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, 2001
Commission File Number 1-10192
Gulfport Energy Corporation
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(Exact name of registrant as specified in its charter)
Delaware 73-1521290
- ----------------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
Incorporation or organization) Identification Number)
6307 Waterford Blvd., Suite 100
Oklahoma City, Oklahoma 73118
(405) 848-8807
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(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
Preferred Stock, $0.01 par value None
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 [ ].
1
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. [ ]
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 31, 2002 was 10,146,566. The aggregate market
value of the voting stock held by non-affiliates of Gulfport using an average
trading price in December 31, 2001 was $12,233,000.
APPLICABLE ONLY 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
----- -----
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Common Stock Issued Outstanding December 31, 2001: 10,146,566
Common Stock Issued Outstanding February 1, 2002: 10,146,566
2
TABLE OF CONTENTS
Page
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Disclosure Regarding Forward-Looking Statements 4
Part I
Item 1. Business 4
Item 2. Properties 13
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 24
PART III
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 24
Item 11. Executive Compensation 26
Item 12. Security Ownership of Certain Beneficial Owners and Management 26
Item 13. Certain Relationships and Related Transactions 26
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8K 27
Signatures 28
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 known as WRT Energy Corporation ("WRT"), 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 strength, goals, expansion and
growth of Gulfport's business and operations, plans, references to future
success, reference 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 assurances 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, its business
or operations.
Item 1. Business
Description of Business
Gulfport is an independent oil and gas exploration and production
company with properties located in the Louisiana Gulf Coast. Gulfport has a
market enterprise value of approximately $50.9 million dollars and generated
EBITDA of $9.6 million dollars for the twelve months ended December 31, 2001. As
of December 31, 2001, the Company had 29 MMBOE proved reserves with a present
value (10%) of estimated future net reserves of $130 million dollars.
Gulfport is actively pursuing further development of its properties in
order to fully exploit its reserves. The Company has a substantial portfolio of
low risk developmental projects for the next several years providing the
opportunity to increase production and cash flow. Gulfport's developmental
program is designed to reach the Company's high impact, higher potential rate of
return prospects through the penetration of several producing horizons.
Additionally, Gulfport owns 3-D seismic data, which along with the
Company's technical expertise, will be used to identify exploratory prospects
and test undrilled fault blocks in existing fields.
Background
Gulfport is the successor of WRT Energy Corporation ("WRT"). WRT filed for
bankruptcy in February 1996. Gulfport emerged as the reorganized company in July
1997.
4
Principal Oil and Gas Properties
Gulfport owns interests in a number of producing oil and gas properties
located along the Louisiana Gulf Coast. The following is a map showing the
locations of Gulfport's principal oil and gas properties.
(MAP OMITTED)
Gulfport serves as the operator of substantially all of the properties in
which it holds a working interest with the exception of the Texaco ("Texaco" or
"ChevronTexaco") well and deep rights at West Cote Blanche Bay. During 2001
Chevron acquired Texaco. The following table presents certain information as of
January 1, 2002 reflecting Gulfport's net interest in its producing oil and gas
properties.
Net Proved Reserves
Shut-in As of 1/1/02
-------------------
Field NRI/WI Active Wells wells(1) Acreage(2) Gas Oil Total
-------------- ------------ -----------
Percentages Gross Net Gross Net Gross Net MBOE MBOE MBOE
- ---------------------------------------------------------------------------------------------------------
E Hackberry 78.7/100 17 17 73 73 3,147 3,147 590 3,392 3,982
W Hackberry 87.5/100 2 2 25 25 592 592 47 248 295
West Cote
Blanche Bay (3) 78.7/100 48 47 296 296 4,590 4,590 3,384 20,906 24,290
Overrides/Royalty Various 12 1 6 1 403 403 100 277 377
------------------------------------------------------------------------
TOTAL 79 67 400 395 8,732 8,732 4,121 24,823 28,944
========================================================================
(1) The following wells produce on an intermittent basis: East Hackberry -
4; West Hackberry - 1; and West Cote Blanche Bay - 6.All of Gulfport's
acreage is Developed Acreage.
(2) Includes 1 producing well and 3 shut-in wells attributable to depths
below the Rob "C" Marker ("Deep Rights"). Gulfport has a 7.45%
non-operated working interest (5.84% NRI) in the Deep Rights. The Deep
Rights are operated by ChevronTexaco Corporation.
(3) In the future, Gulfport will have to plug and abandon almost 400
wellbores. Gulfport's strategy to meet this obligation is to plug at
least twenty wells a year at WCBB, three at Hackberry and to invest in
plugging escrow accounts. The Company continually deposits money in
the West Cote Blanche Bay Escrow Account, which currently has a
balance of approximately $2.3 million dollars. Additionally, Gulfport
has a $200,000 letter of credit dedicated to the plugging operations
at East Hackberry.
All of the oil and gas leases in which Gulfport owns an interest have been
perpetuated by production. The operator may surrender the leases at any time by
notice to the lessors, or by the cessation of production.
East Hackberry Field
(Map Omitted)
Location and Land
The East Hackberry Field is located along the western shore of Lake
Calcasieu in Cameron Parish, Louisiana approximately 80 miles west of Lafayette
5
and 15 miles inland from the Gulf of Mexico. In February 1994, Gulfport
purchased a 100% working interest (approximately 79% average NRI) in certain
producing oil and gas properties situated in the East Hackberry Field. The
purchase included two separate lease blocks, the Erwin Heirs Block which is
located on land originally developed by Gulf Oil Company (now ChevronTexaco
Corporation), and the adjacent State Lease 50 Block which is located primarily
in the shallow waters of Lake Calcasieu, originally developed by Texaco. The two
lease blocks together contain 3,147 acres.
In September 1994, Gulfport sold an overriding royalty interest equal to a
50% working interest in certain producing oil and gas wells situated in the East
Hackberry Field to Milam Royalty Corporation a subsidiary of J. P. Morgan and
Company. In April 1999, Gulfport purchased the overriding royalty interest back
from the then current owner, Queen Sand Resources, Inc. giving Gulfport a 100%
working interest in the field.
Geology
The Hackberry Field is a major salt intrusive feature, elliptical in shape
as opposed to a classic "dome," divided into East and West field entities by a
saddle. Structurally, Gulfport's East Hackberry acreage is located on the
eastern end of the Hackberry salt ridge. There are over 30 pay zones at this
field. The salt intrusion trapped Oligocene through Lower Miocene rocks in a
series of complex, steeply dipping fault blocks. The Camerina sand series is a
prolific producer with 1-2 MMBL per well of oil potential. Gulfport's wells
currently produce from perforations found between 5,100' and 12,200'.
Area History and Production
The East Hackberry field was discovered in 1926 by Gulf Oil Company (now
ChevronTexaco Corporation) by a gravitational anomaly survey. The massive
shallow salt stock presented an easily recognizable gravity anomaly indicating a
productive field. Initial production began in 1927 and has continued to the
present. The estimated cumulative oil and condensate production through 2002
was 111 million barrels of oil with casinghead gas production being 60 billion
cubic feet of gas. There have been a total of 170 wells drilled on Gulfport's
portion of the field with 17 having current daily production; three produce
intermittently; 73 wells are shut-in and 4 wells have been converted to salt
water disposal wells. The remaining 73 wells have been plugged and abandoned.
During 2001, daily net production averaged 305 barrels of oil with a limited
amount of net gas production.
Facilities
Gulfport has land-based production and processing facilities located at
the East Hackberry Field. The facility is comprised of two dehydrating units and
four disposal pumps. Gulfport also has a field office that serves both the East
and West Hackberry fields. Due to the high cost of gas, Gulfport converted the
Erwin Heirs Block from gas lift to other lifting methods in 2000 and returned
the rental compressors. Gulfport reactivated three pumping units from inventory
and purchased an additional surface unit and two electric submersible pumps.
2001 Activity
Gulfport began a program to periodically test shut-in wells on the State
Lease 50 portion of the East Hackberry Field. Additionally, Gulfport
reactivated a satellite tank battery at the State Lease 50 portion of East
Hackberry. The Company also conducted several remedial operations that included
6
repairing holes in tubing and casing, replaced parted tubing and cleaned out
salt water disposal wells.
West Hackberry Field
Location and Land
The West Hackberry Field is located on land and is five miles West of Lake
Calcasieu in Cameron Parish, Louisiana approximately 85 miles west of Lafayette
and 15 miles inland from the Gulf of Mexico. In November 1992, Gulfport
purchased a 100% working interest (approximately 80% average NRI, subsequently
increased to approximately 87.5% NRI) in 592 acres within the West Hackberry
Field.
Gulfport's leases at West Hackberry are located within two miles of one of
the United States' Department of Energy's Strategic Petroleum Reserves. The
West Hackberry storage facility occupies 525 acres and has capacity to store 222
million barrels of oil in underground salt caverns.
Geology
Structurally, Gulfport's West Hackberry acreage is located on the western
end of the Hackberry salt ridge. (See graphic above.) There are over 30 pay
zones at this field. West Hackberry consists of a series of fault-bounded traps
in the Oligocene-age Vincent and Keough sands associated with the Hackberry Salt
Ridge. Recoveries from these thick, porous, water-drive reservoirs have
resulted in per well cumulatives of almost 700 BOE.
Area History and Production
The first discovery well at West Hackberry was drilled in 1938 and was
developed by Superior Oil Company (now Exxon-Mobil Corporation) between 1938 and
1988. The estimated cumulative oil and condensate production through 2001 was
170 million barrels of oil with casinghead gas production of 120 billion cubic
feet of gas. There have been 36 wells drilled to date on Gulfport's portion of
West Hackberry and currently 2 are producing, 25 are shut-in and 1 well has been
converted to a saltwater disposal well. The remaining 8 wells have been plugged
and abandoned. During 2001, daily net production averaged 40 barrels of oil and
a limited amount of gas.
Facilities
Gulfport has land-based production and processing facilities located at
the West Hackberry field. Gulfport has two dehydrating units and one disposal
pump. During 2000, due to the high cost of gas, Gulfport converted the West
Hackberry field from gas lift to other lifting methods. The Company reactivated
two pumping units from inventory and sold a company owned compressor. Gulfport
maintains a field office that serves both the East and West Hackberry fields.
2001 Activity
Gulfport conducted several remedial operations that included repairing
holes in tubing and casing and replacing parted tubing.
West Cote Blanche Bay Field
(Map Omitted) (Type Log Omitted)
7
Location and Land
The West Cote Blanche Bay (WCBB) Field lies approximately five miles off
the coast of Louisiana primarily in St. Mary Parish in a shallow bay, with water
depths averaging eight to ten feet. Gulfport originally acquired from Texaco a
6.25% working interest in all zones in the WCBB field in July 1988. In April
1995, Gulfport completed the purchase of an additional 43.75% working interest
in the WCBB field from an affiliate of Benton Oil and Gas Company and two
affiliates of Tenneco, Inc. as to those rights lying above the base of the Rob
"C" marker, located at approximately 10,500'. The sellers retained their
interests in all depths below the base of the Rob "C" marker. In July, 1997
Gulfport acquired the remaining 50% working interest in the WCBB field in depths
above the Rob "C" marker from Texaco and became the operator of the shallow
rights in the field. In 1999 Gulfport exercised a preferential right to
purchase an additional 1.00% working interest in the rights below the Rob "C"
marker. Currently Gulfport owns a 100% working interest (78.66% NRI) and is
the operator in the depths above the Rob "C" marker and owns a 7.45%
non-operated working interest (5.84% NRI) in depths below the Rob "C" marker.
Texaco is the operator below the base of the Rob "C" marker. Gulfport's
leasehold at WCBB covers a portion of Louisiana State Lease 340 and contains
4,590 acres.
Geology
WCBB overlies one of the largest salt dome structures on the Gulf Coast.
The field is characterized by a piercement salt dome, which created traps from
the Pleistocene through the Miocene. The relative movements affected deposition
and created a complex system of fault traps. The compensating fault sets
generally trend NW-SE and are intersected by sets having a major radial
component. Later-stage movement caused extension over the dome and a large
graben system was formed.
There are over 100 distinct sandstone reservoirs recognized throughout
most of the field and nearly 200 major and minor discrete intervals have been
tested. Within the over 800 wellbores that have been drilled to date in the
field, over 4,000 potential zones have been penetrated. These sands are highly
porous and permeable reservoirs primarily with a strong water drive.
