UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997
Commission File Number 1-10192
Gulfport Energy Corporation
(Exact name of registrant as specified in its charter)
Delaware 73-1521290
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
1601 NW Expressway, Suite 700
Oklahoma City, Oklahoma 73118-1401
(405) 848-8808
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive office)
Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
NAME OF EACH EXCHANGE ON WHICH
TITLE OF EACH CLASS REGISTERED
Common Stock, $0.01 par value None
Indicate by a check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X ] No [ ].
Indicate by a 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 information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
1
All shares of common and preferred stock outstanding prior to the
Effective Date of the Plan of Reorganization (July 11, 1997) were canceled on
the Effective Date. The number of shares of the registrant's Common Stock, $0.01
par value, outstanding at March 20, 1998 was 22,076,315. The aggregate market
value of the voting stock held by non-affiliates of the registrant on that date
was $33,817,000.
APPLICABLE OF TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ X ] No [ ]
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12, and 13 of Part III have been omitted from this report
since Gulfport Energy Corporation will file with the Securities and Exchange
Commission, not later than 120 days after the close of the fiscal year, a
definitive proxy statement, pursuant to Regulation 14A, which involves the
election of directors. The information required by Items 10, 11, 12 and 13 of
Part III of this report, which will appear in the definitive proxy statement, is
incorporated by reference into this Annual Report.
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TABLE OF CONTENTS
Page
Disclosure Regarding Forward-Looking Statements............................................................ 4
PART I
Item 1. Business........................................................................................... 4
Item 2. Properties......................................................................................... 21
Item 3. Legal Proceedings.................................................................................. 21
Item 4. Submission of Matters to a Vote of Security Holders................................................ 22
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters................................................................................ 22
Item 6. Selected Financial Data ........................................................................... 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................................... 24
Item 8. Financial Statements and Supporting Data........................................................... F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............. 34
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act............................................................ 34
Item 11. Executive Compensation............................................................................ 34
Item 12. Security Ownership of Certain Beneficial Owners and Management.................................... 34
Item 13. Certain Relationships and Related Transactions.................................................... 34
PART IV
Item 14. Exhibits and Reports on Form 8-K.................................................................. 34
Signatures........................................................................................ 35
3
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K includes "forward-looking statements" within the meaning of
Section 27A of the Securities Exchange Act of 1934, as amended, (the "Exchange
Act"). All statements, other than statements of historical facts included in
this Form 10-K that address activities, events or developments that Gulfport
Energy Corporation ("Gulfport" or the "Company"), a Delaware corporation
formerly named WRT Energy Corporation, expects or anticipates will or may occur
in the future, including such things as estimated future net revenues from oil
and gas reserves and the present value thereof, future capital expenditures
(including the amount and nature thereof), business strategy and measures to
implement strategy, competitive strengths, goals, expansion and growth of
Gulfport's business and operations, plans, references to future success,
references to intentions as to future matters and other such matters are
forward-looking statements. These statements are based on certain assumptions
and analyses made by Gulfport in light of its experience and its perception of
historical trends, current conditions and expected future developments as well
as other factors it believes are appropriate in the circumstances. However,
whether actual results and developments will conform with Gulfport's
expectations and predictions is subject to a number of risks and uncertainties;
general economic, market or business conditions; the opportunities (or lack
thereof) that may be presented to and pursued by Gulfport; competitive actions
by other oil and gas companies; changes in laws or regulations; and other
factors, many of which are beyond the control of Gulfport. Consequently, all of
the forward-looking statements made in the Form 10-K are qualified by these
cautionary statements and there can be no assurance that the actual results or
developments anticipated by Gulfport will be realized, or even if realized, that
they will have the expected consequences to or effects on Gulfport or its
business or operations.
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
Gulfport owns and operates mature oil and gas properties in the Louisiana
Gulf Coast Area. Gulfport seeks to achieve reserve growth and increased cash
flow from operations by exploiting its existing properties and acquiring
additional Louisiana Gulf Coast properties with exploitation and exploration
potential.
BACKGROUND
On February 14, 1996 ("Petition Date"), Gulfport's predecessor (the
"Debtor"), filed a petition with the Bankruptcy Court for the Western District
of Louisiana ("Bankruptcy Court") for protection under Chapter 11 of the Federal
Bankruptcy Code. Such case is referred to herein as the "Reorganization Case."
Upon filing of the voluntary petition for relief, the Debtor, as
debtor-in-possession, was authorized to operate its business for the benefit of
claim holders and interest holders, and continued to do so, without objection or
request for appointment of a trustee. All debts of the Debtor as of the Petition
Date were stayed by the bankruptcy petition and were subject to compromise
pursuant to such
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proceedings. The Debtor operated its business and managed its assets in the
ordinary course as debtor-in-possession, and obtained court approval for
transactions outside the ordinary course of business. Based on these actions,
all liabilities of the Company outstanding at February 14, 1996, were
reclassified to estimated pre-petition liabilities.
By order dated May 5, 1997, the Bankruptcy Court confirmed the Joint
Plan of Reorganization (the "Plan") of the Debtor's and co-proponents DLB Oil
and Gas, Inc. ("DLB") and Wexford Management LLC ("Wexford," and together with
DLB "DLBW"). The Plan was consummated and became effective on July 11, 1997 (the
"Effective Date"). On the Effective Date, the Debtor was merged with and into a
newly formed Delaware corporation named "WRT Energy Corporation" which effective
March 30, 1998, changed its name to "Gulfport Energy Corporation." On the
Effective Date, Gulfport allocated the actual reorganization value to the
entity's assets as defined by Statement of Position Number 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
As used herein, "Debtor" refers to the registrant prior to the Effective Date of
the Plan, "Gulfport" refers to the registrant following the Effective Date of
the Plan, and the "Company" or "WRT" refers to the registrant prior to or after
the Effective Date of the Plan, as the context requires.
EVENTS LEADING TO THE REORGANIZATION CASE
Entering 1995, the Company's strategic focus was the acquisition and
development of operated working interests in large, mature oil and gas fields in
south Louisiana. To help finance its acquisition and development program, the
Company utilized borrowings under its December 1994 $40,000,000 credit facility
(the "Credit Facility") with International Nederlanden Capital Corporation
("INCC") that was secured by substantially all of the Company's assets. In
addition, in February 1995, the Company offered 100,000 Units consisting of
$100,000,000 aggregate principal amount of 13 7/8% Senior Notes Due 2002 (the
"Senior Notes") and warrants (the "Warrants") to purchase an aggregate of
800,000 shares of the Company's Common Stock (the "Offering"). The net proceeds
from the Offering were used to acquire working interests in certain oil and gas
properties, to repay substantially all borrowings under the Credit Facility and
other indebtedness and for general corporate purposes.
During the remainder of 1995, the Company borrowed additional funds
under the Credit Facility, bringing the outstanding borrowings to $15,000,000,
the maximum amount of borrowings available under the Credit Facility. On
December 31, 1995, the Credit Facility converted to a term loan whereby
quarterly principal payments of one-sixteenth of the outstanding indebtedness
were due and payable.
Following the completion of the acquisition of working interests in
certain oil and gas properties, the Company initiated a significant capital
expenditure program to increase oil and gas production levels in each of its
fields. This program consisted of approximately 70 workover, side track and
recompletion projects and ten new development wells. Funding was provided from
operating cash flow, remaining proceeds from the Offering and borrowings under
the Credit Facility. The Company's production levels increased on a gas
equivalent (Mcfe) basis from March
5
1995, when the oil and gas property acquisitions were completed, to September
1995; however, the production increases were realized at a slower pace than
expected at the time of acquisition.
The lower than expected level of production resulted from various
factors including a combination of ordinary production declines, unexpected
losses of production from several key wells, mechanical difficulties in the Lac
Blanc Field and significant production declines in the predominantly oil
producing West Cote Blanche Bay Field, which was not then operated by the
Company. Contributing significantly to the shortfall in anticipated production
rates were three major well projects which proved to be unsuccessful in
September 1995, for which the Company expended a total of approximately
$3,600,000. Also, contributing to lower than expected net revenues and operating
cash flow was a significant decline in oil and gas prices during the third and
early fourth quarters of 1995 compared to the corresponding quarters of the
previous year. These lower than expected production rates, together with
decreased oil and gas prices during the third quarter of 1995, had a significant
negative effect on the Company's liquidity and cash flow from operations.
Based on operating results for the quarter ended September 30, 1995,
the Company had not yet realized the oil and gas production levels required at
then current prices and costs to support the Company's capital requirements and
fund existing debt service on the Senior Notes and pay dividends on its 9%
Convertible Preferred Stock ("Preferred Stock"). In early October 1995, the
Company had fully utilized the $15,000,000 borrowing base available under the
Credit Facility; and, in response to liquidity and cash flow concerns, the
Company changed its focus from acquisition and development of non-producing
reserves to conservation of cash resources and maintenance of existing producing
properties. The Company curtailed its activities to the minimum level of
maintenance necessary to operate prudently its producing oil and gas wells. All
other activities, including prospect acquisitions, new drilling, and development
of the Company's proved non-producing and undeveloped reserves, ceased.
In connection with this strategy, the Company made certain changes to
its corporate structure and organization aimed at reducing costs and improving
operations. On November 10, 1995, Steven S. McGuire resigned as a director,
Chairman of the Board and Chief Executive Officer of the Company. Samuel C. Guy,
the Company's Executive Vice President, also resigned as a director. Mr. Guy's
employment contract, which expired on February 29, 1996, was not renewed by the
Company. The Board of Directors appointed Raymond P. Landry, previously
President and Chief Operating Officer of the Company, to the position of
Chairman of the Board and Chief Executive Officer. See Item 10, "Directors and
Executive Officers of the Registrant."
The Company also implemented plans to reduce general and administrative
expenses in Houston, Texas as well as move the corporate offices from The
Woodlands, Texas, and reduce its workforce from 76 in October 1995 to 28 in June
1997. The workforce reductions, primarily from the Company's research and
development activities and wireline/logging operations, were consistent with the
Company's focus on conservation of cash and maintenance of existing producing
properties.
The Company experienced further decreases in oil and gas production and
6
related cash flows in late 1995 and early 1996, which further deteriorated the
Company's already weakened financial condition. At December 31, 1995, the
Company was in default under certain financial covenants of the Credit Facility.
As a result of the declines in oil and gas production and related cash flows,
the Company was not generating, and did not expect to generate in the near term,
sufficient cash flow to meet its existing obligations, including: the $6,900,000
interest payment on the Senior Notes due March 1, 1996, trade payable
obligations remaining from the Company's 1995 capital expenditure program,
quarterly principal and interest due on the Credit Facility, dividends on the
Preferred Stock and ongoing field operating and general and administrative
expenses. As liquidity problems became more severe, the Company concluded that a
comprehensive financial restructuring would provide the best result to the
various stakeholders in the Company.
On February 14, 1996, the Company commenced a voluntary reorganization
case under Chapter 11 of the Bankruptcy Code by filing a voluntary petition for
bankruptcy relief with the Bankruptcy Court (Case No. 96BK-50212). Upon the
filing of the voluntary petition for relief, the Company, as
debtor-in-possession, was authorized to operate its business for the benefit of
claim holders and interest holders, and continued to do so without objection or
request for appointment of a trustee. All debts of the Company as of the
Petition Date were stayed by the bankruptcy petition and were subject to
compromise pursuant to such proceedings. The Company did not make the March 1,
1996 interest payment on the Senior Notes and pursuant to an order of the
Bankruptcy Court did not make the scheduled interest payment of $381,000 to INCC
on February 28, 1996, nor did it make any interest payments from that date on
the Credit Facility through July 1997. In addition, the Company did not make
the first scheduled payment of $938,000 due on the Credit Facility March 31,
1996, nor did it make any principal payments from that date through July 1997.
On July 11, 1997, the Credit Facility was paid in full, pursuant to the Plan of
Reorganization. The Company was required to obtain court approval for
transactions outside the ordinary course of business.
On October 22, 1996, the Company accepted and signed the proposal
("DLBW Proposal") submitted by DLB and Wexford, on behalf of its affiliated
investment funds, providing the terms of a proposed capital investment in a plan
of reorganization for the Company. DLB and Wexford are together referred to
herein as DLBW. The Company subsequently obtained Bankruptcy Court approval of
the expense reimbursement provisions of the DLBW Proposal.
Subsequent to the Company's execution of the DLBW Proposal, DLB
commenced negotiations with Texaco Exploration and Production, Inc. ("TEPI")
regarding, (i) the claim asserted by TEPI against the Company and its affiliates
("Texaco Claim"), (ii) the purchase of certain interests owned by TEPI in the
West Cote Blanche Bay Field ("WCBB Assets") and (iii) the Contract Area
Operating Agreement related to the WCBB Assets and various other agreements
relating thereto. As a result of the negotiations, on March 11, 1997 TEPI and
DLB entered into, among other agreements, the Purchase, Sale and Cooperation
Agreement ("PS&C Agreement") pursuant to which DLB (i) agreed to purchase the
Texaco Claim, (ii) agreed to purchase the WCBB Assets from TEPI, and (iii)
agreed to guarantee ("P&A Guarantee") the performance of all plugging and
abandonment obligations related to both the WCBB Assets and the Company's
interests in West Cote Blanche Bay Field ("WCBB") and, in order to implement the
P&A Guarantee, the Company paid into a trust ("P&A Trust") established for the
benefit of the State of Louisiana, $1,000,000 on the Effective Date of the Plan.
7
Pursuant to the PS&C Agreement, on the Effective Date of the Plan, DLB
among other things, assigned its rights associated with the WCBB Assets to the
Company, and as a result, the Company assumed jointly and severally with DLB,
the liabilities with respect to the WCBB Assets.
By order dated May 5, 1997, the Bankruptcy Court approved the Plan. The
Plan involved (i) the issuance to WRT's unsecured creditors, on account of their
allowed claims, an aggregate of 10 million shares of Gulfport Common Stock, (ii)
the issuance to WRT's unsecured creditors, on account of their allowed claims,
the right to purchase an additional three million eight hundred thousand shares
(3,800,000) of Gulfport Common Stock at a purchase price of $3.50 per share
("Rights Offering"), (iii) the issuance to DLBW and affiliates of the number of
shares of Gulfport Common Stock obtained by dividing DLBW's Allowed Secured
Claim ("Secured Claim") amount by a conversion price of $3.50 per share, (iv)
the purchase by DLBW of all shares of Gulfport Common Stock not otherwise
purchased pursuant to the Rights Offering, (v) the transfer by DLB of the WCBB
Assets to Gulfport along with the associated P&A Trust and associated funding
obligation in exchange for five million shares (5,000,000) of Gulfport Common
Stock, (vi) the funding by WRT of $3,000,000 to an entity (the "Litigation
Entity") to be controlled by an independent party for the benefit of most of the
Company's existing unsecured creditors and the transferring to that Entity any
and all causes of action, claims, rights of actions, suits or proceedings which
have been or could be asserted by WRT except for (a) the action to recover
unpaid production proceeds payable to WRT by Tri-Deck Oil & Gas Company and (b)
the foreclosure action to recover title to certain assets, (vii) the
distribution of warrants to purchase Gulfport Common Stock at an exercise price
of $10.00 per share to holders of certain securities litigation claims against
the Debtor and to holders of the Debtor's Common Stock and preferred stock, and
(viii) the cancellation of the Debtor's common stock and preferred stock.
Pursuant to the Plan, Gulfport owns a 12% economic interest in the Litigation
Entity and the remainder of the economic interests in the Litigation Entity were
allocated to unsecured creditors based on their ownership percentage of the
thirteen million eight hundred thousand (13,800,000) shares distributed and
issued as described in (i) and (ii) above.
The Plan became effective on July 11, 1997.
Upon the Effective Date of the Plan, Gulfport became the owner of one
hundred percent (100%) of the working interest in the shallow contract area at
WCBB. The proceeds from the Rights Offering were utilized to provide the cash
necessary to satisfy Administrative and Priority Claims ("APC"), fund the
Litigation Entity with $3,000,000 and provide Gulfport with working capital.
BUSINESS STRATEGY
Gulfport's business strategy is to increase reserves and cash flow by
exploring its existing properties and, to the extent permitted by Company's
capital resources, acquiring additional Louisiana Gulf properties with
exploitation and exploration potential.
8
PRINCIPAL OIL AND GAS PROPERTIES
Gulfport owns interests in a number of producing oil and gas properties
located along the Louisiana Gulf Coast. At December 31, 1997, the Company served
as the operator of all properties in which it held an interest. The following
table presents certain information as of December 31, 1997 reflecting the
Company's net interest in its producing oil and gas properties, including those
held through joint ventures.
PRODUCING SHUT-IN PROVED RESERVES(2)
WELLS WELLS ACREAGE ----------------------------
------------------- ------------------- ----------------- GAS OIL TOTAL
PROPERTY(1) GROSS NET GROSS NET GROSS NET (MBOE) (MBOE) MBOE
- ---------------- ------ -------- ------ -------- ------ ------ ------ ------ ------
Abbeville Field 1 0.7 1 0.7 60 42 10 2 12
Atchafalaya Bay Field 0 0 1 1.0 0 0 135 426 561
Bayou Penchant Field 8 8.0 4 4.0 1,360 1,360 803 23 826
Bayou Pigeon Field 9 7.9 4 4.0 1,490 1,490 21 267 288
Deer Island Field 4 4.0 1 1.0 412 412 193 12 205
East Hackberry Field 14 6.8 62 32.3 3,582 1,791 20 342 362
Golden Meadow Field 1 1.0 0 0.0 171 171 152 23 175
Lac Blanc Field 3 0.2 6 4.0 4,841 2,887 6 0 6
Napoleonville Field 3 3.0 2 2.0 278 278 0 189 189
West Hackberry Field 5 5.0 20 20.0 592 592 0 96 96
West Cote Blanche Bay 56 54.1 336 336.0 4,590 4,590 54 23,057 23,111
Other Wells 1 0.3 8 4.3 1,559 522 0 0 0
------ -------- ------ -------- ------ ------ ------ ------ ------
Total at year end 105 91.0 445 409.3 18,935 14,135 1,394 24,437 25,831
====== ======== ====== ======== ====== ====== ====== ====== ======
(1) Substantially all properties are located in south Louisiana.
(2) Represents proved reserves attributable to properties as
estimated by independent petroleum engineers. See Note 20 to
"Notes to Financial Statements."
Abbeville Field. The Abbeville Field, purchased in March 1995 and
situated on dry land near Abbeville in Vermillion Parish, Louisiana, was first
discovered by Continental Oil Company ("Conoco") in 1939. The Company acquired
approximately 70% of the working interest before payout (approximately 67% after
payout) with an average net revenue interest ("NRI") of approximately 54% before
payout (51% after payout) in approximately 60 gross acres, in the field. The
three tracts acquired contain varying depth limitations. In one tract the
Company acquired only the rights below 9,550 feet. Another tract is limited to
depths from the surface down to 13,000 feet. The third tract contains both
leases without depth limitations and leases with depth limited from the surface
down to 13,000 feet. The two wells in the Abbeville Field produce primarily gas.
During 1997, one well was successfully recompleted twice. Net proved ultimate
reserves from these two projects are estimated at 135 Mmcfe.
Bayou Penchant. The Bayou Penchant Field, purchased in January 1995,
consists of approximately 1,360 gross acres of leases, and includes eight
producing wells, four shut-in wells and one salt water disposal well in
Terrebonne Parish, Louisiana. The Company's working interest is 100%
(approximately 86% average NRI) in all but one well, the CL&F No. 7 well in
which the Company's working interest is approximately 70% (59% NRI). The Bayou
Penchant Field is located in a marshy area with existing dredged canals and
produces primarily gas from multiple productive zones, ranging in depth from
2,400 to 10,400 feet. During 1997, there were three successful and two
unsuccessful recompletion attempts. Net proved ultimate reserves from the five
attempts are estimated at 453 Mmcfe.
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Bayou Pigeon Field. The Bayou Pigeon Field, purchased in March 1995,
consists of approximately 1,490 gross acres located in the marshy coastal waters
on both sides of Little Bayou Pigeon in Iberia Parish, Louisiana. The Company
has a 100% working interest in thirteen wells (ten producing and three shut in
wells, approximately 80% average NRI). The Company initially believed they owned
a 100% working interest in three additional wells in the Bayou Pigeon Field;
however, subsequent to December 31, 1995, the Company received notice from a
third party claiming that the Company's title has failed as to approximately 43
acres. If it is ultimately determined that the Company's title has failed, the
Company's working interest in these three wells would be reduced to
approximately 7% (5% NRI), 75% (63% NRI) and 95% (72% NRI), respectively. The
Company's financial statements as of and for the years ended December 31, 1997,
1996 and 1995 reflect operating results and proved reserves for the reduced
working and net revenue interests. As the title failure predates its ownership
of the field, the Company is currently evaluating its recourse against the
predecessors-in-title relative to this issue. Production from the Bayou Pigeon
Field is predominately oil from multiple productive zones at depths ranging from
6,900 to 12,000 feet. During 1996, one well was successfully recompleted. During
1997, one recompletion was marginally successful.
Deer Island Field. The Deer Island Field, purchased in March 1995, is
located in marshy, inland waters in Terrebonne Parish, Louisiana and is accessed
by workboat through dredged canals. The Company acquired a 100% working interest
(approximately 73% NRI before payout and 66% thereafter) in approximately 412
acres comprised of two non-contiguous lease blocks in the Deer Island Field.
Current production from the southern lease block is primarily gas from multiple
producing zones at depths ranging from 8,200 to 10,200 feet. The two wells in
the northern lease block produce from an oil sand at a depth of approximately
10,350 feet. The interests in both tracts were originally acquired through two
separate subleases from Exxon. In the southern lease block, the interest is
composed of three tracts with varying depth limitations, with the greatest depth
being approximately 10,500 feet. Exxon retained the rights below 10,500 feet and
Exxon or other producers own the rights to the other outstanding depths. In the
northern lease block, the interest is limited to depths between the surface and
10,720 feet. During 1997, two significant oil and gas wells sanded up and ceased
production. Although there was no recompletion activity in 1997, two workover
projects are scheduled for the first half of 1998, to rework the two wells
sanded up in 1997.
East Hackberry Field. In February 1994, the Company purchased a 100%
working interest (approximately 82% average NRI) in certain producing oil and
gas properties situated in the East Hackberry Field in Cameron Parish,
Louisiana. The purchase included two separate lease blocks, the Erwin Heirs
Block, originally developed by Gulf Oil Company and the Texaco State Lease
("S/L") 50 Block, originally developed by Texaco, Inc. The East Hackberry Field
is located along the western shore of Lake Calcasieu in Cameron Parish,
Louisiana approximately 80 miles west of Lafayette and 15 miles inland from the
Gulf of Mexico. The properties cover approximately 3,582 acres of oil and gas
leases, together with thirteen productive wells and sixty-three shut-in wells
that were originally drilled by Gulf Oil Company and Texaco.
In September 1994, the Company sold an overriding royalty interest in
certain producing oil and gas wells situated in the East Hackberry Field to
Milam Royalty Corporation ("Milam"). On an aggregate basis the overriding
royalty interests
10
provide for payment to Milam of 62.5% of 80% (equal to 50% on
a 100% working interest basis) of the net profits attributable to the wells
covered by the arrangement until Milam recovers 150% of its cash investment and
46.875% of 80% thereafter (equal to 37.5% on a 100% working interest basis).
Related agreements further provide that for an additional royalty purchase price
based on the then effective percentage described in the two preceding sentences
of the Company's future cost of drilling new wells or recompleting existing
wells in new reservoirs (and subject to certain limitations stated in such
agreements), Milam may elect to retain an identical royalty interest in the new
wells. The Company retains complete operational control over the East Hackberry
Field. During 1997, there was one marginally successful recompletion, one
unsuccessful recompletion attempt and one well was plugged and abandoned.
Golden Meadow Field. The Golden Meadow Field, purchased in March 1995,
is located in marshy, inland waters in Lafourche Parish, Louisiana and was
discovered by Texaco in 1961. The portion of the Golden Meadow Field in which
the Company owns a 100% working interest (approximately 79% average NRI) covers
approximately 171 acres. The Golden Meadow Field is presently producing from a
gas bearing sand at a depth of approximately 12,500 feet. Although there was no
downhole activity in 1997, modifications to the surface equipment resulted in
improved well performance and a slight increase in proved reserves.
Lac Blanc Field. The Lac Blanc Field, purchased in July 1993, consists
of 4,841 gross acres and underlies a marsh and shoreline near the community of
Pecan Island in Vermilion Parish, Louisiana and was first discovered in 1975.
The Company purchased a 91% average working interest (55% average NRI) in
acreage within the Lac Blanc Field from an affiliate of Freeport-McMoRan, Inc.
The sellers retained a 20% back-in working interest in any new wells drilled in
previously undeveloped fault blocks. The field has produced approximately 150
Bcf of gas and 1.1 MMBbls of oil since its discovery, but in recent years it has
experienced substantial production declines, which were accompanied by
substantial increases in water production rates. Three unsuccessful attempts
were made during 1995 to restore production to this field and compensate for the
reduced gas volumes caused by the unexpected onset of water production. Two
workover attempts were made in the Exxon Fee No. 23 well. A split in the casing
ultimately resulted in the loss of future utility in the well. In early 1997, an
Amine unit was installed and the wells were returned to production.
In connection with the purchase of the Lac Blanc Field, the Company
established a plugging and abandonment escrow arrangement. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Commitments and Contingencies."
Napoleonville Field. In December 1994, the Company purchased from BSFI
Western E&P, Inc. ("BSFI") a 100% working interest (approximately 75% average
NRI) in approximately 300 acres of leases within the Napoleonville Field. Three
producing wells, two shut-in wells and one saltwater disposal well are located
within the Company's lease acreage. The Napoleonville Field is located in
Assumption Parish, Louisiana on dry land and produces primarily oil from
multiple pay zones which range in depth from 9,500 to 10,000 feet. The Company's
interest in the Napoleonville Field was purchased in exchange for the issuance
of 1,300,000 shares
11
of its Common Stock. During 1997, a gravel pack was installed in one of the
producing wells. There was no other downhole activity.
West Hackberry Field. In November 1992, the Company purchased a 100%
working interest (approximately 80% average NRI, subsequently increased to
approximately 87.5% NRI) in acreage within the West Hackberry Field, in Cameron
Parish, Louisiana. The field was discovered in 1928 and was developed by
Superior Oil Company (now Mobil) between 1938 and 1988. During 1997, a rod pump
was installed in one of the producing wells, resulting in an initial stabilized
rate of 45 bopd.
West Cote Blanche Bay Field. TEPI, the operator of WCBB prior to March
1997, discovered the WCBB field in 1938. This field lies approximately five
miles off the coast of Louisiana in St. Mary Parish in a shallow bay, with water
depths averaging seven to eight feet, and overlies one of the largest salt dome
structures on the Gulf Coast. The Company acquired from TEPI a 6.25% working
interest in the WCBB in July 1988. In April 1995, the Company completed the
purchase of an additional 43.75% working interest in WCBB from an affiliate of
Benton Oil and Gas Company and two affiliates of Tenneco, Inc. The sellers
retained their interests in all depths below approximately 10,500 feet. Pursuant
to the Plan, at the Effective Date, the Company acquired the remaining 50%
working interest in WCBB in depths above the Rob "C" marker located at
approximately 10,500 feet and became the operator of the field. During 1995, ten
successful oil and three successful gas recompletions were made with two
additional attempts being unsuccessful. Additionally, five new development oil
wells and one new development gas well were drilled. One development well was
unsuccessful. These success ratios are consistent with the Company's past
experience in WCBB. During 1997, there were five successful recompletions
(including two TEPI wells), three unsuccessful recompletion attempts, five
successful workovers and two successful new wells. Net proved ultimate reserves
for these projects are estimated to be in excess of 500 MBoe. During the first
quarter of 1998 there were two successful and one marginally successful
recompletion attempts.
ACREAGE
The following table sets forth the Company's developed acreage at
December 31, 1997. The Company did not own any undeveloped acreage at December
31, 1997.
DEVELOPED ACREAGE (1)
----------------------------
GROSS NET
-------- --------
Louisiana Onshore and State Waters 18,935 14,135
Texas Onshore 381 95
-------- --------
Total 19,316 14,230
======== ========
(1) Developed acreage is acreage assigned to producing wells for the
spacing unit of the producing formation. Developed acreage in certain
of the Company's properties that include multiple formations with
different well spacing requirements may be considered undeveloped for
certain formations but have only been included as developed acreage in
the presentation above.
Certain acreage is subject to depth limitations.
12
The oil and gas leases in which the Company has an interest are for
varying primary terms and may require the payment of delay rentals to continue
the primary terms. The operator may surrender the leases at any time by notice
to the lessors, by the cessation of production or by failure to make timely
payment of delay rentals. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Commitments and Contingencies - Texaco
Global Settlement."
DRILLING AND RECOMPLETION ACTIVITIES
The following table contains data with respect to certain of the
Company's field operations during the years ended December 31, 1997, 1996, and
1995. The Company drilled no exploratory wells during the periods presented.
TITLE TO OIL AND GAS PROPERTIES
It is customary in the oil and gas industry to make only a cursory
review of title to undeveloped oil and gas leases at the time they are acquired
and to obtain more extensive title examinations when acquiring producing
properties. However, with respect to future undeveloped leasehold and producing
property acquisitions, if any, the Company will conduct title examinations on
material portions of such properties in a manner generally consistent with
industry practice. Certain of the Company's oil and gas properties may be
subject to title defects, encumbrances, easements, servitude's or other
restrictions, none of which, except as noted below, in management's opinion,
will in the aggregate materially restrict the Company's operations.
During 1996, the Company received notice that a third party is claiming
that the Company's title has failed with respect to approximately 43 acres in
the Bayou Pigeon Field. Some or all of the acreage in dispute is considered to
be productive in three separate production units. Under the assumption that the
Company's title is flawed, the Company's working interest in three units may be
reduced from 100% of each unit to approximately 7% (5% NRI), 74% (63% NRI), and
95% (72% NRI). Financial statements as of and for the years ended December 31,
1997 and 1996, reflect operating results and proved reserves discounted for this
possible failure.
13
As the alleged title failure predates its ownership of the field, the Company is
currently evaluating its recourse against the predecessors-in-title relative to
this issue. The Company is currently negotiating a settlement with the third
party pursuant to their claim.
RESERVES
The oil and gas reserve information set forth below represents only
estimates. Reserve engineering is a subjective process of estimating volumes of
economically recoverable 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 and of engineering and geological interpretation. As a result, the
estimates of different engineers often vary. In addition, the results of
drilling, testing and production may justify revisions of such estimates.
Accordingly, reserve estimates often differ from the quantities of oil and gas
that are ultimately recovered. Estimates of economically recoverable oil and gas
and of future net revenues are based on a number of variables and assumptions,
all of which may vary from actual results, including geologic interpretation,
prices, and future production rates and costs.
The following table sets forth estimates of the proved oil and gas
reserves of the Company at December 31, 1997, as estimated by the Company's
independent petroleum engineers, Netherland, Sewell & Associates, Inc. ("NSAI"),
reduced for the proved reserves attributable to the possible title failure of
approximately 43 acres in the Bayou Pigeon Field. See "Title to Oil and Gas
Properties" above.
1997
---------------------------------------------------
PROVED RESERVES DEVELOPED UNDEVELOPED TOTAL
--------- ----------- -----
Oil (MBbls) 7,220 18,597 25,817
Gas (MMcf) 8,259 3,317 11,576
MBoe 8,596 19,150 27,746
Year-end pursuant value of estimated $ 16,075,000 $ 60,355,000 $ 76,430,000
future net revenues
Total reserves increased to approximately 27,746,000 barrels of oil
equivalent ("Boe") at December 31, 1997, from approximately 16,443,000 Boe at
December 31, 1996. The 1997 year-end estimates increased from amounts previously
reported due to the addition of 11,666,000 Boe associated with the acquisition
of the remaining interest in the WCBB properties and the upward revisions to the
reserves estimates of 947,000 Boe, offset in part by 1997 production of
1,036,000 Boe.
The estimated future net revenues set forth above were determined by
using reserve quantities of proved reserves and the periods in which they are
expected to be developed and produced based on economic conditions prevailing at
December 31, 1997. The estimated future production is priced at December 31,
1997, without escalation using $17.91 per Bbl and $2.62 per Mcf. Additional
information concerning the Company's oil and gas reserves and disclosure of the
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
and Gas Reserves (Unaudited) is set forth in Note 18 to the Company's
financial statements.
In compliance with federal law, the Company files annual reports with
14
the Energy Information Agency of the U S. Department of Energy with respect to
its production of oil and gas during each calendar year and its estimated oil
and gas reserves at the end of each year. The reserve values set forth above and
in the Company's Financial Statements attached hereto may vary within five
percent from the estimates previously provided to the Department of Energy by
the Company due to the Company's practice of including in its report to the U.S.
Department of Energy all oil and gas production and reserves attributable to
wells for which the Company serves as operator.
PRODUCTION, PRICES AND COSTS
The Company sells its oil and gas at the wellhead and does not refine
petroleum products. Other than normal production facilities, the Company does
not own an interest in any bulk storage facilities or pipelines. As is customary
in the industry, the Company sells its production in any one area to relatively
few purchasers, including transmission companies that have pipelines near the
Company's producing wells. Gas purchase contracts are generally on a short-term
"spot market" basis and usually contain provisions by which the prices and
delivery quantities for future deliveries will be determined. The majority of
the Company's crude oil production is sold on 30-day "evergreen" contracts with
prices based on postings plus a premium. The following table contains certain
historical data respecting the average sales prices received and the average
production costs incurred by the Company during the years ended December 31,
1997, 1996 and 1995.
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
Production Volumes
Oil (MBbls) 566 615 778
Gas (MMcf) 2,818 3,629 7,403
Oil equivalents (MBoe) 1,036 1,220 2,012
Average Prices
Oil (per Bbl) $20.93 $22.17 $16.59
Gas (per Mcf) $ 2.86 $ 2.86 $ 1.59
Oil equivalents (per MBoe) $19.20 $19.68 $12.27
Average production costs (per Boe) $9.05 $10.90 $ 4.74
Average production taxes (per Boe) $1.48 $ 1.47 $ 1.08
Percentages of revenues from oil and gas sales to specific customers
representing 10% or more of annual oil and gas revenues are recapped below:
15
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------- ------------- ----------
Texas-Ohio Gas, Inc. N/A N/A 13%
Plains Marketing and
Transportation N/A 39% 19%
Riverside Pipeline Company N/A N/A 15%
Tri-Deck Oil and Gas Company N/A 26% 32%
Prior Energy 43% 15% N/A
Wickford Energy 29% N/A N/A
Gathering and Energy Marketing 22% N/A N/A
FACILITIES
The Company owns an industrial building located in Lafayette, Louisiana
with approximately 12,500 square feet of office, warehouse and shop space.
COMPETITION AND MARKETS
Availability of Markets. The availability of a ready market for any oil
and/or gas produced by Gulfport depends on numerous factors beyond the control
of management, including but not limited to, the extent of domestic production
and imports of oil, the proximity and capacity of gas pipelines, the
availability of skilled labor, materials and equipment, the effect of state and
federal regulation of oil and gas production and federal regulation of gas sold
in interstate commerce. Gas produced by Gulfport in Louisiana is sold to various
purchasers who service the areas where the Gulfport's wells are located.
Gulfport's wells are not subject to any agreements that would prevent it from
either selling its gas production on the spot market or committing such gas to a
long-term contract; however, there can be no assurance that Gulfport will
continue to have ready access to suitable markets for its future oil and gas
production.
Impact of Energy Price Changes. Oil and gas prices can be extremely
volatile and are subject to substantial seasonal, political and other
fluctuations. The prices at which oil and gas produced by Gulfport may be sold
is uncertain and it is possible that under some market conditions the production
and sale of oil and gas from some or all of it's properties may not be
economical. The availability of a ready market for oil and gas and the prices
obtained for such oil and gas, depend upon numerous factors beyond the control
of Gulfport, including competition from other oil and gas suppliers and national
and international economic and political developments. Because of all of the
factors influencing the price of oil and gas, it is impossible to accurately
predict future prices.
REGULATION
Orphaned Well Act. In June 1993, the Louisiana legislature passed the
Louisiana Oilfield Site Restoration Law (the "Orphaned Well Act") which provides
that if an oil field site is transferred from one party to another, the parties
to the transfer may elect to establish a trust account for such site to provide
a source of funds for future site restoration. A primary advantage of this law
is that, once the site-specific trust account has been approved by the Secretary
of the
16
Louisiana Department of Natural Resources (the "DNR"), the party transferring
the oil field site is relieved of liability by the state for any site
restoration costs or actions associated with the site. Management believes that
this makes Gulfport and others who are willing to use this law more competitive
as purchasers of oil and gas properties. If the parties to a transfer elect to
be covered under the Orphaned Well Act, the Secretary of the DNR will require
that a site assessment be performed by a contractor approved by the special
state commission created under the statute and will require the parties to the
transaction to provide a proposed funding schedule for the trust account. The
site assessment must specifically identify site restoration costs needed to
restore the oil field site based on conditions existing at the time of the
transfer. Generally, some contribution to the trust account will be required at
the time of the transfer and additional funding will be required quarterly
thereafter until the account is fully funded. The trust account is monitored by
the DNR and the funds in the trust accounts remain the property of the DNR. The
purchaser of the oil field site is liable for site restoration at the end of its
useful life. If the purchaser restores the site, the purchaser will be entitled
to recover the balance of the trust account. Compliance with such law does not,
however, relieve the parties to the transaction from liability to private
parties.
Gulfport is contractually committed in its purchase contracts for the
Initial LLOG Property and Remaining LLOG Properties to establish plugging and
abandonment escrow funds as allowed by Louisiana's Orphaned Well Act. In
connection with its bankruptcy case, LLOG filed a claim asserting that the
Debtor was required, notwithstanding the bankruptcy case, to fulfill its
contractual commitment to establish plugging and abandonment funds (the
"Asserted LLOG P&A Trusts"), and that LLOG had a vendor's lien on the Initial
LLOG Property and Remaining LLOG Properties securing the Debtor's performance of
the contractual commitment. The Debtor disputed LLOG's claim and its asserted
vendor's lien, and filed an objection seeking a disallowance of LLOG's claim and
a determination that any claim asserted by LLOG with respect to the Asserted
LLOG P&A Trusts was unsecured. On July 8, 1997, the Bankruptcy Court ruled that
LLOG's claim with respect to the Asserted LLOG P&A Trusts was secured by a valid
vendor's lien on the Initial LLOG Property and Remaining LLOG Properties, but
did not determine the amount of such claim. The Debtor filed a motion requesting
that the Bankruptcy Court reconsider its ruling. On January 15, 1998, the
Bankruptcy court denied Gulfport's motion to reconsider its ruling. Therefore,
Gulfport will be required to establish plugging and abandonment funds. The
amount of and terms of payment into each fund will be established by the State
of Louisiana upon completion of an independent study to be commissioned by the
Company. As of March 31, 1998, the independent study had not been completed.
Accordingly, Gulfport is unable to determine the amount and payment towards the
future obligation related to these commitments.
Environmental Regulation. Operations of Gulfport are subject to
numerous federal, state, and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of a permit
before drilling commences, restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities, prohibit drilling activities
on certain lands lying within wetlands or other protected areas and impose
substantial liabilities for pollution resulting from drilling and production
operations. Moreover, state and federal environmental
17
laws and regulations may become more stringent. These environmental laws and
regulations may affect Gulfport's operations and costs as a result of their
effect on oil and gas development, exploration, and production operations. For
instance, legislation has been proposed in Congress from time to time that would
amend the federal Resource Conservation and Recovery Act of 1976 ("RCRA") to
reclassify oil and gas production wastes as "hazardous waste." If such
legislation were enacted, it could have a significant impact on the Company's
operating costs, as well as the oil and gas industry in general. It is not
anticipated that Gulfport will be required in the near future to expend amounts
that are material in relation to its total capital expenditures program by
reason of environmental laws and regulations, but inasmuch as such laws and
regulations are frequently changed, Gulfport is unable to predict the ultimate
cost of compliance. In addition, The Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") and certain
state laws and regulations impose liability for cleanup of waste sites and in
some cases attorney's fees, exemplary damages and/or trebling of damages.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder
impose a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
United States waters. A "responsible party" includes the owner or operator of a
facility or vessel, or the lessee or permittee of the area in which an offshore
facility is located. The OPA assigns liability to each responsible party for oil
removal costs and a variety of public and private damages. While liability
limits apply in some circumstances, a party cannot take advantage of liability
limits if the spill was caused by gross negligence or willful misconduct or
resulted from violation of a federal safety, construction or operating
regulation. If the party fails to report a spill or to cooperate fully in the
cleanup, liability limits do not apply. Few defenses exist to the liability
imposed by the OPA. The OPA also imposes ongoing requirements on a responsible
party, including proof by owners and operators of offshore oil and gas
facilities of establishment of $150,000,000 in financial responsibility.
Financial responsibility could be established by various means including
insurance, guarantee, surety bond, letter of credit or qualification as a
self-insurer. There is substantial uncertainty as to whether insurance companies
or underwriters will be willing to provide coverage under the OPA. The financial
tests or other criteria that will be used to judge self-insurance are also
uncertain. Gulfport cannot predict the final resolution of these financial
responsibility issues but such requirements have the potential to result in the
imposition of substantial additional annual costs on it or otherwise materially
adversely affect it. The impact of the rule should not be any more adverse to
Gulfport than it will be to the other similarly situated or less well
capitalized owners or operators. See "Operational Hazards and Insurance".
The Clean Water Act, together with the related National Pollution
Discharge Elimination System ("NPDES"), and similar state environmental laws are
expected to prohibit oil and gas producers from discharging produced water
overboard into waters of the U.S. shoreward of the territorial seas ("Coastal
Waters") within one year or less. Gulfport is currently discharging produced
water overboard at its Tigre Lagoon facility in Louisiana. In June 1995,
Gulfport began underground injection at its East Hackberry facility and
discontinued overboard discharge. Gulfport received the final permit (WP #4831)
from the Louisiana Department of Environmental Quality ("LDEQ") on February 18,
1995 in connection with its Tigre Lagoon facility.
18
The final permit expired on December 31, 1996. In addition, the Company has
filed and obtained a NPDES permit with the Environmental Protection Agency
("EPA") for coverage of the applicable Company Coastal Waters facilities under
the EPA general permit relating to discharge of produced water.
Radioactive Materials Licensing. Gulfport is licensed, regulated and
subject to inspection by the LDEQ with respect to the ownership and operation of
its radioactive well logging tools. Failure to comply with such licensing and
regulatory requirements could cause Gulfport to lose its rights to operate its
well logging tools. Gulfport's radioactive well logging tools required the use
of radioactive materials and explosives which may result in substantial losses
or liabilities to third parties, including claims for bodily injuries, reservoir
damage, loss of reserves, environmental damage and other damages to persons or
property. In December of 1997, Gulfport sold all of its radioactive well logging
tools. See "Operational Hazards and Insurance" below.
Federal and State Regulation. Complex regulations concerning all phases
of energy development at the local, state and federal levels apply to Gulfport's
operations and often require interpretation by Gulfport's professional staff or
outside advisors. The federal government and various state governments have
adopted numerous laws and regulations respecting the production, transportation,
marketing and sale of oil and gas. Regulation by state and local governments
usually covers matters such as the spacing of wells, allowable production rates,
pooling and unitization, environmental protection, pollution control, pricing,
taxation and other related matters. In Louisiana, the Commissioner of the Office
of Conservation is empowered to create geographic or geological units for
drilling and producing wells which units contain, in the Commissioner's sole
judgement, the production acreage likely to be efficiently and economically
drained by such well. These units are created only after notice to interested
parties and a hearing at which time the Commissioner will accept geological and
engineering testimony from the interested parties. The creation of these units
could have the result of combining Gulfport's leasehold interest with lease
acreage held by competing producers and could have the effect of reducing
Gulfport's interest in a drilling or producing well below the leasehold interest
to which it would otherwise be entitled. Unitization of Gulfport's properties
may force Gulfport to share production from its wells and leases with others and
can occur after development or acquisition costs have been incurred by Gulfport.
If Gulfport's leases are subjected to unitization, Gulfport may ultimately be
entitled to a lesser share of production from its wells than it expected. Any
federal leases acquired by Gulfport will be subject to various federal statutes
and the rules and regulations of federal administrative agencies. Moreover,
future changes in local, state or federal laws and regulations could adversely
affect the operations of Gulfport.
Legislation affecting the oil and gas industry is under constant review
for amendment or expansion, frequently increasing the regulatory burden.
Numerous departments and agencies, both federal and state are also authorized by
statute to issue, and have issued, rules and regulations binding the oil and gas
industry that often are costly to comply with and that carry substantial
penalties for non-compliance. In addition, production operations are affected by
changing tax and other laws relating to the petroleum industry, by constantly
changing administrative regulations and possible interruption or termination by
government authorities.
19
The Federal Energy Regulatory Commission (the "FERC") regulates the
transportation and sale for resale of natural gas in interstate commerce
pursuant to the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy
Act of 1978 (the "NGPA"). In the past, the federal government has regulated the
prices at which oil and gas could be sold. Currently, sales by producers of
natural gas, and all sales of crude oil, condensate and natural gas liquids can
be made at uncontrolled market prices, but Congress could reenact price controls
at any time.
Gulfport's natural gas gathering operations may be or become subject to
safety and operational regulations relating to the design, installation,
testing, construction, operation, replacement, and management of facilities.
Pipeline safety issues have recently become the subject of increasing focus in
various political and administrative arenas at both the state and federal
levels. Gulfport cannot predict what effect, if any, the adoption of additional
pipeline safety legislation might have on its operations, but does not believe
that any adverse effect would be material.
Proposals and proceedings that might affect the oil and gas industry
are routinely pending before the Congress, FERC, and the courts. Gulfport cannot
predict when or whether any such proposals may become effective. In the past,
the natural gas industry has been very heavily regulated. There is no assurance
that the current regulatory approach pursued by the FERC will continue
indefinitely into the future.
Notwithstanding the foregoing, it is not anticipated that compliance
with existing federal, state and local laws, rules and regulations will have a
material adverse effect upon the capital expenditures, earnings or competitive
position of Gulfport.
OPERATIONAL HAZARDS AND INSURANCE
Gulfport's operations are subject to all of the risks normally incident
to the production of oil and gas, including blowouts, cratering, pipe failure,
casing collapse, oil spills and fires, each of which could result in severe
damage to or destruction of oil and gas wells, production facilities or other
property, or injury to persons. The energy business is also subject to
environmental hazards, such as oil spills, gas leaks, and ruptures and discharge
of toxic substances or gases that could expose Gulfport to substantial liability
due to pollution and other environmental damage. Although Gulfport maintains
insurance coverage considered to be customary in the industry, it is not fully
insured against certain of these risks, either because such insurance is not
available or because of high premium costs. The occurrence of a significant
event that is not fully insured against could have a material adverse effect on
Gulfport's financial position.
EMPLOYEES
At December 31, 1997, the Company employed 21 persons, including 1
executive. At March 1, 1998, the Company employed 18 persons, including 1
executive. None of the Company's employees are represented by labor unions or
covered by any collective bargaining arrangement. The Company considers its
relations with its employees to be satisfactory.
20
ITEM 2. PROPERTIES
See Item 1 - Business for details on properties.
ITEM 3. LEGAL PROCEEDINGS
During 1996, WRT received notice from a Third Party claiming that WRT's
title has failed as to approximately 43 acres in the Bayou Pigeon Field. Some or
all of the acreage in the dispute is considered to be productive in three
separate production units. Assuming that WRT's title is flawed, WRT's working
interest in three units may be reduced from 100% of each unit to approximately
7% (5% NRI), 75% (63% NRI), and 95% (72% NRI), respectively. The financial
statements as of and for the years ended December 31, 1997, 1996 and 1995,
reflect operating results and proved reserves discounted for this possible title
failure. As the alleged title failure predates its ownership of the field,
Gulfport is currently evaluating its recourse against the predecessors-in-title
relative to this issue. The Company is currently negotiating a settlement with
the Third Party of its claim.
During 1995, the Company entered into a marketing agreement with
Tri-Deck Oil and Gas Company ("Tri-Deck") pursuant to which Tri-Deck would
market all of WRT's oil and gas production. Subsequent to the agreement, James
Florence, who served as both Tri-Deck's principal and WRT's Director of
Marketing, assigned to Plains Marketing Tri-Deck's right to market WRT's oil
production and assigned to Perry Oil & Gas ("Perry Gas") Tri-Deck's right to
market WRT's gas production. During early 1996, Tri-Deck failed to make payments
to WRT attributable to several months of WRT's gas production. Consequently, on
May 20, 1996, the Company filed with the Bankruptcy Court a Motion to Reject the
Tri-Deck Marketing Agreement, and on May 29, 1996, the Company initiated an
adversary proceeding against Tri-Deck and Perry Gas. Perry Gas was the party
which ultimately purchased the Company's gas production for the months in
question.
On January 20, 1998, Gulfport and the Litigation Trust entered into a
Clarification Agreement to clarify provisions of the Plan that might be
ambiguous as to whether the Company or the Litigation Trust should prosecute
Causes of Action so as to avoid duplicative litigation efforts, as well as
possible res judicata and collateral estoppel effect as to claims, which could
reduce the pool of potential recoveries otherwise made available to each party's
respective beneficiaries. As a part of the Clarification Agreement, the Trust
will intervene or be substituted as the actual party in interest in the Tri-Deck
case.
Wildwing Investments, Inc. ("Wildwing") initiated litigation against
the Company entitled Wildwing Investments, Inc. v. WRT Energy Corporation,
pending in the Fifteenth Judicial District Court, Parish of Lafayette, State of
Louisiana. This case has been settled in principle, although no settlement
document has been finalized as of the date of this filing. The terms of the
settlement are that Plains Resource & Transportation, Inc. and Wickford Energy
Marketing, L.C. ("Stakeholders"), who are currently holding funds in suspense
attributable to mineral production from the leases made the subject of the
lawsuit, will be instructed by the Company and Wildwing to distribute $269,500
to Wildwing in full and final compromise of the Lafayette litigation. Additional
sums held by the Stakeholders are to be distributed to the lessors of the leases
made the subject of the litigation an amount for payment of royalties due and
owing up to the date of
21
this filing. The balance held by the Stakeholders will thereafter be
distributed to the Company. Settlement of this dispute therefore does not
present an immediate loss to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
HISTORICAL MARKET INFORMATION
Since the Effective Date, Gulfport's common stock has been included for
quotation on the NASD OTC Bulletin Board under the trading symbol "WRTE"
(through March 30, 1998) and "GPEC" thereafter. The following table sets forth
the high and low sales prices and volume of trading in the common stock in each
quarter commencing with the Effective Date.
1997 LOW HIGH
- ------------------------------------ ---------------- ---------------
Third quarter No activity No activity
(Commencing July 11,1997)
Fourth quarter $3.75 $5.00
Prior to February 29, 1996, WRT's common stock had been quoted on the
NASDAQ National Market under the symbol "WRTE". During the period January 1,
1996 through February 29, 1996, the high and low sales price reported on the
NASDAQ National Market were $1.19 and $0.25 respectively. Effective February 29,
1996, WRT's common stock was delisted form the NASDAQ National Market.
HOLDERS OF RECORD
At the close of business on March 24, 1998, there were 22,076,315 shares
of Common Stock outstanding held by 298 shareholders of record.
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock. Gulfport
currently intends to retain all earnings to fund its operations and expansion.
Therefore, Gulfport does not intend to pay dividends on its Common Stock in the
foreseeable future. Further, the Credit Facility restricts the Company from
declaring or paying any dividends on any class of its capital stock so long as
the Credit Facility is outstanding.
22
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data as of and for the year ended
December 31, 1996 and as of and for the six months and 10 days ended July 10,
1997 for the Predecessor Company and the five months 21 days ended December 31,
1997 for the Reorganized Company are derived from the financial statements of
the Company included elsewhere in the Annual Report. The selected financial data
at December 31, 1995, 1994, and 1993 and for the years then ended have been
derived from historical consolidated financial statements of WRT. The financial
data set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the financial
statements of the Company and the notes thereto included elsewhere in this
Annual Report.
REORGANIZED
COMPANY PREDECESSOR COMPANY
------------ ------------------------------------------------------
JULY 11, SIX MONTHS
1997 TO 10 DAYS YEAR ENDED DECEMBER 31,
DECEMBER 31, JULY 10, -----------------------------------------
1997 1997 1996 1995 1994 1993
------------ ---------- -------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Statement of Operation Data
Oil and gas sales $ 9,756 $ 10,138 $ 24,019 $ 24,655 $11,034 $ 4,657
Operating expenses 11,478 11,002 40,855 139,497(1) 10,126 5,841
------- -------- -------- --------- ------- -------
Net income (loss) from
operations (1,722) (864) (16,836) (114,842) 908 (1,184)
------- -------- -------- --------- ------- -------
Interest expense 727 1,106 5,562 13,759 19 447
Reorganization costs -- 7,771 7,345 -- -- --
Net income (loss) before
income taxes and
extraordinary item (1,713) (9,615) (29,387) (128,175) 4,266 (1,322)
Extraordinary item -- 88,723 -- -- -- --
Net income (loss) before
dividends on preferred stock (1,713) 79,108 (29,387) (128,175) 4,230 (1,322)
Dividends on preferred stock -- (1,510) (2,846) (2,846) (2,846) (591)
Net income (loss) available
to common stock (1,713) 77,598 (32,233) (131,021) 1,384 (1,913)
Earnings (loss) per common and
common equivalent
share (0.08) N/A N/A N/A N/A N/A
Average common and common
equivalent shares outstanding 22,076 9,539 9,539 9,466 7,792 4,154
Capital expenditures $ 5,644 $ 2,562 $ 4,823 $ 116,730 $40,087 $14,325
23
REORGANIZED
COMPANY PREDECESSOR COMPANY
------------ -----------------------------------------------------
DECEMBER 31,
DECEMBER 31, -----------------------------------------------------
1997 1996 1995 1994 1993
------------ --------- --------- -------- --------
Balance Sheet Data (in thousands)
Working capital (deficit) $ (719) $ 148,932 $(131,601) $ 6,301 $ 24,270
Property, plant and
equipment, net 81,501 56,899 63,913 59,042 18,586
Total assets 92,346 68,076 79,247 81,857 48,233
Total long-term debt 13,528 -- -- 6,260 205
Shareholders' equity (deficit) 70,280 (90,551) (61,869) 63,538 43,394
(1) Operating expenses for 1995 include a non-cash charge of $103,000,000
related to impairment of long-lived assets pursuant to SFAS No. 121,
non-cash charges of $3,600,000 related to a minimum production
guarantee obligation, a $2,000,000 provision for doubtful accounts, and
a $1,400,000 charge related to restructuring costs incurred. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
As a result of the Reorganization Case and Plan, which was consummated
and became effective on July 11, 1997, the Company was required to present its
financial statements pursuant to fresh start reporting standards. Accordingly,
the financial statements of Gulfport are not comparable to the financial
statements of WRT. However, in the case of the statement of operations, the
Company believes that comments comparing calendar years are appropriate in order
to provide a more meaningful understanding of the Company's operations.
The following discussion and analysis of the Company's financial
condition and results of operations is based in part on the consolidated
financial statements and the notes thereto included elsewhere in this Form 10-K
and should be read in conjunction therewith.
RECENT EVENTS
See Item 1 "Business - Events Leading to the Reorganization Case" for a
discussion of recent events related to the Company's operations and subsequent
filing for protection under Chapter 11 of the Federal Bankruptcy Code.
ACCOUNTING CHANGE
Before July 11, 1997, the Company used the successful efforts method
for reporting oil and gas operations. Commencing on the Effective Date, the
Company converted to the full cost pool method of accounting for its oil and gas
operations to be in conformity with the method used by DLB, its principal
shareholder.
Due to the restating of property values to comply with fresh start
accounting and the conversion from the successful efforts method to the full
cost pool method for reporting oil and gas operations on the Effective Date,
comparison of depreciation, depletion, and amortization expense for the year
ended December 31, 1997, with prior years will not be meaningful.
24
RESULTS OF OPERATIONS
PRICES AND PRODUCTION VOLUMES.
The markets for oil and gas have historically been, and will continue
to be, volatile. Prices for oil and gas may fluctuate in response to relatively
minor changes in supply and demand, market uncertainty and a variety of factors
beyond the control of the Company. Set forth in the table below are the average
prices received by the Company and production volumes during the periods
indicated.
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------- ------------- ---------
Production Volumes
Oil (MBbls) 566 615 778
Gas (MMcf) 2,818 3,629 7,403
Oil equivalents (MBoe) 1,036 1,220 2,012
Average Prices
Oil (per Bbl) $20.93 $22.17 $16.59
Gas (per Mcf) $ 2.86 $ 2.86 $ 1.59
Oil equivalents (per MBoe) $19.20 $19.68 $12.27
Average production costs (per Boe) $ 9.05 $10.90 $ 4.74
Average production taxes (per Boe) $ 1.48 $ 1.47 $ 1.08
COMPARISON OF YEARS ENDED DECEMBER 31, 1997 AND 1996
The Company reported net income attributable to common stock of
$77,598,000, for the year ended December 31, 1997, as compared with net loss
attributable to common stock of $32,233,000, for the year ended December 31,
1996. The changes in earnings attributable to common stock of $109,628,000 was
due primarily to the following factors:
Oil and Gas Revenues. During 1997, the Company reported oil and gas
revenues of $19,894,000, a 17% decrease from revenues of $24,019,000 for 1996.
The decreased revenues are attributable to a decrease in production volumes of
184 MBoe along with a decrease of $0.48 per Boe in average sales price for the
year. The production declines are due primarily to normal production declines
and the loss of production from two large oil wells on the Deer Island lease
during 1997, offset in part by the addition of an additional 50% interest in the
WCBB properties on the Effective Date.
Production Costs. Production costs decreased $3,918,000, or 29% to
$9,386,000 in 1997 from $13,304,000 in 1996. Production costs per Boe decreased
14% from $10.92 in 1996 to $9.41 per Boe in 1997. This decrease in production
costs per Boe was due primarily to the addition in 1996 of the following, as
additional production costs(1) disputed claims adjustments totaling
approximately $2,814,000, (2) the Milam Royalty Corp. settlement in the amount
of $1,172,000, and the (3) Lac Blanc purchase price adjustment in the amount of
$479,000. Production costs per Boe excluding the previously mentioned items
increased by $0.81 in 1997 as compared with 1996, due primarily to increased
workover activities.
25
Gross Production Taxes. Production taxes decreased by $258,000, or 14%,
from $1,791,000 in 1996 to $1,533,000 in 1997. This decrease is partially
attributable to the fact that in Louisiana, gross production taxes on gas sales
are computed on a volumetric basis rather than on the sales price, and gas
volumes decreased by 811 Mmcf, and partially due to a decrease of $1,792,000 in
oil sales in 1997 as compared with 1996.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense was $7,856,000 in 1997. Due to the restating of property
values to comply with fresh start accounting and the conversion from the
successful efforts method to the full cost pool method for reporting oil and gas
operations on the Effective Date, comparisons of 1997 depreciation, depletion,
and amortization expense with prior years will not be meaningful.
General and Administrative Expense. General and administrative expenses
increased by 13% from $3,210,000 in 1996 to $3,642,000 in 1997 due primarily to
a decrease of $616,000 in administrative costs charged to operations resulting
from certain changes in billing practices implemented in 1997. Also contributing
to this increase was a substantial increase in audit fees and contract labor
incurred in connection with implementing the plan of reorganization. These
increases were partially offset by lower salary expenses and other cost savings
implemented by management.
Provision for Doubtful Accounts. Provision for doubtful accounts
decreased $5,087,000 from $5,158,000 in 1996 to $71,000 in 1997. The provision
for doubtful accounts for 1996 consists primarily of an allowance of a
receivable in the amount of $4,278,000 relating to the Tri-Deck legal proceeding
(See "Legal Proceedings"). On January 20, 1998, the Company's rights to its
claims against Tri-Deck were assigned to the Litigation Trust in consideration
for the right to receive 50% of the net proceeds from the settlement of these
claims. In addition, during 1996 the Company charged an additional $880,000 to
bad debts expense related to receivables deemed uncollectible as a result of the
Reorganization Case.
Restructuring Charges and Reorganization Costs. During 1997 the Company
incurred $7,771,000 in reorganization costs, consisting of $3,000,000
contributed to the Litigation Entity as called for in the Plan of
Reorganization, $1,515,000 reimbursed to DLB for restructuring costs it incurred
on the Company's behalf, professional fees totaling $2,213,000 and an accrual of
$1,043,000 for estimated future costs to be incurred in connection with the
reorganization.
During 1996, the Company incurred reorganization costs of $7,345,000,
consisting primarily of professional fees totaling $2,594,000, and the write-off
of previously capitalized debt issuance costs on the Senior Notes in the amount
of $3,834,000.
Minimum Production Guarantee Obligation. The Company provided Tricore
with a limited production guarantee based on the minimum production schedule
attached to the Tricore Joint Venture Agreement. As collateral for the Company's
obligations under the production guarantee, Tricore held a partial assignment of
an
26
interest in the West Cote Blanche Bay Field. This 4.68% working interest (3.72%
net revenue interest) assignment was made subject to the terms and provisions of
the Joint Venture Agreement. Upon satisfaction of the production guarantee,
Tricore is required to execute and deliver a release of the partial assignment.
As discussed elsewhere in this Annual Report, the Company accrued $5,555,000 in
1996 and $3,591,000 in 1995 related to its anticipated minimum production
guarantee obligation to Tricore Energy Venture, L.P. The additional accrual in
1996 was due in part to the disallowance of the Section 29 Energy Credit by the
FERC and the subsequent ruling in the FERC's favor by the United States Court of
Appeals, as further discussed below, and in part due to downward revisions of
the reserve estimates associated with the properties collateralizing the
production payment obligations.
No additional liability was accrued in 1997 in connection with this
production payment guarantee. On December 9, 1997, the Tricore claim was settled
by the Bankruptcy Court as an Allowed General Unsecured Claim in the amount of
$6,800,000 for which Tricore received 524,000 shares of Gulfport and 524,000
litigation Entity interests. As a part of this settlement, Tricore transferred
its interest in the Joint Venture to the Company with the stipulation that if
the Company sells any of the Joint Venture's properties within one year, the
Company will pay to Tricore the net proceeds from the sale.
Impairment of Long-Lived Assets. During 1996, the Company recognized an
impairment loss related to its oil and gas properties and long-lived assets in
the amount of $3,864,000. The 1996 impairment loss was due primarily to further
declines in the Company's estimated oil and gas reserves and the write-down of
certain other equipment to its appraised value.
Based primarily on an analysis of the independent engineers reserve
report dated January 1, 1998, Management has determined that there was no
impairment of long-lived assets during 1997.
Interest Expense. Interest expense decreased from $3,729,000, from
$5,562,000 for 1996 to $1,833,000 primarily due to the termination of the
interest accrual on the $100,000,000 in Senior Notes as of February 14, 1996
(the filing date of the Chapter 11 proceedings).
Extraordinary Gain. During 1997, the Company recognized an
extraordinary gain of $88,723,000 related to the forgiveness of debt recognized
in connection with implementing the Plan of Reorganization.
COMPARISON OF YEARS ENDED DECEMBER 31, 1996 AND 1995
The Company reported a net loss attributable to common stock of
$32,233,000 ($3.38) per share, for the year ended December 31, 1996, as compared
with a net loss attributable to common stock of $131,021,000, ($13.84) per share
for 1995. The reduction in net losses attributable to common stock of
$98,788,000 was due primarily to the following factors:
Oil and Gas Revenues. During 1996, the Company reported oil and gas
revenues of $24,019,000, a 3% decrease from revenues of $24,655,000 for 1995.
The decreased revenues are attributable to a decrease in production volumes of
792 MBoe offset by an increase of $5.58 per MBoe in average sales price for
the year. The production declines are due in part to the mechanical failure of
the Exxon Fee No. 23 and in part due to normal production declines.
Production Costs. Production costs increased $3,770,000, or 40%, from
$9,534,000 in 1995 to $13,304,000 in 1996. Production costs per MBoe increased
130%
27
from $4.74 in 1995 to $10.92 in 1996. This increase in production costs per MBoe
was due primarily to the inclusion in 1996, of the following, as additional
production costs (1) disputed claims adjustments totaling approximately
$2,814,000, (2) the Milam Royalty Corp. settlement in the amount of $1,172,000,
and the (3) Lac Blanc purchase price adjustment in the amount of $479,000.
Production costs on the properties excluding the previously mentioned items
decreased by 7% while the oil sales volume decreased by 21% and the gas sales
volumes decreased by 51%, resulting in significantly increased production costs
per MBoe.
Gross Production Taxes. Production taxes decreased by $348,000, or 16%,
from $2,139,000 in 1995 to $1,791,000 in 1996. This decrease is attributable to
the fact that in Louisiana, gross production taxes on gas sales are computed on
a volumetric basis rather than on the sales price, and gas volumes decreased by
51% in 1996. This decrease in production taxes is partially offset by a $5.58
per barrel increase in the average price received for oil in 1996, which
increased gross production taxes attributable to oil production.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense decreased 37% from $12,645,000 in 1995 to $7,973,000 in
1996. This decrease was due primarily to 21% decrease in oil production combined
with a 51% decrease in gas production. On an MBoe basis, depreciation, depletion
and amortization expense increased 4% from $6.30 per MBoe in 1995 to $6.54 per
MBoe in 1996.
General and Administrative Expense. General and administrative expenses
decreased by 34% from $4,882,000 in 1995 to $3,210,000 in 1996 as a result of
the Company's change in strategy resulting in a substantial reduction in
personnel and third-party geological and engineering costs.
Provision for Doubtful Accounts. Provision for doubtful accounts
increased $3,151,000 from $2,007,000 at December 31, 1995 to $5,158,000 at
December 31, 1996. The provision for doubtful accounts for 1996 consists
primarily of an allowance of a receivable in the amount of $4,278,000 relating
to the Tri-Deck legal proceeding (See "Legal Proceedings"). In addition, during
1996 the Company charged an additional $880,000 to bad debts expense related to
receivables deemed uncollectible as a result of the Reorganization Case.
28
Restructuring Charges and Reorganization Costs. During 1996, the Company
incurred reorganization costs of $7,345,000, consisting primarily of
professional fees totaling $2,594,000, and the write-off of previously
capitalized debt issuance costs on the Senior Notes in the amount of $3,834,000.
During 1995, the Company incurred $1,433,000 in restructuring charges
consisting primarily of the write-off of approximately $1,000,000 in leasehold
improvements related to the relocation of the Company's operations from The
Woodlands, Texas, approximately $305,000 in severance costs related to staff
reductions and changes in senior management, and $145,000 in legal and other
costs directly related to the Company's Reorganization Case.
Minimum Production Guarantee Obligation. The Company has provided Tricore
with a limited production guarantee based on the minimum production schedule
attached to the Tricore Joint Venture Agreement. As discussed elsewhere in this
Annual Report, the Company accrued $5,555,000 in 1996 and $3,591,000 in 1995
related to its anticipated minimum production guarantee obligation to Tricore
Energy Venture, L.P. The additional accrual in 1996 was due in part to the
disallowance of the Section 29 Energy Credit by the FERC and the subsequent
ruling in the FERC's favor by the United States Court of Appeals, as further
discussed below, and in part due to downward revisions of the reserve estimates
associated with the properties collateralizing the production payment
obligations.
Impairment of Long-Lived Assets. Effective December 31, 1995, the Company
adopted SFAS No. 121 resulting in the recognition of an impairment loss related
to the Company's oil and gas properties and other long-lived assets in the
amount of $103,266,000. During 1996, the Company recognized an additional
impairment loss related to its oil and gas properties and long-lived assets in
the amount of $3,864,000. The 1996 impairment loss was due primarily to further
declines in the Company's estimated oil and gas reserves and the write-down of
certain other equipment to its appraised value.
Interest Expense. Interest expense decreased $8,197,000, from $13,759,000
for 1995 to $5,562,000 for 1996, primarily due to the termination of the
interest accrual on the $100,000,000 in Senior Notes as of February 14, 1996
(the filing date of the Chapter 11 proceedings).
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used by operating activities for the year ended December
31, 1997 was $3,890,000 as compared to net cash flows provided by operating
activities in 1996 of $9,140,000. This $13,030,000 decrease in cash flows was
due primarily to the increase in accounts payable in 1996 of $11,365,000,
incurred as a result of the stay provided by the Bankruptcy Court. The majority
of these payables were satisfied in connection with the fresh start accounting
and did not effect cash flows from operating activities in 1997. Also
contributing to the decrease in cash flows was a $4,125,000 decrease in
realization of oil and gas revenues.
On the Effective Date, the Company received gross proceeds from the Rights
Offering of $13,300,000 of which $3,248,000 was used to pay the interest and
loan fees in connection with the INCC loan, $3,000,000 was used to fund the
litigation trust
29
called for in the Plan, $2,963,000 was used to pay pre-petition claims, and
$2,492,000 was used to pay administrative claims. The balance of $1,597,000 was
used for additional working capital for the Company.
In addition, on the Effective Date, the Company exchanged $123,845,000
in unsecured debt for 10,000,000 shares of Gulfport common stock and DLBW and
Dublin Acquisitions a related party to DLBW, exchanged $9,293,000 of secured
debt for 2,655,000 shares of Gulfport common stock.
On July 11 1997, the Company entered into a $15,000,000 credit
agreement (the "Credit Agreement") with ING (U.S.) Capital Corporation ("ING")
that is secured by substantially all of the Company's assets. The terms of the
Credit Agreement required the payoff of a portion of the $18,081,590 in
principal and interest outstanding under the Company's credit facility (the
"Credit Facility") with International Nederlanden (U.S.) Capital Corporation
(predecessor to ING) with proceeds under the Credit Agreement. As of December
31, 1997, the outstanding principal balance under the Credit Agreement was
$15,000,000. Pursuant to the terms of the Credit Agreement, the Company may
elect to be charged at the bank's fluctuating reference rate plus 1.25% or the
rate plus 3.0% at which Eurodollar deposits for one, two, three or six months
are offered to the bank in the Interbank Eurodollar. Principal payments of
$1,000,000 each are due in September 1998, December 1998, and March 1999 with
the remaining principal balance due at maturity on July 10, 1999.
The Credit Agreement contains restrictive covenants which impose
limitations on the Company with respect to, among other things: (i) the
maintenance of current assets equal to at least 110% of current liabilities
(excluding any current portion of the Credit Agreement); (ii) the incurrence of
debt outside the ordinary course of business; (iii) dividends and similar
payments; (iv) the creation of additional liens on, or the sale of, the
Company's oil and gas properties and other assets; (v) the Company's ability to
enter into forward, future, swap or hedging contracts; (vi) mergers or
consolidations; (vii) the issuance of securities other than Common Stock and
options or warrants granting the right to purchase Common Stock; (viii) the
sale, transfer, lease, exchange, alienation or disposal of Company properties or
assets; (ix) investments outside the ordinary course of business; (x)
transactions with affiliates; (xi) general and administrative expenditures in
excess of $1 million during any fiscal quarter or in excess of $3 million during
each fiscal year; and (xii) the maintenance of an aggregate net present value
attributable to all Collateral as determined from engineering reports equal to
120% of the principal amount of the Note on such date.
During 1997, the Company invested $21,931,000 in property acquisition
and development, as compared to $4,282,000 during 1996. Included in 1997
property additions the acquisition of the 50% interest in WCBB properties not
owned by the Company in exchange for 5,616,000 shares of Gulfport common stock,
616,000 shares of which were issued for additional capital expenditures on these
properties paid by DLB. This 50% interest in the WCBB properties was valued at
$15,144,000 for financial reporting purposes. During 1997, the Company received
approximately $2,100,000 from the sale of substantially all its well servicing
equipment.
Net cash provided in financing activities for 1997 was $5,137,000 as
compared to $29,611,000 during 1996. The 1996 cash flows from financing occurred
as a result of the deferral of pre-petition claims in connection with the
Company's Chapter 11 Bankruptcy filing in February 1996.
30
Commencing with the Effective Date of the Plan, the Company commenced a
program to increase production rates, lengthen the productive life of wells and
increase total proved reserves primarily through sidetracks out of and
recompletions of shut-in wells and installation of hydrocyclones on gas wells
producing large volumes of formation water. In addition, certain sidetrack and
development drilling locations have been identified that are expected to improve
reservoir drainage and increase the ultimate recovery of reserves. Pursuant to
this strategy, the Company plans to utilize farm out type arrangements in which
investors pay the development costs in exchange for a working interest in the
developed properties. Although the Company is engaged in discussions with
respect to such arrangements, no definitive agreements have been reached.
Certain recompletions are anticipated to be financed internally. The Company's
capital budget for 1998 for these recompletions is approximately $ 1,000,000.
Funding for this capital budget is anticipated to come primarily from cash flows
from operations. In addition, at December 31, 1997, the Company owed DLB
$1,728,000 for capital expenditures and management fees. See Note 2 to the
financial statements for further details. The Company anticipates that this sum
will be paid in April of 1998 from proceeds from the sale of its well servicing
equipment or from borrowings.
The inability of the Company to obtain adequate financing of its
projected future development costs would severely impair the value of the
Company's oil and gas properties, its cash flows and, ultimately, its continued
existence. The uncertainty about the Company's ability to finance future
development costs raises substantial doubt about the Company's ability to
continue as a going concern. The financial statements do not include any
adjustments relating to the impairment related to the recoverability and
classification of recorded assets, or the amounts and classification of
liabilities that might be necessary in the event the Company cannot continue as
a going concern. See Note 2 to the Company's financial statements.
COMMITMENTS AND CONTINGENCIES
Lac Blanc Escrow Account
In connection with its purchase of a 91% working interest in
the Lac Blanc Field, the Company deposited $170,000 in a segregated trust
account and agreed to make additional deposits of $20,000 per month until the
accumulated balance of the trust account reaches $1,700,000. These funds are
held in a segregated account for the benefit of the State of Louisiana to insure
that the wells in the Lac Blanc Field are properly plugged upon cessation of
production. In return for this financial commitment, the State has granted the
sellers an unconditional release from their contingent liability to the state to
plug and abandon the wells. When all existing wells in the Lac Blanc Field have
been properly plugged and abandoned, the funds in the trust account, should any
remain, will revert to the Company. Due to the filing of the Reorganization Case
in June 1996, the Company ceased contributions to the segregated account. At
December 31, 1997, the balance in this escrow account was $871,000.
Under the Plan, the Company will fund the unfunded portion of
the escrow and maintain future funding requirements.
Plugging and Abandonment Funds
The Company is contractually committed in its purchase contracts
for the Initial LLOG Property and Remaining LLOG Properties to establish
plugging and abandonment funds as allowed by Louisiana's Orphaned Well Act. The
State of Louisiana upon completion of an independent study to be commissioned by
the Company will establish the amount of and terms of payment into each fund. As
of December 31, 1997, the independent study has not been completed. Accordingly,
the Company is unable to determine the amount and payment towards the future
obligation related to these commitments.
Under the Plan, the Company will fund the unfunded portion of the
31
escrow and maintain future funding requirements.
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Reorganized Company assumed the obligation to contribute
approximately $18,000 per month through March of 2004 to a plugging and
abandonment trust and the obligation to plug a minimum of 20 wells per year for
20 years commencing March 11, 1997. TEPI retained a security interest in
production from these properties and the plugging and abandonment trust until
such time the Company's plugging and abandonment obligations to TEPI have been
fulfilled. Once the plugging and abandonment trust is fully funded, the Company
can access it for use in plugging and abandonment charges associated with the
property.
Texaco Global Settlement
Pursuant to the terms of a global settlement between Texaco and
the State of Louisiana which includes the State Lease No. 50 portion of the
Company's East Hackberry Field, the Company is obligated to commence a well or
other qualifying development operation on certain non-producing acreage in the
field prior to March 1998. On January 8, 1998, the Company applied for and was
granted a permit to conduct seismic operations on the East Hackberry Field as
well as other Company properties. The Company is planning on shooting the
seismic as soon as practical. If the Company fails to shoot the seismic or
commence the drilling of a well on this non-producing acreage within a
reasonable period of time, it will be required by the State of Louisiana to
surrender approximately 440 non-producing acres in this field.
Reimbursement of Employee Expenses & Contributions to 401(k) Plan
The Company sponsors a 401(k) savings plan under which eligible
employees may choose to save up to 15% of salary income on a pre-tax basis,
subject to certain IRS limits. At December 31, 1996, the Company is matching
employee contributions with 25% cash contributions. During the period commencing
July 11, 1997 and ending on December 31, 1997, the period commencing January 1,
1997 and ending on July 10, 1997, and the years ended December 31, 1996 and
1995, the Company incurred $13,000, $23,000, $12,000, and $22,000, respectively,
in matching contributions expense associated with this plan.
Tri-Deck/Perry Gas Litigation
During 1995, the Company entered into a marketing agreement with
Tri-Deck Oil and Gas Company ("Tri-Deck") pursuant to which Tri-Deck would
market all of the Company's oil and gas production. Subsequent to the agreement,
Tri-Deck's principal and the Company's Director of Marketing, James Florence,
assigned to Plains Marketing its right to market the Company's oil production
and assigned to Perry Oil & Gas its right to market the Company's gas
production. During early 1996, Tri-Deck failed to make payments to the Company
attributable to several months of its gas production.
On January 20, 1998, the Company and the Litigation Trust entered into a
Clarification Agreement whereby the rights to pursue the Tri- Deck claim were
assigned to the Litigation Trust. In connection with this agreement, the
Litigation
32
Trust agreed to reimburse the Company $100,000 for legal fees the Company had
incurred in connection this and other related claims. As additional
consideration for the contribution of this claim to the Litigation Trust, the
Company is entitled to 85% of the net proceeds from this claim.
Title to Oil and Gas Properties
During 1996, WRT received notice from a third party claiming that the
Company's title has failed as to approximately 43 acres in the Bayou Pigeon
Field. Some or all of the acreage in dispute is considered to be productive in
three separate production units. Under the assumption that the Company's title
is flawed, it's working interest in three units may be reduced to approximately
7% (5% Net Revenue Interest, ("NRI")) 75% (63% NRI), and 95% (72% NRI). The
financial statements as of and for the period commencing July 11, 1997 and
ending December 31, 1997, the period commencing January 1, 1997 and ending July
10, 1997, and for the years ended December 31, 1996 and 1995, reflect operating
results and proved reserves discounted for this possible title failure. As the
title failure predates its ownership of the field, the Company is currently
evaluating its recourse against the predecessors-in-title relative to this
issue. The Company is currently negotiating a settlement with the Third Party,
pursuant to their claim.
Year 2000 Compliance
The company has and will continue to make certain investments in
software systems and applications to ensure it is year 2000 compliant. The
financial impact to the Company to ensure year 2000 compliance has not been and
is not anticipated to be material to its financial position or results of
operations.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPORTING DATA
INDEX TO FINANCIAL STATEMENTS AND SUPPORTING DATA
Independent Auditors' Reports............................................................................. F-2
Balance Sheets, December 31, 1997 and 1996................................................................ F-4
Statements of Operations, Periods July 11, 1997 to December 31,
1997, January 1, 1997 to July 10, 1997, and the Years Ended
December 31, 1996 and 1995................................................................................ F-5
Statements of Shareholders' Equity, Periods July 11, 1997 to
December 31, 1997, January 1, 1997 to July 10, 1997, and the Years Ended
December 31, 1996 and 1995................................................................................ F-6
Statements of Cash Flows, Periods July 11, 1997 to December 31,
1997, January 1, 1997 to July 10, 1997, and the Years Ended
December 31, 1996 and 1995................................................................................ F-8
Notes to Financial Statements............................................................................. F-10
All financial statement schedules are omitted, as the required information is
inapplicable or the information is presented in the financial statements or
related notes.
F-1
INDEPENDENT AUDITORS' REPORT
PRE-EMERGENCE CONSOLIDATED FINANCIAL STATEMENTS
The Board of Directors and
Shareholders of Gulfport Energy Corporation:
We have audited the accompanying consolidated balance sheet of Gulfport
Energy Corporation (formerly WRT Energy Corporation a Texas corporation) (the
"Company") as of December 31, 1996, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended, and
the consolidated statements of operations, shareholders' equity, and cash flows
the period from January 1, 1997 to July 10, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996, and the results of its operations, and cash flows for
the year then ended and the period from January 1, 1997 to July 10, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, on May
2, 1997 the Company's plan of reorganization (the "Plan") was confirmed by the
bankruptcy court. The Plan was substantially consummated on July 11, 1997 and
the Company emerged from bankruptcy. In connection with its emergence from
bankruptcy, the Company adopted fresh start reporting.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern which contemplates among other
things, the realization of assets and liquidation of liabilities in the ordinary
course of business. As discussed in Note 2 to the financial statements, the
Company's independent reserve report which estimates proven reserves, prepared
as of January 1, 1998, indicates that substantial future capital expenditures
are necessary to fully develop its total proven reserves of which only 3.7% are
currently producing. Revenues from these producing properties will not be
sufficient to finance the estimated future capital expenditures necessary to
fully develop the existing proved reserves, nor recover the carrying value of
the Company's oil and natural gas properties. This raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding the financing of anticipated future development costs are also
discussed in Note 2. The financial statements do not include any adjustments
relating to the recoverability and classification of reported asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
HOGAN & SLOVACEK
Oklahoma City, OK
March 27, 1998
F-2
INDEPENDENT AUDITORS' REPORT
POST-EMERGENCE FINANCIAL STATEMENTS
The Board of Directors and
Shareholders of Gulfport Energy Corporation:
We have audited the accompanying balance sheet of Gulfport Energy
Corporation (a Delaware corporation) (formerly WRT Energy Corporation) (the
"Company") as of December 31, 1997, and the related statements of operations,
shareholders' equity, and cash flows for the period from July 11, 1997 to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Gulfport Energy
Corporation as of December 31, 1997, and the results of its operations and its
cash flows for the period from July 11, 1997 to December 31, 1997, in conformity
with generally accepted accounting principles.
As discussed in Note 1 to the financial statements, on May 2, 1997 the
Company's plan of reorganization (the "Plan") was confirmed by the bankruptcy
court. The Plan was substantially consummated on July 11, 1997 and the Company
emerged from bankruptcy. In connection with its emergence from bankruptcy, the
Company adopted fresh start reporting. As a result of the adoption of fresh
start reporting, the post-emergence financial statements are not comparable to
the pre-emergence consolidated financial statements.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern which contemplates among other
things, the realization of assets and liquidation of liabilities in the ordinary
course of business. As discussed in Note 2 to the financial statements, the
Company's independent reserve report which estimates proven reserves, prepared
as of January 1, 1998, indicates that substantial future capital expenditures
are necessary to fully develop its total proven reserves of which only 3.7% are
currently producing. Revenues from these producing properties will not be
sufficient to finance the estimated future capital expenditures necessary to
fully develop the existing proved reserves, nor recover the carrying value of
the Company's oil and natural gas properties. This raises substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding the financing of anticipated future development costs are also
discussed in Note 2. The financial statements do not include any adjustments
relating to the recoverability and classification of reported asset amounts or
the amounts and classification of liabilities that might be necessary should the
Company be unable to continue in existence.
As discussed in Note 1 to the financial statements, on July 11, 1997,
the Company changed its method of accounting for oil and natural gas properties.
HOGAN & SLOVACEK
Oklahoma City, OK
March 27, 1998
F-3
Gulfport Energy Corporation
BALANCE SHEETS
- ------------------------------------------------------------------------------------------
December 31,
-----------------------------------
1997 1996
(Reorganized (Predecessor
Company)(1) Company)(1)
- ------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,203,000 $ 5,679,000
Cash, restricted 2,060,000 --
Accounts receivable, net of allowance
for doubtful accounts of $4,966,000
for 1997 and 1996 4,364,000 3,667,000
Prepaid expenses and other 192,000 349,000
- ------------------------------------------------------------------------------------------
Total current assets 7,819,000 9,695,000
- ------------------------------------------------------------------------------------------
Property and equipment:
Oil and natural gas properties (2) 84,466,000 77,541,000
Other property and equipment 1,577,000 5,118,000
Accumulated depletion, depreciation
and amortization (4,542,000) (25,760,000)
- ------------------------------------------------------------------------------------------
Property and equipment, net 81,501,000 56,899,000
- ------------------------------------------------------------------------------------------
Other assets 3,026,000 1,482,000
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 92,346,000 $ 68,076,000
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 6,346,000 $ 5,529,000
Current maturities of long-term debt 2,192,000 --
- ------------------------------------------------------------------------------------------
Total current liabilities 8,538,000 5,529,000
- ------------------------------------------------------------------------------------------
Prepetition current liabilities:
Subject to compromise -- 136,346,000
Not subject to compromise -- 16,752,000
- ------------------------------------------------------------------------------------------
Total pre-petition current liabilities -- 153,098,000
Long-term debt 13,528,000 --
Total liabilities 22,066,000 158,627,000
- ------------------------------------------------------------------------------------------
Commitments and contingencies -- --
Shareholders' equity (deficit):
Preferred stock - $.01 par value, 2,000,000
authorized, 1,265,000 issued and outstanding
at December 31, 1996 -- 27,677,000
Common stock - $.01 par value, 50,000,000
authorized, 22,076,315 and 9,539,207 issued
and outstanding at December 31, 1997
and 1996, respectively 221,000 95,000
Paid-in capital 71,772,000 39,571,000
Accumulated deficit (1,713,000) (157,562,000)
Treasury stock, at cost (35,100 shares at
December 31, 1996) -- (332,000)
- ------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) 70,280,000 (90,551,000)
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) $ 92,346,000 $ 68,076,000
==========================================================================================
See accompanying notes to financial statements.
(1) As used herein, "Predecessor Company" means the operations of the
Company prior to July 11, effective date of the order regarding
substantial consummation of the Amended Plan of Reorganization, and
"Reorganized Company" means the operations of the Company subsequent to
that date. (See Note 1)
(2) Effective July 11, 1997, the Company adopted the full cost method of
accounting for oil and natural gas properties.
F-4
Gulfport Energy Corporation
STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------
Reorganized Predecessor Company
Company
July 11, January 1,
through through Year Ended December 31,
December 31, July 10, ----------------------------------
1997 1997 1996 1995(Note 1)
- ---------------------------------------------------------------------------------------------------------------
REVENUES:
Gas sales $ 3,344,000 $ 4,706,000 $ 10,382,000 $ 11,747,000
Oil and condensate sales 6,412,000 5,432,000 13,637,000 12,908,000
Other income, net 736,000 126,000 356,000 426,000
- ---------------------------------------------------------------------------------------------------------------
10,492,000 10,264,000 24,375,000 25,081,000
- ---------------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Operating expenses including
production taxes 5,397,000 5,514,000 15,095,000 11,673,000
Depletion, depreciation
and amortization 4,542,000 3,314,000 7,973,000 12,645,000
General and administrative 1,539,000 2,103,000 3,210,000 4,882,000
Interest 727,000 1,106,000 5,562,000 13,759,000
Provision for doubtful accounts -- 71,000 5,158,000 2,007,000
Restructuring charges -- -- -- 1,433,000
Minimum production
guarantee obligation -- -- 5,555,000 3,591,000
Impairment of long-lived assets -- -- 3,864,000 103,266,000
- ---------------------------------------------------------------------------------------------------------------
12,205,000 12,108,000 46,417,000 153,256,000
LOSS BEFORE REORGANIZATION
EXPENSES AND INCOME TAXES (1,713,000) (1,844,000) (22,042,000) (128,175,000)
Reorganization expenses -- 7,771,000 7,345,000 --
- ---------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (1,713,000) (9,615,000) (29,387,000) (128,175,000)
Income tax expense -- -- -- --
- ---------------------------------------------------------------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY ITEM (1,713,000) (9,615,000) (29,387,000) (128,175,000)
LOSS FROM EXTRAORDINARY ITEM--
GAIN ON DISCHARGE OF DEBT -- 88,723,000 -- --
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (1,713,000) 79,108,000 (29,387,000) (128,175,000)
Preferred stock dividends, net -- (1,510,000) (2,846,000) (2,846,000)
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) APPLICABLE TO
COMMON STOCK $ (1,713,000) $ 77,598,000 $ (32,233,000) $(131,021,000)
===============================================================================================================
PER SHARE OF COMMON STOCK AMOUNTS:
Loss from continuing operations $ (0.08) N/A N/A N/A
Income from extraordinary item -- N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (0.08) N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 22,076,000 N/A N/A N/A
===============================================================================================================
See accompanying notes to financial statements.
F-5
Gulfport Energy Corporation
STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Common
Stock Additional
Preferred --------------------- Paid-In Accumulated Treasury
Stock Shares Amount Capital Deficit Stock
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1995(Note 1) $ 27,677,000 9,539,207 $ 95,000 $ 38,866,000 $(128,175,000) $ (332,000)
Reversal of preferred
stock dividends
previously accrued -- -- -- 712,000 -- --
Net loss before
dividends on
preferred stock -- -- -- -- (29,387,000) --
Other -- -- -- (7,000) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1996 27,677,000 9,539,207 95,000 39,571,000 (157,562,000) (332,000)
Net income -- -- -- -- 79,108,000 --
Effect of fresh
start reporting (27,677,000) 12,537,108 126,000 32,201,000 78,454,000 332,000
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
July 11, 1997 -- 22,076,315 221,000 71,772,000 -- --
Net loss -- -- -- -- (1,713,000) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1997 $ -- 22,076,315 $ 221,000 $ 71,772,000 $ (1,713,000) $ --
===================================================================================================================================
See accompanying notes to financial statements.
F-6
Gulfport Energy Corporation
STATEMENTS OF CASH FLOWS
- ---------------------------------------------------------------------------------------------------------------------------
Reorganized Predecessor Company
Company ----------------------------------------------------
July 11, January 1,
through through Year Ended December 31,
December 31, July 10, -------------------------------
1997 1997 1996 1995(Note 1)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ (1,713,000) $ 79,476,000 $ (29,387,000) $(128,175,000)
Adjustments to reconcile net income
(loss) to net cash provided
by operating activities:
Extraordinary item -
gain on debt discharge -- (88,723,000) -- --
Depletion, depreciation and amortization 4,633,000 3,314,000 8,882,000 13,674,000
Provision for doubtful accounts
and notes receivable -- 71,000 5,158,000 2,007,000
Gain on sale of equipment (587,000) -- -- --
Write-off of debt issuance costs
and Senior Notes discount -- -- 5,263,000 --
Impairment of long-lived assets -- -- 3,864,000 103,266,000
Write-off of leasehold improvements -- -- -- 946,000
Gain on sale of oil and gas properties -- -- (5,000) (3,000)
Write-off of accounts receivable
included in production costs -- -- (1,172,000) --
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (1,077,000) 307,000 (515,000) (2,249,000)
(Increase) decrease in prepaid
expenses (117,000) (331,000) 132,000 (349,000)
Increase (decrease) in accounts payable
and accrued liabilities 556,000 301,000 11,365,000 13,551,000
Increase in minimum production
guarantee obligation -- -- 5,555,000 3,591,000
------------- ------------- ------------- -------------
Net cash provided by (used in)
operating activities 1,695,000 (5,585,000) 9,140,000 6,259,000
------------- ------------- ------------- -------------
Cash flows from investing activities:
Decrease in notes and other receivables -- -- -- 69,000
Additions to cash held in escrow (133,000) (22,000) (121,000) (220,000)
Capital expenditures (5,644,000) (2,562,000) (4,823,000) (116,730,000)
Proceeds from sale of oil and gas properties 35,000 -- 5,000 390,000
Proceeds from sale of equipment 2,081,000 -- -- --
Decrease in other assets 138,000 -- -- --
------------- ------------- ------------- -------------
Net cash used in investing activities (3,523,000) (2,584,000) (4,939,000) (116,491,000)
------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from borrowings -- 15,000,000 -- 126,141,000
Payment of pre-petition liabilities and
administrative claims -- (8,105,000) -- --
Proceeds for issuance of warrants -- 13,300,000 -- 1,600,000
Debt issuance costs -- -- -- (5,722,000)
Principle payments on borrowing (20,000) (15,014,000) (130,000) (19,603,000)
Payment of loan origination fees (200,000) -- -- --
Purchase of treasury stock -- -- -- (17,000)
Proceeds from option and warrant exercises -- -- -- 2,508,000
Common stock filing fees -- -- -- (120,000)
Dividends on preferred stock -- -- -- (2,135,000)
------------- ------------- ------------- -------------
Net cash provided by (used in)
financing activities (220,000) 5,181,000 (130,000) 102,652,000
------------- ------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents (2,048,000) (2,988,000) 4,071,000 (7,580,000)
Cash and cash equivalents -
beginning of period 5,311,000 5,679,000 1,608,000 9,188,000
------------- ------------- ------------- -------------
Cash and cash equivalents - end of period $ 3,263,000 $ 2,691,000 $ 5,679,000 $ 1,608,000
============= ============= ============= =============
F-7
Gulfport Energy Corporation
STATEMENTS OF CASH FLOWS (Continued)
- ---------------------------------------------------------------------------------------------------------------------------
Reorganized Predecessor Company
Company ----------------------------------------------------
July 11, January 1,
through through Year Ended December 31,
December 31, July 10, -------------------------------
1997 1997 1996 1995 (Note 1)
- ---------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash
Flow Information:
Interest paid 505,000 28,000 -- 8,232,000
Income taxes paid -- -- -- 36,000
Supplemental Information of Non-Cash
Investing and Financing Activities:
Common stock issued to purchase oil
and gas properties -- -- -- 1,617,000
Note receivable from sale of property
and equipment -- -- -- 3,400,000
Reduction in drilling and workover rigs
and marine equipment notes receivable
and related deferred gain -- -- -- 1,763,000
Accrued dividends on preferred stock -- (1,510,000) (712,000) 712,000
See accompanying notes to financial statements.
F-8
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Reorganization Proceedings
Gulfport Energy Corporation (the "Company"), formerly known as WRT
Energy Corporation, is a domestic independent energy company engaged in the
production of oil and natural gas. On July 11, 1997, the Company's subsidiaries
were merged into the Company. On the effective date of the reorganization, the
state of incorporation of the reorganized Company was changed from the State of
Texas to the State of Delaware. Prior to July 11, 1997, the financial statements
represented the consolidated financial statements of the Company and its
subsidiaries.
As discussed in Note 3, on February 14, 1996, (the "Petition Date"),
the Company filed a voluntary petition with the Bankruptcy court for the Western
District of Louisiana (the "Bankruptcy Court") for protection under Chapter 11
of the Bankruptcy Code. On May 5, 1997, the Bankruptcy Court confirmed an
Amended Plan of Reorganization (the "Plan") for the Company and on the Effective
Date an order of substantial consummation regarding the Plan became final and
nonappealable. On the Effective Date, the Debtor was merged with and into a
newly formed Delaware corporation named "WRT Energy Corporation" which on
February 13, 1998 by action of its board of directors underwent a name change to
"Gulfport Energy Corporation". Effective July 11, 1997 (the "Election Date"),
the Company implemented fresh start reporting, as defined by the Accounting
Standards Division of the American Institute of Certified Public Accountants
Statement of Position Number 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7").
Principles of Consolidation
Until December 31, 1995, the Company owned 100% of the stock of two
subsidiaries, Tesla Resources, Inc. ("Tesla") and Southern Petroleum, Inc.
("Southern Petroleum"). On that date, both Tesla and Southern Petroleum were
merged into the Company with the Company emerging as the sole surviving
corporation. In November 1995, the Company formed a wholly owned subsidiary, WRT
Technologies, Inc., which was established to own and operate the Company's
proprietary, radioactive, cased-hole logging technology. Prior to July 11, 1997,
the financial statements were consolidated and include the accounts of the
Company and its wholly owned subsidiary, WRT Technologies, Inc., which was
merged into the Company on that date. All significant intercompany transactions
were eliminated during the consolidation periods.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents for purposes of the
statement of cash flows.
Fair Value of Financial Instruments
At December 31, 1997, the carrying amounts of all financial instruments
approximate their fair market values.
F-9
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
Oil and Natural Gas Properties
Before July 11, 1997, the Company used the successful efforts method
for reporting oil and gas operations. Commencing with the reorganization, the
Company converted to the full cost pool method of accounting to be in conformity
with the method used by its principal shareholder, DLB Oil & Gas, Inc. ("DLB").
COMMENCING JULY 11, 1997
In connection with the implementation of fresh start reporting, as
described in Note 3, the Company implemented the full cost pool method of
accounting for oil and gas operations. Accordingly, all costs including
nonproductive costs and certain general and administrative costs associated with
acquisition, exploration and development of oil and natural gas properties are
capitalized. Net capitalized costs are limited to the estimated future net
revenues, after income taxes, discounted at 10% per year, from proved oil and
natural gas reserves and the cost of the properties not subject to amortization.
Such capitalized costs, including the estimated future development costs and
site remediation costs, if any, are depleted by an equivalent units-of-
production method, converting natural gas to barrels at the ratio of
six Mcf of natural gas to one barrel of oil. No gain or loss is recognized upon
the disposal of oil and gas properties, unless such dispositions significantly
alter the relationship between capitalized costs and proved oil and natural gas
reserves.
Oil and natural gas properties not subject to amortization consist of
the cost of undeveloped leaseholds. These costs are reviewed periodically by
management for impairment, with the impairment provision included in the cost of
oil and natural gas properties subject to amortization. Factors considered by
management in its impairment assessment include drilling results by the Company
and other operators, the terms of oil and gas leases not held by production, and
available funds for exploration and development.
PRIOR TO JULY 11, 1997
Prior to July 11, 1997, the Company followed the successful efforts
method of accounting for its oil and gas operations. Under the successful
efforts method, costs of productive wells, development dry holes and productive
leases are capitalized and amortized on a unit-of-production basis over the life
of the remaining proved reserves as estimated by the Company's independent
engineers. The Company's estimate of future dismantlement and abandonment costs
was considered in computing the aforementioned amortization.
Cost centers for amortization purposes were determined based on a
reasonable aggregation of properties with common geological structures or
stratigraphic conditions, such as a reservoir or field. The Company performed a
review for impairment of proved oil and gas properties on a depletable unit
basis when circumstances suggest the need for such a review. For each depletable
unit determined to be impaired, an impairment loss equal to the difference
between the carrying value and the fair value of the depletable unit was
recognized. Fair value, on a depletable unit basis, was estimated to be the
present value of expected future net cash flows computed by applying estimated
future oil and gas prices, as determined by management, to estimated future
production of oil and gas reserves over the economic lives of the reserves.
Exploration expenses, including geological, geophysical and costs of
carrying and retaining undeveloped properties were charged to expense as
incurred.
Unproved properties were assessed periodically and a loss was
recognized to the extent, if any, that the cost of the property had been
impaired. If proved reserves were not discovered within one year after drilling
was completed, costs were charged to expense.
F-10
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Other Property and Equipment
Depreciation of other property and equipment is provided on a
straight-line basis over estimated useful lives of the related assets, which
range from 7 to 30 years.
Implementation of Statement of Accounting Standards No. 121
Effective December 31, 1995, the Company adopted the provisions of
Financial Accounting Standards No. 121 ("SFAS No. 121") which requires that an
impairment loss be recognized whenever the carrying amount of a long-lived asset
exceeds the sum of the estimated future cash flows (undiscounted) of the assets.
As discussed above, impairment losses on oil and gas properties were determined
on a discounted future cash flow basis. For each long-term asset determined to
be impaired, an impairment loss equal to the difference between the carrying
value and the fair value of the asset was recognized.
During 1995, the Company recorded a non-cash charge of $103,266,000 in
connection with the adoption of this new accounting standard of which
approximately $95,000,000 related to the impairment of oil and gas properties,
the result of significant downward revisions in the Company's proved oil and gas
reserves. At December 31, 1996, the Company incurred an additional non-cash
charge of $2,545,000 related to the further impairment of its oil and gas
properties as well as the impairment of some of its field equipment. Principal
fields suffering further impairment in value in 1996 were the Abbeville Field,
the Lac Blanc Field, and the West Hackberry Field as a result of additional
downward revisions in the proved oil and gas reserves at December 31, 1996.
The Company also recorded non-cash charges related to certain rig,
marine and field equipment owned or securing notes receivable. The Company
expected this equipment would provide drilling field services in the Company's
oil and gas development program. Due to liquidity problems and the reduced level
of development activity, the Company did not expect to utilize these assets in
the near term and, accordingly, recovery of the related carrying cost was deemed
unlikely. As a result of the adoption of SFAS No. 121, the Company recorded an
impairment of $7,900,000 related to this equipment in 1995. During 1996, the
Company incurred an additional non-cash charge of $1,319,000 related to the
further impairment of its office and field equipment. Of this balance, $815,000
relates primarily to a write down of the Company's office equipment and computer
software to its appraised fair market value, and the balance of $504,000 relates
to a write-down of the wireline equipment to its appraised fair value.
Earnings (Loss) Per Share
Earnings (loss) per share computations are calculated on the
weighted-average of common shares and common share equivalents outstanding
during the year. Common stock options and warrants are considered to be common
share equivalents and are used to calculate earnings per common and common share
equivalents except when they are anti-dilutive.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities and operating loss and tax credit
carryforwards. Deferred income tax assets and liabilities are based on enacted
tax rates applicable to the future period when those temporary differences are
expected to be recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income during the period
the rate change is enacted. Deferred tax assets are recognized in income in the
year in which realization becomes determinable.
Revenue Recognition
F-11
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Natural gas revenues are recorded in the month produced using the
entitlement method, whereby any production volumes received in excess of the
Company's ownership percentage in the property are recorded as a liability. If
less than the Company's entitlement is received, the underproduction is recorded
as a receivable. Oil revenues are recognized in the month produced.
Concentration of Credit Risk
The Company operates in the oil and natural gas industry principally in
the state of Louisiana with sales to refineries, re-sellers such as pipeline
companies, and local distribution companies. While certain of these customers
are affected by periodic downturns in the economy in general or in their
specific segment of the natural gas industry, the Company believes that its
level of credit-related losses due to such economic fluctuations has been
immaterial and will continue to be immaterial to the Company's results of
operations in the long term. Unrelated to economic fluctuations, during 1996,
the Company incurred a bad debt in the amount of $4,278,000 related to marketing
of its oil and gas by Tri-Deck Oil & Gas Company ("Tri-Deck"). See Notes 5 and
15 for further discussion.
During the year ended December 31, 1997, approximately 99%, of the
Company's revenues from oil and natural gas sales were attributable to sales to
five primary customers: Prior Energy, Wickford Energy Marketing, Gathering and
Energy Marketing Corp., Texaco Trading and Transportation and Mobil Oil
Corporation. During the years ended December 31, 1996 and 1995, approximately
89% and 79%, respectively, of the Company's revenues from oil and gas sales were
attributable to sales to five primary customers: Tri-Deck, Plains Marketing and
Transportation, Inc., Texas-Ohio Gas, Inc., Riverside Pipeline Company and Prior
Energy.
The Company maintains cash balances at several banks. Accounts at each
bank are insured by the Federal Deposit Insurance Corporation up to $100,000.
Cash balances in excess of insured limits total $3,163,000 at December 31, 1997.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgements
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the financial statements and revenues and expenses during the
reporting period. The financial statements are highly dependent on oil and gas
reserve estimates, which are inherently imprecise. Actual results could differ
materially from those estimates.
Stock Options and Warrant Agreements
Effective at the date of reorganization, all previously issued stock
option plans of the Company were terminated and all outstanding options were
cancelled. At that date a Warrant Agreement went into effect. These warrants are
exercisable at $10 per share and will expire on July 11, 2002. The Plan
authorized the issuance of up to 1,104,000 warrants. As of December 31, 1997,
there were 221,000 warrants issued and outstanding.
Commitments and Contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation or other sources are recorded when it is probable that a liability
has been incurred and the amount can be reasonably estimated.
1995 Information not covered by Auditor's Reports
On December 10, 1997, the Company received notice from its former
Certified Public Accountants that they had terminated their client-auditor
relationship. The former independent certified public accountants annual report
covering the fiscal years ended December 31, 1996 and 1995, did not include any
adverse opinion or disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope or accounting principles. The opinion, however, did
include an explanatory paragraph expressing, among other things, substantial
doubts about the Company's
F- 12
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
ability to continue as a going concern.
The former independent certified public accountants have, however, not
given consent to the use of their report on the consolidated financial
statements for the year 1995. Therefore, all references to 1995 financial
information should be treated as unaudited information.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified to conform to
the current year presentation.
2. GOING CONCERN CONSIDERATIONS
The accompanying financial statements of the Company have been prepared
on a going concern basis, which contemplates the realization of assets and the
liquidation of liabilities in the ordinary course of business.
As of January 1, 1998, based on the Company's independent reserve
report, the Company had 27,746,000 barrel of oil equivalents ("Boe") in total
proved reserves of which proved developed producing reserves were only 1,033,000
Boe. The Company's independent reserve report prepared as of that date
anticipated future capital expenditures of $166,812,000 to fully develop its
total proved reserves. As of December 31, 1997, based on the independent reserve
report, the Company's proved developed producing reserves will not generate
sufficient revenues to recover the carrying value of the Company's producing oil
and gas properties. The future development of the Company's undeveloped proved
reserves is dependent upon its ability to finance the development of these
properties.
Possible sources of financing for the development of these properties
include cash flows generated from future operations, sale of additional common
stock to current shareholders through a stock rights offering or to the public
through a public offering, borrowing and through farm out type arrangements
where third party investors pay the development costs in exchange for a working
interest in the developed properties.
The inability to obtain adequate financing of these projected future
development costs would severely impair the value of the Company's oil and gas
properties, its cash flows, and ultimately its continued existence. The
uncertainty about the Company's ability to finance future development costs
raises substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments relating to the
impairment related to the recoverability and classification of recorded assets,
or the amounts and classification of liabilities that might be necessary in the
event the Company cannot continue as a going concern. Management is currently
attempting to negotiate certain farm out agreements in which third party
investors would pay certain development costs. It is not possible, however, to
predict at this time the success of these negotiations.
F- 13
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
3. REORGANIZATION PROCEEDING
On February 14, 1996, the Company filed a voluntary petition in the
United States Bankruptcy Court for the Western District of Louisiana (the
"Bankruptcy Court") for reorganization pursuant to Chapter 11 of the Federal
Bankruptcy Code (the "Reorganization Proceeding"). During the balance of 1996
and a portion of 1997, the Company operated as a debtor-in-possession,
continuing in possession of its estate and the operation of its business and
management of its property. On May 5, 1997, the Bankruptcy Court confirmed an
Amended Plan of Reorganization (the "Plan") for the Company. On July 11, 1997,
the Bankruptcy Court determined that the Plan had been substantially
consummated, and the Bankruptcy Court's order of substantial consummation became
final and nonappealable on July 11, 1997 (the "Effective Date").
As a result of the consummation of the Plan and due to (1) the
reallocation of the voting rights of equity interest owners and (2) the
reorganization value of the Company's assets being less than the total of all
post-petition liabilities and allowed claims, the effects of the Reorganization
Proceeding were accounted for in accordance with fresh start reporting standards
promulgated under SOP 90-7.
In conjunction with implementing fresh start reporting, management
determined a reorganized value of the Company's assets and liabilities in the
following manner:
The reorganized value of proved oil and natural gas properties was
determined based on future net revenues discounted to present value utilizing a
rate of approximately twenty five percent (25%). For the purpose of calculating
future revenues of oil and natural gas properties, oil and gas prices in effect
at December 31, 1996, were used. The reorganized value of oil and gas properties
also included $5,000,000 allocated to nonproducing properties.
DLB Oil & Gas, Inc. ("DLB") contributed certain interests previously
owned by Texaco Exploration and Production. Inc. ("TEPI")in the West Cote
Blanche Bay Field ("WCBB Assets") along with a $1,000,000 deposit to a plugging
and abandonment trust for 5,616,300 shares of the reorganized Company's common
stock. This transaction was recorded at DLB's net basis in the WCBB Assets of
$15,144,000. In connection with this acquisition, the Reorganized Company
assumed the obligation to contribute approximately $18,000 per month through
March 2004 to this plugging and abandonment trust and the obligation to plug a
minimum of 20 wells per year for 20 years commencing March 11, 1997. TEPI
retained a security interest in production from these properties and the
plugging and abandonment trust until such time as the Company's obligations
for plugging and abandonment to TEPI have been fulfilled. Once the plugging
and abandonment trust if fully funded, the Company can access it for use in
plugging and abandonment charges associated with the property.
In accordance with the Plan, $3,000,000 was set aside by the Company to
form a Litigation Entity. The Company owns a 12% interest in this Litigation
Entity. The entire $3,000,000 was included in reorganization expense on the
financial statements for the six months and ten day period ended July 10,
1997. No value was assigned to the Company's interest in the Litigation Entity
on the reorganized balance sheet as management was not able to determine with
any certainty the amount, if any, that the Company might recover from this
investment.
Current assets and liabilities were recorded at book value which
approximates their fair market value. Long-term liabilities were recorded at
present values of amounts to be paid and the pre-consummation stockholders'
deficit was adjusted to reflect the par value of pre-consummation equity
interests and the recognition of $88,723,000 in debt forgiveness income. On the
effective date, the shareholders' deficit was closed into paid-in capital and
the Company started with no deficit or retained earnings.
It should be noted that the reorganized value was determined by
management on the basis of its best judgement of what it considers to be current
fair market value of the Company's assets and liabilities after reviewing
relevant facts concerning the price at which similar assets are being sold
between willing buyers and sellers. However, there can be no assurances that the
reorganized value and the fair market value are comparable and the difference
between the Company's calculated reorganized value and the fair market value
may, in fact, be material.
F-14
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (Continued)
As of July 11, 1997, the effect on the Company's balance sheet of
consummating the Plan and implementing the fresh start reporting was:
July 11, 1997 Substantial Fresh Start Reorganized
Prior to Consummation Reporting Balance
Consummation Adjustments Adjustments Sheet
---------------- ---------------- ----------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,714,000 $ 1,598,000 $ -- $ 5,312,000
Accounts receivable, net 3,287,000 -- -- 3,287,000
Prepaid expenses and other 870,000 -- -- 870,000
------------- ------------- ------------- -------------
Total current assets 7,871,000 1,598,000 -- 9,469,000
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT:
Properties subject to depletion 80,120,000 15,144,000 (20,187,000) 75,077,000
Properties not subject to depletion -- -- 5,000,000 5,000,000
Other property, plant, and equipment 5,300,000 -- (2,362,000) 2,938,000
------------- ------------- ------------- -------------
85,420,000 15,144,000 (17,549,000) 83,015,000
Less accumulated depreciation,
depletion and amortization (29,274,000) -- 29,274,000 --
------------- ------------- ------------- -------------
56,146,000 15,144,000 11,725,000 83,015,000
------------- ------------- ------------- -------------
OTHER ASSETS 1,231,000 94,000 (285,000) 1,040,000
------------- ------------- ------------- -------------
$ 65,248,000 $ 16,836,000 $ 11,440,000 $ 93,524,000
============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and
accrued liabilities $ 9,545,000 $ (3,771,000) $ -- $ 5,774,000
Pre-petition secured debt 16,915,000 (16,915,000) -- --
------------- ------------- ------------- -------------
Total current liabilities 26,460,000 (20,686,000) -- 5,774,000
------------- ------------- ------------- -------------
PRE-PETITION CURRENT LIABILITIES
SUBJECT TO COMPROMISE:
Unsecured debt 136,818,000 (7,012,000) (129,806,000) --
------------- ------------- ------------- -------------
LONG-TERM LIABILITIES:
Other non-current liabilities -- 757,000 -- 757,000
Notes payable -- 15,000,000 -- 15,000,000
------------- ------------- ------------- -------------
-- 15,757,000 -- 15,757,000
------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock 95,000 104,000 22,000 221,000
Preferred stock 27,677,000 -- (27,677,000) --
Additional paid in capital 39,570,000 31,673,000 529,000 71,772,000
Treasury stock (333,000) -- 333,000 --
Retained earnings (165,039,000) (3,000,000) 168,039,000 --
------------- ------------- ------------- -------------
(98,030,000) 28,777,000 141,246,000 71,993,000
------------- ------------- ------------- -------------
$ 65,248,000 $ 16,836,000 $ 11,440,000 $ 93,524,000
============= ============= ============= =============
Substantial consummation adjustments are those involving cash transactions
occurring on the Effective Date. Fresh Start Reporting adjustments are those
involving non-cash transactions occurring on the Effective Date.
In accordance with the provisions of the Plan, the Company:
Issued to its unsecured creditors, on account of their allowed claims, an
aggregate of
F-15
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10 million shares of the Reorganized Company's common stock. At the effective
date, 1,412,000 of the above-described shares were held in escrow to cover the
settlement of disputed unsecured claims in the amount of $18,339,000. Through
December 31, 1997, $10,413,000 of these claims have been settled for $7,045,000
resulting in the issuance from the escrow account, of 547,000 shares or the
Reorganized Company's common stock.
Issued 3,800,000 shares of the Reorganized Company's common stock for
$13,300,000 in cash in connection with a stock rights offering to it's unsecured
creditors.
Issued 952,000 shares of the Reorganized Company's common stock in payment
of $3,332,000 in secured claims
Issued 1,703,000 shares of the Reorganized Company's common stock in
payment of a $5,961,000 claim purchased by DLB from Texaco Exploration and
Production, Inc. ("TEPI").
Issued 5,616,000 shares of the Reorganized Company's common stock in
exchange for the WCBB Assets acquired by DLB from TEPI along with the associated
P&A trust fund and associated funding and plugging obligations. In connection
with this transaction the Company transferred to TEPI certain assets and
non-producing acreage.
The Company paid $1,672,000 in administrative and priority claims,
$1,145,000 in secured claims, and $143,000 in convenience claims. At
December 31, 1997 $1,492,000 was being held in escrow to cover settlement of
disputed priority, administrative and secured claims.
The Company transferred $3,000,000 to a Litigation Trust along with the
Company's rights to any and all causes of action, claims, rights of actions,
suits or proceedings which have been or could be asserted by it except for (a)
the action to recover unpaid production proceeds payable to the Company by
Tri-Deck Oil & Gas Company and (b) the foreclosure action to recover title to
certain assets (See Note 17 regarding the subsequent transfer of these claims to
the Litigation Entity). This transfer was treated as a pre-reorganization
expense on the financial statements for the six months and ten day period ended
July 10, 1997. The Reorganized Company owns a 12% economic interest in the
Litigation Entity and the remainder of the economic interests in the Litigation
Entity was allocated to former unsecured creditors based on their ownership
percentage of the 10 million shares as described above.
4. RELATED PARTY TRANSACTIONS
Subsequent to the Effective Date of the Plan of Reorganization,
substantially all of the Company's former unsecured creditors became
shareholders. In the ordinary course of business, the Company still conducts
business activities with a substantial number of these shareholders.
DLB Oil & Gas, Inc. ("DLB") and Wexford Management LLC ("Wexford") were,
along with the Company, co-proponents in the Plan of Reorganization. As of
December 31, 1997, DLB and Wexford own approximately 49% and 8%, respectively,
of the Company's outstanding common stock.
DLB paid $1,515,000 in reorganization costs incurred on the Company's
behalf, which was satisfied by the issuance of stock in connection with the
Company's stock rights offering described above and cash. These costs were
included in reorganization cost incurred during the six months and 10 days ended
July 10, 1997. In addition, DLB charged the Company $465,000 for management
services provided to it during the period July 11, 1997 through December 31,
1997. During the period May 1, 1997 through July 10, 1997, DLB was the operator
on the WCBB properties in which the Company had a 50% working interest at that
time. Subsequent to that date, the WCBB properties were contributed to the
Company for common stock, as described above, and the Company became the
operator of these properties. As of December 31, 1997, the Company owes DLB
$1,728,000 which consists of unpaid management fees, capital expenditures, and
operating expenses paid by DLB on the Company's behalf.
F-16
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During the period July 11, 1997 through December 31, 1997, the Company
sold $4,335,000 in oil to a DLB subsidiary. These sales occurred at prices
which the Company could be expected to obtain from an unrelated third party.
5. PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization as of December 31, 1997 and 1996, are
as follows:
1997 1996
----------------------- -----------------------
Oil and gas properties $ 84,466,000 $ 77,541,000
Equipment - 2,954,000
Office furniture and fixtures 1,100,000 1,669,000
Building 217,000 235,000
Land 260,000 260,000
---------------------- ----------------------
Total property and equipment 86,043,000 82,659,000
Accumulated depreciation, depletion
And amortization (4,542,000) (25,760,000)
---------------------- ----------------------
Property and equipment, net $ 81,501,000 $ 56,899,000
====================== ======================
On the Effective Date, DLB transferred its interest in the WCBB Assets
to the Reorganized Company in exchange for five million (5,000,000) shares of
the Reorganized Company Common Stock and the assumption by the Company of
certain plugging and abandonment obligations related to the West Cote Blanche
Bay Field (See Note 3 for further details). This transaction was valued at
$12,987,000, which included a $1,000,000 plugging and abandonment escrow account
required by TEPI. In connection with this transaction, DLB paid an additional
$2,157,000 in development costs on these properties for which it received an
additional 616,000 shares of the Reorganized Company common stock.
In December 1994, the Company sold four drilling and workover rigs,
obtained in connection with certain oil and gas property acquisitions, to an oil
field service contractor for a total consideration of $3,900,000. The purchaser
gave a 6% secured promissory note in exchange. No gain or loss was recognized at
the date of the sale. The $1,000,000 gain on the sale was deferred and was being
realized over the life of the note. Concerns about the ability of the purchaser
to perform pursuant to the terms of the contract resulted in the Company
reversing the deferred gain in September 1995. At December 31, 1995, the related
note receivable was canceled. The Company has hired counsel and currently is
seeking to recover the collateral securing these notes.
In December 1994 and May 1995, the Company sold to the same oil field
service contractor marine and oil field service equipment for a total
consideration of $5,200,000. The purchaser gave two 6% secured promissory notes
in exchange. No gain or loss was recognized at the date of the sale. The
$800,000 gain on the sale was deferred and was being realized over the life of
the notes. Concerns about the ability of the purchaser to perform pursuant to
the terms of the contracts resulted in the Company reversing in September 1995
the deferred gain. At December 31, 1995, the two related promissory notes were
fully canceled. The Company has hired counsel and is currently seeking to
recover the collateral securing these notes.
No value has been assigned to any potential recoveries related to the
above two transactions in the fresh start accounting.
F-17
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During December 1997, the Company sold substantially all of its field
equipment for approximately $2,100,000 resulting in a net gain on the sale of
$594,000.
6. PROVISION FOR DOUBTFUL RECEIVABLES
The Company has recorded provisions for certain receivables in which
collectibility is uncertain as follows:
In April 1995, the Company allegedly entered into a marketing agreement
with Tri-Deck pursuant to which Tri-Deck would market all of the Company's oil
and natural gas production. Subsequent to the agreement, Tri-Deck's principal,
James Florence, who was also serving as the Company's Director of Marketing,
assigned to Plains Marketing its right to market the Company's oil production
and entered into a contract with Perry Oil and Gas to market the Company's gas
production. During the early stages of the Company's Reorganization Case,
Tri-Deck failed to make payments to the Company attributable to several months
of the Company's gas production. Due to the uncertainty of the amount that will
be recovered from Tri-Deck, the Company has recorded an allowance for this
receivable in the amount of $4,278,000. Of this amount, approximately $1,700,000
related to the receivable from Tri-Deck for the purchase of the Company's April
and May, 1996 gas production and has been deposited into a depository account
with the Bankruptcy Court's registry.
The Company has a long-term receivable, recovery of which is made in
the form of a production payment from the oil and gas revenues in certain
Company operated oil and gas properties. The most significant well underlying
the production payment ceased production during the third quarter of 1995 due to
mechanical failure of the well bore. As a result, the ultimate recovery of the
remaining receivable is uncertain. The Company wrote-off the remaining $472,000
receivable balance in 1995.
During 1994, the Company made two personal loans of $62,500 and
$300,000 to an executive officer of the Company on an unsecured basis payable on
the last day of February and June 1995, respectively. The loan for $62,500 was
repaid in March 1995 and the $300,000 loan maturity date was extended until
December 31, 1995. The loan was not repaid when due on December 31, 1995 and the
Company has recorded an allowance of $300,000 for this note. The executive
resigned from the Company in January 1995. The executive officer filed for
personal debt protection subsequent to December 1996.
During the period ended July 10, 1997, the Company charged $71,000 to
bad debts expense.
7. OTHER ASSETS
Other assets as of December 31, 1997 and 1996, consist of the
following:
December 31,
---------------------------------------
1997 1996
------------------ ------------------
Plugging and abandonment escrow account
on the Lac Blanc properties - See Note 15 $ 871,000 $ 831,000
Plugging and abandonment escrow account
on the WCBB properties - See Note 15 1,203,000 -
Prepaid loan fees, net of amortization 296,000 367,000
CD's securing letter of credit 400,000 -
Deposits 256,000 284,000
---------------- ---------------
$ 3,026,000 $ 1,482,000
================ ===============
F-18
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING CHARGES AND REORGANIZATION COSTS
The Company incurred certain restructuring costs in connection with its
change in strategy and corporate structure. During 1995, these costs consisted
primarily of the write-off of approximately $1,000,000 in leasehold improvements
related to the relocation of the Company's operations from The Woodlands, Texas,
approximately $300,000 in severance costs related to staff reductions and
changes in senior management and $100,000 in legal fees and other costs directly
related to the Company's Reorganization Case.
During 1996, the Company incurred $7,345,000 in reorganization costs,
primarily consisting of professional fees totaling $2,594,000 and the write-off
of previously capitalized debt issuance costs on the Senior Notes (herein
defined) in the amount of $3,834,000.
During 1997, the Company incurred $7,771,000 in reorganization costs,
consisting of $3,000,000 contributed to the Litigation Trust (See Note 17 for
further details), $1,515,000 in reimbursements to DLB for restructuring costs it
incurred on the Company's behalf, professional fees totaling $2,213,000, and an
accrual of $1,044,000 for estimated future costs to be incurred in connection
with the reorganization.
9. LONG-TERM LIABILITIES
As of December 31, 1997 and 1996, a break down of long term debt is as
follows:
1997 1996
--------------------- -------------------
Long-term debt:
Credit facility $ 15,000,000 $ -
Priority tax claims 527,000 -
Building loan 193,000 -
--------------------- --------------------
15,720,000 -
Less current portion 2,192,000 -
===================== ===================
$ 13,528,000 $ -
===================== ===================
Long-term debt in default treated
as current liabilities:
Credit facility $ - $ 15,000,000
Senior Notes - 98,572,000
Other - 377,000
===================== ===================
$ - $ 113,949,000
===================== ===================
Credit Facility
In December 1994, the Company entered into a $40,000,000 credit
facility with International Nederlanden (U.S.) Capital Corporation ("INCC")
("Credit Facility") that was secured by substantially all of the Company's
assets. At December 31, 1996, the Company had borrowings outstanding of
$15,000,000, the maximum amount of borrowings available under the Credit
Facility. At December 31, 1995, the revolving loan borrowings were converted to
a term loan whereby quarterly principal payments of one-sixteenth of the
outstanding indebtedness were due and payable. Amounts outstanding under the
Credit Facility bore interest at an annual rate selected by the Company of
either (i) the London Inter-Bank offered rate ("LIBOR") plus 3%, or (ii) the
Lender's prime lending rate plus 1.25%. The estimated fair value of the
Company's indebtedness under its Credit Facility approximates the principal
balance outstanding, as the facility bears interest at rates tied to market
rates and is secured by substantially all of the Company's assets.
At December 31, 1996, the Company was in default under certain
financial covenants of the
F-19
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Credit Facility. Accordingly, the Company classified the debt as current at
December 31, 1996. While in bankruptcy, INCC was stayed from enforcing certain
remedies provided for in the credit agreement and the indenture. On the
Effective Date, this loan was repaid in full along with $3,154,000 in accrued
interest and legal fees.
On the Effective Date, ING (U.S.) Capital Corporation (successor to
INCC) ("ING") entered into a new $15,000,000 loan agreement with the Company.
Terms of this loan call for initial loan fees of $188,000 to be paid on or prior
to closing with two additional loan fee payments of $100,000 each payable on or
prior to December 31, 1997 and December 31, 1998. The loan matures on July 11,
1999 with interest to be paid quarterly and with three interim principal
payments of $1,000,000 each to be made in September 1998, December 1998, and
March 1999. This loan bears interest at the option of the Company at either (1)
LIBOR plus 3% or (2) ING's fluctuating "reference rate" plus 1.25%. This loan is
collateralized by substantially all of the Company's assets. At 12/31/97 this
rate was 8.8125%.
At December 31, 1997, the Company held $2,060,000 in cash representing
the proceeds from the sale of its field equipment as further described in Note 5
above. As of the date of this report, ING has not released these funds for
general use by the Company.
13 7/8% Senior Notes Offering
In February 1995, the Company offered 100,000 Units consisting of
$100,000,000 aggregate principal amount of 13 7/8% Senior Notes and Warrants
("Warrants") to purchase an aggregate of 800,000 shares of the Company's Common
Stock ("Offering").
The Senior Notes were unsecured obligations of the Company ranking
senior in right of payment to any subordinated indebtedness of the Company.
The Senior Notes were issued under an indenture. The Company was not in
compliance with the provisions of the indenture at December 31, 1996,
accordingly, the Company classified the debt as current at that date.
The Company, pursuant to an order of the Bankruptcy Court, did not make
the scheduled interest payment of $6,938,000 on March 1, 1996, nor had the
Company made any interest payments since that date. In accordance with SOP 90-7,
the Company has not recorded interest expense on the Senior Notes subsequent to
the Petition Date. At December 31, 1996, interest accrued related to the Senior
Notes was $6,359,000. Had the Company accrued interest on the Senior Notes for
the period subsequent to the Petition Date through December 31, 1996, an
additional $12,141,000 of interest expense would have been recorded as of
December 31, 1996.
On the effective date, the Senior Notes were cancelled and the note
holders received a pro rata share of 10,000,000 shares of common stock in the
Reorganized Company along with all other unsecured creditors.
Priority Tax Claims
In accordance with the Plan of Reorganization, priority taxes totaling
$703,000 are to be paid in four annual installments without interest. The first
annual installment of $176,000 was made on the Effective Date.
Building Loan
During early 1996, the Company entered into a loan agreement with M C
Bank and Trust Company to finance the acquisition of land and a building located
in Lafayette, Louisiana. The original loan balance was $215,000 and called for
monthly principal and interest payments totaling $3,000 per month through 2005
with the unpaid balance due at that time. The loan bears interest at 9.5% per
annum and is collateralized by the land and building.
F-20
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LONG TERM DEBT MATURITIES
Following are the maturities of long-term liabilities for each of the
next five years:
1998 $ 2,192,000
1999 13,193,000
2000 195,000
2001 21,000
2002 23,000
Thereafter 96,000
-----------------
$ 15,720,000
=================
10. PREFERRED STOCK OFFERING
Public Offering of Preferred Stock
On October 27, 1993, the Company completed its public offering of
1,265,000 shares of 9% Convertible Preferred Stock ("Preferred Stock") at a
price of $25 per share. The offering resulted in cash proceeds to the Company of
$27,700,000, net of underwriting fees, commissions and offering costs. The
proceeds of the offering were used to purchase additional oil and gas
properties, to conduct oil and gas property development, to develop and
fabricate logging tools and for general purposes.
The Preferred Stock had a liquidation preference of $25 per share and
was convertible, at the option of the holder, into 2.083 shares of the Company's
common stock. The Preferred Stock was not redeemable before October 20, 1995.
Dividends on the Preferred Stock were to accrue and were cumulative from October
20, 1993, and were payable quarterly in arrears when declared by the Board of
Directors. The Company was precluded under the terms of the Senior Note
Indenture and Credit Facility from declaring any dividends during 1996. As a
result of this and the bankruptcy proceedings, the Company did not accrue
dividends payable on its Preferred Stock during 1996. In addition, accrued and
unpaid Preferred Stock dividends at December 31, 1995 have been reversed in the
1996 financial statements. All outstanding Preferred Stock was cancelled
effective July 11, 1997, and the former preferred shareholders were given
Warrants exercisable at a price of $10 per share for a total of 221,000 shares
in the Reorganized Company Common Stock.
11. COMMON STOCK OPTIONS AND WARRANTS
All outstanding stock options and warrants issued prior to July 11,
1997, were cancelled in connection with the Plan of Reorganization.
On July 10, 1997, the Company entered into an employment agreement with
Mr. Ray Landry, the Company's former president, to perform certain services for
the Company. In connection with this employment agreement, Mr. Landry was
granted Incentive Stock Options to acquire 60,000 shares of the Company's common
stock for $3.50 per share. The employment agreement does not specify the life of
these options.
In connection with the Plan of Reorganization, new warrants for 221,000
shares of the Reorganized Company common stock were issued to the former
preferred shareholders. In addition, to the extent that any securities
litigation claims based on preferred or common stock ownership are allowed as a
"Class Proof of Claim", the Company has the obligation to issue this class an
additional 221,000 in warrants to purchase common stock in the Reorganized
Company. These warrants are each exercisable for one share of common stock at an
exercise price of $10 per share. The warrants will expire on July 11, 2007. In
accordance with the Plan of Reorganization, the Company has the right to issue
up to 1,104,000 warrants.
F-21
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
A reconciliation of the statutory federal income tax amount to the
recorded expense follows:
July 11, 1997 January 1, 1997
Through Through
December 31, 1996 1995
1997 July 10, 1997
---------------- ------------------- ----------------- ------------
Income (loss) before
Federal income taxes $ (1,713,000) $ 79,108,000 $ (29,387,000) $(128,175,000)
============= ============= ============= =============
Expected income tax (benefit)
At statutory rate (651,000) 30,061,000 (10,285,000) (44,861,000)
Valuation allowance 651,000 -- 9,358,000 44,977,000
Tax deduction in excess of book
For stock options exercised -- -- -- (144,000)
Net operating loss carryforward
Utilized -- (30,061,000) -- --
Reorganization costs -- -- 923,000 --
Other -- -- 4,000 28,000
------------- ------------- ------------- -------------
Income tax expense recorded $ -- $ -- $ -- $ --
============= ============= ============= =============
The tax effects of temporary differences and net operating loss carry
forwards, which give rise to deferred tax assets (liabilities) at December 31,
1997 and 1996, respectively, are as follows:
1997 1996
------------- -------------
Net operating loss carryforward $ 3,740,000 $ 19,002,000
Oil and gas property basis difference 22,362,000 28,971,000
Other 1,953,000 6,702,000
------------- -------------
Total deferred tax asset 28,055,000 54,675,000
Valuation allowance (28,055,000) (54,607,000)
------------- -------------
Deferred tax asset -- 68,000
------------- -------------
Deferred tax liability -- (68,000)
------------- -------------
Net deferred tax asset (liability) $ -- $ --
------------- -------------
The Company filed a short period tax return for the six months and ten
days ended July 10, 1997. On that return, the Company utilized $30,061,000 of
it's deferred tax asset. Since the deferred tax asset was fully reserved by a
valuation allowance at December 31, 1996, no income tax expense was recognized
on the financial statements for the period January 1 to July 10, 1997.
The Company has an available tax net operating loss carryforward of
approximately $10,000,000 as of December 31, 1997. This carryforward will
expire in the year 2012.
F-22
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. EARNINGS (LOSS) PER SHARE
Earnings per share for all periods were computed based on common
stock equivalents outstanding on that date during the applicable periods.
14. JOINT VENTURE AGREEMENT
By a Joint Venture Agreement dated October 18, 1991, the Company
entered into a joint venture to develop certain oil and gas properties with
Tricore Energy Venture, L.P., a Texas limited partnership ("Tricore") and Stag
Energy Corporation ("Stag").
Under the terms of the Tricore agreements Tricore contributed the
capitalization required to complete the development of selected prospects, and
Stag and the Company contributed, or arranged for contribution of, the prospects
to be developed.
The Company provided Tricore with a limited production guarantee based
on the minimum production schedule attached to the Tricore joint venture
agreement.
As a result of significant production declines from jointly-owned
properties, the Company has recorded in 1996 and 1995, minimum production
guarantee charges of $5,555,000 and $3,591,000, respectively. The $9,146,000
liability recognized at December 31, 1996 represented the Company's estimated
ultimate obligation to the joint venture, including the disallowance of certain
tax credits.
On December 9, 1997, this claim was settled as an Allowed General
Unsecured Claim in the amount of $6,800,000 for which Tricore received 524,000
shares of the Reorganized Company common stock and 524,000 Litigation Entity
interests. As a part of this settlement, Tricore transferred its interest in the
Joint Venture to the Company with the stipulation that if the Company sells any
of the Joint Venture's properties within one year, the Company will pay to
Tricore the net proceeds from such sale.
15. COMMITMENTS
Leases
As of December 31, 1997, the Company had no long-term, non-cancelable
operating lease commitments.
Rental expense for all operating leases for the period commencing July
11, 1997 and ending December 31, 1997, the period commencing January 1, 1997 and
ending July 10, 1997, and for the years ended December 31, 1996, and 1995 was
$77,000, $109,000, $207,000, and $482,000, respectively.
During 1996, the Company terminated its office lease covering
approximately 24,000 square feet in The Woodlands, Texas. The lessor asserted a
secured claim in connection with the Company's reorganization case in the amount
of $250,000 and an unsecured claim in the amount of $127,000, attributable to
rental obligations and lease rejection damages associated with such lease. On
April 22, 1997, the Bankruptcy Court granted the claimant an allowed secured
claim of $118,000 and an allowed unsecured claim in the amount of $150,000.
