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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
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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: