dissolution of the Company or the sale of all, or substantially all, of its
assets.
33
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of August 12, 1999, regarding
the beneficial ownership of Common Stock by each person known by the Company to
own beneficially 5% or more of the outstanding Common Stock, each director of
the Company, certain named executive officers, and the directors and executive
officers of the Company as a group. The persons named in the table have sole
voting and investment power with respect to all shares of Common Stock owned by
them, unless otherwise noted.
Amount and Nature
Name and Address of of Beneficial
Beneficial Owner Ownership Percent
Anthony P. Towell 365,683 1,2 4.8%
Marshall A. Smith III 333,520 2,3 4.4%
Thomas R. Kaetzer 116,000 2,4 1.6%
Jim C. Bigham 160,935 2,5 2.2%
Richard L. Creel 35,000 2,6 *
Henri M. Nevels 31,430 2,7 *
John E. Loehr 492,159 2,8 6.4%
J. Virgil Waggoner 8,983,884 2,9 78.2%
All current directors and officers
as a group (8 persons) 10,519,611 10 82.3%
Anaconda Opportunity Fund 604,444 11 7.7%
Carlin Equities Corporation 377,777 12 5.0%
Renier Nevels 390,000 13 5.1%
* Less than 1%
1 Includes 262,222 shares issuable upon conversion of presently convertible
Preferred Stock, 60,000 shares subject to presently exercisable warrants
and options, and 38,461 shares issuable upon conversion of a debenture.
2 Shareholder's address is 397 N. Sam Houston Parkway East, Suite 375,
Houston, Texas 77060.
3 Includes 290,000 shares subject to presently exercisable warrants and
options and 40,104 shares owned directly, 83 shares owned by Joyce Smith,
the wife of Mr. Smith, and 3,333 shares owned by Marshall A. Smith IV and
Mark Shelton, sons of Mr. Smith. Mr. Smith III disclaims beneficial
ownership of the shares and warrants owned by Senior Drilling Company,
which is controlled by Mitchell D. Smith, the brother of Mr. Smith.
4 Includes 16,000 shares subject to warrants exercisable at 09/01/99.
34
5 Includes 120,000 shares subject to presently exercisable warrants and
options, and 40,935 shares held directly, and 1,000 shares held by Jeff G.
Gray, son of Mr. Bigham.
6 Includes 30,000 subject to presently exercisable options.
7 Includes 31,430 shares subject to presently exercisable warrants and
options. Mr. Nevels disclaims beneficial ownership of the shares and
warrants owned by his father, Renier Nevels.
8 Includes 322,159 shares subject to presently exercisable warrants and
options and 20,494 shares held directly; 6,000 shares subject to presently
exercisable warrants, 76,923 shares issuable upon conversion of a
debenture, 39,333 shares issuable upon conversion of presently convertible
Preferred Stock, and 25,250 shares held by ST Advisory Corporation; and
2,000 shares held by his daughter's trust, the Joanna Drake Loehr Trust.
Mr. Loehr is president and sole shareholder of ST Advisory Corporation.
9 Includes 4,250,000 shares subject to presently convertible preferred stock
and 20,000 shares subject to presently exercisable options.
10 Includes 1,312,528 shares subject to presently exercisable warrants,
options and convertible securities.
11 Includes 524,444 shares issuable upon conversion of presently convertible
Preferred Stock and 80,000 shares subject to presently exercisable
warrants. Shareholder's address is c/o Anaconda Capital, 730 Fifth Avenue,
15th Floor, New York, New York 10019.
12 Includes 327,777 shares issuable upon conversion of presently convertible
Preferred Stock and 50,000 shares subject to presently exercisable
warrants. Shareholder's address is 1270 Avenue of the Americas, 12th Floor,
New York, New York 10020.
13 Includes 195,000 shares issuable upon conversion of presently convertible
Preferred Stock at a price per share of Common Stock of $5.00, and 405,000
shares subject to presently exercisable warrants. Shareholder's address is
P. O. Box 1, 3680 Maaseik, Belgium.
ITEM 13. Certain Relationships and Related Transactions
Since January, 1997, Mr. J. Virgil Waggoner, a director and significant
stockholder of the Company, has personally guaranteed (i) a revolving
line-of-credit with Southwest Bank of Texas, with an outstanding balance at
August 12, 1999 of $3,000,000; (ii) a revolving line-of-credit with Compass
Bank, with an outstanding balance at August 12, 1999 of $500,000; and (iii) the
payment of monthly installments in the amount of $25,000 on a note with Compass
Bank, with an outstanding balance at August 12, 1999 of $1,275,000. The Company
had issued Mr. Waggoner options to purchase an aggregate of 850,000 shares of
the Company's Common Stock; however, on July 15, 1999, Mr. Waggoner agreed to
irrevocably declare the options null and void retroactively to the dates of
execution and effectiveness.
On December 15, 1997, the Company obtained a personal loan from Mr.Waggoner
in the amount of $1,000,000, bearing interest at he floating Prime Rate, which
was 8.5% at the time of the loan. On June 29, 1998, Mr. Waggoner converted the
principal and interest on the loan to Common Stock at $1.625 per share, as part
of a private offering by the Company.
35
On December 1, 1998, the Company purchased the Ft. Terrett Properties from
an unrelated party. The purchase price for the interests was $800,000 in cash
and 100,000 shares of the Company's Common Stock. Mr. Waggoner, a director of
the Company, provided financing for the acquisition in the amount of $250,000 on
December 15, 1998 and $550,000 on January 4, 1999. The Company issued 50,000
shares of Common Stock to Mr. Waggoner for arranging the acquisition.
On December 28, 1998, Mr. Waggoner converted $1,915,000 in outstanding
principal and interest of loans made to the Company during the last six months
of 1998 to shares of the Series BB Preferred Stock, par value $.01 and
liquidation value $500 per share. The closing price of the Common Stock on
December 28, 1998 was $.60 per share.
On May 28, 1999, Mr. Waggoner converted $635,000 in outstanding principal
and interest of loans made to the Company in 1999 to Series BB Preferred Stock.
The closing price of the Common Stock on that date was $.375 per share.
On July 15, 1999, Mr. Waggoner purchased 4,000,0000 shares of the Company's
Common Stock in a private offering at $.75 per share, for a total purchase price
of $3,000,000. The closing price of the Common Stock on July 15, 1999 was $.6875
per share.
As a result of and giving effect to the transactions described above, at
August 12, 1999, Mr. Waggoner beneficially owns and has sole voting and
dispositive power for 8,983,884 shares, representing 78.2% of the Company's
Common Stock, which includes 4,250,000 shares subject to conversion of the
Series BB and 20,000 shares subject to the exercise of options.
During 1998, the Company advanced sums to Gulf Coast Exploration, Inc.
("GCX") totaling $102,000 for services to be rendered in the identification,
evaluation, acquisition and operation of oil and gas properties. The president
of GCX is Marshall A. Smith, Jr., the father of the Company's chief executive
officer. At December 31,1998, the debt had been fully reserved.
On October 1, 1998, Toro Oil Company executed an unsecured promissory note
to the Company for the purchase of 100% of WestCo for $150,000, with interest at
the prime rate per annum and due September 30, 1999. To date, no principal
payments have been received. At December 31,1998, the promissory note had been
fully reserved.
SECTION 16 REQUIREMENTS
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than 10% of a
registered class of the Company's equity securities, to file initial reports of
ownership and reports of changes in ownership with the Securities and Exchange
Commission (the "SEC"). Such persons are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it with
respect to 1998, or written representations from certain reporting persons, the
Company believes that its officers, directors and persons who own more than 10%
of a registered class of the Company's equity securities have complied with all
applicable filing requirements.
36
GLOSSARY
The following are definitions of certain terms used in this Form 10-K.
Bbl. Barrel.
BOE. Barrel of oil equivalent, based on a ratio of 6,000 cubic feet of natural
gas for each barrel of oil.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a Working Interests is owned.
Horizontal Drilling. High angle directional drilling with lateral penetration of
one or more productive Reservoirs.
Mcf. One thousand cubic feet.
Net acres or net wells. The sum of the fractional Working Interests owned in
gross acres or gross wells.
Net oil and gas sales. Oil and natural gas sales less oil and natural gas
production expenses.
Overriding Royalty Interest. The right to a share of production from a well free
of all costs and expenses except transportation, in addition to other
Royalties reserved by the lessor by the property.
Present Value. The pre-tax present value, discounted at 10%, of future net cash
flows from estimated proved reserves, calculated holding prices and costs
constant at amounts in effect on the date of the report (unless such prices
or costs are subject to change pursuant to contractual provisions) and
otherwise in accordance with the Commission's rules for inclusion of oil
and gas reserve information in financial statements filed with the
Commission.
Proceeds of Production. Money received (usually monthly) from the sale of oil
and gas produced from Producing Properties.
Producing Properties. Properties that contain one or more wells that produce oil
and/or gas in paying quantities (i.e., a well for which proceeds from
production exceed operating expenses).
Productive well. A well that is producing oil or gas or that is capable of
production.
Prospect. A lease or group of leases containing possible reserves, capable of
producing crude oil, natural gas, or natural gas liquids in commercial
quantities, either at the time of acquisition, or after vertical or
horizontal drilling, completion of workovers, Recompletions, or operational
modifications.
Proved Reserves. Estimated quantities of crude oil, natural gas, and natural gas
liquids that geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known Reservoirs under
existing economic conditions; i.e., prices and costs as of the date the
estimate is made. Reservoirs are considered proved if either actual
production or a conclusive formation test supports economic producibility.
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
37
b. The immediately adjoining portions not yet drilled but which can be
reasonably judged as b. The immediately adjoining portions not yet
drilled but which can be reasonably judged as economically productive
on the basis of available geological and engineering data. In the
absence of information on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the
reservoir.
Reserves which can be produced economically through application of improved
recovery techniques (such as fluid injection) are included in the "proved"
classification when successful testing by a pilot project, or the operation of
an installed program in the reservoir, provides support for the engineering
analysis on which the project or program was based.
Proved Reserves do not include:
a. Oil that may become available from known Reservoirs but is classified
separately as "indicated additional reserves";
b. Crude oil, natural gas, and natural gas liquids, the recovery of which
is subject to reasonable doubt because of uncertainty as to geology,
Reservoir characteristics, or economic factors;
c. Crude oil, natural gas, and natural gas liquids that may occur in
undrilled Prospects; and
d. Crude oil, natural gas, and natural gas liquids that may be recovered
from oil shales and other sources.
Proved Developed Reserves. Reserves that can be expected to be recovered through
existing wells with existing equipment and operating methods. Additional
oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should be included as
"proved developed" only after testing by a pilot project or after operation
of an installed program has confirmed through production response that
increased recovery will be achieved.
Proved Undeveloped Reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that
are reasonably certain of production when drilled. Proved reserves for
other units that have not been drilled can be claimed only where it can be
demonstrated with certainty that there is continuity of production from the
existing productive formation. Under no circumstances should estimates for
Proved Undeveloped Reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proven effective by actual
tests in the area and in the same Reservoir.
Recompletion. The completion for production of an existing wellbore in another
formation from that in which the well has previously been completed.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil or gas that is confined by impermeable rock
or water barriers and is individual and separate from other reservoirs.
Royalty. The right to a share of production from a well free of all costs and
expenses.
38
Royalty Interest. An interest in an oil and gas property entitling the owner to
a share of oil and natural gas production free of costs of production.
Standardized Measure. The present value, discounted at 10%, of future net cash
flows from estimated proved reserves, after income taxes, calculated
holding prices and costs constant at amounts in effect on the date of the
report (unless such prices or costs are subject to change pursuant to
contractual provisions) and otherwise in accordance with the Commission's
rules for inclusion of oil and gas reserve information in financial
statements filed with the Commission.
Waterflood. An engineered, planned effort to inject water into an existing oil
Reservoir with the intent of increasing oil reserve recovery and production
rates.
Working Interest. The operating interest under a lease, the owner of which has
the right to explore for and produce oil and gas covered by such lease. The
full working interest bears 100 percent of the costs of exploration,
development, production, and operation, and is entitled to the portion of
gross revenue from the proceeds of production which remains after proceeds
allocable to Royalty and Overriding Royalty Interests or other lease
burdens have been deducted.
Workover. Rig work performed to restore an existing well to production or
improve its production from the current existing Reservoir.
39
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, 1998, and 1997.
Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996.
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996.
Notes to Consolidated Financial Statements, December 31, 1998, 1997
and 1996.
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits:
Number Description
@2.1 Purchase and Sale Agreement, with amendments, between Pharaoh Oil
and Gas, Inc, as Seller, and WestCo Producing Company, as
Purchaser, dated June 12, 1996.
@2.2 Addendum of Purchase and Sale Agreement by and between Gary O.
Bolen, Individually and d/b/a Badger Oil Company, Pharaoh Oil and
Gas, Inc., and GulfWest Texas Company.
@2.3 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.
@2.4 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.
40
#2.5 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.
#2.6 Addendum of Purchase and Sale Agreement between Pharaoh and
WestCo Producing Company, dated December 5, 1996.
#2.7 Assignment of Purchase and Sale Agreement by and between Pharaoh,
GulfWest Permian Company and WestCo Producing Company, dated
December 5, 1996.
#2.8 Form of Assignment and Bill of Sale by and between Pharaoh as
Assignor and GulfWest Permian Company as Assignee.
^2.9 Purchase and Sale Agreement between Pharaoh, as Seller, and
WestCo Oil Company, or its assigns, as Purchaser, dated March 1,
1997.
^2.10Assignment of Purchase and Sale Agreement by and between WestCo
Oil Company and GulfWest Permian Company, dated March 20, 1998.
^2.11Form of Assignment and Bill of Sale by and between Pharaoh as
Assignor and GulfWest Permian Company as Assignee, executed March
20, 1998.
^2.12Term Renewal Note in the amount of $10,237,215.00 payable to the
order of Chase Bank of Texas, N.A. and executed by GulfWest
Permian Company and GulfWest Texas Company, dated March 20, 1998.
^2.13Term note in the amount of $612,675.00 payable to the order of
Pharaoh Oil and Gas, Inc. and executed by GulfWest Permian
Company, dated March 20, 1998.
^2.14Security Agreement-Pledge of GulfWest Permian stock to Chase
Bank of Texas, N.A. by GulfWest Oil Company, dated March 20,
1998.
^2.15Limited Guaranty Agreement by and between GulfWest Oil Company
and Chase Bank of Texas, N.A., executed March 20, 1998.
*3.1 Articles of Incorporation of the Registrant and Amendments
thereto.
*3.2 Bylaws of the Registrant.
@4.1 Statement of Resolution Establishing and Designating the
Company's Class AA Preferred Stock, filed with the Secretary of
State of Texas as an amendment to the Company's Articles of
Incorporation on September 23, 1996.
41
@4.2 Statement of Resolution Establishing and Designating the
Company's Class AAA Preferred Stock, filed with the Secretary of
State of Texas as an amendment to the Company's Articles of
Incorporation on September 23, 1996.
$4.3 Subscription and Registration Rights Agreement for the Purchase
of Preferred Stock Between the Company and Eco2, Inc. dated March
13, 1996.
$4.4 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.
#4.5 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.
#4.6 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.
&4.7 Statement of Resolution Establishing and Designating the
Company's Class C Preferred Stock, filed with the Secretary of
State of Texas as an amendment to the Company's Articles of
Incorporation on September 15, 1998.
4.8 Statement of Resolution Establishing and Designating the
Company's Class BB Preferred Stock, filed with the Secretary of
State of Texas as an amendment to the Company's Articles of
Incorporation on January 27, 1999, filed herewith.
%10.1GulfWest Oil Company 1994 Stock Option and Compensation Plan,
amended and restated as of April 15, 1998 and approved by the
shareholders on May 28, 1998.
10.2 Employment Agreement between the Company and Marshall A Smith
III, dated September 9, 1997.
$10.3Employment Agreement between the Company and Jim C. Bigham,
dated September 9, 1997.
$10.4Employment Agreement between the Company and Richard L. Creel,
dated September 9, 1997.
+20.1 Letter to Shareholders dated August 12, 1996.
{21.1Form of Letter of Agreement with Class AAA Preferred
Stockholder, dated July 7, 1999.
22.1 Subsidiaries of the Registrant filed herewith.
42
25 Power of Attorney (included on signature page of this Annual
Report).
27.1 Financial Data Schedule filed herewith.
_______________
@ Previously filed with the Company's Form 8-K, Current Report
dated October 10, 1996, filed with the Commission on October 25,
1996.
# Previously filed with the Company's Form 8-K, Current Report
dated December 5, 1996, filed with the Commission on December 17,
1996.
^ Previously filed with the Company's Form 8-K, Current Report
dated March 20, 1998, filed with the Commission on April 3, 1998.
* Previously filed with the Company's Registration Statement (on
Form S-1, Reg. No. 33-53526), filed with the Commission on
October 21, 1992.
$ Previously filed with the Company's Quarterly Report on Form
10-Q/A for the period ended September 30, 1997, as amended and
filed with the Commission on April 8, 1998.
% Previously filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1994, filed with the Commission
on April 14, 1995.
+ Previously filed with the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 1996, filed with the Commission on
August 14, 1996.
{ Previously filed with the Company's Current Report on Form 8-K
dated July 15, 1999 and filed with the Commission on July 23,
1999.
43
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: August 25, 1999 By:\s\ Thomas R. Kaetzer
Thomas R. Kaetzer
President
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Thomas R. Kaetzer as his true and lawful
attorney-in-fact and agent, with full power of substitution, for him and in his
name, place, and stead, in any and all capacities to sign any and all amendments
or supplements to this Annual Report on Form 10-K, and to file the same, and
with all exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney- in-fact and
agent full power and authority to do and perform each and every act and thing
requisite and necessary to be done as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
\s\ Anthony P. Towell Chairman of the Board of August 25, 1999
Anthony P. Towell Directors
\s\ Marshall A. Smith III Chief Executive Officer and August 25, 1999
Marshall A. Smith III Director
\s\ Thomas R. Kaetzer President, Chief of Operations August 25, 1999
Thomas R. Kaetzer and Director
\s\ Jim C. Bigham Executive Vice President, August 25, 1999
Jim C. Bigham Secretary and Director
\s\Richard L. Creel Vice President of Finance August 25, 1999
Richard L. Creel
\s\ Henri M. Nevels Director August 25, 1999
Henri M. Nevels
\s\ J. Virgil Waggoner Director August 25, 1999
J. Virgil Waggoner
\s\ John E. Loehr Director August 25, 1999
John E. Loehr
44
GULFWEST OIL COMPANY
FINANCIAL REPORT
DECEMBER 31, 1998
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT
ON THE FINANCIAL STATEMENTS F-1
FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-4
Consolidated statements of stockholders' equity (deficit) F-5
Consolidated statements of cash flows F-9
Notes to consolidated financial statements F-10
INDEPENDENT AUDITOR'S REPORT ON
THE FINANCIAL STATEMENT SCHEDULE F-28
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts F-29
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 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, 1998 and 1997,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
GulfWest Oil Company and Subsidiaries as of December 31, 1998 and 1997 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company experienced significant recurring
net losses, has negative working capital as of December 31, 1998, and is
currently in default on certain covenants of its debt agreements. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding those matters also are described in Note
2. The accompanying financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
\s\WEAVER AND TIDWELL, L.L.P
WEAVER AND TIDWELL, L.L.P.
Dallas, Texas
August 18, 1999
F-1
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS
1998 1997
-------------- --------------
CURRENT ASSETS
Cash and cash equivalents $ 204,307 $ 626,519
Accounts receivable - trade, net of allowance
for doubtful accounts of $ -0-
in 1998 and 1997 527,791 855,383
Prepaid expenses 74,961 54,494
Inventory 13,925 -
-------------- --------------
Total current assets 820,984 1,536,396
-------------- --------------
OIL AND GAS PROPERTIES,
using the successful efforts
method of accounting
Undeveloped properties 750,628 4,585
Developed properties 7,283,205 17,026,171
-------------- --------------
8,033,833 17,030,756
OTHER PROPERTY AND EQUIPMENT 1,406,987 1,171,214
Less accumulated depreciation,
depletion, and amortization (2,411,755) (2,874,403)
-------------- --------------
Net oil and gas properties and
other property and equipment 7,029,065 15,327,567
-------------- --------------
DEPOSITS ON DEVELOPED OIL & GAS PROPERTIES 17,300 225,892
INVESTMENTS 191,478 -
-------------- --------------
TOTAL ASSETS $ 8,058,827 $ 17,089,855
============== ==============
The Notes to Consolidated Financial Statements are an integral
part of these statements.
F-2
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
1998 1997
--------------- --------------
CURRENT LIABILITIES
Notes payable $ 487,000 $ 350,000
Notes payable - related parties 950,000 150,000
Current portion of long-term debt 2,972,731 311,233
Current portion of long-term debt - related parties 300,914 350,000
Accounts payable - trade 1,406,131 1,427,661
Accrued expenses 442,617 290,362
--------------- --------------
Total current liabilities 6,559,393 2,879,256
--------------- --------------
LONG-TERM DEBT, net of current portion 3,120,245 11,185,055
--------------- --------------
LONG-TERM DEBT - RELATED PARTIES 281,126 1,000,000
--------------- --------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 130 54
Common stock 3,113 1,759
Additional paid-in capital 12,763,936 8,204,533
Retained deficit (14,516,642) (6,028,328)
Long-term accounts and notes receivable -
related parties, net of allowance for doubtful
accounts of $700,230 and $448,230 in 1998
and 1997, respectively (152,474) (152,474)
--------------- --------------
Total stockholders' equity (deficit) (1,901,937) 2,025,544
--------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY (DEFICIT) $ 8,058,827 $ 17,089,855
=============== ==============
F-3
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------------ ------------------- ------------------
OPERATING REVENUES
Oil and gas sales $ 1,804,147 $ 4,269,032 $ 1,549,069
Lease sales 73,297 252,333
Well servicing revenues 432,352 481,562 58,881
Operating overhead and other income 167,054 137,075 105,729
------------------ ------------------- ------------------
2,403,553 4,960,966 1,966,012
2,403,553
------------------ ------------------- ------------------
Lease operating expenses 1,647,329 2,139,128 656,957
Cost of leases sold 37,747 91,831
Cost of well servicing operations 420,527 279,340 46,424
Lease abandonment 85,696
Impairment of assets 2,279,449
Depreciation, depletion, and amortization 2,322,423 1,624,759 466,097
General and administrative 2,063,709 1,478,312 1,104,595
------------------ ------------------- ------------------
8,733,437 5,559,286 2,451,600
------------------ ------------------- ------------------
LOSS FROM OPERATIONS (6,329,884) (598,320) (485,588)
------------------ ------------------- ------------------
OTHER INCOME AND EXPENSE
Interest income 11,602 8,678 332
Interest expense (1,302,885) (1,087,039) (1,034,508)
Gain (loss) on sale of assets (765,893)
------------------ ------------------- ------------------
LOSS BEFORE INCOME TAXES (8,387,060) (1,676,681) (1,519,764)
INCOME TAXES
------------------ ------------------- ------------------
NET LOSS $ (8,387,060) $ (1,676,681) $ (1,519,764)
DIVIDENDS ON PREFERRED STOCK
(PAID 1998 - $101,254; 1997 - $150,062;
1996 - $72,017) (427,173) (380,928) (1,363,677)
------------------ ------------------- ------------------
NET LOSS AVAILABLE TO COMMON
SHAREHOLDERS $ (8,814,233) $ (2,057,609) $ (2,883,441)
================== =================== ==================
LOSS PER COMMON SHARE -
BASIC AND DILUTED $ (3.68) $ (1.19) $ (2.28)
================== =================== ==================
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, 1998, 1997 AND 1996
Number of Shares
--------------------------------
Preferred Common
Stock Stock
----------- -----------
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 stock options under benefit plan
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 offering costs
(85,000 shares through private placement and 51,250
through exercise of warrants) 136,250
Payments on loans to related parties
Issuance of warrants for services and additional
financing costs
Provision for bad debts - receivables from related parties
Net loss
Dividends paid on preferred stock
BALANCE, December 31, 1997 5,390 1,759,185
=========== ===========
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-5
Common Preferred Additional Retained Receivables from
Stock Stock Paid-In Capital Deficit Related Parties
$ 1,086 $ $ 3,596,514 $(2,609,804) $ (113,775)
525 1,078,721
(83,416)
46 2,131,681
23,050
24,125
773,080
61,482
(1,519,764)
( 72,017)
1,611 46 7,604,121 (4,201,585) (112,659)
12 (12)
8 406,958
(139,584)
136 178,879
98,487
14,587
1,282
(1,676,681)
(150,062)
$ 1,759 $ 54 $ 8,204,533 $(6,028,328) $ (152,474)
F-6
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Number of Shares
Preferred Common
Stock Stock
BALANCE, December 31, 1997 5,390 1,759,185
Conversion of 200 shares of AAA preferred
stock and unpaid dividends to 77,988 shares
of common stock (200 77,988
Conversion of related party debt to 3,830 shares
of BB preferred stock 3,830
Issuance of 4,000 shares of C preferred stock
for acquisition of assets 4,000
Issuance of 1,276,344 common shares,
net of offering costs (116,920 through
private placement, 53,587 through exercise
of warrants, 955,837 in exchange
for debt, accrued interest, deferred compensation
and accounts payable, 150,000 for acquisition of
assets) 1,276,344
Issuance of options and warrants for services
and additional financing costs
Increase in accounts and notes receivable - related parties
Provision for bad debts-receivables from
related parties
Net loss
Dividends paid on preferred stock
BALANCE, December 31, 1998 13,020 3,113,517
The Notes to Consolidated Financial Statements are
an integral part of these statements.
F-7
Common Preferred Additional Retained Receivables from
Stock Stock Paid-In Capital Deficit Related Parties
$ 1,759 $ 54 $ 8,204,533 $ (6,028,328) $ (152,474)
78 (2) 6,876
38 1,914,962
40 630,094
1,276 1,845,439
162,032
(152,000)
152,000
(8,387,060)
(101,254)
$ 3,113 $ 130 $ 12,763,936 $ (14,516,642) $ (152,474)
F-8
GULFWEST OIL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS END DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,387,060) $ (1,676,681) $ (1,519,764)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization 2,322,423 1,624,759 466,097
Abandoned leases 85,696
Partnership loss 8,522
Common stock and warrants issued and charged to
operations 162,032 14,586 817,305
Loss on sale of assets 765,893
Impairment of assets 2,279,449
Provision for bad debts 252,000 1,282 61,482
(Increase) decrease in accounts
receivable - trade, net 329,439 (242,944) (458,820)
(Increase) decrease in Inventory (13,925)
(Increase) decrease in prepaid expenses (20,467) (52,151) 35,249
(Increase) decrease in discounts on notes payable 10,511 33,334
Increase (decrease) in accounts payable
and accrued expenses 1,587,723 568,566 779,098
------------- ------------- -------------
Net cash provided by (used in) operating activities (713,971) 247,928 299,677
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 148,351
Purchase of property and equipment (6,407,296) (2,626,655) (2,713,569)
(Increase) decrease in accounts and notes and receivable - related party (102,000) (139,584) (83,416)
Payments received on loans to related parties 25,305 23,050
------------- ------------- -------------
Net cash used in investing activities (6,360,945) (2,740,934) (2,773,935)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net 155,827 153,390 559,145
Proceeds from sale of preferred stock, net 406,967 1,981,728
Payments on debt (247,702) (1,941,602) (743,875)
Proceeds from debt issuance 6,845,833 4,566,355 823,206
Dividends paid (101,254) (150,062) (72,017)
------------- ------------- -------------
Net cash provided by financing activities 6,652,704 3,035,048 2,548,187
------------- ------------- -------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (422,212) 542,042 73,929
CASH AND CASH EQUIVALENTS,
beginning of year 626,519 84,477 10,548
------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
end of year $ 204,307 $ 626,519 $ 84,477
============= ============= =============
CASH PAID FOR INTEREST $ 407,054 $ 922,563 $ 202,111
============= ============= =============
The Notes to Consolidated Financial Statements are an integral part of
these statements.
F-9
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies consistently
applied by management in the preparation of the accompanying financial
statements.
Organization/Concentration of Credit Risk
GulfWest Oil Company and subsidiaries (the "Company") intends to
pursue the acquisition of quality oil and gas prospects which have proved
developed and undeveloped reserves and the development of prospects with
third party industry partners.
The accompanying financial statements include the Company and its
wholly-owned subsidiaries: Vanco Well Service, Inc. ("Vanco"), GulfWest
Texas Company ("GWT"), both formed in 1996; DutchWest Oil Company formed in
1997; Southeast Texas Oil and Gas Company, L.L.C. ("Setex LLC") acquired
September 1, 1998; and, SETEX Oil and Gas Company ("SETEX") formed August
11, 1998. All material intercompany transactions and balances are
eliminated upon consolidation. The financial statements also include the
results of operations for the first nine months of 1998 for the Company's
former wholly- owned subsidiaries: WestCo Oil Company (WestCo), formed in
1995 and sold October 1, 1998; and GulfWest Permian Company ("GWP") formed
in 1996 and sold October 1, 1998.
The Company grants credit to independent and major oil and gas
companies for the sale of crude oil and natural gas. In addition, the
Company grants credit to joint owners of oil and gas properties which the
Company, through SETEX (or formerly WestCo), operates. Such amounts are
secured by the underlying ownership interests in the properties. The
Company also grants credit to various third parties through Vanco for well
servicing operations.
The Company maintains cash on deposit in interest and non-interest
bearing accounts which, at times, exceed federally insured limits. The
Company has not experienced any losses on such accounts and believes it is
not exposed to any significant credit risk on cash and equivalents.
Statement of Cash Flows
The Company considers all highly liquid investment instruments
purchased with remaining maturities of three months or less to be cash
equivalents for purposes of the consolidated statements of cash flows.
Non-Cash Investing and Financing Activities:
In 1998, $1,965,000 of notes payable, $311,500 of accounts payable,
$100,090 of accrued expenses and $1,105,000 of liong-term debt were
converted to common or preferred stock. All of the outstanding membership
interest of Setex LLC was acquired in exchange for $630,134 of preferred
stock. In addition, $131,250 in common stock was issued in exchange for
property and equipment costs. Long-term debt totalling $1,299,200 was
re-financed during 1998.
In 1997, the Company acquired other property and equipment through the
issuance of debt totaling $130,875. Additionally, the Company exchanged a
related party note receivable of $73,782 for oil and gas properties. 51,250
shares of common stock were issued to related parties upon the exercise of
warrants and paid for by conversion of accrued expenses to such parties of
$26,250.
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.
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.
F-10
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Use Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil
and gas producing activities. Costs to acquire mineral interests in oil and
gas properties, to drill and equip exploratory wells that find proved
reserves, and to drill and equip development wells are capitalized. Costs
to drill exploratory wells that do not find proved reserves, and geological
and geophysical costs are expensed.
As the Company acquires significant oil and gas properties, any
unproved property that is considered individually significant is
periodically assessed for impairment of value, and a loss is recognized at
the time of impairment by providing an impairment allowance. Capitalized
costs of producing oil and gas properties and support equipment, after
considering estimated dismantlement and abandonment costs and estimated
salvage values, are depreciated and depleted by the unit-of-production
method.
On the sale of an entire interest in an unproved property, gain or
loss on the sale is recognized, taking into consideration the amount of any
recorded impairment if the property has been assessed individually. If a
partial interest in an unproved property is sold, the amount received is
treated as a reduction of the cost of the interest retained. On the sale of
an entire or partial interest in a proved property, gain or loss is
recognized, based upon the fair values of the interests sold and retained.