Area History and Production
Texaco drilled the discovery well in 1940 based on a seismic and
gravitational anomaly. WCBB was subsequently developed on an even 160-acre
pattern for much of the remainder of the decade. Developmental drilling
continued and reached its peek in the 1970's when over 300 of the over 800 total
wells were drilled in the field. Of the over 800 wells drilled, only 80 were dry
holes and many of these were capable of hydrocarbon production. As a result, the
field has an historic success rate of over 90% for all wells drilled. The
cumulative gross production for the average producer in the field was 237 MBO,
with over 100 of those wells (14% of total wells) producing in excess of 500
MBO. As of January 1, 2002, field cumulative gross production was 191 MMBO and
232.5 BCF of gas.
There have been 871 wells drilled in WCBB. Of these, 48 are currently
producing, 303 are shut-in and five have been converted to salt water disposal
wells. The balance of the wells (or 515) have been plugged and abandoned.
During 2001, Gulfport's net current daily production averaged 1,280 barrels of
oil, 399 MCF of gas and 11,881 barrels of water at WCBB.
In 1991, Texaco conducted a 70 square mile 3-D seismic survey with 1,100
shot points per mile that processed out 100 fold. In 1993, an undershoot survey
around the crest and production facilities was added. Gulfport owns the rights
8
to the seismic data. In December of 1999 Gulfport completed the reprocessing
of the seismic data and its technical staff developed prospects from the data.
The reprocessed data will enable Gulfport to identify prospects in areas of the
field that would otherwise remain obscure.
Facilities
Gulfport owns and operates a production facility at WCBB. The platform
for the production facility stretches over a mile and is equipped with a 30 MMCF
capacity dehydrating system and three 225 horsepower triplex saltwater disposal
pumps. The Company has an ongoing program to modernize and service the
production facilities at WCBB. During 2001, Gulfport installed two new gas
compressors totaling 3,000 horsepower into full time service at the field
replacing three outdated inefficient compressors. The new compressors increased
efficiency and, together with a new header valve the Company installed at one of
the tank batteries, reduced gas usage in the field by 50%. Other work performed
on the facility during 2001 included repairing or replacing flow lines and gas
lift lines. Gulfport also back flowed and cleaned sand from the five saltwater
disposal wells at West Cote Blanche Bay, which allows the wells to handle a
higher volume of water. The Company generates cash flow by handling other
companies' gas and oil and disposing of their saltwater through the facility for
a fee. In 2001, Gulfport earned an average of $33,524 a month from third party
facility charges.
2001 Activity
During April 2001, Gulfport finished the seven well drilling program it
had commenced in January of 2001. The Company successfully drilled, completed
and is currently producing six intermediate depth wells, with total depths
averaging approximately 9,000' and one shallow well, with a total depth of
2,500'. These wells found significant oil and gas deposits in multiple targets
ranging from relatively low risk proven undeveloped objectives to higher
potential exploratory targets. Gulfport feels that by taking most future wells
to a depth of 9,000' there will be an increased chance of converting reserves
currently classified as possible and probable to proved.
Gulfport continued to meet its plugging obligation and plugged 26 wells at
WCBB during 2001 at an average cost of $18,400 per well. The Company has plugged
90 wells at WCBB since it began its plugging program in 1997.
2002 Field Activity
West Cote Blanche Bay
In 2002, Gulfport continues to use the reprocessed 3-D seismic data to
identify and confirm intermediate and shallow prospects at WCBB. The Company
plans to begin a ten well drilling program in the second quarter of 2002. The
ten well program will consist of eight developmental intermediate depth wells,
one developmental shallow horizontal well and one exploratory shallow well. The
Company anticipates that these wells will access significant oil and gas
deposits with most of the wells having multiple targets ranging from relatively
low risk proven undeveloped objectives to higher potential exploratory targets.
Gulfport also anticipates several recompletions and workovers and will continue
to fulfill its plugging obligations during 2002.
East & West Hackberry
Gulfport will continue testing shut-in wells and putting them on permanent
or intermittent production as results warrant. The Company also plans several
recompletion projects for the Erwin and State Lease 50 portion of East
9
Hackberry. Gulfport is in the process of generating projects in the West
Hackberry field.
Texaco Operated Well
In June of 1999, Gulfport executed a sublease in favor of Texaco of an
approximate 72 acre block below the base of the 8 Sand, located at approximately
9,060 feet, at WCBB and reserved a 25% back-in working interest after the
proceeds of the well totaled $1,000,000. The well paid out in December 1999.
Overriding Royalty Interests
Gulfport also owns overriding royalty interests in an additional 14
producing oil and gas wells lying in four fields.
When Gulfport sold its interest in the Bayou Penchant Field to Castex
Energy 1996 Limited Partnership effective April 1, 1998, Gulfport retained a 10%
overriding royalty interest in this field. The Bayou Penchant field is located
in Terrebonne Parish, Louisiana and the 2001 average daily gross production from
five producing wells was 1,250 gross MCF of gas.
Gulfport also owns a 2.5% overriding royalty interest in three producing
wells at the Napoleonville Field retained when Gulfport sold its interest to
Plymouth Operating Company in 1998. The Napoleonville field is located in
Assumption Parish, Louisiana and averaged 150 gross barrels of oil per day in
2001.
Additionally, Gulfport owns a net profits interest in one producing well
and all the leasehold rights in the South Atchafalaya Bay Field located in St.
Mary Parish, Louisiana. This well was placed on production in late 1999. This
interest provided over $21,000 in net revenue to Gulfport in 2001.
The land occupied by a warehouse owned by Gulfport in Lafayette, LA covers
approximately one acre. The mineral rights underlying the building were
included in a unit drilled by Newfield Exploration Company. In April 2000,
effective June 1999, Gulfport backed into a working interest in the Gladys
Garber #1 well. During 2001, the well generated over $62,000 net to Gulfport's
interest.
Fee Minerals and Surface Interest
Gulfport owns 230 net acres of fee minerals and surface interest adjacent
to its West Hackberry Field in Cameron Parish, Louisiana. This property
currently contains six producing wells.
Castex Energy 1996 Limited Partnership
Castex Back-In
Gulfport sold its interest in the Bayou Penchant, Bayou Pigeon, Deer Island
and Golden Meadow fields to Castex Energy 1996 Limited Partnership effective
April 1, 1998 subject to a 25% reversionary interest in the partnership after
Castex had received 100% of the initial investment. Castex informed Gulfport
that the investment had paid out effective September 1, 2001. In lieu of a 25%
interest in the partnership, Gulfport elected to take a proportionately reduced
25% working interest in the properties. The Company now owns the following
working interest in the subject fields:
10
Field Parish Working Interest
Bayou Penchant Terrebonne 3.125%
Bayou Pigeon Iberia 6.250%
Deer Island Terrebonne 6.250%
Golden Meadow Lafourche 3.125%
In addition to the producing wells and associated leasehold rights,
Gulfport has prepaid the drilling and completion costs of three new wells.
Other Interests
Litigation Trust
Gulfport owns a 12% interest in the Trust (the "Litigation Trust") that was
established in WRT's bankruptcy to pursue litigation connected with WRT.
The Litigation Trust filed approximately 400 preference actions and
several substantive actions alleging fraud, malpractice and other wrongdoings.
At this time, Gulfport cannot estimate what the potential future recovery from
the litigation will be.
Oil and Gas Marketing
Gulfport sells its oil and gas at the wellhead and does not refine
petroleum products. Other than normal production facilities, Gulfport does not
own an interest in any bulk storage facilities or pipelines. As is customary in
the industry, Gulfport sells its production in any one area to relatively few
purchasers, including transmission companies that have pipelines near Gulfport'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 Gulfport's
crude oil production in 2001 was sold on contracts based on the average closing
price on NYMEX for each trading day during the month of delivery.
During 2001, oil sales to Gulfmark Energy Inc. accounted for 86% of
Gulfport's oil sales. Gulfport had no other purchasers that accounted for
greater than 10% of it's oil sales. Gulfport had no gas purchasers that
accounted for more than 10% of it's total sales.
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. Oil and gas produced by Gulfport in Louisiana is sold to
various purchasers who service the areas where Gulfport's wells are located.
Gulfport's wells are not subject to any agreements that would prevent Gulfport
from either selling its 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
11
is uncertain and it is possible that under some market conditions the production
and sale of oil and gas from some or all of its 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.
Environmental Regulation
Operations of Gulfport are subject to numerous federal, state and local
laws and regulations governing environmental protection. Over the last several
years, state and federal environmental laws and regulations have become more
stringent and may continue to become more stringent in the future. These laws
and regulations may affect Gulfport's operations and costs as a result of their
affect on oil and gas development, exploration, and production operations. 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.
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 for a company its
size, 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.
Headquarters and Other Facilities
Gulfport leases office space in Oklahoma City, Oklahoma under a lease
covering approximately 7,000 square feet. The monthly rent is approximately
$13,000.
In 1996, Gulfport purchased a building in Lafayette, Louisiana to be used
as Gulfport's Louisiana headquarters. The 16 year-old building contains 12,480
total square feet with 8,180 square feet of finished office area and 6,300
square feet of clear span warehouse area. The mortgage balance was
approximately $163,000 as of January 1, 2002 with an estimated fair market value
of $350,000. This building allows Gulfport to provide office space for
Louisiana personnel, have access to meeting space close to the fields and to
maintain a corporate presence in Louisiana.
Employees
At December 31, 2001 Gulfport had 13 employees. A Louisiana well
servicing company serves as contract operator of the fields and provides all
necessary field personnel.
12
Item 2. Properties
Oil & Gas Reserves
The oil and gas reserve information set forth below represents estimates
as prepared by the independent engineering firm of Netherland, Sewell &
Associates, Inc. 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
Gulfport at December 31, 2001, as estimated by Netherland, Sewell & Associates,
an independent engineering firm.
January 1, 2002
------------------------------------------
Proved Reserves Developed Underdeveloped Total
----------- -------------- ------------
Oil (MBBLS) 3,745 21,078 24,823
Gas (MMCF) 3,499 21,226 24,725
MBOE 4,328 24,616 28,944
Year-end present value 10% of
estimated future net revenue $22,027,000 $108,370,200 $130,397,200
Total proved reserves increased to 28,944 MBOE at January 1, 2002 from
25,129 at January 1, 2001. This increase in reserves is mainly attributable to
the Company's drilling activity during 2001 as well as the mapping of additional
proved undeveloped locations.
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, 2001. The estimated future production is priced at December 31, 2001
without escalation using $16.75 per BBL and $2.65 per MCF, adjusted by lease for
transportation fees and regional price differentials.
In compliance with federal law, Gulfport files annual reports with 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.
Production, Prices, and Production Costs
The following is a table and graph of Gulfport's net production in 2001.
13
Year Ended December 31,
2001 2000 1999
---- ---- ----
Production Volumes:
Oil (MBBLS) 595 530 576
Gas (MMCF) 71 83 107
Oil Equivalents (MBOE) 607 544 594
Average Prices
Oil (per BBL) $25.25 $29.76 $16.86
Gas (per MCF) $ 6.02 $ 4.04 $ 2.83
Oil Equivalents (per MBOE) $25.48 $29.62 $16.86
Average Production Costs (per BOE) $ 7.85 $ 9.35 $ 6.18
Average Production Taxes (per BOE) $ 2.88 $ 3.02 $ 1.64
(Graph Omitted)
Drilling and Recompletion Activities
The following table contains data with respect to certain of Gulfport's
field operations during the years ended December 31, 2001, 2000 and 1999.
2001 2000 1999
Gross Net Gross Net Gross Net
------------ ------------ ------------
Recompletions, Sidetracks
and Deepenings:
Oil 6 6 4 4 15 15
Gas 0 0 0 0 0 0
Non-Productive 0 0 1 1 12 12
------------ ------------ ------------
TOTAL: 6 6 5 5 27 27
============ ============ ============
Development Wells:
Oil 6 6 2 2 5 5
Gas 0 0 1 1 0 0
Non-Productive 0 0 1 1 1 1
------------ ------------ ------------
TOTAL: 6 6 4 4 6 6
============ ============ ============
Exploratory Wells:
Oil 1 1 0 0 0 0
Gas 0 0 0 0 0 0
Non-Productive 0 0 0 0 0 0
------------ ------------ ------------
TOTAL: 1 1 0 0 0 0
============ ============ ============
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. In
future acquisitions, Gulfport will conduct title examinations on material
portions of such properties in a manner generally consistent with industry
practice. Certain of Gulfport's oil and gas properties may be subject to title
defects, encumbrances, easements, servitudes or other restrictions, none of
which, in management's opinion, will in the aggregate materially restrict
Gulfport's operations.
14
Item 3. Legal Proceedings
Gulfport has been named as a defendant in various lawsuits. The
ultimate resolution of these matters is not expected to have a material adverse
affect on the Company's financial condition or results of operations for the
periods presented in the financial statements.