Lac Blanc Escrow Account
In connection with its purchase of a 91% working interest in the Lac
Blanc Field, the Company deposited $170,000 in a segregated trust account and
agreed to make additional deposits of $20,000 per month until the accumulated
balance of the trust account reaches $1,700,000. These funds are held in a
segregated account for the benefit of the State of Louisiana to insure that the
wells in the Lac Blanc Field are properly plugged upon cessation of production.
In return for this financial commitment, the State has granted the sellers an
unconditional release
F-23
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
from their contingent liability to the state to plug and abandon the wells. When
all existing wells in the Lac Blanc Field have been properly plugged and
abandoned, the funds in the trust account, should any remain, will revert to the
Company. Due to the filing of the Reorganization Case in June 1996, the Company
ceased contributions to the segregated account. At December 31, 1997, the
balance in this escrow account was $871,000.
Under the Plan, the Company will fund the unfunded portion of the
escrow and maintain future funding requirements.
Plugging and Abandonment Funds
The Company is contractually committed in its purchase contracts for
the Initial LLOG Property and Remaining LLOG Properties to establish plugging
and abandonment funds as allowed by Louisiana's Orphaned Well Act. The State of
Louisiana, upon completion of an independent study to be commissioned by the
Company, will establish the amount of and terms of payment into each fund. As of
December 31, 1997, the independent study has not been completed. Accordingly,
the Company is unable to determine the amount of and terms of payment towards
the future obligation related to these commitments.
Under the Plan, the Company will fund the unfunded portion of the
escrow and maintain future funding requirements.
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the Reorganized Company assumed the obligation to contribute
approximately $18,000 per month through March 2004 to a plugging and abandonment
trust and the obligation to plug a minimum of 20 wells per year for 20 years
commencing March 11, 1997. TEPI retained a security interest in production from
these properties and the plugging and abandonment trust until such time the
Company's plugging and abandonment obligations to TEPI have been fulfilled. Once
the plugging and abandonment trust is fully funded, the Company can access it
for use in plugging and abandonment charges associated with the property.
Texaco Global Settlement
Pursuant to the terms of a global settlement between Texaco and the
State of Louisiana which includes the State Lease No. 50 portion of the
Company's East Hackberry Field, the Company is obligated to commence a well or
other qualifying development operation on certain non-producing acreage in the
field prior to March 1998. On January 8, 1998, the Company applied for and was
granted a permit to conduct seismic operations on the East Hackberry Field as
well as other Company properties. The Company is planning on shooting the
seismic as soon as practical. If the Company fails to shoot the seismic or
commence the drilling of a well on this non-producing acreage within a
reasonable period of time, it will be required by the State of Louisiana to
surrender approximately 440 non-producing acres in this field.
Reimbursement of Employee Expenses & Contributions to 401(k) Plan
The Company sponsors a 401(k) savings plan under which eligible
employees may choose to contribute up to 15% of salary income on a pre-tax
basis, subject to certain IRS limits. The Company contribution to the 401(k)
plan is discretionary and currently is 25% of employee contributions up to 6%
of their salary. This benefit vests to employees over a five-year employment
period or at a rate of 20% per each year of participation. During the period
commencing July 11, 1997 and ending on December 31, 1997, the period commencing
January 1, 1997 and ending on July 10, 1997, and the years ended December 31,
1996 and 1995, the Company incurred $13,000, $23,000, $32,000, and $22,000,
respectively, in matching contributions expense associated with this plan.
Stay Bonus
The Company's Board of Directors determined that it was necessary to
provide a "stay bonus" to facilitate retention of employees during the
Reorganization Case in view of the uncertainties of the future of the Company.
On November 6, 1996, the Bankruptcy Court entered an order authorizing the stay
bonuses. The Company accrued $614,000 for these stay bonuses in December of 1996
and the bonuses were paid in June 1997.
F-24
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. CONTINGENCIES
Tri-Deck/Perry Gas Litigation
During 1995, the Company entered into a marketing agreement with
Tri-Deck Oil and Gas Company ("Tri-Deck") pursuant to which Tri-Deck would
market all of the Company's oil and gas production. Subsequent to the agreement,
Tri-Deck's principal and the Company's Director of Marketing, James Florence,
assigned to Plains Marketing its right to market the Company's oil production
and assigned to Perry Oil & Gas its right to market the Company's gas
production. During early 1996, Tri-Deck failed to make payments to the Company
attributable to several months of its gas production. Consequently, the Company
responded in two ways. First, on May 20, 1996, the Company filed a Motion to
Reject the Tri-Deck Marketing Agreement. Second, on May 29, 1996, the Company
initiated an adversary proceeding against Tri-Deck and Perry Oil and Gas ("Perry
Gas"). Perry Gas was the party, which ultimately purchased the Company's gas
production for the months in question.
With respect to the Motion to Reject, the Bankruptcy Court authorized
the rejection and directed Tri-Deck and the Company to determine the amount of
production proceeds attributable to the Company's June gas production which were
payable to the Company. Consequently, Perry Gas thereafter made payment to the
Company of the June gas proceeds less $75,000 for a set-off claim by Perry Gas,
which is subject to further consideration by the Bankruptcy Court.
Next, with respect to the adversary proceeding, the Company sought
turnover by Tri-Deck and/or Perry Gas of all unpaid production proceeds payable
to the Company under the marketing agreement and the issuance of a temporary
restraining order and preliminary injunction against both parties to prevent
further disposition of such proceeds pending outcome of the proceedings. On May
31, 1996 the Bankruptcy Court entered a consensual temporary restraining order
against both Tri-Deck and Perry Gas. On June 18, 1996, a Preliminary Injunction
was entered by the Court which required Perry Gas to segregate into a separate
depository account the funds due for the purchase of the Company's April and May
1996, gas production from Tri-Deck. Subsequently, upon motion by the Company the
Court ordered such funds to be placed into the Bankruptcy Court's registry, as
Perry Gas had made certain withdrawals from the separate depository account
without authorization by the Court. Currently, funds in the amount of
approximately $1,700,000 remain in the registry of the Court. Additionally, a
dispute exists between the Company and Perry Gas as to additional funds owed by
Perry Gas for the purchase of the Company's April and May 1996 gas production.
Currently, the adversary proceeding remains pending as to the ultimate issue of
ownership of proceeds. Tri-Deck has also filed an answer and counterclaim in
which Tri-Deck is asserting, among other items, damages for tortious
interference of its contractual relationships with others. Recovery of the
$1,700,000 receivable is dependent on the court rendering a favorable ruling on
the issue. As of the date of the report, the court has not ruled on this issue.
Although management believes that Tri-Deck's claim to the funds in the registry
of the court is invalid, and the aforementioned counterclaim is without merit,
for financial reporting purposes the receivable from Tri-Deck was fully reserved
for as of December 31, 1997.
On January 20, 1998, the Company and the Litigation Trust entered into
a Clarification Agreement whereby the rights to pursue the Tri- Deck claim were
assigned to the Litigation Trust. In connection with this agreement, the
Litigation Trust agreed to reimburse the Company $100,000 for legal fees the
Company had incurred in connection this and other related claims. As additional
consideration for the contribution of this claim to the Litigation Trust, the
Company is entitled to 85% of the net proceeds from this claim.
Title to Oil and Gas Properties
During 1996, WRT received notice from a third party claiming that the
Company's title has failed as to approximately 43 acres in the Bayou Pigeon
Field. Some or all of the acreage in dispute is considered to be productive in
three separate production units. Under the assumption that the Company's title
is flawed, it's working interest in three units may be reduced to approximately
7% (5% Net Revenue Interest, ("NRI")) 75% (63% NRI), and 95% (72% NRI). The
financial statements as of and for the period commencing July 11, 1997 and
ending December 31, 1997, the period commencing January 1, 1997 and ending July
10, 1997, and for the years ended December 31, 1996 and 1995, reflect operating
results and proved reserves discounted for this possible title failure. As
the title failure predates its ownership of the field, the Company is
F-25
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
currently evaluating its recourse against the predecessors-in-title relative to
this issue. The Company is currently negotiating a settlement with the Third
Party, pursuant to their claim.
Other Litigation
The Company has been named as a defendant on various other litigation
matters. The ultimate resolution of these matters is not expected to have a
material adverse effect on the Company's financial condition or results of
operations for the periods presented in the financial statements.
17. LITIGATION TRUST ENTITY
On August 13, 1996, the Bankruptcy Court executed and entered its Order
Appointing Examiner directing the United States Trustee to appoint a
disinterested person as examiner in the Company's bankruptcy case.
The Court ordered the appointed examiner ("Examiner") to file a report
of the investigation conducted, including any fact ascertained by the examiner
pertaining to fraud, dishonesty, incompetence, misconduct, mismanagement or
irregularity in the management of the affairs of the Company.
The Examiner's final report dated April 2, 1997, recommended numerous
actions for recovery of property or damages for the Company's estate which
appear to exist and should be pursued. Management does not believe the
resolution of the matters referred to in the Examiner's report will have a
material impact on the Company's consolidated financial statements or results of
operations.
Pursuant to the Plan of Reorganization, all of the Company's possible
causes of action against third parties (with the exception of certain litigation
related to recovery of marine and rig equipment assets and claims against
Tri-Deck), existing as of the effective date of the Plan, were transferred into
a "Litigation Trust" controlled by an independent party for the benefit of most
of the Company's existing unsecured creditors. The litigation related to
recovery of marine and rig equipment and the Tri-Deck claims were subsequently
transferred to the litigation trust as described below.
The Litigation Entity was funded by a $3,000,000 cash payment from the
Company, which was made on the Effective Date. The Company owns a 12% interest
in the Litigation Trust with the other 88% being owned by the former general
unsecured creditors of the Company. For financial statement reporting purposes,
the Company has not recognized the potential value of recoveries which may
ultimately be obtained, if any, as a result of the actions of the Litigation
Trust, treating the entire $3,000,000 payment as a reorganization cost incurred
during the period commencing January 1, 1997 and ending on July 10, 1997.
On January 20, 1998, the Company and the Litigation Entity entered into
a Clarification Agreement whereby the rights to pursue various claims reserved
by the Company in the Plan of Reorganization were assigned to the Litigation
Trust. In connection with this agreement, the Litigation Trust agreed to
reimburse the Company $100,000 for legal fees the Company had incurred in
connection these claims. As additional consideration for the contribution of
this claim to the Litigation Trust, the Company is entitled to 20% to 80% of the
net proceeds from these claims.
18. SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCTION
ACTIVITIES (UNAUDITED)
The following is historical revenue and cost information relating to
the Company's oil and gas operations located entirely in the southeastern United
States:
F-26
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Capitalized Costs Related to Oil and Gas Producing Activities
Results of Operations for Producing Activities
The following schedule sets forth the revenues and expenses related to
the production and sale of oil and gas. The income tax expense is calculated by
applying the current statutory tax rates to the revenues after deducting costs,
which include depreciation, depletion and amortization allowances, after giving
effect to the permanent differences. The results of operations exclude general
office overhead and interest expense attributable to oil and gas production.
July 11, 1997
Through January 1, 1997
December 31, Through
1997 July 10, 1997 1996 1995
--------------- --------------- --------------- -------------
Revenues $ 9,756,000 $ 10,138,000 $ 24,019,000 $ 24,655,000
Production costs 5,397,000 5,514,000 15,095,000 11,673,000
Depletion 4,371,000 3,314,000 7,973,000 12,645,000
--------------- --------------- --------------- -------------
(12,000) 1,310,000 951,000 337,000
Income tax expense - - 34,000 7,000
--------------- --------------- --------------- -------------
Results of operations
From producing activities $ (12,000) $ 1,310,000 $ 917,000 $ 330,000
=============== =============== =============== =============
Oil and Gas Reserves
The following table presents estimated volumes of proved and proved
developed oil and gas reserves, prepared by independent reserve engineers, as of
December 31, 1997, 1996 and 1995 and changes in proved reserves during the last
three years, assuming continuation of economic conditions prevailing at the end
of each year. Estimated volumes as of July 11, 1997 were extrapolated from the
December 31, 1997 numbers and were not prepared by independent reserve
engineers. Volumes for oil are stated in thousands of barrels (MBbls) and
volumes for natural gas are stated in millions of cubic feet (Mmcf). The
weighted average prices at December 31, 1997 used for reserve report purposes
are $17.91 and $2.62 for oil and gas reserves, respectively.
The Company emphasizes that the volumes of reserves shown below are
estimates which, by their nature, are subject to revision. The estimates are
made using all available geological and reservoir data, as well as production
performance data. These estimates are reviewed annually and revised, either
upward or downward, as warranted by additional performance data.
F-27
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
July 11 to January 1 to
December 31, 1997 July 10, 1997 1996 1995
---------------------- ------------------------ ---------------------- ----------------------
Oil Gas Oil Gas Oil Gas Oil Gas
---------- ----------- ---------- ----------- --------- ----------- ---------- -----------
Proved Reserves:
Beginning of the period 13,677 13,409 13,923 15,121 14,627 19,131 7,431 28,797
Purchases of oil and gas
Reserves in place 11,612 163 -- -- -- -- 15,068 39,204
Extensions, discoveries and
Other additions -- -- -- -- -- -- 960 4,235
Revisions of prior reserve
Estimates 848 (890) -- -- (89) (381) (7,821) (44,859)
Current production (320) (1,106) (246) (1,712) (615) (3,629) (778) (7,403)
Sales of oil and gas
Reserves in place -- -- -- -- -- -- (233) (843)
------- ------- ------- ------- ------- ------- ------- -------
End of period 25,817 11,576 13,677 13,409 13,923 15,121 14,627 19,131
======= ======= ======= ======= ======= ======= ======= =======
Proved developed reserves 7,219 8,259 7,248 8,252 9,550 11,687 10,209 16,663
======= ======= ======= ======= ======= ======= ======= =======
Discounted Future Net Cash Flows
Estimates of future net cash flows from proved oil and gas reserves
were made in accordance with SFAS No. 69, "Disclosures about Oil and Gas
Producing Activities." The following tables present the estimated future cash
flows, and changes therein, from the Company's proved oil and gas reserves as of
December 31, 1997, 1996 and 1995, assuming continuation of economic conditions
prevailing at the end of each year.
Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves
1997 1996 1995
------------------- ----------------- -----------------
Future cash flows $ 492,680,000 $ 421,954,000 $ 311,419,000
Future development costs (166,812,000) (107,627,000) (96,460,000)
Future production costs (119,235,000) (90,558,000) (89,187,000)
Future production taxes (58,807,000) (46,703,000) (35,411,000)
------------------- ----------------- -----------------
Future net cash flows before
income taxes 147,826,000 177,066,000 90,361,000
10% annual discount for
estimated timing of cash flows (71,396,000) (78,399,000) (38,994,000)
------------------- ----------------- -----------------
Discounted future net
cash flows 76,430,000 98,667,000 51,367,000
Future income taxes, net of
10% annual discount - - -
------------------- ----------------- -----------------
Standardized measure of
discounted future net cash
flows $ 76,430,000 $ 98,667,000 $ 51,367,000
=================== ================= =================
F-28
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Changes in Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves
1997 1996 1995
---------------- ----------------- -------------
Sales and transfers of oil and
Gas produced, net of
Production costs $ (9,352,000) $ (8,924,000) $(12,982,000)
Net changes in prices and
Development and production costs (50,101,000) 55,345,000 (26,418,000)
Acquisition of oil and gas reserves
in place, less related production
costs 27,195,000 -- 62,974,000
Extensions, discoveries and
Improved recovery, less related costs -- -- 4,859,000
Revisions of previous quantity
Estimates, less related
Production costs 5,720,000 (914,000) (44,100,000)
Sales of reserves in place -- -- (1,089,000)
Accretion of discount 6,248,000 5,137,000 6,452,000
Net change in income taxes -- -- 11,600,000
Other (1,947,000) (3,344,000) (2,851,000)
------------ ------------ ------------
Total change in standardized
measure of discounted future
net cash flows $(22,237,000) $ 47,300,000 $ (1,555,000)
============ ============ ============
F-29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Information concerning the Company's change in accountants was
previously reported on the Company's report on Form 8-K filed with the
Securities and Exchange Commission on December 23, 1997.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
For the information called for by Items 10, 11, 12, and 13, reference
is made to the Company's definitive proxy statement for its 1988 Annual Meeting
of Stockholders, which will be filed with the Securities and Exchange Commission
within 120 days after December 31, 1997, and portions of which are incorporated
herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a)
(1) Financial Statements
(2) Financial Statement Schedules
(3) Exhibits required by Item 601 of Regulation S-K
are as follows:
2.1 Final Order Authorizing Use of Proceeds from Oil
and Gas Operations. (1)
2.2 Letter agreement by and among WRT Energy
Corporation, DLB Oil & Gas, Inc. and Wexford
Management, LLC dated October 22, 1996.(2)
2.3 Debtor's and DLBW's First Amended Joint Plan of
Reorganization Under Chapter 11 of the United
States Bankruptcy Code dated January 20, 1997.
(3)
2.4 First Amended Disclosure Statement Under 11
U.S.C. 1125 In Support of Debtor's and DLBW's
First Amended Joint Plan of Reorganization Under
Chapter 11 of the United States Bankruptcy Code
dated January 20, 1997. (3)
2.5 Agreement and Plan Merger (4)
(1) Filed with Form 10K dated March 14, 1997
(2) Filed with Form 10K dated November 6, 1996
(3) Filed with Form 10K dated March 3, 1997
(4) Filed with Form 10K dated July 22, 1997
27.1 Financial Data Schedule
(1) Filed with Form 8K dated March 14, 1997
(2) Filed with Form 8K dated November 6, 1996
(3) Filed with Form 8K dated March 3, 1997
(4) Filed with Form 8K dated July 22, 1997
(b) The Registrant filed the following reports on Form 8-K
Form 8-K filed on December 23, 1997 reporting changes
in registrants certified accountants.
Form 8-KA filed on February 17, 1998 reporting letter
to the SEC from KPMG Peat Marwick LLP regarding
termination of their client - auditor relationship.
34
SIGNATURES
Pursuant to the requirements Section 13 or 15(d) of the Securities and Exchange
Act of 1934 as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
GULFPORT ENERGY CORPORATION
Date: March 31, 1998
By: /s/ GARY C. HANNA 3/31/98
---------------------------------- ---------
Gary C. Hanna Date
President
Pursuant to the requirements of the Securities Exchange Act of 1934 as amended.
This report has been signed below by the following persons on behalf of the
Registrant and in the capacity and on the date indicated.
By: /s/ GARY C. HANNA 3/31/98
---------------------------------- ---------
Gary C. Hanna Date
President
By: /s/ RONALD D. YOUTSEY 3/31/98
---------------------------------- ---------
Ronald D. Youtsey Date
Secretary and Treasurer
By: /s/ CHARLES E. DAVIDSON 3/31/98
---------------------------------- ---------
Charles E. Davidson Date
Director
By: /s/ MARK LIDDELL 3/31/98
---------------------------------- ---------
Mark Liddell Date
Director
By: /s/ MIKE LIDDELL 3/31/98
---------------------------------- ---------
Mike Liddell Date
Director
By: /s/ ROBERT BROOKS 3/31/98
---------------------------------- ---------
Robert Brooks Date
Director
35
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
EXHIBIT 27.1 Financial Data Schedule