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
Revenue Recognition
The Company recognizes oil and gas revenues on the sales method as oil
and gas production is sold. Differences between sales and production
volumes during the years ended December 31, 1998, 1997, and 1996 were not
significant. Well servicing revenues are recognized as the related services
are performed. Operating overhead income is recognized based upon monthly
contractual amounts for lease operations. Occasionally, the Company will
acquire undeveloped oil and gas leases with the intent to resell all or a
portion of such leases. Lease sales are recognized (and the related
applicable costs as "Costs of Leases Sold") as such sales are made.
Fair Value of Financial Instruments
At December 31, 1998 and 1997, the Company's financial instruments
consist of notes receivable from related parties, notes payable and
long-term debt. Interest rates currently available to the Company for notes
receivable, notes payable and long-term debt with similar terms and
remaining maturities are used to estimate fair value of such financial
instruments. Accordingly, the carrying amounts are a reasonable estimate of
fair value.
F-11
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies - continued
Investments
Investments consist of an interest in a partnership acquired in
the Setex LLC acquisition, accounted for under the equity method of
accounting.
Earnings (Loss) Per Share
Earnings (loss) per share are calculated based upon the
weighted-average number of outstanding common shares. Diluted earnings
(loss) per share are calculated based upon the weighted-average number
of outstanding common shares, plus the effect of dilutive stock
options, warrants, convertible preferred stock and convertible
debentures.
The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128 "Earnings Per Share", which requires that
both basic earnings (loss) per share and diluted earnings (loss) per
share be presented on the face of the statement of operations. All
per-share amounts are presented 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.
Impairments
Impairments, measured using fair market value, are recognized
whenever events or changes in circumstances indicate that the carrying
amount of long-lived assets (other than unproved oil and gas
properties discussed above) may not be recoverable and the future
undiscounted cash flows attributable to the asset are less than its
carrying value. Because of declining sales prices for oil and gas in
1998, certain producing oil and gas properties were impaired at
December 31, 1998. The Company charged $2,279,449 to operations in
1998 as an impairment loss, based upon discounted net present value of
future cash flows of related oil and gas properties.
Stock Based Compensation
In October 1995, SFAS No. 123, "Stock Based Compensation," (SFAS
123) was issued. This statement requires the Company to choose between
two different methods of accounting for stock options and warrants.
The statement defines a fair- value-based method of accounting for
stock options and warrants but allows an entity to continue to measure
compensation cost for stock options and warrants using the accounting
prescribed by APB Opinion No. 25 (APB 25), "Accounting for Stock
Issued to Employees." Use of the APB 25 accounting method results in
no compensation cost being recognized if options are granted at an
exercise price at the current market value of the stock or higher. The
Company will continue to use the intrinsic value method under APB 25
but is required by SFAS 123 to make pro forma disclosures of net
income (loss) and earnings (loss) per share as if the fair value
method had been applied in its 1998, 1997 and 1996 financial
statements. See Note 6 to the consolidated financial statements for
further information.
Implementation of New Financial Accounting Standards
The Company adopted SFAS No. 130 "Reporting Comprehensive
Income", No. 131 "Disclosures About Segments of an Enterprise and
Related Information" and No. 132 "Employers Disclosures About Pensions
and Other Post Retirement Benefits". Adoption of these statements had
no material effects on the Company's financial position, results of
operations or cash flows.
F-12
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Operations and Management Plans
At December 31, 1998, the Company's current liabilities exceeded
its current assets by $5,738,409 and the Company was either past due
or in default of certain of its debt agreements. Further, the Company
has experienced significant recurring net losses. Following are steps
management has taken and are proceeding with in an attempt to move the
Company to profitability:
- First, management elected to focus more on natural gas reserves
and production and sold its subsidiary, GulfWest Permian. This
sale eliminated a very significant portion of its debt which was
tied to older, higher cost oil production and reserves.
- Second, at the same time GulfWest Permian was sold, management
decided to sell the old operating company, WestCo, bring in a new
operating team, SETEX, and consolidate the Company's offices in
Houston.
- Third, since December 31, 1998, the Company has raised working
capital to meet its immediate obligations and began to enhance
production. A director of the Company purchased $635,000 of
Series BB Preferred Stock and subscribed to purchase $3,000,000
of Common Stock, $1,500,000 of which the Company has received at
August 12, 1999. The funds from these equity offerings are being
used specifically to reduce current liabilities and increase
production through workovers and installation of surface
equipment.
- Fourth, with the operating capital commitment and a consolidated
office in Houston, the Company focused on evaluating and
acquiring natural gas assets to achieve a more balanced cash flow
from oil and natural gas.
- Fifth, the near-term operating focus of SETEX was to turn each
remaining oil and gas asset of the Company into a positive cash
flow property, even at lower oil and gas prices. This was to be
done by significantly lowering expenses and increasing
production.
- Sixth, the Company brought in key technical staff to focus on the
evaluation of existing properties and pipelines, and to continue
with efforts to increase production and revenue from the
Company's existing core assets.
- Seventh, the Company defined a tactical and strategic business
plan to use existing assets to achieve a positive corporate cash
flow and to identify and evaluate additional development and
acquisition opportunities to further grow the Company.
Specifically, the Company's staff has identified and continues to
evaluate workover and drilling projects on its existing oil and
gas properties. If successful, these "in-hand" opportunities are
projected to provide the Company with sufficient revenue to
become profitable. In addition, the Company has identified, and
is evaluating and negotiating the acquisition of additional oil
and gas properties in its core areas.
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-13
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:
1998 1997
Unproved oil and gas properties $ 4,585 $ 4,585
Proved oil and gas properties 7,309,587 16,292,916
Support equipment and facilities 719,661 733,255
8,033,833 17,030,756
Less accumulated depreciation,
depletion and amortizatin (1,827,123) (2,513,105)
Net capitalized costs $ 6,206,710 $ 14,517,651
Results of Operations for Oil and Gas Producing Activities:
1998 1997 1996
Oil and gas sales $ 1,804,147 $ 4,269,032 $ 1,549,069
Production costs (1,647,329) (2,139,128) (656,957)
Exploration costs (lease abandonments) ( 85,696)
Depreciation, depletion and amortization (2,100,332) (1,470,368) ( 391,494)
Income tax expense
Results of operations for oil and gas
producing activities - income (loss) $ ( 1,943,514) $ 659,536 $ 414,922
Costs Incurred in Oil and Gas Producing Activities:
1998 1997 1996
Property Acquisitions
Proved $ 4,704,408 $ 683,616 $ 11,158,616
Unproved - 4,585
Development Costs 1,786,900 1,477,458 273,799
$ 6,491,308 $ 2,165,659 $ 11,432,415
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,
1998 and 1997, and its results of operations for the years ended
December 31, 1998, 1997 and 1996 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-14
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 year ended December 31, 1996, as if the
Phase I and Phase II transactions had occurred as of January 1, 1996:
Year Ended
December 31,
1996
Revenues $ 4,945,513
Costs and expenses 4,526,103
Income (loss) from operations 419,410
Other income and expense (1,081,997)
Income taxes
Net income (loss) $ ( 662,587)
Earnings (loss) per share - basic and diluted $ (1.60)
Effective April 1, 1998, the Company acquired oil and gas
reserves from an unrelated party (Phase III). The acquisition cost was
$3,072,000 including $2,575,000 in long-term debt, $100,000 cash paid
in 1998, $200,000cash paid in 1997 and other fees and expenses
totaling $197,000. Effective October 1, 1998, the Company sold its
interest in these properties as part of the sale of its wholly owned
subsidiary, GulfWest Permian.