Item 4. Submission of Matters to a Vote of Security Holders
On November 28, 2001 the Board of Directors nominated five persons to serve
on the Board of Gulfport. On December 30, 2001 the holders of a majority of the
outstanding shares of Gulfport's common stock executed a written consent
electing the five nominated persons as directors of Gulfport. Each director
will serve until the next annual meeting or until he is succeeded by another
qualified director who has been elected.
The annual shareholder meeting for Gulfport for the year ended December
31, 2001 has been scheduled for April 15, 2002.
Item 4a. Executive Officers of the Registrant.
The officers of Gulfport are as follows:
Name Age Position
---- --- --------
Mike Liddell 48 Chairman of the Board, Chief
Executive Officer, President and
Director
Michael G. Moore 45 Vice President and Chief
Financial Officer
Lisa Holbrook 31 Vice President, General Counsel
and Secretary
Mike Liddell has served as a director of Gulfport since July 11, 1997, as
Chief Executive Officer since April 28, 1998 and as Chairman of the Board since
July 28, 1998. Mr. Liddell has served as President of Gulfport since July 2000.
In addition, Mr. Liddell served as Chief Executive Officer of DLB from October
1994 to April 28, 1998, and as a director of DLB from 1991 through April 1998.
From 1991 to 1994, Mr. Liddell was President of DLB. From 1979 to 1991, he was
President and Chief Executive Officer of DLB Energy. He received a B.S. degree
in education from Oklahoma State University. He is the brother of Mickey
Liddell.
Michael G. Moore has served as Vice President and Chief Financial Officer
since July 2000. From May 1998 through July 2000, Mr. Moore served as Vice
President and Chief Financial Officer of Indian Oil Company. From September 1995
through May 1998, Mr. Moore served as Controller of DLB Oil & Gas, Inc. Prior
to that, Mr. Moore served as Controller of LEDCO, Inc., a Houston based gas
marketing company. Mr. Moore received both his B.B.A degree in finance and his
M.B.A. from the University of Central Oklahoma.
Lisa Holbrook has served as Vice President and Secretary of Gulfport since
November 5, 1999, and as General Counsel since April 28, 1998. In addition, Ms.
Holbrook served as Assistant General Counsel of DLB until April 1998. In 1996,
Ms. Holbrook received her J.D. from Oklahoma City University Law School where
she graduated with highest distinction.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Gulfport's Common Stock is traded on the NASD OTC Bulletin Board under the
symbol GPOR. The following table sets forth the high and low sales prices for
the Common Stock in each quarter:
YEAR ENDED DECEMBER 31, 2001 LOW HIGH
-------------------------------- ----- -----
First Quarter $3.875 $4.500
Second Quarter $4.000 $6.250
Third Quarter $4.000 $4.600
Fourth Quarter $4.250 $4.600
Holders of Record
At the close of business on February 1, 2002 there were 10,146,566 shares
of Common Stock outstanding held by 363 shareholders of record.
Dividend Policy
Gulfport has never paid dividends on the Common Stock. Gulfport currently
intends to retain all earnings to fund its operations. Therefore, Gulfport does
not intend to pay any cash dividends on the Common Stock in the foreseeable
future.
Item 6. Selected Financial Data
As a result of the Reorganization Case and Plan, which was consummated
and became effective on July 11, 1997, Gulfport 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 Gulfport's operations.
The following selected financial data as of and for the years ended
December 31, 2001, 2000, 1999, 1998 and as of and for the five months 21 days
ended December 31, 1997, for Gulfport and for the six months and 10 days ended
July 10, 1997, for the Predecessor Company are derived from the financial
statements of Gulfport included elsewhere in the Annual Report. 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 Gulfport and the notes thereto included elsewhere in this Annual
Report.
16
Reorganized Company Predecessor Company
July 11, Six Months
Year ended 1997 to 10 Days
December 31, December 31, July 10,
2001 2000 1999 1998 1997 1997
------- ------- ------- -------- -------- --------
Statement of Operation Data (in thousands, except per share amounts)
Oil and gas sales $15,458 $16,118 $10,018 $ 8,298 $ 9,456 $ 10,138
------- ------- ------- -------- -------- --------
Operating expenses 11,929 11,635 9,978 66,415 11,478 11,002
------- ------- ------- -------- -------- --------
Net income (loss) from operations 3,529 4,483 40 (58,117) (2,022) (864)
------- ------- ------- -------- -------- --------
Interest expense 381 596 934 1,534 727 1,106
Proceeds for litigation trust - - 1,342 - - -
Reorganized cost - - - - - (7,771)
Net income (loss) before
dividends on preferred stock
an extraordinary item 5,417 4,459 641 (59,109) (1,713) (9,615)
Extraordinary item - - - - - 88,723
Miscellaneous Income 1,921 - - - - -
Net income (loss) before dividends
on preferred stock 5,417 4,459 641 (59,109) (1,713) 79,108
Dividends on preferred stock - - - - - (1,510)
Net income (loss) available to
common stock 5,417 4,459 641 (59,109) (1,713) 77,59
Earnings (loss) per common and
common share equivalent 0.53 0.44 0.13 (72.35) (3.88) N/A
Average common and common
equivalent shares outstanding 10,147 10,145 5,120 817 442 9,539
Capital expenditures $12,761 $ 6,658 $ 7,147 $ 991 $ 5,644 $ 2,562
Reorganized Company
2001 2000 1999 1998 1997
------- ------- ------- -------- --------
Balance Sheet Data
Working capital (deficit) $(4,171) $ 132 $(1,352) $ (3,204) $ (719)
Property, plant and equipment, net 35,723 26,692 23,469 19,990 81,507
Total assets 40,892 36,178 33,484 27,568 92,346
Long term debt 143 301 179 381 13,528
Shareholders' equity (deficit) $33,992 $28,573 $24,114 $ 18,503 $ 70,280
(1) Operating expenses for 1998 include non-cash charges of $50,131,000
for impairment of oil and gas properties, $271,000 for abandonment of
long-lived assets and a $244,000 provision for doubtful accounts. 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
The following discussion and analysis of the Company's financial condition
and results of operations is based in part on the financial statements and the
notes thereto included elsewhere in this Annual Report and should be read in
conjunction therewith.
Credit Facilities
On July 11, 1997 Gulfport entered into a $15,000,000 credit facility with
ING (U.S.) Capital Corporation. During 1998 and 1999, there were two amendments
to the facility and the maturity date was reset to June 30, 2000. On June 28,
2000, the Company repaid in full its credit facility at ING and established a
new credit facility at Bank of Oklahoma ("BOK"). Gulfport was advanced $1.6
million on this new facility, which called for interest payments to be made
17
monthly in addition to twelve monthly principal payments of $100,000, with the
remaining unpaid balance due on August 31, 2001. On March 22, 2001, Gulfport
executed a new note with BOK increasing the availability to $1,760,000,
increasing the monthly payments slightly to $110,000 beginning July 1, 2001 and
extending the maturity date to October 1, 2002. This new note replaces the
original BOK note dated June 28, 2000.
On May 22, 2001, the Company entered in to a revolving line of credit
agreement with Gulfport Funding, LLC, ("Gulfport Funding") which has ownership
in common with the Company. Under the terms of the agreement, the Company may
borrow up to $3,000,000, with borrowed amounts bearing interest at Bank of
America Prime Rate plus 4%. All outstanding principal amounts along with accrued
interest are due on February 22, 2002. The Company paid a facility commitment
fee of $60,000 in connection with this line of credit. This fee will be
amortized over the life of the agreement. As of December 31, 2001, the Company
borrowed $3,000,000 available under this line.
In accordance with the revolving credit agreement, the Company issued
108,625 warrants to CD Holdings, LLC. The exercise price of these warrants was
established as the average closing price of the Company's common stock for the
five days following the issuance of the warrants. The warrant agreement provides
for pro-rata adjustments to the number of warrants granted if the Company at any
time increases the number of outstanding shares or otherwise adjusts its
capitalization.
Accounting Change
Before July 11, 1997, Gulfport used the successful efforts method for
reporting oil and gas operations. On July 11, 1997, Gulfport converted to the
full cost pool method of accounting for its oil and gas operations.
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 as of July 1997,
comparison of depreciation, depletion, and amortization expense for the years
ended December 31, 2001, 2000, 1999 and 1998, with prior years will not be
meaningful.
Results of Operations
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 Gulfport. 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,
2001 2000 1999
---- ---- ----
Production Volumes:
Oil (MBBLS) 595 530 576
Gas (MMCF) 71 83 107
Oil Equivalents (MBOE) 607 544 594
Average Prices:
Oil (per BBL) $25.50 $29.76 $16.86
Gas (per MCF) $ 4.20 $ 4.04 $ 2.83
Oil Equivalents (per MBOE) $25.48 $29.62 $16.86
Average Production Costs (per BOE) $ 7.85 $ 9.35 $ 6.18
Average Production Taxes (per BOE) $ 2.88 $ 3.02 $ 1.64
Comparison of Years Ended December 31, 2001 and 2000
Gulfport reported net income attributable to common stock of $5,417,000 for
the year ended December 31, 2001, as compared with $4,459,000 for the year ended
December 31, 2000. The increase in earnings attributable to common stock of
$958,000 was due to gains recorded during 2001 on the settlement of disputed
amounts.
Oil and Gas Revenues. For the year ended December 31, 2001 Gulfport
reported oil and gas revenues of $15,458,000, a 4% decrease from revenues of
$16,118,000 in 2000. This $660,000 decrease in revenues is attributable to a 14%
decease in prices per BOE to $25.50 for the year ended December 31, 2001 as
compared to $29.76 for the same period in 2000. This decrease in revenues due to
18
prices was primarily offset by an increase in total BOE's produced and sold
resulting from the successful completion of the Company's 2001 drilling program
initiated in January 2001.
Operating Expenses Including Production Taxes. Total lease operating
expenses decreased $215,000 to $6,517,000 for the year ended December 31, 2001
as compared to $6,732,000 for the same period in 2000. This decrease was
primarily attributable to a reduction in gas lift costs for 2001 as compared to
the same period in 2000.
General and Administrative Expenses. Net General and administrative
expenses increased only slightly by $82,000 or 5% to $1,634,000 for the year
ended December 31, 2001 from $1,552,000 for the same period 2000. This increase
was due primarily to fees associated with consultations with the Company's
financial advisors. In addition, due to an increased number of employees,
Gulfport recognized increased levels of salaries and benefits expense for the
year ended December 31, 2001 as compared to the same period in 2000. These
increases were completely offset however by administrative reimbursements from
related party's companies.
Interest Expense. Interest expense decreased by $215,000 or 36% to
$381,000 for the year ended December 31, 2001 from $596,000 for the same period
in 2000. This decrease was due to the settlement of disputed amounts with a
third party. Prior to the settlement, Gulfport was accruing approximately
$25,000 per month in interest expense.
Litigation Trust. No revenues were received from the Litigation Trust for
the comparable periods in 2001 or 2000.
Other changes in income for the year ended December 31, 2001 as compared
to the year ended December 31, 2000 were attributable to the following factors:
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense was $3,778,000 for the year ended December 31, 2001,
consisting of $3,512,000 in depletion on oil and gas properties, $218,000 in
depreciation of other property and equipment and $48,000 in amortization
expense. This is a 13% increase when compared to the 2000 depreciation,
depletion and amortization expense of $3,351,000. This increase is due primarily
to an increase in production for the year ended December 31, 2001 to 607 MBOE as
compared to 544 MBOE for the same period in 2000.
19
Income Taxes. As of December 31, 2001, the Company had a net operating loss
carryforward of approximately $83 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $47
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. A
current tax provision of $2.17 million was provided for the year ended 2001,
which was fully offset by an equal income tax benefit due to operating loss
carryforwards and other deferred tax assets.
Gain on Settlement of Disputed Amounts. Other changes in income for the
period ended December 31, 2001 included $1.9 million of non-recurring income
related to the settlement of disputed amounts. During the second quarter of
2001, the Company reached a settlement with Texaco Exploration and Production,
Inc. ("Texaco") regarding previously disputed amounts, some of which date back
to periods which were prior to the Company's reorganization. The Company's net
gain resulting from this settlement was $754,000. Also included on "Gain on
Settlement of Disputed Amounts" for the year ended December 31, 2001, were items
previously recorded as accounts payable totaling $1,167,000 which were also
settled or had expired by December 31, 2001. Included in this total were certain
tax claims of $372,000 as discussed in Note 6 to the Financial Statements, as
well as $795,000 in funds which the Company had previously classified as
accounts payable at December 31, 2000 because it believed these funds exceeded
its share of revenues on properties which it owns.