Effective September 1, 1998, the Company acquired all the
membership interests of Setex, LLC, pursuant to an Interest Purchase
Agreement ("Agreement"). The aggregate purchase consideration for all
the membership interests consisted of 4,000 shares of the Series C
Preferred Stock of GulfWest and warrants to purchase 100,000 shares of
GulfWest Common Stock. In this transaction, the Company acquired
working interests in proved undeveloped oil and gas properties located
in six (6) counties in South and East Texas with estimated proved
reserves of approximately 3 billion cubic feet of natural gas
equivalent net to the Company's interest. The net consideration
received ($630,134) was determined through negotiations based upon
third party engineering reports.
F-15
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Cost of Oil and Gas Properties - continued
Costs Incurred in Oil and Gas Producing Activities: - continued
Supplemental unaudited pro forma information (under the purchase
method of accounting) presenting the results of operations for the
years ended December 31, 1998 and 1997, as if the Setex LLC
transaction had occurred as of January 1, 1998 and 1997:
Year Ended Year Ended
December 31, December 31,
1998 1997
Revenues $ 2,485,510 $ 5,244,524
Costs and expenses 8,988,287 5,882,696
Income (loss) from operations ( 6,502,777) ( 638,172)
Other income and expense ( 2,058,063) ( 1,079,771)
Income taxes
Net income (loss) ($ 8,560,840) ($ 1,717,943)
Earnings (loss) per share - basic and diluted ($ 3.75) ($ 1.22)
Note 4. Accrued Expenses
Accrued expenses consisted of the following:
December 31, December 31,
1998 1997
Payroll and payroll taxes $ 92,586 $ 79,366
Interest 310,573 181,525
Professional fees 30,000 21,000
Sales taxes 9,458 8,471
$ 442,617 $ 290,362
Note 5. Notes Payable and Long-Term Debt
Notes payable is as follows:
1998 1997
$450,000 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). $ 450,000 $ 500,000
$175,000 notes payable due May, 1998. Interest at
prime rate, plus 2% (prime rate at 7.75% at December 31,
1998); 18% past due rate, payable monthly. Secured by
oil and gas properties. $ 175,000
$12,000 notes payable due on demand. Interest at 8%
payable quarterly; unsecured. $ 12,000
Promissory note to director of the Company at 8.5% interest.
Due December 31, 1998; unsecured. $ 800,000
$ 1,437,000 $ 500,000
F-16
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:
1998 1997
Line of credit (up to $3,000,000) to bank; due April 10, 2000;
secured by guaranty of a director. Interest at prime rate
(7.75% at December 31, 1998). $ 2,999,515 $ 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 to various individuals at
9.5% interest per annum; $25,000 retired April, 1997;
$105,000 converted to common stock June, 1998;
amounts include $245,000 ($350,000-1997) due to
related parties; past due. 370,000 475,000
Notes payable to finance vehicles, payable in aggregate
monthly installments of approximately $10,000, including
interest of 8.5% to 10.5% per annum; secured by the related
equipment, due various dates through 2001. 253,251 245,609
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; retired January and August, 1998. 98,968
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; retired April, 1998. 1,299,200
Promissory note to director of the Company at 8.5% interest
Due December 15, 1998; unsecured; converted to
common stock June, 1998. 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.
Retired March, 1998. 6,132,786
Notes payable to unrelated entity to retire other debt at an
Interest rate of prime plus 1% (prime at December, 1998 7.75%);
due February 1, 2001. Secured by oil and gas properties.
The note contains certain financial covenants that the Company
was not in compliance with at December 31, 1998. 1,350,000
F-17
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Notes Payable and Long-Term Debt - continued
Long-term debt - continued
1998 1997
Notes payable to related party to finance equipment with
monthly installments of $7,800, including interest at 10%
per annum; final payment due September, 2003; secured
by related equipment. 337,040
Line of credit up to $500,000 to bank; due April, 1999;
secured by guaranties of a director and officer.
Interes at prime rate (7.75% at December 31, 1998). 500,000
6,675,016 12,846,288
Less current portion ( 3,273,645) ( 661,233)
Total long-term debt $ 3,401,371 $12,185,055
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. The note contains certain covenants that the Company
had not complied with at December 31, 1998.
Estimated annual maturities for long-term debt are as follows:
1999 $ 3,273,645
2000 3,154,125
2001 99,563
2002 80,911
2003 66,772
$ 6,675,016
Note 6. Stockholders' Equity
Common Stock 1998 1997
Par value $.001; 20,000,000 shares authorized;
3,113,517 and 1,759,185 shares issued and
outstanding as of December 31, 1998 and
1997, respectively. $ 3,113 $ 1,759
Preferred Stock
Class AA, par value $.01; 4,000 shares authorized;
1,950 shares issued and outstanding as of
December 31, 1998 and 1997. 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 $ 19
F-18
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Class AAA, par value $.01; 4,000 shares authorized;
3,440 and 3,240 shares issued and outstanding as
of December 31, 1998 and 1997, respectively.
Dividends are cumulative and payable quarterly at
the rate of $45 per share per annum. The shares
are convertible into common stock based upon a
purchase value of $500 per share of Class AAA stock
divided by the lesser of (i) $3.50 per share or (i) 70%
of the average closing NASDAQ bid price of the common
stock for the 15 trading days that end on the 3rd business
day preceding conversion. In addition, the Company is
obligated to pay $2.10 per week (from August 15, 1997;
$2.00 from May 15 to August 15, 1997) per $1,000
purchase amount to Class AAA stock as additional
dividends until sufficient securities are registered to
cover public resales of common stock issuance
upon conversion of Class AAA shares. 33 35
Series BB, par value $.01; 12,000 shares authorized;
3,830 shares issuable as of December 31, 1998.
Dividends are cumulative and payable quarterly at the
rate of $60 per share per annum. Shares are redeemable,
commencing two years after date of issue at Company's
option, at 110% of original price paid by shareholder plus
accrued dividends. The shares are also convertible into
common stock based upon a value of $500 per share
divided by $.60 per share of common stock. 38
Series C, par value $.01; 12,000 shares authorized; 4,000 shares
issuable as of December 31, 1998. The Series C preferred stock
does not pay dividends and is not redeemable. At any time during
the period commencing one year and expiring three years following
the date of issuance, provided the closing Nasdaq price of the
Company's common stock is at least $10.00 per share for ten
consecutive days, the shares are convertible at the Company's
option into common stock based upon a purchase value of $500 per
Class C share divided by the greater of (i) $10.00 per share of
common stock or (ii) the average closing price of the common
stock for the 10 trading days preceding the conversion. 40
$ 130 $ 54
All classes of preferred shareholders have liquidation preference over
common shareholders of $500 per preferred share, plus accrued dividends.
Dividends in arrears at December 31, 1998 were $541,796 ($49,151 - Class AA;
$492,645 - Class AAA). Dividends in arrears at December 31, 1997 were $230,766
($184,866 - Class AAA; $45,900 - Class AA).
F-19
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Stock Options
The Company maintains a Non-Qualified Stock Option Plan (as amended
and restated, the "Plan") which authorizes the grant of options of up to
1,000,000 shares of common stock. Under the Plan, options may be granted to
any of the Company's key employees (including officers), employee and
nonemployee directors, and advisors. The Plan is administered by a
committee appointed byt the Board of Directors. Options granted under the
Plan have been granted at an option price of $3.13 and $1.81 per share. In
July 1999, the Board of Directors authorized that all employee and director
options under the plan be reduced to a price of $.75 per share. Following
is a schedule by year of the activity related to stock options, including
weighted- average ("WTD AVG") exercise prices of options in each category.