Comparison of Years Ended December 31, 2000 and 1999
Gulfport reported net income attributable to common stock of $4,459,000
for the year ended December 31, 2000, as compared with $641,000 for the year
ended December 31, 1999. The increase in earnings attributable to common stock
of $3,818,000 was due primarily to a significant increase in average oil and gas
prices in 2000.
Oil and Gas Revenues. For the year ended December 31, 2000, Gulfport
reported oil and gas revenues of $16,118,000, a 61% increase from revenues of
$10,018,000 in 1999. This $6,100,000 increase in revenues is attributable to a
76% increase in prices per BOE to $29.76 for the year ended December 31, 2000 as
compared to $16.86 for the same period in 1999. This increase in revenues was
partially offset by a slight reduction in total BOE's produced and sold due to
natural production declines during the year.
Operating Expenses Including Production Taxes. Total lease operating
expenses increased $2,092,000 to $6,732,000 for the year ended December 31, 2000
as compared to $4,640,000 for the same period in 1999. This increase was
partially attributable to a $1,028,000 increase in gas lift costs to $1,555,000
for the year ended 2000 from $528,000 for the same period in 1999. This
increase in gas lift costs is attributable to the increased gas prices for 2000
as compared to 1999 as well as increase in gas usage related to an increased
number of producing wells brought online in 2000. In addition, the increase in
operating expenses was also due in part to an approximately $763,000 increase in
production taxes for year ended 2000 as a result of increased revenues from
higher oil and gas prices.
General and Administrative Expenses. General and administrative expenses
decreased by $171,000 or 10% to $1,552,000 for the year ended December 31, 2000
from $1,723,000 for the same period 1999. This decrease was due primarily to
Gulfport's continuing efforts to reduce overall general and administrative
costs.
20
Interest Expense. Interest expense decreased by $338,000 or 36% to
$596,000 for the year ended December 31, 2000 from $934,000 for the same period
in 1999. This decrease was due to a reduction in Gulfport's interest bearing
debt of $1.9 million.
Litigation Trust. In 1999, the Company received proceeds of $1,342,000 from
the Trust. Since the Company had no basis in the Litigation Trust, the Company
recognized the entire proceeds of $1,342,000 as income in the month in which it
was received. No revenues were received from the Litigation Trust for the
comparable period in 2000.
Other changes in income for the year ended December 31, 2000 as compared
to the year ended December 31, 1999 were attributable to the following factors:
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization expense was $3,351,000 for the year ended December 31, 2000,
consisting of $3,126,000 in depletion on oil and gas properties, $209,000 in
depreciation of other property and equipment and $16,000 in amortization
expense. This is a 7% decrease when compared to the 1999 depreciation, depletion
and amortization expense of $3,615,000. This decrease is due primarily to a
reduction in total BOE's produced for the year ended December 31, 2000 as
compared to the same period in 1999.
Income Taxes. As of December 31, 2000, the Company had a net operating loss
carryforward of approximately $69 million, in addition to numerous timing
differences which gave rise to a deferred tax asset of approximately $41
million, which was fully reserved by a valuation allowance at that date.
Utilization of net operating loss carryforwards and other timing differences
will be recognized as a reduction in income tax expense in the year utilized. A
current tax provision of $1.78 million was provided for the year ended December
31, 2000, which was fully offset by an equal income tax benefit due to operating
loss carryforwards and other deferred tax assets.
Capital Expenditures, Capital Resources and Liquidity
Net cash flow provided by operating activities for the year ended December
31, 2001 was $7.6 million, as compared to net cash flow provided by operating
activities of $6.3 million for the comparable period in 2000.
Net cash provided by financing activities for 2001 was $3.1 million as
compared to net cash used of $1.9 million during 2000. Net cash provided by
financing activities in 2001 included $3.0 million of proceeds from the new
Gulfport Funding, LLC credit facility while net cash used in 2000 included $3.5
million of principle repayments. Net cash used in financing activities for 2000
was $1.9 million as compared to net cash provided of $2.9 million during 1999.
Net cash used in financing activities in 2000 included $3.5 million of principle
payments to pay off the ING note and make principle payments on the new BOK
facility and the proceeds of $1.6 million from the new BOK facility. The 1999
net cash flows provided by financing activities occurred as a result of the $3.2
million from the Stockholder Credit Facility and the net proceeds from the 1999
Regulation D Offering. The 1999 Regulation D Offering after expenses yielded
$4.97 million to Gulfport. Affiliated Stockholders subscribed for 4,040,011
shares in the 1999 Regulation D Offering through the forgiveness of $3.0
million in debt, thus netting $2.0 million to Gulfport for the net cash proceeds
from the 1999 Regulation D Offering.
Capital Expenditures. In 2001, Gulfport invested $12.8 million in oil and
gas properties and other property and equipment as compared to $6.7 million
during the comparable period in 2000. Of the $2.8 million the Company spent
during 2001, $6.8 million was spent on drilling and completion activity on new
wells and $6.0 million was spent on work over activity on existing wells. During
2001, Gulfport financed its capital expenditures with cash flow provided by
operations and borrowings under the Company's two credit facilities.
21
Gulfport's strategy is to continue to increase cash flows generated by its
properties by undertaking new drilling, workover, sidetrack and recompletion
projects in the fields to exploit its extensive reserves. The Company has
upgraded its infrastructure by enhancing its existing facilities to increase
operating efficiencies, increase volume capacities and lower lease operating
expenses. Additionally, Gulfport has undertaken the reprocessing of its 3D
seismic data in its principal property, West Cote Blanche Bay. The reprocessed
data will enable the Company's geophysicists to generate new prospects and
enhance existing prospects in the intermediate zones in the field thus creating
a portfolio of new drilling opportunities in the most prolific depths of the
field.
Capital Resources. On July 11, 1997 Gulfport entered into a $15,000,000
credit facility with ING (U.S.) Capital Corporation ("ING"). During 1998 and
1999, there were two amendments to the facility and the maturity date was reset
to June 30, 2000. On June 28, 2000, the Company repaid in full its credit
facility at ING and established a new credit facility at Bank of Oklahoma
("BOK"). Gulfport was advanced $1.6 million on this new facility, which called
for interest payments to be made monthly in addition to twelve monthly principal
payments of $100,000, with the remaining unpaid balance due on August 31, 2001.
On March 22, 2001, Gulfport executed a new note with BOK increasing the
availability to $1,760,000, increasing the monthly payments slightly to $110,000
beginning July 1, 2001 and extending the maturity date to October 1, 2002. This
new note replaces the original BOK note dated June 28, 2000.
On May 22, 2001, the Company entered in to a revolving line of credit
agreement with Gulfport Funding, LLC, ("Gulfport Funding") which has ownership
in common with the Company. Under the terms of the agreement, the Company may
borrow up to $3,000,000, with borrowed amounts bearing interest at Bank of
America Prime Rate plus 4%. All outstanding principal amounts along with accrued
interest are due on February 22, 2002. The Company paid a facility commitment
fee of $60,000 in connection with this line of credit. This fee will be
amortized over the life of the agreement. As of December 31, 2001, the Company
borrowed $3,000,000 available under this line.
In March 2002, the Company commenced a Private Placement Offering of $10.0
million dollars consisting of 10,000 Units. Each Unit consists of (i) one (1)
share of Cumulative Preferred Stock, Series A, of the Company (Preferred) and
(ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per
share. Dividends shall accrue on the Preferred Stock prior to the Mandatory
Redemption Date (as defined below) at the rate of 12% per annum payable
quarterly in cash or, at the option of the Company for a period not to exceed
two (2) years from the Closing Date, payable in whole or in part in additional
shares of the Preferred based on the Liquidation Preference (as defined below)
of the Preferred at the rate of 15% per annum. No other dividends shall be
declared or shall accrue on the Preferred. To the extent funds are legally
available, the Company is obligated to declare and pay the dividends on the
Preferred. The Warrants have a term of ten (10) years and an exercise price of
$4.00. The Company is required to redeem the Preferred on the fifth anniversary
of the first issuance and the Company may at its sole option, choose to redeem
the Preferred at any time before the expiration of the five years.
Two-thirds of the Preferred Stockholders can affect any Company action
which would effect their preference position. The Preferred cannot be sold or
transferred by its holders and the Company must use its best efforts to register
with the Securities and Exchange Commission ("SEC") the common stock issued in
connection with the exercise of the Warrants or, if possible, piggyback the
issued common stock if the Company participates in a public offering with the
SEC.
The Offering was made available to stockholders and affiliates of the
Company as of December 31, 2001 who were known to be accredited investors by the
Company. Purchasers were able to participate up to their pro-rata share of
ownership in the Company as of December 31, 2001. The Offering's initial closing
will begin March 29, 2002 and will continue until April 15, 2002. Mike
Liddell, the Company's Chief Executive Officer, shall have until September 30,
2002 to subscribe for his proportionate share of the Offering.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3.0 million dollar loan along with the accumulated
interest due from the Company for 3,262.98 Units. Additionally on March 29,
2002, entities controlled by the majority shareholder initially funded a share
of the Preferred Offering in the amount of $2,738,000.
As a result of the completion of the NSA engineering report for the year
ended January 1, 2002, the Company intends to initiate discussions with it's
banking institutions and attempt to put in a place a larger and longer-term
revolving credit facility. The Company cannot be sure however that they will be
successful.
The Company is also currently consulting with several financial advisors to
determine how to take advantage of the current market whether through internal
value creation or a capital markets transaction.
22
Liquidity. The primary capital commitments faced by the Company are the
capital requirements needed to continue developing the Company's proved reserves
and to continue meeting the required principal payments on its term Credit
Facilities.
In Gulfport's January 1, 2002 reserve report, 85% of Gulfport's net
reserves were categorized as proved undeveloped. The proved reserves of
Gulfport will generally decline as reserves are depleted, except to the extent
that Gulfport conducts successful exploration or development activities or
acquires properties containing proved developed reserves, or both.
To realize reserves and increase production, the Company must continue its
exploratory drilling, undertake other replacement activities or utilize third
parties to accomplish those activities. The Company plans to begin a ten well
drilling program in the second quarter of 2002. The ten well program will
consist of eight developmental intermediate depth wells, one developmental
shallow horizontal well and one exploratory shallow well. The Company
anticipates that these wells will access significant oil and gas deposits with
most of the wells having multiple targets ranging from relatively low risk
proven undeveloped objectives to higher potential exploratory targets. Gulfport
also anticipates several recompletions and workovers in the field during 2002.
It is anticipated that these reserve development projects will be funded either
through the use of cash flow from operations when available, interim bank
financing, a long-term credit facility or by accessing the capital markets. The
cash flow generated from these new projects will be reinvested in the field to
complete more capital projects.
Commitments and Contingencies
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the 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. ChevronTexaco retained a security interest in production from
these properties until abandonment obligations to ChevronTexaco 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. As of December 31, 2001, the plugging and abandonment trust totaled
$2,272,000, including interest received during 2001 of approximately $55,000.
During October 2001, Gulfport completed the yearly program to meet its
plugging liability for the twelve-month period ending March 2001. The Company
plugged 26 non-producing wells at West Cote Blanche Bay. During March 2002,
Gulfport began to fulfill its yearly plugging commitment of 20 wells at WCBB for
the twelve-month period ending, March 2002.
In addition, the Company has letters of credit totaling $200,000 secured
by certificates of deposit being held for plugging costs in the East Hackberry
field. Once specific wells are plugged and abandoned the $200,000 will be
returned to the Company.
Texaco Global Settlement
Pursuant to the terms of a global settlement between ChevronTexaco and the
State of Louisiana which includes the State Lease No. 50 portion of Gulfport's
East Hackberry Field, Gulfport was obligated to commence drilling a well or
other qualifying development operation on certain non-producing acreage in the
field prior to March 1998. Because of prevailing market conditions during 1998,
23
the Company believed it was commercially impractical to shoot seismic or
commence drilling operations on the subject property. As a result, Gulfport has
agreed to surrender approximately 440 non-producing acres in this field to the
State of Louisiana. At December 31, 2001, Gulfport was in the process of
releasing these properties to the State of Louisiana.
Year 2000 Compliance
Gulfport made all necessary investments in software systems and
applications to ensure it was Year 2000 compliant. Gulfport did not experience
any difficulties related to the Year 2000 rollover. Any cost associated with
the process of becoming Year 2000 compliant was not material.
Subsequent Events
In March 2002, the Company commenced a Private Placement Offering of $10.0
million dollars consisting of 10,000 Units. Each Unit consists of (i) one (1)
share of Cumulative Preferred Stock, Series A, of the Company (Preferred) and
(ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per
share. Dividends shall accrue on the Preferred Stock prior to the Mandatory
Redemption Date (as defined below) at the rate of 12% per annum payable
quarterly in cash or, at the option of the Company for a period not to exceed
two (2) years from the Closing Date, payable in whole or in part in additional
shares of the Preferred based on the Liquidation Preference (as defined below)
of the Preferred at the rate of 15% per annum. No other dividends shall be
declared or shall accrue on the Preferred. To the extent funds are legally
available, the Company is obligated to declare and pay the dividends on the
Preferred. The Warrants have a term of ten (10) years and an exercise price of
$4.00. The Company is required to redeem the Preferred on the fifth anniversary
of the first issuance and the Company may at its sole option, choose to redeem
the Preferred at any time before the expiration of the five years.
Two-thirds of the Preferred Stockholders can affect any Company action
which would effect their preference position. The Preferred cannot be sold or
transferred by its holders and the Company must use its best efforts to register
with the Securities and Exchange Commission ("SEC") the common stock issued in
connection with the exercise of the Warrants or, if possible, piggyback the
issued common stock if the Company participates in a public offering with the
SEC.
The Offering was made available to stockholders and affiliates of the
Company as of December 31, 2001 who were known to be accredited investors by the
Company. Purchasers were able to participate up to their pro-rata share of
ownership in the Company as of December 31, 2001. The Offering's initial closing
will begin March 29, 2002 and will continue until April 15, 2002. Mike
Liddell, the Company's Chief Executive Officer, shall have until September 30,
2002 to subscribe for his proportionate share of the Offering.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3.0 million dollar loan along with the accumulated
interest due from the Company for 3,262.98 Units. Additionally on March 29,
2002, entities controlled by the majority shareholder initially funded a share
of the Preferred Offering in the amount of $2,738,000.
Item 8. Financial Statements and Supplementary Data
The information required by this item appears on pages F-1 through F-22
following the signature pages of this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
PART III
Item 10. Directors and Executive Officers of the Registrant.
The officers and directors of Gulfport are as follows:
Name Age Position
---- --- -------
Mike Liddell 48 Chairman of the Board, Chief Executive
Officer, President and Director
Michael G. Moore 45 Vice President and
Chief Financial Officer
Lisa Holbrook 31 Vice President, General Counsel and
Secretary
Robert E. Brooks 55 Director
*David L. Houston 49 Director
*Mickey Liddell 40 Director
*Dan Noles 54 Director
*Members of Gulfport's Audit Committee.
24
Mike Liddell has served as a director of Gulfport since July 11, 1997, as
Chief Executive Officer since April 28, 1998 and as Chairman of the Board since
July 28, 1998. Mr. Liddell has served as President of Gulfport since July 2000.
In addition, Mr. Liddell served as Chief Executive Officer of DLB from October
1994 to April 28, 1998, and as a director of DLB from 1991 through April 1998.
From 1991 to 1994, Mr. Liddell was President of DLB. From 1979 to 1991, he was
President and Chief Executive Officer of DLB Energy. He received a B.S. degree
in education from Oklahoma State University. He is the brother of Mickey
Liddell and brother in law of Dan Noles.
Michael G. Moore has served as Vice President and Chief Financial Officer
since July 2000. From May 1998 through July 2000, Mr. Moore served as Vice
President and Chief Financial Officer of Indian Oil Company. From September 1995
through May 1998, Mr. Moore served as Controller of DLB Oil & Gas, Inc. Prior to
that, Mr. Moore served as Controller of LEDCO, Inc., a Houston based gas
marketing company. Mr. Moore received his B.B.A degree in finance from the
University of Central Oklahoma in 1982 and in 1987 also completed his M.B.A.
from the University of Central Oklahoma.
Lisa Holbrook has served as Vice President and Secretary of Gulfport since
November 5, 1999, and as General Counsel since April 28, 1998. In addition, Ms.
Holbrook served as Assistant General Counsel of DLB until April 1998. In 1996,
Ms. Holbrook received her J.D. from Oklahoma City University Law School where
she graduated with highest distinction.
Robert E. Brooks has served as a director of Gulfport since July 11, 1997.
Mr. Brooks is currently a partner with Brooks Greenblatt, a commercial finance
company located in Baton Rouge, Louisiana that was formed by Mr. Brooks in July
1997. Mr. Brooks is a Certified Public Accountant and was Senior Vice President
in charge of Asset Finance and Managed Assets for Bank One, Louisiana between
1993 and July 1997. He received his B.S. degree from Purdue University in
mechanical engineering in 1969. He obtained graduate degrees in finance and
accounting from the Graduate School of Business at the University of Chicago in
1974.
David Houston has served as a director of Gulfport since July 1998. Since
1991, Mr. Houston has been the principal of Houston & Associates, a firm that
offers life and disability insurance, compensation and benefits plans and estate
planning. Prior to 1991, he was President and Chief Executive Officer of Equity
Bank for Savings, F.A., a $600 million, Oklahoma-based savings bank. He
currently serves on the board of directors and executive committee of Deaconess
Hospital, Oklahoma City, Oklahoma, and is the former chair of the Oklahoma State
Ethics Commission and the Oklahoma League of Savings Institutions. He received a
Bachelor of Science degree in business from Oklahoma State University and a
graduate degree in banking from Louisiana State University.
Mickey Liddell has served as a director of Gulfport since January 1999. Mr.
Liddell is currently the President of Banner Entertainment, Inc., a motion
picture production company in Los Angeles, California. Prior to 1994, Mr.
Liddell owned and managed wholesale nutrition product stores in Los Angeles.
Mr. Liddell received a Bachelor of Arts from the University of Oklahoma in
Communications in 1984 and a graduate degree from Parson School of Design in New
York, New York in 1987. He is the brother of Mike Liddell and the brother in
law of Dan Noles.
Dan Noles was appointed to the Board of Directors in January of 2000. Mr.
Noles has served as the president of Atoka Management Company, an oilfield
equipment company, since 1993. Mr. Noles received his Bachelor degree in
25
Finance from the University of Oklahoma in 1970. Mr. Noles is the
brother-in-law to Mike Liddell and Mickey Liddell.
Items 11 & 12.
For information concerning Item 11 - Executive Compensation and Item 12 -
Security Ownership of Certain Beneficial owners and Management, see the
definitive Proxy Statement of Gulfport Energy Corporation for the Annual Meeting
of Shareholders to be held on April 15, 2002, which will be filed with the
Securities and Exchange Commission within 120 days after the close of the
Registrant's year and is incorporated herein by this reference (with the
exception of portions noted therein that are not incorporated by reference).
See also Part I - Item 4A - Executive Officers of the Registrant.
Item 13. Certain Relationships and Related Transactions
In March 2001, a company that shares common ownership with Gulfport
acquired a majority of the oil and natural gas properties of a mid-continent
exploration and production company. Subsequent to the acquisition, Gulfport
began providing administrative services to effectively manage the day-to-day
operations of this acquisition and in turn receives an administrative service
fee for such services.
26
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements. The following Financial Statements
of the Company, the Notes thereto, and the reports thereon are
filed under Item 8 of this Report.
Independent Auditors Report F-2
Balance Sheets, December 31, 2001 and 2000 F-3
Statements of Income, Years Ended December 31, 2001, 2000 and 1999 F-4
Statements of Stockholders' Equity, Years Ended December 31, 2001,
2000 and 1999. F-5
Statements of Cash Flows, Years Ended December 31, 2001, 2000
and 1999 F-6
Notes to Financial Statements F-7
2. Financial Statement Schedules. All financial statement schedules
have been omitted, as the required information is inapplicable or is
not present in amounts sufficient to require submission of the
schedule or the information is presented in the Financial Statements
or related notes.
3. Exhibits.
10.1 Credit Agreement Dated June 28, 2000 between Registrant and
Bank of Oklahoma Filed March 30, 2001
10.2 Stock Option Plan Filed March 30, 2001
10.3 Credit Agreement dated February 1, 2001 between Registrant
and Bank of Oklahoma
(b). Reports on Form 8-K
June 30, 2000 - Disclosure of bank debt reduction and hiring of
new CFO
27
SIGNATURES
Pursuant to the requirements of 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.
Date: March 30, 2001.
GULFPORT ENERGY CORPORATION
By:/s/Mike Liddell
-------------------------------------
Mike Liddell, Chief Executive Officer
Pursuant to the requirements of the Securities and 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.
Date: March 30, 2002 By:/s/Mike Liddell
------------------------------------
Mike Liddell, Chief Executive
Officer And Director
Date: March 30, 2002 By:/s/Robert Brooks
-------------------------------------
Robert Brooks, Director
Date: March 30, 2002 By:/s/David L. Houston
-------------------------------------
David L. Houston, Director
Date: March 30, 2002 By:/s/Mickey Liddell
-------------------------------------
Mickey Liddell, Director
Date: March 30, 2002 By:/s/Dan Noles
-------------------------------------
Dan Noles, Director
Date: March 30, 2002 By:/s/Michael G. Moore
-------------------------------------
Michael G. Moore, Vice President and
Chief Financial Officer
28
EXHIBIT INDEX
10.7 Credit Agreement Dated June 28, 2000 between Registrant and
Bank of Oklahoma Filed March 30, 2001
10.8 Stock Option Plan Filed March 30, 2001
10.9 Credit Agreement dated February 1, 2001 between Registrant
and Bank of Oklahoma
29
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Page
----
Independent Auditors' Report F-2
Balance Sheets, December 31, 2001 and 2000 F-3
Statements of Income, Years Ended December 31, 2001,
2000 and 1999 F-4
Statements of Shareholders' Equity, Years Ended December
31, 2001, 2000 and 1999 F-5
Statements of Cash Flows, Years Ended December 31, 2001, 2000
and 1999 F-6
Notes to Financial Statements F-7
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
The Board of Directors and
Stockholders of Gulfport Energy Corporation:
We have audited the accompanying balance sheets of Gulfport Energy
Corporation (a Delaware corporation) as of December 31, 2001 and 2000, and the
related statements of income, stockholders' equity, and cash flows for the years
ended December 31, 2001, 2000 and 1999. These financial statements are the
responsibility of Gulfport's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits 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
audits provide 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, 2001 and 2000, and the results of its operations and its cash
flows for the years ended December 31, 2001, 2000 and 1999, in conformity with
accounting principles generally accepted in the United States of America.
HOGAN & SLOVACEK
Oklahoma City, OK
March 29, 2002
F-2
GULFPORT ENERGY CORPORATION
BALANCE SHEETS
December 31,
--------------------------
2001 2000
------------ ------------
Assets
Current assets:
Cash and cash equivalents $ 1,077,000 $ 3,657,000
Accounts receivable, net of allowance for
doubtful accounts of $239,000 and $244,000
at December 31, 2001 and 2000, respectively 1,096,000 3,608,000
Accounts receivable - related party 160,000 -
Prepaid expenses and other current assets 253,000 171,000
------------ ------------
Total current assets 2,586,000 7,436,000
------------ ------------
Property and equipment:
Oil and natural gas properties 103,344,000 90,640,000
Other property and equipment 1,976,000 1,919,000
Accumulated depletion, depreciation,
amortization and impairment reserve (69,597,000) (65,867,000)
------------ ------------
Property and equipment, net 35,723,000 26,692,000
------------ ------------
Other assets 2,583,000 2,050,000
------------ ------------
$ 40,892,000 $ 36,178,000
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $ 2,637,000 $ 6,426,000
Note payable - related party 3,000,000 -
Current maturities of long-term debt 1,120,000 878,000
------------ ------------
Total current liabilities 6,757,000 7,304,000
------------ ------------
Long-term debt 143,000 301,000
------------ ------------
Total liabilities 6,900,000 7,605,000
------------ ------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock - $.01 par value, 1,000,000
authorized, none issued - -
Common stock - $.01 par value, 15,000,000
authorized, 10,146,566 and 10,145,400 issued
and outstanding at December 31, 2001 and 2000,
respectively 101,000 101,000
Paid-in capital 84,192,000 84,190,000
Accumulated deficit (50,301,000) (55,718,000)
------------ ------------
Total stockholders' equity 33,992,000 28,573,000
------------ ------------
Total liabilities and stockholders'
equity $ 40,892,000 $ 36,178,000
============ ============
See accompanying notes to financial statements.