1998 1997
WTD AVG WTD AVG
Prices Number Prices Number
Balance, January 1 $ 2.85 800,000 $ 3.06 215,000
Options issued $ 1.81 210,000 $ 2.77 585,000
Options exercised/expired $ 3.12 (520,000) $ - -
Balance, December 31 $ 2.52 490,000 $ 2.85 800,000
Options covering 490,000 (1997 - 740,000) common shares were
exercisable at December 31, 1998, at a weighted- average option price of
$2.52 (1997 - $2.85) 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, 1998:
1999 2000 2001 2002 Thereafter Total
$1.81 210,000 210,000
$3.00 100,000 10,000 65,000 175,000
$3.13 105,000 - 105,000
------- ------ ------ ------ ------- -------
205,000 - 10,000 65,000 210,000 490,000
Stock Warrants
The Company has issued a significant number of stock warrants for
a variety of reasons, including compensation to employees, additional
inducements to purchase the Company's common or preferred stock,
inducements related to the issuance of debt and for payment of goods
and services. Following is a schedule by year of the activity related
to stock warrants, including weighted-average exercise prices of
warrants in each category:
1998 1997
WTD AVG WTD AVG
Prices Number Prices Number
Balance, January 1 $ 3.23 2,654,555 $ 3.16 2,702,055
Warrants issued $ 3.49 1,008,500 $ 3.00 93,750
Warrants exercised/expired $ 1.92 (774,712) $ 1.54 (141,250)
Balance, December 31 $ 3.16 2,888,343 $ 3.23 2,654,555
Included in the "warrants exercised/expired" column in 1998 were
53,587 warrants with a weighted average price of $.48 exercised by
related parties. Included in the "warrants issued" and "warrants
exercised/expired" column in 1998 were 644,250 warrants issued in
previous years whose expiration dates were extended. The remaining
76,785 warrants expired. Included in the "warrants issued" and
"warrants exercised/expired" columns in 1997 were 51,250 $.50 warrants
exercised by related parties. The remaining 90,000 warrants expired.
F-20
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 6. Stockholders' Equity - continued
Following is a schedule by year and by exercise price of the
expiration of the Company's stock warrants issued as of December 31,
1998:
1999 2000 2001 2002 2003 Thereafter Total
$ .475 30,748 30,748
.50 12,841 12,841
1.50 175,000 175,000
1.625 19,000 19,000
1.75 631,250 631,250
1.80 73,750 73,750
2.00 2,500 100,000 102,500
2.25 40,000 40,000
2.50 75,000 75,000
3.00 166,754 500,000 666,754
3.25 47,500 47,500
3.50 205,250 205,250
4.50 174,250 174,250
5.00 244,500 100,000 344,500
5.75 50,000 40,000 90,000
6.00 200,000 200,000
--------- ------- ------- ------- ------- ------- ---------
1,673,750 205,250 159,000 - 166,754 683,589 2,888,343
Warrants outstanding to officers, directors and employees of the
Company at December 31, 1998 and 1997 were approximately 1,046,619 and
1,300,000, respectively. The exercise prices on these warrants range
from $.475 to $6.00 and expire various dates through 2006.
Other Stock Based Compensation Disclosures
During 1998, 1997 and 1996, the Company issued options and
warrants totaling 90,000 (all exercisable), 1997- 85,000 (25,000
exercisable) and 1996 - 653,000 (all exercisable), respectively, to
employees as compensation. As disclosed in Note 1, the Company
continues to use the intrinsic value based method of APB 25 to measure
stock based compensation. If the Company had used the fair value
method required by SFAS 123, the Company's net loss and per share
information would approximate the following amounts:
1998 1997 1996
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
SFAS 123 compensation cost $ $ 128,100 $ $ 39,750 $ $ 1,494,640
APB 25 compensation cost $ $ $ $ $ 24,125 $
Net loss ($ 8,387,060) ($ 8,515,160) ($ 1,676,681) ($ 1,716,431) ($ 1,519,764) ($ 2,990,279)
Loss per common share -
basic and diluted ($ 3.68) ($ 3.73) ($ 1.19) ($ 1.22) ($ 2.28) ($ 3.44)
The effects of applying SFAS 123 as disclosed above are not indicative of
future amounts. The Company anticipates making additional stock based employee
compensation awards in the future.
The Company utilized the Black-Sholes option pricing model to estimate the
fair value of the options and warrants (to employees and non-employees) on the
grant date. Significant assumptions include (1) 5.75% risk free interest rate;
(2) weighted average expected life of 1998 - 4.4 years; 1997 - 3 years; 1996 -
4.95 years; (3) expected volatility of 1998 - 70.48%; 1997 - 77.68%; 1996 -
81.89% and (4) no expected dividends.
F-21
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Loss Per Common Share
The following is a reconciliation of the numerators and denominators used
in computing loss per share:
1998 1997 1996
Net loss ($ 8,387,060) ($1,676,681) ($1,519,764)
Preferred stock dividends ( 427,173) ( 380,928) ( 1,363,677)
Loss available to common --------------- ----------- ----------
shareholders (numerator) ($ 8,814,233) ($2,057,609) ($2,883,441)
=============== ========== ==========
Weighted-average number of shares
of common stock (denominator) 2,394,866 1,725,926 1,266,974
=============== ========= =========
Loss per share ($ 3.68) ($ 1.19) ($ 2.28)
=============== ========== ==========
Potential dilutive securities (1998 and 1997 - stock options,
stock warrants, convertible preferred stock and convertible
debentures; 1996 - stock options, stock warrants and convertible
preferred stock) have not been considered since the Company reported a
net loss and, accordingly, their effects would be antidilutive.
As of August 12, 1999, 4,117,969 shares of Common Stock have been
issued during 1999, including 4,100,000 to directors of the Company.
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, 1998 and
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, 1998 and 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, 1998 and 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. At December 31, 1998, accrued
compensation to one current and two former officers totalled $89,917.
From July 22 to August 13, 1998, the Company advanced sums
totalling $102,000 to Gulf Coast Exploration, Inc. At December 31,
1998, the debt had been fully reserved.
F-22
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 8. Related Party Transactions - continued
On October 1, 1998, Toro Oil Company executed an unsecured promissory note
to the Company for the purchase of 100% of WestCo for $150,000, with interest at
the prime rate per annum and due September 30, 1999. To date, no principal
payments have been received. At December 31, 1998, the promissory note had been
fully reserved.
Interest expensed on related party notes totaled approximately $154,000,
$49,000 and $26,000 for the years December 31, 1998, 1997 and 1996,
respectively.
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,
1998 1997
Deferred tax assets
Provision for bad debts $ 238,078 $ 152,398
Net operating loss carryforwards 3,471,306 1,521,758
Oil and gas properties 744,413 -
Deferred tax liability
Oil and gas properties ( - ) ( 30,600)
Net deferred tax assets before
valuation allowance 4,453,797 1,643,556
Valuation allowance ( 4,453,797) ( 1,643,556)
Net deferred tax assets (liabilities) $ - $ -
As of December 31, 1998 and 1997, 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, 1998 and 1997.
1998 1997
Tax benefit calculated at statutory rate ($ 2,851,601) ($ 595,140)
Increase (reductions) in taxes due to:
Effect of net operating loss carryforwards 1,945,266 562,638
Effect on non-deductible expenses 66,724 42,703
Impairment of oil and gas assets 775,012 -
Other 64,599 ( 10,201)
----------- ------------
Current federal income tax provision $ - $ -
=========== ============
F-23
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Income Taxes - continued
As of December 31, 1998, the Company had net operating loss carryforwards
of $10,209,723, which are available to reduce future taxable income and the
related income tax liability. These carryforwards expire as follows:
Net
Operating
Losses
2004 $ 73,936
2006 217,957
2008 152,504
2009 636,826
2010 1,174,305
2011 565,410
2012 1,667,413
2018 5,721,372
$ 10,209,723
Note 10. Commitments and Contingencies
Lease Obligations
The Company leases office space at one location under a three (3) year
lease which commenced January 1, 1999. Future annual commitments under the lease
are: 1999 - $36,678, 2000 - $36,678 and 2001 - $36,678.
Year 2000 Computer Issues
The Company is working to resolve the potential impact of the year 2000 on
the ability of the Company's computerized informtion systems to accurately
process information that may be date sensitive. Any of the Company's programs
that recognize a date using "00" as the year 1900 rather than the year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation.
The Company has not completed its asessment, particularly related to
outside customers or vendors. The Company has received notification from its
general ledger vendor that its current system is compliant. The Company intends
to complete its outside customer/vendor assessment in the fourth quarter of
1999. If the Company and/or third parties upon which it relies are unable to
address this issue in a timely manner, it could result in a material financial
risk to the Company, possibly delaying receipts from sales of oil and natural
gas.