F-3
GULFPORT ENERGY CORPORATION
STATEMENTS OF INCOME
Year ended December 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
Revenues:
Gas sales $ 298,000 $ 337,000 $ 303,000
Oil and condensate sales 15,160,000 15,781,000 9,715,000
Other income 215,000 252,000 -
------------ ----------- -----------
15,673,000 16,370,000 10,018,000
------------ ----------- -----------
Costs and expenses:
Operating expenses 4,767,000 5,098,000 3,472,000
Production taxes 1,750,000 1,634,000 1,168,000
Depreciation, depletion, and
amortization 3,778,000 3,351,000 3,615,000
General and administrative 1,634,000 1,552,000 1,667,000
Provision for doubtful accounts - - 56,000
------------ ----------- -----------
11,929,000 11,635,000 9,978,000
------------ ----------- -----------
INCOME FROM OPERATIONS 3,744,000 4,735,000 40,000
------------ ----------- -----------
OTHER (INCOME) EXPENSE:
Gain on settlement of disputed
amounts (1,921,000) - -
Interest expense 381,000 596,000 934,000
Interest income (133,000) (320,000) (193,000)
Proceeds from Litigation Trust - - (1,342,000)
------------ ----------- -----------
(1,673,000) 276,000 (601,000)
------------ ----------- -----------
INCOME BEFORE INCOME TAXES 5,417,000 4,459,000 641,000
INCOME TAX EXPENSE (BENEFIT):
Current 2,167,000 1,784,000 255,000
Deferred (2,167,000) (1,784,000) (255,000)
------------ ----------- -----------
- - -
------------ ----------- -----------
NET INCOME $ 5,417,000 $ 4,459,000 $ 641,000
============ =========== ===========
NET INCOME PER COMMON SHARE:
Basic $ 0.53 $ 0.44 $ 0.13
============ =========== ===========
Diluted $ 0.52 $ 0.43 $ 0.13
============ =========== ===========
See accompanying notes to financial statements.
F-4
GULFPORT ENERGY CORPORATION
Statements of Stockholders' Equity
Additional
Preferred Common Stock Paid-in Accumulated
Stock Shares Amount Capital Deficit
--------- --------- ---------- ----------- ------------
Balance at December 31, 1998 $ - 3,445,400 $1,723,000 $77,598,000 (60,818,000)
Change in par value of
common stock - - (1,689,000) 1,689,000 -
------ ---------- ---------- ----------- -----------
Balance as restated,
December 31, 1998 - 3,445,400 34,000 79,287,000 (60,818,000)
Regulation D offering - 6,700,000 67,000 4,903,000 -
Net income - - - - 641,000
------ ---------- ---------- ----------- -----------
Balance at December 31, 1999 - 10,145,400 101,000 84,190,000 (60,177,000)
Net income - - - - 4,459,000
------ ---------- ---------- ----------- -----------
Balance at December 31, 2000 - 10,145,400 101,000 84,190,000 (55,718,000)
Common shares issued - 1,166 - 2,000 -
Net income - - - - 5,417,000
------ ---------- ---------- ----------- -----------
Balance at December 31, 2001 $ - 10,146,566 $ 101,000 $84,192,000 $(50,301,000)
====== ========== ========== =========== ===========
See accompanying notes to financial statements.
F-5
GULFPORT ENERGY CORPORATION
Statements of Cash Flows
Year ended December 31,
----------------------------------------
2001 2000 1999
------------ ----------- -----------
Cash flows from operating activities:
Net income $ 5,417,000 $ 4,459,000 $ 641,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion, depreciation and
amortization 3,730,000 3,335,000 3,615,000
Provision for doubtful accounts
receivable - - 56,000
Amortization of debt issuance costs 44,000 16,000 108,000
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable - related (160,000) - -
(Increase) decrease in accounts
receivable 2,512,000 (1,553,000) (455,000)
(Increase) decrease in prepaid
expenses (126,000) (51,000) (10,000)
(Decrease) increase in accounts
payable and accrued liabilities (3,789,000) 130,000 2,406,000
------------ ----------- -----------
Net cash provided by operating
activities 7,628,000 6,336,000 6,361,000
------------ ----------- -----------
Cash flows from investing activities:
Additions to cash held in escrow (533,000) (55,000) (92,000)
Redemption of Certificates of
Deposit - 200,000 -
Capital expenditures (12,761,000) (6,658,000) (7,147,000)
Proceeds from sale of oil and
gas properties - 100,000 47,000
Proceeds from sale of equipment - - 5,000
Increase (decrease) in other assets - (19,000) (94,000)
------------ ----------- -----------
Net cash used in investing activities (13,294,000) (6,432,000) (7,281,000)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from sales of common stock 2,000 - 4,971,000
Proceeds from borrowings -
related party 3,000,000 - -
Proceeds from borrowings 960,000 1,600,000 3,210,000
Principle payments on borrowings (876,000) (3,495,000) (5,311,000)
Payment of loan origination fees - (16,000) -
------------ ----------- -----------
Net cash provided by (used in)
financing activities 3,086,000 (1,911,000) 2,870,000
------------ ----------- -----------
Net (decrease) increase in cash and
cash equivalents (2,580,000) (2,007,000) 1,950,000
Cash and cash equivalents at beginning
of period 3,657,000 5,664,000 3,714,000
------------ ----------- -----------
Cash and cash equivalents at end
of period $ 1,077,000 $ 3,657,000 $ 5,664,000
============ =========== ===========
Supplemental disclosure of cash flow
information:
Interest payments $ 114,000 $ 240,000 $ 476,000
============ =========== ===========
See accompanying notes to financial statements.
F-6
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Gulfport is a domestic independent oil and gas exploration, development and
production company with properties located in the Louisiana Gulf Coast.
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.
Oil and Gas Properties
The Company uses the Full Cost 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 gas properties, are capitalized. Net capitalized costs
are limited to the estimated future net revenues, after income taxes, discounted
at 10% per year, from proven oil and 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 gas to barrels at the ratio of
six MCF of 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 proven oil and gas reserves. Oil
and 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 gas
properties subject to amortization. Factors considered by management in its
impairment assessment include drilling results by Gulfport and other operators,
the terms of oil and gas leases not held by production, and available funds for
exploration and development.
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
seven to 30 years.
Reclassifications
Certain reclassifications have been made to the 2000 and 1999 financial
statements presentations in order to conform to the 2001 financial statements
presentation.
Net Income per Common Share
Basic net income per common share is computed by dividing income
attributable to common stock by the weighted average number of common shares
outstanding for the period. Diluted net income per common share reflects the
potential dilution that could occur if options or other contracts to issue
F-7
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
common stock were exercised or converted into common stock. Calculations of
basic and diluted net income per common share are illustrated in Note 12.
Income Taxes
Gulfport uses the asset and liability method of accounting for income
taxes, under which, deferred tax assets and liabilities are recognized for the
future tax consequences of (1) temporary differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities
and (2) 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 as income in the year in which realization becomes
determinable.
Revenue Recognition
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
Gulfport's entitlement is received, the underproduction is recorded as a
receivable. There is no such liability or asset recorded at December 31, 2001
or December 31, 2000. Oil revenues are recognized in the month produced.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates, judgments
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. Actual results could differ materially from those estimates.
Significant estimates with regard to these financial statements include the
estimate of proved oil and gas reserve quantities and the related present value
of estimated future net cash flows there from and future net operating loss
carryforwards available as reductions of income tax expense.
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.
Segment Information
The Company's only revenue generating activity is the production and sale
of oil and gas. Therefore, no reporting of business segments has been included
in these financial statements or the notes thereto.
2. ACCOUNTS RECEIVABLE - RELATED PARTY
Included in the accompanying December 31, 2001 balance sheet are amounts
receivable from entities that have similar controlling interests as those
F-8
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
controlling the Company. These receivables represent amounts billed by the
Company for general and administrative functions performed by Gulfport's
personnel on behalf of the related party companies during 2001. Gulfport has
reduced its corresponding expenses by $325,000 billed to the companies for
performance of these services.
3. PROVISION FOR ALLOWANCE FOR DOUBTFUL ACCOUNTS
A summary of the activity in the allowance for doubtful accounts for the
years ended December 31, 2001 and 2000 is as follows:
2001 2000
------------- -------------
Balance, beginning of the year $ 244,000 $ 244,000
Provision for bad debts - -
Bad debts written off (5,000) -
------------- -------------
$ 239,000 $ 244,000
============= =============
No charges to bad debt expense were made during the years ended December 31,
2001 and 2000. During the year ended December 31, 1999, the Company charged
$56,000 to bad debt expense. The 1999 bad debt expense related to receivables
on properties no longer owned by Gulfport.
4. PROPERTY AND EQUIPMENT
The major categories of property and equipment and related accumulated
depreciation, depletion and amortization as of December 31 are as follows:
2001 2000
------------- -------------
Oil and gas properties $ 103,344,000 $ 90,640,000
Office furniture and fixtures 1,499,000 1,442,000
Building 217,000 217,000
Land 260,000 260,000
------------- -------------
Total property and equipment $ 105,320,000 $ 92,559,000
------------- -------------
Accumulated depreciation, depletion,
amortization and impairment reserve (69,597,000) (65,867,000)
------------- -------------
Property and equipment, net $ 35,723,000 $ 26,692,000
============= =============
Included in oil and gas properties at December 31, 2001 and 2000, are
$1,217,000 and $801,000, respectively, in general and administrative costs
incurred and capitalized to the full cost pool. General and administrative costs
capitalized to the full cost pool are those incurred directly related to
exploration and development activities such as geological costs and other
administrative costs associated with overseeing the exploration and development
activities. All general and administrative costs not directly associated with
exploration and development activities were charged to expense as they were
incurred. During 1999, $413,000 in general and administrative costs were
capitalized to the full cost pool.
F-9
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
During 2000, the Company sold equipment related to oil and gas properties
totaling $100,000. The sale of these properties was treated as a reduction to
the full cost pool.
5. OTHER ASSETS
Other assets as of December 31 consist of the following:
2001 2000
------------- -------------
Plugging and abandonment escrow account
on the WCBB properties $ 2,272,000 $ 1,739,000
CDs securing letter of credit 200,000 200,000
Deposits 111,000 111,000
------------- ------------
$ 2,583,000 $ 2,050,000
============= ============
6. SETTLEMENT OF CLAIMS
In accordance with a reorganization that took place during 1997, Gulfport
accrued certain tax claims totaling $372,000, which are included in the
accompanying balance sheet at December 31, 2000 as current liabilities. At
December 31, 2001 management determined these claims would not be asserted and
they were written off. The resulting income has been included in "Gain on
Settlement of Disputed Amounts" in the accompanying statement of income for the
year ended December 31, 2001.
7. LONG-TERM DEBT
Long-term debt as of December 31 is as follows:
2001 2000
------------- -------------
Note payable to bank, payable in
monthly payments of $110,000, including
interest at the Chase Manhattan Prime
rate plus 1% (5.75% at December 31, 2001),
with final payment of outstanding
principal and accrued interest amounts due
October 2002. $ 1,100,000 $ -
Note payable to bank, payable in
monthly payments of $100,000, including
interest at the Chase Manhattan
Prime rate plus 1%, with final payment
of outstanding principal and accrued
interest amounts due August 2001.
The outstanding balance at December 1,
2000, was refinanced effective February 1,
2001. - 1,000,000
Note payable to bank, payable in
monthly payments of $2,900, including
interest at 9.5%, concluding May, 2004,
collaterized by land and building. 163,000 179,000
------------ ------------
Total 1,263,000 1,179,000
Less - current maturities of long-term debt (1,120,000) (878,000)
------------ ------------
Debt reflected as long-term $ 143,000 $ 301,000
============ ============
Following are the maturities of long-term debt for each of the next three
years:
2002 $1,120,000
2003 21,000
2004 122,000
----------
$1,263,000
==========
Note Payable Refinancing
On February 1, 2001, Gulfport refinanced its $1,000,000 note payable which
was outstanding at December 31, 2000. Additional borrowings of $960,000 were
also made during April 2001, bringing the total amount borrowed to $1,760,000,
which is the total available under this line. Under the terms of the new
agreement, monthly principal payments of $110,000 were to be made beginning July
1, 2001, with the remaining outstanding principal due October 1, 2002. The
refinanced note bears interest at Chase Manhattan Prime rate plus 1%.
F-11
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
Building Loan
In 1996, the Company purchased a building in Lafayette, Louisiana to be
used as Gulfport's Louisiana headquarters. The building is 12,480 square feet
with approximately 6,180 square feet of finished office area and 6,300 square
feet of warehouse space. This building allows Gulfport to provide office space
for Louisiana personnel, have access to meeting space close to the fields and to
maintain a corporate presence in Louisiana.
8. NOTE PAYABLE - RELATED PARTY
On May 22, 2001, the Company entered in to a revolving line of credit
agreement with Gulfport Funding, LLC, ("Gulfport Funding") which has ownership
in common with the Company. Under the terms of the agreement, the Company may
borrow up to $3,000,000, with borrowed amounts bearing interest at Bank of
America Prime Rate plus 4%. The Company paid a facility commitment fee of
$60,000 in connection with this line of credit. This fee will be amortized over
the life of the agreement. As of December 31, 2001, the Company had borrowed the
$3,000,000 available under this line. All outstanding principal amounts along
with accrued interest were due on February 22, 2002.
In accordance with the revolving credit agreement, the Company issued
108,625 warrants to CD Holdings, LLC. The exercise price of these warrants was
established as the average closing price of the Company's common stock for the
five days following the issuance of the warrants. The warrant agreement provides
for pro-rata adjustments to the number of warrants granted if the Company at any
time increases the number of outstanding shares or otherwise adjusts its
capitalization.
On March 29, 2002, the outstanding balance on this note, along with
accumulated interest due on the note, were retired through Gulfport Funding's
participation in the Company's Private Placement Offering as described in Note
17.
9. COMMON STOCK OPTIONS, WARRANTS AND CHANGES IN CAPITALIZATION
Options
The Company granted its Chief Financial Officer 10,000 stock options with
an exercise price of $2.00 per share and an effective date of July 15, 2000.
The options vest 35% in July 2001, and 35% in July 2002 with the remaining
shares vesting in 2003. The option agreement provides for pro-rata adjustments
F-12
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
to the options granted if the Company at any time increases the number of
outstanding shares or otherwise alters its capitalization.
During January, 2000, the Company's Chief Executive Officer, employees, and
non-employee directors were granted a total of 313,635 stock options with an
exercise price of $2.00 per share. The options vest 35% in January 2001, and 35%
in January 2002, with the remaining options vesting in January 2003. The option
agreements provide for pro-rata adjustments to options granted if the Company at
any time increases the number of outstanding shares or otherwise alters its
capitalization.
On June 1, 1999, Gulfport's Chief Executive Officer and President were each
granted stock options for the purchase of 2.5% of the outstanding shares of
Common Stock at an exercise price of $2.00 per share. The options vest 35% on
June 1, 2000, and 35% on June 1, 2001, with the remaining options vesting on
June 1, 2002. The option agreements provide for pro-rata adjustments to options
granted if Gulfport at any time increases the number of outstanding shares or
otherwise alters its capitalization. Stock options previously granted to the
President were surrendered to Gulfport upon his death in December 1999.
On September 15, 1999, all non-employee board members were each granted
10,000 options with an exercise price of $2.00. The options vest 33% on October
1, 1999, and 33% on October 1, 2000, with the remaining options vesting on
October 1, 2001. These options granted to non-employee board members will be
adjusted on a pro-rata basis to reflect any change in the capitalization of the
Company.
Options outstanding at December 31, 2001 totaled 607,355. Of this total,
319,080 options were exercisable at December 31, 2001, with the remaining
options vesting in future periods.
Warrants
In accordance with the revolving credit agreement discussed in Note 8, the
Company issued 108,625 warrants to CD Holdings, LLC. The exercise price of these
warrants was estimated as the average closing price of the Company's common
stock for the five days following the issuance of the warrants. The warrant
agreement provides for pro-rata adjustments to the number of warrants granted it
the Company at any time increases the number of outstanding shares or otherwise
adjusts its capitalization.
Also, at December 31, 2001, 1,163,195 warrants, each for the purchase of
one share of Gulfport's common stock, were outstanding. All of these warrants
were issued pursuant to a 1997 warrant agreement, stemming from a reorganization
which occurred that year. The warrants will expire on July 11, 2002 and are
exercisable at $10 per warrant.
The related agreement contains several anti-dilutive provisions that
provide for adjustments to the terms of the warrants in the event of any
recapitalization by Gulfport. As a result of Gulfport's capitalization changes
as described below, which occurred subsequent to the issuance of these warrants,
each warrant outstanding at December 31, 2001 can purchase .234 shares of common
stock.
F-13
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
Reverse Stock Split
On March 5, 1999, the Board of Directors authorized a 50-to-1 reverse stock
split, thereby decreasing the number of issued and outstanding shares to
3,445,400, and increasing the par value of each share to $.50. Subsequent to
this reverse stock split, the par value was reduced to $.01.
Regulation D Private Placement Offering
During September 1999, Gulfport conducted a private placement of stock (the
"Regulation D Offering"). In accordance with the provisions of certain
exemptions, the Regulation D Offering was made only to Accredited Investors as
defined in Regulation D.
Gulfport offered 6,700,000 shares of common stock at an exercise price of
$.75 per share. Each shareholder exercising his basic subscription privilege in
full was entitled to oversubscribe for additional shares. A total of 6,700,000
shares were subscribed, yielding $5,016,000, net of offering costs. As of the
date of the Regulation D Offering, affiliated Shareholders were owed $3,238,000
by the Company. In the Regulation D Offering, the Affiliated Shareholders
acquired 4,040,011 common shares through the forgiveness of $3,030,000 of this
debt, with the remaining balance of $208,000 paid in cash during 1999.
10. SETTLEMENT OF DISPUTED AMOUNTS
During the second quarter of 2001, the Company reached a settlement with
Texaco Exploration and Production, Inc. ("Texaco") regarding previously disputed
amounts, some of which date back to periods which were prior to the Company's
reorganization. The Company's net gain resulting from this settlement is
included in the accompanying statement of income for the year ended December 31,
2001, as "Gain on Settlement of Disputed Amounts" in the amount of $754,000.
Also included on "Gain on Settlement of Disputed Amounts" for the year
ended December 31, 2001, were items previously recorded as accounts payable
totaling $1,167,000 which were also settled or had expired by December 31, 2001.
Included in this total were certain tax claims of $372,000 as discussed in Note
6, as well as $795,000 in funds which the Company had previously classified as
accounts payable at December 31, 2000 because it believed these funds exceeded
its share of revenues on properties which it owns.
11. INCOME TAXES
A reconciliation of the statutory federal income tax amount to the recorded
expense follows:
F-14
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
2001 2000 1999
----------- ----------- ----------
Income before federal income taxes $ 5,417,000 $ 4,459,000 $ 641,000
----------- ----------- ----------
Expected income tax at statutory rate 2,167,000 1,784,000 255,000
Net operating loss carryforward
utilized (2,167,000) (341,000) -
Other deferred tax assets utilized - (1,443,000) (255,000)
----------- ----------- ----------
Income tax expense recorded $ - $ - $ -
=========== =========== ==========
The tax effects of temporary differences and net operating loss
carryforwards, which give rise to deferred tax assets at December 31 are
estimated as follows:
2001 2000
------------ -----------
Net operating loss carryforward $ 32,403,000 $ 18,231,000
Oil and gas property basis difference 14,181,000 23,089,000
------------ ------------
Total deferred tax asset 46,584,000 41,320,000
Valuation allowance (46,584,000) (41,320,000)
------------ ------------
Net deferred tax asset (liability) $ - $ -
============ ============
The Company has an available tax net operating loss carry forward estimated
at approximately $83,085,000 as of December 31, 2001. This carryforward will
begin to expire in the year 2013.
12. NET INCOME PER COMMON SHARE
A reconciliation of the components of basic and diluted net income per
common share is presented in the table below:
2001 2000 1999
------------------------------- ------------------------------- ----------------------------
Per Per Per
Income Shares Share Income Shares Share Income Shares Share
---------- ---------- ----- ---------- ---------- ----- -------- --------- -----
Basic:
Income attributable
to common stock $5,417,000 10,146,112 $0.53 $4,459,000 10,145,400 $0.44 $641,000 5,120,255 $0.13
===== ===== =====
Effective of dilutive
securities:
Stock options - 342,261 - 259,567 - -
---------- ---------- ---------- ---------- -------- ---------
Diluted:
Income attributable
to common stock,
after assumed
dilutions $5,417,000 10,488,373 $0.52 $4,459,000 10,404,967 $0.43 $641,000 5,120,255 $0.13
========== ========== ===== ========== ========== ===== ======== ========= =====
Common stock equivalents not included in the above calculations of diluted
income are 1,163,195 warrants issued in 1997. Also not included in the
calculation of 2001 diluted earnings per share are 108,625 warrants issued in
connection with the Company's line of credit with Gulfport Funding, as discussed
in Note 8. Also, not included in the calculation of the 1999 diluted income per
F-15
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
share are 253,635 stock options issued to an officer of Gulfport in June 1999
and 30,000 stock options issued to certain directors in September 1999. These
potential common shares were not considered in the calculations due to their
anti-dilutive effect during the periods presented.
13. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company conducts business
activities with a substantial number of its shareholders.
DLB Oil & Gas, Inc. ("DLB") and Wexford Management LLC ("Wexford") were,
along with Gulfport, co-proponents in a 1997 plan of reorganization. During
April of 1998, DLB distributed all of its shares in the Company to its
shareholders prior to DLB's acquisition by Chesapeake Energy Corporation. As a
result of this distribution, Charles Davidson, Mike Liddell and Mark Liddell
collectively received 37.5% of the Company's stock. As of December 31, 2001,
Wexford and its affiliates owned approximately 17.7% of Gulfport's issued
outstanding stock. Charles Davidson, Mike Liddell and the Estate of Mark Liddell
own collectively 55.8% of the Company's outstanding stock as of December 31,
2001.
Administrative Service Agreement
Pursuant to the terms and conditions of an Administrative Services
Agreement, DLB agreed to make available to the Company personnel, services,
facilities, supplies, and equipment as needed, including executive and
managerial, accounting, auditing and tax, engineering, geological and
geophysical, legal, land and administrative and clerical services. The initial
term was one year beginning on the date of the Administrative Services
Agreement. The Administrative Services Agreement was to continue for successive
one-year periods unless terminated by either party. On April 28, 1998, in
connection with the acquisition of DLB, Inc. by Chesapeake Energy Corporation,
the obligations of DLB under the Administrative Services Agreement were assigned
to DLB Equities, L.L.C.
Gulfport paid fees under this agreement totaling $21,000 in 1999 and
believes that such fees are comparable to those that would have been charged by
an independent third party. Effective June of 1999, this Administrative Service
Agreement was terminated.
Stockholder Credit Facility
On August 18, 1998, Gulfport entered into a $3,000,000 revolving credit
facility with Liddell Investments, L.L.C., Liddell Holdings, L.L.C., CD
Holdings, L.L.C. and Wexford Entities (collectively "Affiliated Stockholders").
Borrowing under the Stockholder Credit Facility was due on August 17, 1999 and
bore interest at LIBOR plus 3%. Pursuant to the facility agreement, Gulfport
paid the eligible Affiliated Stockholders an aggregate commitment fee equal to
$60,000. Gulfport repaid $2,000,000 of principal under the Amended ING Credit
Agreement with borrowings under the Stockholder Credit Facility. The remaining
$1,000,000 was used for working capital and general corporate purposes. The
Affiliated Stockholders paid the subscription price for 1,200,000 shares
pursuant to their Basic Subscription Privilege in the Rights Offering through
F-16
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
the forgiveness of the amount owed to them under this stockholder credit
facility.
On August 5, 1999, Gulfport entered into a $3,255,000 revolving credit
facility with the "Affiliated Stockholders". Borrowing under this agreement was
due on August 1, 2000, and bore interest at LIBOR plus 3%. Pursuant to the terms
of the agreement, Gulfport paid aggregate commitment fees equal to $65,000 or 2%
of the related borrowings in stock. This debt was extinguished through the
issuance of 4,040,011 shares of common stock to the Affiliated Stockholders in
the Regulation D Offering in August 1999, and through the payment of additional
funds totaling $208,000.
14. COMMITMENTS
Leases
As of December 31, 2001 and 2000, the Company had no long-term,
non-cancelable operating lease commitments. Rental expense for all operating
leases for the years ended December 31, 2001, 2000 and 1999, totaled $127,000,
$112,000 and $119,000, respectively.
Plugging and Abandonment Funds
In connection with the acquisition of the remaining 50% interest in the
WCBB properties, the 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. Texaco retained a security interest in production from these
properties until abandonment obligations to Texaco 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. As of
December 31, 2001, the plugging and abandonment trust totaled $2,272,000,
including interest received during 2001 of approximately $55,000.
During October 2001, Gulfport completed the yearly program to meet its
plugging liability for the twelve month period ending March 2001. The Company
plugged 26 non-producing wells at West Cote Blanche Bay. During March 2002,
Gulfport began to fulfill its yearly plugging commitment of 20 wells at WCBB for
the twelve month period ending, March 2002.
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 Gulfport's East
Hackberry Field, Gulfport was obligated to commence drilling a well or other
qualifying development operation on certain non-producing acreage in the field
prior to March 1998. Because of prevailing market conditions during 1998, the
Company believed it was commercially impractical to shoot seismic or commence
drilling operations on the subject property. As a result, Gulfport has agreed to
surrender approximately 440 non-producing acres in this field to the State of
Louisiana. At December 31, 2001, Gulfport was in the process of releasing these
properties to the State of Louisiana.