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.
F-24
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11. Oil and Gas Reserves Information (Unaudited) - continued
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, 1998, 1997, and 1996, together with
the changes therein.
Crude Oil Natural Gas
(Bbls) (Mcf)
QUANTITIES OF PROVED RESERVES:
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
Revisions ( 2,317,025) ( 845,166)
Extensions, discoveries, and additions 21,306 65,751
Purchases 177,416 2,958,550
Sales ( 1,375,820) ( 1,518,913)
Production ( 98,157) ( 200,225)
---------- -----------
Balance December 31, 1998 1,084,147 6,655,355
========== ===========
PROVED DEVELOPED RESERVES:
December 31, 1996 2,498,287 4,067,278
---------- ----------
December 31, 1997 2,158,239 4,286,755
---------- ----------
December 31, 1998 769,862 3,866,308
========== ==========
F-25
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:
1998 1997 1996
Future cash inflows $22,260,688 $87,414,045 $117,580,889
Future production and development costs
Production 10,379,070 35,441,101 42,128,957
Development 2,935,160 9,937,663 6,596,609
----------- ----------- -----------
Future cash flows before income taxes 8,946,458 42,035,281 68,855,323
Future income taxes ( - ) ( 7,852,795) ( 17,027,637)
---------- ----------- -----------
Future net cash flows after income taxes 8,946,458 34,182,486 51,827,686
10% annual discount for estimated
timing of cash flows ( 3,756,850) ( 13,419,225) ( 21,704,010)
---------- ----------- -----------
Standardized measure of discounted
future net cash flows $ 5,189,608 $ 20,763,261 $ 30,123,676
=========== ============ ============
The following reconciles the change in the standardized measure of discounted
future net cash flows:
Beginning of year $20,763,261 $ 30,123,676 $ 5,907,735
Changes from:
Purchases 1,619,804 551,704 22,269,011
Sales ( 7,563,199) ( 3,076,199) ( 1,307,000)
Extensions, discoveries and improved
recovery, less related costs 258,112 7,167,886 4,174,440
Sales of oil and gas produced net of
production costs ( 156,818) ( 2,129,904) ( 892,112)
Revision of quantity estimates ( 7,584,033) ( 860,133) ( 164,080)
Accretion of discount 2,553,324 4,002,061 715,122
Change in income taxes 4,769,976 5,126,956 ( 8,653,448)
Changes in estimated future
development costs ( 677,160) ( 1,429,664) ( 673,185)
Development costs incurred that
reduced future development costs 1,786,900 1,447,458 273,799
Change in sales and transfer prices,
net of production costs (11,523,635) ( 19,265,762) 7,576,032
Changes in production rates (timing)
and other 943,076 (894,818} 897,362
----------- ----------- ------------
End of year $ 5,189,608 $ 20,763,261 $ 30,123,676
=========== ============ ============
F-26
GULFWEST OIL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Prior Period Adjustments
Based upon comments by the SEC during a review of the Company's Preliminary
Proxy Statement (subsequently abandoned), the Company adjusted its accounting
for certain common stock purchase warrants and stock options which had been
issued in 1996 and 1997, and adjusted its accounting for the convertible
preferred stock issued with a discounted conversion feature in 1996. The Company
used the intrinsic method of accounting under APB 25 to measure employee stock
based compensation and fair value method of accounting under SFAS 123 to measure
other stock based compensation, utilizing a 60% discount off the Nasdaq market
price at the measurement date for both methods. The Company has restated stock
based compensation without a discount off the Nasdaq market price at the
measurement date. During 1996, the Company issued Class AAA Convertible
Preferred Stock with a 30% discounted conversion feature, convertible at the
issue date. 1996 is restated to reflect the effects of the 30% discount as a
preferred dividend. During 1997, options were issued to a director of the
Company. The options have since been irrevocably rescinded by the director,
effective retroactively to the grant date. Additionally, the penalty feature for
the Class AAA preferred dividends have been restated because of a mathematical
error in 1997. The aggregate of these adjustments resulted in an increase to
previously reported net loss to common shareholders of $1,986,689 and $1.57 per
share for 1996, and a decrease of $30,266 and $.02 per share in 1997. These
adjustments did not have any effect on income taxes for the periods ended
December 31, 1996 and 1997. The 1996 and 1997 consolidated balance sheet and
related consolidated statement of operations, stockholders equity, and statement
of cash flows have been restated to reflect these adjustments.
Note 13. Interim Financial Data (unaudited)
Following are the aggregate effects of year end adjustments that are deemed
by management to be material to the results of the fourth quarter of 1998:
- Write-down of oil and gas assets
for impairment (charged to expense) $ 2,279,449
- Adjustments to assets and equity
related to the Setex LLC acquisition
(no charge to expense) $ 1,369,866
- Adjustment in the Company's method
of computing stock based compensation
to non-employees (charged to expense) $ 139,176
F-27
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
GULFWEST OIL COMPANY
Our report on the consolidated financial statements of GulfWest Oil Company and
Subsidiaries as of December 31, 1998 and 1997 and for each of the three years in
the period ended December 31, 1998, 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, 1998, 1997 and
1996 on page F-29.
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
August 18, 1999
F-28
GULFWEST OIL COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
BALANCE BALANCE
AT AT END
BEGINNING
OF PROVISIONS/ RECOVERIES/ OF
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS PERIOD
- ---------------------------------------- -------------- -------------- --------------- ---------------
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
============== ============== =============== ===============
For the year ended
December 31, 1998:
Accounts and notes receivable -
related parties 448,230 252,000 700,230
============== ============== =============== ===============
Valuation allowance for
deferred tax assets 1,643,556 2,810,241 4,453,797
============== ============== =============== ===============
F-29
Exhibit 21.1
Form of Letter of Agreement
with Class AAA Preferred Stockholder
(GulfWest Oil Company Letterhead)
July 7, 1999
(Class AAA Preferred Stockholder)
Dear Stockholder,
This letter is to obtain your agreement to amend Section 7 of the
Certificate of the Designation, Preferences, Rights and Limitations of the Class
AAA Preferred Stock of GulfWest Oil Company (the "Amendment"). The conversion
price will change from the lesser of $3.50 per share or 70% of the average
closing bid price of the Company's Common Stock to a set price equal to 120% of
the sales price per share of GulfWest's $3 million private offering of Common
Stock (the "Offering"). The conversion of the Preferred Stock and unpaid
dividends to Common Stock at the set price will occur simultaneously with the
closing of the Offering. The Amendment will be predicated upon the successful
close of the Offering.
If you agree to the Amendment, please acknowledge below and fax the
executed copy to me at (713) 974-0617. I greatly appreciate your cooperation in
this matter.
Sincerely,
\s\ Marshall A. Smith
Marshall A. Smith, CEO
Signed:\s\ (Class AAA Preferred Stockholder)
Exhibit 22.1
Subsidiaries of the Registrant
GulfWest has six wholly-owned subsidiaries, all Texas corporations or companies:
1. GulfWest Texas Company ("GW Texas") was organized September 23, 1996
and is the owner of record of interests in certain properties located
in the Vaughn Field, Crockett County Texas (the "Vaughn Field").
2. DutchWest Oil Company ("DutchWest") was organized July 28, 1997 and is
the owner of record of interests in certain oil and natural gas
properties located in Hardin and Polk Counties, Texas.
3. VanCo Well Service, Inc. ("VanCo") was organized September 5, 1996 and
operates well servicing equipment for the Company and under contracts
with third parties.
4. SETEX Oil and Gas Company ("SETEX") was organized August 11, 1998 and
operates oil and natural gas properties in which the Company owns
majority Working Interests.
5. Southeast Texas Oil and Gas Company, L.L.C. ("Setex LLC")was acquired
September 1, 1998 and is the owner of record of interests in certain
oil and natural gas properties located in eight counties in South and
East Texas.
6. LTW Pipeline Co. ("LTW") was organized April 19, 1999 to be the owner
and operator of natural gas gathering systems and pipelines, and to
market the natural gas produced by the Company's properties.