F-17
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
Contributions to 401(k) Plan
During 1999, Gulfport sponsored a 401(k) savings plan under which eligible
employees could chose to contribute up to 15% of their total compensation on a
pre-tax basis, subject to certain IRS limits. Gulfport did not incur any
expense related to this plan during the year ended December 31, 1999. On
February 17, 1999, this 401(k) savings plan was terminated and all contributions
were distributed to the participants.
Effective January 1, 2000, Gulfport began sponsoring new 401(k) and Profit
Sharing plans under which eligible employees may contribute up to 15% of their
total compensation through salary deferrals. Also under these plans, the
Company will make a contribution each calendar year on behalf of each employee
equal to at least 3% of his or her salary, regardless of the employee's
participation in salary deferrals. During the years ended December 31, 2001 and
2000, Gulfport incurred $20,000 and $24,000, respectively, in contributions
expense related to this plan.
Employment Agreement
At December 31, 2001, Gulfport had an employment agreement with its Chief
Executive Officer. This agreement expires June 1, 2004, and calls for an annual
salary of $200,000, which may be adjusted for cost of living increases.
15. CONTINGENCIES
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.
Concentration of Credit Risk
Gulfport operates in the oil and 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
oil and gas industry, Gulfport 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. No bad debt
expense was incurred during 2001 or 2000. During 1999, Gulfport incurred bad
debts of $56,000.
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation up to
$100,000. At December 31, 2001 and 2000, Gulfport held cash in excess of
insured limits in these banks totaling $977,000 and $3,556,000, respectively.
During the year ended December 31, 2001, approximately 86% of Gulfport's
revenues from oil and gas sales were attributable to Gulfmark Energy Inc.
During the year ended December 31, 2000, approximately 91% of Gulfport's
revenues from oil and gas sales were attributable to two primary customers:
F-18
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
Black Hills Energy and Equiva Trading Company. During the year ended December
31, 1999, approximately 99% of Gulfport's revenues from oil and gas sales were
attributable to five primary customers: Equiva Trading Company, Black Hills
Energy Resources, Inc., Flash Oil & Gas Southwest, Inc., Burlington Resources,
and Plains All American, Inc.
16. LITIGATION TRUST ENTITY
Pursuant to the Company's 1997 plan of reorganization, all of Gulfport'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 that 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 Trust was funded by a $3,000,000 cash payment from the
Company, which was made on the effective date of reorganization. Gulfport owns a
12% interest in the Litigation Trust with the other 88% being owned by the
former general unsecured creditors of Gulfport. For financial statement
reporting purposes, Gulfport 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 at the time of Gulfport's reorganization.
On January 20, 1998, Gulfport and the Litigation Trust entered into a
Clarification Agreement whereby the rights to pursue various claims reserved by
Gulfport under 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 Gulfport had incurred in connection these
claims. As additional consideration for the contribution of this claim to the
Litigation Trust, Gulfport is entitled to 20% to 80% of the net proceeds from
these claims.
There were no funds received from the Litigation Trust during the year
ended December 31, 2001 and 2000. During 1999, Gulfport received $1,342,000 in
proceeds from the Litigation Trust.
17. SUBSEQUENT EVENT
In March 2002, the Company commenced a Private Placement Offering of $10.0
million dollars consisting of 10,000 Units. Each Unit consists of (i) one (1)
share of Cumulative Preferred Stock, Series A, of the Company (Preferred) and
(ii) a warrant to purchase up to 250 shares of common stock, par value $0.01 per
share. Dividends shall accrue on the Preferred Stock prior to the Mandatory
Redemption Date (as defined below) at the rate of 12% per annum payable
quarterly in cash or, at the option of the Company for a period not to exceed
two (2) years from the Closing Date, payable in whole or in part in additional
shares of the Preferred based on the Liquidation Preference (as defined below)
of the Preferred at the rate of 15% per annum. No other dividends shall be
declared or shall accrue on the Preferred. To the extent funds are legally
available, the Company is obligated to declare and pay the dividends on the
Preferred. The Warrants have a term of ten (10) years and an exercise price of
$4.00. The Company is required to redeem the Preferred on the fifth anniversary
of the first issuance and the Company may at its sole option, choose to redeem
the Preferred at any time before the expiration of the five years.
Two-thirds of the Preferred Stockholders can affect any Company action
which would effect their preference position. The Preferred cannot be sold or
transferred by its holders and the Company must use its best efforts to register
with the Securities and Exchange Commission ("SEC") the common stock issued in
connection with the exercise of the Warrants or, if possible, piggyback the
issued common stock if the Company participates in a public offering with the
SEC.
The Offering was made available to stockholders and affiliates of the
Company as of December 31, 2001 who were known to be accredited investors by the
Company. Purchasers were able to participate up to their pro rata share of
ownership in the Company as of December 31, 2001. The Offering's initial closing
will begin March 29, 2002 and will continue until April 15, 2002. Mike
Liddell, the Company's Chief Executive Officer, shall have until September 30,
2002 to subscribe for his proportionate share of the Offering.
On March 29, 2002, Gulfport Funding, LLC, participated in the Offering
through a conversion of its $3.0 million dollar loan along with the accumulated
interest due from the Company for 3,262.98 Units. Additionally, on March 29,
2002, entities controlled by the majority shareholder initially funded a share
of the Preferred Offering in the amount of $2,738,000.
F-19
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
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:
Capitalized Costs Related to Oil and Gas Producing Activities
2001 2000
------------- -------------
Proven Properties $ 103,344,000 $ 90,640,000
Accumpulated depreciation, depletion
Amortizaiton and impairment reserve (68,685,000) (65,173,000)
------------- -------------
Proven properties, net $ 34,659,000 $ 25,467,000
============= =============
Costs Incurred in Oil and Gas Property Acquisition and Development Activities
2001 2000 1999
----------- ---------- ----------
Acquisition $ - $ - $ 337,000
Development 12,704,000 6,505,000 6,803,000
----------- ---------- ----------
Total $12,704,000 $6,505,000 $7,140,000
=========== ========== ==========
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.
F-20
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
2001 2000 1999
----------- ---------- -----------
Revenues $15,458,000 $16,117,000 $10,018,000
Production costs (6,517,000) (6,732,000) (4,640,000)
Depletion (3,512,000) (3,125,000) (3,410,000)
----------- ----------- -----------
5,429,000 6,260,000 1,968,000
----------- ----------- -----------
Income tax expense
Current 2,172,000 2,504,000 781,000
Deferred (2,172,000) (2,504,000) (781,000)
----------- ----------- -----------
- - -
----------- ----------- -----------
Results of operations
from producting activities $ 5,429,000 $ 6,260,000 $ 1,968,000
=========== =========== ===========
Oil and Gas Reserves
The following table presents estimated volumes of proven and proven
undeveloped oil and gas reserves as of December 31, 2001, 2000, and 1999 and
changes in proven reserves during the last three years, assuming continuation of
economic conditions prevailing at the end of each year. Volumes for oil are
stated in thousands of barrels (MBbls) and volumes for gas are stated in
millions of cubic feet (MMCF). The weighted average prices at December 31, 2001
used for reserve report purposes are $16.75 and $2.65, adjusted by lease for
transportation fees and regional price differentials, for oil and gas reserves,
respectively.
Gulfport 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.
2001 2000 1999
-------------- -------------- --------------
Oil Gas Oil Gas Oil Gas
------ ------ ------ ------ ------ ------
Proven Reserves
Beginning of the period 22,098 18,188 25,923 6,264 24,282 3,331
Purchases in oil and
gas reserves in place - - - - 1,594 2,762
Extensions, discoveries
and other additions - - - -
Revisions of prior
reserve estimates 3,320 6,608 (3,295) 12,007 641 297
Current production (595) (71) (530) (83) (594) (126)
Sales of oil and gas
reserves in place - - - - - -
------ ------ ------ ------ ------ ------
End of period 24,823 24,725 22,098 18,188 25,923 6,264
====== ====== ====== ====== ====== ======
Proven developed reserves 3,745 3,499 3,066 2,077 6,606 2,073
====== ====== ====== ====== ====== ======
F-21
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
Discounted Future Net Cash Flows
Estimates of future net cash flows from proven 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 Gulfport's proven oil and gas reserves as of December 31,
2001, 2000, and 1999, assuming continuation of economic conditions prevailing at
the end of each year.
Standardized Measure of Discounted Future Net Cash Flows Relating to Proven Oil
and Gas Reserves
YEAR ENDED DECEMBER 31,
-------------------------------------------
2001 2000 1999
------------- ------------- -------------
Future cash flows $ 522,246,000 $ 763,942,000 $ 676,056,000
Future development costs (132,310,000) (118,857,000) (132,708,000)
Future production costs (88,373,000) (93,817,000) (91,705,000)
Future production taxes (53,247,000) (67,349,000) (83,392,000)
------------- ------------- -------------
Future net cash flows before
income taxes 248,316,000 483,919,000 368,251,000
10% discount to reflect timing
of cash flows (117,919,000) (203,025,000) (222,896,000)
------------- ------------- -------------
Discounted future net cash flows 130,397,000 280,894,000 145,355,000
Future income taxes, net of 10%
discount (1,475,000) (68,037,000) (14,602,000)
------------- ------------- -------------
Standardized measure of
discounted future net
cash flows $ 128,922,000 $ 212,857,000 $ 130,753,000
============= ============= =============
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to
Proven Oil and Gas Reserves
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000 1999
------------ ------------ ------------
Sales and transfers of oil
and gas produced, net of
production costs $ (8,941,000) $ (9,386,000) $ (5,378,000)
Net changes in prices and
production costs (344,592,000) 104,539,000 113,060,000
Acquisition of oil and gas
reserves in place, less
related production costs - - 4,978,000
Extensions, discoveries and
improven recovery, less
related costs - - -
Revisions of previous quantity
estimates, less related
production costs 117,930,000 20,515,000 3,722,000
Sales of reserves in place - - -
Accretion of discount 85,106,000 19,871,000 1,550,000
Net changes in income taxes 66,562,000 (53,435,000) (14,602,000)
Other - - -
------------ ------------ ------------
Total change in standardized
measure of discounted future
net cash flows $(83,935,000) $ 82,104,000 $103,330,000
============ ============ ============
F-22
GULFPORT ENERGY CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
CONTINUED
Comparison of Standardized Measure of Discounted Future Net Cash Flows to the
Net Carrying Value of Proven Oil and Gas Properties at December 31, 2001 and
2000 is as follows:
2001 2000
------------ ------------
Standardized measure of discounted
future and net cash flows $130,397,000 $280,894,000
Proven oil and gas properties 103,344,000 90,640,000
Less accumulated depreciation, depletion,
amortization and impairment reserve (68,685,000) (65,173,000)
Net carrying value of proven oil and
gas properties 34,659,000 25,467,000
------------ ------------
Standardized measure of discounted future net
cash flows in excess of net carrying
value of proven oil and gas properties $ 95,738,000 $255,427,000
============ ============
F-23
EXHIBIT 10.3
John N. Huff
Vice President
Energy Banking
(405) 272-2028
Fax 272-2588
jhuff@bokf.com
February 1, 2001
Mr. Mike Liddell
Gulfport Energy Corporation
6307 Waterford Blvd., Suite 100
Oklahoma City, OK 73118
Re: Loan Agreement Covenants
Dear Mike,
This letter is written to evidence our mutual understanding between Gulfport
Energy Corporation ("Borrower") and Bank of Oklahoma ("Bank") regarding a
$1,760,000 loan to Gulfport Energy Corporation. Borrower agrees to the
following conditions in connection with its obligation to Bank of Oklahoma:
1. Any proceeds from the sale of oil/gas properties having an aggregate
selling price in excess of $100,000 will be applied to the loan
balance.
2. Borrower will not encumber any oil and gas producing properties.
3. No material changes in the ownership of Gulfport without Bank consent.
4. Current assets divided by current liabilities, exclusive of obligations
to Bank shall exceed 1.0 at all times.
5. Borrower's indebtedness other than trade payables incurred in the
ordinary course of business and excluding all loans from Bank of
Oklahoma is limited to $100,000 without prior Bank consent.
6. Borrower will not pay any dividends or redeem any shares without prior
Bank consent.
7. Borrower will maintain its primary depository accounts with the Bank.
Please sign below as your acceptance of these terms and conditions.
We appreciate the opportunity to provide you with this credit facility.
Very truly yours,
John N. Huff
Vice President
Agreed and accepted this _____ day of February 2001.
For the Borrower:
By:
----------------------------------------------------
Mike Liddell, Chief Executive Officer